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<SEC-DOCUMENT>0000927016-02-001826.txt : 20020415
<SEC-HEADER>0000927016-02-001826.hdr.sgml : 20020415
ACCESSION NUMBER:		0000927016-02-001826
CONFORMED SUBMISSION TYPE:	10-K405
PUBLIC DOCUMENT COUNT:		13
CONFORMED PERIOD OF REPORT:	20011231
FILED AS OF DATE:		20020401

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			ENVIRONMENTAL POWER CORP
		CENTRAL INDEX KEY:			0000805012
		STANDARD INDUSTRIAL CLASSIFICATION:	COGENERATION SERVICES & SMALL POWER PRODUCERS [4991]
		IRS NUMBER:				042782065
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K405
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-15472
		FILM NUMBER:		02596939

	BUSINESS ADDRESS:	
		STREET 1:		500 MARKET ST
		STREET 2:		STE 1E
		CITY:			PORTSMOUTH
		STATE:			NH
		ZIP:			03801
		BUSINESS PHONE:		6034311780

	MAIL ADDRESS:	
		STREET 1:		500 MARKET ST
		STREET 2:		STE 1E
		CITY:			PORTSMOUTH
		STATE:			NH
		ZIP:			03801
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>



================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark one)

     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

     For the fiscal year ended           December 31, 2001
                               -------------------------------------

                                       OR

     [_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
          EXCHANGE 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, Fourth Floor, Portsmouth, New Hampshire 03801
                    (Address of principal executive offices)
                                   (Zip code)

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

          Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value

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  [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]

State the aggregate market value for the voting stock held by non-affiliates of
the registrant: The aggregate market value, computed by reference to the closing
price of such stock on March 27, 2002, was $3,134,952.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the last practicable date: On March 27, 2002 there were
20,251,653 outstanding shares of Common Stock, $.01 par value, of the
registrant.

================================================================================

                                       1

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be filed with the Securities and
Exchange Commission and delivered to shareholders in connection with the 2002
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Annual Report filed on Form 10-K. The portions of the Proxy Statement under
the headings "Audit Committee Report", "Report of the Compensation Committee"
and the "Stock Performance Graph" are not incorporated by reference and are not
a part of this Form 10-K Report.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
Description of Contents                                                                                Page #
- -----------------------                                                                                ------
<S>                                                                                                    <C>
PART I:
- -------
Item 1.   Business                                                                                       3
Item 2.   Properties                                                                                    14
Item 3.   Legal Proceedings                                                                             15
Item 4.   Submission of Matters to a Vote of Security Holders                                           15

PART II:
- --------
Item 5.   Market for Registrant's Common Equity and Related Shareholder Matters                         16
Item 6.   Selected Financial Data                                                                       17
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations         19
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk                                    39
Item 8.   Financial Statements and Supplementary Data                                                   39
Item 9.   Disagreements on Accounting and Financial Disclosure                                          39

PART III:
- ---------
Item 10.  Directors and Executive Officers                                                              40
Item 11.  Executive Compensation                                                                        40
Item 12.  Security Ownership of Certain Beneficial Owners and Management                                40
Item 13.  Certain Relationships and Related Transactions                                                40

PART IV:
- --------
Item 14.  Index to Financial Statements, Exhibits, and Reports on Form 8-K                              41
          Signature Page                                                                                47
</TABLE>


                            CAUTIONARY STATEMENT

This Annual Report on Form 10-K 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 to differ materially from those
indicated by the forward-looking statements. These factors include, without
limitation, those set forth below under the caption "Item 7. - Certain Factors
That May Affect Future Results".

                                       2

<PAGE>

ITEM 1. BUSINESS

Environmental Power Corporation, known as EPC, is an independent developer and
owner of electrical generating facilities powered by non-commodity fuels and
renewable energy sources. Our power generating facilities use alternative fuels,
most of which are wastes, which are generally not subject to the same cost
fluctuations as traditional fuels. Our power generating facilities have also
been able to exceed air quality emission standards and to assist with the
clean-up of wastes that are sources of water pollution. Accordingly, we have
realized financial benefits, such as tax-exempt financing and sales of pollution
allowances from the pollution control benefits of our facilities.

Since our founding in 1982, we have partially or fully developed seven
hydroelectric plants, two municipal waste projects and three waste-coal fired
generating facilities. We sold all but one of these projects as follows:

     .    We sold four hydropower projects during their development phases;

     .    We transferred rights to two municipal waste projects during their
          development phases;

     .    We sold three hydropower facilities after completion;

     .    We sold, during development, a 43 megawatt (net) waste-coal fired
          facility located in Pennsylvania known as the Milesburg Project. This
          project was involved in protracted litigation with, among others, West
          Penn Power Company. We settled the litigation in 1997 and sold the
          project to West Penn.

     .    We sold, after completion in 1994, a 51 Megawatt (net) waste-coal
          fired facility located in Utah known as the Sunnyside Project. 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. These matters were settled
          by a payment to us of $1,500,000 and the release of certain contingent
          liabilities.

Buzzard Power Corporation, our subsidiary, currently owns a 22-year leasehold
interest in an approximate 83 megawatt (net) waste-coal fired facility located
in Pennsylvania known as the Scrubgrass Project.

In 2001, we acquired all of the common stock of Microgy Cogeneration Systems
Inc., a privately held Colorado company. We operate Microgy as a subsidiary.
Microgy holds an exclusive license in North America for development and
deployment of a proprietary technology for extraction of methane gas from animal
wastes and its use to fuel generation of energy. EPC is currently in the process
of developing its strategies for pursuing the opportunities which result from
this acquisition.

Our ongoing business activities are discussed further in the following sections.

Buzzard Power Corporation

Buzzard leases the Scrubgrass facility from Scrubgrass Generating Company, L.P.
The Scrubgrass facility, located on a 600-acre site in Venango County,
Pennsylvania, is an approximate 83 megawatt waste coal-fired electric generating
station.

Buzzard's lease commenced on June 30, 1994 and provides for a term of 22 years
with a renewal option for up to 3 years. Under the lease, Scrubgrass Generating
Company assigned to Buzzard all principal project agreements and its rights and
obligations under such contracts including:

                                       3

<PAGE>

 .  the power purchase agreement

 .  management services agreement

 .  operating and maintenance agreement

 .  limestone supply agreements

 .  ground lease agreements

 .  fuel agreements

 .  transportation

 .  materials handling agreements.

We have pledged Buzzard's common stock to the Scrubgrass Generating Company as
security for Buzzard's performance of its obligations as lessee. PG&E National
Energy Group, a wholly owned indirect subsidiary of NEG, Inc., which in turn is
a wholly owned indirect subsidiary of PG&E Corporation, manages the Scrubgrass
facility under a Management Services Agreement.

PG&E Operating Services Company, also a wholly owned indirect subsidiary of NEG,
Inc., operates the plant under a 15-year Operating and Maintenance Agreement.
PG&E OSC prepares a budget for all operating expenses, including a fixed
management fee, and certain targeted output performance levels, which is
approved annually. Under the operating agreement, PG&E OSC may be liable for an
amount not to exceed its management fee if it does not achieve certain targeted
output performance levels.

Buzzard sells all of its electric output to Pennsylvania Electric Company, known
as Penelec, under a twenty-five year power sales agreement, which commenced in
June 1993. Under this contract, except for amounts sold above certain hourly and
annual limits, all power is sold at fixed rates which initially averaged 4.68
cents per kilowatt hour and escalated by 5% annually through 1999. For years
2000 through 2012, the agreement provides for a rate equal to the greater of a
scheduled rate or a rate based on the PJM Billing Rate. The PJM Billing Rate is
the monthly average of the hourly rates for purchases by the General Public
Utilities Group from, or sale to, the Pennsylvania-New Jersey-Maryland
Interconnection. For years 2013 through 2015 and 2016 through 2018, if we
exercise the renewal term option, the agreement provides for a rate equal to the
lower of the average monthly PJM Billing Rate or the rate paid for calendar year
2012 adjusted annually by the percentage change in the Gross National Product
Deflator less one percent.

In early 2000, we resolved a protracted legal proceeding with Penelec. The
proceeding, among other issues, involved Penelec's unwillingness to pay contract
rates for power in excess of 80 megawatts produced by the Scrubgrass facility.
On March 24, 2000, Penelec paid the outstanding balances due under a settlement
agreement of $3,687,000 for previous deliveries of electric energy plus $608,000
in interest. We reported these revenues in our 2000 financial statements.
Penelec also agreed to pay for all future net deliveries of electric energy at
the rates set forth in the power sales agreement, subject to, among other
conditions, certain annual and hourly limits, with energy purchased in excess of
such limits paid for at a market based rate. To date, these limits have not
materially affected our revenues.

Buzzard deposits all revenues earned under the power sales agreement into an
account administered by a disbursement agent. Before Buzzard can receive cash
from the operation of the Scrubgrass facility, Buzzard must first satisfy all
operating expenses, base lease payments, restricted cash deposits, and other
subordinated obligations. Buzzard's base lease payments consist of Scrubgrass
Generating Company's debt service, equity repayment, base return on equity and
related expenses. Buzzard must also pay to Scrubgrass Generating Company
additional rent of 50 percent of the net cash flows Buzzard receives from the
operation of the Scrubgrass facility. We are not required to fund Buzzard's
operating losses, or otherwise invest further from sources outside of the
Scrubgrass Project.

The debt obligations for Scrubgrass Generating Company and Buzzard are described
below:

                                       4

<PAGE>

<TABLE>
<CAPTION>
                                         Balance at      Balance at                                       Matures
    Description of the Obligation         12/31/01        12/31/00         Interest Rate                  Through
- ---------------------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>                               <C>
Lease obligations:

   Variable rate tax-exempt bonds     $135,600,000     $135,600,000      Quoted Bond Rates                  2012

   Swap rate term loan                  10,669,663       12,541,087      7.5475% (through 2000)             2005
                                                                         7.6725% (thereafter)

   Variable rate term loan               8,344,479       10,061,427      LIBOR + 1.250%                     2004

Buzzard's debt obligations:

   Variable rate term loan                 985,747        1,188,573      LIBOR + 1.250%                     2004

   Working capital loan                  1,116,905        2,742,961      LIBOR + 1.125% (through 2000)      2002
                                                                         LIBOR + 1.250% (thereafter)
</TABLE>

Scrubgrass Generating Company or Buzzard pays interest on these obligations at
either quoted rates for tax exempt debt, rates fixed by swap agreements for
taxable debt, or rates for taxable debt which are based on the London Interbank
Offering Rate, or LIBOR. On December 22, 1995, Scrubgrass Generating Company
entered into an interest rate swap arrangement that fixed the LIBOR component
for the life of its swap rate term loan at 6.4225%. As a result, the interest
rate for the swap rate term loan was fixed at 7.5475% through 2000 and at
7.6725% for its remaining. Under the terms of the loan agreements, we are
subject to various customary financial and operating covenants. As of December
31, 2001 and 2000, we complied with all such covenants.

The Environmental Protection Agency and the Pennsylvania Department of
Environmental Protection granted Nitrogen Oxide Ozone Transport Region Budget
Allowances, or NOx Credits, to Buzzard based on factors that primarily pertain
to the design and operation of the Scrubgrass facility. Buzzard is required
annually to maintain NOx Credits that equal or exceed the quantity of its
nitrogen oxide emissions during a seasonal period known as an ozone season. If
the Scrubgrass plant's nitrogen oxide emissions exceed its available NOx
Credits, Buzzard would be subject to fines by such agencies. During 1999,
Buzzard installed machinery, costing $811,568, which has significantly reduced
our nitrogen oxide emissions. Accordingly, we anticipate that Buzzard may not
require a portion of its future NOx Credits to comply with the applicable
regulations. NOx Credits are transferable and marketable. Buzzard has sold and
may sell, from time to time, its projected excess NOx Credits or purchase
additional NOx credits, that are necessary to meet the applicable regulations.
To date, we have entered into several agreements to sell and purchase, when
necessary, NOx credits. We recognized net proceeds from these NOx Credit
transactions of $0 in 2001, $1,156,338 in 2000 and $606,960 in 1999, which were
reported as other income in our accompanying consolidated financial statements.
During February 2002, the Company received $2,428,200 from sales of anticipated
excess NOx emission credits for the 2002 through 2007 ozone seasons. The income
from these sales was reported during the first quarter of 2002.

Microgy Cogeneration Systems

In the second half of 2001, we acquired Microgy Cogeneration Systems, Inc., a
development stage company based in Golden, Colorado. The acquisition is
described in Item 5 of this Report and in our consolidated financial statements.
Microgy intends to market and operate in the renewable energy and distributed
generation sectors of the electric energy industry and the pollution mitigation
area of the agricultural industry. Microgy has an exclusive license to an
anaerobic digestion technology that is designed to provide efficient conversion
of certain agricultural and other wastes into combustible biogas and an
environmentally improved waste effluent. Microgy also has a license for a
microturbine technology and possible rights to other technologies which we are
currently evaluating.

                                       5

<PAGE>

Anaerobic Digester License Agreement

The licensor of the anaerobic digester technology is Danish Biogas Technology
A/S, or DBT. DBT is 50% owned by Schouw & Co., a Danish public company. On May
12, 2000, Microgy entered into a revised licensing agreement with DBT which
granted Microgy a perpetual and exclusive license in certain territories,
specifically North America, for use of certain proprietary technologies in its
cogeneration facilities, including the anaerobic digestion technology. This
agreement superseded previous license agreements.

As part of the agreement, DBT will own a 5% minority equity stake in any legal
entity that owns any project developed by Microgy using the enhanced anaerobic
digester technology in which Microgy holds an equity position. The agreement
also specifies a fixed payment amount per project to DBT for engineering work
and construction drawings and a licensing fee that is based on a percentage of
the total cost for each project facility where the licensed technology is
installed and operating. A monthly consulting fee will be paid to DBT upon
commercial operation of proposed projects.

Currently, we are developing plans for deployment of the anaerobic digester
technology. Consultants with expertise in the agriculture industries, renewable
energy, finance, engineering and technical and related legal disciplines have
been working with members of EPC's board of directors and our management in this
effort. We expect that this planning process will assist Microgy in recognizing
and pursuing the best short and long term strategies for developing our
anaerobic digestion and renewable energy business.

Proposed Projects

Microgy plans to develop projects based upon the anaerobic digestion technology
license. Our present business strategy anticipates the outright sale of
facilities; however, we expect that, in some circumstances, we may own some or
even a majority of projects. In addition to any ownership position Microgy may
have, it presently plans to manage and may operate any such proposed facilities.
We anticipate these facilities will deliver renewable energy for supply to the
utility grid and will provide pollution control benefits to the agricultural
markets. The ultimate opportunity to develop such projects and/or to sell these
facilities to others, as well as to manage and/or operate them profitably,
depend on factors including the value which can be derived from the energy and
agricultural markets discussed below.

Power Contracts

In December 2000, Microgy entered into an agreement with a California-based
irrigation district that provides water and electric services to its customers
located primarily in the California central valley. This agreement is currently
being renegotiated and may be modified substantially from its current form.
Under the agreement, Microgy may sell up to 15 megawatts of power to the
irrigation district once it has developed facilities to generate such power. The
term of the agreement is ten years from the date of commercial operation of each
proposed facility. The facilities would provide renewable energy created by
Microgy's licensed process and would source their wastes principally from the
farms that are customers of the irrigation district.

On March 21, 2002, Microgy entered into a power sales agreement with Wisconsin
Public Service Corporation. Under the agreement, Microgy may sell up to 15
megawatts of peak power to Wisconsin Public Service from numerous biogas
cogeneration facilities. The agreement also provides for the sale to Wisconsin
Public Service of a portion of the environmental credits derived from the
generation of energy at the facilities. The term of the agreement is 15 years
from the date of the agreement with a five year option to extend by Wisconsin
Public Service. The yet-to-be developed facilities would be located at various
dairy farms and other agricultural facilities and provide renewable energy
created from agricultural waste.

Energy Markets

We generate revenue from the sale of electric energy and derive or expect to
derive some additional revenues and other benefits from our present and proposed
involvement with environmentally friendly power generating

                                       6

<PAGE>

facilities. There are three segments of the energy markets, as well as the
markets for "green" energy benefits, pollution offsets, and the agricultural
markets, all of which affect our current or planned activities.

PURPA Qualified Facilities (QFs)

The energy crisis of the 1970's led to the enactment of the Federal Public
Utility Regulatory Policies Act of 1978, or PURPA. PURPA encouraged companies
other than utilities to enter the electric energy business by reducing
regulatory constraints. In addition, PURPA requires utilities to purchase
electricity produced by facilities using alternative fuels or from cogeneration
facilities that meet the Federal Energy Regulatory Commission's, or FERC's,
requirements for certification as qualifying facilities, or QF's. The
requirements are described below. This obligation upon utilities to purchase the
output from QFs requires that utilities purchase all power produced at the
utilities' avoided cost. Generally, the avoided cost is the price at which the
utility could purchase or produce the same amount of power from sources other
than the QF.

Scrubgrass is a QF. All of the electricity produced at the Scrubgrass facility
is sold under a contract with Penelec, entered into pursuant to PURPA. Except
for output in excess of certain annual and hourly limits, the contract has a
fixed price with fixed escalations through 2004 and minimum prices from 2005
through 2012. However, after 2004 prices may be influenced by the prices for
electricity in the traditional commodity power markets for the Western PJM
(Pennsylvania-New Jersey-Maryland) Interconnection.

We believe that the facilities we would build using Microgy's licensed
technology would meet the qualifications required to be a QF.

Commodity Electricity

The market for traditional commodity electricity, while national in scope, has
regional variations in pricing. Variations are due to generating and
transmission capacity, regional production costs, and demand within those
regions. In general, however, prices were generally flat or declining over the
period between 1990 and 2000. Further, as the market has moved increasingly
toward trading electricity as a commodity, it has been marked by increased
volatility. In many markets during 2000, there were very high prices during
certain times for peak period electricity. Peak periods are customarily defined
as the sixteen-hour period encompassing the daytime hours, Monday through
Friday. During 2001, the slower economy and lower cost of conventional fuels
used for power generation have brought prices substantially lower. We expect the
near-term market for commodity electricity to remain very price competitive with
upward pressure on prices dependent upon increased costs of fuels used for
electric generation. If and when the economy becomes more robust and consumption
of energy increases, there are likely to be increases in conventional fuel
prices as well as geographical areas within the United States which will need
increased capacity to service demand and prices will likely increase
accordingly.

For 2002 and 2003, the U.S. Department of Energy, or DOE, projects increasing
prices for natural gas, which is considered the most influential fuel in
determining the trading price of commodity electricity. If such projections
prove to be accurate and commodity electricity prices increase, the output from
any facilities developed by Microgy, will be increasingly price competitive and
potentially more profitable. This should also make it easier for us to attract
and execute new opportunities to develop these projects.

Renewable Peak Period Electricity

We plan to develop facilities that serve the market for renewable energy
delivered during peak usage periods. We believe that such renewable energy will
result in "green" benefits as described below. We intend this combination of
renewable energy and peak period delivery to position our output into the
highest priced segments of the electricity markets. During peak periods there is
the greatest use and demand for electricity. Natural gas is the principal fuel
source for generating commodity electricity on a peaking basis. Except for oil,
which is seldom now used, generation from most other fuels is not readily
adaptable to peak period operation. Microgy's anaerobic digestion technology
produces biogas from the processed manure that, like natural gas, can be stored
and used to

                                       7

<PAGE>

generate power during peak periods. We believe that Microgy's technology offers
us a valuable generating capability, namely, the ability to produce renewable,
peak energy.

The demand for renewable power in the energy markets is driven largely by
consumer desire for such power and by state legislation. Surveys of electric
customers throughout the United States have shown that a large percentage of
individuals would be willing to pay premiums to purchase renewable energy. These
preferences have resulted in green pricing programs in many local energy
markets. Many states and local governments have further encouraged the growth of
renewables through tax incentives and by requiring utilities to offer customers
electricity derived from renewable sources and/or to generate or purchase a
small portion of their electricity from renewable energy providers. Presently,
the United States Congress is considering proposed legislation which would add
significant tax benefits to the generation of electricity produced from biomass.
Further, many states and the Federal government require a portion of the power
consumed in their own facilities to be provided from renewable generating
sources. These Renewable Portfolio Standards, or RPS, have increased over the
last several years. The DOE foresees significant growth in the generation
capacity of renewables - from 357 billion kilowatt hours of generation from
non-hydroelectric renewable energy sources in 2000 to 464 billion in 2020.

Green Tags and Pollution Offset Credits

As a potential producer of renewable energy, we expect to be able to sell
separately electricity and "green" energy credits, also called "green tickets"
or "green tags". Green tags can be defined in many ways. We define them as the
marketable bundle of benefits derived from the environmentally friendly
generation of power. In some instances, we may include all or some portion of
the green tags in wholesale electricity purchase agreements. However, we may
also separately trade these green tags or some of their unbundled components in
a growing trading market.

Buzzard has been able to sell pollution offset credits based upon NOx emissions
which were discussed previously. Our future facilities may also be able to sell
NOx, greenhouse gases, and other pollution offset credits in addition to
electricity and other green credits. The market for these and similar credits is
projected to grow as stricter environmental regulations and emission standards
are adopted.

We expect that trends in the energy and green trading markets will play an
important role in our ability to develop future facilities and our potential
profitability. However, there are many competitors in these markets and, in
addition, the local characteristics of each market, such as installed renewable
generating capacity or local legislation, could create impediments to our plans
and progress.

Agricultural Markets

We plan to provide anaerobic digester equipment and services to help control
pollution in agricultural markets, specifically Animal Feeding Operations, or
AFOs.

Runoff from animal wastes presents significant water pollution problems. In
1998, state reports of water quality conditions indicated that:

     .    of the rivers and streams surveyed, (53% of all perennial stream
          miles) 36% were partially or fully impaired and another 8% were
          threatened;
     .    of the surveyed lakes, (40% of all lake acres) 39% were partially or
          fully impaired and another 10% were threatened;
     .    of the estuaries surveyed by coastal states (72% of all estuarine
          waters), 38% were impaired and another 4% were threatened; and
     .    of the Great Lakes shore miles surveyed (94% of all shore miles), 97%
          were impaired and another 1% were threatened.

The Clean Water Act identified polluted runoff as the most important remaining
source of water pollution and provided for a coordinated effort to reduce
polluted runoff from a variety of sources. As part of this effort, the

                                       8

<PAGE>

Clean Water Act called for the USDA and EPA to take steps to minimize the water
quality and public health impacts of AFOs.

Large and medium AFOs are responsible for the greatest contribution to the
problem of excess manure nutrients. For example:

     .    72% of these farms are estimated to have inadequate capacity to
          utilize all nitrogen produced on-farm.
     .    As nutrients produced by AFOs increased from 1982 to 1997, crop
          acreage associated with those farms declined. Additional crop acreage
          can be used to spread excess animal waste to reduce the concentration
          of water polluting nitrogen.
     .    The 73 million acres of cropland and permanent pasture associated with
          AFOs is estimated to have capacity to assimilate for only 38% of the
          calculated available nitrogen from those farms.
     .    Total recoverable manure nitrogen from medium and large animal
          operations almost doubled between 1982 to 1997. They contribute almost
          70% of the total excess nitrogen in the U.S.:
     .    On medium farms - excess nitrogen increased by 83% from 1982 to 1997
     .    On large farms - excess nitrogen increased by 104% from 1982 to 1997

There are over 7,000 AFOs in the United States in the over 500 head dairy and
over 1000 head hog markets alone. These numbers are expected to increase as the
industry continues its trend of consolidation. Based upon this information, the
government has created a new designation for these larger farms, Concentrated
Animal Feeding Operations, or CAFOs. CAFOs will be subject to stricter
permitting and licensing standards. The EPA is expected to regulate these
operations closely. Nevertheless, it is believed that farmers realize many
benefits from consolidation.

We believe that the pollution control benefits of Microgy's technologies should
help CAFOs meet the stricter guidelines and permitting requirements and, as a
result, many farms would be able to address existing pollution problems over
time and to increase land application of less-pollutant manure and, in some
instances, support a larger herd on the same amount of land. Alternatively, in
critical pollution areas, or where uses for residual products can be identified,
the land application of manure could be substantially curtailed.

Competition

We face several types of competitors including:

     .    commodity power producers
     .    renewable power producers
     .    peak power producers
     .    pollution control providers
     .    "opportunity" competitors

Commodity Power Producers

We plan to develop and own or sell power generating facilities that provide
wholesale electricity to the utility grid. Our competitors include all other
producers of electricity, such as:

     .    traditional utilities
     .    other independent power producers
     .    coal-fired plants
     .    nuclear plants, and
     .    facilities fueled by natural gas, wind-energy, hydro-electric,
          geo-thermal, and various other fuels.

As described, this market is very price competitive. Many of our competitors are
well established, more experienced and better capitalized than EPC.

                                       9

<PAGE>

We believe that we have identified a market niche that will enable us to serve
multiple market segments. We believe that providing pollution control benefits
along with green, peaking electric energy, may afford us an opportunity to avoid
direct competition with a large segment of the commodity power market. We will,
however, be heavily influenced by that market.

Renewable Power Producers

Several other technologies exist to provide "green" renewable energy, including
wind, solar, geo-thermal, biomass, and landfill gas extraction. Producers using
these sources of renewable power compete with us in the sale of renewable energy
and Green Tags. They also compete for participation in green pricing programs,
RPS programs and state mandates for renewables. Many of these competitors are
experienced, well financed, and established in our markets.

We believe that our facilities will compete by seeking to provide benefits that
some of these organizations cannot. The Microgy technology will allow us to
store biogas so that we can provide firm power at peak periods. We believe that
most renewable power sources, other than biogas from a highly controlled source,
cannot consistently produce and/or store their energy and cannot easily provide
firm peak power which usually has the greatest market value. We expect that the
pollution control benefits of Microgy's technology, as well as its anticipated
ability to generate green energy during peak periods, will allow us to serve
multiple markets and to compete.

Pollution Control Providers

Farmers have several options to handle the pollution problems described in the
Agricultural Markets section. They range from acquiring additional land for
spreading, to reducing herd sizes, to employing other technologies such as
plug-flow digesters.

These pollution control options may limit the number of potential sites for
future Microgy facilities and, to the extent that tradeable pollution control
allowances are created, such alternatives are likely to affect Microgy's
opportunities in these markets.

However, we believe that our solution may offer farmers the potential to
realize similar pollution control benefits as some or all of these other
solutions and at the same time to, receive additional financial incentives.

"Opportunity" Competitors

We define opportunity competitors in two ways: First, there is the competitor
for farm sites and the competition resulting from other sources of pollution
mitigation as discussed above. Second, there may become competition for the
various resources which affect our operations or potential profitability. For
example, the market to obtain organic byproducts digested in the planned Microgy
projects may become subject to competition. Presently, we believe there is
little competition for these byproducts. However, in the future, the situation
may change.

The following sections describe the competition facing our subsidiaries.

Buzzard Power Corporation

Buzzard generates electricity using waste coal, an alternative energy source.
Buzzard sells all of its electricity at rates established under a long-term
power purchase agreement. With the exception of the risk that Penelec would seek
and achieve judicial determination that it has a right to renegotiate the terms
of the power purchase agreement the sale of power from our existing facility is
not subject to competition during the term of the power purchase agreement.

However, since our contracted rates in the later years of the agreement are
determined with reference to current consumer price indices and future market
conditions, the rate at which such power is sold after 2004 is influenced
by competitive power rates in the region. Therefore, low wholesale energy rates
during the later years of the power

                                       10

<PAGE>

purchase agreement would adversely affect our profitability and could affect our
results of operations and financial position.

Microgy Cogeneration Systems

Microgy plans to generate revenue from the development, sale, and/or ownership
of facilities that market renewable, "green" energy in addition to providing
pollution control features to the agricultural markets. In the energy market,
its competitors include traditional regulated utilities, unregulated
subsidiaries of regulated utilities, energy brokers and traders, energy service
companies in the development and operation of energy-producing projects as well
as the marketers of electric energy, equipment suppliers, providers of pollution
control products or services, and other non-utility generators like EPC.

Microgy's "green" competitors include other energy producers using biomass
combustion, biomass anaerobic digestion, geothermal, solar, wind, new hydro, and
other renewable sources. These companies represent a significant class of
competitors because they will compete with Microgy for sale of "green tags" and
participation in various Renewable Portfolios and other programs.

In the agricultural markets, Microgy faces many forms of competition from other
providers of pollution control. The most significant among these entities may
include environmental engineers, providers of pollution control systems, and
other developers of anaerobic digesters or plug-flow digesters. Competition
includes private companies, public companies, associations, cooperatives,
government programs, such as AgStar, foreign companies, and educational pilot
programs.

Energy Regulation

Our Scrubgrass facility is certified as a QF by the FERC. Scrubgrass is and any
of our future facilities or projects will be subject to federal and state laws
and regulations. Pursuant to PURPA, FERC has promulgated regulations that exempt
QFs from the Federal Power Act of 1935, Public Utility Holding Company Act, or
PUHCA, and, except under certain limited circumstances, state laws regulating
the rates charged by electric utilities. In order to be a QF under PURPA, any
facilities that we might acquire or develop will be required to meet certain
size, fuel and ownership requirements and/or co-generate. In addition to
regulating QFs, PURPA requires that electric utilities purchase electric energy
produced by QFs at negotiated rates or at a price equal to the incremental or
avoided cost that would have been incurred by the utility if it were to generate
the power itself or purchase it from another source. We are not presently
subject to regulation under PUHCA and do not presently intend to engage in any
activities that would cause us to be so regulated.

The nature and impact of potential future changes of laws or regulations on our
projects is unknown at this time. Presently, there are numerous pending
legislative proposals and recent laws, which suggest a comprehensive
restructuring of the electric utility industry. If PURPA is amended or repealed,
the statutory requirement that electric utilities purchase electricity from QFs
at full-avoided cost could be repealed or modified. While existing contracts are
expected to be honored, the repeal or modification of these statutory purchase
requirements under PURPA in the future could increase pressure from electric
utilities to renegotiate existing contracts. Should there be changes in
statutory purchase requirements under PURPA, and should these changes result in
amendments to our current power purchase agreement for Scrubgrass which reduce
the contracted rates, our results of operations and financial position could be
negatively impacted.

State public utility commissions, pursuant to state legislative authority, may
have jurisdiction over how any new federal initiatives are implemented in each
state. The actual scope of jurisdiction over independent power projects by state
public utility regulatory commissions varies from state to state. Presently,
through its power purchase agreement with Penelec, the Scrubgrass plant is
affected by state legislation in Pennsylvania.

On December 3, 1996, in response to changes in the electric industry,
Pennsylvania passed legislation known as the Electricity Generation Customer
Choice and Competition Act, or Customer Choice Act, which became effective
on January 1, 1997. The Customer Choice Act regulates the generation portion of
the electric business by

                                       11

<PAGE>

permitting a Pennsylvania retail electric customers to choose their electric
generation supplier over a phase-in period which expired December 31, 2000. The
Customer Choice Act required that all electric utilities file restructuring
plans with the PUC. Penelec filed its proposed restructuring plan during 1997.
The plan was subsequently litigated by numerous parties, and later settled by an
agreement which was approved by the PUC on October 20, 1998. The settlement
agreement set forth a comprehensive plan for restructuring Penelec's service and
for ensuring there would be competition for electric generation for all of
Penelec's customers beginning on January 1, 1999. The restructuring plan, as
approved by the PUC, provided for Penelec to maintain a separate non-utility
generator cost recovery mechanism for accounting purposes. The restructuring
plan is designed to enable Penelec to recover all of its costs from non-utility
generators such as the Scrubgrass plant and should serve to decrease the
pressure on Penelec to renegotiate existing power contracts with non-utility
generators.

On November 21, 2000, the shareholders of General Public Utilities Group and
First Energy Corp. approved a merger of these two companies. First Energy and
GPU have applied for approval of their merger to Federal Energy Regulatory
Commission, New Jersey Board of Public Utilities, Pennsylvania Public Utility
Commission, Nuclear Regulatory Commission, Federal Communications Commission,
Securities and Exchange Commission, and the Department of Justice under the
Hart-Scott-Rodino Act. We have been monitoring these merger activities to
determine whether such activities would have an unfavorable impact on the
Scrubgrass Project.

Presently, except as discussed above, neither the Customer Choice Act nor
Penelec's restructuring plan directly impacts us, since the legislation and
restructuring plan pertain to the retail market or new contracts in the
wholesale market. Nevertheless, we continue to monitor regulatory developments
in order to evaluate any impact on the Scrubgrass Project and possible new
business opportunities for Microgy.

Environmental Regulation

Our present and any future projects are and will be subject to various federal,
state and local regulations pertaining to the protection of the environment,
primarily in the areas of water and air pollution. Microgy intends to build
plants in various states. These facilities will be subject to federal, state and
local regulatory requirements in all the locations where they may operate.

In many cases, these regulations require a lengthy and complex process of
obtaining and maintaining licenses, permits and approvals from federal, state
and local agencies. We also have and will have significant administrative
responsibilities to monitor our compliance with the regulations. As regulations
are enacted or adopted in any of these jurisdictions, we cannot predict the
effect of compliance therewith on our business. Our failure to comply with all
the applicable requirements could require modifications to operating facilities.
During periods of non-compliance, our operating facilities may be forced to
shutdown until the compliance issues are resolved. EPC is responsible for
ensuring the compliance of its facilities with all the applicable requirements
and, accordingly, attempts to minimize these risks by dealing with reputable
contractors and using appropriate technology to measure compliance with the
applicable standards. The cost of environmental regulation does and will
continue to affect our profitability.

Buzzard Power Corporation

We believe the Scrubgrass Project, EPC's only operating project, is currently in
compliance with all material applicable environmental regulations. Our
Scrubgrass Project is most notably affected by the following environmental
regulations:

Air Quality -- The Scrubgrass Project is subject to air quality regulations
under the Federal Clean Air Act of 1970. This Act established National Ambient
Air Quality Standards for certain pollutants including ozone, sulfur dioxide,
nitrogen dioxide, particulate matter, carbon monoxide and lead. In particular,
CAA Title I established the Northeast Ozone Transport Region, which includes 12
northeast states and the District of Columbia, to address the transport of these
pollutants which may lead to the non-attainment of the ozone standards in the
Northeast. Ozone control is facilitated by the control of pollutant precursors,
which are nitrogen oxides, or NOx, and volatile organic

                                       12

<PAGE>

compounds. Electric generating facilities that use fossil fuels, including the
Scrubgrass facility, are considered major sources of NOx emissions.

In recent years, the Pennsylvania Department of Environmental Protection
established regulations that required companies with stationary sources of NOx
emissions to establish plans to reduce their NOx emissions. To administer these
regulations, the Department began allocating Nitrogen Oxide Ozone Transport
Region Budget Allowances, or NOx Credits, to facilities based on numerous
factors including the design and operation of each facility. A market-based
trading system was established to allow companies with excess NOx Credits to
trade with companies that required additional NOx Credits to meet the stricter
requirements. More recently, an Ozone Transport Commission established certain
inner and outer zones with seasonal NOx emission reductions that required the
Scrubgrass Project to achieve certain targeted NOx emission levels beginning on
May 1, 1999. Under such requirements, the Scrubgrass Project will also be
required to achieve reduced emission standards by May 2003. Due to the efficient
design of the Scrubgrass facility, the Scrubgrass Project met the new 1999
requirements without any modifications to the facility. However, we made capital
improvements of $811,568 in 1999 to the Scrubgrass facility, which are expected
to enable the Scrubgrass facility to meet the stricter standards in 2003. We
expect to meet the air quality standards for sulfur dioxide, nitrogen dioxide,
particulate matter, carbon monoxide and lead for the foreseeable future without
any additional material modifications to the Scrubgrass facility.

Waste Disposal -- The Scrubgrass Project must also comply with various
environmental regulations pertaining to water discharge as well as the handling
and disposal of hazardous and non-hazardous wastes. The Pennsylvania's
Department establishes classifications for wastes and requires companies to
follow certain handling and disposal procedures for each waste classification.
Currently, the Scrubgrass Project employs special handling procedures for the
transportation of its fuel, which is classified as a waste, from the waste sites
to the Scrubgrass facility. The fuel is burned in the Scrubgrass facility where
it is treated with various substances such as limestone during the electric
generation process. Ash, which is a byproduct of the waste-coal combustion
process, is removed from the Scrubgrass facility and returned to the original
waste site, which is reclaimed in part by deposit of the ash along with the
soil. Under existing regulations, ash is not classified as a hazardous waste.
However, various environmental organizations have recently been lobbying for
changes to the applicable regulations for the classification of ash. If there
are changes to the waste classification of ash, our ash disposal costs may
significantly increase which could have material adverse affect on the results
of operations and financial position.

Microgy Cogeneration Systems

Microgy has no projects currently in operation. Depending on the location of
each individual plant, state implementation plans of the Clean Air and Clean
Water Acts as described above may apply. The state permitting process could
involve lengthy delays for fact and law source reviews and to purchase of
offsets in order to counter-balance emissions. Microgy's projects may be subject
to the following additional regulations:

Current Regulations

The major Federal law affecting manure management on animal operations is the
Clean Water Act, under which the National Pollutant Discharge Elimination
System, or NPDES, program covers Concentrated Animal Feeding Operations, or
CAFOs. Federal NPDES permits may be issued by EPA or any state authorized by EPA
to implement the NPDES program. Forty-three states are certified by the EPA to
issue their own NPDES permits. Of note, EPA materials published in 1999
indicated that 32 states have a requirement covering application rates of manure
on the land, and 27 states require at least some animal operations to develop
and use waste management plans.

In addition, each distributed generation site with an installed reciprocating
engine and generator is regulated under a state implementation plan (SIP)
developed in accordance with the Federal Clean Air Act. The engine emissions at
each site will be covered under a general statewide permit or a point source
permit. The engine emissions are considered a minor point source for both the
general and specific permit and no other emission control devices are required.

                                       13

<PAGE>

Anticipated Changes to Current Regulations

In 1999, the US Department of Agriculture, or USDA, and EPA announced the
Unified National Strategy for Animal Feeding Operations, which sets forth a
framework of actions USDA and EPA plan to take under existing legal and
regulatory authority to minimize impacts to water quality and public health from
animal feeding operations and to establish a national performance expectation
for animal feeding operations.

Under the Unified Strategy, all CAFO owners and operators will be expected to
develop and implement comprehensive nutrient management plans for properly
managing the animal wastes produced at their facilities. Inclusion of such plans
as part of the NPDES permit means that for the first time, the application of
manure on land will be a part of a required Federal permit.

Proposed nutrient management plans rely on the Natural Resources Conservation
Service Field Office Technical Guide as the primary technical reference. This
guide limits manure application on land to the level determined by the more
limiting of the two major nutrients: nitrogen or phosphorus. In the past, manure
management has focused on managing manure nitrogen. Shifting to a
phosphorus-based standard will require more land on which to spread the same
amount of manure. Studies indicate that soil phosphorus levels can be rapidly
built up in the soil by the application of manure, but may take years to deplete
to levels enabling additional manure applications. Therefore, basing nutrient
management on phosphorus has significant implications for animal operations with
excess manure by increasing

     .   the acreage needed for spreading
     .   manure application costs, and
     .   the number of farms that will need alternative ways to dispose of
         manure.

Impact of Microgy System

While digesting the raw manure and burning the resulting biogas to make
electricity does not eliminate the nutrients from the manure slurry, the process
does change their chemical makeup. In the anaerobic digestion process, many of
the nutrients that were previously bound in organic molecules are mineralized,
or reduced to the inorganic forms of the nutrients. These are the forms that are
usable by crops. The organic forms in undigested manure must first be broken
down before they can be used. Because this natural breaking down process usually
takes several years, there are residual nutrients in the soil left over from
previous years' manure applications. These residuals must be taken into account
when calculating current manure application rates, resulting in less manure
being spread on the same amount of cropland. By providing the nutrients in
readily usable forms, digested manure has lower potential to produce a residual.
Therefore, more of it can be spread on an acre of cropland, thus reducing manure
spreading costs.

In addition, further environmental benefits can be achieved by subjecting the
digested manure slurry to other nutrient extraction techniques, such as chemical
precipitation. By digesting the manure, these nutrients are in a form that is
more easily extracted in such techniques.

Employees

At the time of this filing, we had nine employees, including three EPC executive
officers and other marketing, finance, engineering and administrative personnel.
The loss of any executive officer could have a material adverse effect on our
business. Our employees are not represented by a collective bargaining agreement
and we consider relations with our employees to be good.

Item 2.  PROPERTIES

Buzzard leases an approximate 83 megawatt waste coal-fired electric generating
facility located on approximately 600 acres in Venango County, Pennsylvania. The
payment terms of the lease are described in Item 1.

                                       14

<PAGE>

We leased 1,028 square feet of office space in Portsmouth, New Hampshire from
February 1996 until March 2002. In March 2002, we began leasing 2,818 square
feet of office space for our new corporate headquarters in Portsmouth, New
Hampshire under a five year lease with monthly payments of $5,520.

Microgy is a tenant-at-will for office space located in Colorado and Wisconsin
with aggregate rents of $3,728 per month.

Item 3.  LEGAL PROCEEDINGS

We are currently not involved in any legal proceedings.

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

At our 2001 Annual Meeting of Stockholders, held on November 1, 2001, the
following actions were submitted to a vote of security holders:

1. Our stockholders elected a Board of Directors to serve for the ensuing year
until their respective successors have been duly elected and qualified. The
results of the voting were as follows:

                                                     Number of Shares
                                                     ----------------
          Elected Director                        For            Withheld
          ----------------                        ---            --------

         Joseph E. Cresci                      13,999,022          45,600
         Donald A. Livingston                  14,034,022          10,600
         Peter J. Blampied                     14,031,822          12,800
         Edward B. Koehler                     14,031,822          12,800
         Robert I. Weisberg                    14,034,022          10,600
         George A. Kast                        14,031,822          12,800
         Benjamin J. Brant                     14,031,822          12,800
         Thomas M. Matthews                    14,034,022          10,600


2. Our stockholders approved an amendment to our Certificate of Incorporation to
increase the number of authorized shares of common stock, from 20,000,000 to
50,000,000 and the number of authorized shares of preferred stock, from
1,000,000 to 2,000,000. The results of the voting were as follows:

         Result                                            Number of Shares
         ------                                            ----------------

         For                                                     13,994,101
         Against                                                     49,021
         Abstain                                                      1,500

3. Our stockholders approved the adoption of a 2001 Stock Incentive Plan. The
results of the voting were as follows:

         Result                                            Number of Shares
         ------                                            ----------------

         For                                                     13,958,322
         Against                                                     86,200
         Abstain                                                        100

4. Our stockholders ratified the selection of the firm Deloitte & Touche LLP as
auditors for the fiscal year ending December 31, 2001. The results of the voting
were as follows:

                                       15

<PAGE>

         Result                                           Number of Shares
         ------                                           ----------------

         For                                                    14,041,622
         Against                                                     2,000
         Abstain                                                     1,000

                                     PART II

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

Stock Market Trading:

Our common stock trades on the NASD OTC Bulletin Board under the symbol "POWR".
As of March 20, 2002 there were approximately 251 record holders and
approximately 970 beneficial holders of our common stock.

The following table shows the quarterly high and low bid prices during 2000 and
2001 as reported by the OTC Bulletin Board:

           Year               Period                        High        Low
           ----               ------                        ----        ---

          2000          First Quarter                      $0.81       $0.44
                        Second Quarter                      0.69        0.50
                        Third Quarter                       0.75        0.47
                        Fourth Quarter                      0.69        0.41

          2001          First Quarter                       0.56        0.44
                        Second Quarter                      0.86        0.22
                        Third Quarter                       0.70        0.40
                        Fourth Quarter                      0.54        0.40

These over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.

Changes in Securities and Use of Proceeds:

During 2001, we acquired 100% of the common stock of Microgy in two related
transactions. On July 23, 2001, we exchanged our securities for approximately
87.7% of the outstanding common stock of Microgy under a June 20, 2001 agreement
with Microgy and certain principal Microgy shareholders. Under the agreement, we
agreed to offer the remaining Microgy shareholders the opportunity to exchange
their Microgy securities for our securities. On December 28, 2001, we completed
the exchange of our securities for the remaining outstanding securities of
Microgy. The details of the two exchange transactions are discussed in the
following paragraphs.

On July 23, 2001, we issued an aggregate of 5,521,549 shares of common stock and
197,760.7 shares of our newly designated Series B Convertible Preferred Stock to
certain principal stockholders of Microgy in exchange for 15,919,147 shares of
Microgy common stock. Each share of our preferred stock, which voted with our
common stock on an as-converted basis, was automatically converted into ten
shares of common stock as of November 9, 2001 upon an increase in the authorized
common stock to an amount sufficient to allow conversion of the preferred stock.
The exchange ratio of 0.4711 shares of our common stock for each share of
Microgy common stock was determined by negotiations among us, Microgy and the
primary principal Microgy shareholders. The exchange ratio is based on all of
the fully diluted equity of Microgy being exchanged for 45% of our fully diluted
equity and assumes exercise or conversion of all derivative securities. The
exchange ratio may be increased to reflect certain issuances of equity by us to
generate funds to be available for financing Microgy. However, holders of
approximately 94% of the Microgy common stock agreed to waive their right

                                       16

<PAGE>

to adjustments in the exchange ratio, other than any adjustment resulting from
400,000 options and warrants issued in September 2001. One of the principal
Microgy shareholders exchanged a warrant to purchase 800,000 shares of Microgy
common stock for a warrant to purchase our securities based on the exchange
ratio. In connection with our issuance of 400,000 options and warrants in
September 2001, we adjusted the exchange ratio to 0.4873 shares of our common
stock for each share of Microgy common stock. We issued 258,884 additional
shares of common stock to the principal Microgy shareholders on December 28,
2001 and amended the warrant issued to the principal Microgy shareholder to
reflect the new exchange ratio.

On October 17, 2001, we offered the remaining security holders of Microgy, who
owned an aggregate of 2,230,126 shares of Microgy common stock, warrants to
purchase 885,000 shares of Microgy common stock and options to purchase 290,000
shares of Microgy common stock, an opportunity to exchange their Microgy
securities for our securities based on the adjusted exchange ratio. On December
28, 2001, we issued 1,086,830 shares of common stock and exchanged warrants to
purchase 431,298 shares of our common stock and options to purchase 141,329
shares of our common stock for the remaining Microgy securities pursuant to
Regulation D. The warrants to purchase 431,298 shares are exercisable through
September 30, 2002 at an exercise price of $2.05 per share. The options to
purchase 141,329 shares were issued under our 2001 Stock Incentive Plan at an
exercise price of $3.08 per share, with scheduled expiration dates of September
18, 2006, subject to earlier termination upon termination of employment or
consultancy. An option for 116,962 of the shares vested one-third immediately,
and vests one-third on October 1, 2002 and the final one-third on October 1,
2003. An option for the other 24,367 shares vested immediately.

Under a July 23, 2001 Registration Rights Agreement, we were required to file a
resale registration statement for the former Microgy security holders by
November 30, 2001. In November 2001, the deadline for filing the registration
statement was extended to March 31, 2002.

Dividends:

We declared dividends on common stock during 1999 and 2000 as follows:

                                                                     Dividends
                                                 Dividends           Declared
       Year               Period                  Declared           per Share
       ----               ------                  --------           ---------

       1999        First Quarter                 $  171,102            $ .015
                   Second Quarter                   171,102              .015
                   Third Quarter                    171,102              .015
                   Fourth Quarter                   171,102              .015
                                                 ----------            ------
                                                 $  684,408            $ .060
                                                 ==========            ======

       2000        First Quarter                 $  171,102            $ .015
                   Second Quarter                   171,102              .015
                   Third Quarter                    171,102              .015
                   Fourth Quarter                   171,102              .015
                                                 ----------            ------
                                                 $  684,408            $ .060
                                                 ==========            ======

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.

Item 6.  SELECTED FINANCIAL DATA

The following selected financial data for the five years ended December 31, 2001
is derived from our audited consolidated financial statements. The data should
be read in conjunction with the consolidated financial statements and other
financial information included elsewhere herein. Dollars are shown in thousands
except per share data.

                                       17

<PAGE>

<TABLE>
<CAPTION>
                                                                           Year Ended December 31
                                                           --------------------------------------------------------
                                                            2001 (1)     2000        1999        1998        1997
                                                           --------    --------    --------    --------    --------
<S>                                                        <C>         <C>         <C>         <C>         <C>
Results of Operations Data:

Power generation revenues                                  $ 53,518    $ 54,303    $ 48,268    $ 45,721    $ 43,763
                                                           --------    --------    --------    --------    --------

Costs and expenses:
     Operating expenses                                      23,681      22,291      21,931      19,215      17,756
     Lease expenses                                          24,706      26,416      23,111      22,971      24,488
     General and administrative expenses                      3,973       3,603       2,455       2,197       1,995
     Reversal of provision for nonrecovery of
           project development costs                            ---         ---         ---         ---       (940)
     Depreciation and amortization                              441         415         363         285         258
                                                           --------    --------    --------    --------    --------
                                                             52,801      52,725      47,860      44,668      43,557
                                                           --------    --------    --------    --------    --------

Operating income                                                717       1,578         408       1,053         206

Other income (expense):
     Other income                                             2,135         ---         ---           8         622
     Interest income                                             78         737         111         156         581
     Interest expense                                          (185)       (320)       (375)       (461)       (424)
     Sale of NOx emission credits                               ---       1,156         607         ---         ---
     Amortization of deferred gain                              308         308         308         308         308
     Write-off of receivables in litigation                     ---         ---         ---      (3,508)        ---
     Gain on sale of project                                    ---         ---         ---         ---       7,424
                                                           --------    --------    --------    --------    --------
                                                              2,336       1,881         651      (3,497)      8,511
                                                           --------    --------    --------    --------    --------

Income (loss) before income taxes                             3,053       3,459       1,059      (2,444)      8,717

Income tax (expense) benefit                                 (1,374)     (1,632)       (470)        795      (4,103)
                                                           --------    --------    --------    --------    --------

Income (loss) before cumulative effect of a
    change in accounting principle                            1,679       1,827         589      (1,649)      4,614

Cumulative effect of a change in accounting
     principle (3)                                              ---         ---       1,189         ---         ---
                                                           --------    --------    --------    --------    --------

Net income (loss)                                          $  1,679    $  1,827    $  1,778    $ (1,649)   $  4,614
                                                           ========    ========    ========    ========    ========

Basic earnings (loss) per common share                     $   0.12    $   0.16    $   0.16    $  (0.14)   $   0.41
Diluted earnings (loss) per common share                   $   0.11    $   0.16    $   0.16    $  (0.14)   $   0.41
Dividends declared per common share                        $    ---    $   0.06    $   0.06    $   0.09    $   0.99
Weighted average number of common shares
   outstanding on a fully diluted basis                      14,746      11,409      11,407      11,407      11,260

Balance Sheet Data:

Total assets                                               $ 85,566    $ 69,284    $ 58,782    $ 55,163    $ 61,362
Working capital                                              (1,499)     (1,176)     (2,662)     (1,190)        536
Deferred gain (2)                                             4,472       4,780       5,089       5,397       5,706
Long-term obligations (3)                                    65,216      58,304      51,546      46,511      40,032
Shareholders' (deficit) equity                                4,383      (3,970)     (5,471)     (6,559)     (3,878)
</TABLE>

- --------
(1)  The Results of Operations Data for 2001 includes Microgy from July 23, 2001
     to December 31, 2001.
(2)  See Note B of the Consolidated Financial Statements.
(3)  See Note O of the Consolidated Financial Statements and the Consolidated
     Statements of Operations for further disclosures pertaining to a change in
     accounting principle.

                                       18

<PAGE>

Item 7. 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 Penelec under a 25 year power sales agreement.

In 2001, we acquired all of the common stock of Microgy, a privately held
Colorado company. Microgy holds an exclusive license in North America for
development and deployment of a proprietary technology for 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 by a payment to us of $1,500,000 and the
release of certain contingent liabilities.

Our business activities are discussed further in Item 1. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations compares our results of operations for the years ended December 31,
2001, 2000 and 1999 and should be read in conjunction with the consolidated
financial statements and notes thereto, and the comparative summary of selected
financial data appearing elsewhere in this report. Historical results and trends
which might appear should not be taken as indicative of future operations.

Cautionary Statement

This Annual Report on Form 10-K contains "forward-looking statements", as
defined by the Private Securities Litigation Reform Act of 1995, in order to
provide investors with prospective information about the Company. 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".

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 our
consolidated financial statements, 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

                                       19

<PAGE>

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 as 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, in addition to a
specified base rent, which consists of all of the lessor's debt service, equity
repayment, base return on equity and related expenses, 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-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
December 31, 2001, we have an accrued lease expense of $63,648,995 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.

As of December 31, 2001, without regard to straight-line lease accounting, we
estimate the future minimum lease payments over the remaining base term of the
Scrubgrass lease are as follows:

                          2002                 15,301,000
                          2003                 16,723,000
                          2004                 19,703,000
                          2005                 21,715,000
                          2006                 26,058,000
                    Thereafter                278,149,000
                                            -------------

                         Total              $ 377,649,000
                                            =============


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

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

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

                                       20

<PAGE>

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 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 December 31, 2001, we have an accrued power generation
revenue of $63,648,995 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 December 31,

                                       21

<PAGE>

2001, we have recorded a net deferred income tax liability of $146,396 on our
consolidated balance sheet. We have also recorded a valuation allowance of
$148,377 against our gross deferred income tax assets as of December 31, 2001,
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.

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

Year ended December 31, 2001 compared with the year ended December 31, 2000

Our net income decreased to $1,679,331, or 12 cents per share, for 2001 from
$1,826,808, or 16 cents per share, in 2000. The decrease in net income was
primarily due to:

     .  decreases in power generation revenues and interest income;
     .  the absence of revenues from sales of NOx emission credits; and
     .  increases in operating expenses and general and administrative expenses.

The effect of these changes was partially offset by an increase in other income
and decreases in lease expenses, interest expense and income tax expense.

Earnings per common share decreased to $0.12 per common share in 2001 from $0.16
per common share in 2000. The decrease was primarily due to a decrease in net
income and an increase in the weighted average common shares outstanding. The
weighted average common shares outstanding increased in 2001 due to the issuance
of additional shares for the acquisition of Microgy.

Power generation revenues decreased to $53,518,000 for 2001 from $54,303,222 in
2000 and all pertained to Scrubgrass. The decrease in power generation revenues
was primarily due to the absence in 2001 of revenues of approximately $3,687,000
from the settlement with Penelec. This decrease was partially offset by:

     .  greater output from the Scrubgrass facility;
     .  a 5% increase in certain rates billed to Penelec under the terms of the
        power sales agreement; and
     .  an increase in revenue recorded as a result of the straight-line
        accounting treatment of revenues under the power sales agreement which
        amounted to $7,460,852 in 2001 and $7,036,012 in 2000.

                                       22

<PAGE>

Scrubgrass operated at 91.2% of its capacity in 2001 as compared to 90.2% for
2000. The improvement in the capacity rate occurred primarily because of fewer
unplanned shutdowns to respond to equipment malfunctions and utility
curtailments.

Operating expenses increased to $23,681,081 for 2001 from $22,291,069 in 2000
and all pertained to Scrubgrass. The increase in operating expenses was
primarily due to:

     .   higher fuel expense from cost escalations in certain fuel supply
         agreements;
     .   higher fuel expense from changes in fuel mix and the quality of fuel
         sources;
     .   higher fuel expense from the improvement in facility output;
     .   increases in labor, labor related costs and operator fees pursuant to
         the terms of the operations and maintenance agreement; and
     .   increases in planned maintenance because of differences in the scope of
         procedures performed during the 2001 and 2000 annual maintenance
         outages.

These increases were partially offset by a decrease in expensed facility
modifications because of differences in the nature of procedures performed in
2001 versus 2000.

