YORK RESEARCH CORP, 10-K, 1997-05-23

YORK RESEARCH CORP
10-K, 1997-05-23
COGENERATION SERVICES & SMALL POWER PRODUCERS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________

FORM 10-K
(Mark One)

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

For the fiscal year ended February 28, 1997
----------------------------------
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to
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Commission file number 0-72
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York Research Corporation
-----------------------------------------------------------------
(Exact name of registrant as specified)

Delaware 06-0608633
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)

280 Park Avenue, Suite 2700 West, New York, New York 10017
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 557-6200
--------------
Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
-------------------- -----------------------
None

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

Common stock, par value $.01 per share
--------------------------------------
(Title of class)

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

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

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of May 12, 1997 was as follows:

Common Stock, $.01 par value - $95,282,690

(Based on a closing price of $8.0625 for the common stock on such date).

The number of shares outstanding of the Registrant's classes of common
stock, as of May 12, 1997:

Common Stock, $.01 par value 14,306,628 shares

Documents incorporated by reference: None

<PAGE>
PART I

ITEM 1 BUSINESS

A. General

York Research Corporation ("York" or the "Company") is a developer, owner
and marketer of energy related projects and products. York, through its
subsidiaries, partnerships, joint ventures and affiliates, currently
participates in two broad areas of the energy business--power project
development and services, including cogeneration and wind energy, and the
marketing of energy and natural gas for sale in the wholesale power markets
and the wholesale and retail natural gas markets. The Company believes that
continuing deregulation of world energy markets, privatization of electric
power generation and distribution systems, and increasingly open markets are
creating a demographic opportunity that York is well positioned to exploit.
The Company believes that its several areas of expertise will converge to
create potential for growth as the twenty-first century approaches.

The Company has developed three power projects in New York City. A 7
megawatt ("MW") engine powered facility in Coney Island, Brooklyn, was completed
in 1989, and was subsequently replaced by a 28 MW combined cycle gas turbine
facility at the same site, known as the Warbasse Project. The third project is
the 286 MW facility owned by the Brooklyn Navy Yard Cogeneration Partners, L.P.
("BNY Facility"). Both projects have Consolidated Edison Company of New York,
Inc. ("Con Edison") and various host entities as the main customers.

As a result of these projects and various others under development, the
Company is capable of developing a gamut of projects from very small to very
large, using both fossil fuels and wind power as energy sources, serving utility
grids, merchant sales, and self-contained residential complexes or industrial
users.

The wholesale power business in the United States was previously limited to
inter-utility and power pool purchases and sales. More recently, due to federal
deregulation, power may be purchased, transmitted over existing utility systems,
and then sold in the wholesale markets. When fully deregulated, the retail
energy market would approximate $200 billion per year.

Through its subsidiary, York Windpower Corporation ("York Windpower") (see
Item 1.E), the Company is proceeding to develop selected very large wind power
projects, and a series of mid-size projects. In some areas, the indigenous wind
regimes provide a competitive source of power to meet expanding needs. In
others, although there is a current surplus of energy, there is a long-term
need. One of the current driving forces behind the large projects is economic
development, combined with future capacity needs and the natural desire to
replace fossil fuels with environmentally clean renewable energies.

York will meet these needs by combining the Company's prowess in project
development, energy services and marketing with European technologically
advanced wind turbine products. As a consequence of York's relationship with
European manufacturers, the Company may offer selected countries the opportunity
to create new jobs by locating

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production facilities for these technologically advanced products in their
areas, while acquiring for York large scale long-term power contracts. This
arrangement assures the manufacturer of an economic production level, while
providing to the Company the advantages of domestic content, product
availability and competitive costs.

Management believes that these areas of current concentration will allow the
Company to capitalize on its strengths and experience while positioning it for
the future. During the past several years, the Company has invested a
significant portion of its revenues and capital resources in developing and
nurturing new markets and projects. These efforts and expenditures, which need
to continue at some level in the near term, have not yet begun to generate
revenues, but management believes their potential warrants the efforts.

All note references are to Notes to Consolidated Financial Statements.

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B. Cogeneration

1. THE WARBASSE PROJECT

Between 1987 and 1989, York constructed and operated a 7 MW engine powered
cogeneration project that supplied all of the utility services including
electricity, heat, hot water and air conditioning to Amalgamated Warbasse
Houses, Inc. ("AWH"), a 10,000 resident middle income housing complex in
Brooklyn, New York. During 1989, York, as agent for the project owner,
Warbasse-Cogeneration Technologies Partnership L.P. ("WCTP") (see Item 1.E),
negotiated a 21 MW Power Sale Agreement between Con Edison and WCTP based upon
expansion of the project. The Power Sale Agreement required WCTP to replace and
expand its facility, converting it from an engine facility to a larger gas
turbine facility, interconnect with the utility system and achieve commercial
operation by the end of 1991, and to achieve full rated capacity no later than
December 31, 1994, all of which was accomplished ahead of schedule. This
Agreement was approved by the Public Service Commission ("PSC") in October 1989
and includes capacity, energy and operation and maintenance payments continuing
through the year 2011, with payments indexed to prevailing fuel price levels and
inflation. The Warbasse facility is on land leased from AWH, its thermal host.

The Company and WCTP executed an Agreement to Provide for Construction of
Additional Capacity in 1990, pursuant to which the Company constructed the
expansion of the facility to service the Con Edison contract. The Company and
WCTP also executed an Operations and Maintenance ("O&M") Agreement in 1989
pursuant to which the Company agreed to operate the facility for its life (see
Note 5).

In September 1994, pursuant to the O&M Agreement, the Company resumed full
operation of the Warbasse facility, and since that date has supplied all of the
thermal and electric needs of AWH on a continuous basis, and the full capacity
requirements of its electric power contract with Con Edison, as dispatched. See
Item 13 and Note 5 for information regarding receivables due to the Company from
WCTP and the operations of the Warbasse facility.

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2. BROOKLYN NAVY YARD PROJECT

Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), is owned and
controlled equally by a subsidiary of Edison Mission Energy ("Mission"), which
is a wholly owned subsidiary of SCE Corp., and B-41 Associates L.P. ("B-41LP").
BNYLP was formed to develop, construct, finance, own and operate the 286
megawatt natural gas fired combined cycle BNY Facility, which began operations
on November 1, 1996.

The Company and Mission previously estimated the total capital costs of the
Brooklyn Navy Yard ("BNY") Facility, when fully completed, to be approximately
$420,000,000. Due to an expansion of the construction scope and the resulting
delays, this estimate has been exceeded, including capitalized interest during
construction. On December 22, 1995, the New York City Industrial Development
Agency (the "IDA") issued $253,925,700 of Industrial Development Revenue Bonds
for the purpose of financing certain costs incurred through that date in
constructing and developing the BNY Facility. These bonds are recourse to a
letter of credit ("LOC") in like amounts arranged by Mission, which LOC is in
turn supported by a Mission guarantee. BNYLP has agreed to reimburse Mission if
the guarantee is called, out of future cash flow as and if available. The
proceeds of this bond sale were used to reimburse Mission for a portion of its
construction loans made to date and to reimburse the Company for engineering and
other costs that had been expensed in prior periods and for services that have
been performed by the Company.

In March 1996, the project delivered initial test quantities of power to Con
Edison, equivalent to existing contract capacity. Construction was substantially
completed and the facility commenced operations in accordance with its contract
on November 1, 1996. Mission has funded all construction costs incurred to
date in excess of those funded by the IDA bonds mentioned above, and may need to
provide additional guarantees to secure non-recourse project financing. The
Company has no obligation to fund the project or provide guarantees and all
obligations incurred by BNYLP to date are non-recourse to the Company.

Pursuant to the provisions of the partnership agreement, Mission retains the
right, because it has spent in excess of $13,258,043 in development costs, to
take all the votes on the Management Committee that control the day to day
operations of BNYLP. Mission has informed B-41LP that they have incurred gross
costs in excess of $454,000,000 through February 28, 1997 for this project. If
Mission decides to exercise its right to cast all votes on the BNYLP Management
Committee, B-41LP still remains a 50% general and limited partner in the Navy
Yard project and retains all its other rights, and Mission retains all its
funding and other obligations to the Project and B-41LP.

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<PAGE>

Like other large projects of this nature, the BNY cogeneration project is
subject to various risks. There can be no assurance that the facility, although
completed, will operate at sufficient levels to cover all operation and
maintenance expenses and debt service. The Company has no liability for any such
shortfalls.

C. Marketing of Electric Power and Natural Gas

During Fiscal 1997, the Company purchased 85% of the outstanding shares of
North American Energy Conservation Inc. ("NAEC")(see Note 15), which has been
arranging wholesale electric power transactions since the beginning of 1994.
These activities depend upon open access to the utility-owned transmission grid
through which power flows between regions. On April 24, 1996 the Federal Energy
Regulatory Commission ("FERC") exercised its authority over the transmission
grid by setting comprehensive rules for open and comparable access to the entire
grid for all parties. These rules will apply to NAEC and to York cogeneration
and power projects. The newly deregulated United States market consumes 2.8
trillion kilowatt hours of electric energy each year for which the retail cost
is nearly $200 billion. The $70 billion wholesale market is now open. During the
next several years the retail power market is also expected to be substantially
deregulated.

In 1996 NAEC expanded its business into the marketing of natural gas to the
wholesale and retail markets and opened a regional office in Syracuse, New York.

The Company believes that emerging opportunities in the wholesale and retail
markets and broader geographic activity will lead to services and products not
currently available, and that the project development and operating expertise of
the Company will be combined with the marketing of energy commodities on a value
added basis.

While the Company believes that its creative capability, its several
relationships, and its level of performance to date can lead to long-term
success, there can be no assurance as to future results or as to how competitive
these businesses will become.

To date, activities have been substantially limited to Eastern Canada, New
England, and the Middle Atlantic states. The Company believes that its marketing
concepts can be applied over a much broader area and a greater breadth of
product offerings.

D. Wind Energy and Economic Development

Consistent with its strategy of developing environmentally beneficial power
projects for long-term operation, and for marketing power in future competitive
markets, the Company has been actively pursuing a variety of renewable energy
projects, particularly those that utilize wind energy in strategic locations.
York Windpower currently plans to develop selected very large wind projects and
a series of mid-sized ones.

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The current driving force behind these wind projects will be a combination
of short and long-term energy needs, economic development in the regions, and
the environmentally friendly nature of wind energy.

E. Subsidiaries, Partnerships and Joint Ventures

The Company conducts a substantial portion of its business through
subsidiaries, partnerships and joint ventures, in some of which affiliates of
the Company have an interest.

York owns 100% of the outstanding shares of B-41 Management Corp. ("B41MC"),
Cogeneration Technologies, Inc. ("Cogen"), and York Internet Power Services,
Inc., all of which are Delaware Corporations; 85% of the outstanding shares of
NAEC, a Delaware Corporation; and 100% of the outstanding shares of York
Research Canada, Inc. ("York Canada"), an entity incorporated under the laws of
Canada. York Canada owns 100% of the outstanding shares of York Windpower Corp.,
an entity incorporated under the laws of Canada.

York and its subsidiaries own 74.7% of B-41LP, the 50% partner in BNYLP, as
a result of the following:

B-41MC holds a 5% general partnership interest in B-41LP.

Cogen holds a 22% limited partnership in B-41LP resulting from
assignment of a 40 MW Power Contract to B-41LP.

York holds a 90% limited partnership interest in York Cogen Partners
L.P. ("YCP"), which in turn holds a 53% limited partnership interest in
B-41LP resulting from assignment of a 90 MW power contract to B-41LP.

RV Associates L.P. ("RVA"), an entity controlled by the chairman of
the Company, holds a 5% general partnership interest and a 15% limited
partnership interest in B-41LP, resulting from assignment of a 40 MW
contract to B-41LP, assumption of certain partnership liabilities and
acceptance of a reduced share of development fees and reimbursements.

A portion of B-41LP's partnership interest in BNYLP has been pledged
as collateral to unaffiliated third parties to secure certain
obligations of B-41LP.

WCTP is a limited partnership whose 25% general partner is RRR'S Ventures
Ltd. ("RRR'S"). The Chairman of the Company is president and a major shareholder
in RRR'S. Entities unaffiliated with the Company or RRR'S own an aggregate of
75% limited partnership interest in WCTP. RRR'S also holds a 10% general
partnership interest in YCP (see Item 13).

North American Energy Conservation, Inc. is 15% owned by the Chairman of the
Company.

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<PAGE>

F. Backlog

The Company does not currently calculate backlog because the revenue streams
are dependent upon a number of variable factors such as inflation, fuel prices,
electric utility rates and utilizations, and natural gas prices and supply.

G. Patents and Trademarks

The Company and its subsidiaries have no patents or trademarks that can be
considered material to the Company's or its subsidiaries' businesses.

H. Research and Development

Since research and development costs are not significant, the Company does
not account separately for these costs.

I. Raw Materials and Suppliers

The Company and its subsidiaries are not dependent on any single source of
supplies or services for their activities.

J. Marketing

York markets its projects and products through a dedicated sales staff,
supplemented by technical support personnel and management personnel from the
Company, and by representatives internationally.

K. Employees

As of April 30, 1997, the Company and its subsidiaries employed 44 people on
a full-time basis. Most of the Company's executives are technically trained and
actively engaged in the project development and sales areas.

L. Competition

There are many companies with access to greater financial resources that are
active in various aspects of the Company's energy business. These companies will
continue to compete in the energy marketplace. The Company cannot assess the
effect of competition in the future.

M. Customers

During Fiscal 1997, all of the services revenues were derived from WCTP and
BNYLP. Energy sales were derived from numerous retail customers and utilities.
Two utilities accounted for approximately 20% and 15% respectively, of the total
revenues, however, due to the relatively short-term nature of the contracts with
these customers, the loss of one of these customers would have no material
adverse effect on the Company.

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<PAGE>

N. Environmental Matters

The Company believes that the various technologies it employs, which provide
for increased efficiency, compared to conventional power generation facilities,
are not environmentally sensitive. The construction of power generation
facilities requires typical environmental impact statements and permitting
procedures which may result in delays. The Company believes that it is in
compliance with federal, state and local laws involving the protection of the
environment. The Company does not believe that continued compliance will require
any material capital expenditures. The Company's facilities are designed to
comply with all applicable environmental laws.

O. Regulation

A subsidiary of the Company operates the Warbasse cogeneration facility in
New York that is a qualifying cogeneration facility ("QF") pursuant to the
Public Utility Regulatory Policies Act of 1978 ("PURPA"). The Company has also
been involved in the development of the BNY cogeneration project in New York, a
project that has filed for and obtained QF status.

Projects that meet the QF criteria stated in the federal rules generally are
exempt from federal, state and local regulation that applies to generating
facilities which are not QFs. However, the New York State Public Service
Commission ("NYPSC") has determined that it has the authority to regulate sales
of electricity by QFs to retail customers, though the regulatory regime is less
burdensome than that applied to traditional utilities. The NYPSC has not made
any determination as to whether this policy would apply to the Projects.

One of the criteria for QF status is that a total of no more than 50
percent of the equity interests may be owned by one or more companies that
are electric utility holding companies under the Public Utility Holding
Company Act of 1935 ("PUHCA"). Under PUHCA, an entity which owns 10 percent
or more of the voting securities of, or otherwise controls, an electric
utility company, is an electric utility holding company. An electric utility
company is defined in PUHCA to mean a company that owns or operates physical
facilities for the generation, transmission or distribution of electricity
for sale. QFs are expressly exempt from this definition, and the Company
therefore is not a public utility holding company by virtue of its interests
in QFs.

Power Brokering

A power broker is not considered to be a public utility under the Federal
Power Act ("FPA") and is not subject to regulation by the Federal Energy
Regulatory Commission ("FERC"), which administers the FPA. A power broker
arranges transactions for a buyer and seller and receives a fee for its
services. To date, no company that is a power broker has been found by the SEC
to be an electric utility company under PUHCA. Accordingly, the Company believes
that its activities as

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<PAGE>

a broker of electricity also would not result in its becoming an electric
utility company or an electric utility holding company under PUHCA, and would
not affect the QF status of the Projects.

Power Marketing

NAEC is considered to be a public utility under the FPA and its transactions
are regulated under the FPA. A power marketer takes title to electricity and
resells it at wholesale in interstate commerce. To date, no company that is a
power marketer has been found by the SEC to be an electric utility company under
PUHCA, but there can be no assurance as to the future. The Company believes that
NAEC's activities as a power marketer would not result in the Company becoming
an electric utility company or an electric utility holding company under PUHCA
and would not affect the QF status of the Projects.

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<PAGE>

ITEM 2 PROPERTIES

The Company leases its facilities. The Company considers its facilities to
be suitable and adequate for the purposes for which they are used.

Square
Entity/Location Footage Use
- ---------------- ----------- ---------

York Research Corporation (1) Office
280 Park Avenue
New York, New York

Subsidiaries

Cogeneration Technologies, Inc. (1) Office
280 Park Avenue
New York, New York

York Research Canada, Inc. (2) Office
1000 De La Gauchetiere
Street West
Montreal, Quebec, Canada

York Windpower Corp. (2) Office
1000 De La Gauchetiere
Street West
Montreal, Quebec, Canada

North American Energy Conservation, Inc. (3) Office
100 Clinton Square, Suite 400
126 North Salina Street
Syracuse, New York

(1) Total square footage shared by York and Cogen at this location is currently
12,300.

(2) Total square footage shared by York Canada and York Windpower Corp. at this
location is currently 1,650.

(3) Total square footage leased by NAEC at this location is approximately
12,850, less approximately 3,800 square feet sublet to two tenants.

ITEM 3 LEGAL PROCEEDINGS

There is no material litigation directly affecting the Company. See Note 4
as to certain litigation involving BNYLP.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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PART II

ITEM 5 MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS

The Company's common stock is traded in the over-the-counter market under
the symbol "YORK". The following table shows the range of high and low closing
sales prices for the common stock on the NASDAQ National Market System.

HIGH LOW

Fiscal Year 1997
First Quarter 9-7/8 5-7/8
Second Quarter 10-5/16 8-5/8
Third Quarter 11-5/8 9-3/8
Fourth Quarter 10-1/2 8-7/8

Fiscal Year 1996
First Quarter 6-3/4 4-7/8
Second Quarter 6-1/4 4-3/4
Third Quarter 7-3/4 5
Fourth Quarter 7-1/2 5-1/8

On May 13, 1997, the Company had 534 holders of record of its common stock.
The Company has not declared any common stock or cash dividends during the last
five years and has no present intention to declare cash dividends.

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<PAGE>

ITEM 6 SELECTED FINANCIAL DATA
(in thousands of dollars, except per share data)

<TABLE>
<CAPTION>
For the Year Ended
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
2/28/97 2/28/96 2/28/95 2/28/94 2/28/93
--------- --------- --------- --------- ---------
Total revenues $ 46,327 $ 14,392 $ 7,524 $ 6,494 $ 5,698
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Net income (loss) from continuing operations $ 7,823 $ 4,400 $ 222 ($ 416) ($ 1,892)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Net income (loss) per common share from continuing
operations $ 0.51 $ 0.35 $ 0.02 ($ 0.03) ($ 0.17)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Total assets $ 84,829 $ 60,002 $ 50,685 $ 29,467 $ 30,410
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Limited recourse long-term liabilities (1) $ 19,982 $ 20,232 $ 20,482 $ 0 $ 0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Other long-term liabilities $ 885 $ 685 $ 638 $ 1,155 $ 1,498
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Deferred revenue and other credits $ 3,460 $ 3,460 $ 3,478 $ 4,097 $ 4,776
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Stockholders' equity $ 46,990 $ 32,827 $ 21,886 $ 18,742 $ 11,646
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Cash dividends declared per common share $ 0 $ 0 $ 0 $ 0 $ 0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

(1) Recourse to certain of B-41LP's cash flow and not recourse to the Company.
This limited recourse obligation was settled subsequent to February 28, 1997
(see Note 5 and the Pro forma Balance Sheet).

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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
ITEM 7 CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

Brooklyn Navy Yard Project

Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), a joint venture,
was formed on October 19, 1992. BNYLP is owned and controlled equally by a
subsidiary of Edison Mission Energy ("Mission"), which is a wholly owned
subsidiary of SCE Corp., and a limited partnership, B-41 Associates, L.P.("B-41
LP"), in which the Company is the majority partner (see Note 4).

Pursuant to the provisions of the partnership agreement, Mission retains the
right, because it has spent in excess of $13,258,043 in development costs, to
take all the votes on the Management Committee that control the day to day
operations of BNYLP. Mission has informed B-41LP that they incurred gross costs
in excess of $454,000,000 through February 28, 1997 for this project. If Mission
decides to exercise its right to cast all votes on the BNYLP Management
Committee, B-41LP still remains a 50% general and limited partner in the Navy
Yard project and retains all its' other rights, and Mission retains all its
funding and other obligations to the Project and B-41LP.

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<PAGE>

Warbasse Project

In September 1994, the Company resumed full operations of the Warbasse
facility, and since that date has supplied, on a continuous basis, all the
electric and thermal energy needs of the host, Amalgamated Warbasse Houses,
Inc., and is supplying up to the full capacity requirements of its electric
power contract with Consolidated Edison Company of New York, Inc, when
dispatched.

The Company has completed the Warbasse project, and transferred the facility
to Warbasse-Cogeneration Technologies Partnership L.P. on August 1, 1996. The
Company expects to spend up to $1,000,000 during the next year, on certain
remaining items for increased efficiency and operational control, which were
accrued at the time of transfer.

