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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, ~~2008~~2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-32393

Environmental Power Corporation

(Exact name of registrant as specified in its charter)

Delaware

75-3117389

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification Number)

120 White Plains Road, 6^th Floor, Tarrytown NY 10591

Registrant’s telephone number, including area code: (914) 631-1435

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Exchange on Which Registered
Common Stock, $0.01 par value per share		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer ¨ Accelerated filer x¨ Non-accelerated filer ¨x Smaller reporting company ¨x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, ~~2008~~2009, was approximately $607.23 million based on $40.1752, the price at which the registrant’s common stock was last sold on June 30, ~~2008~~2009, the last business day of the registrant’s most recently completed second fiscal quarter.

As of February 28, ~~2009~~2010, the registrant had 15,~~614~~708,~~604~~591 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s definitive proxy statement on Schedule 14A for the registrant’s ~~2009~~2010 annual meeting of stockholders, to the extent filed pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, ~~2008~~2009, are incorporated by reference into Part III of this report. In the event that such proxy statement is not filed within 120 days after the end of the registrant’s fiscal year ended December 31, ~~2008~~2009, the registrant will file an amendment to this report within such 120-day period setting forth the information required by Part III of this report.

ENVIRONMENTAL POWER CORPORATION

ANNUAL REPORT

ON FORM 10-K

INDEX

PART I		42
Item 1. Business		42
Item 1A. Risk Factors		1513
Item 1B. Unresolved Staff Comments		2625
Item 2. Properties		2625
Item 3. Legal Proceedings		2625
Item 4. Submission of Matters to a Vote of Security Holders		26
PART II		27
PART II		28
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		27
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		28
Item 6. Selected Financial Data		29
Item 6. Selected Financial Data		30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		47
Item 8. Financial Statements and Supplementary Data		47
Item 8. Financial Statements and Supplementary Data		48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		48
Item 9A. Controls and Procedures		47
Item 9A. Controls and Procedures		48
Item 9B. Other Information		48
Item 9B. Other Information		51
PART III		49
PART III		52
Item 10. Directors and Executive Officers and Corporate Governance		49
Item 10. Directors and Executive Officers of the Registrant		52
Item 11. Executive Compensation		49
Item 11. Executive Compensation		52
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		53
Item 13. Certain Relationships and Related Transactions		50
Item 13. Certain Relationships and Related Transactions		53
Item 14. Principal Accountant Fees and Services		50
Item 14. Principal Accountant Fees and Services		53
PART IV		51
PART IV		54
Item 15. Exhibits and Financial Statement Schedules		51
Item 15. Exhibits and Financial Statement Schedules		54
Signatures		84
Signatures		83

Cautionary Statement Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995, referred to as the PSLRA, provides a “safe harbor” for forward-looking statements. Certain statements contained or incorporated by reference in this Quarterly Report, such as statements concerning planned manure-to-energy systems, our sales pipeline, our backlog, our projected sales and financial performance, statements containing the words “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue,” “target” and variations thereof, and other statements contained in this Quarterly Report regarding matters that are not historical facts are forward-looking statements as such term is defined in the PSLRA. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to:

• uncertainties involving ~~early-stage companies, including~~ our need for additional financing to continue as a going concern,

•

uncertainties regarding the ability to obtain additional financing, and the timing, amount and terms of such financing,

•

uncertainties regarding our payment defaults under various material obligations we and our subsidiaries have entered into and the remedies our creditors may exercise with respect thereto,

•

uncertainties relating to early-stage companies;

•

the lack of binding commitments and the need to negotiate and execute definitive agreements for the construction and financing of facilities,

•

the lack of binding commitments for the purchase of gas produced by certain facilities,

•

the lack of binding commitments for, and other uncertainties with respect to, supplies of substrate,

•

uncertainties regarding the costs associated with substrate and other project inputs,

•

risks and uncertainties relating to the development of markets for carbon sequestration credits and other marketable renewable attributes, and the level of revenues we may achieve from such sources,

•

uncertainties regarding the amount and rate of growth in operating expenses,

•

unpredictable developments, including plant outages and repair requirements as well as risks related to weather and the unpredictability of extreme weather events,

•

risks related to performance on the part of suppliers of components, goods and services to our facilities,

•

financing and cash flow requirements and uncertainties,

•

inexperience with the design, construction, startup and operation of multi-digester facilities,

•

difficulties involved in developing and executing a business plan,

•

technological uncertainties, including those relating to competing products and technologies,

• unpredictable developments, including plant outages and repair requirements,

•

commodity price volatility, particularly with respect to the price of natural gas,

•

the difficulty of estimating construction, development, repair, maintenance and operating costs and timeframes,

•

the uncertainties involved in estimating insurance and warranty recoveries, if any,

•

the inability to predict the course or outcome of any negotiations with parties involved with our projects,

•

uncertainties relating to general economic and industry conditions,

•

uncertainties relating to government and regulatory policies, the legal environment, intellectual property issues and the competitive environment in which Environmental Power Corporation and its subsidiaries operate,

and other factors, including those described in Part III, Item 1A of this ~~Quarterly~~Annual Report on Form 10-QK under the heading “Risk Factors,” as well as factors set forth in other filings we make with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1.

Business

~~Environmental Power is a developer, owner~~Overview and operator of renewable energy production facilities. Environmental Power’s goal is to produce energy that is Beyond Renewable™, which Environmental Power defines as energy that not only is derived from waste materials instead of precious resources, but energy that is also clean, reliable and cost-effective. Environmental Power and its subsidiaries develop and own facilities that, unlike many renewable energy facilities, are intended to be profitable without the need for subsidies or other governmental assistance. Any such government assistance would, however, benefit Environmental Power’s facilities by increasing their potential for profitability, while at the same time expanding opportunities for the profitable deployment of such facilities. Environmental Power believes that a number of factors, including volatile energy prices, greater desire for renewable energy sources, more stringent environmental and waste management requirements imposed on farmers and food industry waste producers, and greater revenue opportunities from carbon sequestration credits will continue to provide favorable market conditions for its business.

InEnvironmental ~~the~~Power ~~past,~~is wea ~~have~~developer, ~~operated~~owner inand ~~two~~operator ~~major~~of ~~segments,~~renewable ~~through~~energy ~~Microgy,~~production ~~Inc~~facilities., asEnvironmental Power’s agoal ~~developer~~is ofto ~~renewable~~produce energy ~~facilities~~that ~~for~~is ~~the~~Beyond ~~production~~Renewable™, ~~and commercial~~which ~~application~~Environmental ofPower ~~methane-rich~~defines ~~biogas~~as energy that not only is derived from ~~agricultural~~waste ~~and~~materials ~~food~~instead ~~industry~~of ~~wastes~~precious resources, ~~and~~but ~~through~~energy ~~EPC~~that ~~Corporation~~is ~~and~~also ~~its~~clean ~~subsidiary,~~and ~~Buzzard~~reliable. Environmental Power ~~Corporation,~~and ~~referred~~its tosubsidiaries asdevelop ~~Buzzard,~~and ~~the~~own ~~holder~~facilities ofthat, aunlike ~~leasehold~~many ~~interest~~renewable inenergy afacilities, ~~waste-coal~~are ~~fired generating~~intended ~~facility~~to inbe ~~Pennsylvania~~profitable ~~known~~without as the ~~Scrubgrass~~need ~~facility~~for federal tax subsidies. OnAny ~~May 31~~such government assistance would, ~~2007~~however, ~~our~~benefit ~~board~~Environmental Power’s offacilities ~~directors~~by ~~authorized~~increasing ~~management~~their topotential ~~enter~~for ~~into~~profitability, ~~negotiations~~while ~~regarding~~at the ~~disposition~~same oftime ~~the~~expanding ~~leasehold~~opportunities ~~interest~~for in the ~~Scrubgrass~~profitable ~~facility~~deployment of such facilities. ~~On February 29,~~Environmental ~~2008,~~Power webelieves ~~completed~~that ~~the~~a ~~disposition~~number of ~~the~~factors, ~~leasehold~~including ~~interest.~~volatile energy Asprices, agreater ~~result,~~desire for ~~financial~~renewable ~~reporting~~energy ~~purposes~~sources, wemore ~~are~~stringent ~~now~~environmental ~~consolidating~~and ~~all~~waste ~~segments~~management ofrequirements ~~continuing~~imposed ~~operations~~on farmers and ~~reporting~~food ~~the~~industry ~~results~~waste ofproducers, ~~Buzzard~~and asrevenue ~~“discontinued~~opportunities from carbon sequestration credits will ~~operations”.~~continue Weto ~~thus~~provide ~~now~~favorable ~~operate~~market ~~only~~conditions infor ~~Microgy’s~~its ~~segment~~business.

In the past, we have operated in two major segments, through Microgy, isInc., as a developer of renewable energy facilities for the production and commercial application of methane-rich biogas ~~produced~~ from ~~animal~~agricultural and food industry ~~wastes.~~and ~~The~~other ~~biogas~~organic ~~can~~wastes, beand ~~sold~~through toEPC ~~end-users~~Corporation orand ~~used~~its tosubsidiary, Buzzard ~~produce~~Power ~~pipeline-grade methane~~Corporation, ~~which~~referred ~~Microgy refers~~ to as ~~renewable~~Buzzard, ~~natural~~the ~~gas,~~holder orof ~~RNG®,~~a ~~liquefied~~leasehold ~~natural~~interest ~~gas,~~in ora ~~LNG,~~waste-coal ~~compressed~~fired ~~natural~~generating ~~gas,~~facility orin ~~CNG,~~Pennsylvania ~~renewable~~known ~~electrical~~as ~~energy~~the orScrubgrass ~~thermal~~facility. ~~energy~~On May 31, as2007, ~~well~~our asboard ~~other~~of ~~useful by-products.~~directors ~~Microgy’s~~authorized ~~systems~~management ~~utilize~~to enter ainto ~~proven~~negotiations ~~European~~regarding ~~biogas~~the ~~production~~disposition ~~technology~~of ~~that~~the ~~Microgy~~leasehold ~~believes~~interest isin ~~superior~~the toScrubgrass ~~other~~facility. ~~such~~On ~~technologies.~~February 29, ~~Microgy~~2008, ~~owns~~we completed the ~~perpetual,~~disposition ~~exclusive~~of ~~North~~the ~~American~~leasehold ~~license~~interest. toAs ~~this~~a ~~technology.~~result, Infor ~~addition~~financial reporting purposes, we are now ~~Microgy~~consolidating ~~has~~all ~~developed~~segments ~~significant~~of ~~engineering,~~continuing ~~construction~~operations and ~~process~~reporting ~~knowledge~~the ~~regarding~~results ~~these~~of ~~systems~~Buzzard as “discontinued operations”. We thus now operate only in Microgy’s segment.

~~Due~~Microgy tois ~~the~~a ~~rates~~developer ~~for conventional~~of renewable energy ~~experienced~~facilities infor ~~recent~~the ~~years~~production ~~in many U.S. markets~~ and ~~expected~~commercial ~~future~~application ~~increases~~of inmethane-rich biogas ~~such~~produced ~~rates~~from ~~over~~animal, ~~the~~food ~~long~~industry ~~term,~~and ~~Microgy~~other ~~believes~~organic ~~that~~wastes. ~~its~~The ~~systems~~biogas can be ~~profitable~~sold ~~without~~to ~~the~~end-users ~~need~~or ~~for~~used ~~subsidies,~~to ~~rebates,~~produce ~~grants~~pipeline-grade ~~or other credits. Nevertheless~~methane, which Microgy ~~believes~~refers ~~that~~to ~~tax~~as ~~credits,~~ renewable ~~energy~~natural ~~credits~~gas, ~~pollution~~or ~~offset credits~~RNG®, ~~carbon~~liquefied ~~sequestration~~natural ~~credits~~gas, ~~and~~or ~~other~~LNG, ~~such~~compressed ~~incentives~~natural ~~may~~gas, ~~be available now~~ or ~~in the future to Microgy’s facilities~~CNG, ~~and~~renewable ~~such incentives~~electrical ~~would~~energy ~~serve~~or tothermal ~~enhance~~energy, ~~the~~as ~~potential~~well ~~profitability~~as ofother ~~its~~useful ~~facilities~~by-products. ~~In addition, the energy output from~~ Microgy’s systems ~~may~~utilize ~~carry~~ a ~~premium~~proven ~~price~~European inbiogas ~~some~~production ~~areas,~~technology. asIn ~~numerous~~addition, ~~environmentally~~Microgy ~~responsible~~has ~~entities~~developed ~~are~~significant ~~seeking renewable~~engineering, ~~energy~~construction ~~sources~~ and ~~many~~process ~~states~~knowledge ~~have~~regarding ~~either~~these ~~passed or are considering legislation requiring utilities to obtain or generate a certain percentage of their power from renewable sources~~systems.

InDue ~~addition~~ to the ~~value~~increased ~~generated~~demand ~~from~~for ~~the~~renewable ~~production~~energy, ~~and~~Microgy ~~sale~~believes ofthat ~~renewable~~its ~~gas~~systems can be profitable without the need for federal subsidies, ~~our~~rebates, ~~facilities~~or ~~produce~~grants. ~~soil~~Nevertheless, ~~amendment~~Microgy ~~products~~believes that ~~can~~tax credits and other such incentives may be ~~used~~available asin ~~an alternative~~the future to ~~peat~~Microgy’s ~~moss~~facilities, and ~~liquid~~such ~~fertilizer~~incentives ~~that~~would ~~can~~serve beto ~~used~~enhance ~~for~~the ~~crop~~potential ~~growth.~~profitability Weof ~~believe~~its facilities. ~~that~~Future ~~our~~climate ~~facilities~~change ~~can~~legislation, ~~generate~~if ~~additional~~any, ~~environmental~~may ~~benefits~~enhance ~~with~~the ~~significant~~value ~~economic~~of ~~and~~Microgy’s ~~social~~products. ~~value~~In byaddition, ~~providing~~the aenergy ~~valuable~~output ~~waste~~from ~~management solution~~Microgy’s ~~for~~systems ~~farms~~may ~~and~~carry ~~other~~a ~~producers~~premium ofprice ~~organic~~in ~~wastes~~some areas, ~~such~~ as ~~those~~numerous inenvironmentally ~~the~~responsible entities ~~food~~are ~~industry.~~seeking ~~Federal~~renewable energy sources and ~~state~~many ~~agencies~~states have either passed or are considering ~~regulations~~legislation ~~that~~requiring ~~require~~utilities ~~concentrated~~to ~~animal~~obtain ~~feeding~~or ~~operations,~~generate ~~referred~~a tocertain aspercentage ~~CAFOs,~~of ~~to implement~~their power from renewable sources.

4In addition to the value generated from the production and sale of renewable gas, our facilities produce soil amendment products that can be used as a bedding, compost or peat moss and liquid fertilizer that can be used for crop growth. We believe that our facilities can generate additional environmental benefits with significant economic and social value by providing a valuable waste management solution for farms and other producers of organic wastes, such as those in the food industry. Federal and state agencies have either passed or are considering regulations that require concentrated animal feeding operations, referred to as CAFOs, to implement changes to their current waste management practices. We believe that these increasingly stringent environmental regulations will be another factor creating opportunities for the deployment of our systems.

~~changes~~Microgy intends to ~~their~~continue ~~current~~to ~~waste~~focus ~~management~~on ~~practices~~its strategy of developing large-scale, standardized facilities utilizing an ownership model either entirely or together with financial or operating partners. WeUnder ~~believe~~this ~~that~~model ~~these~~Microgy ~~increasingly~~will ~~stringent~~construct, own and operate facilities and profit from the ongoing sale of biogas or RNG® as well as sales of greenhouse gas sequestration credits or other marketable environmental ~~regulations~~benefits. ~~will~~This strategy beencompasses ~~another~~the ~~significant~~construction and operation of stand-alone merchant plants like the Huckabay Ridge facility described below, as well as facilities dedicated to the needs of a single customer at one or more customer locations, such as the ~~factor~~Grand ~~creating~~Island ~~opportunities~~facility ~~for~~described below. By pursuing this strategy, Microgy intends to accumulate gas production and carbon sequestration capacity over time. In addition, Microgy continues to standardize both its system design and its approach to the marketplace ~~deployment~~in order to allow for a cost-effective scale-up of ~~our~~its ~~systems~~business.

~~Microgy~~Having ~~intends~~constructed ~~to continue~~both tothe ~~focus~~multi- ~~on its strategy of developing large~~and single-~~scale,~~tank ~~standardized~~system ~~facilities~~in ~~utilizing~~four ancurrently ~~ownership~~operating ~~model~~installations, ~~pursuant to which~~ Microgy ~~will~~intends ~~construct,~~to own ~~and~~the ~~operate~~digester ~~facilities~~systems ~~and~~it ~~profit~~develops, ~~from~~either ~~the~~outright, ~~ongoing~~through ~~sale~~an ofaffiliated ~~biogas~~company, or ~~RNG®~~in ~~produced~~substantial bypart, ~~such~~through ~~facilities~~HMI asEnergy, ~~well~~LLC, asa ~~sales~~joint-venture ofcompany ~~carbon~~formed ~~sequestration~~in January ~~credits~~2010 or(discussed ~~other~~further ~~marketable~~below), ~~environmental~~in ~~benefits.~~which ~~This~~Microgy ~~strategy~~owns ~~encompasses~~30% of the ~~construction~~membership ~~and~~interests. ~~operation~~Our ~~of stand~~multi-~~alone merchant~~digester ~~plants~~facilities ~~like~~will ~~the~~primarily ~~Huckabay~~produce ~~Ridge~~pipeline-quality ~~facility~~renewable ~~described~~natural ~~below~~gas, asalthough ~~well~~we aswill ~~facilities~~also ~~dedicated~~consider opportunities to ~~the~~produce ~~needs~~and sell ofconditioned abiogas, ~~single~~electricity, ~~customer~~compressed atnatural ~~one~~gas, orreferred ~~more~~to ~~customer~~as ~~locations~~CNG, ~~such~~or asliquid ~~the~~natural ~~Grand Island facility described below. By pursuing this strategy~~gas, ~~Microgy~~ ~~intends~~referred to ~~accumulate~~as ~~gas~~LNG, ~~production~~from ~~and~~our ~~carbon~~facilities. Microgy’s ~~sequestration~~development ~~capacity~~efforts ~~over~~are ~~time.~~focused Inon ~~addition,~~applications ~~Microgy~~of ~~continues~~its totechnology ~~standardize~~that ~~and~~are ~~streamline~~resource efficient. ~~both~~Development ~~its~~of ~~system~~smaller ~~design~~scale and ~~its~~single-digester ~~approach~~facilities towill ~~the~~be ~~marketplace~~targeted intoward ~~order~~customers tothat ~~allow~~have ~~for~~multiple ~~rapid~~sites and ~~cost-effective~~ ~~scale-up~~opportunities ofthat ~~its~~have ~~business~~shorter development cycles.

~~Having~~Microgy’s ~~constructed~~efforts ~~both~~have resulted, most recently, in the ~~multi-~~start ~~and~~of ~~single-tank~~commercial ~~system~~operations inat ~~four~~the ~~currently~~Huckabay ~~operating~~Ridge ~~installations~~facility in Stephenville, ~~Microgy~~Texas, ~~intends~~which tobegan ~~own~~commercial operations in the ~~digester~~first ~~systems~~quarter itof ~~develops~~2008. ~~Our~~Huckabay ~~multi-digester~~Ridge ~~facilities~~consists ~~will~~of ~~primarily~~eight ~~produce pipeline~~916,000-~~quality~~gallon ~~renewable~~digesters ~~natural~~which ~~gas,~~operate ~~although~~together weto ~~will~~process ~~also~~the ~~consider~~manure ~~opportunities~~from toapproximately ~~produce~~10,000 cows and ~~sell conditioned biogas,~~produce ~~electricity~~575,000 million ~~CNG~~British Thermal Units, or ~~LNG~~MMBtus, ~~from~~of ~~our~~RNG® ~~facilities~~annually. ~~Microgy’s~~ ~~development~~The ~~efforts~~gas ~~are~~is ~~focused~~treated onand ~~applications~~compressed ofto produce ~~its~~pipeline ~~technology~~grade methane that ~~are~~is ~~resource~~sold ~~efficient. Development~~and ofdelivered ~~smaller~~directly ~~scale~~into ~~and~~nearby ~~single-digester~~natural ~~facilities~~gas ~~will~~pipelines. beHuckabay ~~targeted~~Ridge ~~toward customers~~is ~~that~~expected ~~have~~to ~~multiple~~produce ~~sites~~approximately ~~and~~782,000 ~~opportunities~~MMBtus, ~~that~~of ~~have~~pipeline-grade ~~shorter~~methane ~~development~~for ~~cycles. Microgy’s~~sale ~~goal~~per ~~with~~year ~~all~~once ~~projects~~a isplanned tocombined ~~maximize~~heat ~~the~~and power, ~~profitability~~or ofCHP, ~~every~~system ~~project~~has bybeen ~~implementing~~installed ~~the~~and ~~right~~potential ~~technology~~modifications ~~and~~made ~~most~~to ~~profitable~~the ~~off-take arrangements~~gas processing systems.

~~Microgy’s~~We ~~efforts~~ have ~~resulted,~~two ~~most~~other ~~recently,~~multi-digester facilities in ~~the~~development ~~start of commercial operations at the Huckabay Ridge facility~~ in ~~Stephenville,~~ Texas, ~~which~~having ~~began~~expected ~~commercial~~output ~~operations in the first quarter~~ of ~~2008~~670,000 MMBtus. ~~Huckabay~~We ~~Ridge~~have ~~consists~~also ofannounced ~~eight~~three ~~916,000~~proposed multi-~~gallon~~digester ~~digesters~~RNG® ~~which~~facilities ~~operate~~in ~~together~~California, toand ~~process~~a ~~the~~proposed ~~manure~~multi-digester ~~from~~RNG® ~~approximately~~facility ~~10,000~~in ~~cows~~Colorado. ~~The~~These ~~gas~~projects isare ~~treated~~in ~~and compressed~~various tostages ~~produce~~of ~~pipeline-grade~~development. ~~methane~~In ~~that~~January is2010, ~~sold~~Microgy ~~and~~contributed ~~delivered~~its ~~directly~~interest ~~into~~in ~~nearby~~one ~~natural~~of ~~gas~~the ~~pipelines.~~California ~~Huckabay~~projects ~~Ridge~~and isthe Colorado ~~expected~~project to ~~produce~~the ~~approximately~~new ~~635~~joint venture,~~000 million~~ ~~British~~HMI ~~Thermal Units~~Energy, ~~or MMBtus~~LLC, ofdescribed ~~pipeline-grade methane per year~~below.

WeIn ~~have~~addition, ~~announced~~Microgy ~~three~~has ~~other~~commenced construction of a multi-digester ~~facilities~~renewable inbiogas ~~development~~facility ~~in Texas~~to ~~having~~be located at the ~~same~~flagship ~~expected~~Grand ~~output~~Island, Nebraska beef processing plant of JBS Swift & Company, referred to as Swift. Under the ~~Huckabay~~terms ~~Ridge~~of the agreement with Swift, Microgy will construct, own and operate the facility. Weand ~~have~~sell ~~also~~its ~~announced~~gas ~~three~~output ~~proposed~~to ~~multi-digester~~Swift ~~RNG®~~for ~~facilities~~use in ~~California~~its ~~that~~operations ~~are~~to inoffset ~~advanced~~natural ~~stages~~gas ~~of development~~utilization pursuant to a 15-year gas purchase agreement. WeThe ~~completed~~Grand ~~$60~~Island ~~million~~facility inwill ~~tax-exempt~~consist ~~bond~~of ~~financing~~two in1.3 million ~~November~~gallon ~~2006~~digesters ~~relating~~that will toprocess wastes generated by the ~~construction~~Grand Island processing facility and ~~operation~~that ofwe ~~the~~expect ~~four~~will ~~RNG®~~be ~~facilities~~able into ~~Texas.~~produce ~~Furthermore~~approximately 235,000 we MMBtus per year. We completed $627.~~425~~0 million in tax-exempt bond financing in ~~September~~Nebraska in July 2008 to finance a portion of the construction costs of ~~two~~the ofGrand ~~our~~Island ~~three~~facility. ~~proposed~~However ~~California~~these ~~facilities,~~bonds are currently in default and wethe ~~currently~~trustee ~~anticipate~~or ~~pursuing~~25% aof ~~further~~the ~~$26~~bondholders could accelerate the bonds and demand repayment at any time.02 ~~million~~We inare ~~such~~currently seeking a solution ~~financing~~to ~~for~~these circumstances, including the ~~third~~financing ~~proposed~~to ~~California~~complete construction of the facility., but we cannot assure you that we will be successful in doing so on favorable terms, or at all.

In addition, Microgy ~~has~~is ~~commenced~~operating ~~construction~~three ofsingle ~~a multi-~~digester ~~renewable~~facilities ~~biogas facility~~in toWisconsin. beMicrogy ~~located~~sold atthese ~~the~~projects ~~flagship Grand Island, Nebraska beef processing plant of JBS Swift & Company, referred~~ to ~~as Swift. Under~~ the ~~terms~~farms ofon ~~the~~which ~~agreement~~they ~~with Swift~~are located, ~~Microgy will construct, own~~ and ~~operate~~developed ~~the~~them ~~facility~~in ~~and~~conjunction ~~sell~~with ~~its gas~~Dairyland ~~output~~Power toCooperative, ~~Swift~~an ~~for~~electric ~~use~~cooperative inutility, ~~its~~referred ~~operations~~ to ~~offset~~as ~~natural gas utilization pursuant to a 15-year gas purchase agreement~~Dairyland. The ~~Grand~~biogas ~~Island~~from ~~facility~~these ~~will~~projects ~~consist~~is ofused ~~two 1.2 million gallon digesters that will process wastes generated~~ by ~~the Grand~~Dairyland ~~Island processing facility and that we expect will be able~~ to ~~produce approximately 235,000 MMBtus per year. We completed $7.0 million in tax-exempt bond financing in Nebraska in July 2008 to finance a portion of the construction costs of the~~ Grand Island facility. In addition to this facility, Microgy and Swift may work together to identify, evaluate and develop project opportunities at Swift’s other North American beef and pork processing facilities.

In3 October 2006, we entered into a business development agreement, referred to as the BDA, with Cargill, Incorporated, referred to as Cargill. We are leveraging our relationship with Cargill to accelerate our identification and development of both facilities for the production of RNG® and smaller-scale, multi-digester facilities dedicated to a single customer. Our agreement with Cargill is described in more detail under the heading “Business—Facility and Business Development Efforts—Business Development Agreement with Cargill” appearing below.

generate electricity. In ~~addition~~January 2010, Microgy iscontributed ~~operating~~the ~~three~~rights ~~single~~to ~~digester~~the ~~facilities~~net inrevenues ~~Wisconsin.~~of ~~Microgy~~the ~~sold~~Wisconsin ~~these projects~~facilities to ~~the~~HMI ~~farms~~Energy, ~~on which they are located~~LLC, ~~and~~a ~~developed~~joint ~~them~~venture inbetween ~~conjunction with Dairyland Power Cooperative~~Microgy, anInc. ~~electric~~and ~~cooperative~~Homeland Renewable ~~utility~~Energy, ~~referred to as Dairyland~~Inc. ~~The~~Microgy ~~biogas~~retains ~~from~~a ~~these~~30% ~~projects~~membership isinterest ~~used~~in bythe ~~Dairyland~~joint ~~to generate electricity~~venture.

The Microgy Market Opportunity

We believe that facilities based on Microgy’s technology can generate profitable quantities of marketable, renewable gas from animal and food industry wastes and by-products and other organic waste streams. Increased interest in renewable energy sources, as well as a desire for energy not subject to commodity price fluctuations, drives demand for each of these uses of gas produced by Microgy’s systems. Also, we believe that increasingly stringent environmental regulations concerning handling of animal and other wastes motivate demand for Microgy’s systems at or near CAFO and food industry sites. The ultimate opportunity to develop facilities, as well as to manage and/or operate them profitably, depends on numerous factors, including the value that can be derived from the various markets described below.

Gas. ~~Although~~While natural gas prices have ~~fluctuated~~been ~~significantly~~and ~~over~~continue ~~the~~to ~~last~~be ~~year~~volatile, ~~over~~we ~~the~~anticipate ~~past~~increases ~~several~~in ~~years~~ natural gas prices ~~have~~in ~~risen~~the ~~substantially~~long-term due to considerable increases in demand for gas both domestically and overseas. In the United States, this increase ~~has~~will ~~been~~be due principally to the fuel needs of the power plants that have been built in the past decade, as well as relatively limited increases in natural gas delivery capabilities. In addition, developing countries, including China and India, are becoming large consumers of energy, placing further pressure on prices for fossil fuels. Microgy’s systems produce commercial quantities of biogas with a high percentage of methane, which is then refined to RNG® by processing it with scrubbing devices to remove carbon dioxide, sulfur compounds and other impurities. Microgy’s systems for the production of RNG®, unlike natural gas wells, do not suffer depletion and are consistent sources of output so long as required inputs are available.

Renewable Energy. We believe that market and political forces will continue to drive increased adoption of renewable energy sources, ~~principally~~ principally due to increasing concerns about the price, volatility, supply stability and environmental impact of conventional fuels. The demand for energy produced from renewable resources may provide our facilities with a variety of benefits, including federal and state renewable power production and investment credits, tax credits and greenhouse gas sequestration credits, as well as a competitive advantage as compared to conventional sources of supply. For example, currently 3033 states, including Texas and California and the District of Columbia, have enacted a renewable portfolio standard or other state mandates requiring electric utilities to increase their use of renewable energy resources such as wind, solar, and bioenergy. We believe that the directives embodied in the Energy Policy Act of 2005, the 2008 Farm Bill, and the American Recovery and Reinvestment Act of 2009 and the accompanying tax credits and related benefits should serve to further drive adoption of renewable energy solutions like those provided by Microgy. The law provides a number of incentives designed to spur development of renewable energy facilities, including, for example, accelerated depreciation provisions for gas gathering facilities. We believe that Microgy’s facilities may qualify for some or all of these tax credits and other benefits, either directly or by attracting customers who can benefit from tax credits associated with utilizing renewable energy sources.

We also believe that the greenhouse gas sequestration credits that Microgy’s facilities are expected to produce will be marketable ~~and will further enhance the potential profitability of the facilities~~. The market for greenhouse gas offsets has increased significantly in the last year in response to emerging regulatory requirements as well as demand from companies, municipalities and individuals who are reducing their greenhouse gas impacts on a voluntary basis. Importantly, digester projects that reduce methane emissions compared to baseline conditions produce offsets that qualify under many mandatory and voluntary programs in place ~~however~~. However, the specific methodologies for calculation and monitoring vary widely.

While in many cases we are required to share the benefits of such credits with our business partners and investors, we nevertheless expect such offsets to enhance the economics of our facilities. We believe that our share of the market for greenhouse gas sequestration credits will add value and enhance the financial viability of our facilities.

6Climate change legislation currently under consideration, as well as international treaties relating to climate change, may further drive demand for Microgy’s products, including greenhouse gas offsets, or provide further production incentives.

Microgy’s Strategy

Our objective is to become a leader in the renewable energy sector through the production and marketing of pipeline- grade gas and biogas and in the development of pipeline gas production capacity and biogas resources, which will constitute gas reserves under our control. Key elements of our strategy include:

Developing facilities ~~that~~in which we will ~~own~~have an ownership interest, thereby developing and growing non-depleting biogas reserves under our management. We intend to continue to focus on an ownership model, in which we own facilities entirely or together with financial or operational partners. We believe that this ownership model will allow us to profit from the sale of biogas or pipeline-grade gas for the operational life of the facilities. By owning and operating such facilities, and by securing the supply of required amounts of manure and substrates, we seek to develop and grow a portfolio of gas reserves under our control. We view our facilities as gas wells but without the typical depletion curve, so long as required inputs are available.

Capitalizing on the environmental attributes, as well as the renewable nature of the energy, generated by our facilities. We believe that the environmental attributes, such as greenhouse gas sequestration credits, generated by our facilities represent a ~~potentially~~potential ~~significant~~ source of revenue, and we intend to pursue commercialization of these attributes, through sales into trading markets as well as bi-lateral and revenue sharing arrangements. In addition, we believe that the renewable nature of the gas produced by our facilities will be attractive to certain purchasers, including entities required to achieve renewable portfolio standards, and may result in premium prices in some cases. We intend to aggressively market the renewable quality of our gas to these purchasers.

Focusing development efforts on markets allowing for rapid and cost-effective scale-up of our business. Microgy has now constructed both the multi- and single-tank system in four currently operating ~~installations;~~ ~~Microgy will develop and own these digester systems~~installations. Our multi-digester facilities will primarily produce pipeline quality renewable natural gas, although we will also consider opportunities to produce and sell conditioned biogas, electricity, CNG and LNG from our facilities. Microgy’s development efforts are focused on applications of its technology that are resource efficient. Development of smaller scale and single-digester facilities will be targeted toward customers that have multiple sites and opportunities that have shorter development cycles. ~~Microgy’s goal with all projects is to maximize the profitability of every project by implementing the right technology and most profitable long-term off-take agreement.~~

Standardizing systems to allow for rapid and cost-effective replication and scalability. We intend to standardize and streamline elements of our systems so that we can drive down their costs and implement them more rapidly. Toward this end, Microgy is refining the design of its multi-tank system based on knowledge gained from its Huckabay Ridge facility, and is pursuing standardization of components, procurement channels, vendors, and design-build contracts to allow for rapid and cost-effective construction~~, all in order to fulfill our objective of building out the currently announced pipeline of projects~~.

Pursuing the advantages of our business model, in which we create and manage profitable renewable energy opportunities while alleviating the environmental pressures facing agriculture and food industry participants. We believe we are the ~~only~~leading provider of large scale RNG based anaerobic digesters that is aggressively pursuing a business model of creating and managing profitable renewable energy opportunities while simultaneously addressing customers’ environmental issues. Furthermore, by operating and maintaining the facilities ourselves, we believe that we will be able to maximize gas production and control the supply of required materials. To our knowledge, many other suppliers of anaerobic digestion systems merely supply the equipment, and leave the ongoing operation of the system to the purchaser. By pursuing our business model, we believe we can ~~supply~~provide a compelling value proposition to ~~customers~~our ~~and maximize value from gas production~~customers.

Microgy’s Products and Services

With respect to current and future projects such as our multi-digester RNG® facilities in Texas and California, as well as our smaller-scale, multi-digester dedicated facilities, such as the facility being built for Swift, Microgy seeks to own and operate all or part of each facility, thereby profiting from the sale of the gas produced, whether by the sale of gas as a commodity or to end-users or other purchasers pursuant to longer-term

~~produced, whether by the sale of gas as a commodity or to end-users or other purchasers pursuant to longer-term~~ supply agreements. Therefore, we expect our principal commercial product to be the RNG® or biogas produced by our facilities, together with tradable environmental attributes, such as greenhouse gas offset credits. In addition, other by-products of the operation of these facilities may have commercial value as soil amendments, fertilizer and animal bedding.

An analysis of our sales by product for each of the three years in the period ended December 31, ~~2008~~2009 is as follows:

	2008		2007		2006
	2009		2008		2007
Gas sales	$	23,~~173~~836,~~453~~800	$	~~540~~2,~~047~~173,453	$	~~468~~540,~~509~~047
Operation and maintenance services		~~325~~348,~~339~~222		~~371~~325,~~344~~339		~~356~~371,~~713~~344
Tipping fees		~~152~~425,~~873~~605		~~188~~152,~~597~~873		~~185~~188,~~844~~597
Carbon credit sales		~~246~~18,~~891~~409		67246,~~489~~891		1367,~~000~~489
Construction contract services		—		—		1,192,150
Grant revenue		82,411		—		—
Other		~~6,482~~—		76,~~470~~482		—7,470
Total revenue	$	24,~~905~~711,~~038~~447	$	12,~~174~~905,~~947~~038	$	21,~~216~~174,~~216~~947

Microgy’s Technology

At the heart of the Microgy system is an enhanced biogas production system. Whereas previous systems had principally focused on the environmental remediation aspects of digestion and produced biogas as a by-product, the Microgy system is designed specifically to maximize biogas production. Methane is the main product of the process, making up approximately 6560% of the resulting biogas. Microgy’s system can be easily coupled to standard, generally commercially available gas conditioning equipment in order to clean the biogas to produce RNG®, or the biogas can be burned ~~directly~~ for use in electric generation or other thermal energy applications. Other by-products of the process can include fertilizers, bedding, compost and other bio-solid products that have economic value and ~~are~~may ~~often~~be marketable.

Microgy’s proprietary process mixes animal manure with additional substrates, such as food industry wastes and by-products containing fats, proteins and carbohydrates, in a process referred to as co-digestion. The manure provides the anaerobic bacteria that are the engine of the biogas production process, while also serving as a buffer that assists in maintaining the reaction at proper levels. A wide variety of materials can provide the proteins, fats and carbohydrates that enhance the biological process in our digesters. Substrates that we might use in our digesters ~~range from~~include waste crop oils, spoiled food, animal fats, used greases and cooking oils, brewery waste toand cheese waste. These materials are widely available but tend to be concentrated in urban areas. The addition of substrate significantly increases gas production, with the relative contributions of substrate and manure to the production of biogas varying depending upon the type of substrate used. The ability to add substrate with known characteristics to our process helps us to balance the health of the digester while increasing biogas output. The controlled combination of these wastes with the manure, along with our operational controls and technical know-how, represent the essential elements of our proprietary approach to the market.

Some substrate materials are useful inputs into other energy production processes or may even be substitutes for animal feed. As such, the value of those materials may change over time depending on market dynamics, emerging technologies or even tax policy. We have focused our efforts on procuring substrates that do not have alternate uses for which companies typically pay a fee for disposal. In some cases, we ~~may~~are be paid “tipping fees” associated with the disposal of these materials, which ~~may~~helps ~~help~~ us to mitigate the costs of transporting substrate to our site. Substrate availability, market conditions and transportation requirements can vary significantly by region. As such, project location is an important consideration in determining project feasibility. We have in place a substrate management team that works with our strategic partners to identify and evaluate potential materials and manage logistics.

Microgy’s system utilizes sophisticated equipment and control systems. This allows us to ~~optimize~~ manage the recipe for digestion in each tank, maintain ~~precise~~ temperature control and ~~carefully~~ adjust the mixing rate. In addition, the Microgy system is composed of steel tanks and piping, which are durable and nonporous, allowing for calibration of the ~~process~~ process within a controlled environment and appropriate management of ongoing gas production and equipment operations. Furthermore, the high level of gas output and its high methane content allows for application of other technologies, such as those ~~used~~ used for gas conditioning. Coupled with the technical advantages of the system is a suite of proprietary processes and “know how” to achieve the ~~highest~~anticipated levels of biogas production~~, resulting in the lowest output costs per unit of input of any anaerobic digestion system known to Microgy~~.

LOGO

License Agreement with Danish Biogas Technology A/S

Microgy licenses the anaerobic digestion portion of its technology from Danish Biogas Technology A/S, referred to as DBT. DBT’s parent, Xergi A/S, referred to as Xergi, is 50% owned by Schouw & Co., a Danish public company and 50% by DDH, a Danish environmental and engineering firm. DBT has been a leader in the development of this technology and has constructed 30 anaerobic digester facilities in Europe over the past 15 years. In Denmark, DBT’s systems have been successful in providing manure management and viable renewable energy for many years.

In May 2000, Microgy entered into a licensing agreement with DBT that granted Microgy a perpetual and exclusive license in North America for ~~the~~ the commercial development and use of certain proprietary technologies, including Microgy’s core anaerobic digestion technology. This license agreement was amended in April 2003 and March 2005 to further define certain support obligations of ~~DBT~~ DBT and to amend the structure of the compensation payable to DBT for use of the license. According to the license as amended, DBT will receive fixed payments for its participation in the design phase of each project, including engineering work and construction drawings, and a licensing fee, included in the cost of the facility, that is based on a percentage of the total cost for each project facility where the licensed technology is installed and operating. We believe that our relationship with DBT is good.

9In April 2009, Environmental Power and Microgy entered into a Cooperation Agreement with DBT and Xergi, referred to as the Cooperation Agreement. The Cooperation Agreement supersedes the license agreement described above. The Cooperation Agreement, while maintaining many of the original business concepts

contained in the original license agreement, restructures the license agreement to reflect Microgy’s shift to a build, own and operate business model from the original digester equipment sales model and better defines the respective roles of the parties to enable them to more efficiently interface going forward.

The Cooperation Agreement addresses anaerobic-digester plants incorporating above-ground digesters with mixers, referred to as the DBT Technology. Pursuant to the Cooperation Agreement, DBT grants to Microgy an irrevocable and perpetual right and license to utilize the DBT Technology in the design, construction, and/or operation by Environmental Power, Microgy and their affiliates of anaerobic-digesters and related systems. This grant is exclusive as to North America for the term set forth in the Cooperation Agreement and is non-exclusive as to North America thereafter, excludes Europe during the term but is non-exclusive as to Europe thereafter. As in the original license agreements, the grant is non-exclusive as to the rest of the world, leaving each party free to pursue projects outside of North America and Europe. The Cooperation Agreement further provides that commencing as of May 2009, Microgy may utilize digester technologies other than the DBT Technology throughout the world.

As part of the Cooperation Agreement, the Company agreed to pay a $500,000 license fee for the Swift Grand Island project. The Company has only paid $200,000 to date and the remaining $300,000 is overdue for payment. While DBT has given us notice of material breach under the Cooperation Agreement as a result of the failure to make this payment, it has not taken any action with respect to such failure.

The Agreement became effective in May 2009 when DBT received an up-front payment of certain license fees for certain Microgy projects of Microgy’s choosing, which were paid for by Environmental Power’s issuance of its 14% Convertible Notes due January 1, 2014, referred to as the 14% convertible notes, in the original principal amount of $3,000,000. The January 1, 2010 interest payment due on the 14% convertible notes issued to DBT, along with interest due on the other $5,000,000 principal amount of 14% convertible notes previously issued, was not paid by EPC. The trustee has given the Company notice of default but to date neither the trustee nor any of the note holders have made any attempt to accelerate payment of these notes.

Facility and Business Development Efforts

Identified Facilities Development

The following table sets forth facilities that we have identified to date as being under development by Microgy and its affiliates, including information with respect to the type of facility, its location, and its anticipated output:

Facility	Location	Type Gas	RNG Production(a)
Mission	TX	RNG	635,000
Rio Leche	TX	RNG®	670,000
Rio Leche	TX	RNG	635,000
Cnossen	TX	RNG®	670,000
Cnossen	TX	RNG	635,000
Hanford Cluster	CA	RNG®	618,000
Hanford Cluster	CA	RNG	732,000
Bar 20(b)	CA	RNG®	629,000
Bar 20	CA	RNG	601,000
Maddox	CA	RNG®	340,000
Riverdale Cluster	CA	RNG	621,000
Weld County(b)	CO	RNG®	651,000
Cargill 1	ID	RNG	550,000
Cargill 2	CO	RNG	365,000
Swift-Grand Island	NE	Inside-the-Fence	235,000
Total			53,~~009~~813,000

(a) Expected gas production in MMBtu / year at full operation.

~~The~~(b) ~~foregoing~~Ownership ~~table~~transferred ~~does~~in ~~not~~January ~~include~~2010 ~~the~~to ~~Huckabay~~HMI ~~Ridge facility~~Energy, ~~which is now in operation. In addition~~LLC, ~~the table does not include projects currently under consideration that have not been finalized for active development. Projects currently~~ in ~~this~~which ~~latter~~Microgy ~~category~~has ~~have~~a an30% ~~expected annual production of up to approximately 12 million MMBtu/year~~interest.

~~Business~~The ~~Development~~foregoing ~~Agreement (BDA)~~table ~~with~~does ~~Cargill~~not include the Huckabay Ridge facility, which commenced operations in 2008.

In8 October 2006, we entered into the BDA with Cargill, Incorporated, acting through its Emerging Business Accelerator Unit, referred to as Cargill. Pursuant to the terms of the BDA, Cargill has agreed to use its reasonable efforts to identify potential anaerobic digester projects for development by us within Cargill’s network of customers, farmers and strategic business partners in North America. Cargill and Microgy will work jointly to identify specific targeted markets for developing such projects within the Cargill network, and Cargill will identify project candidates based upon agreed project guidelines. We will consider each project candidate and select those candidates we want Cargill to pursue further on our behalf. Cargill will then negotiate with such project candidates with the goal of obtaining a binding agreement whereby such project candidates commit to give Microgy the option to implement an anaerobic digester project. Once a project commitment has been signed, Cargill will present it to us for review and consideration. We will then proceed with the negotiation of mutually acceptable leases and other project agreements with the project candidates in which we are interested.

In consideration of Cargill’s services under the BDA, we will grant to Cargill warrants to purchase shares of our common stock equal to 1% of the outstanding shares of our common stock on a fully-diluted basis on such date as Cargill delivers executed project commitments with project candidates relating to anaerobic digester projects covering 10,000 cow equivalents, as defined, and thereafter to issue similar warrants on each succeeding date on which the same warrant issuance conditions have again been satisfied, up to a maximum of 4.99% of the outstanding shares of common stock on such issuance date subject to all warrants in the aggregate. The warrants will be exercisable for a period of five years from the issuance date, and will have an exercise price per share equal to 75% of the closing price of our common stock on the last trading day prior to the issuance date. To date, we have granted Cargill warrants to purchase 175,912 shares of our common stock at an exercise price of $5.37 per share under this arrangement.

AsThe ~~further~~HMI ~~consideration~~Energy ~~for~~Joint ~~Cargill’s~~Venture services under the BDA, for a three-year period beginning with the first date of issuance of a greenhouse gas reduction certificate issued to, owned or controlled by us derived from an anaerobic digester project subject to a project commitment, referred to as an eligible certificate, we will convey to Cargill or its designee ownership of 25% of all such eligible certificates, after giving effect to any share of such certificates owed to a project candidate pursuant to the terms of any lease or other project agreement with such project candidate. During such three-year period, Cargill will also have the first right to bid on any other proposed sale or conveyance of any eligible certificates. In addition, with respect to each project subject to a project commitment which generates revenue to us from the sale of gas, electricity or other by-products (but not including sales of greenhouse gas reduction certificates), we will be obligated to pay to Cargill, within 30 days of receipt of such revenues, 2% of such revenues for a five-year period beginning on the date on which any such revenue is first received. Finally, during a three-year period following the date of first generation of gas or electricity by an anaerobic digestion project subject to a project commitment, Cargill will have the first right to bid on the proposed sale or conveyance of all such gas or electricity.

~~The~~We ~~BDA~~have ~~will~~been ~~terminate~~examining ~~upon~~various strategic alternatives over the ~~earliest~~ last several months in support of the ~~following~~build-out ~~events:~~of Microgy’s project pipeline. In connection with these efforts, in January 2010, Microgy formed a joint development company with Homeland Renewable Energy, Inc., referred to as HRE, whereby Microgy contributed certain assets, as more fully described below, as its equity contribution for a 30% ownership position, and HRE will contribute $1,500,000 in cash as its equity contribution for its 70% ownership position.

•We entered into the ~~third~~following ~~anniversary~~agreements ofrelating to the ~~date~~joint ofventure with HRE, referred to as the ~~BDA;~~JV Agreements:

• a Contribution Agreement, dated January 29, 2010, referred to as the ~~delivery~~Microgy byContribution ~~Cargill~~Agreement, ofamong ~~project~~Microgy, ~~commitments~~HMI ~~signed~~Energy, byLLC, ~~project~~referred ~~candidates~~to ~~covering~~as 50HMI,~~000~~ ~~dairy~~and ~~cow~~Environmental ~~equivalents~~Power;

• ~~termination by~~ a ~~party~~Contribution ~~if a court shall have entered a final~~Agreement, ~~non-appealable~~dated ~~order,~~January ~~decree~~29, ~~ruling or other action restraining~~2010, ~~enjoining~~referred orto ~~otherwise~~as ~~prohibiting~~ the ~~transactions~~HRE ~~contemplated~~Contribution byAgreement, ~~the~~between ~~BDA~~HRE and HMI; and

• ~~termination by~~ a ~~party~~Limited ifLiability ~~the~~Company ~~other~~Agreement ~~party~~of isHMI, indated ~~material~~January ~~breach~~29, ~~or default~~2010, ~~which~~referred ~~breach~~to oras ~~default~~the isLLC ~~not~~Agreement, ~~cured~~between ~~within~~Microgy 30and ~~days after the date of notice thereof;~~HRE.