Lease expenses decreased to $24,705,813 for 2001 from $26,415,897 in 2000. The
decrease was primarily due to:

     .   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;
     .   decreases in scheduled base equity rents; and
     .   a decrease in additional rent paid to the lessor, which amounts to 50
         percent of the net available cash flows from Scrubgrass, as a result of
         decreases in available cash flows from Scrubgrass. During 2000, such
         cash flows included revenues and interest income from the settlement
         with Penelec and income from sales of NOx emission credits.

These decreases in lease expenses were partially offset by:

     .   an increase in lease expenses recorded as a result of the straight-line
         accounting treatment of lease expenses under the Scrubgrass lease which
         amounted to $7,460,852 in 2001 and $7,036,012 in 2000; and
     .   increases in scheduled principal payments and fees for the Scrubgrass
         debt which were billed to us under the terms of the lease.

General and administrative expenses increased to $3,973,025 for 2001 from
$3,602,960 in 2000. The increase was primarily due to:

     .   Microgy overhead expenses following its acquisition on July 23, 2001;
     .   significant expenses related to the Microgy acquisition for
         post-acquisition integration, business development, and strategic
         planning;
     .   increases in our labor force for planned business expansion; and
     .   an increase in Scrubgrass insurance expense due to changes in the
         insurance market for power generation facilities.

These increases were partially offset by lower Scrubgrass management expenses
and executive compensation during 2001. Scrubgrass had incurred significant
professional fees, travel expenses and labor related costs during 2000 to
address certain non-recurring business matters including the settlement with
Penelec and the replacement of the letter of credit.

Interest income decreased to $78,203 for 2001 from $736,867 in 2000. The
decrease was primarily due to:

     .   the absence of approximately $608,000 of interest income from the
         settlement with Penelec;

                                       23

<PAGE>

     .   lower average interest rates for investments; and
     .   reductions in the average outstanding balances of notes receivable from
         officers.

Interest expense decreased to $185,547 for 2001 from $320,641 in 2000. 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.

We had other income of $2,135,048 in 2001 from the settlement of the Sunnyside
litigation which is discussed further under Liquidity and Capital Resources.

We earned net proceeds of $1,156,338 from the sale of NOx emissions credits in
2000. Our NOx emission credits are discussed further under Liquidity and Capital
Resources.

Income tax expense decreased to $1,373,454 for 2001 from $1,632,233 in 2000. The
decrease was primarily due to a decrease in income before taxes and a lower
effective tax rate in 2001. The decrease in the effective tax rate was largely
due to lower state income taxes.

Year ended December 31, 2000 compared with the year ended December 31, 1999

Our net income in 2000 increased to $1,826,808, or 16 cents per share, from
$1,777,562, or 16 cents per share, in 1999. This increase was primarily due to
increases in power generation revenue, interest income and income from sales of
NOx emission credits. Such increases were offset in part by the absence of
income from the cumulative effect of a change in accounting principle and
increases in operating expenses, lease expenses, general and administrative
expenses, depreciation and amortization, and income tax expense.

Power generation revenues in 2000 increased to $54,303,222 from $48,268,311 in
1999 and all pertained to Scrubgrass. The increase in power generation revenues
during 2000 was primarily due to:

     .   the $3,687,000 payment from the settlement with Penelec;
     .   greater output from the Scrubgrass facility;
     .   a 5% increase in rates billed to Penelec under the terms of the power
         sales agreement; and
     .   increases in the rates charged for power generation in excess of 80
         megawatts pursuant to the terms of the settlement agreement with
         Penelec.

These increases were offset in part by a decrease in revenue recorded as a
result of the straight-line accounting treatment of revenue under the power
sales agreement which amounted to $7,036,012 in 2000 and $7,765,631 in 1999.
Scrubgrass operated at 90.2% of its capacity in 2000 as compared to 89.5% for
1999. The improvements in the capacity rate occurred primarily due to shorter
planned maintenance outages and fewer unplanned shutdowns to respond to
equipment malfunctions and utility curtailments.

Operating expenses in 2000 increased to $22,291,069 from $21,931,318 in 1999 and
all pertained to Scrubgrass. The increase in operating expenses was primarily
due to:

     .   higher fuel costs from cost escalations in fuel supply agreements and
         improvements in output at the Scrubgrass facility;
     .   increases in diesel fuel costs; and
     .   increases in labor and related costs, operator fees and operator
         bonuses under the terms of the operations and maintenance agreement.

These increases were partially offset by lower maintenance expenses and the
absence in 2000 of expenses related to Year 2000 compliance. Maintenance
expenses decreased during 2000 primarily because of differences in the scope

                                       24

<PAGE>

of procedures performed during the 1999 and 2000 annual maintenance outages and
fewer unplanned maintenance shutdowns.

Lease expenses in 2000 increased to $26,415,897 from $23,110,677 in 1999 and all
pertained to Scrubgrass. The increase in lease expenses was primarily due to:

     .   increases in the lessor's loan costs, which are passed along to us as a
         lease expense, due to higher average interest rates on the tax exempt
         bonds and variable rate term loans and loan origination costs from the
         replacement letter of credit;
     .   increases in scheduled base equity rents; and
     .   an increase in additional rent paid to the lessor, which amounts to 50
         percent of the net available cash flows from Scrubgrass, due to
         increases in available cash flows from Scrubgrass. Cash flows in 2000
         included revenues and interest income from the settlement with Penelec
         and income from increased sales of NOx emission credits.

Our overall increase in lease expenses during 2000 was partially offset because:

     .   the lessor's junior debt obligations were fully satisfied during 1999,
         so our lease expense did not include principal and interest on these
         obligations in 2000; and
     .   we had a decrease in lease expense recorded as a result of the
         straight-line accounting treatment of lease expenses under the
         Scrubgrass lease which amounted to $7,036,012 in 2000 and $7,765,631 in
         1999.

General and administrative expenses in 2000 increased to $3,602,960 from
$2,455,095 in 1999. The increase in general and administrative expenses during
2000 was primarily due to:

     .   higher Scrubgrass management costs for refinancing matters, salary
         raises and the potential sale of the Scrubgrass project;
     .   increases in professional fees because we engaged several consultants
         to consider various sale and restructuring alternatives;
     .   bonuses aggregating $710,000 to executive officers; and
     .   increases in Scrubgrass insurance premiums.

The aforementioned increases were offset in part by a decrease in legal fees
during 2000.

Depreciation and amortization increased to $415,230 in 2000 from $363,234 in
1999. Depreciation and amortization increased in 2000 primarily because our 1999
capital expenditures, which were substantially made during the third quarter,
were depreciated for the entire year in 2000.

Interest income increased to $736,867 in 2000 from $110,975 in 1999. The
increase was primary attributable to approximately $608,000 of interest income
from the settlement with Penelec and higher average interest rates on short-term
investments.

Interest expense decreased to $320,641 in 2000 from $375,208 in 1999. The
decrease was primarily attributable to reductions in the outstanding borrowings
under the Scrubgrass term credit facility which reduced in $600,000 increments
every six months through July 2000. This decrease was partially offset by
increases in average interest rates on borrowings.

Sale of NOx emission credits increased to $1,156,338 in 2000 from $606,960 in
1999. Sales of NOx emission credits are discussed further under Liquidity and
Capital Resources.

Income tax expense increased to $1,632,233 in 2000 from $470,552 in 1999. The
increase in income tax expense for 2000 was largely due to an increase in
earnings before income taxes and an increase in the effective tax rate. During
2000,

                                       25

<PAGE>

we had significant earnings from Scrubgrass which are taxed in Pennsylvania. Due
to the high tax rate in Pennsylvania, we had a material increase in state income
taxes which increased our effective tax rate for 2000.

Cumulative effect of a change in accounting principle increased our earnings by
$1,188,989 in 1999 and pertained to a change in our method of accounting for
major equipment overhauls. The cumulative effect of a change in accounting
principle did not affect 2000 operating results.

2002 Outlook

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

Power generation revenues are expected to increase in 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 2002 primarily due to:

     .   an approximate 4% average escalation in rates for fuel supply
         agreements;
     .   changes in the scope of planned maintenance procedures and facility
         modifications; and
     .   a 5% escalation in operator fees under the terms of the operations and
         maintenance agreement

Lease expenses are expected to increase in 2002 primarily because:

     .   we have scheduled increases in base equity rent payments; and
     .   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:

     .   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;
     .   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;
     .   we expect the lessor to bill us lower scheduled term loan principal
         payments pursuant to the terms of the lease; and
     .   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 2002
primarily because:

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

                                       26

<PAGE>

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

Assuming no additional share issuances and no repurchases, our weighted average
common shares outstanding is expected to increase from 14,144,222 shares in 2001
to 20,251,653 shares in 2002. We expect this increase because our shares issued
for the acquisition of Microgy, which were weighted from the date they were
issued in 2001, are expected to be outstanding for all of 2002. This increase is
expected to significantly dilute our basic and diluted earnings per common share
during 2002.

Recently Issued Accounting Standards

There are four recently issued accounting standards which are required to be
adopted in the future which are described in Note B to the Consolidated
Financial Statements.

Liquidity and Capital Resources

Operating Activities

Our cash provided by operating activities was $2,687,504 in 2001, $469,770 in
2000 and $2,752,441 in 1999. 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.

We reported net earnings of $1,679,331 during 2001 which contributed
significantly to the cash provided by operating activities. The following
adjustments, which did not impact our cash flows, need to be considered in order
to reconcile our net income in 2001 to our net cash provided by operating
activities:

Depreciation and amortization - During 2001, we recognized depreciation and
amortization for lease rights of $149,004, licensed technology rights of
$81,823, deferred financing costs of $43,580, machinery and equipment
modifications of $154,405 and equipment and furniture of $12,598.

Deferred income taxes - We had a net deferred income tax liability of $146,396
as of December 31, 2001 versus a net deferred income tax asset of $755,193 as of
December 31, 2000. On July 23, 2001, we acquired a significant deferred tax
liability from Microgy related to licensed technology rights which was the
primary reason we changed to a net deferred income tax liability position as of
December 31, 2001. This change was partially offset by the acquired tax benefits
from Microgy's net operating loss carryforwards. The individual components of
our deferred income tax expense, which amounted to $104,425 in 2001, are
outlined in the notes to our consolidated financial statements.

Deferred gain, net - Our deferred gain, net, decreased to $4,471,955 as of
December 31, 2001 from $4,780,365 as of December 31, 2000. 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.

Release of Sunnyside liabilities - We reported other income of $635,048 from the
release of contingent liabilities related to Sunnyside. These liabilities are
discussed further in Liquidity and Capital Resources.

Stock-based compensation - We issued stock options with a fair market value of
$113,600 to a director for services performed for us.

We also offer the following information to discuss changes in operating assets
and liabilities which most notably impacted our cash position during 2001:

                                       27

<PAGE>

Receivable from utility - Our receivable from utility increased to $7,905,864 as
of December 31, 2001 from $7,336,408 as of December 31, 2000. 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 $607,590 as of
December 31, 2001 from $760,980 as of December 31, 2000. The decrease was
largely due to planned reductions in fuel inventory quantities at Scrubgrass.

Accounts payable and accrued expenses - Our accounts payable and accrued
expenses increased to $9,382,471 as of December 31, 2001 from $6,952,054 as of
December 31, 2000. The increase was primarily because:

     .    our corporate taxes payable increased by $413,858 primarily due to the
          deferral of tax payments for 2001 taxable earnings until 2002;

     .    our additional rent accrual increased by $272,000 primarily due to
          increases in cash flows from Scrubgrass operations;

     .    we had numerous increases in expenses which are discussed in more
          detail under Results of Operations; and

     .    our lease payable for the lessor's bond interest increased by $806,420
          due to longer bond maturities. The effect of the longer bond
          maturities was partially offset by lower interest rates.

Long-term debt to supplier - We financed the 1997 rewind of the Scrubgrass
generator with an installment note from the generator manufacturer which had
outstanding balances of $97,893 as of December 31, 2001 and $190,446 as of
December 31, 2000. The decrease is due to an installment payment made in May
2001. The last installment for this obligation is due in May 2002.

Investing Activities

Our cash used in investing activities was $1,071,915 in 2001, $291,009 in 2000
and $284,623 in 1999. 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 $808,936
in 2001, $678,524 in 2000 and $739,128 in 1999. Our payments for major equipment
overhauls amounted to $415,460 in 2001, $418,670 in 2000 and $1,271,141 in 1999.
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.

Acquisitions - We made expenditures of $412,120 in 2001 for contract
negotiations and due diligence activities related to the acquisition of Microgy.
These expenditures were capitalized in the purchase price of Microgy in the
accompanying consolidated financial statements.

Property, plant and equipment - Property, plant and equipment expenditures were
$232,691 in 2001, $3,023 in 2000 and $829,117 in 1999. During 1999, we made
machinery and equipment modifications of $811,568 to improve the air quality
emission systems at the Scrubgrass facility which are discussed further in the
next section. During 2001, we made machinery and equipment modifications of
$227,295 to improve the raw water pre-treatment systems at the Scrubgrass
facility. The remaining capital expenditures in each period were primarily
purchases of office equipment for our corporate headquarters.

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<PAGE>

Sale of NOx Credits - Under applicable environmental laws and regulations,
Scrubgrass needed to achieve certain seasonal nitrogen oxide emission levels
beginning on May 1, 1999, and will also be required to achieve reduced emission
standards by May 2003. Due to the efficient design of the Scrubgrass facility,
Scrubgrass met the 1999 requirements without any modifications to the facility.
However, as discussed in the previous section, we made capital improvements of
$811,568 during 1999 to the Scrubgrass facility, which are expected to enable
Scrubgrass to meet the stricter standards in 2003. By making improvements to the
facility before 2003, we anticipated that we would not require a portion of our
future NOx Credits to maintain our compliance with the applicable regulations.
Consequently, we sold our anticipated excess NOx Credits in recent years and
used the proceeds to finance the capital improvements and generate additional
cash flows for operations. We expect to comply with all material environmental
regulations for the foreseeable future without any additional material
modifications to the Scrubgrass facility. Recently, we received our next award
of NOx Credits 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 Credits
to maintain our compliance with the applicable regulations and sold the
anticipated excess NOx Credits in 2002 for $2,428,200.

Project development activities - We expect to begin 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.

Financing Activities

Our cash used in financing activities was $1,454,984 in 2001, $177,283 in 2000
and $2,524,046 in 1999. We offer the following information concerning the
financing activities for our business:

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.

Working Capital Loan for Scrubgrass - 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 $1,116,905 as of December 31, 2001 and $2,742,961 as of
December 31, 2000. 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. Awaiting the
refinancing, we have been keeping the outstanding balance of this loan at
reduced levels to meet the existing paydown requirements of the original
facility, which requirements have already been met for 2001 and 2002. The
outstanding balance of this loan was also reduced as of December 31, 2001 in
anticipation of paying the higher balances in accounts payable and accrued
expenses.

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:

     .    Buzzard's Lessee Working Capital Loan commitment expires in December
          2002.

     .    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

                                       29

<PAGE>


requirements to $8 million in 2003 through 2005. After 2005, the available
working capital facility and annual paydown requirements would reduce
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 December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                         Balance at      Balance at                                         Matures
    Description of the Obligation         12/31/01        12/31/00          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                   10,669,663       12,541,087     7.5475% (through 2000)              2005
                                                                         7.6725% (thereafter)

   Variable rate term loan                8,344,479       10,061,427     LIBOR + 1.250%                      2004

Buzzard's debt obligations:

   Variable rate term loan                  985,747        1,188,573     LIBOR + 1.250%                      2004

   Working capital loan                   1,116,905        2,742,961     LIBOR + 1.125% (through 2000)       2002
                                                                         LIBOR + 1.250% (thereafter)
</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.

Notes Receivable from Officers - We have outstanding notes receivable from
officers and directors for shares purchased in connection with stock option
plans which amounted to $645,948 as of December 31, 2001 and $445,948 as of
December 31, 2000. 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. During 2000, we received aggregate note repayments of $363,783
from executive officers. During 2001, executive officers borrowed an aggregate
of $200,000 from us.

Term Credit Facility for Scrubgrass - In June 1997, Buzzard borrowed an
additional $3 million from the lessor under a three year agreement to cover the
cash deficiency which resulted from an extended annual outage at Scrubgrass and
associated costs and expenses. We made payments for this obligation of $600,000
in 2000 and $1,550,000 in 1999.

Dividends - We declared dividends on common stock of $684,408, or 6 cents per
share, in each of 2000 and 1999. 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 also paid dividends of $5,000 per year
to Buzzard's preferred stockholder during 2001, 2000 and 1999. Since we declared

                                       30

<PAGE>

dividends of $171,102 in each of 2000 and 1999 that were paid in the following
years, our dividend payments were $176,102 in 2001, $689,408 in 2000 and
$518,306 in 1999.

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 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
our consolidated financial statements.

Cash Flow Outlook

During 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
Item 1, 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 2002 are expected to be sufficient to satisfy all of these restrictions
and provide us with continuing distributions for the foreseeable future.

On December 31, 2001, our unrestricted cash balance increased to $468,271 from
$307,666 as of December 31, 2000. On December 31, 2001, our restricted cash
balance increased to $1,014,580 from $587,476 as of December 31, 2000. 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.

During the three months ended March 31, 2002, we received distributions of
$1,555,506 from Scrubgrass which significantly exceeded our distributions of
$298,750 from 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, we received a partial
distribution of our revenues from 2002 sales of NOx Credits from Scrubgrass
during the three months ended March 31, 2002. Assuming the continuing trends of
favorable operations and low interest rates, and distribution of our remaining
revenues from 2002 sales of NOx Credits, we expect to receive record levels of
distributions from Scrubgrass in 2002. Therefore, for the next twelve months, we
expect that distributions from Scrubgrass, combined with our current cash
balances, would likely be sufficient to fund:

     .    EPC's corporate overhead requirements;

     .    Microgy's corporate overhead requirements prior to the development or
          construction of power projects;

     .    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

                                       31

<PAGE>

resources. There can be no assurance that such financing would be obtained or,
if obtained, would be on terms acceptable to us.

During 2002, Microgy plans to commence the sale, development and construction of
projects based upon the anaerobic digestion technology license. 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 Annual Report on Form 10-K.

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.

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 $2.3 million through December
31, 2001. 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

                                       32

<PAGE>

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.

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. 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 our 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.

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<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.

Our 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 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

                                       34

<PAGE>

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, 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:

                                       35

<PAGE>

     .  site agreements;
     .  supply contracts;
     .  design/build or other construction related agreements;
     .  power sales contracts;
     .  various co-product sales agreements;
     .  waste disposal agreements;
     .  licenses;
     .  environmental and other permits;
     .  local government approvals; and
     .  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 unable to defend such claim successfully or obtain
indemnification or warranty recoveries, there may be a material adverse effect
on our financial condition.

                                       36

<PAGE>

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.

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.

                                       37

<PAGE>

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 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.

                                       38

<PAGE>

Item 7A. 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 effect of converting the
variable rate borrowings to fixed rate borrowings for specified time periods.

Lease Expense - As a lease cost of the Scrubgrass facility, 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 Scrubgrass monitors
market conditions for interest rates and, from time to time, enters into
interest rate swaps to manage the interest payments for Scrubgrass. The interest
rate swaps have the effect of converting the variable rate borrowings to fixed
rate borrowings for specified time periods.

As of December 31, 2001, the aggregate outstanding balance of our variable rate
debt obligations was $2,852,652. As of December 31, 2001, the aggregate
outstanding balance of the lessor's variable rate debt obligations, which are
passed along to us as a lease expense, was $143,944,479. Based on these
balances, an immediate change of one percent for the variable interest rates
would cause a change in interest expense of $28,527 and lease expense of
$1,439,445. 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.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements listed in the following Index to Financial Statements
are filed as a part of this annual report under Item 14 - Exhibits, Index to
Financial Statements, and Reports on Form 8-K.

                          Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                            ----
<S>                                                                                                         <C>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES

Independent Auditors' Report                                                                                 F-1

Consolidated Balance Sheets as of December 31, 2001 and 2000                                                 F-2

Consolidated Statements of Operations and Other Comprehensive Income for the Years Ended December
31, 2001, 2000 and 1999                                                                                      F-3

Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 2001, 2000 and 1999                                                                             F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999                   F-5

Notes to Consolidated Financial Statements                                                                   F-6

Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None
</TABLE>

                                       39

<PAGE>

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS

Information with respect to our directors may be found in the section captioned
"Occupations of Directors" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the 2002 Annual Meeting of
Shareholders. Such information is incorporated herein by reference.

Item 11.  EXECUTIVE COMPENSATION

Information with respect to this item may be found in the section captioned
"Compensation and Other Information Concerning Directors and Officers" appearing
in the definitive Proxy Statement to be delivered to shareholders in connection
with the 2002 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to this item may be found in the sections captioned
"Principal Holders of Voting Securities" and "Election of Directors" appearing
in the definitive Proxy Statement to be delivered to shareholders in connection
with the 2002 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this item may be found in the section captioned
"Compensation and Other Information Concerning Directors and Officers" appearing
in the definitive Proxy Statement to be delivered to shareholders in connection
with the 2002 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.

                                       40

<PAGE>

                                     PART IV

Item 14. INDEX TO FINANCIAL STATEMENTS, EXHIBITS, AND REPORTS ON FORM 8-K

The following documents are filed as part of this annual report:

         (a) 1. Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                                    Page
                                                                                                                    ----
<S>                                                                                                                 <C>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES

Independent Auditors' Report                                                                                         F-1

Consolidated Balance Sheets as of December 31, 2001 and 2000                                                         F-2

Consolidated Statements of Operations and Other Comprehensive Income for the Years Ended December
31, 2001, 2000 and 1999                                                                                              F-3

Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 2001, 2000 and 1999                                                                                     F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999                           F-5

Notes to Consolidated Financial Statements                                                                           F-6
</TABLE>

         (a) 2. Financial Statement Schedules

The following consolidated financial statement schedule is required to be filed
with this annual report:

Schedule II - Valuation and Qualifying Accounts
- -----------------------------------------------

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
              Column A                   Column B                   Column C              Column D        Column E
- ----------------------------------------------------------------------------------------------------------------------
                                                          Additions      Additions
                                        Balance at     (resulting from   (charged to
                                       beginning of    acquisition of    income tax                      Balance at
            Description                   period         subsidiary)     expense)        Deductions    end of period
- ----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>             <C>               <C>             <C>          <C>
Year Ended December 31, 2000:
- -----------------------------
    Valuation reserve for net
    operating loss carryforwards        $  -----        $   -----          $ -----                       $   -----

Year Ended December 31, 2001:
- -----------------------------
    Valuation reserve for net
    operating loss carryforwards        $  -----        $ 139,521          $ 8,856                       $ 148,377
</TABLE>

                                       41







<PAGE>

(a) 3. Exhibits

The following Exhibits are included in this report:

<TABLE>
<CAPTION>
     Exhibit                                                                                    Incorporation
      Number       Description                                                                    Reference
      ------       -----------                                                                    ---------
     <S>         <C>                                                                            <C>
      3.01       Certificate of Incorporation, as amended.

      3.02       Certificate of Designations related to the Company's newly designated, $.01         J
                 par value, Series B Convertible Preferred Stock.

      3.03       Amendment to Certificate of Incorporation effective November 9, 2001.

      3.04       Bylaws of the Registrant, as amended.                                               F

      10.01      Share Exchange Agreement dated June 20, 2001 among the Company, Microgy and         H
                 the Principal Microgy Shareholders.

      10.02      Stockholders' Agreement dated July 23, 2001 among the Company, the Principal        H
                 Microgy Shareholders, Joseph E. Cresci and Donald A. Livingston.

      10.03      Registration Rights Agreement dated July 23, 2001 among the Company, the            H
                 Principal Microgy Shareholders, Joseph E. Cresci, Donald A. Livingston and
                 future exchanging Microgy security holders who become a party thereto.

      10.04      Form of Joinder Agreement related to Share Exchange Agreement.                      H

      10.05      Form of Waiver Agreement dated July 23, 2001 executed by certain Microgy            H
                 Shareholders.

      10.06      Warrant Agreement dated July 23, 2001 between the Company and Daniel J.             I
                 Eastman.

      10.07      Technology Licensing Agreement dated May 12, 2000 between                           K
                 Microgy and Danish K Biogas Technology, A.S. (portions of this
                 exhibit have been omitted and filed separately with the
                 Securities and Exchange Commission pursuant to a request for
                 confidential treatment).

      10.08      Promissory Note dated September 14, 2001 between the Company and Alco               K
                 Financial Services, LLC.

      10.09      Security Agreement dated September 14, 2001 between the Company and Alco            K
                 Financial Services, LLC.

      10.10      Warrant to purchase 50,000 shares of common stock issued to Alco Financial          K
                 Services, LLC.

      10.11      Services Agreement dated September 13, 2001 between the Company and PG&E
                 Energy Trading Power, L.P. pertaining to the sale and purchase of Nitrogen
                 Oxide Ozone Transport Region (NOx) Budget Allowances completed in 2002.

      10.12      Agreement for Power Purchases between Microgy and Wisconsin Public Service
                 Corporation dated March 21, 2002.

      10.13      Environmental Power Corporation Retirement Plan, as restated,
                 effective as of January 1, 1998 and dated as of December 23,
                 1998.

      10.14      Trust Agreement for Environmental Power Corporation Retirement
                 Plan, as amended and restated, effective as of January 1, 1998
                 and dated as of December 23, 1998.

      10.15      Indemnification Agreement dated February 12, 2002 between the
                 Company and Joseph Cresci, Donald Livingston, William Linehan,
                 and their successors.
</TABLE>

                                       42

<PAGE>

<TABLE>
     <S>         <C>                                                                    <C>
     10.16       Office Building Lease Agreement dated December 21, 2001 between
                 the Company and Merkle, Soupcoff, & Fiorentino, Inc.

     10.17       Form of Warrant Agreement executed by certain Microgy warrant
                 holders.

     10.18       Agreement for the Sale of Electric Energy from the Scrubgrass          B
                 Generating Plant by and between Pennsylvania Electric Company
                 and Scrubgrass Power Corporation dated August 7, 1987 which was
                 assigned by Scrubgrass Power Corporation to Scrubgrass
                 Generating Company, L.P. on December 15, 1990 and assigned by
                 Scrubgrass Generating Company, L.P. to Buzzard Power
                 Corporation on June 17, 1994.

     10.19       Supplemental Agreement for the Sale of Electric Energy from the        B
                 Scrubgrass Generating Plant by and between Pennsylvania
                 Electric Company and Scrubgrass Power Corporation dated
                 February 22, 1989, as amended by letter agreement dated March
                 28, 1989, which was assigned by Scrubgrass Power Corporation to
                 Scrubgrass Generating Company, L.P. on December 15, 1990 and
                 assigned by Scrubgrass Generating Company, L.P. to Buzzard
                 Power Corporation on June 17, 1994.

     10.20       Second Supplemental Agreement for the Sale of Electric Energy          B
                 from the Scrubgrass Generating Plant by and between
                 Pennsylvania Electric Company and Scrubgrass Power Corporation
                 dated September 27, 1989 which was assigned by Scrubgrass Power
                 Corporation to Scrubgrass Generating Company, L.P. on December
                 15, 1990 and assigned by Scrubgrass Generating Company, L.P. to
                 Buzzard Power Corporation on June 17, 1994.

     10.21       Third Supplemental Agreement for the Sale of Electric Energy           B
                 from the Scrubgrass Generating Plant by and between
                 Pennsylvania Electric Company and Scrubgrass Power Corporation
                 dated August 13, 1990 which was assigned by Scrubgrass Power
                 Corporation to Scrubgrass Generating Company, L.P. on December
                 15, 1990 and assigned by Scrubgrass Generating Company, L.P. to
                 Buzzard Power Corporation on June 17, 1994.

     10.22       Amendment to the Third Supplemental Agreement for the Sale of          B
                 Electric Energy from the Scrubgrass Generating Plant by and
                 between Pennsylvania Electric Company and Scrubgrass Power
                 Corporation dated November 27, 1990 which was assigned by
                 Scrubgrass Power Corporation to Scrubgrass Generating Company,
                 L.P. on December 15, 1990 and assigned by Scrubgrass Generating
                 Company, L.P. to Buzzard Power Corporation on June 17, 1994.

     10.23       Letter Agreement dated December 20, 1990 amending the Agreement        B
                 for the Sale of Electric Energy from the Scrubgrass
                 Generating Plant by and between Pennsylvania Electric Company
                 and Scrubgrass Power Corporation dated August 7, 1987, as
                 amended and supplemented from time to time through November 27,
                 1990, which was assigned by Scrubgrass Power Corporation to
                 Scrubgrass Generating Company, L.P. on December 15, 1990 and
                 assigned by Scrubgrass Generating Company, L.P. to Buzzard
                 Power Corporation on June 17, 1994.

     10.60       Management Services Agreement by and between Scrubgrass                B
                 Generating Company, L.P. and PG&E-Bechtel Generating Company
                 dated December 15, 1990 which was assigned by Scrubgrass
                 Generating Company, L.P. to Buzzard Power Corporation on June
                 17, 1994. PG&E-Bechtel Generating Company has assigned its
                 rights to this agreement ultimately to U.S. Gen. (now PG&E
                 National Energy Group). Exhibit A to this agreement was omitted
                 because it was previously filed as Exhibit 10.67.
</TABLE>

                                       43

<PAGE>

<TABLE>
     <S>         <C>                                                                    <C>
     10.61       Agreement for Operation and Maintenance of the Scrubgrass              B
                 Cogeneration Plant between Scrubgrass Generating Company, L.P.
                 and Bechtel Power Corporation dated December 21, 1990 which was
                 assigned by Scrubgrass Generating Company, L.P. to Buzzard
                 Power Corporation on June 17, 1994. Bechtel Power Corporation
                 has assigned its rights to this agreement ultimately to U.S.
                 Operating Services Company (now PG&E Operating Services
                 Company).

     10.62       First Amendment to the Agreement for Operation and Maintenance         B
                 of the B Scrubgrass Cogeneration Plant between Buzzard Power
                 Corporation and, ultimately, U.S. Operating Services Company
                 (now PG&E Operating Services Company) dated December 22, 1995.

     10.67       Appendix I to the Amended and Restated Participation Agreement,        G
                 dated as of G December 22, 1995, among Buzzard Power
                 Corporation, Scrubgrass Generating Company, L.P., Environmental
                 Power Corporation, Bankers Trust Company and Credit Lyonnais,
                 which Appendix defines terms used and not otherwise defined in
                 other contracts.

     10.70       Stock Pledge Agreement, dated December 19, 1991, between               D
                 Environmental Power Corporation and Scrubgrass Generating
                 Company, L.P.

     10.71       Amended and Restated Participation Agreement, dated as of              G
                 December 22, 1995, among Buzzard Power Corporation, Scrubgrass
                 Generating Company, L.P., Environmental Power Corporation,
                 Bankers Trust Company and Credit Lyonnais.

     10.72       Amendment No. 1, dated as of May 22, 1997, to the Amended and          C
                 Restated Participation Agreement, dated as of December 22,
                 1995, among Buzzard Power Corporation, Scrubgrass Generating
                 Company, L.P., Environmental Power Corporation, Bankers Trust
                 Company and Credit Lyonnais.

     10.73       Director Option Plan.                                                  F

     10.80       Amended and Restated Lease Agreement between Scrubgrass                B
                 Generating Company, L.P., a Delaware limited partnership, as
                 Lessor, and Buzzard Power Corporation, a Delaware corporation,
                 as Lessee, dated as of December 22, 1995. Schedules and similar
                 attachments listed in the Lease have been omitted and the
                 Company agrees to furnish supplementally a copy of any omitted
                 schedule or attachment to the Securities and Exchange
                 Commission upon request.

     10.83       Amended and Restated Disbursement and Security Agreement               B
                 between Scrubgrass Generating Company, L.P., as Lessor, Buzzard
                 Power Corporation, as Lessee, Bankers Trust Company as
                 Disbursement Agent and Credit Lyonnais acting through its New
                 York Branch as Agent, dated as of December 22, 1995. Schedules
                 and similar attachments listed in this agreement have been
                 omitted and the Company agrees to furnish supplementally a copy
                 of any omitted schedule or attachment to the Securities and
                 Exchange Commission upon request.

     10.84       Amended and Restated Lessee Working Capital Loan Agreement             B
                 between Scrubgrass Generating Company, L.P., as Lender, and
                 Buzzard Power Corporation, as Lessee, dated as of December 22,
                 1995.

     10.85       Amendment No. 1, dated as of May 22, 1997, to the Amended and          C
                 Restated Disbursement and Security Agreement between Scrubgrass
                 Generating Company, L.P., as Lessor, Buzzard Power Corporation,
                 as Lessee, Bankers Trust Company as Disbursement Agent and
                 Credit Lyonnais acting through its New York Branch as Agent,
                 dated as of December 22, 1995.
</TABLE>

                                       44

<PAGE>

<TABLE>
<S>        <C>                                                                              <C>
10.91      Amendment No. 2, dated as of September 2, 1998, to the Amended and Restated      E
           Participation Agreement, dated as of December 22, 1995, among Buzzard Power
           Corporation, Scrubgrass Generating Company, L.P., Environmental Power
           Corporation, Bankers Trust Company and Credit Lyonnais.

10.92      Amendment No. 1, updated as of October 9, 1998, to the Amended and Restated      E
           Disbursement and Security Agreement between Scrubgrass Generating Company,
           L.P., as Lessor, Buzzard Power Corporation, as Lessee, Bankers Trust Company
           as Disbursement Agent and Credit Lyonnais acting through its New York Branch
           as Agent, dated as of December 22, 1995.

10.93      Amendment No. 1, dated as of June 1, 1996, but not executed until July 24,       E
           1998, to the Amended and Restated Lease Agreement between Scrubgrass
           Generating Company, L.P., a Delaware limited partnership, as Lessor, and
           Buzzard Power Corporation, a Delaware corporation, as Lessee, dated as of
           December 22, 1995.

10.94      Lease between Adams Realty Trust and Environmental Power Corporation, dated      E
           January 26, 1999.

10.95      Settlement Agreement and Release between GEC Alsthom International, Inc. and     E
           Buzzard Power Corporation dated May 28, 1998.

10.96      Purchase and Sale Agreements, dated as of December 16, 1998, January 4,          E
           1999 E and January 8, 1999, between PG&E Energy Trading - Power, L.P. and
           Buzzard Power Corporation pertaining to Nitrogen Oxide Ozone Transport
           Region (NOx) Budget Allowances.

10.97      Environmental Power Corporation Medical Expense Reimbursement Plan               E
           effective E as of September 1, 1998 and dated as of December 18, 1998.

10.98      Environmental Power Corporation Defined Benefit Pension Plan effective as        E
           of E January 1, 1998 and dated as of December 23, 1998.

10.99      Settlement Agreement, dated August 3, 1999 and effective February 27, 2000,      F
           among Buzzard Power Corporation, Scrubgrass Generating Company L.P. and
           Pennsylvania Electric Company.

11         Computation of Earnings per Share.

21         Subsidiaries of the Registrant.

23.1       Consent of Deloitte & Touche LLP.
</TABLE>

Incorporation References:

A            Intentionally omitted

B            Previously filed as part of the Company's Report on Form 10-K for
             the year ended December 31, 1996 (Commission File No. 0-15472).

C            Previously filed as part of the Company's Report on Form 10-Q for
             the period ended June 30, 1997 (Commission File No. 0-15472).

D            Previously filed as part of the Company's Report on Form 10-K for
             the year ended December 31, 1997 (Commission File No. 0-15472).

E            Previously filed as part of the Company's Report on Form 10-K for
             the year ended December 31, 1998 (Commission File No. 0-15472).

F            Previously filed as part of the Company's Report on Form 10-K for
             the year ended December 31, 1999 (Commission File No. 0-15472).

                                       45

<PAGE>

<TABLE>
<S>        <C>
           G       Previously filed as part of the Company's Report on Form
                   10-K for the year ended December 31, 2000 (Commission
                   File No. 0-15472).

           H       Previously  filed as part of Amendment  No. 7 to Schedule 13D
                   filed by Joseph E. Cresci on August 2, 2001

           I       Previously filed as part of Schedule 13D filed by Daniel J.
                   Eastman on August 2, 2001

           J       Previously  filed as part of the Company's Report on Form 8-K
                   dated as of  August 7, 2001 (Commission File No. 0-15472).

           K       Previously filed as part of the Company's Report on Form
                   10-Q for the period ended September 30, 2001 (Commission
                   File No. 0-15472).

(b) Reports on Form 8-K

            i).   On December 28, 2001, the Registrant disclosed that William
                  D. Linehan returned to EPC following a leave of absence and
                  was named Acting Chief Financial Officer and Acting
                  Treasurer effective November 20, 2001.

           ii).   On December 28, 2001, the Registrant disclosed pursuant to
                  Regulation FD the Letter to Shareholders dated November 30,
                  2001, which was included in its Third Quarter 2001 Quarterly
                  Brochure to Shareholders.
</TABLE>

                                       46

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

Dated:                                      ENVIRONMENTAL POWER CORPORATION

April 1, 2002                       By             /s/ Joseph E. Cresci
                                            ------------------------------------
                                                  Joseph E. Cresci, Chairman
                                                  and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act 1934, this report
has been signed below by the following persons on behalf of registrant and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         Signature                    Title                              Date
<S>                                   <C>                                <C>
  /s/ Joseph E. Cresci                Chairman, Chief                    April 1, 2002
- ----------------------------------
     Joseph E. Cresci                 Executive Officer,
                                      & Director (Principal
                                      Executive Officer)

  /s/ Donald A. Livingston            President & Chief                  April 1, 2002
- ---------------------------
    Donald A. Livingston              Operating Officer


   /s/ William D. Linehan             Acting Treasurer and Chief         April 1, 2002
- ---------------------------
     William D. Linehan               Financial Officer
                                      (Principal Financial and
                                      Accounting Officer)

 /s/ Peter J. Blampied                Director                           April 1, 2002
- ----------------------------------
    Peter J. Blampied

/s/ Benjamin Brant                    Director                           April 1, 2002
- ----------------------------------
   Benjamin Brant

/s/ Edward B. Koehler                 Director                           April 1, 2002
- ----------------------------------
   Edward B. Koehler

/s/ George Kast                       Director                           April 1, 2002
- ----------------------------------
   George Kast

/s/ Tom W. Matthews                   Director                           April 1, 2002
- ----------------------------------
  Tom W. Matthews

/s/ Robert I. Weisberg                Director                           April 1, 2002
- ----------------------------------
   Robert I. Weisberg
</TABLE>

                                       47

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders of
   Environmental Power Corporation

We have audited the accompanying consolidated balance sheets of Environmental
Power Corporation (the "Corporation") and subsidiaries as of December 31, 2001
and 2000 and the related consolidated statements of operations and comprehensive
income, shareholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the index at Item 14, (a)2. These
consolidated financial statements and financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Environmental Power Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Notes B and O to the consolidated financial statements, the
Corporation changed its method of accounting for major equipment overhauls in
1999.

/s/ Deloitte & Touche LLP


Boston, Massachusetts
March 1, 2002

                                      F-1

<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                             December 31      December 31
                                                                                                 2001            2000
                                                                                            -------------    -------------
<S>                                                                                         <C>              <C>
ASSETS

CURRENT ASSETS:
    Cash  and  cash equivalents                                                             $     468,271    $     307,666
    Restricted cash                                                                             1,014,580          587,476
    Receivable from utility                                                                     7,905,864        7,336,408
    Other current assets                                                                          607,590          760,980
                                                                                            -------------    -------------
            TOTAL CURRENT ASSETS                                                                9,996,305        8,992,530

PROPERTY, PLANT  AND  EQUIPMENT, NET                                                              652,830          558,015

DEFERRED INCOME TAX ASSET                                                                               0          755,193

LEASE RIGHTS, NET                                                                               2,161,503        2,310,507

ACCRUED POWER GENERATION REVENUES                                                              63,648,995       56,188,143

GOODWILL                                                                                        4,912,866                0

LICENSED TECHNOLOGY RIGHTS, NET                                                                 3,628,177                0

OTHER ASSETS                                                                                      565,570          479,786
                                                                                            -------------    -------------

           TOTAL ASSETS                                                                     $  85,566,246    $  69,284,174
                                                                                            =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
    Accounts payable and accrued expenses                                                   $   9,382,471    $   6,952,054
    Dividends payable on common stock                                                                   0          171,102
    Secured promissory note payable to related party                                              750,000                0
    Other current liabilities                                                                   1,363,108        3,045,787
                                                                                            -------------    -------------
          TOTAL CURRENT LIABILITIES                                                            11,495,579       10,168,943

DEFERRED GAIN, NET                                                                              4,471,955        4,780,365

SECURED PROMISSORY NOTES PAYABLE
    AND OTHER BORROWINGS                                                                        1,420,467        2,116,309

DEFERRED INCOME TAX LIABILITY                                                                     146,396                0

ACCRUED  LEASE  EXPENSES                                                                       63,648,995       56,188,143
                                                                                            -------------    -------------
         TOTAL LIABILITIES                                                                     81,183,392       73,253,760
                                                                                            -------------    -------------

SHAREHOLDERS' EQUITY (DEFICIT):
    Preferred Stock ($.01 par value; 2,000,000 and 1,000,000 shares authorized
         as of December 31, 2001 and 2000, respectively;
         no shares issued)                                                                              0                0
    Preferred Stock (no par value, 10 shares authorized; 10 shares
         issued as of December 31, 2001 and 2000, respectively)                                       100              100
    Common Stock ($.01 par value; 50,000,000 and 20,000,000 shares
        authorized;  21,370,293 and 12,525,423 shares issued; and
         20,251,653 and 11,406,783 shares outstanding as of
         December 31, 2001 and 2000, respectively.)                                               213,702          125,254
    Additional paid-in capital                                                                  6,850,046                0
    Accumulated deficit                                                                        (1,518,390)      (3,192,721)
    Accumulated other comprehensive loss                                                          (60,385)               0
                                                                                            -------------    -------------
                                                                                                5,485,073       (3,067,367)

    Treasury stock (1,118,640 common shares, at cost, as of
         December 31, 2001 and 2000, respectively)                                               (456,271)        (456,271)
    Notes receivable from officers and board members                                             (645,948)        (445,948)
                                                                                            -------------    -------------
          TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                                  4,382,854       (3,969,586)
                                                                                            -------------    ------------

          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                              $  85,566,246    $  69,284,174
                                                                                            =============    =============
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-2

<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                            Year Ended December 31
                                                                      2001            2000            1999
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
POWER GENERATION REVENUES                                         $ 53,518,000    $ 54,303,222    $ 48,268,311
COSTS AND EXPENSES:
     Operating expenses                                             23,681,081      22,291,069      21,931,318
     Lease expenses                                                 24,705,813      26,415,897      23,110,677
     General and administrative expenses                             3,973,025       3,602,960       2,455,095
     Depreciation and amortization                                     441,410         415,230         363,234
                                                                  ------------    ------------    ------------
                                                                    52,801,329      52,725,156      47,860,324
                                                                  ------------    ------------    ------------
OPERATING INCOME                                                       716,671       1,578,066         407,987
                                                                  ------------    ------------    ------------
OTHER INCOME (EXPENSE):
     Interest income                                                    78,203         736,867         110,975
     Interest expense                                                 (185,547)       (320,641)       (375,208)
     Amortization of deferred gain                                     308,410         308,411         308,411
     Sales of NOx emission credits                                         ---       1,156,338         606,960
     Settlement of the Sunnyside Project litigation                  2,135,048             ---             ---
                                                                  ------------    ------------    ------------
                                                                     2,336,114       1,880,975         651,138
                                                                  ------------    ------------    ------------
INCOME BEFORE INCOME TAXES                                           3,052,785       3,459,041       1,059,125
INCOME TAX EXPENSE                                                  (1,373,454)     (1,632,233)       (470,552)
                                                                  ------------    ------------    ------------
INCOME BEFORE CUMULATIVE EFFECT OF A
    CHANGE IN ACCOUNTING PRINCIPLE                                   1,679,331       1,826,808         588,573
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
   PRINCIPLE, NET OF $812,440 IN INCOME TAXES                              ---             ---       1,188,989
                                                                  ------------    ------------    ------------
NET INCOME                                                           1,679,331       1,826,808       1,777,562
OTHER COMPREHENSIVE LOSS:
    Minimum pension liability adjustment, net of
         income tax benefit of $39,606                                 (60,385)            ---             ---
                                                                  ------------    ------------    ------------
COMPREHENSIVE INCOME                                              $  1,618,946    $  1,826,808    $  1,777,562
                                                                  ============    ============    ============
DIVIDENDS DECLARED:
     Common shares                                                $          0    $    684,408    $    684,408
     Preferred shares                                             $      5,000    $      5,000    $      5,000
     Dividends declared per common share                          $       0.00    $       0.06    $       0.06

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
     Basic                                                          14,144,222      11,406,783      11,406,783
     Diluted                                                        14,745,695      11,408,809      11,407,076
BASIC EARNINGS PER COMMON SHARE:
          Income before cumulative effect of a change in
             accounting principle                                 $       0.12    $       0.16    $       0.05
          Cumulative effect of a change in accounting principle            ---             ---            0.11
                                                                  ------------    ------------    ------------
          Net income                                              $       0.12    $       0.16    $       0.16
                                                                  ============    ============    ============
DILUTED EARNINGS PER COMMON SHARE:
          Income before cumulative effect of a change in
             accounting principle                                 $       0.11    $       0.16    $       0.05
          Cumulative effect of a change in accounting principle            ---             ---            0.11
                                                                  ------------    ------------    ------------
          Net income                                              $       0.11    $       0.16    $       0.16
                                                                  ============    ============    ============
PRO FORMA AMOUNTS ASSUMING THE CHANGE IN
      ACCOUNTING WAS APPLIED RETROACTIVELY:

           Net income                                                                             $    588,573
           Basic and diluted earnings per common share                                            $       0.05
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-3

<PAGE>

ENVIRONMENTAL POWER CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                              Preferred
                                                   Preferred Stock              Stock                  Common Stock
                                                   ($.01 Par Value)          (No Par; 10             ($.01 Par Value)
                                                Shares         Amount       shares issued)        Shares          Amount
                                             -----------------------------  ---------------   -----------------------------
<S>                                          <C>                            <C>               <C>                <C>
BALANCE AT JANUARY 1, 1999                             0.0    $         0     $        100        12,525,423   $   125,254

     Dividends paid
     Net income
                                               ---------------------------  ---------------   -----------------------------

BALANCE AT DECEMBER 31, 1999                             -              0              100        12,525,423       125,254

     Dividends paid
     Notes receivable repayments
     Net income
                                               ---------------------------  ---------------   -----------------------------

BALANCE AT DECEMBER 31, 2000                             -              0              100        12,525,423       125,254

     Issuance of stock options for services
     Issuance of warrant to lender
     Dividends paid
     Borrowings under notes receivable
     Exchange of convertible preferred stock
          and common stock for 87.7% of
          outstanding equity of Microgy          197,760.7      1,528,690                          5,521,549        55,215
     Issuance of additional common stock
          to holders of 87.7% of outstanding
          equity in Microgy                                                                          258,884         2,589
     Conversion of preferred stock to
          common stock                          (197,760.7)    (1,528,690)                         1,977,607        19,776
     Exchange of common stock for 12.3%
          of outstanding equity of Microgy                                                         1,086,830        10,868
     Exchange of options and warrants for
          options and warrants of Microgy
     Stock issuance and registration costs
     Net income
     Minimum pension liability adjustment, net
                                               ---------------------------  ---------------   -----------------------------

BALANCE AT DECEMBER 31, 2001                             -    $         0     $        100        21,370,293   $   213,702
                                               ===========================  ===============   =============================

<CAPTION>
                                                                                Accumulated                   Receivable
                                              Additional                           Other                      from Officers
                                                Paid-in        Accumulated      Comprehensive   Treasury       and Board
                                                Capital          Deficit           Loss           Stock         Members
                                             --------------  ----------------  --------------  ------------   ------------
<S>                                          <C>             <C>               <C>             <C>            <C>
BALANCE AT JANUARY 1, 1999                     $         0     $  (5,418,275)     $        0    $ (456,271)     $(809,731)

     Dividends paid                                                 (689,408)
     Net income                                                    1,777,562
                                               ------------  ----------------  --------------  ------------   ------------

BALANCE AT DECEMBER 31, 1999                             0        (4,330,121)              0      (456,271)      (809,731)

     Dividends paid                                                 (689,408)
     Notes receivable repayments                                                                                  363,783
     Net income                                                    1,826,808
                                               ------------  ----------------  --------------  ------------   ------------

BALANCE AT DECEMBER 31, 2000                             0        (3,192,721)              0      (456,271)      (445,948)

     Issuance of stock options for services        113,600
     Issuance of warrant to lender                  14,398
     Dividends paid                                                   (5,000)
     Borrowings under notes receivable                                                                           (200,000)
     Exchange of convertible preferred stock
          and common stock for 87.7% of
          outstanding equity of Microgy          4,212,942
     Issuance of additional common stock
          to holders of 87.7% of outstanding
          equity in Microgy                        197,528
     Conversion of preferred stock to
          common stock                           1,508,914
     Exchange of common stock for 12.3%
          of outstanding equity of Microgy         829,252
     Exchange of options and warrants for
          options and warrants of Microgy           55,697
     Stock issuance and registration costs         (82,285)
     Net income                                                    1,679,331
     Minimum pension liability adjustment, net                                       (60,385)
                                               ------------  ----------------  --------------  ------------   ------------

BALANCE AT DECEMBER 31, 2001                   $ 6,850,046     $  (1,518,390)     $  (60,385)   $ (456,271)     $(645,948)
                                               ============  ================  ==============  ============   ============

<CAPTION>



                                                  Total
                                               ------------
<S>                                          <C>
BALANCE AT JANUARY 1, 1999                     $(6,558,923)

     Dividends paid                               (689,408)
     Net income                                  1,777,562
                                               ------------

BALANCE AT DECEMBER 31, 1999                    (5,470,769)

     Dividends paid                               (689,408)
     Notes receivable repayments                   363,783
     Net income                                  1,826,808
                                               ------------

BALANCE AT DECEMBER 31, 2000                    (3,969,586)

     Issuance of stock options for services        113,600
     Issuance of warrant to lender                  14,398
     Dividends paid                                 (5,000)
     Borrowings under notes receivable            (200,000)
     Exchange of convertible preferred stock
          and common stock for 87.7% of
          outstanding equity of Microgy          5,796,847
     Issuance of additional common stock
          to holders of 87.7% of outstanding
          equity in Microgy                        200,117
     Conversion of preferred stock to
          common stock                                   0
     Exchange of common stock for 12.3%
          of outstanding equity of Microgy         840,120
     Exchange of options and warrants for
          options and warrants of Microgy           55,697
     Stock issuance and registration costs         (82,285)
     Net income                                  1,679,331
     Minimum pension liability adjustment, net     (60,385)
                                               ------------

BALANCE AT DECEMBER 31, 2001                   $ 4,382,854
                                               ============
</TABLE>

                                      F-4

<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31
                                                                           2001           2000           1999
                                                                       -----------    -----------    -----------
<S>                                                                    <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                         $ 1,679,331    $ 1,826,808    $ 1,777,562
    Adjustments to reconcile net income to net cash
       provided by operating activities:
          Depreciation and amortization                                    441,410        415,230        363,234
          Deferred income taxes                                            104,425        121,112        137,816
          Cumulative effect of a change in accounting principle                ---            ---     (1,188,989)
          Amortization of deferred gain                                   (308,410)      (308,411)      (308,411)
          Release of Sunnyside Project liabilities                        (635,048)           ---            ---
          Stock-based compensation                                         113,600            ---            ---
          Accrued power generation revenues                             (7,460,852)    (7,036,012)    (7,765,631)
          Accrued lease expenses                                         7,460,852      7,036,012      7,765,631
          Changes in operating assets and liabilities:
               (Increase) decrease in receivable from utility             (569,456)    (3,632,486)     2,894,942
               Decrease (increase) in other current assets                 164,510       (115,128)       175,610
               (Increase) decrease in other assets                         (20,730)        37,599         (9,268)
               Increase (decrease) in accounts payable and
                   accrued expenses                                      1,810,425      2,200,148     (1,021,783)
               Increase in long-term liabilities                               ---         11,400         11,400
               Decrease in long-term debt to supplier                      (92,553)       (86,502)       (79,672)
                                                                       -----------    -----------    -----------
                     Net cash provided by operating activities           2,687,504        469,770      2,752,441
                                                                       -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from the collection of notes receivable                           ---            ---         46,062
    Cash paid for acquisition of Microgy, net of cash acquired            (412,120)           ---            ---
    (Increase) decrease in restricted cash                                (427,104)      (287,986)       498,432
    Property, plant and equipment expenditures                            (232,691)        (3,023)      (829,117)
                                                                       -----------    -----------    -----------
                   Net cash used in investing activities                (1,071,915)      (291,009)      (284,623)
                                                                       -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Dividend payments                                                     (176,102)      (689,408)      (518,306)
    Net (repayments) borrowings under working capital loan              (1,626,056)       748,342       (395,045)
    Borrowings under secured promissory note payable to
         related party                                                     750,000            ---            ---
    Repayment of secured promissory notes payable and
         other borrowings                                                 (202,826)      (600,000)    (1,610,695)
    (Borrowings under) proceeds from officer notes receivable             (200,000)       363,783            ---
                                                                       -----------    -----------    -----------
                  Net cash used in financing activities                 (1,454,984)      (177,283)    (2,524,046)
                                                                       -----------    -----------    -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           160,605          1,478        (56,228)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                             307,666        306,188        362,416
                                                                       -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                               $   468,271    $   307,666    $   306,188
                                                                       ===========    ===========    ===========
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-5

<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--BUSINESS AND ORGANIZATION

Environmental Power Corporation (individually "EPC" or consolidated "the
Company") is an independent developer and owner of generating facilities powered
by non-commodity fuels and renewable energy sources. The Company's operations
are discussed further in the following sections.

Scrubgrass Project

The Scrubgrass Project, located on a 600 acre site in Venango County,
Pennsylvania, is an approximately 83 Megawatt waste coal-fired electric
generating station (the "Facility") which was constructed by Bechtel Power
Corporation. On June 30, 1994, Buzzard Power Corporation ("Buzzard"), a
subsidiary of EPC, entered into an agreement to lease the Facility from
Scrubgrass Generating Company, L.P. (the "Lessor"), a joint venture of certain
wholly owned indirect subsidiaries of PG&E Corporation and Bechtel Generating
Company, Inc. On October 20, 1998, Bechtel Generating Company, Inc. transferred
its interest in the Lessor to a wholly owned subsidiary of Cogentrix Energy,
Inc. The lease provides for an initial term of 22 years with a renewal option
for up to 3 years. Pursuant to the lease, the Lessor assigned to Buzzard all
principal project agreements and its rights and obligations thereunder
including, but not limited to, the power purchase agreement, management services
agreement, operations and maintenance agreement, limestone supply agreements,
ground lease agreements, fuel agreements and transportation and materials
handling agreements. EPC has pledged Buzzard's common stock to the Lessor as
security for Buzzard's performance of its obligations as lessee. PG&E National
Energy Group ("NEG"), a wholly owned indirect subsidiary of NEG, Inc., which in
turn is a wholly owned indirect subsidiary of PG&E Corporation, manages the
Scrubgrass Project.

PG&E Operating Services Company (the "Operator"), a wholly owned indirect
subsidiary of NEG, Inc., operates the Facility pursuant to a 15-year Operating
and Maintenance Agreement (the "O&M"). The Operator prepares a budget for all
operating expenses, including a fixed management fee, and certain targeted
output performance levels, which is approved annually. Under the terms of the
O&M, the Operator can incur a liability not to exceed its management fee if the
Operator does not achieve certain targeted output performance levels.

Buzzard maintains a long-term supply agreement with Quality Aggregates, Inc. to
supply the Scrubgrass Project with limestone which, in September 1999, was
extended through the year 2008 and which may be extended up to 10 additional
years. Buzzard also maintains a 15-year agreement with Savage Industries, Inc.
for the transportation of fuel, ash and limestone which expires in 2005. The
costs established under these agreements will escalate at partially fixed and
partially indexed rates.

