THERMO ECOTEK CORP, S-2, 1998-05-11

THERMO ECOTEK CORP
S-2, 1998-05-11
COGENERATION SERVICES & SMALL POWER PRODUCERS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1998

REGISTRATION NO. 333-
================================================================================

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

FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------

THERMO ECOTEK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C>
DELAWARE 04-3072335
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

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

245 WINTER STREET
SUITE 300
WALTHAM, MASSACHUSETTS 02154
(781) 370-1500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

SANDRA L. LAMBERT, SECRETARY
THERMO ECOTEK CORPORATION
C/O THERMO ELECTRON CORPORATION
81 WYMAN STREET
P. O. BOX 9046
WALTHAM, MASSACHUSETTS 02254-9046
(781) 622-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

Copies to:

<TABLE>
<S> <C>
SETH H. HOOGASIAN, ESQ. EDWIN L. MILLER, JR., ESQ.
GENERAL COUNSEL TESTA, HURWITZ & THIBEAULT, LLP
THERMO ECOTEK CORPORATION 125 HIGH STREET
C/O THERMO ELECTRON CORPORATION BOSTON, MASSACHUSETTS 02110
81 WYMAN STREET (617) 248-7000
WALTHAM, MASSACHUSETTS 02254-9046
(781) 622-1000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement has become effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value...... 5,175,000 shares $17.9375 $92,826,562.50 $27,384
=======================================================================================================================
</TABLE>

(1) Includes 675,000 shares subject to the Underwriters' over-allotment option.

(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low sales prices of the Common Stock reported in the
consolidated transaction reporting system on May 5, 1998.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION -- DATED MAY 11, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
4,500,000 Shares

LOGO
Common Stock
- --------------------------------------------------------------------------------

All of the shares of Common Stock offered hereby (the "Offering") are being sold
by Thermo Ecotek Corporation (the "Company"), a majority-owned subsidiary of
Thermo Electron Corporation ("Thermo Electron"). Thermo Electron intends to
purchase 300,000 shares of Common Stock in this Offering. Following the
Offering, Thermo Electron will own approximately 81% of the outstanding shares
of Common Stock of the Company (assuming no exercise of the Underwriters'
over-allotment option).

The Common Stock is listed on the American Stock Exchange (the "AMEX") under the
symbol "TCK". On May 8, 1998, the reported last sales price of the Common Stock
on the AMEX was $17.75 per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" ON PAGES 7 TO 17 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
======================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1)(2) Company(2)
- ----------------------------------------------------------------------------------------------------------------------
Per Share........................................... $ $ $
- ----------------------------------------------------------------------------------------------------------------------
Total(3)............................................ $ $ $
======================================================================================================================
</TABLE>

(1) The Company and Thermo Electron have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."

(2) Before deducting expenses payable by the Company estimated to be $500,000.
The underwriting discounts and commissions payable to the underwriters will
be reduced by $ for shares of Common Stock purchased by Thermo
Electron and the proceeds to the Company will be increased by such amount.

(3) The Company has granted the several underwriters a 30-day over-allotment
option to purchase up to 675,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be $
and the total Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------

The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made through the facilities
of the Depository Trust Company, New York, New York, on or about ,
1998.

PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY

CIBC OPPENHEIMER
, 1998
<PAGE> 3

[Graphics/Photographs]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
appearing elsewhere in this Prospectus and incorporated herein by reference. The
information contained in this Prospectus assumes that the Underwriters' over-
allotment option will not be exercised, unless indicated otherwise.

THE COMPANY

Thermo Ecotek Corporation(the "Company") is engaged in several businesses
involving environmentally responsible technologies and products including (i)
the generation of nonutility electric power using clean power processes ("clean
power resources"), (ii) the production and sale of engineered clean fuels and
the development and operation of natural gas gathering, storage and marketing
businesses ("clean fuels") and (iii) the development and sale of environmentally
friendly pest control products ("biopesticides"). The Company has entered these
businesses by leveraging its expertise with environmental technologies and plans
to capitalize on opportunities created by the deregulation of the U.S. energy
markets, increasing energy demand and stricter environmental regulation
worldwide.

CLEAN POWER RESOURCES

U.S. Market

Biomass Operations. Since the mid-1980s, the Company's core business has
been to design, develop, own and operate independent power generation plants
using environmentally friendly fuels, such as agricultural and wood waste
("biomass"). The Company currently owns and operates seven biomass facilities
representing total electric generation capacity of 140 megawatts. With its three
New England facilities fueled by wood waste and its four California facilities
fueled by agricultural and wood waste, the Company is the largest biomass energy
plant operator in the U.S. While the Company's current biomass operations are
profitable, the development and construction of new U.S. biomass-fueled plants
are currently uneconomical because (i) the price for biomass fuels is higher
relative to alternative fuels such as natural gas and (ii) the Company believes
that deregulation of the U.S. electric utility market will drive energy prices
downwards as it favors the most price competitive electric generation
alternatives. The Company is shifting its focus from the U.S. biomass energy
market to other energy projects which it expects to be competitive in the
domestic power generation market.

Retrofit/Repower Opportunities. In response to deregulation, the Company
has sought to exploit new opportunities in the domestic power generation market
where it can be competitive by leveraging its extensive experience in all
aspects of power project development, including permitting, regulatory
compliance, utility interface, financing, fuel procurement, construction
management, operations and maintenance. For example, the Company is pursuing
opportunities using the latest clean combustion technologies to retrofit or
repower power plants being divested by utilities. In certain states, utilities
are divesting certain power generating assets due to deregulation which requires
them to unbundle their power generating assets from their distribution and
transmission assets. The Company's strategy is to acquire these power generating
assets at prices which will allow the Company to (i) effectively compete in the
deregulated energy market by providing power at competitive prices while (ii)
maintaining acceptable returns on its investments in such assets. Recently, the
Company purchased two of Southern California Edison's natural gas-fired plants
in the greater Los Angeles area for $9.5 million, providing the Company the
opportunity to repower these aging facilities (potentially capable of generating
over 600 megawatts) in order to compete effectively in the recently deregulated
California power market. The Company is actively pursuing other opportunities to
repower or retrofit older, inefficient and less environmentally friendly U.S.
power plants which are being divested by utility companies and municipalities.

International Market

The Company is actively pursuing opportunities in certain international
markets where demand for electric power is being driven by rapid economic growth
and where stricter environmental regulations are
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<PAGE> 5

being enacted. The Company intends to address both the need for additional power
generating capacity, in the form of greenfield development of environmentally
responsible facilities, including biomass facilities, and the need for
retrofitting these facilities to bring them into environmental compliance.

Czech Republic. In the Czech Republic, the Company has formed a joint
venture through which it recently acquired an interest in two existing energy
plants near the towns of Tabor and Pribram. The Company intends to expand and
modernize the Tabor facility to provide approximately 50 megawatts of electrical
output to be sold to the local power distribution company and an adjacent
industrial customer. The Company currently runs auxiliary boilers at Pribram
that provide thermal service during peak hours. Additionally, the Company
conducted a study which identified a total of 30 Czech plants, with aggregate
potential generating capacity of 2,000 megawatts, that present possible further
retrofitting opportunities. The Company believes that existing high emissions
boilers at many Czech plants like the Tabor facility can be brought into
environmental compliance using various combustion or pollution control
technologies. Additionally, the Company believes that financing for projects
located in the Czech Republic will be facilitated by the country's investment
grade rating.

Italy. In September 1996, the Company formed a joint venture with
Marcegaglia Group of Mantova, Italy, a large privately-held steel fabricating
company, to develop, own and operate biomass-fueled electric power facilities.
The Company believes Italy is an attractive market because the Italian
government has passed legislation authorizing a price subsidy to the biomass
plants. The joint venture is currently proceeding with the development of six
projects, all of which have signed preliminary power purchase agreements with
ENEL, the national Italian electric utility, and all of which have been approved
by the Italian government's price subsidy program for biomass plants.

Other International Opportunities. The Company will continue to evaluate
opportunities in foreign countries against its selection criteria. These
criteria include (i) the significant, long-term need for additional capacity or
reconfiguration of existing capacity; (ii) the ability and willingness of power
purchasers to provide creditworthy power purchase payment arrangements; (iii) a
legal system that provides for the predictable and reliable enforcement of
contracts; and (iv) a stable political and economic environment which would
minimize risks relating to political turmoil and currency fluctuation.

CLEAN FUELS

K-Fuel. In August 1995, the Company entered into a limited partnership
agreement with KFx, Inc. ("KFx") to develop, construct and operate a 500,000 ton
per year sub-bituminous coal beneficiation plant near Gillette, Wyoming (the
"K-Fuel Facility"). The K-Fuel Facility, the first of its kind, utilizes
patented clean coal technology owned by KFx which transforms low energy, high
moisture coal into a low moisture, high energy fuel with reduced sulfur
("K-Fuel"). Although the facility has operated and produced commercially salable
product, the Company has encountered certain difficulties in optimizing its
performance to achieve optimal and sustained operation. See "Risk
Factors -- Risks Associated with Clean Fuels Business -- Uncertainty Regarding
K-Fuel Facility."

The Clean Air Act is the primary market driver for the development in the
U.S. of beneficiated clean coal fuel products. The Clean Air Act implemented
stricter limitations on air emissions, including nitrous oxide ("NO(x)") and
sulfur dioxide ("SO(2)"), the primary causes of smog and acid rain. The K-fuel
technology addresses this problem by producing a coal fuel product that has
SO(2) emissions significantly below the levels required by the Clean Air Act.
The Company estimates, based on published utility coal consumption data and
responses to Phase I and Phase II requirements of the Clear Air Act, that a
market of approximately 100 to 150 million tons per year of clean coal products
will develop between the years 2000 and 2010. In addition to the electric
utility industry, the Company intends to market K-Fuel to manufacturers and
other industrial coal users that are subject to the SO(2) provisions of the
Clean Air Act

Star Natural Gas. The Company recently established its Star Natural Gas
Company subsidiary ("Star Natural Gas") to exploit opportunities in the natural
gas gathering, storage and marketing business. The Company recently recruited
senior management with extensive industry experience to implement this strategy.

many small to midsize gas gathering and storage facilities, and (ii) to gain the
experience needed to capture margins ordinarily paid to third parties in its
other electric generation business, with minimal investment and risk.

BIOPESTICIDES

Through its majority-owned Thermo Trilogy subsidiary, the Company develops,
produces and markets a broad range of biopesticide products which are
increasingly being used as cost-effective alternatives or complements to
conventional chemical-based pest control technologies. Biopesticides are highly
effective on targeted pests, but have little, if any, harmful effect on the
environment or on non-target organisms (including humans, livestock, and
wildlife) and are less prone to cause insect resistance than conventional
chemical pesticides. In addition, biopesticides are often cost-effective because
their early application preserves natural, beneficial insects, which precludes
the need for repeated chemical spraying.

The Company entered the biopesticides market through a series of
acquisitions of the biopesticides businesses of each of W.R. Grace & Co.,
biosys, inc. ("biosys") and Novartis AG. Through these acquisitions the Company
has obtained a broader biopesticide product portfolio than any other
biopesticide company. The Company's products address the $400 million
biopesticides market which, according to industry sources, has grown 15-20% per
year over the past several years. Products produced by Thermo Trilogy include
botanical extracts from the seed of tropical neem trees, microbial based
pesticides (fungal based insecticides and fungicides, bacculovirus, beneficial
nematodes, and Bts), insect pheromone-based products such as traps and lures,
and disease free sugar cane planting stock. As compared to conventional chemical
pesticides, most of Thermo Trilogy's products are derived from natural origins
with minimal or no toxicity. Thermo Trilogy's products are used primarily by
agricultural farmers, pest control operators, and consumers and are sold through
various distribution channels worldwide.

The biopesticide market is highly fragmented and the Company intends to
seek further acquisitions to strengthen and broaden its product offerings to
agricultural growers and consumers.

The Company operated as a segment of the Energy Systems Division (the
"Division") of Thermo Electron from 1979 until its incorporation as Thermo
Energy Systems Inc. in Delaware in November 1989. Upon the Company's
incorporation, Thermo Electron transferred certain of the assets and business of
the Division to the Company in exchange for 15,750,000 shares of the Company's
Common Stock and the assumption by the Company of certain liabilities of the
Division. In December 1994, the name of the Company was changed to Thermo Ecotek
Corporation. As of May 8, 1998, Thermo Electron beneficially owned approximately
92% of the Company's outstanding Common Stock.

Unless the context otherwise requires, references in this Prospectus to the
Company or Thermo Ecotek refer to Thermo Ecotek Corporation and its subsidiaries
and their predecessors. The Company's principal executive offices are located at
245 Winter Street, Suite 300, Waltham, Massachusetts 02154, and its telephone
number is (781) 370-1500.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered Hereby(1).............................. 4,500,000 shares
Common Stock to be Outstanding after the Offering(2)........ 40,714,487 shares
Use of Proceeds............................................. For general corporate purposes, including possible
acquisitions. See "Use of Proceeds."
AMEX Symbol................................................. TCK
</TABLE>

- ---------------
(1) Includes 300,000 shares of Common Stock that Thermo Electron intends to
purchase in this Offering.

(2) Based on the number of shares outstanding as of May 6, 1998. Includes
10,821,485 shares issuable to Thermo Electron upon conversion on May 6, 1998
of its 4.0% Subordinated Convertible Debentures due 2001 in the principal
amount of $68.5 million. Does not include 1,160,397 shares of Common Stock
reserved for issuance under the Company's stock-based compensation plans and
3,334,704 shares reserved for issuance upon conversion or exchange of
outstanding convertible securities. See "Capitalization" and Notes 4, 5 and
11 to Consolidated Financial Statements of the Company.

5
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
APRIL 4, 1998
-----------------------
PRO AS
FORMA(6) ADJUSTED(7)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 46,465 $121,740
Working capital............................................. 65,279 140,554
Total assets................................................ 486,526 561,801
Long-term obligations....................................... 106,679 106,679
Total shareholders' investment.............................. 229,013 304,288
</TABLE>

- ---------------
(1) In September 1995, the Company changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly, the
Company's 39-week transition period ended September 30, 1995, is presented.

(2) Derived from unaudited financial statements.

(3) Includes the results of the business of biosys, inc. since its acquisition
by the Company in January 1997.

(4) Includes the results of the Bt business of Novartis since its acquisition by
the Company in November 1997.

(5) During the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share." As a result,
all previously reported earnings per share have been restated.

(6) Stated on a pro forma basis to reflect the May 1998 conversion of
$68,500,000 principal amount of subordinated convertible debentures into
10,821,485 shares of Common Stock by Thermo Electron.

(7) Adjusted to reflect the sale by the Company of 4,500,000 shares of Common
Stock offered hereby, assuming a public offering price of $17.75 per share
(the last reported sales price on the AMEX on May 8, 1998), after deducting
the underwriting discounts and commissions and estimated Offering expenses
payable by the Company.

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RISK FACTORS

An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective investors should carefully consider
the following risk factors, in addition to the other information set forth in
this Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.

Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), are made
throughout this Prospectus. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are intended
to identify forward-looking statements. The Company wishes to caution readers
that the following important factors, among others, in some cases have affected,
and in the future could affect, the Company's actual results and could cause its
actual results in 1998 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.

GENERAL

Transition of Business Focus. Since its inception, the Company has derived
a substantial majority of its revenues from the development, construction and
operation of biomass electric generation facilities. While the Company's U.S.
biomass energy business is expected to continue to generate revenues for the
foreseeable future, the Company expects the aggregate revenues and profitability
associated with this business to decline significantly beginning in fiscal 2000.
In addition, within the next few years the Company expects a substantial portion
of its revenues to be derived from new business ventures in clean power
resources, clean fuels and biopesticides. A major portion of the Company's
efforts will be focused on developing and acquiring new power projects,
additional clean fuel projects and its biopesticides business. The Company has
had limited prior experience in the repowering of power plants and the
development and sale of clean fuels, and there can be no assurance that the
Company will be able to successfully develop, market or sell its products and
services in these areas. The Company's future success will depend significantly
on its ability to develop, introduce, and integrate new products and services in
these areas. No assurance can be given that the Company will be successful in
this regard. Any failure or inability of the Company to implement these
strategies would have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Expected Price Reductions
under California SO#4 Contracts."

Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses that complement or augment the Company's
business strategy or existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. Any acquisitions completed by the Company may be
made at substantial premiums over the fair value of the net assets of the
acquired companies that would result in substantial expenses for the
amortization of goodwill. There can be no assurance that the Company will be
able to complete future acquisitions or that the Company will be able to
successfully integrate any acquired businesses. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financing, if available
at all, may be on terms that are not favorable to the Company and may result in
dilution to the Company's shareholders or in its earnings per share.

RISKS ASSOCIATED WITH CLEAN POWER RESOURCES BUSINESS

Development Risks

Uncertainty of Project Development. The process of locating, developing,
permitting, financing, and constructing power plants is complex, lengthy, and
expensive. Only a small percentage of the projects that the Company evaluates
and pursues ultimately results in operating projects. As a result, the Company
may not recover any expenses that it incurs in the evaluation and development of
many projects.

Although all the U.S. plants currently operated by the Company utilize
biomass as fuel, the Company is not currently considering the development of
further biomass-fueled projects in the U.S. due to high biomass fuel costs and
the relatively high costs of constructing and operating biomass fueled plants.
The Company is considering the development of biomass fueled projects
internationally in countries where market conditions

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may support profitable biomass operations. The Company has also expanded its
development focus to include international clean power opportunities and other
environmentally sound technologies such as developing or repowering natural gas
or coal fueled power facilities. In this regard, the Company has established
operations in the Czech Republic and Italy. The completion or success of these
projects and new ventures is subject to a number of significant conditions,
including obtaining financing, negotiating key contracts with partners and other
third parties and other material development activities such as obtaining
required permits. No assurance can be given that these projects or new ventures
will be completed on a timely basis, or at all. Any failure by the Company to
successfully develop new projects would have a material adverse effect on the
future growth of the Company.

Uncertainty of Access to Capital. The Company has sought to finance the
debt portion of each of its clean power projects in a manner that is
substantially nonrecourse to the Company. To minimize its equity commitment, the
Company must borrow substantial amounts from third party lenders. The borrowings
are typically secured only by the applicable project assets and the capital
stock of the appropriate entity, typically a joint venture or limited
partnership in which the Company has a majority interest or wholly owned
subsidiary through which the Company develops its projects and operates its
facilities ("Operating Company"). The Company anticipates that it will require
substantial financing to fund both the equity and debt components of future
projects. No assurance can be given that financing for future projects will be
available on a nonrecourse basis or on acceptable terms, or at all. Any failure
by the Company to obtain adequate amounts of financing on acceptable terms would
have a material adverse effect on the future growth of the Company.

Dependence on Terms of Power Sales Agreement. The profitability of any of
the Company's clean power facilities is heavily dependent upon the power sales
agreement that it has entered into with the electric utility or other customer.
Under certain of these agreements, in the event of service termination by the
Operating Company prior to the end of the applicable obligation period, the
Operating Company may be required to reimburse the utilities to the extent that
cumulative revenue calculated at established rates exceeds the amounts
calculated at the utilities avoided cost rates. Most of the Company's existing
power sales agreements were obtained as a direct negotiation with the purchasing
utility. However, in recent years, in the U.S. such agreements have increasingly
been awarded as a result of competitive bidding. Consequently, obtaining a power
sales agreement in the U.S. has become progressively more competitive and
expensive and, in many cases, less profitable. In the future, foreign power
sales agreements also may increasingly be subject to competitive bidding. In
addition, the passage of the National Energy Policy Act of 1992 has removed
certain barriers to entry into the independent power market by utilities and
others, and is expected to increase competition in that market. There can be no
assurance that power sales agreements, if any, entered into by the Company in
the future will be as profitable as the power sales agreements to which the
Operating Companies are currently parties. See "-- Expected Price Reductions
under California SO#4 Contracts."

Risks Associated with Doing Business Outside the United States. The
Company believes that significant growth opportunities in the power market exist
outside of the U.S. In that regard, the Company is currently pursuing projects
in Italy and the Czech Republic, and intends to identify other countries in
which to develop power projects. Doing business in many foreign countries
exposes the Company to many risks that are not present in the U.S., including
political, military, privatization, currency exchange and repatriation risks,
and higher credit risks related to the utility purchaser. In addition, it is
possible that legal obligations may be more difficult for the Company to enforce
in foreign countries and that the Company may be at a disadvantage in any legal
proceeding with the local entity. Local laws may also limit the ability of the
Company to hold a majority interest in some of the projects that it develops or
acquires. See "-- Risks Associated With International Operations."

Intense Competition for Projects. The Company believes that there are
approximately 200 companies that are actively engaged in the worldwide
nonutility power market. Many of the companies in the power market have
substantially greater financial and technical resources than those of the
Company. Domestic competition in this market is expected to intensify as a
result of deregulation at the federal and state levels, and due to the trend
toward awarding contracts based upon competitive bidding. Such competition may
reduce the ability of the Company to secure future projects and may have a
material adverse effect on the profitability of future projects.
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Uncertainty of Regulatory or Community Support. Development, construction
and operation of a clean power project requires numerous environmental, siting,
and other permits. The process of obtaining these permits can be lengthy and
expensive. In addition, local opposition to a particular project can
substantially increase the cost and time associated with developing a project,
and can potentially render a project unfeasible or uneconomic. The Company may
incur substantial costs or delays or may be unsuccessful in developing clean
power projects as a result of such opposition.

Operating Risks

Expected Price Reductions under California SO#4 Contracts. The power sales
agreements for the Company's Woodland, Mendota, and Delano plants in California
are so-called standard offer #4 ("SO#4") contracts, which require Pacific Gas &
Electric ("PG&E"), in the case of Woodland and Mendota, and Southern California
Edison ("SCE"), in the case of Delano I and Delano II, to purchase the power
output of the projects at fixed rates until 2000 in the case of Woodland and
Mendota, and 2001 in the case of Delano. However, with respect to Woodland and
Mendota, PG&E has asserted that the fixed rates under its agreements will
terminate mid-1999, although the Company disputes this assertion. Thereafter,
the utility will pay a rate based upon the costs that would have otherwise been
incurred by the purchasing utilities in generating their own electricity or in
purchasing it from other sources ("avoided cost") (as determined from time to
time by the California Public Utility Commission ("CPUC")). Avoided cost is
determined pursuant to a formula that is intended to estimate the price that the
utility would, but for its contract with the power producer, be paying for the
same amount of energy. The rate fluctuates with the price of fuels and certain
other factors. At present, the avoided cost is substantially lower than the
payments currently being made by PG&E and SCE to the Company under the fixed
rate portions of its contracts. In addition, although it is difficult to predict
future levels of avoided cost, based on current estimates, avoided cost is
expected to be substantially lower in 2000 than the rates currently being paid
by PG&E and SCE under its fixed rate contracts. The Company expects, that at
current avoided cost rates, absent sufficient reductions in fuel prices and
other operating costs, the Company's Mendota and Delano plants would operate at
substantially reduced operating income levels or at a loss beginning in fiscal
2001. In fiscal 1997 the Mendota and Delano plants' aggregate operating income
was approximately $34.0 million. Further, if the Woodland plant were to operate
at projected avoided cost levels, substantial losses would result primarily due
to nonrecourse lease obligations that extend beyond 2000. Absent sufficient
reductions in fuel prices and other operating costs, under such circumstances
the Company would draw down power reserve funds to cover operating cash
shortfalls and then, should such funds be depleted, either renegotiate its
nonrecourse lease for the Woodland plant or forfeit its interest in the plant.
During the first quarter of fiscal 1997, the Company began recording as an
expense the funding of reserves required under Woodland's nonrecourse lease
agreement to cover projected shortfalls in lease payments beginning in 2000.
Consequently, the results of the Woodland plant were greatly diminished during
1997 and the Company expects that such results will be reduced to approximately
breakeven in 1998 and thereafter. During fiscal 1997 and 1996, the Woodland
plant contributed $1.0 million and $5.1 million of operating income,
respectively.

Potential Decreased Power Sales due to Power Curtailments. The power sales
agreements between the Woodland and Mendota Operating Companies and PG&E allowed
PG&E to curtail the quantity of power purchased under each of these agreements
by up to 1,000 hours of generating capacity annually. PG&E generally exercised
its curtailment rights during periods when cheaper hydroelectric power was
available, which generally occurred following periods of heavy rain or snow.
Curtailment reduces the power payment received by the Operating Companies and,
therefore, has an adverse effect on the financial results of those Operating
Companies. During fiscal 1997, the Company experienced approximately 860 hours
of utility imposed curtailments at each of these plants. In 1997 the Company
renegotiated PG&E's curtailment rights, limiting PG&E to 500 hours per year.

Potential Increased Fuel Prices and Reduced Availability of Fuel. The
profitability of the Company's plants is dependent in part upon the difference
between the price the Company receives from its utility customers for power and
the price the Company pays for the fuel. The Company has typically entered into
long-term fuel supply agreements for a significant portion of its fuel
requirements. These agreements generally provide for prices based upon
predetermined formulas or indexes. If fuel prices rise significantly, the
Company will be required to pay higher prices on the spot market for the portion
of its fuel not covered by

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agreements. The Company's existing power sales agreements do not adjust to
account for changes in the Company's fuel prices. Therefore, the profitability
of these agreements, and any future power sales agreement that do not provide
for such an adjustment, could be materially adversely affected by increases in
the Company's fuel prices. In addition, future fuel shortages could adversely
affect the Company's ability to deliver power, and therefore receive payments,
pursuant to its power sales agreements.