In March 1997, B-41LP settled all its obligations to Sanwa Business Credit
Corp. ("SBCC") for a cash payment of $2,750,000. SBCC, in exchange for this cash
payment gave up all its interest in the future cash flow from the Brooklyn Navy
Yard Project and has no continuing interest in any of the Company's projects or
assets (see Note 5 and the Pro forma Balance Sheet).

General

During the year ended February 28, 1997, cash balances increased by
approximately $6.0 million. Net income from operations generated approximately
$7.8 million and increases in accounts payable, accrued expenses and other
long-term liabilities generated approximately $5.2 million. These sources of
cash were offset by an increase in receivables of approximately $11.0 million
predominantly due to the acquisition of NAEC, which principally accounts for
cash generated by operating activities of approximately $2.1 million. During
Fiscal 1996, the Company had net income of approximately $4.4 million offset by
approximately $3.0 million spent on construction of the Warbasse project, and an
increase in receivables of approximately $1.7 million, resulting in cash used in
operating activities of approximately $509,000. During Fiscal 1995, the Company
had net income of approximately $222,000, and spent approximately $1,846,000 on
construction, with virtually no change in service receivables, resulting in cash
used in operating activities of approximately $2.3 million.

Approximately $3.9 million was generated by financing activities during
Fiscal 1997, mainly due to proceeds from the exercise of stock options and
warrants of approximately $3.7 million and the repayment by the York Research
Corporation Employee Stock Ownership Trust ("ESOP") of $450,000. Cash
generated by financing activities in Fiscal 1996 was approximately
$4,416,000, due to the repayment by the ESOP of $3,079,000 of the demand
purchase money loans due to the Company, and $1,455,000 due to proceeds from
the exercise of stock warrants and options. In Fiscal 1995, the ESOP repaid
$2,153,000, and there were no material exercises of warrants or options.

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<PAGE>

The ESOP purchased from the Company a total of 3,793,500 shares of the
Company's Common Stock between 1988 and February 28, 1996 in exchange for demand
purchase money loans, totaling approximately $14,462,000 (see Note 11). During
Fiscal 1995, the ESOP trustee sold 380,000 shares of the Company's common stock
at a profit to the ESOP, and repaid $2,153,000 of the demand purchase loans. The
ESOP also repaid approximately $370,000 of third party loans during Fiscal 1995,
leaving a balance owed to third parties of approximately $561,000. During Fiscal
1996, the ESOP trustee sold 606,000 shares of the Company's common stock at a
profit to the ESOP, and repaid $3,079,000 of the demand purchase money loan.
During Fiscal 1997, the ESOP trustee sold 50,000 shares of the Company's common
stock, and repaid $450,000 of the demand purchase money loan.

See Note 3 for disclosure of the impact of the issuance of Statement of
Financial Accounting Standards No. 128, Earnings Per Share.

Because of the nature of the Company's business, there can be no assurance
that service and other revenues will continue at the same level from year to
year. This Annual Report on Form 10-K contains a number of forward-looking
statements, all of which are based on current expectations. Actual results may
vary materially.

Results of Operations

1997 Compared to 1996

Total revenues in Fiscal 1997 soared by approximately $31,936,000 over
Fiscal 1996, due predominantly to the acquisition of NAEC on November 1, 1996
(see Note 15), which accounted for the increase in energy sales of approximately
$26,571,000. Service revenues increased by approximately $9,307,000, due mainly
to an increase of $11,000,000 as a result of a services agreement between WCTP
and RVA, and the Company (see Note 14), and an increase of approximately
$748,000 in service revenues to WCTP due to higher fuel costs, and an increase
in purchases of supplies, spare parts, etc. These increases were offset by a
decrease in engineering services of approximately $2,442,000, due mainly to
$2,500,000 of reimbursements in Fiscal 1997 by BNYLP for certain engineering
costs a portion of which was expensed in prior periods versus $5,000,000 of
similar reimbursements in Fiscal 1996. Development and other fees decreased
approximately $3,942,000 due to none being earned in Fiscal 1997.

Cost of services, which include fuel and other operations and maintenance
costs, increased approximately $763,000 during Fiscal 1997, commensurate with
service revenues from WCTP.

Cost of energy increased approximately $25,000,000 as a result of the
commencement of energy sales due to the acquisition of NAEC. The gross margin
from energy sales is subject to various market fluctuations and may vary from
year to year.

Selling, general and administrative expenses increased approximately
$1,840,000. The operations of NAEC since acquisition, including payroll and
employee benefits, rent and office expenses, consulting fees, etc., accounted
for approximately $1,135,000 of the total increase in selling,

-15-

<PAGE>

general and administrative expenses. The remaining increase is explained by
an additional $470,000 spent on payroll and employee benefits in Fiscal 1997,
due to salary increases and bonuses, and increased consulting fees of
approximately $360,000 for the development of potential new markets.

Interest and other income increased approximately $1,775,000. This was
mainly due to interest of approximately $1,285,000 recorded by CTI due on the
note receivable from WCTP which commenced in August, 1996 (see Note 5).
Additional receipts of approximately $168,000 from AWH, recognized as other
income, in payment of certain amounts due to CTI which were deferred in prior
years, accounted for another portion of the increase in interest and other
income. The commencement in December 1996 of general partner fees received by
B-41LP from BNYLP accounted for an increase in other income of approximately
$299,000.

1996 Compared to 1995

Total revenues increased approximately $6,868,000 when comparing the years
ended February 28, 1996 to February 28, 1995. This was mainly due to a
reimbursement by BNYLP of $5,000,000 for certain engineering services and other
costs that had been expensed in prior periods. Services revenues increased
approximately $2,290,000 when comparing year to year, since the Warbasse project
resumed operations in September 1994, thereby reflecting only six months of
revenue in Fiscal 1995 versus a full year in Fiscal 1996. Development fees paid
by Mission to B-41LP to compensate B-41LP for certain services rendered
increased $2,000,000 and power brokerage fees increased $425,000. These
increases were offset by decreases of $2,500,000 and $533,000 due to the
conclusion of certain monthly development fees from BNYLP in December 1994 and
June 1995, respectively.

Cost of services increased approximately $2,490,000 when comparing Fiscal
1996 to Fiscal 1995. This was principally due to an increase in cost of services
to WCTP, which include fuel and other operations and maintenance costs, of
approximately $1,728,000, commensurate with service revenues to WCTP and an
increase in related overhead expenses allocated from selling, general and
administrative expenses.

Selling, general and administrative expenses increased approximately
$300,000 when comparing Fiscal 1996 to Fiscal 1995. An increase of approximately
$478,000 is attributable to payroll and related expenses, as a result of salary
increases, additional personnel, and continually increasing health insurance
costs. An increase of approximately $407,000 was related to expenditures for
development of new projects, and an increase of $181,000 in Fiscal 1996 related
to public company and corporate communications expenses. Selling, general and
administrative expenses decreased approximately $778,000, as a result of an
increase in overhead expenses allocated to cost of services.

Interest and other income increased approximately $876,000 from year to
year. Of this increase, approximately $1,083,000 was due to interest received
from WCTP related to the long-term note receivable acquired by B-41LP in
September 1994, thereby reflecting only six months of interest income in Fiscal
1995 versus a full year in Fiscal 1996. The realization of a deferred gain of
approximately $244,000 in Fiscal 1995 resulted in a decrease when comparing year
to year.

-16-

<PAGE>

Income allocated to minority interest increased $500,000 when comparing year
to year. This was the minority portion of the income of B-41LP.

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial Statements on Page 27.

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES

None

-17-

<PAGE>

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS

The executive officers and directors of the Company are:

Robert M. Beningson Chairman of the Board, President and Chief
Executive Officer

Michael Trachtenberg Executive Vice President, Chief Financial
and Accounting Officer and Secretary

Robert C. Paladino Executive Vice President

H. Clifton Whiteman Director

Stanley Weinstein Director

Mr. Robert M. Beningson, 68, was elected a director of the Company in
October 1981. In February 1982, Mr. Beningson was elected Chairman of the Board,
President and Chief Executive Officer of the Company. Mr. Beningson is Chief
Executive Officer and Chairman of the Board of each of the Company's
subsidiaries. Previously, Mr. Beningson was Chairman of the Board of Directors
of the Company between 1968 and 1979.

Mr. Michael Trachtenberg, 48, a Certified Public Accountant, joined the
Company in January 1987 and was elected Vice President, Chief Financial Officer
and Secretary in March 1987. From November 1985, until joining the Company, Mr.
Trachtenberg was a financial consultant in private practice. Prior thereto, Mr.
Trachtenberg was Vice President-Finance and Chief Financial Officer of S&S
Corrugated Paper Machinery Co., Inc. From 1980 to 1984 Mr. Trachtenberg held
various positions with Carter Day Industries, Inc., an agricultural equipment
manufacturer and energy and environmental systems company, culminating in his
appointments as Vice President, Treasurer and Chief Financial Officer.

Mr. Robert C. Paladino, 46, joined the Company in January 1987 and was
elected Executive Vice President in April 1990. From October 1980 until joining
the Company, Mr. Paladino was Senior Vice President and General Counsel of NPS
Technologies Group, Inc., an engineering and construction company serving the
electric utility industry. From 1974 to 1980, Mr. Paladino held various
positions with the Edison Electric Institute, the national organization for the
investor-owned electric utility industry, culminating in his appointment as
Director of Fossil Fuels and Assistant to the President.

Mr. H. Clifton Whiteman, 71, was elected to the Board of Directors in July
1991. From March 1982 through March 1989, Mr. Whiteman served as Executive Vice
President of The Bank of Tokyo Trust Company. Following his retirement in April
1989, he was a consultant to The Bank of Tokyo Group in New York City until
April 1992. Mr. Whiteman serves on the Board of Directors of CB Bancshares, Inc.

-18-

<PAGE>

Mr. Stanley Weinstein, 71, was elected to fill a vacancy on the Board of
Directors in May, 1995. Until 1991, Mr. Weinstein was a partner at Deloitte and
Touche, certified public accountants, and since such date, has been an
independent consultant.

None of the directors or executive officers of the Company are related to
each other.

ITEM 11 EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation received by the Company's
Chief Executive Officer and the remaining most highly paid executive officers
for the three fiscal years ended February 28, 1997.

<TABLE>
<CAPTION>
Annual Compensation
------------------------------
Other
Salary Bonus Compensation
Name & Principal Position Year ($) ($) ($) (2)
- --------------------------------------------------- ---- ------- ------- ------------
<S> <C> <C> <C> <C>
ROBERT M. BENINGSON 1997 480,681 0 0
Chairman, President & 1996 400,681 0 0
Chief Executive Officer 1995 371,082 0 0

MICHAEL TRACHTENBERG 1997 199,231 100,000 0
Executive Vice President & 1996 190,000 0 0
Chief Financial and Accounting 1995 190,000 0 0
Officer

ROBERT C. PALADINO 1997 193,846 100,000 0
Executive Vice President 1996 179,538 0 15,000
1995 164,924 0 0

<CAPTION>
Long-Term Compensation
-----------------------------

Awards Payouts
------------------ ---------
Restr All Other
Stock Options/ LTIP Compen-
Awards SAR's Payouts sation
Name & Principal Position ($) (#) (1) ($) ($) (3)
- --------------------------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
ROBERT M. BENINGSON 0 0 0 18,875
Chairman, President & 0 0 0 12,109
Chief Executive Officer 0 375,000 0 19,737

MICHAEL TRACHTENBERG 0 0 0 23,418
Executive Vice President & 0 0 0 14,699
Chief Financial and Accounting 0 100,000 0 18,863
Officer

ROBERT C. PALADINO 0 0 0 23,418
Executive Vice President 0 0 0 14,699
0 50,000 0 16,180
</TABLE>

(1) The Company does not grant SAR's. In fiscal 1995, all grants were
qualified stock options.

(2) Forgiveness of indebtedness.

(3) Represents the value of the Company's contribution to the ESOP allocable
to executives' accounts for such year.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information on option grants in Fiscal 1997
to the named executive officers.

<TABLE>
<CAPTION>
Individual Grants
------------------------------
<S> <C> <C> <C> <C> <C>
% of Total
Options Alternative
Options Granted to Exercise Grant Date
Granted Employees in Price Expiration Present Value
Name (#) Fiscal Year ($/share) Date ($)
- ---------------------------------------------------- ------------- --------------- ----------- ------------- ---------------
ROBERT M. BENINGSON 0 N/A N/A N/A N/A

MICHAEL TRACHTENBERG 0 N/A N/A N/A N/A

ROBERT C. PALADINO 0 N/A N/A N/A N/A
</TABLE>

-19-
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUE

The following table sets forth information on option exercises in Fiscal
1997 by the named executive officers and the value of such officers unexercised
options at February 28, 1997.

<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired Unexercised Options In-the-Money Options
on Value at Fiscal Year end (#) at Fiscal Year End ($) (1)
Exercise Realized ---------------------------- --------------------------
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ----------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ROBERT M. BENINGSON 0 0 2,325,000 0 8,630,500 0

MICHAEL TRACHTENBERG 35,000 196,875 193,000 72,000 802,175 352,950

ROBERT C. PALADINO 5,000 32,000 156,000 40,000 632,275 192,475
</TABLE>

(1) Value calculated is the difference between closing price on the date of
exercise or year end, respectively, and the exercise price.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
Years of Service (2)
----------------------------------------------------------------
Remuneration(1) 10 15 20 25 30 35+
- --------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
50,000 3,200 4,125 5,200 6,250 7,500 8,750

100,000 8,200 11,625 15,200 18,250 21,675 24,175

150,000 13,200 19,125 25,200 30,750 36,675 40,425

200,000 18,200 26,625 35,200 43,250 51,675 56,675

250,000 23,200 34,125 45,200 55,750 66,675 72,925

</TABLE>

(1) Based on highest five year average and includes annual salary and cash
bonus, if any.

(2) The years of credited service for individuals listed in the Summary
Compensation Table are 41 for Robert M. Beningson, 10 for Robert C.
Paladino, and 14 for Michael Trachtenberg.

IRS regulations limit the amount of compensation credited for Pension Plan
purposes to $150,000 per year, subject to cost of living increases.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Mr. Paladino filed a Form 4 one month late, which reported the exercise of
options and the gift of those shares to a charity.

COMPENSATION OF DIRECTORS

Directors receive no fees for attending Board or Committee meetings.
However, both Mr. Whiteman and Mr. Weinstein serve as consultants to York, and
give advice, consultation and reports to York on such matters as are requested
by Executive Officers or the Board of Directors. In both Fiscal 1997 and Fiscal
1996, Mr. Whiteman received $24,000. Mr. Weinstein received $24,000 in Fiscal
1997, and $18,000 in Fiscal 1996.

The Company has not entered into any employment contracts with any of the
herein named Officers or Directors.

-20-

<PAGE>

SECURITY OWNERSHIP OF
ITEM 12 CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

a. Security Ownership of Certain Beneficial Owners

The following table sets forth the information indicated as of February 28,
1997, as to all persons known by the Board of Directors to be the beneficial
owners of more than five percent of the Corporation's Common Stock.

Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class (1)
----------------------------------- -------------------- -------------

Robert M. Beningson
280 Park Avenue
New York, NY 10017 3,491,000(1)(2) 21.2%

H. Clifton Whiteman
280 Park Avenue
New York, NY 10017 1,235,420(1)(4) 8.6%

York Research Corp.
Employee Stock Ownership Plan
280 Park Avenue
New York, NY 10017 1,120,220(1) 7.9%

See note references below.

b. Security Ownership of Management

The following table sets forth the information indicated as of February 28,
1997 with respect to common stock of the Company beneficially owned by directors
and officers of the Company and by directors and officers as a group:

Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (1)
---------------------------------- -------------------- -------------
<S> <C> <C>
Robert M. Beningson 3,491,000(1)(2) 21.2%

Michael Trachtenberg 286,200(1)(3) 2.0%

Robert C. Paladino 202,000(1)(5) 1.4%

H. Clifton Whiteman 1,235,420(1)(4) 8.6%

Stanley Weinstein 20,000(1)(6) (6)

Directors and Officers
as a group (5) persons 5,234,620(1) 30.8%
</TABLE>

-21-

<PAGE>

(1) The Percent of Class is based upon 14,256,304 issued and outstanding shares
of common stock at February 28, 1997 plus the shares that underlie
unexercised warrants or options held by the individuals.

(2) Includes 824,000 shares owned directly, plus warrants to purchase 1,650,000
shares of common stock, options to purchase 575,000 shares of common stock
and 442,000 shares owned by RRR'S Ventures, Ltd., a corporation controlled
by Mr. Beningson.

(3) Includes 21,200 shares owned directly by Mr. Trachtenberg and options to
purchase 265,000 shares of common stock.

(4) Includes 75,200 shares owned directly by Mr. Whiteman, warrants to purchase
40,000 shares of common stock, and 1,120,220 shares held by the ESOP of
which Mr. Whiteman is the trustee.

(5) Includes 6,000 shares owned directly by Mr. Paladino and options to purchase
196,000 shares of common stock.

(6) Includes warrants to purchase 20,000 shares of common stock; less than 1%
ownership.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Beningson is President and a major shareholder of RRR'S Ventures, Ltd.,
a corporation in which the Chief Financial Officer of the Company is also a
minor shareholder, which is 25% general partner to WCTP, limited partner in RV
Associates L.P. ("RVA") (which in turn is a minority partner in B-41LP), and 10%
general partner in York Cogen Partners L.P. ("YCP"), a limited partner in B-41LP
(see Note 4). Mr. Beningson is also a 15% shareholder in NAEC.

At February 28, 1997, WCTP was indebted to the Company for approximately
$2,006,000 related to operations and maintenance services, of which $1,583,625
was paid subsequent to year end, for approximately $2,500,000 for loans to WCTP
and for professional services paid for on behalf of WCTP, and for approximately
$28,810,000 related to the transfer of the Warbasse Facility, and indebted to
YCP for $28,522,000 (see Note 5).

In Fiscal 1993, RVA received a distribution of $2,000,000 from B-41LP which
is expected to be charged against capital, concurrent with future allocations of
income.

At February 28, 1997, Mr. Beningson was indebted to the Company for
$6,971,500 related to the exercise of warrants and purchase of common shares in
prior years. Mr. Trachtenberg is indebted to the Company for $214,860 related to
the exercise of options. Mr. Paladino is indebted to the Company for $130,000
related to the exercise of options and an advance. All these amounts are
non-interest bearing and are payable on demand. Mr. Whiteman is indebted to the
Company for $125,000 related to demand loans, the principal of which bears
interest at prime.

At February 28, 1997 and 1996, approximately $62,000 and $75,000,
respectively, was due to the Company from RRR'S as a result of general partners'
and administrative fees due to RRR'S by YCP, offset by, the cumulative effect of
expenses paid by the Company on behalf of RRR'S.

-22-

<PAGE>

In March 1997, B-41LP settled all its obligations to SBCC for a cash payment
of $2,750,000. SBCC, in exchange for this cash payment gave up all its interest
in the future cash flow from the Brooklyn Navy Yard Project and has no
continuing interest in any of the Company's projects or assets. In settling this
obligation, B-41LP caused RVA and its partners to lose tax benefits that they
would have been able to utilize. Therefore, the Company will compensate RVA for
its lost tax benefits in the total amount of $4 million. The form of this
non-cash transaction with RVA and its partners will be the exercise of 500,000
pre-existing warrants at $6 per share for a total of $3,000,000, and the
transfer of $1,000,000 of the Company's note receivable from the Chairman to a
nonconsolidated affiliate. This extinguishment of the SBCC liability will result
in an extraordinary gain of approximately $5.4 million net of taxes, which will
be reflected in the first quarter of Fiscal 1998.

As of November 1, 1996, the Company acquired 85% of the shares of NAEC for
$1 from NAEC. Prior to the acquisition, all of the stock was owned by the
Company's chairman. The acquisition has been accounted for as a purchase. In
Fiscal 1997, prior to the acquisition, the Company recognized approximately
$924,000 as reimbursement of cost.

In the year ended February 28, 1997, the Company recorded $11,000,000 of
fees for services rendered through February 28, 1997 to WCTP and RV Associates
L.P. ("RVA"), two partnerships of which a company controlled by the Company's
chairman is the general partner. This amount was included in service revenues.
These fees were recorded pursuant to a services agreement between WCTP, RVA, CTI
and York. The services include ongoing negotiations of consolidation agreements
with Con Edison and Edison Mission Energy, aiding in resolving various contract
issues concerning WCTP's and RVA's power purchase agreements with Con Edison,
and various issues related to the progress of the Brooklyn Navy Yard Project.
Included in other receivables at February 28, 1997 was the fourth quarter
installment of $3,500,000 of fees for services, which was received on May 14,
1997.

The Company recognizes that potential conflicts of interest may arise by
reason of the fact that Mr. Beningson controls RRR'S Ventures, Ltd. and RVA, and
is President and Chief Executive Officer of the Company. Mr. Beningson has
advised the Company that in all transactions between or affecting any affiliated
entity and the Company he will act in the best interests of the shareholders of
the Company, as determined by the Board of Directors of the Company, excluding
himself.

-23-

<PAGE>
PART IV

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(1)(1) and (a)(2): See Index to Consolidated Financial Statements at Page

27. (a)(3) Exhibits:

<TABLE>
<C> <S>
3(a) Certificate of Incorporation of the Company, as amended. (1)

3(a) (I) Certificate of Amendment to the Company's Certificate of Incorporation as filed
with the Secretary of State of the State of Delaware on May 16, 1988.