Buzzard sells electric output to Pennsylvania Electric Company ("Penelec"),
pursuant to a twenty-five year Power Sales Agreement ("PSA") which commenced in
June 1993, at fixed rates initially averaging 4.68 cents per kwh and which
escalated at five percent per year through calendar year 1999. For the years
2000 through 2012, the PSA provides for a rate equal to the greater of a
scheduled rate or a rate based on the PJM Billing Rate (the monthly average of
the hourly rates for purchases by the General Public Utilities Group ("GPU")
from, or sale by GPU to, the Pennsylvania-New Jersey-Maryland Interconnection).
For the years 2013 through 2015 and 2016 through 2018, if the renewal term
option is exercised, the PSA provides for a rate equal to the lower of the
average monthly PJM Billing Rate or the rate paid for the calendar year 2012
adjusted annually by the percentage change in the Gross National Product
Deflator less one percent. The Facility achieved commercial operation on June 8,
1993.

The Company was involved in a legal proceeding with Penelec whereby, among other
complaints, the Company alleged that Penelec failed to pay the Lessor and
Buzzard contract rates for power in excess of 80 Megawatts produced by the
Facility. On August 3, 1999, the Lessor and Buzzard jointly entered into a
settlement agreement with Penelec to terminate the ongoing litigation. Under the
terms of the settlement agreement, in full settlement of

                                      F-6

<PAGE>

all alleged claims, Penelec agreed to pay the Plaintiffs for all previous net
deliveries of electric energy from the Scrubgrass facility in excess of 80
Megawatt at rates set forth in the PSA, minus the total payments Penelec
previously made at 90% of a market based rate, plus interest at the legal rate
of 6%. Penelec also agreed in the settlement agreement to pay for future net
deliveries of electric energy at the rates set forth in the PSA subject to,
among other conditions, certain annual and hourly limits, with energy purchased
in excess of such limits paid for at a market based rate. On March 24, 2000,
Penelec remitted the outstanding balances due under the settlement agreement for
previous net deliveries of electric energy and interest which amounted to
approximately $3,687,000 and $608,000, respectively. The Company reported these
revenues in its consolidated statement of operations for 2000.

Buzzard deposits all revenues earned under the PSA into an account administered
by a disbursement agent. Before Buzzard can receive cash generated by the
Scrubgrass Project, all operating expenses, base lease payments (which are
described below), restricted cash deposits and other subordinated payments must
be satisfied. Buzzard, as lessee, is required to pay the Lessor, in addition to
a specified base rent, which consists of all of the Lessor's debt service,
equity repayment, base return on equity and related expenses, an additional rent
of 50 percent of the net cash flows Buzzard receives from the Scrubgrass
Project's operations. Buzzard is not required to fund operating losses, or
otherwise invest further, from sources outside of the Scrubgrass Project.

Buzzard and the Lessor have various debt obligations related to the Scrubgrass
Project. As discussed above, 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. The Scrubgrass Project had the following debt
obligations as of December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                         Balance at      Balance at                                          Matures
    Description of the Obligation         12/31/01        12/31/00                Interest Rate              Through
- -----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>               <C>                               <C>
Lessor's debt obligations:
   Variable rate tax-exempt bonds        $135,600,000     $135,600,000     Quoted Bond Rates                   2012
   Swap rate term loan                     10,669,663       12,541,087     7.5475% (through 2000)              2005
                                                                           7.6725% (thereafter)
   Variable rate term loan                  8,344,479       10,061,427     LIBOR + 1.250%                      2004

Buzzard's debt obligations:
   Variable rate term loan                    985,747        1,188,573     LIBOR + 1.250%                      2004

   Working capital loan                     1,116,905        2,742,961     LIBOR + 1.125% (through 2000)       2002
                                                                           LIBOR + 1.250% (thereafter)
</TABLE>

The Lessor's debt obligations and Buzzard's debt obligation incur interest at
either quoted rates, rates fixed by swap agreements, or variable rates which are
based on the London Interbank Offering Rate ("LIBOR"). On December 22, 1995, the
Lessor entered into an interest rate swap arrangement which fixed the LIBOR
component for the life of its swap rate term loan at 6.4225%. As a result, the
interest rate for the swap rate term loan was fixed at 7.5475% (LIBOR + 1.125%)
through December 31, 2000 and 7.6725% (LIBOR + 1.25%) for the remaining term of
the obligation. The Lessor's tax-exempt bonds incurred interest at floating
rates ranging from 2.00% to 4.50% and 3.35% to 6.15% during 2001 and 2000,
respectively. Under the terms of the Lessor's loan agreements, the Company is
subject to various customary financial and operating covenants. As of December
31, 2001 and 2000, the Company was in compliance with these covenants.

 The Environmental Protection Agency and the Pennsylvania Department of
Environmental Protection (the "Regional Authorities") granted Nitrogen Oxide
Ozone Transport Region Budget Allowances ("NOx Credits") to the Company based on
numerous factors that primarily pertain to the design and operation of the
Facility. The Company is required annually to maintain sufficient NOx Credits
which equal or exceed the quantity of its nitrogen oxide emissions during a
specified seasonal period (the "ozone season"). If the Company's nitrogen oxide
emissions exceed its available NOx Credits, the Company would be subject to
fines by the Regional Authorities.

                                      F-7

<PAGE>

During 1999, the Company installed machinery, costing $811,568, which has
significantly reduced its nitrogen oxide emissions. Accordingly, the Company
anticipates that it may not require a portion of its future NOx Credits to
maintain its compliance with the applicable regulations. Because NOx Credits are
transferable and marketable, the Company has sold and may sell, from time to
time, its available NOx Credits or purchase additional NOx credits that are
necessary to meet the applicable regulations. The Company received net proceeds
from NOx Credit transactions of $0, $1,156,338 and $606,960 in 2001, 2000, and
1999 respectively, which have been reported as other income in the accompanying
consolidated statements of operations.

Microgy Cogeneration Systems

In the second half of 2001, the Company acquired Microgy Cogeneration Systems,
Inc., a development-stage company based in Golden, Colorado. The acquisition is
described in Note C to our consolidated financial statements. Microgy intends to
market and operate in the renewable energy and distributed generation sectors of
the electric energy industry and the pollution mitigation area of the
agricultural industry. Microgy has an exclusive license to an anaerobic
digestion technology that is designed to provide efficient conversion of certain
agricultural wastes into combustible biogas and an environmentally improved
waste effluent. Microgy also has a license for a microturbine technology and
possible rights to other technologies which it is currently evaluating.

The licensor of the anaerobic digester technology is Danish Biogas Technology
A/S ("DBT"). DBT is 50% owned by Schouw & Co., a Danish public company. On May
12, 2000, Microgy entered into a revised licensing agreement with DBT which
granted Microgy a perpetual and exclusive license in certain territories,
specifically North America, for use of certain proprietary technologies in its
cogeneration facilities, including the anaerobic digestion technology. This
agreement superseded previous license agreements.

As part of the agreement, DBT will own a 5% minority equity stake in any legal
entity that owns any project developed by Microgy using the enhanced anaerobic
digester technology in which Microgy holds an equity position. The agreement
also specifies a fixed payment amount per project to DBT for engineering work
and construction drawings and a licensing fee that is based on a percentage of
the total cost for each project facility where the licensed technology is
installed and operating. A monthly consulting fee will be paid to DBT upon
commercial operation of proposed projects.

Microgy plans to develop projects based upon the anaerobic digestion technology
license and may hold various interests in these facilities. Microgy's present
business strategy anticipates the outright sale of facilities, however, in some
instances, Microgy may own some or a portion of the projects. In addition,
Microgy may or may not operate and/or manage the facilities. These facilities
are expected to deliver renewable energy for supply to the utility grid and
provide pollution control benefits to the agricultural markets.

Sunnyside Project

The Sunnyside Project is an approximately 51 Megawatt (net) waste coal-fired
facility located at a site adjacent to the Sunnyside Coal Mine in Carbon County,
Utah. The Company sold its remaining interest in the Sunnyside Project on
December 31, 1994 to B&W Sunnyside, L.P. and NRG Sunnyside, Inc. (the
"Purchasers"). From May 1996 to April 2001, the Company had been involved in a
legal proceeding to collect the Purchasers' remaining obligations from the sale.

On April 10, 2001, the Company received aggregate proceeds of $1,500,000 from
the Purchasers and resolved the litigation by executing a Binding Settlement
Agreement dated April 9, 2001 ("the Settlement"). At the time of making the
Settlement, the Company had contingent obligations of $1,218,078 recorded on its
consolidated balance sheet. The contingent obligations were principally expenses
for the sale of the Sunnyside Project which were payable upon collection of the
Purchasers' obligations. In the Settlement, the Company was formally released
from contingent obligations of $177,962. The Company has also been released as a
result of the statute of limitations or by the terms of the underlying
agreements from additional contingent obligations of $457,086. The

                                      F-8

<PAGE>

Company reported the settlement proceeds of $1,500,000 and the released
liabilities of $635,048 as other income in its consolidated statement of
operations for 2001.

Because of the terms of the Settlement, which terms represented a substantial
compromise of its previous claims against the Purchasers, the Company is
presently considering its rights and obligations with respect to the remaining
contingent obligations. Until the Company resolves these remaining issues, the
unsettled contingent obligations will remain recorded on its consolidated
balance sheet.

NOTE B -- SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the
accounts of Environmental Power Corporation and its wholly owned or majority
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated financial statements include
the accounts of Microgy from the date of acquisition (July 23, 2001) until
December 31, 2001 (See Note C).

Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make 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.

Cash Equivalents: The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash equivalents.

Concentrations of Credit Risk: The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash equivalents
and receivable from utility. The Company's cash equivalents represent short-term
financial instruments which are issued from reputable financial institutions.
Receivable from utility represents amounts due from the Company's sole customer
Penelec, a public utility with a credit rating of BBB by Standard & Poors,
pursuant to the terms of the 25 year power sales agreement.

Restricted Cash: Restricted cash includes all cash held by the disbursement
agent for the Scrubgrass Project pursuant to project agreements which require
requisition and/or certification by the Lessor or bank to withdraw (See Note A).
The Company makes scheduled deposits to restricted cash accounts which are
restricted primarily for scheduled maintenance procedures.

Non-Cash Activities: The Company had the following non-cash investing and
financing activities during 2001:

<TABLE>
     <S>                                                                     <C>
     Fair value of a warrant for 50,000 shares issued to secure financing
       (deferred as a cost of the financing)                                   $    14,398
                                                                             =============

     Fair value of Microgy assets acquired                                     $ 8,775,655
     Liabilities assumed                                                        (1,432,127)
                                                                             -------------
     Acquisition price - fair value of securities issued and direct
     acquisition costs (including direct acquisition costs of $102,606
       that are included in accounts payable and accrued expenses as of
       December 31, 2001)                                                      $ 7,343,528
                                                                             =============
</TABLE>

Fuel Inventory: Fuel inventory consists primarily of handling and hauling costs
and is recorded on a lower of cost or market basis with cost determined on a
monthly weighted average basis.

Property, Plant and Equipment: Property, plant and equipment are stated at cost
less accumulated depreciation. The Company capitalizes significant renewals and
betterments that increase the useful lives of assets while repairs and
maintenance are expensed when incurred. The cost and accumulated depreciation
for property, plant and equipment disposals are removed from the balance sheet
and any resulting gains or losses are reported in the

                                      F-9

<PAGE>

statement of operations at the time of the asset disposition. The Company
depreciates its property plant and equipment using straight-line and accelerated
methods over the estimated useful lives of the assets. The Company records
depreciation for office equipment and furniture using the straight-line method
over periods ranging from three to five years and for machinery and equipment
modifications using the double declining balance method over seven years. The
Company evaluates the impairment of long-lived assets based on the projection of
undiscounted cash flows whenever events or changes in circumstances indicated
that the carrying amounts of such assets may not be recoverable. In the event
such cash flows are not expected to be sufficient to recover the recorded value
of the assets, the assets are written down to their estimated fair values.

Investment in Projects (Note F): Investment in projects is recorded at cost and
consists primarily of engineering work related to Microgy's future power
generating projects.

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
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets". The Company periodically reviews the carrying value of
goodwill and other intangible assets against the operating performance and
future undiscounted net cash flows of the related businesses and recognizes
impairment losses whenever circumstances indicate that the carrying values may
not be recoverable. The Company did not have acquired goodwill or intangible
assets recorded on its balance sheet prior to the Microgy acquisition.
Accumulated amortization of licensed technology rights was $81,823 at December
31, 2001.

Deferred Financing Costs: In 1997 and 1995, the Company incurred deferred
financing costs of $139,925 and $300,000, respectively, in connection with
restructuring debt related to the Scrubgrass Project. Deferred financing costs
are being amortized over the lives of the related debt which range from three to
nine years. Accumulated amortization of deferred financing costs was $353,795
and $318,155 at December 31, 2001 and 2000, respectively.

Lease Rights: Lease rights are recorded at cost and are being amortized over the
22-year lease term for the Scrubgrass facility. Accumulated amortization of
lease rights was $1,117,557 and $968,553 at December 31, 2001 and 2000,
respectively.

Accrued Power Generation Revenue and Accrued Lease Expense: As discussed in Note
A, the Company has entered into a long-term agreement, to provide electricity to
PENELEC, which provides for scheduled rate increases. In accordance with
accounting principles generally accepted in the United States of America,
revenue has been recorded on the straight-line basis over the 22-year lease
term. The accrual for power generation revenue is limited to the amount of
accrued lease expense, as described below. Therefore, no amount for the
straight-lining of future revenues, which would result in profits, has been
provided for in the consolidated financial statements. Accrued power generation
revenue was $63,648,995 and $56,188,143 at December 31, 2001 and 2000,
respectively, and represents the portion of revenue earned that has not yet been
received.

As discussed in Note A, the Company has entered into a long-term lease agreement
for the Scrubgrass Project which provides for scheduled lease expense increases.
In accordance with accounting principles generally accepted in the United States
of America, the scheduled lease expense has been recorded on the straight-line
basis over the 22 year lease term. Accrued lease expense was $63,648,995 and
$56,188,143 at December 31, 2001 and 2000, respectively, and represents the
portion of lease expense that has not yet been paid.

Deferred Gain: The Company's sale of the Scrubgrass Project on December 28, 1990
was not treated as a sale for financial accounting purposes. This was originally
due to the existence of an option which enabled the Company to reacquire Buzzard
and to lease the Scrubgrass Project for a substantial portion of its commercial
operation. This option constituted a significant continuing involvement by the
Company which provided evidence that it had retained substantial risks or
rewards of ownership of the Scrubgrass Project. In December 1993, the Company
agreed to a modification to the proposed form of lease thereby relinquishing the
fair market value purchase option. Accordingly, the Company removed from the
Consolidated Balance Sheet the gross assets and liabilities of the

                                      F-10

<PAGE>

Scrubgrass Project and recorded a deferred gain of $6,785,035 arising from the
original sale of the Scrubgrass Project in 1990. The deferred gain is being
amortized over the 22 year minimum lease term, which commenced on June 30, 1994.
Accumulated amortization of the deferred gain was $2,313,080 and $2,004,670 at
December 31, 2001 and 2000, respectively.

Maintenance Reserve: Prior to 1999, the Company recorded the expense of major
equipment overhauls on a straight-line basis using management's best estimate of
the future cash outlays. Management's estimates were charged to expense and
credited to a major maintenance reserve in anticipation of the future outlays
for major overhauls. Beginning January 1, 1999, the Company recorded the expense
of major equipment overhauls as incurred. The Company's change in accounting
principle is discussed further in Note O.

Interest Payments: The Company classifies interest payments according to the
nature of its contractual obligations. The Company's base lease payments for
interest on the Lessor's debt obligations are reported as lease expense. The
Company's interest payments on its own debt obligations are reported as interest
expense. The Company paid interest on its own debt obligations of $196,811,
$289,116 and $391,857 during the years ended December 31, 2001, 2000 and 1999,
respectively.

Income Taxes: The Company accounts for income taxes in accordance SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax reporting bases of assets and liabilities and are measured by applying
the enacted tax rates and laws to taxable years in which the differences are
expected to reverse. The Company recognizes a deferred tax asset for the tax
benefit of net operating loss carryforwards when it is more likely than not that
the tax benefits would be realized and reduces the deferred tax asset with a
valuation reserve when it is more likely than not that some portion of the tax
benefits would not be realized.

Earnings Per Common Share: The Company computes its earnings per common share
using the treasury stock method in accordance with SFAS No. 128, "Earnings per
Share". The Company computes 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, the
Company considers its 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 the Company's common stock for the period. The Company
excludes 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 years ended December
31, 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                    Income               Shares            Per Share
                                                                  (Numerator)         (Denominator)         Amounts
                                                               ----------------    -----------------     -----------
<S>                                                             <C>                 <C>                   <C>
Year Ended December 31, 2001:
- -----------------------------
Income available to shareholders                                    $ 1,679,331            14,144,222          $  .12
Effect of dividends to preferred stockholders                            (5,000)
                                                                ---------------     -----------------     -----------
Basic EPS - income available to common shareholders                   1,674,331            14,144,222             .12
Effect of dilutive securities:
     Assumed conversion of preferred stock                                                    585,155
     Assumed exercise of dilutive stock options                                                16,318
                                                                ---------------     -----------------     -----------
Diluted EPS - income available to common shareholders               $ 1,674,331            14,745,695          $  .11
                                                                ===============     =================     ===========

Year Ended December 31, 2000:
- -----------------------------
Income available to shareholders                                    $ 1,826,808            11,406,783          $  .16
Effect of dividends to preferred stockholders                            (5,000)
                                                                ---------------     -----------------     -----------
Basic EPS - income available to common shareholders                   1,821,808            11,406,783             .16
Effect of dilutive securities:
     Assumed exercise of dilutive stock options                                                 2,026
                                                                ---------------     -----------------     -----------
Diluted EPS - income available to common shareholders               $ 1,821,808            11,408,809          $  .16
                                                                ===============     =================     ===========
</TABLE>


                                      F-11

<PAGE>

<TABLE>
<S>                                                             <C>                 <C>                   <C>
Year Ended December 31, 1999:
- -----------------------------
Income available to shareholders                                    $ 1,777,562            11,406,783          $  .16
Effect of dividends to preferred stockholders                            (5,000)
                                                                ---------------     -----------------     -----------
Basic EPS - income available to common shareholders                   1,772,562            11,406,783             .16
Effect of dilutive securities:
     Assumed exercise of dilutive stock options                                                   293
                                                                ---------------     -----------------     -----------
Diluted EPS - income available to common shareholders               $ 1,772,562            11,407,076          $  .16
                                                                ===============     =================     ===========
</TABLE>

As of December 31, 2001, there were outstanding options and warrants to purchase
1,442,499 shares of the Company's common stock which were antidilutive and not
included in the computation of diluted EPS. The options and warrants expire at
various dates through 2011.

Stock Options: As permitted by SFAS 123, "Accounting for Stock-Based
Compensation," the Company accounts for employee and director stock compensation
plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, the Company records compensation
expense in an amount equal to the excess of the quoted market price on the grant
date over the option price for options issued under its option plans for
employees and directors. As required by SFAS 123, the Company has disclosed in
Note L of its consolidated financial statements the pro forma net income and per
share amounts as if the Company had accounted for its employee and director
plans under SFAS 123. During 2001, the Company recognized $113,600 in
stock-based compensation expense for options issued outside of its option plans
for employees and directors.

Derivative Instruments and Hedging Activities: On January 1, 2001, the Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which established accounting and reporting standards for derivative
instruments, derivative instruments embedded in other contracts, and hedging
activities. SFAS No. 133 requires that entities recognize all derivative
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not have
any derivative instruments which should be recognized in its financial
statements. However, the Lessor has certain interest rate swap arrangements with
financial institutions that meet the definition of derivative instruments under
SFAS No. 133. Since Buzzard funds the Lessor's debt obligations as a base lease
payment, the Company has disclosed in Note M certain information about the
Lessor's derivative instruments.

Recent Accounting Pronouncements: In June 2001, the Financial Accounting
Standards Board ("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 Microgy
acquisition was accounted for in accordance with SFAS 141 (see Note C).

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 the completion of a transitional impairment test within six months of
adoption, with any identified impairments treated as a cumulative effect of a
change in accounting principle. The provisions of SFAS 142 have been applied to
the goodwill and intangible assets acquired in the Microgy acquisition (see Note
C). The Company did not have acquired goodwill or intangible assets recorded on
its balance sheet prior to the Microgy acquisition. The Company adopted SFAS No.
142 on January 1, 2002 and is still evaluating the impact of SFAS No. 142 on its
consolidated financial statements.

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

                                      F-12

<PAGE>

related to the retirement of tangible long-lived assets. The Company does not
expect that the adoption of SFAS 143 will have a significant impact on its
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. The Company adopted SFAS No. 144 on
January 1, 2002 and is still evaluating the impact of SFAS No. 144 on its
consolidated financial statements.

NOTE C - ACQUISITION

During 2001, the Company acquired 100% of the common stock of Microgy in two
related transactions. On July 23, 2001, the Company exchanged its securities for
approximately 87.7% of the outstanding common stock of Microgy under a June 20,
2001 agreement with Microgy and certain principal Microgy shareholders. Under
the agreement, the Company agreed to offer the remaining Microgy shareholders
the opportunity to exchange their Microgy securities for its securities. On
December 28, 2001, the Company completed the exchange of its securities for the
remaining outstanding securities of Microgy. The details of the two exchange
transactions are discussed in the following section.

Transaction Details

On July 23, 2001, the Company issued, an aggregate of 5,521,549 shares of common
stock and 197,760.7 shares of newly designated Series B Convertible Preferred
Stock to certain principal stockholders of Microgy in exchange for 15,919,147
shares of Microgy common stock. Each share of preferred stock, which voted with
the common stock on an as-converted basis, was automatically converted into ten
shares of common stock as of November 9, 2001 upon an increase in the authorized
common stock to an amount sufficient to allow conversion of the preferred stock.
The exchange ratio of 0.4711 shares of the Company's common stock for each share
of Microgy common stock was determined by negotiations among the Company,
Microgy and the primary principal Microgy shareholders. The exchange ratio is
based on all of the fully diluted equity of Microgy being exchanged for 45% of
the Company's fully diluted equity and assumes exercise or conversion of all
derivative securities. The exchange ratio may be increased to reflect certain
issuances of equity by the Company to generate funds to be available for
financing Microgy. However, holders of approximately 94% of the Microgy common
stock agreed to waive their right to adjustments in the exchange ratio, other
than any adjustment resulting from 400,000 options and warrants issued in
September 2001. One of the principal Microgy shareholders exchanged a warrant to
purchase 800,000 shares of Microgy common stock for a warrant to purchase the
Company's securities based on the exchange ratio. In connection with the
Company's issuance of 400,000 options and warrants in September 2001, the
Company adjusted the exchange ratio to 0.4873 shares of the Company's common
stock for each share of Microgy common stock. The Company then issued 258,884
additional shares of common stock to the principal Microgy shareholders on
December 28, 2001 and amended the warrant issued to the principal Microgy
shareholder to reflect the adjusted exchange ratio.

On October 17, 2001, the Company offered the remaining security holders of
Microgy, who owned an aggregate of 2,230,126 shares of Microgy common stock,
warrants to purchase 885,000 shares of Microgy common stock and options to
purchase 290,000 shares of Microgy common stock, an opportunity to exchange
their securities of Microgy for the Company's securities based on the adjusted
exchange ratio. On December 28, 2001, the Company issued 1,086,830 shares of its
common stock and exchanged warrants to purchase 431,298 shares of its common
stock and options to purchase 141,329 shares of its common stock for the
remaining Microgy securities.

Under the terms of a Registration Rights Agreement dated July 23, 2001, the
Company was required to file a resale registration statement for the former
Microgy security holders by November 30, 2001. In November 2001, the deadline
for filing the registration statement was extended to March 31, 2002.

                                      F-13

<PAGE>

Purchase Accounting and Valuation

The Company acquired Microgy to pursue a prospective growth opportunity in the
area of environmentally sound power generation. The Company believes that trends
in the power and agricultural markets create an opportunity to develop power
generation projects using Microgy's exclusive licensed technology. The Company
paid $7,343,528 for Microgy and accounted for the transaction using the purchase
method of accounting as required by SFAS No. 141. The purchase price represents
the fair value of the securities issued and the direct costs of the acquisition.
The fair value of the common stock was determined using available market
information and appropriate valuation methodologies. The fair value of the
common stock options and warrants were determined using an option pricing model
(See Note L). The following table outlines the components of the purchase price:


                                                      Number           Fair
                                                     Of Shares        Value
                                                  ------------------------------

             Common stock                             8,844,870    $ 6,837,084
             Common stock options                       141,329         11,967
             Common stock warrants                      821,170         43,730
             Acquisition costs                                         450,747
                                                  ------------------------------

             Total purchase price                     9,807,369    $ 7,343,528
                                                  ==============================

The purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values as of July 23, 2001. The fair values of the assets
acquired and liabilities assumed are summarized as follows:

          Cash                                                     $    18,306
          Other current assets                                           4,662
          Property plant, and equipment                                 29,127
          Investment in projects                                       100,694
          Licensed technology rights                                 3,710,000
          Goodwill                                                   4,912,866
                                                                 ---------------
                                                                     8,775,655

          Less: Liabilities assumed                                 (1,432,127)
                                                                 ---------------
          Total Purchase Price                                     $ 7,343,528
                                                                 ===============

At the time of the acquisition, the Company believed that Microgy held numerous
elements of value which could not be separated from the value of the overall
business. These elements of value were assigned to goodwill and included: 1)
technology rights for products and processes which currently do not have a
commercial application; 2) preliminary business relationships; 3) an established
workforce; 4) a proprietary market analysis; and 5) strategic business plans to
capitalize on future market opportunities.

On July 23, 2001, the Company commenced accounting for 100% of Microgy's
operations since the minority interest shareholders were no longer at risk for
Microgy's losses.

Pro forma Information

The following summarized unaudited pro forma information assumes the acquisition
of Microgy occurred on January 1, 2000. The unaudited pro forma results are not
necessarily indicative of the results which might actually have been obtained
had the acquisition occurred as of January 1, 2000, nor are they intended to be
indicative of future results of operations. The amounts below do not include any
amortization of goodwill or indefinite-lived intangible assets.

                                      F-14

<PAGE>

<TABLE>
<CAPTION>
                                                                 Year Ended                     Year Ended
                                                              December 31, 2001              December 31, 2000
                                                          --------------------------    ----------------------------
<S>                                                       <C>                           <C>
Power generation revenues                                              $ 53,518,000                      54,303,222
Net income                                                                1,131,696                       1,038,323
Basic earnings per common share                                                0.06                            0.05
Diluted earnings per common share                                              0.06                            0.05
</TABLE>


NOTE D -- OTHER CURRENT ASSETS

Other current assets consists of the following as of December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                   2001                     2000
                                                                              ----------------          --------------
<S>                                                                           <C>                       <C>
Fuel inventory                                                                      $ 455,907               $ 630,039
Prepaid expenses                                                                      123,670                 126,845
Deferred financing costs (Note P)                                                      18,894                    ----
Deposits and other current assets                                                       9,119                   4,096
                                                                              ----------------          --------------
                                                                                    $ 607,590               $ 760,980
                                                                              ================          ==============
</TABLE>

NOTE E -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost less accumulated depreciation
and consists of the following as of December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                   2001                     2000
                                                                              ----------------          --------------
<S>                                                                           <C>                       <C>
Power generating facilities:
     Machinery and equipment modifications - Scrubgrass                           $1,163,863               $ 936,568
     Less: Accumulated depreciation                                                 (555,081)               (400,676)
                                                                              ----------------          --------------
                                                                                     608,782                 535,892
                                                                              ----------------          --------------
Office:
     Equipment and furniture                                                          83,067                 143,171
     Less: Accumulated depreciation                                                  (39,019)               (121,048)
                                                                              ----------------          --------------
                                                                                      44,048                  22,123
                                                                              ----------------          --------------

                                                                                  $  652,830               $ 558,015
                                                                              ================          ==============
</TABLE>

During 2001, the Company retired from service and removed from its balance sheet
fully depreciated property, plant and equipment with an original cost of
$94,628. Depreciation expense for the years ended 2001, 2000 and 1999 was
$167,003, $223,872 and $145,008, respectively.

NOTE F -- OTHER ASSETS

Other assets consists of the following as of December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                    2001                     2000
                                                                              ----------------          --------------
<S>                                                                           <C>                       <C>
Scrubgrass Project deposits                                                       $   367,706             $   358,016
Deferred financing costs (See Note B)                                                  86,130                 121,770
Investment in projects                                                                100,694                    ----
Security deposits                                                                      11,040                    ----
                                                                              ----------------          --------------
                                                                                  $   565,570             $   479,786
                                                                              ================          ==============
</TABLE>

                                      F-15

<PAGE>

Scrubgrass Project deposits represent performance bonds required by state and
local governing authorities for excess highway maintenance and reclamation of
fuel sites.

NOTE G -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consists of the following as of December
31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                   2001                      2000
                                              --------------          ---------------
<S>                                           <C>                      <C>
Accounts payable                                $ 4,124,390              $ 3,306,614
Accrued expenses                                  4,101,015                2,902,232
Corporate taxes payable                           1,157,066                  743,208
                                              --------------          ---------------
                                                $ 9,382,471              $ 6,952,054
                                              ==============          ===============
</TABLE>

Accounts payable at December 31, 2001 and 2000 includes $3,936,058 and
$3,076,183, respectively, which are related to Scrubgrass Project operations.

Accrued expenses at December 31, 2001 and 2000 includes $3,796,008 and
$2,749,343, respectively, which are related to Scrubgrass Project operations.

NOTE H - RETIREMENT PLAN

Effective January 1, 1998 the Company established a non-contributory defined
benefit pension plan (the "Plan") covering all of its employees who are at least
21 years of age and who have completed at least one year of service. Under the
Plan, the benefits payable to each employee at normal retirement age are based
on years of service and compensation during the three consecutive years of the
latest 10 years immediately preceding retirement which would yield the highest
monthly benefit payment. Employees who have at least 20 years of service at the
time of their retirement would receive the maximum retirement benefit. The
Company's general funding policy is to contribute annually to the Plan the
maximum amount that can be deducted for Federal income tax purposes.

As of January 1, 1998, the commencement date for the Plan, the Company had a
projected benefit obligation of $871,130. The projected benefit obligation as of
January 1, 1998 is being amortized as a prior service cost over 18 years which
represents the average future years of service for the participants in the Plan
at that date.

The following table sets forth the changes during 2001 and 2000 in the projected
benefit obligation for the Plan:

<TABLE>
<CAPTION>
                                                                                     2001                     2000
                                                                                --------------          --------------
<S>                                                                             <C>                     <C>
Projected benefit obligation, beginning of the year                                $1,438,313              $1,139,624
Service cost                                                                           96,914                  97,079
Interest cost                                                                         100,682                  68,377
Actuarial loss                                                                         58,202                 133,233
                                                                                --------------          --------------
Projected benefit obligation, end of the year                                      $1,694,111              $1,438,313
                                                                                ==============          ==============
</TABLE>

The following table sets forth a reconciliation of the funded status of the Plan
to the amounts recognized in the consolidated balance sheets as of December 31,
2001 and 2000:

<TABLE>
<CAPTION>
                                                                                     2001                     2000
                                                                                --------------           -------------
<S>                                                                             <C>                      <C>
Projected benefit obligation                                                      $ 1,694,111              $1,438,313
Fair market value of Plan assets                                                     (599,577)               (347,400)
                                                                                --------------           -------------
Unfunded projected benefit obligation                                               1,094,534               1,090,913
Unrecognized actuarial loss                                                          (424,901)               (254,612)
Unrecognized prior service cost                                                      (687,734)               (733,583)
                                                                                --------------           -------------
(Prepaid) accrued pension cost                                                     $  (18,101)               $ 102,718
                                                                                ==============           =============
</TABLE>

                                      F-16

<PAGE>

The amounts recognized in the consolidated balance sheets as of December 31,
2001 and 2000 consist of:

<TABLE>
<CAPTION>
                                                                                     2001                     2000
                                                                                --------------          --------------
<S>                                                                             <C>                     <C>
Accrued benefit liability                                                           $ 769,624               $ 683,815
Intangible asset                                                                     (687,734)               (581,097)
Other comprehensive income                                                            (99,991)                    ---
                                                                                --------------          --------------
Net amount recognized                                                               $ (18,101)              $ 102,718
                                                                                ==============          ==============
</TABLE>

The accrued benefit liability and intangible asset are reported in accounts
payable and accrued expenses on the consolidated balance sheets. Other
comprehensive income is reported, net of tax, in stockholders' equity on the
consolidated balance sheet.

The following table sets forth the changes during 2001 and 2000 in the fair
market value of Plan assets:

<TABLE>
<CAPTION>
                                                                                     2001                     2000
                                                                                --------------          --------------
<S>                                                                             <C>                     <C>
Fair market value of Plan assets, beginning of the period                           $ 347,400               $ 396,164
Contributions by the Company to the Plan                                              346,879                 163,130
Benefits paid                                                                          (8,401)                    ---
Return on Plan assets                                                                 (86,301)               (211,894)
                                                                                --------------           -------------
Fair market value of Plan assets, end of the period                                 $ 599,577               $ 347,400
                                                                                ==============          ==============
</TABLE>

The Company has invested the Plan assets in a portfolio of mutual funds which
consist primarily of growth stocks. The Company expects to make an additional
contribution of $382,890 to the Plan prior to the due date for filing its 2001
Federal income tax return.

The Company's net periodic pension cost for 2001 and 2000 are comprised of the
following components:

<TABLE>
<CAPTION>
                                                                                     2001                     2000
                                                                                --------------          --------------
<S>                                                                             <C>                     <C>
Service cost                                                                        $  96,914               $  97,079
Interest cost                                                                         100,682                  68,377
Expected return on assets                                                             (27,456)                (31,693)
Amortization of actuarial gain                                                         10,071                    (589)
Amortization of prior service cost                                                     45,849                  45,849
                                                                                --------------          --------------
Net periodic pension cost                                                           $ 226,060               $ 179,023
                                                                                ==============          ==============
</TABLE>

The actuarial assumptions used in 2001 and 2000 to determine the pension
benefits for the Plan were:

<TABLE>
<CAPTION>
                                                                                     2001                     2000
                                                                                --------------          --------------
<S>                                                                             <C>                     <C>
Weighted average discount rate                                                          6.75%                    7.0%
Expected long-term return on Plan assets                                                 8.0%                    8.0%
Weighted average rate of increase in compensation levels                                 5.0%                    5.0%
</TABLE>

NOTE I -- OTHER CURRENT LIABILITIES

Other current liabilities consists of the following as of December 31, 2001 and
2000:

<TABLE>
<CAPTION>
                                                                                     2001                     2000
                                                                                --------------          --------------
<S>                                                                             <C>                     <C>
Scrubgrass Project working capital loan                                           $ 1,116,905              $2,742,961
Scrubgrass Project note payable-current portion (See Note J)                          148,310                 202,826
Scrubgrass Project long-term debt to supplier-current portion (See Note J)             97,893                 100,000
                                                                                --------------          --------------
                                                                                  $ 1,363,108              $3,045,787
                                                                                ==============          ==============
</TABLE>

                                      F-17


<PAGE>

The Scrubgrass Project working capital loan represents outstanding borrowings
due to the Lessor under a Lessee Working Capital Loan Agreement. Under the terms
of this agreement, which expires in December 2002, Buzzard may borrow up to $4
million for the ongoing working capital requirements of the Scrubgrass Project.
Buzzard paid interest on the outstanding borrowings under this agreement at
LIBOR plus 1.125% through December 31, 2000 and LIBOR plus 1.25% during 2001.
(3.33% as of December 31, 2001 and ranging from 3.33% to 8.23% during 2001 and
7.02% to 7.93% during 2000).

NOTE J -- SECURED PROMISSORY NOTES PAYABLE AND OTHER BORROWINGS

Secured promissory notes payable and other borrowings as of December 31, 2001
and 2000 consists of:

<TABLE>
<CAPTION>
                                                                          2001              2000
                                                                     -------------      -------------
<S>                                                                  <C>                <C>
Scrubgrass Project note payable (See Note I)                           $  837,437         $  985,747
Scrubgrass Project long-term debt to supplier (See Note I)                    ---             90,446
Sunnyside Project obligations (See Note A)                                583,030          1,040,116
                                                                     -------------      -------------
                                                                       $1,420,467         $2,116,309
                                                                     =============      =============
</TABLE>

The Scrubgrass Project note payable represents an installment obligation which
was incurred as part of the Lessor's debt restructuring in December 1995, when
Buzzard extended the term of certain current liabilities through 2004. Buzzard
paid interest on the outstanding borrowings under the Scrubgrass Project note
payable at LIBOR plus 1.25% (3.33% as of December 31, 2001 and ranging from
3.33% to 8.23% during 2001 and 7.14% to 8.05% during 2000). The scheduled
aggregate annual repayments for the Scrubgrass Project note payable are $148,310
in 2002, $447,902 in 2003 and $389,535 in 2004.

The Scrubgrass Project long-term debt to supplier represents the present value
of the long-term installments due to GEC Alsthom, the manufacturer of the
Facility's generator, under a non-interest bearing financing agreement. Under
the terms of the agreement, the Company financed the cost of repairs to the
generator with five installments payable as follows: $50,000 in May 1998;
$100,000 in May 1999, $100,000 in May 2000; $100,000 in May 2001 and $100,000 in
May 2002. As of December 31, 2001 and 2000, the Company has recorded on its
balance sheet the present value of the remaining installments, discounted at the
Facility's incremental borrowing rate (6.75%), which amounted to $97,893 and
$190,446, respectively.

NOTE K -- INCOME TAXES

Income tax expense consists of the following for the years ended December 31,
2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                      2001            2000            1999
                                                                  ------------    ------------     -----------
<S>                                                               <C>             <C>              <C>
Current:
     Federal                                                       $  788,843      $  853,791       $ 193,035
     State                                                            480,186         657,330         139,701
                                                                  ------------    ------------     -----------
             Total current tax expense                              1,269,029       1,511,121         332,736
                                                                  ------------    ------------     -----------

Deferred:
     Federal                                                           90,530          99,245         121,292
     State                                                             13,895          21,867          16,524
                                                                  ------------    ------------     -----------
             Total deferred tax expense                               104,425         121,112         137,816
                                                                  ------------    ------------     -----------

                                                                   $1,373,454      $1,632,233       $ 470,552
                                                                  ============    ============     ===========
</TABLE>

In 1999, the Company reported deferred income tax expense of $812,440 in its
Consolidated Statement of Operations as a reduction of the cumulative effect of
a change in accounting principle (See Note O).

                                      F-18

<PAGE>

Income taxes paid during the years ended December 31, 2001, 2000 and 1999
amounted to $855,363, $1,273,280 and $267,104, respectively.

A reconciliation between the actual income tax expense and the income tax
expense computed by applying the statutory federal income tax rate to the income
before income taxes for the years ended December 31, 2001, 2000 and 1999 is as
follows:

<TABLE>
<CAPTION>
                                                                      2001            2000             1999
                                                                  ------------    ------------     ------------
<S>                                                               <C>             <C>              <C>
Federal tax expense at 34%                                         $1,037,947      $1,176,074       $  360,103
State tax expense, net of federal tax benefit                         320,249         448,270          103,116
State tax valuation allowance, net of federal tax benefit               8,856             ---              ---
Nondeductible portion of meals and entertainment                        5,141           5,970            5,626
Other                                                                   1,261           1,919            1,707
                                                                  ------------    ------------     ------------
                                                                   $1,373,454      $1,632,233       $  470,552
                                                                  ============    ============     ============
</TABLE>

The components of the net deferred income tax asset (liability) as of December
31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                 2001             2000
                                                                             -------------    -------------
<S>                                                                           <C>              <C>
Deferred tax assets:
     Accrued lease expense                                                    $25,837,291      $22,808,678
     Deferred tax effect of the sale of the Scrubgrass Project for which
          the net gain was deferred for financial reporting purposes              893,914          939,814
     Capital loss carryforwards                                                    99,025           98,200
     Expenses deferred for tax reporting purposes                                  46,684              ---
     Other comprehensive income                                                    39,606              ---
     Pre-acquisition net operating loss carryforward of Microgy                   622,374              ---
     State net operating loss carryforwards                                         8,856           20,509
                                                                             -------------    -------------
                                                                               27,547,750       23,867,201
                                                                             -------------    -------------
Deferred tax liabilities:
     Accrued power generation revenue                                          25,837,291       22,808,678
     Defined benefit pension plan contribution                                    158,833           95,907
     Licensed technology rights                                                 1,344,450
     Other                                                                        205,195          207,423
                                                                             -------------    -------------
                                                                               27,545,769       23,112,008
                                                                             -------------    -------------
                                                                                    1,981          755,193
Less: valuation allowances                                                        148,377              ---
                                                                             -------------    -------------
                                                                              $  (146,396)     $   755,193
                                                                             =============    =============
</TABLE>

As of December 31, 2001, the Company has Federal and state net operating loss
carryforwards of $1,666,094 and $1,829,386, respectively, which are available to
reduce future taxable income. These net operating loss carryforwards relate to
the acquisition of Microgy and expire at various dates through 2020. Due to the
change of ownership provisions in Section 382 of the Internal Revenue Code, the
Company's utilization of Microgy's pre-acquisition net operating loss
carryforwards is limited to $367,911 per year.

As of December 31, 2001, the Company established a $148,377 valuation reserve
for the tax benefit of net operating loss carryforwards which may not be
realized in the future. The Company expects that future taxable income would be
sufficient to realize the tax benefits of the remaining net operating loss
carryforwards.

                                      F-19

<PAGE>

NOTE L -- SHAREHOLDERS' EQUITY

Stock Options

In November 2001, the Company's Board of Directors and stockholders approved the
2001 Stock Incentive Plan ("the 2001 Plan"), which provides for the award of up
to 3,000,000 shares of common stock to eligible employees, consultants and
directors of the Company. The Company's awards under the 2001 Plan may consist
of incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights and other stock awards. The 2001 Plan provides that stock
options and similar awards may be issued with exercise periods of up to 10 years
and minimum option prices equal to 100 percent of the fair market value of the
common stock on the date of grant (110 percent of the fair market value in the
case of individuals holding 10% or more of the Company's common stock). During
2001, the Company granted options for 141,329 shares under the 2001 Plan. As of
December 31, 2001, there were 2,858,671 shares available for grant under the
2001 Plan.

The Company has reserved 405,000 shares of common stock for issuance upon
exercise of stock options which are outstanding or may be granted under the
Company's 1993 Director Plan. The options granted under the 1993 Director Plan
were principally intended to constitute non-qualified options with an option
price of 100 percent of the fair market value of the common stock on the date of
the grant. The options vest at the date of grant and expire 10 years from the
date of grant. The Company granted options for 20,000 shares under the 1993
Director Plan during each of the years 1999, 2000 and 2001. As of December 31,
2001, there were 325,000 shares available for grant under the 1993 Director
Plan.

During 2001, the Company granted options for 450,000 shares of common stock and
warrants for 50,000 shares of common stock to related parties outside of stock
plans. These stock options and warrants are discussed in Note P.

Stock option transactions during 2001, 2000 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                                Options Outstanding
                                                      ----------------------------------------
                                                          Shares                  Price
                                                      --------------       -------------------
<S>                                                   <C>                  <C>
   Balance at January 1, 1999                                20,000             $1.50 - 1.688
   Options granted                                           20,000                .625 - .75
                                                      --------------       -------------------
   Balance at December 31, 1999                              40,000              .625 - 1.688
   Options granted                                           20,000                .50 - .688
                                                      --------------       -------------------
   Balance at December 31, 2000                              60,000               .50 - 1.688
   Options granted                                          611,329                .43 - 3.08
                                                      --------------       -------------------
   Balance at December 31, 2001                             671,329             $    .43-3.08
                                                      ==============       ===================
</TABLE>

The following table summarizes information about the Company's options
outstanding as of December 31, 2001:

<TABLE>
<CAPTION>
                          ------------Options Outstanding---------------   -----Options Exercisable----
                                       Weighted         Weighted                            Weighted
                                        Average          Average                             Average
        Range of           Number      Exercise         Remaining              Number       Exercise
     Option Prices       Of Shares       Price       Contractual Life        Of Shares        Price
   ----------------------------------------------------------------------------------------------------
<S>                      <C>          <C>            <C>                     <C>            <C>
     $ 0.43 - 0.625        130,000        $ 0.46        5.28 years            130,000        $ 0.46
       0.688 - 0.83        380,000          0.72        5.05 years            380,000          0.72
       1.50 - 1.688         20,000          1.59        6.46 years             20,000          1.59
               3.08        141,329          3.08        3.97 years             63,354          3.08
                     ----------------------------------------------------------------------------------
                           671,329        $ 1.19        4.91 years            593,354        $ 0.95
                     ==================================================================================
</TABLE>

                                      F-20

<PAGE>

Under the provisions of Accounting Principles Board Opinion ("APB") No. 25, the
Company does not recognize compensation expense for stock option awards under
the 2001 Plan and 1993 Director Plan since the underlying options have exercise
prices equal to 100 percent of the fair market value of the common stock on the
date of grant (110 percent of the fair market value in the case officers or
other employees holding 10% or more of the Company's common stock for the 2001
Plan). However, pursuant to the provisions of SFAS No. 123, the Company is
required to calculate the fair market value of its stock options using different
criteria from the provisions of APB No. 25. Using the fair market value criteria
required by SFAS No. 123 to calculate compensation expense on stock options
granted during 2001, 2000 and 1999, the Company would have recognized pro forma
net income of $1,676,213 and pro forma basic earnings per share of $.12 in 2001,
pro forma net income of $1,824,944 and pro forma basic earnings per share of
$.16 in 2000, and pro forma net income of $1,775,050 and pro forma basic
earnings per share of $.16 in 1999.

The estimated fair market values of the Company's options granted during 2001,
2000 and 1999 were $.28 per share, $.18 per share and $.23 per share,
respectively. The fair market values were calculated using an option pricing
model with the following assumptions:

<TABLE>
<CAPTION>
                                                    2001             2000         1999
                                                  ----------------------------------------
<S>                                               <C>            <C>           <C>
          Dividend yield                                   0%             6%           10%
          Risk free rate of return                      3.73%          5.99%         5.99%
          Expected useful life                       2 years        5 years       5 years
          Expected stock volatility rate               88.04%         42.03%        57.38%
</TABLE>

Dividends

The Company declared aggregate dividends of $684,408 (6 cents per share) and
$684,408 (6 cents per share) during 2000 and 1999, respectively. Since March
2001, the Company's Board of Directors has not declared dividends on its common
stock. Due to the recent acquisition of Microgy and anticipated expansion of its
business, the Company's Board of Directors has concluded that available cash
flows should be redirected to operating and investing activities for the
foreseeable future.

The Company paid dividends of $5,000 per year to a preferred stockholder during
2001, 2000 and 1999. The preferred stockholder is entitled to cumulative
dividends of $5,000 per year and has a liquidation preference to receive $500
per share, plus any cumulative unpaid dividends, prior to the distribution of
any remaining assets to common shareholders. There were no dividends in arrears
to the preferred stockholder as of December 31, 2001.

Exchange of Microgy Stock Options and Warrants

Under the terms of the Exchange Agreement, various parties exchanged Microgy
options and warrants for options and warrants to purchase securities of the
Company based on the Exchange Ratio, as adjusted. The fair value of these
options and warrants were calculated using an option pricing model with the
following assumptions:

<TABLE>
<CAPTION>
                                                        50,000        240,000        800,000         885,000
                                                       Microgy        Microgy        Microgy         Microgy
                                                       Options        Options        Warrants       Warrants
                                                     -----------------------------------------------------------
<S>                                                  <C>            <C>              <C>            <C>
    Calculated fair value                                   $ 0       $ 11,967        $ 41,451        $ 2,279
    Options/Warrants for EPC common shares               24,367        116,962         389,872        431,298
    Exercise price per share (EPC share basis)           $ 3.08         $ 3.08        $   1.03        $  2.05
    Dividend yield                                            0%             0%              0%             0%
    Risk free rate of return                              1.711%         4.336%          2.182%         1.811%
    Expected useful life                               3 months     4.75 years          1 year       9 months
    Expected stock volatility rate                        88.04%         88.04%          72.28%         88.04%
</TABLE>

                                      F-21

<PAGE>

Other Equity Transactions

The Company has outstanding notes receivable from officers and directors for
shares purchased in connection with the 1990 Stock Plan and 1993 Director Plan
which amounted to $645,948 and $445,948 as of December 31, 2001 and 2000,
respectively. The notes, which are classified as a reduction of shareholders'
equity, are payable upon demand and bear interest at a floating rate which is
payable monthly. The notes are also secured by the shares purchased by the
officers and directors. As of December 31, 2001, the Company has interest
receivable from officers of $5,209.

NOTE M -- COMMITMENTS

Corporate

The Company is obligated under various non-cancelable operating leases for
office space and automotive vehicles. As of December 31, 2001, the future
minimum payments due under these leases are as follows:

                2002                          $  77,788
                2003                             75,383
                2004                             70,050
                2005                             66,240
                2006                             66,240
          Thereafter                             11,040
                                             -----------
               Total                          $ 366,741
                                             ===========

Rent expense for these operating leases was $46,800, $46,689 and $44,230 in
2001, 2000 and 1999, respectively.

Scrubgrass Project

The Company is obligated under a facility lease related to the Scrubgrass
Project. As of December 31, 2001, the estimated minimum lease payments over the
remaining 14.5 year base term of the Scrubgrass lease are as follows:

                2002                             15,301,000
                2003                             16,723,000
                2004                             19,703,000
                2005                             21,715,000
                2006                             26,058,000
          Thereafter                            278,149,000
                                             ---------------
               Total                          $ 377,649,000
                                             ===============

The Company's Scrubgrass Project lease expense was $24,705,813, $26,415,897 and
$23,110,677 in 2001, 2000 and 1999, respectively. As discussed in Note A, in
addition to scheduled base rent and additional rent payments, the Scrubgrass
Project lease expense includes principal, interest and related fees on the
Lessor's debt obligations. Since a portion of the Lessor's debt obligations have
variable interest rates, the Company has estimated its future minimum lease
payments using average interest rates of 3.12% for the tax-exempt bonds and
7.795% for the variable rate term loan.

As discussed in Notes A and B, the Lessor has an interest rate swap arrangement
for one of its term debt obligations which is considered a derivative
instrument. Beginning July 1, 2000, the Lessor was required to recognize the
interest rate swap as either an asset or liability in its statement of financial
position in accordance with SFAS No. 133. As of December 31, 2001, the Lessor
had a liability of $504,064 in its statement of financial position for the
estimated fair market value of the interest rate swap.

                                      F-22

<PAGE>

The Company has also been assigned various long-term noncancelable obligations
under contractual agreements for fuel handling and excavation, limestone supply,
and waste disposal. The contractual terms are generally for 5 to 15 years and
provide for renewal options. The estimated future minimum payments due under
these noncancelable obligations at December 31, 2001 are as follows (See
Note A):

                2002                               2,334,000
                2003                               2,413,000
                2004                               2,496,000
                2005                               2,581,000
                2006                               2,668,000
          Thereafter                              13,868,000
                                               --------------
               Total                             $26,360,000
                                               ==============

NOTE N -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments primarily consist of cash and cash
equivalents, restricted cash, receivable from utility, accounts payable, Lessee
working capital loan, short-term debt obligations and long-term debt
obligations. As of December 31, 2001 and 2000, the carrying amounts for cash and
cash equivalents, restricted cash, receivable from utility, accounts payable,
Lessee working capital loan and short-term debt obligations approximate fair
value because of the short maturity of these instruments. As of December 31,
2001 and 2000, the carrying amounts for the long-term debt obligations also
approximate fair value because such obligations incur interest at variable
rates.

NOTE O -- CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 1999, the Company changed its method of accounting for
major equipment overhauls to a method which is consistent with the viewpoints
expressed by the Securities and Exchange Commission. Previously, the Company
recorded the expense of major equipment overhauls on a straight-line basis to a
major maintenance reserve in anticipation of future outlays for the major
overhauls. Beginning in 1999, the Company recorded the expense of major
equipment overhauls when incurred. As a result of this change, the Company
realized an increase in operating expenses of $307,893 and a decrease in income
tax expense of approximately $125,000 during 1999. The Company also recognized
the effect of this change on years prior to 1999 with an increase to net income
of $1,188,989 in 1999. This increase in net income consists of an elimination of
the Company's major maintenance reserve, with a balance of $2,001,429 at
December 31, 1998, and the reversal of $812,440 in deferred income tax benefits.

NOTE P -- RELATED PARTY TRANSACTIONS

In September 2001, the Company paid $150,000 to George Kast, a principal
shareholder of the Company and previously a Principal Microgy Shareholder, in
full satisfaction of a pre-acquisition Microgy obligation.

On September 14, 2001, the Company borrowed $750,000 from Alco Financial
Services, LLC ("Alco"). Robert Weisberg, a Director of the Company, 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%. The Company
also pays an administrative fee of 0.6% per month and paid a commitment fee of
$7,500 to secure the loan. The loan is secured by all of the Company's assets
(other than the stock of its subsidiary, Buzzard Power Corporation). In
connection with the loan, the Company granted Alco five year warrants to
purchase 50,000 shares of common stock at $0.60 per share. During 2001, the
Company recognized interest expense and administrative fees of $20,792 and
$16,050, respectively for this loan.

                                      F-23

<PAGE>

In May 2001, the Company granted Mr. Weisberg five-year options to purchase
100,000 shares of common stock at $.43 per share. In September 2001, the Company
granted Mr. Weisberg five-year options to purchase 350,000 shares of common
stock at $0.72 per share. The options were issued in exchange for Mr. Weisberg's
services performed for the Company.

The fair value of the securities granted to Alco and Mr. Weisberg were
calculated using an option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                      100,000        350,000         50,000
                                                      Options        Options        Warrants
                                                    ------------------------------------------
<S>                                                  <C>             <C>             <C>
          Calculated fair value                       $ 17,869        $95,731         $14,398
          Dividend yield                                     0%             0%              0%
          Risk free rate of return                        3.73%          3.73%           3.73%
          Expected useful life                         2 years        2 years         2 years
          Expected stock volatility rate                 71.57%         85.51%          85.51%
</TABLE>

The Company reported the fair value of the securities granted to Mr. Weisberg as
stock-based compensation in its general and administrative expenses for 2001.
The fair value of the securities granted to Alco, along with the commitment fee
and related legal expenses, were reported as deferred financing costs and are
being amortized over the life of the loan. As of December 31, 2001, the Company
has deferred financing costs of $18,894 in other current assets, which will be
amortized during 2002.