Operating Difficulties. The financial performance of each of the Company's
plants depends to a significant extent upon the ability of each plant to be
capable of performing at or near capacity. If a plant is unable to perform at
these levels, payments under the power sales agreement will be reduced, possibly
significantly. The Company has in the past experienced mechanical problems with
the boilers at its Mendota and Woodland plants and suffered major equipment
damage at its Whitefield plant. Although the Company believes that these
problems have been corrected, no assurance can be given that these or other
plants will not experience operating problems in the future. No assurance can be
given that business interruption insurance will be adequate to cover all
potential losses, or that such insurance will continue to be available on
reasonable terms.

Dependence on Utility Customers. Each of the current U.S. projects relies
upon one power sales agreement with a single electric utility customer for the
majority, if not all, of its revenues over the life of the power sales
agreement. During fiscal 1997, Public Service of New Hampshire ("PSNH"), SCE,
and PG&E accounted for 18%, 31%, and 32%, respectively, of the Company's
revenues. The failure of any one utility customer to fulfill its contractual
obligations could have a substantial negative impact on the Company. No
assurance can be given that a particular utility will not be unwilling or
unable, at some time, to make required payments under its power sales
agreements. Further, in a deregulated market, the Company may do business with
customers of various sizes and levels of credit-worthiness.

Potential Earthquake Damage. The Company's California plants are located
in areas where there is a risk of potentially significant earthquake activity.
Projects that the Company develops in the future may also be located in areas
where there is earthquake risk. The Company's earthquake insurance is not
sufficient to cover all potential losses and there can be no assurance that such
insurance will continue to be available on reasonable terms.

Regulatory Risks

Potential Rate Reduction by PSNH. In 1990, a plan of reorganization (the
"Plan") for PSNH was approved by the U.S. Bankruptcy Court for the District of
New Hampshire. Pursuant to the Plan, Northeast Utilities ("NU") acquired the
assets of PSNH. An agreement between NU and the State of New Hampshire contains
language to the effect that PSNH will seek to renegotiate some of the terms of
certain rate orders with small power producers, including the Whitefield and
Hemphill Operating Companies, and that the state will support PSNH in such
efforts. PSNH reached an agreement in principle with these two Operating
Companies to settle the renegotiation of their rate orders. The settlement
agreement is subject to the approval of the New Hampshire Public Utility
Commission ("NHPUC") on terms acceptable to both PSNH and the Operating
Companies. The principal terms of the agreement generally call for the two
Operating Companies to reduce the amount of power sold annually to PSNH to 70%
of the plants' capacities, and to reduce the price per kilowatt paid by PSNH to
$0.06 per kilowatt hour, escalating three percent per year for the remainder of
the term of the original, applicable rate order. In consideration of these
reductions, the Operating Companies would receive certain cash settlement
payments, paid over several years. The settlement agreement has technically
expired, however, no party to the settlement agreement has notified the other
that it would not proceed in accordance with the terms thereof if approved by
NHPUC nor were they required to do so. The settlement, if approved and executed,
is not expected to have a material impact on the Company's results of operations
or financial condition. Should the matter not reach resolution, the Company does
not believe that PSNH has the right to take unilateral action to reduce the
price of purchased power under such arrangements. Rejection of the Company's
rate orders would result in a claim for damages by the Company and could be the
subject of lengthy litigation. In January 1997, NU disclosed in a filing with
the Securities and Exchange Commission that if a proposed deregulation plan for
the New Hampshire electric utility industry were adopted, PSNH could default on
certain financial obligations and seek bankruptcy protection. In February 1997,
NHPUC voted to adopt a deregulation plan, and in March 1997, PSNH filed suit to
block the plan. In March 1997, the federal district court issued a temporary
restraining order which prohibits the NHPUC from
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<PAGE> 12

implementing the deregulation plan as it affects PSNH, pending a determination
by the court whether PSNH's claim could then be heard by the court. In April
1997, the court ruled that it could now hear the case and ordered that the
restraining order would continue indefinitely pending the outcome of the suit.
In addition, in March 1997, the Company, along with a group of other biomass
power producers, filed a motion with the NHPUC seeking clarification of the
NHPUC's proposed deregulation plan regarding several issues, including purchase
requirements and payment of current rate order prices with respect to the
Company's energy output. In January 1998, NHPUC issued an oral ruling rejecting
the settlement agreements and modifications that would impact PSNH's ability to
finance and secure the settlement contract to the Operating Companies but has
not yet issued a written order in the matter. An unfavorable resolution of this
matter, including the bankruptcy of PSNH, could have a material adverse effect
on the Company's results of operations and financial position.

Potential Effects of Loss of QF Status or Changes to PURPA. The Company's
existing facilities are subject to the provisions of various laws and
regulations, including the Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA"). PURPA provides to Qualifying Facilities ("QFs") certain
exemptions from substantial federal and state legislation, including regulation
as public utilities. PURPA also requires electric utilities to purchase
electricity generated by QFs at prices not exceeding their avoided cost. Any
future changes to PURPA could have a material adverse effect on the Company.

Public Utility Holding Company Act. The Public Utility Holding Company Act
of 1935 ("PUHCA") regulates public utility holding companies and their
subsidiaries. The Company is not and will not be subject to regulation as a
holding company under PUHCA as long as the domestic power plants it owns and/or
operates are QFs under PURPA or otherwise are exempt from regulation as public
utility holding companies under PUHCA. If a power plant were to lose such
status, the Operating Company owning or leasing that plant could become a public
utility company, which could result in the Company becoming a public utility
holding company. In addition, loss of QF status, regardless of the Company's
ability to avoid public utility holding company status, could be a default under
many of the Company's facility lease and power-sales agreements. In the event of
any such default, the other parties to such agreements could seek various
remedies against the Company or could seek to renegotiate such agreements on
terms more favorable to such parties. In addition, to ensure that the Company
will not be subject to regulation as a holding company under PUHCA, the foreign
power plants it owns and/or operates also must be exempt from regulation as
public utility companies under PUHCA.

Potential Increased Competition Due to Regulatory Changes. The Company
believes that certain regulatory changes are likely to have a significant impact
on the domestic power market over the next five years. The National Energy
Policy Act of 1992 exempts a new class of facilities, electric wholesale
generators ("EWG") from certain federal utility regulation and liberalizes
access for non-utility generators to the utility power transmission grid. In
addition, many states are considering the elimination of many of the regulations
that currently limit the ability of power generators to negotiate power-sales
agreements directly with industrial and commercial customers. The Company
believes that the effect of these regulatory changes will be to increase
competition for the sale of power.

The Evolving California Electric Utility Market. The electric utility
market in California has undergone a complex restructuring which is not yet
complete. The California Public Utility Commission ("CPUC") and the California
legislature have required the creation of an Independent System Operator
("ISO"), which operates transmission facilities owned by investor-owned
utilities in the state, and a Power Exchange ("PX"), which conducts hourly and
daily auctions of electric energy that are designed to set prices at market
levels. The ISO and PX were created in May 1997 and commenced operations on
March 31, 1998. The activities of the ISO and PX are subject to comprehensive
Federal Energy Regulatory Commission ("FERC") regulation. FERC has approved
tariffs and rates for the ISO and PX, but these approvals are not final; they
are subject to further FERC and judicial review. In addition, the restructuring
of the California electric utility market may have an effect on avoided cost.
Investor-owned utilities in California are required to buy power through the PX.
The avoided costs for such utilities thus potentially will be determined based
on market prices set through the PX. These market prices may be lower than
energy rates set in current QF contracts which may adversely affect Operating
Companies after the end of the fixed price period in their contracts with
utilities.

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Limitations Imposed by Environmental Regulation. Federal, state, and local
environmental laws govern air emissions and discharges into water and the
generation, transportation, storage, and treatment and disposal of solid and
hazardous waste. These laws establish standards governing most aspects of the
construction and operation of the Company's facilities, and often require
multiple governmental permits before these facilities can be constructed,
modified, or operated. There can be no assurance that all required permits will
be issued for the Company's projects under development or for future projects,
or that the requirements for continued environmental regulatory laws and
policies governing their enforcement may change, requiring new technology or
stricter standards for the control of discharges of air or water pollutants, or
for solid or hazardous waste or ash handling and disposal. Such future
developments could affect the manner in which the Company operates its plants
and could require significant additional expenditures to achieve compliance with
such requirements. It is possible that compliance may not be technically or
economically feasible.

RISKS ASSOCIATED WITH CLEAN FUELS BUSINESS

Uncertainty Regarding K-Fuel Facility. The Company has entered into a
limited partnership agreement with KFx Wyoming, Inc., a subsidiary of KFx, Inc.
(the "K-Fuel Partnership"), to develop, construct, and operate a subbituminous
coal beneficiation plant near Gillette, Wyoming. The plant will utilize certain
patented clean coal technology (the "K-Fuel technology") which transforms low
energy, high moisture coal into low-moisture, high-energy fuel with reduced
sulfur. The Company has provided approximately $60 million for the design,
construction, and operation of the plant. A tax credit per ton of fuel produced
and sold is available with respect to qualifying alternative fuels from a
facility placed in service before June 30, 1998, pursuant to a binding written
contract in effect before December 31, 1996. The Company believes that the K-
Fuel Facility was placed in service in April 1998. Although the facility has
operated and produced commercially salable product, the Company has encountered
certain difficulties in optimizing its performance to achieve optimal and
sustained operation. The Company has addressed and resolved certain problems
previously encountered, including a fire at the facility and certain
construction problems, including issues relating to the flow of materials within
the facility and the design and operation of certain pressure-release equipment.
Currently, the Company is experiencing certain operational problems relating to
tar and fines residue build-up within the system during production and other
product quality issues related to product dusting. The Company is actively
exploring solutions to these problems. Because the technology being developed at
the facility is new and untested, no assurance can be given that other
difficulties will not arise or that the Company will be able to correct these
problems and achieve optimal and sustained performance. In addition, there can
be no assurance that the K-Fuel Facility would be determined to be qualified for
the tax credit, or that the Company will realize a benefit from the tax credit.
The economic returns of the K-Fuel Facility primarily result from tax credits on
the facility's production of K-Fuel. The Company expects that the K-Fuel
Facility will report operating losses for financial reporting purposes primarily
as a result of recording depreciation over the expected life of this tax credit.
Further, the Company currently has an agreement for the sale of only 33% of the
plant's anticipated output for the first three years of operation and, at the
purchaser's option, the plant's entire output from the fourth through the tenth
year of operation. No assurance can be given that the purchaser of the fuel will
exercise its option in years four through ten or that the Company will be able
to enter into additional contracts for the sale of fuel on acceptable terms, or
at all. Demand for the fuel produced by the plant is expected to result in large
part from the requirement that coal-burning utilities comply with the future
scheduled sulfur dioxide emissions restrictions contained in the Clean Air Act.
If the fuel produced by the plant does not allow the achievement of desired
emissions reductions, or if regulations relating to emissions become less
restrictive in the future, demand for the plant's fuel output would be
materially adversely affected.

Federal Regulation of Air Emissions. A significant factor driving the
creation of the U.S. market for K-Fuel and other beneficiated coal products is
the Clean Air Act. The Clean Air Act specifies certain air emission requirements
for electrical utility companies and industrial coal users. The Company believes
that compliance with such regulations by these coal users can be fully or
partially met through the use of clean-burning fuel technologies like the one
being employed at the Company's K-Fuel Facility. The Company is unable to
predict future regulatory changes and their impact on the demand for K-Fuel. A
full or partial repeal or revision of the Clean Air Act would have a material
adverse effect on the Company's clean fuel business.

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Operating Hazards and Uninsured Risks. The Company's K-Fuel Facility is
subject to the risks inherent in the operation of high pressure, high
temperature equipment producing combustible fuels. These risks include the
possibility of fire, explosions, pollution and other environmental risks. These
risks could result in substantial losses to the Company's K-Fuel Facility and
revenues due to injury and loss of life, severe damage to and destruction of
property and equipment, pollution and other environmental damage and suspension
of operations. The K-Fuel Facility maintains insurance of various types to cover
its operations. No assurance can be given that the Company will be able to
maintain adequate insurance in the future at rates the Company considers
reasonable. The occurrence of a significant event not fully insured or
indemnified against could materially and adversely affect the Company's
financial condition and results of operations.

Electric Utility Regulatory Changes. The U.S. electric utility market is
currently in the early stage of deregulation. The National Energy Policy Act of
1992 exempts a new class of facilities, EWG's from certain federal utility
regulation and liberalizes access for nonutility generators to the utility power
transmission grid. In addition, the Federal government and many states are
considering the elimination of many regulations that currently limit the ability
of power generators to negotiate power sales agreements directly with industrial
and commercial customers. The Company believes that these regulatory changes
will result in utilities and other power generators placing a high emphasis on
reducing costs in their operations. This may result in increased competition
from other producers of beneficiated coal products or other fuel sources to the
extent that such competing fuels result in cost savings for utilities and other
power producers which will have a material adverse effect on the price the
Company can charge for K-Fuel and thus have a material adverse effect on the
Company's results of operations.

No Established Market for Beneficiated Fuel Products. Although the Company
believes that a substantial market will develop for clean coal fuel products, an
established market does not currently exist. As a result the availability of
accurate and reliable pricing information and transportation alternatives are
not fully known. The future success of the Company's K-Fuel business will be
determined by its ability to establish such a market among potential customers
such as electrical utility companies and industrial coal users. Many of such
potential users of the Company's products will be able to choose among
alternative fuel supplies.

Competition. The Company will face competition from other companies in the
clean coal and alternative fuel technology industries. Some of these companies
have financial and managerial resources greater than those of the Company, and
therefore may be able to offer products more competitively priced and more
widely available than those of the Company. Also, such competitors' products may
make the Company's products obsolete or non-competitive. Furthermore, the
Company's license to the K-Fuel technology at the K-Fuel Facility is
non-exclusive and KFx may seek additional partners to develop other facilities
using the K-Fuel technology. In addition, demand for the Company's K-Fuel could
be adversely affected by potential customers' ability to purchase emissions
offsets as allowed under the 1990 Amendments.

Natural Gas Business Operating Risks. The Company's proposed natural gas
business is subject to all of the operating risks normally associated with the
processing, transporting and storage of natural gas, including blowouts,
pollution and fires, each of which could result in damage to or destruction of
processing and storage facilities or properties, or in personal injury. The
Company intends to obtain insurance coverage limiting financial loss resulting
from certain of these operating hazards. Losses and liabilities arising from
uninsured or underinsured events could reduce revenues and increase costs to the
Company and could materially adversely affect the Company's financial condition
and results of operations.

Volatility of Natural Gas Prices. Historically, the market for natural gas
has been volatile and is likely to continue to be volatile in the future. Prices
for natural gas are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for natural gas and oil, market uncertainty
and other factors over which the Company has no control. These factors include
the extent of domestic production and importation of foreign natural gas and/or
oil, political instability in oil and gas producing countries and regions, the
ability of members of the Organization of Petroleum Exporting Countries to agree
upon price and production levels for oil, the effect of federal regulation on
the sale of natural gas and/or oil in interstate commerce, and other
governmental regulation of the production and transportation of natural gas
and/or oil. Certain other factors outside the Company's control, such as
operational and transportation difficulties of pipeline or oil purchasing
companies, may also limit sales. In addition, the price level of natural gas
obtainable

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by the Company depends upon the needs of the purchasers to which the producer
has access. Depending on the purchasers' needs and the price obtainable for
natural gas which the Company is able to sell, the revenues of the Company from
its proposed natural gas business could be materially adversely affected.

RISKS ASSOCIATED WITH THE BIOPESTICIDES BUSINESS

Need for Regulatory Approval. The Company's Thermo Trilogy subsidiary's
biopesticide products cannot be sold unless the U.S. Environmental Protection
Agency (the "EPA") grants Thermo Trilogy a registration for each pesticide
product it intends to manufacture or sell. Thermo Trilogy must submit extensive
toxicological studies and results of field testing as well as other studies to
the EPA to apply for a product registration. Pesticide registrations under state
laws and regulations must also be obtained. In addition, pesticide registrations
must be obtained from foreign governments before Thermo Trilogy's products can
be sold in a particular country, and these countries may also require costly and
extensive studies to support the registration applications some of which may be
more stringent then current U.S. regulations. Registration of Thermo Trilogy's
new products likely will be lengthy and expensive. There is no assurance that
the EPA, states or foreign governments will timely grant pesticide registrations
to Thermo Trilogy, or at all. Pesticide registrations may also be revoked if new
registrations are adopted or if Thermo Trilogy violates regulations regarding
the manufacturing, sale or labeling of Thermo Trilogy's products. Such
regulation applies to all stages of field testing and to the manufacture, sale
and use of most of Thermo Trilogy's products. There can be no assurance that
Thermo Trilogy will continue to be able to comply with EPA regulations or any
changes thereto. The regulatory process or private litigation contesting
products of Thermo Trilogy may be costly and time-consuming and may delay
research, development, production and/or marketing of such products and require
costly and time-consuming procedures, all of which may furnish an advantage to
competitors. There can be no assurance that requisite regulatory approvals
and/or registrations of any or all of Thermo Trilogy's products will be granted
on a timely basis, if at all. In addition, new or more stringent regulations may
be adopted or imposed, which could have a material adverse effect on Thermo
Trilogy's business, financial condition and results of operations.

Uncertainty of Market Acceptance/Penetration. Thermo Trilogy's sales
growth is dependent on the penetration of its products into new markets. The
primary competition to Thermo Trilogy's products are chemical pesticides, and
Thermo Trilogy must educate customers on the cost effectiveness and efficacy and
minimal environmental effects of Thermo Trilogy's products compared to chemical
pesticides in order to gain acceptance for application on new crop types in
different parts of the world. In addition, the rate of acceptance of Thermo
Trilogy's products in the U.S. will be substantially affected by ongoing EPA
review and registration of the use of currently available chemical insecticides
and biopesticides and the extent to which the EPA restricts or bans chemical
pesticides for which Thermo Trilogy has biopesticide alternatives. No assurance
can be given that Thermo Trilogy's products will gain increased acceptance in
new market segments.

Highly Competitive Markets and Technological Change. Most of the markets
in which Thermo Trilogy operates are highly competitive and are subject to rapid
technological change. Several of Thermo Trilogy's products are in testing or
early marketing stages. Many of Thermo Trilogy's competitors are large chemical
and pharmaceutical companies with greater financial, marketing, and
technological resources than Thermo Trilogy. There is no assurance that
competitors will not develop new products that will render Thermo Trilogy's
products noncompetitive. The development of transgenic plants and seeds, which
are genetically engineered seeds or plants designed to improve resistance to
insects or disease or to improve product quality, may pose a competitive threat
to Thermo Trilogy's products in the future.

Reliance on Third Party Manufacturers and Producers. Thermo Trilogy relies
on overseas producers of the raw materials for its neem-based products and on
third parties to manufacture some of its products. In particular, Thermo
Trilogy's sole supplier of neem products is P.J. Margo Pvt. Ltd., a joint
venture in India in which Thermo Trilogy holds a fifty percent interest,
pursuant to an exclusive supply contract that expires in 2001. There is no
assurance that Thermo Trilogy will have an uninterrupted supply of raw materials
or that third party manufacturers will produce the products at competitive
prices.

Uncertainty of Product Development and Commercialization. Thermo Trilogy's
products are at various stages of development and commercialization. The ability
of Thermo Trilogy to sell its products in large commercial markets will be
dependent upon continued product development to allow increased efficiency and

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reduced costs in production. There can be no assurance that increased efficiency
and reduced costs of production can be achieved. Thermo Trilogy cannot
accurately predict whether any of its products under development can be produced
and marketed profitably.

Seasonality of Product Sales. Thermo Trilogy currently markets its
products predominantly for use in the northern hemisphere, where the growing
season generally runs from March to October; therefore, the seasonal nature of
agriculture will cause Thermo Trilogy's product sales to be concentrated during
such period and will result in substantial variations in quarter to quarter
financial results.

Perishability of Products. Certain of Thermo Trilogy's microbial products
are living organisms and thus have a limited shelf-life, may biodegrade quickly
when exposed to light and heat and are perishable. In addition, such products
may be perishable when exposed to hostile environments including severe or
changing weather patterns particularly during shipping and storage. Failure of
these products as a result of perishability could have a material adverse effect
on the business of the Company.

Testing. Commercial introduction of additional products and the expansion
of label claims for current products to include additional insects are both
contingent upon, among other factors, completion of field testing. Unusual
weather conditions during field tests prior to the growing season or other tests
in subsequent growing seasons could result in delays in product development and
commercialization. Such delays could result in additional losses due to
increased operating expenses in the intervening period without significant
offsetting revenues.

Product and Warranty Liability. Thermo Trilogy faces an inherent business
risk of exposure to product liability and warranty claims in the event that the
use of its current products or prospective products lack efficacy or result in
adverse effects. Further, product liability claims could result in Company
exposure for crop damage or personal injury. Run-off excess concentrations of
pesticide products could also expose Thermo Trilogy to claims and liabilities
for water pollution, including governmental fines and penalties. There can be no
assurance that the scope of Thermo Trilogy's insurance coverage is sufficient,
that it can obtain additional coverage or that Thermo Trilogy will have
sufficient resources to satisfy any product liability and warranty claims.

OTHER RISKS

Significant Quarterly Fluctuations in Operating Results. The Company's
operating results fluctuate significantly from quarter to quarter based on a
number of factors, primarily seasonal energy demand in California, which results
in higher payments under the Company's California power-sales agreements in the
months of May through October, and lower payments during the remainder of the
year, and seasonal demand for its biopesticide products. The Company
historically has operated at marginal profitability during its second fiscal
quarter due to the rate structure under these agreements. In addition, the
Company's operating results can be affected by utility imposed curtailments or
by any operating problems that cause a plant to operate at less than normal
capacity, and with respect to its biopesticide business, by agricultural
conditions such as pest infestation, amount of rain, and other adverse weather
conditions, the occurrence of natural resistance factors, and the increase or
decrease in agricultural plantings and produce prices.

Limitation on Access to Operating Company Assets and Cash Flow. The
Company's operations are conducted through the Operating Companies, and the
Company's cash flow is contingent on the ability of the Operating Companies to
make dividends or other distributions to the Company. The terms of certain
leases and financial agreements to which the Operating Companies are parties
require that certain funds be held in trust and restricted from distribution to
the Company. As of April 4, 1998, the Company had funds totaling $82.3 million
of which approximately $45.2 million was restricted from distribution by the
terms of certain Operating Companies' lease and financing agreements. In
addition, until such time, if ever, as projections of avoided cost change, all
cash flows from the Woodland operation, other than cash required for tax
distributions, will be restricted from distribution to the Company. The
inability of the Company to receive distributions from the Operating Companies
could have a material adverse effect on the future growth of the Company.

Dependence on Proprietary Technology. Proprietary rights relating to the
Company's products will be protected from unauthorized use by third parties only
to the extent that they are covered by valid and

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enforceable patents or are maintained in confidence as trade secrets. The
Company has a number of U.S. patents and also owns corresponding foreign patents
in a number of jurisdictions throughout the world. There can be no assurance
that any patents now or hereafter owned by the Company will afford protection
against competitors. Proceedings initiated by the Company to protect its
proprietary rights could result in substantial costs to the Company. There can
be no assurance that competitors of the Company, some of whom have substantially
greater resources than those of the Company, will not initiate litigation to
challenge the validity of the Company's patents, or that they will not use their
resources to design comparable products that do not infringe the Company's
patents. The Company could incur substantial costs and diversion of management
resources with respect to the defense of any such claims, which could have a
material adverse effect on the Company's business, financial condition, and
results of operation. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block the Company's ability to make, use, sell,
distribute or market its products and services in the U.S. and abroad. There may
also be pending or issued patents held by parties not affiliated with the
Company that relate to the Company's products or technologies. In the event that
a claim relating to proprietary technology or information is asserted against
the Company, the Company may need to acquire licenses to, or contest the
validity of, any such competitor's proprietary technology. It is likely that
significant funds would be required to contest the validity of any such
competitor's proprietary technology. There can be no assurance that any license
required under any such competitor's proprietary technology would be made
available on acceptance terms or that the Company would prevail in any such
contest. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to prevent misappropriation of
its technology or independent development by others of similar technology. In
addition, the laws of some jurisdictions do not protect the Company's
proprietary rights to the same extent as the laws of the U.S. There can be no
assurance that these protections will be adequate.

The Company relies on trade secrets and proprietary know-how which it seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.

Potential Impact of Year 2000 on Processing Date-sensitive
Information. The Company is currently assessing the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems and on products purchased by the Company. The
Company believes that its internal information systems are either year 2000
compliant or will be so prior to the year 2000 without incurring material costs.
There can be no assurance, however, that the Company will not experience
unexpected costs and delays in achieving year 2000 compliance for its internal
information systems, which could result in a material adverse effect on the
Company's future results of operations.

The Company is presently assessing whether its key suppliers are adequately
addressing the year 2000 problem and the effect this might have on the Company.
The Company has not completed its analysis and is unable to conclude at this
time that the year 2000 problem as it relates to its products purchased from key
suppliers is not reasonably likely to have a material adverse effect on the
Company's future results of operations.