3(b) Bylaws of the Company. (1)

4(a) Form of Certificate evidencing Common Stock, $.01 par value per share, of the
Company. (2)

10(o) Agreement for Construction of Additional Capacity, dated May 7, 1990, between
Warbasse-Cogeneration Technologies Partnership, L.P. and York Research Corporation.
(3)

10(q) Lease and Energy Sale Agreement, dated December 18, 1989 between the Brooklyn Navy
Yard Development Corporation and Cogeneration Technologies, Inc., a wholly owned
subsidiary of the Company. (4)

10(r) Limited Partnership Agreement by and between Mission Energy New York, Inc. and B-41
Associates, L.P., dated October 19, 1992, with Exhibits thereto. (5)

10(s) Stipulation of Settlement among counsel to plaintiffs in litigation entitled In Re
York Research Corporation Securities Litigation, United States District Court,
Southern District of New York, Master File No. 91 Civ. 5040 (LJF), and counsel for
all defendants therein, dated January 15, 1993, with Exhibits thereto. (5)

10(t) Final Judgment of Dismissal with Prejudice, In Re York Research Corporation
Securities Litigation, United States District Court, Southern District of New York,
Master File No. 91 Civ. 5040 (LJF). (5)

10(u) Amended and Restated Agreement of Limited Partnership of B-41 Associates L.P., dated
December 26, 1992. (5)

10(bb) Promissory Note, dated November 17, 1994, made by Warbasse-Cogeneration Technologies
Partnership L.P. payable to the order of Cogeneration Technologies, Inc. (8)

-24-

<PAGE>

10(cc) Security Agreement, dated as of November 17, 1994, made by Warbasse-Cogeneration
Technologies Partnership L.P. to Cogeneration Technologies, Inc. (8)

10(dd) Assignment and Security Agreement, dated as of November 17, 1994, made by Warbasse-
Cogeneration Technologies Partnership L.P. to Cogeneration Technologies, Inc. (8)

10(ee) Intercreditor Agreement, dated as of November 17, 1994, by and among Tomen Power
Corporation, B-41 Associates, L.P., Cogeneration Technologies, Inc. and Warbasse-
Cogeneration Technologies Partnership L.P. (8)

10(ff) Restructuring Fee Agreement, dated as of November 17, 1994, by and among Warbasse-
Cogeneration Technologies Partnership L.P., B-41 Associates, L.P. and Cogeneration
Technologies, Inc. (8)

10(gg) Subordinated Promissory Note, dated as of November 17, 1994, made by Warbasse-
Cogeneration Technologies Partnership L.P. payable to the order of B-41 Associates,
L.P. in the principal amount of $3,000,000. (8)

10(hh) Subordinated Promissory Note, dated as of November 17, 1994, made by Warbasse-
Cogeneration Technologies Partnership L.P. payable to the order of Cogeneration
Technologies, Inc. in the principal amount of $3,000,000. (8)

10(ii) Agreement of Limited Partnership of York Cogen Partners, L.P.

10(jj) Renegotiation and Payment Agreement dated February 28, 1997 by and between Sanwa
Business Credit Corporation and B-41 Associates, L.P.

21 Subsidiaries of the Company

23 Consent of Independent Certified Public Accountants.
</TABLE>

(b) Consolidated Financial Statements

See Index to Consolidated Financial Statements at Page 27.

All other exhibits and financial statement schedules have been
omitted because they have been previously filed or incorporated by
reference, in the Company's Form 10K for the fiscal year ended September
30, 1990, are inapplicable, or the required information is included
elsewhere in the Consolidated Financial Statements or the notes thereto.

The following reports on Form 8-K were filed during the year ended February
28, 1997:

On November 20, 1996, the Company filed a report on Form
8-K with regard to the acquisition of 85% of the outstanding
shares of North American Energy Conservation, Inc.

-25-

<PAGE>

(1) Previously filed as an Exhibit, under the corresponding exhibit number, to
the Company's Form 10K for the fiscal year ended September 30, 1982,
Commission file number 0-72, and incorporated herein by reference.

(2) Previously filed as an Exhibit, under the corresponding exhibit number with
Registration Statement No. 33-13899 on April 30, 1987 and incorporated
herein by reference.

(3) Previously filed as an Exhibit with the Company's Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.

(4) Previously filed as an Exhibit with the Company's Form 10K for the year
ended September 30, 1990 and incorporated herein by reference.

(5) Previously filed as an Exhibit with the Company's Form 10K for the year
ended February 28, 1993 and incorporated herein by reference.

(6) Previously filed as an Exhibit with the Company's Form 10K for the year
ended February 28, 1994 and incorporated herein by reference.

(7) Previously filed as an Exhibit with the Company's Form 10-Q for the quarter
ended August 31, 1994 and incorporated herein by reference.

(8) Previously filed as an Exhibit with the Company's Form 10-Q for the quarter
ended November 30, 1994 and incorporated herein by reference.

-26-
<PAGE>

(YORK)RESEARCH CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE(S)

<S> <C>
York Research Corporation and Consolidated Subsidiaries:

Report of Independent Certified Public Accountants 28

Consolidated Financial Statements:
Consolidated Balance Sheets--February 28, 1997 and 1996 29

Consolidated Statements of Operations for the Years Ended February 28, 1997, February 28, 1996
and February 28, 1995 30

Consolidated Statement of Stockholders' Equity for the Years Ended February 28, 1997, February
28, 1996 and February 28, 1995 31

Consolidated Statements of Cash Flows for the Years Ended February 28, 1997, February 28, 1996
and February 28, 1995 32

Notes to Consolidated Financial Statements 33
through
57
</TABLE>

-27-

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
York Research Corporation:

We have audited the accompanying consolidated balance sheets of York
Research Corporation and Subsidiaries as of February 28, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended February 28, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
York Research Corporation and Subsidiaries at February 28, 1997 and 1996, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended February 28, 1997, in conformity
with generally accepted accounting principles.

As of February 28, 1997, a substantial portion of the Company's assets are
related to the Warbasse Project (See Notes 5 and 6).

Grant Thornton LLP

New York, New York
May 16, 1997

-28-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

PRO FORMA
FEBRUARY 28,
FEBRUARY 28, 1997 (SEE NOTE 5) FEBRUARY 28,
1997 (UNAUDITED) 1996
------------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 11,513,026 $ 8,763,026 $ 5,530,190
Accounts receivable.............................. 7,900,114 7,900,114 --
Other receivables--related parties............... 8,298,806 8,298,806 2,434,498
Inventory........................................ 1,312,086 1,312,086 --
Deferred tax asset............................... 661,000 661,000 684,000
Other current assets (including advances to
employees of $146,300, $146,300 and $32,775,
respectively).................................. 311,356 311,356 204,728
------------- ---------------- ------------
Total current assets........................... 29,996,388 27,246,388 8,853,416
Property, plant and equipment, net................. 602,428 602,428 353,755
Construction in progress--WCTP..................... -- -- 24,726,114
Long-term note receivable--WCTP.................... 49,490,535 49,490,535 20,682,000
Other long-term receivables--WCTP.................. -- -- 1,529,978
Advances to minority partner....................... 2,000,000 2,000,000 2,000,000
Payment in lieu of performance bond-- WCTP......... -- -- 500,000
Other assets (including advances to employees and a
director of $608,267, $608,267 and $627,267,
respectively).................................... 2,402,082 2,402,082 979,094
Excess of investment over net assets acquired,
net.............................................. 337,940 337,940 377,312
------------- ---------------- -------------
Total assets................................... $ 84,829,373 $ 82,079,373 $ 60,001,669
------------- ---------------- -------------
------------- ---------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 10,765,462 $ 10,765,462 $ 1,209,978
Accrued expenses................................. 1,659,085 1,659,085 1,443,149
Accrued income taxes............................. 765,498 765,498 144,342
------------- ---------------- -------------
Total current liabilities...................... 13,190,045 13,190,045 2,797,469
Due to SBCC........................................ 19,982,000 -- 20,232,000
Other long-term liabilities........................ 884,949 884,949 684,833
Deferred revenue and other credits................. 3,460,000 7,907,937 3,460,000
------------- ---------------- -------------
Total liabilities.............................. 37,516,994 21,982,931 27,174,302
Minority interest in partnership................... 321,942 3,669,638 --
Commitments and contingencies...................... -- -- --
Stockholders' equity
Common stock, Class A, $.01 par value; authorized
10,000,000 shares; none issued................. -- -- --
Common stock, $.01 par value; authorized 50,000,000
shares; issued and outstanding
14,256,304 and 13,329,778 shares in 1997 and
1996, respectively............................. 142,563 147,563 133,298
Additional paid-in capital....................... 60,350,127 63,345,127 54,230,850
Accumulated earnings (deficit)................... (4,083,050) 1,353,317 (11,905,661)
------------- ---------------- -------------
56,409,640 64,846,007 42,458,487
Less:
Treasury stock, at cost (47,124 shares)............ (706,401) (706,401) (706,401)
Notes receivable--sale of common stock............. (7,960,313) (6,960,313) (7,539,787)
Deferred compensation--ESOP........................ (752,489) (752,489) (1,384,932)
------------- ---------------- -------------
Total stockholders' equity..................... 46,990,437 56,426,804 32,827,367
------------- ---------------- -------------
Total liabilities and stockholders' equity..... $ 84,829,373 $ 82,079,373 $ 60,001,669
------------- ---------------- -------------
------------- ---------------- -------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

-29-

<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28,

<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Services........................................................... $ 19,756,615 $ 10,450,061 $ 2,974,156
Energy sales....................................................... 26,570,707 -- --
Development and other fees......................................... -- 3,941,688 4,550,064
------------- ------------- ------------
Total revenues................................................... 46,327,322 14,391,749 7,524,220
------------- ------------- ------------
Costs and expenses:
Cost of services................................................... 6,216,115 5,452,869 2,966,075
Cost of energy..................................................... 25,112,691 -- --
Selling, general and administrative................................ 7,859,239 6,019,547 5,720,640
Interest and other (income) expense................................ (4,205,276) (2,430,295) (1,554,539)
Minority interest in partnership................................... 321,942 500,000 --
------------- ------------- ------------
Total costs and expenses......................................... 35,304,711 9,542,121 7,132,176
------------- ------------- ------------
Income before income taxes........................................... 11,022,611 4,849,628 392,044
Provision for income taxes........................................... 3,200,000 450,000 170,000
------------- ------------- ------------
Net income........................................................... $ 7,822,611 $ 4,399,628 $ 222,044
------------- ------------- ------------
------------- ------------- ------------
Net income per common share--primary:................................ $ 0.51 $ 0.35 $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Net income per common share--fully diluted:.......................... $ 0.51 $ 0.35 $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Weighted average number of common shares and common share
equivalents:....................................................... 15,487,779 15,512,011 10,981,173
------------- ------------- ------------
------------- ------------- ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

-30-

<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED TREASURY NOTES DEFERRED
ISSUED AMOUNT CAPITAL (DEFICIT) STOCK RECEIVABLE COMPENSATION
------------ -------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28,
1994................ 12,480,594 $124,806 $49,252,945 $(16,527,333) $(706,401) $(7,292,406) $(6,109,390)
Issuance of common
stock for services.. 80,000 800 174,200 -- -- -- --
Exercise of options... 50,000 500 164,400 -- -- (162,000) --
Cash receipts......... -- -- -- -- -- 60,998 2,153,000
ESOP third party
loans............... -- -- -- -- -- -- 156,029
Deferred compensation
accrual............. -- -- 28,450 -- -- -- 344,870
Net income............ -- -- -- 222,044 -- -- --
---------- -------- ----------- ------------- ---------- ------------- ------------
Balance, February 28,
1995................ 12,610,594 126,106 49,619,995 (16,305,289) (706,401) (7,393,408) (3,455,491)
Exercise of options... 222,957 2,230 776,045 -- -- (296,379) --
Exercise of
warrants............ 207,727 2,077 970,843 -- -- -- --
Cash receipts......... -- -- -- -- -- 150,000 3,079,000
Deferred compensation
accrual............. -- -- 263,958 -- -- -- 148,778
Issuance of shares to
ESOP................ 288,500 2,885 1,089,334 -- -- -- (1,092,219)
Tax effect of options
and warrants........ -- -- 1,013,000 -- -- -- --
ESOP third party
loans............... -- -- -- -- -- -- (65,000)
Issuance of
warrants............ -- -- 497,675 -- -- -- --
Net income............ -- -- -- 4,399,628 -- -- --
---------- -------- ----------- ------------- ---------- ------------- ------------
Balance, February 28,
1996................ 13,329,778 133,298 54,230,850 (11,905,661) (706,401) (7,539,787) (1,384,932)
Exercise of options... 333,800 3,338 1,015,350 -- -- (420,526) --
Exercise of
warrants............ 589,726 5,897 2,743,124 -- -- -- --
Donation of stock..... 3,000 30 30,345 -- -- -- --
Cash receipts......... -- -- -- -- -- -- 450,000
Deferred compensation
accrual............. -- -- 342,458 -- -- -- 182,443
Tax effect of options
and warrants........ -- -- 1,988,000 -- -- -- --
Net income............ -- -- -- 7,822,611 -- -- --
---------- -------- ----------- ------------- ---------- ------------- ------------
Balance, February 28,
1997................ 14,256,304 $142,563 $60,350,127 $(4,083,050) $(706,401) $(7,960,313) $(752,489)
---------- -------- ----------- ------------- ---------- ------------- ------------
---------- -------- ----------- ------------- ---------- ------------- ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

-31-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28,

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income from operations............................................. $ 7,822,611 $ 4,399,628 $ 222,044
Adjustments to reconcile net income from operations to net cash
generated by (used in) operating activities:
Depreciation and amortization........................................ 160,754 167,185 146,857
Deferred income taxes................................................ 23,000 (684,000) --
Non-cash charges..................................................... 397,391 25,000 --
Common shares issued for services and donation....................... 30,375 -- 175,000
Amortization of deferred credits..................................... -- (392,633) (1,152,128)
Gain on sale and disposition of machinery and equipment.............. -- -- 2,855
ESOP contribution.................................................... 524,901 412,736 373,320
Tax benefit of stock options and warrants............................ 1,988,000 1,013,000 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables................................. (10,988,635) (1,687,043) 15,882
Increase in construction in progress............................... -- (2,984,374) (1,845,797)
Net (increase) decrease in notes receivable, inventory, other
current assets, and other assets................................. (3,235,578) (246,483) 415,038
Net decrease in due to bank and equipment vendor................... -- -- (571,664)
Net increase (decrease) in accounts payable, accrued expenses and
long-term liabilities............................................ 5,156,465 (413,744) (221,683)
Increase in accrued taxes.......................................... 246,166 (118,151) 104,921
------------ ----------- -----------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES................. 2,125,450 (508,879) (2,335,355)
------------ ----------- -----------
INVESTING ACTIVITIES:
Purchase of machinery and equipment.................................. (158,995) (144,697) (220,304)
Purchase of NAEC, net of cash acquired............................... 128,495 -- --
------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................................ (30,500) (144,697) (220,304)
------------ ----------- -----------
FINANCING ACTIVITIES:
Amounts received from ESOP........................................... 450,000 3,079,000 2,153,000
Proceeds from notes receivable....................................... -- 150,000 --
Payments on capital leases........................................... (31,687) (17,545) (20,415)
Payment of due to SBCC............................................... (250,000) (250,000) (200,000)
Proceeds from exercise of stock options and warrants................. 3,719,573 1,454,816 500
------------ ----------- -----------
NET CASH GENERATED BY FINANCING ACTIVITIES........................... 3,887,886 4,416,271 1,933,085
------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 5,982,836 3,762,695 (622,574)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 5,530,190 1,767,495 2,390,069
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 11,513,026 $ 5,530,190 $ 1,767,495
------------ ----------- -----------
------------ ----------- -----------
</TABLE>

Non-cash investing and financing activities:

During Fiscal 1997, $28,808,535 was converted from construction in
process, other long-term receivables-WCTP and payment in lieu of performance
bond-WCTP to notes receivable-WCTP.

During Fiscal 1997, the Company acquired 85% of the common stock of NAEC
for $1. The fair value of assets acquired was $4,587,849, and liabilities
assumed were $4,960,240.

During Fiscal 1997, a capital lease obligation of $211,060 was incurred
when the Company entered into leases for new equipment.

During Fiscal 1996, the Company issued 288,500 shares of common stock to
the ESOP, in exchange for a note receivable for $1,092,219.

During Fiscal 1997, 1996 and 1995, the Company received $420,526,
$296,379 and $162,000 of notes receivable--sale of common stock,
respectively, for options exercised.

The accompanying notes are an integral part of these financial statements.

-32-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

1. NATURE OF BUSINESS
------------------

York Research Corporation ("York" or the "Company") is a developer, owner
and marketer of energy related projects and products and through its
subsidiaries, partnerships, joint ventures and affiliates, currently
participates in two broad areas of the energy business--power project
development and services, including cogeneration and wind energy, and the
marketing of energy and natural gas in the wholesale power markets and the
wholesale and retail natural gas markets.

The principal markets for the Company's products and services currently are
the United States and Eastern Canada. Revenues are principally derived from
entities that supply, broker or market energy to utilities, residential
complexes, and industrial concerns.

2. USE OF ESTIMATES
----------------

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------

PRINCIPLES OF CONSOLIDATION
---------------------------

The consolidated financial statements of York and subsidiaries and all
majority owned partnerships include the accounts of Cogeneration Technologies,
Inc. ("Cogen"), B-41 Associates L.P. ("B-41LP"), B-41 Management Corporation
("B-41MC"), York Cogen Partners L.P. ("YCP"), York Internet Power Services,
Inc., North American Energy Conservation, Inc. ("NAEC"), York Research Canada,
Inc. ("York Canada") and York Windpower Corp., which is 100% owned by York
Canada. All material intercompany profits and transactions have been eliminated
in consolidation.

CASH AND CASH EQUIVALENTS
- -------------------------

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

-33-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

REVENUE RECOGNITION
-------------------

The Company recognizes service revenues and energy sales in the period in
which the work is performed or the commodity is delivered. Development fees
received were either amortized over the related development period, or
recognized as received, based on their nature.

LONG-TERM CONTRACT AND CONSTRUCTION IN PROGRESS
-----------------------------------------------

Due to the uncertainties that had surrounded the Warbasse Project (see Note
5), the Company accounted for the Warbasse Project construction contract using
the completed contract method. Construction in progress included equipment,
building structure and installation subcontract costs, and construction period
interest.

PROPERTY, PLANT AND EQUIPMENT
-----------------------------

Property, plant and equipment are stated at cost and are being depreciated
or amortized on the straight-line method over their estimated useful lives as
follows:

Machinery and equipment.................. 5-10 years
Furniture and fixtures................... 5-10 years
Motor vehicles........................... 3 years
Leasehold improvements................... 5-8 years

INCOME TAXES
------------

The Company utilizes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109,
deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities including
net operating loss carryforwards, using the enacted marginal tax rate. Deferred
income tax expense or benefits are based on the changes in the asset or
liability from period to period. Deferred tax assets are recognized to the
extent realization of such benefits are more likely than not.

EXCESS OF INVESTMENT OVER NET ASSETS ACQUIRED, NET
--------------------------------------------------

The Company's acquisition of Cogen in 1985 resulted in an $828,000 excess
of investment over net assets acquired, which is being amortized on a
straight-line basis over 20 years. Accumulated amortization at February 28,
1997 and 1996 is $490,000 and $451,000, respectively. At each balance sheet
date, the Company evaluates the

-34-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

realizability of goodwill based upon expectations of nondiscounted cash flows
and operating income for each subsidiary having a material goodwill balance.
Based upon its most recent analysis, the Company believes that no material
impairment of goodwill exists at February 28, 1997.

LONG-TERM NOTE RECEIVABLES-WCTP
-------------------------------

The realizability of the long-term note receivable-WCTP is evaluated by the
Company by review of the present value of the currently expected future cash
flow from the Warbasse facility.

PER SHARE DATA
--------------
Per share data is based on the weighted average number of common shares and
common share equivalents (warrants and options) outstanding during the year,
calculated using the modified treasury stock method in 1997 and 1996, and the
treasury stock method in 1995.

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average number of shares outstanding........................... 13,705,557 12,888,772 12,465,744
Average of unreleased ESOP shares (a)................................... (923,006) (1,219,279) (1,604,666)
Dilution (warrants and options) (b)..................................... 2,705,228 3,842,518 120,095
------------ ----------- -----------
Weighted average number of common share and common share equivalents.... 15,487,779 15,512,011 10,981,173
------------ ----------- -----------
------------ ----------- -----------
</TABLE>

(a) Amount reflects average unreleased ESOP shares (see Note 11) for the
periods presented. As of 2/28/97, the balance of unreleased ESOP shares
was 867,995.

(b) Amount reflects average dilution for the periods presented. Fiscal 1997 and
1996 include an average of 175,000 and 1,199,300 options and warrants,
respectively, exercisable at prices above market; Fiscal 1995 includes only
options and warrants below market.

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

The carrying amounts of cash and cash equivalents, accounts and other
receivables, accrued expenses and accounts payable approximate fair value,
principally because of the short maturity of these items. For the fair value
of Due to SBCC, see Note 5. For long-term receivables-WCTP (see Note 5 for
terms) and advances to minority partner (see Note 14 for terms), there are no
quoted market prices, and a reasonable estimate of fair value could not be
made without incurring excessive costs.

-35-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

INVENTORY
---------

Inventory consists of natural gas held in storage. The Company accounts for
its natural gas inventory using lower of cost or market, cost being determined
using the average cost method.

RECLASSIFICATIONS
-----------------

Certain amounts in the 1996 consolidated financial statements were
reclassified to conform to the 1997 presentation.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------

In February 1997, the Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share, which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted earnings per share reflects the weighted average common shares
outstanding plus the potential dilutive effect of securities or contracts which
are convertible to common shares, such as options, warrants, and convertible
preferred stock. The pro forma effect of adopting the new standard would be
basic earnings per share of $.61, $.38 and $.02, and diluted earnings per share
of $.52, $.35 and $.02 for the years ended February 28, 1997, 1996 and 1995,
respectively.