•Pursuant ~~termination~~to ~~by a party if~~ the ~~other~~Microgy ~~party~~Contribution ~~becomes~~Agreement, ~~insolvent~~Microgy orcontributed ~~unable~~ to ~~pay~~HMI its debts when due, has a trustee or receiver appointed for any or all of its assets, makes an assignment for the benefit of creditors or has a bankruptcy petition filed by or against it which is not dismissed within 90 days;

• ~~termination~~certain byassets arelating ~~party~~to ifits ~~the~~proposed ~~other~~Bar ~~party~~20 ~~ceases,~~project orin ~~threatens~~California toand ~~cease,~~its toproposed ~~carry~~Weld onCounty ~~business;~~project orin Colorado,

• ~~termination~~right byof afirst ~~party~~refusal ~~for~~on ~~any~~up ~~reason upon 30 days’ written notice~~ to ~~the~~five ~~other~~additional ~~party.~~future projects,

~~Upon~~• ~~any~~Microgy’s ~~termination~~right ofto ~~the~~receive ~~BDA,~~net ~~the~~revenues ~~BDA~~from ~~will~~its ~~become~~Wisconsin ~~void,~~projects and the ~~parties~~rights ~~will have no liability or obligation thereunder, except for liabilities resulting from breach of the BDA on or prior to the date of termination,~~ and ~~except~~obligations ~~that~~relating ~~Cargill will be entitled~~ to ~~any~~such ~~consideration described above for all anaerobic digestion~~ projects ~~subject to a Project Commitment entered into prior to the date of termination. Notwithstanding any termination of the BDA~~, ~~during the term of the BDA~~ and for a period of two years after the date of termination, we will not solicit or negotiate with any person who had entered into negotiations with Cargill or its affiliates with respect to an anaerobic digestion project but with whom no project commitment has been concluded, without the prior written consent of Cargill or Cargill’s participation.

~~Pursuant~~• toMicrogy’s ~~the~~right ~~terms of the BDA, we agreed not~~ to ~~enter~~net ~~into~~receipts afrom ~~similar~~sales ~~business~~of ~~development~~carbon ~~agreement~~credits ~~with~~available ~~certain prohibited parties identified by Cargill from time~~ to ~~time~~Microgy, ~~provided~~other ~~that there cannot be any more~~ than ~~seven~~those ~~prohibited~~owned ~~parties~~or atotherwise ~~any~~available ~~given time, and further provided that Cargill may not deem a party~~ to beour ~~prohibited~~other ifsubsidiaries, weMicrogy ~~were~~Holdings ~~having~~and ~~discussions~~Microgy ~~with~~Grand ~~the party prior to its being so designated by Cargill~~Island.

In exchange for the foregoing assets, Microgy received 30% of the outstanding membership interests in HMI and has received payments from HMI totaling $1,100,000. The remaining $400,000 is due and expected shortly.

In connection with the transactions contemplated by the Microgy Contribution Agreement and the HRE Contribution Agreement, Microgy and HRE entered into the LLC Agreement, which sets forth:

•

customary terms for the governance of HMI, consistent with HRE’s majority ownership but providing for certain minority protections for Microgy;

•

provisions relating to capital calls for financing the joint venture’s projects, including provision for an effective 12% carried interest for Microgy in any project for which it does not meet the capital call and an effective 21% carried interest for HRE in any project for which it does not meet the capital call;

•

provisions relating to the negotiation of a Management Services Agreement, pursuant to which Microgy would provide customary management services to HMI, and an Operations and Maintenance Agreement, pursuant to which Microgy would provide customary operations and maintenance services to projects developed by HMI, each to be on commercially reasonably terms, including reimbursement of costs and market-based fees;

•

rights of first refusal on the part of HMI with respect to the development and ownership of Microgy’s next five projects and Microgy’s obligation to use its development efforts exclusively for the benefit of HMI, which rights of refusal and exclusivity obligations terminate upon the earlier to occur of Microgy obtaining all necessary site and manure supply agreements, construction permits and approvals and commercially reasonable offtake agreements for all five such projects or the expiration or termination of the management services agreement and operations and maintenance agreement; and

•

the limited right to buy out HRE’s ownership in HMI for 120% of the purchase price paid for the membership interests in HMI in certain circumstances.

HRE specializes in large scale animal waste remediation in the United States, through the development, construction and operation of renewable energy power plants fueled by poultry litter and other agricultural residues. In addition, HRE markets the ash residue from poultry litter combustion as a nutrient rich fertilizer and develops woody biomass fueled power plants through a joint venture with Laidlaw Energy (OTC: LLEG.PK). Microgy believes that entering into the JV Agreements with HRE will provide it with a business partner that can assist Microgy in accelerating the development of the projects contributed by Microgy to the joint venture.

Customers and Suppliers

Customers

Microgy intends to sell the gas generated by its facilities pursuant to mid- to long-term purchase and sale commitments with fixed or predictable prices, at a premium to the natural gas market. When beneficial, Microgy may elect to sell some of the gas in the spot market, as a commodity with ~~appropriate~~ price hedging mechanisms.

Microgy’s smaller-scale multi-digester facilities will be developed to supply the gas needs of a single customer on-site, such as Swift, pursuant to a long-term purchase and sale agreement, though Microgy expects to have the right to market excess gas not used by these customers.

In the twelve months ending December 31, ~~2008~~2009, we recognized $~~1.7~~3,763,000 ~~million~~ in total revenues from sales of RNG®, ~~and~~ tipping fees and a grant at our Huckabay Ridge facility and revenues of $~~1.2~~948,000 ~~million~~ from gas sales, operations and maintenance services and ~~carbon~~greenhouse gas sequestration credit sales related to the Wisconsin facilities. ~~Revenue in 2007 was entirely related to the facilities in Wisconsin under our relationship with Dairyland.~~

Microgy had two significant customers in ~~2008~~2009, Dairyland and ~~Lower~~Pacific ~~Colorado~~Gas & ~~River~~Electric ~~Authority, which provided over 10% of 2008 revenues~~Company. ~~We believe our relationship with these customers has been good.~~ In ~~late 2008~~2009, ~~Lower~~Pacific ~~Colorado~~Gas ~~River~~and ~~Authority~~Electric ~~was~~accounted ~~replaced~~for ~~with~~70% ~~Pacific~~of ~~Gas~~revenues and ~~Electric~~Dairyland ~~Company~~accounted asfor ~~the~~19% ~~purchaser~~ of ~~gas~~revenues. ~~from~~We believe our ~~Huckabay~~relationship ~~Ridge~~with ~~facility.~~these customers is good.

In March 2009, we signed a 10 year renewable natural gas supply agreement with Xcel Energy. The agreement, which has an additional 10 year option, provides that the Microgy RNG® will be sold to Xcel on a fixed price basis at a premium to the current market price for traditional natural gas. The production will come from a facility in Colorado on which we intend to commence construction inwhen ~~2010~~we have obtained the necessary permits, equity and debt financing.

Suppliers

Microgy and its affiliates generally obtain the construction materials and equipment necessary to construct and operate their facilities from commercial sources pursuant to purchase orders and similar arrangements. Microgy believes these materials and equipment to be generally commercially available. Microgy and its affiliates generally enter into manure handling agreements with the farms on which their facilities are located for the supply of manure for the operation of such facilities, or arrangements for the operation by third parties of manure composting operations on land owned by Microgy affiliates. Microgy generally seeks to locate its large-scale multi-digester facilities in areas with a high concentration of manure from diverse sources.

Substrate for a facility can be obtained from a variety of sources, either on an opportunistic basis, pursuant to informal supply relationships, or from the operations of the consumer of the gas, in the case of the smaller-scale, single customer installations. Substrate can also be obtained via long-term contract, such as the agreement in place with Liquid Environmental Solutions Corp.

Discontinued Operations

Buzzard Power Corporation, referred to as Buzzard, is a subsidiary of our wholly -owned subsidiary, EPC Corporation. Buzzard formerly leased a generating facility from Scrubgrass Generating Company, L.P. The Scrubgrass plant, referred to as Scrubgrass, located on a 600-acre site in Venango County, Pennsylvania, is an approximate 83 megawatt waste coal-fired electric generating station. Buzzard completed the disposition of its leasehold interest in this facility on February 29, 2008.

~~The~~10 disposition of Buzzard’s leasehold interest in the Scrubgrass facility has substantially reduced our revenue base and will continue our trend of operating losses and uses of cash until the revenue base for Microgy grows to sufficient levels to support our expense base.

Competition

~~digestion,~~Competition 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 marketable renewable energy credits and participation in various renewable portfolios and other programs.

Microgy plans to generate revenue from the development and ownership of facilities that market renewable, “green” energy in addition to providing pollution control features to the agricultural and food industry markets. 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 marketable renewable energy credits and participation in various renewable portfolios and other programs.

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. Many of these companies are beginning to compete in the alternative fuels and renewable energy business with the growth of the industry and the advent of many new technologies. Larger companies, due to their greater financial and other resources, will be better positioned than Microgy to develop new technologies and to install existing or more advanced renewable energy facilities, which could harm Microgy’s business. Microgy also faces many forms of competition with respect to the resources required to operate its facilities. Such competition includes other providers of pollution control, including environmental engineers, providers of pollution control systems, private companies, public companies, associations, cooperatives, government programs, foreign companies, and educational pilot programs. Furthermore, there are many companies that offer anaerobic digester systems. A number of competitors have more mature businesses and have successfully installed anaerobic digester systems in the United States. Microgy may be forced to compete with any of these competitors for access to equipment, construction supplies, skilled labor for the construction and operation of its facilities and the supplies of manure and substrate required to operate its facilities. In addition, Microgy may also have to compete for access to substances that make desirable substrates with other users of these substances, such as recyclers of waste grease and producers of biodiesel and other biofuels. The effect of such competition could be reflected in higher costs associated with obtaining access to these resources, as well as an insufficient supply of these resources for the profitable operation of Microgy’s facilities.

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 and waste management. 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 new applicable requirements could require modifications to operating facilities. During periods of non-compliance, our operating facilities may be forced to shut down until the compliance issues are resolved. We are responsible for ensuring the compliance of our facilities with all the applicable requirements and, accordingly, we attempt 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, including the associated asset retirement obligation, does and will continue to affect our profitability.

Depending on the location of each individual plant, the federal Clean Water Act and state implementation plans of the federal Clean Air Act, as well as other state and local laws, may apply to Microgy’s projects. The primary 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 CAFOs.

Federal NPDES permits may be issued by the EPA or any state authorized by the EPA to implement the NPDES program. The EPA has certified 45 states to issue their own NPDES permits. Furthermore, in December ~~2002, the EPA issued new rules to regulate manure run-off~~ on farms, one of the nation’s leading causes of water pollution. The new rules apply to an estimated 15,500 livestock operations across the country. These farms will need to obtain permits, submit an annual report, and develop and follow a plan that will ensure that measures are being instituted to minimize runoff from wastewater and manure. We believe that these requirements represent a significant opportunity for Microgy, insofar as a Microgy system can play a useful role in any animal waste management program.

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2002, the EPA issued new rules to regulate manure run-off on farms, one of the nation’s leading causes of water pollution. The new rules apply to an estimated 15,500 livestock operations across the country. These farms will need to obtain permits, submit an annual report, and develop and follow a plan that will ensure that measures are being instituted to minimize runoff from wastewater and manure. We believe that these requirements represent a significant opportunity for Microgy, insofar as a Microgy system can play a useful role in any animal waste management program.

We expect that all of our facilities will be required to obtain various state and local environmental and other permits and approvals. For example, grease-trap waste from restaurants and other food service providers is a desirable and highly available form of substrate for our facilities in Texas. The Texas Commission of Environmental Quality (TCEQ) environmental authorities classify grease-trap waste as Municipal Solid Waste (MSW) and such waste is managed as a non-hazardous municipal waste. Microgy is required to obtain a solid waste permit for each of our planned facilities in Texas to the extent we desire to use grease-trap waste as substrate in the operation of such facilities, and have obtained such a permit for the Huckabay Ridge facility. In addition, we have obtained water discharge permits for each of our planned California facilities, and obtaining such permits is a lengthy process. To date, our experience in obtaining such permits has been positive but future projects may, however, present unique circumstances, and the timing and cost of permits may be uncertain.

We expect that any climate change legislation, or any international treaties relating to climate change, may have a positive effect on our business to the extent that they increase demand for our projects or enhance the market for the greenhouse gas offsets and credits produced by our facilities.

Energy Regulation

As evidenced by the facilities developed by Microgy in Wisconsin ~~and under development by Microgy Replacement for Swift~~, Microgy’s anaerobic digester facilities can be used for the generation of electricity. In the event that Microgy were to pursue applications of its technology for the generation of electricity for sale by Microgy into the electric grid, any such generating facility would become subject to the complex matrix of federal and state regulation of the energy sector, including the federal Public Utility Regulatory Policies Act, the Federal Power Act and the regulation and oversight of state public utility commissions. Microgy, itself, does not currently produce electricity for sale into the electric grid.

Employees

As of December 31, ~~2008~~2009, we had 44 thirty-one full and part-time employees, including executive officers and other marketing, finance, engineering and administrative personnel. None of our employees are represented by a collective bargaining agreement, and we consider our relations with our employees to be good. In ~~early~~Eleven ~~2009, as a result~~ of ~~a reduction in force and attrition,~~ the ~~number~~thirty-one of employees ~~was~~are ~~reduced by 11 to 33 as of March 16, 2009. Facility~~ operating personnel ~~are~~at 12our ofWisconsin ~~the~~or ~~remaining~~Texas ~~33 employees~~facilities.

Available Information

We maintain a website with the address www.environmentalpower.com. We are not including the information contained on our ~~web~~website ~~site~~ as part of, or incorporating it by reference into this annual report. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

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ITEM 1A.

RISK FACTORS

Investing in our securities, involves a high degree of risk. You should carefully consider the risks and uncertainties described below before purchasing our securities. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties may also impair our business operations and adversely affect our prospects. The order in which such risks are presented does not necessarily reflect the relative importance of such risks or the likelihood that any of the events or circumstances described below will occur or exist.

If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall and you may lose all or part of the money you paid to buy our common stock.

Risks Relating to Our Business

We have experienced losses to date, and we anticipate that we will continue to experience losses through at least ~~2010~~2012, which means that we will have to raise significant additional financing induring the first half of ~~2009~~2010 in order to continue our business operations. The opinion from our independent auditors as of December 31, 2009, stated that there is substantial doubt at December 31, 2009, about our ability to continue as a going concern.

We are a company inthat ~~the~~has ~~process~~been of pursuing an aggressive and novel business approach to the construction and operation of renewable energy facilities and the production of renewable natural gas. As noted below, our sole operating business, Microgy, is in the early stages of its development. As a result, we have a history of losses. For the twelve months ended December 31, 2009, we incurred a net loss from continuing operations of $36,112,000 including a non-cash write-down for the impairment of certain assets of $26,070,000. For the year ended December 31, 2008, we incurred a net loss from continuing operations of $22,996,000 which includes a non-cash, non-recurring expense for the impairment of goodwill of $4,913,000. For the ~~years~~year ended December 31, 2007 ~~and 2006,~~ we incurred a net ~~losses~~loss from continuing operations of $11,161,000~~, and $11,399,000, respectively~~. We expect to continue to incur losses, reduce our earnings or, as the case may be, add to our ~~earnings~~ deficit as we seek to further develop our business. We currently expect that these ongoing losses will adversely affect our financial condition through at least ~~2010~~2012. Future losses are likely to continue unless we successfully implement our business plan. As a result of these losses, we anticipate that we will, in all likelihood, have to rely on external financing for most of our capital and operational requirements. We will need to raise substantial financing in ~~the first half of 2009 in~~ order to fund ongoing general and administrative expenses associated with our corporate overhead, asdebt ~~well~~service ~~as interest~~ and dividend requirements ~~and~~ to continue as a going concern. While we have raised $1,100,000 in cash to date from the contribution of certain assets to a joint venture, these funds will not be sufficient to meet our operating needs during the first half of 2010. We currently have no commitments for any ~~such~~additional financing. We cannot assure you such financing will be available on reasonable terms or in a timely fashion, or at all, particularly in the current economic environment, in which capital raising activities are especially challenging. Future losses are likely to continue unless we successfully implement our business plan. If we are not successful in reaching and maintaining profitable operations, we may not be able to attract sufficient capital to continue our operations. Our inability to obtain adequate financing would likely result in the need to ~~reduce the number of projects we construct and even to curtail or~~ cease our business operations and would materially impair the value of your investment in our securities.

~~Our~~As ~~sole~~a ~~operating~~result ~~business,~~of ~~Microgy~~our failure to make certain payments, ~~has~~we ~~limited~~and ~~operating~~our ~~history~~subsidiaries ~~from~~are ~~which~~currently ~~to evaluate~~in ~~its~~default ~~business~~under various obligations, and ~~products~~we cannot determine the remedies our creditors may exercise.

~~Our~~We ~~sole~~failed ~~operating~~to ~~business,~~make ~~Microgy,~~the ~~was~~payment ~~formed~~ in ~~1999~~respect ~~and~~of ~~remains in~~ the ~~early~~January 1, ~~stages~~2010 ofinterest ~~its development.~~payment ~~Microgy~~on isour ~~developing~~14% ~~facilities~~Convertible ~~that~~Notes ~~use~~due ~~environmentally~~January 1, ~~friendly~~2014, referred ~~anaerobic digestion and other technologies~~ to ~~produce~~as ~~biogas~~the ~~from~~14% ~~animal~~convertible ~~and organic wastes~~notes. ~~Although~~In ~~Microgy~~addition, ~~has~~we ~~developed~~failed ~~and~~to ismake ~~operating~~certain ~~three~~payments ~~single~~to ~~digester facilities~~Xergi, inA/S, ~~Wisconsin~~referred ~~and~~to ~~the~~as ~~multi-digester~~Xergi, ~~Huckabay~~under ~~Ridge~~our ~~facility~~Cooperation Agreement, ~~Microgy~~dated ~~still~~April 23, ~~has~~2009, ~~limited~~referred ~~experience~~to inas the ~~construction~~Cooperation ~~and~~Agreement, ~~operation~~among ofus, ~~multiple~~our subsidiary, ~~digester facilities such as those~~ Microgy, isInc., ~~currently~~Xergi ~~constructing~~and orDanish ~~intends~~Biogas toTechnology, ~~construct~~A/S, ~~and~~ ~~limited~~referred ~~experience~~to ~~in gas conditioning or the sale of gas~~ as ~~a commodity~~DBT. InOur ~~addition~~subsidiary, Microgy ~~has~~Holdings, ~~experienced~~LLC, ~~challenges~~referred ~~during~~to ~~the~~as ~~startup~~Microgy ~~and~~Holdings, ~~initial~~failed ~~operation~~to ofmake the ~~Huckabay~~payments ~~Ridge~~in ~~facility~~respect ~~that~~to ~~have~~the ~~resulted~~December 1, in2009 ~~outages~~interest ~~for~~payments ~~corrective~~on ~~measures.~~the Weremaining ~~took~~Texas ~~advantage~~tax-exempt ofbonds ~~such~~and anCalifornia ~~outage to complete comprehensive upgrades to process~~tax-~~instrumentation~~exempt ~~and~~bonds ~~controls,~~on ~~the~~which ~~gas~~it ~~conditioning system,~~ and ~~the~~its ~~gas-collection~~subsidiaries ~~system~~are inobligated ~~order~~from toits ~~achieve~~own ~~anticipated performance levels~~funds. ~~While we gained~~In

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~~valuable~~addition, ~~knowledge~~our assubsidiary, Microgy Grand Island, LLC, failed to ~~our~~make ~~processes~~payments in respect to the December 1, 2009 interest payments on the Nebraska tax-exempt bonds on which it is obligated from its own funds, and ~~incorporated~~has other creditors which remain unpaid. We have been given notice of default under the ~~lessons~~indenture ~~learned~~for ~~into~~the ~~future~~14% ~~projects~~convertible notes, webut ~~cannot~~neither ~~assure~~the ~~you~~holders ~~that~~nor ~~similar~~the ~~challenges~~trustee ~~will~~thereunder have taken any further action with respect to such default. We have been given notice of default under the indentures for the Texas and California tax-exempt bonds, and the holders of the Texas and California tax-exempt bonds have accelerated the obligations associated with the bonds in full, but have not betaken any further action to enforce their rights in any collateral. We have not been given notice of default under the indenture for the Nebraska tax-exempt bonds, and neither the holders nor the trustee thereunder have taken any action ~~encountered~~with respect to such default. Finally, we have been given notice of material breach of the Cooperation Agreement, but neither Xergi nor DBT has taken any further action with respect to ~~future~~such ~~facilities~~breach. ~~Because~~We currently have outstanding past due and unpaid obligations of ~~Microgy’s~~$560,000 ~~limited~~in ~~experience~~respect of the 14% convertible notes, ~~there~~$23,088,000 isin arespect ~~risk~~of ~~that~~the ~~Microgy~~Texas ~~may~~tax-exempt ~~never~~bonds beplus ~~profitable~~accrued interest from December 1, 2009, $8,356,000 in respect of the California tax-exempt bonds plus accrued interest from December 1, 2009, and $300,000 in respect of payments owed to Xergi under the Cooperation Agreement, and $1,334,000 in dividends on our series A preferred stock, among other amounts owed to other creditors. We currently do not have sufficient funds to pay any of these amounts.

We cannot predict what actions our creditors may take. Relevant agreements with Texas and California bondholders, entered into prior to the acceleration of obligations underlying the bonds, provide for cross-collateralization of all of the assets associated with our Huckabay Ridge facility, our Rio Leche and Cnossen projects in Texas, and our Riverdale and Hanford projects in California. The Nebraska tax-exempt bonds are secured by the assets associated with our Grand Island facility. Our other obligations are unsecured. The holders of the Texas, California and Nebraska tax-exempt bonds may take steps to foreclose on their collateral, although to date none has done so. Our creditors could also seek to initiate involuntary proceedings under the United States Bankruptcy Code, or we may determine that it is in our best interest to initiate such proceedings voluntarily. While we are in discussions with some of these creditors and other parties with respect to these obligations, we cannot assure you that any such discussions will result in a favorable resolution of these obligations. The foregoing circumstances, and the actions our creditors may elect to take with respect to them, are likely to result in a material adverse effect on our business as well as a material impairment of the value of your investment in our securities.

Our sole operating business, Microgy, has limited operating history from which to evaluate its business and products.

Our sole operating business, Microgy, was formed in 1999 and remains in the early stages of its development. Microgy is developing facilities that use environmentally friendly anaerobic digestion and other technologies to produce biogas from animal and organic wastes. Although Microgy has developed and operates three single digester facilities in Wisconsin and the multi-digester Huckabay Ridge facility, Microgy still has limited experience in the construction and operation of multiple digester facilities such as those Microgy is currently constructing or intends to construct, and limited experience in gas conditioning or the sale of gas as a commodity. In addition, Microgy experienced challenges during the startup and initial operation of the Huckabay Ridge facility that resulted in outages for corrective measures. We took advantage of such an outage to complete comprehensive upgrades to process-instrumentation and controls, the gas conditioning system, and the gas-collection system in order to achieve anticipated performance levels. While we gained valuable knowledge as to our processes and incorporated the lessons learned into future projects, we cannot assure you that similar challenges will not be encountered with respect to future facilities. Because of Microgy’s limited experience, there is a risk that Microgy may never be profitable.

Microgy cannot predict when any facility will be completed, what Microgy’s costs will be or, consequently, whether Microgy or any facility developed by Microgy will be profitable.

Development of Microgy’s facilities is an inherently risky activity, subject to significant uncertainties and a lengthy development cycle. Uncertainties and risks include those relating to costs and availability of supplies and ~~labor, costs and quality of facility components and installation services, fluctuations in the prices available for the sale of facility output and timing of~~ completion of construction and commencement of commercial operations. Furthermore, obtaining the large number of agreements, permits and approvals necessary to develop, install, operate and manage any of Microgy’s facilities, as well as to market the energy and other co-products and to provide necessary related resources and services, involves a long development cycle and decision-making process. Microgy is required to enter into or obtain some or all of the following in connection with the development of its facilities:

labor, costs and quality of facility components and installation services, fluctuations in the prices available for the sale of facility output and timing of completion of construction and commencement of commercial operations. Furthermore, obtaining the large number of agreements, permits and approvals necessary to develop, install, operate and manage any of Microgy’s facilities, as well as to market the energy and other co-products and to provide necessary related resources and services, involves a long development cycle and decision-making process. Microgy is required to enter into or obtain some or all of the following in connection with the development of its facilities:

•

Off-take interconnection agreements;

•

Site agreements;

•

Supply contracts;

•

Design/build or other construction-related agreements;

•

Off-take agreements for gas produced;

•

Power sales contracts for facilities dedicated to the generation of electricity;

• Agreements for the sale of greenhouse gas ~~offset~~sequestration credits or other tradable environmental attributes;

•

Various co-product sales agreements;

•

Waste disposal agreements;

•

Environmental and other permits and licenses;

•

Government approvals; and

•

Financing commitments required for the successful completion of facilities under consideration.

Microgy’s failure to accomplish any of these objectives could materially increase the cost, or prevent the successful completion of, development or operation of facilities and incur the loss of any investment made. Many of these objectives are dependent upon decisions by third parties. Delays in such parties’ decision-making process are outside of our control and may have a negative impact on our development costs, cost of operations, receipt of revenue and revenue projections. We expect that, in some cases, it may take a year or more to obtain decisions on permits and approvals and to negotiate and close these complex agreements. Such delays could harm our operating results and financial condition.

As a result of the foregoing uncertainties we are unable to project with certainty Microgy’s organizational, structural, staffing or other overhead costs, the construction or operating costs associated with any facility, or whether any facility, or Microgy as a whole, will generate a profit. If Microgy fails to generate a profit, your investment in our securities will be materially, adversely affected.

If we are unable to obtain needed financing for Microgy’s facilities, the value of our Microgy investment may be reduced significantly.

Because we have not yet generated sufficient positive cash flow, and do not expect to do so until at least ~~2011~~2012, we do not have adequate funds on hand to complete construction of the facilities we currently have planned. We are seeking and will require corporate, project or group financing to fund the cost of any development we may decide to pursue for Microgy’s facilities. This financing may be difficult or impossible for us to obtain particularly in the current economic environment, in which capital raising activities are especially challenging. If we are unable to obtain such financing, the value of our Microgy investment may be reduced significantly, and we may be required to substantially curtail our business or completely cease construction or operation of any facilities. The availability of additional financing will depend on prospective lenders’ or investors’ review of our financial capabilities as well as specific facilities and other factors, including their

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development we may decide to pursue for Microgy’s facilities. This financing may be difficult or impossible for us to obtain particularly in the current economic environment, in which capital raising activities are especially challenging. If we are unable to obtain such financing, the value of our Microgy investment may be reduced significantly, and we may be required to substantially curtail our business or completely cease construction or operation of any facilities. The availability of additional financing will depend on prospective lenders’ or investors’ review of our financial capabilities as well as specific facilities and other factors, including their assessment of our ability to construct and manage each facility successfully and the current state of the economy. Such financing may not be available to us on acceptable terms, or at all. If we are unable to obtain the required financing, we will have to reduce the number of projects we construct and may even have to curtail or cease our business operations, which would have a material adverse effect on your investment in our securities.

If Microgy is unable to obtain sufficient manure and substrate for its facilities at an acceptable cost, such facilities, and Microgy as a whole, will likely not be profitable.

The performance of Microgy’s facilities is dependent on the availability of large quantities of animal manure and substrates derived from animal and other organic waste resources to produce raw energy and meet performance standards in the generation of renewable natural gas. A substantial portion of the gas production of Microgy’s facilities is derived from the co-digestion contribution enabled by substrate. While Microgy has or is expected to have agreements relating to the supply of manure and substrate, these agreements may not cover all of Microgy’s requirements for such resources, and Microgy will be subject to the ability of the counterparties to such agreements to perform their obligations thereunder. Lack of manure or substrate or adverse changes in the nature or quality of such waste resources or the cost to supply or transport them would seriously affect the ability of Microgy’s facilities to produce gas at profitable levels and, consequently, its ability to develop and finance facilities and to operate efficiently and generate income. As a result, its revenue and financial condition would be materially and negatively affected. We cannot assure you that the waste resources Microgy’s facilities require will be available in the future in acceptable quantity or quality, for free or at prices that make them affordable or accessible.

Microgy is expected to derive a significant portion of its revenues from the sale of renewable natural gas; as a result it may have some exposure to volatility in the commodity price of natural gas.

Microgy is expected to derive a significant portion of its revenues from the sale of renewable natural gas. Microgy typically enters into medium- to- long-term off-take arrangements for the gas produced by its facilities as part of the planning and development of such facilities, and may enter into other hedging arrangements, in order to mitigate the associated commodity price risk. Furthermore, our subsidiary, Microgy Holdings, is required by the terms of its tax-exempt bonds to maintain certain gas price protection arrangements for specified periods of time. We believe that these arrangements will be considered normal purchases and sales and will not be subject to derivative accounting. However, there may be times when such off-take and hedging arrangements expire or otherwise terminate before new arrangements are put in place, and such arrangements are subject to the creditworthiness of the counterparties to them. In addition, we cannot assure you that any such risk management vehicles will always be available or successful. Because renewable natural gas commands a premium over, but still tracks prices for, conventional natural gas, Microgy will be exposed, to the extent not covered by long-term contracts, to market risk with respect to the commodity pricing of conventional natural gas. Historically, natural gas prices have been volatile and Microgy expects such volatility to continue.

We expect revenues from sales of greenhouse gas sequestration credits and other environmental attributes, but the market for such attributes is nascent and may not develop in a manner that allows us to profit from the sales of such credits to the level projected, or at all.

The multiple digester facilities that we plan to implement through Microgy Holdings and our other subsidiaries are expected to ~~produce~~ produce greenhouse gas ~~offset~~sequestration credits and other marketable environmental attributes. While there exist trading markets for these attributes, and additional trading markets or other commercial avenues may develop, the existing trading markets are new and experience thin trading and price volatility, which can hinder sales of credits and make their value unpredictable. The quantity of credits that may be generated are a function of the carbon credit offset characteristics as determined by protocols used to document and verify the carbon offset value. These protocols continue to evolve, and changes in these protocols could substantially diminish further carbon credit eligibility. Furthermore, much of the participation in these markets is voluntary, in response to social and environmental concerns, as opposed to being driven by regulatory

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credits and make their value unpredictable. The quantity of credits that may be generated are a function of the carbon credit offset characteristics as determined by protocols used to document and verify the carbon offset value. These protocols continue to evolve, and changes in these protocols could substantially diminish further carbon credit eligibility. Furthermore, much of the participation in these markets is voluntary, in response to social and environmental concerns, as opposed to being driven by regulatory requirements. While many states and the federal government are pursuing or are considering carbon emissions limits and related initiatives that may spur greater development of and participation in these markets, we are unable to determine the effect of these initiatives on these markets. We cannot assure you that these trading markets will develop further, or even that they will continue to exist. In addition, many of our agreements with our business partners and investors require us to share such credits or any revenues we derive from sales of such credits, and agreements we negotiate in the future may also include such requirements. As a result of the foregoing, we may recognize significantly smaller revenues than we anticipate from the sale of greenhouse gas sequestration credits or other environmental attributes.

WeIn connection with financial closings on projects, we have pledged all of our ~~interest~~interests in our facilities in Texas and California as security for the loans relating to Microgy Holdings’ tax-exempt bond financings in those jurisdictions, and our subsidiary, Microgy Grand Island, LLC, has entered into a financing lease with respect to the Grand Island facility. We are in default on these loans and the bondholders could seek to initiate foreclosure proceedings on these assets.

We have invested, and expect to invest, substantial funds and resources in the Huckabay Ridge facility and the other multi-digester, renewable natural gas facilities in Texas, California and Nebraska. WeIn ~~have~~connection with initial financial closings on the projects, we pledged all of our interest in the Huckabay Ridge facility, as well as the Rio Leche, Cnossen and Mission facilities in Texas as collateral security for the loan to our subsidiary, Microgy Holdings, from the Gulf Coast Industrial Development Authority of Texas relating to the $60 million tax-exempt bond financing we completed in November 2006. WeThe ~~have~~outstanding principal amount of these bonds has been reduced to $23,088,711. We pledged all of our interest in the Riverdale and Hanford facilities in California as collateral security for the loan to our subsidiary, Microgy Holdings, from the California Statewide Communities Development Authority relating to the $62.425 million tax-exempt bond financing we completed in September 2008,. ~~and~~The weoutstanding ~~expect~~amount toof ~~pledge~~these ~~all~~bonds ofhas ~~our~~been ~~interest~~reduced into ~~the~~$8,355,699. ~~proposed~~Both ~~Bar~~the 20Texas ~~facility~~and in California bonds ~~if we~~ are ~~successful~~now in ~~closing~~default ~~the~~and ~~anticipated~~have ~~$26.02~~been ~~million second tranche of such financing~~accelerated. While these loans are non-recourse to Environmental Power, in certain circumstances Environmental Power is required to provide at least 20% of the construction costs of these facilities, as well as to cover any cost overruns in construction and certain other significant costs, which ~~represents~~if applicable would represent a substantial investment of corporate resources. IfBecause Microgy Holdings ~~were~~is toin default on these loans, webondholders ~~would~~by ~~lose~~foreclosure proceedings could seek to seize some or all of our investment in the Texas and California facilities, which if successful would have a material adverse effect on our business, financial condition and results of operations as well as your investment in our securities. In addition, our subsidiary, Microgy Grand Island, LLC, has entered into a $7.0 million sale and leaseback transaction with the City of Grand Island, Nebraska in connection with its tax-exempt bond financing in Nebraska to finance the construction of the Grand Island facility, and has guaranteed the City’s obligations under the tax-exempt bonds. Environmental Power has equity contribution and support obligations with respect to the Grand Island facility that are substantially similar to those under the Texas and California financings. If Microgy Grand Island ~~defaults~~ onis ~~its~~in ~~lease~~default ~~and~~on its guarantee obligations to the City of Grand Island, and we ~~would~~may lose some or all of our investment in the Grand Island facility, which would have a material adverse effect on our business, financial condition and results of operations.

Microgy faces competition in the renewable energy market as well as for the resources necessary to operate its facilities.

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 marketable renewable energy credits and participation in various renewable portfolios and other programs.

~~Competition~~17 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. Many of these companies are beginning to compete in the alternative fuels and renewable energy business with the growth of

Microgy also faces many forms of competition with respect to the resources required to operate its facilities. Such competition includes other providers of pollution control, including environmental engineers, providers of pollution control systems, private companies, public companies, associations, cooperatives, government programs, foreign companies, and educational pilot programs. Furthermore, there are many companies that offer anaerobic digester systems. A number of these competitors have more mature businesses and have successfully installed anaerobic digester systems in the United States. Microgy may be forced to compete with any of these competitors for access to equipment, construction supplies, skilled labor for the construction and operation of its facilities and the supplies of manure and substrate required to operate its facilities. In addition, Microgy may also have to compete for access to substances that make desirable substrates with other users of these substances, such as recyclers of waste grease and producers of biodiesel and other biofuels. The effect of such competition could be reflected in higher costs associated with obtaining access to these resources, as well as an insufficient supply of these resources for the profitable operation of Microgy’s facilities. If Microgy cannot obtain and maintain these supplies, or cannot obtain or maintain them at reasonable costs, the profitability of Microgy’s business will be adversely affected.

Extreme weather events may have a material adverse effect on the operation on our facilities.

Microgy’s facilities and sites are sensitive to extreme weather events. For instance, the anaerobic digestion process requires temperatures within a certain band, and extreme cold or heat may negatively impact the process or increase operating costs as a result of the need to counter such temperatures. ~~This was the case in early 2007, when Texas experienced record cold temperatures that hindered startup of the Huckabay Ridge facility.~~ Also, our sites contain retention ponds that have been designed with ample capacity to collect and retain storm water run-off, but, despite applying best maintenance practices, that capacity on rare occasions can be strained by severe rainfall. Thus, in August 2008, a 25-year record rainfall event caused a storm water retention pond breach and spill that required cleanup of a dry creek bed and reporting to the local environmental authorities, and earlier this year heavy rains saturated neighboring properties at Huckabay Ridge and thus significantly limited the ability of neighboring properties to utilize the plant’s effluent, which we distribute pursuant to a commercial-fertilizer registration issued by the Texas State Chemist. While Microgy considers typical local weather conditions in the design of its facilities and maintains appropriate insurance to mitigate associated risks to the extent commercially feasible, Microgy cannot anticipate all unusual weather events, and such events have had and may in the future have a material adverse effect on the operation of its facilities.

It is possible that we may expend large sums of money on individual projects to bring Microgy’s products to market and that the revenue that Microgy derives from these products from new projects may be insufficient to fund our operations.

Microgy’s business approach to the renewable energy may not produce results as anticipated, be profitable or be readily accepted by the marketplace. We cannot estimate whether the gas produced by facilities based on Microgy’s technology will materialize at anticipated prices, or whether satisfactory profit margins will be achieved. If such pricing levels are not achieved or sustained, or if Microgy’s technologies and business approach to Microgy’s markets do not achieve or sustain broad acceptance, our business, operating results and financial condition will be materially and negatively impacted.

~~Because~~18 we have not filed patents to protect Microgy’s intellectual property, we might not be able to prevent others from using Microgy’s technology; conversely, others who have filed for patent or other protection might be able to prevent Microgy from using its technology.

~~Furthermore,~~Because we ~~cannot~~have ~~assure~~not ~~you~~filed ~~that~~patents ~~others~~to ~~have~~protect ~~not~~Microgy’s ~~developed~~intellectual property, orwe ~~will~~might not ~~develop,~~be able ~~similar~~to ~~technologies~~prevent ~~that~~others ~~will~~from ~~compete~~using ~~with~~ Microgy’s ~~without infringing~~technology; ~~upon~~conversely, ~~Microgy’s~~others ~~intellectual~~who ~~property~~have ~~rights~~filed for patent or ~~those~~other ofprotection might be able to prevent Microgy from using its ~~licensor~~technology.

Microgy has not filed any patent applications on any of its intellectual property. Should Microgy decide to file patent applications, we cannot assure you that any patent applications relating to Microgy’s existing or future products or technologies will result in patents being issued, that any issued patents will afford adequate protection to Microgy, or that such patents will not be challenged, invalidated, infringed or circumvented. Furthermore, we cannot assure you that others have not developed, or will not develop, similar technologies that will compete with Microgy’s without infringing upon Microgy’s intellectual property rights or those of its licensor.

Third parties, including potential competitors, may already have filed patent applications relating to the subject matter of Microgy’s current or future technology. In the event that any such patents are issued to such parties, such patents may preclude Microgy or its licensor from obtaining patent protection for its technologies, products or processes. In addition, such patents may hinder or prevent Microgy from commercializing its technology and could require Microgy to enter into licenses with such parties. We cannot assure you that any required licenses would be available to us on acceptable terms, or at all.

Microgy relies on confidentiality agreements and licensing agreements to maintain the proprietary nature of its technology. To compete effectively, Microgy may have to defend the rights to its intellectual property from time to time. Such defense costs may be significant and have a negative impact on our financial condition. In addition, we may lack the financial resources to adequately defend Microgy’s intellectual property.

Microgy’s facilities are likely to be subject to numerous governmental regulations.

We expect that Microgy’s facilities are likely to be subject to various local, state and federal government regulations, including regulations covering air and water quality, solid waste disposal and related pollution issues. These regulations are mandated by the United States Environmental Protection Agency, or EPA, and state and local governments and are usually implemented through a permitting process, with ongoing compliance requirements thereafter. For example, grease-trap waste from restaurants and other food service providers is a desirable and highly available form of substrate for our facilities in Texas. However, the Texas environmental authorities required that we obtain a solid-waste permit for each of our planned facilities in Texas to the extent we desire to use grease-trap waste as substrate in the operation of such facilities. ~~Furthermore~~In addition, while we ~~have~~are ~~had~~authorized to ~~obtain~~distribute ~~water~~our ~~discharge~~effluent ~~permits~~in ~~for~~Texas ~~our~~to ~~planned~~neighboring ~~California~~properties ~~facilities~~pursuant to a commercial-fertilizer registration issued by the Texas State Chemist, ~~which~~the ~~typically~~neighboring ~~involve~~properties are still subject to regulations that require application of the effluent at agronomically sound rates. There are times when a ~~lengthy~~customer ~~process~~has to curtail use of our liquid byproduct to prevent over-application, thereby necessitating that we find other outlets for the byproduct, potentially increasing operating costs, including provision for interim storage. We expect that all of our facilities will be required to obtain and comply with various environmental and other permits and approvals, which will vary from location to location. In addition, our activities will fall under a number of health and safety regulations and laws and regulations relating to farming and zoning. Compliance with these regulations and permitting requirements could delay the development of facilities and/or ~~could~~add beto ~~costly~~our operating costs on an interim or even a permanent basis and harm our financial condition or potentially require that we discontinue operations, depending upon the severity and duration of a particular compliance issue.

Microgy’s facilities may become subject to regulations or taxes based on carbon or other emissions.

Microgy’s facilities produce and emit into the atmosphere carbon dioxide and hydrogen sulfide as a result of the anaerobic digestion gas conditioning processes that they employ. While such facilities capture and thereby reduce the amount of methane, a potent greenhouse gas, that would otherwise enter the atmosphere, there are direct emissions of carbon dioxide, another greenhouse gas. As such, Microgy’s facilities may still be subject to ~~future~~ federal or state legislation or regulation, or the implementation of international treaties, which seek to limit or impose a cost on greenhouse gas emissions. If any such legislation, regulations or treaties were implemented, Microgy may be required to expend resources to capture the carbon dioxide it produces, pay a tax on its carbon dioxide emissions, purchase greenhouse gas offset credits, reduce the greenhouse offset credits claimed for such facilities or take similar actions. In addition, Microgy could become subject to federal, state and local taxes and regulations regarding its other emissions. Any of the foregoing could harm the profitability of Microgy’s facilities.

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future federal or state legislation or regulation, or the implementation of international treaties, which seek to limit or impose a cost on greenhouse gas emissions. If any such legislation, regulations or treaties were implemented, Microgy may be required to expend resources to capture the carbon dioxide it produces, pay a tax on its carbon dioxide emissions, purchase greenhouse gas sequestration credits, reduce the greenhouse sequestration credits claimed for such facilities or take similar actions. In addition, Microgy could become subject to federal, state and local taxes and regulations regarding its other emissions. Any of the foregoing could harm the profitability of Microgy’s facilities.

Our operating results are difficult to predict in advance and may fluctuate significantly, which may result in a substantial decline in our stock price.

Our operating results are difficult to predict in advance and may fluctuate significantly, and a failure to meet the expectations of analysts or our stockholders would likely result in a substantial decline in our stock price.

Factors that are likely to cause our results to fluctuate include the following:

•

the amount and timing of our operating expenses and capital expenditures;

•

the success or failure of the facilities currently underway;

•

our ability to specify, develop and complete facilities, and to introduce and market the energy created by such facilities and bring them to volume production in a timely manner;

•

the rate of adoption and acceptance of new industry standards in our target markets; and

•

other unforeseen activities or issues.

If our operating results fluctuate greatly, our business may be materially adversely affected and our stock price will likely decline.

Risks Relating to Our Capital Stock

We have numerous outstanding shares of restricted common stock, as well as options, warrants and shares of preferred stock exercisable or convertible into a substantial number of shares of our common stock; the resale of outstanding restricted shares, as well as the exercise or conversion of these securities and the resale of the underlying shares, may adversely affect the price of our common stock.

The resale by our stockholders of shares of our restricted common stock or securities exercisable for or convertible into shares of our common stock could cause the market price of our common stock to decline.

A significant portion of our outstanding shares of common stock had been restricted from immediate resale, but is now available for sale in the market pursuant to Rule 144 under the Securities Act of 1933. As of December 31, ~~2008~~2009, we had approximately:

• 15,~~614~~803,~~604~~034 shares of our common stock are issued and 15,708,591 shares are outstanding, of which 1,212,726 shares of common stock outstanding are “restricted securities” within the meaning of Rule 144 and 35117,~~250~~625 shares are subject to vesting pursuant to restricted stock awards granted to certain employees; and

•

2,823,659 shares of common stock issuable upon conversion of our series A preferred stock;

all of which shares, other than employee restricted stock awards subject to vesting, are eligible for resale without volume and manner of sale restrictions in accordance with Rule 144, except to the extent held by our affiliates. We are currently authorized to issue 50,000,000 shares of common stock.

We also currently have on file with the Securities and Exchange Commission an effective registration statement that permits the resale of up to 100,000 shares of our common stock subject to warrants exercisable at a price of $6.33 per share by the holders of such warrants. In addition, in connection with our sale of shares of our series A preferred stock and common stock warrants on November 9, 2006, we filed a registration statement to permit the resale of up to 4,387,360 shares of common stock issuable upon conversion of such shares of series A preferred stock and exercise of such warrants, which registration statement is currently effective. The shares of series A preferred stock were convertible at a conversion price of $5.27 per share, and the common stock warrants were exercisable at a price of $5.52 per share as to 1,406,205 of the warrants, and $5.27 per share as to 168,745 of the warrants. In October 2007, the exercise price of the warrants was reduced to $5.25 per share, and the preferred stock conversion price was reduced to $5.25 per share as a result of anti–dilution adjustments

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stock issuable upon conversion of such shares of series A preferred stock and exercise of such warrants, which registration statement is currently effective. The shares of series A preferred stock were convertible at a conversion price of $5.27 per share, and the common stock warrants were exercisable at a price of $5.52 per share as to 1,406,205 of the warrants, and $5.27 per share as to 168,745 of the warrants. In October 2007, the exercise price of the warrants was reduced to $5.25 per share, and the preferred stock conversion price was reduced to $5.25 per share as a result of anti–dilution adjustments triggered by the issuance of common stock in the October 2007 public offering, resulting in an increase of 11,250 in the number of shares of our common stock issuable upon conversion of the series A preferred stock.

In addition, pursuant to our business development agreement with Cargill, Incorporated, we may issue warrants to Cargill from time to time to acquire up to an aggregate of 4.99% of our outstanding common stock on a fully diluted basis, at an exercise price equal to 75% of the closing price of our common stock on the date on which such warrants are issued. In May 2007, we issued to Cargill, Incorporated warrants to purchase 175,912 shares of our common stock at an exercise price of $5.37 per share, representing 1% of our fully diluted common stock at the time, as required by ~~the~~ a business development agreement with Cargill that expired in 2009.

On March 13, 2009, we closed on the sale of $5 million original principal amount of our 14% convertible notes due January 1, 2014. These notes are convertible into an aggregate of up to approximately 925,926 shares of our common stock, based upon the minimum conversion price of the notes, all of which shares may be sold by the holders thereof without restriction, except to the extent held by our affiliates.

AsOn ~~of December~~May 3122, ~~2008,~~2009 we ~~had~~issued ~~outstanding~~an ~~options~~additional ~~and warrants to acquire up to approximately 4,905,935 shares of our common stock at prices ranging from~~ $~~1.75~~3 tomillion ~~$8.89~~original ~~per~~principal ~~share,~~amount ~~with a weighted average exercise price~~ of ~~$2.98~~the ~~per~~notes ~~share.~~as ~~The~~payment ~~shares~~for ofcertain ~~common~~license ~~stock~~fees ~~issuable upon exercise of these options will be freely transferable without restriction, except~~ to the ~~extent~~licensor ~~that~~of ~~they~~Microgy’s ~~are~~technology ~~held by our affiliates. Any shares held by our affiliates may only be sold~~ in ~~compliance~~a ~~with~~private ~~the~~placement ~~volume limitations of Rule 144~~transaction. These ~~volume~~notes ~~limitations~~are ~~restrict the number of~~convertible ~~shares~~into ~~that~~up ~~may be sold by an affiliate in any three-month period~~ to ~~the greater of 1% of the number of shares then outstanding, which equals~~ approximately ~~156~~555,~~000~~556 shares as of ~~December 31,~~common ~~2008~~stock, orbased upon the ~~average~~minimum ~~weekly~~conversion ~~trading~~price. ~~volume~~These ofshares ~~our common~~are ~~stock~~“restricted ~~during~~securities” ~~the~~within ~~four calendar weeks preceding~~ the ~~filing~~meaning of aRule ~~notice on Form~~ 144 ~~with respect to the sale~~.

As of December 31, 2009, we had outstanding options, warrants and stock appreciation rights to acquire up to approximately 5,096,536 shares of our common stock at prices ranging from $0.20 to $8.89 per share, with a weighted average exercise price of $4.51 per share and an average remaining contractual term of 3.8 years. The shares of common stock issuable upon exercise of these options will be freely transferable without restriction, except to the extent that they are held by our affiliates. Any shares held by our affiliates may only be sold in compliance with the volume limitations of Rule 144. These volume limitations restrict the number of shares that may be sold by an affiliate in any three-month period to the greater of 1% of the number of shares then outstanding, which equals approximately 157,000 shares as of December 31, 2009, or the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

As a result of the resale of outstanding shares of our common stock, including restricted shares and shares issuable upon exercise or conversion of the foregoing securities, the price of our common stock may be adversely affected.

The issuance of preferred stock may adversely affect the value of our common stock or make it more difficult for a party to acquire a controlling interest in our company.