Risks Associated With International Operations. International sales
accounted for 4.0% of the Company's total revenues in 1997. Over the next
several years, the Company intends to continue to significantly expand its
presence in international markets. International revenues are subject to a
number of risks, including the following: agreements may be difficult to enforce
and receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs, or adopt other restrictions on foreign trade; fluctuations in
exchange rates may affect product demand and adversely affect the profitability
in U.S. dollars of products and services provided by the Company in foreign
markets where payment for the Company's products and services is made in the
local currency; U.S. export licenses may be difficult to obtain; and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that any of these factors will not have a
material adverse impact on the

16
<PAGE> 18

Company's business and results of operations. See "-- Risks Associated with
Doing Business Outside of the United States."

Control by Thermo Electron. The Company's stockholders do not have the
right to cumulate votes for the election of directors. Thermo Electron, which
will own approximately 81% of the voting stock of the Company after the
Offering, assuming no exercise of the Underwriters' over-allotment option, has
the power to elect the entire Board of Directors of the Company and to approve
or disapprove any corporate actions submitted to a vote of the Company's
stockholders. See "Relationship with Thermo Electron."

Potential Conflicts of Interest. The Company may be subject to potential
conflicts of interest from time to time as a result of its relationship with
Thermo Electron. For example, conflicts may arise in the determination of the
annual services fee payable by the Company pursuant to the Corporate Services
Agreement between the Company and Thermo Electron and in determining whether to
invest funds with or borrow funds from Thermo Electron pursuant to other
contractual arrangements. Certain officers of the Company, including John N.
Hatsopoulos and Paul F. Kelleher are also officers of Thermo Electron and/or
other subsidiaries of Thermo Electron, and are full-time employees of Thermo
Electron. These officers will devote only a small portion of their working time
(anticipated to be less than 5% in the case of Messrs. Hatsopoulos and Kelleher)
to the affairs of the Company. Further, it is an essential element of Thermo
Electron's career development program that successful executives and managers be
considered for positions of increased responsibility anywhere within the Thermo
Electron family of companies. Certain of the Company's executives and managers
were promoted to their present positions under this policy. There can be no
assurance that the Company's present executives and managers will not assume
other positions within the Thermo Electron family of companies, causing them to
be unavailable to serve the Company or to reduce the amount of time that they
devote to the affairs of the Company. For financial reporting purposes, the
Company's financial results are included in the consolidated financial
statements of Thermo Electron. Since the members of the Board of Directors of
the Company who are also affiliated with Thermo Electron have fiduciary duties
to the stockholders of the Company and the stockholders of Thermo Electron, or
both, as applicable, such individuals will consider not only the short-term and
the long-term impact of operating decisions on the Company, but also the impact
of such decisions on the consolidated financial results of Thermo Electron. In
some instances the impact of such decisions could be disadvantageous to the
Company while advantageous to Thermo Electron, or vice versa. For example,
conflicts may arise with respect to possible future acquisitions by the Company
of assets or businesses of Thermo Electron or another Thermo Electron affiliated
company in which the purchase price to be paid by the Company is subject to
negotiation between the Company and Thermo Electron or such other Thermo
Electron affiliated company. These negotiations will be subject to the potential
conflicts associated with related-party transactions. The Company is also a
party to various agreements with Thermo Electron that may limit the Company's
operating flexibility. There can be no assurance that these factors will not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Relationship with Affiliates."

Potential Volatility of Stock Price. Since public trading of the Company's
Common Stock commenced in January 1995, the market price has fluctuated
considerably, and it may continue to fluctuate in the future. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new contracts or products by the Company or its competitors,
government regulation and approvals, developments in patent or other proprietary
rights and market conditions for stocks of companies similar to the Company
could have a significant impact on the market price of the Common Stock.

Lack of Dividends. The Company anticipates that for the foreseeable future
the Company's earnings, if any, will be retained for use in the business and
that no cash dividends will be declared or paid on the Common Stock. Declaration
of dividends on the Common Stock will depend upon, among other things, future
earnings, the operating and financial condition of the Company, its capital
requirements and general business conditions. See "Dividend Policy."

17
<PAGE> 19

USE OF PROCEEDS

The net proceeds to be received by the Company from the Offering are
estimated to be $75.2 million (approximately $86.6 million if the Underwriters'
over-allotment option is exercised in full) assuming a public offering price of
$17.75 per share (the last reported sales price on the AMEX on May 8, 1998),
after deducting the underwriting discounts and commissions and estimated
Offering expenses payable by the Company. The Company intends to use these net
proceeds for general corporate purposes, which may include equity investment in
future projects, possible acquisitions of businesses, repayment of outstanding
indebtedness, capital expenditures, working capital requirements, research and
development, and loans to and/or investments in the Company's subsidiaries. The
precise amount and timing of the application of such net proceeds will depend
upon the funding requirements of the Company and the availability and cost of
other funds. The Company is in various stages of negotiations with respect to
several acquisitions; however, it currently has no commitment or agreement for
any material acquisition. Pending these uses, the Company expects to invest the
net proceeds primarily in investment grade interest or dividend bearing
instruments, either directly by the Company or pursuant to a repurchase
agreement with Thermo Electron. The Company's cash equivalents may be invested
from time to time pursuant to a repurchase agreement with Thermo Electron. Under
this agreement, the Company in effect lends excess cash to Thermo Electron,
which Thermo Electron collateralizes with investments principally consisting of
corporate notes, United States government agency securities, money market funds,
commercial paper, and other marketable securities, in the amount of at least
103% of such obligation. The Company's funds subject to the repurchase agreement
currently earn a return equal to a rate based on the 90-day Commercial Paper
Composite Rate plus 25 basis points, set at the beginning of each quarter.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is listed on the AMEX under the symbol TCK. The
following table sets forth the high and low sales prices for the periods
indicated of the Company's Common Stock as reported in the consolidated
transaction reporting system. Sales prices have been restated to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend, in
October 1996.

<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter............................................... $11 1/6 $ 8 11/12
Second Quarter.............................................. 14 10 3/4
Third Quarter............................................... 16 5/6 13 1/6
Fourth Quarter.............................................. 16 5/12 13 1/3
FISCAL 1997
First Quarter............................................... 16 1/4 14 1/2
Second Quarter.............................................. 15 3/4 14 1/8
Third Quarter............................................... 16 11 3/8
Fourth Quarter.............................................. 15 1/2 13 1/4
FISCAL 1998
First Quarter............................................... 18 1/2 13
Second Quarter.............................................. 19 3/4 16 3/4
Third Quarter (through May 8, 1998)......................... 19 3/4 17 3/4
</TABLE>

As of May 8, 1998, the Company had 703 holders of record of its Common
Stock. This does not include holdings in street or nominee names. The last
reported sales price of the Common Stock on the AMEX was $17.75 on May 8, 1998.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock
and does not expect to declare or pay cash dividends in the foreseeable future
because its policy has been to use earnings to finance expansion and growth.
Payment of dividends will rest within the discretion of the Company's Board of
Directors and will depend upon, among other factors, the Company's earnings,
capital requirements and financial condition. Payment of dividends by the
Company may be further limited by certain restrictions on the ability of certain
of the Company's subsidiaries to transfer funds to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

18
<PAGE> 20

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
April 4, 1998, stated on a pro forma basis to reflect the May 1998 conversion by
Thermo Electron of $68.5 million principal amount of subordinated convertible
debentures into 10,821,485 shares of Common Stock, and as adjusted to give
effect to the sale of the shares of Common Stock offered hereby, assuming a
public offering price of $17.75 per share (the last reported sales price on the
AMEX on May 8, 1998), after deducting the underwriting discounts and commissions
and estimated Offering expenses payable by the Company.

<TABLE>
<CAPTION>
APRIL 4, 1998
-----------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Long-term Obligations:
Nonrecourse tax-exempt obligations........................ $ 37,600 $ 37,600
Subordinated convertible debentures....................... 53,595 53,595
Capital lease obligations................................. 15,484 15,484
-------- --------
106,679 106,679
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 50,000,000 shares
authorized; 37,437,930 pro forma shares issued and
41,937,930 shares as adjusted (1)...................... 3,744 4,194
Capital in excess of par value............................ 170,753 245,578
Retained earnings......................................... 81,049 81,049
Treasury stock at cost, 2,047,913 shares.................. (30,265) (30,265)
Cumulative translation adjustment......................... 6 6
Net unrealized gain on available-for-sale investments..... 3,726 3,726
-------- --------
Total Shareholders' Investment......................... 229,013 304,288
-------- --------
Total Capitalization (Long-term Obligations and
Shareholders' Investment)........................ $335,692 $410,967
======== ========
</TABLE>

- ---------------
(1) Does not include 4,495,101 shares of Common Stock reserved for issuance
under the Company's stock-based compensation plans and upon conversion of
the Company's 4.875% and noninterest-bearing convertible debentures. As of
April 4, 1998, options to purchase 1,160,397 shares of Common Stock had been
granted under these plans. See Notes 4, 5 and 11 of Notes to Consolidated
Financial Statements.

19
<PAGE> 21

SELECTED FINANCIAL INFORMATION

The selected financial information below for the nine months ended
September 30, 1995, and as of and for the fiscal years ended September 28, 1996,
and September 27, 1997, has been derived from the Company's Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
in this Prospectus. This information should be read in conjunction with the
Company's Consolidated Financial Statements and related notes included elsewhere
in this Prospectus. The selected financial information as of and for the fiscal
years ended January 1, 1994, and December 31, 1994, and as of September 30,
1995, has been derived from the Company's Consolidated Financial Statements,
which have been audited by Arthur Andersen LLP, but have not been included in
this Prospectus. The selected financial information for the fiscal year ended
September 30, 1995, and for the six-month periods ending March 29, 1997, and
April 4, 1998, has not been audited but, in the opinion of the Company, includes
all adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly such information in accordance with generally accepted accounting
principles applied on a consistent basis.

<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED FISCAL YEAR ENDED SIX MONTHS ENDED
------------------- ----------- ---------------------------------- -----------------------
JAN. 1, DEC. 31, SEPT. 30, SEPT. 30, SEPT. 28, SEPT. 27, MARCH 29, APRIL 4,
1994 1994 1995(1) 1995(1)(2) 1996 1997(3) 1997(2)(3) 1998(2)(4)
-------- -------- ----------- ---------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................... $117,691 $134,261 $107,139 $139,319 $150,076 $180,191 $77,188 $95,016
-------- -------- -------- -------- -------- -------- ------- -------
Costs and Operating
Expenses:
Cost of revenues.......... 100,242 100,457 74,097 98,822 101,883 113,236 55,135 65,040
Selling, general, and
administrative
expenses................ 4,971 8,555 7,856 9,307 11,525 18,260 8,026 11,672
Research and development
expenses................ -- -- -- -- 693 1,597 569 1,389
-------- -------- -------- -------- -------- -------- ------- -------
105,213 109,012 81,953 108,129 114,101 133,093 63,730 78,101
-------- -------- -------- -------- -------- -------- ------- -------
Operating Income............ 12,478 25,249 25,186 31,190 35,975 47,098 13,458 16,915
Interest Income............. 460 1,636 2,820 3,340 5,104 5,089 2,262 2,370
Interest Expense............ (2,005) (11,143) (10,567) (13,333) (14,727) (13,926) (6,644) (6,768)
Gain on Issuance of Stock by
Subsidiary................ -- -- -- -- -- -- -- 6,269
Equity in Earnings (Loss) of
Joint Venture............. (1,718) -- -- -- (26) 33 126 123
-------- -------- -------- -------- -------- -------- ------- -------
Income Before Provision for
Income Taxes and Minority
Interest.................. 9,215 15,742 17,439 21,197 26,326 38,294 9,202 18,909
Provision for Income
Taxes..................... 2,304 4,972 6,027 7,200 7,271 14,415 3,358 4,609
Minority Interest Expense... 3,021 1,119 1,148 1,457 1,275 1,334 592 844
-------- -------- -------- -------- -------- -------- ------- -------
NET INCOME.................. $ 3,890 $ 9,651 $ 10,264 $ 12,540 $ 17,780 $ 22,545 $ 5,252 $13,456
======== ======== ======== ======== ======== ======== ======= =======
EARNINGS PER SHARE(5):
Basic..................... $ .20 $ .49 $ .46 $ .58 $ .76 $ .92 $ .21 $ .55
======== ======== ======== ======== ======== ======== ======= =======
Diluted................... $ .19 $ .37 $ .34 $ .43 $ .54 $ .64 $ .16 $ .38
======== ======== ======== ======== ======== ======== ======= =======
WEIGHTED AVERAGE SHARES(5):
Basic..................... 19,737 19,737 22,477 21,796 23,528 24,613 24,772 24,460
======== ======== ======== ======== ======== ======== ======= =======
Diluted................... 20,079 30,847 33,815 33,014 36,292 38,740 37,872 39,261
======== ======== ======== ======== ======== ======== ======= =======
</TABLE>

20
<PAGE> 22

SELECTED FINANCIAL INFORMATION (CONTINUED)

(2) Derived from unaudited financial statements.

(3) Includes the results of the business of biosys, inc. since its acquisition
by the Company in January 1997.

(4) Includes the results of the Bt business of Novartis since its acquisition by
the Company in November 1997.

21
<PAGE> 23

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company reports its results in two business segments. The Energy
segment currently operates independent electric power-generation facilities
through joint ventures, limited partnerships, or wholly owned subsidiaries (the
"Operating Companies") and also operates a K-Fuel Facility. The Biopesticide
segment manufactures and sells biopesticides through the Company's
majority-owned subsidiary, Thermo Trilogy Corporation.

In the Energy segment, each Operating Company in the United States sells
power under a long-term power-sales agreement. The profitability of operating
the Company's facilities depends on the price received for power under the
power-sales agreements with power purchasers, on plant performance or
availability, and on the fuel, operating, and maintenance costs for the
facilities. As of January 1998, the Energy segment operates a 12-megawatt energy
center and five auxiliary boilers in the Czech Republic. The Energy segment
earns a disproportionately high share of its income in May to October due to the
rate structures under the power-sales agreements for its California plants,
which provide strong incentives to operate during this period of high demand.
Conversely, the Energy segment has historically operated at marginal
profitability during the second fiscal quarter due to the rate structure under
these agreements. The Energy segment's profitability is also dependent on the
amount of development expenses that it incurs.

The Company has also entered the field of engineered clean fuels through a
limited partnership agreement with KFx, Inc. The Company is a 95% partner in a
partnership established to develop, construct, and operate a sub-bituminous
coal-beneficiation facility using the patented K-Fuel technology. This facility,
located near Gillette, Wyoming, will use the K-Fuel technology, which transforms
low-energy, high-moisture coal into low-moisture, high-energy fuel with reduced
sulfur. The Company believes that the K-Fuel Facility was placed in service in
April 1998. The economic returns of the K-Fuel Facility primarily result from
tax credits on the facility's production of K-Fuel. The Company expects that the
K-Fuel Facility will report operating losses for financial reporting purposes
primarily as a result of recording depreciation over the expected life of the
tax credit. See "Risk Factors -- Risks Associated with Clean Fuels Business --
Uncertainty Regarding K-Fuel Facility."

The Company has expanded its energy operations into international markets
and has begun business development efforts in Italy and the Czech Republic. In
January 1998, the Company, through a wholly owned subsidiary's participation in
a joint venture ("EMD Ventures"), indirectly acquired an 83% interest in the
assets of a 12-megawatt energy center near Tabor, Czech Republic, along with the
business of five auxiliary boilers in the town of Pribram, Czech Republic (the
"Czech Republic operations"). The Company has begun construction to expand the
12-megawatt facility to 50-megawatt capacity. The cost of business development
efforts is expected to increase as the Company expands into these markets due to
increased complexity inherent in foreign development. In addition, the amount of
cash required to fund equity investments is expected to increase, due to the
financing requirements of lenders in foreign markets.

Thermo Trilogy's biopesticide products include botanical extracts from the
seed of the tropical neem tree, microbial-based pesticides (fungal-based
insecticides and fungicides bacterial-based insecticides, baculovirus and
beneficial nematodes), insect pheromone-based products such as traps and lures,
and disease-free sugar cane planting stock. These biopesticide products are used
as alternatives or complements to conventional chemical-based pest-control
technologies. In January 1997, Thermo Trilogy acquired substantially all of the
assets of biosys, inc. In November 1997, Thermo Trilogy acquired the sprayable
bacillus thuringiensis ("Bt") -- biopesticide business of Novartis AG and its
affiliates (the "Bt business of Novartis").

Since its inception, the Company has derived a substantial majority of its
revenues from the development, construction and operation of biomass electric
generation facilities. While the Company's U.S. biomass energy business is
expected to continue to generate revenues for the foreseeable future, the
Company expects the aggregate revenues and profitability associated with this
business to decline significantly beginning in fiscal 2000. In addition, within
the next few years the Company expects a substantial portion of its revenues to
be derived from new business ventures in clean power resources, clean fuels and
biopesticides. A major portion of the Company's efforts will be focused on
developing and acquiring new power projects, additional clean fuel

22
<PAGE> 24

projects and its biopesticides business. The Company has had limited prior
experience in the repowering of power plants and the development and sale of
clean fuels, and there can be no assurance that the Company will be able to
successfully develop, market or sell its products and services in these areas.
The Company's future success will depend significantly on its ability to
develop, introduce and integrate new products and services in these areas. No
assurance can be given that the Company will be successful in this regard. Any
failure or inability of the Company to implement these strategies would have a
material adverse effect on the Company's business, financial condition and
results of operations.

RESULTS OF OPERATIONS

In June 1995, the Company changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly, the
results of operations for 1996 compares the year ended September 28, 1996
(fiscal 1996) with the unaudited year ended September 30, 1995 (1995).

First Six Months Fiscal 1998 Compared With First Six Months Fiscal 1997

Total revenues increased 23% to $95.0 million in the first six months of
fiscal 1998 from $77.2 million in the first six months of fiscal 1997. Revenues
from the Energy segment in the first six months of fiscal 1998 were $80.6
million, compared with $72.6 million in the first six months of fiscal 1997. The
increase was primarily due to higher contractual rates at all the Company's
facilities, except the Hemphill plant. The increase was also due to the
inclusion of $2.4 million of revenues from the Czech Republic operations,
purchased in January 1998, and, to a lesser extent, higher electrical generation
at all of the Company's facilities due to the first six months of fiscal 1998
including 27 weeks, compared with 26 weeks in the first six months of fiscal
1997.

Revenues at Thermo Trilogy in the first six months of fiscal 1998 were
$14.4 million, compared with $4.6 million in the first six months of fiscal
1997. The increase was substantially due to the inclusion of revenues from the
biosys business and the Bt business of Novartis, acquired in January 1997 and
November 1997, respectively.

The gross profit margin increased to 32% in the first six months of fiscal
1998 from 29% in the first six months of fiscal 1997. The gross profit margin
for the Energy segment increased to 30% in the first six months of fiscal 1998
from 27% in the first six months of fiscal 1997. The improvement resulted
primarily from higher contractual energy rates at the Company's Delano, Gorbell
and Whitefield facilities as well as the inclusion of higher-margin revenues
from the Czech Republic operations.

The gross profit margin for Thermo Trilogy decreased to 40% in the first
six months of fiscal 1998 from 50% in the first six months of fiscal 1997. The
decrease resulted primarily from the inclusion of lower-margin revenues from the
biosys business for six months in fiscal 1998, compared with three months in
fiscal 1997, as well as the inclusion of lower-margin revenues from the Bt
business of Novartis.

The power sales agreements for the Company's Woodland, Mendota and Delano
plants in California are so-called standard offer #4 ("SO#4") contracts, which
require Pacific Gas & Electric ("PG&E"), in the case of Woodland and Mendota,
and Southern California Edison ("SCE"), in the case of Delano I and Delano II,
to purchase the power output of the projects at fixed rates until 2000 in the
case of Woodland and Mendota, and 2001 in the case of Delano. However, with
respect to Woodland and Mendota, PG&E has asserted that the fixed rates under
its agreements will terminate mid-1999, although the Company disputes this
assertion. Thereafter, the utility will pay a rate based upon the costs that
would have otherwise been incurred by the purchasing utilities in generating
their own electricity or in purchasing it from other sources ("avoided cost")
(as determined from time to time by the California Public Utility Commission).
Avoided cost is determined pursuant to a formula that is intended to estimate
the price that the utility would, but for its contract with the power producer,
be paying for the same amount of energy. The rate fluctuates with the price of
fuels and certain other factors. At present, the avoided cost is substantially
lower than the payments currently being made by PG&E and SCE to the Company
under the fixed rate portions of its contracts. In addition, although it is
difficult to predict future levels of avoided cost, based on current estimates,
avoided cost is expected to be substantially lower in 2000 than the rates
currently being paid by PG&E and SCE under
23
<PAGE> 25

its fixed rate contracts. The Company expects, that at current avoided cost
rates, absent sufficient reductions in fuel prices and other operating costs,
the Company's Mendota and Delano plants would operate at substantially reduced
operating income levels or at a loss beginning in fiscal 2001. In fiscal 1997
the Mendota and Delano plants' aggregate operating income was approximately
$34.0 million. Further, if the Woodland plant were to operate at projected
avoided cost levels, substantial losses would result primarily due to
nonrecourse lease obligations that extend beyond 2000. Absent sufficient
reductions in fuel prices and other operating costs, under such circumstances
the Company would draw down power reserve funds to cover operating cash
shortfalls and then, should such funds be depleted, either renegotiate its
nonrecourse lease for the Woodland plant or forfeit its interest in the plant.
During the first quarter of fiscal 1997, the Company began recording as an
expense the funding of reserves required under Woodland's nonrecourse lease
agreement to cover projected shortfalls in lease payments beginning in 2000.
Consequently, the results of the Woodland plant were greatly diminished during
1997 and the Company expects that such results will be reduced to approximately
breakeven in 1998 and thereafter. During fiscal 1997 and 1996, the Woodland
plant contributed $1.0 million and $5.1 million of operating income,
respectively.

The Company believes that the K-Fuel Facility was placed in service in
April 1998 and the Company began reporting the K-Fuel Facility's results of
operations at that time. Although the facility has operated and produced
commercially salable product, the Company has encountered certain difficulties
in optimizing its performance to achieve optimal and sustained operation. The
Company has addressed and resolved certain problems previously encountered,
including a fire at the facility and certain construction problems, including
issues relating to the flow of materials within the facility and the design and
operation of certain pressure-release equipment. Currently, the Company is
experiencing certain operational problems relating to tar and fines residue
build-up within the system during production and other product quality issues
related to product dusting. The Company is actively exploring solutions to these
problems. Because the technology being developed at the facility is new and
untested, no assurance can be given that other difficulties will not arise or
that the Company will be able to correct these problems and achieve optimal and
sustained performance. In addition, there can be no assurance that the K-Fuel
Facility would be determined to be qualified for the tax credit, or that the
Company will realize a benefit from the tax credit.

Selling, general, and administrative expenses as a percentage of revenues
increased to 12% in the first six months of fiscal 1998 from 10% in the first
six months of fiscal 1997. The increase resulted primarily from the inclusion of
higher selling, general, and administrative expenses as a percentage of revenues
at Thermo Trilogy due to the acquisitions of the biosys business and the Bt
business of Novartis.

Research and development expenses represent Thermo Trilogy's ongoing new
product development and increased to $1.4 million in the first six months of
fiscal 1998 from $0.6 million in the first six months of fiscal 1997 due to the
acquisition of the Bt business of Novartis.

Interest income increased to $2.4 million in the first six months of fiscal
1998 from $2.3 million in the first six months of fiscal 1997. Interest income
earned on invested proceeds from the Company's April 1997 issuance of $50.0
million principal amount of 4.875% subordinated convertible debentures was
largely offset by a reduction in invested funds due to cash expended for the
acquisition of the Bt business of Novartis, the repurchase of Company common
stock, and construction of the K-Fuel Facility.

Interest expense increased to $6.8 million in the first six months of
fiscal 1998 from $6.6 million in the first six months of fiscal 1997. An
increase in interest expense related to the issuance of the 4.875% subordinated
convertible debentures was largely offset by a decrease in interest expense due
to lower outstanding debt related to the Company's Delano and Mendota plants.

The Company and Thermo Electron have adopted a strategy of spinning out
certain of their businesses into separate subsidiaries and having these
subsidiaries sell a minority interest to outside investors. The Company believes
that this strategy provides additional motivation and incentives for the
management of the subsidiaries through the establishment of subsidiary-level
stock option incentive programs, as well as capital to support the subsidiaries'
growth. As a result of the sale of stock by Thermo Trilogy, the Company recorded
a nontaxable gain on issuance of stock by subsidiary of $6.3 million in the
first six months of fiscal 1998. The size and timing of these transactions are
dependent on market and other conditions that are beyond the
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<PAGE> 26

Company's control. In addition, in October 1995, the Financial Accounting
Standards Board ("FASB") issued an exposure draft of a Proposed Statement of
Financial Accounting Standards, "Consolidated Financial Statements: Policy and
Procedures" (the "Proposed Statement"). The Proposed Statement would establish
new rules for how consolidated financial statements should be prepared. If the
Proposed Statement is adopted, there would be significant changes in the way the
Company records certain transactions of its controlled subsidiaries. Among those
changes, any sale of the stock of a subsidiary that does not result in a loss of
control would be accounted for as a transaction in the equity of the
consolidated entity with no gain or loss being recorded. The FASB continues to
deliberate on this issue and the timing and contents of any final statement are
uncertain. Accordingly, there can be no assurance that the Company will be able
to realize gains from such transactions in the future.