NOTE Q - SEGMENT INFORMATION

The Company manages and evaluates its operations in two reportable business
segments: Scrubgrass Project and Microgy. These segments have been classified
separately by the chief operating decision maker because of the different
technologies used in the generation of energy and the future growth prospects of
those technologies. The Company's reportable business segments, which are
described in Note A, follow the same significant accounting policies discussed
in Note B. Financial data for reportable business segments is as follows:

<TABLE>
<CAPTION>
                                                   Scrubgrass
                                                    Project       Microgy        Other       Consolidated
                                                 ----------------------------------------------------------
<S>                                               <C>            <C>          <C>             <C>
Year Ended December 31, 2001:
- -----------------------------
Power generation revenues                            53,518,000         ----          ----       53,518,000
Interest income                                          40,969         ----        37,234           78,203
Interest expense                                        164,252        4,604        16,691          185,547
Depreciation and amortization                           339,049       85,446        16,915          441,410
Income tax expense (benefit)                          1,273,000     (112,600)      213,054        1,373,454
Net income (loss)                                     1,754,625     (379,408)      304,114        1,679,331
Identifiable assets                                  76,358,553    8,668,675       539,018       85,566,246

Year Ended December 31, 2000:
- -----------------------------
Power generation revenues                            54,303,222         ----          ----       54,303,222
Interest income                                         656,024         ----        80,843          736,867
Interest expense                                        309,241         ----        11,400          320,641
Depreciation and amortization                           405,723         ----         9,507          415,230
Income tax expense (benefit)                          2,045,062         ----      (412,829)       1,632,233
Net income (loss)                                     2,812,717         ----      (985,909)       1,826,808
Identifiable assets                                  68,181,102         ----     1,103,072       69,284,174
</TABLE>

                                      F-24

<PAGE>

<TABLE>
<S>                                                  <C>         <C>          <C>             <C>
Year Ended December 31, 1999:
- -----------------------------
Power generation revenues                            48,268,311         ----           ----       48,268,311
Interest income                                          51,199         ----         59,776          110,975
Interest expense                                        363,770         ----         11,438          375,208
Depreciation and amortization                           356,062         ----          7,172          363,234
Cumulative effect of a change in accounting
   principle, net of income taxes of $812,440         1,188,989         ----           ----        1,188,989
Income tax expense (benefit)                            812,000         ----       (341,448)         470,552
Net income (loss)                                     2,331,473         ----       (553,911)       1,777,562
Identifiable assets                                  57,427,454         ----      1,354,548       58,782,002
</TABLE>

There were no transactions between reportable business segments. Excluding
reportable business segments, the Company had income from the settlement of the
Sunnyside Project litigation, general corporate assets and operating activities
for its corporate office. General corporate assets primarily consist of cash and
equivalents, office equipment, prepaid expenses and a deferred income tax asset.
Since the Sunnyside Project is no longer an operating business, this income was
not included in a reportable business segment.

NOTE R - SUBSEQUENT EVENT

During February 2002, the Company received $2,428,200 from sales of anticipated
excess NOx emission credits for the 2002 through 2007 ozone seasons. The income
from these sales was reported during the first quarter of 2002.

                                      F-25

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.01
<SEQUENCE>3
<FILENAME>dex301.txt
<DESCRIPTION>CERTIFICATE OF INCORPORATION, AS AMENDED
<TEXT>
<PAGE>
                                                                    Exhibit 3.01

                          CERTIFICATE OF INCORPORATION

                                       OF

                         ENVIRONMENTAL POWER CORPORATION

                               * * * * * * * * * *

         FIRST.      The name of the corporation is Environmental Power
Corporation.

         SECOND.     The address of its registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.

         THIRD.      The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.

         FOURTH.     The total number of shares of all classes of capital stock
which the corporation shall have authority to issue is 21,000,000 shares,
comprised of 20,000,000 shares of Common Stock with a par value of One Cent
($.01) per share (the "Common Stock") and 1,000,000 shares of Preferred Stock
with a par value of One Cent ($.01) per share (the "Preferred Stock").

         A description of the respective classes of stock and a statement of the
designations, preferences, voting powers (or no voting powers), relative,
participating, optional or other special rights and privileges and the
qualifications, limitations and restrictions of the Preferred Stock and Common
Stock are as follows:

         A.       PREFERRED STOCK
                  ---------------

                  The Preferred Stock may be issued in one or more series at
such time or times and for such consideration or considerations as the board of
directors may determine. Each series shall be so designated as to distinguish
the shares thereof from the shares of all other series and classes.

         The board of directors is expressly authorized, subject to the
limitations prescribed by law and the provisions of this Certificate of
incorporation, to provide for the issuance of all or any shares of the Preferred
Stock in one or more series, each with such designations, preferences, voting
powers (or no voting powers), relative, participating, optional or other special
rights and privileges and such qualifications, limitations or restrictions
thereof as shall be stated in the resolution or resolutions adopted by the board
of directors to create such series, and a certificate of said resolution or
resolutions shall be filed in accordance with the General Corporation Law of the
State of Delaware. The authority of the board of directors with respect to each
such series shall include without limitation of the foregoing the right to
provide that the shares of each such series may be: (i) subject to redemption,
at the option of either the holder or the corporation or upon the happening of a
specified event, at such time or times and at such price or prices; (ii)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on

<PAGE>

such conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the corporation; (iv) convertible into, or
exchangeable for, at the option of either the holder or the corporation or upon
the happening of a specified event, shares of any other class or classes of
stock, or of any other series of the same or any other class or classes of
stock of the corporation at such price or prices or at such rates of exchange
and with such adjustments, if any; (v) entitled to the benefit of such
limitations, if any, on the issuance of additional shares of such series or
shares of any other series of Preferred Stock; or (vi) entitled to such other
preferences, powers, qualifications, rights and privileges, all as the board of
directors may deem advisable and as are not inconsistent with law and the
provisions of this Certificate of Incorporation.

         B.       COMMON STOCK
                  ------------

         1        Relative Rights of Preferred Stock and Common Stock. All
                  ---------------------------------------------------
preferences, voting powers, relative, participating, optional or other special
rights and privileges, and qualifications, limitations, or restrictions of the
Common Stock are expressly made subject and subordinate to those that may be
fixed with respect to any shares of the Preferred Stock.

         2        Voting Rights. Except as otherwise required by law or this
                  -------------
Certificate of Incorporation, each holder of Common Stock shall have one vote
in respect of each share of stock held by him of record on the books of the
corporation for the election of directors and on all matters submitted to a
vote of stockholders of the corporation.

         3        Dividends. Subject to the preferential rights of the Preferred
                  ---------
Stock, the holders of shares of Common Stock shall be entitled to receive, when
and if declared by the board of directors, out of the assets of the corporation
which are by law available therefor, dividends payable either in cash, in
property or in shares of capital stock.

         4        Dissolution, Liquidation or Winding Up. In the event of any
                  --------------------------------------
dissolution, liquidation or winding up of the affairs of the corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Preferred Stock, holders of Common Stock shall be
entitled, unless otherwise provided by law or this Certificate of
Incorporation, to receive all of the remaining assets of the corporation of
whatever kind available for distribution to stockholders ratably in proportion
to the number of shares of Common Stock held by them respectively.

         FIFTH.      The name and mailing address of the sole incorporator is as
follows:

         Name                                   Mailing Address
         ----                                   ---------------

         Dennis R. Shaughnessy, Esq.            Testa, Hurwitz & Thibeault
                                                Exchange Place
                                                53 State Street
                                                Boston, MA 02109

                                      2

<PAGE>

         SIXTH.      The corporation is to have perpetual existence.

         SEVENTH.    In furtherance and not in limitation of the powers
conferred by the laws of the State of Delaware:

         A.       The board of directors of the corporation is expressly
authorized to adopt, amend or repeal the by-laws of the corporation.

         B.       Elections of directors need not be by written ballot unless
the by-laws of the corporation shall so provide.

         C.       The books of the corporation may be kept at such place within
or without the State of Delaware as the by-laws of the corporation may provide
or as may be designated from time to time by the board of directors of the
corporation.

         EIGHTH.     Whenever a compromise or arrangement is proposed between
this corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of Section 279 of Title 8
of the Delaware Code, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.

         NINTH.      The corporation eliminates the personal liability of each
member of its board of directors to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that the
foregoing shall not eliminate the liability of a director (i) for any breach of
such director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under section 174 of Title 8 of the
Delaware Code or (iv) for any transaction from which such director derived an
improper personal benefit.

         TENTH.      The corporation reserves the right to amend or repeal any
provision contained in this Certificate of incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon a stockholder
herein are granted subject to this reservation.

         I, THE UNDERSIGNED, being the sole incorporator hereinabove named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do

                                      3

<PAGE>

make this certificate, hereby declaring and certifying that this is my act and
deed and the facts herein stated are true, and accordingly have hereunto set my
hand this 20th day of August, 1986.

                                                    /s/ Dennis R. Shaughnessy,
                                                   ----------------------------
                                                   Dennis R. Shaughnessy, Esq.

                                      4

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.03
<SEQUENCE>4
<FILENAME>dex303.txt
<DESCRIPTION>AMENDMENT TO CERTIFICATE OF INCORPORATION
<TEXT>
<PAGE>

                                                                    Exhibit 3.03

                  AMENDMENT TO CERTIFICATE OF INCORPORATION OF
                         ENVIRONMENTAL POWER CORPORATION

     Pursuant to Section 242 of the Delaware General Corporation Law,
Environmental Power Corporation, a Delaware corporation, hereby submits the
following amendment to its Certificate of Incorporation:

     1.     The name of the Corporation is Environmental Power Corporation,
(the "Corporation").

     2.     The certificate of incorporation of the Corporation is hereby
amended by striking out the first paragraph of Article FOURTH thereof and by
substituting in lieu of said first paragraph the following new paragraph:

            "FOURTH. The total number of shares of all classes of capital
            stock which the corporation shall have authority to issue is
            52,000,000 shares, comprised of 50,000,000 shares of Common Stock
            with a par value of One Cent ($.01) per share (the "Common Stock")
            and 2,000,000 shares of preferred stock with a par value of One
            Cent ($.01) per share (the "Preferred Stock")."

     3.     The amendment of the certificate of incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.

     I, Joseph E. Cresci, Chairman, Chief Executive Officer and Secretary of the
Corporation, for the purpose of amending the Corporation's Certificate of
Incorporation pursuant to the Delaware General Corporation Law, do make this
certificate, hereby declaring and certifying that this is my act and deed on
behalf of the Corporation this 8th day of November, 2001.

                                                /s/ Joseph E. Cresci
                                               -----------------------------
                                               By: Joseph E. Cresci
                                               Title:  Chairman, Chief Executive
                                               Officer and Secretary

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>5
<FILENAME>dex1011.txt
<DESCRIPTION>SERVICE AGREEMENT
<TEXT>
<PAGE>

                                                                   Exhibit 10.11

                               SERVICES AGREEMENT

         THIS SERVICES AGREEMENT (the "Agreement") is entered into as of
September 13, 2001 between PG&E Energy Trading-Power, L.P. ("PGET"), a
Delaware limited partnership, having an office at 7500 Old Georgetown Road,
Bethesda, MD 20814, and Buzzard Power Corporation ("Buzzard"), a Delaware
corporation having an office at 2151 Lisbon Road, Kennerdell, PA 16374,
collectively referred to herein as the "Parties".

         WHEREAS, Buzzard expects to own, as lessee of the Scrubgrass generating
facility, certain NOx emission allowances and wishes to engage PGET to perform
certain marketing services relating to such allowances pursuant to the terms and
conditions set forth in this Agreement; and

         WHEREAS, PGET wishes to perform such services;

         NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties, intending to be bound hereby, agree
as follows:

         SECTION 1.               SERVICES.
                                  --------

         Pursuant to separate transaction agreements between the Parties,
substantially in the form of Exhibit A attached hereto (subject to Section 2
below), to be executed on or before December 1, 2001 (the "Buzzard/PGET Sale
Documents"), Buzzard shall sell, and PGET shall purchase, the quantity of NOx
emission allowances identified on Exhibit B attached hereto (the "Identified
Allowances"). Pursuant to the terms hereof, PGET shall use commercially
reasonable efforts to resell the Identified Allowances, on or before November
15, 2001, to a third party at the highest available price (the "Third Party Sale
Price"); provided, however, that Buzzard may direct PGET, from time to time, to
sell any or all of the Identified Allowances on terms acceptable to Buzzard.
Each Party expressly acknowledges and agrees that PGET shall not act as or be an
agent for Buzzard.

         SECTION 2.               COMPENSATION.
                                  ------------

         (a) In consideration of PGET's services in reselling the Identified
Allowances, the price payable by ET for each Identified Allowance to Buzzard, as
set forth in the Buzzard /PGET Sale Documents, shall be equal to:

         Third Party Sale Price - $35 - ( 25% x Profit);

         Where:        Profit = Average Third Party Sale Price for the
                       5-year stream indicated in Exhibit B - Benchmark
                       Price; provided however, that if Profit equals a
                       negative value, Profit shall be deemed to equal zero;
                       and Benchmark Price = $5,000, if Exhibit B reflects a
                                                3-year stream; or
                                             $4,000, if Exhibit B reflects a
                                                5-year stream

                                       1


<PAGE>

                            NO CONSEQUENTIAL DAMAGES.
                            ------------------------
Neither Party shall be liable to the other Party for any consequential or
indirect losses or damages that may be incurred in connection with the services
provided hereunder, including, without limitation, loss of use, lost profits or
revenues, cost of capital, or loss of goodwill.

                                 GOVERNING LAW.
                                 -------------
         THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK.

                           EXECUTION IN COUNTERPARTS.
                           -------------------------
         This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which counterparts,
when so executed and delivered, shall be deemed to be an original and all of
which counterparts, taken together, shall constitute but one and the same
Agreement.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       2


<PAGE>

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.

                                              BUZZARD:

                                              BUZZARD POWER CORPORATION

                                              By: /s/ Joseph E. Cresci
                                                  ---------------------------
                                                  Name: Joseph E. Cresci
                                                  Title: Vice President

                                              ACKNOWLEDGED AND AGREED TO:

                                              SCRUBGRASS GENERATING COMPANY,
                                              L.P.

                                              By: /s/ P. Chrisman Iribe
                                                  ---------------------------
                                                  Name: P. Chrisman Iribe
                                                  Title: President

                                              SELLER:

                                              PG&E ENERGY TRADING - POWER, L.P.
                                              BY PG&E ENERGY TRADING HOLDINGS
                                              CORPORATION, ITS SOLE GENERAL
                                              PARTNER

                                              By: /s/ Lyndell E. Maddox
                                                  ---------------------------
                                                  Name: Lyndell E. Maddox
                                                  Title: President & CEO

<PAGE>

                                    Exhibit A

October 29, 2001

Scrubgrass Generating Company, L.P.
RR1, Box 238
Kennerdell, PA  16374

Fax: (814) 385-6661

RE:  NOx Transaction

         This letter shall confirm the agreement reached between PG&E Energy
Trading - Power, L.P. ("PGET") and Buzzard Power Corporation ("Counterparty")
regarding the transaction set forth below.

Introduction:               The Clean Air Act contains a program for control of
                            NOx emissions, under which parties may buy and sell
                            NOx Emission Allowances which are valid for NOx
                            emissions emitted from May 1 - September 30 of each
                            year 1999-2002 (the "Ozone Season"). The NOx
                            Emission Allowance program is administered by EPA,
                            pursuant to regulations issued by that agency under
                            the Clean Air Act. Buyer and Seller expect this
                            program to be continued for the Ozone Seasons of
                            years 2003-2007. Seller is interested in selling
                            certain NOx Emission Allowances for vintage years
                            2003, 2004, 2005, 2006, and 2007, and Buyer is
                            interested in purchasing those same Allowances.

Commodity:                  NOx Emission Allowances

Trade Date:                 October 22, 2001

Seller:                     Counterparty

Buyer:                      PGET

Vintage Year(s):            2003, 2004, 2005, 2006, 2007

Contract Quantity:          150 Allowances for 2003, 140 Allowances per year for
                            2004 through 2007, (710 total)

<PAGE>

Price(s):                   $3,420 per NOx Emission Allowance for Vintage 2003,
                            $3,420 per NOx Emission Allowance for Vintage 2004,
                            $3,420 per NOx Emission Allowance for Vintage 2005
                            $3,420 per NOx Emission Allowance for Vintage 2006
                            $3,420 per NOx Emission Allowance for Vintage 2007

Condition Precedent:        Buyer and Seller recognize the NOx Allowances are
                            originating from the Commonwealth of Pennsylvania
                            Department of Environmental Protection ("DEP"), and
                            as such, if Pennsylvania DEP and EPA have not funded
                            Seller's EPA NOx account by _____ of each Vintage
                            Year, neither Seller nor Buyer shall have any
                            obligation hereunder for that respective Vintage
                            Year's Allowances. However, all obligations to
                            deliver subsequent Vintage Year's Allowances shall
                            continue consistent with the terms set forth herein.

<PAGE>

Delivery/Documentation:     Within 10 business days of the EPA's funding of
                            Seller's EPA NOx Allowance Tracking System ("NATS")
                            account of each Vintage Years' Allowances, Seller
                            will deliver a partially executed Allowance Transfer
                            Form or its legal equivalent ("ATF") to Buyer,
                            authorizing the transfer of the Contract Quantity
                            from Seller's account into the appropriate to
                            Buyer's account.

                            PGET's EPA NATS account information:
                            NOx:
                            AAR:  Sarah M. Barpoulis, 1073
                            ALT:  Lisa Wildes, 1813
                            NATS Acct. # 999900000014

                            Counterparty's EPA NATS account information:
                            NOx:
                            AAR:______________________, #_______
                            NATS Acct. #

                            Within three business days of receiving the ATF or
                            its legal equivalent, Buyer will execute the form
                            and cause it to be placed on file with the EPA in
                            accordance with all applicable regulations.

                            Buyer may, with Seller's prior written approval,
                            modify any documentation provided by Seller prior to
                            its submission to the EPA. Buyer will promptly
                            furnish to Seller or its designated representative
                            copies of any documentation which Buyer submits to
                            the EPA to effectuate this transfer. Excluded from
                            this requirement is documentation concerning Buyer's
                            confidential matters.

                            Upon notification by the EPA that the transfer
                            contemplated by this transaction letter will not be
                            recorded, the parties shall promptly confer, and
                            then they shall cooperate in taking all reasonable
                            actions necessary to cure any defects in the
                            proposed transfer, so that the transfer can be
                            recorded.

Payment:                    For each Vintage Years' Allowances, payment shall be
                            made by Buyer in immediately available funds (U.S.
                            Dollars) by wire transfer to Seller's account
                            specified below (or in such other form as reasonably
                            requested by Seller) within three Business Days of
                            written or electronic notification by the EPA that
                            the Vintage Years' Allowances have been transferred
                            from Seller to Buyer.

Additional Terms and        This transaction is subject to the Additional Terms
Conditions:                 and Conditions set forth below.

<PAGE>

Definitions:                "Allowance" means a NOx Emission Allowance, as
                            defined by the Clean Air Act and regulated by the
                            EPA.

                            "Clean Air Act" means Title IV of the Clean Air Act
                            Amendments of 1990 (effective November 15, 1990) as
                            well as any amendments thereto and regulations
                            promulgated thereunder, all of which are the basis
                            for the federal air pollution control program for
                            NOx emissions.

                            "Confidential Information" means all oral and
                            written information exchanged between Seller and
                            Buyer with respect to the pricing of Allowances
                            hereunder. The following exceptions, however, do not
                            constitute Confidential Information for the purposes
                            of this transaction: (a) information that is or
                            becomes generally available to the public other than
                            as a result of a disclosure by either party in
                            violation of this transaction letter; (b)
                            information that was already known by either party
                            on a non-confidential basis prior to this
                            transaction letter; and (c) information that becomes
                            available to either party on a non-confidential
                            basis from a source other than the other party if
                            such source was not subject to any prohibition
                            against disclosing the information to such party.

                            "EPA" means the United States Environmental
                            Protection Agency or any successor agency with
                            similar jurisdiction.

<PAGE>

                        ADDITIONAL TERMS AND CONDITIONS
                        -------------------------------

Netting. If Buyer and Seller are each required to pay an amount to the other on
- -------
the same day, then such amounts with respect to each party may be aggregated and
the parties may discharge their obligations to pay through netting, in which
case the party, if any, owing the greater aggregate amount shall pay to the
other party the difference between the amounts owed.

Security. If a party (the "Beneficiary Party") reasonably determines that the
- --------
other party's creditworthiness, financial responsibility or performance
viability is unsatisfactory, the Beneficiary Party may require Performance
Assurance. "Performance Assurance" means, at the option of the Beneficiary
Party: (i) the posting of a letter of credit; (ii) a cash prepayment; or (iii)
the posting of other acceptable collateral or security by the party with
impaired credit. The Performance Assurance shall be delivered within two (2)
business days of the date of such request.

Events of Default. An "Event of Default" shall mean with respect to a party
- -----------------
("Defaulting Party"): (i) any representation or warranty made by the Defaulting
Party herein shall at any time prove to be false or misleading in any material
respect; (ii) the failure by the Defaulting Party to perform any covenant set
forth herein; (iii) the Defaulting Party shall make an assignment or any general
arrangement for the benefit of its creditors, files a petition or otherwise
commences, authorizes or acquiesces in the commencement of a proceeding or cause
under any bankruptcy or similar law for the protection of creditors, or has such
a petition filed against it and such proceeding remains undismissed for 30 days,
otherwise becomes bankrupt or insolvent (however evidenced), or becomes unable
to pay its debts as they fall due (each of the foregoing shall be referred to as
a "Bankruptcy Proceeding"); (iv) the occurrence of a material adverse change
with respect to the Defaulting Party; provided, such material adverse change
shall not be considered an Event of Default if the Defaulting Party establishes
and maintains for so long as the material adverse change is continuing,
Performance Assurance for the benefit of the other party (the "Non-Defaulting
Party") in a form and amount reasonably acceptable to the Non-Defaulting Party;
(vi) the failure by the Defaulting Party to establish, maintain, extend or
increase Performance Assurance when required pursuant to this transaction; (vii)
in the event a party has posted a guarantee, the failure by the guarantor of the
Defaulting Party to perform any covenant set forth in the guarantee it delivered
in respect of any such transaction, any representation or warranty made by such
guarantor shall prove to have been false or misleading in any material respect
when made or when deemed to be repeated, or the guaranty shall expire or be
terminated or shall in any way cease to guaranty the obligations of the
Defaulting Party hereunder; or (viii) the guarantor of the Defaulting Party
shall be subject to a Bankruptcy Proceeding.

Remedies upon an Event of Default.
- ---------------------------------

(a) In the event of a default by Buyer, this transaction can be terminated
immediately by Seller upon written notice to Buyer. Upon such termination, Buyer
will be obligated to pay Seller damages equal to the positive difference, if
any, between (a) the aggregate price set forth in this transaction and (b) the
aggregate market price of these Allowances as of the date of

<PAGE>

termination, to be determined based upon the average of two quotes from
brokerage firms or third-party intermediaries reasonably selected by Seller, net
of reasonably expected transaction costs. If Buyer has already made a partial
payment to Seller, the amount owed under this provision will be decreased by
that amount already paid. Except with respect to breaches of Buyer's obligations
under Confidentiality, no other damages will be available to Seller.
      ---------------

(b) In the event of a default by Seller, this transaction can be terminated
immediately by Buyer upon written notice to Seller. Upon such termination,
Seller will be obligated to pay Buyer an amount equal to the cost to Buyer
(including its transaction costs) of purchasing Allowances equivalent to those
that were to be delivered under this transaction but which Seller failed to
deliver, less the cost that Buyer would have had to pay Seller for the same
number of Allowances. Except with respect to breaches of Seller's obligations
under Confidentiality, no other damages will be available to Buyer.
      ---------------

Audit. Each party has the right, at its sole expense, to examine the records of
- -----
the other party during normal business hours to the extent reasonably necessary
to verify the accuracy of any statement rendered to such party. If any such
examination reveals any inaccuracy in any statement, the necessary adjustments
in such statement and the payments made pursuant to such inaccurate statement
shall be adjusted; provided, however, that such adjustments shall be made prior
to the lapse of one calendar year following the date on which the inaccurate
statement was delivered.

Late Payments. All overdue payments shall bear interest from (and including) the
- -------------
due date to (but excluding) the date of payment at a rate equal to two percent
(2%) over the per annum rate of interest equal to the prime lending rate as may
from time to time be published in the Wall Street Journal under "Money Rates";
provided, the interest rate shall never exceed the maximum lawful rate permitted
by applicable law.

Limitation of Remedies, Liability and Damages. THE PARTIES CONFIRM THAT THE
- ---------------------------------------------
EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED HEREIN SATISFY THE ESSENTIAL
PURPOSES HEREOF. FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR
MEASURE OF DAMAGES IS PROVIDED, SUCH EXPRESS REMEDY OR MEASURE OF DAMAGES SHALL
BE THE SOLE AND EXCLUSIVE REMEDY, THE OBLIGOR'S LIABILITY SHALL BE LIMITED AS
SET FORTH IN SUCH PROVISION AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN
EQUITY ARE WAIVED. IF NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY HEREIN
PROVIDED, THE OBLIGOR'S LIABILITY SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES
ONLY, SUCH DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND ALL
OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. UNLESS EXPRESSLY
HEREIN PROVIDED, NEITHER PARTY SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL,
PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS
INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT, UNDER ANY INDEMNITY
PROVISION OR OTHERWISE. IT IS THE INTENT OF THE PARTIES THAT THE LIMITATIONS
HEREIN IMPOSED ON REMEDIES AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE
CAUSE OR CAUSES

<PAGE>

RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH NEGLIGENCE
BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. TO THE EXTENT ANY DAMAGES
REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE
DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN
ADEQUATE REMEDY IS INCONVENIENT AND THE LIQUIDATED DAMAGES CONSTITUTE A
REASONABLE APPROXIMATION OF THE HARM OR LOSS.

Taxes. Each party shall pay any taxes or other fees that are associated with its
- -----
respective purchase or sale of the Allowances as described herein.

Assignment. Neither party shall assign this transaction or its rights hereunder
- ----------
without the prior written consent of the other party. Upon any assignment made
in compliance with this section, this transaction shall inure to and be binding
upon the successors and assigns of the assigning party. Notwithstanding the
foregoing, either party may, without the need for consent from the other party
(and without relieving itself from liability hereunder), (a) transfer, pledge or
assign this transaction as security for any financing with financial
institutions; (b) transfer or assign this transaction to an affiliate of such
party provided that such assignee has substantially equivalent financial
capability to the assignor; or (c) transfer or assign this transaction to any
person or entity succeeding to all or substantially all of the assets of such
assignor; provided, however, in each case, that any such assignee shall agree to
be bound by the terms and conditions thereof.

Notices. Any notice, request, demand, statement or payment provided for herein
- -------
to either Seller or Buyer shall be confirmed in writing and shall be made as
specified below. A notice sent by facsimile transmission shall be deemed
received by the close of the business day on which such notice was transmitted
or such earlier time as confirmed by the receiving party and notice by overnight
mail or courier shall be deemed to have been received two (2) business days
after it was sent or such earlier time as is confirmed by the receiving party
unless it confirms a prior verbal communication, in which case any such notice
shall be deemed received on the day sent.

Notices & Correspondence:                   Payments & Invoices:
PG&E Energy Trading-Power, L.P.             PG&E Energy Trading-Power, L.P.
7500 Old Georgetown Road                    7500 Old Georgetown Road
Bethesda, Maryland 20814                    Bethesda, Maryland 20814
Attn:  Emissions Trader                     Attn: Director, Power Accounting
Telephone:  (301) 280-6600                  Telephone: (301) 280-6600
Fax:        (301) 280-6912                  Fax:  (301) 280-6601 or 280-6604

Scrubgrass Generating Company L.P.          Scrubgrass Generating Company L.P.
Buzzard Power Corporation                   Buzzard Power Corporation
2151 Lisbon Road                            2151 Lisbon Road
Kennerdell, PA  16374                       Kennerdell, PA  16374
Attn:  General Manager                      Attn: Accounting
Telephone:  (814) 385-6661 x15              Telephone: (814) 385-6661
Fax:        (814) 385-6704                  Fax:       (814) 385-6704

<PAGE>

with a copy to:
Assistant General Counsel                   Assistant General Counsel
Scrubgrass Generating Company, L.P.         PG&E Energy Trading-Power, L.P.
7500 Old Georgetown Road, 13th Floor        7500 Old Georgetown Road, 13th Floor
Bethesda, MD 20814                          Bethesda, MD 20814
Telephone:  (301) 280-6800                  Telephone: (301) 280-6600
Fax:        (301) 280-6913                  Fax:       (301) 280-6060

<PAGE>

Payments by Wire Transfer:
Boston Safe Deposit and Trust Company
Account Title: PG&E Energy Trading-Power, L.P.
Account Number: 145513
ABA Number: 011 001 234

Bankers Trust Company, NY
Corporate Trust Agency Group
Account Title: Venango (Scrubgrass) Operating A/C
Account Number: 01419647
ABA Number: 021001033

From time to time Seller and/or Buyer may change the foregoing addresses by
sending notice of such change in accordance with this section.

Representations and Warranties. Seller hereby represents and warrants to Buyer
- ------------------------------
as follows:

                  (a) Seller has and, at all times during the term of this
transaction will have, all necessary power and authority to execute, deliver and
perform its obligations hereunder.

                  (b) The execution, delivery and performance of this
transaction by Seller have been duly authorized by all necessary action and do
not violate any of the terms or conditions of Seller's governing documents, or
any contract to which it is a party, or any law, rule, regulation, order,
judgment or other legal or regulatory determination applicable to Seller.

                  (c) There is no pending or threatened litigation, arbitration
or administrative proceeding that materially adversely affects Seller's ability
to perform this transaction.

                  (d) Seller is, or will be prior to any transfer to Buyer, the
owner, free and clear of any liens, encumbrances, charges, agreements or claims,
of the Allowances herein being transferred.

Seller makes NO representations or warranties as to the following:

                  (a) There is no warranty or representation that Buyer's use
for compliance or transferability or merchantability of these Allowances will
not be challenged by a government agency, private party, or other interested
third party. Except as expressly set forth in this transaction letter, Seller
expressly negates any other representations or warranties, whether written or
oral, and whether express or implied.

Buyer hereby represents and warrants to Seller as follows:

                  (a) Buyer has, and at all times during the term of this
transaction will have, all necessary power and authority to execute, deliver and
perform its obligations hereunder.

<PAGE>

                  (b) The execution, delivery and performance of this
transaction by Buyer have been duly authorized by all necessary action and do
not violate any of the terms or conditions of Buyer's governing documents, or
any contract to which it is a party, or any law, rule, regulation, order,
judgment or other legal or regulatory determination applicable to Buyer.

                  (c) There is no pending or threatened litigation, arbitration
or administrative proceeding that materially adversely affects Buyer's ability
to perform this transaction.

Entire Agreement. This transaction letter is the final and entire agreement
- ----------------
between the parties. No modification or amendment of this transaction letter
shall be effective or binding unless set forth in writing signed by both
parties.

No Waiver. Waiver of any breach of this transaction shall not be construed as a
- ---------
waiver of any other breach.

Governing Law. INCLUDING ANY COUNTERCLAIMS AND CROSS CLAIMS ASSERTED IN SUCH
- -------------
ACTION, THIS TRANSACTION SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF _____, INCLUDING THE UNIFORM COMMERCIAL CODE, WITHOUT
REGARD TO THE LAWS OF SUCH STATE REQUIRING THE APPLICATION OF THE LAWS OF
ANOTHER STATE. It is agreed that this transaction is enforceable as a "qualified
financial contract" within the meaning of New York General Obligations Law
Section 5-701(b).

Confidentiality.       Except as provided in this Section, neither party shall
- ---------------
publish, disclose, or otherwise divulge Confidential Information to any person,
at any time during or after the term of this transaction, without the other
party's prior express written consent. Each party shall permit knowledge of and
access to the Confidential Information only to those of its corporate
affiliates, attorneys, accountants, representatives, agents and employees who
have a need to know related to this transaction.

         If required by any law, statute, ordinance, decision, order or
regulation passed, adopted, issued or promulgated by a court, governmental
agency or authority having jurisdiction over a party, that party may release
Confidential Information, or a portion thereof, to the court, governmental
agency or authority, as required by the applicable law, statute, ordinance,
decision, order or regulation, and a party may disclose Confidential Information
to accountants in connection with audits, provided that such party has notified
the other party of the required disclosure, such that the other party may
attempt (if such party so chooses) to cause that court, governmental agency,
authority or accountant to treat such information in a confidential manner and
to prevent such information from being disclosed or otherwise becoming part of
the public domain.

         This Section survives for a period of one (1) year following the
expiration or termination of this transaction.

<PAGE>

Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Counterparty by returning an executed copy of this
transaction letter via facsimile to PGET at (301) 280-6060. Your response should
reflect the appropriate party in your organization who has the authority to
enter into the transaction.

PG&E ENERGY TRADING - POWER, L.P.
By:  PG&E Energy Trading Holdings
Corporation - its sole general partner

By: /s/ Sarah M. Barpoulis
   -----------------------
Name: Sarah M. Barpoulis
      Senior Vice President

ACCEPTED AND AGREED:

SCRUBGRASS GENERATING COMPANY, L.P.

By: /s/ Gary F. Weidenger
   ----------------------
Name:  Gary F. Weidenger
Title: Senior Vice President

<PAGE>

                                    Exhibit B

                    Identification of NOx Emission Allowances

- -------------------------------------------------------------------------------
           Originating State               Vintage Year            Quantity
- -------------------------------------------------------------------------------
             Pennsylvania                      2003                150 tons
- -------------------------------------------------------------------------------
             Pennsylvania                      2004                140 tons
- -------------------------------------------------------------------------------
             Pennsylvania                      2005                140 tons
- -------------------------------------------------------------------------------
             Pennsylvania                      2006                140 tons
- -------------------------------------------------------------------------------
             Pennsylvania                      2007                140 tons
- -------------------------------------------------------------------------------

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>6
<FILENAME>dex1012.txt
<DESCRIPTION>AGREEMENT FOR POWER PURCHASES
<TEXT>
<PAGE>

                                                                   Exhibit 10.12

                      WISCONSIN PUBLIC SERVICE CORPORATION

                          AGREEMENT FOR POWER PURCHASES

                                  WITH MICROGY

<PAGE>

                                                                     Page 1 of 7

                                                                   Agreement No.

                      WISCONSIN PUBLIC SERVICE CORPORATION
                      ------------------------------------

                         AGREEMENT FOR POWER PURCHASES
                         -----------------------------

                  Agreement entered into this 21st day of March, 2002, between
Microgy Cogeneration Systems, Inc., a Colorado Corporation, with principal
offices located at 166 N. Green Bay Road, Suite C, Theiensville, Wisconsin 53092
(hereinafter the "Seller"), and WISCONSIN PUBLIC SERVICE CORPORATION
(hereinafter the "Company").

                              W I T N E S S E T H :

                  WHEREAS, the Seller intends to install facilities at certain
individual locations for the purpose of generating electrical energy ("Energy"),
said generation facilities will produce total of up to 15,000 KW, three phase,
and synchronous type, of Energy as more particularly described on Exhibit A
attached hereto (the "Facilities") to be located at various dairy farms and
other agricultural facilities in Wisconsin and,

                  WHEREAS, Seller will install facilities utilizing one of the
three following configurations: (a) direct interconnection of the facility to
the Company's distribution system ("Direct Interconnection"), (b)
interconnection of the facility to a municipal interconnection system served by
the Company as a wholesale distributor ("Municipal Interconnection"), and (c)
interconnection of the facility to a utility other than the Company ("Third
Party Interconnection").

                  WHEREAS, the Company, consistent with its policy of
encouraging innovation and conservation in the energy field, is agreeable to the
Seller's installing said Facilities.

                  WHEREAS, in accordance with regulation of the appropriate
jurisdictional body, the Public Service Commission of Wisconsin (hereinafter the
"Commission "), the Company is charged with the responsibility of furnishing
reliable and continuous service to its customers at a fixed frequency and
voltage within prescribed limits, and the Company's electric utility system must
be constructed and operated in a safe manner from the standpoint of its
employees, as well as the general public. The following are the principal
concerns which must be addressed in this Agreement by the Company and the
Seller.

                  A.   Potential electrical safety hazards resulting from the
Facilities energizing part of a distribution system otherwise isolated by an
outage.

                  B.   Reliability and safety considerations relating to proper
and adequate operation of protective equipment associated with the Company's
distribution system and the potential for the service entrance equipment (e.g.,
fuses and circuit breakers) of individual customers being rendered inadequate by
the operation of the Facilities.

<PAGE>

                                                                     Page 2 of 7

                  C.   The potential under various conditions for damage to
customer-owned utilization equipment because of irregularities in frequency
and/or voltage resulting from operation of the Facilities.

                  D.   The potential for damage and/or improper operation of
customer equipment, such as motors and interference with communication circuits,
both resulting from excessive harmonics in the Company's utility power supply
originating with the Facilities.

                  WHEREAS, the Public Service Commission of Wisconsin has
adopted certain interconnection policies and guidelines that were recommended by
a Technical Advisory Committee, established by the Public Service Commission of
Wisconsin with respect to safety, system protection, and power quality
standards, which policies and guidelines have been incorporated in the Company's
rules for Parallel Generation in Wisconsin.

                  NOW, THEREFORE, the parties hereto each in consideration of
the agreements of the other agree as follows:

                  1.   The Seller agrees, represents and warrants that the
Facilities to be interconnected with the distribution system of the Company are
as described in the applicable Standard Agreement for Interconnection, which is
attached hereto as Exhibit A and made a part hereof. Seller agrees to such
modifications to the Standard Interconnection Agreement as Company may
reasonably require because of specific conditions or circumstances applicable to
Direct Interconnection Facilities, Municipal Interconnection Facilities, or
Third Party Interconnection Facilities, as the case may be. The Standard
Agreement for Interconnection may be executed by Seller or any assignee of the
Seller as required by Company.

                  2.   (a)  The Seller agrees to make available and sell to the
Company and the Company agrees to accept and purchase from the Seller the entire
Energy output generated by each Facility specifically designated by Seller (up
to an aggregate total of 15,000 KW) at the price ("Purchase Price") and subject
to the other terms and conditions, set forth in Exhibit B of this Agreement.

                       (b)  The Company shall purchase the environmental credits
("Environmental Credits") generated from 500 KW of Energy delivered and sold to
the Company for a purchase price of $0.015 per KW hour. The Company shall have
the right to utilize the Environmental Credits it purchases hereunder for its
green pricing program or to meet the Renewable Portfolio Standard(s) pursuant to
Section 196.378 of the Wisconsin Statutes. Seller shall retain all remaining
Environmental Credits, tax credits, and other credits resulting from generation
of Energy or operation of the Facilities. The Company will reasonably cooperate
with Seller to maximize the value to Seller of all Environmental Credits and
other credits; provided, however, that under no circumstances shall Company be
required to incur any expense in connection with the foregoing.

                       (c)  The Company is entering into this Agreement based
upon Seller's representation that the Facilities will normally operate at load
factor in excess of eighty percent (80%). The pricing included in this Agreement
is based on the Company being able to include the capacity of the Energy
purchased under this Agreement as part of the capacity audit approved

<PAGE>

                                                                     Page 3 of 7

by the Mid American Interconnected Network ("MAIN"). If MAIN does not approve
capacity levels acceptable to the Company for Energy purchased under this
Agreement, the Seller agrees to negotiate in good faith to modify the pricing
terms of this Agreement in order to allow the capacity levels to be approved and
included in a MAIN audit. The new pricing terms may include the use of capacity
nominations, a rate of payment for capacity, or penalties for failure to deliver
nominated capacity at specified times. In the event of any adjustment hereunder,
the new pricing terms for capacity and Energy would, in total, be equal to the
gross dollar amount of the pricing terms per KW hour as set forth and as
adjusted from time to time in Exhibit B of this Agreement.

                  3.   The Seller shall operate the Facilities in accordance
with the Company's Parallel Generation Rules, (Rate Schedule PGX) which are
attached hereto as Exhibit C, and updated from time to time, and made a part
hereof.

                  4.   The Seller and the Company shall abide by and be subject
to the rules, regulations, of the Company as filed with and approved by the
Commission from time to time, and the rules and regulations of the Wisconsin
Administrative Code, and all applicable national, state and local codes,
including any future modifications or changes thereof and updated from time to
time.

                  5.   The Company may require the Seller to install inrush
limiting equipment at any Facility if the inrush current from any the Facility
causes a voltage drop of more than 4.0% of the primary distribution voltage
level or causes objectionable flicker (defined as a primary voltage drop that
exceeds the borderline of visibility on the GE Flicker curve, as described in
Annex 1) to other customers or exceeds existing or future limits established by
regulatory agencies. The Company may test and monitor flicker to assure the
criteria in this paragraph are met. Without liability, the Company may require
the Seller to reduce Energy deliveries or may refuse Energy deliveries at any
time during this Agreement if the Company reasonably determines a condition
exists which is likely to result in disruption of service to a customer of the
Company or harm to the Company's distribution system. Upon cessation of such
condition, the Company shall promptly accept deliveries of Energy hereunder.

                  6.   The Seller, in accordance with and in addition to the
Company's Parallel Generation Rules attached hereto as Exhibit C, shall install
such relaying equipment as is necessary to enable the Seller to automatically
isolate the Facilities from the Company's system upon loss of one or more phases
of the Company supply, including, with limitation, over/under frequency
relaying, over/under voltage relaying, ground fault relaying, loss of phase
relaying, and full three-phase, over-current relaying.

                  7.   The Seller shall provide in December of each year a
schedule of maintenance for the Facilities for the following year. Any unusual
or unscheduled maintenance of the Facilities shall be promptly reported to the
Company.

                  8.   The Seller agrees to maintain insurance respecting the
Facilities and operation thereof in the following amounts:

<PAGE>

                                                                     Page 4 of 7

                       a)   General liability         $1,000,000 per occurrence

                       b)   Workers' compensation     Minimum requirements under
                                                      state law; qualified
                                                      municipal self-insurance
                                                      acceptable

                       c)   Comprehensive vehicle     $1,000,000 per occurrence
                            liability insurance

                       d)   All risk property         80% replacement cost of
                            insurance                 each Facility

The Seller will, upon request, make its insurance certificates available to the
Company.

                  9.   Indemnity and limitation of liability.
                       -------------------------------------

                       (a)  The Company and the Seller agree that each shall be
responsible for the electricity on its respective side of the Interconnection
Point and shall indemnify, save harmless and defend the other against all
claims, demands, costs, or expenses for loss, damage or injury to persons or
property in any manner directly or indirectly arising from any negligent acts of
such party, their employees or agents. The Company and the Seller respectively
assume full responsibility in connection with the service rendered hereunder for
their respective wires, cables, and other devices used in connection with the
rendered service. Each Party hereto shall be solely liable for all claims of its
own employees arising from any worker's compensation laws.

                       (b)  Each Party agrees to defend and hold the other Party
and the other Party's agents, servants or employees harmless from any claims,
demands, actions or causes of action arising out of any act or omission on the
part of itself or its agents, servants, or employees which may arise out of the
performance of or be in relation to the performance of any of its other rights
or duties under this Agreement. It is further understood and agreed that the
Seller holds the Company harmless for, and assumes all risk of damage to the
Facilities caused by the Seller's operation of said Facilities. It is further
understood and agreed that the Company holds the Seller harmless for, and
assumes all risk of damage to the Company's system caused by the Company's
operation of said system.

                       (c) The Company and the Seller agree to indemnify and
hold harmless each other, their respective officers, directors, agents, and
employees against all loss, damage, expense, costs, and liability (including
without limitation attorneys' fees) to the other Party and to third persons for
injury to or death of persons or injury to property, occurring on the
indemnifying Party's side of the Interconnection Point proximately caused by the
indemnifying Party's negligent construction, ownership, operation, or
maintenance of any of such Party's works or facilities used in connection with
this Agreement.

                       (d)  Neither the Company nor the Seller shall be liable
to the other for any incidental, special, indirect or consequential damages.

<PAGE>

                                                                     Page 5 of 7

                  10.  Force Majeure.
                       -------------

                       (a)  As used in this Agreement, "Uncontrollable Force"
means any event beyond the reasonable control of a party which results in the
failure of some performance under this Agreement, including but not limited to
the following: failure of equipment or facilities due to drought, flood,
earthquake, storm, fire, lightening, epidemic, war, riot, civil disturbance,
sabotage, strike or labor difficulty, accident or curtailment of supply or
equipment, casualty to equipment or other unavailability of equipment, inability
to obtain and maintain rights-of-way, permits, licenses and other required
authorizations from any federal, provincial or local agency or person for any of
the facilities or equipment necessary to provide or receive services hereunder,
and restraint, order or decree by court of public authority.

                       (b)  Neither party shall be considered to be in default
in respect of any obligation hereunder (other than the obligation to pay amounts
due to the other party under or pursuant to this Agreement) to the extent such
failure of performance shall be due to an Uncontrollable Force. The party
affected by an Uncontrollable Force shall give prompt (and in no event more than
five days after the commencement of the nonperformance arising as a result of an
Uncontrollable Force) written notice to the other party stating the nature of
the event, its anticipated duration and any action being taken to avoid or
minimize its effect.

                       (c)  Performance shall be excused for the shorter of the
duration of the interruption caused by the Uncontrollable Force or one hundred
eighty (180) days. The non-performance party shall use its reasonable best
efforts to remedy its inability to perform, but neither party shall be obligated
to settle or resolve a labor difficulty or to hire substitute labor on terms
unacceptable to that party. Either party may terminate this Agreement in the
event an Uncontrollable Force extends for a period greater than 180 days.

                       (d)  Notwithstanding the foregoing, in the event that an
Uncontrollable Force results in any of the Facilities causing damage or
disruption to the Company's property or facilities, the Company may require the
Seller to deactivate or disconnect the offending Facility or Facilities until
such time as the Uncontrollable Force is remedied or otherwise no longer
materially affects the Facility, as determined by the Company in its reasonable
discretion.

                  11.  This Agreement shall commence as of the date hereof and
shall continue for a period of fifteen (15) years from the date hereof. The
Company shall have the right of first offer to renew this Agreement for an
additional term of at least five (5) years at the then prevailing market rates
for Energy and environmental credits.

                  12.  This Agreement may be terminated by either party hereto
in the event of a material breach hereunder and the breaching party fails to
cure such breach within 30 days of written notice of such breach by the
non-breaching party. In the case of a material breach by Seller, Company shall
provide notice to Seller and to the Facility's lender, mortgage and/or bond
trustee (the "Financing Entity") at the address provided to the Company by
notice from Seller given in accordance with Section 14 of this Agreement.

                  13.  Except as provided in this Section 13, neither party may
pledge or assign its rights hereunder without the prior written consent of the
other party. Seller, at any time

<PAGE>

                                                                     Page 6 of 7

without consent of the Company, upon ten days' prior written notice to Company,
may assign or pledge to any affiliate or to any entity owning the Facilities or
for the benefit of any Financing Entity, any or all of its rights hereunder,
including, but not limited to, its right to receive payments for Energy
generated by any Facility and sold to the Company; provided, however, that
Seller shall not be thereby relieved of any of its duties and obligations
hereunder and provided further that Seller shall execute and deliver any
additional documentation that Company may reasonably request in order to
guaranty the performance of any such assignee. Company shall cooperate as
reasonably requested by Seller at Seller's expense, to provide information as
may be requested by Seller from time to time in order for Seller to secure
financing and satisfy its Financing Entity. The Company agrees to negotiate in
good faith to make reasonable modifications to this Agreement to accommodate the
good faith requirements of Seller's Financing Entity . Thereafter, this
Agreement shall not be modified or amended by Seller except in the manner, if
any, permitted and subject to the conditions, if any, imposed by each such
assignment or pledge. This Agreement shall be binding on the parties' successors
and assigns in accordance with its terms.

                  14.  All notices hereunder (other than notices designated for
delivery to operating personnel, which shall be made in any manner reasonable
under the circumstances) shall be sufficient if personally delivered or sent by
registered or certified mail postage prepaid, courier service or telecopy
(followed by mail) addressed, if to Company to: Wisconsin Public Service
Corporation, 700 N. Adams, P.O. Box 19001, Green Bay, WI 54307-9001 Attention:
Electric Rates Supervisor, fax no.(920) 433-5734; and if to Seller to: Microgy
Cogeneration Systems, Inc., 166 N. Green Bay Road, Suite C, Thiensville,
Wisconsin 53092 Attention: Engineering Dept. Supervisor, fax number 262-242-9430
with a copy to: Environmental Power Corporation, One Cate Street, Fourth Floor,
Portsmouth, New Hampshire 03801, fax no. (603) 431-2650.

                  15.  Either party may terminate this Agreement without penalty
in the event that Seller is not able to commence sales of Energy to the Company
by May 31, 2003; however, if Seller, in good faith, has commenced construction
on the projects anticipated hereunder and is proceeding diligently to complete
construction then this Agreement shall not be terminated and the Company shall
be obligated to Purchase the Energy according to the terms of this Agreement.

                  16.  The Seller has the right to appeal to the Commission in
the event that the Seller believes this Agreement is unreasonable. This
Agreement shall be governed by and shall be enforceable under the laws of the
State of Wisconsin.

                  17.  If any clause, provision or section of this Agreement is
ruled invalid by any court or competent jurisdiction, the invalidity of such
clause, provision or section shall not affect any of the remaining provisions
hereof.

                  18.  This Agreement and the exhibits attached hereto
constitute the entire agreement between the parties with respect to the matters
contained herein. All prior agreements with respect thereto are superseded
hereby and each party confirms that it is not relying on any representations or
warranties of the other party except as specifically set forth herein. This
Agreement may be simultaneously executed in several counterparts, each of which
shall be an

<PAGE>

                                                                     Page 7 of 7

original and all of which constitute one and the same instrument. No amendment
or modification hereto shall be binding unless in writing and duly executed by
both parties.

                  19.  All terms and conditions of this Agreement and any
amendments thereto shall remain confidential between the parties and shall not
be disclosed to third parties except as required by law.

                               MICROGY COGENERATION SYSTEMS, INC.

                               By: /s/ Daniel J. Eastman          Date:  3/21/02
                                  --------------------------------     ---------

                               Name:   Daniel J. Eastman
                                    --------------------------------------------

                               Title:  Sr. Vice President Business Development
                                     -------------------------------------------

                               WISCONSIN PUBLIC SERVICE CORPORATION

                               By: /s/ Patrick W. Fox             Date:3/21/02
                                  --------------------------------     ---------

                               Name:  Patrick W. Fox
                                    --------------------------------------------

                               Title: Director Resource Supply
                                     -------------------------------------------

<PAGE>

                                    EXHIBIT A

                      TO AGREEMENT FOR POWER PURCHASES WITH
                                     MICROGY

                      WISCONSIN PUBLIC SERVICE CORPORATION
                      ------------------------------------

                       APPLICATION FOR INTERCONNECTION OF
                       ----------------------------------
                     SMALL POWER PRODUCERS AND COGENERATORS
                     --------------------------------------

                           (Please Refer to Chapter 3)

<PAGE>

                                    EXHIBIT B

                      TO AGREEMENT FOR POWER PURCHASES WITH
                                     MICROGY

Energy Purchase Price for Energy generated at the Facilities

Summer On-Peak             $0.0600 per kilowatt hour.
Summer Off-Peak            $0.0183 per kilowatt hour.
Winter On-Peak             $0.0450 per kilowatt hour.
Winter Off-Peak            $0.0183 per kilowatt hour.

The Summer period shall be defined as all hours during the months of June, July,
August and September of each calendar year. The Winter period shall be defined
as all hours during the months of October through May.

On-Peak hours shall be from 7:00 am to 11:00pm local time Mondays through
Fridays (except holidays). Off-Peak hours shall be defined as all hours not
defined as On-Peak hours.

Seller will generate Energy from the Facilities at the load factor set forth in
Section 2(c) of this Agreement for at least 16 hours during each weekend
Off-Peak period.

1.       Rate Adjustment:

                       The purchase prices listed above shall remain in effect
                       until the implementation date of the Company's next rate
                       case filing (UR-114). At that time, any change to the
                       Company's applicable buy-back rate (Pg-2) shall be
                       reflected in the Seller's rate by changing the rate by
                       the same percentage as any change in the Company's
                       applicable Pg-2 rate. This adjustment clause will hold
                       true for any subsequent rate changes in the Company's
                       applicable Pg-2 rate for the duration of this agreement.
                       At no time during the duration of this agreement shall
                       the purchase price of Energy be adjusted below the levels
                       set at the implementation of this agreement.