We are authorized to issue up to 2,000,000 shares of preferred stock, of which 281,241 shares have been designated as series A 9% cumulative convertible preferred stock, referred to as the series A preferred stock, and which are currently issued and outstanding. The preferred stock not already designated and issued may be issued in series from time to time with such designations, rights, preferences and limitations as our board of directors may determine by resolution without stockholder approval. While the terms of the series A preferred stock do not currently allow for the issuance of preferred stock having dividend and liquidation preferences greater than or senior to the series A preferred stock, any future issuances of preferred stock may enjoy dividend and liquidation preferences over our common stock, thereby diminishing the value of our common stock. Furthermore, the issuance of preferred stock, as well as any authorized but unreserved common stock, while providing flexibility in connection with possible future financings or acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a controlling interest in our company.

~~Our~~21 ~~management and directors, as well as the holders of our series A preferred stock, are able to exercise significant control over our management and affairs.~~

As of December 31, 2008, executive officers and directors, including Richard E. Kessel, Joseph E. Cresci, Roger Ballentine, Kamlesh R. Tejwani, Robert I. Weisberg, John R. Cooper, August Schumacher, Jr., Lon Hatamiya, Steven Kessner, Michael E. Thomas and Dennis Haines, beneficially owned approximately 17.46% of our outstanding common stock. In addition, the three holders of our series A preferred stock, two of which are affiliated with each other, control approximately 18.3% of the total number of votes currently entitled to be cast

atOur ~~any~~management ~~meeting~~and ~~of our stockholders. While there are no voting agreements among them~~directors, ~~such~~as ~~persons,~~well as ~~a group, may be able to exercise some level of control over~~ the outcome of matters submitted for stockholder action, including the election of members to our board of directors and the approval of significant change in control transactions. This may have the effect of delaying or preventing a change in control of our company and, therefore, your opportunity to sell your shares in such a transaction. Furthermore, the holders of our series A preferred stock, ~~have~~are ~~special~~able ~~approval rights with respect~~ to exercise ~~certain~~significant ~~changes~~control toover our ~~certificate~~management ~~of incorporation~~ and ~~certain other corporate actions~~affairs.

As of December 31, 2009, executive officers and directors, including Richard E. Kessel, Joseph E. Cresci, Roger Ballentine, Kamlesh R. Tejwani, Robert I. Weisberg, John R. Cooper, August Schumacher, Jr., Lon Hatamiya, Steven Kessner, Michael E. Thomas and Dennis Haines, beneficially owned approximately 17.5% of our outstanding common stock. In addition, the three holders of our series A preferred stock, two of which are affiliated with each other, control approximately 18.3% of the total number of votes currently entitled to be cast at any meeting of our stockholders. While there are no voting agreements among them, such persons, as a group, may be able to exercise some level of control over the outcome of matters submitted for stockholder action, including the election of members to our board of directors and the approval of significant change in control transactions. This may have the effect of delaying or preventing a change in control of our company and, therefore, your opportunity to sell your shares in such a transaction. Furthermore, the holders of our series A preferred stock have special approval rights with respect to certain changes to our certificate of incorporation and certain other corporate actions.

The lack of a developed trading market may make it difficult for you to sell shares of our common stock.

While our common stock is currently listed for trading on the ~~NASDAQ~~Nasdaq Capital Market, trading activity in our common stock has fluctuated and has at times been limited. For example, for the one-month period from December 1, ~~2008~~2009 to December 31, ~~2008~~2009, our daily trading volume ranged from a low of 269,~~500~~700 shares to a high of 1969,~~363,500~~200 shares, and averaged ~~144~~255,~~600~~ 000 shares a day. We cannot guarantee that a consistently active trading market will develop in the future. As a result, a holder of our common stock may find it difficult to dispose of our common stock.

If we fail to continue to meet all applicable continued listing requirements of The ~~NASDAQ~~Nasdaq Capital Market and ~~NASDAQ~~Nasdaq determines to delist our common stock, the market liquidity and market price of our common stock could decline.

Our common stock is currently listed on The ~~NASDAQ~~Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other listing requirements. Among these requirements is that our common stock maintain a minimum closing bid price of at least $1.00 per share. IfOn ~~our~~March 16, ~~common stock fails to maintain a minimum closing bid price of at least $1.00 per share for thirty consecutive business days~~2010, we ~~will~~received ~~have~~notice from aNasdaq ~~180-day~~that ~~period~~we towere ~~regain~~not in compliance with the $1.00 minimum bid ~~price~~requirement ~~rule.~~for Ifcontinued welisting ~~fail~~and tothat ~~regain compliance within such period,~~ our ~~common~~securities ~~stock~~would ~~may~~ be ~~subject~~delisted. toAs ~~delisting~~permitted ~~from~~under the ~~NASDAQ~~Nasdaq ~~Capital~~rules ~~Market.~~we ~~NASDAQ~~have ~~temporarily~~appealed ~~suspended~~this ~~its~~decision ~~minimum~~which ~~bid~~will ~~price~~defer ~~rule~~any ~~effective October 16, 2008~~ delisting until ~~January 16,~~after ~~2009,~~the ~~due~~appeal tois ~~overall~~heard ~~conditions~~in ~~affecting~~30 ~~the~~to ~~stock~~45 ~~markets~~days. ~~This~~ ~~suspension~~We ~~was~~will ~~recently~~consider ~~extended~~available options to ~~April 19,~~regain ~~2009.~~compliance ~~Our~~with ~~common~~the ~~stock has not had a~~ minimum ~~closing~~ bid price ~~of $1~~requirement.00 ~~per~~Nasdaq ~~share~~has ~~since~~informed ~~October 20,~~us ~~2008.~~that Ifthe weonly ~~fail~~historically toacceptable ~~continue~~definitive toplan ~~meet~~for ~~all~~regaining ~~applicable~~compliance is ~~listing~~a ~~requirements~~reverse ofstock ~~The~~split. ~~NASDAQ Capital~~We ~~Market~~are ~~and~~unable ~~NASDAQ determines~~ to ~~delist~~determine ~~our~~if ~~common~~we ~~stock,~~will anbe ~~active~~successful ~~trading~~with ~~market for~~ our ~~common~~appeal ~~stock~~and may ~~not~~in beany ~~sustained~~event ~~and~~determine ~~the~~it ~~market~~is ~~price~~in ~~of our common stock could decline. In addition,~~ the ~~delisting~~best interest of our ~~common~~company ~~stock~~to ~~would~~delist ~~also trigger~~our asecurities ~~right~~even onif ~~the part of the holders of~~ our ~~outstanding~~appeal ~~shares~~is ofsuccessful. ~~series~~We Adisclaim ~~preferred~~any intention ~~stock~~or obligation to ~~increase~~update the ~~cumulative~~statements ~~dividend~~in ~~rate~~this onreport ~~such~~for ~~shares~~purposes ~~from~~of ~~9% per~~disclosing ~~year~~any toaction ~~16% per~~or ~~year.~~response ~~We cannot assure you~~ that we ~~will~~decide ~~not ultimately fail~~ to ~~comply~~take ~~with~~after the ~~minimum~~date ~~bid price rule or other NASDAQ listing standards~~hereof.

If our stock is delisted, an active trading market for our common stock may not be sustained and the market price of our common stock could decline. In addition, the delisting of our common stock would also trigger a right on the part of the holders of our outstanding shares of series A preferred stock to increase the cumulative dividend rate on such shares from 9% per year to 16% per year and such holders may claim other damages. We cannot assure you that we will not ultimately fail to comply with Nasdaq listing standards or voluntarily decide to delist our stock from The Nasdaq Capital Market.

The market price for our common stock has been and may continue to be volatile.

The market price for our common stock has been volatile, and it is likely to continue to be so. InFor ~~addition,~~instance the ~~market~~ price ~~for~~of our common stock ~~could~~reached bea ~~subject~~high toof ~~significant~~$1.09 ~~fluctuations~~ in ~~response~~the tofirst ~~variations~~quarter ~~in quarterly operating results, announcements~~ of ~~technological~~2009 ~~innovations or new facilities~~ and ~~products~~a bylow ~~us or our competitors, or our failure to achieve operating results consistent with any securities analysts’ projections~~ of ~~our performance~~ $0.14 ~~Furthermore,~~in the ~~stock~~fourth ~~market~~quarter ~~has experienced extreme price and volume fluctuations and volatility that have particularly affected the market price~~ of ~~many emerging growth and development stage companies such as ours~~2009. ~~Such~~While ~~fluctuations~~we ~~and~~cannot ~~volatility~~state ~~have~~with ~~often~~any ~~been~~certainty ~~unrelated~~the orspecific ~~disproportionate~~reasons tofor the ~~operating~~recent ~~performance~~volatility of ~~such companies. As a result of fluctuations related or~~ ~~unrelated to our performance, the value of our common stock may be materially adversely affected.~~

2322

our stock price, we believe that such volatility could be due to the current financial recession and related economic uncertainties and their impact on the stock market generally as well as on the stock prices of early stage companies such as ours, in addition to the risks and uncertainties regarding our business described elsewhere in this report. In addition, the market price for our common stock could be subject to significant fluctuations in response to variations in quarterly operating results, announcements of technological innovations or new facilities and products by us or our competitors, or our failure to achieve operating results consistent with any securities analysts’ projections of our performance. Furthermore, the stock market has experienced extreme price and volume fluctuations and volatility that have particularly affected the market price of many emerging growth and development stage companies such as ours. Such fluctuations and volatility have often been unrelated or disproportionate to the operating performance of such companies. As a result of fluctuations related or unrelated to our performance, the value of our common stock may be materially adversely affected.

We will require and are actively seeking significant additional financing, which may result in our issuing a significant number of shares of our common stock or preferred stock, which in turn may dilute the value of your shares.

We ~~have historically needed to raise capital to fund our operating losses. We expect to~~ continue to incur operating losses through at least 2010. In November 2006, we completed a tax-exempt bond financing in Texas to finance a portion of the construction costs of our Texas facilities, as well as a $15 million private placement of our series A preferred stock and common stock warrants. In October 2007, we completed a public offering resulting in net proceeds to us of approximately $26.6 million. In July 2008, we completed a $7.0 million tax-exempt bond financing in Nebraska to finance a portion of the construction costs of our Grand Island facility. In September 2008, we completed a $62.425 million first tranche tax-exempt bond financing in California to finance a portion of the constructions costs of our proposed California facilities, and anticipate pursuing a proposed $26.02 million second tranche financing. On March 13, 2009 we closed on a sale of $5.0 million original principal amount of our 14% convertible notes due January 1, 2014 for net proceeds of approximately $4.4 million, and we continue to work with our financial advisors to identify and explore various opportunities to raise the capital we require. However, we cannot assure you that we will be able to raise sufficient capital on acceptable terms, or at all. The level of funds we are able to raise, if any, will determine the level of development and construction activity that we can pursue and whether we will be able to continue as a going concern. We will require and will continue to seek corporate and project financing to fund our ongoing overhead and growth plans as well as the cost of any development we may decide to pursue for our facilities. Without limiting the foregoing, as described elsewhere in this annual report, we will have to raise significant additional ~~capital~~financing in the first half of ~~2009~~2010 in order to fund ongoing general and administrative expenses associated with our corporate overhead as well as ~~interest~~debt service and dividend requirements and to continue as a going concern. We cannot assure you that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Any such financing could be in the form of debt or equity instruments or a combination of debt and equity instruments. To the extent any such financing involves equity or convertible debt, we may issue a significant number of shares of our common stock or preferred stock, which will dilute an existing investment in our common stock, and we may issue such shares at prices that may be lower than the price paid for our common stock by our stockholders. In addition, if we issue shares of preferred stock, such preferred stock may have rights and preferences that are superior to those of our common stock. Indeed, the shares of our series A preferred stock issued in our November 2006 private placement have rights and preferences that are superior to those of our common stock. Because we are authorized to issue shares of additional series of preferred stock, as designated by our board of directors, subject to certain limitations included in the terms of our series A preferred stock, we may issue more shares of preferred stock in the future.

Issuances of common stock or securities convertible into common stock in the future could dilute existing stockholders and adversely affect the market ~~price~~ of our common stock. Of the 50,000,000 shares of authorized common stock, 15,703,034 are issued, 15,614,604 are outstanding and 4,905,935 have been reserved for issuance upon the exercise of options and warrants outstanding as of December 31, 2008. An additional 2,823,660 shares have been reserved for issuance in connection with the conversion of shares of our series A preferred stock issued in our November 2006 private placement. We may also issue warrants to purchase up to 4.99% of our common stock, on a fully diluted basis, to Cargill, Incorporated pursuant to the terms of our business development agreement. In May 2007, we issued warrants to purchase 175,912 shares of our common stock at an exercise price ~~$5.37~~ ~~per share, representing 1%~~ of our ~~fully diluted~~ common stock ~~at the time to Cargill as required by the business development agreement~~. ~~Additionally, in October 2007, we issued 5,400,000 shares of common stock in an underwritten public offering.~~ We ~~also have the authority to issue preferred stock as previously described, debt securities convertible into common stock, and options and warrants to purchase shares of our common stock. We~~ may issue shares of common stock or securities convertible into common stock at values below our market price up to a maximum of 19.9% of our outstanding common stock without stockholder approval, which values may be substantially below the price paid for our common stock by our stockholders. We also do not need stockholder approval to issue an unlimited number of shares of common stock or securities convertible into common stock (provided sufficient shares of common stock are authorized and unreserved) at or above the market price for our common stock pursuant to certain ~~NASDAQ~~Nasdaq Capital Market requirements. Any such issuances could be at values below the price paid for our common stock by our stockholders.

2423

Our outstanding series A preferred stock has rights and preferences superior to that of our common stock, may impair our ability to raise additional financing, may harm our financial condition if we are required to redeem it and could have the effect of discouraging an acquisition or reducing the amount of proceeds available to common stockholders upon such an acquisition.

Our shares of series A preferred stock have rights and preferences which are superior to those of our common stock, including:

•

an accruing dividend of 9% on the stated value of each outstanding share of series A preferred stock, payable before the payment of any dividends on our common stock;

•

a preference upon liquidation, dissolution or winding up of Environmental Power equal to 200% of the stated value of each share of preferred stock, plus any accrued but unpaid dividends;

•

the right to consent to certain changes to our certificate of incorporation and bylaws, and certain other significant corporate actions; and

•

the right to a payment equal to 150% of the stated value of each outstanding share of Series A preferred stock upon certain change-in-control events.

Our series A preferred stock may also have a material adverse effect on our financial condition and results of of operations. With certain exceptions, including exceptions for permitted indebtedness, as defined, we have agreed to limit our ability to incur additional indebtedness while such preferred stock is outstanding. Subject to other exceptions, we have also agreed with series A holders not to issue stock senior to or on a par with series A preferred stock. These constraints could materially and adversely affect our ability to raise funds necessary to continue our business. In addition, the series A preferred stock provides for various triggering events, such as our common stock not being listed for trading on the American Stock Exchange, ~~NASDAQ~~Nasdaq Global Market, ~~NASDAQ~~Nasdaq Capital Market or New York Stock Exchange, the failure to deliver shares of our common stock upon conversion and specified change of control transactions. Several other triggering events are described in the certificate of designations, preferences and rights of the series A preferred stock. If one of these triggering events occurs, we may be required to redeem all or part of the outstanding shares of series A preferred stock at 120% of their stated value (150% in the case of certain change in control transactions), including payment of accrued dividends and penalties, or the dividend rate on the series A preferred stock may be increased from 9% per year to 16% per year, depending on the triggering event and the elections made by the holders of the series A preferred stock. Some of the triggering events include matters over which we may have some, little, or no control. Any such redemption could leave us with little or no working capital for our business. Furthermore, by virtue of their voting power and other rights and preferences, the outstanding series A preferred stock could have the effect of blocking or discouraging certain acquisitions of our company or reducing the proceeds available to common stockholders as a result of any such acquisitions.

We do not intend to pay cash dividends on our common stock.

We have not paid cash dividends on our common stock since 2001, and we do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon the future earnings, capital requirements, financial requirements and other factors that our board of directors will consider, and is subject to the prior payment of all accrued but unpaid dividends on our series A preferred stock. Furthermore, the terms of our series A preferred stock prohibit the payment of dividends on our common stock while any shares of our series A preferred stock are outstanding. Because we do not anticipate paying cash dividends on our common stock, the return on any investment in our common stock will depend solely on a change, if any, in the market value of our common stock.

2524

Item 1B.

Unresolved Staff Comments

Not applicable.

Item 2.

Properties

In the ordinary course of our business, we currently lease office space atin ~~various~~Golden, ~~locations~~Colorado and Tarrytown, New York. The office space in Golden, Colorado has been subleased to a third party. We believe this office space, including the space for our corporate headquarters, located in Tarrytown, ~~N.Y.~~New York, is replaceable at reasonable rates.

Microgy Holdings’ wholly -owned subsidiary, MST Estates LLC, owns approximately seventy-two acres of land in Erath County, Texas, which is the site on which the Huckabay Ridge ~~project~~facility is located. We believe the company’s Huckabay Ridge facility is the largest renewable natural gas plant of its kind in North America. The plant generates methane-rich biogas from manure and other agricultural waste, conditions it to natural gas standards and distributes it through a commercial pipeline. Huckabay Ridge consists of eight anaerobic digesters that extract methane-rich biogas from waste to produce energy. This property is subject to a mortgage securing the obligations under our Texas and California tax-exempt bonds.

Microgy Holdings’ wholly -owned subsidiary, Rio Leche Estates L.L.C., owns approximately ninety-two acres of land in Dublin, Texas, which is the site on which the planned Rio Leche facility would be located. This property is ~~expected~~subject to bea ~~located~~mortgage securing the obligations under our Texas and California tax-exempt bonds.

In addition to the foregoing, in the ordinary course of our business, certain of the company’s operating subsidiaries enter into long-term leases with nominal annual rent authorizing construction and operation of our facilities on various host properties.

Item 3.

Legal Proceedings

We are not currently a party to any material legal proceedings.

~~Item~~25 ~~4. Submission of Matters to a Vote of Security Holders~~

No matters were submitted to a vote of our security holders, through solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 2008.

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers, their ages and their positions as of February 2928, ~~2009~~2010 are set forth below:

Name	Age	Position
Richard E. Kessel	5960	President and Chief Executive Officer and President
Michael E. Thomas	4950	Senior Vice President, Chief Financial Officer and Treasurer
Dennis Haines	5657	Vice President , General Counsel and Secretary

Richard E. Kessel has been our President and Chief Executive Officer since July 2006. From October 2003 to July 2006, Mr. Kessel was President and Chief Executive Officer of Bedford Partners, a consulting firm assisting private equity firms in acquiring energy, water, waste and other service related enterprises. From July 1, 2002 to September 30, 2003, Mr. Kessel served as the President and Chief Executive Officer for North America, and a Senior Vice President of, Suez Environment, an international company focused on water, wastewater and waste services. The North American operations overseen by Mr. Kessel were comprised of five companies with over 9,200 employees, $1.3 billion in annual revenues and $1.5 billion in assets. Mr. Kessel served as President and Chief Executive Officer of Trigen Energy Corporation, an energy services company with $1 billion in assets, $533 million in annual revenue and 34 operating facilities in 22 states, from April 1, 2000 to June 30, 2002, after serving as its Executive Vice President and Chief Operating Officer from December 1993 to March 31, 2000. Previously, Mr. Kessel was President and Chief Executive Officer of United Thermal Corporation (acquired by Trigen), which owned and operated the district energy systems in Baltimore, Boston, Philadelphia and St. Louis, and Chief Operating Officer of Sithe Energies, Inc., a developer of independent power projects in the United States and global markets. Mr. Kessel serves on the board of directors of ISO New England, Inc., the operator of the New England region’s bulk power system and wholesale electricity markets. Mr. Kessel holds a B.S. in electrical engineering from Manhattan College, completed the course work for a masters in finance from New York University’s Stern School of Business and received an advanced management degree from the Wharton School of Business Executive Program.

Michael E. Thomas has been our Senior Vice President and Chief Financial Officer since May 2007 and became Treasurer in June 2007. From January 2007 to May 2007, Mr. Thomas was the principal of MET Consulting, LLC, a business and financial services consulting firm. From January 1999 to December 2006, Mr. Thomas was Vice President, Chief Financial Officer for Maine Yankee Atomic Power Company. From October 2004 to December 2006, Mr. Thomas served as Vice President and Chief Financial Officer for Connecticut Yankee Atomic Power Company and from December 2004 to December 2006 as Vice President and Chief Financial Officer for Yankee Atomic Electric Company. In these capacities, Mr. Thomas had responsibility for financial reporting, investment management, risk management and treasury functions, as well as human resources responsibilities for these three utilities, which had combined assets of over $1 billion and substantially completed decommissioning programs for the three nuclear power plants owned by them during Mr. Thomas’ tenure. From 1991 to 1999, Mr. Thomas held various other finance positions with Maine Yankee Atomic Power Company, including Manager of Financial Services and Vice President and Treasurer. From 1984 to 1989, Mr. Thomas held various finance positions with Central Maine Power Company, including Senior Financial Analyst and Director of Treasury Operations. Mr. Thomas holds a bachelor’s degree with a major in economics from Bowdoin College and an MBA from the University of Southern Maine.

Dennis Haines has been our Vice President and General Counsel since October 2006 and Secretary since June 2007. For the last several years, Mr. Haines took on various assignments with Suez, a worldwide energy and environmental services provider, including serving as General Counsel at Teris L.L.C., a Suez subsidiary, from July 2005 to August 2006. From January 2003 to February 2005, Mr. Haines provided legal support to various other Suez units, including operations in Nova Scotia and the United Kingdom. From January 2001 to December 2002, Mr. Haines served as General Counsel at Trigen Energy Corporation, White Plains, NY, part of Suez Energy International. Mr. Haines was also General Counsel & Secretary at Zurn Industries, Inc., Erie, PA, an NYSE-traded company which, through Zurn/NEPCO, specialized in the design and construction of power-generation facilities worldwide. Mr. Haines is a graduate of the University of Pittsburgh (J.D., 1977, and B.A., 1974), and a member of the New York, California, and Pennsylvania Bars.

2726

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Price of and Dividends on Environmental Power’s Common Stock and Related Stockholder Matters

Our common stock currently trades on the ~~NASDAQ~~Nasdaq Capital Market under the symbol “EPG.” As of December 31, ~~2008~~2009 there were approximately ~~162~~ 215 record holders and over 15,500 beneficial holders of our common stock.

~~Prior to December 21, 2007, our common stock traded on the American Stock Exchange.~~ The following table shows the ~~quarterly~~ high and low sales prices for our common stock ~~during~~as ~~2007~~reported ~~through~~on ~~December 20,~~the ~~2007~~Nasdaq asCapital ~~reported~~Market onfor each of the ~~American~~quarters ~~Stock~~in ~~Exchange~~the years ended December 31, 2008 and 2009, respectively.

	High		Low
Fiscal Year Ended December 31, 2007
Fiscal Year Ended December 31, 2008
First Quarter	$	86.8525	$	63.3565
Second Quarter	$	95.3462	$	63.4094
Third Quarter	$	94.1760	$	41.6062
Fourth Quarter (through December 20, 2007)	$	5.50	$	3.92
Fourth Quarter		2.25		0.28
	High		Low
Fiscal Year Ended December 31, 2009
First Quarter	$	1.09	$	0.25
Second Quarter		0.82		0.33
Third Quarter		0.69		0.41
Fourth Quarter		0.48		0.14

~~The~~Our ~~following~~board ~~table~~of ~~shows~~directors has not declared any dividends on our common stock since the ~~high~~last ~~and~~quarter ~~low~~of ~~sales~~2000. ~~prices~~Due to the anticipated continued expansion of our business, our board of directors has determined that available cash should be used for operating and investing activities for the foreseeable future, except to the extent of cash dividends required to be paid on outstanding shares of our ~~common~~series A 9% cumulative convertible preferred stock, referred to as ~~reported~~the onseries A preferred stock. In addition, the terms of ~~NASDAQ~~our ~~Capital~~series ~~Market~~A ~~for~~preferred stock prohibit the ~~remainder~~payment of ~~the~~dividends ~~fourth~~on ~~quarter~~our ofcommon ~~2007~~stock ~~and~~while ~~for~~any ~~each~~shares of ~~the~~our ~~quarters~~series inA preferred stock remain outstanding or any accrued dividends on the ~~year~~series ~~ended~~A ~~December~~preferred stock remain unpaid. As of January 311, 2010, ~~2008~~$1,334,179 in preferred dividends were accrued and unpaid.

	High		Low
Fiscal Year Ended December 31, 2007
Fourth Quarter (December 21, 2007 through December 31, 2007)	$	5.04	$	4.25
Fiscal Year Ended December 31, 2008
First Quarter	$	6.25	$	3.65
Second Quarter	$	5.62	$	3.94
Third Quarter	$	4.60	$	1.62
Fourth Quarter	$	2.25	$	0.28

Our board of directors has not declared any dividends on our common stock since the last quarter of 2000. Due to the anticipated continued expansion of our business, our board of directors has determined that available cash should be used for operating and investing activities for the foreseeable future, except to the extent of cash dividends required to be paid on outstanding shares of our series A 9% cumulative convertible preferred stock, referred to as the series A preferred stock. In addition, the terms of our series A preferred stock prohibit the payment of dividends on our common stock while any shares of our series A preferred stock remain outstanding or any accrued dividends on the series A preferred stock remain unpaid.

Calculation of Aggregate Market Value of Non-Affiliate Shares

For purposes of calculating the aggregate market value of shares of our common stock held by non-affiliates as set forth on the cover page of this Annual Report on Form 10-K, we have assumed that all outstanding shares are held by non-affiliates, except for shares held by each of our executive officers, directors and 5% or greater stockholders. In the case of 5% or greater stockholders, we have not deemed such stockholders to be affiliates unless there are facts and circumstances which would indicate that such stockholders exercise any control over our company, or unless they hold 10% or more of our outstanding common stock. These assumptions should not be deemed to constitute an admission that all executive officers, directors and 5% or greater stockholders are, in fact, affiliates of our company, or that there are not other persons who may be deemed to be affiliates of our company. Further information concerning shareholdings of our officers, directors and principal stockholders is included or incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K.

be deemed to constitute an admission that all executive officers, directors and 5% or greater stockholders are, in fact, affiliates of our company, or that there are not other persons who may be deemed to be affiliates of our company. Further information concerning shareholdings of our officers, directors and principal stockholders is included or incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities

Not applicable.

COMPARATIVE STOCK PERFORMANCE GRAPH

The following graph compares the cumulative stockholder return on our Common Stock with the return on the ~~NASDAQ~~ Nasdaq Index, which represents other similarly sized issuers traded on ~~the~~The ~~NASDAQ~~Nasdaq Capital Market, where our common stock ~~now~~ trades and SIC Code 1311 (Crude Petroleum & Natural Gas), which represents an index for the industry which we believe to be most comparable to that in which most of our business is now conducted, in each case for the five year period ended December 31, ~~2008~~2009. The comparison assumes ~~the~~an investment of $100~~.00~~ on January 1, ~~2003~~2005 in each of our common stock, the ~~NASDAQ~~ Nasdaq Index, and the SIC Code 1311 and assumes the reinvestment of dividends.

The graph below and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Exchange Act, nor shall such information be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.

LOGO

2928

Item 6.

Selected Financial Data

This section presents our historical consolidated financial data. You should read carefully the following selected consolidated financial data together with our consolidated financial statements and the related notes included in this report, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements.

We derived the statements of operations data for the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~ 2007 and the balance sheet data as of December 31, ~~2008~~ 2009 and ~~2007~~2008 from our audited consolidated financial statements, which are included atin ~~the~~this ~~end~~annual ofreport ~~this~~on ~~report~~Form 10-K. We derived the statements of operations data for the years ended December 31, ~~2005~~2006 and ~~2004~~2005 and the balance sheet data as of December 31, ~~2006~~2007, ~~2005~~2006 and ~~2004~~2005 from our audited consolidated financial statements not included in this report. Historical results are not necessarily indicative of future results. You should read the notes to our consolidated financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net loss per share.

Amounts in thousands except per share amount.	Year Ended December 31
Amounts in thousands except per share amounts	Year Ended December 31
	2008			2007			2006			2005			2004
	2009			2008			2007			2006			2005
Results of Operations Data:
Revenues	$	24,~~905~~711		$	12,~~175~~905		$	21,~~216~~175		$	42,~~088~~216		$	34,~~736~~088
Costs and expenses:
Operations and maintenance		73,~~118~~607			~~942~~7,118			~~2,099~~942			62,~~116~~099			36,~~735~~116
Impairment of goodwill		4,913			—			—			—			—
Impairment of assets		26,070			4,913			—			—			—
General and administrative expenses		126,~~003~~408			12,~~444~~003			1112,~~229~~444			611,~~810~~229			56,~~239~~810
Depreciation and amortization		1,~~359~~541			~~304~~1,359			~~299~~304			~~250~~299			~~215~~250
Total Costs and Expenses		2537,~~393~~626			1325,~~690~~393			13,~~627~~690			13,~~176~~627			913,~~189~~176
Operating (loss) income		(22,488	)		(12,515	)		(11,411	)		(9,088	)		(5,453	)
Operating Loss		(32,915	)		(22,488	)		(12,515	)		(11,411	)		(9,088	)
Other income (expense):
Interest income		~~487~~42			~~783~~487			~~448~~783			~~233~~448			24233
Interest expense		(~~969~~3,344	)		(12969	)		(912	)		(69	)		(166	)
Other income (expense)		—			584			—			33			—
Other income		134			—			584			—			33
		(482	)		1,355			439			260			8
Total other income (expense)		(3,168	)		(482	)		1,355			439			260
(Loss) income before income taxes		(22,970	)		(11,160	)		(10,972	)		(8,828	)		(5,445	)
Net Loss before Income Taxes		(36,083	)		(22,970	)		(11,160	)		(10,972	)		(8,828	)
Income tax expense (benefit)		26			1			427			12			(84	)
Income tax expense		29			26			1			427			12
Net (loss) Continuing Operations		(22,996	)		(11,161	)		(11,399	)		(8,840	)		(5,361	)
Net Loss from Continuing Operations		(36,112	)		(22,996	)		(11,161	)		(11,399	)		(8,840	)
Net income (loss) Discontinued Operations		6,989			(6,196	)		(2,716	)		(2,574	)		1,403
Net Income (Loss) from Discontinued Operations		—			6,989			(6,196	)		(2,716	)		(2,574	)
Net (loss)		(16,007	)		(17,357	)		(14,115	)		(11,414	)		(3,958	)
Net Loss		(36,112	)		(16,007	)		(17,357	)		(14,115	)		(11,414	)
Preferred Securities Dividend Requirements		(1,~~326~~334	)		(1,~~348~~326	)		(~~198~~1,348	)		(5198	)		(5	)
Beneficial Conversion Feature of Preferred Stock		—			~~(57~~—	)		(~~4,131~~57	)		—(4,131	)		—
Change in Value of Modified Warrants		—			~~(98~~—	)		—(98	)		—			—
Loss Applicable to Common Shareholders	$	(17,333	)	$	(18,860	)	$	(18,444	)	$	(11,419	)	$	(3,963	)
Net Loss Applicable to Common Shareholders	$	(37,447	)	$	(17,333	)	$	(18,860	)	$	(18,444	)	$	(11,419	)
Weighted average number of common shares outstanding on a diluted basis		15,~~579~~587			1115,~~339~~579			911,~~635~~339			79,~~384~~635			47,~~583~~384
Basic and Diluted income (loss) per Common Share	$	(1.11	)	$	(1.66	)	$	(1.91	)	$	(1.55	)	$	(0.86	)
Basic and Diluted Net Income (Loss) per Common Share	$	(2.40	)	$	(1.11	)	$	(1.66	)	$	(1.91	)	$	(1.55	)
From Continuing Operations		(12.5640	)		(1.1256	)		(1.6312	)		(1.2063	)		(1.1720	)
From Discontinued Operations		~~0.45~~—			(0.5445	)		(0.2854	)		(0.3528	)		(0.3135	)
Balance Sheet Data (Continuing Operations):
Total assets	$	~~162~~42,~~013~~747		$	~~113~~162,~~049~~013		$	93113,~~051~~049		$	2793,~~705~~051		$	1127,~~314~~705
Working capital, including restricted cash		~~103~~(48,~~846~~594	)		70103,~~208~~746			6470,~~261~~208			1464,~~176~~261			114,~~014~~176
Long-term obligations		~~129~~1,~~475~~432			60129,~~658~~475			60,~~717~~658			~~645~~60,717			~~614~~645
Common Shareholders’ equity		17,718			33,115			18,521			25,697			10,218
Common Shareholders’ equity (deficit)		(19,481	)		17,718			33,115			18,521			25,697

~~(1)~~29 ~~See Note C of the Consolidated Financial Statements.~~

Item 7.

Management’s Discussion and Analysis of Financial Statements and Results of Operations

You should read the following discussion and analysis of financial condition and results of operations together with the “Selected ~~Consolidated~~ Consolidated Financial Data” section of this annual report on Form 10-K and our consolidated financial statements and accompanying notes appearing in this report. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward- looking statements due to important factors including, but not limited to, those set forth in Part I, Item IA-Risk Factors appearing elsewhere in this report.

~~Overview~~OVERVIEW

Environmental Power is a developer, owner and operator of renewable energy production facilities. Environmental Power’s goal is to produce energy that is Beyond Renewable™, which Environmental Power defines as energy that not only is derived from waste materials instead of precious resources, but energy that is also clean, ~~reliable~~ and ~~cost-effective~~reliable. Environmental Power and its subsidiaries develop and own facilities that, unlike many renewable energy facilities, are intended to be profitable without the need for ~~subsidies~~federal ortax ~~other governmental assistance~~subsidies. Any such government assistance would, however, benefit Environmental Power’s facilities by increasing their potential for profitability, while at the same time expanding opportunities for the profitable deployment of such facilities. Environmental Power believes that a number of factors, including volatile energy prices, greater desire for renewable energy sources, more stringent environmental and waste management requirements imposed on farmers and food industry waste producers, and ~~greater~~ revenue opportunities from carbon sequestration credits will continue to provide favorable market conditions for its business.

In the past, we have operated in two major segments, through Microgy, Inc., as a developer of renewable energy facilities for the production and commercial application of methane-rich biogas from agricultural and food industry and other organic wastes, and through EPC Corporation and its subsidiary, Buzzard Power Corporation, referred to as Buzzard, ~~which was~~ the holder of a leasehold interest in a waste-coal fired generating facility in Pennsylvania known as the Scrubgrass facility. On May 31, 2007, our board of directors authorized management to enter into negotiations regarding the disposition of the leasehold interest in the Scrubgrass facility. On February 29, 2008, we completed the disposition of the leasehold interest. As a result, for financial reporting purposes, we are now consolidating all segments of continuing operations and reporting the results of Buzzard as “discontinued operations”. We thus now operate only in Microgy’s segment.

Microgy is a developer of renewable energy facilities for the production and commercial application of methane-rich biogas produced from animal, ~~and~~ food industry and other organic wastes. The biogas can be sold to end-users or used to produce pipeline-grade methane, which Microgy refers to as renewable natural gas, or RNG®, liquefied natural gas, or LNG, compressed natural gas, or CNG, renewable electrical energy or thermal energy, as well as other useful by-products. Microgy’s systems utilize a proven European biogas production ~~technology~~ ~~that Microgy believes is superior to other such technologies. Microgy owns the perpetual, exclusive North American license to this~~ technology. In addition, Microgy has developed significant engineering, construction and process knowledge regarding these systems.

Due to the ~~rates~~increased demand for ~~conventional~~renewable energy ~~experienced in recent years in many U.S. markets and expected future increases in such rates over the long term,~~ Microgy believes that its systems can be profitable without the need for federal subsidies, rebates, ~~grants~~ or ~~other credits~~grants. Nevertheless, Microgy believes that tax credits, ~~renewable energy credits, pollution offset credits, carbon sequestration credits~~ and other such incentives may be available ~~now or~~ in the future to Microgy’s facilities, and such incentives would serve to enhance the potential profitability of its facilities. Future climate change legislation, if any, may enhance the value of Microgy’s products. In addition, the energy output from Microgy’s systems may carry a premium price in some areas, as numerous environmentally responsible entities are seeking renewable energy sources and many states have either passed or are considering legislation requiring utilities to obtain or generate a certain percentage of their power from renewable sources.

In addition to the value generated from the production and sale of renewable gas, our facilities produce soil amendment products that can be used as a bedding, compost or peat moss and liquid fertilizer that can be used

for crop growth. We believe that our facilities can generate additional environmental benefits with significant economic and social value by providing a valuable waste management solution for farms and other producers of organic wastes, such as those in the food industry. Federal and state agencies have either passed or are considering regulations that require concentrated animal feeding operations, referred to as CAFOs, to implement changes to their current waste management practices. We believe that these increasingly stringent environmental regulations will be another factor creating opportunities for the deployment of our systems.

Microgy intends to continue to focus on its strategy of developing large-scale, standardized facilities utilizing an ownership model either entirely or together with financial or operating partners. Under this model Microgy will construct, own and operate facilities and profit from the ongoing sale of biogas or RNG^® as well as sales of greenhouse gas sequestration credits or other marketable environmental benefits. This strategy encompasses the construction and operation of stand-alone merchant plants like the Huckabay Ridge facility described below, as well as facilities dedicated to the needs of a single customer at one or more customer locations, such as the Grand Island facility described below. By pursuing this strategy, Microgy intends to accumulate gas production and carbon sequestration capacity over time. In addition, Microgy continues to standardize both its system design and its approach to the marketplace in order to allow for a cost-effective scale-up of its business.

Having constructed both the multi- and single-tank system in four currently operating installations, Microgy intends to own the digester systems it develops, either outright, through an affiliated company, or in substantial part, through HMI Energy, LLC, a joint-venture company formed in January 2010 (discussed further below), in which Microgy owns 30% of the membership interests. Our multi-digester facilities will primarily produce pipeline-quality renewable natural gas, although we will also consider opportunities to produce and sell conditioned biogas, electricity, compressed natural gas, referred to as CNG, or liquid natural gas, referred to as LNG, from our facilities. Microgy’s development efforts are focused on applications of its technology that are resource efficient. Development of smaller scale and single-digester facilities will be targeted toward customers that have multiple sites and opportunities that have shorter development cycles.

Microgy’s efforts have resulted, most recently, in the start of commercial operations at the Huckabay Ridge facility in Stephenville, Texas, which began commercial operations in the first quarter of 2008. Huckabay Ridge consists of eight 916,000-gallon digesters which operate together to process the manure from approximately 10,000 cows and produce 575,000 MMBtus of RNG^® annually. The gas is treated and compressed to produce pipeline grade methane that is sold and delivered directly into nearby natural gas pipelines. Huckabay Ridge is expected to produce approximately 782,000 million British Thermal Units, or MMBtus, of pipeline-grade methane for sale per year once a planned combined heat and power, or CHP, system has been installed and potential modifications made to the gas processing systems.

We have two other multi-digester facilities in development in Texas having expected output of 670,000 MMBtus. We have also announced three proposed multi-digester RNG^® facilities in California, and a proposed multi-digester RNG^® facility in Colorado. These projects are in various stages of development. In January 2010, Microgy contributed its interest in one of the California projects and the Colorado project to the new joint venture, HMI Energy, LLC, described below.

Microgy has commenced construction of a multi-digester renewable biogas facility to be located at the flagship Grand Island, Nebraska beef processing plant of JBS Swift & Company, referred to as Swift. Under the terms of the agreement with Swift, Microgy will construct, own and operate the facility and sell its gas output to Swift for use in its operations to offset natural gas utilization pursuant to a 15-year gas purchase agreement. The Grand Island facility will consist of two 1.3 million gallon digesters that will process wastes generated by the Grand Island processing facility and that we expect will be able to produce approximately 235,000 MMBtus per year. We completed $7.0 million in tax-exempt bond financing in Nebraska in July 2008 to finance a portion of the construction costs of the Grand Island facility. However these bonds are currently in default and the trustee or

In 25% ~~addition~~of to the ~~value~~bondholders ~~generated~~could ~~from~~accelerate the ~~production~~bonds and ~~sale~~demand ofrepayment ~~renewable~~at ~~gas,~~any wetime. ~~believe~~We ~~that~~are ~~our facilities~~currently ~~can~~seeking ~~generate additional environmental benefits with significant economic and social value by providing~~ a ~~valuable waste management~~ solution ~~for~~to ~~farms~~these ~~and other producers of organic wastes~~circumstances, ~~such~~including ~~as those in~~ the ~~food~~financing ~~industry.~~to ~~Federal~~complete ~~and~~construction of ~~state~~the ~~agencies have either passed or are considering regulations that require concentrated animal feeding operations~~facility, ~~referred~~but towe ascannot ~~CAFOs,~~assure toyou ~~implement changes to their current waste management practices. We believe~~ that ~~these~~we ~~increasingly stringent environmental regulations~~ will be ~~another~~successful ~~significant~~in ~~factor~~doing ~~creating~~so ~~opportunities~~on ~~for~~favorable ~~the~~terms, ~~deployment~~or ofat ~~our systems~~all.

~~Microgy~~In ~~intends to continue to focus on its strategy of developing large-scale~~addition, ~~standardized~~ ~~facilities utilizing an ownership model, pursuant to which~~ Microgy ~~will~~is ~~construct,~~operating ~~own~~three ~~and~~single ~~operate~~digester facilities ~~and~~in ~~profit~~Wisconsin. ~~from~~Microgy ~~the~~sold ~~ongoing~~these ~~sale~~projects ofto ~~biogas~~the orfarms ~~RNG®~~on ~~produced~~which bythey ~~such~~are ~~facilities as~~located, ~~well as sales of carbon sequestration credits or other marketable environmental benefits. This strategy encompasses the construction~~ and ~~operation~~developed ofthem ~~stand-alone~~in ~~merchant~~conjunction ~~plants~~with ~~like~~Dairyland ~~the~~Power ~~Huckabay Ridge facility described below~~Cooperative, asan ~~well~~electric ~~as facilities~~cooperative ~~dedicated to the needs of a single customer at one or more customer locations~~utility, ~~such~~referred to as ~~the~~Dairyland. ~~Grand~~The ~~Island~~biogas ~~facility~~from ~~described~~these ~~below.~~projects Byis ~~pursuing~~used ~~this~~by ~~strategy,~~Dairyland ~~Microgy intends~~ to ~~accumulate~~generate ~~gas production and carbon sequestration capacity over time~~electricity. In ~~addition~~January 2010, Microgy ~~continues~~contributed tothe ~~standardize~~rights ~~and~~to ~~streamline~~the ~~both~~net ~~its~~revenues ~~system~~of ~~design and its approach to~~ the ~~marketplace~~Wisconsin infacilities ~~order~~ to ~~allow~~HMI ~~for~~Energy, ~~rapid and cost-effective scale-up of its business~~LLC.

Having constructed both the multi- and single-tank system in four currently operating installations, Microgy intends to own the digester systems it develops. Our multi-digester facilities will primarily produce pipeline-quality renewable natural gas, although we will also consider opportunities to produce and sell conditioned biogas, electricity, CNG or LNG from our facilities. Microgy’s development efforts are focused on applications of its technology that are resource efficient. Development of smaller scale and single-digester facilities will be targeted toward customers that have multiple sites and opportunities that have shorter development cycles. Microgy’s goal with all projects is to maximize the profitability of every project by implementing the right technology and most profitable off-take arrangements.

Microgy’s efforts have resulted, most recently, in the start of commercial operations at the Huckabay Ridge facility in Stephenville, Texas, which began commercial operations in the first quarter of 2008. Huckabay Ridge consists of eight 916,000-gallon digesters which operate together to process the manure from approximately 10,000 cows. The gas is treated and compressed to produce pipeline-grade methane that is sold and delivered directly into nearby natural gas pipelines. Huckabay Ridge is expected to produce approximately 635,000 million British Thermal Units, or MMBtus, of pipeline-grade methane per year.

We have announced three other multi-digester facilities in development in Texas having the same expected output as the Huckabay Ridge facility. We have also announced three proposed multi-digester RNG® facilities in California that are in advanced stages of development. We completed $60 million in tax-exempt bond financing in November 2006 relating to the construction and operation of the four RNG® facilities in Texas. Furthermore, we completed $62.425 million in tax-exempt bond financing in September 2008 to finance a portion of the construction costs of two of our three proposed California facilities, and we currently anticipate closing a further $26.02 million in such financing for the third proposed California facility.

In addition, Microgy has commenced construction of a multi-digester renewable biogas facility to be located at the flagship Grand Island, Nebraska beef processing plant of JBS Swift & Company, referred to as Swift. Under the terms of the agreement with Swift, Microgy will construct, own and operate the facility and sell its gas output to Swift for use in its operations to offset natural gas utilization pursuant to a 15-year gas purchase agreement. The Grand Island facility will consist of two 1.2 million gallon digesters that will process wastes generated by the Grand Island processing facility and that we expect will be able to produce approximately 235,000 MMBtus per year. We completed $7.0 million in tax-exempt bond financing in Nebraska in July 2008 to finance a portion of the construction costs of the Grand Island facility. In addition to this facility, Microgy and Swift will work closely together to identify, evaluate and develop project opportunities at Swift’s other North American beef and pork processing facilities.

In October 2006, we entered into a business development agreement, referred to as the BDA, with Cargill, Incorporated, referred to as Cargill. We are leveraging our relationship with Cargill to accelerate our identification and development of both facilities for the production of RNG® and smaller-scale, multi-digester facilities dedicated to a single customer.

Discontinued Operations

The disposition of Buzzard’s leasehold interest in the Scrubgrass facility was completed on February 29, 2008. Buzzard leased its generating facility from Scrubgrass Generating Company, L.P. The Scrubgrass plant, referred to as Scrubgrass, located on a 600-acre site in Venango County, Pennsylvania, is an approximate 83 megawatt waste coal-fired electric generating station. We decided to seek the disposition of Buzzard’s leasehold interest in the Scrubgrass facility to allow management to focus its attention and resources on the development and growth of Microgy. As a result of Buzzard’s disposition of its leasehold interest, we are now consolidating all segments of continuing operations for financial reporting purposes and reporting the results of Buzzard as “discontinued operations”.

The assets and liabilities of Buzzard have been accounted for as discontinued operations for sale for all periods presented in accordance with the criterion established in ~~Statement of Financial~~ Accounting Standard Codification (“~~SFAS~~ASC”) ~~No. 144~~360-10-5-35 ~~“Accounting for~~ Impairment or Disposal of Long~~-Lived~~ Lived Assets.” We no longer have a continuing involvement with the Buzzard business since we disposed of the leasehold interest in the Scrubgrass facility and do not continue any revenue or cost-generating activities related to Buzzard. InAs ~~accordance~~required ~~with~~by the ~~SFAS No. 144~~ASC, the accompanying consolidated balance sheets and statements of operations report the assets, liabilities and operations of Buzzard as discontinued operations.

GOING CONCERN

The company’s consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. As a predominately development-oriented company, we have experienced substantial losses since the year ended December 31, 2002. For the year ended December 31, 2009, we incurred a net loss applicable to common shareholders of $37,447,000 and used cash of $8,190,000 in operating activities. We anticipate incurring losses at least through 2012 as we continue the construction of our portfolio of announced projects subject to the availability of funding. As of December 31, 2009, we had an accumulated deficit of $105,122,000, and our unrestricted cash and cash equivalents amounted to $663,000. Currently, our facility at Huckabay Ridge, Texas will not generate sufficient positive cash flow, by itself, to meet our short-term and long-term corporate and project-related capital requirements. In addition we were unable to make the January 1, 2010 interest payment of $560,000 on our 14% convertible notes and did not make either the July 1, 2009 or January 1, 2010 dividend payments on our 9% Series A preferred stock which total $1,334,000. Our subsidiary, Microgy Holdings, LLC, referred to as Microgy Holdings, is in default on outstanding tax-exempt bonds and the bondholders have accelerated demand for payment on these obligations. Microgy Holdings does not have cash to pay these obligations. Among the options available to the bondholders is to seek to foreclose on the Huckabay Ridge facility and the other Texas and California projects included in their collateral. To date bondholders have not yet attempted to do so. Our subsidiary Microgy Grand Island, LLC, referred to as Microgy Grand Island is in default on outstanding tax-exempt bonds but the bondholders have not given notice of default or taken any action to accelerated demand for payment on these obligations.

contribute to future liquidity needs. While we have implemented steps to reduce our general and administrative expenses and Huckabay Ridge is generating positive operating cash flow, we will need to raise substantial funds during the first half of 2010 in order to fund ongoing general and administrative expenses as well as debt service and dividend requirements. We are currently actively seeking additional sources of capital to meet these financing needs. To that end, on January 29, 2010 we completed a transaction whereby, through the establishment of a joint venture, we expect to receive $1,500,000 in the first quarter of 2010. This transaction is explained in greater detail in Note P—Subsequent Events. We continue to work with our independent financial advisors to identify and explore various opportunities to raise the capital we require as well as other strategic alternatives. However, we cannot assure you that we will be able to raise sufficient capital on acceptable terms, or at all. The level of funds we are able to raise, if any, will determine the level of development and construction activity that we can pursue and whether we will be able to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. The uncertainties described in the preceding paragraph raise substantial doubt at December 31, 2009 about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of the carrying amount of recorded assets or to the amount and classification of liabilities that might result should we be unable to continue as a going concern.