Equity in earnings (loss) of joint venture represents the Company's
proportionate share of income (loss) from a joint venture.

The Company's effective tax rates were 24% and 36% in the first six months
of fiscal 1998 and 1997, respectively. The effective tax rate in the first six
months of fiscal 1998 was below the statutory federal income tax rate due to the
nontaxable gain on issuance of stock by subsidiary. The effective tax rate
exceeded the statutory federal income tax rate in the first six months of fiscal
1997 primarily due to the impact of state income taxes, offset in part by the
exclusion of income taxed directly to a minority partner.

Minority interest expense represents the allocation of income from plant
operations to a minority partner in an Operating Company and, in the first six
months of fiscal 1998, the minority shareholders' proportionate share of Thermo
Trilogy's results.

The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products purchased by the Company. The Company
believes that its internal information systems are either year 2000 compliant or
will be so prior to the year 2000 without incurring material costs. There can be
no assurance, however, that the Company will not experience unexpected costs and
delays in achieving year 2000 compliance for its internal information systems,
which could result in a material adverse effect on the Company's future results
of operations.

The Company is presently assessing whether its key suppliers are adequately
addressing the year 2000 problem and the effect this might have on the Company.
The Company has not completed its analysis and is unable to conclude at this
time that the year 2000 problem as it relates to products purchased from key
suppliers is not reasonably likely to have a material adverse effect on the
Company's future results of operations.

Fiscal 1997 Compared With Fiscal 1996

Revenues increased 20% to $180.2 million in fiscal 1997 from $150.1 million
in fiscal 1996. Revenues increased $14.2 million due to the inclusion of
revenues for the full fiscal year from Thermo Trilogy, including operations from
the biosys acquisition in January 1997. In addition, during fiscal 1997, the
Company decided not to proceed in its development of a natural gas cogeneration
facility in Staten Island, New York and, accordingly, recorded $8.2 million of
previously deferred revenues related to an August 1993 agreement with a utility.
The increase in revenues was also due to higher contractual energy rates at all
of the Company's facilities, except the Hemphill plant.

The gross profit margin increased to 37% during fiscal 1997 from 32% in
fiscal 1996. The improvement results primarily from the effect of the Staten
Island agreement and, to a lesser extent, the inclusion of higher-margin Thermo
Trilogy revenues for all of fiscal 1997 and the effect of higher contractual
energy rates. The increases were offset in part by lower profitability at the
Company's Woodland plant for the reasons discussed in the results of operations
for the first six months of fiscal 1998.

Selling, general, and administrative expenses as a percentage of revenues
were 10% in fiscal 1997, compared with 8% in fiscal 1996. The increase resulted
primarily from the inclusion of higher selling, general, and administrative
expenses as a percentage of revenues at Thermo Trilogy for a full year, offset
in part by higher revenues.

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<PAGE> 27

Research and development expenses represent Thermo Trilogy's ongoing new
product development and increased to $1.6 million in fiscal 1997 from $0.7
million in fiscal 1996 due to the acquisition of the biosys business.

Interest income was unchanged at $5.1 million in fiscal 1997 and fiscal
1996. Increases in fiscal 1997 invested balances as a result of the Company's
issuance of the 4.875% subordinated convertible debentures and operating cash
flows were offset by amounts expended for the repurchase of Company common
stock, construction of the K-fuel Facility, and the January 1997 acquisition of
the biosys business.

Interest expense decreased to $13.9 million in fiscal 1997 from $14.7
million in fiscal 1996, due to lower outstanding debt related to the Company's
Delano and Mendota plants, offset in part by an increase in interest expense due
to the issuance of the 4.875% subordinated convertible debentures.

Equity in earnings (loss) of joint venture represents the Company's
proportionate share of income (loss) from a joint venture.

The Company's effective tax rates were 38% and 28% in fiscal 1997 and 1996,
respectively. The fiscal 1997 rate exceeded the statutory federal income tax
rate as a result of the impact of state income taxes, offset in part by the
exclusion of income taxed directly to a minority partner. The effective tax rate
in fiscal 1996 was lower than the statutory federal income tax rate due to the
full utilization of tax loss and credit carryforwards as a result of the
resolution of certain tax contingencies, offset in part by the impact of state
income taxes.

Minority interest expense represents the allocation of income from plant
operations to a minority partner in an Operating Company.

Fiscal 1996 Compared With 1995

Revenues increased 8% to $150.1 million in fiscal 1996 from $139.3 million
in 1995. The increase was primarily due to higher contractual energy rates in
fiscal 1996 at all of the Company's facilities, except the Hemphill plant, as
well as fewer days of scheduled and unscheduled outages at the Delano plants and
the inclusion of $1.7 million in revenues from Thermo Trilogy, which was
acquired in May 1996.

The gross profit margin increased to 32% during fiscal 1996 from 29% in
1995. The improvement results largely from the effect of higher energy rates in
1996 and, to a lesser extent, lower fuel costs.

Selling, general, and administrative expenses as a percentage of revenues
were 8% in fiscal 1996, compared with 7% in 1995. The change results primarily
from an ongoing increase in business development efforts and the inclusion of
higher general and administrative expenses as a percentage of revenues at Thermo
Trilogy.

Research and development expenses represent Thermo Trilogy's ongoing new
product development.

Interest income increased to $5.1 million in fiscal 1996 from $3.3 million
in 1995, primarily due to interest income earned on invested proceeds from the
issuance of $37.0 million principal amount of noninterest bearing subordinated
convertible debentures in March 1996 and the Company's initial public offering
in February 1995. Interest expense increased to $14.7 million in fiscal 1996
from $13.3 million in 1995, primarily due to the conversion of the Mendota plant
lease to a capital lease effective April 1995.

Equity in earnings (loss) of joint venture represents the Company's
proportionate share of income (loss) from a joint venture.

The Company's effective tax rates were 28% and 34% in fiscal 1996 and 1995,
respectively. The rates in both years reflect the exclusion of income taxed
directly to minority partners, as well as the benefit of tax credits and loss
carryforwards, offset in part by the impact of state income taxes. The effective
tax rate decreased in fiscal 1996 from 1995 due to the full utilization of tax
loss and credit carryforwards as a result of the resolution of certain tax
contingencies.

Minority interest expense represents the allocation of income from plant
operations to a minority partner in an Operating Company.

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<PAGE> 28

LIQUIDITY AND CAPITAL RESOURCES

Working capital was $65.3 million at April 4, 1998, compared with $90.7
million at September 27, 1997. The Company had cash, cash equivalents, and
current restricted funds of $60.9 million at April 4, 1998, compared with $104.3
million at September 27, 1997. Current restricted funds held in trust pursuant
to certain lease and debt agreements totaled $14.4 million and $20.8 million at
April 4, 1998, and September 27, 1997, respectively. In addition, cash and cash
equivalents include $9.3 million and $12.0 million at April 4, 1998, and
September 27, 1997, respectively, which are restricted by the terms of certain
lease and financing agreements. These restrictions limit the ability of the
Operating Companies to transfer funds to the Company in the form of dividends,
loans, advances, or other distributions. Further, until such time, if ever, as
projections of avoided costs change, all cash flows from the Woodland Operating
Company, other than cash required for tax distributions, will be restricted from
distribution to the Company. During the first six months of fiscal 1998, the
Company's operating activities provided cash and restricted funds of $18.1
million. Cash from the Company's operations was offset in part by cash used to
fund increases in accounts receivable and inventory of $3.5 million and $0.9
million, respectively. The increase in accounts receivable was in support of
increased revenues due to the acquisition of the Bt business of Novartis in
November 1997 and the purchase of Czech Republic operations in January 1998. The
increase in inventory was substantially associated with the Company's Czech
Republic operations.

During the first six months of fiscal 1998, the Company's investing
activities used cash of $41.1 million. In November 1997, the Company, through
Thermo Trilogy, acquired the Bt business of Novartis for $19.1 million in cash
and the assumption of certain liabilities. In March 1998, the Company acquired
two power-generation facilities and related sites in California for
approximately $9.5 million in cash and the assumption of certain liabilities.
The Company, through its Limited Partnership Agreement with KFx Wyoming, Inc.,
expended $7.5 million for the construction of the K-Fuel Facility. In January
1998, the Company, through a wholly owned subsidiary's participation in a joint
venture, indirectly acquired an 83% interest in the assets of a 12-megawatt
energy center near Tabor, Czech Republic, along with the business of five
auxiliary boilers in the town of Pribram, Czech Republic, for $6.9 million in
cash. In addition, the Company expended $1.9 million on other capital
expenditures during the first six months of fiscal 1998. During the remainder of
fiscal 1998, the Company expects to expend an additional $2.0 million on capital
expenditures.

During the first six months of fiscal 1998, the Company's financing
activities used cash of $20.4 million. The Company used cash of $24.7 million
for the repayment of long-term obligations and payments under capital lease
obligations related to two of its California plants. In the first six months of
fiscal 1998, Thermo Trilogy issued shares of its common stock in private
placements for net proceeds of approximately $14.9 million. Through a series of
transactions commencing in April 1997, the Company's Board of Directors has
authorized the repurchase, through various dates, of up to $30.0 million of its
own securities in the open market, or in negotiated transactions. Through April
4, 1998, the Company had repurchased $29.9 million in common stock under these
authorizations, including $10.2 million during the first six months of fiscal
1998. Any such purchases are funded from working capital.

In September 1996, the Company, through a wholly owned subsidiary, formed a
joint venture with Marcegaglia Group of Mantova, Italy, to develop, own, and
operate biomass-fueled electric power facilities in that country, which may
require significant equity investments if development efforts are successful. In
January 1996, the Company, through a wholly owned subsidiary, entered into a
joint development agreement with EMD in the Czech Republic. In January 1998, the
Company entered into a new joint venture arrangement with EMD, superseding the
prior agreement, which may require significant equity investments if development
efforts are successful.

The Company's short-term financing requirements at April 4, 1998, consisted
primarily of $16.9 million, due in the remainder of fiscal 1998, of principal
and interest payments related to the long-term financing provisions for the
Mendota and Delano projects. The Company expects that the cash flows of its
Mendota, Delano I, and Delano II plants will be sufficient to make future lease
and debt payments. The Company believes that its short-term liquidity needs will
be met through cash flows from operating activities. The Company has commenced
an expansion project in its Czech Republic operations, acquired in January 1998.

27
<PAGE> 29

The Company estimates the cost of this expansion as $25.0 million, of which it
expects approximately 66% will be funded by bank financing and the remainder
from internal funds. While the Company does not currently have any firm
available credit facilities, it does not expect to require funding for currently
existing operations in the foreseeable future, with the exception of the
financing required for the expansion project at its Czech Republic operations.
The Company believes that its existing resources are sufficient to meet the
capital requirements of its existing businesses for the foreseeable future,
including at least the next 24 months. The Company is in the early stages of
developing projects in Italy, the Czech Republic, and Southern California.
Equity investments required by the Company for these development efforts, if
successful, are uncertain, but may be significant. Although the Company's
projects are designed to produce cash flow over the long-term, the Company will
have to obtain significant additional funds from time to time to complete
acquisitions and to meet project development requirements, including the funding
of equity investments. As the Company acquires, invests in, or develops future
plants, the Company expects to finance them with nonrecourse debt, internal
funds, additional equity or through borrowings from third parties or Thermo
Electron. Although Thermo Electron has expressed its willingness to provide
funds to the Company to help finance acquisitions and equity investments in
future projects, the Company has no agreements with Thermo Electron or third
parties that assure funds will be available on acceptable terms or at all.

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<PAGE> 30

BUSINESS

The Company is engaged in several businesses involving environmentally
responsible technologies and products including (i) the generation of nonutility
electric power using clean power processes ("clean power resources"), (ii) the
production and sale of engineered clean fuels and the development and operation
of natural gas gathering, storage and marketing businesses ("clean fuels") and
(iii) the development and sale of environmentally friendly pest control products
("biopesticides"). The Company has entered these businesses by leveraging its
expertise with environmental technologies and plans to capitalize on
opportunities created by the deregulation of the U.S. energy markets, increasing
demand for power and stricter environmental regulation worldwide.

CLEAN POWER RESOURCES

OVERVIEW

Since the mid-1980s, the Company's core business has been to design,
develop, own and operate independent power generation plants using
environmentally friendly fuels, such as agricultural and wood waste ("biomass").
The Company currently owns and operates seven biomass facilities representing
total electric generation capacity of 140 megawatts. With its three New England
facilities fueled by wood waste and its four California facilities fueled by
agricultural and wood waste, the Company is the largest biomass energy plant
operator in the United States. In response to deregulation, the Company has
sought to exploit new opportunities in the domestic power generation market
where it can be competitive by leveraging its extensive experience in all
aspects of power project development, including permitting, regulatory
compliance, utility interface, financing, fuel procurement, construction
management, operations and maintenance. For example, the Company is pursuing
opportunities using the latest clean combustion technologies to retrofit or
repower power plants being divested by utilities. The Company is actively
pursuing opportunities in certain international markets where demand for
electric power is being driven by rapid economic growth and where stricter
environmental regulations are being enacted. The Company intends to address both
the need for additional power generating capacity, in the form of greenfield
development of environmentally responsible facilities, including biomass
facilities, and the need for retrofitting these facilities to bring them into
environmental compliance.

INDUSTRY

Regulatory changes have had and will continue to have a significant impact
on the domestic power market. The National Energy Policy Act of 1992 exempts a
new class of facilities electric wholesale generators ("EWGs") from certain
federal utility regulation and liberalizes access for nonutility generators to
the utility power transmission grid. Deregulation in certain states has created
price competition among various utility and nonutility operators and favors the
most price competitive supplier. In addition, in certain states deregulation is
requiring utilities to unbundle their generating assets from their distribution
and transmission assets and as a result some utilities are divesting their
generating assets creating opportunities for nonutility power generators to
enter the market. Many states are also considering the elimination of many of
the regulations that currently limit the ability of power generators to
negotiate power sale agreements directly with industrial and commercial
customers. The Company believes that the enhanced ability to transmit (or
"wheel") power combined with the ability to negotiate directly with power
consumers, are also creating new opportunities for nonutility generators. At the
same time, the elimination of these barriers in the power market will increase
competition for the sale of power. The Company believes that increased
competition will lead to significant industry consolidation, which will create
new opportunities for companies with the financial resources to acquire
operating projects. Moreover, new environmental regulations, primarily the 1990
Amendments, have created significant new opportunities in the domestic power
market arising out of the requirements of many power plants for environmentally
responsible combustion technologies that will help them to comply with these new
regulations.

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<PAGE> 31

In the international electric power market, the Company sees similar
opportunities resulting from growth in demand for clean power resources driven
primarily by economic growth in developing nations, where existing generating
capacity is inadequate to satisfy increased demand for power from businesses and
consumers. At the same time, many countries are passing, or otherwise becoming
subject to, increasingly strict environmental regulations. For example, Eastern
European nations seeking admittance to the European Union ("EU") will need to
pass environmental legislation that complies with EU standards. Toward that end,
the Czech Republic passed its first clean air legislation in 1991. In addition,
international power projects seeking World Bank financing will be required to
meet emissions standards established by that entity.

In many countries where substantial new generating capacity is required,
governments and utilities do not have the available capital or the technical
expertise to add the required capacity, and transmission grids are often
inadequate to deliver needed power to certain locations. In addition, where
compliance with environmental standards is a consideration, many countries lack
the necessary experience with low emission combustion technologies. As a result,
many foreign governments are seeking to privatize government-owned utilities and
are encouraging the development of new (or "greenfield") power plants by
nonutility generators. Strong local support exists in these countries for
independent power projects, particularly those that utilize indigenous fuels and
otherwise rely upon local sources, materials and labor. Because very few
qualified independent power producers are based in many of these counties,
significant opportunities exist for nonutility generators such as the Company to
participate in both repowerings and greenfield power plant development.

BUSINESS STRATEGY

The Company's strategy is to apply its technical expertise and project
development and operational experience to domestic and international market
opportunities created by the deregulation of energy markets, increased electric
power demand primarily in developing countries and increasingly strict
environmental regulation. In the design, development and operation of biomass
fueled plants and natural gas cogeneration facilities, the Company has
significant experience with different power generation technologies, including
fluidized bed boilers, gas turbines, cogeneration and combined cycle generation.
The Company believes that its experience with different technologies and fuels
will allow it to maximize the efficiency and minimize the environmental impact
of a power project. The Company's ability to respond to market opportunities as
they arise will depend upon its access to sufficient amounts of capital. See
"Risk Factors -- Uncertainty of Access to Capital."

U.S. Strategy

While the Company's current biomass operations are profitable, the
development and construction of new U.S. biomass-fueled plants are currently
uneconomical because (i) the price for biomass fuels is higher relative to
alternative fuels such as natural gas and (ii) the Company believes that
deregulation of the U.S. electric utility market will drive energy prices
downwards as it favors the most price competitive electric generation
alternatives. The Company is shifting its focus from the U.S. biomass energy
market to other energy projects which it expects to be competitive in the
domestic power generation market. In the U.S., the Company's primary strategy is
to take advantage of opportunities in the energy market created by deregulation.
In certain states deregulation is promoting or requiring utilities to unbundle
their generation assets from distribution and transmission assets and as a
result certain utilities are divesting their generation assets. The Company's
strategy is to acquire these assets at prices which will allow the Company to
(i) effectively compete in the deregulated energy market by providing power at
competitive prices while (ii) maintaining acceptable returns on its investments
in such assets.

The Company intends to focus on the potential acquisition of projects with
generating capacities in the range of 50 to 200 megawatts. The Company believes
that this segment of the power market presents significant opportunities because
it attracts fewer larger nonutility generators, and because many smaller
nonutility generators lack the financial resources to effectively compete in a
deregulating and consolidating market. Recently, the Company acquired two power
plants from SCE for approximately $9.5 million and the assumption of certain
liabilities. These facilities pose a significant opportunity to repower the 126
megawatt San Bernardino facility and the 154 megawatt Highgrove facility with
new equipment and technology with the

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<PAGE> 32

capacity to generate, on a combined basis, 600 megawatts of electricity at
competitive rates, with fewer air emissions. The plants, built in the 1950s,
have been designated "non must run" meaning they are not currently essential for
assuring the reliable operation of the California power grid. The Company is
evaluating various options regarding its participation, through these
facilities, in the recently deregulated California electric-power market. If the
Company undertakes to repower these facilities, the Company expects a
significant financing would be involved, including significant equity
investments and bank financings. No assurance can be given that the Company will
undertake to repower these facilities or that if it does, it will successfully
complete such project on a timely basis or at all. The Company is also actively
pursuing other opportunities to repower or retrofit older, inefficient and less
environmentally friendly power plants located in the U.S. being divested by U.S.
utility companies and municipalities.

With respect to its existing biomass business, in response to the upcoming
transition to avoided cost based power sales agreements, the Company is actively
pursuing ways to reduce its expenses relating to these facilities while reducing
the potential adverse effect on profitability of these facilities as a result of
avoided cost based pricing. For example, the Company is in the process of
renegotiating certain of its fuel supply contracts, is exploring various ways to
reduce fuel costs, and is supporting certain legislation that would provide
environmentally responsible power producers like the Company certain tax
benefits.

International Strategy

The Company is also actively pursuing opportunities in the international
power market, which is growing rapidly due to economic growth in many developing
countries and the passage of environmental regulations that will necessitate the
repowering of older plants in certain countries. The Company intends to address
both the need for additional power generating capacity, in the form of
greenfield development of environmentally responsible facilities, including
biomass facilities, and the need for repowering, by introducing environmentally
responsible combustion technologies to older plants. Other international
opportunities include repowering of former state-owned facilities as a result of
privatization. For example, the Company has embarked on new projects in the
Czech Republic and Italy.

The Company follows a multi-step process in screening international project
opportunities. First, the Company evaluates a particular country against several
criteria, including (i) the significant, long-term need for additional capacity
or reconfiguration of existing capacity, (ii) the ability and willingness of the
power purchaser to provide creditworthy power purchase payment arrangements
(possibly through government guarantees), (iii) a legal system that provides for
the predictable and reliable enforcement of contracts and (iv) a stable
political and economic environment which would minimize risks relating to
political turmoil and currency fluctuations. If a country meets the Company's
criteria, the Company will review individual projects against a set of project
criteria. Specifically, the Company intends to select for development projects
that (a) have a capacity of 50 to 200 megawatts, (b) provide opportunities for
environmentally responsible combustion technologies and (c) provide the
opportunity for the use of indigenous fuels and the local procurement of
equipment, services and other resources necessary to operate the facility. The
Company believes that facilities in the 50 to 200 megawatt size represent the
best opportunities because they are more easily financed than larger projects
and because the facility can be constructed in the geographic area of the fuel
source and energy demand, which reduces reliance on often inadequate
transmission grids. The process of locating, developing, permitting, financing
and constructing power plants is complex, lengthy and expensive, and no
assurance can be given that the Company will successfully develop all or any of
the projects that it evaluates from time to time. See "Risk
Factors -- Uncertainty of Project Development."

CURRENT OPERATING PROJECTS

The following table summarizes certain information relating to the
Company's projects currently in operation. With the exception of the Mendota
plant, at the end of each leased facility's applicable lease term, the Company
has the option to renew the lease for a specified period or purchase the
facility at fair market value. The Mendota plant may be purchased for a fixed
amount at the end of its lease term.

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In-service

<TABLE>
<CAPTION>
PLANT SIZE OWNERSHIP OF IN-SERVICE
LEASE/PROJECT LOCATION (NET MW) OPERATING COMPANY DATE
------------- ------------- ---------- ----------------- -------------
<S> <C> <C> <C> <C>
Hemphill New Hampshire 13.6 67% December 1987
Lease
Gorbell Maine 13.6 80% December 1987
Lease
Whitefield New Hampshire 13.6 100% July 1988
Own
Mendota California 25 100% May 1990
Lease
Woodland California 25 100% May 1990
Lease
Delano I California 27 100% January 1991
Own
Delano II California 22 100% January 1994
Own
Tabor Czech 12 87% January 1998
Own Republic
</TABLE>

Hemphill. The Hemphill facility, a 13.6-megawatt, wood-waste plant, was
completed in late 1987. It is located on a 50-acre site in Springfield, New
Hampshire. The Operating Company is a joint venture in which the Company has a
67% interest. The generating equipment at the Hemphill facility is owned by
BankBoston Leasing Services Inc., which leases the facility to the Operating
Company through March 2003 with an option to renew or purchase the facility at
fair market value. Public Service of New Hampshire (PSNH) purchases power
produced by the plant at a fixed rate under a rate order issued by the New
Hampshire Public Utility Commission (NHPUC) expiring in 2006. The Operating
Company purchases wood-waste pursuant to two contracts with affiliates of the
Company's joint venture partner, each of which expires in 2003. The contracts
provide for the supply of wood-waste to the Operating Company at prescribed
prices through December 1997 and at market prices thereafter. The current
arrangement with PSNH is subject to dispute. See "-- Legal Proceedings" and
"Risk Factors -- Regulatory Risks."

Gorbell. The Gorbell facility, a 13.6-megawatt wood-waste plant, was
completed in late 1987. It is located on a 56-acre site in Athens, Maine. The
design of the facility is substantially similar to the Hemphill plant. The
Operating Company is a joint venture in which the Company has an 80% interest,
which decreases to 60% in 1998. The generating equipment at the Gorbell facility
is owned by BankBoston Leasing Services Inc., which leases the facility to the
Operating Company through March 2003, with an option to renew or purchase the
facility for fair value. Power produced by the plant is sold to Central Maine
Power Company (CMP) through 2007 at a fixed price per kilowatt hour that is
indexed annually to the rate of inflation. The Operating Company's fuel is
purchased from an affiliate of the Company's joint venture partner pursuant to
an agreement expiring in 2002 under which the price escalates based upon a
prescribed index.

Whitefield. The Whitefield facility is a 13.6-megawatt wood-waste plant
that has been in operation since 1988. It is located on a 46-acre site in
Whitefield, New Hampshire. The power produced by the plant is sold to PSNH at
established rates under a power sale agreement that expires in 2005. This plant
is also subject to PSNH's attempt to renegotiate rate orders. See "Hemphill"
above. Fuel is purchased pursuant to an agreement expiring in 1998 under which
the price escalates based upon a prescribed index. The Whitefield facility was
originally owned by Chrysler Capital Corp., and leased to the Operating Company.
The Company purchased the Whitefield facility in August 1992. See "Risk
Factors -- Regulatory Risks."

Mendota. The Mendota facility is a 25-megawatt agricultural and urban
wood-waste plant that has been in operation since 1990. It is located on an
80-acre site in Mendota, California. The Operating Company is a limited
partnership, 100% of which is owned by the Company. The generating equipment is
owned by Chrysler Capital Corp., which leases the equipment to the Operating
Company through 1999 at which point the Company will have an option to purchase
the facility for $5.0 million. In June 1995, the Operating Company

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<PAGE> 34

amended the facility lease which resulted in the agreement being treated as a
capital lease. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The power generated by the plant is sold to Pacific
Gas & Electric ("PG&E") under a standard offer #4 ("SO#4") contract expiring in
2014. Under the contract, PG&E is required to purchase the plant's electricity
at predetermined prices until 2000, and at a price equal to PG&E's avoided cost
for the remainder of the contract. Payments for capacity are fixed throughout
the life of the contract. PG&E has asserted that the fixed rates under this
contract will terminate mid-1999, however, the Company disputes this assertion.
Approximately 28% of the fuel for the plant is purchased pursuant to long-term
contracts terminating between 1998 and 2002, under which prices increase in
accordance with prescribed schedules or market-based indexes. The remainder of
the plant's fuel is purchased by the Operating Company on the spot market. See
"Risk Factors -- Operating Risks."