4. BROOKLYN NAVY YARD
------------------

A joint venture, Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP")
was formed as of October 19, 1992. BNYLP is owned and controlled equally by a
subsidiary of Edison Mission Energy ("Mission"), which is a wholly-owned
subsidiary of SCE Corp., and B-41LP. BNYLP was formed to develop, construct,
finance, own and operate the 286 megawatt ("MW") natural-gas-fired,
combined-cycle Brooklyn Navy Yard ("BNY") cogeneration facility with
Consolidated Edison Company of New York, Inc. ("Con Edison") and various host
entities as the principal customers.

-36-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

B-41LP was formed to more effectively develop and manage the original
partners' investments in the BNY facility. The profit sharing and ownership
percentages in the B-41LP partnership agreement, as amended, are as follows:

1. RV Associates L.P. ("RVA"), whose limited partner, RRR'S Ventures
Ltd., and general partner are controlled by the Chairman of the
Company, is a 5% general partner. B-41MC, a wholly-owned subsidiary
of York, is also a 5% general partner.

2. RVA is also a 15% limited partner. RVA contributed a power purchase
agreement totaling 40 MW.

3. Cogen, a wholly-owned subsidiary of York, is a 22% limited partner.
Cogen contributed a power purchase agreement totaling 40 MW.

4. YCP is a 53% limited partner. RRR'S Ventures Ltd. is the 10% general
partner of YCP, and York is the 90% limited partner in YCP. YCP
contributed a power purchase agreement totaling 90 MW.

For tax purposes, depreciation, operating losses and capital transactions
are subject to other sharing percentages.

The BNYLP partnership agreement contains provisions, among other things,
with respect to funding obligations of Mission, security for loans and
guarantees by Mission, the allocation of cash flow and tax depreciation under
various circumstances, profits and losses both before and after Mission's
advances have been repaid, management of the Partnership, and dispute resolution
(including provisions for a buy out of either Mission's or B-41LP's general
partnership interest). B-41LP and Mission are in the process of amending the
Partnership agreement to reflect certain changes pertaining to funding
obligations, management, and operations.

Upon formation of BNYLP, all of the project-related assets, contract
rights, leases or other intangible assets that had been accumulated by the
Company and B-41LP during the pre-joint venture development period, as well as
all related liabilities, were transferred to BNYLP. Although BNYLP accounts for
B-41LP's contribution at an agreed upon value of $7,000,000, B-41LP recorded
its investment in BNYLP at the historical carrying value of the assets

-37-

<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

contributed of zero. B-41LP accounts for its investment in BNYLP under the
equity method.

For the years ended February 28, 1997 and 1996, BNYLP's only activity was
the construction, testing and initial operation of the BNY facility. As capacity
payments from Con Edison did not start until March 1997, BNYLP did not recognize
any revenues, expenses, or operating profits or losses. The summarized financial
information of BNYLP at February 28, 1997 and 1996 is as follows:

(UNAUDITED) (UNAUDITED)
1997 1996
-------------- --------------
Current assets........................... $ 23,797,000 $ 15,138,000
Noncurrent assets........................ $454,747,000 $351,980,000
Current liabilities...................... $204,234,000 $ 93,277,000
Noncurrent liabilities................... $253,926,000 $253,926,000
Net assets............................... $ 20,384,000 $ 19,915,000

The Company and Mission previously estimated the total capital costs of the
BNY Facility, when fully completed, to be approximately $420,000,000. On
December 22, 1995, the New York City Industrial Development Agency (the "IDA")
issued $253,925,700 of Industrial Development Revenue Bonds for the purpose of
financing certain costs incurred through that date in constructing and
developing the BNY Facility. These bonds are recourse to a letter of credit
("LOC") in like amounts arranged by Mission, which LOC is in turn supported by a
Mission guarantee. BNYLP has agreed to reimburse Mission if the guarantee is
called, out of future cash flow as and if available. The proceeds of this bond
sale were being used to reimburse Mission for a portion of its construction
loans made to date and to reimburse the Company for engineering and other costs
that had been expensed in prior periods and for services that have been
performed by the Company.

In March 1996, the project delivered initial test quantities of power to Con
Edison, equivalent to existing contract capacity. Construction was substantially
completed and the facility commenced operations in accordance with its contract
on November 1, 1996. Mission has funded all construction costs incurred to date
in excess of those funded by the IDA bonds mentioned above, and may need to
provide additional guarantees to secure project financing. The Company has no
obligation to fund the project or provide guarantees and all obligations
incurred by BNYLP to date are non-recourse to the Company.

-38-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

In consideration for certain development services for the BNY facility
performed by the Company, RVA has assumed the obligation for certain credit
facilities totaling $9,750,000 which are repayable only from amounts received
from third party BNYLP financings or BNY facility operations.

As of February 28, 1997, the Company and B-41LP have received a total of
$21,541,000 for development fees, a nonrefundable commission from a vendor in
connection with the procurement of certain BNYLP equipment, and for
reimbursement of development costs net of related liabilities assumed by BNYLP.
In Fiscal 1997, 1996 and 1995, the Company recognized development fee revenue of
$0, $3,267,000 and $4,300,000, respectively. At February 28, 1997 and 1996,
revenues of $3,460,000 have been deferred, which is one half of the
nonrefundable commission, to be recognized over the estimated useful life of the
related equipment.

In accordance with the joint venture agreement, the Company provides
engineering services for BNYLP. During Fiscal 1997, 1996 and 1995, the Company
recognized revenue from engineering services of approximately $838,000,
$780,000 and $593,000, respectively, which are reflected in service revenues
and cost of services. During Fiscal 1997 and 1996, the Company also recognized
reimbursements of $2,500,000 and $5,000,000, respectively, for certain
engineering and other costs a portion of which had been expensed in prior
periods. At February 28, 1997 and 1996, the Company had receivables from BNYLP
of approximately $280,000 and $138,000, respectively. These amounts are
included in other receivables and were fully collected subsequent to the
respective year ends.

Commencing December 1, 1996, BNYLP paid general partner fees to B-41LP
equal to 2.5% of gross monthly revenues of the Brooklyn Navy Yard project.
B-41LP in turn pays a general partner fee of 1.25% of gross monthly revenues to
each of B-41MC and RVA. In the year ended February 28, 1997, B-41MC recognized
general partner fees of $298,690, with a receivable of $166,598 at February 28,
1997, which was paid in April 1997.

-39-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

Management Committee, B-41LP still remains a 50% general and limited partner
in the Navy Yard project and retains all its other rights, and Mission retains
all its funding and other obligations to the Project and B-41LP.

In February 1997, the general contractor of the Brooklyn Navy Yard facility
brought an action in California against BNYLP seeking damages of $137 million
for amounts owed under the turnkey contract and denying liability under various
claims. BNYLP responded to the complaint, denying all the allegations contained
therein and commenced an action in New York against the general contractor
denying any liability under the turnkey contract and seeking in excess of $13
million of counter claims. In addition, BNYLP has been named as one of the
defendants in another action relating to the construction activity of the
Brooklyn Navy Yard facility. Although it is a general partner of BNYLP, B-41LP
was not served in these complaints and is not a party to any of the actions.

Like other large projects of this nature, the BNY cogeneration facility is
subject to various risks. There can be no assurance that the facility, although
completed, will operate at sufficient levels to cover all operation and
maintenance expenses and debt service. The Company has no liability for any such
shortfalls.

5. WARBASSE PROJECT
----------------

In May 1990, an agreement was entered into between Warbasse-Cogeneration
Technologies Partnership L.P. ("WCTP") (see Note 14) and the Company whereby the
Company agreed to construct the expansion of the Warbasse facility converting it
from the engine facility previously constructed for WCTP by the Company, to a
larger gas turbine facility (the "Warbasse Project") to enable it to service Con
Edison pursuant to the existing contract between WCTP and Con Edison.

The Company also contracted with WCTP to provide operations and maintenance
services for the Warbasse Project at its direct cost. The services agreement
includes providing fuel, operating, manning and maintaining the facility. The
Company operates the Warbasse Facility, supplying on a continuous basis all the
thermal and electric energy needs of the host, Amalgamated Warbasse Houses,
Inc., and supplying up to the full capacity requirements of its electric power
contract with Con Edison, when dispatched. During Fiscal 1997, 1996 and 1995,
the Company recognized approximately $5,400,000, $4,700,000 and $2,400,000,
respectively, for operations and maintenance services revenues, which has been
reflected in service revenues. Cost of

-40-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

services for the same periods was approximately $5,400,0000, $4,700,000 and
$2,400,000, respectively.

On July 27, 1994, B-41LP purchased from Sanwa Business Credit Corp.
("SBCC") the note obligation of WCTP to SBCC together with all related
collateral and ancillary rights owned by SBCC. In payment, SBCC would have
received a share of the cash flow, if any, from the BNY project. The note
obligation of WCTP to B-41LP (the "B-41LP Note") has been recorded as a
Long-term note receivable--WCTP and has a face value of $28,522,000, which
includes accrued interest of $6,022,000 from April 1, 1991 through July 27,
1994. This obligation is payable to B-41LP from a portion of the net operating
cash flow of the Warbasse project. On December 1, 1996, this note obligation of
WCTP (herein after referred to as the YCP Note) was assigned to YCP by B-41LP.
The YCP Partnership Agreement was amended to provide that the amounts received
by YCP in respect of the note obligation shall be distributed 74.7% to York
and 25.3% to RRR'S, its minority partner, which are the same distribution
percentages as were held by York and affiliates of RRR'S in B-41LP.

The YCP Note has been reflected in the consolidated balance sheet at an
amount equal to the initial obligation to SBCC. The $7,840,000 difference
between the face amount of the note and the amount reflected will be adjusted to
income over time as principal payments of the long-term note receivable are made
by WCTP.

The obligation of B-41LP to SBCC has been recorded as Due to SBCC of
$20,682,000, which was the net present value of the maximum annual amount
payable to SBCC, over 30 years discounted at 7%. Other than $700,000 paid
through February 28, 1997, the amount to be paid to Sanwa would have been a
function of B-41LP's share of the actual cash flow generated from the BNY
project, with no guaranteed minimum amount. B-41LP's obligation to SBCC was
recourse only to and secured only by B-41LP's cash flow, if any, from the BNY
project.

-41-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

of $3,000,000, and the transfer of $1,000,000 of the Company's note receivable
from the Chairman to a nonconsolidated affiliate. This extinguishment of the
SBCC liability will result in an extraordinary gain of approximately
$5.4 million net of taxes, which will be reflected in the first quarter of
Fiscal 1998. The accompanying pro forma balance sheet reflects these
transactions as if they occurred on February 28, 1997.

On November 17, 1994, the YCP Note due from WCTP was restructured along
with other long-term debt of WCTP. Such other long-term debt of WCTP includes a
note payable to Tomen Power Corporation ("Tomen") and includes a note payable
to Cogen. The three notes will share in the net operating cash flow of WCTP, as
defined, pro rata in proportion to the principal balances of the notes, and
would share PARI PASSU in the collateral of WCTP in the event of a default.
Management expects that all three notes will be paid from the operations of
WCTP, and each note carries an interest rate of LIBOR plus 2%. In addition,
YCP and Cogen will receive a restructuring fee of $3,000,000 each, to be paid
the year after the three notes are fully paid.

The Company completed construction of the project, and on August 1, 1996,
the Warbasse Facility was transferred by Cogen to WCTP, in exchange for a Note
Receivable of $28,808,535. The Note Receivable represents the total construction
cost of the facility plus (1) the unpaid balance of approximately $1,530,000 in
Other long-term receivables-WCTP at February 28, 1996, which relates to
operation and maintenance services performed for WCTP in prior periods, (2) a
$500,000 payment made to WCTP in lieu of a performance bond and (3) an accrual
for the remaining construction tasks which generally relate to improving
efficiency and operational control. Therefore, the caption Long-term note
receivable-WCTP on the balance sheet consists of:

YCP Note............................ $20,682,000
CTI Note............................ 28,808,535
----------
$49,490,535
----------
----------

Interest income on these notes amounted to approximately $3,490,000,
$2,360,000 and $1,277,000 for Fiscal 1997, 1996 and 1995, respectively.

-42-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

6. OTHER RECEIVABLES--RELATED PARTIES
----------------------------------

Other receivables--related parties at February 28, 1997 and 1996 consist
of the following:

1997 1996
------------ ------------

Service and other receivables--WCTP.............. $ 8,019,190 $ 1,696,583
Engineering service and general
partner fee receivables-- BNYLP................ 279,616 137,915
Other receivables--NAEC.......................... -- 600,000
------------ ------------
$ 8,298,806 $ 2,434,498
------------ ------------
------------ ------------

Of the total other receivables--related parties at February 28, 1997,
$5,083,625 was received subsequent to year end.

7. PROPERTY, PLANT AND EQUIPMENT
-----------------------------

Property, plant and equipment at February 28, 1997 and 1996 consist of the
following:

1997 1996
---------- ----------
Machinery and equipment.................... $ 925,099 $ 650,738
Furniture and fixtures..................... 249,980 248,797
Motor vehicles............................. 315,448 221,937
Leasehold improvements..................... 36,064 35,064
---------- ----------
1,526,591 1,156,536
Less: accumulated depreciation............. (924,163) (802,781)
---------- ----------
$ 602,428 $ 353,755
---------- ----------
---------- ----------

8. CONSTRUCTION IN PROGRESS
------------------------

Construction in Progress ("CIP") as of February 28, 1996 included all of
the personal property procured, to which the Company had title, for expansion
of the Warbasse Project. Also included in CIP was $1,012,000 of interest and
professional fees capitalized through February 28, 1996. On August 1, 1996, the
Warbasse facility was transferred by Cogen to WCTP (see Note 5).

-43-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

9. ACCRUED EXPENSES
----------------

Accrued expenses at February 28, 1997 and 1996 include:

1997 1996
------------ ------------

Professional fees......................... $ 537,000 $ 643,000
Taxes other than income................... 445,000 --
Construction and
cogeneration services.................... -- 332,000
Accrued pension cost...................... 398,000 255,000
Other..................................... 279,000 213,000
----------- -----------
Total accrued expenses.................... $1,659,000 $1,443,000
----------- -----------
----------- -----------

10. STOCKHOLDERS' EQUITY
--------------------

Common Stock -- The Company has authorized 50,000,000 shares of common
stock. In addition, the Company has authorized 10,000,000 shares of Class A
common stock, none of which have been issued. Each Class A common share has
one/hundredth of a vote as compared with the regular common stock and is
entitled to a $.20 dividend priority before any dividends are payable on the
full voting common stock.

The Company, from time to time, issues shares of unregistered common stock
for payment of certain nonemployee services. The shares are valued at 70% of the
market value of registered common stock on the date of issue, which management
believes approximates the fair market value of services rendered. This
consideration has been included in selling, general and administrative expenses
in the appropriate period. There were no shares issued for payment of
nonemployee services in Fiscal 1997 or 1996. In Fiscal 1995, 80,000 shares were
issued with a value of $175,000 for payment of nonemployee services.

Incentive Stock Option ("ISO") Plan -- In 1982, the Company authorized
1,400,000 qualified stock options, which have all been granted. The 1982 Plan
expired on April 26, 1992. In September 1993, the Company adopted the 1993 ISO
Plan, authorizing a total of 3,000,000 qualified and nonqualified stock options,
of which 1,619,000 qualified stock options were granted to employees, and 56,000
nonqualified stock options were granted to two consultants to the Company.

Options granted under both plans may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Options granted under the Stock Option Plans will expire not more
than ten years from the date of grant.

-44-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

In Fiscal 1997, the Company granted 150,000 options to employees of the
Company. The exercise price of the options is equal to the fair market value of
the common stock at the date of the grant. These options vest over a three year
period.

The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, Accounting for Stock Based Compensation (FAS 123).
It applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock based compensation plans. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed by
FAS 123, the Company's net income and income per share would be decreased to the
pro forma amounts indicated below for the year ended February 28, 1997:

Net Income
As reported................. $7,822,611
Pro forma................... $7,698,490

Income per common share
As reported.................. $ .51
Pro forma.................... $ .50

No options were granted in Fiscal 1996.

These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before March 1, 1995. The fair value of these options was estimated
at the date of grant using Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended February 28, 1997:

Volatility............................ 79%
Risk free rate........................ 6.98%
Expected life......................... 10 years
Forfeiture rate....................... 33%

The weighted average fair value of options granted during Fiscal 1997, for
which the exercise price equals the market price on the grant date, was $7.64,
and the weighted average exercise price was $8.96.

-45-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

Stock option activity during Fiscal 1997, 1996 and 1995 is summarized
below:

WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- -----------------

Balance, February 28, 1994.................. 1,127,900 $ 5.55
Granted..................................... 1,139,000 3.14
Exercised................................... (50,000) 3.24
----------
Balance, February 28, 1995.................. 2,216,900 4.37
Exercised................................... (222,957) 4.24
Canceled.................................... (23,543) 4.23
----------
Balance, February 28, 1996.................. 1,970,400 4.36
Granted..................................... 150,000 8.96
Exercised................................... (333,800) 3.79
Canceled.................................... (40,773) 4.17
----------
Balance, February 28, 1997.................. 1,745,827 $ 4.90
----------
----------

At February 28, 1997, 1996 and 1995, 1,361,313, 1,496,252 and 282,034,
options, respectively, were exercisable.

The following table summarizes information concerning currently outstanding
and exercisable stock options:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$3.00-$4.50 750,544 7.39 $ 3.20 605,944 $ 3.22
$4.51-$6.00 730,983 5.82 $ 5.33 616,067 $ 5.35
$8.00-$10.00 264,300 7.02 $ 8.54 139,302 $ 8.17
--------- ---------
1,745,827 1,361,313
--------- ---------
--------- ---------
</TABLE>

Warrants--all warrants are exercisable upon grant, although the underlying
shares may not necessarily be registered, and the warrants expire after ten
years. The exercise prices of the warrants are the NASDAQ closing prices of the
Company's common stock at the dates of grant.

In February and March 1988, the Company's Chairman exercised warrants to
purchase 850,000 shares of common stock in exchange for cash and a noninterest
bearing note totaling $3,531,250. In September 1989, the Company's Chairman
exercised warrants to purchase 625,000 shares of common stock in exchange for
cash and a noninterest bearing note payable on demand totaling $3,706,250. In
Fiscal 1992, the Company's Chairman repaid $600,000. These notes, which total
$6,971,500 at February 28, 1997 and 1996 are included in Notes receivable--sale
of common stock (see Note 5). In June, 1996, the Company's Chairman gifted
100,000 warrants to various third parties.

-46-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

The following table presents Mr. Beningson's total number of warrants
outstanding as of February 28, 1997 (see Note 5):

Date of # Warrants Price per
Grant Held Share
----------- ----------- -----------
4/90 375,000 $ 6.00 (reset from $11.00 on
7/16/93)
1/91 475,000 $ 6.00 (reset from $8.00 on 7/16/93)
7/93 800,000 $ 6.00
---------
1,650,000
---------
---------

In July 1993, warrants were granted to purchase 40,000 shares of the
Company's common stock at a purchase price of $6.00 to H. Clifton Whiteman, a
director of the Company. In July 1995, Stanley Weinstein, a director of the
Company, was granted warrants to purchase 20,000 shares of the Company's common
stock at $5.44 per share through 2005.

In Fiscal 1997, a former director of the Company exercised warrants to
purchase a total of 300,000 shares of the Company's common stock in exchange for
$1,387,500. In Fiscal 1996, this former director exercised warrants to purchase
a total of 200,000 shares in exchange for $925,000. At February 28, 1997, this
former Director holds warrants to purchase 700,000 shares of common stock which
expire in 2002 and specify a purchase price of $4.63.

In July 1993, warrants were granted to purchase 75,000 shares of the
Company's common stock at a purchase price of $6.00 per share to three entities
that have performed various consulting services for the Company. In September
1995, December 1995 and March 1996, warrants were granted to purchase 30,000,
32,500 and 20,000 shares, respectively, of the Company's common stock, to
consultants that have performed various services for the Company. During Fiscal
1997, 10,000 warrants were exercised for $51,250, and 25,000 warrants were
exercised for $137,500.

In the aggregate, at February 28, 1997, warrants to purchase 3,126,211
shares of the Company's common stock at prices ranging from $4.50 to $11.00 were
outstanding, expiring through 2005.

11. EMPLOYEE BENEFIT PLANS
----------------------

EMPLOYEE SAVINGS PLAN
---------------------

During 1988, the Company adopted the York Research Corporation 401(k) Plan
("401(k) Plan"). The 401(k) Plan allows employees of the Company to defer a
portion of their earnings on a pre-tax basis through contributions to the 401(k)
Plan. The Company may at its discretion make a contribution to the 401(k) Plan.
To date the Company has elected not to contribute to the 401(k) Plan.

DEFINED BENEFIT PLAN
--------------------

The Company has a defined benefit pension plan covering substantially all
employees not covered by a collective bargaining agreement. The benefits are
based on years of service and the highest consecutive five years of the
employees' compensation. The Company's funding policy is to contribute annually
the amount

-47-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

necessary to satisfy the Internal Revenue Service's funding standards.
Contributions are intended to provide, not only for benefits attributed to
service to date, but also for those expected to be earned in the future.