<PAGE>

                                    EXHIBIT C

                      TO AGREEMENT FOR POWER PURCHASES WITH
                                     MICROGY

                      WISCONSIN PUBLIC SERVICE CORPORATION
                      ------------------------------------

                            PARALLEL GENERATION RULES
                            -------------------------

                               (RATE SCHEDULE PGX)
                               -------------------

                         (Please refer to Addendum #12)

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>7
<FILENAME>dex1013.txt
<DESCRIPTION>ENVIRONMENTAL POWER RETIREMENT PLAN
<TEXT>
<PAGE>

                                                                   Exhibit 10.13

                   ENVIRONMENTAL POWER CORPORATION
                          RETIREMENT PLAN

                           -------------

                            As Restated
                   Effective as of January 1, 1998

<PAGE>

                            ENVIRONMENTAL POWER CORPORATION
                                   RETIREMENT PLAN

                                  -----------------

                                  TABLE OF CONTENTS

                                  -----------------

<TABLE>
<S>                                                                                                               <C>
ARTICLE 1.........................................................................................................1

   1.1   NAME OF PLAN.............................................................................................1
   1.2   EFFECTIVE DATE...........................................................................................1

ARTICLE 2.........................................................................................................1

   2.1   "ACCRUED BENEFIT"........................................................................................1
   2.2   "ACTUARIAL EQUIVALENT"...................................................................................2
   2.3   "ADMINISTRATOR"..........................................................................................2
   2.4   "AFFILIATED EMPLOYER"....................................................................................2
   2.5   "ANNUITY STARTING DATE"..................................................................................2
   2.6   "APPLICABLE INTEREST RATE"...............................................................................3
   2.7   "APPLICABLE MORTALITY TABLE".............................................................................3
   2.8   "APPLICATION FOR BENEFITS"...............................................................................3
   2.9   "AVERAGE ANNUAL COMPENSATION"............................................................................3
   2.10  "AVERAGE MONTHLY COMPENSATION"...........................................................................3
   2.11  "BENEFICIARY"............................................................................................3
   2.12  "BOARD"..................................................................................................3
   2.13  "BREAK IN SERVICE".......................................................................................3
   2.14  "CODE....................................................................................................3
   2.15  "COMPENSATION............................................................................................3
   2.16  "CREDITED SERVICE".......................................................................................4
   2.17  "ELIGIBLE EMPLOYEE"......................................................................................4
   2.18  "EMPLOYEE"...............................................................................................5
   2.19  "EMPLOYER"...............................................................................................5
   2.20  "EMPLOYMENT COMMENCEMENT DATE"...........................................................................5
   2.21  "ERISA"..................................................................................................5
   2.22  "FORMER PARTICIPANT".....................................................................................5
   2.23  "HIGHLY COMPENSATED EMPLOYEE"............................................................................5
   2.24  "HOUR OF SERVICE"........................................................................................5
   2.25  "LATE RETIREMENT DATE"...................................................................................7
   2.26  "LEASED EMPLOYEE"........................................................................................7
   2.27  "LEAVE OF ABSENCE".......................................................................................7
   2.28  "NORMAL RETIREMENT AGE"..................................................................................7
   2.29  "NORMAL RETIREMENT DATE".................................................................................7
   2.30  "PARTICIPANT"............................................................................................7
   2.31  "PARTICIPATING EMPLOYER".................................................................................8
   2.32  "PLAN"...................................................................................................8
   2.33  "PLAN YEAR"..............................................................................................8
   2.34  "PBGC RATE"..............................................................................................8
   2.35  "REGULATION..............................................................................................8
   2.36  "RETIREMENT".............................................................................................8
   2.37  "RETIRED PARTICIPANT"....................................................................................8
   2.38  "SOCIAL SECURITY RETIREMENT AGE".........................................................................8
</TABLE>

                                      i

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<TABLE>
<S>                                                                                                              <C>
   2.39  "TOTALLY AND PERMANENTLY DISABLED".......................................................................8
   2.40  "TRUST"..................................................................................................8
   2.41  "TRUST AGREEMENT"........................................................................................8
   2.42  "TRUST FUND".............................................................................................8
   2.43  "TRUSTEE"................................................................................................8
   2.44  "YEAR OF ELIGIBILITY SERVICE"............................................................................9
   2.45  "YEAR OF SERVICE"........................................................................................9

ARTICLE 3.........................................................................................................9

   3.1   REQUIREMENTS TO BECOME A PARTICIPANT.....................................................................9
   3.2   ELIGIBILITY FOLLOWING A TERMINATION OR TRANSFER OF EMPLOYMENT............................................9
   3.3   ELIGIBLE CLASSIFICATION..................................................................................9
   3.4.  DETERMINATION OF ELIGIBILITY BY ADMINISTRATOR............................................................9

ARTICLE 4.........................................................................................................9

   4.1   NORMAL RETIREMENT........................................................................................9
   4.2   DISABILITY RETIREMENT...................................................................................10
   4.3   DEFERRED RETIREMENT BENEFIT; SUSPENSION OF BENEFITS.....................................................10
   4.4   ADJUSTMENTS AFTER REQUIRED BEGINNING DATE...............................................................11
   4.5   REEMPLOYMENT OF RETIRED PARTICIPANT.....................................................................11
   4.6   EFFECT OF BREAK IN SERVICE..............................................................................12
   4.7   EFFECT OF PRIOR DISTRIBUTION; REPAYMENT OF DISTRIBUTION.................................................12
   4.8   NO DUPLICATION OF BENEFITS..............................................................................12

ARTICLE 5........................................................................................................13

   5.1   DEFINITIONS.............................................................................................13
   5.2   MAXIMUM ANNUAL RETIREMENT BENEFIT.......................................................................14
   5.3   COMBINED PLAN LIMITATION................................................................................15
   5.4   COST OF LIVING ADJUSTMENT...............................................................................17
   5.5   SPECIAL LIMITATION FOR 25 HIGHEST-PAID EMPLOYEES........................................................17

ARTICLE 6........................................................................................................18

   6.1   COMMENCEMENT OF BENEFITS................................................................................18
   6.2   AUTOMATIC FORMS OF PAYMENT..............................................................................19
   6.3   WAIVER OF AUTOMATIC ANNUITY FORM........................................................................20
   6.4   EXPLANATION OF AUTOMATIC ANNUITY FORM...................................................................20
   6.5   OPTIONAL FORMS OF PAYMENT...............................................................................21
   6.6   CODE SECTION 401(A)(9) REQUIREMENTS.....................................................................21
   6.7   NO DECREASE IN BENEFIT..................................................................................22
   6.8   USE OF TERM "PARTICIPANT"...............................................................................22

ARTICLE 7........................................................................................................22

   7.1   PRE-RETIREMENT SURVIVOR ANNUITY.........................................................................22
   7.2   OTHER PRE-RETIREMENT DEATH BENEFITS.....................................................................24
   7.3   DEATH AFTER BENEFITS COMMENCE...........................................................................24
   7.4   DESIGNATION OF BENEFICIARY..............................................................................25
   7.5   IMMEDIATE CASHOUT OF $5,000 OR LESS.....................................................................25
   7.6   USE OF TERM "PARTICIPANT"...............................................................................25

ARTICLE 8........................................................................................................25

   8.1   SEPARATION FROM SERVICE.................................................................................25
   8.2   LESS THAN TWO YEARS OF SERVICE..........................................................................25
   8.3   AT LEAST TWO YEARS OF SERVICE; FULL VESTING.............................................................25
   8.4   PRIOR BREAK IN SERVICE..................................................................................26
</TABLE>

                                      ii

<PAGE>

<TABLE>
<S>                                                                                                              <C>
   8.5   PAYMENT OF VESTED BENEFIT...............................................................................26
   8.6   NO DECREASE IN BENEFIT..................................................................................27

ARTICLE 9........................................................................................................27

   9.1   APPLICATION MUST BE FILED...............................................................................27
   9.2   DEATH BENEFITS APPLICATION..............................................................................27
   9.3   TERMINATION BENEFITS APPLICATION........................................................................27
   9.4   NORMAL RETIREMENT BENEFITS..............................................................................28
   9.5   CHANGES IN ELECTION.....................................................................................28
   9.6   REVIEW OF APPLICATION...................................................................................28
   9.7   OBLIGATION TO FURNISH CURRENT ADDRESS; MISSING PERSONS..................................................28
   9.8   NOTICE OF DEATH, RETIREMENT OR SEPARATION FROM SERVICE..................................................28
   9.9   MAILING OF BENEFITS.....................................................................................28
   9.10  MINORS AND INCOMPETENTS.................................................................................28
   9.11  DIRECT ROLLOVER.........................................................................................29
   9.12  MEANING OF PARTICIPANT..................................................................................30
   9.13  ELECTRONIC MEDIA........................................................................................30

ARTICLE 10.......................................................................................................30

   10.1  APPOINTMENT OF ADMINISTRATOR............................................................................30
   10.2  POWERS AND DUTIES OF ADMINISTRATOR; ADMINISTRATOR NOT TO ACT IN DISCRIMINATORY MANNER...................30
   10.3  ADMINISTRATOR TO KEEP ACCURATE RECORDS..................................................................31
   10.4  RELIANCE ON SPECIALISTS.................................................................................31
   10.5  COMPENSATION; LIABILITY.................................................................................32
   10.6  CLAIMS PROCEDURE........................................................................................32
   10.7  AGENT FOR SERVICE OF LEGAL PROCESS......................................................................33

ARTICLE 11.......................................................................................................33

   11.1  TRUST AGREEMENT.........................................................................................33
   11.2  INVESTMENT OF TRUST FUND................................................................................33
   11.3  TRUSTEE'S ACCOUNTS......................................................................................33
   11.4  TRUSTEE'S RECORDS.......................................................................................34
   11.5  TRUSTEE'S LIABILITY.....................................................................................34
   11.6  TRUSTEE'S COMPENSATION AND EXPENSES.....................................................................34

ARTICLE 12.......................................................................................................34

   12.1  CONTRIBUTIONS...........................................................................................34
   12.2  EXCLUSIVE BENEFIT.......................................................................................34
   12.3  EXPENSES................................................................................................35

ARTICLE 13.......................................................................................................35

   13.1  PERMANENCE OF PLAN......................................................................................35
   13.2  RIGHT TO AMEND OR TERMINATE.............................................................................35
   13.3  TERMINATION OF PLAN OR PLAN AND TRUST...................................................................36
   13.4  VESTING ON TERMINATION OR PARTIAL TERMINATION OF PLAN...................................................36
   13.5  LIMITATION OF BENEFITS ON PLAN TERMINATION..............................................................37
   13.6  ALLOCATION OF ASSETS....................................................................................37
   13.7  LIQUIDATION OF TRUST....................................................................................38
   13.8  MERGER OR CONSOLIDATION OF PLAN.........................................................................38

ARTICLE 14.......................................................................................................38

   14.1  PROHIBITION ON ASSIGNMENT OR ALIENATION.................................................................38
   14.2  QUALIFIED DOMESTIC RELATIONS ORDER......................................................................38
   14.3  OFFSET OF BENEFITS......................................................................................40
</TABLE>

                                      iii

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<TABLE>
<S>                                                                                                              <C>
ARTICLE 15.......................................................................................................40

   15.1  AFFILIATED EMPLOYER REQUIREMENTS........................................................................40
   15.2  ADOPTION OF PLAN BY AFFILIATED EMPLOYER.................................................................41
   15.3  WITHDRAWAL FROM PLAN....................................................................................41

ARTICLE 16.......................................................................................................42

   16.1  DEFINITIONS.............................................................................................42
   16.2  WHEN PROVISIONS APPLY...................................................................................45
   16.3  MINIMUM BENEFITS........................................................................................45
   16.4  ADJUSTMENTS TO CODE SECTION 415 ANNUAL BENEFITS LIMITS..................................................45
   16.5  ELIGIBILITY FOR TOP-HEAVY MINIMUM BENEFIT...............................................................46

ARTICLE 17.......................................................................................................47

   17.1  RIGHTS OF EMPLOYEES.....................................................................................47
   17.2  OBLIGATION OF THE AFFILIATED EMPLOYERS..................................................................47
   17.3  ACTION BY THE EMPLOYER..................................................................................47
   17.4  LIABILITY OF EMPLOYER...................................................................................47
   17.5  BONDING.................................................................................................47
   17.6  CONSTRUCTION............................................................................................47
   17.7  TITLES..................................................................................................48
   17.8  COUNTERPARTS............................................................................................48
   17.9  MILITARY LEAVE..........................................................................................48
</TABLE>

                                      iv

<PAGE>

                         ENVIRONMENTAL POWER CORPORATION
                                 RETIREMENT PLAN

         WHEREAS, Environmental Power Corporation (herein referred to as the
"Employer") adopted the Environmental Power Corporation Retirement Plan (herein
referred to as the "Plan") for the benefit of its Employees, effective as of
January 1, 1998; and

         WHEREAS, the Employer desires to amend the Plan to comply with the
Retirement Protection Act of 1994 provisions of the 1994 Uruguay Round
Agreements Act, the Uniformed Services Employment and Reemployment Rights Act of
1994, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of
1997, the IRS Restructuring and Reform Act of 1998 and the Community Renewal Tax
Relief Act of 2000; and

         WHEREAS, it is intended that the Plan continue to be a qualified plan
under Section 401(a) of the Internal Revenue Code and operate for the exclusive
benefit of the Participants and their Beneficiaries;

         NOW, THEREFORE, the Plan is hereby amended by restating the Plan it its
entirety as follows:

                                    ARTICLE 1
                                    ---------

                             Name and Effective Date
                             -----------------------

         1.1      Name of Plan  The Plan shall be known as the "Environmental
                  ------------
Power Corporation Retirement Plan".

         1.2      Effective Date The Plan originally became effective as of
                  --------------
January 1, 1998. This restatement of the Plan is effective as of January 1,
1998, except as otherwise provided herein.

                                    ARTICLE 2
                                    ---------

                                   Definitions
                                   -----------

         2.1      (a)      "Accrued Benefit" means at any time the product of
the Normal Retirement Benefit multiplied by a fraction, the numerator of which
is the number of a Participant's years of Credited Service at such time, and
the denominator of which is the number years of Credited Service the
Participant would have at Normal Retirement Age or, if greater, 25.

                  (b)      When determining the Accrued Benefit, the Normal
Retirement Benefit is the monthly benefit to which the Participant would be
entitled if he continued to earn annually until such Normal Retirement Age the
same rate of Compensation upon which his normal retirement benefit would be
computed. This rate of Compensation is computed on the basis of

                                      1

<PAGE>

Compensation taken into account under the Plan, but not to exceed the ten years
of service immediately preceding the determination.

         2.2      (a)      "Actuarial Equivalent" means a form of benefit
differing in time, period or form of payment from a particular benefit provided
under the Plan but having the same value when calculated, subject to
subsections (b) and (c), using the following factors:

                Pre-Retirement           Post-Retirement
                --------------           ---------------

Interest             6%                      5.5%

Mortality            None                    1983 IAM - Male

                  (b)      Effective as of January 1, 2000, for the purpose of
determining the lump sum Actuarial Equivalent of a Participant's Accrued
Benefit, Actuarial Equivalent shall mean the present value of a Participant's
Accrued Benefit based on the Applicable Mortality Table and the Applicable
Interest Rate.

                  (c)      Notwithstanding the foregoing, the lump sum Actuarial
Equivalent of a benefit, the Annuity Starting Date of which occurs during the
period commencing January 1, 2000 and ending on the date on which this amendment
and restatement is adopted, shall be the greater of:

                           (i)    the present value of a Participant's Accrued
Benefit based on the Applicable Mortality Table and the Applicable Interest
Rate; or

                           (ii)   the present value of a Participant's Accrued
Benefit based on the mortality table of subsection (a) and the PBGC Rate.

         2.3      "Administrator" means the Employer, or such other individual,
committee or firm as the Employer shall designate from time to time in
accordance with Section 10.1.

         2.4      "Affiliated Employer" means the Employer and each of the
Affiliated Employers. "Affiliated Employers" means the Employer and all other
corporations, partnerships, trades or businesses (whether or not incorporated)
that are members of an affiliated group as described in Section 15.1.

         2.5      "Annuity Starting Date" means:

                  (a)      the first day of the first period for which a benefit
is payable under the Plan as an annuity, or

                  (b)      in the case of a benefit not payable in the form of
an annuity, the first day on which all events have occurred that entitle the
recipient to such benefit.

                                      2

<PAGE>

         2.6      "Applicable Interest Rate" means the average yield on 30-year
Treasury Constant Maturities, or such other interest rate as may be specified by
the Commissioner of Internal Revenue, as published in the Federal Reserve
Bulletin, for the month of November preceding the Plan Year.

         2.7      "Applicable Mortality Table" means the 1983 Group Annuity
Mortality Table, with margin, blended 50% male and 50% female, or such other
mortality table as may be prescribed by the Commissioner of Internal Revenue.

         2.8      "Application for Benefits" means the method, prescribed by the
Administrator, by which an individual may request a distribution under the Plan.

         2.9      "Average Annual Compensation" means the annual average of a
Participant's Compensation during the three consecutive Plan Years that produce
the highest annual average. If a Participant has been employed for less than
three full Plan Years, the available full years shall be averaged, or if less
than one full year is available, the Participant's Compensation shall be
annualized.

         2.10     "Average Monthly Compensation" means one-twelfth of a
Participant's Average Annual Compensation.

         2.11     "Beneficiary" means any individual, trust, estate or other
recipient entitled to receive death benefits hereunder, on either a primary or a
contingent basis.

         2.12     "Board" means the board of directors of the Employer.

         2.13     (a)      "Break in Service" means the failure of an individual
to complete more than 500 Hours of Service during a Plan Year, unless such
failure is due to a Leave of Absence. An Employee who fails to return to
employment with the Employer at the expiration of a Leave of Absence shall be
deemed to have terminated employment as of the date on which such Leave of
Absence commenced.

                  (b)      If an Employee separates from service and is
subsequently reemployed, his prior Credited Service shall be reinstated as of
the date on which he became reemployed if:

                           (i)     he was vested in his Accrued Benefit as of
the date on which he separated from service; or

                           (ii)   the number of one-year Breaks in Service does
not equal or exceed five years.

         2.14     "Code" means the Internal Revenue Code of 1986, as amended
from time to time.

         2.15     (a)      "Compensation" with any respect to any Participant
means such Participant's wages, salaries, fees for professional services and
other amounts received (without

                                      3

<PAGE>

regard to whether or not an amount is paid in cash) for services rendered in
the course of employment with the Employer maintaining the Plan to the extent
that the amounts are includible in gross income for a Plan Year.

                  (b)      Compensation shall exclude: (i) contributions made by
the Employer to a plan of deferred compensation to the extent that the
contributions are not includible in the gross income of the Participant for the
taxable year in which contributed, (ii) any distributions from a plan of
deferred compensation; (iii) amounts realized from the exercise of a
non-qualified stock option, or when restricted stock (or property) held by an
Employee either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture; (iv) amounts realized from the sale, exchange
or other distribution of stock acquired under a qualified stock option; and (v)
other non-taxable fringe benefits

                  (c)      The Compensation of a Participant taken into account
under the Plan shall not exceed $160,000, as adjusted under Section 401(a)(17)
of the Code. In the case of a Plan Year of less than 12 months, the dollar
limitation under this subsection shall be the amount determined by multiplying
the applicable amount described in the preceding sentence by a fraction, the
numerator of which is the number of months in the Plan Year and the denominator
of which is 12. In the case of a Participant who commences or ceases
participation in the Plan on a date other than the first or last day of the
Plan Year, no adjustment shall be made to the applicable dollar limitation.

         2.16     "Credited Service" means a Plan Year during which a
Participant is credited with at least 1,000 Hours of Service. In no event shall
a Participant be credited with more than one year of Credited Service for any
Plan Year nor shall a Participant be credited with Credited Service for any
Plan Year in which he fails to accumulate 1,000 Hours of Service except as
hereinafter provided in this section. If a Participant is credited with more
than 500 and less than 1,000 Hours of Service for a Plan Year because he either:

                  (a)      enters or, following a Break in Service, reenters
employment with the Employer after the first day of a Plan Year, or

                  (b)      terminates his employment or retires prior to the end
of a Plan Year,

he shall accrue a partial year of Credited Service for such Plan Year in the
ratio that his Hours of Service for such year bears to 1,000.

         2.17     "Eligible Employee" means an Employee of an Employer who is
not ineligible to participate in the Plan under Section 3.3. Notwithstanding
anything herein to the contrary, an individual who is not characterized or
treated as a common law employee by the Employer shall not be eligible to
participate in the Plan. In the event that such an individual is reclassified
as a common law employee, the individual shall be eligible to participate in
the Plan as of the later of the actual date of such reclassification or the
effective date of such reclassification (to the extent such individual
otherwise meets the requirements of Section 3.3).

                                      4

<PAGE>

         2.18     "Employee" means an individual who is a common law employee
of an Affiliated Employer. A Leased Employee shall not be treated as an
Employee

         2.19     "Employer" means Environmental Power Corporation, a
Massachusetts corporation, and any sole proprietorship, partnership or
corporation that succeeds to the business of and assumes the obligations of the
Employer.

         2.20     "Employment Commencement Date" means the first day on which an
individual is credited with an Hour of Service.

         2.21     "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.

         2.22     "Former Participant" means a Participant who has ceased to be
an Employee and for whom an amount continues to be held by the Trustee.

         2.23     "Highly Compensated Employee" means an individual who is a
common law employee of the Employer and who:

                  (a)      (i)    owns more than a 5% interest in an Affiliated
Employer at any time during the Plan Year or the preceding Plan Year; or

                           (ii)   received earnings from the Affiliated
Employers in excess of $80,000 during the preceding Plan Year.

                  (b)      For purposes of subsection (a):

                           (i)    In determining ownership, the constructive
ownership provisions of Section 318 of the Code shall be applied utilizing a 5%
test in lieu of the 50% test set forth in subparagraph (a)(2)(C) thereof.

                           (ii)   The term "earnings" means earnings as defined
in Section 5.3(a)(ii).

                           (iii)  The dollar limit referred to in subsection (a)
(ii) shall be adjusted in accordance with Regulations for increases in the cost
of living.

                  (c)      The determination of who is a Highly Compensated
Employee shall be made in accordance with Section 414(q) of the Code and
Regulations thereunder.

         2.24     (a)      "Hour of Service" means:

                           (i)    each hour for which an individual is
compensated, or entitled to be compensated, by the Employer for the performance
of duties;

                                      5

<PAGE>

                           (ii)   each hour for which an individual is
compensated, or entitled to be compensated, by the Employer for a period during
which no duties are performed by such individual (irrespective of whether the
employment relationship has terminated) due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military duty or Leave of
Absence, up to a maximum of 501 hours for any single continuous period during
which no duties are performed (whether or not such period falls within a single
Plan Year or other computation period). Hours shall not be credited for payment
to an individual from a plan required by workers' compensation, unemployment
compensation or disability insurance laws, nor shall hours be credited for
reimbursement of an individual for medical or medically related expenses;

                           (iii)  each hour for which back pay, irrespective of
mitigation of damages, has been awarded or agreed to by the Employer, provided
that, if such award or agreement of back pay is for reasons other than the
performance of duties, such hours shall be subject to the restrictions of
paragraph (ii), and hours credited under this paragraph shall be credited for
the period or periods to which the award or agreement pertains rather than to
the period in which the award, agreement or payment is made; and

                           (iv)   for purposes of determining whether a Break in
Service has occurred only, each hour to a maximum of 501 hours for any single
continuous period of absence, regardless of whether the individual is
compensated for such absence, if such absence occurs by reason of pregnancy of
the individual, birth of a child of the individual, adoption of a child by the
individual or the individual caring for a child for the period beginning
immediately following such birth or adoption, if such Hours of Service would
otherwise have been credited to such individual but for such absence. Hours of
Service credited under this paragraph shall be credited in the year in which
such absence commences or, if unnecessary to prevent a Break in Service in that
year, in the immediately following year. Hours of Service credited under this
paragraph shall only be credited to the individual upon receipt by the
Administrator of such timely information as may be reasonably required to
establish the existence and duration of such absence.

                  (b)      The same Hours of Service shall not be credited under
more than one of the paragraphs of subsection (a). All Hours of Service shall
be computed and credited to computation periods in accordance with Sections
2530.200b-2(b) and (c) of the Department of Labor regulations.

                  (c)      In determining whether an individual is credited with
a Year of Eligibility Service under of Article 3 or a Year of Service under
Article 8, Hours of Service shall be credited for the following:

                           (i)    the period during which such individual
performs services as a Leased Employee;

                           (ii)   the period during which such individual would
have been a Leased Employee but for the failure to satisfy the requirements of
subsection (a)(ii) of the definition herein of a "Leased Employee";

                                      6

<PAGE>

                           (iii)  the period during which such individual is a
common law employee of an Affiliated Employer other than the Employer; and

                           (iv)   the period during which such individual
performs services for the Employer as a common law employee in a classification
of such employees who are not eligible to participate in the Plan.

         2.25     "Late Retirement Date" means the first day of the month
coinciding with or next following the Retirement of a Participant who continues
to be an Employee after reaching Normal Retirement Date.

         2.26     (a)      "Leased Employee" means, subject to subsection (b),
an individual who performs services for an Affiliated Employer, other than as a
common law employee, if: (i) such services are provided pursuant to a written
or oral agreement between an Affiliated Employer and any other person; (ii) the
individual has performed during any consecutive 12-month period (A) at least
1,500 Hours of Service for the Affiliated Employers or (B) a number of Hours of
Service which is at least 501 and which is at least equal to 75% of the median
Hours of Service that are customarily performed by any employee of the
Affiliated Employers in the particular position in which such individual is
performing services; and (iii) such services are performed under primary
direction or control by the entity for which such services are provided.

                  (b)      An individual shall not be considered to be a Leased
Employee if: (i) such individual participates in a money purchase pension plan
providing: (A) a nonintegrated employer contribution at a rate not less than 10%
of the individual's Compensation, (B) immediate participation and (C) full and
immediate vesting; and (ii) Leased Employees, determined without regard to this
sentence, do not constitute more than 20% of the nonhighly compensated work
force of the Affiliated Employers.

         2.27     "Leave of Absence" means any extended absence from employment
that is due to (a) service in the Armed Forces of the United States if and for
such periods as the Employee's reemployment rights are guaranteed by law, (b)
temporary incapacity, or (c) other good cause which is authorized by the
Employer. Effective August 5, 1993, such term includes any absence or reduced
work schedule for a reason designated by the Employer as qualifying under the
Family and Medical Leave Act of 1993, if such Act applies to the Employer. An
Employee shall not be considered to have terminated employment with the
Employer during a Leave of Absence.

         2.28     "Normal Retirement Age" means the later of a Participant's
62nd birthday or the fifth anniversary of the date on which he became a
Participant.

         2.29     "Normal Retirement Date" means the first day of the month
coinciding with or next following a Participant's Normal Retirement Age.

         2.30     "Participant" means an Employee who has satisfied the
requirements of Article 3 for eligibility to participate in the Plan and who
has not separated from service with the Affiliated Employers.

                                      7

<PAGE>

         2.31     "Participating Employer" means (a) the Employer, and (b) any
other Affiliated Employer that has adopted the Plan in accordance with Section
15.2.

         2.32     "Plan" means the Environmental Power Corporation Retirement
Plan as set forth herein, together with any and all supplements, schedules and
amendments hereto that may be in effect.

         2.33     "Plan Year" means the 12-month period ending on December 31 of
each year.

         2.34     "PBGC Rate" means, when determining the lump sum value of a
benefit, the set of interest rates that would be used by the Pension Benefit
Guaranty Corporation to determine a lump sum value if the Plan terminated on the
first day of the Plan Year in which such benefit is distributed and there were
sufficient assets to provide guaranteed benefits.

         2.35     "Regulation" means any rule or regulation promulgated under
the Code by the Secretary of the Treasury or his delegate.

         2.36     "Retirement" means separation from service with the Affiliated
Employers as a result of which a Participant is entitled to receive a benefit
under Article 6.

         2.37     "Retired Participant" means a Participant who separates from
service with the Affiliated Employers on or after attaining Normal Retirement
Age.

         2.38     "Social Security Retirement Age" means a Participant's
retirement age under Section 216(l) of the Social Security Act determined
without regard to the age increase factor under such section as if the early
retirement age under paragraph (2) thereof were 62.

         2.39     "Totally and Permanently Disabled" means suffering from a
physical or mental condition which, in the opinion of a licensed physician
selected by the Administrator, may be expected to result in death or to be of
continued duration of not less than 12 months, and which renders a Participant
incapable of engaging in any substantial gainful employment.

         2.40     "Trust" means the trust created by the Trust Agreement.

         2.41     "Trust Agreement" means the agreement between the Employer and
the Trustee relating to the Plan, together with any and all supplements and
amendments thereto that may be in effect.

         2.42     "Trust Fund" means all the assets held by the Trustee under
the Trust Agreement.

         2.43     "Trustee" means the person or persons who may from time to
time be acting as trustee or trustees under the Trust Agreement.

                                      8

<PAGE>

         2.44     "Year of Eligibility Service" means the 12-month period
commencing on an Employee's Employment Commencement Date during which the
Employee is credited with at least 1,000 Hours of Service. In the case of an
Employee who does not complete 1,000 Hours of Service during such 12-month
period, Year of Eligibility Service means a Plan Year beginning after the
Employee's Employment Commencement Date during which the Employee is credited
with at least 1,000 Hours of Service.

         2.45     "Year of Service" means a Plan Year during which an individual
is credited with at least 1,000 Hours of Service.

                                    ARTICLE 3
                                    ---------

                     Eligibility to Participate in the Plan
                     --------------------------------------

         3.1      Requirements to Become a Participant. (a) Subject to Section
                  ------------------------------------
3.3, each Eligible Employee shall become a Participant on the January 1 or July
1 coinciding with or next following the date on which he has completed one Year
of Eligibility Service and attained age 21.

                  (b)      An Employee who incurs a Break in Service prior to
becoming eligible to participate shall be considered a new Employee for purposes
of this section.

         3.2      Eligibility Following a Termination or Transfer of Employment.
                  -------------------------------------------------------------
An Employee who has become a Participant in accordance with Section 3.1, ceased
to be an Employee and subsequently returned to employment shall again become a
Participant, subject to Section 3.3, as of the date on which he completes an
Hour of Service following his return to employment.

         3.3      Eligible Classification. Notwithstanding the foregoing
                  -----------------------
provisions of this Article 3, an Employee shall not be an Eligible Employee if
the Employee is a member of a classification of Employees that the Employer has
designated as not eligible to participate in the Plan. The Employer may at any
time and from time to time remove any one or more Employees or any group(s) or
class(es) of them from eligibility to participate in this Plan, but no such
removal shall reduce the Accrued Benefit of any Participant.

         3.4.     Determination of Eligibility by Administrator. The
                  ---------------------------------------------
determination of an Employee's eligibility to participate in the Plan shall be
made by the Administrator from the records of the Affiliated Employers and the
Administrator's determination shall be conclusive and binding upon all persons.

                                    ARTICLE 4
                                    ---------

                       Retirement and Disability Benefits
                       ----------------------------------

         4.1      Normal Retirement. Upon attaining his or her Normal Retirement
                  -----------------
Age, a Participant shall be 100% vested in his Accrued Benefit. A Participant
who retires on his or her Normal Retirement Date shall be entitled to receive a
monthly retirement benefit, commencing as

                                      9

<PAGE>

of his Normal Retirement Date and continuing for his remaining lifetime equal
to the product of (a) and (b), where:

                           (a)    is 55% of his Average Monthly Compensation,
and

                           (b)    is a fraction, the numerator of which is the
number of years of Credited Service that the Participant has performed as of
the date of the determination and the denominator of which is 20. For this
purpose, the maximum number of years of Credited Service taken into account
shall be 20.

         4.2      Disability Retirement. (a) A Participant who becomes Totally
                  ---------------------
and Permanently Disabled prior to Normal Retirement Age shall be deemed to have
retired as of the date on which the disability commences. The benefit payable
to a Participant who retires under this section shall be a monthly benefit
which is the Actuarial Equivalent of such Participant's Accrued Benefit.

                  (b)      The benefit payable under subsection (a) shall
commence as of the first day of the month in which the Participant begins
receiving benefits under the Social Security Act and shall cease with the
payment due for the month preceding the earliest of:

                           (i)    the date as of which the Participant is found
not to be permanently and totally disabled under the Social Security Act;

                           (ii)   the date of death of the Participant; or

                           (iii)  the Participant's Normal Retirement Date.

                  (c)      If payment of a monthly benefit under subsection (a)
ceases by reason of the Participant's attaining Normal Retirement Date, payment
of a retirement benefit under Section 4.1 shall commence in accordance with
Article 6.

                  (d)      If payment of a Participant's monthly benefit ceases
as a result of the Disabled Participant's death, any death benefit payable to
the Disabled Participant's surviving spouse shall be determined under Article 7.

         4.3      Deferred Retirement Benefit; Suspension of Benefits. (a)
                  ---------------------------------------------------
Except as provided in Section 6.1(b), if a Participant continues in the service
of the Employer after attaining Normal Retirement Date, payment of retirement
benefits shall be suspended in accordance with subsection (b) and shall not
commence until the Participant becomes a Retired Participant.

                  (b)      The Plan Administrator shall notify each Participant
described in subsection (a) who is credited with at least 40 Hours of Service
during a calendar month that his or her benefits have been suspended in
accordance with Department of Labor regulations Section 2530.203-3. Such
notification shall be given in writing by personal delivery or first class mail
during the first month or payroll period in which benefits are not paid; shall
describe the reasons for the suspension, the Plan provision requiring the
suspension and the Plan's procedure for

                                      10

<PAGE>

providing a review of the decision to suspend benefits; and shall include a
copy of this section and a statement that applicable Department of Labor
regulations may be found at Section 2530.203-3 of the Code of Federal
Regulations.

                  (c)      If the notice required by subsection (b) is not
provided to a Participant described in subsection (a) or if such a Participant
is credited with less than 40 Hours of Service during a calendar month, the
retirement benefit payable to the Participant determined as of the Annuity
Starting Date shall be the greater of (i) the Participant's Accrued Benefit as
of the date on which the Participant actually retired based on Average Monthly
Compensation and Credited Service as of such date, or (ii) the Actuarial
Equivalent, reflecting the deferred payment, of the Participant's Accrued
Benefit determined as of Normal Retirement Date.

                  (d)      In the case of a Participant described in subsection
(a) whose benefits have been suspended under subsection (b), the benefit
payable as of the Annuity Starting Date shall be such Participant's Accrued
Benefit determined as of such date.

         4.4      Adjustments After Required Beginning Date. A Participant's
                  -----------------------------------------
Accrued Benefit shall be actuarially increased to take into account the period
after age 70 1/2 in which the Employee does not receive any benefits under the
Plan. The actuarial increase begins on the April 1 following the calendar year
in which the Employee attains age 70 1/2, and ends on the date on which
benefits commence after retirement in an amount sufficient to satisfy Section
401(a)(9) of the Code. The amount of actuarial increase payable as of the end
of the period for actuarial increases must be no less than the Actuarial
Equivalent of the Employee's retirement benefits that would have been payable
as of the date on which the actuarial increase must commence plus the Actuarial
Equivalent of additional benefits accrued after that date. The actuarial
increase is generally the same as, and not in addition to, the actuarial
increase required for that same period under Section 411 of the Code to reflect
the delay in payments after normal retirement, except that the actuarial
increase required under Section 401(a)(9)(C) of the Code must be provided even
during the period during which an employee is in Section 203(a)(3)(B) service.
For purposes of Section 411(b)(1)(H) of the Code, the actuarial increase will
be treated as an adjustment attributable to the delay in distribution of
benefits after the attainment of normal retirement age. To the extent permitted
under Section 411(b)(1)(H) of the Code, the actuarial increase required under
Section 401(a)(9)(c)(iii) of the Code may reduce the benefit accrual otherwise
required under Section 4.3(c), except that the rules on the suspension of
benefits are not applicable.

         4.5      Reemployment of Retired Participant. (a) If a Retired
                  -----------------------------------
Participant who is receiving monthly benefits becomes an Employee, he or she
shall continue to receive monthly benefit payments and shall become a
Participant upon completion of an Hour of Service.

                  (b)      The benefit payable to a Participant described in
subsection (a) shall be adjusted as of the end of each Plan Year following his
or her reemployment (the "benefit adjustment date"). The adjusted monthly
benefit shall be paid in the form of payment already in effect for the
Participant, beginning with the first monthly payment due after the benefit
adjustment date or, if later, the Participant's Normal Retirement Date. The
amount of the adjusted monthly benefit shall be the Participant's Accrued
Benefit, based upon his or her

                                      11

<PAGE>

Average Monthly Compensation and Credited Service determined as of the benefit
adjustment date, reduced by the amount determined under subsection (c).

                  (c)      To determine the amount of a Participant's adjusted
monthly benefit, the amount determined under subsection (b) shall be reduced by
the Actuarial Equivalent of all distributions made to the Participant by the
benefit adjustment date as to which the Plan could (without regard to Code
Section 401(a)(9) and the Regulations thereunder) have suspended payment under
Section 4.4. No reduction under this subsection shall have the effect of
reducing the monthly benefit payable to the Participant below the monthly
benefit in effect as of the last day of the Plan Year preceding the benefit
adjustment date.

         4.6      Effect of Break in Service. (a) Except as otherwise provided
                  --------------------------
in Section 4.7(b), in the case of a Participant who incurs a Break in Service,
Years of Service shall include periods of service before the Break in Service
only if (i) the Participant had a vested benefit before the Break in Service,
or (ii) the number of consecutive Breaks in Service is less than either five or
the Participant's aggregate Years of Service before such Breaks in Service.

                  (b)      Any Year of Service that is not credited under this
Plan shall not be taken into account for purposes of subsection (a).

         4.7      Effect of Prior Distribution; Repayment of Distribution. (a)
                  -------------------------------------------------------
Subject to subsection (b), if a Participant separates from, and then returns to,
service with the Employer, any benefits to which such Participant becomes
entitled shall be reduced by the Actuarial Equivalent of any benefits previously
distributed.

                  (b)      If an individual has received a lump sum payment
under Article 6 or Article 8 that is less than the present value of his or her
Accrued Benefit and is again employed by the Employer in a classification of
employees eligible to participate in the Plan, he or she shall be entitled,
during the period commencing on the date of reemployment and ending on the
earlier of the fifth anniversary of such date or the occurrence of five
consecutive Breaks in Service commencing after the lump sum payment, to
recontribute to the Trust Fund the full amount of the lump sum payment. A
Participant who recontributes an amount under this subsection shall pay
interest, compounded annually, at the rate determined under Section
411(c)(2)(C) of the Code from the date on which the lump sum payment is
received until repayment is made. Any amount recontributed and the interest
paid thereon shall not be considered an annual addition for purposes of Article
5. All of a Participant's Credited Service shall be aggregated for purposes of
the Plan upon a payment to the Trustee in accordance with this subsection. In
the event a Participant does not make a payment under this subsection, any
Credited Service prior to the Break in Service shall be disregarded when
determining such Participant's Accrued Benefit.

         4.8      No Duplication of Benefits. No Participant shall be entitled
                  --------------------------
to a benefit under this Plan based upon any period of service with respect to
which he is receiving benefits under any other defined benefit pension plan to
which the Employer or an Affiliated Employer contributes on his behalf.

                                      12

<PAGE>

                                    ARTICLE 5
                                    ---------

                             Limitations on Benefits
                             -----------------------

         5.1      Definitions. The following definitions shall apply for
                  -----------
purposes of this Article 5:

                  (a)      (i)    "Annual additions" means, with respect to a
Participant for each limitation year, the sum of:

                                  (A)    The contributions by the Employer or an
                  Affiliated Employer to any qualified defined contribution
                  plan;

                                  (B)    any forfeitures allocated to a
                  Participant under such a plan;

                                  (C)    any contribution to such a plan by the
                  Participant; and

                                  (D)    any contribution by an Affiliated
                  Employer allocated to an individual medical account, as
                  defined in Section 415(l)(2) of the Code, established for a
                  Participant under any pension or annuity plan, and, in the
                  case of an individual who is or was at any time a key
                  employee, as defined in Section 416(i) of the Code, any
                  contribution by an Affiliated Employer paid or accrued to a
                  separate account in a funded welfare benefit plan, as defined
                  in Section 419(e) of the Code, established for the purpose of
                  providing post-retirement medical benefits.

                           (ii)   The term "annual additions" shall not include
any investment earnings allocable to a Participant, amounts recontributed to
this Plan or any rollover contribution (including amounts received by a trustee
of a plan of an Affiliated Employer in a direct transfer from another qualified
plan).

                  (b)      "Earnings" means wages, as defined in Section 3401(a)
of the Code, and other compensation received by a Participant during a
limitation year that are reported in Box 1 on IRS Form W-2 (Wage and Tax
Statement) for the calendar year in which such limitation year ends. Earnings
shall be determined without regard to any rules under Section 3401(a) of the
Code that limit the remuneration included in wages on the basis of the nature
or location of the employment or the services performed. For limitation years
beginning after 1997, earnings shall also include elective amounts that are not
includible in the gross income of the Participant under Section 125, 402(e)(3),
402(h), 403(b) or, effective for limitation years beginning after 2000,
132(f)(4) of the Code.

                  (c)      "Excess amount" means the amount allocated or
credited to a Participant in excess of the limits applicable under Section 5.2
or 5.3.

                  (d)      "Limitation year" means the Plan Year.

                                      13

<PAGE>

                  (e)      "Projected annual retirement benefit" means the
annual benefit to which a Participant would be entitled under any qualified
defined benefit retirement plan maintained by the Affiliated Employers, based
on the assumptions that employment continues until normal retirement age, that
earnings continue until normal retirement age at the same rate as in effect in
the plan's limitation year under consideration, and that all other relevant
factors used to determine benefits under the plan as of the current limitation
year of such plan remain constant for al such limitation years.

         5.2      Maximum Annual Retirement Benefit.
                  ---------------------------------

                  (a)      (i)    The maximum annual retirement benefit payable
to any Participant for any limitation year under this Plan and any other
qualified defined benefit retirement plan maintained by the Affiliated
Employers, shall not exceed the lesser of:

                                  (A)    100% of the Participant's average
                  earnings for the three consecutive highest paid years, or

                                  (B)    $90,000, adjusted in accordance with
                  Section 5.4.

                           (ii)   If the annual retirement benefit is not paid
in the form of a single life annuity or qualified joint and survivor annuity
(as defined in Section 417(b) of the Code), the interest rate used to determine
an Actuarial Equivalent of the limitation set forth in paragraph (i) shall be
the greater of the rate set forth in Section 2.2(a) or 5%.

                  (b)      (i)    If a Participant has less than 10 years of
participation in the Plan, the limitation set forth in subsection (a)(i)(B)
shall be reduced by multiplying such limitation by a fraction, the numerator of
which is the number of years of participation in the Plan and the denominator of
which is 10.

                           (ii)   If a Participant has less than 10 years of
employment with the Employer, the limitations set forth in subsection (a)(i)(A)
and subsection (c) shall be reduced by multiplying such limitations by a
fraction, the numerator which is the number of years of such employment and the
denominator of which is 10.

                  (c)      In the case of a Participant who has not participated
in any qualified defined contribution retirement plan maintained by any
Affiliated Employer (including an individual medical account or funded welfare
benefit plan), this Plan, in conjunction with all other qualified defined
benefit retirement plans of the Employer, may pay annual retirement benefits
that exceed 100% of the average compensation of such Participant, provided such
annual retirement benefits do not exceed $10,000 for the current Plan Year and
for all prior Plan Years.

                  (d)      If payment of an annual retirement benefit begins
 before Social Security Retirement Age, the dollar limitation set forth in
subsection (a)(i)(B) (as adjusted under Section 5.4(a)) shall be reduced to the
Actuarial Equivalent, determined in accordance with subsection (f), of such
dollar limitation at Social Security Retirement Age.

                                      14

<PAGE>

                  (e)      If payment of an annual retirement benefit begins
after a Participant reaches Social Security Retirement Age, the dollar
limitation set forth in subsection (a)(i)(B) (as adjusted under Section 5.4(a))
shall be increased to the Actuarial Equivalent of an annual benefit commencing
at Social Security Retirement Age equal to such dollar limitation. Actuarial
equivalence shall be determined in accordance with subsection (f).

                  (f)      (i)    For purposes of the adjustment required by
subsection (e), the Actuarial Equivalent dollar limit shall be the lesser of
the amount determined under Section 2.2(a) or the amount determined by
substituting an interest rate assumption of 5% for the interest rate assumption
in Section 2.2(a).

                           (ii)   For purposes of the adjustment required by
subsection (d), the dollar limit shall be reduced until age 62 by using the
factors that reduce old-age insurance benefits under the Social Security Act
and, if benefits begin before age 62, such limit shall be further reduced to
the Actuarial Equivalent of the limit at age 62. The Actuarial Equivalent of
the dollar limit at age 62 shall be the lesser of the amount determined under
Section 2.2(a) or the amount determined by substituting an interest rate
assumption of 5% for the interest rate assumption in Section 2.2(a).

         5.3      Combined Plan Limitation. (a) This section shall not apply
                  ------------------------
after December 31, 1999.

                  (b)      In the case of a Participant who is or has at any
time been covered by a qualified defined contribution retirement plan
maintained by an Affiliated Employer, the sum of the defined contribution
fraction described in subsection (b) and the defined benefit fraction described
in subsection (c) shall not exceed 1.0.

                  (c)      (i)    the defined contribution fraction is a
fraction:

                                  (A)    the numerator of which is the sum of
                  the annual additions for the current and all prior limitation
                  years, determined with respect to each such year under the
                  rules governing the crediting of annual additions for such
                  year and computed as of the end of such year:

                                         (1)    credited to the Participant
                                  under any qualified defined contribution
                                  retirement plan of an Affiliated Employer,
                                  whether or not terminated,

                                         (2)    attributable to nondeductible
                                  employee contributions to any defined benefit
                                  retirement plan of an Affiliated Employer,
                                  whether or not terminated,

                                         (3)    attributable to any welfare
                                  benefit plan, as defined in Section 419(e) of
                                  the Code, of an Affiliated Employer, and

                                      15

<PAGE>

                                         (4)    attributable to any individual
                                  medical account, as defined in Section 415(1)
                                  (2) of the Code, maintained by an Affiliated
                                  Employer; and

                                  (B)    the denominator of which is the sum of
                  the lesser of the following amounts, computed for each
                  limitation year as of the end of such year and including
                  limitation years when the individual was not a Participant as
                  a result of ineligibility to participate or because the
                  Employer did not maintain a defined contribution plan:

                                         (1)    125% of the defined contribution
                                  dollar limitation in effect for such
                                  limitation year, or

                                         (2)    35% of the Participant's
                                  earnings for the limitation year.

                  (d)      (i)    Subject to paragraph (ii), the defined benefit
fraction is a fraction:

                                  (A)    the numerator of which is the sum of
                  the Participant's projected annual retirement benefits under
                  each qualified defined benefit retirement plan of the
                  Affiliated Employers, whether or not terminated, determined
                  as of the end of the limitation year; and

                                  (B)    the denominator of which is the lesser
                  of:

                                         (1)    125% of $90,000 (or, in the case
                                  of benefits commencing before or after the
                                  Social Security Retirement Age, the
                                  Actuarial Equivalent of such amount), as
                                  adjusted under Section 5.4(a), or

                                         (2)    140% of the Participant's
                                  average earnings for the highest three
                                  consecutive limitation years, as adjusted
                                  under Section 5.4(b).

                           (ii)   If a Participant was a participant as of the
first day of the first limitation year beginning after 1986 in any qualified
defined benefit retirement plan of an Affiliated Employer that was in effect on
May 6, 1986, the denominator of the defined benefit fraction shall not be less
than 125% of such Participant's minimum accrued benefit.

                  (e)      If a Participant is, or has ever been, covered under
more than one defined benefit plans maintained by the Employer, the sum of the
Participant's annual benefits from all such plans can not exceed the maximum
permissible amount. Benefits shall be reduced under any other defined benefit
plan before under this Plan unless such plans are terminated, in which event
benefits shall be limited in this Plan.

                                      16

<PAGE>

                  (f)      If the Employer maintains, or at any time maintained,
one or more qualified defined contribution plans, welfare benefit funds, as
defined in Code Section 419(e), or individual medical accounts, as defined in
Code Section 415(1)(2) which provides an annual addition covering any
Participant in this Plan, the sum of the Participant's defined contribution
fraction and defined benefit fraction shall not exceed 1.0 in any limitation
year. If the limitations of Code Section 415(e) become applicable, benefits
under a defined contribution plan are first provided.

         5.4      Cost of Living Adjustment. (a) The dollar limitation referred
                  -------------------------
to in Section 5.2(a)(i)(B) shall be adjusted in accordance with Regulations for
increases in the cost of living.

                  (b)      In the case of a Participant who has separated from
service with the Employer, the amount of average earnings described in Sections
5.2(a)(i)(A) and 5.3(d)(i)(B)(2) shall be adjusted annually by multiplying such
amount by a fraction with a numerator equal to the adjusted dollar limitation
described in Section 5.2(a)(i)(B) for the limitation year for which such
adjustment is being made, and a denominator equal to the adjusted dollar
limitation in effect for the year in which such separation from service
occurred.

                  (c)      If an Affiliated Employer maintains a qualified
defined benefit retirement plan providing any post-retirement ancillary
benefits (other than a qualified joint and survivor annuity with the
Participant's spouse), the denominator referred to in Section 5.3(d)(i)(B)
shall be adjusted in accordance with Regulations.

         5.5      Special Limitation for 25 Highest-Paid Employees. (a) Subject
                  -------------------------------------------------
to subsection (b), the annual benefit payments made to any individual who is
one of the 25 most highly compensated active and former Highly Compensated
Employees shall not exceed the sum of: (i) the payments that would be made to
such individual under a straight life annuity that is the Actuarial Equivalent
of the individual's Accrued Benefit and all other benefits, other than a Social
Security supplement, payable to the individual under the Plan, and (ii) the
annual amount payable to the individual under a Social Security supplement.

                  (b)      Subsection (a) shall not apply with respect to an
individual described in such subsection if: (i) after payment of all benefits
due to such individual under the Plan, the value of the Trust Fund would equal
or exceed 110% of the value of the current liabilities, as defined in Code
Section 412(1)(7), of the Plan; (ii) the lump sum Actuarial Equivalent of the
benefits payable to such individual under the Plan is less than 1% of the value
of such current liabilities; or (iii) the lump sum Actuarial Equivalent of all
benefits payable to such individual under the Plan does not exceed $5,000.

                  (c)      (i)    The benefit of a Participant that is
restricted by subsection (a) may be distributed in full to such Participant if,
before receipt of the restricted amount, the Participant enters into a written
agreement with the Administrator to secure repayment to the Plan of the
restricted amount. The "restricted amount" is the excess of the amounts to be
distributed to the Participant (accumulated with reasonable interest) over the
amounts that could have been distributed to the Participant under the straight
life annuity described in subsection (a)

                                      17

<PAGE>

(accumulated with reasonable interest). The Participant may secure repayment of
the restricted amount by: (A) entering into an agreement for the deposit in
escrow with an acceptable depositary of property having a fair market value
equal to at least 125% of the restricted amount, (B) providing a bank letter of
credit in an amount not less than the restricted amount, or (C) posting a bond,
furnished by an insurance company, bonding company or other surety for federal
bonds, in an amount not less than the restricted amount.

                           (ii)   An escrow agreement described in paragraph
(i)(A) may permit the Participant to withdraw amounts in excess of 125% of the
restricted amount provided that, if the market value of the property held under
such arrangement falls below 100% of the remaining restricted amount, the
Participant is required to deposit additional property to increase the value of
the property held by the depositary to not less than 125% of the remaining
restricted amount. Such an escrow agreement may provide that, subject to the
Participant's obligation under the preceding sentence, the Participant shall
have the right to receive any income from the property placed in escrow.

                           (iii)  A surety or bank may release any liability in
excess of the remaining restricted amount under a bond or letter of credit
described in paragraph (i)(B) or (C).

                           (iv)   If the Administrator certifies to the
depositary, surety or bank that the Participant (or the Participant's estate)
is no longer required to repay the restricted amount, a depositary may
redeliver to the Participant (or the Participant's estate) any property held
under an escrow agreement, and a surety or bank may release any liability on a
Participant's bond or letter of credit.

                  (d)      For purposes of this section, the term "benefit"
includes loans in excess of the limit set forth in Code Section 72(p)(2)(A);
any periodic income; any withdrawal values payable to a living employee; and
any death benefits not provided for by insurance on the employee's life.

                                    ARTICLE 6
                                    ---------

                         Payment of Retirement Benefits
                         ------------------------------

         6.1      Commencement of Benefits.
                  ------------------------

                  (a)      Application for Benefits. Except as provided in
                           ------------------------
subsection (b) and Sections 6.2(a), 7.5 and 8.5(a), payment of benefits under
the Plan shall commence as soon as practicable after approval of an Application
for Benefits but in no event later than 60 days after the last day of the Plan
Year in which occurs the latest of (i) Normal Retirement Date, (ii) separation
from service with the Affiliated Employers, or (iii) the tenth anniversary of
the date on which the Participant commenced participation in the Plan.

                  (b)      Required Beginning Date.
                           -----------------------

                                      18

<PAGE>

                           (i)    Except as otherwise provided in paragraph
(ii) or (iii), payment of benefits hereunder shall commence no later than the
April 1 next following the later of the calendar year in which an individual
attains age 70-1/2 or the calendar year in which the individual separates from
service with the Affiliated Employers.

                           (ii)   Payment of benefits to an Employee who (A) is
not a 5-percent owner and (B) attains age 70-1/2 before 2002 shall commence no
later than the April 1 next following the calendar year in which the Employee
attains age 70-1/2, unless the Employee elects to defer the commencement of
benefit payments until separation from service with the Affiliated Employers.
In the event of such an election, payment of benefits shall commence no later
than April 1 of the calendar year following the calendar year in which the
Employee separates from service with the Affiliated Employers.

                           (iii)  Paragraph (i) shall not apply to an Employee
who is a 5-percent owner. Payment of benefits to such an Employee shall
commence no later than April 1 of the calendar year following the calendar year
in which the Employee attains age 70-1/2.

                           (iv)   For purposes of this subsection, `5-percent
owner' means an individual who, at any time during the Plan Year ending in the
calendar year in which the individual attains age 70-1/2 or during any of the
four preceding Plan Years, is described in Section 16.1(e)(i)(C).

         6.2      Automatic Forms of Payment.
                  --------------------------

                  (a)      Cashout of $5,000 or Less. Notwithstanding any other
                           -------------------------
provision of this Article, if the Actuarial Equivalent lump sum value of an
individual's Accrued Benefit does not exceed $5,000 the Administrator shall
direct the Trustee to distribute such benefit in an Actuarial Equivalent lump
sum payment without the consent of the Participant (or the Participant's spouse,
if any) as soon as practicable following the last day of the Plan Year in which
the date on which such individual becomes a Retired Participant. If such value
exceeds $5,000 at the time of any distribution under the Plan, the value of the
benefit shall be deemed to exceed $5,000 at all times thereafter.

                  (b)      Married Participants. Unless an election under
                           --------------------
Section 6.3 is in effect, the Accrued Benefit of a Participant who is married
during the twelve-consecutive month period ending on the Annuity Starting Date
shall be paid in the form of an Actuarial Equivalent joint and survivor annuity
with level monthly payments for the life of the Participant and, upon his or
her death after the commencement of benefit payments, monthly payments equal to
50% of the Participant's monthly benefit continuing to his or her spouse for
life if he or she survives the Participant.

                  (c)      Unmarried Participants. Unless an election under
                           ----------------------
Section 6.3 is in effect, the Accrued Benefit of an unmarried Participant shall
be paid in the form of level monthly payments for the life of the Participant
with such payments ceasing upon his or her death

                                      19

<PAGE>

         6.3      Waiver of Automatic Annuity Form. (a) A Participant may elect
                  --------------------------------
to waive the automatic joint and survivor annuity or life annuity. Such
election must be made in writing during the period beginning upon receipt of
the written explanation described in Section 6.4 and ending on the Annuity
Starting Date, and may be revoked in writing at any time during such period.

                  (b)      Consent of Spouse Required. A married Participant's
                           --------------------------
waiver of the automatic joint and survivor annuity must include the written
consent of the individual who is the Participant's spouse on the Annuity
Starting Date. The spouse's consent must specifically acknowledge any
designated Beneficiary, the effect of such election and the form of payment
elected, and must be witnessed by a Plan representative or a notary public. A
change in the designated Beneficiary made subsequent to a spousal consent shall
be deemed to be a revocation of the Participant's election to waive the joint
and survivor annuity. Any subsequent election to waive the joint and survivor
annuity must comply with the requirements of this subsection.

                  (c)      When Consent Not Needed. The consent of the
                           -----------------------
Participant's spouse shall not be required if it is established to the
satisfaction of the Administrator that it cannot be obtained because there is
no spouse or the spouse cannot be located, or under such other circumstances as
may be prescribed by Regulations.

         6.4      Explanation of Automatic Annuity Form.
                  -------------------------------------

                  (a)      Subject to subsection (b), not less than 30 days and
not more than 90 days before the Annuity Starting Date, the Administrator shall
provide each Participant with a written explanation of:

                           (i)    the terms and conditions of the automatic
joint and survivor annuity or, in the case of an unmarried Participant, life
annuity;

                           (ii)   the Participant's right to waive the joint and
survivor annuity or the life annuity and the effect of a waiver;

                           (iii)    a description of the material features and
relative values of the optional forms of payment available under the Plan;

                           (iv)   the requirements that the Participant's spouse
consent to any waiver of the automatic joint and survivor annuity and that the
spouse's consent specifically acknowledge the effect of such waiver, any
designated Beneficiary and the form of payment elected; and

                           (v)    the Participant's right to revoke the waiver
and the effect of such revocation.

                  (b)      Payments of benefits may commence less than 30 days
(but not less than 8 days) after an individual's receipt of the information
required by subsection (a) if:

                                      20

<PAGE>

                           (i)    the Participant has been provided with
information that clearly indicates that the Participant has at least 30 days to
consider whether to waive the joint and survivor annuity and elect (with
spousal consent) a form of distribution other than a joint and survivor annuity;

                           (ii)   the Participant is permitted to revoke any
affirmative distribution election at least until the Annuity Starting Date, or
if later, at any time prior to the expiration of the 8-day period beginning on
the date on which the explanation of the joint and survivor annuity is provided
to the Participant; and

                           (iii)  the Annuity Starting Date is a date after the
date on which the written explanation was provided to the Participant.

                  (c)      If an individual's Annuity Starting Date will occur
more than 90 days after the date on which such individual received the
information required by subsection (a), except as otherwise permitted by
Regulations, the Administrator shall again furnish such individual with the
written information required by subsection (a) so that such information is
received no more than 90 days before the Annuity Starting Date.

                  (d)      Within 30 days of the receipt of a timely written
request from an individual who has received the information described in
subsection (a), but not more frequently than once during any Plan Year, the
Administrator shall provide such individual with a written explanation of the
financial effect on such individual's benefits of any election under this
section.

         6.5      Optional Forms of Payment. Subject to Section 6.2, a
                  -------------------------
Participant may, by filing an Application for Benefits, elect to have the
Actuarial Equivalent of his or her Accrued Benefit paid under one of the
following options:

                  (a)      Contingent annuitant option - level monthly payments
                           ---------------------------
for the life of the Participant with, upon his or her death after the
commencement of benefit payments, payments (at the same rate as that paid to
the Participant or, if the Participant so elects, 50% or 100% of such rate)
continuing to the contingent annuitant for life if he or she survives the
Participant. A Participant's election of the contingent annuitant option shall
not take effect if the Participant or the contingent annuitant dies before the
Annuity Starting Date:

                  (b)      Life annuity option - level monthly payments for the
                           -------------------
life of the Participant with such payments ceasing upon his or her death; and

                  (c)      Lump sum payment - a single lump sum payment that is
                           ----------------
the Actuarial Equivalent of the Participant's Accrued Benefit.

         6.6      Code Section 401(a)(9) Requirements. (a) Distributions under
                  -----------------------------------
the Plan shall be made in accordance with Section 401(a)(9) of the Code and
Regulations thereunder, including the minimum distribution incidental benefit
requirement of Section 1.401(a)(9)-2 thereof. Notwithstanding any other
provision of the Plan, with respect to distributions under the Plan

                                      21

<PAGE>

made for calendar years after 2000, the Plan shall apply the minimum
distribution requirements of Section 401(a)(9) of the Code in accordance with
the Regulations under said section proposed on January 17, 2001. The preceding
sentence shall apply to calendar years beginning before the effective date of
final Regulations under Section 401(a)(9) of the Code or until such other date
as may be specified by the Internal Revenue Service.