The power sale agreements between the Mendota and Woodland (discussed
below) Operating Companies and PG&E allowed PG&E to curtail the quantity of
power purchased under these agreements by up to 1,000 hours of generating
capacity annually at each plant. PG&E normally exercised its curtailment rights
during periods when cheaper hydroelectric power was available, which generally
occurred following periods of heavy rain or snow. Curtailment reduces the power
payment received by the Operating Companies and, therefore, has an adverse
effect on the financial results of those Operating Companies. The Company
experienced approximately 860, 930, and 950 hours of utility-imposed
curtailments at each of the two plants during fiscal 1997, 1996, and 1995,
respectively. In 1997, the Company renegotiated PG&E's curtailment rights
limiting PG&E to 500 hours per year.

Woodland. The Woodland facility is a 25-megawatt agricultural and urban
wood-waste plant located on a 38-acre site in Woodland, California. The design
of the plant is essentially the same as the Mendota plant. The Operating Company
is a limited partnership in which the Company owns all of the equity. The
generating equipment is owned by BankBoston Leasing Services Inc., which leases
the generating equipment to the Operating Company through March 2010, with an
option to renew or purchase the generating equipment for fair value. The
electricity generated by the plant is sold to PG&E under an SO#4 contract
expiring in 2014, at predetermined energy prices until 2000. PG&E has asserted
that the fixed rates under this contract will terminate mid-1999, however, the
Company disputes this assertion. The price for the remainder of the contract is
PG&E's avoided cost. Payments for capacity are fixed for the life of the
contract. Approximately 21% of the fuel for the plant is purchased pursuant to
long-term contracts terminating in 2000, under which prices increase in
accordance with prescribed schedules or market-based indexes. The remaining fuel
is purchased by the Operating Company on the spot market.

The Operating Company has conditions in its nonrecourse lease agreement
that require the funding of a "power reserve" in years prior to 2000, based on
projections of operating cash flow shortfalls in 2000 and thereafter. The power
reserve represents funds available to make lease payments in the event that
revenues are not sufficient after the plant converts to avoided cost rates in
March 2000. This funding requirement will significantly limit future profit
distributions the Operating Company may make to the Company. Accordingly,
beginning in the first quarter of fiscal 1997, the Company has expensed the
funding of reserves required under Woodland's nonrecourse lease agreement to
cover projected shortfalls in lease payments beginning in 2000. Consequently,
the results of the Woodland plant were greatly diminished during 1997, and the
Company expects that such results will be reduced to approximately break-even in
1998 and thereafter. During fiscal 1997 and 1996, the Woodland plant contributed
$1.0 million and $5.1 million of operating income, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and "Risk Factors -- Operating Risks."

Delano I. The Delano I facility is a 27-megawatt agricultural and urban
wood-waste plant located on a 124-acre site in Delano, California. SCE purchases
power under an SO#4 contract expiring in 2020, under which energy prices are
predetermined until September 2000, and then at avoided cost for the remainder
of the contract. Approximately 49% of the fuel supply is purchased pursuant to
long-term contracts with terms expiring from 1997 to 2004 under which prices
increase in accordance with prescribed schedules or market-based indexes. The
remaining fuel is purchased by the Operating Company on the spot market. The
Company has guaranteed to the Operating Company the price and availability of
fuel that is not purchased pursuant to the long-term contracts. The Delano I
generating equipment was originally owned by Westinghouse Credit
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Corporation and leased to the Company. In December 1993, the Company purchased
Delano I for $21.5 million in cash and the assumption of $66.9 million original
principal amount of nonrecourse, long-term, tax-exempt bonds issued by the
California Pollution Control Finance Authority ("CPCFA"). These bonds
effectively bear interest at a rate of 8.3%, with principal and interest payable
semi-annually until maturity in 2000.

Delano II. In January 1994, the Delano Operating Company commenced
operation of phase II of the Delano project, a 22-megawatt agricultural and
urban wood-waste plant located on the same site as Delano I. The facility is
wholly owned by the Delano Operating Company. Power generated by the Delano II
facility is also purchased by SCE under the Delano I contract described above,
under which prices are fixed until September 2000. Fuel is also purchased
pursuant to the same contracts as Delano I. The Delano II facility is owned by
the Company and is subject to $66.0 million original principal amount of
nonrecourse, long-term tax-exempt bonds issued by CPCFA. These bonds effectively
bear interest at a rate of 6%, with principal and interest payable semi-annually
until maturity in 2000.

Czech Republic

In January 1996, the Company, through a wholly owned subsidiary, signed a
joint development agreement with a Czech power development company, EMD. The
Company owns a 65% interest in this joint venture. The initial focus is on
expansion and environmental retrofit of existing Czech energy centers. To
support this effort, the Company has opened an office in Prague. The development
of these projects is subject to a number of conditions including negotiation of
definitive agreements for power sale, fuel supply, construction and other
agreements with third parties. In January 1998, the Company entered into a new
joint venture arrangement, superseding the original arrangement, and in
connection therewith, indirectly acquired a majority interest in two Czech
Energy Centers near the towns of Tabor and Pribram. The Tabor facility provides
12 megawatts of electrical output and 165 tons per hour of thermal production.
Plans for the Tabor facility include the expansion and modernization of the
Energy Center to provide approximately 50 megawatts of electrical output to be
sold to the local power distribution company and an adjacent industrial
customer. At the Pribram facility, the joint venture has purchased five
auxiliary boilers that provide thermal service during peak hours. In addition,
the Company is exploring other projects relating to expanding and retrofitting
existing Czech energy centers through the joint venture.

PROJECTS IN DEVELOPMENT

Domestic -- U.S.

The State of California's Public Utility Commission ("CPUC") has mandated
the restructuring of California's electric utility industry. Under the terms of
the mandate, the competitive market for electric power generation commenced in
March 1998, contemporaneously with the Company's acquisition of two power
generation facilities and related sites in California for approximately $9.5
million in cash and the assumption of certain liabilities. These natural
gas-fired facilities were built in the 1950's and have been designated "non must
run" by the Independent System Operator, meaning they are not currently
essential for assuring the reliable operation of the California power grid.
During calendar 1997, the plants operated at less than five percent capacity.
These facilities pose an opportunity to repower a 126 megawatt San Bernadino
facility and a 154 megawatt Highgrove facility with new equipment and technology
with the capacity to generate, on a combined basis, 600 megawatts of electricity
at competitive rates, with fewer emissions. The Company is currently evaluating
its various options regarding its participation, through these facilities, in
the recently deregulated California electric-power market. If the Company
undertakes to repower these facilities, the Company expects a significant
financing would be involved including significant equity investments and bank
financings. No assurance can be given that the Company will undertake to repower
these facilities or that if it does, it will successfully complete such project
on a timely basis or at all. In addition, to sell power from these facilities,
the Company must ensure that it will not be subject to regulation as a holding
company under PUHCA and that all necessary approvals from the FERC and/or the
CPUC are obtained.

The Company is also pursuing a number of domestic electric power projects.
The project opportunities are located in New England, Florida and California
and, like the San Bernadino and Highgrove facilities,
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involve the repowering or reconfiguration of existing power stations. The
projects are subject to a number of conditions which may impact their economic
viability and as a result there is no assurance that the Company will be
successful in acquiring these facilities.

Italy

In September 1996, the Company, through a wholly owned subsidiary, formed a
50:50 joint venture (the "Joint Venture") with Marcegaglia Group of Mantova,
Italy, to develop, own, and operate biomass-fueled electric power facilities in
that country. The Joint Venture has begun development of six facilities for
which it has signed preliminary power purchase contracts with ENEL, and all of
which have been approved by the Italian government's price subsidy program for
biomass-fueled plants. In addition, European Union grants which may be available
to cover a portion of the capital costs are being pursued for several of the
projects. The Joint Venture has established an office near Milan to coordinate
the process of securing site locations, permits, and fuel sources and arranging
for the construction and financing of these facilities. The facilities are
subject to a number of conditions including negotiation of definitive agreements
for power sale, fuel supply, and other agreements with third parties. No
assurance can be given that conditions or agreements will be satisfied on a
timely basis, if at all. The Company does not expect that any of the projects
will be operational before 2000.

The Company had been exploring opportunities in India and the Dominican
Republic but due to a variety of circumstances, has decided to no longer
actively pursue those business opportunities.

LEGAL PROCEEDINGS

In 1990, a plan of reorganization (the "Plan") for PSNH was approved by the
U.S. Bankruptcy Court for the District of New Hampshire. Pursuant to the Plan,
Northeast Utilities ("NU") acquired the assets of PSNH. An agreement between NU
and the State of New Hampshire contains language to the effect that PSNH will
seek to renegotiate some of the terms of certain rate orders with small power
producers, including the Whitefield and Hemphill Operating Companies, and that
the state will support PSNH in such efforts. PSNH reached an agreement in
principle with these two Operating Companies to settle the renegotiation of
their rate orders. The settlement agreement is subject to the approval of the
NHPUC on terms acceptable to both PSNH and the Operating Companies. The
principal terms of the agreement generally call for the two Operating Companies
to reduce the amount of power sold annually to PSNH to 70% of the plants'
capacities, and to reduce the price per kilowatt paid by PSNH to $0.06 per
kilowatt hour, escalating three percent per year for the remainder of the term
of the original, applicable rate order. In consideration of these reductions,
the Operating Companies would receive certain cash settlement payments, paid
over several years. The settlement agreement has technically expired, however,
no party to the settlement agreement has notified the other that it would not
proceed in accordance with the terms thereof if approved by NHPUC, nor were they
required to do so. The settlement, if approved and executed, is not expected to
have a material impact on the Company's results of operations or financial
condition. Should the matter not reach resolution, the Company does not believe
that PSNH has the right to take unilateral action to reduce the price of
purchased power under such arrangements. Rejection of the Company's rate orders
would result in a claim for damages by the Company and could be the subject of
lengthy litigation. In January 1997, NU disclosed in a filing with the
Securities and Exchange Commission that if a proposed deregulation plan for the
New Hampshire electric utility industry were adopted, PSNH could default on
certain financial obligations and seek bankruptcy protection. In February 1997,
NHPUC voted to adopt a deregulation plan, and in March 1997, PSNH filed suit to
block the plan. In March 1997, the federal district court issued a temporary
restraining order which prohibits the NHPUC from implementing the deregulation
plan as it affects PSNH, pending a determination by the court whether PSNH's
claim could then be heard by the court. In April 1997, the court ruled that it
could now hear the case and ordered that the restraining order would continue
indefinitely pending the outcome of the suit. In addition, in March 1997, the
Company, along with a group of other biomass power producers, filed a motion
with the NHPUC seeking clarification of the NHPUC's proposed deregulation plan
regarding several issues, including purchase requirements and payment of current
rate order prices with respect to the Company's energy output. In January 1998,
NHPUC issued an oral ruling rejecting the settlement agreements and
modifications that would impact PSNH's ability to finance and secure the
settlement contract to the Operating Companies but has not yet issued a written
order in the matter. An
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unfavorable resolution of this matter, including the bankruptcy of PSNH, could
have a material adverse effect on the Company's results of operations and
financial position.

REGULATORY MATTERS

The Company is subject to energy and environmental laws and regulations at
the federal, state, local, and international levels in connection with the
development, ownership, and operation of its plants. Federal laws and
regulations govern power purchase and sale transactions, the types of fuel that
may be used by a plant, the ownership of a plant, the plant's efficiency, and
the type and use of combustion and pollution-control technology at a plant.
State utility regulatory commissions must establish the rates and, in some
instances, other terms and conditions under which public utilities purchase
electric power from nonutility generators. Under certain circumstances where
specific exemptions are otherwise unavailable, state utility regulatory
commissions may have broad jurisdiction over nonutility electric power plants.
Energy-producing projects also are subject to federal, state, local, and
international laws, as well as administrative regulations governing the
emissions and other substances produced by a plant, and geographical location,
zoning, and land use.

Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"). The
U.S. market for nonutility generators selling electricity at wholesale rates
developed after the passage of PURPA. Prior to the passage of PURPA, regulated
utilities were the primary producers of electric power. PURPA was passed in the
wake of the energy crises of the 1970s as a means to increase energy efficiency
and foster the development of alternative power generation technologies. The
1978 enactment of PURPA and the adoption of regulations thereunder by the
Federal Energy Regulatory Commission ("FERC") provided incentives for the
development of cogeneration and small power-production facilities.

A domestic electricity-generating project must be a Qualifying Facility
("QF"), in order to take advantage of certain rate and regulatory incentives
provided by PURPA. To qualify as a QF, a plant must be a cogeneration facility
or small power producer (less than 80 megawatts) that burns waste or alternative
fuels, must satisfy certain engineering standards and an electric utility or an
electric utility holding company or its subsidiary must not own more than 50% of
the economic interest in the plant. PURPA exempts most QFs from the Public
Utility Holding Company Act of 1935 ("PUHCA"), most provisions of the Federal
Power Act (the "FPA") and, except under certain limited circumstances, state
laws concerning rates or financial regulation of electric utilities. Each of the
domestic operating plants that the Company currently owns and/or operates meets
the requirements under PURPA necessary for QF status.

PURPA provides two primary benefits to QFs. First, most QFs are relieved of
compliance with certain of extensive federal, state, and local regulations that
control the development, financial structure, and operation of any
energy-producing plant and the prices and terms on which energy may be sold by
the plant. Second, FERC's regulations promulgated under PURPA require that
electric utilities purchase electricity generated by QFs, at a price based on
the purchasing utility's full "avoided cost." This is defined as the incremental
cost to an electric utility of electric energy or capacity that the utility
would have to generate itself or purchase from another source if it did not have
power available from the QF. FERC regulations also permit QFs and utilities to
negotiate agreements for utility purchases of power at rates lower than the
utility's avoided cost. While all of the Company's domestic operating existing
projects have long-term power sale agreements at rates equal to or greater than
the utilities' current avoided cost, the current practice is for most power sale
agreements to be awarded at a rate below avoided cost, due to increasing
competition for utility contracts. Moreover, whereas in the 1980s power sale
agreements were often entered into as a result of negotiations between a
nonutility generator and a utility, increasingly, these agreements are the
subject of competitive bidding, which tends to lower the price that a nonutility
generator may receive for power. Currently, the demand for the construction of
cogeneration plants has significantly diminished in the U.S.; therefore, the
Company does not anticipate entering into any new construction projects of this
type in the near future.

The Company endeavors to design its projects, monitor its compliance with
applicable regulations, and choose its customers in a manner that minimizes the
risks of losing QF status for its projects. If the Operating Company was unable
to qualify as a QF, the facility could be subject to regulation as a public
utility under the

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FPA and state laws and the Company could become a public utility holding company
by owning or controlling ten percent or more of a facility that would no longer
be exempt from PUHCA unless the Operating Company qualified as an EWG under the
National Energy Policy Act of 1992 (See "National Energy Policy Act" below) or
qualifies for another exemption from PUHCA. A loss of QF status could result in
defaults under the Operating Company leases, power sale agreements, and other
contracts, which could have a material adverse effect on the Company.

PUHCA. Under PUHCA, any corporation, partnership, or other legal entity
that directly or indirectly owns or controls or holds with power to vote 10% or
more of the outstanding voting securities of a "public utility company," or a
company that is a "holding company" of a public utility company, is subject to
registration with the Securities and Exchange Commission and regulation under
PUHCA, unless eligible for an exemption. PURPA provides that companies that only
own QFs are not public utility holding companies under PUHCA. A holding company
of a public utility company that is subject to registration is required by PUHCA
to limit its utility operations to a single integrated utility system and to
such other businesses as are reasonably incidental or economically necessary or
appropriate to the operation of such integrated public utility system. Approval
by the Securities and Exchange Commission is required for nearly all important
financial and business dealings of a registered holding company.

FPA. The FPA grants FERC exclusive rate-making jurisdiction over wholesale
sales of electricity in interstate commerce, FERC has jurisdiction to establish
rates, to amend or revoke or modify previously approved rates and has
jurisdiction over certain corporate-related transactions. These rates may be
based on a cost-of-service approach or may be determined through competitive
bidding or negotiation, or, lastly, may be based on other criteria as long as
FERC finds the rates are "just and reasonable" and in the public interest. While
most QFs under PURPA are exempt from the rate-making and certain other
provisions of the FPA, projects not qualifying for QF status would be subject to
the FPA and to FERC rate-making jurisdiction which may limit their flexibility
in negotiations with power purchasers.

National Energy Policy Act. In 1992, Congress enacted comprehensive new
energy policy legislation in its passage of the National Energy Policy Act. This
law is primarily designed to foster competition in energy production and provide
competitive access to the transmission grid. To achieve these goals, the
National Energy Policy Act amended PUHCA to create EWGs, a new class of
generating facility that is exempt from public utility company regulation under
PUHCA. An EWG is an entity determined by FERC to be exclusively engaged,
directly or indirectly, in the business of owning and/or operating certain
eligible facilities and selling electric energy at wholesale. EWGs may own
generating facilities of any size, use any fuel source, and may be owned by
utilities or nonutilities. EWGs generally may not own transmission facilities.
The Company intends to file for EWG status with respect to the operation of its
two recently acquired power facilities located near San Bernadino and Highgrove,
California, however, there can be no assurance that the Company will obtain such
status with respect to these facilities. Domestic EWGs may not make retail sales
of electric energy. The National Energy Policy Act also provides new authority
to FERC to mandate that owners of electric transmission lines provide wheeling
access to nonutility generators at just and reasonable rates. Previously
limited, wheeling rights enhance the ability of nonutility generators to
negotiate transmission access and encourage development of facilities whose most
feasible siting lies outside the purchasing utility's service area. In 1996,
FERC enhanced this transmission access by issuing its Order Nos. 888 and 889.
Order No. 888 required utilities to provide third parties wholesale open access
to transmission facilities on terms comparable to those that apply when
utilities use their own systems. In Order No. 889, FERC required transmission-
owning utilities to adopt procedures for an open access, same-time information
system regarding their services. The Company believes that the National Energy
Policy Act could benefit the Company by expanding its ability to own and operate
facilities that do not qualify for QF status. However, this legislation may also
result in increased competition by allowing utilities and others to develop such
facilities without being subject to the constraints of PUHCA.

State Regulation. State public utility commissions ("PUCs") have broad
authority to regulate the rates, expenses, financings, and power sale
transactions of regulated electric utilities. Since a power sale agreement will
become a part of a utility's expenses (and therefore will be reflected in its
rates), sale agreements with nonutility generators typically fall under the
regulatory purview of PUCs. Recognizing the
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competitive nature of the acquisition process, most PUCs will permit utilities
to "pass through" expenses associated with an independent power contract to the
utility's retail customers.

Environmental Protection Regulation. The construction and operation of
power projects are subject to extensive federal, state, and local laws and
regulations adopted for the protection of health, safety, and the environment,
and to regulate land use. The laws and regulations applicable to the Company
primarily involve the discharge of emissions into the water and air, and the use
of water, but can also include wetlands preservation, endangered species, waste
disposal, and noise regulation. These laws and regulations in many cases require
a lengthy and complex process of obtaining licenses, permits, and approvals from
federal, state, and local agencies. If such laws and regulations are changed and
the Company's facilities are not grandfathered, extensive modifications to
project technologies and facilities could be required.

In November 1990, comprehensive amendments to the Clean Air Act were
enacted. The first major revisions to the Clean Air Act since 1977, the 1990
Amendments expand the scope of federal regulations and enforcement in several
significant respects. In particular, provisions relating to nonattainment, air
toxins, permitting, enforcement, and acid deposition may affect many power
projects. Although the majority of these new provisions were implemented by
1993, the full scope of the new requirements remains uncertain pending
implementation of new regulations by the United States Environmental Protection
Agency. The Clean Air Act and the 1990 Amendments contain provisions that
regulate the amount of sulfur dioxide and nitrous oxide that may be emitted by
both new and existing projects. None of the Company's projects are expected to
be affected by the acid rain provisions of the 1990 Amendments. However, many
power generating facilities may have to take various repowering steps to comply
with the 1990 Amendments.

The Company does not believe that it will be required to make material
capital expenditures to comply with existing environmental regulations.

Nonutility generators (including EWGs) that are not QFs under PURPA are
considered to be public utilities in many states, and are subject to broad
regulation by PUCs -- ranging from the requirement of certificates of public
convenience and necessity -- to regulation of organizational, accounting,
financial, and other corporate matters. Although FERC generally has exclusive
jurisdiction over the rates charged by such a producer to its wholesale
customers, PUCs have the ability, in practice, to influence the establishment of
such rates by asserting jurisdiction over the purchasing utility's ability to
pass through the resulting cost of the purchased power to its retail customers.
In addition, states may assert jurisdiction over the siting and construction of
facilities, and over the issuance of securities and the sale or other transfer
of assets by these facilities.

Certain states have adopted or are considering legislation that will remove
many of the restrictions that currently limit the ability of nonutility
generators to sell electrical power directly to industrial and commercial
customers. The Company believes that the removal of these restrictions will
result in greater competition and greater opportunities to negotiate power sale
agreements with industrial and commercial customers and may result in state
PUC's attempting to reduce, or forcing the renegotiation of, fixed rates or
contracts. Although the Company believes that the trend in the power market is
toward deregulation, to date, only a few states have passed any such
legislation, and there can be no assurance that any further similar legislation
will ultimately be passed.

RAW MATERIALS

Fuel and operating supplies purchased by the Company's independent power
projects are either available from a number of different suppliers or from
alternative sources that could be developed without a material adverse effect on
the Company. To date, the Company has experienced no difficulties in obtaining
these materials. No assurance can be given in the future of the availability at
reasonable prices.

SEASONAL INFLUENCES

The Company earns a disproportionately high share of its income in the
months of May through October due to rate structures under the power sale
agreements relating to its California plants, which provide strong

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incentives to operate during this period of high demand. Conversely, the Company
historically has operated at marginal profit during its second fiscal quarter
due to the rate structure under these agreements.

CUSTOMERS

The Company derived 10% or more of its revenues during the past three years
from its three most significant electric utility customers: PSNH, SCE, and PG&E.
Revenues from these three customers as a percentage of total revenues were
approximately 18%, 31%, and 32%, respectively, in fiscal 1997.

COMPETITION

The worldwide independent power market now consists of numerous companies,
ranging from small startups to multinational industrial companies. In addition,
a number of regulated utilities have created subsidiaries that compete as
nonutility generators. Nonutility generators often specialize in market
"niches," such as a specific technology or fuel (i.e., gas-fired cogeneration,
refuse-to-energy, hydropower, geothermal, wind, solar, wood, or coal) or a
specific region of the country where they believe they have a market advantage.
However, many nonutility generators, seek to develop projects powered by the
best fuel available. Many companies in this market have substantially greater
financial, technical, and operational resources than the Company. The Company
competes primarily on the basis of project experience, technical expertise,
capital resources, and power pricing.

EMPLOYEES

As of September 27, 1997, the Company employed, directly and through its
Operating Companies and subsidiary, a total of 275 employees devoted primarily
to its clean resources business. None of these employees are represented by a
labor union, and the Company considers its relations with these employees to be
good.

PROPERTIES

The Company's corporate headquarters are located in Waltham, Massachusetts,
and consist of approximately 15,000 square feet that are occupied pursuant to a
lease expiring in 2003. The Company also leases office space in Prague, Czech
Republic; Milan, Italy; and Roseville, California. The Company's other
properties consist of the power plants described under "Operating Projects." The
Company owns all of the land on which the plants are built.

The Company's California plants are located in areas where there is a risk
of potentially significant earthquake activity. Projects that the Company
develops in the future may also be located in areas where there is earthquake
risk. The Company's earthquake insurance is not sufficient to cover all
potential losses and there can be no assurance that such insurance will continue
to be available on reasonable terms.

CLEAN FUELS

K-FUEL
OVERVIEW

In August 1995, the Company, through two wholly owned subsidiaries, entered
into a Limited Partnership Agreement with KFx Wyoming, Inc. (the "K-Fuel
Partnership") a subsidiary of KFx, Inc., to develop, construct, and operate a
subbituminous coal beneficiation plant to be constructed near Gillette, Wyoming.
The K-Fuel Partnership has been granted, in exchange for certain future
contingent royalty payments, a nonexclusive right and license to use certain
patented clean coal technology ("K-Fuel") to create a low-moisture, high-energy
fuel with reduced sulfur that will help coal-burning utilities meet the SO(2)
emission restrictions contained in the Clean Air Act through fuel switching or
blending. See "Business -- Clean Fuels -- Industry." In order to meet Clean Air
Act standards while continuing to utilize high energy, high sulfur coal, many
power plants will be required to install scrubbers and baghouses to reduce
emissions from exhaust gases. These modifications are expensive and may reduce
plant generating capacity by up to 25%.