Pension cost for the years ended February 28, 1997, 1996 and 1995 include
the following components:

1997 1996 1995
--------- --------- ---------
Service cost -
benefits earned during
the current period...................... $ 30,756 $ 28,568 $ 23,285
Interest cost on projected
benefit obligation...................... 104,757 87,520 80,214
Actual return on plan assets............. (39,633) (36,716) (28,727)
Net amortization and deferral............ (4,263) 4,178 (1,687)
--------- --------- ---------
Net pension cost....................... $ 91,617 $ 83,550 $ 73,085
--------- --------- ---------
--------- --------- ---------

For all periods presented, the weighted average discount rate was 8.5% and
rate of increase in future compensation levels was 3% used in determining the
actuarial present value of the projected benefit obligation. The expected
long-term rate of return on plan assets is 8.5%.

The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet as of February 28, 1997 and 1996:

1997 1996
------------ ------------
Actuarial present value of
benefit obligations:
Vested benefit obligation................. $ 1,195,570 $ 1,057,085
------------ ------------
------------ ------------
Accumulated benefit obligation............ $ 1,216,018 $ 1,088,755
------------ ------------
------------ ------------
Projected benefit obligation.................. $ 1,292,437 $ 1,145,738
Plan assets at fair value..................... 860,810 759,630
------------ ------------
Unfunded obligation........................... 431,627 386,108
Unamortized net transition obligation......... (111,949) (126,458)
Unrecognized net (gain) loss.................. 78,357 (4,408)
Adjustment required to recognize
minimum liability............................ -- 74,000
------------ ------------
Accrued pension cost.......................... $ 398,035 $ 329,242
------------ ------------
------------ ------------

-48-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

EMPLOYEE STOCK OWNERSHIP PLAN
-----------------------------

During 1988, the Company adopted an Employee Stock Ownership Plan ("ESOP")
that covers substantially all employees. Effective March 1, 1994, the Company
adopted the provisions of Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6"). The following table presents the
number of shares of common stock, which were unregistered at the time and
subsequently registered, the ESOP purchased from the Company, at prices which
represented 70% of the NASDAQ closing prices at the date of purchase:

PURCHASED IN # SHARES PURCHASE
FISCAL YEAR PURCHASED PRICE
--------------- ----------- -----------

1996 288,500 $ 1,092,219
1995 -- --
1994 -- --
1993 and prior 3,500,000 13,370,000
--------- -----------
3,788,500 $14,462,219
--------- -----------
--------- -----------

Management believes the valuation represented the fair market value of the
unregistered shares on those dates.

The Company contributed approximately $525,000, $413,000 and $373,000 to
the ESOP during Fiscal 1997, 1996 and 1995, respectively. The Company makes
annual contributions to the ESOP as determined by the Board of Directors and
subject to certain limitations dictated by tax regulations.

To purchase the shares from the Company, the ESOP borrowed funds from the
Company. Repayment of these loans has been and is expected from employer
contributions, borrowing by the ESOP from third parties, and by sale of
unreleased ESOP shares to third parties. The Company has recorded all amounts
loaned to the ESOP as deferred compensation, a contra-equity account, and has
included the third party loans to the ESOP in other long-term liabilities.
Certain of the unreleased ESOP shares are used as collateral for a third party
loan to the ESOP.

During the quarter ended August 31, 1993, the ESOP borrowed $1,150,000 from
third parties. These funds, along with an additional $12,987,000 generated
through February 28, 1997 by the sale of the Company's stock owned by the ESOP,
were used to repay the demand purchase money loans due to the Company. The
$1,150,000 initially borrowed by the ESOP was included in other long-term
liabilities and as deferred compensation, a contra-equity account, and had a
balance of approximately $626,000 and $561,000 at February 28, 1997 and 1996 as
a result of repayments by the ESOP. The ESOP incurred interest expense of
approximately $72,500 and $65,000, respectively related to these loans during
Fiscal 1997 and 1996.

ESOP shares are released and allocated to participant accounts based upon
Company contributions and certain payments made to reduce ESOP debt to the
Company. The Company reports compensation expense as shares are committed to be
released equal to the current market price of the shares, and the shares then
become outstanding for earnings-per-share ("EPS") computations.

-49-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

A summary of the ESOP shares as of February 28, 1997 and 1996 is as
follows:

1997 1996
------------ ------------
Allocated shares.......................... 551,649 481,619
Shares released for allocation............ 56,353 70,030
Unreleased shares......................... 867,995 1,000,348
------------ ------------
1,475,997 1,551,997
------------ ------------
------------ ------------
Fair value of unreleased shares
at February 28, 1997 and 1996.......... $ 8,028,954 $ 6,377,219
------------ ------------
------------ ------------

12. INCOME TAXES
------------
The provision (benefit) for income taxes for each of the three years ended
February 28, 1997 are as follows:

1997 1996 1995
------------ ---------- ----------

Current:
Federal................................ $ 602,000 $ 75,000 $ 11,000
State and local........................ 587,000 46,000 159,000
------------ ---------- ----------
1,189,000 121,000 170,000
------------ ---------- ----------
Deferred:
Federal................................ (89,000) (399,000) --
State and local........................ 112,000 (285,000) --
------------ ---------- ----------
23,000 (684,000) 0
------------ ---------- ----------
Tax benefits allocated directly to
paid-in capital:
Federal................................ 1,577,000 275,000 --
State and local........................ 411,000 738,000 --
------------ ---------- ----------
1,988,000 1,013,000 0
------------ ---------- ----------
Provision............................... $ 3,200,000 $ 450,000 $ 170,000
------------ ---------- ----------
------------ ---------- ----------

During the year ended February 28, 1997, income tax expense was reduced by
approximately $1,811,000 resulting from the benefit of utilizing net operating
loss carryforwards.

Through the fiscal year ended September 30, 1994, the Company filed its tax
returns based on a September year-end. On July 18, 1995, the Internal Revenue
Service granted the Company permission to file its tax returns on a February
year-end, effective February 28, 1995. At February 28, 1997, the Company had the
following net operating loss carryforwards for federal income tax purposes:

YEAR OF EXPIRATION AMOUNT
------------------ ------------
September 30, 2007......................... $ 1,208,000
September 30, 2009......................... 155,000
------------
$ 1,363,000
------------
------------

During the year ended February 28, 1997, the Company utilized all of its
alternative minimum tax net operating loss carryforwards. The difference between

-50-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

these loss carryforward amounts is attributable to adjustments required in the
alternative minimum tax computation.

Internal Revenue Code Section 382 places a limitation on the utilization of
carryforwards when an ownership change, as defined in the tax law, occurs.
Generally, an ownership change occurs when there is a greater than 50 percent
change in ownership. If such a change should occur, the actual utilization of
carryforwards, for tax purposes, would be limited annually to a percentage,
approximately 5.5%, of the fair market value of the Company at the time of such
change.

The reconciliation between the effective tax rate and the statutory federal
income tax rate is as follows:

<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Amount computed using the
statutory rate................................ $ 3,748,000 $ 1,646,000 $ 147,000

Increase (reduction) in taxes
resulting from:
Increase (utilization) of
federal loss carryforwards.................... (1,248,000) (1,391,000) (78,000)

Reduction in valuation allowance
for loss carryforwards........................ (434,000) (684,000) --

Imputed interest income on
loans......................................... 153,000 171,000 148,000

Nondeductible expenses......................... 207,000 194,000 42,000

Foreign losses................................. 6,000 325,000 291,000

Litigation settlement.......................... (45,000) 169,000 (194,000)

Valuation allowances on other
temporary differences......................... (522,000) (383,000) (303,000)

State and local taxes, net
of federal tax benefit
and state loss carryforwards.................. 733,000 329,000 105,000

Alternative minimum tax........................ 602,000 75,000 11,000

Other.......................................... -- (1,000) 1,000
------------ ------------ ------------
$ 3,200,000 $ 450,000 $ 170,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

-51-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

The components of the deferred tax asset and deferred tax liability as of
February 28, 1997 and 1996 were as follows:

1997 1996
------------ -----------
Deferred tax asset
- ------------------
Loss carryforwards.......................... $ 1,624,000 $ 4,119,000
Credit carryovers........................... 675,000 289,000
Accrued expenses............................ 26,000 96,000
Other....................................... -- 13,000
------------ -----------
2,325,000 4,517,000
Less: Valuation allowance................... (1,337,000) (3,833,000)
------------ -----------
Total deferred tax asset.................... 988,000 684,000
------------ -----------

Deferred tax liability
- ----------------------
Partnership items........................... 338,000 --
Other....................................... (11,000) --
------------ -----------
Total deferred tax
liability................................. 327,000 --
------------ -----------
Net deferred tax asset.......................... $ 661,000 $ 684,000
------------ -----------
------------ -----------

During the year ended February 28, 1997, the reduction in the valuation
allowance of $2,496,000 was the result of current utilization of net operating
losses of $1,811,000, current utilization of other deferred tax assets and
other adjustments of approximately $381,000, and the recognition of the
additional deferred tax asset of $304,000, based on the Company's expectation
of future taxable income.

The deferred tax asset relating to net operating loss carryforwards of
$1,624,000 include tax benefits of $287,000 relating to stock options and
warrants that was allocated directly to paid-in capital.

The Company paid income taxes for:
Year ended February 28, 1997.............. $ 608,000
Year ended February 28, 1996.............. $ 298,000
Year ended February 28, 1995.............. $ 110,000

-52-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

13. LEASE OBLIGATIONS
-----------------

Future minimum annual rental payments for real property, required under
leases and having terms of more than one year at February 28, 1997, are as
follows:

Operating
Leases
-------------
1998 $ 617,000
1999 663,000
2000 616,000
2001 622,000
2002 622,000
Thereafter 982,000
-------------
Total minimum lease payments $ 4,122,000
-------------
-------------

In July 1990, in connection with a lease for office space, the Company
received from the prior tenant a rent subsidy equal to the difference between
the market rate for the premises and the rental provided for in the lease. This
subsidy, which totaled $625,000, was paid to the Company in April 1991 and was
being amortized over the life of the lease as a monthly reduction to rent
expense. At February 28, 1995, the unamortized balance was $126,000. In May
1995, the lease was restructured and the remaining unamortized balance of
$72,000 was recognized. The restructuring of the lease extended the life to 2003
at a reduced expense, and added another 2,500 square feet of office space.

Total rent expense for operating leases was approximately $505,000 in
Fiscal 1997, $623,000 in Fiscal 1996 and $419,000 in Fiscal 1995.

The Company leases equipment under leases that have been classified as
capital leases for financial statement purposes. As of February 28, 1997,
included in property, plant and equipment are the following assets held under
capital leases:

Machinery and equipment........................... $ 224,747
Accumulated depreciation.......................... (14,916)
---------
$ 209,831
---------
---------

-53-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

Future minimum lease payments for assets under capital leases at
February 28, 1997 are as follows:

1998 $ 56,788
1999 56,788
2000 56,788
2001 56,788
2002 37,819
---------
264,971
Less: Amount representing
Interest 53,910
---------
Present value and net
minimum lease payments $ 211,061
---------
---------

The above amount totaling $211,061 has been included on the balance sheet
as other long-term liabilities.

14. RELATED PARTY TRANSACTIONS
--------------------------

In Fiscal 1993, the Company loaned Mr. Whiteman $100,000, which is
outstanding at February 28, 1997 and is payable on demand, and earns interest at
prime. At February 28, 1997, the total outstanding balance was approximately
$125,000. In each of Fiscal 1997, 1996 and 1995, the Company paid Mr. Whiteman
$24,000 for consulting services. In Fiscal 1995, the Company issued 40,000
shares of common stock, valued at $87,500, 70% of the fair market value on the
date of issue, to Mr. Whiteman for consulting services.

In Fiscal 1997 and 1996, the Company paid Mr. Weinstein $24,000 and
$18,000, respectively, for consulting services, and in Fiscal 1996 granted
warrants to purchase 20,000 shares of the Company's common stock at $5.44 per
share.

Mr. Beningson is President and a major stockholder of RRR'S, which is a 25%
general partner of WCTP, limited partner of RVA, and a 10% general partner of
YCP. In Fiscal 1997, RVA was allocated $321,942 of the interest income on the
YCP Note (see Note 5). In Fiscal 1996, RVA received $500,000 which was the
minority portion of the income of B-41LP. In Fiscal 1993, RVA received a
distribution of $2,000,000 from B-41LP, which is expected to be charged against
capital, concurrent with future allocations of income.

As discussed in Note 5, WCTP contracted with the Company to procure,
construct, design and place in operation a cogeneration facility. The Company's
Chairman and Chief Financial Officer are shareholders of the general partner of
WCTP. The general partner of WCTP receives a general partners fee of 1% of WCTP
revenues and an administrative services payment of 4% of WCTP

-54-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

revenues. The limited partners are not related parties to the Company. The
general partner may have the potential for substantial future distributions
from WCTP.

In the year ended February 28, 1997, the Company recorded $11,000,000 of
fees for services rendered through February 28, 1997 to WCTP and RV Associates
L.P. ("RVA"), two partnerships of which a company controlled by the Company's
chairman is the general partner. This amount was included in service revenues.
These fees were recorded pursuant to a services agreement between WCTP, RVA, CTI
and York. The services include ongoing negotiations of consolidation agreements
with Con Edison and Edison Mission Energy, aiding in resolving various contract
issues concerning WCTP's and RVA's power purchase agreements with Con Edison,
and various issues related to the progress of the Brooklyn Navy Yard Project.
Included in other receivables at February 28, 1997 was the fourth quarter fee of
$3,500,000 for services, which was received on May 14, 1997.

Mr. Beningson is president and was previously the sole shareholder of NAEC.
The Company had an agreement with NAEC which provided for the Company to be
reimbursed for all costs associated with its activities related to NAEC and the
Company received a fee mutually agreed upon based on level of activity. At
February 28, 1996, NAEC was indebted to the Company for approximately $600,000
related to various costs. This was fully paid in April 1996. In Fiscal 1997,
prior to acquisition of 85% of the shares of NAEC (see Note 15), the Company
recognized approximately $924,000 as reimbursement of costs, and no power
brokerage fees. In Fiscal 1996 and 1995, the Company recognized $1,200,000 each
year as reimbursement of costs, and power brokerage fees of $675,000 and
$250,000, respectively.

15. ACQUISITION OF NAEC
-------------------

As of November 1, 1996, the Company acquired 85% of the shares of NAEC for
$1 from NAEC. Prior to the acquisition, all of the stock was owned by the
Company's chairman. The acquisition has been accounted for as a purchase and the
operations of NAEC have been reflected as of the acquisition date.

The following table reflects unaudited pro forma combined results of
operations for the Company and NAEC on the basis that the acquisition had taken
place at the beginning of the fiscal year:

FOR THE YEAR ENDED
FEBRUARY 28,
----------------------------
1997 1996
------------- -------------
Revenues.................................. $ 70,048,380 $ 32,006,011
------------- -------------
Net Income................................ $ 7,388,152 $ 2,717,124
------------- -------------
Net Income per Common Share............... $ 0.49 $ 0.18
------------- -------------
Shares Used in Computation................ 15,487,779 15,512,011
------------- -------------

-55-

<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

In managements' opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of the periods presented or of
future operations of the combined companies under the ownership and management
of the Company.

16. SIGNIFICANT CUSTOMERS AND CONTRACTS
-----------------------------------

Energy sales were derived from numerous retail customers and utilities. Two
utilities accounted for approximately 20% and 15%, respectively, of the total
revenues in Fiscal 1997.

As part of its marketing operations, the Company routinely enters into
commitments for the purchase of electric and gas energy. The Company obtains
similar commitments from its customers. To minimize risk, the Company uses
futures contracts in the natural gas markets.

17. SETTLEMENT OF CLASS ACTION LITIGATION
-------------------------------------

The Company, while denying any liability, and in the opinion of management,
in order to avoid a protracted and costly litigation, settled in May 1993 a
class action lawsuit which shareholders brought against the Company and certain
directors and officers of York. Pursuant to the terms of the settlement, in
March 1995 the Company issued to the members of the class warrants to purchase
600,000 shares of its common stock at $8.00 ("Class A Warrants") per share and
warrants to purchase 180,000 shares of its common stock at $6.15 ("Class B
Warrants") per share (collectively the "Warrants"). The Class A Warrants expired
on November 1, 1995. When the Class A Warrants expired, the holders of such
warrants became entitled to and did surrender them for $6.9 million drawn under
a letter of credit which had been posted on February 16, 1995 by Edison Mission
Energy. The Class B Warrants remain outstanding except that at February 28,
1997, 14,918 Class B Warrants had been exercised. Under the terms of the
settlement other principal provisions of the Warrants include the following:

(i) The Company has the right to redeem the Class B Warrants in whole or in
part for $11.50 per Warrant.

(ii) The Company has the right to reduce the Class B Warrant exercise price
in its discretion (the "adjusted exercise price").

(iii) Unless the Class B Warrants have previously been redeemed or
accelerated the warrants may be exchanged by the holders thereof on the
Expiration Date, which has been extended, for $11.50 in cash per warrant (the
"Surrender Price").

iv) All unexpired Class B Warrants may no longer be exchanged for the
Surrender Price if the closing price of the Company's stock on NASDAQ shall have
equaled or exceeded the exercise price or adjusted exercise price of the
Warrants plus $11.50 on at least seventy-five of ninety consecutive trading days
at any time prior to the Expiration Date.

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<PAGE>

YORK RESEARCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------

(v) The Surrender Price of the Class B Warrants was collateralized by a 35%
limited partnership interest in Brooklyn Navy Yard Cogeneration Partners, L.P.
("BNYLP") held by B-41 Associates, L.P. This limited partnership interest will
be released when it is replaced by a letter of credit or if the event described
in (iv) above occurs. When the new warrants referred to in (vi) below were
issued, the collateral was reduced to a 17 1/2% limited partnership interest.

(vi) On March 18, 1996, the Company agreed with counsel for the Class Action
litigants to issue up to 180,000 new Warrants to holders of Class B Warrants as
consideration for an extension until December 31, 1996 of the obligation of
B-41LP to provide a letter of credit (in an amount up to $1,984,000) to secure
the Surrender Price of the remaining Class B Warrants. Court approval of the
agreement was given on June 4, 1996. Thereafter, 179,500 new Class C Warrants
were issued, the shares issuable upon exercise thereof having been registered.
The new Class C Warrants expire between September 27, 1998 and October 4, 1998,
are exercisable at $6.50 per share and do not have any provisions for surrender
or collateral. Because B-41LP did not provide the letter of credit by
December 31, 1996, the Class B Warrant expiration date extends day for day and
a further extension is presently under negotiation.

-57-
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

YORK RESEARCH CORPORATION
- -------------------------
(Registrant)

/s/ Robert M. Beningson /s/ Michael Trachtenberg
- ----------------------------------- --------------------------
Robert M. Beningson Michael Trachtenberg
President, Chief Executive Officer Executive Vice President;
Chairman of the Board Chief Financial and Accounting
May 21, 1997 Officer; Secretary
May 21, 1997

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

/s/ Robert M. Beningson
- ------------------------
Robert M. Beningson
Director
May 21, 1997

/s/ H. Clifton Whiteman
- ------------------------
H. Clifton Whiteman
Director
May 21, 1997

/s/ Stanley Weinstein
- ------------------------
Stanley Weinstein
Director
May 21, 1997

-58-

<PAGE>
Exhibit 10(ii)

AGREEMENT OF LIMITED PARTNERSHIP OF

YORK COGEN PARTNERS L.P.

AGREEMENT OF LIMITED PARTNERSHIP ("Agreement") made as of October
19, 1990, by and between RRR'S Ventures Ltd., a Connecticut corporation,
general partner (the "Managing General Partner"), York Research Corporation,
a Delaware corporation (the "Initial Limited Partner"), and those who
hereafter execute this agreement by attorney-in-fact or otherwise, as limited
partners (the Initial Limited Partner and those who hereafter execute this
Agreement as limited partners collectively being referred to herein as
"Limited Partners"; each General Partner and the Limited Partners
collectively being referred to herein as the "Partners"). As used herein,
the term "Managing General Partner" shall refer only to RRR'S Ventures Ltd.,
or its successor in interest, as long as such person remains a General
Partner hereunder.

ARTICLE I.

ORGANIZATION

1.1. FORMATION OF THE PARTNERSHIP. The parties hereto do hereby
form a limited partnership (the "Partnership") under the provisions of the
Delaware Revised Uniform

<PAGE>

Limited Partnership Act ("Act"). Promptly following the execution hereof, the
Managing General Partner, on behalf of the Partnership, shall execute or cause
to be executed a Certificate of Limited Partnership in accordance with the
Act and all such other certificates and documents conforming thereto and shall
do or cause to be done all such filings, recordings, publications and other
acts as may be necessary, appropriate or advisable from time to time to comply
with all requirements for the formation, operation and/or continuance of a
limited partnership under the Act and in all jurisdictions where the
Partnership desires to conduct its business. The Managing General Partner
shall cause the Partnership to comply with all requirements for the
qualification of the Partnership as a limited partnership in any jurisdiction
where the Partnership desires to conduct its business before the Partnership
shall conduct any business in such jurisdiction.

1.2. PARTNERSHIP NAME. The name of the Partnership shall be "York
Cogen Partners L.P."; provided, however, that subject to all applicable laws,
the business of the Partnership may be conducted under any other name or names
deemed necessary or advisable by the Managing General Partner.

1.3. PURPOSES AND POWERS OF THE PARTNERSHIP. The purposes of the
Partnership shall be to promote and fund the design, development,
construction, installation, operation,

-2-

<PAGE>

maintenance and purchase of a cogeneration facility ("Facility") to provide
electricity, domestic hot water, heating and cooling, or of other facilities,
and in connection therewith, to purchase or otherwise acquire, own, hold,
lease, manage, operate, develop, exploit, improve, maintain, mortgage or
otherwise dispose of, and generally to deal in and with property of any kind,
character or description whatsoever, whether real, personal or mixed, tangible
or intangible and wheresoever situate or evidenced, and any interests, rights,
estates and privileges therein and to do all other things provided the same is
not forbidden by the Act or other applicable laws. In furtherance of the
purposes of the Partnership, the Partnership shall have the power to do any
and all other things whatsoever necessary or desirable in connection with the
foregoing or otherwise contemplated by this Agreement.