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 affect 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 CD to our consolidated annual financial statements appearing in this report, involve the more significant judgments and estimates that were used in the preparation of our consolidated financial statements.

~~Method~~Accounts ofReceivable ~~Accounting for Revenues~~

WeAccounts ~~record~~receivable ~~revenues~~is ~~for~~presented on the ~~sales~~consolidated balance sheets net of ~~natural~~estimated ~~gas~~uncollectible asamounts. ~~natural~~The Company records an allowance ~~gas~~for isestimated ~~delivered~~uncollectible ~~and~~accounts ~~billed~~in onan aamount ~~monthly~~approximating ~~basis~~anticipated losses. Individual collectible accounts are written off against the allowance when collection of the individual accounts appears doubtful.

WeNotes ~~record~~Receivable revenues for operation and maintenance of the facilities at Dairyland which appear as revenues on our income statement. Operations and maintenance revenues are recorded as services are provided and billed on a monthly basis.

~~Revenue~~In 2005, we completed construction of the digesters at Five Star Dairy and Wild Rose Dairy and in 2006, we completed construction of the digester at the Norswiss Dairy, collectively “Dairyland sites”. The sales price for each digester was $1,037,000 and is to be paid out of the cash flow from the sale of ~~carbon~~gas and greenhouse gas sequestration credits isgenerated ~~only~~under ~~recognized~~the applicable biogas supply agreement between the digester owner and Dairyland sites, which extends through 11 years after the sale for the facility to which it relates. We will be paid up to a maximum of $3,111,000 in the aggregate, plus simple interest at 5% per annum, which is evidenced by three separate notes from each of the digester owners of $1,037,000 each. In 2009 and 2008, the company received payments of $18,000 and $219,000, respectively, from the sale of carbon sequestration credits ~~have~~which ~~been~~were ~~authenticated~~applied byto these notes. As of December 31, 2009 after giving effect to the $750,000 bad debt allowance relating to these notes established in 2005, the notes have an ~~independent~~aggregate ~~third~~remaining ~~party~~balance of $1,515,000 ~~registered~~which onwe expect to collect in its entirety. We will continue to evaluate the ~~Chicago~~estimated ~~Climate~~operating ~~Exchange~~cash flows from these digesters that support the ability to realize these notes and ~~invoiced~~make further adjustments, if required. As described in Note P—Subsequent Events, we contributed certain rights related to the collection of these notes, among other assets, to the joint venture we ~~customer~~entered into in January 2010.

~~Revenues~~Intangible ~~and~~Assets profits from our construction contracts relating to our relationship with Dairyland, which appear as Microgy revenues on our 2006 income statement, were generally recognized by applying percentages of completion for the period to the total estimated profits for the respective contracts. Percentage of completion was determined by relating the actual cost of the work performed to date to the current estimated total cost of the respective contracts. When the estimate on a contract indicates a loss, our policy is to record the entire loss during the accounting period in which it is estimated. In the ordinary course of business, at a minimum on a quarterly basis, we prepared updated estimates of the total forecasted revenue, cost and profit or loss for each contract. The cumulative effect of revisions in estimates of the total forecasted revenue and costs during the course of the work is reflected in the accounting period in which the facts that caused the revision become known. The financial impact of these revisions to any one contract is a function of both the amount of the revision and the percentage of completion of the contract. An amount equal to the costs incurred is included in the total estimated revenue when realization is probable. Profit from unapproved change orders and claims is recorded in the period such amounts are resolved.

~~Notes~~Under ~~Receivable~~the provisions of ASC 350 Goodwill and Other Intangibles

In• ~~2005,~~goodwill ~~we completed construction of the digesters at Five Star Dairy~~ and ~~Wild~~indefinite-lived ~~Rose~~intangible ~~Dairy.~~assets ~~During~~are ~~2006,~~tested ~~we completed construction at the Norswiss Dairy, collectively “Dairyland sites”. Each digester has begun operations. The sales price~~ for ~~each~~impairment digester was $1.0 million. We will be paid from the cash flow from the sale of gas generated under the applicable biogas supply agreement between the digester owner and Dairyland sites, which extends through 11 years after the sale for the facility to which it relates. We will be paid up to a maximum of $3.1 million in the aggregate, plus interest at ~~5% per~~least annum, which is evidenced by three separate notes from each of the digester owners of approximately $1.0 million each. In 2008, the company received payments of $219,000 from the sale of carbon sequestration credits which were applied to these notes. As of December 31, 2008 after giving effect to the $750,000 bad debt allowance relating to these notes established in 2005, the notes have an aggregate remaining balance of $1.6 million which we expect to collect in its entirety. We will continue to evaluate the estimated operating cash flows from these digesters that support the ability to realize these notes and make further adjustments, if required. annually;

~~Accounting~~• ~~for~~goodwill ~~Income~~and ~~Taxes~~indefinite-lived intangible assets are no longer to be amortized to income; and

As• ~~part of~~ the ~~process~~amortization ofperiod ~~preparing our consolidated financial statements we are required to estimate our income taxes in each~~ of ~~the~~intangible ~~jurisdictions~~assets ~~in which we operate. This process involves estimating our actual current tax exposure together~~ with ~~assessing~~finite ~~temporary~~lives ~~differences~~can resulting from differing treatment of items 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~~no ~~from~~longer ~~future~~than ~~taxable~~forty ~~income and to the extent we believe that recovery is not likely, we must establish a valuation allowance~~years. ~~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 consolidated statement of operations.~~

~~Significant~~The ~~management~~Company ~~judgment~~acquired isMicrogy, ~~required~~Inc. in ~~determining~~1999. ~~our~~This ~~provision~~acquisition ~~for~~resulted ~~income~~in ~~taxes,~~an ~~our~~initial ~~deferred~~allocation ~~tax~~of ~~assets~~$4,913,000 ~~and~~to ~~liabilities~~goodwill. ~~and~~The ~~any valuation~~impairment ~~allowance~~evaluation ~~recorded~~for ~~against~~goodwill ~~our~~had ~~deferred~~been ~~tax~~conducted ~~assets.~~at Asleast ~~of December 31~~annually, ~~2008,~~or wemore ~~had~~frequently, ~~recorded~~if aevents ~~net~~or ~~deferred~~changes ~~income~~in ~~tax~~circumstances ~~asset~~indicated ofthat ~~$18.4~~an ~~million~~asset ~~and~~might abe ~~valuation~~impaired. ~~allowance~~The ofevaluation ~~$18.4~~was ~~million~~performed ~~against~~using ~~our~~a ~~net~~two-step ~~deferred~~process. ~~income~~The ~~tax~~first ~~assets,~~step ~~due~~compares tothe ~~uncertainties~~book ~~related~~value toof ~~our~~the ~~ability~~Company’s toreporting ~~utilize~~unit ~~carryforwards~~to ~~before~~its ~~they~~estimated ~~expire~~fair value. The ~~valuation~~second ~~allowance~~step isof ~~based~~the ongoodwill ~~our~~impairment ~~estimates~~test, ofwhich ~~taxable~~is ~~income~~only byrequired ~~jurisdiction~~when inthe ~~which~~net webook ~~operate~~value ~~and~~of the ~~period~~reporting ~~over~~unit ~~which~~exceeds ~~our~~the ~~deferred~~fair ~~tax~~value, ~~assets~~compares ~~will~~the beimplied fair ~~recoverable.~~value Inof ~~the~~goodwill ~~event~~to ~~that~~its ~~actual~~book ~~results~~value ~~differ~~to ~~from~~determine ~~these~~if ~~estimates,~~an orimpairment weis ~~adjust~~required. ~~these~~The Company estimates inthe ~~future~~fair ~~periods,~~values weof ~~may~~its ~~need~~reporting tounit ~~adjust~~using the ~~valuation~~income ~~allowance~~approach which ~~could~~measures ~~materially~~the ~~impact~~value ~~our~~of ~~financial~~an ~~position~~intangible ~~and~~asset ~~results~~based on the expected stream of monetary ~~operations~~benefits attributable to it over its remaining useful life.

AsThe aCompany ~~result~~annually ofperformed tests to determine the appropriate ~~implementation~~value of ~~FIN~~goodwill. ~~48,~~The weresults ~~recognized~~of nothese ~~material~~tests ~~adjustment~~in 2008 resulted in the ~~valuation~~Company’s ~~allowance~~determination orthat ~~deferred~~the ~~tax~~entire ~~asset.~~balance Atof $4,913,000 was impaired, due primarily to the ~~adaptation~~ ~~date~~current market price of ~~January 1,~~its ~~2007,~~common westock ~~had~~relative ~~$10.4~~to ~~million~~its book value, projections of ~~unrecognized~~future ~~tax~~cash ~~benefits~~flows and other factors. Previously, ~~all~~the market price of ~~which~~the ~~would~~Company’s ~~affect~~common ~~our~~stock ~~effective~~and, ~~tax~~consequently, ~~rate~~its ifmarket ~~recognized.~~capitalization Atwere ~~December~~relatively high 31compared to the book value per share of its common stock. However, since 2008 the Company’s market value has been substantially below its book value, wedue ~~have~~principally ~~$19.9~~to ~~million~~the current market price of ~~unrecognized~~its ~~tax~~common ~~benefits~~stock. As ~~primarily~~a result, accounting requirements required the Company to determine ~~comprised~~whether there is enough market value after covering other net assets on a book basis to cover any of ~~federal~~its goodwill. The Company determined that market value was insufficient to cover goodwill, and ~~state~~determined ~~net~~that ~~operating~~the ~~losses~~write-off was required. The write-off of goodwill is not a reflection on the economics of the Company’s projects, which the Company continues to stand behind, but is simply the result of the application of accounting requirements associated with goodwill impairment.

Impairment of Long- Lived Asset

In accordance with ASC 360-10 “Property, Plant and Equipment”, the Company evaluates long-lived assets such as construction in progress, property and equipment and purchased intangible assets with finite lives subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the net realizable value of the asset. There were no such impairment charges recorded during the years ended December 31, 2008 and 2007. However, as described above, we did record an impairment of goodwill in 2008. For the year ended December 31, 2009 we determined certain long-lived assets were impaired and wrote down the value of these assets to their current net realizable value. See Note N- Impairment of Assets for a discussion of these write-downs. It should be noted that these impairments were recorded in accordance with the applicable accounting rules and does not mean we do not intend to complete the projects. We still retain valid permits at these sites and other items of value to us, such as relationships with local farms and preliminary designs and plans, which we may utilize when, and if, we are able to obtain financing for these projects and proceed with their development.

Revenue Recognition

We record revenues from gas sales when the gas is produced and tipping fees when we receive the material and invoice the customer. We record revenues for operation and maintenance of the facilities at the Dairyland

~~Intangible~~ Power ~~Assets~~Cooperative sites which appear as revenues on our statements of operations. Operations and maintenance revenues and natural gas revenues are recorded as services are provided or gas is produced on a monthly basis. Revenue from the sale of greenhouse gas sequestration credits is only recognized after the carbon credits have been authenticated by an independent third party, registered on the Chicago Climate Exchange and invoiced to the customer.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets.” The most significant changes made by SFAS No. 142 are:

• goodwill and indefinite-lived intangible assets will be tested for impairment at least annually;

• goodwill and indefinite-lived intangible assets will no longer be amortized to income; and

• the amortization period of intangible assets with finite lives will no longer be limited to forty years.

The Company acquired Microgy, Inc. in 1999. This acquisition resulted in an initial allocation of $4,913,000 to goodwill. The impairment evaluation for goodwill is conducted at least annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed using a two-step process. The first step compares the book value of the Company’s reporting unit to its estimated fair value. The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, compares the implied fair value of goodwill to its book value to determine if an impairment is required. The Company estimates the fair values of its reporting unit using the income approach which measures the value of an intangible asset based on the expected stream of monetary benefits attributable to it over its remaining useful life.

The Company annually performs tests to determine the appropriate value of goodwill. The results of these tests in 2008 resulted in the Company’s determination that the entire balance of $4,913,000 was impaired, due primarily to the current market price of its common stock relative to its book value, projections of future cash flows and other factors. Previously, the market price of the Company’s common stock and, consequently, its market capitalization were relatively high compared to the book value per share of its common stock. However, this year the Company’s market value is substantially below its book value, due principally to the current market price of its common stock. As a result, accounting requirements require the Company to determine whether there is enough market value after covering other net assets on a book basis to cover any of its goodwill. The Company determined that market value was insufficient to cover goodwill, and determined that the write-off was required. The write-off of goodwill is not a reflection on the economics of the Company’s projects, which the Company continues to stand behind, but is simply the result of the application of accounting requirements associated with goodwill impairment.

Stock-Based Compensation Expense

The employee stock-based compensation expense recognized ~~under FAS123R~~ and information presented in the ~~disclosure~~ required ~~under~~disclosure ~~FAS123~~ was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions, and these assumptions can vary over time.

Employee stock-based compensation expense recognized in ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. ~~FAS~~The ~~123R requires~~ forfeitures toare be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. A forfeiture rate of 0% for directors, 0% to 25% for executive officers and 0% to 16% for other employees is applied to the stock-based compensation expense, determined through historical experience of employee stock-based awards. We base our determination of expected volatility primarily on our assessment of the historical volatility of our common stock. During the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007, we based our determination of the expected term using a combination of the simplified method and our assessment of the historical post vesting termination activity depending on the amount of historical information available.

InAccounting ~~October of 2006, Microgy entered into a Business Development Agreement with Cargill, pursuant to which Cargill would receive warrants to purchase our common stock in exchange~~ for ~~the~~Income ~~identification~~Taxes ~~of anaerobic digester projects. Our accounting policy for equity instruments issued to consultants and vendors in~~

35Income Taxes: We account for income taxes in accordance with ASC 740 “Income Taxes”. As required by this ASC, 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. We recognize a deferred tax asset for the future tax benefits when it is more likely than not that the tax benefits will be realized and reduce the deferred tax asset with a valuation reserve when it is more likely than not that some portion of the tax benefits will not be realized.

exchange for goods and services follows the provisions of EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and EITF 00-18, Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendors performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with EITF 00-18, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantors balance sheet once the equity instrument is granted for accounting purposes.

Results of Operations

Continuing and Discontinued Operations

Comparison of the Years ended December 31, 2009 and 2008

Overview. For the year ended December 31, 2009, we had a net loss applicable to common shareholders of $37,447,000 or loss per common share of $2.40, compared to a net loss applicable to common shareholders of $17,333,000 or loss per common share of $1.11 for the year ended December 31, 2008. This increase in net loss reflects changes in results from continuing operations and discontinued operations as follows:

•

Net loss from continuing operations was $36,112,000 for the year ended December 31, 2009 as compared to $22,996,000 for the year ended December 31, 2008. The results for 2009 included a non-cash non-recurring charge for the impairment of assets of $26,070,000 as described below. The results for 2008 include a non-cash charge for the impairment of assets of $4,913,000.

•

In 2008, we disposed of our discontinued operations. The results for 2008 include two months of results before the disposal of the operation. The results for 2008 also include a gain on disposal of discontinued operations of $8,000,000. There was no comparable item in 2009.

•

Without the non-cash charges for the impairment of assets in 2009 and 2008, the net loss from continuing operations would have declined from $18,083,000 in 2008 to $10,042,000 in 2009.

Individual line items on the statements of operations are discussed below.

Revenues. Revenues for the year ended December 31, 2009 increased to $4,711,000 from $2,905,000 for the year ended December 31, 2008, or an increase of 62%. The increase is attributable primarily to revenues from the Huckabay Ridge facility which began operations in February 2008 and had revenues of $3,764,000 in 2009 and $1,723,000 for 2008. In 2008, from September through December, Huckabay Ridge did not have production because the facility was taken out of service for certain repairs, equipment upgrades and operating improvements.

Operations and maintenance expense. For the year ended December 31, 2009, operations and maintenance expense was $3,607,000, a decrease of $3,511,000 from operations and maintenance expense incurred for the year ended December 31, 2008. The decrease in operations and maintenance expense, despite higher revenues, was due to the fact that 2008 results include some non-recurring and start-up expenses related to initial operations at Huckabay Ridge. In addition, expenses for 2008 included a charge of $562,000 related to the write-off of deposits with suppliers based on our decision to terminate certain tank orders. Operations and maintenance expense also declined in 2009 because in 2008 we had the costs related to two insurance events and we received and recorded the insurance proceeds in 2009.

Impairment of assets. In 2009, we review our long lived assets for impairment whenever changes in circumstances indicate their carrying value may not be recoverable. Due to the loss of debt funding on certain projects and lack of liquidity, we recorded an impairment related to these projects and reduced the carrying value of these assets to their net realizable value. We also wrote-off the deferred financing costs related to these debt obligations. The impairment of assets included a write-down of $21,434,000 on six separate projects and write-off of $4,636,000 in deferred financing costs. Since it is difficult to provide the necessary documentation of a development project’s sales value to third parties, we determined that, except in one instance where we have a separate land value, the assets should be written down to $0.

In 2008, we determined that the entire $4,913,000 balance of our goodwill resulting from the acquisition of Microgy was impaired. This impairment is a non-cash, non-recurring charge. We annually performed tests to determine the appropriate value of goodwill. The results of these tests in 2008 resulted our determination that the entire balance of $4,913,000 was impaired, due primarily to the current stock price of our common stock relative its book value, projections of future cash flow and other factors. Previously, the market price of our common stock and consequently our market capitalization were relatively high compared to the book value of our common stock. However, in 2008 our market value fell below our book value due principally to the market price of our common stock. As a result, accounting standards required us to determine whether there is enough market value after covering other net assets on a book basis to cover any of the goodwill. We determined that market value was insufficient to cover goodwill and determined that the write-off was required.

General and administrative expense. General and administrative expense decreased by $5,595,000 to $6,408,000 for the year ended December 31, 2009 from $12,003,000 for the year ended December 31, 2008. The primary reason for the decline in general and administrative expense was the reduction in payroll expenses and related costs due to reductions in force. Non-cash compensation expense from the issuance of options and stock appreciation rights also declined significantly.

Depreciation and amortization expense. Depreciation and amortization expense increased to $1,541,000 for the year ended December 31, 2009, as compared to $1,359,000 for the year ended December 31, 2008. The increase in depreciation and amortization expense was due to increased depreciation of the Huckabay Ridge facility, which began commercial operations in February 2008 and added capital improvements in 2009.

Operating loss. As a result of the changes described above, our operating loss increased to $32,915,000 for the year ended December 31, 2009, as compared to $22,488,000 for the year ended December 31, 2008. Without the increase in the non-cash charge for impairments of assets in 2009, the operating loss would have declined by $10,730,000.

Interest income. Interest income for the year ended December 31, 2009 was $42,000, as compared to $487,000 for the year ended December 31, 2008. Interest income declined due to both higher invested balances in 2008 as compared to 2009 and lower interest rates on invested assets in 2009.

Interest expense. Interest expense increased to $3,344,000 in 2009 from $969,000 in 2008. The increase was due to several factors. In 2009, the Company issued $8,000,000 aggregate principal amount of its 14% convertible notes and incurred of $816,000 of interest expense on these notes. In April 2009, we also stopped capitalizing interest on the Swift project and recorded $368,000 of interest expense during 2009 in respect of the tax-exempt bond financing relating to this facility. We also expensed some of the interest incurred on our Texas and California tax-exempt bond financings to the extent that they were redeemed or repurchased in 2009. In 2008, all of the interest costs on the California bonds and interest on $45,000,000 of the Texas bonds was capitalized.

Other income (expense). In 2009, we recorded income of $161,000 from the adjustment of the valuation of an outstanding warrant. This income was partially offset from the loss on the sublease of our Golden, Colorado facility of $28,000. We had no items of other income or expense in 2008.

Income tax expense. Because we are not assured of realizing the benefits of operating losses for tax purposes we did not record an income tax benefit for losses incurred during the years ended December 31, 2009 and 2008. Income tax expense for 2009 and 2008 represents estimated payments for state income taxes.

Loss from discontinued operations, net of taxes. The results for 2008, a loss of $1,011,000, consist of the operating loss of Buzzard for the first two months of 2008 prior to the disposition of the Scrubgrass facility on February 29, 2008. We had no discontinued operations in 2009.

Gain on disposal of discontinued operations. We disposed of Buzzard’s interest in the Scrubgrass facility on February 29, 2008 and recognized a one-time gain of $8,000,000. With the exception of a cash payment of $375,000, the gain was non-cash in nature and consisted principally of recognition of a previously deferred gain in the amount of $2,570,000, forgiveness of indebtedness in the amount of $3,456,000 and elimination of other obligations in the amount of $1,630,000. There was no tax provision provided on the disposition due to the utilization of net operating loss carryforwards at the federal and state levels which offset any potential tax liability with respect to the gain on disposal.

The net result of the loss from discontinued operations and gain on disposal of discontinued operations for the year ended December 31, 2008 was net income from discontinued operations of $6,989,000. We had no discontinued operations in 2009.

Comparison of the Years ended December 31, 2008 and 2007

Overview. For the year ended December 31, 2008 we had a net loss applicable to common shareholders of $17,333,000 or loss per common share of $1.11, compared to a net loss applicable to common shareholders of $18,860,000 or loss per common share of $1.66 for the year ended December 31, 2007. This reduction in net loss reflects changes in continuing operations and discontinued operations as follows:

• Net loss from continuing operations was $22,996,000 for the year ended December 31, 2008 as compared to $11,161,000 for the year ended December 31, 2007. The results for 2008 included a non-cash non-recurring charge for the impairment of goodwill of $4,913,000.

• Net loss from discontinued ~~operation~~operations was $1,011,000 for the year ended December 31, 2008 as compared to $6,196,000 for the year ended December 31, 2007. In 2008, discontinued operations includes two months of results before the operation was disposed of as compared to twelve months of results for 2007.

•

The results for 2008 include a gain on disposal of discontinued operations of $8,000,000. There was no comparable item in 2007.

~~Individual~~37 ~~line items on the income statement are discussed below.~~

Individual line items on the statements of operations are discussed below.

Revenues. Revenues for the year ended December 31, 2008 increased to $2,905,000 from $1,175,000 for the year ended December 31, 2007 or an increase of 147%. The increase is attributable primarily to revenues from the Huckabay Ridge facility which began operations in February 2008 and had revenues of $1,723,000 for 2008. The facility was in service from February through August and then resumed production in December. The facility was taken out of service for certain repairs, equipment upgrades and operating improvements.

Operations and maintenance expense. For the year ended December 31, 2008 operations and maintenance expense was $7,118,000, which was an increase of $6,176,000 over operations and maintenance expense incurred for the year ended December 31, 2007. The increase was due to operations and maintenance expense of $5,973,000 at Huckabay Ridge which began operation in February 2008 and therefore had no operations and maintenance expense in 2007. These expenses include some non-recurring and start-up expenses related to initial operations at Huckabay Ridge. In addition expenses included a charge of $562,000 related to the write-off of deposits with suppliers based on our decision to terminate tank orders.

Impairment of goodwill. In 2008, as discussed above, we determined that our goodwill resulting from the acquisition of Microgy was impaired and the entire balance of $4,913,000 was impaired. This impairment is a non-cash, non recurring charge. We annually ~~perform~~performed tests to determine the appropriate value of goodwill. The results of these tests in 2008 resulted in our determination that the entire balance of $4,913,000 was impaired, due primarily to the ~~current~~ ~~stock~~ price of our common stock relative to its book value, projections of future cash flow and other factors. Previously, the market price of our common stock and consequently our market capitalization were relatively high compared to the book value of our common stock. However, in 2008 our market value was substantially below our book value due principally to the current market price of our common stock. As a result, we were required us to determine whether there is enough market value, after covering other net assets on a book basis, to cover any of the goodwill. We determined that market value was insufficient to cover goodwill and determined that the write-off was required. This calculation is not a reflection of the economics of the projects we are undertaking, which we continue to stand behind, but is simply the application of accounting requirements associated with goodwill.

and other factors. Previously, the market price of our common stock and consequently our market capitalization were relatively high compared to the book value of our common stock. However, this year our market value is substantially below our book value due principally to the current market price of our common stock. As a result accounting standards require us to determine whether there is enough market value after covering other net assets on a book basis to cover any of the goodwill. We determined that market value was insufficient to cover goodwill and determined that the write-off was required. This calculation is not a reflection of the economics of the projects we are undertaking, which we continue to stand behind, but is simply the application of accounting requirements associated with goodwill requirements.

General and administrative expense. General and administrative expense decreased by $441,000 to $12,003,000 for the year ended December 31, 2008 from $12,444,000 for the year ended December 31, 2007. The primary reasons for the decline in general and administrative expense were reductions in payroll expense and non-cash compensation expense from the issuance of options and stock appreciation rights. These reductions in expenses were partially offset by higher expenses for insurance and professional fees.

Depreciation and amortization expense. Depreciation and amortization expense increased to $1,359,000 for the year ended December 31, 2008 as compared to $304,000 for the year ended December 31, 2007. The increase in depreciation and amortization expense was principally due to the fact that 2008 included eleven months of depreciation of the Huckabay Ridge facility, which began commercial operations in February 2008.

Operating loss. As a result of the changes described above, our operating loss ~~from continuing operations~~ increased to $22,488,000 for the ~~twelve months~~year ended December 31, 2008 as compared to $12,515,000 for the ~~twelve~~year ~~months~~ ended December 31, 2007.

Interest income. Interest income for the year ended December 31, 2008 was $487,000 as compared to $783,000 for the year ended December 31, 2007. Interest income declined due to both higher invested balances in 2007 as compared to 2008 and lower interest rates on invested assets in 2008.

Interest expense. Interest expense increased to $969,000 in 2008 from $12,000 in 2007. The increase was due to the fact that we ceased capitalizing the interest associated with the Huckabay Ridge facility when construction was completed in February 2008. The interest expense related to the portion of the bonds allocated to finance the Huckabay Ridge facility is no longer capitalized but is recorded as interest expense. The amount of this interest expense is $87,500 a month.

Other income (expense). In 2007, income of $584,000 was the one-time recognition of the reversal of a reserve resulting from the expiration of the statute of limitations on a contingent obligations related to the sale of a project in 2001.

Income tax expense. Because we are not assured of realizing the benefits of operating losses for tax purposes we did not record an income tax benefit for losses incurred during the years ended December 31, 2008 and 2007.

Loss from discontinued operations, net of taxes. The results for 2008, a loss of $1,011,000, consists of the operating loss of Buzzard for the first two months of 2008 prior to the disposition of the Scrubgrass facility on February 29, 2008. The 2007 loss of $6,196,000 reflects the results of Buzzard for the twelve months ended December 31, 2007.

Gain on disposal of discontinued operations. We disposed of Buzzard’s interest in the Scrubgrass facility on February 29, 2008 and recognized a one-time gain of $8,000,000. With the exception of a cash payment of $375,000 the gain was non-cash in nature and consisted principally of recognition of a previously deferred gain in the amount of $2,570,000, forgiveness of indebtedness in the amount of $3,456,000 and elimination of other obligations in the amount of $1,630,000. There was no tax provision provided on the disposition because we believe that we have sufficient net operating loss carry-forwards at the federal and state levels to offset any potential tax liability with respect to the gain on disposal.

The net result of loss from discontinued operations and gain on disposal of discontinued operations for the year ended December 31, 2008 was income of $6,989,000 compared to a loss of $6,196,000 for the year ended December 31, 2007.

Comparison of the Years ended December 31, 2007 and 2006

For the year ended December 31, 2007, we had a net loss applicable to common shareholders of $18.9 million, or loss available per common share of $1.66, compared to net loss applicable to common shareholders of $18.4 million, or loss per common share of $1.91, for the year ended December 31, 2006. The increase in net loss available to common shareholders was primarily attributable to a $3.5 million increase in loss from discontinued operations, and an increase in preferred dividend requirements of $1.2 million. These changes were partially offset by a decrease in the amortization of the beneficial conversion feature associated with our series A preferred stock offering in November 2006, and a $915,000 increase in other income as a result of higher interest income and the resolution of an outstanding contingency.

We have one continuing business segment, Microgy. The results of operations for this business segment, which is presented as continuing operations, as well as our discontinued operations, comprised of the results of our Buzzard subsidiary, are discussed below.

Continuing Operations

Revenues from continuing operations decreased by $1.04 million, or 47%, to $1,175,000 for the year ended December 31, 2007, as compared to $2.2 million for the year ended December 31, 2006. This decrease in revenue is due mainly to the change in business model from a model where we sell facilities to third parties, to the current ownership model, where we build, own, and operate facilities for our own account. Revenues from the operation and maintenance of facilities increased to $1,175,000 for the year ended December 31 2007, compared to $825,000 for the year ended December 31, 2006. The increase in operations and maintenance revenue in the year ended December 31, 2007 is a result of the three Dairyland sites being fully operational in 2007 as compared to 2006, when only two facilities were fully operational. During 2007, we recognized carbon sequestration credit sales of $68,000 which were verified and sold during the third quarter of 2007. The credits themselves were associated with operations of the Dairyland sites from January 2007 through May of 2007. Pursuant to our agreements with the owners of these facilities, a portion of this sale was recognized by us as revenue and a portion was applied to the balance of the notes we hold in respect of the purchase price of these facilities. By way of comparison, in the year ended December 31, 2006, we recognized $13,000 from the sale of greenhouse gas sequestration credits. In the year ended December 31, 2006, we recognized $1.2 million from the sale of the digester equipment to the Wisconsin facilities, whereas there were no such sales in 2007 due to the change in the business model.

Our operations and maintenance expense decreased to $942,000 for the year ended December 31, 2007 as compared to $2.1 million for the year ended December 31, 2006. This decrease is due primarily to the shift in emphasis from a sales model to an ownership model, as discussed above. In the year ended December 31, 2007, we did not recognize any expenses from the construction of facilities. In the year ended December 31, 2006, $812,000 of the $2.1 million in operations and maintenance expense was related to the construction of electric generating facilities constructed for sale to Dairyland. Operations and maintenance costs decreased from $1.3 million in the year ended December 31, 2006 to $942,000 in the year ended December 31, 2007, due primarily to lower repair and maintenance costs at the Dairyland sites.

General and administrative expenses from continuing operations increased by $1.2 million to $12.4 million for the year ended December 31, 2007, as compared to $11.2 million for in the year ended December 31, 2006. This increase was primarily due to a $762,000 increase in non-cash compensation expense and a $1.5 million increase in payroll related expenses, including severance. These increases were partially offset by a $992,000 decrease in professional service expenses. In the year ended December 31, 2007, we recognized $2.8 million of

~~non-cash~~Other ~~compensation~~income ~~expenses~~(expense). ~~due~~In ~~primarily~~2007, toincome of $584,000 was the ~~FAS~~one-time ~~123R~~recognition ~~treatment~~of the reversal of ~~options~~a ~~and~~reserve ~~stock~~resulting ~~appreciation~~from ~~rights~~the ~~granted~~expiration toof ~~employees,~~the asstatute ~~compared~~of tolimitations ~~non-cash compensation~~on ~~expense~~a ofcontingent ~~$2.0~~obligation ~~million~~related into the ~~year~~sale ~~ended~~of ~~December 31,~~a ~~2006~~project in 2001.

WeIncome ~~experienced~~tax anexpense. ~~increase~~Because inwe ~~preferred~~are ~~security~~not ~~dividend requirements~~assured ~~related~~of torealizing ~~our~~the ~~series~~benefits Aof 9%operating ~~cumulative~~losses ~~convertible~~for ~~preferred~~tax ~~stock~~purposes ~~issued~~we indid ~~November~~not ~~2006,~~record ~~from~~an ~~$193,000~~income ~~for~~tax ~~the~~benefit ~~year ended December 31, 2006 to $1.3 million~~ for ~~the~~losses ~~year~~incurred ~~ended~~during ~~December 31, 2007, representing dividends either accrued or paid in~~ the ~~year~~years ended December 31, ~~2007.~~2008 ~~Dividends on our series A 9% cumulative convertible preferred stock accrue at the rate of 9% per annum~~ and ~~are payable on January 1 and July 1 of each year, to the extent declared and paid out of funds legally available therefore~~2007.

~~The~~Loss ~~foregoing~~from ~~expenses~~discontinued ~~were~~operations, ~~offset~~net ~~in part by other income~~ of $1taxes.4 ~~million~~The results for ~~the~~ ~~year ended December 31~~2008, ~~2007,~~a ~~compared~~loss ~~to other income~~ of $~~439~~1,011,000 ~~for the year ended December 31~~, ~~2006.~~consist ~~The~~of ~~increase~~the inoperating ~~other~~loss ~~income~~of isBuzzard ~~primarily~~for ~~due to~~ the ~~expiration~~first oftwo ~~the~~months ~~statute~~ of ~~limitations~~2008 ~~regarding~~prior ~~potential liability related~~ to the ~~Sunnyside~~disposition ~~project and the release~~ of ~~a reserve therefore, which provided $584,000 in other income during~~ the ~~year~~Scrubgrass ~~ended~~facility ~~December~~on February 3129, ~~2007~~2008. ~~Additionally,~~The ~~interest~~2007 ~~income~~loss ~~increased~~of by $~~335~~6,196,000 toreflects ~~$783,000~~the inresults of Buzzard for the twelve months ~~ended~~ ended December 31, 2007 ~~primarily as a result of higher average cash balance due to the common stock offering~~.

InGain ~~the~~on ~~year~~disposal ~~ended December 31,~~of ~~2007,~~discontinued ~~our~~operations. ~~construction~~We disposed of Buzzard’s interest in the ~~progress~~Scrubgrass ~~balance~~facility ~~increased~~on byFebruary 29, ~~$13.6~~2008 ~~million~~and torecognized a ~~total~~one-time gain of $278,000,000.6 ~~million.~~With Asthe exception of ~~December 31,~~a ~~2007~~cash payment of $375,000 wethe ~~had~~gain awas ~~total~~non-cash ~~cost~~in nature and consisted principally of ~~$23.5~~recognition ~~million~~of ~~associated~~a ~~with~~previously ~~the~~deferred ~~Huckabay~~gain in ~~Ridge~~the ~~facility,~~amount of ~~which~~ $1.2 ~~million~~,570,000, ~~was~~forgiveness ~~made~~of upindebtedness ofin ~~capitalized~~the ~~interest~~amount of $3,456,000 and ~~finance~~elimination ~~costs~~of ~~and~~other ~~approximately~~obligations in the amount of $6.1,630,000. ~~million~~There ofwas ~~capitalized~~no ~~commissioning~~tax ~~costs~~provision ~~due~~provided toon the ~~extended,~~disposition ~~ongoing~~because ~~commissioning~~we ~~period.~~believe Bythat ~~comparison,~~we inhave sufficient net operating loss carryforwards at the ~~year~~federal ~~ended~~and ~~December 31,~~state ~~2006,~~levels ~~our construction~~to inoffset ~~progress~~any ~~balance~~potential ~~increased~~tax byliability ~~$13.2~~with ~~million~~respect to ~~$14.1~~the ~~million~~gain on disposal.

~~Discontinued~~The ~~Operations~~net result of loss from discontinued operations and gain on disposal of discontinued operations for the year ended December 31, 2008 was net income of $6,989,000 compared to a net loss of $6,196,000 for the year ended December 31, 2007.

WeFUTURE ~~experienced~~OPERATING aRESULTS pre-tax loss from discontinued operations of $6.2 million for the year ended December 31, 2007, compared to a $2.7 million pre-tax loss for year ended December 31, 2006. This increase in pre-tax loss is primarily due to an increase in operating expenses of $3.1 million, and a $177,000 increase in other expenses.

~~Billed~~We ~~power~~expect ~~generation~~to ~~revenues~~experience atsignificant ~~Buzzard,~~fluctuations ~~which~~in ~~consist~~future ofoperating ~~power~~results ~~generation~~that ~~revenues,~~may ~~increased~~be caused by ~~$2.9~~many ~~million~~factors, toincluding, ~~$58.8~~among ~~million for the year ended~~other ~~December 31~~things, ~~2007~~the asprogress ~~a result~~ of ~~increased~~Microgy’s ~~power~~business ~~rates~~plan, ~~as compared to $55.9 million for~~ the ~~year~~effects ~~ended~~of ~~December 31~~competition, ~~2006.~~market ~~Buzzard~~acceptance ~~operated at 93.6%~~ of ~~capacity~~our ~~for this period~~products, ~~compared~~the tomix ~~97%~~ of ~~capacity~~our ~~for~~products ~~the~~and ~~year~~services ~~ended December 31~~sold, ~~2006.~~demand ~~The~~for ~~decrease~~our ~~was~~products aor ~~result~~the timing of acustomer ~~twelve~~acceptance ~~day~~of ~~maintenance~~our ~~outage~~products, inchanges ~~May 2007. The decrease~~ in the ~~capacity~~level ~~was~~of ~~offset~~our byoperating aexpenses, 7%general ~~increase~~economic inconditions ~~billed~~and ~~power~~the ~~rates~~factors inset ~~2007.~~forth ~~This increase~~ in ~~billed~~Part ~~power~~I, ~~generation~~Item 1A—Risk ~~revenues~~Factors ~~was~~appearing ~~completely offset~~elsewhere ~~by a decrease~~ in ~~accrued~~this ~~power generation revenues of $2~~report.9 ~~million. The accrued power generation revenues result from the FASB 13 accounting treatment of the Scrubgrass lease.~~ In ~~accordance with generally accepted accounting principles in the United States~~addition, we ~~are~~face ~~required~~the touncertainty ~~treat~~of ~~our power sales agreement with Penelec as a lease, aggregate~~ the ~~minimum~~outcome ~~lease~~of ~~payments~~negotiations ~~expected~~related to those bedebt ~~received~~instruments ~~over its life, and recognize it~~ on awhich ~~straight-line basis over the 22-year lease term. However,~~ we have ~~limited~~defaulted ~~the~~and ~~recognition~~our oflack ~~accrued power revenues to the recognition~~ of ~~the~~liquidity ~~deemed~~if ~~minimum payments of the facility lease so that~~ we docannot ~~not~~obtain ~~recognize~~additional ~~any~~financing. ~~profits~~Due ~~early related~~ to ~~executory~~these ~~costs~~and orother ~~payment~~factors, ~~for~~our ~~goods~~annual revenues and ~~services~~operating ~~other~~results ~~than solely~~are ~~for~~difficult ~~the right~~ to ~~use~~forecast ~~the facility~~accurately.

~~Total~~LIQUIDITY ~~operating~~AND ~~expenses~~CAPITAL atRESOURCES Buzzard for the year ended December 31, 2007 increased by $3.1 million to $32.5 million, as compared to $29.5 million for the year ended December 31, 2006. This increase was primarily a result of increases in maintenance costs of $2.6 million and fuel costs of $512,000. The increase in maintenance costs is largely attributable to a twelve day maintenance outage that occurred in May of 2007. Lease expenses at Buzzard decreased by $432,000 to $21.7 million in the year ended December 31, 2007, compared to

2009

Overview

As a predominately development-oriented company, we have experienced substantial losses since the year ended December 31, 2002. In the past, we have obtained outside funding to fund our losses and meet our capital requirements. At December 31, 2008 we determined that unless we obtained substantial outside sources of capital in 2009, we would not be able to fund our ongoing general and administrative requirements, debt service and dividend requirements. During 2009, we did raise sufficient capital to meet some of our requirements but other obligations remain due and unpaid such as those described in Going Concern above. At December 31, 2009, we have $663,000 of cash and cash equivalents and will again need substantial outside funding during 2010 to meet our obligations and continue operations.

Operating Activities

Our cash used in operating activities was $8,190,000 for the year ended December 31, 2009, compared to cash used in operating activities of $12,443,000 for the year ended December 31, 2008. We reported a net loss of

$~~22.1 million~~36,112,000 induring the year ended December 31, ~~2006~~2009. ~~General~~The ~~and~~following ~~administrative~~adjustments ~~expenses~~to ~~increased~~our cash flows need to ~~$3.0~~be ~~million~~considered in ~~the~~order ~~year~~to ~~ended December 31,~~reconcile ~~2007,~~our ~~compared~~net toloss ~~$2.4~~for ~~million~~2009 into ~~the~~our ~~year~~net ~~ended~~cash ~~December 31,~~used ~~2006.~~in operating activities:

~~Quarterly~~Impairment ~~Results~~of assets—In 2009, we recorded impairments for certain assets in construction-in-process and certain deferred financing costs in the amount of ~~Operations~~$26,070,000 as described in Note N—Impairment of Assets. This impairment is a non-cash charge and is added back to funds provided from operations.

~~Note~~Depreciation Oand toamortization—During the ~~consolidated~~year ~~financial statements included in this report sets forth items from our statements of operations for the eight quarters~~ ended December 31, ~~2008. This data has been derived from unaudited financial statements that~~2009, inwe ~~the~~recognized ~~opinion~~depreciation ofand ~~management,~~amortization ~~include all adjustments, consisting only of normal recurring adjustments, necessary~~ for ~~a fair presentation of the~~ ~~information.~~equipment This information should be read in conjunction with the consolidated financial statements and the notes thereto and other financial information appearing elsewhere in this report. We believe that period-to-period comparisons of ~~our financial~~$1,355,000 ~~results are not necessarily meaningful~~ and ~~should~~licensed ~~not~~technology berights ~~relied upon as an indication~~ of ~~future performance~~$186,000.

~~The~~Stock-based ~~trends~~compensation—Accounting for stock ~~discussed~~appreciation inrights, ~~the~~options ~~period-to-period~~and ~~comparisons~~restricted ~~above~~stock ~~generally~~grants ~~apply~~resulted toin ~~the~~non-cash ~~results~~compensation expenses of ~~operations~~$418,000 for ~~our~~the ~~eight~~year ~~most~~ended ~~recent~~December 31, ~~quarters~~2009.

~~We expect~~Investing toActivities experience significant fluctuations in future quarterly operating results that may be caused by many factors, including, among other things, the progress of Microgy’s business plan, the effects of competition, market acceptance of our products, the mix of our products and services sold, demand for our products or the timing of customer acceptance of our products, changes in the level of our operating expenses, general economic conditions and the factors set forth in Part I, Item 1A—Risk Factors appearing elsewhere in this report. Due to these and other factors, our annual revenues and operating results are difficult to forecast accurately.

~~LIQUIDITY~~Our ~~AND~~cash ~~CAPITAL~~provided ~~RESOURCES~~by investing activities was $93,169,000 in the year ended December 31, 2009, as compared to cash used for investing activities of $73,345,000 in the year ended December 31, 2008. In 2009 the cash provided by investing activities was primarily from a reduction in our restricted cash balances. These funds were primarily used to repurchase or redeem outstanding debt and related interest.

~~Going~~Restricted ~~Concern~~cash—We are required to hold cash associated with our tax-exempt bond financing with a third party disbursement agent. On December 31, 2009, the disbursement agent was holding a balance of $1,792,000 in bond proceeds, compared to $104,577,000 on December 31, 2008. The decrease in restricted cash is attributable primarily to the restricted cash funds used for repayment and redemption of outstanding Texas and California tax-exempt bonds, as well as the sweeping of bond accounts in connection with the acceleration of the bonds following default. These assets are invested in short-term, high quality debt instruments.

~~The~~Construction ~~company’s~~of ~~consolidated~~projects—Expenditures ~~financial statements have been prepared~~ on aconstruction ~~going~~of ~~concern~~our ~~basis~~projects, ~~which~~including ~~contemplates~~capitalized ~~continuity of operations~~interest, ~~realization of~~was ~~assets and satisfaction of liabilities in the ordinary course of business. As a predominately development oriented company~~$9,481,000 wefor ~~have experienced substantial losses since~~ the year ended December 31, ~~2002. For the year ended December 31~~2009, ~~2008,~~ wecompared ~~incurred a net loss applicable~~ to ~~common shareholders of~~ $1716,~~332~~906,~~979~~000 ~~and~~for ~~used cash of $13,100,178 in operating activities. We anticipate incurring losses at least through 2010 as we continue~~ the ~~construction of our portfolio of announced~~ ~~projects~~year ~~which~~ended we anticipate completing at varying times in 2010, subject to the availability of funding and the operational ramp up of our Huckabay Ridge facility and completion of construction and then operation of our Swift Grand Island facility during 2009. As of December 31, 2008~~, we had an accumulated deficit of $71,401,984, and our unrestricted cash and cash equivalents amounted to $3,157,938~~. Currently, our facility at Huckabay Ridge, Texas, which is being ramped up to full production, will not generate positive cash flow until the ramp up is complete and steady state conditions are achieved. In any event, the cash we project to be generated from Huckabay Ridge, by itself, will be insufficient to meet our short-term and long-term corporate and project-related capital requirements.

~~In the past~~Property, weplant ~~have been able to obtain outside financing to fund our losses~~ and ~~meet~~equipment—Property, ~~our~~plant ~~capital requirements with the anticipation that once our portfolio of projects are complete~~ and ~~operational,~~equipment ~~they~~expenditures ~~would contribute to future liquidity needs. While we have implemented steps to reduce our general and~~were ~~administrative expenses~~$266,000, wefor ~~will need to raise substantial funds during~~ the ~~first~~year ~~half~~ended ofDecember 31, 2009, incompared ~~order~~ to ~~fund~~expenditures ~~ongoing general and administrative expenses as well as interest and dividend requirements. We are currently actively seeking additional sources~~ of ~~capital to meet these financing needs. To that end, on March 13, 2008 we closed on a sale of~~ $~~5.0 million original principal amount of our 14% convertible notes due January 1~~377,000 ~~2014~~ for ~~net proceeds of approximately $4.4 million, and we continue to work with our financial advisors to identify and explore various opportunities to raise~~ the ~~capital~~year weended ~~require. However~~December 31, ~~we cannot assure you that we will be able to raise sufficient capital on acceptable terms, or at all~~2008. ~~The level of funds we are able to raise, if any, will determine the level of development and construction activity that we can pursue and whether we will be able to continue as a going concern.~~

Financing Activities

Our cash used for financing activities was $87,474,000 in the year ended December 31, 2009, compared to cash provided by financing activities of $64,113,000 in the year ended December 31, 2008. We offer the following information concerning the financing activities for our business:

Proceeds from long-term debt—In 2009, we issued $8,000,000 in 14% convertible notes. We received $5,000,000 in cash from these notes and $3,000,000 of the notes was used for the payment of license fees.

Dividend payments obligations—We paid dividends of $667,000 to preferred stockholders during the year ended December 31, 2009.

Payment on long-term debts—In November 2009, Microgy Holdings repaid or redeemed $46,220,000 of outstanding principal amount of the Texas and California tax-exempt bond obligations. In December 2009, an additional $44,761,000 was repaid in connection with the acceleration of the bonds following default.

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. The uncertainties described in the preceding paragraph raise substantial concern at December 31, 2008 about our ability to continue as a going concern without additional financing. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of the carrying amount of recorded assets or to the amount and classification of liabilities that might result should we be unable to continue as a going concern.

2008

Operating Activities

Our cash used in operating activities was $13,~~100~~679,000 in the year ended December 31, 2008, compared to cash used in operating activities of $78,~~930~~117,000 for the year ended December 31, 2007. We reported ~~net~~ a net loss of $16,007,000 during the year ended December 31, 2008. The following adjustments, towhich did not impact our cash flows, need to be considered in order to reconcile our net loss for 2008 to our net cash used in operating activities:

Impairment of goodwill— In 2008 we recorded an impairment for the entire balance of our goodwill as an expense of $4,913,000. This impairment is a non-cash charge and is added back to funds provided from operations.

Depreciation and amortization—During the year ended December 31, 2008, we recognized depreciation and amortization for licensed technology rights of $186,000, lease rights of $20,000 and property plant and equipment of $1,153,000.

Stock-based compensation—The ~~FAS 123(R)~~ accounting for options, stock appreciation rights, ~~options~~ warrants and restricted stock grants resulted in non-cash compensation expenses of $1,951,000 for the year ended December 31, 2008.

We also offer the following information regarding changes in operating assets and liabilities that most notably impacted our cash position during 2008:

Receivables—Total receivables increased by $15,783,000. The increase is primarily attributable to increased receivables at Buzzard due to increased power generation revenues in the fourth quarter of 2008 compared to power generation revenues in the fourth quarter of 2007.

Investing Activities

Our cash used for investing activities was $7673,~~504~~345,000 in the year ended December 31, 2008, as compared to $5,~~952~~764,000 in the year ended December 31, 2007. Cash used for investing activities for the year ended December 31, 2008 included a $56,641,000 increase in restricted cash as a result of the 2008 bond financings. Our investing activities were concentrated primarily in the following areas:

Restricted cash—We are required to hold cash associated with our tax-exempt bond financing with a third party disbursement agent. On December 31, 2008, the disbursement agent was holding a balance of $104,577,000 in bond proceeds, compared to $45,785,000 on December 31, 2007. ~~The~~We ~~increase~~also inheld ~~restricted cash is attributable to our~~ $62553,~~425,~~000 in ~~tax-exempt~~a ~~bond~~restricted ~~financing in California and $7,000,000 in tax exempt bond financing in Nebraska. These increases in~~ cash ~~were~~account ~~offset~~to byfund ~~the expenditure of funds for the construction of~~ our ~~facilities~~potential ~~in Huckabay Ridge, Texas and Grand~~asset ~~Island,~~retirement ~~Nebraska.~~obligation ~~These~~at ~~assets are invested in short term high quality debt instruments~~Huckabay.