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The K-Fuel Partnership procured a 24-acre site for construction of the
plant and began construction in August 1995 under a third party, turnkey
construction contract. In return for a 95% equity interest in the plant, the
Company has currently provided approximately $60 million for the design,
construction, and operation of the plant with the capacity to product up to
500,000 tons of K-Fuel per year. A tax credit is available for facilities
producing and selling alternative fuels, such as K-fuel. To be eligible,
companies must enter into binding, written contracts for the construction of the
facility, by December 31, 1996, and facilities must be placed in service no
later than June 30, 1998. The Company believes that the K-Fuel Facility was
placed in service in April 1998. Although the facility has operated and produced
commercially salable product, the Company has encountered certain difficulties
in optimizing its performance to achieve optimal and sustained operation. The
Company has addressed and resolved certain problems previously encountered,
including a fire at the facility and certain construction problems including
issues relating to the flow of materials within the facility and design and
operation of certain pressure-release equipment. Currently, the Company is
experiencing certain operational problems relating to fines and tar residue
build-up within the system during production and other product quality issues
related to product dusting. The Company is actively exploring solutions to these
problems. Because the technology being developed at the facility is new and
untested, no assurance can be given that other difficulties will not arise, or
that the Company will be able to correct these problems and achieve optimal and
sustained performance. In addition, there can be no assurance that the K-Fuel
Facility would be determined to be qualified for the tax credit, or that the
Company will realize a benefit from the tax credit. The economic returns of the
K-Fuel Facility primarily result from tax credits on the facility's production
of K-Fuel. The Company expects that the K-Fuel Facility will report operating
losses for financial reporting purposes primarily as a result of recording
depreciation charges over the expected life of the tax credit. See "Risk
Factors -- Uncertainty Regarding K-Fuel Facility."

In fiscal 1995, the Company purchased 1,500,000 shares of KFx Inc. common
stock for $3.0 million, representing an approximate 7% equity interest in the
Company. In fiscal 1996, the Company purchased an additional 1,500,000 shares of
KFx common stock for $3.0 million, representing an additional 7% equity interest
in KFx. In 1997, the Company purchased an additional 1,250,000 shares of KFx
common stock for $2.5 million, bringing its total equity interest in KFx to
approximately 18%. The Company has warrants, exercisable from January 1, 2000,
through July 1, 2001, to purchase 7,750,000 shares at $3.65 per share. In
addition, the Company has the right to purchase further shares at that time for
then fair market value so that when added to all other shares of KFx common
stock owned by the Company, would result in the Company owning up to a total 51%
equity interest in KFx on a fully diluted basis. If all warrants and options are
exercised, the Company will be able to consolidate the results of operations of
other K-Fuel projects initiated by KFx. See Note 3 of Notes to Consolidated
Financial.

INDUSTRY

The Clean Air Act is the primary market driver for the development in the
U.S. of beneficiated clean coal fuel products. The Clean Air Act implemented
stricter limitations on air emissions, including nitrous oxide (NO(x)) and
sulfur dioxide (SO(2)), the primary causes of smog and acid rain. These
limitations, which began being phased in, in 1995 require many power plants to
take various significant steps, including changing to cleaner fuels, modifying
combustion technologies, adding emissions control systems, purchasing emissions
offsets and even shutting down. The K-Fuel Technology addresses this problem by
producing a coal fuel product that has SO(2) and NO(x) emissions significantly
below the levels required by the Clean Air Act.

Title IV of the Clean Air Act specifies a two-phase implementation schedule
that primarily targets electric utility companies. The core of the acid rain
program is the allowance system, whereby utilities subject to the program are
granted (or otherwise obtain) "allowances" to emit SO(2). Each allowance
represents the right to emit one ton of SO(2) for a particular calendar year.
Phase I implementation began on January 1, 1995, and affected 110 large,
high-emission generating plants in 21 states (primarily in the industrial
midwest). Phase II will begin in the year 2000 and will affect approximately 800
electric generating plants. The effective SO(2) emission rate used to calculate
Phase II emissions allowances is approximately 50% of the emissions rate used to
calculate Phase I emissions allowances. When using Wyoming Powder River Basin
("PRB") coal as

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feedstock material, the K-Fuel Technology will produce a fuel product that has a
SO(2) emission rate of approximately 0.7 to 1.0 lbs. SO(2) per MMBtu, which the
Company believes is less than the emissions rates used in the complex formulas
that determine SO(2) allowance for individual utility plants.

The Company estimates, based on published utility coal consumption data and
responses to Phase I and Phase II requirements of the Clean Air Act, that a
market of approximately 100 to 150 million TPY of clean coal fuel products will
develop between the year 2000 and 2010. This anticipated market assumes that
regulations passed under the Clean Air Act remain in force. Any amendments to
the Clean Air Act that eases the specified limits on industrial S0(2) emissions
could negatively impact the potential size of the market and the domestic growth
prospects of the Company.

BUSINESS STRATEGY

The Company's U.S. marketing emphasis is directed primarily at electric
utility companies and industrial coal user located in the industrial midwest
states. As reported by the U.S. Department of Energy, the total domestic market
for coal fuel is approximately 1 billion tons per year ("TPY"), of which the
majority of the tonnage (in excess of 80 percent) is used by the electric
utility companies. Coal-fired electricity generation currently accounts for
approximately 55 percent of the nation's total electricity supply.

In addition to the electric utility industry, the Company intends to market
the K-Fuel product to manufacturers and other industrial coal users that are
either subject to the S0(2) provisions of the Clean Air Act or that desire to
improve their fuel combustion performance. Fuel combustion performance is
becoming more important to electric utilities because of the need to cut costs
and become more efficient in an increasingly competitive market environment.

The K-Fuel Technology can also produce lower NO(x) emissions (when using
PRB coal as the feedstock) as compared to typical eastern coals. Laboratory
tests have indicated that such reductions can be up to approximately 40 percent
over eastern bituminous coal. NO(x) is a primary component in ground-level smog
and is also a contributor to acid rain. In October 1997, the EPA proposed new
NO(x) emission guidelines for 22 midwestern and southern states and the District
of Columbia that would significantly reduce current allowed levels of NO(x) (in
some states by up to approximately 40 percent). Electric utility power plants
are the likely targets to reduce NO(x) as the overall cost to achieve the
reduction levels is thought to be less than reduction initiatives aimed at the
automobile and manufacturing industries. In February 1998, the U.S. Court of
Appeals for the District of Columbia rejected a legal challenge by the electric
utility industry, upholding certain 1996 regulations under the Clean Air Act
with respect to NO(x) control standards. The court held that the standards were
achievable and that the EPA had the technical and legal authority to mandate
such standards.

NATURAL GAS

OVERVIEW

The Company recently established its Star Natural Gas subsidiary to exploit
opportunities in the natural gas gathering, storage and marketing business. The
Company recently recruited senior management with extensive industry experience
to implement this strategy.

INDUSTRY

The U.S. natural gas market currently consumes 22 trillion cubic feet per
year or 60 billion cubic feet per day of natural gas. The average annual
consumption growth projection is 1.6 - 1.7%. It is estimated that the U.S.
consumption of natural gas by the year 2020 will be approximately 33 trillion
cubic feet per year. This growth in demand is projected to be driven by the
modernization of today's outdated electric generating facilities to more
efficient facilities utilizing natural gas as the economic fuel of choice.
Generation had accounted for 3 trillion cubic feet of gas usage in 1996, and is
projected to consume as much as 9.9 trillion cubic feet by the year 2020. This
increase in demand will require new/expanded natural gas infrastructure to
continue to meet the natural gas market.

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Different aspects of the Company's new natural gas business activities are
subject to regulation at the federal or state level. FERC has jurisdiction over,
among other things, the construction and operation of pipeline and related
facilities used in the transportation and sale of natural gas in interstate
commerce, including the construction, extension, expansion or abandonment of
such facilities. FERC also has jurisdiction over the rates and charges for the
transportation of natural gas in interstate commerce and the sale by a natural
gas company of natural gas in interstate commerce for resale. FERC thus would
regulate any interstate transportation businesses in which the Company might
engage. The Company does not anticipate engaging in interstate pipeline
transportation subject to FERC jurisdiction. Natural gas marketers and brokers
generally are not subject to federal or state regulation. Natural gas storage
activities that are in interstate commerce also fall within FERC's
transportation jurisdiction. FERC must grant prior approval for the construction
or abandonment of interstate storage facilities, and also regulates the rates
and charges of interstate storage services. If storage facilities are not
engaged in interstate commerce, FERC has no jurisdiction. Various states do,
however, regulate such intrastate storage activities. Furthermore, FERC
generally does not have jurisdiction over gas gathering activities, and the
Company will attempt to obtain, and maintain, FERC non-jurisdictional status for
any gas gathering activities. However, various states regulate the rates and
terms of service of gas gathering companies.

Recent FERC regulatory initiatives have potentially affected business
opportunities in the natural gas industry. Specifically, in Order No. 636 (and
subsequent related orders), FERC mandated a fundamental restructuring of the
interstate natural gas pipeline business. Order No. 636 required interstate
pipelines to "unbundle", or segregate, the sales, transportation, storage and
other components of their existing sales service, and to separately state the
rates for each unbundled service. Order No. 636 also created a secondary market
in interstate pipeline transportation, generally increasing the availability of
transportation capacity. FERC's stated purpose in issuing Order No. 636 was
generally to increase competition in the natural gas industry, and, more
specifically, to increase the ability of natural gas marketers, brokers, and
other merchants to sell natural gas in competition with interstate pipelines.
Various aspects of Order No. 636 are still subject to judicial challenge, and it
is not possible to predict with precision the ultimate effect of Order No. 636
and related orders. The Company believes, however, that Order No. 636 has had a
positive impact on the natural gas industry as a whole by increasing
competition, and specifically on the Company by increasing access to
transportation capacity by marketers and brokers. Further, the environment
continues to be one of consolidation and mergers, and the consolidation of
smaller companies. The smaller natural gas marketing companies are consolidating
primarily due to their inability to meet credit requirements. Large companies
are focusing on the acquisition of other large company's assets while leaving
the smaller companies available in the marketplace to opportunistic investors.
Large companies have also been divesting unwanted assets at attractive prices.

BUSINESS STRATEGY

The Company is attempting to position itself in the natural gas industry to
become a multi-segmented natural gas business and seeks (i) to capitalize on
attractive opportunities by aggregating and rationalizing many small to midsize
gas gathering and storage facilities and (ii) to gain experience needed to
capture margins ordinarily paid to third parties in its other electric
generation business, with minimal investment and risk.

RAW MATERIALS

The K-Fuel Partnership is purchasing coal feed stock for the plant's needs
from Dry Fork Coal Company under a purchase order agreement. The parties have
negotiated, but have not yet executed, a 10 year coal supply agreement providing
for up to 1,000,000 tons of coal per year at a fixed price subject to certain
escalation factors. The Dry Fork mine is located on property adjacent to the
K-Fuel Facility.

CUSTOMERS

The K-Fuel Partnership has entered into contracts with affiliates of
American Electric Power, Inc. ("AEP"), a major U.S. electric utility, pursuant
to which AEP has agreed to conduct a "test burn" and to
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purchase an aggregate of 500,000 tons from the K-Fuel Facility over a three-year
period. AEP also has an option to purchase 100% of the K-Fuel Facility
production over a subsequent seven-year period upon the fulfillment of the
initial 500,000 tons. The option available to AEP may limit the interest of
other potential customers in entering into supply agreements with the Company.

COMPETITION

In the area of K-Fuel, to the Company's knowledge, there are currently no
competitors producing significant commercial quantities of beneficiated clean
coal fuel products either in the U.S. or internationally. However, there are
other clean coal technology companies that are developing or intend to develop
fuel combustion and product technologies to reduce emission pollutants and/or
increase the heating value of coal feedstock fuel sources. Many of these
companies have greater financial, technical and operational resources the
Company. The Company expects to compete with other naturally low-sulfur coals.
Also, SO(2) emissions credits or offsets allow non-compliance users of higher
sulfur coals to bundle coal purchases with emission credits to meet Clean Air
Act requirements. The Company expects to compete based on price, quality and
performance.

In the natural gas industry the Company expects to compete with many
companies, certain of which have substantially greater financial, technical and
operational resources than the Company.

ENVIRONMENTAL PROTECTION REGULATION

See "Business -- Clean Power Resources -- Regulatory Matters."

EMPLOYEES

As of May, 1998, the Company's clean fuel business employed a total of 21
employees. None of these employees are represented by a labor union, and the
Company, considers its relations with these employees to be good.

PROPERTIES

The Company's K-Fuel Facility is located on approximately 80 acres of land
inside the rail loop in Fort Union Mine, in Campbell County, Wyoming,
approximately 5 miles northeast of Gillette, Wyoming. The K-Fuel Facility is
comprised of three buildings totaling approximately 7,100 square feet. The
Company also rents office space in Houston, Texas and Dallas, Texas.

INTELLECTUAL PROPERTY

The K-Fuel Partnership has been granted, in exchange for certain future
contingent royalty payments, a nonexclusive right and license to use certain
patented clean coal technology owned by KFx, Inc.

BIOPESTICIDES

OVERVIEW

Through its majority-owned Thermo Trilogy subsidiary, the Company develops,
produces and markets a broad range of biopesticide products which are
increasingly being used as cost-effective alternatives or compliments to
conventional chemical-based pest control technologies. Biopesticides are highly
effective on targeted pests, but have little, if any, harmful effect on the
environment or on non-target organisms (including humans, livestock, and
wildlife) and are less prone to cause insect resistance than conventional
chemical pesticides. In addition, biopesticides are often cost-effective because
their early application preserves natural, beneficial insects, which precludes
the need for repeated chemical spraying.

The Company entered the biopesticides market through a series of
acquisitions. The Company's products address the $400 million biopesticides
market.

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In May 1996, the Company, through two of its wholly owned subsidiaries,
acquired the assets of the biopesticide division of W.R. Grace & Co. that
develops, manufactures, and markets environmentally friendly products used for
pest control, for approximately $8.1 million in cash and the assumption of
certain liabilities. In addition, the Company will pay a royalty fee of seven
percent on annual sales of the acquired business in excess of $14 million
through the year 2000. In January 1997, Thermo Trilogy acquired substantially
all of the assets of biosys, inc. through bankruptcy liquidation for
approximately $11.2 million and the assumption of certain liabilities. In
November 1997, Thermo Trilogy acquired the sprayable bacillus thuringiensis
(Bt)-biopesticide business of Novartis AG and its affiliate for approximately
$19.1 million in cash and the assumption of certain liabilities.

Through these acquisitions the Company has developed a broader product
portfolio than any other Company for its market. Products produced by Thermo
Trilogy include botanical extracts from the seed of tropical neem trees,
microbial-based pesticides (fungal-based insecticides and fungicides,
bacculovirus, beneficial nematodes, and Bts), insect pheromone-based products
such as traps and lures, and disease-free sugar cane planting stock. Thermo
Trilogy's products are used primarily by agricultural farmers, consumers, and
pest-control operators and are sold through various distribution channels
worldwide.

The biopesticide market is highly fragmented and the Company intends to
seek further acquisitions to strengthen and broaden its product offerings to
agricultural growers and consumers.

INDUSTRY

The worldwide pesticide market, composed primarily of herbicides,
insecticides and fungicides, is currently $28 billion. The insecticide market
alone is currently estimated at $8 billion with biopesticides accounting for
approximately 5% of that market. The biopesticides market has grown 15-20% per
year over the last several years. Insecticides are used primarily by the
agricultural industry to control pest infestation on crops ranging from large
acreage row crops such as cotton, corn and rice to lower acreage, high value
crops such as fruits, vegetables and nuts. Chemical pesticides have historically
dominated the market; however, more recently biopesticide products have been
gaining market acceptance.

The agricultural community is undergoing a trend towards integrated pest
management. This concept involves combining several pest control products and
techniques to maintain pests at acceptable levels while reducing costs to the
customer and harm to the environment and minimizing insect resistance build-up.
These techniques, which emphasize early monitoring and detection using pheromone
lures, and preservation of beneficial insects using "soft" products, involve the
use of biopesticides together with chemical pesticides.

The concerns regarding toxic, chemical pesticide residues in food and the
environment, the buildup of insect resistance to chemical pesticides and the
increasing adoption within the agricultural community of integrated pest
management practices have led to the increased use of environmentally friendly
biopesticides. Biopesticides are cost-effective alternatives because their early
application preserves natural, beneficial insects which allows growers to avoid
repeated spraying often necessary with chemical pesticide use.

Pesticides are strictly regulated by the EPA and foreign regulatory bodies.
In general, each pesticide product must receive a product registration, based on
extensive field studies and data requirements, before they can be sold to the
public. Biopesticide product approval generally requires less extensive testing
and field data than chemical pesticides because of their more limited effect on
humans and the environment. Typically, EPA approval for a new biopesticide
product will take two to three years and cost significantly less to obtain than
new chemical pesticide product approvals which can take five to ten years to
obtain. The higher costs and longer approval process associated with development
of chemical insecticides, along with increased insect resistance and other
pesticide market trends, have contributed to an increasing preference among
growers for the use of cost-effective biopesticide products as compared to
chemical pesticides.

Chemical insecticides are synthetic (man-made) chemicals which are highly
toxic to the target pest population. Although effective in controlling the
targeted pest population, chemical pesticides, because of their toxicity,
frequently kill a broader range of insects, including beneficial insects. In
addition, chemical pesticides may adversely affect plants and animals through
direct exposure to the insecticides or indirectly

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through the ingestion of food or water containing chemical pesticide residue.
Chemical pesticides are also slow to degrade and therefore have a longer
residual impact on the environment. Biopesticides, however, are naturally
occurring or are isolated from nature and are minimally toxic or non-toxic. The
active ingredient of biopesticides is derived, without significant purification
or modification, from a living microorganism. Unlike chemical pesticides,
biopesticides are usually target-specific and do not adversely affect the
broader insect population, including beneficial insects. Also, biopesticides are
highly biodegradable and photodegradable and thus have very little residual
impact on the environment. In addition, studies have shown that high levels of
chemical pesticide use over time may lead to a buildup in resistance by the
target pest population. To date, over 500 insect species have developed
resistance to one or more classes of chemical insecticides that were initially
effective at controlling such species. Typically, when resistance begins to
occur, pesticide users tend to apply higher concentrations of pesticides more
often which results in both increasingly resistant insect populations, greater
damage to the environment and higher costs. The harm to the environment caused
by chemical pesticides along with the build up of insect resistance have led to
increased demand for environmentally friendly biopesticides.

The widespread use of chemical insecticides over the last several decades
has raised public concerns regarding toxic chemical residue in foods including
fruits, vegetables, milk and meat, and increased environmental pollution
including contamination of drinking water sources. Consequently, U.S. and
foreign regulatory authorities have been enacting strict pesticide product
registration laws regulating the manufacture, sale and use of pesticides. These
laws also require ongoing regulatory compliance, including strict product
labeling. As a result, biopesticides are gaining more acceptance as alternatives
or complements to many chemical pesticides.

Biopesticide market participants historically consist primarily of niche
developmental units within large agrochemical companies and small start-up
biopesticide companies. The large chemical companies initially invested in
biopesticides because they viewed them as a potential alternative to chemical
insecticides. Start-up biopesticide companies proliferated in response to market
demand for environmentally friendly biopesticides. More recently, however, the
chemical industry has begun to consolidate and as a result large chemical
companies have begun to focus on their increasingly competitive core business of
large volume chemical pesticides. As a result, chemical companies are divesting
biopesticide product lines. Start-up biopesticide companies have made
significant investments in research and development focusing on the development
of narrow product lines but have not adequately invested in marketing and sales.
As a result, they often have failed to develop a critical mass of product
diversity and sales and marketing to sustain them long-term.

BUSINESS STRATEGY

The Company's strategy is to capitalize on industry trends of favoring
safer alternatives to chemicals and exploit business opportunities from the
consolidation of biopesticide market segments to become a leading full service
provider of biopesticide products and integrated pest management solutions. The
Company intends to achieve these goals by acquiring, developing and
commercializing a broader range of biopesticide products, expanding its sales
and marketing efforts, focusing such efforts on customer education and services,
and improving manufacturing efficiencies and techniques. The Company's strategy
includes the following elements:

Focus on High Value Product Markets. The Company directs its biopesticides
at protecting high value products including vegetables, fruits, nuts and
ornamental flowers. Biopesticides are cost-effective, particularly when used to
protect high value products, because their early application preserves natural,
beneficial insects which allows growers to avoid the repeated spraying often
necessary with chemical use.

Extend and Develop Product Portfolio. The Company plans to expand the
application of its line of commercial products to a broader variety of crops and
additional geographic regions. The Company intends to extend its product lines
and achieve market penetration in its target markets by working closely with
customers, primarily through extensive field testing. This will allow the
Company to develop and improve its products, demonstrate product efficacy,
identify and develop new products and techniques that address specific customer
needs and educate the customer on the benefits of biopesticides. The Company has
an extensive

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library of microbial strains/isolates that have potential for future product
development. The Company intends to develop new products or modify existing
products with these strains to cover a broader range of pests.

Acquisition Strategy. The Company intends to extend or supplement its
product offerings through strategic acquisitions. The biopesticide market is
highly fragmented. The Company has achieved a critical mass of product diversity
and operating infrastructure that will allow it to acquire smaller, limited
product companies that lack the resources to effectively market their narrow
product lines, as well as acquire the biopesticide product lines that larger
agrochemical companies are increasingly divesting. This will allow the Company
to offer customers a complete portfolio of products, while increasing operating
efficiencies and leveraging its distribution channels across a broader range of
product lines.

Improve Manufacturing Efficiencies. The Company believes that it can
achieve further cost savings and efficiencies by consolidating manufacturing
operations at its recently acquired Wasco, California facility and improving
proprietary process techniques.

Expand Sales and Marketing Efforts. The Company gained access to a global
distributor network with its acquisition of the Novartis Bt product line. The
Company intends to use this network to expand sales of its other product lines
internationally. In addition, the Company plans to expand sales by working
closely with customers to educate them on the benefits of biopesticides over
synthetic chemicals, identify and address specific customer needs while
gathering information to identify market trends.

PRODUCTS

The Company offers a broad range of pest control products that can be
characterized as follows:

Botanical Pesticides: Derived from the seeds of the tropical neem
tree, including azadirachtin, which is used in a broad spectrum of insect
control, and neem oil, which is effective in controlling plant diseases and
certain pests. These products currently represent approximately 16% of
Thermo Trilogy's sales.(1)

Microbial Pesticides: Natural microorganisms such as certain soil
bacteria (Bascillus thuringiensis or Bts), viruses and fungi which can be
isolated and used as pesticides. These products currently represent
approximately 55% of Thermo Trilogy's sales.(1)

Nematodes: Microscopic, parasitic worms which are effective against a
broad range of soil-inhabiting insects. These products currently represent
approximately 4% of Thermo Trilogy's sales.(1)

Pheromones: Naturally-occurring biochemicals that insects use to
communicate, which are used to disrupt mating patterns, for monitoring
levels of pest infestation or to lure insects into segregated areas for
destruction. These products currently represent approximately 20% of Thermo
Trilogy's sales.(1)

Other: The Company also sells other products, including proprietary,
disease-free sugarcane planting stocks that are sold to sugarcane growers.
These products currently represent approximately 5% of sales.(1)

The Company's customers are fruit, vegetable and ornamental flower growers
(85% of revenues) and professional pest control operators and consumers (15% of
revenues). The Company sells its products primarily through a worldwide network
of distributors. The Company manufactures its products through a combination of
Company-owned production facilities and third party manufacturers and
formulators.

The Company's current product and technology portfolio is derived from over
$100.0 million of research and development investment by the Company's
predecessors. The Company believes that its commercial and developing product
portfolio is sufficiently broad to support substantial internal growth. The
Company focuses its product development activities on broadening the usage of
its products through improving and demonstrating (primarily through extensive
field trials) their efficacy and cost-effectiveness. The Company has obtained

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

1Revenue data determined on a pro forma basis for the fiscal year ended
September 27, 1997 to include revenues from the Bt business acquired from
Novartis AG and its affiliates assuming such acquisition took place on September
29, 1996. Such amounts are not necessarily indicative of future operations.
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61 EPA registrations for its products and 55 product registrations in more than
65 foreign countries. The Company has numerous U.S. patents (and corresponding
foreign patents), and also has obtained licenses for over 20 additional patents
that are exclusive in the Company's field of use.

REGULATORY MATTERS

No pesticide may be manufactured, used or sold without federal and state
approvals. Such approvals, called registrations, must be obtained for each
individual product formulation for use on specific pests for specific crops.
Adding new uses, new pests, new crops or new formulations requires submission of
additional applications or data for approval.

The U.S. Environmental Protection Agency ("EPA") regulates pesticides under
the Federal Insecticide, Fungicide, and Rodenticide Act and implementing EPA
regulations. To obtain a pesticide registration from the EPA, the applicant must
submit extensive field test data evidencing product effectiveness, nontargeted
organism testing, environmental impact studies, residue chemistry, and toxicity
studies on plants and animals. Initial product registrations can take many years
to obtain, and an applicant may incur considerable additional delay and expense
if the EPA requests further testing and data. To promote the development and use
of biopesticides, the EPA has established special guidelines for their
registration which are set out in subdivision M of the EPA's Pesticide
Assessment Guidelines which generally require less time and expense than that
required for synthetic pesticides.

As a part of the pesticide registration process, the applicant must submit
labeling data describing the chemical composition of the pesticide,
concentrations, manufacturer directions for application, pest and crop use, and
cautionary and warning statements to be put on all packaging of the pesticides.
All pesticide packages must contain the approved label and no changes can be
made to the label without EPA approval.