1.4. PRINCIPAL PLACE OF BUSINESS AND ADDRESS. The principal place
of business of the Partnership shall be located at 900 Park Avenue, Suite 19E,
New York, New York 10021, or at such other address or addresses as the
Managing General Partner may designate by notice to all other Partners. The
Partnership may maintain offices and other facilities from time to time at
such locations, within or without the State of New York, as may be deemed
necessary or advisable by the Managing General Partner.

-3-

<PAGE>

1.5. TERM. The existence of the Partnership shall commence on the
date that the Partnership's Certificate of Limited Partnership is filed as
provided in Section 17-201 of the Act, and, unless sooner terminated or
dissolved under the provisions of this Agreement or by operation of law, the
Partnership shall dissolve five (5) years following the date of the expiration
or other termination of the last to expire or terminate of any agreement
pursuant to which the Partnership will provide any person with electricity,
domestic hot water, heating or cooling.

1.6. POWER OF ATTORNEY. Each Limited Partner, by the execution of
this Agreement, whether in counterpart, by separate instrument, by
attorney-in-fact or otherwise, does hereby irrevocably constitute and appoint
the Managing General Partner, with full power of substitution, his true and
lawful attorney and agent, with full power and authority in his name, place
and stead, to file, prosecute, defend, settle or compromise any and all
actions at law or suits in equity for or on behalf of the Partnership with
respect to any claim, demand or liability asserted or threatened by or against
the Partnership, and to make, execute, sign, acknowledge, swear, deliver,
record and file on each Limited Partner's behalf (a) all certificates and
other instruments (including, without limitation, all counterparts of this
Agreement, all amendments

-4-

<PAGE>

thereto, the Partnership's Certificate of Limited Partnership and all
amendments thereto) which the Managing General Partner deems appropriate to
qualify or continue the Partnership as a limited partnership in the
jurisdictions in which the Partnership may conduct business or which may be
required to be filed by the Partnership or any of the Partners under the laws
of any jurisdiction; (b) all instruments which the Managing General Partner
deems appropriate to reflect a change in or modification of the Partnership in
accordance with the terms of this Agreement; (c) all conveyances and other
instruments which the Managing General Partner deems appropriate to reflect
the dissolution and termination of the Partnership; (d) certificates of
assumed name; (e) all certificates and instruments that may be appropriate to
reflect (i) a change in the name or the location of the principal place of
business of the Partnership, (ii) the disposition by a Partner of his interest
in the Partnership or any part thereof, (iii) the substitution or addition of
a person becoming a Partner of the Partnership, (iv) a distribution in
reduction of the capital contribution of a Partner, and (v) a change in the
capital of the Partnership; and (f) such other agreements, instruments and
conveyances as the Managing General Partner may deem, from time to time,
necessary or desirable for the promotion, conduct and development of the
Partnership's business.

The Power of Attorney granted herein shall be irrevocable and deemed
to be a power coupled with an interest and shall survive the death, insanity,
incompe-
-5-

<PAGE>

tency, legal incapacity, bankruptcy, insolvency or dissolution of any Limited
Partner or the assignment by a Limited Partner of his interest in the
Partnership. Each Limited Partner hereby agrees to be bound by any
representation made by the Managing General Partner and by any successor(s)
thereto acting in good faith pursuant to such Power of Attorney, and each
Limited Partner hereby waives any and all defenses which may be available to
contest, negate or disaffirm the actions of the Managing General Partner and
any successor(s) thereto taken in good faith under such Power of Attorney. In
addition, each Limited Partner hereby agrees to execute and deliver to the
Managing General Partner within five days after receipt of the Managing
General Partner's request therefor, such other and further powers of attorney,
and other instruments which the Managing General Partner deems necessary to
comply with any laws, rules or regulations relating to the formation of the
Partnership or the conduct of business by the Partnership. In the event of
any conflict between this Agreement and any instruments filed by such attorney
pursuant to the Power of Attorney granted in this Section 1.6, this Agreement
shall control.

ARTICLE II.

MANAGEMENT

-6-

<PAGE>

2.1. MANAGEMENT. Subject to the limitations of this Agreement, the
Managing General Partner shall have full, exclusive and complete control of
the management of the Partnership's affairs for the purposes herein stated
and shall make all decisions affecting Partnership affairs to carry out its
purposes and exercise its powers, including, without limitation, all of the
powers, rights and privileges of a general partner in a limited partnership
under the Act. The Managing General Partner may take such other actions as
it deems necessary or desirable to manage the business of the Partnership,
including, but not limited to, the following: (a) to borrow money on a
secured or unsecured basis from banks, brokers or other persons; (b) to open,
maintain and close bank accounts; (c) to sign checks; (d) to pledge assets
for loans; (e) to pay or authorize the payment of distributions to the
Partners and of liabilities of the Partnership such as organizational
expenses, offering expenses, selling commissions, legal and accounting fees,
and other reasonable and ordinary fees and expenses; and (f) generally, to
act for the Partnership in all matters incidental to the foregoing, including
the preparation and filing of all Partnership tax returns and the making of
such tax elections and determinations as appear to it appropriate. The
Managing General Partner shall be the "tax matters partner" of the
Partnership as defined in Section 6231 of the Internal Revenue Code of 1986,
as amended (the

-7-

<PAGE>

"Code"). The Managing General Partner, in its sole discretion, may cause the
Partnership to make, refrain from making and, once having made, revoke the
election referred to in Section 754 of the Code or any other election
affecting the computation of partnership income required or permitted to be
made by the Partnership pursuant to Section 703(b) of the Code or the Treasury
Regulations promulgated thereunder, and any similar elections provided by
state or local law or any similar provision enacted in lieu thereof.

2.2. SERVICES OF THE MANAGING GENERAL PARTNER. The Managing General
Partner shall render to the Partnership such services as are reasonably
necessary for the management and conduct of the business of the Partnership.

2.3. STANDARD OF CARE AND INDEMNIFICATION OF GENERAL PARTNER. The
Managing General Partner will use ordinary care and reasonable diligence in
the management of the Partnership's business. No General Partner will be
liable to any other Partner or any other person for any reason or for any act
or omission taken or omitted in good faith and within the scope of the
authority conferred upon such General Partner by this Agreement absent fraud
or deliberate breach of the terms of this Agreement. The Partnership shall
indemnify and save harmless each General Partner from and against any and all
liability, loss, damage, reasonable cost or expense (including, without
limitation, attorneys fees and disbursements) incurred or

-8-

<PAGE>

sustained by each of them in the conduct of the business of the Partnership
to the fullest extent permitted under the provisions of the Act. In
particular, and without limitation of the foregoing, each General Partner
shall be entitled to indemnification by the Partnership to the fullest extent
permitted by the Act against the reasonable and ordinary expenses (including,
without limitation, attorneys' fees and disbursements) actually incurred by
the General Partner in connection with the defense of any action to which a
General Partner was, is or is threatened to be made a party and which is
brought by or in the right of the Partnership to procure a judgment in favor
of the Partnership.

2.4. OTHER ACTIVITIES OF GENERAL PARTNER AND LIMITED PARTNERS. The
Managing General Partner is authorized to manage the business of the
Partnership in conjunction with its other business interests, activities and
investments and, subject to the provisions of Section 2.2 hereof, will not be
obligated to devote all or any particular part of its time and effort to the
Partnership and its affairs. Neither this Agreement nor any activity
undertaken on behalf of the Partnership shall prevent any General Partner or
any of its shareholders, directors, officers, affiliates, partners or
employees or the Limited Partners from engaging in any other activities or
businesses or from making any other investments, whether or not such

-9-

<PAGE>

activities, businesses or investments are similar in nature to the business of
the Partnership or whether they are conducted individually or jointly with
others, without any obligation to account to the other Partners for such
activities, businesses or investments or to disgorge any profits or other
benefits derived therefrom and without having to offer an interest in such
activities, businesses or investments to the other Partners. A General
Partner, acting in its sole discretion but in accordance with arm's-length
terms and conditions, may engage in, compensate with Partnership funds and
otherwise do business with any person, firm or corporation notwithstanding
that such person, firm or corporation is an affiliate (or an affiliate of an
affiliate) of any Partner.

2.5. LIMITED PARTNERS. The Limited Partners will not participate in
any way in the management or control of the business of the Partnership.

2.6. FAILURE TO TAKE ACTION. No General Partner will be liable to
the Partnership or any of the Partners for its failure to take any action,
including, but not limited to, any action on behalf of the Partnership which
may prevent the foreclosure of all or any portion of the property of the
Partnership, including, without limitation, the Facility, due to the
Partnership's lack of sufficient funds therefor. The Managing General Partner
shall have the power, but shall not be obligated, to (i) sell all or any

-10-

<PAGE>

portion of the property of the Partnership in order to raise such funds, or
(ii) cause the dissolution of the Partnership or the abandonment of all or any
portion of its property or both, without any liability whatsoever and without
prejudice to any claim that any General Partner or the Partnership may have
against the Limited Partners for the breach of any provisions of this
Agreement.

2.7. REIMBURSEMENT. The Managing General Partner shall be
reimbursed for all reasonable and ordinary costs incurred in the performance
of its duties on behalf of the Partnership, including, but not limited to,
organization expenses, sales commissions, marketing costs, fees for
professional services and similar expenses. Any amounts not paid out of the
initial capital contributions to the Partnership shall be payable out of
future Partnership revenues and receipts.

2.8. NO PERSONAL LIABILITY FOR RETURN OF CAPITAL. Except as
otherwise specifically provided herein, no General Partner shall be personally
liable for the return or repayment of all or any portion of the capital
contributions or profits of any Partner (or assignee), it being expressly
agreed that any such return or repayment of capital or profits made pursuant
to this Agreement shall be made solely from the assets of the Partnership
(which shall not include any right of contribution from any General Partner).

-11-

<PAGE>

2.9. COMPENSATION PAYABLE TO THE MANAGING GENERAL PARTNER. The
Partnership shall pay the Managing General Partner a management fee
("Management Fee") equal in amount to one percent (1%) of the Partnership's
revenues each fiscal year plus an Administrative Services Fee which shall be
the greater of $10,000 per month or four percent (4%) of the Partnership's
revenue, which Management and Administrative Services Fees may be payable in
installments of such amounts and at such times during the Partnership's fiscal
years as shall be determined by the Managing General Partner. Solely for
purposes of computing the Management and Administrative Services Fees, the
term "revenues" shall mean all cash received by the Partnership during any
fiscal year as a result of its operations plus any gain realized by the
Partnership during such year from sales of its assets, but specifically
excluding therefrom all capital contributions, loans or other advances made to
the Partnership. To the extent the Partnership is unable to make prompt
payment of such fees, they shall be deferred and paid, together with interest
on the deferred amount at the Prime Rate, as defined in Section 3.5, below.

ARTICLE III.

CAPITAL CONTRIBUTIONS

3.1. CONTRIBUTIONS BY THE GENERAL PARTNERS. The General Partners
shall make the respective initial contribu-

-12-

<PAGE>

tions indicated in Schedule 3.1. A General Partner may contribute any greater
amount to the Partnership.

3.2. CAPITAL CONTRIBUTIONS BY THE LIMITED PARTNERS. Each Limited
Partner shall be required to make an initial capital contribution to the
Partnership in the amount indicated in Schedule 3.2. The Limited Partners
shall have no right to contribute additional capital in excess of that
required hereunder unless the Managing General Partner in its sole discretion,
so agrees.

3.3. ADDITIONAL CAPITAL CONTRIBUTIONS. The Limited Partners shall
be required to make additional contributions to the Partnership in the
respective amounts and under the circumstances indicated in Schedule 3.3, upon
written notice by the Managing General Partner. No Limited Partner will be
required to contribute any capital or lend any funds to the Partnership except
as provided in Sections 3.2 and 3.3 hereof. No General Partner will be
required to contribute any capital or lend any funds to the Partnership except
as provided in Sections 3.1 and 8.3 hereof and except as may be required by
applicable law or as may be necessary, in the opinion of counsel to the
Partnership, in order that the Partnership be classified as a partnership for
Federal income tax purposes.

3.4. WITHDRAWAL OF CAPITAL. No Partner will be entitled to withdraw
any part of his contribution to the capital of the Partnership or to receive
any distribution

-13-

<PAGE>

from the Partnership except as specifically provided for herein, nor shall any
Partner have the right to cause a partitioning of Partnership property.
Distributions, as herein provided, to the Partners may be made, in the sole
discretion of the Managing General Partner, in cash, in kind or any
combination thereof.

3.5. DEFAULTS BY LIMITED PARTNERS. In the event a Limited Partner
defaults in the payment of his capital contribution, the Managing General
Partner will send a notice (the "Default Notice") to the defaulting Limited
Partner demanding the payment as to which the default occurred. If the
defaulting Limited Partner does not make such payment within ten (10) days
after the mailing date of the Default Notice, the Managing General Partner, at
its option, may pursue, on behalf of the Partnership, any remedies the
Partnership or the Managing General Partner may have to collect such amount,
together with interest thereon at a rate per annum equal to the prime
commercial lending rate publicly announced by Citibank, N.A. in effect from
time to time on 90-day unsecured loans to its most creditworthy borrowers
(the "Prime Rate"), plus 2%, and together with all costs and expenses incurred
by the Partnership in connection therewith (including, without limitation,
reasonable attorneys' fees and disbursements). A Limited Partner who defaults
in the payment of its capital contribution and fails to cure such default
within ten (10)

-14-

<PAGE>

days of receiving a Default Notice in respect thereof shall forfeit all
profits and cash distributions for the fiscal year in which the default occurs
and for all subsequent fiscal years until an amount equivalent to the total
capital contribution subscribed for by such defaulting Limited Partner plus
the other sums provided for herein are paid to the Partnership. Upon payment
of the total capital contributions and the other sums provided for herein, a
formerly defaulting Limited Partner shall be entitled to share in all
Partnership profits and cash distributions for the fiscal year in which such
cure payment occurs, provided that the amounts of profits and cash
distributions shall be prorated to reflect the periods of time during which
the Limited Partner was in default, and the period after cure.

ARTICLE IV.

CAPITAL ACCOUNTS; ALLOCATIONS OF
PROFITS AND LOSSES; DISTRIBUTIONS

4.1. CAPITAL ACCOUNTS. Each Partner shall have a capital account
("Capital Account").

(a) CREDITS. Each Partner's Capital Account shall be
increased by (i) the amount of money contributed by such Partner to the
Partnership, including, for this purpose, the amount of Partnership
liabilities assumed by such Partner, (ii) the fair market value of any
property contributed by such Partner to the Partnership (net of

-15-

<PAGE>

liabilities secured by such contributed property that the Partnership is
considered to assume or take subject to under Code Section 752) and (iii) the
Book income or gain (or items thereof) allocated to such Partner hereunder,
including income and gain exempt from tax and income and gain in respect of
contributed or revalued property.

(b) DEBITS. Each Partner's Capital Account shall be decreased
by (i) the amount of money distributed to such Partner, including, for this
purpose, the amount of the Partner's liabilities assumed by the Partnership,
(ii) the fair market value of any property distributed to such Partner (net of
liabilities secured by such distributed property that the Partner is
considered to assume or take subject to under Code Section 752), and (iii) any
Book loss or deduction allocated to such Partner hereunder, including
expenditures described in Code Section 705(a)(2)(B) and including loss or
deduction in respect of contributed or revalued property.

(c) RULES OF MAINTENANCE; "BOOK" ITEMS. The Capital Accounts
of the Partners shall be further determined and maintained as necessary to
comply with Treas. Reg. Section 1.704-1(b)(2)(iv). The term "Book" when used
in the context of income, gain, expense, loss, deduction, or value, means the
method of accounting prescribed for compliance with the capital account
maintenance rules set forth in the Regulations under Code Section 704.

-16-

<PAGE>

(d) REVALUATION. Partnership property (whether tangible or
intangible) shall be revalued on the books of the Partnership under the
circumstances and to the extent set forth in Treas. Reg. Section
1.704-1(b)(2)(iv)(f). In connection therewith, the Capital Accounts shall be
adjusted for allocations of depreciation, depletion, amortization, and gain or
loss for Book purposes with respect to such property so as to take account of
the variation between the adjusted basis and Book value of such property in
the same manner as under Code Section 704(c).

(e) DISTRIBUTIONS OF PROPERTIES. In the event of a
distribution of Partnership property to any Partner, the Capital Accounts of
the Partners shall be adjusted in accordance with Treas. Reg. Section
1.704-1(b)(2)(iv)(e).

(f) TRANSFERS. Upon the transfer of all or a part of a
Partner's interest in the Partnership, the Capital Account of the transferor
that is attributable to the transferred interest shall carry over to the
transferee.

4.2. GENERAL ALLOCATIONS.

(a) PROFITS. Subject to the special allocations under
Sections 4.3 and 4.3.1, profits for any fiscal year shall be allocated among
the Partners
(i) first, until the amount of profits allocated under
Sections 4.2, 4.3 and 4.3.1 for the fiscal year and all prior fiscal years
equals the amount of losses

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allocated under Sections 4.2, 4.2.1, 4.2.2 and 4.3.1 for all prior fiscal
years, in the same proportion as such losses have been allocated; and

(ii) the balance, in accordance with the proportions
indicated in Schedule 4.2 hereto.

(b) LOSSES. Subject to the special allocations under Sections
4.3 and 4.3.1, and subject to Sections 4.2.1 and 4.2.2, losses for any fiscal
year shall be allocated among the Partners

(i) first, until the amount of losses allocated under
Sections 4.2, 4.2.1, 4.2.2 and 4.3.1 for the fiscal year and all prior fiscal
years equals the amount of profits allocated under Sections 4.2, 4.3 and 4.3.1
for all prior fiscal years, in the same proportion as such profits have been
allocated; and

(ii) the balance, in accordance with the proportions
indicated in Schedule 4.2 hereto.

4.2.1. EXCESS LOSSES. Losses shall not be allocated to any
Limited Partner to the extent (the "Excess Losses") that such allocation would
cause or increase a deficit balance in such Partner's Capital Account. For
this purpose, a Partner's Capital Account shall include any amounts that the
Partner is then obligated to restore or is treated under Treas. Reg. Section
1.704-1(b) or Temporary Regulations thereunder as obligated to restore,
except that no amount of Minimum Gain (as described in Section 4.3(b))

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shall be included (or reduce any deficit balance). Excess Losses shall be
allocated to the General Partner.

4.2.2. NONRECOURSE DEDUCTIONS.

(a) The allocation of nonrecourse deductions (as defined
and determined in Treas. Reg. Section 1.704-1T(b)(4)) shall be made among the
Partners as indicated in Schedule 4.2.2.

(b) Solely for purposes of determining a Partner's
proportionate share of the "excess nonrecourse liabilities" of the Partnership
within the meaning of Treas. Reg. Section 1.752-1T(e)(3)(ii), the Partners'
interests in Partnership profits are as indicated in Schedule 4.2.2.

4.3. Certain Regulatory Allocations. Subject to the provisions of
paragraph (c) of this Section 4.3, the following special allocations shall be
effected.

(a) QUALIFIED INCOME OFFSET. If any Partner receives an
unexpected adjustment, allocation or distribution described in Treas. Reg.
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) items of income and gain
(consisting of a pro rata portion of each item or partnership income,
including gross income, and gain for such year) shall be allocated to such
Partner in an amount and manner sufficient to eliminate the deficit Capital
Account balance, or any increase in such deficit balance, caused by such
unexpected adjustment, allocation, or distribution as quickly as possible.

(b) NONRECOURSE DEBT CHARGEBACKS.

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(i) If there is a net decrease in partnership minimum
gain (as defined in and measured pursuant to Treas. Reg. Section
1.704-1T(b)(4)(iv), which is referred to herein as "Minimum Gain") for a
taxable year, each Partner will be allocated, before any other allocation of
Partner items made pursuant to this Agreement, items of income and gain for
the taxable year and, if necessary, subsequent taxable years, in proportion
to, and to the extent of an amount equal to the greater of (i) the portion of
such partner's share (as determined under Treas. Reg. Section
1.704-1T(b)(4)(iv)(e) and (f)) of the net decrease in Partnership Minimum
Gain during such year that is allocable to the disposition of partnership
property subject to one or more nonrecourse liabilities of the partnership or
(ii) the deficit balance in the Partner's Capital Account at the end of the
year (determined, for this purpose, before any allocation of income, gain,
loss, deduction, or Code Section 705(a)(2)(b) expenditure for such year) and
otherwise in the amounts required by Treas. Reg. Section
1.704-1T(b)(4)(iv)(e), with which this Section 4.3(b)(i) is intended to
comply.

(ii) If there is a net decrease in Minimum Gain
attributable to any nonrecourse debt (as defined in Treas. Reg. Section
1.704-1T(b)(4)(iv)(k)(2)) of the Partnership for which any partner bears the
economic risk of loss (which is referred to herein as "Partner Nonrecourse
Debt") for a taxable year, each Partner will be allocated, before any other
allocation of Partner items made pursuant

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to this Agreement (other than a chargeback pursuant to Section 4.3(b)(i)),
items of income and gain for the taxable year and, if necessary, subsequent
taxable years, in proportion to, and to the extent of an amount equal to the
greater of (i) the portion of such partner's share (as determined under Treas.
Reg. Section 1.704-1T(b)(4)(iv)(h)) of the net decrease in Minimum Gain
attributable to Partner Nonrecourse Debt during such year that is allocable to
the disposition of partnership property subject to such debt or (ii) the
deficit balance in the Partner's Capital Account at the end of the year
(determined, for this purpose, before any allocation of income, gain, loss,
deduction, or Code Section 705(a)(2)(b) expenditure for such year) and
otherwise in the amounts required by Treas. Reg. Section
1.704-1T(b)(4)(iv)(h)(4), with which this Section 4.3(b)(ii) is intended to
comply.