                  (b)      If a person other than the Participant's spouse is a
contingent annuitant, the periodic annuity payment to the survivor of the
Participant must not exceed the applicable percentage of the annuity payment for
such period payable to the Participant under the applicable table contained in
Section 1.401(a)(9)-2 of the Regulations under the Code. In addition,
notwithstanding any other provision in the Plan, no payment option shall be
permitted if it causes a Participant's benefit to be paid over a period of time
extending beyond the Participant's life expectancy (or the joint life
expectancies of the Participant and contingent annuitant as of the time payments
commence, without any recalculation of life expectancies thereafter), and the
Plan provisions shall be applied consistent with the Regulations issued under
Code Section 401(a)(9).

         6.7      No Decrease in Benefit.  After benefit payments have begun,
                  ----------------------
they shall not be reduced because of an increase in Social Security benefit
levels or in the Social Security wage base.

         6.8      Use of Term "Participant". For purposes of this Article, the
                  -------------------------
term "Participant" includes a Former Participant.

                                    ARTICLE 7
                                    ---------

                                 Death Benefits
                                 --------------

         7.1      Pre-retirement Survivor Annuity. (a) Subject to Section 7.5
                  -------------------------------
and the following subsections of this section, the surviving spouse of a vested
Participant who was legally married to such spouse for the twelve-month period
preceding the date of his death and dies before his Annuity Starting Date shall
receive a death benefit in the form of the preretirement survivor annuity
described in subsection (b).

                  (b)      (i)    The preretirement survivor annuity payable
under subsection (a) is a monthly pension benefit for the life of the surviving
spouse equal to:

                                  (A)    In the case of a vested Participant who
                  dies after the earliest date on which retirement benefits
                  could have been paid under Article IV, 50% of the
                  Participant's Accrued Benefit calculated as if the Participant
                  had retired on the day before death and had elected to have
                  vested benefits paid in the form of an Actuarial Equivalent
                  50% joint and survivor annuity under Section 6.2(b).

                                  (B)    In the case of a vested Participant who
                  dies on or before the earliest date on which retirement
                  benefits could have been paid under Article IV, 50% of the
                  Participant's Accrued Benefit calculated as if the Participant
                  had

                                      22

<PAGE>

                  separated from service on the date of death, had survived
                  to the earliest date on which retirement benefits could have
                  been paid, had commenced receiving vested benefits on that
                  date in the form of an Actuarial Equivalent 50% joint and
                  survivor annuity in accordance with Section 6.2(b), and had
                  died on the day following the date on which benefits
                  commenced.

                           (ii)   The surviving spouse shall be entitled to
commence payment of the preretirement survivor annuity described in paragraph
(i)(A) as of the later of: (A) first day of the month following the
Participant's death, or (B) the first day of the month in which the Participant
would have been eligible to commence benefit payments. Notwithstanding the
foregoing, no benefits shall commence prior to the Participant's Normal
Retirement Date without the consent of the spouse.

                  (c)      (i)    With spousal consent as provided in this
paragraph, a Participant may elect in writing to waive the preretirement
survivor annuity. Any such election shall be made by the Participant and
contain the consent of the Participant's spouse. The spouse's written consent
must be witnessed by a Plan representative or a notary public, and specifically
acknowledge the effect of such election and any other designated Beneficiary.
No consent shall be required if it is established to the satisfaction of the
Plan Administrator that such consent cannot be obtained because there is no
spouse or the spouse cannot be located, or under such other circumstances as
may be prescribed by Regulations.

                           (ii)   An election under this subsection must be made
during the period beginning on the first day of the Plan Year in which the
Participant attains age 35 or, if later, the date on which the individual
becomes a Participant, and ending on the earlier of the Participant's Annuity
Starting Date or the date of the Participant's death. If a Participant
separates from service with the Employer before the beginning of such election
period, such period shall begin on the date of separation from service.

                           (iii)  The Plan Administrator shall provide each
Participant with a written explanation of the preretirement survivor annuity
containing information comparable to that required by Section 6.4(a). The
written explanation shall be provided during whichever of the following four
periods ends last:

                                  (A)    The period beginning with the first day
                  of the Plan Year in which the Participant attains age 32 and
                  ending with the last day of the Plan Year preceding the Plan
                  Year in which the Participant attains age 35.

                                  (B)    The 12-month period commencing on the
                  date on which the individual becomes a Participant.

                                  (C)    The 12-month period commencing on the
                  date on which the preretirement survivor annuity is no longer
                  subsidized within the meaning of Section 1.401(a)-20 of the
                  Regulations.

                                      23

<PAGE>

                                  (D)    The 12-month period commencing on the
                  date on which the preretirement survivor annuity first became
                  effective with respect to the Participant.

                           (iv)   In the case of a Participant who separates
from service with the Employer before age 35, the written explanation required
by this subsection shall be provided during the 12-month period commencing on
the date of separation from service.

                           (v)    A Participant may revoke a waiver of the
preretirement survivor annuity at any time during the election period without
the spouse's consent. Any subsequent waiver must contain the spouse's consent.
For purposes of this Section 7.1, any change in Beneficiary designation
occurring after the spousal consent shall be deemed to be a revocation of the
Participant's waiver of the preretirement survivor annuity.

                           (vi)   An election, or a failure to make an election,
under this Section 7.1 shall not affect the Participant's right upon retirement
to elect an optional form of payment under Section 6.5.

         7.2      Other Pre-Retirement Death Benefits. (a) The Beneficiary of a
                  -----------------------------------
Participant who dies before the Annuity Starting Date shall be entitled to
receive:

                           (i)    if an election under Section 7.1(c) is in
effect, the amount described in subsection (b), or

                           (ii)   in all other cases, the excess of the amount
described in subsection (b) over the value of the death benefit, if any,
payable under Section 7.1(a).

                  (b)      The amount described in this subsection is: (i) in
the case of a Participant who separates from service with the Affiliated
Employers before attaining Normal Retirement Age, the Actuarial Equivalent of
the Participant's vested Accrued Benefit; and (ii) in the case of a Participant
who does not separate from service with the Affiliated Employers before
attaining Normal Retirement Age, the Actuarial Equivalent of the Participant's
Accrued Benefit.

                  (c)      Subject to Section 6.6, the Beneficiary shall be
entitled to commence payment of the benefit described in this section as of the
later of: (i) first day of the month following the Participant's death, or (ii)
the first day of the month in which the Participant would have been eligible to
commence benefit payments.

                  (d)      If a Beneficiary has not been designated by a
Participant, the Beneficiary shall be the surviving spouse or, if there is no
surviving spouse, the Participant's estate.

         7.3      Death After Benefits Commence. If a Participant dies on or
                  -----------------------------
after the Annuity Starting Date, the death benefit, if any, payable to the
Beneficiary shall depend upon the form of payment of benefits in effect for
such Participant at the time of death.

                                      24

<PAGE>

         7.4      Designation of Beneficiary. Subject to Section 7.1, each
                  --------------------------
Participant shall have the right to designate the Beneficiary to receive death
benefits payable hereunder and, subject to Section 7.5, the manner in which such
death benefits shall be paid. Such designations shall be made on a form
furnished by and filed with the Administrator, and may be changed in a like
manner.

         7.5      Immediate Cashout of $5,000 or Less. If the value of the lump
                  -----------------------------------
sum Actuarial Equivalent of the death benefit payable under this Article does
not exceed $5,000, the Administrator shall direct the Trustee to distribute the
entire value of such benefit in a lump sum payment provided such payment is
made prior to the commencement of death benefit payments. If the value of the
lump sum Actuarial Equivalent of such death benefit exceeds $5,000 at the time
of any distribution under the Plan, the value of the benefit payable under this
Article shall be deemed to exceed $5,000 (or $3,500) at all times thereafter.

         7.6      Use of Term "Participant" For purposes of this Article, the
                  ------------------------
term "Participant" includes a Former Participant.

                                   ARTICLE 8
                                   ---------

                      Separation from Service and Vesting
                      -----------------------------------

         8.1      Separation from Service. The eligibility of a Former
                  -----------------------
Participant to receive his distribution of benefits upon separation from
service with the Affiliated Employers before his Normal Retirement Date or
becoming Totally and Permanently Disabled shall be determined under this
Article.

         8.2      Less Than Two Years of Service.
                  ------------------------------

                  (a)      Except as otherwise provided in Section 8.3(b) and
(c), a Participant who separates from service with the Affiliated Employers
before completing two Years of Service shall not be entitled to receive a
benefit under the Plan. Such an individual shall be deemed to have received a
single sum payment in the amount of $0 on the date of separation from service
and shall forfeit his or her Accrued Benefit as of the last day of the Plan
Year in which separation from service occurs.

                  (b)      If a Participant described in subsection (a) becomes
an Employee before incurring five consecutive Breaks in Service, his or her
Accrued Benefit shall be restored.

         8.3      At Least Two Years of Service; Full Vesting.
                  -------------------------------------------

                  (a)      A Former Participant who separates from service with
the Affiliated Employers after completing at least two Years of Service shall
be entitled to receive a percentage of his or her Accrued Benefit, based upon
the Participant's Years of Service, as follows:

                                      25

<PAGE>

                   Years of Service                   Vested Percentage
                   ----------------                   -----------------

                   Less than 2                               0%
                   2 but less than 3                         20%
                   3 but less than 4                         40%
                   4 but less than 5                         60%
                   5 but less than 6                         80%
                   6 or more                                 100%

                  (b)      Unless a forfeiture has previously occurred under
Section 8.2 (a), the Accrued Benefit of a Participant who separates from
service before Normal Retirement Age and is not 100% vested shall be forfeited
upon the occurrence of the earlier of: (i) the occurrence of five consecutive
Breaks in Service, or (ii) the date on which the Participant receives or
commences to receive distribution of his Accrued Benefit.

         8.4      Prior Break in Service. The vested percentage of the Accrued
                  ----------------------
Benefit, other than amounts previously forfeited under this Article, of a Former
Participant who again becomes a Participant after a Break in Service shall be
determined as follows:

                  (a)      If the Former Participant had achieved any percentage
of vesting before the Break in Service, all Years of Service shall be
aggregated.

                  (b)      If the Former Participant had not achieved any
percentage of vesting before the Break in Service, and if the number of
consecutive Breaks in Service is less than either (i) five or (ii) the
aggregate number of Years of Service before such Breaks in Service, all Years
of Service shall be aggregated.

                  (c)      If the Former Participant had not achieved any
percentage of vesting before the Break in Service, and if the number of
consecutive Breaks in Service equals or exceeds both (i) five and (ii) the
aggregate number of Years of Service before such Breaks in Service, all Years
of Service before such Breaks in Service shall be disregarded.

         8.5      Payment of Vested Benefit.
                  -------------------------

                  (a)      Immediate Cashout of $5,000 or Less. If the Actuarial
                           -----------------------------------
Equivalent lump sum value of a Former Participant's vested Accrued Benefit does
not exceed $5,000, the Administrator shall direct the Trustee to distribute such
vested benefit in a single sum payment without the consent of the Former
Participant (and his or her spouse, if any) as soon as practicable following
separation from service. If the Actuarial Equivalent lump sum value of an
individual's vested Accrued Benefit exceeds $5,000 at the time of any
distribution under the Plan, its value shall be deemed to exceed $5,000 at all
times thereafter.

                  (b)      Deferred Payment. Subject to subsection (c), a Former
                           ----------------
Participant who has separated from service with the Affiliated Employers with a
vested Accrued Benefit whose

                                      26

<PAGE>

Actuarial Equivalent lump sum value exceeds $5,000 shall be entitled to receive
a distribution of his or her vested Accrued Benefit at Normal Retirement Date
in accordance with Article 6.

         8.6      No Decrease in Benefit. The vested benefit of a Former
                  ----------------------
Participant shall not be decreased by reason of an increase in Social Security
benefit levels or in the Social Security wage base occurring after separation
from service.

                                   ARTICLE 9
                                   ---------

          Applications for Benefits and Other Distribution Procedures
          -----------------------------------------------------------

         9.1      Application Must Be Filed. (a) Benefits under the Plan shall
                  -------------------------
be paid in the manner and at the time selected in an Application for Benefits
filed with the Administrator in accordance with this Article after receipt of
the information required by subsection (b)(i) and (ii) and as soon as
reasonably practicable after the Annuity Starting Date.

                  (b)      Not less than 30 and not more than 90 days before an
individual's Annuity Starting Date, the Administrator shall provide the
individual with an Application for Benefits and the following written
information:

                           (i)    a general description of the material features
of, and an explanation of the relative values of, the optional forms of payment
available under the Plan; and

                           (ii)   information as to the individual's right, if
any, to defer receipt of the distribution and that failure to file an
Application for Benefits within the time specified in this Article shall be
treated as an election to defer.

                  (c)      (i)    Except as provided in paragraph (ii), an
individual's Annuity Starting Date shall be not less than 30 days or more than
90 days after the date on which the individual has received the written
information required by subsection (b)(i) and (ii). If an individual's Annuity
Starting Date will occur more than 90 days after such date, the Administrator
shall again provide such individual with the information required by subsection
(b)(i) and (ii) so that it is received no more than 90 days before the Annuity
Starting Date.

                           (ii)   Payment of benefits may commence less than 30
days but not less than 8 days after an individual's receipt of the information
required by subsection (b)(i) and (ii) in accordance with Section 6.4(b).

         9.2      Death Benefits Application.  The Application for Benefits
                  --------------------------
required for the payment of death benefits must be filed by the Beneficiary of
a deceased Participant and must be accompanied by a death certificate.

         9.3      Termination Benefits Application. If payment of vested
                  --------------------------------
benefits is to commence at the election of a Participant before the
Participant's Normal Retirement Date, an Application for

                                      27

<PAGE>

Benefits must be filed with the Administrator within a reasonable time
following the Participant's receipt of such application.

         9.4      Normal Retirement Benefits. If a payment of a Participant's
                  --------------------------
benefit is to commence at or after Normal Retirement Date and the Participant
fails to file an Application for Benefits within a reasonable time following
receipt of such application and the written information required by Section
9.1(b)(i) and (ii), the benefit to which such Participant is entitled shall be
paid in the automatic form under Article 6.

         9.5      Changes in Election. The election of a form of payment or the
                  -------------------
designation of a Beneficiary made in an Application for Benefits may be changed
by filing a new Application for Benefits before the Annuity Starting Date.

         9.6      Review of Application. The Administrator shall promptly
                  ---------------------
process each Application for Benefits received by it and shall notify the
applicant in writing of the action taken regarding the Application for Benefits
within a reasonable period of time following its receipt.

         9.7      Obligation to Furnish Current Address; Missing Persons. (a) An
                  ------------------------------------------------------
individual for whom vested benefits are being held by the Trustee shall keep the
Administrator notified of a current mailing address. The Administrator and the
Employer shall be discharged from any liability resulting from a failure to pay
benefits if reasonable effort has been made to contact the individual at the
last address on record.

                  (b)      If an individual entitled to benefits under the Plan
cannot be located after diligent search and the whereabouts of such individual
continues to be unknown for a period of three years, the Administrator may
determine that such individual has died, whereupon such benefits shall be
distributed to the Beneficiary or Beneficiaries determined in accordance with
Article 7. If no such Beneficiary or Beneficiaries can be located after
reasonable efforts, the Administrator may determine that such benefits are
forfeited in accordance with Section 8.3(b). Such benefits shall be restored to
the Participant or Beneficiary entitled thereto upon such individual's claim
therefor filed within the time prescribed by applicable law.

         9.8      Notice of Death, Retirement or Separation from Service.
                  ------------------------------------------------------
Whenever benefits become payable under the Plan because of the death,
Retirement or other separation from service of a Participant, the Administrator
shall transmit to the Trustee a notice specifying the name and address of the
Participant (including, if applicable, any designated or contingent
Beneficiary) or Beneficiary who is entitled to receive benefits under the Plan
and the medium of payment.

         9.9      Mailing of Benefits. Whenever the Trustee is directed to make
                  -------------------
payment or delivery of benefits in accordance with a notice of the
Administrator, mailing a check in the appropriate amount to the person or
persons entitled thereto at the address designated in such notice shall be
adequate delivery by the Trustee for all purposes.

         9.10     Minors and Incompetents. If any benefit hereunder becomes
                  -----------------------
payable to a minor, to an individual under a legal disability, or to an
individual not judicially declared incompetent but

                                      28

<PAGE>

who, by reason of illness or mental or physical disability, is, in the opinion
of the Administrator, unable properly to administer such benefit, such benefit
shall be paid to the legally appointed guardian or conservator of such
individual, or to a relative or friend for the care and support of such
individual, as selected by the Administrator, and the Trustee, the
Administrator and the Employer shall not incur any liability therefor.

         9.11     Direct Rollover. (a) For purposes of this section, the
                  ---------------
following terms shall have the meanings set forth below:

                           (i)    "Direct rollover" means a payment to one or
more eligible retirement plans specified by a distributee.

                           (ii)   "Distributee" means an Employee or former
Employee; the surviving spouse of an Employee or former Employee; and the
spouse or former spouse of an Employee or former Employee who is the alternate
payee under a qualified domestic relations order as defined in Section 414(p)
of the Code.

                           (iii)  "Eligible retirement plan" means an individual
retirement account or annuity described in Section 408 of the Code, an annuity
plan described in Section 403(a) of the Code or a qualified trust described in
Section 401(a) of the Code that will accept a distributee's eligible rollover
distribution. Notwithstanding the foregoing, in the case of an eligible
rollover distribution made to the surviving spouse of a Participant, an
eligible retirement plan means only an individual retirement account or annuity.

                           (iv)   "Eligible rollover distribution" means the
distribution under the Plan of all or a portion of the balance to the credit of
a distributee, other than: one or more distributions to be made during a
taxable year of the distributee which in the aggregate are reasonably expected
to be less than $200; a distribution that is one of a series of substantially
equal periodic payments made not less frequently than annually for the life or
life expectancy of the distributee or the joint lives or joint life expectancy
of the distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; payments under an annuity contract made
in or after the year in which the employee attains (or would, if living, have
attained) age 70-1/2; the portion of any distribution that is required to be
made under Section 401(a)(9) of the Code; and the portion of any distribution
that is not includible in gross income.

                  (b)      Notwithstanding any other provision of the Plan, a
distributee may elect, in accordance with procedures established by the
Administrator, that all or a portion of an eligible rollover distribution to be
made to the distributee shall instead be distributed in a direct rollover. If a
portion but not all of an eligible rollover distribution is to be distributed in
a direct rollover, such portion may not be less than $500. In the case of an
eligible rollover distribution not exceeding $500, any direct rollover must
consist of the entire amount of the eligible rollover distribution.

                  (c)      (i)    Not less than 30 days before the Annuity
Starting Date of a distributee who is entitled to receive an eligible rollover
distribution, the Administrator shall, in

                                      29

<PAGE>

accordance with Section 402(f) of the Code, provide the distributee with a
written explanation of the rules governing rollovers (including the right to
make a direct rollover under subsection (b)), the special tax treatment
available to lump sum distributions and the mandatory federal income tax
withholding on any eligible rollover distribution for which no election is made
under subsection (b). No later than the date on which the information required
by this paragraph is provided to a distributee, the Administrator shall notify
the distributee that he or she is entitled to consider, for a period of at
least 30 days following receipt of such information, whether or not to make an
election under subsection (b).

                           (ii)   Notwithstanding paragraph (i) but subject to
section 6.4(b), a direct rollover or distribution may be made less than 30 days
after the distributee receives the information required by paragraph (i), if
the distributee affirmatively elects to receive a distribution or to make a
direct rollover under subsection (b).

         9.12     Meaning of Participant. For purposes of this Article, the term
                  ----------------------
"Participant" includes a Former Participant.

         9.13     Electronic Media. (a) Any reference in the Plan to "written"
                  ----------------
or "in writing" shall be construed to include a reference to the use of
electronic media, to the extent made available by the Plan Administrator and
permitted by the Internal Revenue Service and the Department of Labor.

         (b)      Subsection (a) shall not apply for the following purposes
under the Plan: (i) Any spousal required in connection with any action taken by
a Participant, including the waiver of a spousal death benefit, a qualified
preretirement survivor annuity or a joint and survivor annuity, the designation
of a Beneficiary other than a spouse, or an application for a loan under the
Plan; (ii) making or revoking a Beneficiary designation, (iii) providing notice
of an amendment to the Plan's vesting schedule; (iv) any notification of action
taken by the Administrator regarding an application for benefits; (v) a request
for review of a denial of benefits and the submission of issues and comments in
connection with such an appeal; and (vi) a Participant's request for a copy of
the Plan or other documents relating to the establishment and operation of the
Plan.

                                   ARTICLE 10
                                   ----------

                           Administration of the Plan
                           --------------------------

         10.1     Appointment of Administrator. In the absence of any action by
                  ----------------------------
the Employer to appoint an Administrator, the Employer shall be the
Administrator of the Plan. The Employer may appoint one or more individuals,
firms, corporations or other entities to be the Administrator of the Plan, and
the Employer may, at any time and from time to time, remove such person(s) as
Administrator, with or without cause.

         10.2     Powers and Duties of Administrator; Administrator Not to Act
                  ------------------------------------------------------------
in Discriminatory Manner. (a) The Administrator shall constitute the "named
- ------------------------
fiduciary" and the "administrator" with respect to the Plan as such terms are
defined in ERISA, and in such capacities it shall have

                                      30

<PAGE>

authority to control and manage the operation and administration of the Plan.
The Administrator shall have the powers and duties specified in the Plan,
including the discretionary authority to interpret the provisions of the Plan
and to determine all questions relating to eligibility for benefits hereunder.
Any such interpretation or determination adopted by the Administrator in good
faith shall be binding upon the Employer and on all Participants, Former
Participants and Beneficiaries. The Administrator, in exercising its discretion
shall do so in a uniform and nondiscriminatory manner, treating all individuals
in similar circumstances alike.

                  (b)      The Administrator shall establish a funding method
and policy consistent with the objectives of the Plan, and shall determine the
Plan's short-and long-term financial needs and communicate such requirements to
the Trustee.

                  (c)      The Administrator may employ such accountants,
counsel, specialists and other persons as it deems necessary or desirable in
connection with the administration of this Plan. To the extent permitted by
ERISA, the Administrator may delegate any of its fiduciary responsibilities or
other duties or responsibilities to such persons as the Administrator deems
appropriate.

                  (d)      The Administrator may correct any defect, supply any
omission, reconcile any inconsistency, and adopt such rules and procedures with
respect to the administration of this Plan in such manner and to such extent as
it may deem necessary and expedient to carry out the Plan.

                  (e)      The Administrator may remedy any inequity resulting
from incorrect information received or communicated in good faith or as a
result of an administrative or operational error. Such remedial action may
include taking such actions as may be required under any correction program
established by the Internal Revenue Service, the Department of Labor or any
other administrative agency, including the Employee Plans Compliance Resolution
System of the Internal Revenue Service; reallocation of Plan assets; adjusting
the amount of future payments to Participants, Former Participants,
Beneficiaries or alternate payees; and the institution and prosecution of legal
actions to recover benefit payments made in error.

         10.3     Administrator to Keep Accurate Records. The Administrator
                  --------------------------------------
shall keep accurate records and minutes of its proceedings and actions with
respect to the Plan. It shall maintain, or cause to be maintained, accounts
showing the operation and condition of the Trust Fund, and shall keep, or cause
to be kept, in convenient form such data as may be necessary for the valuation
of the assets and liabilities of the Plan. The Administrator shall prepare or
cause to be prepared and distributed to Employees, Participants, Former
Participants and Beneficiaries and to be filed with the appropriate government
agencies, as the case may be, all necessary descriptions, reports, information
and data required by the Code, ERISA and any other applicable law.

         10.4     Reliance on Specialists. None of the Employer, its officers,
                  -----------------------
directors and employees, the Administrator or the Trustee shall be responsible
for any reports furnished by any specialist retained or employed by the
Administrator but they shall be entitled to rely thereon as well as on
certificates furnished by an accountant, and on all opinions of counsel. The
Employer,

                                      31

<PAGE>

its officers, directors and employees, the Administrator and the Trustee shall
be fully protected with respect to any action taken or suffered by them in good
faith in reliance upon such specialist, accountant or counsel, and all actions
taken or suffered in such reliance shall be conclusive upon each of them and
upon all Employees, Participants, Former Participants, Beneficiaries and any
other persons interested hereunder and under the Trust Agreement.

         10.5     Compensation; Liability. (a) The Administrator shall be
                  -----------------------
entitled to reimbursement for its reasonable expenses incurred hereunder.
Individuals serving as Administrator who are also full-time employees of the
Employer shall not be compensated for their services as Administrator, except
as their compensation as employees may be such compensation. Other individuals
or entities serving as Administrator shall be entitled to reasonable
compensation for their services.

                  (b)      The Employer shall indemnify the Administrator who is
also a full-time employee of the Employer against all liability occasioned by
any act or omission to act, provided that the Administrator acted in good
faith. The Employer shall be entitled to defend or maintain, either in its own
name or in the name of the Administrator or any member thereof, any suit or
litigation arising hereunder with respect to the Administrator or any member
thereof, and may act as counsel or employ its own counsel for such purpose.
Except as may be required by ERISA, no bond or other security shall be required
of the Administrator for the faithful performance of its duties hereunder.

         10.6     Claims Procedure. (a) If a Participant, Former Participant or
                  ----------------
Beneficiary asserts a right to any benefit under the Plan that he has not
received, he shall file a written claim for such benefit with the Administrator.
If the Administrator wholly or partially denies such claim, it shall provide
written notice to the claimant within 90 days of the receipt by the
Administrator of the claim. The Administrator shall set forth in the notice:

                           (i)    the specific reasons for the denial of the
claim,

                           (ii)   specific reference(s) to pertinent provisions
of the Plan on which the denial is based,

                           (iii)  a description of any additional material or
information necessary to perfect the claim and an explanation of why such
material or information is necessary, and

                           (iv)   an explanation of the Plan's claims review
procedure.

                  (b)      A Participant, Former Participant or Beneficiary
whose Application for Benefits is denied may request a full and fair review of
the decision denying the claim within 60 days after receipt of the notice of
the denial from the Administrator. The Participant, Former Participant or
Beneficiary may:

                           (i)    request a hearing by the Administrator upon
written application to the Administrator,

                                      32

<PAGE>

                           (ii)   review pertinent documents in the possession
of the Administrator, and

                           (iii)  submit issues and comments in writing to the
Administrator for review.

                  (c)      A decision on review by the Administrator shall be
made promptly and not later than 60 days after the receipt by the Administrator
of a request for review, unless special circumstances (such as the need to hold
a hearing) require an extension of time for processing, in which case the
claimant will be so notified of the extension, and a decision shall be rendered
as soon as possible, and not later than 120 days after the receipt of the
request for review. The decision shall be in writing and shall include specific
reasons for the decision written in a manner calculated to be understood by the
Participant, Former Participant or Beneficiary, and specific reference to the
pertinent provisions of the Plan on which the decision is based. The decision
of the Administrator shall be final and binding upon all parties.

         10.7     Agent for Service of Legal Process. The Administrator shall
                  ----------------------------------
have the power to designate the agent for service of legal process for the
Plan. Service of legal process may also be made upon the Trustee or the
Administrator.

                                   ARTICLE 11
                                   ----------

                                    Trustee
                                    -------

         11.1     Trust Agreement. The Employer and the Trustee shall enter into
                  ---------------
a Trust Agreement establishing the Trust Fund and prescribing the powers,
duties, obligations and functions of the Trustee with respect to the Trust
Fund. Such Trust Agreement, as in effect from time to time, is hereby
incorporated into and made a part of this Plan.

         11.2     Investment of Trust Fund. Except as otherwise provided in the
                  ------------------------
Trust Agreement and subject to the Plan's funding policy and method, the Trustee
shall invest and reinvest the assets of the Trust Fund in its discretion in
accordance with all applicable rules, regulations and requirements, including
the prudence and diversification requirements of ERISA. The Trust Agreement may
provide for investment of all or any part of the Trust Fund in a common or
collective trust and for the appointment by the Trustee of a corporation or
trust company as trustee or managing agent of that portion of the Trust Fund to
be so invested; during such time as any part or all of the Trust Fund is so
invested, such common or collective trust shall constitute a part of this Plan.

         11.3     Trustee's Accounts. The assets of the Trust Fund shall be
                  ------------------
valued at their fair market value annually by the Trustee as of the last day of
each Plan Year, or such other date as may be designated by the Administrator,
and the values reported to the Employer and the Administrator, together with a
statement of receipts and disbursements for the Plan Year and such other
information regarding the Trust Fund as the Employer may request.

                                      33

<PAGE>

         11.4     Trustee's Records. The Trustee shall keep and maintain records
                  -----------------
under the direction of the Administrator which shall accurately disclose at all
times the state of the Trust Fund.

         11.5     Trustee's Liability. The Trustee shall not be responsible for
                  -------------------
the validity of the Plan or Trust Agreement or for the adequacy of the Trust
Fund to meet its obligations hereunder, but shall be accountable only for funds
paid to it under the Trust Agreement.

         11.6     Trustee's Compensation and Expenses. The Trustee shall be
                  -----------------------------------
entitled to reimbursement for its reasonable expenses incurred hereunder. An
individual serving as Trustee who is also a full-time employee of the Employer
shall not be compensated for his services as Trustee, except as his
compensation as an employee of the Employer may be such compensation. Other
individuals and any corporation or trust company serving as Trustee shall be
entitled to compensation for its services in such amount as the Employer and
such Trustee may agree upon from time to time. Such reimbursement or
compensation due a Trustee, if not paid by the Employer, shall constitute a
charge upon the Trust Fund. The Trustee shall be entitled to indemnification
from the Employer only if and to the extent so provided in the Trust Agreement.

                                   ARTICLE 12
                                   ----------

                   Contributions; Exclusive Benefit; Expenses
                   ------------------------------------------

         12.1     Contributions. (a) The Employer shall pay to the Trustee from
                  -------------
time to time such amounts as shall be necessary to provide the benefits under
the Plan determined by the application of accepted actuarial methods and
assumptions. The method of funding of the Plan shall be consistent with Plan
objectives.

                  (b)      No contribution shall be required or permitted under
the Plan from any Participant.

         12.2     Exclusive Benefit. (a) Except as otherwise provided in this
                  -----------------
Article and Article 13, the assets of the Plan shall never be paid or revert to
the Employer, or be used for any purpose other than the exclusive purpose of
providing benefits to Participants or their Beneficiaries and defraying the
reasonable expenses of administering the Plan.

                  (b)      If the Administrator determines that the Employer has
contributed any amount to the Trustee by reason of a mistake of fact, the
Administrator may direct the Trustee in writing to return to the Employer,
within one year after the payment of the contribution, the lesser of the amount
actually contributed by such mistake of fact or its then current value.

                  (c)      All contributions hereunder are made on the condition
that the Plan and the Trust initially qualify under Sections 401(a) and 501 of
the Code. If the Internal Revenue Service determines that the Plan and Trust do
not initially qualify, the Administrator, upon the written request of the
Employer, shall direct the Trustee to return to the Employer the then current
value of any Employer contributions within one year following the denial of
initial qualification.

                                      34

<PAGE>

                  (d)      All contributions hereunder are made on the condition
that they are deductible under Section 404 of the Code. If the Internal Revenue
Service determines that any portion of the Employer's contribution for a Plan
Year is not deductible, the Administrator, upon the written request of the
Employer, shall direct the Trustee to return to the Employer the lesser of such
disallowed portion or its then current value within one year following the
disallowance of the deduction.

         12.3     Expenses. All expenses incurred in establishing and operating
                  --------
the Plan, including, but not limited to, legal and actuarial fees, brokerage
commissions, administrative expenses and Trustee's expenses, shall be paid by
the Trustee from the Trust Fund to the extent permitted under Sections 403(c)(1)
and 404(a)(1)(A) of ERISA, unless paid by the Employer. In accordance with
Prohibited Transaction Class Exemption 80-26, the Employer may advance to the
Trustee amounts necessary to pay the ordinary operating expenses of the Plan or
may pay such expenses itself, and in either event the Employer shall be entitled
to be reimbursed by the Trustee for such advances or payments.

                                   ARTICLE 13
                                   ----------

                         Amendment; Termination; Merger
                         ------------------------------

         13.1     Permanence of Plan. The Employer has established the Plan with
                  ------------------
the bona fide intention and expectation of continuing it indefinitely, but the
Employer shall be under no obligation or liability whatsoever to maintain the
Plan (or the Trust) for any given length of time.

         13.2     Right to Amend or Terminate. (a) The Employer reserves the
                  ---------------------------
right at any time and from time to time to amend the Plan by resolution of the
Board, and to terminate the Plan or the Trust by delivering to the Trustee a
copy of a notice of termination executed by an officer of the Employer duly
authorized by the Board. Notwithstanding the preceding sentence, the Employer
shall have no power to amend or terminate the Plan or to terminate the Trust in
such manner as would:

                           (i)    increase the duties or liabilities of the
Trustee without the written consent of the Trustee;

                           (ii)   cause or permit any of the Trust assets to be
diverted to purposes other than for the exclusive benefit of the Participants,
Former Participants or their Beneficiaries;

                           (iii)  cause any reduction in the amount theretofore
credited to any Participant, Former Participant or Beneficiary or deprive any
such person of any benefit distribution option theretofore accrued and
available;

                           (iv)   deprive any Participant, Former Participant or
Beneficiary of any optional time or form of benefit payment with respect to
amounts accrued prior to the effective date of such amendment; or

                                      35

<PAGE>

                           (v)    cause or permit any portion of the Trust Fund
to revert to or become the property of the Employer, except as provided in
Article 12 or this Article.

                  (b)      If the Employer adopts an amendment changing the
vesting provisions of the Plan, or any other amendment that directly or
indirectly affects the computation of the vested percentage of any Accrued
Benefit, a Participant or Former Participant who has at least three Years of
Service may elect to have his vested percentage determined in accordance with
the vesting schedule in effect immediately before the effective date of the
amendment, unless the individual's vested percentage under the Plan as amended
cannot at any time be less than such percentage determined without regard to
such amendment. Such election shall be made in writing and be filed with the
Administrator by the latest of (i) 60 days after the amendment is adopted, (ii)
60 days after the amendment becomes effective, or (iii) 60 days after written
notice of the amendment is issued to the Participant or Former Participant by
the Administrator. The Participant or Former Participant must have completed
the required three years by the latest date on which an election may be filed
hereunder. A Participant or Former Participant's vested percentage shall not be
less than the percentage to which he would have been entitled in the event of
separation from service immediately before the date on which such amendment is
adopted or the effective date of such amendment, whichever is later.

         13.3     Termination of Plan or Plan and Trust. (a) Both the Plan and
                  -------------------------------------
the Trust shall automatically terminate upon the bankruptcy or dissolution of
the Employer without continuation of the business of the Employer by a
successor proprietorship, partnership or corporation that assumes the
obligations of the Employer hereunder. Unless the Plan and Trust are sooner
terminated pursuant to the preceding sentence, the Plan and, if so directed by
the Employer, the Trust shall terminate upon delivery to the Trustee of a
notice of termination executed on behalf of the Employer by an officer
specifying the date as of which the Plan, or the Plan and the Trust, shall
terminate.

                  (b)      A successor to the business of the Employer, by
whatever form or manner resulting, may continue the Plan and Trust by executing
appropriate supplementary instruments, and such successor shall thereupon
succeed to all of the rights, powers and duties of the Employer hereunder. The
employment of any Employee who has continued in the employ of any such
successor shall not be deemed to have been terminated or severed for any
purpose hereunder if any such supplementary instrument so provides.

         13.4     Vesting on Termination or Partial Termination of Plan.
                  -----------------------------------------------------
Notwithstanding any other provision of the Plan, upon the termination or partial
termination of the Plan (irrespective of whether the Trust is terminated), the
rights of each Participant or Former Participant, or in the case of a partial
termination, the rights of each Participant or Former Participant affected by
such partial termination, and each Beneficiary, to benefits accrued to the date
of such termination or partial termination, to the extent funded as of such
date, shall become nonforfeitable.

                                      36

<PAGE>

         13.5     Limitation of Benefits on Plan Termination. Upon the
                  ------------------------------------------
termination of the Plan, the benefit of any individual who is or has been a
Highly Compensated Employee shall be limited to a benefit that is
nondiscriminatory under Section 401(a)(4) of the Code.

         13.6     Allocation of Assets. (a) Upon the complete termination of the
                  --------------------
Plan, after payment of fees and expenses, the Administrator shall allocate the
net assets of the Trust Fund among the Participants, Former Participants and
Beneficiaries in the following order:

                           (i)    Toward the payment of that portion, if any, of
each individual's Accrued Benefit derived from voluntary and rollover
contributions.

                           (ii)   Toward the payment of that portion, if any, of
each individual's Accrued Benefit derived from mandatory contributions.

                           (iii)  In the case of those who were receiving
benefits or who were eligible to receive benefits, the benefits determined as
follows:

                                  (A) In the case of an individual who was
                  receiving benefits during the three-year period before
                  termination, the benefit determined in accordance with the
                  provisions of the Plan in effect during the five-year period
                  preceding the date of termination which result in the smallest
                  benefit, but in no event less than the benefit he or she was
                  receiving during such three-year period.

                                  (B) In the case of an individual who would
                  have been entitled to receive benefits had such individual
                  retired before the beginning of the three-year period before
                  termination, the benefit determined in accordance with the
                  provisions of the Plan in effect during the five-year period
                  preceding the date of termination which result in the smallest
                  benefit.

                           (iv)   (A)    All other benefits, if any, guaranteed
                  under the provisions of Title IV of ERISA, determined without
                  regard to Section 4022B(a) thereof.

                                  (B)    The additional benefits, if any, which
                  would be determined under subparagraph (A) for a substantial
                  owner if Section 4022(b)(5) of ERISA did not apply.

                           (v)    All other nonforfeitable benefits under the
                  Plan.

                           (vi)   All other benefits under the Plan.

                  (b)      Except as otherwise provided by law, any assets
remaining in the Trust Fund after payment of the benefits described in
subsection (a) shall be returned to the Employer.

                  (c)      If the assets of the Trust Fund are not sufficient to
provide the full amount of the benefits of all individuals described in
paragraphs (i), (ii) and (iii) of subsection (a), such

                                      37

<PAGE>

assets shall be allocated pro rata among such individuals on the basis of the
present value, as of the date of termination, of their respective benefits
described in such paragraphs. If the assets of the Trust Fund are not
sufficient to provide the full amount of the benefits described in paragraph
(iv) of subsection (a), such assets shall be allocated as provided in Section
4044(b)(3) of ERISA.

         13.7     Liquidation of Trust. (a) Upon the termination of the Plan,
                  --------------------
the Employer shall direct the Trustee:

                           (i)    to reduce to cash all or part of the Trust
Fund, as the Employer may deem appropriate;

                           (ii)   to pay the liabilities, if any, of the Trust;
and

                           (iii)  to value the remaining assets of the Trust as
of the date of termination.

                  (b)      In the event the Trust is also terminated, the
Employer shall also direct the Trustee to distribute the assets of the Trust in
cash or in kind, or partly in cash and partly in kind, to the individuals
having an interest in the Trust in proportion to the amounts allocated to such
individuals under Section 13.6. If the Trust is not terminated, the Employer
shall so notify the Trustee and the Trustee shall continue to administer the
Trust Fund as provided in the Plan and the Trust Agreement.

         13.8     Merger or Consolidation of Plan. The Plan shall not merge or
                  -------------------------------
consolidate with another plan or transfer assets and liabilities to another
trust, unless each Participant is, in the event of plan termination immediately
after the merger, consolidation or transfer, entitled to a benefit at least
equal to the benefit such Participant would have been entitled to receive if the
Plan had terminated immediately before such merger, consolidation or transfer.
In any transaction described in the preceding sentence, the Trust Fund shall be
allocated in accordance with Section 414(l) of the Code.

                                   ARTICLE 14
                                   ----------

                              Spendthrift Provision
                              ---------------------

         14.1     Prohibition on Assignment or Alienation. The beneficial
                  ---------------------------------------
interest in the Trust of a Participant, Former Participant or Beneficiary shall
not be assignable or subject to attachment or receivership, nor shall it pass
to any trustee in bankruptcy or be reached or applied by any legal process for
the payment of any obligation of the Participant, Former Participant or
Beneficiary.

         14.2     Qualified Domestic Relations Order. (a) Section 14.1 shall not
                  ----------------------------------
apply to a qualified domestic relations order. The Administrator shall abide by
the terms of any qualified domestic relations order. A "qualified domestic
relations order" means any judgment, decree or order (including approval of a
property settlement agreement) that creates or recognizes the existence of an
alternate payee's right to receive all or a portion of the benefits payable to a

                                      38

<PAGE>

Participant hereunder pursuant to a state's domestic relations law relating to
the provision of child support, alimony payments or marital property rights to a
spouse, former spouse, child or other dependent of the Participant, which
specifically states:

                           (i)    The name and last known mailing address of the
Participant and of each alternate payee covered by such order;

                           (ii)   The amount or percentage of the Participant's
benefits to be paid by the Plan to each alternate payee or the manner in which
such amount or percentage is to be determined;

                           (iii)  The number of payments or the period to which
such order applies; and
                           (iv)   The name of each plan to which such order
applies.

                  (b)      The Administrator shall establish reasonable written
procedures to determine the qualified status of domestic relations orders and to
administer distributions made thereunder consistent with the following:

                           (i)    The Administrator shall promptly notify the
Participant and any named alternate payee of the receipt of a domestic
relations order and the procedures used for determining whether such order is
qualified under Section 414(p) of the Code.

                           (ii)   The Administrator shall, within a reasonable
time following receipt, determine whether such order is qualified and notify
the Participant and each alternate payee of such determination.

                           (iii)  During the period beginning upon receipt of
the order and ending on the earlier of the date of determination of its
qualified status or the expiration of 18 months, the Administrator shall
separately account for the amounts which will be payable to the alternate payee
if the domestic relations order is determined to be qualified.

                           (iv)   If, within 18 months of receipt, the order is
determined to be qualified, the Administrator shall pay the amounts described
in paragraph (iii) to the alternate payee pursuant to the terms of the order.
If, within 18 months of receipt, the order is determined not to be qualified,
or the order's status is unresolved, the Administrator shall pay the amounts
described in paragraph (iii) to the person or persons entitled to such amounts
under the terms of the Plan as if no order had been received.

                           (v)    A determination that a domestic relations
order is qualified made later than 18 months after the receipt of such order
shall only operate prospectively.

                  (c)      Payments made under this section shall completely
discharge the Plan of its obligations with respect to the Participant and each
alternate payee to the extent of any such payments.

                                      39

<PAGE>

                  (d)      To the extent authorized by a qualified domestic
relations order, a distribution under the Plan may be made to an alternate
payee before the Participant whose benefits are subject to such order attains
the earliest retirement age (as defined in Section 414(p)(4)(B) of the Code),
provided that the alternate payee consents to such distribution if the amount
payable to the alternate payee exceeds $5,000.

         14.3     Offset of Benefits. (a) Subject to subsection (b), the
                  ------------------
foregoing prohibitions against alienation shall not apply to any offset of a
Participant's benefits, made in accordance with the provisions of paragraphs
(C) and (D) of Section 401(a)(13) of the Code, against an amount that the
Participant is ordered or required to pay to the Plan if the order or
requirement to pay is due to: (i) a judgment of conviction against the
Participant for a crime involving the Plan; (ii) a civil judgment (including a
consent order or decree) entered by a court in an action brought against the
Participant in connection with a violation (or alleged violation) of the
fiduciary provisions of part 4 of subtitle B of title I of ERISA; or (iii) a
settlement agreement between the Department of Labor or the Pension Benefit
Guaranty Corporation and the Participant in connection with a violation (or
alleged violation) of the fiduciary provisions of ERISA.

                  (b)      Any such judgment, order, decree or settlement
agreement must expressly provide for the offset of all or part of the amount
ordered or required to be paid to the Plan from the Participant's benefits
under the Plan.

                  (c)      In the case of a married Participant to whom the
survivor annuity requirements of Section 401(a)(11) of the Code apply, no
offset shall be made under this section unless the written consent of the
Participant's spouse, witnessed by a notary public or a representative of the
Plan, has been obtained or it has been established to the satisfaction of the
Administrator that such consent cannot be obtained because the Participant has
no spouse, because the spouse cannot be located, or because of such other
circumstances as may be prescribed in Regulations under Section 417 of the Code.

                                   ARTICLE 15
                                   ----------

                         Affiliated Employer Provisions
                         ------------------------------

         15.1     Affiliated Employer Requirements. (a) For purposes of
                  --------------------------------
Section 2.4 and the other provisions of the Plan in which such term appears,
"Affiliated Employers" means the Employer and all corporations, partnerships,
trades or businesses (whether or not incorporated) which constitute a
controlled group of corporations with the Employer, a group of trades or
businesses under common control with the Employer, an affiliated service group
or other controlled group, within the meaning of Section 414(b), Section
414(c), Section 414(m) or Section 414(o), respectively, of the Code. For
purposes of the limitations on benefits in Article 5, "Affiliated Employers"
means the Employer and all corporations, partnerships, trades or businesses
(whether or not incorporated) which constitute a controlled group of
corporations with the Employer or a group of trades or businesses under common
control with the Employer, within the meaning of Section 414(b) or Section
414(c) of the Code, as modified by Section 415(h) of the Code, or

                                      40

<PAGE>

which constitute an affiliated service group or other controlled group within
the meaning of Section 414(m) or Section 414(o) of the Code.

                  (b)      In furtherance and not in limitation of the other
provisions of this Plan, all service of an Employee with any one or more of the
Affiliated Employers (after such entity has become an Affiliated Employer) shall
be treated as employment by the Employer for purposes of determining the
Employee's Hours of Service, eligibility to become a Participant under Article
3, and the limitations on benefits in Article 5. The transfer of employment by
an Employee to another Affiliated Employer shall not be a Retirement or other
separation from service with the Employer for purposes of the Plan.

                  (c)      In addition to those corporations, partnerships,
trades or businesses that constitute Affiliated Employers under subsection (a),
the Employer may from time to time designate other corporations, partnerships,
trades or businesses as Affiliated Employers for any or all purposes of this
Plan, but only if such other corporations, partnerships, trades or businesses
are affiliated with one or more other Affiliated Employers through joint
ownership, continuing or recurring contractual relationships, or otherwise, and
such designation does not discriminate in favor of Highly Compensated
Employees. The Employer may remove any such other corporation, partnership,
trade or business from the status of an Affiliated Employer at any time, but
only if any such removal does not have the effect of reducing the vested
Accrued Benefit of any Participant, Former Participant or Beneficiary.

         15.2     Adoption of Plan by Affiliated Employer. With the written
                  ---------------------------------------
approval of the Employer, an Affiliated Employer may become a Participating
Employer by adopting the Plan for the benefit of its employees. In the event of
such adoption, the Affiliated Employer shall by appropriate written
instruments(s) join in the Plan and the Trust Agreement, and the provisions of
the Plan shall be construed as necessary to account for participation herein by
the Affiliated Employer and its employees. No Affiliated Employer shall be, or
have the power to designate, the Administrator of the Plan, nor shall it have
the power to amend or terminate the Plan or the Trust Agreement, nor shall it
have any of the other powers, duties or responsibilities of the Employer, such
powers as set forth herein being hereby reserved exclusively to the Employer.

         15.3     Withdrawal from Plan. With the approval of the sponsoring
                  --------------------
Employer, any Participating Employer may at any time withdraw from the Plan upon
thirty (30) days written notice of its intention to withdraw. The sponsoring
Employer may at any time revoke the Plan participation of any Participating
Employer upon giving such Participating Employer and the Trustee at least thirty
(30) days written notice, in the form of a certificate of vote by its board of
directors, of the effective date of such revocation. In the event of such
withdrawal or revocation, the Administrator shall in its sole discretion either:

                  (a)      direct the Trustee to make such current or deferred
distribution to the Participants affected by such withdrawal or revocation as
it should deem appropriate and in accordance with the Plan; or

                                      41

<PAGE>

                  (b)      direct that the portion of the Trust allocable to
such affected Participants be transferred to a trust fund or group contract
which is qualified and exempt under the applicable provisions of the Code, for
purposes of providing equal or greater benefits for such Participants.

                                   ARTICLE 16
                                   ----------

                            Top-heavy Plan Provisions
                            -------------------------

         16.1     Definitions. For purposes of this Article:
                  -----------

                  (a)      (i)    "Top-heavy plan" means this Plan for any Plan
in which, as of the determination date:

                                  (A) it is not included in an aggregation group
                  and the sum of the present value of the accrued benefits of
                  key employees exceeds 60% of the sum of the present value of
                  all of the accrued benefits under the Plan, or

                                  (B)    it is required to be included in a
                  top-heavy group.

                           (ii)   Except as otherwise provided in paragraph
(iii), paragraph (i)(A) shall be applied by taking into account distributions
made to any employee or beneficiary during the five-year period ending on the
determination date and any amount distributed under a terminated plan which
would have been required to be included in the aggregation group.

                  (iii)    Paragraph (i)(A) shall be applied by disregarding:

                                  (A)    deductible voluntary contributions;

                                  (B)    the accrued benefit of a former key
                  employee (or the beneficiary of a former key employee) for all
                  Plan Years after ceasing to be a key employee;

                                  (C)    the accrued benefit of an individual
                  who has not performed services for an Affiliated Employer at
                  any time during the five-year period ending on the
                  determination date;

                                  (D)    any accrued benefit attributable to
                  employer contributions rolled over or transferred on behalf of
                  an individual after which contributions were originally made
                  to a qualified retirement plan maintained by an employer other
                  than an Affiliated Employer or were otherwise rolled over or
                  transferred into the Trust Fund at the direction of the
                  individual; and

                                  (E)    benefits paid on account of death, to
                  the extent such benefits exceed the individual's accrued
                  benefit immediately before death.

                                      42

<PAGE>

The accrued benefit of an individual that has been disregarded under
subparagraph (C) shall be taken into account on the determination date next
following the date on which such individual again performs services for an
Affiliated Employer.

                  (b)      "Top-heavy group" means the aggregation group which,
if viewed as a single plan, would be a top-heavy plan. For purposes of the
preceding sentence, the determination of the present value of an accrued benefit
shall be based only on the interest rate and mortality tables used by the
defined benefit retirement plan under which such benefit accrued. In determining
whether the aggregation group is top-heavy, the accrued benefits or the account
balances of all plans shall be valued as of the determination dates for such
plans that fall within the same calendar year. The accrued benefit of any
non-key employee shall be determined under the method, if any, that uniformly
applies for accrual purposes under all defined benefit plans maintained by the
aggregation group or, if there is no such method, as if such benefit accrued not
more rapidly than under the slowest accrual rate permitted under the fractional
accrual rule of Section 411(b)(1)(C) of the Code.

                  (c)     "Determination date" means, for this Plan and any
other plan included in the aggregation group, the last day of such plan's
preceding plan year, or in the case of the first plan year of the plan, the
last day of such plan year.

                  (d)      (i)    "Aggregation group" means:

                                  (A)    Each qualified defined benefit and
                  defined contribution retirement plan of the Affiliated
                  Employers in which a key employee is or was a participant
                  within the period of five Plan Years ending on the
                  determination date;

                                  (B)    Each other qualified defined benefit
                  and defined contribution retirement plan of the Affiliated
                  Employers that enables any plan described in subparagraph (A)
                  to meet the qualification requirements of the Code; and

                                  (C)    All other qualified defined benefit or
                  defined contribution retirement plans of the Affiliated
                  Employers elected by the Administrator that do not cause the
                  aggregation group to violate the qualification requirements of
                  the Code.

                           (ii)   For purposes of this subsection, a qualified
retirement plan shall include frozen plans and any terminated plans that were
maintained within the period of five Plan Years ending on the determination
date.

                  (e)      (i)    "Key employee" means an employee who, at any
time during the Plan Year containing the determination date, or during any of
the four Plan Years preceding such Plan Year, was:

                                      43

<PAGE>

                                  (A) An officer of an Affiliated Employer whose
                  earnings exceed 50% of the dollar limitation described in Code
                  Section 415(b)(1)(A), as adjusted under Code Section 415(d);

                                  (B)    An employee or a self-employed
                  individual, as described in Section 401(c)(1) of the Code,
                  having earnings from the Affiliated Employers exceeding the
                  dollar limitation in effect under Section 415(c)(1)(A) of the
                  Code for the calendar year in which the Plan Year ends and
                  owning an interest in the Affiliated Employers that is both
                  more than a one-half percent interest in value and one of the
                  ten largest interests in the Affiliated Employers;

                                  (C)    An owner of more than a 5% interest in
an Affiliated Employer; or

                                  (D)    An owner of more than a 1% interest in
                  an Affiliated Employer whose earnings from the Affiliated
                  Employers exceed $150,000 for the Plan Year.

                           (ii)   For purposes of this subsection, the term
"employee" includes a terminated, retired, disabled, deceased or part-time
employee, and a leased employee within the meaning of Code Section 414(n)(2). A
Beneficiary of an individual described in this subsection shall be considered a
key employee.

                           (iii)  For purposes of paragraph (i)(A), if there are
more than three officers of the Affiliated Employers, no more than 10% of all
employees of the Affiliated Employers, based on the highest number of employees
within the five Plan Years preceding the determination date, to a maximum of
50, shall be treated as officers. Individuals performing executive functions
for a sole proprietorship, partnership, association or trust that is an
Affiliated Employer shall be treated as officers.

                           (iv)   For purposes of paragraph (i)(B), if two
employees or self-employed individuals have the same ownership interest in an
Affiliated Employer, the employee or self-employed individual having the larger
annual earnings for the Plan Year during any part of which such ownership
interest existed shall be treated as having the larger ownership interest.

                           (v)    In determining ownership, the constructive
ownership provisions of Section 318 of the Code shall apply, but the
aggregation rules of Section 414(b), (c), (m) and (o) of the Code shall not
apply.

                  (f)      "Non-key employee" means an employee who is not a key
employee.

                  (g)      "Earnings" means earnings as defined in Section
5.1(b). Except for purposes of determining status as a key employee under
subsection (e), an individual's earnings for any year shall be deemed not to
exceed $150, as adjusted under Section 401(a)(17) of the Code.

                                      44

<PAGE>

                  (h)      "Average earnings" means the average of a
Participant's earnings for the five consecutive years of service which produce
the highest average. In determining average earnings, any year in the five
consecutive year period in which a year of service was not earned shall not be
counted. If a Participant has completed less than five years of service, the
average of the earnings for all years of service shall be used. Earnings
received for years of service beginning after the close of the last Plan Year
in which the Plan is top-heavy shall be disregarded.

                  (i)      "Year(s) of service" means the period of service used
to determine the vested percentage of a Participant's benefits under a defined
benefit or defined contribution retirement plan of an Affiliated Employer.

         16.2     When Provisions Apply. Except where provided otherwise, the
                  ---------------------
following sections of this Article shall apply for any Plan Year during which
this Plan is a top-heavy plan.

         16.3     Minimum Benefits. (a) Subject to subsection (b), each non-key
                  ----------------
employee who is a Participant during the applicable Plan Year shall be entitled
to an annual retirement benefit (expressed as a single life annuity beginning at
the normal retirement date with no ancillary benefits) derived from employer
contributions equal to the lesser of (1) 20% of average earnings, or (2) 2% of
average earnings multiplied by the number of his or her years of service. For
purposes of the preceding sentence, only those years of service which include
the last day of a Plan Year during which this Plan is a top-heavy plan shall be
taken into account. This subsection shall be disregarded for any Plan Year in
which its application would reduce the accrued benefit of any Participant.