Construction ofon projects—Expenditures on ~~construction of~~ our ~~projects~~facilities were $16,906,000 for the twelve months ended December 31, 2008 compared to $12,388,000 for the twelve months ended December 31, 2007.

Property, plant and equipment—Property, plant and equipment expenditures were $377,000, for the year ended December 31, 2008, compared to expenditures of $560,000 for the year ended December 31, 2007. ~~The expenditures did not include capitalized interest.~~

Financing Activities

Our cash provided by financing activities was $6664,~~693~~113,000 infor the year ended December 31, 2008, compared to cash provided by for financing activities of $26,157,000 in the year ended December 31, 2007. We offer the following information concerning the financing activities for our business:

Dividend payments obligations—We paid dividends of $1,326,000 to preferred stockholders during the year ended December 31, 2008.

Public Offerings of Common Stock—On October 3, 2007, the Company raised $26.6 million through the sale of 5,400,000 shares of common stock.

~~Net~~ Proceeds from Bond Financing—In ~~September~~ 2008, Microgy Holdings, LLC, our wholly-owned subsidiary, closed a $6269,425,000 9%in tax-exempt bond ~~financing through the California Statewide Communities Development Authority~~financings. The ~~proceeds~~bonds ofwere ~~the~~issued ~~bond~~at ~~offering~~par ~~will~~and ~~provide~~pay ~~debt~~a ~~financing~~coupon ~~for~~of ~~two proposed renewable natural gas facilities in California being developed by Microgy~~9%. ~~In July 2008,~~ Microgy Grand Island, ~~LLC~~Inc., our wholly-owned subsidiary, closed a $7,000,000 7%in tax-exempt ~~bond~~bonds ~~financing~~that ~~through~~were ~~the~~issued ~~City~~at ofpar ~~Grand~~and ~~Island,~~pay ~~Nebraska.~~a ~~The proceeds~~ coupon of ~~the bond offering will provide debt financing for the renewable natural gas facility under construction at Grand Island, Nebraska~~7%.

Exercise of Stock Options and Warrants—We received $2,952,000 of gross proceeds from the exercise of stock options and warrants in the year ended December 31, 2007.

~~Operating~~Long-Term ~~Activities~~Contractual Liabilities & Commitments

Our cash used in operating activities was $7.9 million in the year ended December 31, 2007, compared to cash used in operating activities of $10.0 million for the year ended December 31, 2006. We reported a net loss of $17.4 million during the year ended December 31, 2007. The following ~~adjustments,~~table ~~which~~shows ~~did not impact~~ our ~~cash~~long-term ~~flows,~~contractual ~~need~~liabilities toand becommitments. ~~considered in order to reconcile our net loss for 2007 to our net cash used in operating activities:~~

Depreciation and amortization—During the year ended December 31, 2007, we recognized depreciation and amortization for licensed technology rights of $186,000, lease rights of $149,000 and property plant and equipment of $126,000.


Commitments of Continuing Operations	2010		2011		2012		2013		2014		Thereafter		Total
Operating Leases(1)	$	366,972	$	328,800	$	126,228	$	—	$	—	$	—	$	822,000
Microgy Commitments(2)		3,000,000		—		—		—		—		—		3,000,000
14% Convertible Notes(3)		8,000,000		—		—		—		—		—		8,000,000
Tax Exempt Bonds(4)		38,444,409		—		—		—		—		—		38,444,409
Security Deposit(5)		100,000		100,000		100,000		100,000		—		—		400,000
Vehicle Loans(6)		19,814		1,476		—		—		—		—		21,290

TOTAL	$	49,931,195	$	430,276	$	226,228	$	100,000	$	—	$	—	$	50,687,699

~~Deferred~~(1) ~~gain,~~We ~~net—Our deferred~~are ~~gain,~~obligated ~~net,~~under ~~decreased~~various tonon-cancelable ~~$2.6~~operating ~~million~~leases asfor ofoffice ~~December 31, 2007 from $2~~space.~~9 million~~ asRent ofexpense ~~December 31,~~for ~~2006.~~these ~~The~~operating ~~decrease~~leases iswas ~~due~~$272,513, to$371,637, ~~the~~and ~~amortization~~$424,765, ofin ~~the~~2009, ~~deferred~~2008 ~~gain~~and ~~related to Scrubgrass~~2007, ~~which is being amortized on a straight-line basis over 22 years~~respectively.

~~Interest~~(2) ~~expense,~~These ~~accrued—During~~commitments ~~the~~relate ~~year~~to ~~ended~~various ~~December 31,~~purchase ~~2007~~agreements, weand ~~had~~include ~~$603,000~~amounts ~~of interest~~expected ~~expense~~to ~~that~~be ~~was~~claimed ~~added~~by toSouthTex ~~the~~Treaters ~~outstanding~~for ~~principal~~gas ~~balance~~treatment ofequipment, ~~the~~in ~~ArcLight~~connection ~~loan.~~with our Microgy facilities.

~~Stock-based compensation—The FAS 123~~(R3) ~~accounting~~Although ~~for~~these ~~options~~notes ~~and~~are ~~stock~~not ~~grants~~due ~~resulted~~until January 1, 2014, EPC is in ~~non-cash~~default ~~compensation~~on ~~expenses~~this ofobligation ~~$2.8~~and ~~million~~either ~~for~~the trustee or 25% of the ~~year~~bond ~~ended~~holders ~~December 31,~~can ~~2007.~~demand immediate payment.

We(4) ~~also~~Microgy ~~offer~~Holdings is in default on the ~~following~~Texas ~~information~~and ~~regarding~~California ~~changes~~bonds and bondholders have accelerated demand for payment of the principal of the remaining bonds in ~~operating~~the ~~assets~~amount ~~and~~of ~~liabilities~~$31,444,409. ~~that~~Microgy ~~most~~Grand ~~notably~~Island ~~impacted~~is ~~our~~in ~~cash~~default ~~position~~on ~~during~~the ~~2007:~~$7,000,000 of Nebraska bonds but neither the bondholders nor the trustee has demanded accelerated payment.

~~Receivables—Total~~(5) ~~receivables~~In ~~increased~~December by2008, ~~$2.9~~Microgy ~~million.~~signed ~~The~~a ~~increase~~contract iswith ~~primarily~~a ~~attributable~~customer tothat ~~increased~~required ~~receivables~~security atdeposits ~~Buzzard due~~ to ~~increased~~ ~~power~~protect ~~generation~~against ~~revenues~~failure ~~in the fourth quarter of 2007 compared~~ to ~~power~~deliver ~~generation~~product ~~revenues~~ in ~~the~~certain ~~fourth quarter of 2006~~instances.

~~Investing~~(6) ~~Activities~~We are obligated under various loans for vehicles.

~~Our~~The ~~cash~~following ~~used~~table ~~for~~provides ~~investing~~details ~~activities~~regarding ~~was~~the ~~$6.0~~current ~~million~~portion inof ~~the~~our ~~year~~long-term ~~ended~~debt ~~December 31, 2007,~~obligations as ~~compared~~of ~~to $66.6 million in the year ended~~ December 31, ~~2006~~2009. ~~Cash~~At ~~used for investing activities for the year ended~~ December 31, ~~2006~~2008 ~~included~~none ~~a $53.2 million dollar increase in restricted cash as a result~~ of ~~the~~our ~~November~~debt ~~2006 bond~~obligations ~~financing. Our investing activities~~ were ~~concentrated~~due ~~primarily~~within one ~~in the following areas~~year:

Restricted cash— We are required to hold cash associated with our tax-exempt bond financing with a third party disbursement agent. On December 31, 2007, the disbursement agent was holding a balance of $45.8 million in bond proceeds, compared to $52.2 million on December 31, 2006. We also hold $489,000 in a restricted cash fund to fund our asset retirement obligation at Huckabay. Additionally, we were 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 were allowed to use cash from this restricted maintenance fund for major equipment overhauls at Scrubgrass, subject to certain restrictions. Our restricted cash balance associated with Buzzard was $2.2 million on December 31, 2007, compared to $3.2 million on December 31, 2006. These funds will be used to pay for future major maintenance expenses at the Scrubgrass facility.


	December 31, 2009
Current portion of long-term debt
California loan related to tax-exempt bonds	$	8,355,699
Texas loan related to tax-exempt bonds		23,088,710
Nebraska loan related to tax-exempt bonds		7,000,000
14% convertible notes		8,000,000
Vehicle loans		19,814

TOTAL	$	46,464,223

~~Construction~~The onfollowing ~~projects—Expenditures~~table onprovides ~~our~~details ~~facilities~~regarding ~~were~~our ~~$12.4~~long-term ~~million~~contractual ~~for~~obligations ~~the~~as ~~twelve~~of ~~months ended~~ December 31, ~~2007~~2009 compared to $13.2 million for the twelve months ended December 31, 2006. As of December 31, 2007, we had incurred expenditures of $22.0 million related to the construction of the Huckabay Ridge facility, including $6.1 million of capitalized commissioning costs due to the extended and ~~continuing~~2008: ~~commissioning period. Expenditures for projects other than Huckabay Ridge were approximately $722,000 million in the year ended December 31, 2007.~~

Property, plant and equipment—Property, plant and equipment expenditures did not include capitalized interest and were $560,000 for the year ended December 31, 2007, compared to expenditures of $177,000 for the year ended December 31, 2006.


	December 31, 2009		December 31, 2008
Long-term debt
Vehicle loans	$	1,432	$	50,023
California loan related to tax-exempt bonds		—		62,425,000
Texas loan related to tax-exempt bonds		—		60,000,000
Nebraska financing lease related to tax-exempt bonds		—		7,000,000

TOTAL	$	1,432	$	129,475,023

~~Financing~~Notes Receivable from Officers and ~~Activities~~Directors—We have outstanding notes receivable from former and current officers and directors for shares purchased in connection with stock option plans of $638,219 as of December 31, 2009 and December 31, 2008. These notes, partially secured by the underlying shares of stock purchased thereby, are payable upon demand and bear interest at a floating rate which is payable monthly. In accordance with company policy and applicable law, we no longer make loans to our officers or directors.

~~Our~~Microgy ~~cash~~Holdings Debt Obligations—In November 2006, Microgy Holdings closed a $60,000,000 tax-exempt bond financing through the Gulf Coast Industrial Development Authority of Texas. These bonds were issued at par and pay a coupon of 7%. The proceeds of the bond offering provided bydebt financing for our Huckabay Ridge renewable natural gas facilities in Texas. To date we have used $1,200,000 to fund costs of issuance, $15,000,000 to fund construction of our Huckabay Ridge facility, and $2,492,000 to fund construction activities ~~was~~at the Rio Leche and Cnossen projects. In September 2008, Microgy Holdings closed a $2662,425,000 tax-exempt bond financing through the California Statewide Communities Development Authority.2 ~~million~~These bonds were also issued at par and pay a coupon of 9%. To date, we have used $1,249,000 to fund costs of issuance. In November of 2009, Microgy Holdings entered into a demand purchase agreement with the bondholders that resulted in redemption or repurchase of $15,005,000 of the ~~year~~Texas ~~ended~~bonds ~~December~~ and $31,215,000 ~~2007~~of the California bonds plus accrued interest. Microgy Holdings failed to make the required semi-annual interest payments due on the Texas and California bonds as of December 1, ~~compared~~2009 from general corporate funds. This failure was deemed to ~~cash provided~~be an event of default by ~~financing~~the ~~activities~~bondholders and the bondholders accelerated payment of ~~$75~~interest and principal of these bonds on December 23, 2009.5 ~~million~~As ina result, the ~~year~~bondholders ~~ended~~applied existing restricted cash funds to reduce the amount of obligations outstanding to their current balances at December 31, ~~2006~~2009. WeThe ~~offer~~obligations of Microgy Holdings under the ~~following~~Texas ~~information~~and ~~concerning~~California bond financings are non-recourse to Environmental Power although Environmental Power is required to provide at least 20% of the ~~financing~~construction ~~activities~~cost ~~for~~of ~~our~~the facility, ~~business:~~as well as to cover any cost overruns in construction and to fund operations and maintenance prior to achievement of completion. The trustee or bondholders holding 25% of the principal amount of the bonds can seek to begin foreclosure proceedings on the assets but neither has done so to date.

~~Dividend~~Microgy ~~payments~~Grand ~~obligations~~Island, LLC Debt Obligation—WeIn ~~paid~~July 2008, ~~dividends~~Microgy Grand Island LLC, our wholly-owned subsidiary, closed a $7,000,000 tax-exempt bond financing through the City of Grand Island, Nebraska. These bonds were issued at par and pay a coupon of 7%. The proceeds of the bond offering provided debt financing for the renewable gas facility under construction at Grand Island, Nebraska. These bonds carry certain restrictions and covenants, including reporting requirements and restrictions on the use of the funds. To date, we have used $~~871~~140,000 to ~~preferred~~fund ~~stockholders~~costs ~~during~~of issuance and $5,909,000 of the ~~year~~proceeds ~~ended~~to fund construction of our Grand Island facility. The obligations of Microgy Grand Island LLC under the Nebraska bond financing are non-recourse to Environmental Power, although Environmental Power is required to provide at least 20% of the construction cost of the facility, as well as to cover any cost overruns in construction and to fund operations and maintenance prior to achievement of completion. On December 311, 2009, ~~2007~~the required interest payment of $245,000 was made from the debt service reserve fund of the bonds. The payment of interest from the debt service reserve fund is an event of default which has not been cured. The trustee or bondholders holding 25% of the principal amount of the bonds can accelerate payment of these bonds and begin foreclosure proceedings on the assets but neither has done so to date.

Public Offerings of Common Stock—On October 3, 2007, the Company raised $26.6 million through the sale of 5,400,000 shares of common stock.

Public Offerings of Preferred Stock—On October 21, 2006, the Company raised $14.0 million, net of associated fees of $950,000, through the sale of 281,241 shares of Series A Cumulative Convertible Preferred Stock and Warrants. The Convertible Preferred Stock holders are entitled to a 9% cumulative dividend, payable on a semiannual basis.

Proceeds from Bond Financing— In November 2006, Microgy Holdings, LLC, our wholly-owned subsidiary, closed a $60 million tax-exempt bond financing through the Gulf Coast Industrial Development Authority. The bonds were issued at par and will pay a coupon of 7%. The proceeds of the bond offering will provide debt financing for four proposed renewable natural gas facilities in Texas being developed by Microgy. The bonds carry certain restrictions and covenants, including reporting requirements and restrictions on the use of the funds. The debt held by Microgy Holdings is non recourse to Environmental Power, although Environmental Power is required to provide at least 20% of the construction costs of these facilities, as well as to cover any cost overruns in construction.

Exercise of Stock Options and Warrants—We received $2,952,000 of gross proceeds from the exercise of stock options and warrants in the year ended December 31, 2007.

Working capital loan and current notes payable for Scrubgrass—Buzzard may borrow up to $6 million under a lessee working capital loan agreement with the lessor of the Scrubgrass facility for ongoing working capital requirements of this project. The outstanding borrowings under this loan were $1.8 million as of December 31, 2007. On December 31, 2006, the outstanding borrowings under this loan were $4.2 million.

~~Long~~2010 ~~Term~~Outlook ~~Liabilities & Commitments~~

~~The~~Operations ~~following table shows all of our long term liabilities and commitments. Note K to our consolidated financial statements provides additional information on these commitments.~~

Commitments of Continuing Operations($ USD)	2009		2010		2011		2012		2013		Thereafter		Total
Operating Leases(1)	$	336,672	$	336,672	$	298,500	$	111,078		—		—	$	1,082,922
Microgy Commitments(2)		3,000,000		—		—		—		—		—		3,000,000
Tax Exempt Bonds(3)		10,308,250		10,308,250		10,658,250		11,603,750	$	11,606,350	$	285,416,450		339,901,300
Security Deposit(4)		250,000		100,000		100,000		100,000		100,000				650,000
Vehicle Loan and Other Capital Leases(5)		30,347		18,829		—		—		—		—		49,176
TOTAL	$	13,925,269	$	10,763,751	$	11,056,750	$	11,814,828	$	11,706,350	$	285,416,450	$	344,683,398

The following forward-looking information concerning our anticipated results of operations for the full year 2010 is being compared to our historical results of operations for 2009.

1Because Wewe ~~are~~contributed ~~obligated~~our ~~under~~interest ~~various~~in ~~non-cancelable~~the ~~operating~~Wisconsin ~~leases~~facilities ~~for~~to ~~office~~a ~~space~~joint venture in January 2010, we will not be reporting the revenues and ~~automotive~~operations ~~vehicles~~and maintenance expenses of the Wisconsin facilities in our financial statements after January 2010. ~~Rent~~We ~~expense~~will account for ~~these~~Wisconsin ~~operating~~operations ~~leases~~on ~~was~~the ~~$371,637,~~equity ~~$424,765,~~method and ~~$286,501,~~include in30% ~~2008,~~of ~~2007~~the ~~and~~net ~~2006,~~revenues ~~respectively~~in our statement of operations.

2If ~~These~~we ~~commitments~~are ~~relate~~able to ~~various~~implement ~~purchase~~combined ~~agreements,~~heat and ~~include~~power ~~amounts~~improvements ~~expected~~at toHuckabay beRidge, ~~claimed~~we byanticipate ~~SouthTex~~a ~~Treaters~~substantial ~~for~~increase ~~gas treatment equipment,~~ in ~~connection with our Microgy facilities~~revenue.

3At InHuckabay ~~2007~~Ridge, ~~Microgy~~due ~~began~~to ~~scheduled~~outages ~~interest~~and ~~payments~~downtime onto complete comprehensive upgrades, the ~~tax~~facility ~~exempt~~did ~~bonds~~not produce at maximum capacity in 2009. ~~Mandatory~~We ~~redemption~~expect our Huckabay Ridge facility to be capable of ~~principal~~achieving ~~amounts~~an ~~begins~~operating rate equal to its annualized production target of 575,000 MMbtus per year. In addition, if we are able to obtain financing to implement certain CHP improvements we expect the annual production of RNG® we can sell to increase to an annual rate of 782,000 MMbtus in ~~2012~~2010.

4We expect our operation and maintenance expenses at Huckabay Ridge to increase during 2010 to reflect the normal commercial operations of the Huckabay Ridge facility for a full year of production. In ~~December~~addition, ~~2008~~during 2009, ~~Microgy~~operations ~~signed~~and amaintenance ~~contract~~costs ~~with~~at aHuckabay ~~customer~~Ridge ~~that~~were ~~required~~reduced ~~security~~by ~~deposits~~the toreceipt ~~protect~~of ~~against~~certain ~~failure~~insurance proceeds related to ~~deliver~~claims ~~product~~for incidents inthat ~~certain~~occurred ~~instances~~in 2008.

5In We2009, ~~are~~we ~~obligated~~completed ~~under~~a ~~various~~number ~~non-cancelable~~of ~~capital~~actions ~~leases~~to ~~for~~reduce ~~automotive~~or ~~vehicles~~eliminate certain general and administrative costs. General and administrative expenses in 2010 are expected to be consistent with 2009 amounts.

~~The~~Projects ~~following~~in ~~table provides further detail regarding our debt obligations as of December 31, 2008 and December 31, 2007:~~ Development

	December 31,2008		December 31,2007
Secured Promissory Notes Payable and Other Obligations
Vehicle loan & capital leases	$	50,023	$	103,983
California loan related to tax exempt bonds		62,425,000		—
Texas loan related to tax exempt bonds		60,000,000		60,350,000
Nebraska financing lease related to tax exempt bonds		7,000,000		—
TOTAL	$	129,475,023	$	60,453,983

Other Texas Projects. The Cnossen and Rio Leche projects are in the engineering phase and some initial site work has been completed. We have made our initial equity contributions for these projects and expect to proceed with foundation construction and additional site work when we obtain the required capital. Anticipated completion of construction is approximately one year after we begin full construction.

~~Notes~~California ~~Receivable~~Projects. ~~from~~As ~~Officers~~previously ~~and~~reported, ~~Directors~~our –California projects We have ~~outstanding~~all ~~notes~~requisite ~~receivable from~~water ~~former~~ and ~~current~~air ~~officers~~permits. ~~and~~Our ~~directors~~ability ~~for shares purchased in connection with stock option plans that amounted~~ to ~~$638,219~~continue asdevelopment of ~~December 31,~~these ~~2008~~projects ~~and~~will ~~December 31,~~depend ~~2007.~~on ~~These~~whether ~~notes,~~we ~~secured~~can byobtain the ~~underlying~~necessary ~~shares~~equity ~~of stock purchased thereby, are payable upon demand~~ and ~~bear~~debt ~~interest at a floating rate which is payable monthly~~funding. ~~In accordance with company policy and applicable law, we no longer make loans to our officers or directors.~~

~~Microgy~~JBS ~~Holdings,~~Swift ~~LLC~~Grand ~~Debt~~Island. ~~Obligations—In~~Construction ~~November~~on ~~2006, Microgy Holdings, LLC, our wholly-owned subsidiary, closed a $60,000,000 tax-exempt bond financing through~~ the ~~Gulf~~biogas ~~Coast~~facility ~~Industrial~~located ~~Development Authority of Texas. These bonds were issued~~ at ~~par~~the ~~and~~JBS ~~will~~Swift & ~~pay a coupon of 7%~~Co. ~~The~~beef ~~proceeds~~processing ofplant ~~the~~in ~~bond~~Grand Island, ~~offering~~Nebraska, ~~will~~began ~~provide debt financing for four proposed renewable natural gas facilities~~ in ~~Texas~~2008 ~~being~~and ~~developed~~has bybeen ~~Microgy.~~funded Toto date wefrom ~~have used approximately $1.2 million to fund costs of issuance and $15 million of~~ the ~~proceeds to fund construction of our Huckabay Ridge facility. In September 2008 Microgy Holdings, LLC closed a~~ $627,~~425~~000,000 ~~tax-exempt~~in bond financing ~~through the California Statewide Communities Development Authority~~. ~~These~~We ~~bonds~~have, ~~were~~however, ~~also~~suspended ~~issued~~construction atpending ~~par~~financing ~~and~~commitments ~~will~~for ~~pay~~remaining acapital ~~coupon of 9%~~requirements. ~~The~~In ~~proceeds~~addition ofwe ~~this~~are ~~bond~~currently ~~offering~~in ~~will~~default ~~provide debt financing for~~on ~~two of~~ the ~~three~~$7,000,000 ~~proposed renewable natural gas facilities~~ in ~~California~~tax-exempt ~~being~~bonds ~~developed~~previously ~~by Microgy~~issued. ~~To date, we have used approximately $1.3 million to fund costs of issuance. These Texas~~

The suspension of construction has resulted in a delay in meeting the scheduled date for commencement of biogas deliveries under the terms of the Biogas Purchase and Sale Agreement between Microgy Grand Island, LLC and JBS Swift. Microgy Grand Island has informed JBS Swift that Microgy Grand Island intends to resume construction once remaining financing needs are secured and since February 2009 has, on a reservation-of-rights basis, made certain payments to JBS Swift to cover its claim for liquidated damages. We believe that such damages constitute the sole remedy under the biogas agreement for delay and to date JBS Swift has not disputed our view.

and California obligations also have certain covenants related to performance objectives at the Huckabay Ridge facility. The obligations of Microgy Holdings under the Texas and California bond financings are non-recourse to Environmental Power, although Environmental Power, is required to provide at least 20% of the construction costs of these facilities, as well as to cover any cost overruns in construction and to fund operations and maintenance prior to achievement of completion.

Microgy Grand Island, LLC Debt Obligation— In July 2008, Microgy Grand Island LLC, our wholly owned subsidiary, closed a $7,000,000 tax-exempt bond financing through the City of Grand Island, Nebraska. These bonds were issued at par and will pay a coupon of 7%. The proceeds of the bond offering will provide debt financing for the renewable gas facility under construction at Grand Island, Nebraska. These bonds carry certain restrictions and covenants, including reporting requirements and restrictions on the use of the funds. To date, we have used $140,000 to fund costs of issuance and $4.6 million of the proceeds to fund construction of our Grand Island facility. The obligations of Microgy Grand Island LLC under the Nebraska bond financing are non recourse to Environmental Power, although Environmental Power is required to provide at least 20% of the construction cost of the facility, as well as to cover any cost overruns in construction and to fund operations and maintenance prior to achievement of completion.

2009 Outlook

Operations

The following forward-looking information concerning our anticipated results of operations for the full year 2009 is being compared to our historical results of operations for 2008.

We expect increased revenues during 2009 from increased sales of RNG® produced by our Huckabay Ridge facility in Texas due to an expected full year of operations and due to higher capacity factors than were experienced in 2008. Our revenues related to the Dairyland sites are expected to be approximately consistent with revenues from such facilities in 2008. Also, we expect our Swift Grand Island facility to generate revenues when it is placed in service later this year.

At Huckabay Ridge, a recent outage has ended, during which we completed comprehensive upgrades to process-instrumentation and controls, the gas conditioning system, and the gas-collection system. These upgrades will bring the facility into conformity with the third-generation project design that we are utilizing on our next round of facilities. We also used the outage to complete repairs to two digester tanks that sustained damage due to over pressurization. The sources of over pressurization have been identified and were addressed in the current upgrades. With the completion of these upgrades, we expect our Huckabay Ridge facility to be capable of achieving an operating rate equal to its annualized production target of 635,000 MMbtus per year. Currently, we are in the process of bringing the Huckabay Ridge facility to full output levels, which we expect to occur in March 2009.

We expect our operation and maintenance expenses at Huckabay Ridge to decrease during 2009 to reflect the commercial operations of the Huckabay Ridge facility without the heightened operating and maintenance costs which were included in 2008. During the first seven months of production, these costs were higher than normal due to start-up expenses, and were subsequently heightened during the third and fourth quarters of 2008 due to the outage and related restart. We expect the Dairyland sites’ operations and maintenance expenses to remain approximately constant to 2008 levels. Additionally, we expect to start incurring operations and maintenance expenses associated with the Swift Grand Island facility once it commences commercial operation in 2009.

In 2008 and early 2009 we instituted a number of steps to reduce or eliminate certain general and administrative costs, and are currently examining other cost-saving measures. General and administrative expenses are expected to decline relative to 2008. We believe these measures will result in future reduced general and administrative costs as the full annual impact of these measures take effect.

In addition to the Huckabay Ridge facility, our other planned Texas and California projects are in various stages of development. Our Cnossen and Rio Leche projects are in the engineering and early stages of construction and initial site work has been completed. We are currently seeking capital to fund our required equity contributions for these projects to complement the equity we have invested to date. We have commenced construction on the biogas facility located at the JBS Swift & Co. beef processing plant in Grand Island, Nebraska. In July 2008 we received $7,000,000 in tax-exempt bond financing, less certain closing costs, from the City of Grand Island, Nebraska for the project. The funds are currently restricted for use on the project and held by a trustee, to be disbursed to cover certain documented project expenses. The terms of this financing are set forth in greater detail in our Current Report on Form 8-K, dated July 22, 2008, as filed with the Securities and Exchange Commission on July 25, 2008.

All requisite water and air permits required by the California Environmental Quality Act for the Riverdale, Hanford and Bar 20 projects in California have been approved. We have closed on $62.425 million of tax-exempt bond financing in California for the Riverdale and Hanford facilities, and expect to pursue an additional $26.02 million of such financing for the Bar 20 facility, though we do not yet have any binding commitments for such additional financing. The terms of our California financing are set forth in greater detail in our Current Report on Form 8-K, dated August 28, 2008, as filed with the Securities and Exchange Commission on September 4, 2008.

Cash Flow Outlook

During early ~~2009~~2010, we expect to fund our business activities principally from available cash balances, raising additional funds through debt and/or equity financings or other financing or strategic transactions by Environmental Power, Microgy or their affiliates and project-specific financing, to the extent available. ~~The~~To ~~requirement~~that ~~for~~end ~~additional~~on ~~financing~~January 29, ~~will~~2010 beMicrogy, inInc. ~~direct~~formed ~~proportion~~a tojoint development ~~the~~company ~~number~~called ofHMI ~~projects~~Energy, onLLC, ~~which~~referred weto ~~begin~~as ~~construction~~HMI, aswith ~~well~~Homeland asRenewable ~~our~~Energy ~~construction~~Inc, ~~schedule~~referred to as HRE. InUnder ~~addition~~the terms of the agreements relating to HMI, ~~during~~Microgy ~~2009~~contributed certain assets related to the Bar 20 California project weand ~~will~~Weld ~~need~~County Colorado project, rights to ~~meet~~up ~~significant~~to ~~interest~~five additional future projects, net revenues and ~~preferred~~rights ~~dividend~~and obligations asrelating ~~well~~to Microgy’s existing Wisconsin projects, and the right to receipts from the sale of carbon sequestration credits from the Wisconsin and other projects not pledged as ~~fund~~collateral ~~general~~for the Texas and ~~operating~~California ~~expenses~~bonds. WeIn ~~will~~exchange, ~~require~~Microgy ~~significant~~will ~~additional~~receive ~~capital~~$1,500,000 ~~over~~from ~~the~~HRE ~~next~~and ~~twelve~~a ~~months~~30% interest in ~~order~~HMI. toThe ~~continue~~other to70% ~~fund~~interest ~~our~~in ~~planned construction~~HMI ~~program~~is onheld ~~its~~by ~~current schedule~~HRE.

WeThe ~~have~~requirement ~~raised~~for ~~gross proceeds from the California tax-exempt bond issuance of $62.425 million to date, and currently expect to seek~~ additional ~~tax-exempt bond~~ financing ~~in California of $26.02 million. The proceeds from these financings~~ will be ~~used to cover not only construction costs but also debt-service and other normal reserves. Terms of the bond financings require that we first invest equity~~ in andirect ~~amount~~proportion ~~equal~~ to ~~at least 20% of~~ the ~~estimated~~number ~~costs~~ of ~~construction~~projects ~~(similar~~on towhich ~~the~~we ~~terms~~begin ofconstruction, ~~the~~as ~~bond-financings~~well ~~for~~ as our ~~Texas~~construction ~~projects)~~schedule. ~~before~~In ~~bond funds become available to us~~addition, ~~that~~ ~~Environmental~~during ~~Power~~2010 orwe ~~its~~will ~~subsidiaries~~need ~~raise~~to atresolve ~~least~~outstanding ~~$45.0~~and ~~million~~unpaid ininterest ~~additional~~on ~~capital~~our ~~prior~~14% toconvertible ~~June 30,~~notes ~~2009,~~ of ~~which at least~~ $~~17.5~~560,000, ~~million~~unpaid ispreferred ~~available~~dividends ~~to fund construction~~ of ~~the~~$1,334,000 ~~California~~and ~~facilities (with these amounts being proportionately reduced should~~ the ~~second~~remaining ~~closing~~obligations ofunder the Texas and California ~~bonds~~tax-exempt ~~not occur)~~bonds, ~~and~~as ~~that~~well ~~the~~as ~~Huckabay~~fund ~~Ridge~~significant ~~facility~~interest ~~meet~~and ~~certain~~preferred ~~gas~~dividend ~~production~~obligations and ~~financial~~general ~~performance~~and ~~tests~~operating ~~over a continuous 60-day period prior to June 30, 2009~~expenses. We ~~currently~~ ~~plan~~will onrequire ~~pursuing~~significant ~~the full $45.0 million in~~ additional capital ~~prior~~ to ~~June 30,~~fund ~~2009~~our inproposed ~~accordance~~construction ~~with~~program ~~the draw conditions~~ on ~~the~~its ~~California bonds~~current schedule.

With the closing on the tax-exempt bond issue for the Microgy Grand Island project in July 2008, ~~debt~~the initial debt financing of that project is complete. We will, however, need to raise additional money to ~~fund~~complete ~~our~~the ~~required~~project, ~~equity contribution~~ and ~~complete~~we will also need to resolve the existing default under the bonds for this project.

WeOn ~~will~~December 31, ~~need~~2009, toour ~~augment~~unrestricted ~~these~~ cash ~~resources~~balance bywas ~~additional~~$663,000, ~~capital~~as incompared ~~the~~to ~~first~~$3,158,000 ~~half~~as of ~~2009~~December 31, ~~to meet~~2008. ~~the~~In ~~draw~~addition, our ~~conditions~~current onrestricted ~~the~~cash ~~California~~balances ~~bonds~~were ~~described above~~$1,792,000 ~~as well as to fund ongoing general~~ and ~~administrative~~$104,577,000, ~~expenses~~at ~~associated~~December 31, ~~with~~2009 ~~our corporate overhead~~ and ~~interest~~December 31, ~~and~~2008, ~~dividend requirements~~respectively.

OnOur ~~December 31,~~current ~~2008,~~cash balance will not be sufficient to fund all of our ~~unrestricted~~corporate ~~cash~~overhead ~~balance~~requirements ~~was~~through $3the second quarter of 2010. We will require substantial additional financing,~~158~~ at both the project and parent company levels,~~000~~ to continue operations, ascomplete ~~compared~~the toconstruction ~~$26~~of currently planned facilities,~~069,000~~ as ofnoted ~~December 31~~above, ~~2007.~~including Inthose ~~addition~~already under construction, ~~our~~as well as for ongoing debt service, dividend payments and general and ~~current~~administrative ~~restricted~~expenses. ~~cash~~We ~~balances~~have ~~were~~engaged ~~$104~~independent financial advisors to assist us in exploring corporate and project financing opportunities and other strategic alternatives. We currently have no commitments for any additional financing,~~577,000~~ and ~~$45~~we cannot assure you that such financing will be available on reasonable terms or in a timely fashion,~~785,000,~~ or at ~~December 31~~all, ~~2008~~particularly ~~and~~in ~~December 31,~~the ~~2007~~current economic environment, ~~respectively~~in which capital raising activities are especially challenging. ~~The~~Our ~~restricted~~inability ~~cash~~to ~~represents~~obtain adequate financing would likely result in the ~~remaining~~need ~~proceeds~~to severely curtail or cease our business operations.

of our $60 million tax-exempt bond financing in Texas, proceeds from our $62.425 million tax exempt financing in California and $7.0 million tax exempt financing in Nebraska. For each of the three additional planned RNG® facilities in Texas, we are able to spend up to $15,000,000 from restricted cash, subject to certain restrictions and provided that we have first funded at least 20% of the expected cost of each such facility.

We believe that our current cash balance will be sufficient to fund our minimum lease and debt obligations, current contractual commitments, and our corporate overhead requirements through early 2009. However, we will require substantial additional financing, at both the project and parent company levels, to complete the construction of currently planned facilities, as noted above, including those already under construction, as well as for ongoing interest and dividend payments as well as general and administrative expenses. We have engaged independent financial advisors to assist us in exploring project financing opportunities. On March 13, 2009 we closed on a sale of $5.0 million original principal amount of our 14% convertible notes due January 1, 2014 for net proceeds of approximately $4.4 million. We currently have no commitments for any additional financing, and we cannot assure you that such financing will be available on reasonable terms or in a timely fashion, or at all, particularly in the current economic environment, in which capital raising activities are especially challenging. Our inability to obtain adequate financing would likely result in the need to curtail or cease our business operations.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Our most significant risk exposure is changing interest rates which may affect our short term investments generally and would also impact future debt financing costs. The gas production of future projects, to the extent not subject to fixed price off -take agreements or other hedging arrangements, has the potential to expose us to risk associated with fluctuating gas prices. These risks are described in more detail below.

Short-term investments

We invest cash balances that are in excess of our normal operating requirements in short term investments generally with maturities of three months or less. Because of the credit quality and short duration of these investments, we do believe our short-term investments are subject to normal market risks associated with high quality, low duration money market investments. A portion of our restricted cash balance is invested in highly rated, highly liquid government securities. We believe that those instruments are not subject to material potential near-term ~~losses in future earnings from reasonably possible near-term changes in market rates or prices.~~

quality, low duration money market investments. A portion of our restricted cash balance is invested in highly rated, highly liquid government securities. We believe that those instruments are not subject to material potential near-term losses in future earnings from reasonably possible near-term changes in market rates or prices.

Debt

We have financed and expect to continue to finance Microgy’s projects with debt financing, including tax-exempt financing, to the extent available. Any such debt financing will be subject to prevailing interest rates.

Commodity Price Risk

AsSince the natural gas we produce is renewable, we can demand and have received pricing at a premium to “brown” gas. However as Microgy establishes multi-digester projects for the production of RNG®, we could become exposed to market risk with respect to natural gas prices, to the extent that this risk is not mitigated by long -term off-take agreements. Historically, natural gas prices have been volatile, and we expect such volatility to continue. Fluctuations in the commodity price of natural gas may have a materially adverse impact on the profitability of some of our facilities; particularly where we do not have a long-term contract for the sale of the facility’s output at a fixed or predictable price. At such time as Microgy’s facilities begin to produce commercial quantities of gas for sale as a commodity, we intend to explore various strategies, including hedging transactions and the like, in order to mitigate the associated commodity price risk. In connection with our tax-exempt bond financings, we are required to maintain certain gas price protection arrangements for the gas output of our facilities.

Substrate Costs

We rely on significant quantities of substrate materials that provide proteins, fats, and carbohydrates that enhance the biological process in our digesters. Notwithstanding any supply agreements we may have, we are currently unable to forecast the costs associated with transporting substrate, and are exposed to market risk relating to availability of these materials. Substrate availability is affected by industry supply and demand, including competition by other users and recyclers of these materials, weather, and many other factors. In addition, if we are unable to meet the delivery requirements of our suppliers on a regular basis, we risk losing these sources of substrate. Fluctuations in the availability of substrate and the cost to transport it to our projects are expected and could have a materially adverse effect on the profitability of our facilities. In the absence of substrate of sufficient quality at an affordable cost, our anaerobic digester facilities would operate less efficiently, which would materially and adversely affect our overall profitability. A substantial portion of the gas production of Microgy’s facilities is derived from the co-digestion contribution enabled by substrate. We are aggressively pursuing efforts to secure reliable substrate supplies on cost effective terms for projects.

47Byproduct Management

Our operations generate significant quantities of solid and liquid byproducts that are marketable. The solids have value as a soil amendment and with further processing may have other commercial applications, including as a replacement for peat moss and as a building material. Our liquids, in addition to being a source of irrigation water to adjacent landowners, may also be utilized as a fertilizer by neighboring farms as the liquids contain basic nutrients that contribute to plant growth. We continue to engage in market development for both forms of byproducts within existing regulatory frameworks. For example, we are authorized to distribute our liquid byproduct in Texas pursuant to a commercial fertilizer license issued by the Texas State Chemist. Neighboring properties interested in the use of our liquid byproduct as a fertilizer are expected to apply it responsibly, at agronomic rates. There are times when a customer has to curtail use of our liquid byproduct to prevent over-application, thereby necessitating that we find other outlets for the byproduct, potentially increasing operating costs, including provision for interim storage. Compliance with these and other applicable regulations and permitting requirements could delay the development of facilities and/or add to our operating costs on an interim or permanent basis and harm our financial condition or potentially require that we discontinue operations, depending upon the severity of any land-application restrictions.

currently unable to forecast the costs associated with transporting substrate, and are exposed to market risk relating to availability of these materials. Substrate availability is affected by industry supply and demand, including competition by other users and recyclers of these materials, weather, and many other factors. Fluctuations in the availability of substrate and the cost to transport it to our projects are expected and could have a materially adverse effect on the profitability of our facilities. For example, Microgy has recently experienced an unfavorable shift in the availability of certain types of substrates as a result of increases in corn and animal-feed prices. In the absence of substrate of sufficient quality at an affordable cost, our anaerobic digester facilities would operate less efficiently, which would materially and adversely affect our overall profitability. A substantial portion of the gas production of Microgy’s facilities is derived from the co-digestion contribution enabled by substrate. We are aggressively pursuing efforts to secure reliable substrate supplies on cost effective terms for projects.

Item 8.

Financial Statements and Supplementary Data

The consolidated financial statements, the notes thereto and the reports thereon of ~~Vitale,~~ Caturano &and ~~Co.~~Company, P.C., an independent registered public accounting firm, required hereunder with respect to Environmental Power Corporation and its consolidated subsidiaries are included in this report on pages 5451 through 8283 and are incorporated herein by reference.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no disagreements with our independent auditors on accounting and financial disclosure matters.

Item 9A(T). Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, ~~2008~~2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. While our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only such reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, ~~2008~~2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Report of Management on Internal Control over Financial Reporting ~~and Attestation of Independent Registered Public Accounting Firm~~

Management’s report on our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) including a description of material weaknesses in our internal control over financial reporting as of December 31, 2007 and the remedial measures we undertook to address those material weaknesses and the independent registered public accounting firm’s related audit report are included below.

Remediation of Previously Reported Material Weaknesses

Changes in Internal Control Over Financial Reporting. We previously reported three material weaknesses in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) which were described in Item 9A and Management’s Report on Internal Control over Financial Reporting in our Annual Report on Form 10-K for the year ended December 31, 2007 which we filed on March 17, 2008. A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5) or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be detected.

During the third quarter of the year ended December 31, 2008 we reported on Form 10-Q significant changes made to our internal control over financial reporting to address our previously reported material weaknesses. We concluded that our previously reported material weaknesses no longer constituted material weaknesses as of September 30, 2008. During the fourth quarter of 2008 management completed additional testing to confirm this finding that our remedial measures had been effective and our previously reported material weaknesses no longer constitute material weaknesses as of December 31, 2008.

A discussion of the changes in status of our material weaknesses and the remediation steps taken is included below. Our reported material weaknesses no longer constituted material weaknesses as of December 31, 2008:

1) Inadequate financial statement preparation and review procedures

• We significantly increased the number and expertise of experienced supervisory personnel within the accounting and finance organization.

• We implemented procedures to improve documentation of review and approval process of monthly results and related journal entries, reconciliations and financial reporting.

• We enhanced our existing quarterly disclosure committee closing meetings to include a formal financial review process.

• We enhanced our existing policies and procedures relating to general ledger account reconciliations, including establishment of a formal escalation method to notify senior financial management of accounts that have unreconciled or unadjusted variances.

• We implemented formal policies and procedures to ensure that our accounting and analysis of complex accounting areas are adequately supported and documented.

• We have implemented procedures for the timely preparation of memoranda to support all non-routine transactions.

• We implemented a process to obtain additional guidance on complicated accounting questions.

• We established more restrictive controls regarding the preparation and approval of journal entries.

During the third quarter of 2008 and confirmed at December 31, 2008, management concluded that the remedial measures described above were sufficient such that we no longer had inadequacies in our financial statement preparation and review procedures which would have constituted a material weakness as of December 31, 2008.

2) Ineffective and inadequate controls over the expenditure function.

• We improved our policies and procedures to ensure the reconciliation of receiving reports and vendor invoices to ensure all purchases are in accordance with our policies and are recorded accurately and timely in our records.

• We improved the documentation procedures related to the approval of expenditures.

• We implemented a purchase order system over certain expenditures.

• We improved the documentation of existing procedures.

During the third quarter of 2008 and confirmed at December 31, 2008, management concluded that the remedial measures described above were sufficient such that we no longer had ineffective and inadequate controls over the expenditure function which would have constituted a material weakness as of December 31, 2008.

3) Inadequate controls over review of material contracts.

• We implemented procedure to improve the identification and communication of material contracts.

• We implemented policies and procedures for the controller to review all material contracts, to determine if all monetary aspects of a contract comply with GAAP. The review is evidenced in a memorandum documenting the review and indicating any issues found during the review. The memorandum is signed by the controller, approved by the chief financial officer and included in the contract file.

• We established procedures to enable accounting personnel to have access to additional resources to evaluate complex contract issues.

During the third quarter of 2008 and confirmed at December 31, 2008 management concluded that the remedial measures described above were sufficient such that we no longer had ineffective and inadequate controls over the review of material contracts function which would have constituted a material weakness as of December 31, 2008.

Management’s Report on Internal Control over Financial Reporting as of December 31, 2008

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with management’s assessment of the effectiveness of internal control over financial reporting in connection with the preparation and filing of our Annual Report on Form 10-K for the year ended December 31, ~~2008~~2009, management, including our chief executive officer and chief financial officer, ~~reviewed~~concluded ~~its~~that ~~assessment~~our ofinternal control ~~the~~over ~~effectiveness~~financial ofreporting ~~our~~was ~~internal~~effective ~~controls~~at ~~over~~the ~~financial~~reasonable ~~reporting~~assurance level as of December 31, ~~2007,~~2009. ~~the~~

5047

material weaknesses then identified, and the remedial measures implemented, as described above. In connection with this review, we determined that the previously identified material weaknesses in internal control over financial reporting as of December 31, 2007 had been remediated and no longer constituted material weaknesses at December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

In connection with management’s assessment of the effectiveness of internal control over financial reporting in connection with the preparation and filing of our Annual Report on Form 10-K for the year ended December 31, 2008, management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2008.

Vitale, Caturano & Co. P.C., our independent registered public accounting firm, has issued a report on the effectiveness of our internal control over financial reporting. This report is included in its report on our financial statements appearing on page 55 of this Annual Report.

Item 9B.

Other Information

~~Not~~We held ~~applicable~~our Annual Meeting of Stockholders on December 29, 2009. At the Annual Meeting, 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:


Elected as a Director	Number of Shares Voted in Favor	Number of Shares Withheld
Roger S. Ballentine	11,819,925	2,029,213
John R. Cooper	11,827,327	2,021,812
Joseph E. Cresci	10,269,213	3,579,927
Lon Hatamiya	12,868,757	980,281
Richard E. Kessel	12,983,870	865,269
Steven Kessner	11,827,935	2,021,204
August Schumacher, Jr.	12,989,996	865,142
Kamlesh R. Tejwani	9,020,538	4,828,601
Robert I. Weisberg	9,100,521	4,748,619

In addition, our stockholders acted upon and approved the following item by the following vote:


Item	Votes For	Votes Against	Abstained	Broker Non-Votes
The ratification of our board of directors’ selection of Caturano and Company, P.C. as our Independent auditors for the fiscal year ending December 31, 2009.	13,587,845	235,966	25,328	0

PART III

Item 10.

Directors and Executive Officers and Corporate Governance

Directors and Executive Officers

Information regarding our directors may be found under the caption “Election of Directors” in the Proxy Statement for our ~~2009~~2010 Annual Meeting of Stockholders. Information regarding our executive officers may be found under the caption “Executive Officers of the Registrant” appearing at the end of Part I of this annual report on Form 10-K. Such information is incorporated herein by reference.

Audit Committee

We have a separately designated standing Audit Committee established in accordance with Section 3(a) (58) (A) of the Exchange Act. Additional information regarding the Audit Committee may be found under the captions “Corporate Governance—Board Committees—Audit Committee” and “Corporate Governance—Report of the Audit Committee” in the Proxy Statement for our ~~2009~~2010 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Audit Committee Financial Expert

The Board of Directors has designated John R. Cooper as the “Audit Committee Financial Expert” as defined by Item 401(h) of Regulation S-K of the Exchange Act and determined that he is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

Director Nominees

Information regarding procedures for recommending nominees to the Board of Directors may be found under the caption “Corporate Governance—Director Candidates” in the Proxy Statement for our 2010 ~~2009~~ Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Section 16(a) Beneficial Ownership Reporting Compliance

Information regarding Section 16(a) Beneficial Ownership Reporting Compliance may be found under the caption “Stock Ownership Information—Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for our ~~2009~~2010 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Code of Ethics

We have adopted a code of business conduct and ethics that applies to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions) as well as our employees. A copy of our code of business conduct and ethics is available on our website at www.environmentalpower.com under “Investor Relations—Corporate Governance”. We intend to post on our website all disclosures that are required by applicable law, the rules of the Securities and Exchange Commission or ~~Amex~~Nasdaq listing standards concerning any amendment to, or waiver from, our code of business conduct and ethics.

Item 11.

Executive Compensation

Information with respect to this item may be found under the caption “Information about Executive and Director Compensation” in the Proxy Statement for our ~~2009~~2010 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

5249

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information with respect to this item may be found under the caption “Stock Ownership Information” and “Securities Authorized for Issuance under Equity Compensation Plans” in the Proxy Statement for our ~~2009~~2010 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Item 13.

Certain Relationships and Related Transactions

Information with respect to this item may be found under the caption “Corporate Governance—Certain Relationships and Related Transactions” in the Proxy Statement for our ~~2009~~2010 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Item 14.

Principal Accountant Fees and Services

Information with respect to this item may be found under the caption “Corporate Governance—Registered Public Accounting Firm’s Fees” in the Proxy Statement for our ~~2009~~2010 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

5350

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a)(1) Financial Statements.

		Page
Index to Financial Statements
Report of Independent Registered Public Accounting Firm		5552
Consolidated Balance Sheets		5753
Consolidated Statements of Operations		5854
Consolidated Statements of Cash Flows		5955
Consolidated Statements of Shareholders’ Equity		6056
Notes to Consolidated Financial Statements		6157

(a)(2) List of Exhibits.