For purposes of this Section 4.3(b), the determination of
whether any distribution by the Partnership is allocable to the proceeds of a
nonrecourse liability of the Partnership shall be made by the Managing General
Partner, in its discretion, under any reasonable method in accordance
with Treas. Reg. Section 1.704-1T(b)(4)(iv)(g)(4) or Section
1.704-1T(b)(4)(iv)(h)(7) such that, to the greatest possible extent, such
distribution would not result in an allocation under this Section 4.3(b) that
would distort the Partners' intended allocation of profits and losses as
indicated in Sections 4.2, 4.2 and 4.2.2.

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(c) DEFICIT BALANCE. Solely for the purposes of this Section
4.3, there will be excluded from a Partner's deficit balance in its Capital
Account any amount the Partner is then obligated to restore or treated under
Treas. Reg. Section 1.704-1(b) or Temporary Regulations thereunder as
obligated to restore to its Capital Account, including, without limitation,
the Partner's share of Minimum Gain.

4.3.1. CURATIVE ALLOCATIONS. The allocations set forth in
Section 4.3 hereof are intended to comply with certain requirements of
Sections 1.704-1(b) and 1.704-1T of the Treasury Regulations. The Partners
hereby acknowledge and agree that such allocations may cause results that are
not consistent with the manner in which the Partners intend to share profits
or bear losses of the Partnership. Accordingly, the Managing General Partner
is hereby authorized and directed to make other allocations of profit, loss,
Book depreciation, Book gain, and Book loss among the Partners in any
reasonable manner in its discretion so as to correct such inconsistencies and
allow the Partners' intended transaction to result. In general, the Partners
anticipate that this will be accomplished by specially allocating items among
the Partners so that, after such offsetting special allocations under this
Section 4.3.1 are made, each Partner's Capital Account will, to the extent
possible, equal the Capital Account such Partner would have had if the
allocations in Section 4.3 were not a part of

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this Agreement and all Partnership items had been allocated to the Partners
solely pursuant to Sections 4.2, 4.2.1 and 4.2.2.

4.3.2. TAX ALLOCATIONS; CODE SECTION 704(C); ELECTIONS.

(a) CORRESPONDENCE. Except as otherwise provided in this
Section 4.3.2, all items of income, gain, loss, and deduction shall be
allocated among the Partners for federal income tax purposes in the same
manner as the corresponding allocations for Book purposes.

(b) CODE SECTION 704(c) PRINCIPLES. In cases in which
Code Section 704(c) applies to Partnership property, the Capital Accounts
shall be adjusted in accordance with this Section 4.3.2(b) for allocation to
the Partners of depreciation, depletion, amortization, and gain or loss as
computed for Book purposes with respect to such property. In the event that
the Book value of an item of Partnership property differs from its adjusted
tax basis, allocations of depreciation, depletion, amortization, gain, and
loss with respect to such property will be made in a manner that takes
account of the variation between the adjusted tax basis and Book value of
such property to the extent required by Code Section 704(c). The amount of
Book depreciation, depletion or amortization for a period with respect to an
item of Partnership property is the amount that bears the same relationship
to the Book value of such

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property as the depreciation (or cost recovery deduction), depletion or
amortization computed for tax purposes with respect to such property for such
period bears to the adjusted tax basis of such property.

(c) ELECTIONS; DECISIONS. For tax purposes, any
elections, including under Code Section 754, and any decisions relating to
the allocations of profits, losses or any other items shall be made by the
Managing General Partner in its discretion, in a manner that reasonably
reflects the intent of the parties hereunder.

4.3.3. TIMING.

(a) Allocations in the case of Partners admitted during a
taxable year shall be made in accordance with Code Section 706, using any
convention permitted by law and selected by the Managing General Partner in
its discretion.

(b) For purposes of determining Profits, Losses or any
other items allocable to any period, the same shall be determined on a daily,
monthly or other basis permitted under Code Section 706, as determined by the
Managing General Partner in its sole discretion.

4.4. LIQUIDATIONS. Upon liquidation as defined in Treas. Reg.
Section 1.704-1(b)(ii) of the Partnership or any Partner's interest therein,
liquidating distributions shall be made in accordance with the Partner's
positive Capital Account balances, as determined after taking into account

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all adjustments to such Capital Accounts provided for herein (including those
for the taxable year during which such liquidation occurs), by the end of the
Partnership's taxable year during which such liquidation occurs or, if later,
within 90 days after the date of such liquidation. Any obligation of a
Partner to make contributions to the Partnership shall be satisfied no later
than the end of the partnership taxable year in which such Partner's interest
is liquidated, or if later, within 90 days after the date of such liquidation.

4.5. CERTAIN DISTRIBUTIONS. Distributions other than of the
proceeds of sales or refinancings of fixed Partnership assets may be
distributed among the Partners in the sole discretion of the Managing General
Partner from time to time, in such respective amounts as it deems appropriate.

4.6. DISTRIBUTION OF CASH FROM SALES AND CASH FROM FINANCINGS. Cash
from Sales and Cash from Financings shall, after payment of all Partnership
liabilities which are then due (including obligations to Partners and their
Affiliates) and the setting aside of reasonable reserves be distributed to the
Partners with positive Capital Account balances (after such Capital Accounts
have been adjusted to reflect the allocation of gain or loss arising from such
event and after any allocations under Section 4.3.1) in the

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proportions that such positive balances bear to each other, in an amount
sufficient to reduce such balances to zero.

4.7. DETERMINATION OF TIME AND AMOUNT OF DISTRIBUTIONS. The time
and amount of all distributions made pursuant to this Article IV shall be
determined by the Managing General Partner.

4.8. DEFINITIONS. As used herein, the following terms shall have
the following meanings:

"Cash from Financings" means the net cash proceeds realized by the
Partnership from the financing of any of the Partnership's assets or the
refinancing of any Partnership indebtedness after deduction of all expenses
incurred in connection therewith, less such amounts for construction,
reconstructing, rehabilitation, repair, working capital, working capital
reserves, and any amounts repaid to lenders, all as the Managing General
Partner deems reasonably necessary for future Partnership operations and plus
any cash released from such reserves.

"Cash from Sales" means the net cash proceeds realized by the
Partnership (after deduction of brokerage commissions and all other related
expenses) from the sale, exchange, condemnation or other disposition of any of
its assets and any insurance proceeds received by the Partnership from any
insurance policy insuring against physical damage to Partnership assets, after
deduction of all expenses incurred in connection therewith and payment of any

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underlying indebtedness related to the assets sold or disposed of, less such
amounts for working capital reserves as the Managing General Partner deems
reasonably necessary for future Partnership operations and plus any cash
released from such reserves.

ARTICLE V.

LIMITED PARTNERS

5.1. LIMITED LIABILITY. The Limited Partners shall not have any
personal liability or obligation for any debt, liability or other obligation
of the Partnership except as provided in the Act. No Limited Partner shall be
responsible for the obligations of any other Partner.

5.2. CERTIFICATE OF LIMITED PARTNERSHIP INTEREST. A Limited
Partner's interest in the Partnership and its rights and obligations hereunder
shall be represented by a Certificate of Limited Partnership Interest. The
Managing General Partner shall maintain, in the Partnership's principal
office, a Certificate Registry indicating the name and address of the record
owner of each such Certificate.

ARTICLE VI.

RECORDS, REPORTS AND TAXES

6.1. FISCAL YEAR, ACCOUNTING AND REPORTS. The fiscal year of the
Partnership for both accounting and

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Federal income tax purposes shall be such fiscal year as may be required by
Section 706(b) of the Code, as determined by the Managing General Partner, and
the Partnership shall utilize the accrual method of accounting for financial
and income tax purposes. At all times during the continuance of the
Partnership, the Managing General Partner shall keep or cause to be kept full
and faithful books of account in which shall be entered fully and accurately
each transaction of the Partnership. The books of the Partnership shall be
audited annually at the expense of the Partnership by such independent
certified public accounting firm as the Managing General Partner shall
designate (any such firm from time to time so designated being herein referred
to as the "Partnership's accountants"), and the annual audited financial
statements of the Partnership, as prepared by the Partnership's accountants,
shall be transmitted by the Managing General Partner to the Partners within
one hundred twenty (120) days after the end of each fiscal year. Such
statements shall include a report of (a) each Partner's share of the
Partnership's profits, losses and cash receipts for such year and (b) each
Partner's Capital Account as of the end of such year maintained pursuant to
Article IV hereof.

All questions of accounting relating to such audited financial
statements and annual reports to Partners shall be determined by the
Partnership's accountants, and their reasonable determination sh7all be final
and binding on

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all Partners. The financial statements so delivered may be changed from time
to time to cure errors or omissions and to give effect to any retroactive
costs or adjustments. All costs and expenses incurred in connection with such
reports and statements shall constitute expenses of the Partnership.

6.2. INSPECTION; REPORTS. All books and records of the Partnership
will be open to inspection and examination at all reasonable times by the
Partners or their representatives and by any former Partner and his
representatives prior to receipt and acceptance by such former Partner of his
full distributive share upon his withdrawal from or the dissolution of the
Partnership, and, thereafter, at such times as will be necessary in order to
enable such former Partner to prepare or process through an audit of his
Federal, state or local income or estate tax returns.

6.3. BANK ACCOUNTS. The Managing General Partner, on behalf of the
Partnership, shall open and maintain a bank account or accounts in which shall
be deposited all of the capital, cash receipts and other funds of the
Partnership. All withdrawals from the Partnership's bank accounts shall be
made upon checks or instructions signed by the Managing General Partner or
such person or persons and in such matters as the Managing General Partner may
from time to time designate.

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ARTICLE VII.

DISTRIBUTIONS, WITHDRAWALS, ADMISSION
AND REPLACEMENT OF PARTNERS, AND
TRANSFER OF PARTNERSHIP INTERESTS

7.1. DISTRIBUTIONS TO PARTNERS. The Managing General Partner shall
have sole discretion in determining the amount and frequency of distributions
which the Partnership shall make.

7.2. DEATH, INCOMPETENCE, DISSOLUTION OR WITHDRAWAL OF A LIMITED
PARTNER.

(a) No Limited Partner may withdraw from the Partnership or
retire as a Limited Partner without the prior written consent of the Managing
General Partner.

(b) Upon the death, incompetency, insanity, legal incapacity,
bankruptcy or insolvency of an individual Limited Partner (including a
substituted Limited Partner), his legally authorized personal representative
shall have all of the rights of a Limited Partner for the purpose of settling
or managing his estate, and shall have such power as the decedent,
incompetent, bankrupt or insolvent Limited Partner possessed to make an
assignment of his interest in the Partnership in accordance with the terms
hereof.
(c) Upon the bankruptcy, insolvency, dissolution or other
cessation to exist as a legal entity of any Limited Partner which is not an
individual, the authorized representative of such entity shall have all the

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rights of a Limited Partner for the purpose of effecting the orderly winding
up and disposition of the business of such entity and such power as such
entity possessed to make an assignment of its interest in the Partnership in
accordance with the terms hereof.

7.3. TIMING OF WITHDRAWAL. Withdrawal of a Limited Partner shall
not occur for purposes of computing the withdrawing Limited Partner's
distributive interest pursuant to this Agreement until the last business day
of the calendar quarter in which such event of withdrawal has taken place.
For all other purposes of this Agreement, such withdrawal shall be deemed to
have occurred on the date upon which the Managing General Partner gives notice
of its consent to the Limited Partner's withdrawal.

7.4. DISTRIBUTION ON WITHDRAWAL. Upon the withdrawal of a Limited
Partner or upon the termination of the Partnership, all in accordance with the
terms of this Agreement, each withdrawing Limited Partner, or each Partner, as
the case may be, shall be paid his respective distributive interest in cash or
in kind in accordance with the Partners' respective Capital Account balances.

7.5. TIME PAYMENT. The distributive interest of any Partner
withdrawing pursuant to this Agreement shall be paid within the period
specified in Section 4.4 hereof. If there are any assets which cannot be
properly valued on the withdrawal date, then each Partner's proportionate
amount of

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any such assets may be retained in the Partnership until such time when the
assets can be properly valued. If there is any pending transaction or claim
by or against the Partnership involving or which may affect the Capital
Accounts or obligations of a withdrawing Partner which cannot, in the judgment
of the Managing General Partner, be then ascertained, the proportionate amount
thereof or the proportionate probable loss therefrom may be retained in the
Partnership until the liquidation of the Partnership. In this situation, no
amount shall be paid or charged to any such Partner or his personal
representative on account of any transaction or claim until its final
liquidation or at such time as the Managing General Partner shall determine.
In the meantime, however, the Partnership may retain from other sums due such
Partner or his personal representative an amount which the Managing General
Partner estimates may be sufficient to cover the share of such Partner in any
probable loss or liability on account of such transaction or claim.

7.6. Continuance of Partnership. Neither the complete nor partial
withdrawal of a Limited Partner, in and of itself, shall terminate or dissolve
the Partnership.

7.7. Rights and Obligations Upon Withdrawal. Upon the complete
withdrawal of a Limited Partner, all of his rights in specific Partnership
property of every kind whatsoever, including, but not limited to, all books
of

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account, records, and papers of the Partnership, shall immediately and without
further assignment, pass to and become vested in the remaining or surviving
Partners. The withdrawing Limited Partner or his legal representatives shall
have only the right to receive the distributions to withdrawn Limited Partners
provided for under this Agreement. A withdrawn Limited Partner or his
personal representatives shall have such access to the books and other data of
the Partnership to the extent necessary to obtain full information with
respect to his distributive interest, but this right continues only until the
distributive interest has been determined as provided under this Agreement.

7.8. Transfer of Limited Partnership Interests.

(a) A Limited Partner shall have the right to assign his right
to share in such profits and losses, to receive such distribution or
distributions and to receive such allocations of income, gain, loss, deduction
or credit to which the assigning Limited Partner was entitled, provided that
the assigning Limited Partner obtains the consent of the Managing General
Partner to such assignment, which consent may be withheld only if (i) in the
opinion of the Managing General Partner the proposed assignment would result
in adverse Federal income tax consequences to the Partnership, or (ii) the
proposed assignment would not comply with Section 9.1(c) hereof. In the event
that the

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Managing General Partner has not given written notification to the assigning
Limited Partner of the Managing General Partner's objection to the proposed
assignment within sixty (60) days following the assigning Limited Partner's
written notice to the Managing General Partner of the proposed assignment, the
Managing General Partner's consent to the assignment shall be deemed to be
given.

(b) Notwithstanding the Managing General Partner's consent to
a Limited Partner's assignment under subsection (a) of this Section, the
assignee shall not become a substituted Limited Partner hereunder unless (i)
such assignment is by an instrument, in form and substance satisfactory to the
Managing General Partner, including (A) an expression by the assignee of his
intention to be substituted as a Limited Partner and his acceptance and
adoption of all of the terms and provisions of this Agreement, as the same may
be amended from time to time, and (B) a provision for the payment otherwise
than by the Partnership of all reasonable expenses incurred by the Partnership
in connection with such admission, including, but not limited to, the cost of
preparing, filing and publishing the necessary amendment or amendments to the
Certificate of Limited Partnership; and (ii) the Managing General Partner
shall have given its consent to the admission of such assignee as a
substituted Limited Partner hereunder, which consent may be withheld in the
Managing General Partner's absolute discretion. Each substituted

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Limited Partner shall be entitled to the same rights and powers as were
possessed by his assignor, including the right to sell or assign his interest
in the Partnership in the same manner and subject to the same conditions.

7.9. Invalid Assignment. The foregoing provisions of this Article
VII to the contrary notwithstanding, any assignment or transfer of a Partner's
interest in the Partnership to a person below twenty-one years of age, to a
person who has been adjudged incompetent or insane or to a person or
organization prohibited by law from holding such interest shall be void and
shall not bind the Partnership.

7.10. Admission of New Partners. No new General Partner may be
admitted to the Partnership without the prior consent of the Managing General
Partner and at least a majority-in-interest of the other General Partners, if
any, and no new Limited Partners may be admitted to the Partnership without
the prior consent of the Managing General Partner. The admission of
additional Partners is further subject to the condition that each such
additional Partner execute this Agreement or an appropriate supplement hereto,
pursuant to which he agrees to be bound by the terms and provisions hereof.
The admission of an additional Partner pursuant to this Section 7.10 shall
not be cause for dissolution of the Partnership.

7.11. Withdrawal of General Partner; Successor Managing General
Partners. The Partnership shall have a

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Managing General Partner at all times and may have such number of additional
General Partners as are admitted to the Partnership in accordance with Section
7.10. The death, disability, incapacity, resignation or other withdrawal in
the case of a General Partner who is a natural person or the bankruptcy,
dissolution, cessation to act as a legal entity, resignation or other
withdrawal in the case of any other General Partner shall not cause a
dissolution of the Partnership and the business of the Partnership shall be
carried on by the remaining General Partners. Upon the withdrawal of the
Managing General Partner, a successor shall be elected by a
majority-in-interest of the remaining General Partners and if there is only
one remaining General Partner, then such General Partner shall act as Managing
General Partner. In the event of a deadlock, the Managing General Partner
shall be the first additional General Partner to be admitted to the
Partnership. If, at the time of the withdrawal of the Managing General
Partner, there are no other General Partners, such Managing General Partner
shall have the right to appoint a successor in its sole and absolute
discretion provided that such substitute Managing General Partner satisfies
the conditions set forth in Section 7.10. If, at the time of the withdrawal
of the Managing General Partner, there are no other General Partners and the
withdrawing General Partner has failed to appoint a successor in accordance
with the preceding sentence, the Partnership shall not be dissolved and the

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business shall continue if, within ninety (90) days from the date of such
withdrawal, all of the Limited Partners agree in writing to continue the
business of the Partnership and to the appointment, effective as of the date
of such withdrawal, of a Managing General Partner and such additional General
Partners as are desired provided that such newly appointed Managing General
Partner and additional General Partners, if any, satisfy the conditions set
forth in Section 7.10.

ARTICLE VIII.
DISSOLUTION, LIQUIDATION AND TERMINATION
8.1. Dissolution. The Partnership shall terminate and shall
immediately be dissolved five (5) years following the date of the expiration
or other termination of the last to expire or terminate of any agreement
pursuant to which the Partnership will provide any person with electricity,
domestic hot water, heating or cooling.

The Partnership shall also be dissolved on the earlier happening of
any of the following events: (i) upon the sale or other disposition of all of
the Partnership's assets in accordance with the provisions of this Agreement;
(ii) upon the bankruptcy, dissolution or other cessation to exist as a legal
entity (other than pursuant to a merger, reorganization or transfer of stock)
of all of the General Partners (including, in the case of a General Partner
which

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is a natural person, his death, disability or incapacity), unless a successor
Managing General Partner is elected in accordance with Section 7.11; or (iii)
upon the occurrence of any other event which, under the provisions of the Act,
would cause a dissolution of the Partnership.

8.2. Final Accounting. Upon the dissolution of and failure to
reconstitute the Partnership, an audit and accounting shall be made by
independent certified accountants selected by the Managing General Partner of
the accounts of the Partnership and of the Capital Accounts of each Partner,
and of the Partnership's assets, liabilities, and changes in financial
condition, from the date of the last previous accounting to the date of such
dissolution. The Managing General Partner, or such person or persons
designated by it, shall act as liquidating trustee or trustees and immediately
proceed to wind-up and terminate the business and affairs of the Partnership
and liquidate the property and assets of the Partnership. In the event the
dissolution is caused by the bankruptcy, dissolution or other cessation to
exist as a legal entity of the Managing General Partner, the liquidating
trustee or trustees shall be designated in accordance with the
majority-in-interest of the remaining Partners. During the interim, the
liquidating trustee shall continue to exploit the rights and properties of the
Partnership consistent with the liquidation thereof, exercising in connection
therewith all of the power and

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authority of the Managing General Partner as herein set forth.

8.3. Liquidation and Termination. Upon liquidation of the
Partnership, if any General Partner shall have a deficit balance in his
Capital Account, such General Partner shall contribute to the Partnership such
amount as shall be necessary to eliminate such deficit balance in cash by the
close of the Partnership's fiscal year in which such liquidation occurs or, if
later, within ninety (90) days after such liquidation, and such amount shall
be subject to claims of creditors of the Partnership or available for
distribution to the other Partners in accordance with the positive balance in
the Capital Accounts of such other Partners. As expeditiously as possible but
in no event later than one (1) year after the occurrence of an event of
dissolution within the time required under Section 4.4 hereof (provided the
Partnership shall not have been continued pursuant to Section 8.1 hereof), the
liquidating trustee shall distribute the assets of the Partnership in the
following order of priority: First, all liabilities and obligations of the
Partnership to creditors, including Partners, shall be paid or provided for
(whether by such reserve as the liquidating trustee shall deem appropriate or
otherwise); and Second, the cash and other property remaining shall be
distributed to the Partners in accordance with Section 4.4 hereof. The
liquidating trustee shall have

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power to establish reserves for the payment of liabilities and obligations of
the Partnership, as aforesaid, in such amounts as the liquidating trustee
shall deem appropriate. All saleable assets of the Partnership may be sold in
connection with any liquidation at public or private sale and at such price
and upon such terms as the liquidating trustee in its sole discretion may deem
advisable. Any Partner and any partnership, corporation or other firm in
which any Partner is in any way interested may purchase assets at such sale.
The distribution of Partnership assets hereunder may be made in cash or in
kind, in the sole and absolute discretion of the liquidating trustee.