                  (b)      If a non-key employee participates in two or more
top-heavy defined benefit retirement plans of the Affiliated Employers, the
minimum benefit requirements of subsection (a) may be met by combining the
benefits provided under such plans. If during any Plan Year a non-key employee
participates in one or more top-heavy defined benefit retirement plans and one
or more top-heavy defined contribution retirement plans of the Affiliated
Employers, such non-key employee shall receive, in lieu of the benefit required
by subsection (a), combined accruals and allocations provided under such defined
benefit and defined contribution retirement plans comparable to the benefit
required by subsection (a). For purposes of satisfying the requirements of this
section, employer contributions on behalf of non-key employees attributable to
amounts deferred under an arrangement described in Section 401(k) of the Code
shall not be taken into account, and employer matching contributions allocated
to a non-key employee that are used to satisfy the requirements of Section
401(k) or 401(m) of the Code shall not be treated as employer contributions.

         16.4     Adjustments to Code Section 415 Annual Benefits Limits.
                  ------------------------------------------------------

                  (a)      This section shall not apply after December 31, 1999.

                                      45

<PAGE>

                  (b)      If the Plan would be a top-heavy plan if "90%" were
substituted for "60%" in Section 16.1(a)(i)(A), the dollar limitation described
in Section 5.3(c)(i) and (d)(i) shall not be multiplied by 125% but shall be
multiplied by 100%.

         16.5     Eligibility for Top-Heavy Minimum Benefit. The eligibility of
                  -----------------------------------------
a non-key employee who is a Participant in the Plan for a minimum benefit under
Section 16.3 shall be determined without regard to employment on a specified
date or exclusion from participation or failure to accrue a benefit by reason
of compensation being less than a stated amount or failure to make mandatory
contributions.

                                      46

<PAGE>

                                   ARTICLE 17
                                   ----------
                                  Miscellaneous
                                  -------------

         17.1     Rights of Employees. The adoption and maintenance of the Plan
                  -------------------
and the Trust shall not be deemed to be a contract between an Affiliated
Employer and any Employee. Nothing herein contained shall be deemed to give any
Employee the right to be retained in the employ of an Affiliated Employer or to
diminish the right of an Affiliated Employer to discharge any Employee at any
time, nor shall it be deemed to give an Affiliated Employer the right to
require any Employee to remain in its employ or interfere with the Employee's
right to terminate his employment at any time.

         17.2     Obligation of the Affiliated Employers. All benefits payable
                  --------------------------------------
under the Plan shall be paid or provided for solely from the Trust Fund and
neither an Affiliated Employer nor the Trustee assumes any personal liability
or responsibility therefor.

         17.3     Action by the Employer. Whenever, under the terms of this
                  ----------------------
Plan, the Employer is permitted or required to do or perform any act or thing,
it shall be done or performed by an officer thereunto duly authorized by the
Board.

         17.4     Liability of Employer. The only duty of the Employer hereunder
                  ---------------------
shall be to use reasonable care in the selection of the Administrator and the
Trustee. Subject to its agreement to indemnify the Administrator as provided in
Section 10.5 and the Trustee to the extent provided in the Trust Agreement,
neither the Employer nor any person acting on behalf of the Employer shall be
liable for any act or omission on the part of the Trustee, or for any act
performed or the failure to perform any act by any person with respect to the
Plan or the Trust.

         17.5     Bonding. Each fiduciary (as defined in Section 3(21) of ERISA)
                  -------
with respect to the Plan shall be bonded in the manner and to the extent
required by Section 412 of ERISA and regulations thereunder.

         17.6     Construction. (a) The provisions of the Plan shall be
                  ------------
construed, administered and enforced according to the laws of the United States
of America insofar as they may be applicable, and otherwise according to the
laws of the Commonwealth of Massachusetts.

                  (b)      The masculine gender shall include both sexes; and
the singular shall include the plural and the plural the singular, unless the
context otherwise requires.

                  (c)      Any provision of the Plan or the Trust Agreement
susceptible to more than one interpretation shall be interpreted in a manner
that is consistent with the Plan and the Trust being an employees' plan and
trust within the meaning of Sections 401(a) and 501 of the Code.

                                      47

<PAGE>

                  (d)      In any question of interpretation or other matter of
doubt, the Trustee, the Administrator and the Employer may rely upon the legal
opinion of counsel for the Employer or any other attorney designated by the
Employer.

         17.7     Titles. The titles of the Articles and sections hereof are
                  ------
included for convenience only and shall not be construed as part of the Plan or
as in any respect affecting or modifying its provisions. Such words in this Plan
as "herein," "hereinafter," "hereof" and "hereunder" refer to this instrument as
a whole and not merely to the subdivision in which such words appear.

         17.8     Counterparts. This Plan may be executed in multiple
                  ------------
counterparts and each fully executed counterpart shall be deemed an original.

         17.9     Military Leave. Effective December 12, 1994, notwithstanding
                  --------------
any provision of the Plan to the contrary, contributions, benefits and service
credit with respect to qualified military service shall be provided in
accordance with Section 414(u) of the Code.

                                   * * * * *

         IN WITNESS WHEREOF, Joseph E. Cresci
                             ---------------------------------------------------
has caused this instrument to be duly executed in its name and on its behalf
this 12th day of February                        , 2002
     ----        --------------------------------

                                             ENVIRONMENTAL POWER CORPORATION

                                             By:  /s/ Joseph E. Cresci
                                                  ------------------------------
                                                  Title: Chief Executive Officer
ATTEST:

   William D. Linehan
- ---------------------------------

                                      48

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.14
<SEQUENCE>8
<FILENAME>dex1014.txt
<DESCRIPTION>RETIREMENT PLAN, TRUST AGREEMENT
<TEXT>
<PAGE>

                                                                   Exhibit 10.14

                   ENVIRONMENTAL POWER CORPORATION
                          RETIREMENT PLAN

                          TRUST AGREEMENT

                          ---------------

                      As Amended and Restated
                   Effective as of January 1, 1998

<PAGE>

                          TABLE OF CONTENTS
                          -----------------

Section                                                                   Page

SECTION L. DEFINITIONS.......................................................1

SECTION 2. ESTABLISHMENT OF TRUST; ALLOCATION OF TRUST ASSETS................1

SECTION 3. EXCLUSIVE BENEFIT.................................................2

SECTION 4. DISBURSEMENTS.....................................................2

SECTION 5. INVESTMENT OF TRUST FUND..........................................2

SECTION 6. LIMITATION OF TRUSTEE'S LIABILITY; LEGAL ACTION...................5

SECTION 7. APPOINTMENT, RESIGNATION OR REMOVAL OF TRUSTEE....................6

SECTION 8. TRUST EXPENSES; TAXES.............................................7

SECTION 9. TRUSTEE'S ACCOUNTS AND REPORTS....................................7

SECTION 10. RELIANCE UPON INSTRUCTIONS.......................................8

SECTION 11. EMPLOYMENT OF COUNSEL AND OTHER AGENTS...........................9

SECTION 12. AMENDMENTS AND TERMINATION.......................................9

SECTION 13. ASSIGNMENT.......................................................9

SECTION 14. NOTICES.........................................................10

SECTION 15. TITLES; CONSTRUCTION OF DOCUMENT................................10

SECTION 16. ALLOCATION OF RESPONSIBILITY....................................10

SECTION 17. EXECUTION OF TRUST AGREEMENT....................................11

SECTION 18. ACCEPTANCE OF TRUST.............................................11

SECTION 19. APPLICABLE LAW..................................................11

<PAGE>

                        ENVIRONMENTAL POWER CORPORATION
                                RETIREMENT PLAN

                                TRUST AGREEMENT
                                ---------------

         TRUST AGREEMENT, effective as of January 1, 1998, by and between
Environmental Power Corporation as settlor, and Joseph Cresci and Donald
Livingston as trustee (the "Trustee").

                              W I T N E S S E T H:
                              - - - - - - - - - -

         WHEREAS, the Employer has established the Environmental Power
Corporation Retirement Plan which is intended to be a plan qualified under
Section 401(a) of the Code; and

         WHEREAS, the Employer has established a trust in connection with the
Plan to hold the funds contributed under the Plan; and

         WHEREAS, the Employer now wishes to establish a separate trust
agreement between the Trustee and the Employer; and

         WHEREAS, the Trustee has consented to act as Trustee and to hold the
assets accumulated in respect of the Plan on the terms and conditions
hereinafter set forth.

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the Employer and the Trustee hereby agree as
follows:

         Section l. Definitions.
         ---------  -----------

         Any capitalized term used herein that is defined in the Plan and is not
defined herein shall have the same meaning as when used in the Plan.

         Section 2. Establishment of Trust; Allocation of Trust Assets.
         ---------  --------------------------------------------------

         (a)      The Trust Fund shall consist of such sums of money or other
property as shall from time to time be paid or delivered to the Trustee pursuant
to the Plan which, together with all earnings, profits, increments and accruals
thereon, without distinction between principal and income, shall constitute the
Trust Fund hereby created and established. The Trust Fund shall be held in trust
and dealt with in accordance with the provisions of this Trust Agreement. The
Employer intends by this Trust Agreement to create a trust forming a part of the
Plan which shall qualify under Sections 401 and 501 of the Code.

         (b)      The Employer may, at any time and from time to time, direct
that any part or all of the assets of the Trust Fund be segregated from the
commingled fund for investment purposes. Subject to the limitations and
standards set forth in Section 5(a), the Employer may direct the

<PAGE>

Trustee with respect to the investment of that portion of the assets of the
Trust Fund which are segregated for investment purposes.

         Section 3. Exclusive Benefit.
         ---------  -----------------

         Except as otherwise provided in the Plan, the Employer shall have no
right, title or interest in the contributions made by it to the Trust Fund and
no part thereof shall ever revert to the Employer. The Trustee shall hold the
assets of the Trust Fund for the exclusive purpose of providing benefits to the
Participants in the Plan and their beneficiaries and defraying the reasonable
expenses of administering the Plan.

         Section 4. Disbursements.
         ---------  -------------

         (a)      Subject to the limitations set forth in this Section 4, the
Trustee shall make such payments from the Trust Fund at such times to such
persons in such amounts as the Administrator shall direct. The Trustee shall be
fully protected in acting upon the written directions of the Administrator in
making such disbursements and shall have no duty to determine the rights or
benefits of any person under the Plan or to inquire into the right or power of
the Administrator to direct any such disbursement.

         (b)      The Trustee shall not be required to make any payments
hereunder in excess of the net realizable value of the Trust Fund at the time
of such payment. The Trustee shall not be required to make any payment in cash
unless there shall be in the Trust Fund at the time an amount of cash
sufficient for the purpose.

         (c)      Any distribution from the Trust Fund may be made in cash or in
kind, or in a combination of both, as directed by the Administrator. If any
distribution is to be made in kind, the Administrator shall specify the
particular assets of the Trust Fund to be distributed.

         (d)      Upon termination or partial termination of the Plan, or the
termination of this Trust, the Trustee shall not be required to make any
distribution or payment of any assets of the Trust until it has received notice
of any approval by the Internal Revenue Service which the Trustee may reasonably
require.

         Section 5. Investment of Trust Fund.
         ---------  ------------------------

         (a)      Investment of the assets comprising the Trust Fund shall at
all times be subject to the limitations and standards set forth in this
Section 5. Decisions as to investments shall take into account the funding
policy adopted pursuant to the Plan. Investment decisions shall be made with the
care, skill, prudence and diligence under the circumstances then prevailing that
a prudent man acting in a like capacity and familiar with such matters would use
in the conduct of an enterprise of a like character with like aims. Investments
shall be diversified so as to minimize the risk of large losses, unless under
the circumstances it is clearly prudent not to do so. Except as

                                      2

<PAGE>

otherwise permitted by regulations of the Department of Labor, the indicia of
ownership of all assets of the Trust Fund shall be maintained within the
jurisdiction of the district courts of the United States.

         (b)      Subject to the directions of the Employer pursuant to
Section 2 (b) and to the limitations in subsections (a), (c) and (d) of this
Section 5, the Trustee shall manage and invest and reinvest the assets of the
Trust Fund as a single fund in the Trustee's discretion. In this regard, the
Trustee is authorized to exercise all the powers of an owner with respect to the
assets of the Trust Fund in whatever manner the Trustee considers for the best
interests of the Trust Fund. Without limiting the generality of the foregoing,
the Trustee is expressly authorized and empowered in the Trustee's discretion
from time to time to invest and reinvest the Trust Fund and keep it invested,
without distinction between principal and income, in such common stocks,
preferred stocks, bonds, notes, debentures, mortgages, commercial paper,
equipment trust certificates, or other securities, including shares of
registered investment companies, interests in general and limited partnerships,
individual or group insurance and annuity contracts, as the Trustee may deem
advisable, and in any other property, real or personal, tangible or intangible,
as the Trustee may deem advisable, and in making such investments and
reinvestments, the Trustee shall not be restricted to securities or property of
the character authorized for investment by Trustee under any present or future
laws of any state.

                  Notwithstanding the foregoing, the Trustee shall not be
permitted to make any of the following investments: (i) stock or securities of
the Employer or any other investment which may inure to the direct or indirect
benefit of the Employer, or any officer, director, shareholder, partner or
employee thereof, other than the Participant; (ii) any investment which would
constitute a "prohibited transaction" within the meaning of Section 406 of ERISA
or Section 4975 of the Code; (iii) any investment which would constitute a
direct or indirect distribution of benefits or transfer to or for the benefit of
the Participant; (iv) any investment which would result in the realization by
the Trust Fund of "unrelated business taxable income" as defined in the Code;
and (v) any investment in a "collectible" within the meaning of Section 408(m)
of the Code. The Trustee is authorized to retain uninvested such portion of the
Trust Fund as the Trustee deems necessary to meet the current cash obligations
of the Trust.

         (c)      The Trustee may invest part or all of the Trust Fund in a
common or collective trust fund which serves as a medium for trusts meeting the
requirements of Section 501(a) of the Code, by virtue of Section 401(a)
thereof, provided that any such common or collective trust fund itself meets
the requirements of Sections 401(a) and 501(a) of the Code, and provided
further that such investment satisfies the requirements of Section 408(b)(8) of
ERISA and Section 4975(d)(8) of the Code. The Trustee of any such group trust
is hereby appointed as a Trustee of the Plan to facilitate the investment of
assets in such group trust. During such time as any part or all of the Trust
Fund is invested in a common or collective trust fund, such fund shall
constitute a part of this Trust Agreement and a part of the Plan.

                                      3

<PAGE>

         (d)      The Employer may designate one or more investment managers, as
defined in and subject to the requirements of Section 3(38) of ERISA, to direct
the Trustee with respect to the management, acquisition and disposition of any
portion or all of the Trust Fund. The Employer shall inform the Trustee in
writing of any such designation of an investment manager, and such written
notice shall describe in detail the assets of Trust Fund over which the
investment manager shall thereafter have investment management control and the
arrangements that shall be applicable with respect to the management of such
assets by the investment manager. The Trustee shall be entitled to rely upon
such designation of an investment manager and the specified arrangements for the
management of such assets until notified in writing by the Employer that such
designation or such specified arrangement are no longer in effect. During any
period of time in which an investment manager shall direct the investment of a
portion of the Trust Fund, the Trustee shall continue to receive all assets
purchased against payment therefor and to deliver all assets sold against
receipt of the proceeds therefrom. Any designated investment manager may from
time to time issue orders on behalf of the Trustee for the purchase or sale of
securities directly to a broker or dealer and for such purpose the Trustee
shall, upon request, execute and deliver to such investment manager one or more
trading authorizations. The Trustee shall have no responsibility or liability to
anyone relating to the decisions as to investments made by any designated
investment manager. The Trustee shall be under no duty to make any review of
investments acquired for the Trust at the direction or order of an investment
manager or to make any recommendation with respect to disposing of or continuing
to retain any such investment. Nor shall the Trustee have any obligation to
determine the existence of any conversion, redemption, exchange, subscription or
other right relating to any securities purchased of which notice was given prior
to the purchase of such securities and shall have no obligation to exercise any
such right unless the Trustee is informed of the existence of the right by the
investment manager and is requested in writing by the investment manager to
exercise such right within a reasonable time before the time for exercising
thereof expires.

         (e)      In furtherance and not in limitation of the powers referred to
in subsection (b) above, but subject to the limitations and standards in
subsections (a), (c) and (d) above, the Trustee shall have the following powers:

                  (1)      To sell, exchange, convey, transfer, mortgage,
                           pledge, option, lease or otherwise dispose of any
                           asset of the Trust Fund without obligation upon any
                           person dealing with the Trustee to see to the
                           application of any money or other property delivered
                           to the Trustee, and regardless of whether the term of
                           any such lease or other such disposition might
                           survive the termination of the Trust.

                  (2)      To sell at public auction or by private contract,
                           redeem, or otherwise realize upon, any securities,
                           investments or other property forming a part of the
                           Trust Fund and for such purposes to execute such
                           instruments and writings and do such things as it
                           shall deem proper.

                                      4

<PAGE>

                  (3)      To keep any or all securities or other property in
                           the name of a nominee with or without power of
                           attorney for a transfer or in its own name without
                           disclosing its fiduciary capacity.

                  (4)      To collect principal and income as the same shall
                           become due and payable and to give receipts therefor.

                  (5)      To vote upon any stocks, bonds or other securities of
                           any corporation, association or trust at any time
                           comprising the Trust Fund, or otherwise consent to or
                           request any action on the part of such corporation,
                           association or trust, and to give general or special
                           proxies or powers of attorney, with or without power
                           of substitution, and to participate in
                           reorganizations, recapitalizations, consolidations,
                           mergers and similar transactions with respect to such
                           securities; to deposit such stocks or other
                           securities in any voting trust or with any protective
                           or like committee, or with a Trustee, or with
                           depositories designated thereby; and generally to
                           exercise any of the powers of an owner with respect
                           to stocks or other securities or property comprising
                           the Trust Fund which the Trustee deems to be for the
                           best interests of the Trust.

                  (6)      To designate one or more individuals or a corporation
                           or trust company as a Trustee or managing agent for
                           any part or all of the assets of the Trust Fund and
                           to authorize such Trustee or managing agent to invest
                           such assets in any common or collective trust for
                           employee benefit plans for which such Trustee or
                           managing agent serves as Trustee; during such time as
                           any part or all of the Trust Fund is so invested,
                           such common or collective trust shall constitute a
                           part of this Trust Agreement and a part of the Plan.

                  (7)      To make, execute, acknowledge and deliver any and all
                           instruments that the Trustee shall deem necessary or
                           appropriate to carry out the powers herein granted.

         Section 6. Limitation of Trustee's Liability; Legal Action.
         ---------  -----------------------------------------------

         (a)      The Trustee shall be responsible only for the management and
disbursement of amounts from the Trust Fund in accordance with this Trust
Agreement. The Trustee shall have no responsibility for determining the
correctness of the amount of any contribution or for the collection of
contributions if the Employer fails to make the contributions provided for in
any Plan, or for the correctness of any disbursements made or any other action
taken or omitted pursuant to written directions which appear to the Trustee in
good faith (without any duty of inquiry) to be those of the Employer or the
Administrator. Except as required by ERISA, the Trustee shall not be liable for
any loss which may occur from errors, whether of omission or commission, except
for willful negligence, malfeasance or misfeasance. The Employer will

                                      5

<PAGE>

indemnify the Trustee against all liability occasioned by any act or omission
to act, provided that the Trustee acted (or omitted to act) in good faith.

         (b)      The Trustee shall not be required to institute any legal
action or to appear or participate in any legal action to protect or preserve
the property of the Trust, or its title thereto, unless it is in possession of
assets in the Trust Fund sufficient for the payment of, or shall have first
been indemnified to its satisfaction for all loss, cost and liability;
provided, however, that this provision shall not be construed so as to require
the Employer to indemnify the Trustee from expenses or liabilities as to any
suit or proceedings against the Trustee for willful negligence, malfeasance or
misfeasance.

         Section 7. Appointment, Resignation or Removal of Trustee.
         ---------  ----------------------------------------------

         (a)      The Trustee shall be those persons who are so appointed by the
Employer, subject to the person's acknowledgment and acceptance of his, her or
its status as Trustee. If more than one person or entity shall serve as Trustee,
all decisions shall be made pursuant to a simple majority rule, unless any
Trustee shall authorize, in writing, another Trustee to take actions on his or
its behalf.

         (b)      A Trustee shall immediately cease to be a Trustee upon the
effective date of his, her or its resignation or removal. A Trustee may resign
as Trustee of the Trust on 30 days' written notice to the Employer; provided,
however, that the Employer may, by written instrument, waive such notice. By
action of the Board of Directors, the Employer may remove the Trustee
immediately upon delivery to such Trustee of a written notice to that effect
signed by the Board of Directors.

         (c)      In the event of resignation or removal of all of the persons
then serving as Trustee of the Trust, the Trustee shall, subject to Section
8(b), transfer and deliver cash or other assets of an amount equal to the value
of the Trust Fund to such successor Trustee of the Trust or other fiduciary or
other person as the Employer may direct in writing, or if the Employer fails to
notify the Trustee of the party to whom the assets of the Trust are to be
transferred within 30 days after notice of resignation is given, to any
successor Trustee selected by the Trustee if the Trustee chooses to select a
successor. The Trustee shall not be liable for the action or nonaction of any
such successor, whether or not selected by the Trustee. Subject to the
foregoing, any resignation or removal of a Trustee or appointment of a new
Trustee shall be by instrument in writing and shall become effective on the
date therein specified.

         (d)      Any successor (or additional) Trustee shall have the same
powers and duties as the succeeded (or other) Trustee(s), subject to such
changes as shall be agreed upon by the Employer and the successor (or
additional) Trustee. The appointment of any successor (or additional) Trustee
or Trustees hereunder shall, without any separate instrument or conveyance,
immediately vest title to the assets of the Trust in such successor Trustee or
Trustees. Upon request of any successor Trustee or Trustees, the Employer and
the Trustee ceasing to act shall execute and

                                      6

<PAGE>

deliver such instruments of conveyance and further assurance and do such things
as may reasonably be required for more fully and certainly vesting and
confirming in such successor Trustee or Trustees all the right, title and
interest of the Trustee ceasing to act in and to the Trust Fund.

         Section 8. Trust Expenses; Taxes.
         ---------  ---------------------

         (a)      All expenses incurred in operating the Plan and the Trust
including, without limitation, legal fees, actuary's fees, accountant's fees,
administrative expenses, Administrator's expenses, Trustee's fees and the like,
may be paid by the Employer, but if not so paid, shall be paid by the Trustee
from the Trust Fund. Individuals serving as Trustee who are also full-time
employees of the Employer or of an Affiliated Employer shall not be entitled to
any compensation for their services as Trustee, but they shall be entitled to
reimbursement for their reasonable expenses incurred in connection with the
performance of his duties as Trustee.

         (b)      On termination of the Trust, or on resignation or removal of
the Trustee, the Trustee may reserve, in connection with any transfer or
distribution of assets, an amount adequate to assure payment of its fees and
expenses and to provide for any other liabilities of the Trust properly
incurred or to be incurred, and finally shall dispose of any balance of such
amount in the same manner as the rest of the assets were disposed of.

         (c)      The Trustee shall, upon direction of the Employer, pay out of
the Trust Fund any and all taxes of any nature whatsoever, including interest
and penalties, assessed against or imposed upon the Trustee in respect of the
Trust Fund or the income thereof, subject to the terms of any agreements or
contracts made with respect to trust investments which make other provisions
for such tax payments. The Trustee may assume that any taxes in respect of the
Trust Fund or the income thereof are lawfully assessed unless the Employer
shall, in writing, advise the Trustee that, in the opinion of its counsel, such
taxes are or may be unlawfully assessed. In the event that the Employer shall
so advise the Trustee, the Trustee will, if so requested in writing by the
Employer, contest the validity of such taxes in any manner deemed appropriate
by the Employer or its counsel at the expense of the Trust; or the Employer may
contest the validity of any such taxes, at the expense of the Trust, in the
name of the Trustee; and the Trustee shall execute all documents, instruments,
claims and petitions necessary or advisable, in the opinion of the Employer or
its counsel, for the refund, abatement, reduction or elimination of any such
taxes.

         Section 9. Trustee's Accounts and Reports.
         ---------  ------------------------------

         (a)      The Trustee shall keep true and accurate accounts of all
investments, receipts and disbursements and other transactions hereunder, and
all accounts, books and records relating thereto shall be open to inspection and
audit at all reasonable times by any person or persons designated by the
Employer. Within a reasonable period following the close of each Plan Year, or
following the close of such period as may be agreed upon between the Trustee and
the Administrator, and after the removal or resignation of the Trustee as
provided for in Section 7 or

                                      7

<PAGE>

the termination of the Trust as provided for in Section 12, the Trustee shall
file with the Employer and the Administrator an accounting of its transactions
since the last previous such accounting. No person or persons other than the
Employer and the Administrator shall be entitled to any accountings by the
Trustee. Upon the expiration of 60 days from the date of filing such
accounting, to the extent permitted by applicable law, the Trustee shall be
forever released and discharged from any liability or accountability to anyone
as respects the acts or transactions shown in such accounting, except with
respect to any such acts or transactions as to which the Employer shall, within
such 60-day period, file with the Trustee a written statement setting forth its
exceptions or objections. If the Trustee and the Employer cannot amicably
settle the questions raised by such exceptions or objections, the Trustee or
the Employer shall have the right to have questions settled by judicial
proceedings. Nothing herein contained shall be construed as depriving the
Trustee of the right to have a judicial settlement of its accounts. In any
proceeding for a judicial settlement of such accounts or for instructions, the
only necessary parties shall be the Trustee and the Employer.

         (b)      The Trustee shall from time to time make such other reports
and furnish such other information concerning the Trust to the Administrator as
the Administrator may reasonably request including such information and reports
as the Administrator may require in order to comply with Part 1 of Subtitle B
of Title I of ERISA, but only to the extent that such information is available
to the Trustee pursuant to the performance of its duties hereunder.

         Section 10. Reliance Upon Instructions.
         ----------  --------------------------

         (a)      Any action by the Employer pursuant to any of the provisions
of this Trust Agreement shall be evidenced in writing, and the Trustee shall be
fully protected in acting in accordance with such writing. From time to time
the Employer shall furnish the Trustee with a certificate evidencing the
appointment and termination of appointment of any individuals authorized to
give any authorization, request or direction of the Employer or Administrator
hereunder. From time to time the Administrator shall furnish the Trustee with
a certificate designating the person or persons authorized to give the
requests, directions, requisitions and instructions of the Administrator. The
Trustee shall be conclusively entitled to rely upon the identity of the
Administrator and of the person or persons so designated, as disclosed in the
last certificates received by the Trustee.

         (b)      All requests, directions and requisitions for the payment of
money and all other instructions of the Administrator to the Trustee shall be
set forth in writing by such person or persons as shall have been designated as
specified in subsection (a) above, and the Trustee shall act and shall be fully
protected in acting in accordance with such requests, directions, requisitions
and instructions and shall not be charged with any responsibility for the
application of monies paid out or for any action taken in accordance therewith.
The Trustee shall have no responsibility for the correctness or propriety under
the terms of this Trust Agreement or any Plan of any written directions which
the Trustee receives from the Administrator and shall be under no obligation to
investigate or otherwise determine the correctness or propriety of such written
directions. By

                                      8

<PAGE>

such writing, the Administrator may ratify, approve or confirm any action taken
by the Trustee, and upon such ratification, approval or confirmation, the
Trustee shall be protected as though authorization or direction by the
Administrator had preceded such action. In the absence of direction by the
Administrator as to any matter provided for in this Trust Agreement or the
Plan, the Trustee may in the Trustee's discretion take such action as the
Trustee deems fit and proper with respect thereto after reasonable attempts to
secure direction of the Administrator.

         Section 11. Employment of Counsel and Other Agents.
         ----------  --------------------------------------

         The Trustee may employ such accountants, custodians, counsel or other
agents as the Trustee deems advisable and pay such persons reasonable
compensation for any services. The Trustee may from time to time consult with
legal counsel, who may, but need not be, counsel for the Employer, and shall be
fully protected in acting, or refraining from acting, upon the advice of any
counsel with respect to legal questions.

         Section 12. Amendments and Termination.
         ----------  --------------------------

         (a)      This Trust Agreement may at any time be altered, amended or
terminated in whole or in part by an instrument in writing executed by the
Employer and delivered to the Trustee; provided, however, that no alteration or
amendment which affects the rights, duties or responsibilities of the Trustee
may be made without the Trustee' written consent; and provided further that no
such alteration or amendment shall cause any property held subject to the terms
of this Trust to be used for, or diverted to, purposes other than for the
exclusive benefit of the Participants and their Beneficiaries, it being
understood that this proviso is not to be construed to enlarge the obligations
of the Employer beyond those assumed by it under the Plan.

         (b)      Subject to the provisions of Sections 4(b) and 4(c), in the
event of termination of the Trust, all assets then constituting the Trust Fund,
less any amounts constituting charges against the Trust Fund, shall be retained
in trust by the Trustee for the Participants or their Beneficiaries or shall be
paid over or delivered by the Trustee to the Administrator, or in accordance
with its order, for the purposes set forth in the Plan. However, in making such
payments or any other payments or deliveries to or on the order of the
Administrator, the Trustee shall have no duty to determine whether or not they
constitute any use or diversion of the Trust Fund for purposes other than the
payment or provision for the benefits and the cash payments provided for in the
Plan.

         Section 13. Assignment.
         ----------  ----------

         The rights or claims of any person having a beneficial interest under
this Trust to any of the monies or other assets of the Trust Fund shall not be
assignable, nor shall such rights or claims be subject to garnishment,
attachment, execution or levy of any kind, and any attempt to transfer, assign
or pledge the same shall not be recognized by the Trustee except to such extent
as may be required by law or as may be required pursuant to the Plan.

                                      9

<PAGE>

         Section 14. Notices.
         ----------  -------

All notices required to be given by the Trustee to the Employer or the
Administrator shall be deemed to have been given when delivered or mailed,
bearing sufficient postage, to the address of the Employer or Administrator
indicated by the Trustee's records. All notices required to be given by the
Employer or the Administrator to the Trustee shall be deemed to have been given
when delivered or mailed, bearing sufficient postage, to any of the parties then
serving as a Trustee at such address as the Trustee shall designate for such
purpose.

         Section 15. Titles; Construction of Document.
         ----------  --------------------------------

         (a)      The titles of sections are included only for convenience and
shall not be construed as part of this Trust Agreement or in any respect
affecting or modifying its provisions.

         (b)      Any term used in this Trust Agreement which is defined in the
Plan shall have the meaning set forth in the Plan. The masculine gender shall
include both sexes; the singular shall include the plural and the plural the
singular, unless the context otherwise requires.

         Section 16. Allocation of Responsibility.
         ----------  ----------------------------

         (a)      The responsibilities and obligations of the Trustee shall be
strictly limited to those set forth in this Trust Agreement. Except to the
extent imposed by ERISA, no fiduciary of the Plan shall have the duty to
question whether any other fiduciary is fulfilling all of the responsibility
imposed upon such other fiduciary by ERISA or by any regulations or rulings
issued thereunder. Nor shall the Trustee be responsible in any way for any
manner in which the Employer or the Administrator carries out its
responsibilities under this Trust Agreement or, more generally, under the Plan.

         (b)      Whenever there is more than one Trustee in office, the Trustee
may allocate or assign any or all of their duties, responsibilities and powers
hereunder between or among themselves as they may from time to time agree in
writing, and upon such allocation or assignment, the Trustee to whom a duty,
responsibility or power has not been allocated or assigned shall have no
responsibility or liability relating to such duty, responsibility or power. Any
such agreement by or among the Trustee may be terminated, at any time, by
written notice from any Trustee to the other Trustee(s) and shall immediately
terminate upon the death, incapacity, resignation or removal of any Trustee in
office at the time such agreement was made. If the Trustee does not allocate or
assign any or all of his duties, responsibilities and powers hereunder between
or among themselves, all actions of the Trustee shall be by unanimous vote of
the Trustee then in office. If the Trustee allocates or assigns any or all of
his duties, responsibilities and powers hereunder between or among two (2) or
more Trustees, all actions of the Trustee with respect to such duties,
responsibilities and powers shall be by unanimous vote of the Trustee to whom
such duties, responsibilities and powers have been allocated or assigned.

                                      10

<PAGE>

         (c)      Subject to any other agreement pursuant to subsection (b)
above, any Trustee may make bank deposits and withdrawals and may sign, on
behalf of the Trustee, checks, applications for annuities or other contracts,
tax forms, stock transfer powers, purchase or sale orders, or any other
documents which may be required by any bank, insurance company, brokerage firm
or any individual, person, firm, or governmental agency dealing with the Plan
or Trust. The Trustee may appoint other agents and delegate to and authorize
such other agents to carry out any such functions or responsibilities on behalf
of the Trust. A certificate or other writing signed by any Trustee or the
Administrator certifying that any action has been approved by the Employer or
the Trustee, or has been taken in accordance with the Plan or the Trust, or
that any Trustee or any agent has authority to act, or as to any fact relative
to the Plan or the Trust, shall be conclusive in favor of any person dealing
with the Plan or Trust or its property, and any person may rely thereon without
further inquiry.

         Section 17. Execution of Trust Agreement.
         ----------  ----------------------------

         This Trust Agreement may be executed in any number of counterparts and
each fully executed counterpart shall be deemed an original.

         Section 18. Acceptance of Trust.
         ----------  -------------------

         The Trustee accepts the Trust created hereunder and agrees to be bound
by all the terms of this Trust Agreement.

         Section 19. Applicable Law.
         ----------  --------------

         This Trust Agreement shall be construed, administered and enforced
according to the laws of the United States of America to the extent specifically
applicable to the subject matter hereof and otherwise according to the laws of
the Commonwealth of Massachusetts. All contributions to the Trust shall be
deemed to be made in the Commonwealth of Massachusetts.

         IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement
to be executed on this 12th day of February, 2002.

                                                ENVIRONMENTAL POWER CORPORATION

                                                By: /s/ Joseph E. Cresci
                                                -------------------------------
                                                Joseph Cresci
                                                Chief Executive Officer

                                      11

<PAGE>

ATTEST:
                                                TRUSTEE

William D. Linehan
- ------------------
                                                 /s/ Joseph E. Cresci
                                                --------------------
                                                Joseph Cresci
                                                Trustee

ATTEST:

William D. Linehan
- ------------------
                                                /s/ Donald A. Livingston
                                                ------------------------
                                                Donald Livingston
                                                Trustee
ATTEST:

William D. Linehan
- ------------------

                                      12

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>9
<FILENAME>dex1015.txt
<DESCRIPTION>INDEMNIFICATION AGREEMENT
<TEXT>
<PAGE>

                                                                   Exhibit 10.15

                         ENVIRONMENTAL POWER CORPORATION

                             -----------------------

                            INDEMNIFICATION AGREEMENT
                               --------------------

         AGREEMENT made this 12th day of February, 2002, between Environmental
Power Corporation (the "Corporation"), and Joseph Cresci, Donald Livingston and
William D. Linehan, and their successors (each, an "Indemnified Person", and,
collectively, the "Indemnified Persons") in their capacities as either
fiduciaries or agents of all employee welfare benefit plans of the Corporation,
employee pension benefit plans of the Corporation and benefit plans of the
Corporation (the "Plans") as defined in Section 3(1), Section 3(2) and Section
3(3) of the Employee Retirement Income Security Act of 1974, as follows:

         The Corporation shall indemnify the Indemnified Persons against any
loss, liability, cost or other expense, including, but not limited to, the
payment of reasonable attorneys' fees, that may be incurred in the future or may
have been incurred at any time in the past in connection with the Plans, unless
such loss, liability, cost or other expense (whether direct or indirect) arises
or arose from the willful and gross negligence, malfeasance or misfeasance of an
Indemnified Person.

         The Corporation shall indemnify the Indemnified Persons against any
loss, liability, cost or other expense, including, but not limited to, the
payment of reasonable attorneys' fees, because of any investment action or other
action taken or omitted by the Indemnified Persons including investment
decisions and governmental filings, taken in their capacities as fiduciaries of
the Plans in accordance with any direction of the Corporation or a plan
participant of the Plans; any investment action taken or omitted by the
Indemnified Persons in such capacities in accordance with any direction of a
participant, former participant or beneficiary with respect to assets of the
Plans subject to such direction; or any investment action taken or omitted by
the Indemnified Persons in such capacities in the absence of

<PAGE>

directions from the Corporation or the Administrator of the Plans, or from a
participant, former participant or beneficiary with respect to assets of the
Plans subject to such direction; unless such loss, liability, cost or other
expense arises from the willful and gross negligence, malfeasance or misfeasance
by the Indemnified Persons.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the day and year first above written.

                                         ENVIRONMENTAL POWER CORPORATION

                                         By:  /s/ Joseph E. Cresci
                                           -------------------------------------
                                               Joseph E. Cresci, Chief Executive
                                               Officer

ATTEST:

William D. Linehan

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>10
<FILENAME>dex1016.txt
<DESCRIPTION>OFFICE BUILDING LEASE
<TEXT>
<PAGE>

                                                                   Exhibit 10.16

                              OFFICE BUILDING LEASE

         THIS LEASE AGREEMENT (this "Lease") is made as of this 21st day of
December, 2001, by and between Merkle, Soupcoff, & Fiorentino, Inc., a New
Hampshire corporation ("Landlord"), and Environmental Power Corporation, a
Delaware corporation ("Tenant").

                                    ARTICLE 1
                                    PREMISES

         In consideration of the rent hereinafter reserved and of the covenants
hereinafter contained, Landlord does hereby lease to Tenant, and Tenant does
hereby lease from Landlord, that certain portion of Unit 4 of Eldredge Park
West Condominiums (the "Condominiums") as shown on the floor plan attached
hereto as Exhibit A (the "Premises") located in the office building at 1 Cate
          ---------
Street, Portsmouth, New Hampshire (the "Building") as more particularly
described on Exhibit A hereto. The total agreed rentable square footage of the
             ---------
Premises is 2,818 square feet. Tenant shall also have the right to use the
common areas appurtenant to the Premises and, on an as-available basis, the
parking spaces in the Building's parking lot, subject to rules and regulations
promulgated from time to time by the Board of Directors of the Condominiums.

                                    ARTICLE 2
                             TERM AND EXTENDED TERM

         2.1      The term of this Lease (the "Term") shall commence on the
"Commencement Date" (as defined below) and shall terminate at 12:00 o'clock
midnight, local time on the "Termination Date" (as defined below). The Term is
scheduled to commence on March 1, 2002 (the "Scheduled Commencement Date"), and
terminate on February 28, 2007, unless adjusted as provided below.

         2.2      Landlord agrees to cause the Premises to be completed in
accordance with the plans, specifications and agreement approved by both
parties and attached hereto as Exhibit B ("Landlord's Work"). Landlord's Work
                               ---------
shall be completed at the cost and expense of Landlord unless otherwise
specified herein. Landlord's Work may be done with such minor variations as
Landlord may deem advisable, so long as such variations will not materially
interfere with Tenant's intended use of the Premises. "Substantial Completion"
of the Premises shall occur when Landlord certifies in writing to Tenant that
Landlord's Work has been substantially completed and possession of the Premises
has been delivered from Landlord to Tenant, notwithstanding a requirement that
Landlord complete "punch list" or similar corrective work, and notwithstanding
that any work that is the responsibility of the Tenant may not be completed.
Upon completion of Landlord's Work, Landlord shall certify in writing to Tenant
the total cost and expense incurred by Landlord in performing Landlord's Work
("Landlord's Build-Out Cost") and provide Tenant with a reasonable opportunity
to verify such cost and expense. Other

                                      1

<PAGE>

than Landlord's Work, and except as specifically set forth in this Lease,
Landlord shall have no obligation to make any improvements or modifications to
the Premises.

         2.3      The "Commencement Date" of this Lease shall be the later of
the date of Substantial Completion, as defined above, or the Scheduled
Commencement Date, as defined above. The Tenant, by taking possession of the
Premises, shall be deemed to have agreed that the Premises are then in a
satisfactory order, repair and condition, except as set forth on a list
prepared by Landlord and Tenant prior to occupancy, and Tenant shall provide
Landlord, upon request, a written acknowledgment of acceptance. If Tenant, for
whatever reason, occupies the Premises prior to the Commencement Date, then all
terms and conditions of this Lease shall apply to such occupancy, with the
exception of Tenant's obligation to pay Rent, which unless otherwise agreed to
in writing by Landlord and Tenant, shall not commence until the Commencement
Date. If Landlord, for any reason whatsoever, fails to deliver possession of
Premises to Tenant on the Scheduled Commencement Date, this Lease shall not be
void or voidable nor shall Landlord be liable to Tenant for any loss or damage
resulting therefrom, unless such failure is due to Landlord's willful
misconduct. Should the actual Commencement Date be later than the Scheduled
Commencement Date, Tenant's obligation to pay Rent shall not commence until the
Commencement Date, and the Termination Date shall be extended by the same
period as the Commencement Date extended past the Scheduled Commencement Date.
Provided, however, that if Landlord, for whatever reason, is unable to deliver
possession of the Premises to Tenant within thirty (30) days after the
Scheduled Commencement Date, Tenant, in Tenant's sole discretion, may terminate
this Lease by forwarding written notice of such termination to Landlord, in
accordance with the notice provision of this Lease, not later than sixty (60)
days following the Scheduled Commencement Date. If this Lease is terminated
pursuant to the terms of this Section 2.3, Landlord shall refund to Tenant any
Security Deposit or payment of Base Rent Tenant may have previously deposited
with, or paid to Landlord, but the parties shall not otherwise have any
liability or obligation to each other; if Tenant elects not to terminate this
Lease pursuant to the terms of this Section 2.3, then the Commencement Date and
Termination Date of this Lease shall be determined as otherwise set forth in
this Section 2.3.

         2.4      Provided Tenant is not in default of the terms of this Lease
beyond the expiration of applicable notice and cure periods at the time notice
is given to Landlord as hereinafter provided, upon expiration of thirty (30)
months following the Commencement Date, Tenant shall have the option to
terminate this Lease upon not less than one hundred eighty (180) days prior
written notice to Landlord. In the event Tenant elects to terminate this Lease
pursuant to this Section 2.4, the Termination Date of this Lease shall be the
date specified in such notice to Landlord (or if such date specified is less
than 180-days from the date of such notice, then such date which is 180-days
from the date of such notice), and Tenant shall pay to Landlord, on or before
the adjusted Termination Date, the un-amortized portion of Landlord's Build-Out
Cost and Commissions (as defined in Article 23). The un-amortized portion of
Landlord's Build-Out Cost and Commissions shall be determined as of the
adjusted Termination Date on the basis of straight-line amortization of
Landlord's Build-Out Cost and Commissions over a 60-month period beginning on
the Commencement Date.

                                      2

<PAGE>

                                    ARTICLE 3
                                      RENT

         3.1      Tenant hereby covenants and agrees to pay to Landlord as rent
for the Premises (all of which is collectively referred to as "Rent") all of
the following:

         (a)      An annual base rent ("Base Rent") in the amount of Sixty Six
Thousand Two Hundred Forty Dollars ($66,240.00), payable in monthly installments
of Five Thousand Five Hundred Twenty Dollars ($5,520.00). Each monthly
installment of Base Rent shall be paid in advance on the first day of each month
during each calendar year, or portion thereof (with appropriate adjustment for
any calendar year which does not fall totally within the Term), during the Term;
provided, however, that the installment of Base Rent payable for the first full
calendar month of the Term shall be due and payable upon execution of this Lease
and

         (b)      Additional rent ("Additional Rent") in the amount of any
payment referred to as such in any portion of this Lease which accrues while
this Lease is in effect (which shall include any and all charges or other
amounts which Tenant is obligated to pay Landlord under this Lease, other than
Base rent).

         3.2      Base rent and all Additional Rent as provided for under this
Lease shall be paid promptly when due, in cash or by check, in lawful money of
the United States of America, without notice or demand and without deduction,
diminution, abatement or set off of any amount or for any reason whatsoever,
payable to Landlord, and delivered to its offices at the address as stated in
Article 24 or to such other person and place as may be designated by notice in
writing from Landlord to Tenant from time to time. If Tenant shall present to
Landlord more than twice during the Term checks or drafts not honored by the
institution upon which they are issued, then Landlord may require that future
payments of Rent and other sums thereafter payable be made by certified or
cashier's check.

         3.3      Other remedies for non-payment of Rent notwithstanding, any
installment of Rent which is not paid within ten (10) days after the due date
shall be subject, at Landlord's option each month, to a late charge equal to
five percent (5%) of the amount due, which shall be payable as Additional Rent.
Any installment of Base rent or Additional Rent not paid within thirty (30) days
from the date due shall accrue interest at the rate of four percent higher than
the rate published by the Wall Street Journal (or any successor publication)
from time to time as the prime rate (the "Prime Rate") (but in no event higher
than the maximum rate allowed by law) until paid in full, which interest shall
be deemed Additional Rent.

         3.4      No payment by Tenant or receipt by Landlord of a lesser amount
than the monthly installments of Rent herein stipulated shall be deemed to be
other than on account of the earliest stipulated Rent nor shall any endorsement
or statement on any check or any letter accompanying any check or payment as
Rent be deemed an accord and satisfaction, and Landlord may accept such check
for payment without prejudice to Landlord's right to recover the balance of
such Rent or to pursue any other rent be provided in this Lease.

                                      3

<PAGE>

         3.5      Simultaneously with the execution of this Lease, Tenant shall
deposit with Landlord the sum of Eleven Thousand Forty Dollars ($11,040.00) as a
security deposit (the "Security Deposit"). The Security Deposit (which shall not
bear interest to Tenant) shall be considered as security for the payment and
performance of the obligations, covenants, conditions and agreements contained
herein. The Security Deposit shall not constitute an advance payment of any
amounts owed by Tenant under this Lease, or a measure of damages to which
Landlord shall be entitled upon a breach of this Lease by Tenant or upon
termination of this Lease. Landlord may, without prejudice to any other remedy,
use the Security Deposit to the extent necessary to remedy any default in the
payment of Base rent or Additional Rent or to satisfy any other obligation of
Tenant hereunder, and Tenant shall promptly, on demand, restore the Security
Deposit to its original amount. If Landlord transfers its interest in the
Premises during the Term, Landlord may assign the Security Deposit to the
transferee who shall become obligated to Tenant for its return pursuant to the
terms of this Lease, and thereafter Landlord shall have no further liability for
its return.

         3.6      Tenant's pro rata share of the increases in Common Area
Expenses (as defined in Article 4) and increases in Real Estate Taxes (as
defined in Article 5) is agreed to be sixty-five and twenty-six one hundredths
percent (65.26%).

         3.7      It is agreed by Landlord and Tenant that no Rent for the use,
occupancy or utilization of the Premises shall be, or is, based in whole or in
part on the net income or profits derived by any person from the Building or the
Premises, and Tenant further agrees that it will not enter into any sublease,
license, concession or other agreement for any use, occupancy or utilization of
the Premises which provides for rent or other payment for such use, occupancy or
utilization based in whole or in part on the net income or profits derived by
any person from the Premises so leased, used, occupied or utilized. Nothing in
the foregoing sentence, however, shall be construed as permitting or
constituting Landlord's approval of any sublease, license, concession, or other
use, occupancy, or utilization agreement not otherwise approved by Landlord in
accordance with the provisions of Article 13 hereof.

                                    ARTICLE 4
                  COMMON AREA EXPENSES ESCALATION AND UTILITIES

         4.1      Tenant shall pay to Landlord, as Additional Rent, Tenant's pro
rata share, as specified in Section 3.6, of the amount by which the Common Area
Expenses for the Comparison Year exceed the Common Area Expenses for the Base
Year. The term "Common Area Expenses" shall mean any and all expenses and costs
assessed by the Board of Directors of the Condominiums against Unit 4 of the
Condominiums, including any amounts designated as reserves which are assessed
on a continuing basis. The term "Common Area Expenses" shall not include any
special or extraordinary assessments for capital expenditures. Tenant shall pay
each month, in advance, as Additional Rent, one-twelfth of Landlord's estimate
of Tenant's annual obligation under this Article 4. Such payments shall in no
way limit Tenant's annual obligation. If the total of such monthly installments
paid is less than Tenant's total obligation, Tenant shall pay the difference
within 30 days of its receipt of Landlord's statement. Any overpayment shall be
credited to Tenant's obligation for the next succeeding period. The term "Base
Year" shall mean the calendar year in which the Term commences. The term
"Comparison Year" shall mean

                                      4

<PAGE>

the then applicable period of twelve (12) months commencing on January 1st of
each year and ending on December 31st of each year.

         4.2      If the Termination Date or sooner termination of this Lease
shall not coincide with the end of a Comparison Year, then in computing the
amount payable under this Article 4 for the period between the commencement of
the applicable Comparison Year in question and the Termination Date or sooner
termination of this Lease, the amount that would have been due from Tenant for
the full year, if Tenant had been a tenant for the entire Comparison Year,
shall be prorated over the portion of the Comparison Year that Tenant is a
tenant in the Building. Tenant's obligation to pay any additional rent under
this Article 4 which is not paid as of the expiration or sooner termination of
the Lease shall survive the expiration or sooner termination of this Lease.

         4.3      Tenant shall pay, as Additional Rent, directly to the proper
authorities charged with the collection thereof, all charges for water, sewer,
gas, electricity, telephone and other utilities or services used or consumed on
the Premises (except, in each case, to the extent such utilities or services are
included as part of the Common Area Expenses), all such charges to be paid as
the same from time to time become due. It is understood and agreed that Tenant
shall make its own arrangements for such utilities and that Landlord shall be
under no obligation to furnish any utilities to the Premises and shall not be
liable for any interruption or failure in the supply or any such utilities to
the Premises. In the event any such utilities or services are not separately
metered or measured for the Premises, the charges therefor shall be allocated to
Tenant on the basis of the percentage the agreed rentable square footage of the
Premises bears to the total rentable square footage of the premises being served
by such utilities or services.

         4.4      Nothing contained in this Article 4 shall be construed at any
time to reduce the Rent payable hereunder below the amount stipulated in
Articles 3 and 5 of this Lease.

                                    ARTICLE 5
                          REAL ESTATE TAXES ESCALATION

         5.1      Tenant shall pay to Landlord, as Additional Rent, Tenant's pro
rata share, as specified in Section 3.6, of the amount by which Real Estate
Taxes for or attributable to the then current Real Estate Tax Year exceeds the
Base Real Estate Taxes. If the system of real estate taxation shall be altered
or varied and any new tax or levy shall be levied or imposed on said land,
Building and improvements, and/or Landlord, in substitution for Real Estate
Taxes presently levied or imposed on immovables in the jurisdiction where the
Building is located, then any such new tax or levy shall be included within the
term "Real Estate Taxes". Tenant shall pay each month, in advance, as
Additional Rent, one-twelfth of Landlord's estimate of Tenant's annual
obligation under this Article 5. If the total of such monthly installments paid
is less than Tenant's total obligation, Tenant shall pay the difference within
30 days of its receipt of Landlord's statement. Any overpayment shall be
credited to Tenant's obligation for the next succeeding period. The term "Real
Estate Taxes" means all taxes, rates and assessments, general or special,
levied or imposed with respect to Unit 4 of the Condominiums (including all
taxes, rates and assessments, general or special, levied or imposed for school,
public betterment and/or general or local improvements. The term "Base Real
Estate Taxes" means the Real Estate Taxes

                                      5

<PAGE>

for the tax year during which this Lease commences. The term "Real Estate Tax
Year" means each successive twelve (12) month period following and
corresponding to the period in respect of which the Real Estate Taxes are
established, irrespective of the period or periods which may from time to time
in the future be established by competent authority for the purposes of levying
or imposing Real Estate Taxes.

         5.2      Real Estate Taxes which are being contested by Landlord shall
nevertheless be included for purposes of the computation of the liability of
Tenant under Section 5.1 hereof; provided however, that in the event that Tenant
shall have paid any amount of Additional Rent pursuant to this Article 5 and
Landlord shall thereafter receive a refund of any portion of any Real Estate
Taxes on which such payment shall have been based, Landlord shall pay to Tenant
the appropriate portion of such refund. Landlord shall have no obligation to
contest, object or litigate the levying or imposition of any Real Estate Taxes
and may settle, compromise, consent to, waive or otherwise determine in its
discretion any Real Estate Taxes without consent or approval of Tenant.

         5.3      Nothing contained in this Article 5 shall be construed at any
time to reduce the Rent payable hereunder below the amount stipulated in
Articles 3 and 4 of this Lease.

         5.4      It is understood and agreed that Tenant shall not be liable
for any addition to the Real Estate Taxes solely by reason of Landlord's
failure to pay Real Estate Taxes when due.

         5.5      If the Termination Date or sooner termination of this Lease
shall not coincide with the end of a Real Estate Tax Year, then in computing
the amount payable under this Article 5 for the period between the commencement
of the applicable Real Estate Tax Year in question and the Termination Date or
sooner termination of this Lease, the amount that would have been due from
Tenant for the full year, if Tenant had been a tenant for the entire Real
Estate Tax Year, shall be prorated over the portion of the Real Estate Tax Year
that Tenant is a tenant in the Building. Tenant's obligation to pay any
additional rent under this Article 5 which is not paid as of the expiration or
sooner termination of the Lease shall survive the expiration or earlier
termination of this Lease.

                                    ARTICLE 6
                                 USE OF PREMISES

         Tenant covenants to use the Premises only for business or professional
office purposes and for no other purpose, subject to and in accordance with all
applicable zoning and other governmental regulations. Tenant, at its own
expense, shall comply with and promptly carry out all orders, requirements or
conditions imposed by the ordinances, laws and regulations of all of the
governmental authorities having jurisdiction over the Premises, which are
occasioned by or required in the conduct of Tenants business within the Premises
and to obtain all licenses, permits and the like (other than a certificate of
occupancy, which Landlord shall maintain in effect throughout the term of the
Lease) required to permit Tenant to occupy the Premises. Landlord makes no
representation or warranty with respect to the condition of the Building.
Landlord agrees to deliver the Premise to Tenant in conformity with the plans
and specifications set forth on Exhibit B hereto. Tenant shall not permit the
                                ---------
Premises, or any part thereof, to be

                                      6

<PAGE>

used for any disorderly, unlawful or hazardous purpose, nor as a source of
annoyance or embarrassment to Landlord or other tenants, nor for any purpose
other than herein before specified, nor for the manufacture of any commodity
therein, without the prior written consent of Landlord.

                                    ARTICLE 7
                             REPAIRS AND MAINTENANCE

         7.1      Subject to the provisions hereinafter contained with regard to
damage by fire or other casualty and Section 7.2, Landlord agrees to maintain
the Premises in good order and repair during the Term, unless damage thereto
shall have been caused by the act or neglect of Tenant, its agents, employees,
contractors or invitees, in which case, the same shall be required by and at the
expense of Tenant. If Tenant fails to make such repairs promptly, Landlord, at
its option, may make such repairs and Tenant shall pay Landlord on demand
Landlord's actual costs in making such repairs plus a fee of ten percent (10%)
to cover Landlord's overhead. Landlord shall not be liable to Tenant for any
damage or inconvenience and Tenant shall not be entitled to any abatement or
reduction of Rent by reason of any repairs, alterations or additions made by
Landlord under this Lease, provided that Landlord shall not unreasonably
interfere with the conduct of Tenant's business in the Premises.

         7.2      Tenant shall maintain the non-structural portions of the
interior of the Premises in good repair and condition, damages by causes
reasonably beyond Tenant's control and ordinary wear and tear excepted.