The list of Exhibits filed as a part of this annual report on Form 10-K are set forth on the Exhibit Index appearing immediately following the signatures to this report, and is incorporated herein by this reference.

5451

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Environmental Power Corporation:

We have audited the accompanying consolidated balance sheets of Environmental Power Corporation and subsidiaries (the “Company”) as of December 31, ~~2008~~2009 and ~~2007~~2008, and the related consolidated statements of operations, cash flows and changes in shareholders’ equity (deficit), for each of the years ended December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007. ~~We also have audited Environmental Power Corporation and subsidiaries’ internal control over financial reporting as of December~~ ~~31,~~These ~~2008,~~consolidated based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, ~~for~~are ~~maintaining effective internal control over financial reporting, and for its assessment of~~ the ~~effectiveness~~responsibility of ~~internal~~ ~~control over financial reporting, included in~~ the ~~accompanying Management~~ Company’s ~~Report on Internal Control over Financial Reporting~~management. Our responsibility is to express an opinion on these financial statements ~~and an opinion on the company’s internal control over financial reporting~~ based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The ~~and~~Company ~~whether~~is ~~effective internal~~not ~~control~~required ~~over~~to ~~financial~~have, ~~reporting~~nor ~~was~~were ~~maintained~~we inengaged ~~all~~to ~~material~~perform, ~~respects.~~an ~~Our~~audit ~~audits~~ of ~~the~~its ~~financial~~internal ~~statements~~control ~~included~~over ~~examining,~~financial onreporting. Our aaudits ~~test~~included ~~basis,~~consideration ~~evidence~~of ~~supporting~~internal ~~the~~control over ~~amounts and disclosures in the~~ financial ~~statements,~~reporting ~~assessing~~as ~~the accounting~~a ~~principles~~basis ~~used~~for ~~and~~designing ~~significant~~audit ~~estimates~~procedures ~~made~~that byare ~~management,~~appropriate ~~and~~in ~~evaluating~~ the ~~overall~~circumstances, ~~financial~~but ~~statement~~not ~~presentation.~~for ~~Our~~the ~~audit~~purposes of ~~internal~~expressing ~~control~~an ~~over~~opinion ~~financial~~on ~~reporting~~the ~~included~~effectiveness ~~obtaining~~of anthe ~~understanding~~Company’s of internal control over ~~financial~~ financial reporting. Accordingly, ~~assessing~~we ~~the~~express ~~risk~~no ~~that~~such aopinion. An ~~material~~audit ~~weakness~~also ~~exists~~includes examining, ~~and~~on ~~testing~~a ~~and~~test ~~evaluating~~basis, evidence supporting the ~~design~~amounts and ~~operating~~disclosures ~~effectiveness~~in ofthe ~~internal~~financial ~~control~~statements, ~~based~~assessing on the ~~assessed~~accounting ~~risk.~~principles ~~Our~~used ~~audits~~and ~~also~~significant estimates ~~included~~made ~~performing~~by ~~such~~management, ~~other~~as ~~procedures~~well as we ~~considered~~evaluating ~~necessary~~the inoverall ~~the~~financial ~~circumstances.~~statement presentation. We believe that our audits provide a reasonable basis for our ~~opinions~~opinion.

AIn ~~company’s internal~~our ~~control~~opinion, ~~over~~the financial ~~reporting~~statements isreferred ~~a process designed~~ to ~~provide~~above ~~reasonable~~present ~~assurance~~fairly, ~~regarding~~in ~~the~~all ~~reliability~~material ofrespects, ~~financial reporting and~~ the ~~preparation~~consolidated of financial ~~statements~~position ~~for external purposes in accordance with generally accepted~~of ~~accounting~~Environmental ~~principles.~~Power ACorporation ~~company’s internal control over financial reporting includes those policies~~ and ~~procedures~~subsidiaries ~~that~~as ~~(1) pertain to the maintenance~~ of ~~records that~~December 31, in2009 ~~reasonable~~and ~~detail~~2008, ~~accurately~~ and ~~fairly reflect~~ the ~~transactions and~~consolidated ~~dispositions~~results of ~~the~~their ~~assets~~operations ofand ~~the~~their ~~company;~~cash ~~(2) provide~~flows ~~reasonable~~for ~~assurance~~each ~~that~~of ~~transactions~~the ~~are~~years ~~recorded~~ended asDecember 31, ~~necessary~~2009, to2008 ~~permit~~and ~~preparation~~2007, ~~of financial statements~~ in ~~accordance~~conformity with ~~generally accepted~~ accounting principles, ~~and~~generally ~~that receipts~~accepted ~~and expenditures of the company are being made only~~ in ~~accordance with authorizations of management and directors of~~ the ~~company;~~United ~~and~~States ~~(3) provide reasonable assurance regarding prevention or timely detection~~ of ~~unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements~~America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Environmental Power Corporation and subsidiaries as of December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Environmental Power Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company’s recurring losses from operations, its need to raise substantial additional capital and its current cash balance relative to obligations, contractual commitments, and corporate overhead requirements raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note A to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~/s/~~As ~~Vitale~~discussed in Note L to the financial statements, ~~Caturano &~~the ~~Co.~~Company changed the manner in which it accounts for certain warrants effective January 1, P2009.C.

/s/ Caturano and Company, P.C.

Boston, Massachusetts

March 1630, ~~2009~~2010

5652

Environmental Power Corporation and Subsidiaries

Consolidated Balance Sheets

	December 31, 2008			December 31, 2007
	December 31, 2009			December 31, 2008
ASSETS
Current Assets
Cash and cash equivalents	$	3662,~~157,938~~766		$	263,~~069~~157,~~198~~938
Restricted cash		~~104~~1,~~577~~792,~~246~~127			45104,~~784~~577,~~702~~246
Receivables		373,039			741,730
Receivables, net of allowance of $0 and $34,042 at December 31, 2009 and 2008, respectively		533,964			373,039
Other current assets		60304,~~210~~634			~~130~~60,~~194~~210
Current assets of discontinued operations		—			18,588,080
Total Current Assets		3,293,491			108,168,433
Total Current Assets		108,168,433			91,313,904
Restricted cash, non current		262,843			553,014
Restricted cash, non current		553,014			489,477
Property, plant, and equipment, net		25,125,586			23,932,073
Property, plant, and equipment, net		23,932,073			261,171
Construction in progress		9,026,224			20,101,314
Construction in progress		20,101,314			27,640,619
Licensed technology rights, net		2,143,796			2,329,296
Goodwill		—			4,912,866
Notes receivable, net		1,514,896			1,608,500
Licensed technology rights, net		2,329,296			2,514,796
Deferred financing costs, net		932,530			5,122,995
Notes receivable, net		1,608,500			1,841,740
Other assets		447,953			197,569
Deferred financing costs ,net		5,122,995			2,564,882
TOTAL ASSETS	$	42,747,319		$	162,013,194
Other assets		197,569			97,603
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Long term assets of discontinued operations		—			68,334,073
TOTAL ASSETS	$	162,013,194		$	199,971,131
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	45,~~322~~323,~~896~~731		$	24,~~517~~322,~~468~~996
Current liabilities of discontinued operations		—			21,391,138
Current portion of long-term debt		46,464,223			—
Total Current Liabilities		451,~~322~~787,~~896~~954			234,~~908~~322,~~606~~996
Other liabilities		~~340~~282,~~706~~434			~~204~~340,~~484~~706
Long term debt		129,475,023			60,453,983
Long-term debt		1,432			129,475,023
Long term liabilities of discontinued operations		—			72,132,497
Total Liabilities		52,071,820			134,138,725
Total Liabilities		134,138,625			156,699,570
Preferred stock(1)		10,156,021			10,156,021
Minority Interests		100			100
Shareholders’ Equity (Deficit)
Preferred stock (1)		10,156,021			10,156,021
Preferred stock(2)		100			100
Shareholders’ Equity
Common stock(3)		158,030			157,030
Preferred stock (2)		100			100
Additional paid in capital		86,509,898			89,986,923
Common stock (3)		157,030			156,677
Accumulated deficit		(105,121,923	)		(71,401,984	)
Additional paid-in capital		89,986,923			88,036,289
Treasury stock(4)		(388,408	)		(385,402	)
Accumulated deficit		(71,401,984	)		(54,054,005	)
Notes receivable from current directors and a former officer and director		(638,219	)		(638,219	)
Treasury stock (4)		(385,402	)		(385,402	)
Total Shareholders’ Equity (Deficit)		(19,480,522	)		17,718,448
Notes receivable from officers and board members		(638,219	)		(638,219	)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	$	42,747,319		$	162,013,194
Total Common Shareholders’ Equity		17,718,348			33,115,340
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	162,013,194		$	199,971,131

(1) Preferred stock, $.01 par value, 2,000,000 shares authorized; 281,241 shares issued as of December 31, ~~2008~~2009 and ~~December 31, 2007~~2008. Stated value at December 31, ~~2008~~2009 and ~~2007~~2008 of $52.71 per share or $14,824,213.

(2) Preferred stock of subsidiary, no par value, 10 shares authorized; 10 shares issued as of December 31, ~~2008~~2009 and ~~December 31~~2008, ~~2007,~~ respectively.

(3) $.01 par value; 50,000,000 shares authorized; 15,~~703~~803,034 issued and 15,~~614~~708,~~604~~591 outstanding as of December 31, ~~2008~~2009; 50,000,000 shares authorized; 15,~~667~~703,~~784~~034 issued and 15,~~579~~614,~~354~~604 outstanding as of December 31, ~~2007~~2008.

(4) 8894,~~430~~443 shares at cost, as of December 31, ~~2008~~2009 and 88,430 shares at cost as of December 31, ~~2007~~2008.

See Notes to Consolidated Financial Statements.

5753

Environmental Power Corporation and Subsidiaries

Consolidated Statements of Operations

	12 Months Ended
	Years Ended
	December 31,2008			December 31,2007			December 31,2006
	December 31,2009			December 31,2008			December 31,2007
REVENUES	$	24,~~905~~711,~~038~~447		$	12,~~174~~905,~~947~~038		$	21,~~216~~174,~~216~~947
COSTS AND EXPENSES:
COSTS AND EXPENSES
Operations and maintenance		73,~~118~~606,~~033~~882			~~941~~7,~~991~~118,033			2941,~~099,420~~991
Impairment of goodwill		4,912,866			—			—
Impairment of assets		26,070,440			4,912,866			—
General and administrative		126,~~003~~408,~~092~~403			12,~~443~~003,~~605~~092			1112,~~228~~443,~~982~~605
Depreciation and amortization		1,~~359~~540,~~097~~509			~~304~~1,~~331~~359,097			~~298~~304,~~774~~331
TOTAL COSTS AND EXPENSES		2537,~~393~~626,~~088~~234			1325,~~689~~393,~~927~~088			13,~~627~~689,~~176~~927
OPERATING LOSS		(2232,~~488~~914,~~050~~787	)		(1222,~~514~~488,~~980~~050	)		(1112,~~410~~514,~~960~~980	)
OTHER INCOME (EXPENSE):
OTHER INCOME (EXPENSE)
Interest income		~~486~~42,~~986~~264			~~782~~486,~~566~~986			~~447~~782,~~854~~566
Interest expense		(~~968~~3,~~684~~344,412	)		(11968,~~599~~684	)		(811,~~919~~599	)
Other income (expense)		—			583,616			300
Other income		133,878			—			583,616
TOTAL OTHER INCOME (EXPENSE)		(~~481~~3,~~698~~168,270	)		1(481,~~354,583~~698	)		~~439~~1,~~235~~354,583
LOSS BEFORE INCOME TAXES		(22,969,748	)		(11,160,397	)		(10,971,725	)
NET LOSS BEFORE INCOME TAXES		(36,083,057	)		(22,969,748	)		(11,160,397	)
INCOME TAX EXPENSE		2629,~~284~~294			~~900~~26,284			~~427,127~~900
NET LOSS FROM CONTINUING OPERATIONS		(2236,~~996~~112,~~032~~351	)		(1122,~~161~~996,~~297~~032	)		(11,~~398~~161,~~852~~297	)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES OF $0		(1,010,534	)		(6,195,852	)		(2,716,405	)
NET LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES OF $0		—			(1,010,534	)		(6,195,852	)
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAXES OF $0		~~7,999,858~~—			—7,999,858			—
NET LOSS		(1636,~~006~~112,~~708~~351	)		(1716,~~357~~006,~~149~~708	)		(1417,~~115~~357,~~257~~149	)
Preferred Securities Dividend Requirements		(1,~~326~~334,~~271~~179	)		(1,~~348~~326,~~343~~271	)		(~~197~~1,~~715~~348,343	)
Beneficial Conversion Feature of Preferred Stock		—			~~(57,148~~—	)		(457,~~131,022~~148	)
Change in Value of Modified Warrants		—			~~(97,404~~—	)		—(97,404	)
LOSS APPLICABLE TO COMMON SHAREHOLDERS		(17,332,979	)		(18,860,044	)		(18,443,994	)
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(37,446,530	)	$	(17,332,979	)	$	(18,860,044	)
Weighted Average Common Shares Outstanding
Weighted Average Common Shares Outstanding Basic & Diluted		15,587,117			15,579,354			11,338,973
Basic & Diluted		15,579,354			11,338,973			9,634,824
Net Loss Per Common Share from Continuing Operations Basic & Diluted	$	(2.40	)	$	(1.56	)	$	(1.12	)
Loss Per Common Share from Continuing Operations
Net Income (Loss) Per Common Share from Discontinued Operations Basic & Diluted		—			0.45			(0.54	)
Basic & Diluted	$	(1.56	)	$	(1.12	)	$	(1.63	)
Net Loss Per Common Share Basic & Diluted		(2.40	)		(1.11	)		(1.66	)
Income (Loss) Per Common Share from Discontinued Operations
Basic & Diluted	$	0.45		$	(0.54	)	$	(0.28	)
Net Loss Per Common Share
Basic & Diluted	$	(1.11	)	$	(1.66	)	$	(1.91	)

See Notes to Consolidated Financial Statements.

5854

Environmental Power Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	12 Months Ended
	Years Ended
	December 31,2008			December 31,2007			December 31,2006
	December 31,2009			December 31,2008			December 31,2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1636,~~006~~112,~~708~~351	)	$	(1716,~~357~~006,~~149~~708	)	$	(1417,~~115~~357,~~257~~149	)
Net loss from discontinued operations		—			1,010,534			6,195,852
Net gain on sale of discontinued operations		—			(7,999,858	)		—
Non-cash adjustments
Gain on sale of discontinued operations		(7,999,858	)		—			—
Impairment of assets		26,070,440			4,912,866			—
Impairment of goodwill		4,912,866			—			—
Depreciation and amortization		1,540,509			1,386,529			468,923
Depreciation and amortization		1,364,293			468,923			492,149
Non-cash, stock based compensation expense		417,943			1,950,987			2,798,032
Amortization of deferred gain		(51,402	)		(308,411	)		(308,411	)
Amortization of deferred financing costs		157,147			—			—
Amortization of deferred financing costs		22,236			—			7,413
Non-cash income from adjustment to fair value of warrants		(161,001	)		—			—
Accrued interest expense		143,307			603,412			493,489
Write-off of Sunnyside liability		—			(583,030	)		—
Non-cash, stock based compensation expense		1,950,987			2,798,032			2,036,108
Accrued power generation revenues		66,198,164			7,133,903			4,246,201
Accrued lease expenses		(66,198,164	)		(7,133,903	)		(4,246,201	)
Changes in operating assets and liabilities:
Decrease (increase) in receivables		15,782,767			(2,948,334	)		(3,342,173	)
(Increase) decrease in receivables		(160,925	)		236,851			(409,396	)
Decrease in fuel inventory		826,370			362,953			128,259
Increase in other current assets		(244,424	)		—			(190,757	)
Increase in unbilled revenues		—			—			58,448
(Decrease) increase in accounts payable and accrued expenses		302,970			2,065,627			(1,183,520	)
Decrease (increase) in other assets		201,824			(10,080	)		931,315
Net cash used in operating activities in continuing operations		(8,189,692	)		(12,443,172	)		(9,678,015	)
Decrease in notes receivable		233,240			75,964			443,296
(Decrease) in billings in excess of revenues		—			—			(457,719	)
(Decrease) increase in accounts payable, accrued expenses		(14,623,775	)		8,846,119			3,057,424
Decrease in other assets		143,675			121,903			616,843
Net cash used in operating activities		(13,100,178	)		(7,929,698	)		(9,958,816	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred financing costs		(2,580,349	)		—			—
(Increase) decrease in restricted cash		103,075,290			(58,856,081	)		5,969,531
(Increase) decrease in restricted cash		(56,640,766	)		6,995,926			(53,174,880	)
Construction of projects		(9,480,774	)		(17,531,218	)		(12,388,225	)
Construction of projects		(16,906,429	)		(12,388,225	)		(13,245,113	)
Purchase of property, plant and equipment		(265,907	)		(376,529	)		(82,843	)
Purchase of property, plant and equipment		(376,529	)		(559,576	)		(176,531	)
Purchase of treasury stock		(3,006	)		—			—
Net cash used for investing activities		(76,504,073	)		(5,951,875	)		(66,596,524	)
Decrease in notes receivable		93,604			233,240			75,964
(Increase) decrease in other assets		(250,384	)		101,858			(84,230	)
Net cash provided by (used in) investing activities in continuing operations		93,168,823			(76,428,730	)		(6,509,803	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments on preferred stock		(1,326,271	)		(871,058	)		(5,000	)
Proceeds from issuance of long-term debt		5,000,000			69,425,000			—
Payment of dividend on behalf of subsidiary		(15,000	)		—			—
Sale of preferred and common stock		—			—			26,642,914
Proceeds from disposition of discontinued operations		375,000			—			—
Exercise of stock options		—			—			2,951,784
Sale of preferred and common stock		—			26,642,914			14,049,989
Payments on long-term debt		(91,009,368	)		(53,960	)		(260,960	)
Net proceeds from bond financings		69,371,040			—			56,531,217
Dividend payments on preferred stock		(667,090	)		(1,326,271	)		(871,058	)
Net borrowing (repayments) of secured notes		—			(260,960	)		110,385
Increase in deferred financing costs		(733,197	)		(2,580,349	)		—
Repayments of capital lease obligations		—			—			(38,532	)
(Decrease) increase in other liabilities		(64,648	)		136,222			—
Increase in other liabilities		136,222
Payment of dividend on behalf of subsidiary		—			(15,000	)		—
Exercise of stock options		—			2,951,784			707,142
Net cash provided by (used in) financing activities in continuing operations		(87,474,303	)		65,585,642			28,462,680
Net borrowings (repayments) under working capital loan		(1,848,000	)		(2,306,000	)		4,154,000
Net increase (decrease) in cash and cash equivalents from continuing operations		(2,495,172	)		(23,286,260	)		12,274,862
Net cash provided by financing activities		66,692,991			26,156,680			75,509,201
CASH FLOW FROM DISCONTINUED OPERATIONS:
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(22,911,260	)		12,275,107			(1,046,139	)
Net cash provided by (used) in operating activities of discontinued operations		—			(1,235,745	)		1,560,530
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		26,069,198			13,794,091			14,840,230
Net cash provided by investing activities of discontinued operations		—			3,083,745			745,715
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,157,938		$	26,069,198		$	13,794,091
Net cash used in financing activities of discontinued operations		—			(1,473,000	)		(2,306,000	)
Supplemental disclosure of cash flow information
Net increase (decrease) in cash and cash equivalents from discontinued operations		—			375,000			245
Cash Paid During the Year For
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(2,495,172	)		(22,911,260	)		12,275,107
Interest	$	5,751,591		$	261,824			—
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,157,938			26,069,198			13,794,091
Income Taxes		—			—		$	38,000
CASH AND CASH EQUIVALENTS, END OF YEAR	$	662,766		$	3,157,938		$	26,069,198
Supplemental disclosure of non cash investing and financing activity Beneficial conversion feature in connection with sale of preferred stock		—			(57,148	)		(4,131,022	)
Supplemental Disclosure of Cash Flow Information
Non-cash dividend to Series A Preferred Stock Holders		(667,090	)		(667,890	)		(192,715	)
Cash paid during the year for
Warrant Capitalized in Construction in progress		—			(907,289	)		—
Interest (net of amount capitalized)	$	2,463,874		$	881,175		$	11,599
Change in Value of Modified Warrants		—			(97,404	)		—
Income Taxes		29,294			26,284			900
Non-cash investing and financing activity
Payment of license fees with issuance of 14% convertible note		3,000,000			—			—
Accrued dividend requirement of Series A preferred stock		1,334,179			667,090			667,890
Capitalized amortization of deferred financing costs		130,257			96,341			88,955
Warrant capitalized in construction in progress		—			—			(907,289	)
Change in value of modified warrants		—			—			(97,404	)

See Notes to Consolidated Financial Statements.

5955

Environmental Power Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

	CommonStock -Shares	CommonStock -Amount			AdditionalPaid-inCapital				Accum.Deficit				Accum.OtherComp.Loss				TreasuryStock -Shares	TreasuryStock -Amount				DeferredCompensation			Receivable -Officers &Directors			Total
	PreferredStock -Shares	PreferredStock -Amount		CommonStock -Shares		CommonStock -Amount		AdditionalPaid-inCapital			Accum.Deficit			TreasuryStock -Shares		TreasuryStock -Amount		Note-Receivablefrom CurrentDirectors &Former Officer			Total
Balance at January 1, 2006	9,633,348	$	96,333		$	41,454,837			$	(16,749,967	)		$	(499,395	)		88,430	$	(385,402	)		$	2,418,985		$	(638,219	)	$	25,697,172
Balance at December 31, 2006	100	100		9,740,455		97,404		54,640,990			(35,193,961	)		88,430		(385,402	)	(638,219	)		18,520,912
Dividends on preferred stock										~~(197,715~~	)(1,348,343	)									(1,348,343	)							~~(197,715~~	)
Stock based compensation expense	~~2,053~~		21			~~2,036,087~~		3,705,322													3,705,322								~~2,036,108~~
Exercise of stock options	~~105,054~~		~~1,050~~	527,329		~~706~~5,~~091~~273		2,946,512													2,951,785								~~707,141~~
Sale of preferred stock						3,893,968																							3,893,968
Sale of common stock				5,400,000		54,000		26,588,913													26,642,913
Reclass of deferred option expense						2,418,985																	(2,418,985	)					—
Beneficial conversion feature of preferred stock								57,148			(57,148	)									—
Beneficial conversion feature of preferred stock						4,131,022				(4,131,022	)
Modification of Warrants								97,404			(97,404	)									—
Pension liability adjustment, net														499,395															499,395
Net loss											(17,357,149	)									(17,357,149	)
Net loss										(14,115,257	)																		(14,115,257	)
Balance at December 31, 2007	100	100		15,667,784		156,677		88,036,289			(54,054,005	)		88,430		(385,402	)	(638,219	)		33,115,440
Balance at December 31, 2006	9,740,455	$	97,404		$	54,640,990			$	(35,193,961	)		$	—			88,430	$	(385,402	)		$	—		$	(638,219	)		18,520,812
Dividends on preferred stock											(1,326,271	)									(1,326,271	)
Dividends on preferred stock										(1,348,343	)																		(1,348,343	)
Dividend paid on behalf of subsidiary											(15,000	)									(15,000	)
Stock based compensation expense						~~3,705,322~~		1,950,987													1,950,987								~~3,705,322~~
Exercise of stock options	527,329		5,273			2,946,512																							2,951,785
Issuance of restricted stock				35,250		353		(353	)												—
Sale of common stock	5,400,000		54,000			26,588,913																							26,642,913
Net loss											(16,006,708	)									(16,006,708	)
Beneficial conversion feature of preferred stock						57,148				(57,148	)
Balance at December 31, 2008	100	100		15,703,034		157,030		89,986,923			(71,401,984	)		88,430		(385,402	)	(638,219	)		17,718,448
Modification of Warrants						97,404				(97,404	)
Reclassification of equity-linked financial instrument								(3,893,968	)		3,726,591										(167,377	)
Net loss										(17,357,149	)																		(17,357,149	)
Dividends on preferred stock											(1,334,179	)									(1,334,179	)
Balance at December 31, 2007	15,667,784	$	156,677		$	88,036,289			$	(54,054,005	)		$	—			88,430	$	(385,402	)		$	—		$	(638,219	)	$	33,115,340
Dividend paid on behalf of subsidiary								417,943													417,943
Dividends on preferred stock										(1,326,271	)																		(1,326,271	)
Issuance of restricted stock				100,000		1,000		(1,000	)												—
Dividend paid on behalf of subsidiary										(15,000	)																		(15,000	)
Purchase of treasury stock														6,013		(3,006	)				(3,006	)
Stock based compensation expense						1,950,987																							1,950,987
Net loss											(36,112,351	)									(36,112,351	)
Issuance of restricted stock	35,250		353			(353	)
Balance at December 31, 2009	100	100		15,803,034		158,030		86,509,898			(105,121,923	)		94,443		(388,408	)	(638,219	)		(19,480,522	)
Net loss										(16,006,708	)																		(16,006,708	)
Balance at December 31, 2008	15,703,034	$	157,030		$	89,986,923			$	(71,401,984	)		$	—			88,430	$	(385,402	)		$	—		$	(638,219	)	$	17,718,348

See Notes to Consolidated Financial Statements.

6056

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~ Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements

Years Ended December 31, 2009, 2008 and 2007

NOTE A—GOING CONCERN

The company’s consolidated financial statements have been prepared on a going concern basis, ~~which~~ which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. As a predominately development -oriented company, we have experienced substantial losses since the year ended December 31, 2002. For the year ended December 31, ~~2008~~2009, we incurred a net loss applicable to common shareholders of $1737,~~332~~447,~~979~~000 and used cash of $138,~~100~~190,~~178~~000 in operating activities. We anticipate incurring losses at least through ~~2010~~2012 as we continue the construction of our portfolio of announced projects ~~which~~subject weto ~~anticipate~~the ~~completing~~availability atof ~~varying~~funding. ~~times~~As inof ~~2010~~December 31, ~~subject~~2009, towe ~~the~~had ~~availability~~an accumulated deficit of ~~funding~~$105,122,000, and ~~the~~our ~~operational~~unrestricted ~~ramp~~cash upand ofcash equivalents amounted to $663,000. Currently, our facility at Huckabay Ridge, ~~facility~~Texas ~~and~~will ~~completion~~not ~~of construction~~generate ~~and~~sufficient ~~then~~positive ~~operation~~cash offlow, by itself, to meet our ~~Swift~~short-term ~~Grand~~and ~~Island~~long-term ~~facility~~corporate ~~during~~and ~~2009.~~project-related Ascapital ofrequirements. ~~December 31,~~In ~~2008~~addition, we ~~had~~were anunable ~~accumulated~~to ~~deficit~~make the January 1, 2010 interest payment of $71560,~~401~~000 on our 14% convertible notes and did not make either the July 1,~~984~~ 2009 or January 1, ~~and~~2010 dividend payments on our ~~unrestricted~~9% ~~cash~~Series ~~and~~A ~~cash~~preferred ~~equivalents~~stock ~~amounted~~which tototal $31,~~157~~334,~~938~~000. ~~Currently~~Our subsidiary, ~~our~~Microgy ~~facility~~Holdings, atLLC, ~~Huckabay~~referred ~~Ridge,~~to ~~Texas,~~as ~~which~~Microgy Holdings, is ~~being~~in ~~ramped~~default upon tooutstanding ~~full~~tax-exempt ~~production,~~bonds ~~will~~and ~~not~~the ~~generate~~bondholders ~~positive~~have accelerated demand for payment on these obligations. Microgy Holdings does not have cash ~~flow~~to ~~until~~pay these obligations. Among the options ~~ramp~~available upto the bondholders is ~~complete~~to seek to foreclose on the Huckabay Ridge facility and ~~steady~~the ~~state~~other ~~conditions~~Texas ~~are~~and ~~achieved~~California projects included in their collateral. InTo ~~any~~date ~~event,~~bondholders ~~the~~have ~~cash~~not weyet ~~project~~attempted to bedo ~~generated~~so. ~~from~~Our subsidiary Microgy Grand ~~Huckabay~~Island, ~~Ridge~~LLC, byreferred ~~itself,~~to ~~will~~as beMicrogy ~~insufficient~~Grand toIsland ~~meet~~is ~~our~~in ~~short-term~~default ~~and~~on ~~long~~outstanding tax-~~term~~exempt ~~corporate~~bonds ~~and~~but ~~project-related~~the ~~capital~~bondholders ~~requirements~~have not yet given notice of default or taken any action to accelerate demand for payment on these obligations.

In the past, we have been able to obtain outside financing to fund our losses and meet our capital requirements with the anticipation that once our portfolio of projects are complete and operational, they would contribute to future liquidity needs. While we have implemented steps to reduce our general and administrative expenses and Huckabay Ridge is generating positive operating cash flow, we will need to raise substantial funds during the first half of ~~2009~~2010 in order to fund ongoing general and administrative expenses as well as ~~interest~~debt service and dividend requirements. We are currently actively seeking additional sources of capital to meet these financing needs. To that end, on ~~March~~January 1329, ~~2008~~2010 we ~~closed~~completed on a ~~sale~~transaction ofwhereby, ~~$5.0~~through ~~million~~the ~~original~~establishment ~~principal~~of ~~amount~~a ofjoint ~~our~~venture, ~~14%~~we ~~convertible~~expect ~~notes~~to ~~due January~~ receive $1,500,000 ~~2014~~in ~~for~~the ~~net~~first ~~proceeds~~quarter of ~~approximately $4~~2010.4 ~~million,~~This ~~and~~transaction weis explained in greater detail in Note P—Subsequent Events. We continue to work with our independent financial advisors to identify and explore various opportunities to raise the capital we require as well as other strategic alternatives. However, we cannot assure you that we will be able to raise sufficient capital on acceptable terms, or at all. The level of funds we are able to raise, if any, will determine the level of development and construction activity that we can pursue and whether we will be able to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. The uncertainties described in the preceding paragraph raise substantial doubt at December 31, ~~2008~~2009 about our ability to continue as a going concern ~~without additional financing~~. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of the carrying amount of recorded assets or to the amount and classification of liabilities that might result should we be unable to continue as a going concern.

NOTE B—~~BUSINESS~~BASIS ~~AND~~OF ~~ORGANIZATION~~ PRESENTATION

WeThe ~~are~~accompanying aaudited ~~developer,~~consolidated ~~owner,~~financial ~~and~~statements ~~operator~~ of ~~renewable~~Environmental ~~energy~~Power ~~production~~Corporation ~~facilities. Our goal is to produce Energy that is Beyond Renewable®, which~~ (“we ~~define as energy that not only uses waste materials instead of limited resources~~”, ~~but that also is clean~~“us”, ~~reliable, and cost-effective. We~~ ~~own~~“EPC” ~~and~~“Environmental ~~operate the Huckabay Ridge facility in Stephenville~~Power”, ~~Texas,~~or ~~a large-scale, multi-digester facility for~~ the ~~production~~“Company”) ofand ~~pipeline-grade~~our ~~natural~~subsidiaries ~~gas~~have ~~which~~been ~~began~~prepared ~~commercial~~in ~~operation~~accordance inwith the ~~first~~instructions ~~quarter~~to ofForm ~~2008,~~10-K and ~~have~~with ~~several~~Article ~~similar facilities~~10 ~~in varying stages~~ of ~~development.~~Regulation WeS-X ~~also~~and ~~operate~~include ~~three~~all ~~digester~~of ~~facilities in Wisconsin utilizing~~ the ~~same~~information ~~technology that is employed at Huckabay Ridge.~~ and

In57 the past, we have operated in two major segments through Microgy, Inc., as a developer of renewable energy facilities for the production and commercial application of methane-rich biogas from agricultural and

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~food~~Years ~~industry~~Ended ~~wastes,~~December and through EPC Corporation and its subsidiary Buzzard Power Corporation, as holder of a leasehold interest in a waste-coal fired generating facility in Pennsylvania known as the Scrubgrass facility. On May 31, ~~2007~~2009, ~~our board of directors authorized management to enter into negotiations regarding the disposition of the leasehold interest in the Scrubgrass facility. On February 29,~~ 2008, weand ~~completed~~2007 the disposition of the leasehold interest. As a result, for financial reporting purposes, we are now reporting the results of Buzzard as “discontinued operations”. We thus now operate only in Microgy’s segment.

~~Microgy Holdings, LLC was formed in 2006 as a subsidiary of~~ ~~Environmental~~footnotes ~~Power~~required ~~Corporation in connection with the $60 million tax-exempt debt financing we completed in November 2006 relating to the construction and operation of four RNG® facilities in Texas. The assets financed~~ by ~~the~~generally ~~debt~~accepted ~~financing~~accounting ~~are pledged as collateral to the Gulf Coast Industrial Development Authority of Texas, the lender~~principles. The ~~obligations~~information ofin ~~Microgy Holdings related to this financing are non recourse to Environmental Power, although Environmental Power is required to provide at least 20% of the construction costs of~~ these ~~facilities,~~financial asstatements ~~well~~should asbe toread ~~cover~~in ~~any~~conjunction ~~cost~~with ~~overruns~~Management’s inDiscussion ~~construction~~ and ~~operations~~Analysis ~~and maintenance expenses prior to completion~~ of ~~construction.~~ ~~Microgy~~Financial ~~Holdings~~Condition is also the obligor on $62.425 million in tax-exempt debt financing from the California Statewide Communities Development Authority we completed in September 2008 on terms similar to those of the Texas financing. Microgy Grand Island, LLC is the obligor on $7.0 million in tax-exempt debt financing from the City of Grand Island, Nebraska, relating to the construction of our facility at the flagship beef processing plant of JBS Swift & Company, located in Grand Island. The obligations of Microgy Grand Island related to this financing are non recourse to Environmental Power, although Environmental Power is required to provide at least 20% of the construction costs of these facilities, as well as to cover any cost overruns in construction and ~~operations~~Results ~~and maintenance expenses prior to completion~~ of ~~construction~~Operations.

The Annual Report includes important information necessary or useful to understanding the Company’s business and financial statement presentation. In particular, the Company’s significant accounting policies and procedures are presented as Note D—Significant Accounting Policies to the consolidated financial statements.

Codification of Accounting Standards

The Company follows accounting policies and standards set by the Financial Accounting Standards Board, commonly referred to as the (“FASB”). The FASB sets generally accepted accounting principles (“GAAP”) that we adhere to so that we can ensure we consistently report our financial condition (balance sheet), results of operations and cash flows. Over the years the FASB and other designated GAAP setting bodies have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, Emerging Issues Task Force consensus, American Institute of Certified Public Accountants Statements of Position and other standards.

The FASB recognized the complexity of its standard setting process and embarked on a revised process in 2004 that culminated in the release on July 1, 2009 of the FASB Accounting Standards Codification, referred to as the Codification or ASC. The ASC rearranges how GAAP pronouncements are organized and consolidated all GAAP pronouncements into one document. The impact of this change is that instead of referring to a FASB Statement or Interpretation, we will reference the ASC Topic as appropriate. It is important to note the Codification did not change in any way how the Company accounts for transactions or the nature of related disclosures made. References to GAAP issued by the FASB are to the FASB Accounting Standards Codification. Prior FASB standards such as FASB Statement No. 128 “Earnings Per Share” are no longer referred to using this nomenclature and are no longer being issued by the FASB.

This change was effective for periods ending on or after September 15, 2009, and so we have updated our references in this current report on Form 10-K to reflect the appropriate Topic in the ASC.

Amounts on the consolidated statements of cash flows for the years ended December 31, 2008 and 2007 have been reclassified to conform to the presentation for the year ended December 31, 2009.

NOTE C—BUSINESS AND ORGANIZATION

Continuing Operations

In the past, we have operated in two major segments, through Microgy, Inc., as a developer of renewable energy facilities for the production and commercial application of methane-rich biogas from agricultural and food industry and other organic wastes, and through EPC Corporation and its subsidiary, Buzzard Power Corporation, referred to as Buzzard, the holder of a leasehold interest in a waste-coal fired generating facility in Pennsylvania known as the Scrubgrass facility. On May 31, 2007, our board of directors authorized management to enter into negotiations regarding the disposition of the leasehold interest in the Scrubgrass facility. On February 29, 2008, we completed the disposition of the leasehold interest. As a result, for financial reporting purposes, we are now consolidating all segments of continuing operations and reporting the results of Buzzard as “discontinued operations”. We thus now operate only in Microgy’s segment.

Environmental Power Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009, 2008 and 2007

Microgy is a developer of renewable energy facilities for the production and commercial application of methane-rich biogas produced from animal, food industry and other organic wastes. The biogas can be sold to end-users or used to produce pipeline-grade methane, which Microgy refers to as renewable natural gas, or RNG^®, liquefied natural gas, or LNG, compressed natural gas, or CNG, renewable electrical energy or thermal energy, as well as other useful by-products. Microgy’s systems utilize a proven European biogas production technology. In addition, Microgy has developed significant engineering, construction and process knowledge regarding these systems.

Microgy’s efforts have resulted in the start of commercial operations at the Huckabay Ridge facility in Stephenville, Texas, which began commercial operations in the first quarter of 2008. Huckabay Ridge consists of eight 916,000-gallon digesters which operate together to process the manure from approximately 10,000 cows and produce 575,000 million British Thermal Units, or MMBtus, of RNG^® annually. The gas is treated and compressed to produce pipeline grade methane that is sold and delivered directly into nearby natural gas pipelines. Huckabay Ridge is expected to produce approximately 782,000 MMBtus of pipeline-grade methane for sale per year once a planned combined heat and power, or CHP, system has been installed and potential modifications made to the gas processing systems.

Environmental Power Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009, 2008 and 2007

Grand Island facility will consist of two 1.3 million gallon digesters that will process wastes generated by the Grand Island processing facility and that we expect will be able to produce approximately 235,000 MMBtus per year. We completed $7.0 million in tax-exempt bond financing in Nebraska in July 2008 to finance a portion of the construction costs of the Grand Island facility. However these bonds are currently in default and the trustee or 25% of the bondholders could accelerate the bonds and demand repayment at any time. We are currently seeking a solution to these circumstances, including the financing to complete construction of the facility, but we cannot assure you that we will be successful in doing so on favorable terms, or at all.

In addition, Microgy is operating three single digester facilities in Wisconsin. Microgy sold these projects to the farms on which they are located, and developed them in conjunction with Dairyland Power Cooperative, an electric cooperative utility, referred to as Dairyland. The biogas from these projects is used by Dairyland to generate electricity. In January 2010, Microgy contributed the rights to the net revenues of the Wisconsin facilities to HMI Energy, LLC as discussed in Note P—Subsequent Events.

Discontinued Operations

In May 2007, our board of directors authorized management to pursue negotiations for the disposition of Buzzard Power Corporation’s (“Buzzard”) leasehold interest in the Scrubgrass facility, referred to as Scrubgrass. Buzzard is a subsidiary of our wholly -owned subsidiary, EPC Corporation. Scrubgrass located on a 600-acre site in Venango County, Pennsylvania, is an approximate 83 megawatt waste coal-fired electric generating station. We decided to seek the disposition of Buzzard’s leasehold interest in the Scrubgrass facility to allow management to focus its attention and resources on the development and growth of Microgy. On February 29, 2008, we completed all transactions necessary to terminate the leasehold interest held by Buzzard in the Scrubgrass generating facility and the related financial obligations of Buzzard’s immediate parent company, EPC Corporation. We recorded net income from discontinued operations in 2008 of $6,989,000 reflecting a loss from operations for the months of January and February 2008 of $1,011,000 and a one-time gain from disposal of $8,000,000. The gain of approximately $8,000,000, with the exception of a cash payment of $375,000, was non-cash in nature. The components of the gain included $3,456,000 in forgiveness of indebtedness, $2,570,000 for the recognition of a previously deferred gain and $1,630,000 for the relief of net obligations of Buzzard. The disposition was recorded net of a tax obligation of $0 because ~~it is anticipated that~~ existing net operating loss carryforwards ~~will~~ offset ~~any~~ federal or state tax liabilities from the sale.

The assets and liabilities of Buzzard have been accounted for as discontinued operations for ~~sale for~~ all periods presented ~~in accordance with the criterion established in Statement of Financial Accounting Standard (“SFAS”) No~~. ~~144~~ ~~“ Accounting for Impairment or Disposal of Long-Lived Assets .”~~ We do not have a continuing involvement with the Buzzard business since the closing of the disposition of the leasehold interest in the Scrubgrass facility and do not continue any revenue or active cost- generating activities related to Buzzard. InThe ~~accordance with SFAS No. 144, the~~ accompanying consolidated ~~balance~~statements ~~sheets~~of operations report the ~~assets~~operations ~~and liabilities~~ of Buzzard as discontinued ~~and~~operations. Buzzard had revenues of $9,556,000 for the ~~consolidated~~two ~~statements~~months ended February 29, 2008. Buzzard had revenues of ~~operations~~$51,633,000 ~~report~~for the ~~operations~~year ofended ~~Buzzard~~December 31, as2007.

62NOTE D—SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of EPC and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

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

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~discontinued~~Years ~~operations.~~Ended ~~Buzzard~~December ~~had revenues of $9~~31,~~556,000~~ ~~for the two months ended February 29~~2009, 2008. ~~Buzzard had revenues of $51,633,000~~ and ~~$51,662,000~~ ~~for the years ended December 31,~~ 2007 ~~and December 31, 2006, respectively.~~

~~NOTE~~ ~~C—SIGNIFICANT~~revenues ~~ACCOUNTING~~and ~~POLICIES~~ 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.

Principles of Consolidation: The consolidated financial statements include the accounts of Environmental Power Corporation and its wholly owned subsidiaries; all significant inter-company accounts and transactions have been eliminated in consolidation.

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.

Revenue Recognition: We record revenues for operation and maintenance of the facilities at the Dairyland Power Cooperative sites which appear as revenues on our statements of operations. Operations and maintenance revenues and natural gas revenues are recorded as services are provided or gas is delivered and billed on a monthly basis.

Revenue from the sale of carbon sequestration credits is only recognized after the carbon credits have been authenticated by an independent third party, registered on the Chicago Climate Exchange and invoiced to the customer.

	Twelve Month Ended
Revenues	December 31,2008		12/31/2007		December 31,2006
Dairyland sites	$	1,182,246	$	1,174,947	$	2,216,216
Huckabay Ridge, Texas		1,722,792		—		—
Total revenues	$	2,905,038	$	1,174,947	$	2,216,216

Method of Accounting for Contracts: Revenues and profits from our construction contracts, with Dairyland Power Cooperative, referred to as Dairyland, which appear as revenues on our 2006 statement of operations, are generally recognized by applying percentages of completion for the period to the total estimated profits for the respective contracts. Percentage of completion is determined by relating the actual cost of the work performed to date to the current estimated total cost of the respective contracts. When the estimate on a contract indicates a loss, our policy is to record the entire loss during the accounting period in which it is estimated. In the ordinary course of business, at a minimum on a quarterly basis, we prepared updated estimates of the total forecasted revenue, cost and profit or loss for each contract. The cumulative effect of revisions in estimates of the total forecasted revenue and costs during the course of the work is reflected in the accounting period in which the facts that caused the revision become known. The financial impact of these revisions to any one contract is a function of both the amount of the revision and the percentage of completion of the contract. An amount equal to the costs incurred is included in the total estimated revenue when realization is probable. Profit from unapproved change orders and claims is recorded in the period such amounts are resolved.

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

Restricted Cash: Restricted cash includes primarily the net proceeds from Microgy Holdings’ tax-exempt bond financings, totaling approximately $1,792,000 and $104,577,000 as of December 31, 2009 and 2008, respectively. Substantially all of the proceeds from these financings were used to pay interest and the redemption, repurchase or a portion of amounts due on acceleration of the bonds in 2009. The remaining outstanding obligations under these bonds underlying these restricted cash amounts are in default.

Concentrations of Credit Risk: Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, restricted cash and revenues. Our cash equivalents represent short-term financial instruments which are issued from reputable financial institutions. Most of our cash balances may be subject to investment risk because some of the account balances exceed the maximum FDIC insurance amount. All of our renewable natural gas revenues and a substantial portion of our operation and maintenance revenues are from two unrelated customers. We have not encountered and do not expect to encounter any collection problems with these customers. Based on our history and the arrangements we have with our customers, we do not believe we have any substantial exposure to the problem of not collecting our accounts receivable.

Accounts Receivable: Accounts receivable is presented on the consolidated balance sheets net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual collectible accounts are written off against the allowance when collection of the individual accounts appears doubtful.

Impairment of Long-Lived Assets: The Company evaluates long-lived assets, such as construction in progress, property and equipment and purchased intangible assets with finite lives subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. There were no such impairment charges recorded during the years ended December 31, 2008 and 2007. In 2008 we did record an impairment of goodwill as discussed below. For the year ended December 31, 2009 we determined certain long-lived assets were impaired and wrote down the value of these assets to their current net realizable value. See Note N—Impairment of Assets for a discussion of these write-downs.

Property, Plant and Equipment: Property, plant and equipment is stated at cost less accumulated depreciation. The cost of maintenance, repairs and minor renewals that do not materially prolong the useful life of the asset are expensed. Major maintenance projects, repairs, improvements, renewals or betterments that extend the useful life of the asset, increase the usefulness or output of the asset, lower the operating costs of the asset, increase the value of the asset or fulfill a new or upgraded regulatory requirement are capitalized. 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 statement of operations at the time of the asset disposition. We depreciate property, plant and equipment using the straight-line method over the estimated useful lives of the assets. Operating commercial facilities are depreciated based on the useful lives of their component parts which

Environmental Power Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009, 2008 and 2007

vary in length from 15 to 30 years. We record depreciation for office equipment and furniture using the straight-line method over periods from three to five years and we depreciate leasehold improvements over the lesser of the useful life of the asset or the length of the lease. We evaluate the need for impairment of property, plant and equipment based on the projection of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If 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.

Construction in Progress: Construction in progress is stated at cost. Any internal costs that are capitalized are limited to those costs that can be directly identified with the design, engineering, or construction of a specific project and do not include any costs related to production, general corporate overhead, or similar activities. See Note N- Impairment of Assets for a discussion of amounts written off in 2009.

We capitalize the net of interest expense and amortization costs related to the bond financing less any interest income associated with the unspent monies from the debt financing to the project which is being financed by the offering. In 2009, we capitalized $7,435,000 in interest, comprised of $7,647,000 in interest costs related to the California, Nebraska and Texas bonds, offset by $212,000 in interest income related to interest earned on unspent monies. For the years ended December 31, 2008 and 2007, we capitalized $3,700,000 and $2,100,000 of net interest costs, respectively. For the assets related to the Nebraska bonds, we ceased capitalization of interest as of March 31, 2009 because we temporarily suspended active construction activities. Because a substantial portion of the California and Texas bonds were repurchased, redeemed or repaid on acceleration and the remaining bonds are currently due and payable, we ceased capitalizing the interest related to these bonds.

In May 2007, we issued 175,912 warrants, representing 1% of our fully diluted common stock at the time to Cargill as required by the business development agreement. These warrants were determined to have a value of $907,288. We capitalized this development cost to construction in progress. In 2009, one of the projects related to this warrant was abandoned and we recorded an impairment of $689,259. See Note N—Impairment of Assets for a further discussion.

In May 2000, Microgy entered into a licensing agreement with DBT that granted Microgy a perpetual and exclusive license in North America for the commercial development and use of certain proprietary technologies, including Microgy’s core anaerobic digestion technology. This license agreement was amended in April 2003 and March 2005 to further define certain support obligations of DBT and to amend the structure of the compensation payable to DBT for use of the license. According to the license as amended, DBT will receive fixed payments for its participation in the design phase of each project, including engineering work and construction drawings, and a licensing fee, included in the cost of the facility, that is based on a percentage of the total cost for each project facility where the licensed technology is installed and operating. The licensing fee related to the construction of the Huckabay Facility, approximately $1,000,000, has been capitalized and is included in the property, plant and equipment balance.

Intangible assets, goodwill and indefinite lived 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. Accumulated amortization of licensed technology rights was $1,566,204 and $1,380,704 at December 31, 2009 and 2008, respectively. The future estimated amortization expense for licensed technology rights is as follows:


2010	2011	2012	2013	2014	Thereafter	Total
$185,500	185,500	185,500	185,500	185,500	1,216,296	$2,143,796

Environmental Power Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009, 2008 and 2007

Goodwill: Goodwill represents the excess of cost over the fair value of tangible and identifiable intangible assets and was not amortized pursuant to ASC 350 “Intangibles—Goodwill and Other”. The Company acquired Microgy, Inc. in 1999 and this acquisition resulted in $4,913,000 of goodwill. The impairment evaluation for goodwill was conducted at least annually, or more frequently, if events or changes in circumstances indicated that the asset might be impaired. The evaluation was performed using a two-step process. The first step compares the book value of the Company’s reporting unit to its estimated fair value. The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, compares the implied fair value of goodwill to its book value to determine if an impairment is required. The Company estimated the fair values of its reporting unit using the income approach which measures the value of an intangible asset based on the expected stream of monetary benefits attributable to it over its remaining useful life.