Pesticide registrations must also be obtained from each state where the
pesticide will be sold. Some states such as California, which represents an
important market for the Company's products, have their own extensive testing
and pesticide registration procedures and may impose additional restrictions on
the use of the pesticide in such state beyond those imposed by the EPA
regulations. Other states simply follow the EPA registration and labeling
guidelines.

Foreign countries may also require extensive testing and data submission
before pesticides can be manufactured or sold in such foreign country. The
relevant regulations vary from country to country and may be stricter and more
difficult and costly to comply with than EPA's regulations. Some of the
Company's products are registered for sale in more than 65 countries.

The Company's activities may also be subject to regulation under other
state, federal, and foreign government laws and regulations governing employee
and public health and safety, environmental pollution, clean water, disposal of
hazardous wastes, manufacture of chemicals, product liability, food and
agriculture applications, and public disclosure of the use of chemicals.

RESEARCH AND DEVELOPMENT

The Company's principal research and development goal is to broaden usage
of its existing family of products through improving their efficacy and
cost-effectiveness and improve the range of application. The Company acquired
the benefit of over $100.0 million of research and development of its
predecessors. The Company has enough products in the pipeline to sustain
substantial internal growth. The Company's research and development activities
combine basic scientific disciplines, such as biochemistry, microbial genetics
and cellular physiology, with applied disciplines such as fermentation,
formulation, field evaluation and quality control. The goal is to improve
formulation, broaden usage through field testing and improve efficiencies of
products in development.

In addition, the Company is planning to complete development of products
currently in its product pipeline. One of the products in development is a
proprietary baculovirus (commonly known as the celery looper virus) for control
of a broad spectrum of worm pests in vegetables, cotton and other crops. The
Company anticipates introducing this product to the market in 1999. Another
product, a fungus-based product
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Paecilomyces fumosoroseus, is being developed by the Company as a foliar
mycoinsecticide (currently designated PFR-97). PFR-97 has obtained registration
approval in Europe and in the U.S. for control of whiteflies and aphids on
greenhouse-grown plants and is undergoing tests for registration in Japan.
Additional tests will be conducted to expand use on outdoor crops. In addition,
there are two new Bt products under development, one of which is expected to be
introduced in Asia within the next two years. In the last three years, the
Company has used over 100 university, USDA and private consultant researchers to
establish the necessary basic knowledge for product introduction. This includes
timing and method of application and optimum rate and formulation development.
Large-scale field development trials are usually carried out through
collaborative relationships with potential corporate partners, distributors and
growers.

The Company intends to continue conducting research and development
involving the screening and analysis of the more than 10,000 Bt
strains/isolates, representing significant historical research and development
efforts by its predecessors, for new products or for modifying existing products
that may fit a specific niche market. Dozens of isolates of nematodes,
baculoviruses and fungi are also available for screening programs. Using
advanced molecular, biochemical and fermentation techniques, a wide range of
products from the Bt strain library were introduced in the last 15 years in a
number of market segments.

INTELLECTUAL PROPERTY

The Company has numerous U.S. patents and corresponding foreign patents in
various areas related to process development, fermentation, formulation or
applications of current commercial products. Additionally, various patent
applications are pending in the U.S. and foreign countries. The Company also
relies on trade secrets and proprietary know-how which it seeks to protect
through confidentiality agreements with employees, collaborators and
consultants.

The Company's patent portfolio includes several patents related to Bt
technology. The Company has obtained licenses or sublicenses for a number of
patent families in areas related to Bt strain construction and formulation
development. The Company also relies on trade secret protection for its
extensive know-how in quality control.

The Company also has additional patents that have been granted for neem oil
and azadirachtin technologies. The Company also has patent positions covering
nematode and fungi technologies.

The Company has an exclusive license for the fungus PFR-97. Its commercial
development has been completed and product introduction is expected in 1998.
Additionally, the Company has a sublicense agreement for a unique strain of a
baculovirus from Novartis.

COMPETITION

The Company currently has no competition in the neem and azadirachtin-based
product market in the U.S. In the microbial pesticides market (Bts, viruses,
fungi) the Company has a number of competitors, including major chemical
companies. The pheromone market is fragmented and is comprised of dozens of
small competing companies. The Company has a significant share of the nematode
market and is the largest supplier of nematodes in the U.S. and Europe. The
Company's products compete primarily on performance, quality and price. The
Company also competes directly with large agrochemical companies which
manufacture chemical pesticides including Bayer, BASF, Dow Elanco, Novartis,
DuPont, Zeneca and Rhone-Poulenc.

BACKLOG

The Company maintains minimal backlog. Most orders are shipped out of
inventory within a short period of time.

FACILITIES

The Company owns an 80,000 square foot fermentation/formulation facility in
Wasco, California. The Company leases a 26,000 square foot building, in which it
has built a fermentation/formulation facility, in Decatur, Illinois. The
Company's wholly owned subsidiary in the U.K. leases a 20,000 square foot
pheromone

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trap and lure manufacturing facility. The Company's Thermo Trilogy subsidiary's
corporate headquarters is currently located in Columbia, Maryland where it
leases approximately 25,000 square feet of space for office, laboratory and
warehouse use.

EMPLOYEES

Thermo Trilogy has approximately 106 employees in the U.S. and 72 full-time
employees in the U.K. Approximately 20 employees are engaged in research and
development, 113 are in manufacturing and production and 45 are in sales,
service and general management. The Company has had no work stoppages and
considers its relations with employees to be good.

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RELATIONSHIP WITH THERMO ELECTRON

The Company operated as a segment of the Energy Systems Division of Thermo
Electron from 1979 until its incorporation as Thermo Energy Systems Inc. in
Delaware in November 1989. Upon the Company's incorporation, Thermo Electron
transferred certain of the assets and business of the Division to the Company in
exchange for 15,750,000 shares of the Company's Common Stock and the assumption
by the Company of certain liabilities of the Division. In December 1994, the
name of the Company was changed to Thermo Ecotek Corporation. As of May 8, 1998,
Thermo Electron beneficially owned approximately 92% of the Company's
outstanding Common Stock.

Thermo Electron has adopted a strategy of selling a minority interest in
subsidiary companies to outside investors as an important tool in its future
development. As part of this strategy, Thermo Electron and certain of its
subsidiaries have created several privately and publicly held subsidiaries,
including the Company. From time to time, Thermo Electron and its subsidiaries
will create other majority-owned subsidiaries as part of its spin-out strategy.
(The Company and the other Thermo Electron subsidiaries are hereinafter referred
to as the "Thermo Subsidiaries.")

Thermo Electron and its subsidiaries develop, manufacture and market
environmental monitoring and analysis instruments and manufacture biomedical
products including heart-assist devices and mammography systems, papermaking and
recycling equipment, alternative-energy systems and other specialized products
and technologies. Thermo Electron and its subsidiaries also provide
environmental and metallurgical services and conduct advanced technology
research and development. For its fiscal year ended January 3, 1998, Thermo
Electron had consolidated revenues of $3.6 billion and consolidated net income
of $239.3 million.

See "Risk Factors -- Potential Conflicts of Interest."

THE THERMO ELECTRON CORPORATE CHARTER

Thermo Electron and the Thermo Subsidiaries recognize that the benefits and
support they derive from their affiliation are essential elements of their
individual performance. Accordingly, Thermo Electron and each of the Thermo
Subsidiaries adopted the Thermo Electron Corporate Charter (the "Charter") to
define the relationships and delineate the nature of such cooperation among
themselves. The purpose of the Charter is to ensure that (i) all of the
companies and their stockholders are treated consistently and fairly, (ii) the
scope and nature of the cooperation among the companies, and each company's
responsibilities, are adequately defined, (iii) each company has access to the
combined resources and financial, managerial and technological strengths of the
others and (iv) Thermo Electron and the Thermo Subsidiaries, in the aggregate,
are able to obtain the most favorable terms from outside parties.

To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the "Thermo Group")
to external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the formulation of
long-range planning and providing other banking and credit services. Pursuant to
the Charter, Thermo Electron may also provide guarantees of debt obligations of
the Thermo Subsidiaries or may obtain external financing at the parent level for
the benefit of the Thermo Subsidiaries. In certain instances, the Thermo
Subsidiaries may provide credit support to, or on behalf of, the consolidated
entity or may obtain financing directly from external financing sources. Under
the Charter, Thermo Electron is responsible for determining that the Thermo
Group remains in compliance with all covenants imposed by external financing
sources, including covenants related to borrowings of Thermo Electron or other
members of the Thermo Group, and for apportioning such constraints within the
Thermo Group. In addition, Thermo Electron establishes certain internal policies
and procedures applicable to members of the Thermo Group. The cost of the
services provided by Thermo Electron to the Thermo Subsidiaries is covered under
existing corporate services agreements between Thermo Electron and each of the
Thermo Subsidiaries.
50
<PAGE> 52

The Charter presently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participates. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the Company, can withdraw from participation in the Charter upon 30
days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement in effect between the
withdrawing company and Thermo Electron. The withdrawal from participation does
not terminate outstanding commitments to third parties made by the withdrawing
company, or by Thermo Electron or other members of the Thermo Group, prior to
the withdrawal. However, a withdrawing company is required to continue to comply
with all policies and procedures applicable to the Thermo Group and to provide
certain administrative functions mandated by Thermo Electron so long as the
withdrawing company is controlled by or affiliated with Thermo Electron.

CORPORATE SERVICES AGREEMENT

As provided in the Charter, the Company and Thermo Electron have entered
into a Corporate Services Agreement (the "Services Agreement") under which
Thermo Electron's corporate staff provides certain administrative services,
including certain legal advice and services, risk management, certain employee
benefit administration, tax advice and preparation of tax returns, centralized
cash management and certain financial and other services to the Company. The
annual fee for these services was equal to 1% of the Company's revenues for 1997
and will decrease to 0.8% of revenues for 1998. For these services, the Company
was charged $1.3 million, $1.6 million and $1.8 million in fiscal 1995, 1996 and
1997, respectively. The fee is reviewed annually and may be changed by mutual
agreement of the Company and Thermo Electron.

Management believes that the service fees charged under the Services
Agreement are reasonable and that the terms of the Services Agreement are fair
to the Company. For items such as employee benefit plans, insurance coverage and
other identifiable costs, Thermo Electron charges the Company based on charges
directly attributable to the Company. The Services Agreement automatically
renews for successive one-year terms, unless canceled by the Company upon 30
days' prior written notice. In addition, the Services Agreement terminates
automatically in the event the Company ceases to be a member of the Thermo Group
or ceases to be a participant in the Charter. In the event of a termination of
the Services Agreement, the Company will be required to pay a termination fee
equal to the fee that was paid by the Company for services under the Services
Agreement for the nine-month period prior to termination. Following termination,
Thermo Electron may provide certain administrative services on an as-requested
basis by the Company or as required in order to meet the Company's obligations
under Thermo Electron's policies and procedures. Thermo Electron will charge the
Company a fee equal to the market rate for comparable services if such services
are provided following termination.

TAX ALLOCATION AGREEMENT

The Company and Thermo Electron have a Tax Allocation Agreement ("Tax
Allocation Agreement") under which the Company is included in the consolidated
federal and certain state income tax returns filed by Thermo Electron. The Tax
Allocation Agreement provides that Thermo Electron charges or pays the Company
amounts based on the Company's relative contribution to Thermo Electron's tax
liability. If in any year the Company incurs a loss or generates a tax credit,
Thermo Electron shall pay the Company the amount of such benefit realized by
Thermo Electron attributable to such loss or tax credit on the earlier of (i)
the year in which the Company would have obtained a tax benefit from such loss
or tax credit if the Company had filed separate federal income tax returns or
(ii) the year in which the applicable carry-forward period with respect to such
loss or tax credit expires. In fiscal 1997, the Company owed Thermo Electron a
net tax amount of $2.0 million under the Tax Allocation Agreement, which payment
was made by reducing the aggregate amount due to it from Thermo Electron under
the Tax Allocation Agreement. As of September 27, 1997, the aggregate amount due
to the Company from Thermo Electron pursuant to the Tax Allocation Agreement is
$10.2 million, subject to the payment conditions set forth therein.

51
<PAGE> 53

RELATED PARTY TRANSACTIONS

On May 6, 1998 Thermo Electron converted its 4.0% Subordinated Convertible
Debentures due January 2001 in the aggregate principal amount of $68.5 million
into 10,821,485 shares of Common Stock at a conversion rate of $6.33 per share.
Thermo Electron currently beneficially owns approximately 92% of the outstanding
shares of Common Stock. Thermo Electron intends for the foreseeable future to
maintain at least 80% ownership of the Company. This may require the purchase by
Thermo Electron of additional shares of Common Stock from time to time as the
number of outstanding shares issued by the Company increases. These and other
purchases may be made either on the open market, through conversion of
convertible debentures held by Thermo Electron or directly from the Company.

At April 4, 1998, the Company owed Thermo Electron and its other
subsidiaries an aggregate of $1.2 million for amounts due under the Corporate
Services Agreement and related administrative charges, and for miscellaneous
items, excluding loans described above. The largest amount of net indebtedness
owed by the Company to Thermo Electron and its other subsidiaries since
September 29, 1996, was $1.3 million. These amounts do not bear interest and are
expected to be paid in the normal course of business.

As of April 4, 1998, $35.9 million of the Company's cash equivalents were
invested in a repurchase agreement with Thermo Electron. Under this agreement,
the Company in effect lends excess cash to Thermo Electron that Thermo Electron
collateralizes with investments principally consisting of U.S. government-
agency securities, corporate notes, commercial paper, money market funds and
other marketable securities, in the amount of at least 103% of such obligation.
The Company's funds subject to the repurchase agreement will be readily
convertible into cash by the Company. The repurchase agreement earns interest at
a rate based on the 90-day Commercial Paper Composite Rate for 90-day maturities
plus 25 basis points, set at the beginning of each quarter.

STOCK HOLDING ASSISTANCE PLAN

In 1996, the Company adopted a stock holding policy which requires its
executive officers to acquire and hold a minimum number of shares of Common
Stock. In order to assist the executive officers in complying with the policy,
the Company also adopted a Stock Holding Assistance Plan under which it may make
interest-free loans to certain key employees, including its executive officers,
to enable such employees to purchase the Common Stock in the open market. No
such loans are currently outstanding under the plan.

52
<PAGE> 54

MANAGEMENT

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Frank Jungers.......... 71 Chairman of the Board and Director
Brian D. Holt.......... 49 President, Chief Executive Officer and Director
John N. Hatsopoulos.... 64 Senior Vice President, Chief Financial Officer and Director
Parimal S. Patel....... 54 Executive Vice President
Floyd M. Gent.......... 47 Vice President
John T. Miller......... 52 Vice President
Randall W. Miselis..... 44 Vice President
Paul Kelleher.......... 55 Chief Accounting Officer
Jerry P. Davis......... 65 Director
George N. 71 Director
Hatsopoulos..........
William A. Rainville... 56 Director
Susan F. Tierney....... 46 Director
</TABLE>

All of the Company's directors are elected annually by the stockholders and
hold office until their respective successors are duly elected and qualified.
Executive officers are elected annually by the Board of Directors and serve at
its discretion.

Frank Jungers has been a director of the Company since its inception in
1989 and its Chairman of the Board since January 1997. Mr. Jungers has been a
self-employed consultant on business and energy matters since 1977. Mr. Jungers
was employed by the Arabian American Oil Company from 1974 through 1977 as
Chairman and Chief Executive Officer. Mr. Jungers is also a director of The AES
Corporation, Donaldson, Lufkin & Jenrette, Georgia-Pacific Corporation, Thermo
Electron and ThermoQuest Corporation.

Brian D. Holt has been a director of the Company since January 1995 and
President and Chief Executive Officer of the Company since February 1994. For
more than five years prior to his appointment as an officer of the Company, he
was President and Chief Executive Officer of Pacific Generation Company, a
financier, builder, owner and operator of independent power facilities. Mr. Holt
is also a director of KFx, Inc. and Thermo TerraTech Inc.

John N. Hatsopoulos has been a director of the Company since 1990, its
Chief Financial Officer since its inception in 1989, and a Senior Vice President
since 1997. From 1989 until 1997, he also served as a Vice President of the
Company. Mr. Hatsopoulos has been the President of Thermo Electron since January
1997 and its Chief Financial Officer since 1988. Prior to his appointment as
President of Thermo Electron, he served as an Executive Vice President since
1986. Mr. Hatsopoulos is also a director of LOIS/USA Inc., ONIX Systems Inc.,
Thermo Electron, Thermedics Inc., Thermo Fibertek Inc., Thermo Instrument
Systems Inc., Thermo Power Corporation, Thermo TerraTech Inc. and Thermo Vision
Corporation. Mr. Hatsopoulos is the brother of Dr. George N. Hatsopoulos, a
director of the Company.

Parimal S. Patel has been Executive Vice President of the Company since
1981. Prior to 1981, he worked for Thermo Electron since 1970 in various
technical, marketing and program manager capacities.

Floyd M. Gent has been a Vice President of the Company since September
1994. For more than five years prior to that time, Mr. Gent held various
positions, most recently as Executive Vice President, at KTI Environmental
Group, a developer, owner, and operator of waste-to-energy plants.

John T. Miller has been a Vice President of the Company since March 1998.
Prior to joining the Company, he served as President and Chief Executive Officer
of Pacific Generation Company from 1994 to 1998, overseeing its expansion into
international generation projects. From 1990 to 1994, he served as Vice
President of Business Development of Pacific Generation Company, and from 1987
to 1990, he served as its Vice President of Operations.

53
<PAGE> 55

Randall W. Miselis has been a Vice President of the Company since 1996 and
has worked for the Company in various accounting capacities since November 1988.

Paul F. Kelleher has been the Chief Accounting Officer of the Company since
its inception in November 1989. Mr. Kelleher has been Senior Vice President,
Finance and Administration, of Thermo Electron since June 1997, and served as
its Vice President, Finance from 1987 until 1997, and as its Controller from
1982 to January 1996. He is a director of ThermoLase Corporation.

Jerry P. Davis has been a director of the Company since its inception in
1989. He also served as the Chairman of the Board of the Company from February
1994 to January 1997, and as the Company's President and Chief Executive Officer
from 1989 until February 1994. Mr. Davis was also a Vice President of Thermo
Electron from January 1986 through December 1996.

George N. Hatsopoulos has been a director of the Company since its
inception in 1989. Dr. Hatsopoulos has been the Chairman of the Board and Chief
Executive Officer of Thermo Electron since 1956. He also served as the President
of Thermo Electron from 1956 until January 1997. Dr. Hatsopoulos is also a
director of Photoelectron Corporation, Thermedics Inc., Thermo Electron, Thermo
Fibertek Inc., Thermo Instrument Systems Inc., Thermo Optek Corporation,
ThermoQuest Corporation and ThermoTrex Corporation. Dr. Hatsopoulos is the
brother of Mr. John Hatsopoulos, a Director, Senior Vice President and Chief
Financial Officer of the Company.

William A. Rainville has been a director of the Company since November
1995. He has been President and Chief Executive Officer of Thermo Fibertek Inc.,
a majority-owned subsidiary of Thermo Electron that develops and manufactures
equipment and products for the papermaking and paper-recycling industries, since
its inception in 1991; a Senior Vice President of Thermo Electron since March
1993; and a Vice President of Thermo Electron from 1986 to 1993. From 1984 until
January 1993, Mr. Rainville was the President and Chief Executive Officer of
Thermo Electron Web Systems Inc., a subsidiary of Thermo Fibertek Inc. Mr.
Rainville is also a director of Thermo Fibergen Inc., Thermo Fibertek Inc.,
Thermo Remediation Inc. and Thermo TerraTech Inc.

Susan F. Tierney has been a director of the Company since March 1996. Dr.
Tierney is a partner with the Economics Resource Group, an economics/policy
consulting firm. From March 1993 to May 1993, Dr. Tierney was a consultant for
the U.S. Department of Energy, and from May 1993 to July 1995, she served as
Assistant Secretary for Policy for the U.S. Department of Energy. Prior to that
appointment, Dr. Tierney served as Secretary of Environmental Affairs for the
Commonwealth of Massachusetts from January 1991 to March 1993 and as
Commissioner of the Department of Public Utilities for the Commonwealth of
Massachusetts from 1988 to January 1991. Dr. Tierney is also a director of The
Randers Group Incorporated.

54
<PAGE> 56

DESCRIPTION OF CAPITAL STOCK

As of April 4, 1998, the Company had 50,000,000 shares of Common Stock
authorized for issuance, of which 24,568,532 were issued and outstanding. Each
share of Common Stock is entitled to pro rata participation in distributions
upon liquidation and to one vote on all matters submitted to a vote of
stockholders. Dividends may be paid to the holders of Common Stock when and if
declared by the Board of Directors out of funds legally available therefor.
Holders of Common Stock have no preemptive or similar rights. The outstanding
shares of Common Stock are, and the shares offered hereby when issued will be,
legally issued, fully paid and nonassessable.

The shares of Common Stock have noncumulative voting rights, which means
that the holders of more than 50% of the shares voting can elect all the
directors if they so choose, and in such event, the holders of the remaining
shares cannot elect any directors. Prior to the Offering, Thermo Electron
beneficially owned 33,158,545 shares of Common Stock, which represented
approximately 92% of the outstanding Common Stock. Upon completion of the
Offering, Thermo Electron will continue to beneficially own at least 81% of the
outstanding Common Stock, and will have the power to elect all of the members of
the Company's Board of Directors.

The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts or omissions that involve intentional misconduct or a
knowing violation of law. The Company's Certificate of Incorporation also
contains provisions to indemnify the directors and officers of the Company to
the fullest extent permitted by the General Corporation Law of Delaware. The
Company believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors and officers.

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

55
<PAGE> 57

UNDERWRITING

The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Smith Barney Inc. and CIBC Oppenheimer Corp. are acting
as representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions contained in an underwriting agreement among the
Company and the Representatives (the "Underwriting Agreement"), to purchase from
the Company the number of shares of Common Stock set forth below opposite their
respective names:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated..........................
Smith Barney Inc. ..........................................
CIBC Oppenheimer Corp.......................................

---------
Total....................................................... 4,500,000
=========
</TABLE>

The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
Thermo Electron intends to purchase 300,000 shares of Common Stock in this
Offering.

The Underwriters, through their Representatives, have advised the Company
that they propose to offer the Common Stock initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters may
allow to selected dealers a concession of $ per share; and that such dealers
may reallow a concession of $ per share to certain other dealers. After the
Offering, the public offering price and the concessions may be changed by the
Representatives.

The Company has granted to the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
675,000 additional shares of Common Stock at the public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering any over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to 4,500,000.

The Company and Thermo Electron or any subsidiary of Thermo Electron have
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition, or enter into any
transaction which is designed to, or might reasonably be expected to, result in
the disposition) of any shares of Common Stock or any securities convertible
into, or exchangeable for, shares of Common Stock without the prior written
consent of Prudential Securities Incorporated on behalf of the Underwriters, for
a period of 180 days after the date of this Prospectus, (except for the issuance
of shares of Common Stock or the grant of options with respect to any shares of
Common Stock pursuant to existing stock option, purchase and compensation plans,
or upon conversion of any currently outstanding convertible securities or the
issuance of shares of Common Stock as consideration for the acquisition of one
or more businesses provided that such Common Stock may not be resold prior to
the expiration of the 180-day period referenced above, or sales of shares of
Common Stock by the Company to Thermo Electron).

56
<PAGE> 58

The Company and Thermo Electron have agreed to indemnify the several
Underwriters or contribute to any losses arising out of certain liabilities,
including liabilities under the Securities Act.

In connection with the Offering, certain Underwriters (and selling group
members if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 675,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or any selling group member
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.

LEGAL OPINIONS

The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Seth H. Hoogasian, Esq., General Counsel of
Thermo Electron and the Company, and certain legal matters will be passed upon
for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Mr. Hoogasian, who is an officer of Thermo Electron and the Company, owns or has
the right to acquire 14,569 shares of Common Stock of the Company and 108,764
shares of common stock of Thermo Electron.

EXPERTS

The financial statements of the Company included or incorporated by
reference in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, to the extent and for the periods as indicated
in their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.

The financial statements of biosys, inc. as of December 31, 1996 and 1995
and for each of the two years in the period ended December 31, 1996 included in
this Prospectus have been so included in reliance on the report, dated August 7,
1997 (which contains explanatory paragraphs relating to biosys, inc.'s ability
to continue as a going concern, filing for relief under Chapter 11 of the U.S.
Bankruptcy Code and subsequent sale of substantially all of its assets) of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.

The Company agrees to indemnify Price Waterhouse LLP for the payment of all
legal costs and expenses incurred in Price Waterhouse LLP's successful defense
of any legal action or proceeding that arises as a result of inclusion of Price
Waterhouse LLP's audit report on the biosys, inc. past financial statements in
the filing of this Form S-2 with the Securities and Exchange Commission.

57
<PAGE> 59

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, DC 20549; and at the Commission's regional offices at
500 West Madison Street, Chicago, Illinois 60661; and 7 World Trade Center, New
York, New York 10048. Copies of such material can be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates. The Commission also maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Company; the address of such Web site is http://www.sec.gov. The
Common Stock is listed on the American Stock Exchange, and such material that
relates to the Company may also be inspected at the offices of the American
Stock Exchange, 86 Trinity Place, New York, New York 10006.