                                    ARTICLE 8
                               LANDLORD'S SERVICES

         Landlord covenants and agrees to take all reasonable action as may be
necessary to assure that the Board of Directors of the Condominiums fulfills its
obligations to provide services to its members (and that such services are
provided to Tenant) as set forth in the Declaration and By-Laws of the
Condominiums, on substantially the same basis as provided to other tenants of
the Building, including, but not limited to, (i) elevator service, (ii)
janitorial service for common areas, (iii) landscaping, (iv) snow removal, (v)
rubbish removal, (vi) HVAC maintenance and repair, and (vii) exterior window
washing (bi-annual). Tenant hereby acknowledges and agrees that Landlord shall
not be liable in any way for any damage or inconvenience caused by the cessation
or interruption of such heating, air-conditioning, electricity, elevator or
janitor service or if occasioned by fire, accident, strikes, necessary
maintenance, alterations or repairs, or other causes beyond Landlord's control
and Tenant shall not be entitled to any abatement or reduction of Rent by reason
thereof, unless such cessation or interruption renders the Premises unfit for
use and occupancy and continues for a period of fifteen (15) days, in which case
Tenant shall be entitled to an abatement of Rent for the period thereafter that
such cessation or interruption continues.

                                      7

<PAGE>

                                    ARTICLE 9
                               TENANT'S AGREEMENT

         Tenant covenants and agrees: (a) not to obstruct or interfere with the
rights of other tenants, or injure or annoy them or those having business with
them, or conflict with the fire laws or regulations, or with any insurance
policy upon the Building or any part thereof, or with any statutes, rules or
regulations now existing or subsequently enacted or established by the local,
state or federal governments and Tenant shall be answerable for all nuisances
caused or suffered on the Premises, or caused by Tenant in the Building, or on
the approaches thereto; (b) not to place a load on any floor exceeding the floor
load which such floor was designed to carry in accordance with the plans and
specifications of the Building, and not to install, operate or maintain in the
Premises any safe or heavy item of equipment except in such manner and in such
location as Landlord shall prescribe so as to achieve a proper distribution of
weight; (c) not to strip, overload, damage or deface the Premises, hallways,
stairways, elevators, parking facilities or other public areas of the Building,
or the fixtures therein or used therewith, nor to permit any hole to be made in
any of the same; (d) not to suffer or permit any trade or occupation to be
carried on or use made of the Premises which shall be unlawful, noisy,
offensive, or injurious to any person or property, or such as to increase the
danger of fire or affect or make void or voidable any insurance on the Building,
or which may render any increased or extra premium payable for such insurance,
or which shall be contrary to any law or ordinance, rule or regulation from time
to time established by any public authority; (e) not to move any furniture or
equipment into or out of the Premises except at such times and in such manner as
Landlord may from time to time designate, (f) not to place upon the interior or
exterior of the Building, or any window or any part thereof or door of the
Premises, any placard, sign, lettering, window covering or drapes, except as
permitted pursuant to this Lease and except as such and in such place and manner
as shall have been first approved in writing by Landlord, and to use Building
standard signage on its suite entry door, which shall be installed at Tenant's
cost; (g) to park vehicles only in the area from time to time designated by
Landlord; (h) to conform to all rules and regulations from time to time
established by the appropriate insurance rating organization and to all
reasonable rules and regulations from time to time established by the Board of
Directors of the Condominiums and Landlord (provided that such rules and
regulations shall not increase Tenant's obligations under this Lease or decrease
Tenant's rights under this Lease); (i) to be responsible for the cost of removal
of Tenant's bulk trash during occupancy and move-out, (j) not to conduct nor
permit in the Premises either the generation, treatment, storage or disposal of
any hazardous substances and materials or toxic substances of any kind as
described in the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (42 U.S.C. Sections 9601 et seq.), the
Resource Conservation and Recovery Act, as amended (42 U.S.C. 6901 et seq.), any
regulations adopted under these acts, or any other present or future federal,
state, county or local laws or regulations concerning environmental protection,
and Tenant shall prohibit its assignees, sublessees, employees, agents and
contractors (collectively, "Permitees") from doing so and Tenant shall
indemnify, defend and hold Landlord and its agents harmless from all loss,
costs, foreseeable and unforeseeable, direct or consequential; damages;
liability; fines; prosecutions; judgments; litigation; and expenses, including
but not limited to, clean-up costs, court costs and reasonable attorneys' fees
arising out of any violation of the provisions of this Article by Tenant or its
Permitees. A copy of the rules and regulations adopted by the Board of Directors
of the

                                      8

<PAGE>

Condominiums (including those contained in the By-Laws of the Condominiums)
which are referenced in Section (h) above, are attached hereto as Exhibit C.
                                                                  ----------

                                   ARTICLE 10
                                   ALTERATIONS

         Tenant shall not paint the Premises or make any alterations, additions,
or other improvements in or to the Premises or install any equipment of any kind
that shall require any alterations or additions or affect the use of the
Building's water system, heating system, plumbing system, air-conditioning
system, electrical system or other mechanical system, or install any telephone
antennae on the roof, in the windows or upon the exterior of the Building
without the prior written consent of Landlord, such consent not to be
unreasonably withheld or delayed. If any such alterations or additions are made
by Tenant without Landlord's consent, Landlord may correct or remove them and
Tenant shall be liable for any and all costs and expenses incurred by Landlord
in the correction or removal of such work. All plans and specifications for any
such work shall be prepared by Tenant at Tenant's expense and shall thereafter
be submitted to Landlord for its review. No such work shall be commenced by
Tenant without the prior written consent of Landlord and the approval by
Landlord of any contractor of subcontractor to be engaged by Tenant to perform
such work. All work with respect to such alterations and additions shall be done
in a good and workmanlike manner and diligently prosecuted to completion to the
end that Premises shall at all times be a complete unit except during the period
necessarily required for such work. Tenant shall not permit a mechanic's lien(s)
to be placed upon the Premises or the Building as a result of any alterations or
improvements made by it and agrees, if any such lien be filed on account of the
acts of Tenant, promptly to pay the same. If Tenant fails to discharge such lien
within ten (10) days of its filing, then, in addition to any other right or
remedy of Landlord, Landlord may, at its election, discharge the lien. Tenant
shall pay on demand any amount paid by Landlord for the discharge or
satisfaction of any such lien, and all attorneys' fees and other costs and
expenses of Landlord incurred in defending any such action or in obtaining the
discharge of such action or in obtaining the discharge of such lien, together
with all necessary disbursements in connection therewith. Tenant hereby
expressly recognizes that in no event shall it be deemed the agent of Landlord
and no contractor of Tenant shall by virtue of its contract be entitled to
assert any lien against the Premises or Building. All alterations or additions
shall become a part of the realty and surrendered to Landlord upon the
expiration or termination of this Lease, unless Landlord shall at the time of
its approval of such work require removal or restoration on the part of Tenant
as a condition of such approval.

                                   ARTICLE 11
                                  HOLD HARMLESS

         11.1     Other than as a result of the gross negligence of Landlord,
Landlord's willful misconduct or Landlord's failure to perform its obligations
under this Lease, Landlord shall not be liable for any damage to, or loss of,
property in the Premises belonging to Tenant, its employees, agents, visitors,
licensees or other persons in or about the Premises, or for damage or loss
suffered by the business of Tenant, from any cause whatsoever, including,
without limiting the generality thereof, such damage or loss resulting from
fire, steam, smoke, electricity, gas,

                                      9

<PAGE>

water, rain, ice or snow, which may leak or flow from or into any part of the
Premises, or from the breakage, leakage, obstruction or other defects of the
pipes, wires, appliances, plumbing, air-conditioning or lighting fixtures of
the same, whether the said damage or injury results from conditions arising
upon the Premises or upon other portions of the Building of which the Premises
are a part, or from other sources. Landlord shall not be liable in any manner
to Tenant, its agents, employees, invitees or visitors for any injury or damage
to Tenant, Tenant's agents, employees, invitees or visitors, or their property,
caused by the criminal or intentional misconduct, or by any act or neglect of
third parties or of Tenant, Tenants agents, employees, invitees or visitors, or
of any other tenant of the Building. Tenant covenants that no claim shall be
made against Landlord by Tenant, or by any agent or servant of Tenant, or by
others claiming the right to be in the Premises or in the Building through or
under Tenant, for any injury, loss or damage to the Premises or to any person
or property occurring upon the Premises from any cause other than the gross
negligence of Landlord, Landlord's willful misconduct or Landlord's failure to
perform its obligations under this Lease. In no event shall Landlord be liable
to Tenant for any consequential damages sustained by Tenant arising out of the
loss or damage to any property of Tenant.

         11.2     Subject to the waiver of subrogation provisions contained in
this Lease, Tenant covenants and agrees to save Landlord and Landlord's agents
harmless and indemnified, and to defend Landlord and Landlord's agents from all
loss, damage, liability or expense of any kind including without limitation
attorneys' fees and court costs incurred, suffered or claimed by any person
whomsoever, or for any damage or injury to any persons or property from any
cause whatsoever, by reason of the use or occupancy by Tenant, its agents,
employees, invitees or visitors of the Premises, or of the Building unless
caused solely by the gross negligence of Landlord.

         11.3     The provisions of this Article 11 shall survive the expiration
or earlier termination of this Lease.

                                   ARTICLE 12
                                    INSURANCE

         12.1     Tenant shall, at its cost and expense, obtain and maintain at
all times during the Term, for the protection of Landlord and Tenant, Public
Liability Insurance (Comprehensive General Liability or Commercial General
Liability) including Contractual Liability Insurance, with a combined personal
injury and property damage limit of not less than One Million Dollars
($1,000,000.00) for each occurrence and not less than Two Million Dollars
($2,000,000.00) in the aggregate, insuring against all liability of Tenant and
its representatives arising out of and in connection with Tenant's use or
occupancy of the Premises. Landlord shall be named as an additional insured.

         12.2     Tenant shall, at its cost and expense, obtain and maintain at
all times during the Term, fire and extended coverage insurance on the contents
of the Premises, including any leasehold improvements made by Tenant in an
amount sufficient so that no co-insurance penalty shall be invoked in case of
loss.

                                      10

<PAGE>

         12.3     Tenant shall increase its insurance coverage, as required, but
not more frequently than each calendar year if, in the opinion of Landlord or
any mortgagee of Landlord, the amount of public liability and/or property
damage insurance coverage at that time is not adequate.

         12.4     All insurance required under this Lease shall be issued by
insurance companies licensed or authorized to do business in the State of New
Hampshire. Such companies shall have a policyholder rating of at least "A" and
be assigned a financial size category of at least "Class X" as rated in the most
recent edition of "Best's Key Rating Guide" for insurance companies. Each policy
shall contain an endorsement requiring thirty (30) days written notice from the
insurance company to Landlord before cancellation or any change in the coverage,
scope or amount of any policy. Each policy, or a certificate showing it is in
effect, together with evidence of payment of premiums, shall be deposited with
Landlord on or before the Commencement Date, and renewal certificates or copies
of renewal policies shall be delivered to Landlord at least thirty (30) days
prior to the expiration date of any policy.

         12.5     If any of Landlord's insurance policies shall be canceled or
cancellation shall be threatened or the coverage thereunder reduced or
threatened to be reduced in any way because of the use of the Premises or any
part thereof by Tenant or any assignee or subtenant of Tenant or by anyone
Tenant permits on the Premises (other than for the uses permitted hereunder),
and if Tenant fails to remedy the condition within forty-eight (48) hours after
notice thereof, Landlord may at its option either terminate this Lease or enter
upon the Premises and attempt to remedy such condition, and Tenant shall
promptly pay the cost thereof to Landlord. Landlord shall not be liable for any
damage or injury caused to any property of Tenant or of others located on the
Premises from such entry. If any of Tenant's insurance policies shall be
canceled or cancellation shall be threatened or the coverage thereunder reduced
or threatened to be reduced in any way because of the use of the Premises or any
part thereof by Landlord or by any other tenant of the Building, and if Landlord
fails to remedy the condition within forty-eight (48) hours after notice
thereof, Tenant may at its option terminate this Lease.

         12.6     All policies covering real or personal property which either
party obtains affecting the Premises shall include a clause or endorsement
denying the insurer any rights of subrogation or recovery against the other
party to the extent rights have been waived by the insured before the
occurrence of injury or loss. Landlord and Tenant hereby waive any rights of
subrogation or recovery against the other for damage or loss to their
respective property due to hazards covered or which should be covered by
policies of insurance obtained or which should be or have been obtained
pursuant to this Lease, to the extent of the injury or loss covered thereby
assuming that any deductible shall be deemed to be insurance coverage.

                                   ARTICLE 13
                            ASSIGNMENT AND SUBLETTING

         13.1     Tenant shall not assign, transfer, mortgage or encumber this
Lease or sublet the Premises without obtaining the prior written consent of
Landlord, nor shall any assignment or transfer of this Lease be effectuated by
operation of law or otherwise without the prior written consent of Landlord, in
any such case, such consent not to be unreasonably withheld or delayed. In the
event that Tenant desires to assign this Lease, sublet the Premises, or permit
occupancy or

                                      11

<PAGE>

use of the Premises or any part thereof by another party or parties, Tenant
shall provide Landlord with thirty (30) days advance written notice of Tenant's
bona fide proposed assignment or subletting of all or any part of the Premises
and shall provide Landlord with such information concerning the assignee or
subletee as Landlord may reasonably request (provided that any such request is
given within three (3) business days of Landlord's receipt of Tenant's
assignment and sublease notice). Landlord shall have the right, at its option
during said thirty (30) day period, to (a) release Tenant from this Lease for
such space (i.e. terminate the Lease with respect to such space), or (b)
consent or refuse to consent (stating a reasonable basis for such refusal) to
Tenants assignment or subletting of such space and to continue this Lease in
full force and effect as to the entire Premises. The consent by Landlord to any
assignment, transfer, or subletting to any party other than Landlord shall not
be construed as a waiver or release of Tenant from the terms of any covenant or
obligation under this Lease nor shall the collection or acceptance of Rent from
any such assignee, transferee, subtenant or occupant constitute a waiver or
release of Tenant from any covenant or obligation contained in this Lease, nor
shall such assignment or subletting be construed to relieve Tenant from giving
Landlord said thirty (30) days notice, nor from obtaining the consent in
writing of Landlord to any further assignment or subletting (which consent
shall not be unreasonably withheld or delayed). In the event that Tenant
defaults hereunder Tenant hereby assigns to Landlord any and all rent due from
any subtenant of Tenant and hereby authorizes each such subtenant to pay said
rent directly to Landlord. Without limiting the generality of the foregoing,
if Landlord consents to an assignment pursuant to this Article 13, Landlord may
condition its consent upon the entry by such transferee into an agreement (in
form and substances satisfactory to Landlord) with Landlord, by which such
transferee assumes all of Tenant's obligations hereunder, and Landlord shall
release Tenant from any further obligation under this Lease.

         13.2     Notwithstanding the foregoing provisions of this Article 13,
this Lease may be assigned, or the Premises may be sublet, in whole, but not in
part, in each case without Landlord's consent, to any entity into or with which
Tenant may be merged or consolidated or to any entity which shall be an
affiliate, subsidiary, parent or successor of Tenant. If there shall be an
assignment or subletting to an entity referred to in the immediately preceding
sentence, the foregoing provisions of this Article 13, with respect to
assignment or subletting, shall then apply to such entity. For purposes of this
Article 13, (i) an "entity" shall mean a corporation, limited liability
company, limited partnership or partnership, (ii) an "affiliate" shall mean any
entity which, directly or indirectly, controls or is controlled by or is under
common control with Tenant, (iii) "control" shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such entity, whether through the ownership of voting securities
or by contract or otherwise, (iii) a "subsidiary" shall mean any entity not
less than fifty percent (50%) of whose outstanding capital stock, membership
interests or other ownership interests shall, at the time, be owned directly or
indirectly, by Tenant, (iv) a "successor" of Tenant shall mean (x) a entity in
which or with which Tenant, its successors or assigns, is merger or
consolidated, and in accordance with applicable statutory provisions contained
in the instruments of merger or consolidation, the liabilities of parties
participating in such merger or consolidation are assumed by the entity
surviving such merger or created by such consolidation, or (y) an entity
acquiring this Lease and a substantial portion of the property and assets of
Tenant, its successors or assigns, or (z) any successor to a successor entity
becoming such by either of the methods described in clauses (x) or (y).
Acquisition by Tenant, its

                                      12

<PAGE>

successors or assigns of a substantial portion of the assets, together with the
assumption of all or substantially all the obligations and liabilities of any
entity, shall be deemed a merger of such entity into Tenant for purposes of
this Article 13. Notwithstanding any assignment or subletting pursuant to this
Section 13.2, Tenant shall remain fully bound to Landlord by the provisions of
this Lease.

                                   ARTICLE 14
                           LANDLORD'S RIGHT OF ACCESS

         14.1     Landlord may, at any time during Tenants occupancy, during
reasonable business hours enter either to view the Premises or to show the same
to others, or to facilitate repairs to the Premises, or to introduce, replace,
repair, alter or make new or change existing connections from any fixtures,
pipes, wires, ducts, conduits or other construction therein, or remove, without
being held responsible therefor, placards, signs, lettering, window or door
coverings and the like not expressly consented to by Landlord.

         14.2     Landlord may, during the last one hundred eighty (180) days of
the Term, enter the Premises free from hindrance or control of Tenant to show
the Premises to prospective tenants at times which shall not unreasonably
interfere with Tenant's business. If Tenant shall vacate the Premises during
the last month of the Term, Landlord shall have the unrestricted right to enter
the same after Tenant's moving to commence preparations for the succeeding
tenant or for any other purpose whatsoever, without affecting Tenant's
obligation to pay Rent for the full Term.

                                   ARTICLE 15
                                   FIRE CLAUSE

         15.1     In the event the Premises or any part thereof, the elevators,
hallways, stairways or other approaches thereto, becomes damaged or destroyed by
fire or other casualty from any cause so as to render said Premises and/or
approaches unfit for use and occupancy, a just and proportionate part of the
Rent according to the nature and extent of the damage or injury to said Premises
and/or approaches, shall be suspended or abated until said Premises and/or
approaches have been put in as good condition for use and occupancy as at the
time immediately prior to such damage or destruction. Landlord shall proceed, at
its expense and as expeditiously as may be practicable, to repair the damage
unless, because of the substantial extent of the damage or destruction, Landlord
should decide not to repair or restore the Premises, in which event and at
Landlord's option Landlord may terminate this Lease forthwith by giving Tenant a
written notice of its intention to terminate within thirty (30) days after the
date of the fire or other casualty. If Landlord elects to repair the damage,
Landlord shall use reasonable efforts to minimize the disruption to Tenant
during such repairs. Landlord shall not be obligated to repair, restore or
replace any fixture, improvement, alteration, furniture or other property owned,
installed or made by Tenant, all of which shall be repaired, restored or
replaced by Tenant.

         15.2     If (i) Landlord fails to give notice to Tenant within thirty
(30) days of after the date of the fire or other casualty of its intention to
restore or repair the Premises, or terminate this Lease, or (ii) the Premises
can not be restored and repaired as provided in Section 15.1 within a

                                      13

<PAGE>

period of ninety (90) days after the date of the fire or other casualty, or
(iii) Landlord fails to restore or repair the Premises within ninety (90) days
after the date of the fire or other casualty, Tenant shall have the right, upon
notice to Landlord, to terminate this Lease.

         15.3     Tenant shall immediately notify Landlord of any damage to the
Premises caused by fire or any other casualty.

         15.4     No damages, compensation, or claim shall be payable by
Landlord for inconvenience, loss of business or annoyance arising from any
repair or restoration of any portion of the Premises or the Building. Subject
to the provisions of Section 15.1, Landlord shall diligently proceed to have
such repairs made promptly.

                                   ARTICLE 16
                                  CONDEMNATION

         16.1     This Lease shall be terminated and the Rent shall be abated to
the date of such termination in either of the following events: (a)
condemnation of the Premises, the Building or any part thereof by any competent
authority under right of eminent domain for any public or quasi-public use or
purpose; or (b) condemnation by competent authority under right of eminent
domain for any public or quasi-public use or purpose of twenty-five percent
(25%) or more of the Building in which the Premises are located. The forcible
leasing by any competent authority of any portion of the Building other than
the Premises shall have no effect upon this Lease. In case of any taking or
condemnation, whether or not the Term shall cease and terminate, the entire
award shall be the property of Landlord, and Tenant hereby assigns to Landlord
all its right, title and interest in and to any such award. Tenant however,
shall be entitled to claim, prove and receive in the condemnation proceeding
such awards as may be allowed for fixtures and other equipment installed by it,
but only if such awards shall be made by the court in addition to (and shall in
no manner whatsoever reduce) the award made by it to Landlord for the land and
improvements or part thereof so taken.

         16.2     In the event of a temporary taking or condemnation of all or
any part of the Premises for any public or quasi-public use or purpose, this
Lease shall be unaffected and Tenant shall continue to pay in full Base Rent
and all Additional Rent payable for any such period. In the event of any such
temporary taking, notwithstanding the provisions of Section 16.1, Tenant shall
be entitled to claim, prove and receive the portion of the award for such
taking that represents compensation for use or occupancy of the Premises during
the Term, and Landlord shall be entitled to appear, claim, prove and receive
the portions of the award that represent the cost of restoration of the
Premises and the use or occupancy of the Premises after the end of the Term.

                                   ARTICLE 17
                              DEFAULTS AND REMEDIES

         17.1     It is hereby mutually agreed that: (a) if Tenant shall fail
(i) to pay Rent or other sums which Tenant is obligated to pay by any provision
of this Lease, when and as it is due and payable hereunder to Landlord, and
such failure continues for more than five (5) business days

                                      14

<PAGE>

after Tenant's receipt of notice thereof from Landlord (provided, that Landlord
shall not be required to provide Tenant with the notice and five-day period
more than twice in any twelve (12) month period, and thereafter each subsequent
failure to timely pay such sums shall immediately constitute an event of
default), or (ii) to keep and perform each and every covenant, condition and
agreement herein contained on the part of Tenant to be kept and performed, and
such failure continues for more than fifteen (15) days after Tenant's receipt
of notice thereof from Landlord and Tenant has not commenced diligently to
correct such default; or (b) if Tenant shall abandon the Premises and stop
paying rent; or (c) if the estate hereby created shall be taken by execution or
other process of law; or (d) if Tenant shall (i) generally not pay Tenant's
debts as such debts become due, (ii) become insolvent, (iii) make an assignment
for the benefit of creditors, (iv) file, be the entity subject to, or acquiesce
in a petition in any court (whether or not filed by or against Tenant pursuant
to any statute of the United States or any state and whether or not for a
trustee, custodian, receiver, agent, or other officer for Tenant or for all or
any portion of Tenant's property) in any proceeding whether bankruptcy,
reorganization, composition, extension, arrangement, insolvency proceedings, or
otherwise then, and in each and every such case, from thenceforth and at all
times thereafter, at the sole option of Landlord, Landlord may:

         (a)      Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to do so, Landlord may
without notice and without prejudice to any other remedy Landlord may have,
enter upon and take possession of the Premises and expel or remove Tenant and
its effects without being liable to prosecution or any claim for damages
therefor; and Tenant shall indemnify Landlord for all loss and damage which
Landlord may suffer by reason of such termination, whether through the inability
to re-let the Premises or otherwise including any loss of Rent for the remainder
of the Term.

         (b)      Terminate this Lease, in which event Tenant's event of default
should be considered a total breach of Tenant's obligations under this Lease and
Tenant immediately shall become liable for such damages for such breach, in an
amount equal to the total of (1) the costs of recovering the Premises; (2) the
unpaid Rent earned as of the date of termination, plus interest thereon at a
rate per annum from the due date equal to four percent (4%) over the Prime Rate,
provided, however, that such interest shall never exceed the highest lawful
rate; and (3) all other sums of money and damages owing by Tenant to Landlord.
Tenant's right of possession shall cease and terminate and Landlord shall be
entitled to possession of the Premises and shall remove all persons and property
therefrom and reenter the Lease without further demand of Rent or demand of
possession of the Premises, either with or without process of law and without
becoming liable to prosecution therefor, any notice to quit or intention to
reenter being hereby expressly waived by Tenant.

         (c)      Declare the present worth (as of the date of such default) of
the entire balance of Rent for the remainder of the Term to be due and payable,
and collect such balances in any manner not inconsistent with applicable law.
For the purpose of this Section 17.1, "present worth" shall be computed by
discounting the entire balance to present worth at a discount rate equal to one
(1) percentage point above the discount rate then in effect at the Federal
Reserve Bank nearest the location of the Building.

                                      15

<PAGE>

         (d)      Pursue any combination of such remedies and/or other remedy
available to Landlord on account of such default under applicable law. In the
event of any reentry or retaking of the Premises by Landlord and/or any
termination of this Lease by Landlord, Tenant shall nevertheless remain in all
events liable and answerable for the Rent to the date of such retaking, reentry
or termination and Tenant shall also be and remain answerable in damages for the
deficiency or loss of Rent as well as all related expenses which Landlord may
thereby sustain in respect to the balance of the Term, and, in such case,
Landlord reserves full power, which is hereby acceded to by Tenant, to let said
Premises for the benefit of Tenant, in liquidation and discharge, in whole or in
part, as the case may be, of the liability of Tenant under the terms and
provisions of this Lease, and damages and related expenses, at the option of
Landlord, may be recovered by it at the time of the retaking and reentry or in
separate actions, from time to time, as Tenant's obligation to pay Rent would
have accrued if the Term had continued, or from time to time as said damages and
related expenses shall have been made more easily ascertainable by reletting of
the Premises, or such action by Landlord may, at the option of Landlord, be
deferred until the expiration of the Term, in which latter event the cause of
action shall not be deemed to have accrued until the date of the termination of
the Term.

         17.2     The provisions of this Article 17 are subject to the
bankruptcy laws of the United States of America which may, in certain cases,
limit the rights of Landlord to enforce some of the provisions of this Article
in proceedings thereunder. To the extent that limitations exist by virtue
thereof, the remaining provisions hereof shall not be affected thereby but
shall remain in full force and effect. The provisions of this Article 17 shall
be interpreted in a manner which results in a termination of this Lease in each
and every instance, and to the fullest extent and at the earliest moment that
such termination is permitted under the federal and state bankruptcy laws, it
being of prime importance to Landlord to deal only with tenants who have, and
continue to have, a strong degree of financial strength and financial stability.

         17.3     All rents received by Landlord in any re-letting after
Tenant's default shall be applied, first to the payment of such expenses as
Landlord may have incurred in recovering possession of the Premises and in
re-letting the same (including brokerage fees), second to the payment of any
costs and expenses incurred by Landlord, either for making the necessary
repairs (including fitting up the space for such re-letting) to the Premises or
in curing any default on the part of Tenant of any covenant or condition herein
made binding upon Tenant. Any remaining rent shall then be applied toward the
payment of Rent due from Tenant, together with interest and penalties as
defined in Section 3.3, and Tenant expressly agrees to pay any deficiency then
remaining. Landlord shall in no event be liable in any way whatsoever (nor
shall Tenant be entitled to any set off) for Landlord's failure to re-let the
Premises, and Landlord, at its option, may refrain from terminating Tenant's
right of possession, and in such case may enforce against Tenant the provisions
of this Lease for the full Term.

         17.4     In the event Tenant defaults in the performance of any of the
terms, covenants, agreements or conditions contained in this Lease and Landlord
places in the hands of an attorney or collection agency the enforcement of all
or any part of this Lease, the collection of any Rent due or to become due or
recovery of the possession of the Premises, Tenant agrees to pay Landlord's
costs of collection and enforcement including reasonable attorneys' fees,
whether suit is actually filed or not.

                                      16

<PAGE>

                                   ARTICLE 18
                              SUBORDINATION CLAUSE

         This Lease shall be subject and subordinate at all times to the lien of
any mortgage or other encumbrance(s) which may now or which may at any time
hereafter be made upon the Premises or any portion thereof, or upon Landlord's
interest therein. This clause shall be self operative, and no further instrument
of subordination shall be required to effect the subordination of this Lease.
Nonetheless, in confirmation of such subordination, Tenant shall execute and
deliver such further instrument(s) subordinating this Lease to the lien of any
such mortgage or any other encumbrance(s) as shall be desired by any mortgagee
or party secured or proposed to be secured thereby. If the interests of Landlord
under this Lease shall be transferred by reason of foreclosure or other
proceedings for enforcement of any mortgage on the Premises, Tenant shall be
bound to the transferee at the option of the transferee, under the terms,
covenants and conditions of this Lease for the remaining Term, including any
extensions or renewals, with the same force and effect as if the transferee were
Landlord under this Lease, and, if requested by such transferee, Tenant agrees
to attorn to the transferee as its Landlord. The holder of any mortgage
encumbering the Premises shall have the right, unilaterally, at any time to
subordinate fully or partially its mortgage or other security instrument to this
Lease on such terms and subject to such conditions as such holder may consider
appropriate in its discretion. Upon request Tenant shall execute and deliver an
instrument confirming any such full or partial subordination.

                                   ARTICLE 19
                             SURRENDER OF POSSESSION

         Upon the expiration or earlier termination of the Term, Tenant shall
surrender the Premises and all keys, security cards and locks connected
therewith to Landlord in good order and repair (ordinary wear and tear, or
damage by fire or casualty and damage for which Landlord is responsible pursuant
to the terms of this Lease excepted). Subject to the provisions of Article 10,
any and all improvements, repairs, alterations and all other property attached
to or otherwise installed upon the Premises (i), shall, immediately upon the
completion of the installation thereof, be and become Landlord's property
without payment therefor by Landlord, and (ii) shall be surrendered to Landlord
upon the expiration or earlier termination of the Term, except that any
machinery, equipment and movable trade fixtures installed by Tenant and used in
the conduct of the Tenant's trade or business (rather than to service the
Premises generally) and all other personalty of Tenant shall remain Tenant's
property and shall be removed by Tenant upon the expiration or earlier
termination of the Term, and Tenant shall promptly thereafter fully repair any
damage to the Premises or the Building caused by such installation or removal
thereof.

                                   ARTICLE 20
                               TENANT HOLDING OVER

         If Tenant or any person claiming through Tenant shall not immediately
surrender possession of the Premises at the expiration or earlier termination of
the Term, Landlord shall be entitled to recover compensation for such use and
occupancy at one hundred fifty percent (150%) of the Base rent and Additional
Rent payable hereunder just prior to the expiration or earlier

                                      17

<PAGE>

termination of the Term. Landlord shall also continue to be entitled to retake
or recover possession of the Premises as herein before provided in case of
default on the part of Tenant, and Tenant shall be liable to Landlord for any
loss or damage it may sustain by reason of Tenant's failure to surrender
possession of the Premises immediately upon the expiration or earlier
termination of the Term. Tenant hereby agrees that alt the obligations of
Tenant and all rights of Landlord applicable during the Term shall be equally
applicable during such period of subsequent occupancy.

                                   ARTICLE 21
                                   ESTOPPELS

         Tenant shall, without charge therefor, at any time and from time to
time, within five (5) days after request by Landlord, execute, acknowledge and
deliver to Landlord a written estoppel certificate certifying to Landlord, any
mortgagee, assignee of a mortgagee, or any purchaser of the Premises, or any
other person designated by Landlord, as of the date of such estoppel
certificate: (a) that Tenant is in possession of the Premises; (b) that this
Lease is unmodified and in full force and effect (or if there have been
modifications, that this Lease is in full force and effect as modified and
setting forth such modification); (c) whether or not to the best of Tenant's
knowledge there are then existing setoffs or defenses against the enforcement of
any right or remedy of Landlord, or any duty or obligation of Tenant hereunder
(and, if so, specifying the same in detail); (d) the amount of the Base Rent and
the dates through which Base Rent and Additional Rent have been paid, (e) that
Tenant has no knowledge of any then uncured defaults on the part of Landlord
under this Lease (or if Tenant has knowledge of any such uncured defaults,
specifying the same in detail); (f) that Tenant has no knowledge of any event
having occurred that authorizes the termination of this Lease by Tenant (or if
Tenant has such knowledge, specifying the same in detail); (g) the amount of any
Security Deposit held by Landlord; and (h) such reasonable other information
requested by Landlord, such mortgagee, assignee of such mortgagee, such
purchaser or such other person. Failure to deliver the certificate within five
(5) days after request by Landlord shall be conclusive upon Tenant for the
benefit of Landlord and any successor to Landlord that this Lease is in full
force and effect and has not been modified except as may be represented by the
party requesting the certificate.

                                   ARTICLE 22
                            LIEN ON TENANT'S PROPERTY

         To protect Landlord in the event Tenant defaults hereunder, Tenant
hereby grants to Landlord a continuing security interest for all Rent and other
sums of money becoming due hereunder from Tenant, and upon all goods, wares,
chattels, fixtures, furniture and other personal Building of Tenant which are or
may be located on the Premises and the proceeds thereof, none of which may be
removed from the Premises without Landlord's consent so long as any Rent or
other such sum from time to time owed to Landlord hereunder remains unpaid.
Tenant shall, on its receipt of a written request therefor from Landlord,
execute such financing statements, continuation statements and other instruments
as are necessary or desirable, in Landlord's judgment, to perfect such security
interest.

                                      18

<PAGE>

                                   ARTICLE 23
                                     BROKERS

         Except for commissions which may be payable by Landlord to Shanley Real
Estate and Coldstream Real Estate Advisors (collectively, "Commissions"), Tenant
and Landlord each represents and warrants that it has not entered into any
agreement with, nor otherwise had any dealings with, any broker or agent in
connection with the negotiation or execution of this Lease which could form the
basis of any claim by any such broker or agent for a brokerage fee or
commission, finder's fee, or any other compensation of any kind or nature in
connection herewith, and Tenant and Landlord each shall indemnify, defend and
hold the other harmless from and against any costs (including, but not limited
to, court costs and attorneys' fees), expenses, or liability for commissions or
other compensation claimed by any broker or agent with respect to this Lease
which arises out of any agreement or dealings between Tenant and any such agent
or broker.

                                   ARTICLE 24
                               NOTICES AND DEMANDS

         All notices required or permitted hereunder shall be deemed to have
been given if mailed in any United States Post Office by certified or registered
mail, postage prepaid, return receipt requested, addressed to Landlord or Tenant
respectively, at the following addresses or to such other addresses as the
parties hereto may designate to the other in writing from time to time:

TENANT:

If given prior to the Commencement Date:
Environmental Power Corporation
500 Market Street
Portsmouth, NH 03801
Attn: Joseph Cresci, CEO

If given after the Commencement Date:
Environmental Power Corporation
1 Cate Street, Unit 4
Portsmouth, NH 03801
Attn: Joseph Cresci, CEO

LANDLORD:
Merkle, Soupcoff, & Fiorentino, Inc.
1 Cate Street, Unit 3A
Portsmouth, NH 03801
Attn:  Business Manager

                                      19

<PAGE>

                                   ARTICLE 25
                                 QUIET ENJOYMENT

         Landlord covenants and agrees that upon Tenant paying the Rent, the
Additional Rent and any other charges due and payable and observing and
performing all the terms, covenants and conditions on Tenant's part to be
observed and performed, Tenant may peaceably and quietly enjoy the Premises
hereby demised, subject, nevertheless, to the terms and conditions of this Lease
and to any mortgages and deeds of trust hereinbefore mentioned.

                                   ARTICLE 26
                             WAIVER OF TRIAL BY JURY

         LANDLORD AND TENANT EACH AGREE TO, AND THEY HEREBY DO, WAIVE TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES
HERETO AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE
OR OCCUPANCY OF THE PREMISES AND ANY CLAIM OF INJURY OR DAMAGE, AND ANY
STATUTORY REMEDY.

                                   ARTICLE 27
                                  MISCELLANEOUS

         27.1     This Lease shall be construed and governed by the laws of the
State of New Hampshire. Should any provision of this Lease and/or its conditions
be illegal or not enforceable, it or they shall be considered severable, and
this Lease and its conditions shall remain in force and be binding upon the
parties hereto as though said provision or provisions had not been included.

         27.2     The term "Tenant" shall include legal representatives,
successors and permitted assigns.

         27.3     No waiver or breach of any covenant, condition or agreement
herein contained shall operate as a waiver of the covenant, condition or
agreement itself, or of any subsequent breach thereof.

         27.4     Notwithstanding anything to the contrary contained in this
Lease, Tenant shall look only to Landlord's ownership in the Premises for
satisfaction of Tenant's remedies for the collection of a judgment (or other
judicial process requiring the payment of money by Landlord in the event of any
default by Landlord hereunder, and no other property or assets of the
principals of Landlord, disclosed or undisclosed, shall be subject to levy,
execution or the enforcement procedure for the satisfaction of Tenant's
remedies under or with respect to this Lease, the relationship of Landlord and
Tenant hereunder or Tenant's use or occupancy of the Premises. No personal
liability or personal responsibility is assured by, nor shall at any time be
asserted or enforceable against Landlord, its principals, or their respective
heirs, legal representatives, successors and assigns on account of this Lease
or any covenant, undertaking, or

                                      20

<PAGE>

agreement of Landlord contained herein. If any provision of this Lease either
expressed or implied obligates Landlord not to unreasonably withhold its
consent or approval, an action for declaratory judgment or specific performance
shall be Tenant's sole right and remedy in any dispute as to whether Landlord
has breached such obligation. Landlord's remedies for a breach of this Lease by
Tenant shall determined under Article 17 of this Lease.

         27.5     TENANT AND LANDLORD EXPRESSLY AGREE THAT THERE ARE NO IMPLIED
WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
ANY OTHER KIND ARISING OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH
EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE.

         27.6     This Lease shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns. This provision shall not be deemed to
grant Tenant any right to assign this Lease or sublet the Premises or any part
thereof other than as provided in Article 13 hereof.

         27.7     It is understood and agreed by and between the parties hereto
that this Lease contains the final and entire agreement between said parties,
and that they shall not be bound by any terms, statements, conditions or
representations, oral or written, express or implied, not herein contained.
This Lease may not be modified orally or in any manner other than by written
agreement signed by the parties hereto.

         27.8     Every agreement contained in this Lease is, and shall be
construed as a separate and independent agreement. If any term of this Lease or
the application thereof to any person or circumstances shall be invalid and
unenforceable, the remaining provisions of this Lease, the application of such
term to persons or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected.

         27.9     Whenever a period of time is herein prescribed for action to
be taken by Landlord, or Tenant, neither Tenant nor Landlord shall be liable or
responsible for, and there shall be excluded from the computation for any such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations or restrictions, or any
other cause of any kind whatsoever which is beyond its reasonable control.

         27.10    The submission of this Lease to Tenant shall not be construed
as an offer nor shall Tenant have any rights with respect thereto unless
Landlord executes a copy of this Lease and delivers same to Tenant.

         27.11    If, in connection with obtaining financing for the Premises,
any lender shall request modifications to this Lease as a condition for such
financing, Tenant will not unreasonably withhold, delay, or defer its consent
thereto, provided that such modifications do not increase the obligations of
Tenant or decrease the rights of Tenant hereunder or materially adversely
affect either the leasehold interest hereby created or Tenant's use and
enjoyment of the Premises.

                                      21

<PAGE>

         27.12    All times, whenever stated in this Lease, are declared to be
of the essence of this Lease.

         27.13    Tenant's use of the Premises in accordance with the terms of
this Lease shall not result in a violation of the Declaration of the
Condominiums, the By-Laws of the Condominiums or any rules and regulations
adopted as of the date hereof by the Board of Directors of the Condominiums.

         IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands
and seals, by their duly authorized officers, as of the day and year first above
written.

                                    LANDLORD:
                                    MERKLE, SOUPCOFF, & FIORENTINO, INC.

                                    By: /s/ William H. Soupcoff
                                        --------------------------------
                                    Name:  William H. Soupcoff
                                         -------------------------------
         Julie Matson               Title:   President
- ---------------------------               ------------------------------
Witness

                                    TENANT:
                                    ENVIRONMENTAL POWER
                                    CORPORATION

                                    By: /s/ Joseph E. Cresci
                                        -------------------------------
                                    Name:   Joseph E. Cresci
                                         ------------------------------
         Brecca Loh                 Title:  Chairman and CEO
- ---------------------------               -----------------------------
Witness

                                      22

<PAGE>

                                    EXHIBIT A
                           DESCRIPTION AND FLOOR PLAN

<PAGE>

                                    EXHIBIT B
                                 LANDLORD'S WORK

<PAGE>

                                    EXHIBIT C
                    RULES AND REGULATIONS OF THE CONDOMINIUMS

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>11
<FILENAME>dex1017.txt
<DESCRIPTION>WARRANT TO PURCHASE COMMON STOCK
<TEXT>
<PAGE>

                                                                   Exhibit 10.17

This Warrant is issued in exchange for a Warrant (the "Microgy Warrant") to
purchase _______________ shares of common stock of Microgy Cogeneration Systems,
Inc. ("Microgy"), previously issued by Microgy, which Microgy Warrant is of no
further force and effect.

THIS WARRANT AND THE COMMON STOCK RECEIVABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT"), OR ANY STATE
SECURITIES LAWS. THEY MAY NOT BE TRANSFERRED OR OFFERED FOR SALE IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT REGISTRATION IS NOT
REQUIRED.

            VOID AFTER 5:00 P.M., EASTERN TIME, ON SEPTEMBER 30, 2002

                        WARRANT TO PURCHASE COMMON STOCK

                         ENVIRONMENTAL POWER CORPORATION

                   ORIGINAL ISSUE DATE: _______________, 2001

         This is to Certify That, FOR VALUE RECEIVED, ______________ ("Holder")
is entitled to purchase, subject to the provisions of this Warrant, from
ENVIRONMENTAL POWER CORPORATION (the "Company"), at any time until 5:00 P.M.,
Eastern Time, on September 30, 2002 ("Expiration Date"), _________ shares of the
Company's Common Stock ("Shares"). The exercise price ("Exercise Price") of the
Warrant shall be $______ per Share (i.e. $1.00 for each 0.4873401 Shares of
Common Share). The number of Shares to be received upon the exercise of this
Warrant may be adjusted from time to time as hereinafter set forth.

         (a)      Exercise of Warrant. This Warrant may be exercised in whole or
                  -------------------
in part at any time or from time to time until the Expiration Date or if the
Expiration Date is a day on which banking institutions are authorized by law to
close, then on the next succeeding day which shall not be such a day, by
presentation and surrender hereof to the Company or at the office its stock
transfer agent, if any, with the Purchase Form annexed hereto as Exhibit A duly
executed and accompanied by payment of the Exercise Price for the number of
Shares specified in such Form, together with all federal and state taxes
applicable upon such exercise, in cash or by certified or official bank check
payable to the order of the Company.

         The Company agrees not to merge, reorganize or take any action that
would terminate this Warrant unless provisions are made as part of such merger,
reorganization or other action which would provide the holders of this Warrant
with an equivalent of this Warrant as specified in

                                      -1-

<PAGE>

Section (f)(3) hereof. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the right of the Holder to purchase the balance
of the Shares purchasable hereunder. Upon receipt by the Company of this Warrant
at the office of the Company, in proper form for exercise and accompanied by the
Exercise Price, the Holder shall be deemed to be the holder of record of the
Shares issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing such
Shares shall not then be actually delivered to the Holder.

         (b)      Reservation of Shares. The Company hereby agrees that at all
                  ---------------------
times there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of Shares as shall be required for issuance or delivery upon
exercise of this Warrant.

         (c)      Limit on Fractional Shares. No fractional Shares, shares or
                  --------------------------
scrip representing fractional shares shall be issued upon the exercise of this
Warrant. The number of Shares issuable upon exercise of this Warrant involving
an aggregate Exercise Price of less than $1,000 shall be rounded to the next
lowest whole Share and the number of Shares issuable upon exercise of this
Warrant involving an aggregate exercise price of $1,000 or more shall be rounded
to the nearest Share.

         (d)      Exchange, Assignment or Loss of Warrant. This Warrant is
                  ---------------------------------------
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company for other Warrants of different
denominations entitling the Holder thereof to purchase (under the same terms and
conditions as provided by this Warrant) in the aggregate the same number of
Shares purchasable hereunder. Subject to Sections (i) and (1), any transfer or
assignment shall be made by surrender of this Warrant to the Company with the
Assignment Form annexed hereto as Exhibit B duly executed and with funds
sufficient to pay any transfer tax; whereupon the Company shall, without charge,
execute and deliver a new Warrant in the name of the assignee named in such
instrument of assignment and this Warrant shall promptly be canceled. This
Warrant may be divided or combined with other Warrants which carry the same
rights upon presentation hereof at the office of the Company or at the office of
its stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. The term "Warrant" as used herein includes any warrants issued in
substitution for or replacement of this Warrant, or into which this Warrant may
be divided or exchanged. Upon receipt by the Company of evidence satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant, and (in the
case of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will execute and deliver a new Warrant of like tenor and date. Subject to such
right of indemnification, any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.

         (e)      Rights of the Holder. The Holder shall not, by virtue hereof,
                  --------------------
be entitled to any rights of a shareholder in the Company, either at law or
equity, and the rights of the Holder are

                                      -2-

<PAGE>

limited to those expressed in the Warrant and are not enforceable against the
Company except to the extent set forth herein.

         (f)      Adjustment Provisions.  The Common Exercise Rate and the
                  ---------------------
Additional Common Exercise Rate shall be subject to adjustment from time to time
as follows:

                  1.  If, at any time after the Original Issue Date, the number
of shares of Common Stock outstanding is increased by a stock dividend payable
in shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Exercise Price shall be appropriately decreased so that the number of shares
of Common Stock issuable on exercise of the Warrants shall be increased in
proportion to such increase in outstanding shares.

                  2.  If, at any time after the Original Issue Date, the number
of shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Exercise Price shall be appropriately increased so that the
number of shares of Common Stock issuable on exercise of the Warrants shall be
decreased in proportion to such decrease in outstanding shares.

                  3.  In the event of any capital reorganization of the Company,
any reclassification of the stock of the Company (other than a change in par
value or from no par value to par value or from par value to no par value or as
a result of a stock dividend or subdivision, split-up or combination of shares),
any consolidation or merger of the Company, or any sale, lease, conveyance to
another person of the property of the Company pursuant to which the Company's
Common Stock is converted into other securities, cash or assets, each Warrant
shall after such reorganization, reclassification, consolidation, merger or
conveyance be exercisable into the kind and number of shares of stock or other
securities or property of the Company or of the Company resulting from such
consolidation or surviving such merger to which the holder of the number of
shares of Common Stock deliverable (immediately prior to the time of such
reorganization, reclassification, consolidation or merger) upon exercise of such
Warrant would have been entitled upon such reorganization, reclassification,
consolidation, merger or conveyance. The provisions of this clause shall
similarly apply to successive reorganizations, reclassifications,
consolidations, mergers or conveyances.

                  4.  Upon any adjustment of the Exercise Price, the Holder of
this Warrant shall thereafter (until another such adjustment) be entitled to
purchase, at the new Exercise Price, the number of Shares, calculated to the
nearest full share, obtained by multiplying the number of shares of Shares
initially issuable upon exercise of this Warrant by the Exercise Price specified
in the first paragraph of this Warrant and dividing the product so obtained by
the new Exercise Price.

                  (g)  Statement of Adjustment. Whenever a Conversion Rate shall
                       -----------------------
be adjusted as provided in paragraph (f), the Company shall make available for
inspection by the Holder during regular business hours, at its principal
executive offices or at such other place as may be designated by the Company, a
statement, signed by its chief executive officer or president,

                                      -3-

<PAGE>

showing in detail the facts requiring such adjustment and the Conversion Rate
that shall be in effect after such adjustment. The Company shall also cause a
copy of such statement to be sent by first class certified mail, return receipt
requested and postage prepaid, to Holder at such Holder's address appearing on
the Company's records.

                  (h)  Notices. Unless otherwise provided herein, any notice,
                       -------
request, instruction or other document to be given hereunder by any party shall
be in writing and delivered in person or by courier or by facsimile transmission
(followed by mailing certified mail, postage prepaid, return receipt requested)
or mailed by certified mail, postage prepaid, return receipt requested, as
follows: (1) to the Holder at the Holder's address as it appears in the records
of the Company or at such other address as the Holder may otherwise indicate in
a written notice delivered to the Company or (2) to the Company, at 500 Market
Street, Suite 1E, Portsmouth, New Hampshire 03801, Telephone: (603) 431-1780,
Facsimile: (603) 431-2650, or at such other address as the Company may otherwise
indicate in a written notice delivered to Holder. All such notices, requests,
instructions, documents and other communications will (2) if delivered
personally to the address as provided in this Section (h), be deemed given upon
delivery, (2), if delivered by facsimile transmission to the facsimile number as
provided in this Section (h), be deemed given upon receipt, and (3) if delivered
by mail in the manner described above to the address as provided in this Section
(h), be deemed given upon receipt (in each case regardless of whether such
notice is received by any other Person to whom a copy of such communication is
to be delivered pursuant to this Section (h).

                  (i)  Transfer to Comply with the Securities Act of 1933. The
                       --------------------------------------------------
Company may cause the following legend, or one similar thereto, to be set forth
on each certificate representing the Shares or any other security issued or
issuable upon exercise of this Warrant not theretofore distributed to the public
or sold to underwriters for distribution to the public pursuant to Section (i)
hereof; unless legal counsel for the Company is of the opinion as to any such
certificate that such legend, or one similar thereto, is unnecessary:

         The securities represented by this certificate may not be offered for
         sale, sold or otherwise transferred except pursuant to an effective
         registration statement made under the Securities Act of 1933 (the
         "Act") and under any applicable state securities law, or pursuant to an
         exemption from registration under the Act and under any applicable
         state securities law, the availability of which is to be established to
         the satisfaction of the Company.

         The Holder(s) agree that this Warrant and all Shares acquired upon
exercise hereof will be disposed of only in accordance with the Act and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.

                  (j)  Exemption from Registration for Warrant Exercise.
                       ------------------------------------------------

         The Company and the Holder acknowledge that the Company will be relying
on an exemption from the registration requirements of the Securities Act of
1933, as amended (the "Act"), to deliver Shares to the Holder(s) upon the
exercise of the Warrant. The Holder agrees to

                                      -4-

<PAGE>

provide the Company with such information and representations as may be
requested by the Company in order to establish a claim to an exemption from the
registration requirements of the Act, and any applicable state securities laws,
including, a representation that the Holder(s) are taking the Shares for
investment, and not with a view to distribution.

                  (k)  Applicable Law.  This Warrant shall be governed by, and
                       --------------
construed in accordance with, the laws of the state of New York.

                  (l)  Transfer and Assignment. This Warrant may not be
                       -----------------------
transferred or assigned, in whole or in part, without the written consent of the
Company, which shall not be unreasonably withheld. Neither this Warrant nor any
Shares issued upon the exercise hereof shall be transferred other than pursuant
to an effective registration statement under the Securities Act or an exemption
from the registration provisions thereof. Each certificate, if any, evidencing
such shares of restricted stock issued upon any such transfer other than in a
public offering pursuant to an effective registration statement shall bear the
restrictive legend set forth in Section (i), and each Warrant issued upon such
assignment or transfer shall bear the restrictive legend set forth in this
Warrant, unless in the opinion of counsel delivered at the request of the
Holder, which opinion shall be reasonably acceptable to the Company, such legend
is not required for the purposes of compliance with the Act.

                  (m)    Successors and Assigns. The rights evidenced hereby
                         ----------------------
shall inure to the benefit of and be binding upon the successors of the Company
and the successors and assigns of the Holder hereof. The provisions of this
Warrant are intended to be for the benefit of all Holders from time to time of
this Warrant and shall be enforceable by any such Holder.

                                       -5-

<PAGE>

                  (n)    Amendment.  This Warrant and all other Warrants may not
                         ---------
be modified or amended or the provisions hereof waived except by the written
consent of the Company and the Holder(s).

                                            ENVIRONMENTAL POWER CORPORATION

                                            By:   ______________________________
                                                  Name:
                                                  Title:

Agreed and Accepted:

_________________________
Holder:

                                      -6-

<PAGE>

                                    EXHIBIT A

                                  PURCHASE FORM
                                  -------------

                                                    Dated:_____________, 200 __

         The undersigned hereby irrevocably elects to exercise the Warrant to
the extent of purchasing ______________ Common Shares of Environmental Power
Corporation, and hereby makes payment of $_____________ in payment of the actual
Exercise Price thereof.

                     INSTRUCTIONS FOR REGISTRATION OF SHARES
                     ---------------------------------------

Name:  _____________________________________________________________________
                   (Please typewrite or print in block letters)

Address:  __________________________________________________________________

Signature:  __________________________________________________________________

                                      -7-

<PAGE>

                                    EXHIBIT B

                                 ASSIGNMENT FORM
                                 ---------------
                                                    Dated:_____________, 200__

         FOR VALUE RECEIVED, _____________________________________________

hereby sells, assigns and transfers unto

Name:  __________________________________________________________________
                  (Please typewrite or print in block letters)

Address:  ________________________________________________________________

the right to purchase Shares represented by this Warrant to the extent
of _______________ Shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint __________________, attorney, to transfer the
same on the books of the Company with full power of substitution in the
premises.

                                            Signature: _________________________

                                      -8-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>12
<FILENAME>dex11.txt
<DESCRIPTION>COMPUTATION OF EARNINGS
<TEXT>
<PAGE>

Exhibit 11

Environmental Power Corporation
Computation of Earnings Per Share
December 31, 2001

<TABLE>
<CAPTION>
                                                                    Income               Shares            Per Share
                                                                  (Numerator)         (Denominator)         Amounts
                                                                ----------------    ------------------    ------------
<S>                                                             <C>                 <C>                   <C>
Year Ended December 31, 2001:
- -----------------------------
Income available to shareholders                                    $ 1,679,331            14,144,222          $  .12
Effect of dividends to preferred stockholders                            (5,000)
                                                                ----------------    ------------------    ------------
Basic EPS - income available to common shareholders                   1,674,331            14,144,222             .12
Effect of dilutive securities:
     Assumed conversion of preferred stock                                                    585,155
     Assumed exercise of dilutive stock options                                                16,318
                                                                ----------------    ------------------    ------------
Diluted EPS - income available to common shareholders               $ 1,674,331            14,745,695          $  .11
                                                                ================    ==================    ============

Year Ended December 31, 2000:
- -----------------------------
Income available to shareholders                                    $ 1,826,808            11,406,783          $  .16
Effect of dividends to preferred stockholders                            (5,000)
                                                                ----------------    ------------------    ------------
Basic EPS - income available to common shareholders                   1,821,808            11,406,783             .16
Effect of dilutive securities:
     Assumed exercise of dilutive stock options                                                 2,026
                                                                ----------------    ------------------    ------------
Diluted EPS - income available to common shareholders               $ 1,821,808            11,408,809          $  .16
                                                                ================    ==================    ============

Year Ended December 31, 1999:
- -----------------------------
Income available to shareholders                                    $ 1,777,562            11,406,783          $  .16
Effect of dividends to preferred stockholders                            (5,000)
                                                                ----------------    ------------------    ------------
Basic EPS - income available to common shareholders                   1,772,562            11,406,783             .16
Effect of dilutive securities:
     Assumed exercise of dilutive stock options                                                   293
                                                                ----------------    ------------------    ------------
Diluted EPS - income available to common shareholders               $ 1,772,562            11,407,076          $  .16
                                                                ================    ==================    ============
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>13
<FILENAME>dex21.txt
<DESCRIPTION>SUBSIDIARIES OD THE REGISTRANT
<TEXT>
<PAGE>

Exhibit 21

Subsidiaries of the Registrant:

         Buzzard Power Corporation
         Incorporated in Delaware December 12, 1990

         Coal Dynamics Corporation
         Incorporated in Pennsylvania March 21, 1986

         Kaiser Power of Sunnyside, Inc.
         Incorporated in Delaware March 26, 1986

         Kaiser Systems, Inc.
         Incorporated in Delaware March 26, 1986

         Microgy Cogeneration Systems, Inc.
         Incorporated in Colorado March 25, 1999

         Milesburg Energy, Inc.
         Incorporated in Pennsylvania September 30, 1986

         Sunnyside Power Corporation
         Incorporated in Utah September 21, 1987

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>14
<FILENAME>dex231.txt
<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT
<TEXT>
<PAGE>

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.
33-70078 of Environmental Power Corporation on Form S-8 of our report dated
March 1, 2002 appearing in the Annual Report on Form 10-K of Environmental Power
Corporation for the year ended December 31, 2001.

/s/ Deloitte & Touche
- ---------------------
DELOITTE & TOUCHE LLP

Boston, Massachusetts
April 1, 2002

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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