In 2008, the results of the tests to determine the appropriate value of goodwill resulted in the Company’s determination that the entire balance of $4,913,000 was impaired, due primarily to the current market price of its common stock relative to its book value, projections of future cash flows and other factors. Previously, the market price of the Company’s common stock and, consequently, its market capitalization were relatively high compared to the book value per share of its common stock. However, in 2008 the Company’s market value fell substantially below its book value. The Company determined that the write-off was required.

Notes Receivable: In 2005, we completed construction of the digester projects at Five Star Dairy, Wild Rose Dairy, and Norswiss Dairy. Each digester had a purchase price of $1,037,000, of which Microgy agreed to provide 100% seller financing. The notes issued by the purchasers of the digester projects each bear simple interest at 5% per annum, to be paid monthly after the first month that accumulated net profits are received under the purchasers’ respective biogas supply agreement with Dairyland Power Cooperative. Each maker of these notes is only required to make interest and principal payments from the net revenues under the applicable biogas supply agreement with Dairyland Power Cooperative, to the extent that the operation of the facility, which we manage and operate, provides sufficient funds to pay. Each note matures 11 years after the bill of sale for the facility to which it relates has been executed. Because we have limited operating history, we have set up a reserve on these notes in the amount of $750,000 in 2007 to allow for any future cash flow deficiencies that would impair the full value of the notes. As we gain operations and maintenance experience and develop a track record, we will evaluate this allowance and make adjustments accordingly. The following table shows the balance on these notes receivable on December 31, 2009 and December 31, 2008:


	December 31, 2009			December 31, 2008
Notes Receivable
Notes receivable	$	2,264,896		$	2,358,500
Reserve for any future cash flow deficiencies		(750,000	)		(750,000	)

Notes receivable, net	$	1,514,896		$	1,608,500

Beginning in the third quarter of 2007, we sold the carbon sequestration credits generated from the Wisconsin facilities. Pursuant to our agreements with the owners of these facilities, 50% of these sales were recognized by us as revenue and 50% was applied to the balance of the notes. During 2009 and 2008, the balance of the notes receivable was reduced by $18,000 and $218,000, respectively, due to the sale of greenhouse gas sequestration credits. The sales for the year ended December 31, 2009 included revenues for credits generated by vintage years 2005 to 2007 but the sales for the year ended December 31, 2009 includes credits generated only during the last six months of 2008. Under the terms of the notes, the balance of the notes is also reduced by cumulative profits of the Wisconsin facilities from gas sales. In 2009, the notes receivable balance and revenues were reduced by $70,000 from the cumulative profits at one facility.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~Concentrations~~Years ofEnded ~~Credit~~December ~~Risk: Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents~~31, restricted cash and revenues. Our cash equivalents represent short-term financial instruments which are issued from reputable financial institutions. Most of our cash balances may be subject to investment risk because some of the account balances exceed the maximum FDIC insurance amount. All of our renewable natural gas revenues and a substantial portion of our operation and maintenance revenues are from two unrelated customers. We have not encountered and do not expect to encounter any collection problems with these customers. The accounts receivable from outside customers at December 312009, 2008 ~~of $240,000 has been collected. Based on our history~~ and ~~the~~2007 ~~arrangements we have with our two major customers we do not believe we have substantial exposure to uncollectibility of accounts receivable from these customers.~~

~~Impairment~~These ofnotes ~~Long-~~were ~~Lived~~contributed ~~Assets:~~to ~~In accordance with SFAS No. 144, Accounting for~~ the ~~Impairment~~joint orventure ~~Disposal~~in of2010 ~~Long Lived Assets, the Company evaluates long-lived assets such~~ as ~~property~~described ~~and~~in ~~equipment and purchased~~Note ~~intangible~~P—Subsequent ~~assets~~Events. ~~with~~Therefore, ~~finite~~we ~~lives~~will ~~subject~~share ~~to amortization for impairment whenever events or changes~~ in ~~circumstances indicate that~~ the carrying value of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the carrying amount of an asset to estimated undiscounted future ~~cash~~amounts ~~flows~~ultimately ~~expected~~paid toin berespect ~~generated by the asset. If the carrying amount~~ of anthese ~~asset~~notes ~~exceeds~~in ~~its~~accordance ~~estimated~~with ~~undiscounted future cash flows, an impairment charge is recognized by~~ the ~~amount~~terms ~~by which the carrying amount~~ of the ~~asset~~joint ~~exceeds the fair value of the asset~~venture. ~~There were no such impairment charges recorded during the years ended December 31, 2008, 2007 and 2006.~~

~~Restricted~~Deferred ~~Cash~~Financing Costs: ~~Restricted~~Deferred ~~cash~~financing ~~includes~~costs ~~primarily~~include ~~the~~costs ~~net~~directly ~~proceeds~~attributable ~~from~~to ~~Microgy~~our ~~Holdings’,~~issuance Lof debt securities.P. ~~tax-exempt~~These ~~bond financings,~~costs ~~totaling~~are ~~approximately~~deferred ~~$104,577,000~~and capitalized in construction in progress as part of ~~December 31,~~deferred ~~2008.~~financing ~~The~~costs ~~use~~and ofare ~~these~~amortized ~~funds~~over isthe ~~restricted~~remaining tolife of the ~~construction~~related ~~and~~debt. ~~start-up~~In ~~operations~~2006, we incurred deferred financing costs of $2,668,000 related to our ~~three~~$60,000,000 ~~remaining~~tax-exempt ~~planned~~bond financing in Texas. ~~projects,~~In ~~Mission,~~2008 ~~Rio~~we ~~Leche~~recorded an additional $2,273,000 and ~~Cnossen~~$397,000 ~~two~~in ofdeferred financing costs related to our ~~California~~ ~~projects~~$62,425,000 ~~Hanford~~tax-exempt ~~and~~financing ~~Riverdale~~in California and ~~our~~$7,000,000 ~~Grand~~tax-exempt ~~Island~~financing in Nebraska , respectively. The Nebraska ~~project~~costs are being amortized over the 15 year life of the Nebraska debt. ~~Pursuant~~As some of the debt related to ~~agreements~~the ~~requisition~~Texas and~~/or~~ ~~certification~~California bybonds ~~Microgy~~has ~~Holdings~~been repurchased, redeemed or ~~Microgy~~paid ~~Grand~~in ~~Island~~part ~~LLC~~on acceleration, and the ~~related~~remainder ~~approval~~of bythe andebt ~~independent~~is ~~engineer~~currently due and ~~a trustee~~payable, isthe ~~required~~deferred financing costs related to these ~~withdraw~~loans were written off in 2009. See Note N for a complete discussion of the ~~funds~~impairment of these assets.

~~Notes Receivable~~Revenue Recognition: We ~~have~~record ~~completed~~revenues ~~construction~~for ofoperation ~~the digesters at Five Star Dairy, Wild Rose Dairy~~ and ~~Norswiss~~maintenance ~~Dairy,~~of ~~collectively~~the ~~referred~~facilities toat as the Dairyland ~~sites.~~Power ~~Each~~Cooperative ~~digester~~sites ~~has~~which ~~begun~~appear ~~operations.~~as ~~The~~revenues ~~sales~~on ~~price~~our ~~for~~statements ~~each~~of ~~digester was $1~~operations.0 ~~million.~~Operations Weand ~~will~~maintenance berevenues ~~paid~~and ~~from~~natural ~~the cash flow from the sale of~~ gas ~~generated~~revenues ~~under the~~are ~~applicable~~recorded ~~biogas~~as ~~supply~~services ~~agreement~~are ~~between~~provided ~~the~~or ~~digester~~gas ~~owner~~is ~~and~~produced ~~Dairyland,~~on ~~which extends through 11 years after the sale for the facility to which it relates. We will be paid up to~~ a ~~maximum~~monthly ~~of $3~~basis.1 ~~million~~Revenue ~~plus interest at 5% per annum, which is evidenced by three notes of $1.0 million each. In 2008, we applied 50% of the proceeds~~ from the sale of carbon sequestration credits atis ~~these~~only ~~facilities~~recognized ~~to these notes, or $219,000. Therefore,~~ after ~~giving effect to~~ the ~~$750,000~~carbon ~~bad~~credits ~~debt allowance~~have ~~relating~~been toauthenticated ~~these~~by ~~notes established in 2005, as of December 31, 2008, the notes have~~ an ~~aggregate~~independent ~~remaining~~third ~~balance of $1.6 million~~party, ~~which~~registered weon ~~expect to collect in its entirety. We will continue to evaluate~~ the ~~estimated operating cash~~ ~~flows~~Chicago ~~from~~Climate ~~these~~Exchange ~~digesters~~and ~~that~~invoiced ~~support~~to the ~~ability to realize these notes and make further adjustments, if required~~customer.

Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. We capitalize significant renewals and betterments that increase the useful lives of assets while repairs and maintenance charges 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 statement of operations at the time of the asset disposition. We depreciate property plant and equipment using the straight-line method over the estimated useful lives of the assets. We record depreciation for office equipment and furniture using the straight-line method over periods ranging from three to five years, for machinery and equipment on a straight line basis over periods ranging from fifteen to thirty years, and for leasehold improvements using the straight-line method over the lesser of the useful life of the asset or the lease. We evaluate the impairment of long-lived assets based on the projection of undiscounted cash flows whenever


	Years Ended
Revenues	December 31, 2009		December 31, 2008		December 31, 2007
Dairyland sites, Wisconsin	$	947,854	$	1,182,246	$	1,174,947
Huckabay Ridge, Texas		3,763,593		1,722,792		—

Total revenues	$	4,711,447	$	2,905,038	$	1,174,947

At December 31, 2009 one customer was the source of 70% of 2009 revenues and a second customer was the source of 19% of revenues.

Stock Based Compensation: ASC 718 “Compensation” requires all share-based payments to employees, including grants of employee stock options, stock appreciation rights (“SARs”) and restricted stock, to be recognized in the financial statements based on their fair values. Effective January 1, 2006, we adopted this standard using the modified, prospective method. Under this method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value amortized on an straight line basis over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value and amortized on a straight-line basis over the options’ vesting period.

As required by the rules and regulations of the Securities and Exchange Commission, we have classified stock-based compensation during the years ended December 31, 2009, 2008 and 2007 within the same operating expense line items as cash compensation paid to employees. Both cash and non-cash compensation is recognized in general and administrative expenses.

We account for non-employee stock compensation as required by ASC 718 and ASC 505-50 “Equity-Equity Based Payments to Non-Employees”. We record the compensation expense over the period of service at the fair

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~events~~Years orEnded ~~changes~~December ~~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~~31, ~~the assets are written down to their estimated fair values. We do not believe any of our property~~2009, ~~plant,~~2008 orand ~~equipment~~2007 ~~is impaired at December 31, 2008.~~

~~Construction~~ value inof ~~Progress:~~the ~~Construction~~consideration inreceived ~~progress~~or isthe ~~stated~~fair atvalue ~~cost.~~of ~~Any~~the ~~internal~~equity ~~costs~~instruments ~~that~~issued, ~~are~~whichever ~~capitalized~~is ~~are~~more ~~limited~~reliably tomeasurable. ~~those~~The ~~costs~~fair ~~that~~value ~~can be~~of ~~directly~~such ~~identified~~equity ~~with~~instruments ~~the~~is ~~design,~~calculated ~~engineering,~~using ~~or construction of~~ a Black-Scholes ~~specific~~option ~~project and do not include any costs related to production, general corporate overhead, or similar activities~~model.

InIncome ~~accordance~~Taxes: ~~with~~We ~~the~~account ~~provisions~~for ofincome ~~SFAS~~taxes ~~62 “Capitalization of Interest Cost~~ in ~~Situations~~accordance ~~Involving~~with ~~Certain~~ASC ~~Tax-Exempt~~740 ~~Borrowing and~~“Income ~~Certain~~Taxes”. ~~Gifts~~As ~~and~~required ~~Grants”~~by anthis ~~amendment~~ASC, ofdeferred ~~SFAS~~tax 34assets ~~“Capitalization~~and ofliabilities ~~Interest~~are ~~Costs”~~determined webased ~~capitalize~~on ~~the~~differences ~~net~~between ofthe ~~interest~~financial ~~expense~~reporting and ~~amortization~~tax ~~costs~~reporting ~~related~~bases toof ~~the~~assets ~~bond~~and ~~financing~~liabilities ~~less~~and ~~any~~are ~~interest~~measured ~~income~~by ~~associated~~applying ~~with~~ the ~~unspent~~enacted ~~monies~~tax ~~from~~rates and ~~the~~laws ~~debt financing~~ to ~~the~~taxable ~~project~~years in which ~~is being financed by~~ the ~~offering.~~differences Inare ~~2008,~~expected weto ~~capitalized $3~~reverse.7 ~~million~~We inrecognize ~~interest,~~a ~~comprised~~deferred oftax ~~$5.2~~asset ~~million~~for inthe ~~interest~~future ~~expense~~tax ~~related~~benefits towhen ~~the~~it ~~California,~~is ~~Nebraska~~more ~~and~~likely ~~Texas~~than ~~bonds, offset~~not bythat ~~$1.5~~the ~~million~~tax inbenefits ~~interest~~will ~~income~~be ~~related~~realized toand ~~interest~~reduce ~~earned~~the ondeferred ~~unspent~~tax ~~monies.~~asset ~~For~~with ~~the~~a valuation ~~year~~reserve ~~ended~~when ~~December 31,~~it ~~2007~~is wemore ~~capitalized~~likely ~~$2.1~~than ~~million~~not inthat ~~interest~~some ~~and~~portion ~~for~~of the ~~year~~tax ~~ended~~benefits ~~December 31,~~will ~~2006~~not webe ~~capitalized $265,000 of interest~~realized.

InEarnings ~~May~~per Common ~~2007~~Share (“EPS”): We compute earnings per common share in accordance with ASC 260 “Earnings per Share”. We compute basic earnings per share by dividing net income (loss) for the period, weless ~~issued~~any ~~175~~dividends on our Series A 9% Cumulative Convertible Preferred Stock,~~912~~ ~~warrants~~referred to as the series A preferred stock, ~~representing~~by 1%the weighted average number of ~~our~~shares ~~fully~~of common stock outstanding during the period. For purposes of calculating diluted earnings per share, we consider shares issuable in connection with stock options, SARs and warrants to be dilutive common stock atequivalents when the ~~time~~exercise toprice ~~Cargill~~is asless ~~required~~than bythe average market price of our common stock for the period. We exclude anti-dilutive common stock equivalents from the ~~business~~calculation ~~development~~of ~~agreement~~diluted earnings per share. ~~These~~The ~~warrants~~following ~~were~~table ~~valued~~outlines ~~using~~the calculation of basic earnings per share and diluted earnings per share for the ~~Black-Scholes~~years ~~method~~ended December 31, ~~and~~2009, ~~determined~~2008 toand ~~have~~2007. aFor ~~value~~the purposes of ~~$907~~calculating dilutive options,~~288.~~ Weall ~~have~~warrants ~~capitalized~~and ~~this~~options ~~development~~were ~~cost~~calculated using the treasury stock method and ~~this~~the ~~amount~~preferred isstock ~~currently~~impact ~~held~~was incalculated ~~our~~using ~~construction~~the in“as-if ~~progress account~~converted” method.

In May 2000, Microgy entered into a licensing agreement with DBT that granted Microgy a perpetual and exclusive license in North America for the commercial development and use of certain proprietary technologies, including Microgy’s core anaerobic digestion technology. This license agreement was amended in April 2003 and March 2005 to further define certain support obligations of DBT and to amend the structure of the compensation payable to DBT for use of the license. According to the license as amended, DBT will receive fixed payments for its participation in the design phase of each project, including engineering work and construction drawings, and a licensing fee, included in the cost of the facility, that is based on a percentage of the total cost for each project facility where the licensed technology is installed and operating. The licensing fee related to the construction of the Huckabay Facility, approximately $1 million dollars, has been capitalized and is included in the property, plant and equipment balance.


	Years Ended
Earnings Per Share	12/31/2009			12/31/2008			12/31/2007
Net Loss applicable to common shareholders	$	(36,112,351	)	$	(16,006,708	)	$	(17,357,149	)
Dividends to preferred stockholders		(1,334,179	)		(1,326,271	)		(1,348,343	)
Change in value of modified warrants		—			—			(97,404	)
Beneficial conversion feature of preferred stock		—			—			(57,148	)

Earnings (Numerator)	$	(37,446,530	)	$	(17,332,979	)	$	(18,860,044	)
Basic shares (Denominator)		15,587,117			15,579,354			11,338,973

Basic EPS	$	(2.40	)	$	(1.11	)	$	(1.66	)
Diluted shares		15,587,117			15,579,354			11,338,973

Diluted EPS	$	(2.40	)	$	(1.11	)	$	(1.66	)
Anti-Dilutive instruments		9,384,051			7,382,318			7,632,700

~~Intangible~~As ~~assets~~of December 31, ~~goodwill~~2009, 2008 and ~~indefinite~~2007 ~~lived~~respectively, ~~assets:~~there ~~Intangible~~were ~~assets~~outstanding ~~are~~shares ~~recorded at cost and consist~~ of ~~licensed~~preferred ~~technology~~stock ~~rights~~convertible ~~and goodwill.~~into ~~Licensed~~common ~~technology~~shares, ~~rights~~SARs, ~~are~~options, ~~being~~warrants ~~amortized~~and ~~using~~unvested ~~the~~restricted ~~straight-line~~shares ~~method~~to ~~over~~purchase a9,384,051, ~~useful life of 20 years. Accumulated amortization of licensed technology rights was $1~~7,~~380~~382,~~704~~318, and $17,~~195~~632,~~204 at December 31~~700, ~~2008~~shares ~~and 2007,~~of ~~respectively.~~our ~~Licensed~~common ~~technology~~stock, ~~rights~~respectively which were ~~reviewed~~anti-dilutive ~~for~~and ~~impairment~~not ~~pursuant~~included toin ~~Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for~~ the ~~Impairment~~computation ~~or Disposal~~ of ~~Long-Lived~~diluted ~~Assets”~~EPS. The ~~future~~ ~~estimated~~options, ~~amortization~~SARs ~~expense~~and ~~for~~warrants ~~licensed~~expire ~~technology~~at ~~rights~~various isdates asthrough ~~follows:~~2019.

~~Estimated~~Recent ~~Amortization~~Accounting ~~Expense~~Pronouncements: ASC 810 “Consolidation” includes standards for ~~Licensed~~accounting ~~Technology~~for ~~Rights~~non-controlling interests in consolidated financial statements. This standard requires that non-controlling interests be reported as stockholders’ equity. The Statement also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary as long as that ownership change does not result in deconsolidation. This statement is effective for fiscal years beginning after December 15, 2008. We have adopted this guidance and determined that the impact is not material to the Company’s December 31, 2009 financial statements.

2009		2010		2011		2012		2013		Thereafter		Total
$185,500		185,500		185,500		185,500		185,500		1,401,796		$2,329,296

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~Goodwill~~Years ~~represents~~Ended ~~the~~December 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”. We adopted SFAS 142 on January 131, ~~2002 and completed the transitional impairment testing in June 2002 and the required testing annually through December 31~~2009, 2008. ~~The~~and ~~Company~~2007 acquired Microgy, Inc. in 1999. This acquisition resulted in an initial allocation of $4,913,000 to goodwill. The impairment evaluation for goodwill is conducted at least annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed using a two-step process. The first step compares the book value of the Company’s reporting unit to its estimated fair value. The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, compares the implied fair value of goodwill to its book value to determine if an impairment is required. The Company estimates the fair values of its reporting unit using the income approach which measures the value of an intangible asset based on the expected stream of monetary benefits attributable to it over its remaining useful life.

~~The~~ASC ~~Company~~815 ~~annually~~“Derivatives ~~performs~~and ~~tests~~Hedging”, torequires ~~determine~~entities ~~the~~to ~~appropriate value of~~provide ~~goodwill.~~enhanced ~~The~~qualitative ~~results~~disclosures ofabout ~~these~~objectives ~~tests~~and instrategies ~~2008~~for ~~resulted~~using ~~in the Company’s determination that the entire balance of $4~~derivatives,~~913,000~~ ~~was~~quantitative ~~impaired,~~disclosures ~~due~~about ~~primarily~~fair tovalues ~~the~~and ~~current~~amounts ~~market price~~ of ~~its~~gains ~~common~~and ~~stock~~losses ~~relative~~on toderivative ~~its book value~~contracts, ~~projections of future cash flows~~ and ~~other~~disclosures ~~factors.~~about ~~Previously,~~credit ~~the~~risk ~~market~~related ~~price~~contingent ~~of the Company’s common stock~~ features and, ~~consequently,~~derivative ~~its~~agreements. ~~market~~This ~~capitalization~~statement ~~were~~applies ~~relatively high compared~~ to ~~the~~all ~~book~~entities ~~value~~and ~~per~~all ~~share~~derivative ~~of its common stock~~instruments. ~~However,~~The ~~this~~standard ~~year the~~was ~~Company’s~~effective ~~market~~for ~~value~~financial isstatements ~~substantially~~issued ~~below~~for ~~its~~fiscal ~~book~~years ~~value,~~and ~~due~~interim ~~principally~~periods tobeginning ~~the~~after ~~current market price of its common stock.~~November ~~As a result~~15, ~~accounting~~2008. ~~requirements~~We ~~require the Company to determine whether there is enough market value~~have ~~after~~implemented ~~covering~~this ~~other~~standard ~~net assets on a book basis to cover any of its goodwill. The Company determined that market value was insufficient to cover goodwill,~~ and ~~determined~~it ~~that~~did ~~the~~not ~~write-off~~have ~~was~~a ~~required. The~~material ~~write-off~~impact ~~of goodwill is not a reflection~~ on ~~the~~our ~~economics~~financial ofposition ~~the~~and ~~Company’s~~results ~~projects, which the Company continues to stand behind, but is simply the result~~ of ~~the application of accounting requirements associated with goodwill impairment~~operations.

~~Deferred Financing Costs:~~ In February ~~2006,~~2010 wethe ~~incurred~~FASB ~~deferred~~issued ~~financing~~a ~~costs~~pronouncement ~~of $2.7 million~~ related to ~~our~~subsequent ~~$60~~events ~~million~~which ~~tax-exempt~~clarifies ~~bond~~that ~~financing in Texas. In 2008~~ we ~~recorded~~must anevaluate ~~additional~~subsequent ~~$2.3~~events ~~million~~through and $397,000 in deferred financing costs related to our $62.425 million tax-exempt financing in California and $7 million tax -exempt financing in Nebraska , respectively. The California and Texas deferred financing costs are being amortized over the ~~30-year~~date ~~life~~that of the ~~related~~financial ~~debt~~statements ~~and~~are ~~the~~issued. ~~Nebraska~~See ~~costs~~Note ~~over~~P—Subsequent ~~the 15-year life of the Nebraska debt~~Events.

~~Income~~NOTE ~~Taxes:~~E—OTHER WeCURRENT ~~account~~ASSETS 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. We recognize a deferred tax asset for the tax benefit of net operating loss carry forwards when it is more likely than not that the tax benefits will be realized and reduce the deferred tax asset with a valuation reserve when it is more likely than not that some portion of the tax benefits will not be realized.

~~Earnings~~Other ~~per~~current ~~Common~~assets ~~Share:~~consist Weof ~~compute earnings per common share in accordance with SFAS No. 128, “Earnings per Share”. We compute basic earnings per share by dividing net income for~~ the ~~period,~~following ~~less any dividends on our Series A 9% Cumulative Convertible Preferred Stock, referred to~~ as ~~the series A preferred stock, by the weighted average number~~ of ~~shares of common stock outstanding during the period. For purposes of calculating diluted earnings per share~~December 31, we2009 ~~consider shares issuable in connection with stock options, stock appreciation rights~~ and ~~warrants~~ to2008: ~~be dilutive common stock equivalents when the exercise price is less than the average market price of our common stock for the period. We exclude anti-dilutive common stock equivalents~~


Other Current Assets	2009		2008
Prepaid expenses	$	214,602	$	53,214
Other current assets		90,032		6,996

TOTAL	$	304,634	$	60,210

NOTE F—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost less accumulated depreciation and amortization and consists of the following as of December 31, 2009 and 2008:


Property, Plant and Equipment	2009			2008
Machinery and equipment	$	27,619,353		$	25,073,098
Leasehold improvements		102,699			102,699
Office equipment and furniture		265,027			265,027
Less: Accumulated depreciation and amortization		(2,861,493	)		(1,508,751	)

TOTAL	$	25,125,586		$	23,932,073

Depreciation expense for the years ended 2009, 2008, and 2007 was $1,355,009, $1,153,210, and $126,034 respectively.

NOTE G—OTHER ASSETS

Other assets consist of the following as of December 31, 2009 and 2008:

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~from~~Years ~~the~~Ended ~~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, ~~2008~~2009, ~~2007~~2008 and ~~2006.~~2007 ~~For the purposes of calculating dilutive options, all warrants and options were calculated using the treasury stock method. The preferred stock were calculated using the “as-if converted” method.~~

	Twelve Months Ended
Earnings Per Share	12/31/2008			12/31/2007			12/31/2006
(Loss) applicable to shareholders	$	(16,006,708	)	$	(17,357,149	)	$	(14,115,257	)
Dividends to preferred stockholders		(1,326,271	)		(1,348,343	)		(197,715	)
Change in Value of Modified Warrants		—			(97,404	)		—
Beneficial Conversion Feature of Preferred Stock		—			(57,148	)		(4,131,022	)
Earnings (Numerator)	$	(17,332,979	)	$	(18,860,044	)	$	(18,443,994	)
Basic Shares (Denominator)		15,579,354			11,338,973			9,634,824
Basic EPS	$	(1.11	)	$	(1.66	)	$	(1.91	)
Assumed exercise of dilutive stock options		—			—			—
Diluted Shares		15,579,354			11,338,973			9,634,824
Diluted EPS	$	(1.11	)	$	(1.66	)	$	(1.91	)
Anti-Dilutive Instruments		7,382,318			7,632,700			8,146,657

NOTE H—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

AsAccounts ofpayable ~~December 31, 2008, 2007~~ and ~~2006~~accrued ~~respectively,~~expenses ~~there~~consist ~~were outstanding shares~~ of ~~preferred~~ ~~stock~~the ~~convertible~~following ~~into~~as ~~common shares, SARs, options, and warrants to purchase 7,382,318, 7,632,700, and 8,146,657, shares~~ of ~~our common stock~~December 31, ~~respectively~~2009 ~~which were anti-dilutive~~ and ~~not~~2008: ~~included in the computation of diluted EPS. The options and warrants expire at various dates through 2016.~~

Stock Based Compensation: In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004) Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. Effective January 1, 2006, we adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized on an straight line basis over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized on a straight-line basis over the options’ vesting period.


Accounts Payable and Accrued Expenses	2009		2008
Accounts payable	$	2,037,147	$	1,628,955
Accrued dividends payable		1,334,179		667,089
Accrued compensation		45,385		393,024
Accrued licensing fee		100,000		—
Accrued interest		851,723		859,021
Other accrued expenses		955,297		774,907

TOTAL	$	5,323,731	$	4,322,996

OnNOTE ~~March 29,~~I—CURRENT ~~2005,~~PORTION ~~the~~OF ~~Securities~~LONG-TERM ~~and Exchange Commission (“SEC”) published Staff Accounting Bulletin (“SAB”) No. 107~~DEBT, ~~which~~ ~~provides the Staff’s views on a variety of matters relating to stock~~LONG-~~based payments. SAB No. 107 requires that stock-based compensation be classified in the same expense line items as cash compensation. We have classified stock-based~~TERM ~~compensation~~OBLIGATIONS ~~during~~AND ~~the~~CONTRACTUAL ~~years~~OBLIGATIONS ended December 31, 2008, 2007 and 2006 within the same operating expense line items as cash compensation paid to employees. Both cash and non-cash compensation is recognized in general and administrative expenses.

InIssuance ~~November 2005, the FASB issued FSP No. 123R-3, “Transition Election Related to Accounting for the Tax Effects~~ of ~~Share-Based~~ ~~Payment Awards.” We have adopted the simplified method to calculate the beginning balance of the additional paid~~Long-~~in-capital~~Term ~~(“APIC”)~~Debt pool of the excess tax benefit, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon our adoption of FAS 123R.

On March 13, 2009, we closed on the sale of $5,000,000 original principal amount of our 14% convertible notes due January 1, 2014, referred to as the notes, for net proceeds of approximately $4,389,000. The notes are unsecured obligations of Environmental Power Corporation and interest is due semi-annually on January 1 and July 1, with principal due at maturity. The notes are convertible into shares of our common stock of the Company beginning at an initial conversion price of $5.40 a share through December 31, 2009, then increasing to $6.35 per share from January 1, 2010 through December 31, 2010, $7.65 per share from January 1, 2011 through December 31, 2011, $9.75 per share from January 1, 2012 through December 31, 2012 and $11.00 per share from January 1, 2013 to December 31, 2013.

On May 22, 2009 we issued an additional $3,000,000 of these notes as payment for upfront license fees related to certain of our projects under an agreement entered into in April 2009 with the licensor of Microgy’s technology as described in more detail below.

The terms of the notes are governed by an Indenture, dated as of March 1, 2009, as supplemented by a First Supplemental Trust Indenture, dated as of March 1, 2009, as amended and supplemented to date, between the Company and Wells Fargo Bank, National Association, as Trustee, collectively referred to as the indenture. The indenture contains covenants which include restrictions and limitations on our ability and that of our subsidiaries to incur indebtedness and issue certain types of capital stock and engage in certain transactions. In certain instances described in the indenture, the holders of the notes can require us to repurchase or redeem the notes, and we can require holders of the notes to convert into common stock or redeem their notes. The proceeds of these notes can only be used for the costs and expenses associated with the construction and operation of our projects, as described in more detail in the indenture. The First Supplemental Indenture provides for the issuance of notes in an aggregate original principal amount of up to $53,000,000.

On January 1, 2010 an interest payment of $560,000 was due on these notes. EPC did not make the interest payment and failed to make the payment during the 30 day cure period following the due date for payment of the interest. As a result the convertible notes are in default and the Trustee or 25% of the note holders can demand immediate repayment of these notes at any time. Although acceleration of these notes has not been initiated, these notes are classified as current portion of long-term debt because the holders of the notes or the trustee can demand immediate repayment at any time.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

WeYears ~~account~~Ended ~~for~~December ~~non-employee~~31, ~~stock~~2009, ~~compensation~~2008 ~~under SFAS 123(R)~~ and ~~Emerging~~2007 Issues task Force (EITF) 96-18. We record the compensation expense over the period of service at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value of such equity instruments is calculated using a Black-Scholes option model.

WeLicense ~~recognized~~Agreement ~~$1,950,987,~~with ~~$2,798,032~~Danish ~~and~~Biogas ~~$2,036,108~~Technology inA/S ~~total non-cash compensation expense under FAS 123(R) for the years ended December 31, 2008, 2007 and 2006, respectively.~~

~~Recent~~Microgy ~~Accounting~~licenses ~~Pronouncements:~~the anaerobic digestion portion of its technology from Danish Biogas Technology A/S, referred to as DBT. DBT’s parent, Xergi A/S, referred to as Xergi, is 50% owned by Schouw & Co., a Danish public company and 50% by DDH, a Danish environmental and engineering firm.

In ~~September 2006~~May 2000, ~~the~~Microgy ~~Financial~~entered ~~Accounting~~into ~~Standards~~a ~~Board~~licensing ~~(FASB)~~agreement ~~issued~~with ~~Statement~~DBT ofthat ~~Financial~~granted ~~Accounting~~Microgy ~~Standards~~a ~~(SFAS) No. 157,~~perpetual ~~Fair~~and ~~Value~~exclusive ~~Measurements~~license ~~(SFAS~~in ~~157),~~North ~~which~~America ~~defines fair value, establishes a framework~~ for ~~measuring~~the ~~fair~~commercial ~~value,~~development and ~~expands~~use ~~disclosures about fair value measurements. The provisions~~ of ~~SFAS~~certain ~~157 were effective for financial~~proprietary ~~statements~~technologies, ~~issued~~including ~~for~~Microgy’s ~~fiscal~~core ~~years~~anaerobic ~~beginning~~digestion ~~after November 15, 2007~~technology. ~~However,~~This ~~the~~license ~~FASB~~agreement ~~deferred~~was ~~the~~amended ~~effective~~in ~~date~~April of2003 ~~SFAS~~and ~~157,~~March as2005 ~~it relates~~ to ~~fair~~further ~~value~~define ~~measurement~~certain ~~requirements~~support ~~for~~obligations ~~non-financial~~of ~~assets~~DBT and ~~liabilities~~to ~~that~~amend ~~are~~the ~~not remeasured~~structure atof ~~fair~~the ~~value~~compensation onpayable to aDBT ~~recurring~~for ~~basis.~~use ~~These assets include goodwill and other non-amortizable intangible assets. We adopted SFAS 157 as~~ of ~~January 1, 2008 and~~ the ~~adoption did not have a material impact on our financial statements~~license.

On April 23, 2009, The ~~fair~~Company ~~value~~and ~~framework~~Microgy ~~requires~~entered into a ~~categorization~~Cooperation ofAgreement ~~assets~~(the “Agreement”) with DBT and ~~liabilities~~its ~~into~~parent, ~~three~~Xergi. ~~levels~~The ~~based~~Agreement ~~upon~~is intended to replace and terminate the ~~assumptions~~Technology Licensing Agreement dated May 12, 2000 between Microgy and DBT, as amended by Addendum of April 14, 2003 and Addendum No. 2 of March 7, 2005, between DBT and Microgy (~~inputs~~collectively, the “Prior Agreements”). ~~used~~The toAgreement, while maintaining many of the original business concepts contained in the Prior Agreements, restructures the Prior Agreements ~~price~~to reflect the ~~assets~~Company’s shift to a build, own and ~~liabilities.~~operate ~~Level~~business 1model ~~provides~~from the ~~most~~original ~~reliable~~digester ~~measure~~equipment sales model and better defines the respective roles of ~~fair~~the ~~value,~~parties ~~whereas~~to ~~Level~~enable 3them ~~generally~~more ~~requires~~efficiently ~~significant~~to ~~management~~interface ~~judgment~~going forward. The termination ~~three~~of ~~levels~~the ~~are~~Prior ~~defined~~Agreements aswill ~~follows:~~not impair any prior grants of rights by DBT to Microgy or its affiliates, or any collateral assignments of such rights, or any prior payments to DBT or Xergi under the Prior Agreements.

•The ~~Level~~Agreement 1:addresses ~~Unadjusted~~anaerobic-digester ~~quoted~~plants ~~prices~~incorporating above-ground digesters with mixers (the “DBT Technology”). Pursuant to the Agreement, DBT grants to Microgy an irrevocable and perpetual right and license to utilize the DBT Technology in ~~active~~the ~~markets~~design, construction, and/or operation by the Company, Microgy and their affiliates of anaerobic-digesters and related systems. This grant is exclusive as to North America for ~~identical~~the ~~assets~~Term (as defined in the Agreement) and ~~liabilities~~is non-exclusive as to North America thereafter, excludes Europe during the Term but is non-exclusive as to Europe thereafter. As in the Prior Agreements, the grant is non-exclusive as to the rest of the world, leaving each party free to pursue projects outside of North America and Europe. The Agreement further provides that commencing as of May 22, 2009, Microgy may utilize digester technologies other than the DBT Technology throughout the world.

•As ~~Level~~part 2:of ~~Observable~~the ~~inputs~~Agreement, ~~other~~the ~~than~~Company ~~those~~agreed ~~included~~to inpay a ~~Level~~$500,000 1license fee for the Swift Grand Island project. ~~For~~The ~~example~~Company has only paid $200,000 ~~quoted~~to ~~prices~~date and the remaining $300,000 is overdue for ~~similar~~payment. ~~assets~~While orDBT ~~liabilities~~has ingiven ~~active~~us ~~markets~~notice orof ~~quoted~~material ~~prices~~breach ~~for~~under ~~identical~~the ~~assets~~Agreement oras ~~liabilities~~a inresult ~~inactive~~of ~~markets~~the failure to make this payment, it has not taken any action with respect to such failure.

•The ~~Level~~Agreement 3:became ~~Unobservable~~effective ~~inputs~~on May 22, ~~reflecting~~2009 ~~management~~when DBT received an up-front payment of certain license fees for certain Microgy projects of Microgy’s ~~own~~choosing, ~~assumptions~~which ~~about~~were paid for by the ~~inputs~~Company’s ~~used~~issuance of its 14% Convertible Notes due January 1, 2014 (the “Notes”) in ~~pricing~~the original principal amount of $3,000,000. The January 1, 2010 interest payment on the ~~asset~~notes orof ~~liability~~$210,000 was not made and EPC is in receipt of notice of default from the note trustee.

As of December 31, 2008, other than cash, cash equivalents and restricted cash none of the Company’s assets or liabilities were being reported at fair value.

In December 2007, the FASB issued SFAS No. 160, Non controlling Interests in Consolidated Financial Statements (“SFAS No. 160”). This statement requires that non controlling interests be reported as stockholders equity, a change that will effect our financial statement presentation of minority interests in our consolidated subsidiaries. The Statement also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary as long as that ownership change does not result in deconsolidation. This statement is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of SFAS 160 and do not expect this statement to have a material impact on our financial position and results of operations.

In March 2008, The FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). SFAS 161 amends and expands the disclosure requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and requires entities to provide enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~values~~Years ~~and~~Ended ~~amounts~~December ~~of gains and losses on derivative contracts~~31, and disclosures about credit-risk-related contingent features and derivative agreements. This statement applies to all entities and all derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 152009, 2008. ~~We are currently evaluating the impact of SFAS 161~~ and do2007 ~~not expect this statement to have a material impact on our financial position and results of operations.~~

~~NOTE~~The ~~D—OTHER~~following ~~CURRENT~~table ~~ASSETS~~provides details regarding the current portion of our long-term debt obligations as of December 31, 2009:

Other current assets consist of the following as of December 31, 2008 and 2007:


	December 31, 2009
Current Portions of Long-Term Debt
California loan related to tax-exempt bonds	$	8,355,699
Texas loan related to tax-exempt bonds		23,088,710
Nebraska loan related to tax-exempt bonds		7,000,000
14% convertible notes		8,000,000
Vehicle loans		19,814

TOTAL	$	46,464,223

Other Current Assets	2008		2007
Prepaid expenses	$	53,214	$	104,685
Deposits and other current assets		6,996		25,509
TOTAL	$	60,210	$	130,194

The following table provides details regarding our long-term debt obligations as of December 31, 2009 and 2008:

NOTE E—PROPERTY, PLANT AND EQUIPMENT


	December 31, 2009		December 31, 2008
Long-Term Debt
Vehicle loans	$	1,432	$	50,023
California loan related to tax-exempt bonds		—		62,425,000
Texas loan related to tax-exempt bonds		—		60,000,000
Nebraska financing lease related to tax-exempt bonds		—		7,000,000

TOTAL	$	1,432	$	129,475,023

~~Property~~Microgy Holdings Debt Obligations—In November 2006, ~~plant~~Microgy Holdings closed a $60,000,000 tax-exempt bond financing through the Gulf Coast Industrial Development Authority of Texas. These bonds were issued at par and ~~equipment~~pay ~~are~~a ~~recorded~~coupon of 7%. The proceeds of the bond offering provided debt financing for our Huckabay Ridge renewable natural gas facilities in Texas. To date we have used $1,200,000 to fund costs of issuance, $15,000,000 to fund construction of our Huckabay Ridge facility and $2,492,000 to fund construction activities at the ~~cost~~Rio ~~less~~Leche ~~accumulated~~and ~~depreciation~~Cnossen projects. In September 2008, Microgy Holdings, LLC closed a $62,425,000 tax-exempt bond financing through the California Statewide Communities Development Authority. These bonds were also issued at par and ~~consists~~pay a coupon of 9%. To date, we have used $1,249,000 to fund costs of issuance. In November of 2009, Microgy Holdings entered into a demand purchase agreement with the ~~following~~bondholders that resulted in redemption or repurchase of $15,005,000 of the Texas bonds and $31,215,000 of the California bonds plus accrued interest. Microgy Holdings failed to make the required semi-annual interest payments due on the Texas and California bonds as of December 1, 2009 from general corporate funds. This failure was deemed to be an item of default by the bondholders and the bondholders accelerated payment of interest and principal of these bonds on December 23, 2009. As a result, the bondholders applied existing restricted cash funds to reduce the amount of obligations outstanding to their current balances at December 31, ~~2008~~2009 and ~~2007:~~pay for accrued interest on the outstanding bonds. The obligations of Microgy Holdings under the Texas and California bond financings are non-recourse to Environmental Power although Environmental Power is required to provide at least 20% of the construction cost of the facility, as well as cover any cost overruns in construction and to fund operations and maintenance prior to achievement of completion. The trustee or bondholders holding 25% of the principal amount of the bonds can seek to begin foreclosure proceedings on the assets, but neither has done so to date.

Property, Plant and Equipment	2008			2007
Machinery and equipment	$	25,073,098			—
Leasehold improvements		102,699			21,192
Office equipment and furniture		265,027			640,063
Less: Accumulated depreciation		(1,508,751	)		(400,084	)
TOTAL	$	23,932,073		$	261,171

Microgy Grand Island, LLC Debt Obligation—In July 2008, Microgy Grand Island LLC, our wholly-owned subsidiary, closed a $7,000,000 tax-exempt bond financing through the City of Grand Island, Nebraska. These

Depreciation expense for the years ended 2008, 2007, and 2006 was $1,153,210, $126,034, and $113,274 respectively.

NOTE F—OTHER ASSETS

Other assets consist of the following as of December 31, 2008 and 2007:

Other Assets	2008		2007
Security deposits		197,569		97,603
TOTAL	$	197,569	$	97,603

NOTE G—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following as of December 31, 2008 and 2007:

Accounts Payable and Accrued Expenses	2008		2007
Accounts payable	$	1,628,955	$	352,984
Accrued dividends payable		667,089		675,000
Accrued compensation		393,024		373,782
Accrued licensing fee		—		350,000
Accrued interest		859,021		—
Accrued expenses		774,807		765,702
TOTAL	$	4,322,896	$	2,517,468

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~NOTE~~Years ~~H—LONG~~Ended ~~TERM~~December ~~DEBT~~31, 2009, 2008 and 2007

~~Long~~ bonds ~~term~~were issued at par and pay a coupon of 7%. The proceeds of the bond offering provided debt financing for the renewable gas facility under construction at Grand Island, Nebraska. These bonds carry certain restrictions and covenants, including reporting requirements and restrictions on the use of the funds. To date, we have used $140,000 to fund costs of issuance and $5,909,000 of the proceeds to fund construction of our Grand Island facility. The obligations of Microgy Grand Island LLC under the Nebraska bond financing are non-recourse to Environmental Power, although Environmental Power is required to provide at least 20% of the construction cost of the facility, as well as to cover any cost overruns in construction and to fund operations and maintenance prior to achievement of completion. On December 311, ~~2008~~2009, ~~and~~the ~~2007~~required ~~consists~~interest payment of: $245,000 was made from the debt service reserve fund of the bonds. The payment of interest from the debt service reserve fund is an item of default which has not been cured. The trustee or bondholders holding 25% of the principal amount of the bonds can accelerate payment of these bonds and begin foreclosure proceedings on the assets but neither has done so to date.

Secured Promissory Notes Payable and Other Obligations	2008		2007
Vehicle loan & capital leases		50,023		103,983
California tax exempt bonds		62,425,000
Texas tax exempt bonds		60,000,000		60,350,000
Nebraska tax exempt bonds		7,000,000		—
TOTAL	$	129,475,023	$	60,453,983

Long-Term Contractual Liabilities & Commitments

~~Tax-Exempt~~The ~~Bond~~following ~~Financings—In November~~table ~~2006,~~shows ~~Microgy Holdings, LLC,~~ our ~~wholly~~long-~~owned~~term ~~subsidiary,~~contractual ~~closed~~liabilities ~~a $60 million tax-exempt bond financing through the Gulf Coast Industrial Development Authority of Texas. The bonds were issued at par~~ and ~~will~~commitments: pay a coupon of 7%. The proceeds of the bond financing will provide debt financing for the construction of four proposed renewable natural gas facilities in Texas being developed by Microgy, Inc. Interest on the bonds is calculated on the basis of a 360 day year of twelve 30 days months and is payable each June 1st and December 1st.

In September 2008, Microgy Holdings, LLC closed a $62.425 million tax-exempt bond financing through the California Statewide Communities Development Authority. These bonds were also issued at par and pay a coupon of 9%. The proceeds of this bond financing will provide debt financing for two of the three natural gas facilities in California being developed by Microgy. The California bonds also have certain covenants related to performance objectives at the Huckabay Ridge facility.


Commitments of Continuing Operations	2010		2011		2012		2013		Total
Operating Leases(1)	$	366,972	$	328,800	$	126,228	$	—	$	822,000
Microgy Commitments(2)		3,000,000		—		—		—		3,000,000
14% Convertible Notes(3)		8,000,000		—		—		—		8,000,000
Tax-Exempt Bonds(4)		38,444,409		—		—		—		38,444,409
Security Deposit(5)		100,000		100,000		100,000		100,000		400,000
Vehicle Loans(6)		19,814		1,476		—		—		21,290

TOTAL	$	49,931,195	$	430,276	$	226,228	$	100,000	$	50,687,699

In(1) ~~July~~We ~~2008,~~are ~~Microgy~~obligated ~~Grand~~under ~~Island~~various ~~LLC,~~non-cancelable ~~our wholly~~operating ~~owned~~leases ~~subsidiary,~~for ~~closed~~office aspace. $7Rent ~~million~~expense ~~tax-exempt~~for ~~bond~~these ~~financing~~operating ~~through~~leases ~~the~~was ~~City~~$272,513, of$371,637, ~~Grand~~and ~~Island~~$424,765, ~~Nebraska.~~in ~~These~~2009, ~~bonds~~2008 ~~were issued at par~~ and ~~pay a coupon of 7%. The proceeds of this bond financing provide debt financing for the renewable gas facility under construction at Grand Island~~2007, ~~Nebraska~~respectively.

~~The~~(2) ~~foregoing~~These ~~obligations~~commitments ~~carry~~relate ~~certain~~to ~~restrictions~~various ~~and~~purchase ~~covenants~~agreements, ~~including reporting requirements~~ and ~~restriction~~include onamounts ~~the~~expected ~~use~~to ofbe ~~funds.~~claimed Asby ofSouthTex ~~December 31,~~Treaters ~~2008,~~for ~~management~~gas ~~believes~~treatment weequipment, ~~are~~ in ~~full~~connection ~~compliance~~ with ~~the~~our ~~covenants~~Microgy ~~and restrictions of all tax-exempt financings~~facilities.

~~NOTE~~(3) ~~I—INCOME~~Although ~~TAXES~~these notes are not due until January 1, 2014, EPC is in default on this obligation and either the trustee or 25% of the bond holders can demand immediate payment.

~~Income~~(4) ~~tax~~Microgy ~~expense~~Holdings ~~consists of~~is in default on the ~~following~~Texas and California bonds and bondholders have accelerated demand for payment of the ~~years~~principal ~~ended~~of ~~December~~ the remaining bonds in the amount of $31,444,409. ~~2008~~Microgy Grand Island is in default on the Nebraska bonds in the amount of $7,000,000 ~~2007~~but ~~and~~neither ~~2006:~~the bondholders nor the trustee has demanded accelerated payment.

ANALYSIS INCOME TAX EXPENSE	2008		2007		2006
Current
Federal		—		—		—
State	$	26,284	$	900	$	427,127
Total current tax expense		26,284		900		427,127
Deferred
Federal		—		—		—
State		—		—		—
Total deferred tax expense		—		—		—
TOTAL INCOME TAX EXPENSE		26,284		900		427,127

(5)	In December 2008, Microgy signed a contract with a customer that required security deposits to protect against failure to deliver product in certain instances.

(6)	We are obligated under various loans for vehicles.