8.4. Use of Partnership Name Upon Dissolution. At no time during
the operation of the Partnership or upon the termination and dissolution of
the Partnership shall any value be placed upon the firm name, or the right to
its use, or to the goodwill, if any, attached thereto, either between the
Partners or for the purpose of determining any distributive interest of any
Partner in accordance with this Agreement. The personal representatives of
any deceased Partner shall not have any right to claim such value.

ARTICLE IX.
REPRESENTATIONS AND WARRANTIES

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9.1. Representations, Warranties and Agreements of the Limited
Partners. Each Limited Partner represents and warrants to, and agrees with,
the other Partners as follows:

(a) The Limited Partner has full right, power and authority to
execute and deliver this Agreement and to perform each of his obligations
hereunder. This Agreement has been duly executed and delivered on behalf of
the Limited Partner and constitutes the valid and binding obligation of the
Limited Partner in accordance with its terms. The Limited Partner is not
subject to any restriction or agreement which prohibits or would be violated
by the execution and delivery hereof or the consummation of the transactions
contemplated herein or pursuant to which the consent of any third person, firm
or corporation is required in order to give effect to the transactions
contemplated herein;

(b) The Limited Partner (i) has such knowledge of business and
financial affairs as is necessary to enable him to understand the highly
speculative nature of and the risks attendant to investments in securities in
general and to an investment in the Partnership in particular, and to
understand the particular financial, legal and tax implications of the
business to be conducted by the Partnership; (ii) has determined on the basis
of consultations with his own legal and tax advisors that the purchase of an
interest in the Partnership is consistent

-41-

<PAGE>

with his own investment objectives and income prospects; and (iii) has had
access to any and all information concerning the Partnership which he and his
legal and tax advisors requested or considered necessary to make a proper
evaluation of his investment.

(c) The Limited Partner understands that the Partnership
interests being acquired hereunder have not been registered under the
Securities Act of 1933, as amended (the "Act"), on the ground that investment
in the Partnership is exempt under Section 4(2) of the Act as not involving a
public offering. The Limited Partner represents that he is acquiring his
interest in the Partnership for investment for his own account with no present
intention of reselling or otherwise disposing of the same, and understands
that the reliance of the Managing General Partner upon such exemption is
predicated upon the lack of such intention. The Limited Partner further
realizes that in the opinion of the Securities and Exchange Commission the
statutory basis for such exemption would not be present, if, notwithstanding
such representation, such Limited Partner contemplates acquiring his interest
in the Partnership for resale upon the occurrence or non-occurrence of some
predetermined event. In view of such opinion, the Limited Partner confirms
the meaning of his representation to be that he does not now intend to dispose
of all or any portion of his Partnership interest, that to the best of his
knowledge and belief there are no circumstances in the foreseeable future,

-42-

<PAGE>

of which he is now aware, which would require the resale of any portion of
such interest and that he will, in no event, sell, transfer, or otherwise
dispose of his interest in the Partnership or any portion thereof unless, in
the opinion of counsel to the Partnership, such interest may be legally sold,
transferred or otherwise disposed of without registration and/or qualification
under the Act and under other applicable state or Federal statutes, or such
interest shall have been so registered and/or qualified and a registration
statement shall then be in effect with respect thereto. In connection with
the foregoing, such Limited Partner agrees to indemnify and hold harmless the
Partnership, each General Partner and the Limited Partners against any
expenses incurred by them which may arise as a result of any sale or
distribution by him of any such securities in violation of the Act or the
rules and regulations of the Securities and Exchange Commission thereunder or
the securities laws of any state or other jurisdiction applicable thereto.
The Limited Partner further acknowledges his understanding that no trading
market for interests in the Partnership does or will exist at any time and
that his interest will at no time be transferable without potential adverse
tax consequences. The Limited Partner further understands that the
disposition of his interest in the Partnership is also limited by other
provisions of this Agreement.

-43-

<PAGE>

9.2. Representations, Warranties and Agreements of the General
Partners. Each General Partner represents and warrants to, and agrees with,
the Limited Partners that it (a) has full right, power and authority to
execute and deliver this Agreement and to perform each of its obligations
hereunder, (b) has duly executed and delivered this Agreement, (c) has taken
all action necessary to constitute this Agreement its valid and binding
obligation and this Agreement is its duly and validly binding obligation in
accordance with its terms, (d) is not subject to any restriction or agreement
which prohibits or would be violated by the execution and delivery hereof or
the consummation of the transactions contemplated herein or pursuant to which
the consent of any third person, firm or corporation is required in order to
give effect to the transactions contemplated herein, (e) will take all such
other actions as will enable it to remain a General Partner in the Partnership
and perform its obligations hereunder, (f) has taken all steps necessary to
ensure that the Partnership is duly formed, validly existing and in good
standing under the laws of the State of Delaware and has full power and
authority to enter into each of the agreements and perform all of the acts
contemplated by this Agreement, and (g) has not knowingly taken any action
which will cause any Limited Partner to have any personal

-44-

<PAGE>

liability with respect to any obligation of the Partnership except as provided
in this Agreement and the Act.

ARTICLE X.
GENERAL

10.1. Valuation of Partnership Property. Except as otherwise
expressly provided herein, all valuations of Partnership property for any
purpose whatsoever shall be at fair market value as determined by the Managing
General Partner, and any such determination made in good faith and in the
exercise of reasonable discretion will be final and binding upon each Partner,
his heirs, representatives, successors and assigns. In connection with any
such determination, the Managing General Partner, in its sole discretion, may
employ any accountant, appraiser, expert or other person, at the expense of
the Partnership, to assist it and may rely conclusively on the opinion of such
accountant, appraiser, expert or other person.

10.2. Notices. Every notice, consent or other communication
required or permitted to be given by any provision of this Agreement shall be
in writing and shall be deemed to have been duly and properly given or served
for all purposes on the date such notice, consent or other communication is
(a) delivered personally or (b) deposited in a post office box and sent by
registered or certified

-45-

<PAGE>

mail, return receipt requested, postage and charges prepaid, and addressed as
follows: (i) if to the Partnership, to its principal place of business
referred to herein, with a copy to the General Partner at its address referred
to below; (ii) if to a Limited Partner, to the address set below the name of
such Limited Partner on the signature page hereof; and (iii) if to a General
Partner, to its address set below the name of the General Partner on the
signature page hereof. The Partners may change their addresses for purposes
of this Section 10.2 by notice to the Partnership at its principal office in
the manner herein provided for.

10.3. Further Assurances. Each of the parties hereto agrees to
execute, acknowledge, deliver, file, record and publish such further
certificates, instruments, agreements and other documents and to take all such
further action as may be required by law or deemed by the Managing General
Partner to be necessary or useful in furtherance of the Partnership's purposes
and the objectives and intentions underlying this Agreement and not
inconsistent with the terms hereof.

10.4. Authority of the Managing General Partner. No person,
firm or corporation dealing with the Partnership shall be required to inquire
into the authority of the Managing General Partner to take any action or make
any decision.

-46-

<PAGE>

10.5. Entire Agreement. This Agreement incorporates the entire
agreement among the parties hereto, regardless of anything to the contrary
contained in any Certificate of Limited Partnership or other instrument or
notice purporting to summarize the terms hereof, whether or not the same shall
be recorded or published.

10.6. Amendments. This Agreement may be amended at any time,
and from time to time, only upon the written concurrence of the Managing
General Partner, and at least a majority-in-interest of the other Partners.

Notwithstanding any provision to the contrary contained in this
Agreement, this Agreement may be amended by the Managing General Partner, upon
thirty (30) days prior notice to each Partner, as to the following matters:
(a) to add to the representations, duties or obligations of the Managing
General Partner or surrender any right or power granted to the Managing
General Partner herein, for the benefit of the Limited Partners; (b) to cure
any ambiguity, to correct or supplement any provision in this Agreement which
may be inconsistent with any other provision, or to make any other provisions
with respect to matters or questions arising under this Agreement which will
not result in inconsistency with the provisions of this Agreement; and (c) to
delete from or add any provision to this Agreement required or deemed
necessary to be so deleted or added by representatives of the Securities and
Exchange Commission

-47-

<PAGE>

or any other governmental authority for the benefit or protection of the
Limited Partners. However, no such amendment shall cause the Partnership to
become a general partnership, change the liability of the General Partner or
the Limited Partners so as to materially, adversely affect any Partner or
extend the duration of the Partnership.

Upon any amendment of this Agreement, the Certificate of Limited
Partnership shall also be amended if necessary to reflect such amendment.

10.7. Gender and Number. Unless the context otherwise requires,
when used herein, the singular includes the plural and vice versa, and the
masculine includes the feminine and neuter and vice versa. A person is deemed
to include a person, firm, corporation or other entity.

10.8. Benefit. This Agreement is binding upon and inures to the
benefit of the parties hereto, their heirs, legal representatives, successors
and assigns.

10.9. Captions. Captions are inserted for convenience only and
shall not be given any legal effect.

10.10. Execution. This Agreement may be executed in any number
of counterparts, and each such counterpart will for all purposes be deemed an
original instrument, but all such counterparts together will constitute but
one and the same agreement.

10.11. Majority Governance. Each of the parties hereto agrees
that if any action shall be taken

-48-

<PAGE>

pursuant to this Agreement by the required percentage in interest of the
Partners, he will execute any such writing or instrument as may be necessary
to carry out and perfect such action notwithstanding that said party may not
have assented thereto or may have objected thereto. Partnership action
covered within the scope of this clause includes, but is not limited to, the
adoption of any Certificate of Limited Partnership or any amendment thereto,
any instrument effecting or evidencing the withdrawal of a Partner and any
amendment or supplement to this Agreement.

-49-

<PAGE>

SIGNATURE PAGE OF AGREEMENT OF LIMITED PARTNERSHIP
OF
YORK COGEN PARTNERS L.P.

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

RRR'S VENTURES LTD.,
as Managing General Partner

By:
-------------------------------------
President

900 Park Avenue
Suite 19E
New York, New York 10021

----------------------------------------
Taxpayer Identification Number

-50-

<PAGE>

SIGNATURE PAGE OF AGREEMENT OF LIMITED PARTNERSHIP
OF
YORK COGEN PARTNERS L.P.

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

INITIAL LIMITED PARTNER:

YORK RESEARCH CORPORATION

By:
----------------------------------
Robert M. Beningson
President

280 Park Avenue
Suite 2700 West
New York, New York 10017

Dated
Admitted:
------------------------

-51-

<PAGE>

SIGNATURE PAGE OF AGREEMENT OF LIMITED PARTNERSHIP
OF
YORK COGEN PARTNERS L.P.

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

LIMITED PARTNER:

----------------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
Dated Admitted:
------------------------

-52-

<PAGE>

SIGNATURE PAGE OF AGREEMENT OF LIMITED PARTNERSHIP
OF
YORK COGEN PARTNERS L.P.

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

LIMITED PARTNER:

----------------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
Dated Admitted:
------------------------

-53-

<PAGE>

SCHEDULE 3.1

Contributions by the General Partners

-54-

<PAGE>

SCHEDULE 4.2

RRR'S Ventures, Ltd. (Managing General Partner) %

York Research Corporation (Limited Partner) %

-55-

<PAGE>

SCHEDULE 4.2.2

For purposes of this Schedule 4.2.2 there shall be determined for
the taxable year the following:

(i) the excess (the "Net Attributable Profit") of (A) the sum of the items of
income and gain, including, without limitation, the revenues derived from
cogeneration facilities, attributable to the property securing the
Partnership's nonrecourse liabilities (collectively, the "Attributable Profit
Items") over (B) the sum of the items of loss and deduction, including,
without limitation, fees and expenses for management of any cogeneration
facilities attributable to such property, but excluding from such loss and
deduction any nonrecourse deductions as defined in Section 4.2.2(a)
("Nonrecourse Items") (collectively, after such exclusion, the "Attributable
Loss Items") or, if the Attributable Loss Items exceed the Attributable Gain
Items, such excess (the "Net Attributable Loss"); provided, however, for this
purpose, that if the Nonrecourse Items exceed the amount of cost recovery,
depreciation, and amortization of properties subject to nonrecourse
liabilities, to the extent that items of loss and deduction would have been
treated as Nonrecourse Items under Treas. Reg. Section 1.704-1T(b)(iv)(4)(b)
by virtue of the existence of such excess, such items shall not be treated as
Nonrecourse Items or excluded in determining the amount of Attributable Loss
Items; and

(ii) with respect to each Partner, (A) the excess of such
Partner's share of Attributable Profit Items over such Partner's share of
Attributable Loss Items (the "Partner Net Attributable Profit"), or (B) if
such Partner's share of Attributable Loss Items exceeds such Partner's share
of Attributable Profit Items, such excess (the "Partner Net Attributable
Loss"); provided that for this purpose a Partner's share of an item shall be
determined as the amount of the item that would have been allocated to the
Partner pursuant to Sections 4.2, 4.2.1 and 4.3.1 as if there were no
Nonrecourse Items for the taxable year.

If there is a Net Attributable Profit for the taxable year, each
Partner having a Partner Net Attributable Profit for the taxable year shall be
allocated Nonrecourse Items in an amount proportionate to its respective
Partner Net Attributable Profit (which shall also constitute its share of the
item referred to in Section 4.2.2.(b)); if there is a Net Attributable Loss
for the taxable year, each Partner having a Partner Net Attributable Loss for
the taxable year shall be allocated Nonrecourse Items in an

-56-

<PAGE>

amount proportionate to its respective Partner Net Attributable Loss.

-57-

<PAGE>

EXHIBIT 10(jj)

RENEGOTIATION AND PAYMENT AGREEMENT

THIS RENEGOTIATION AND PAYMENT AGREEMENT (the "Agreement") dated as
of February 28, 1997 is entered into by and between SANWA BUSINESS CREDIT
CORPORATION, a Delaware corporation ("SBCC") and B-41 ASSOCIATES, L.P., a
Delaware limited partnership ("B-41"):

R E C I T A L S:

A. SBCC and B-41 entered into a Note Purchase Agreement dated as of
July 27, 1994, together with a number of security and other agreements which
were entered into and delivered as of July 27, 1994.

B. SBCC and B-41 have renegotiated the terms and conditions of the
Note Purchase Agreement to the end that the long term contingent payment to
be made by B-41 to SBCC thereunder has been converted to a sum certain to be
paid by B-41 promptly.

C. SBCC and B-41 are desirous of effecting final payment of all
obligations of B-41 to SBCC and the termination of all existing contractual

<PAGE>

and business relationships between them and with respect to any entities
affiliated with B-41.

NOW THEREFORE, in consideration of the premises and of the terms
and covenants herein contained, the parties hereto covenant and agree as
follows:

1. In consideration of the agreement of B-41 to make the payment
contemporaneously with the execution of this Agreement, B-41 and SBCC agree
that the remaining purchase price payable pursuant to Section 4 of the Note
Purchase Agreement shall be fixed at $2,750,000.

2. Annexed hereto as Exhibit B is the wire transfer payment
instruction from SBCC.

3. Immediately upon the timely initiation of the wire transfer of
the renegotiated purchase price, (i) the Note Purchase Agreement and all
exhibits, documents and agreements executed in connection therewith shall be
terminated and of no further force or effect; and (ii) the following
documents (the forms of each of which are annexed hereto), duly executed and
acknowledged shall be delivered to the appropriate party:

(a) Releases (i) SBCC to B-41 et al.
(Exhibit A-1); (ii) B-41 to SBCC
(Exhibit A-2); (iii) York-Cogen
Partners, L.P. to SBCC (Exhibit A-3);
(iv) B-41 Management Corp. to SBCC
(Exhibit A-4); (v) York Research
Corporation to SBCC (Exhibit A-5).

2
<PAGE>

(b) Termination statements executed by SBCC
for (1) financing statement filed with
the New York Secretary of State as
document number 186087; (2) financing
statement with New York County
as document number 94PN41825; (3)
financing statement filed with the
Delaware Secretary of State as document
number 9412540; and (4) financing
statement filed with Kent County,
Delaware as document number 0003974.

(d) Termination of Agency Agreement (Exhibit
C).

(e) Termination of Proxy and Agreement
(Exhibit D).

(f) Revocation of Payment Instruction
(Exhibit E).

(g) Termination of Notice Agreement (Exhibit
F).

(h) Termination of Consent and Subordination
Agreement (Exhibit G).

(i) Termination of Pledge Agreement (Exhibit
H).

4. SBCC and B-41 agree from time to time after the execution of
this Agreement, to execute, acknowledge and deliver such other instruments,
documents or other materials as are reasonably requested by either of them to
further effectuate the consummation of the transactions contemplated hereby
and, in particular, to effectuate the release of record of the security
interests held by SBCC with respect to assets of B-41 and its affiliated
entities and the termination of the contractual arrangements with

3
<PAGE>

other parties previously entered into with respect to the Note Purchase
Agreement.

5. The Agreement and all documents delivered in connection
herewith constitute the entire agreement between the parties with respect to
the subject matter hereof and supersede all prior agreements and
understandings between the parties hereto relating to the subject matter
hereof.

6. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
EXECUTED IN THE STATE OF NEW YORK BY RESIDENTS THEREOF AND TO BE PERFORMED IN
SUCH STATE.

7. Each party hereto waives any right it may have to a trial by
jury in any action to enforce or defend any matter arising from or related to
this Agreement.

8. This Agreement inures to the benefit of B-41 and SBCC, their
respective successors and permitted assigns, and is binding upon B-41 and
SBCC and their respective successors and permitted assigns.

9. If any one or more of the provisions of this Agreement, or any
agreement or document executed in connection herewith, are held to be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision or provisions in
every other

4
<PAGE>

respect and of the remaining provisions of this Agreement, and
any document or agreement executed in connection herewith, shall not be in
any way impaired. In the event of a finding of such invalidity, illegality
or unenforceability by a court of competent jurisdiction, the parties hereto
express that it is their intention and desire that such court modify such
provision to the minimum extent necessary to avoid such invalidity,
illegality or unenforceability (provided such modification does not alter the
purpose or intent of such provision).

IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.

SANWA BUSINESS CREDIT CORPORATION

By: /s/ Thomas L. Hidder
---------------------------------
Name: Thomas L. Hidder
Title: Senior Vice President

B-41 ASSOCIATES, L.P.

By: B-41 Management Corp.,
its general partner

By: /s/ Michael Trachtenberg
---------------------------------
Name: Michael Trachtenberg
Title: Vice President

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF YORK RESEARCH CORPORATION
-----------------------------------------

Set forth below are the names of all subsidiaries of York Research
Corporation ("York") as of February 28, 1997 required
to be listed on Exhibit 21 to York's 1997 Annual Report on
Form 10-K. Indented companies are direct subsidiaries of the company
under which they are indented.

Percentage
Owned by State of
Immediate Incorporation
Parent or Formation
----------- -------------

York Research Corporation (Parent) N/A Delaware
B-41 Management Corporation 100% Delaware
B-41 Associates L.P. (1) Delaware
Cogeneration Technologies, Inc. 100% Delaware
B-41 Associates L.P. (2) Delaware
York Cogen Partners L.P. 90% Delaware
B-41 Associates L.P. (3) Delaware
FBL Medical Computer
Specialists, Inc. 100% New Jersey
York Internet Power Services, Inc. 100% New York
York Research Canada, Inc. 100% Canada
York Windowpower Corp. 100% Canada
North American Energy Conservation Inc. 85% Delaware
NAEC Energy Services Company, Inc. 100% Delaware

(1) 5% of Profits
9.8% of Losses
9.8% of Depreciation

(2) 22% of Profits
1% of Losses
1% of Depreciation

(3) 53% of Profits
1% of Losses
1% of Depreciation

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated May 16, 1997 accompanying the consolidated
financial statements incorporated by reference or included in the Annual
Report of York Research Corporation and Subsidiaries (which expressed an
unqualified opinion and included an emphasis paragraph relating to the
Company's assets related to the Warbasse Project), on Form 10-K for the year
ended February 28, 1997. We hereby consent to the incorporation by reference
of said report in the Registration Statements of York Research on Forms S-3
(File No. 33-36056, effective August 16, 1990; File No. 33-73616, effective
November 2, 1994; File No. 33-89418, effective February 22, 1995; File No.
33-90654, effective April 6, 1995; File No. 333-10035, effective August 29,
1996; and File No; 333-14151, effective October 24, 1996) and on Forms S-8
(File No. 33-63730, effective June 3, 1993; File No. 33-67616, effective
August 20, 1993; File No. 33-75850, effective March 2, 1994; File No.
33-74730, effective July 2, 1994; and File No. 333-11781, effective September
11, 1996).

GRANT THORNTON LLP

New York, New York
May 16, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS OF AND
FOR THE PERIODS ENDED FEBRUARY 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 11,513,026
<SECURITIES> 0
<RECEIVABLES> 7,900,114
<ALLOWANCES> 0
<INVENTORY> 1,312,086
<CURRENT-ASSETS> 29,996,388
<PP&E> 1,526,591
<DEPRECIATION> (924,163)
<TOTAL-ASSETS> 84,829,373
<CURRENT-LIABILITIES> 13,190,045
<BONDS> 0
0
0
<COMMON> 142,563
<OTHER-SE> 46,847,874
<TOTAL-LIABILITY-AND-EQUITY> 84,829,373
<SALES> 26,570,707
<TOTAL-REVENUES> 46,327,322
<CGS> 25,112,691
<TOTAL-COSTS> 31,328,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,022,611
<INCOME-TAX> 3,200,000
<INCOME-CONTINUING> 7,822,611
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,822,611
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51

</TABLE>