NOTE J—ASSET RETIREMENT OBLIGATION

Asset retirement costs must be capitalized along with the cost of the related long-lived asset because it is required by ASC 450 the “Asset Retirement and Environmental Obligations” Topic of the ASC. The topic also requires that asset retirement costs then be allocated to expense using a systematic and rational method. We have determined that we have an environmental obligation of $174,000 associated with substrate removal at the Huckabay Ridge facility. This amount is included in property, plant and equipment and other liabilities on our balance sheet and is amortized over the life of the related asset.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~Income~~Years ~~taxes~~Ended ~~paid during the years ended~~ December 31, ~~2008~~2009, ~~2007,~~2008 and ~~2006~~2007 ~~amounted to $0, $0, and $38,000, respectively.~~

~~The~~NOTE ~~reconciliation~~K—SHAREHOLDERS’ ~~between~~EQUITY 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, 2008, 2007 and 2006 is as follows:

RECONCILIATION OF TAX (BENEFIT) EXPENSE	2008			2007			2006
Federal tax (benefit) expense at 34%	$	(5,433,344	)	$	(3,799,526	)	$	(3,260,783	)
State tax expense		(26,284	)		(67,485	)		(82,824	)
Valuation allowances		6,083,819			3,856,892			3,737,467
Permanent differences		(597,907	)		11,019			33,267
TOTAL INCOME TAX (BENEFIT) EXPENSE		26,284			900			427,127

The components of the net deferred income tax (asset) liability as of December 31, 2008 and 2007 are as follows:

ANALYSIS OF DEFERRED TAX ASSET ( LIABILITY)	2008			2007
Deferred tax assets
Deferred gain(1)		—		$	967,069
Stocks, warrants and stock appreciation rights	$	762,793			3,114,002
Pre-acquisition net operating loss carry forward of Microgy		497,041			467,000
Federal NOL & AMT Credits		16,910,842			9,632,173
State net operating loss carry forwards		1,402,046			20,400
Deferred revenue		222,934			—
Other, net		116,985			—
Total deferred tax assets		19,912,641			14,200,644
Deferred tax liabilities
Licensed technology rights		(840,596	)		(892,000	)
Original issue discount related to the ArcLight loan		—			(983,271	)
Depreciation and start up costs		(662,853	)		—
Total deferred tax liabilities		(1,503,449	)		(1,875,271	)
Less: valuation allowances		(18,409,192	)		(12,325,373	)
DEFERRED INCOME TAX ASSET (LIABILITY), net		—			—

(1) Deferred tax effect of the sale of the Scrubgrass project for which the net gain was deferred for financial reporting purposes. Gain was recognized in conjunction with disposition of discontinued operations.

As of December 31, 2008, we have federal and state net operating loss carry forwards of $49,737,771 and $32,189,554, respectively, which are available to reduce future taxable income. Of the total net federal operating loss carryforwards, $1,373,468 of these net operating loss carry forwards relate to the acquisition of Microgy. Due to the change of ownership provisions in Section 382 of the Internal Revenue Code, our utilization of these net operating loss carry forwards is limited to $368,000 per year. Federal net operating loss carryforwards expire beginning in 2024 and state net operating loss carryforwards begin to expire in various years between 2013 and 2025.

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below provides an analysis of the activity in the valuation reserve for net operating loss carryforwards for each of the last three years in the period ended December 31, 2008:

Description	Balance atbeginningof period		Additions(charged toincome taxexpense)		Deductions		Balance atend ofperiod
Year Ended December 31, 2008:
Valuation reserve for net operating loss carry forwards	$	12,325,373	$	6,083,819	$	—	$	18,409,192
Year Ended December 31, 2007:
Valuation reserve for net operating loss carry forwards	$	8,468,481	$	3,856,892	$	—	$	12,325,373
Year Ended December 31, 2006:
Valuation reserve for net operating loss carry forwards	$	4,731,014	$	3,737,467	$	—	$	8,468,481

We adopted the provisions of Financial Standards Accounting Board (FASB”) Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN48”) an interpretation of FASB Statement No. 109 on January 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in the valuation allowance or deferred tax asset. At the adoption date of January 1, 2007, we had $10,387,352 of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. At December 31, 2008, we have approximately $19,912,641 of unrecognized tax benefits primarily comprised of federal and state net operating losses.

It is our policy to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2008, we did not have any accrued interest or penalties related to uncertain tax positions. We file income tax returns with federal state and local authorities. The 2003 federal and state returns were closed in 2007 and no material adjustments were identified towards any of our tax positions. Our federal and state tax returns for 2004 to 2007 are subject to future examination by relevant tax authorities.

NOTE J—SHAREHOLDERS’ EQUITY

Preferred Stock

On November 9, 2006, we issued 281,241 units, consisting of (i) one share of series A 9% cumulative convertible preferred stock, referred to as the series A preferred stock, with each share initially convertible into 10 shares of common stock, and (ii) detachable warrants to purchase five shares of common stock exercisable at a price of $5.522 per share, for a purchase price of $53.335 per unit. We received approximately $14.0,000,000 ~~million~~ in proceeds from this offering after paying fees and expenses. This financing is referred to below as the series A financing.

Relevant Material Terms

The terms and provisions of the series A preferred stock are set forth in the Certificate of Designations, Rights and Preferences of Series A Cumulative Convertible Preferred Stock (the “Certificate of Designations”). Certain material terms of the series A preferred stock relevant to this response are summarized below:

The securities offered and sold to the Purchasers in the series A financing were not registered under the Securities Act of 1933, as amended (the “Securities Act”) and were sold in reliance upon the exemption from securities registration afforded by Regulation D under the Securities Act. All of the purchasers represented to us that they were “accredited investors”, as defined in Rule 501 of Regulation D. In connection with the series A financing, we entered into a subscription agreements with the purchasers, pursuant to which we were required to file a registration statement with the Securities and Exchange Commission covering the resale of the common stock issuable upon conversion of the series A preferred stock and issuable upon exercise of the warrants and the warrants issued to one of the placement agents.

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

financing, we entered into a subscription agreements with the purchasers, pursuant to which we were required to file a registration statement with the Securities and Exchange Commission covering the resale of the common stock issuable upon conversion of the series A preferred stock and issuable upon exercise of the warrants and the warrants issued to one of the placement agents.

Dividends: Each share of series A preferred stock has an initial stated value of $52.71 (the “Stated Value”), and accrues dividends at a rate of 9% per annum on the Stated Value, payable semiannually in arrears on January 1 and July 1 and accruing daily on the basis of 12 thirty-day months in a year of 360 days. The dividends are cumulative and payable in cash out of funds legally available.

Liquidation: Upon any liquidation, dissolution or winding up of Environmental Power, whether voluntary or involuntary, the holders of the series A preferred stock are entitled to receive an amount equal to 200% of the Stated Value per share, plus all accrued but unpaid dividends thereon and any accrued but unpaid liquidated damages, if any, for each share of series A preferred stock, before any distribution or payment shall be made to the holders of any other equity securities of Environmental Power, and if the assets of Environmental Power are insufficient to pay in full such amounts, then the entire assets of Environmental Power would be distributed among the holders of series A preferred stock pro-rata in accordance with the respective amounts due to each.

Voting: The series A preferred stock acquired by the purchasers was convertible into 2,812,410 shares of common stock and the holders of the series A preferred stock vote on an as-converted basis with the holders of our common stock. As a result of the issuance of shares of our common stock in the public offering completed in October 2007 at a price per share less than the conversion price of the series A preferred stock, the series A preferred stock and a resulting decrease in such conversion price, is now convertible into 2,823,~~660~~659 shares of common stock.

Conversion: Subject to limitations set forth in the Certificate of Designations, the holders of the series A preferred stock may convert all or any portion of their shares of series A preferred stock into shares of common ~~stock at any time. The shares of series A~~ preferred stock were convertible at a conversion price of $5.27 per share at the time of issuance. Pursuant to the guidance in paragraph 5 of EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, we allocated the proceeds from the Series A financing between the Series A Preferred Stock and the warrants based upon their estimated relative fair values as of the closing date, resulting in $10,156,021 being allocated to the series A preferred stock and $3,385,340 being allocated to the warrants. We then calculated the intrinsic value of the beneficial conversion feature embedded in the series A preferred stock. The beneficial conversion of $4,131,022 was recognized as an additional discount on the series A preferred stock which amount was immediately accreted and treated as a deemed dividend to the holder of the shares of series A preferred stock set forth in the Certificate of Designation

Environmental Power Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009, 2008 and 2007

stock at any time. The shares of series A preferred stock were convertible at a conversion price of $5.27 per share at the time of issuance. We allocated the proceeds from the Series A financing between the Series A Preferred Stock and the warrants based upon their estimated relative fair values as of the closing date, resulting in $10,156,021 being allocated to the series A preferred stock and $3,385,340 being allocated to the warrants. We then calculated the intrinsic value of the beneficial conversion feature embedded in the series A preferred stock. The beneficial conversion of $4,131,022 was recognized as an additional discount on the series A preferred stock which amount was immediately accreted and treated as a deemed dividend to the holder of the shares of series A preferred stock set forth in the Certificate of Designation.

In October 2007 the preferred stock conversion price was reduced to $5.25 per share as a result of anti-dilution adjustments triggered by the sale of common stock in our October 2007 public offering. The change in the conversion price of the preferred stock resulted in additional beneficial conversion feature which was recorded as a $57,148 loss available to common shareholders.

If the closing price of the common stock for each of any ten consecutive trading days exceeds $4.00 (as adjusted for stock splits, recapitalizations and the like) above the then effective Conversion Price, we may, upon written notice, cause each holder of series A preferred stock to convert all or part of such holder’s shares of series A preferred stock, provided that certain other conditions relating to trading volume and the effectiveness of a registration statement covering the underlying shares have been met.

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Redemption or Change in Dividend Rate upon Certain Triggering Events

The holders of the series A preferred stock are entitled to elect to require the company to redeem the preferred stock upon certain “Triggering Events”. Each of the following constitutes a “Triggering Event”:

(i) the failure of the registration statement to be declared effective by the SEC on or prior to the ~~180th~~180 th day after the original issue date of the series A preferred stock, other than as a result of an allowed delay;

(ii) if the registration statement lapses or the holders are not otherwise permitted to resell the underlying shares of common stock, other than as a result of an allowed delay or through an act or omission on their part for more than an aggregate of 30 calendar days (which need not be consecutive calendar days) during any 12 month period, unless the holders are otherwise able to resell underlying shares pursuant to an exemption from registration without any volume limitations;

(iii) we shall fail to deliver certificates representing shares of common stock issuable upon a conversion of the series A preferred stock on or prior to the tenth (10^th) trading day after such shares are required to be delivered;

(iv) we shall fail for any reason to pay in full the amount of cash due pursuant to a buy-in (as defined below in the certificate of designations for the series A preferred stock) within ten calendar days after notice therefore is delivered hereunder;

(v) we shall redeem more than a de minimis number of our junior securities, with certain exceptions;

(vi) we shall be party to a change of control transaction, as defined;

(vii) there shall have occurred a bankruptcy event, as defined;

(viii) ~~Our~~our common stock shall fail to be listed or quoted for trading on athe ~~specified~~NYSE ~~trading~~Amex, The Nasdaq Capital Market, The Nasdaq ~~market~~Global Market or the New York Stock Exchange for more than five consecutive trading days; or

~~(ix)~~72 any final monetary judgment, writ or similar final process, not subject to further appeal, shall be entered or filed against Environmental Power, any subsidiary for which there is recourse to Environmental Power or any of their respective properties or other assets for greater than $2,500,000, and such judgment, writ or similar final process shall remain un-vacated, un-bonded, un-stayed, or un-appealed for a period of 60 calendar days.

Each holder of series A preferred stock will have the right (a) in the case of the third, fourth, fifth, sixth and seventh Triggering Events described above, to cause us to redeem all of such holders shares of series A preferred stock, or (b) at the option of the holder in the case of any Triggering Event as a result of which the holder does not choose redemption, to increase the dividend rate on all of the outstanding series A preferred stock held by such Holder to 16% per annum thereafter until such time as the Triggering Event(s) is cured. The amount payable by us upon redemption in the case of an applicable Triggering Event will be 120% of the stated value per share of series A preferred stock (or 150% of the stated value per share of series A preferred stock in the case of the sixth Triggering Event as described above).

Given that the redemption provision described above does not embody an unconditional obligation requiring us to redeem the instrument at a specified or determinable date or upon an event certain to occur, the series A preferred stock is not a mandatory redeemable financial instrument. Therefore, we determined the guidance in FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which would require classification as a liability, does not apply. Rule 5-02.28 of Regulation S-X requires securities with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity. The redemption rights described above were considered outside of our control. Therefore, we recorded the portion of the proceeds attributable to the series A preferred stock as temporary equity pursuant to EITF Topic D-98, Classification and Measurement of Redeemable Securities. The carrying value of the series A preferred stock was not accreted to its redemption value as the occurrence of the redemption event was not considered probable.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~Warrants:~~Years InEnded ~~addition~~December ~~to the issuance of shares of series A preferred stock~~31, ~~we issued warrants to purchase an aggregate of up to 1~~2009,~~406,205~~ ~~shares~~2008 of common stock at a per share exercise price of $5.52 per share. The warrants have a term of exercise expiring 5 years from their date of issuance. The warrants require physical settlement or, under certain limited circumstances, net-share settlement. We determined that the detachable warrants did not meet the definition of a derivative under FAS 133 paragraph 11(a) because they were considered contracts issued or held that are both (1) indexed to its own stock and ~~(2) classified~~2007 in stockholders’ equity in its statement of financial position. They do not require net-cash settlement nor do they give the counterparty a choice of net-cash settlement or settlement in shares. We have considered paragraphs 12-32 of EITF 00-19 and concluded that the terms of the warrants satisfy all criteria for classification as equity.

(ix) any final monetary judgment, writ or similar final process, not subject to further appeal, shall be entered or filed against Environmental Power, any subsidiary for which there is recourse to Environmental Power or any of their respective properties or other assets for greater than $2,500,000, and such judgment, writ or similar final process shall remain un-vacated, un-bonded, un-stayed, or un-appealed for a period of 60 calendar days.

Each holder of series A preferred stock will have the right (a) in the case of the third, fourth, fifth, sixth, and seventh Triggering Events described above, to cause us to redeem all of such holders shares of series A preferred stock, or (b) at the option of the holder in the case of any Triggering Event, including a Triggering Event as a result of which the holder does not choose redemption, to increase the dividend rate on all of the outstanding series A preferred stock held by such holder to 16% per annum thereafter until such time as the Triggering Event(s) is cured. The amount payable by us upon redemption in the case of an applicable Triggering Event will be 120% of the stated value per share of series A preferred stock (or 150% of the stated value per share of series A preferred stock in the case of the sixth Triggering Event as described above). The delisting of our common stock from The Nasdaq Capital Market would be a Triggering Event giving the holders of the series A preferred stock the right to increase the dividend rate to 16% if we fail to list our common stock on one of the other specified trading markets and such holders may claim other damages.

Given that the redemption provision described above does not embody an unconditional obligation requiring us to redeem the instrument at a specified or determinable date or upon an event certain to occur, the series A preferred stock is not a mandatory redeemable financial instrument. Therefore, we determined the guidance in ASC 480 “Distinguishing Liabilities from Equity” which would require classification as a liability, does not apply. Rule 5-02.28 of Regulation S-X requires securities with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity. The redemption rights described above were considered outside of our control. Therefore, we recorded the portion of the proceeds attributable to the series A preferred stock as temporary equity. The carrying value of the series A preferred stock was not accreted to its redemption value as the occurrence of the redemption event is not considered probable.

Warrants: In addition to the issuance of shares of series A preferred stock, we issued warrants to purchase an aggregate of up to 1,406,205 shares of common stock at a per share exercise price of $5.52 per share which was subsequently reduced to $5.25 per share as a result of anti-dilution adjustments triggered by the sale of common stock in our October 2007 public offering. The warrants have a term of exercise expiring 5 years from their date of issuance. The warrants require physical settlement or, under certain limited circumstances, net-share settlement. We determined that the detachable warrants did not meet the definition of a derivative because they were considered contracts issued or held that are both (1) indexed to its own stock and (2) classified in stockholders’ equity in its statement of financial position. They do not require net-cash settlement nor do they give the counterparty a choice of net-cash settlement or settlement in shares.

We allocated the proceeds between the stock and the warrants based upon their estimated fair values as of the closing date, resulting in $3,385,340 being allocated to the warrants. We determined the fair value of the warrants using the Black-Scholes option pricing model with the following assumptions: weighted average risk free rate of 4.69%; volatility of 77% and a dividend yield of 0%.

In an effort to help us identify candidates for anaerobic digester projects, we ~~have~~ entered into a business development agreement ~~(BDA)~~ with Cargill. In consideration of Cargill’s services (see Note J), under the BDA, we will grant to Cargill warrants to purchase shares of our common stock equal to 1% of the outstanding shares of our common stock on a fully-diluted basis on such date as Cargill delivers executed project commitments with project candidates relating to anaerobic digester projects covering 10,000 cow equivalents, as defined, and thereafter to issue similar warrants on each succeeding date on which the same warrant issuance conditions have again been satisfied, up to a maximum of 4.99% of the outstanding shares of common stock on such issuance date subject to all warrants in the aggregate. The warrants will be exercisable for a period of five years from the issuance date, and will have an exercise price per share equal to 75% of the closing price of our common stock on the last trading day prior to the issuance date. During 2007, we granted Cargill warrants to purchase 175,912 shares of our common stock at an exercise price of $5.37 per share under this arrangement. These warrants were valued using the Black- Scholes method, and determined to have a value of $907,288. We have capitalized this development cost and this amount is currently held in our construction in progress account. In 2009, we determined the asset was impaired and wrote off $689,000 of this amount.

~~Offering~~73 costs: One of the placement agents in the series A financing received a warrant to purchase 168,745 shares of common stock at a purchase price of $5.27 per share, exercisable for a period of five years. We determined the fair value of the warrants using the Black-Scholes option pricing model with the following assumptions: weighted average risk free rate of 4.8%; volatility of 77% and a dividend yield of 0%. The fair value of the warrants of $508,628 was treated as an offset to the proceeds of the series A financing and credited to additional paid in capital.

WeEnvironmental ~~maintain~~Power ~~incentive compensation~~Corporation ~~plans under which restricted stock awards, stock options, stock units~~ and ~~stock~~Subsidiaries appreciation rights may be granted to employees, directors and independent contractors. To date, we have granted stock options, stock appreciation rights and restricted stock awards. Stock options under the plans provide for either nonqualified stock options or incentive stock options. Stock options are granted at the market price on the date of grant and generally vest at a rate of 25%-33% per year. The stock options generally expire 10 years from the date of grant. We issue new shares of common stock upon exercise of stock options.

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009, 2008 and 2007

Offering costs: One of the placement agents in the series A financing received a warrant to purchase 168,745 shares of common stock at a purchase price of $5.27 per share, which was subsequently reduced to $5.25 per share as a result of anti-dilution adjustments triggered by the sale of common stock in our October 2007 public offering. The warrants are exercisable for a period of five years. We determined the fair value of the warrants using the Black-Scholes option pricing model with the following assumptions: weighted average risk free rate of 4.8%; volatility of 77% and dividend yield of 0%.

Non-cash stock based compensation expense

We maintain incentive compensation plans under which, stock options, stock units, stock appreciation rights (“SARs”) and restricted stock awards may be granted to employees, directors and independent contractors. In 2007 we granted stock options and SARs only. In 2008 and 2009 we granted only SARs and restricted stock to employees and directors.

Stock options under the plans provide for either nonqualified stock options or incentive stock options. Stock options are granted at the market price on the date of grant and generally vest at a rate of 25%—33% per year. The stock options generally expire 10 years from the date of grant. We issue new shares of common stock upon exercise of stock options.

Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated based on our historical experience and future expectations.

Valuation Assumptions: The fair value of stock options and SARs granted during the years ended December 31, 2009, 2008 and 2007 was estimated using the Black-Scholes pricing model with the following weighted average assumptions:


	Years Ended
	December 31, 2009			December 31, 2008			December 31, 2007
Fair Market Per Share	$	0.26		$	2.98		$	4.49
Assumptions
Risk-free rate of return		2.71	%		3.04	%		4.37	%
Volatility		79.37	%		64.92	%		77.15	%
Expected annual dividend yield		0.00	%		0.00	%		0.00	%
Option and SARs Expected Term (years)		5.72			4.65			5.14

The Black-Scholes model requires the input of subjective assumptions and these assumptions can vary over time. Employee stock-based compensation expense recognized was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. The forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. A forfeiture rate of 0% for directors, 0% to 25% for executive officers and 0% to 16% for other employees is applied to the stock-based compensation expense, determined through historical experience of employee stock options. We base our determination of expected volatility primarily on our assessment of the historical volatility of our common stock.

The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The dividend yield assumption is based on our history and expectation of future dividend payouts. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.

Environmental Power Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009, 2008 and 2007

Non-cash compensation:

The components of non-cash compensation for the three years in the period ended December 31, 2009 is as follows:


	Years Ended
	December 31, 2009		December 31, 2008		December 31, 2007
Stock options	$	23,342	$	394,244	$	2,046,032
SARs		290,830		1,492,000		752,000
Restricted stock		103,771		64,743		—

Total non-cash stock based compensation expense	$	417,943	$	1,950,987	$	2,798,032

Stock option transactions during the years ended December 31, 2007, 2008 and 2009 are summarized as follows:


Outstanding Options	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term Years	Aggregate Intrinsic Value
Balance at December 31, 2006	3,027,107		$	5.93	6.75	$	8,859,395
Issued in 2007	—
Exercised	(271,324	)		5.41
Expired in 2007	(238,785	)		5.68	—

Outstanding at December 31, 2007	2,516,998		$	5.93	5.37	$	1,098,789
Issued in 2008	—
Exercised	—
Expired in 2008	(203,659	)		6.76	—

Outstanding at December 31, 2008	2,313,339		$	5.76	5.16	$	0
Issued in 2009	—
Exercised in 2009	—
Expired in 2009	(345,449	)		7.09	—

Outstanding at December 31, 2009	1,967,890		$	5.59	4.00	$	0

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. This amount is changed based on the fair market value of our stock. At December 31, 2009 there was no unrecognized expense related to stock options.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~Valuation~~Years ~~Assumptions:~~Ended ~~The fair value of stock options granted during the years ended~~ December 31, ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007 ~~was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:~~

	Year Ended
	December 31,2008			December 31,2007			December 31,2006
Fair Market Per Share	$	2.98		$	4.49		$	4.47
Assumptions
Risk-free rate of return		3.04	%		4.37	%		4.48	%
Volatility		64.92	%		77.15	%		78.32	%
Expected annual dividend yield		0.00	%		0.00	%		0.00	%
Option Life (years)		4.65			5.14			4.00

Stock Appreciation Rights

~~The~~In ~~employee~~2007, ~~stock-based~~the ~~compensation~~company ~~expense~~began ~~recognized~~granting ~~under~~SARs ~~FAS123R~~to ~~and~~employees. ~~presented~~SARs inare ~~the disclosure~~contractual ~~required~~rights ~~under~~that ~~FAS~~entitle ~~123~~the ~~was~~holder ~~determined~~to ~~using~~receive the ~~Black-Scholes~~appreciation ~~option~~in value ~~valuation~~on ~~model.~~shares ~~Option~~of ~~valuation~~employer ~~models~~stock ~~require~~from the ~~input~~grant ofdate. ~~subjective~~Any ~~assumptions~~such ~~and~~appreciation ~~these~~can ~~assumptions~~be ~~can~~paid ~~vary~~in ~~over~~either ~~time.~~cash ~~Employee~~or ~~stock-based~~shares ~~compensation~~upon ~~expense recognized~~exercise, ~~was~~at ~~calculated~~our ~~based~~election. onManagement ~~awards~~currently ~~ultimately~~plans ~~expected~~to continue to ~~vest~~settle SARs exclusively with equity and ~~has~~as ~~been~~such ~~reduced~~these ~~for~~awards are ~~estimated~~classified ~~forfeitures~~as equity. ~~FAS123R~~The ~~requires~~vesting ~~forfeitures~~period for SARs ranges from immediately to bea ~~estimated~~period of 3 years. SARs are granted at the ~~time~~market price of ~~grant~~the ~~and~~stock ~~revised,~~on ifthe ~~necessary,~~date inof ~~subsequent~~grant ~~periods~~and ifexpire ~~actual forfeitures~~10 ~~differ~~years from ~~those~~the ~~estimates~~date of grant. AAt ~~forfeiture~~December 31, ~~rate~~2009 729,671 ofshares 0%SARs towere ~~25%~~vested isand ~~applied~~exercisable toand ~~the~~424,863 ~~stock-based~~SARs ~~compensation~~were ~~expense,~~not ~~determined~~yet ~~through~~vested. ~~historical~~At ~~experience~~December 31, of2009 ~~employee~~there ~~stock~~was ~~options.~~$200,531 Wein ~~base~~unrecognized ~~our~~expense ~~determination~~related ofto SARs, which is expected ~~volatility primarily~~to onbe ~~our~~recognized ~~assessment~~over a weighted average period of 0.9 years. SARs transactions during the ~~historical~~years ~~volatility~~ended ofDecember 31, ~~our~~2007, ~~common~~2008 ~~stock.~~and 2009 are summarized as follows:

The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The dividend yield assumption is based on our history and expectation of future dividend payouts. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.


	Total Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Balance at December 31, 2006	—			—		—
Issued in 2007	431,750		$	6.15	$	9.50
Forfeited in 2007	(5,000	)		7.75		—

Balance at December 31, 2007	426,750			6.17		9.48
Issued in 2008	428,202			5.31		—
Forfeited in 2008	(101,218	)		6.49		—

Balance at December 31, 2008	753,734			5.61		9.00
Issued in 2009	474,750			0.45		10.00
Forfeited in 2009	(73,950	)		6.92		—

Balance at December 31, 2009	1,154,534			3.41		8.80

Restricted Stock ~~option transactions during year ended 2008, 2007 and 2006 are summarized as follows:~~

Outstanding Options	Shares		WeightedAverageExercisePrice		WeightedAverageRemainingContractualTermYears	AggregateIntrinsicValue
Balance at January 1, 2006	2,780,797		$	5.81	6.87	$	3,801,585
Issued in 2006	653,000			6.69	9.51
Exercised	(105,054	)		6.72
Expired in 2006	(301,636	)		6.24	—
Outstanding at December 31, 2006	3,027,107		$	5.93	6.75	$	8,859,395
Issued in 2007	—
Exercised	(271,324	)		5.41
Expired in 2007	(238,785	)		5.68	—
Outstanding at December 31, 2007	2,516,998		$	5.93	5.37	$	1,098,789
Issued in 2008	—
Exercised	—
Expired in 2008	(203,659	)		6.76	—
Outstanding at December 31, 2008	2,313,339		$	5.76	5.16	$	0

We began making restricted stock awards to senior management in 2008. The expense is determined using the market price of the stock on the day the restricted stock is issued. In August 2009, the Company issued 100,000 shares of restricted stock to employees, which will vest ratably in annual installments over three years, commencing on the first anniversary of the grant date. In May 2008, the Company issued 44,750 shares of restricted stock to employees which vest in annual installments over two years. During the years ended December 31, 2009, 2008 and 2007, $103,771, $64,743 and $0 of compensation expense was recognized, respectively. In May 2009, the Company repurchased 6,013 shares of vested restricted stock from employees at $0.50 per share to pay for payroll taxes. A summary of non-vested restricted stock as of December 31, 2009, 2008 and 2007 is as follows:


	Total Shares		Weighted Average Fair Market Value at Grant Date
Outstanding at December 31, 2007	—			—
Granted	44,750		$	5.52
Vested	—			—
Cancelled	(9,500	)		5.52

Outstanding at December 31, 2008	35,250			5.52
Granted	100,000			0.46
Vested	(17,625	)		5.52
Cancelled	—			—

Balance at December 31, 2009	117,625			1.22

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~The~~Years ~~aggregate~~Ended ~~intrinsic~~December ~~value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price and the exercise price~~31, ~~multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31~~2009, 2008. ~~This amount~~and is2007 ~~changed based on the fair market value of our stock. No options were exercised during the year ended December 31, 2008.~~

~~The~~As ~~total~~of ~~compensation~~December 31, ~~cost~~2009, ~~related~~there towas ~~unvested~~$79,270 ~~awards~~of ~~not~~total ~~yet~~unrecognized ~~recognized~~stock-based compensation isexpense ~~$701,232.~~related ~~This~~to ~~amount~~non-vested ~~will~~restricted bestock ~~charged~~arrangements ~~against~~granted ~~income~~under ~~over~~ the ~~next~~2006 ~~three years~~plan. AsThe ofexpense ~~December 31,~~is ~~2008~~expected ~~there~~to ~~were~~be ~~439,000~~recognized ~~shares~~over ofa ~~common~~weighted-average ~~stock~~period ~~available for~~of ~~issuance~~2.74 ~~pursuant to future stock awards~~years.

AShares ~~summary~~or ofSARs ~~the~~available ~~status~~for ofgrant ~~our unvested share awards during fiscal years 2006, 2007 and 2008 is as follows:~~

	Shares		Weighted Average GrantDate Fair Value
Unvested at January 1, 2006	797,690
Awards granted	2,227,950		$	4.17
Awards vested	(1,685,934	)
Awards canceled or expired	(363,049	)
Unvested at December 31, 2006	976,657
Awards granted	—			n/a
Awards vested	(517,539	)
Awards canceled or expired	(238,785	)
Unvested at December 31, 2007	220,333
Awards granted	—			n/a
Awards vested	(93,385	)
Awards canceled or expired	(32,847	)
Unvested at December 31, 2008	94,101

Under existing plans, the Company could issue up to a total of 617,750 additional options and restricted shares. Since SARs do not represent the right to acquire the number of underlying shares, and the number of shares needed to settle the obligation is dependent on the strike price at the date of exercise the number of SARs available for issuance is not determinable.

Warrants

The Company had outstanding warrants of 1,838,862 ~~and 1,860,292~~ as of December 31, ~~2008~~2009 and ~~December 31, 2007, respectively~~2008. The weighted average exercise ~~prices~~price ~~were~~was $~~4.38 and $~~5.38 as of December 31, ~~2008~~ 2009 and ~~December 31, 2007, respectively~~2008. The weighted contract term has 21.8 years remaining as of December 31, ~~2008~~2009.

~~Stock~~Dividends ~~Appreciation Rights~~

InSince ~~2007~~December 2000, ~~the~~our ~~company~~Board ~~began~~of ~~granting~~Directors ~~stock~~has ~~appreciation~~not ~~rights,~~declared dividends ~~known~~on asour ~~SARs,~~common ~~to employees~~stock. ~~SARs~~Due ~~are contractual rights that entitle the holder~~ to ~~receive~~ the ~~appreciation~~acquisition ~~in value on shares~~ of ~~employer~~Microgy ~~stock~~and ~~from~~anticipated ~~the~~expansion ~~grant~~of ~~date.~~its ~~Any~~business, ~~such~~our ~~appreciation~~Board ~~can~~of beDirectors ~~paid~~has inconcluded ~~either~~that available cash orflows ~~shares~~should ~~upon~~be ~~exercise,~~redirected ~~at our election. Management currently plans~~ to ~~continue~~operating ~~to settle SARs exclusively with equity~~ and asinvesting ~~such~~activities ~~these~~for ~~awards~~the ~~are~~foreseeable future, ~~classified~~except asto ~~equity.~~the Inextent ~~2007~~of ~~and~~cash ~~2008,~~dividends ~~all~~required ~~SARs~~to ~~exercises~~be ~~were~~ paid inon outstanding shares. ~~There~~of ~~were~~our noseries ~~exercises~~A ofpreferred ~~SARs in 2008~~stock. WeIn ~~granted 431~~addition,~~750~~ ~~and~~the ~~428,202~~terms ~~SARs~~of inour ~~2007~~series ~~and~~A ~~2008,~~preferred ~~respectively.~~stock ~~We currently~~prohibit ~~have~~the ~~753,734~~payment ~~SARs outstanding, which have a weighted average exercise price~~ of ~~$5.61~~dividends ~~and~~on aour ~~weighted~~common ~~average~~stock ~~remaining~~while ~~contractual~~any ~~term~~ shares of 9our ~~years.~~series WeA ~~recognized~~preferred ~~$1,492,000~~stock ~~and~~remain ~~$752,000~~outstanding inor ~~non~~any ~~cash~~accrued ~~compensation~~dividends ~~expense~~on ~~related to SARs for~~ the ~~years~~series ~~ending~~A ~~December 31,~~preferred ~~2008~~stock ~~and~~remain ~~2007, respectively~~unpaid. ~~The vesting period for SARs ranges~~

In October of 2006, the Company issued 281,241 shares of the series A preferred stock at an aggregate purchase price of $15,000,000. Dividend payments on the preferred stock are due on January 1^st and July 1^st of every year. Because the Company did not pay the July 1, 2009 series A preferred stock dividends as required, the shareholders may have a claim for non-payment. The Company did not have legally available funds for the January 1, 2010 dividend payment. To the extent that the Company does not have legally available funds for a dividend payment, the dividend amount accrues and is payable at the next dividend date on which the Company has legally available funds. In order to account for this dividend, the company has accrued $1,334,179 for the period from January 1, 2009, the date of the last dividend payment of $667,090 through December 31, 2009. The company paid $1,326,271 in preferred dividends in the year ended December 31, 2008.

NOTE L—FAIR VALUE OF FINANCIAL INSTRUMENTS

A contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. Instead a two-step model is applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception under this topic. When we adopted new guidance with respect to the definition of (a) above on January 1, 2009, we identified outstanding warrants that required liability classification because of certain provisions that may result in an adjustment to their exercise price. Accordingly, these warrants were reclassified as liabilities as of January 1, 2009. The result was a decrease in additional paid in capital as of January 1, 2009 of $ 3,893,968, an increase in retained earnings of $3,726,591, and a liability of $167,377. The liability is required to be marked to fair value as of each reporting date until the expiration or exercise of the instruments. The amount recorded in other income on the accompanying statements of operations related to these outstanding warrants for the year ended December 31, 2009 was $161,001.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~from~~Years ~~immediately~~Ended toDecember ~~a period of 3 years. In 2007~~31, ~~we had 426~~2009,~~750~~ ~~SARs~~2008 ~~outstanding, which had a weighted average exercise price of $6.17~~ and a2007 ~~weighted average remaining contractual term of 9.48 years.~~

~~Restricted~~We ~~Stock~~use the Black-Scholes pricing model to calculate fair value of our warrant liabilities. Key assumptions used to apply this model are as follows:

In 2008, we issued 44,750 shares of restricted stock with a fair market value of $5.52 and an intrinsic value of $5.51 per share. The total 2008 non-cash compensation expense for these shares of restricted stock was $64,743. The vesting period is over two years. As of December 31, 2008, there were 35,250 shares of restricted stock outstanding.


	January 1, 2009			December 31, 2009
Risk free interest rate		1	%		1	%
Expected life		2.8 years			1.8 years
Expected volatility of common share price		66	%		106	%
Common share price	$	0.63		$	0.19

~~Dividends~~The Company adopted new guidance that defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements as of January 1, 2008. The new standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. The definition of fair value focuses on an exit price which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

~~Since~~The ~~December~~fair ~~2000,~~value ~~our~~framework ~~Board~~requires ofa ~~Directors~~categorization ~~has not declared dividends on its common stock. Due to the acquisition~~ of ~~Microgy~~assets and ~~anticipated~~liabilities ~~expansion~~into ofthree ~~its~~levels ~~business,~~based ~~our~~upon ~~Board~~the ofassumptions ~~Directors~~(inputs) ~~has~~used ~~concluded~~to ~~that~~price ~~available~~the ~~cash~~assets ~~flows should be redirected to operating~~ and ~~investing~~liabilities. ~~activities~~Level ~~for~~1 ~~the~~provides ~~foreseeable future, except to~~ the ~~extent~~most ofreliable ~~cash~~measure ~~dividends required to be paid on outstanding shares~~ of ~~our~~fair ~~series A preferred stock. In addition~~value, ~~the~~whereas ~~terms~~Level of3 ~~our~~generally ~~series~~requires Asignificant ~~preferred~~management ~~stock~~judgment. ~~prohibit~~The ~~the payment of dividends on our common stock while any shares of our series A preferred stock remain outstanding or any accrued~~three ~~dividends~~levels onare ~~the~~defined ~~series~~as Afollows: ~~preferred stock remain unpaid~~

In• ~~October~~Level of 2006, the company issued 281,241 shares of the series A preferred stock at an aggregate purchase price of $15 million. Dividend payments on the preferred stock are due on January 1st and July 1st of every year. In order to account for this dividend, the company has accrued $667,089 for the period from July 1,: ~~2008,~~Unadjusted ~~the~~quoted ~~date~~prices ~~of the previous dividend payment, through December 31, 2008. The company paid $1,326,271~~ in ~~preferred~~active ~~dividends~~markets infor ~~the~~identical ~~year~~assets ~~ended~~and ~~December 31, 2008~~liabilities.

~~Other~~• ~~Equity~~Level ~~Transactions~~2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

We• ~~have~~Level ~~outstanding~~3: ~~notes receivable~~Unobservable ~~from~~inputs ~~current~~reflecting ~~and~~management’s ~~former~~own ~~officers~~assumptions ~~and~~about ~~directors~~the ~~for~~inputs ~~shares~~used ~~purchased~~ in ~~connection~~pricing ~~with~~ the ~~1990~~asset ~~Stock~~or ~~Plan and 1993 Director Plan which amounted to $638,219 as of both December 31, 2008 and 2007~~liability. 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. In accordance with company policy and applicable law, we no longer make loans to our officers and directors.

The following table presents the assets and liabilities carried at fair value on December 31, 2009.


	Total Gains (Losses)			Fair Value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Non-Recurring
Long-lived assets held and used (construction in progress)	$	(21,403,506	)	$	280,000	$	—	$	280,000	$	—
Recurring
Warrant liabilities		161,101			6,376		—		6,376		—

Construction in progress for future projects was written down to the fair value of $280,000, resulting in an impairment charge of $21,404,506 which was included in earnings. During the year ended December 31, 2009 the Company determined that certain construction in progress amounts that had been carried at cost on the Company’s balance sheet were impaired. Based upon information known to the Company, the fair value of these investments under the criteria of this standard, were not recoverable except for a land value and one of the projects and the Company recognized a loss on these investments. For additional information see footnote N—Impairment of Assets.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~NOTE~~Years ~~K—COMMITMENTS~~Ended December 31, 2009, 2008 and 2007

~~The~~We ~~following~~have ~~table~~concluded ~~shows~~that ~~all~~it is impractical to estimate the fair value of ~~our~~(1) 9% California ~~long~~tax-exempt ~~term~~bonds ~~liabilities~~(2) 7% Texas tax-exempt bonds and ~~commitments:~~(3) 7% Nebraska tax-exempt bonds. Current markets for these securities are illiquid and there are few or any comparable transactions being completed. In addition, the current credit profiles of Environmental Power, Microgy Holdings and Microgy Grand Island, the existence of limited restricted funds that may be used as collateral for these bonds, the current state of projects that these bonds are financing and the fact that these bonds are in default makes it impractical to calculate a fair value of these instruments using management assumptions. Management is unable to observe comparable transactions.

Commitments of ContinuingOperations	2009		2010		2011		2012		2013	Thereafter	Total
Operating Leases(1)	$	336,672	$	336,672	$	298,500	$	111,078	—	—	$	1,082,922
Microgy Commitments(2)		3,000,000		—		—		—	—	—		3,000,000
Tax Exempt Bonds(3)		10,308,250		10,308,250		10,658,250		11,603,750	11,606,350	285,416,450		339,901,300
Security Deposit(4)		250,000		100,000		100,000		100,000	100,000			650,000
Vehicle Loan and Other Capital Leases(5)		30,347		18,829		—		—	—	—		49,176
TOTAL	$	13,925,269		10,763,751		11,056,750		11,814,828	11,706,350	285,416,450	$	344,683,398

We have also concluded it is impractical to estimate the fair value of the $8,000,000 in 14% convertible notes issued in March and May 2009 because there are no recent, similar transactions in the marketplace for comparison and the fact that we have received notice of default with respect to these notes.

1Management Wehas ~~are~~concluded ~~obligated~~that ~~under~~the ~~various~~carrying ~~non-cancelable~~value ~~operating~~of ~~leases~~accounts ~~for~~receivable ~~office space~~ and ~~automotive~~accounts ~~vehicles.~~payable ~~Rent~~approximate ~~expense~~fair ~~for these operating leases was $371,637, $424,765, and $286,501, in 2008, 2007 and 2006, respectively~~value.

2NOTE ~~These~~M—NOTES ~~commitments~~RECEIVABLE ~~relate~~FROM toCURRENT ~~various~~DIRECTORS ~~purchase~~AND ~~agreements~~FORMER OFFICER AND DIRECTOR—We have outstanding notes receivable from current directors and a former officer and director for shares purchased in connection with stock option plans in the amount of $638,219 as of December 31, 2009 and ~~include~~December 31, ~~amounts~~2008. ~~expected~~These tonotes, bepartially ~~claimed~~secured by ~~SouthTex~~the ~~Treaters~~underlying ~~for~~shares ~~gas~~of ~~treatment~~stock ~~equipment~~purchased thereby, inare ~~connection~~payable upon demand and bear interest at a floating rate which is payable monthly. In accordance with company policy and applicable law, we no longer make loans to our ~~Microgy~~officers ~~facilities~~or directors.

3NOTE N—IMPAIRMENT OF ASSETS—In ~~2007~~accordance with ASC Topic 360-10-35 “Accounting for the Impairment or Disposal of Long Lived Assets”, ~~Microgy~~we ~~began~~review ~~scheduled~~our ~~interest~~long ~~payments~~lived onassets to determine whether impairment exists and a write-down is required when events suggest the ~~tax~~assets ~~exempt~~carrying ~~bonds~~value may not be recoverable. ~~Mandatory~~This ~~redemption~~review includes all of ~~principal~~our ~~amounts~~long ~~begins~~lived assets including property, plant and equipment, construction in progress, ~~2012~~licensed technology rights, notes receivable, deferred financing costs and other assets. We also review notes receivable from current directors and a former officer and director. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve judgment.

4Accordingly Inwe ~~December~~have ~~2008,~~recorded ~~Microgy~~the ~~signed~~following anon-cash ~~contract~~impairments ~~with~~in athe ~~customer~~year ~~that~~ending ~~required~~December 31, ~~security~~2009: ~~deposits to protect against failure to delivery product in certain instances.~~

5• WeWrite ~~are~~off ~~obligated~~of ~~under~~construction ~~various~~in ~~non-cancelable~~progress ~~capital~~costs ~~leases~~related ~~for~~to ~~automotive~~our ~~vehicles~~three Texas projects of $13,349,000 to an estimated remaining fair value of $280,000.

~~Cargill~~• ~~Business~~Write ~~Development~~off ~~Agreement~~of construction in progress costs of $7,055,000 on two of our California projects to an estimated remaining fair value of $0.

In• ~~October~~Write ~~2006,~~off we entered into a Business Development Agreement, referred to as the BDA, with Cargill, Incorporated, acting through its Emerging Business Accelerator Unit, referred to as Cargill. Pursuant to the terms of ~~the~~certain ~~BDA,~~forfeited ~~Cargill~~tank ~~has~~deposits ~~agreed~~related to ~~use~~our ~~its~~Texas ~~reasonable efforts to identify potential anaerobic digester~~ projects ~~for development by us within Cargill’s network~~ of ~~customers~~$341, ~~farmers and strategic business partners in North America~~000. Cargill and Microgy will work jointly to identify specific targeted markets for developing such projects within the Cargill network, and Cargill will identify project candidates based upon agreed project guidelines. We will consider each project candidate and select those candidates they want Cargill to pursue further on their behalf. Cargill will then negotiate with such project candidates with the goal of obtaining a binding agreement whereby such project candidates commit to give Microgy the option to implement an anaerobic digester project. Once a project commitment has been signed, Cargill will present it to us for review and consideration. We will then proceed with the negotiation of mutually acceptable leases and other project agreements with the project candidates in which they are interested.

In• ~~consideration~~Write ofoff ~~Cargill’s services under the BDA, we will grant to Cargill warrants to purchase shares~~ of ~~our~~deferred ~~common~~financing ~~stock~~costs ~~equal to 1%~~ of the outstanding shares of our common stock on a fully-diluted basis on such date as Cargill delivers executed project commitments with project candidates relating to anaerobic digester projects covering 10$4,636,000 ~~cow~~related ~~equivalents, as defined, and thereafter~~ to ~~issue~~debt ~~similar~~that ~~warrants~~has ~~on each succeeding date on which the same warrant issuance conditions have again~~ been ~~satisfied,~~repaid upor tois acurrently ~~maximum~~due ~~of 4.99% of the outstanding shares of common stock on such issuance date subject to all warrants in the aggregate. The warrants will be exercisable for a period of five years from the issuance date,~~ and ~~will have an exercise price per share equal to 75% of the closing price of our common stock on the last trading day prior to the issuance date~~payable. ~~During 2007, we granted Cargill warrants purchasing 175,912 shares of our common stock at an exercise price of $5.37~~

•

Write off of construction in progress costs of $689,000 related to a project that has been abandoned.

~~ENVIRONMENTAL~~Environmental ~~POWER~~Power ~~CORPORATION~~Corporation ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements—(Continued)

~~per~~Years ~~share~~Ended ~~under~~December ~~this arrangement. These warrants were valued using the Black Scholes method~~31, ~~and determined to have a value of $907~~2009,~~288.~~ We2008 ~~have capitalized this development cost~~ and ~~this~~2007 ~~amount is currently held in our construction in progress account.~~

AsNOTE ~~further~~O—INCOME ~~consideration~~TAXES for Cargill’s services under the BDA, for a three-year period beginning with the first date of issuance of a greenhouse gas reduction certificate issued to, owned or controlled by us derived from an anaerobic digester project subject to a project commitment, referred to as an eligible certificate, we will convey to Cargill or its designee ownership of 25% of all such eligible certificates, after giving effect to any share of such certificates owed to a project candidate pursuant to the terms of any lease or other project agreement with such project candidate. During such three-year period, Cargill will also have the first right to bid on any other proposed sale or conveyance of any eligible certificates. In addition, with respect to each project subject to a project commitment which generates revenue to Environmental Power or Microgy from the sale of gas, electricity or other by-products (but not including sales of greenhouse gas reduction certificates), we will be obligated to pay to Cargill, within 30 days of receipt of such revenues, 2% of such revenues for a five-year period beginning on the date on which any such revenue is first received. Finally, during a three-year period following the date of first generation of gas or electricity by an anaerobic digestion project subject to a project commitment, Cargill will have the first right to bid on the proposed sale or conveyance of all such gas or electricity.

~~The~~Income ~~BDA~~tax ~~will~~expense ~~terminate~~consists ~~upon~~of the ~~earliest~~following offor the ~~following~~years ~~events~~ended December 31, 2009, 2008 and 2007:

• the third anniversary of the date of the BDA;


ANALYSIS INCOME TAX EXPENSE	2009		2008		2007
Current
Federal		—		—		—
State		29,294		26,284		900

Total current tax expense		29,294		26,284		900

Deferred
Federal		—		—		—
State		—		—		—

Total deferred tax expense		—		—		—

TOTAL INCOME TAX EXPENSE	$	29,294	$	26,284	$	900

•Income taxes paid during the ~~delivery~~years byended December 31, ~~Cargill~~2009, of2008, ~~project~~and ~~commitments~~2007 ~~signed~~amounted byto ~~project~~$29,294, ~~candidates~~$26,284, ~~covering~~and 50$900,~~000~~ ~~cow~~respectively. ~~equivalents;~~

•The ~~termination~~reconciliation bybetween athe actual ~~party~~income iftax aexpense ~~court~~and ~~shall~~the ~~have~~income ~~entered~~tax aexpense ~~final,~~computed ~~non-appealable~~by ~~order,~~applying ~~decree,~~the ~~ruling~~statutory orfederal ~~other~~income ~~action~~tax ~~restraining,~~rate ~~enjoining~~to orthe ~~otherwise~~income ~~prohibiting~~before income taxes for the ~~transactions~~years ~~contemplated~~ended byDecember 31, ~~the~~2009, ~~BDA;~~2008 and 2007 is as follows:

• termination by a party if the other party is in material breach or default, which breach or default is not cured within 30 days after the date of notice thereof;


RECONCILIATION OF TAX (BENEFIT) EXPENSE	2009			2008			2007
Federal tax (benefit) expense at 34%	$	(12,268,239	)	$	(5,433,344	)	$	(3,799,526	)
State tax expense		(1,847,847	)		(26,284	)		(67,485	)
Increase in valuation allowance		14,038,206			6,083,819			3,856,892
Permanent differences		107,174			(597,907	)		11,019

TOTAL INCOME TAX EXPENSE	$	29,294		$	26,284		$	900

•The ~~termination~~components byof ~~a party if~~ the ~~other~~net ~~party~~deferred ~~becomes~~income ~~insolvent~~tax orasset ~~unable~~(liability) toas ~~pay its debts when due, has a trustee or receiver appointed for any or all~~ of ~~its assets~~December 31, ~~makes~~2009 anand ~~assignment~~2008 ~~for~~are ~~the~~as follows: ~~benefit of creditors or has a bankruptcy petition filed by or against it which is not dismissed within 90 days;~~

• termination by a party if the other party ceases, or threatens to cease, to carry on business; or


ANALYSIS OF DEFERRED TAX ASSET ( LIABILITY)	2009		2008
Deferred tax assets
Stock options, warrants and stock appreciation rights	$	837,252	$	762,793
Pre-acquisition net operating loss carryforward of Microgy		438,960		497,041
Federal net operating loss and alternative minimum tax carryforwards and credits

Other Assets

Security deposits

447,953

197,569

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