The Company has filed with the Commission a Registration Statement on Form
S-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act, of which this Prospectus
constitutes a part. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the Commission by the Company (File No.
1-13572) are hereby incorporated by reference into this Prospectus:

(a) Annual Report on Form 10-K for the fiscal year ended September 27,
1997;

(b) Quarterly Report on Form 10-Q for the fiscal quarter ended January
3, 1998; and

The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference (other
than certain exhibits to such documents). Requests for such copies should be
directed to Sandra L. Lambert, Secretary, Thermo Ecotek Corporation, 81 Wyman
Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046 (telephone: (781)
622-1000).

58
<PAGE> 60

THERMO ECOTEK CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THERMO ECOTEK CORPORATION
Report of Independent Public Accountants.................. F-2
Consolidated Statement of Income for the nine months ended
September 30, 1995, the fiscal years ended September
30, 1995, September 28, 1996, and September 27, 1997,
and the six months ended March 29, 1997, and April 4,
1998................................................... F-3
Consolidated Balance Sheet as of September 28, 1996,
September 27, 1997, and April 4, 1998.................. F-4
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1995, the fiscal years ended
September 30, 1995, September 28, 1996, and September
27, 1997, and the six months ended March 29, 1997, and
April 4, 1998.......................................... F-5
Consolidated Statement of Shareholders' Investment for the
fiscal years ended September 30, 1995, September 28,
1996, and September 27, 1997, and the six months ended
April 4, 1998.......................................... F-6
Notes to Consolidated Financial Statements................ F-7

BIOSYS INC.
Report of Independent Public Accountants.................. F-25
Consolidated Balance Sheets of Discontinued Operations as
of December 31, 1995 and 1996.......................... F-26
Consolidated Statements of Discontinued Operations for the
years ended December 31, 1995 and 1996................. F-27
Consolidated Statements of Cash Flows of Discontinued
Operations for the years ended December 31, 1995 and
1996................................................... F-28
Consolidated Statements of Shareholders Equity (Deficit)
of Discontinued Operations for the years ended December
31, 1995 and 1996...................................... F-29
Notes to Consolidated Financial Statements................ F-30

PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF THERMO
ECOTEK CORPORATION AND BIOSYS INC.
Pro Forma Condensed Statement of Income for the year ended
September 27, 1997..................................... F-44
Note to Pro Forma Combined Condensed Statement of
Income................................................. F-45
</TABLE>

F-1
<PAGE> 61

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Thermo Ecotek Corporation:

We have audited the accompanying consolidated balance sheet of Thermo
Ecotek Corporation (a Delaware corporation and 87%-owned subsidiary of Thermo
Electron Corporation) and subsidiaries as of September 28, 1996, and September
27, 1997, and the related consolidated statements of income, shareholders'
investment, and cash flows for the nine months ended September 30, 1995, and for
the years ended September 28, 1996, and September 27, 1997. These 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 financial position of Thermo
Ecotek Corporation and subsidiaries as of September 28, 1996, and September 27,
1997, and the results of their operations and their cash flows for the nine
months ended September 30, 1995, and the years ended September 28, 1996, and
September 27, 1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
November 3, 1997
(except with respect to the matters discussed in
Note 15, as to which the date is May 6, 1998)

F-2
<PAGE> 62

THERMO ECOTEK CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR ENDED SIX MONTHS ENDED
----------- ----------------------------------- --------------------
SEPT. 30, SEPT. 30, SEPT. 28, SEPT. 27, MARCH 29, APRIL 4,
1995 1995 1996 1997 1997 1998
----------- ----------- --------- --------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES (Notes 10 and 12).................. $107,139 $139,319 $150,076 $180,191 $77,188 $95,016
-------- -------- -------- -------- ------- -------
Costs and Operating Expenses:
Cost of revenues (includes $3,223, $4,689,
$4,952, $4,545, $2,605, and $2,966 to
related parties; Notes 7 and 8)......... 74,097 98,822 101,883 113,236 55,135 65,040
Selling, general, and administrative
expenses (includes $1,429, $1,885,
$1,759, $1,802, $799, and $856 to
related parties; Notes 7 and 8)......... 7,856 9,307 11,525 18,260 8,026 11,672
Research and development expenses......... -- -- 693 1,597 569 1,389
-------- -------- -------- -------- ------- -------
81,953 108,129 114,101 133,093 63,730 78,101
-------- -------- -------- -------- ------- -------
Operating Income............................ 25,186 31,190 35,975 47,098 13,458 16,915
Interest Income............................. 2,820 3,340 5,104 5,089 2,262 2,370
Interest Expense (includes $2,055, $2,740,
$2,740, $2,740, $1,370, and $1,370 to
parent company)........................... (10,567) (13,333) (14,727) (13,926) (6,644) (6,768)
Gain on Issuance of Stock by Subsidiary
(Note 15)................................. -- -- -- -- -- 6,269
Equity in Earnings (Loss) of Joint
Venture................................... -- -- (26) 33 126 123
-------- -------- -------- -------- ------- -------
Income Before Provision for Income Taxes and
Minority Interest......................... 17,439 21,197 26,326 38,294 9,202 18,909
Provision for Income Taxes (Note 6)......... 6,027 7,200 7,271 14,415 3,358 4,609
Minority Interest Expense................... 1,148 1,457 1,275 1,334 592 844
-------- -------- -------- -------- ------- -------
NET INCOME.................................. $ 10,264 $ 12,540 $ 17,780 $ 22,545 $ 5,252 $13,456
======== ======== ======== ======== ======= =======
EARNINGS PER SHARE (Note 15):
Basic..................................... $ .46 $ .58 $ .76 $ .92 $ .21 $ .55
======== ======== ======== ======== ======= =======
Diluted................................... $ .34 $ .43 $ .54 $ .64 $ .16 $ .38
======== ======== ======== ======== ======= =======
WEIGHTED AVERAGE SHARES (Note 15):
Basic..................................... 22,477 21,796 23,528 24,613 24,772 24,460
======== ======== ======== ======== ======= =======
Diluted................................... 33,815 33,014 36,292 38,740 37,872 39,261
======== ======== ======== ======== ======= =======
</TABLE>

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

F-3
<PAGE> 63

THERMO ECOTEK CORPORATION

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPT. 28, SEPT. 27, APR. 4,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (includes $53,250, $69,309, and
$35,925 under repurchase agreement with related
party).................................................. $ 63,238 $ 83,540 $ 46,465
Restricted funds.......................................... 18,936 20,773 14,423
Accounts receivable and unbilled revenues................. 28,061 33,039 36,655
Inventories............................................... 11,299 13,916 23,608
Prepaid income taxes (Note 6)............................. 2,016 4,298 4,467
Other current assets...................................... 2,937 1,728 2,748
-------- -------- --------
126,487 157,294 128,366
-------- -------- --------
Property, Plant, and Equipment, Net......................... 262,766 263,067 292,848
-------- -------- --------
Due from Parent Company (Note 6)............................ 12,116 10,164 10,164
-------- -------- --------
Long-term Available-for-sale Investments, at Quoted Market
Value (amortized cost of $6,004, $8,504, and $8,504;
Note 2)................................................... 20,254 12,497 14,613
-------- -------- --------
Restricted Funds............................................ 14,112 20,905 21,457
-------- -------- --------
Other Assets................................................ 13,410 21,378 19,078
-------- -------- --------
$449,145 $485,305 $486,526
======== ======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term obligations (Note 11)........ $ 24,806 $ 35,012 $ 31,308
Accounts payable.......................................... 1,517 4,031 5,482
Lease obligations payable................................. 1,812 1,736 1,697
Accrued interest.......................................... 3,159 3,524 2,915
Accrued income taxes (Note 6)............................. 1,858 2,057 2,057
Other accrued expenses.................................... 15,532 18,965 18,456
Due to parent company..................................... 1,586 1,255 1,172
-------- -------- --------
50,270 66,580 63,087
-------- -------- --------
Long-term Obligations (Note 11):
Nonrecourse tax-exempt obligations........................ 77,900 51,800 37,600
Subordinated convertible debentures (includes $68,500 due
to parent company)...................................... 100,227 130,648 122,095
Capital lease obligations................................. 31,154 22,242 15,484
-------- -------- --------
209,281 204,690 175,179
-------- -------- --------
Deferred Income Taxes (Note 6).............................. 42,633 49,934 57,660
-------- -------- --------
Other Deferred Items (Note 10).............................. 13,958 13,521 17,825
-------- -------- --------
Minority Interest........................................... 3,316 3,304 12,262
-------- -------- --------
Commitments and Contingencies (Notes 3, 7, 8, and 9)
Shareholders' Investment (Notes 4 and 5):
Common stock, $.10 par value, 50,000,000 shares
authorized; 16,174,636, 25,978,198, and 26,616,445
shares issued........................................... 1,617 2,598 2,662
Capital in excess of par value............................ 74,740 95,573 103,335
Retained earnings......................................... 45,048 67,593 81,049
Treasury stock at cost, 21,413, 1,477,250, and 2,047,913
shares.................................................. (481) (20,872) (30,265)
Cumulative translation adjustment......................... -- (52) 6
Net unrealized gain on available-for-sale investments
(Note 2)................................................ 8,763 2,436 3,726
-------- -------- --------
129,687 147,276 160,513
-------- -------- --------
$449,145 $485,305 $486,526
======== ======== ========
</TABLE>

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

F-4
<PAGE> 64

THERMO ECOTEK CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
ENDED FISCAL YEAR ENDED ENDED
----------- ----------------------------------- --------------------
SEPT. 30, SEPT. 30, SEPT. 28, SEPT. 27, MARCH 29, APRIL 4,
1995 1995 1996 1997 1997 1998
----------- ----------- --------- --------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $ 10,264 $ 12,540 $ 17,780 $ 22,545 $ 5,252 $ 13,456
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest expense............................ 1,148 1,457 1,275 1,334 592 844
Depreciation and amortization........................ 12,752 15,239 20,425 21,618 10,439 11,396
Gain on issuance of stock by subsidiary (Note 15).... -- -- -- -- -- (6,269)
Deferred revenue (Note 10)........................... -- -- -- (8,200) -- --
Deferred income tax expense (Note 6)................. 3,987 6,088 3,086 10,715 3,358 4,599
Changes in current accounts, excluding the effect of
acquisitions:
Restricted funds................................... 3,453 2,038 (6,944) (1,837) 6,576 6,350
Accounts receivable and unbilled revenues.......... (11,050) (3,236) (2,130) (3,740) 6,244 (3,533)
Inventories........................................ 582 (1,078) 1,584 (1,371) (2,343) (918)
Other current assets............................... 3,418 5,423 544 1,229 (641) (1,019)
Accounts payable................................... (931) (969) 148 2,457 663 1,411
Lease obligations payable.......................... (1,668) 879 389 (602) (301) (302)
Due (to) from parent company....................... (91) (874) 5,319 3,170 (778) (83)
Other current liabilities.......................... 3,572 2,787 3,599 201 (991) (1,523)
Other.............................................. 720 (77) 26 -- -- --
-------- -------- -------- -------- -------- --------
Net cash provided by operating activities.............. 26,156 40,217 45,101 47,519 28,070 24,409
-------- -------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (Notes 3
and 15)............................................ -- -- (8,088) (10,865) (10,865) (19,100)
Funding of long-term restricted funds................ (7,907) (10,485) (2,073) (6,793) (2,315) (552)
Increase in other deferred items..................... -- -- -- 8,476 2,555 4,567
Increase in other assets............................. (2,030) (2,030) (3,004) (2,452) (2,500) (270)
Purchases of property, plant, and equipment
(Note 15).......................................... (5,350) (5,472) (36,587) (17,710) (8,190) (25,742)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities.................. (15,287) (17,987) (49,752) (29,344) (21,315) (41,097)
-------- -------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of subordinated
convertible debentures (Note 11)................... -- -- 35,942 48,470 -- --
Repayment of long-term obligations................... (3,400) (11,200) (14,100) (16,800) (16,000) (18,400)
Payments under capital lease obligations............. (2,649) (2,649) (7,191) (8,006) (5,842) (6,298)
Net proceeds from issuance of Company and subsidiary
common stock (Notes 4 and 15)...................... 27,598 27,598 6,247 698 1,328 15,349
Payment of withholding taxes related to stock option
exercises.......................................... (23) (23) (1,221) (1,115) (557) (305)
Repurchases of Company common stock.................. -- -- -- (19,743) (879) (10,248)
Distribution to minority partner..................... (1,060) (1,598) (947) (1,346) (607) (533)
Due from parent company.............................. -- 542 -- -- -- --
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing activities.... 20,466 12,670 18,730 2,158 (22,557) (20,435)
-------- -------- -------- -------- -------- --------
Exchange Rate Effect on Cash........................... -- -- -- (31) (9) 48
-------- -------- -------- -------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents....... 31,335 34,900 14,079 20,302 (15,811) (37,075)
Cash and Cash Equivalents at Beginning of Period....... 17,824 14,259 49,159 63,238 63,238 83,540
-------- -------- -------- -------- -------- --------
Cash and Cash Equivalents at End of Period............. $ 49,159 $ 49,159 $ 63,238 $ 83,540 $ 47,427 $ 46,465
======== ======== ======== ======== ======== ========
CASH PAID FOR:
Interest............................................. $ 11,409 $ 12,310 $ 14,267 $ 13,100 $ 6,562 $ 6,341
Income taxes......................................... $ 25 $ 26 $ 101 $ 7 $ 102 $ --
NONCASH ACTIVITIES:
Acquisition of asset under capital lease............. $ 47,020 $ 47,020 $ -- $ -- $ -- $ --
Reduction in lease obligations payable............... 1,980 1,980 -- -- -- --
-------- -------- -------- -------- -------- --------
Assumption of obligations under capital lease...... $ 49,000 $ 49,000 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Fair value of assets of acquired companies........... $ -- $ -- $ 8,983 $ 15,183 $ 15,183 $ 20,025
Cash paid for acquired companies..................... -- -- (8,088) (11,223) (11,223) (19,100)
-------- -------- -------- -------- -------- --------
Liabilities assumed of acquired companies.......... $ -- $ -- $ 895 $ 3,960 $ 3,960 $ 925
======== ======== ======== ======== ======== ========
Conversions of subordinated convertible debentures... $ -- $ -- $ 5,273 $ 19,579 $ 10,467 $ 8,553
======== ======== ======== ======== ======== ========
</TABLE>

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

F-5
<PAGE> 65

THERMO ECOTEK CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT

(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX
FISCAL YEAR ENDED MONTHS
--------------------------------- ENDED
SEPT. 30, SEPT. 28, SEPT. 27, APRIL 4,
1995 1996 1997 1998
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
COMMON STOCK, $.10 PAR VALUE
Balance at beginning of period............................ $ 1,316 $ 1,551 $ 1,617 $ 2,598
Effect of three-for-two stock split....................... -- -- 809 --
Net proceeds from private placement of Company common
stock (Note 4).......................................... -- 22 -- --
Issuance of Company common stock under employees' and
directors' stock plans.................................. 2 18 27 1
Conversions of subordinated convertible debentures........ -- 26 145 63
Capitalization of Company................................. 233 -- -- --
------- -------- -------- --------
Balance at end of period.................................. 1,551 1,617 2,598 2,662
------- -------- -------- --------
CAPITAL IN EXCESS OF PAR VALUE
Balance at beginning of period............................ 36,826 64,188 74,740 95,573
Effect of three-for-two stock split....................... -- -- (809) --
Net proceeds from private placement of Company common
stock (Note 4).......................................... -- 4,942 -- --
Activity under employees' and directors' stock plans...... 89 503 204 (728)
Tax benefit related to employees' and directors' stock
plans................................................... -- -- 2,447 --
Conversions of subordinated convertible debentures........ -- 5,107 18,991 8,490
Capitalization of Company................................. 27,273 -- -- --
------- -------- -------- --------
Balance at end of period.................................. 64,188 74,740 95,573 103,335
------- -------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............................ 17,004 27,268 45,048 67,593
Net income................................................ 10,264 17,780 22,545 13,456
------- -------- -------- --------
Balance at end of period.................................. 27,268 45,048 67,593 81,049
------- -------- -------- --------
TREASURY STOCK
Balance at beginning of period............................ -- (22) (481) (20,872)
Activity under employees' and directors' stock plans...... (22) (459) (648) 855
Repurchases of Company common stock....................... -- -- (19,743) (10,248)
------- -------- -------- --------
Balance at end of period.................................. (22) (481) (20,872) (30,265)
------- -------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of period............................ -- -- -- (52)
Translation adjustment.................................... -- -- (52) 58
------- -------- -------- --------
Balance at end of period.................................. -- -- (52) 6
------- -------- -------- --------
NET UNREALIZED GAIN ON AVAILABLE-FOR-SALE INVESTMENTS
Balance at beginning of period............................ -- -- 8,763 2,436
Change in net unrealized gain on available-for-sale
investments (Note 2).................................... -- 8,763 (6,327) 1,290
------- -------- -------- --------
Balance at end of period.................................. -- 8,763 2,436 3,726
------- -------- -------- --------
TOTAL SHAREHOLDERS' INVESTMENT.............................. $92,985 $129,687 $147,276 $160,513
======= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 66

THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Thermo Ecotek Corporation (the Company) is an environmental company
providing a range of environmentally responsible technologies and products,
including nonutility electric power generation using clean combustion processes
and engineered clean fuels, as well as environmentally friendly pest control
products through its biopesticides subsidiary, Thermo Trilogy Corporation
(Note 3).

The Company is principally engaged in the development and operation of
alternative-energy electrical generation facilities. The Company develops and
operates facilities through joint ventures or limited partnerships in which the
Company has a majority interest, or through wholly owned subsidiaries (the
Operating Companies). The Company's interests in the Operating Companies range
from 67% to 100% and, in each case, are held by wholly owned subsidiaries of the
Company. Of the facilities operated by the Company, three are owned by the
Company and the remainder are owned by unaffiliated parties who lease them to
the Operating Companies under long-term leases (Note 7).

Relationship with Thermo Electron Corporation

The Company was incorporated on November 30, 1989, as a wholly owned
subsidiary of Thermo Electron Corporation (Thermo Electron). At September 27,
1997, Thermo Electron owned 21,382,660 shares of the Company's common stock,
representing 87% of such stock outstanding.

Principles of Consolidation

The accompanying financial statements include the accounts of the Company,
its majority-owned and wholly owned Operating Companies, and its wholly owned
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company accounts for investments in businesses
in which it owns between 20% and 50% using the equity method.

Fiscal Year

In June 1995, the Company changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly, the
Company's transition period, which ended on September 30, 1995, was the 39-week
period from January 1, 1995, to September 30, 1995, referenced as "fiscal 1995."
References to fiscal 1996 and 1997 are for the years ended September 28, 1996,
and September 27, 1997, respectively. Fiscal 1996 and 1997 each included 52
weeks. The unaudited statements of income and cash flows for the 52-week period
ended September 30, 1995, are presented for comparative purposes only.

Revenue Recognition

The Company earns revenues primarily from the operation of
alternative-energy facilities. Revenues from plant operations are recorded as
electricity is delivered. The Operating Companies have long-term power supply
arrangements with local utilities, expiring between 2005 and 2020, to sell all
the output of the plants currently in operation at established or formula-based
defined rates (Note 9). Under certain of these arrangements, in the event of
service termination by the Operating Companies prior to the end of the
obligation period, the Operating Companies may be required to reimburse the
utilities to the extent that cumulative revenue calculated at established rates
exceeds the amounts calculated at the utilities' "avoided cost" rates.
Management does not expect to incur any obligation under these provisions in the
foreseeable future.

F-7
<PAGE> 67
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Woodland plant has conditions in its nonrecourse lease agreement that
require the funding of a "power reserve" in years prior to 2000, based on
projections of operating cash flow shortfalls in 2000 and thereafter. The power
reserve represents funds available to make lease payments in the event that
revenues are not sufficient after the plant converts to avoided-cost rates in
March 2000. This funding requirement will significantly limit future profit
distributions that Woodland may make to the Company. Accordingly, beginning
during the first quarter of fiscal 1997, the Company began recording as an
expense the funding of reserves required under Woodland's nonrecourse lease
agreement to cover projected shortfalls in lease payments beginning in 2000.
Consequently, the results of the Woodland plant were greatly diminished during
1997 and the Company expects that such results will be reduced to approximately
break even in 1998 and thereafter. During fiscal 1996 and 1997, the Woodland
plant contributed $5.1 million and $1.0 million of operating income,
respectively.

Repairs and Maintenance

The Company charges routine repairs and maintenance to expense in the
period the costs are incurred. The Company accrues for major maintenance and
overhauls in anticipation of scheduled outages. Other accrued expenses in the
accompanying balance sheet includes approximately $4.7 million and $3.9 million
at fiscal year-end 1996 and 1997, respectively, in anticipation of major
maintenance and overhauls.

Accounting for Derivatives

The Company has entered into interest rate swap agreements in connection
with debt on certain alternative-energy facilities (Notes 11 and 13). The
interest rate swap agreements convert floating debt obligations to fixed rate
obligations. Interest rate swap agreements are accounted for under the accrual
method. Amounts to be received from or paid to the counter-parties of the
agreements are accrued during the period to which the amounts relate and are
reflected as interest expense. The related amounts payable to the
counter-parties are included in other accrued expenses in the accompanying
balance sheet. The fair value of the swap agreements is not recognized in the
accompanying financial statements since the agreements are accounted for as
hedges.

The Company enters into foreign currency agreements to manage specifically
identifiable risks. The Company's short-term foreign exchange forward contracts
are part of the Company's management of foreign currency exposures. Foreign
currency agreements are treated as a hedge on currency movements on certain
customer deposits received and held in foreign denominated currency. Gains and
losses on the forward contract offset gains and losses on the foreign
denominated account.

The Company does not enter into speculative foreign currency or interest
rate swap agreements.

Stock-based Compensation Plans

The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 5). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity.

Gain on Issuance of Stock by Subsidiary

At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the increase as a
gain.

If gains have been recognized on the issuance of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased either by the subsidiary,
the Company, or Thermo Electron, gain recognition does

F-8
<PAGE> 68
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

not occur on issuances subsequent to the date of a repurchase until such time as
shares have been issued in an amount equivalent to the number of repurchased
shares.

Income Taxes

The Company and Thermo Electron have a tax allocation agreement under which
the Company is included in the consolidated federal and certain state income tax
returns filed by Thermo Electron. The agreement provides that Thermo Electron
charges or pays the Company amounts based on the Company's relative contribution
to Thermo Electron's tax liability. If Thermo Electron's equity ownership of the
Company were to drop below 80%, the Company would be required to file its own
tax returns.

In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.

Cash Equivalents and Restricted Funds

As of September 27, 1997, $69.3 million of the Company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the Company in effect lends excess cash to Thermo Electron, which
Thermo Electron collateralizes with investments principally consisting of
corporate notes, U.S. government-agency securities, money market funds,
commercial paper, and other marketable securities, in the amount of at least
103% of such obligation. The Company's funds subject to the repurchase agreement
are readily convertible into cash by the Company. The repurchase agreement earns
a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter. Cash equivalents also include investments
in money market accounts. The use of cash and cash equivalents totaling $7.6
million and $10.8 million at September 28, 1996, and September 27, 1997,
respectively, was restricted by the terms of certain Operating Companies' lease
and financing agreements.

Restricted funds in the accompanying balance sheet represents amounts held
in trust for lease and debt payments and working capital requirements, as
required by certain of the Operating Companies' lease and financing agreements,
and are invested in money market accounts. Restricted funds that are not
expected to be used within the next fiscal year are classified as long-term in
the accompanying balance sheet.

All cash equivalents and restricted funds are carried at cost, which
approximates market value.

Inventories

Inventories consist of raw materials, fuel, operating supplies, spare
parts, and include, where applicable, materials and overhead. Inventories are
stated at the lower of cost (on a first-in, first-out or average basis) or
market value. The components of inventories are as follows:

<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies................................. $11,299 $11,886
Work in process and finished goods......................... -- 2,030
------- -------
$11,299 $13,916
======= =======
</TABLE>

Available-for-sale Investments

Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company's investments in long-term debt and marketable
equity securities are accounted for at market value (Note 2).

F-9
<PAGE> 69
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property, Plant, and Equipment

The costs of additions and improvements are capitalized. The Company
provides for depreciation and amortization using the straight-line method over
the estimated useful lives of the property as follows: electric generating
facilities -- 25 years, property under capital lease -- the life of the asset,
leasehold improvements -- the shorter of the term of the lease or the life of
the asset, and machinery and equipment -- 3 to 7 years. Property, plant, and
equipment consists of the following:

<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land..................................................... $ 3,479 $ 3,479
Electric generating facilities (Notes 8 and 11).......... 200,425 200,573
Property under capital lease............................. 47,020 47,020
Machinery and equipment.................................. 4,369 7,366
Leasehold improvements................................... 15,032 15,814
Construction in process (Note 3)......................... 39,059 54,585
-------- --------
309,384 328,837
Less: Accumulated depreciation and amortization.......... 46,618 65,770
-------- --------
$262,766 $263,067
======== ========
</TABLE>

Other Assets

Other assets in the accompanying balance sheet includes certain costs
associated with the development of the Company's alternative-energy facilities;
prepaid rent relating to an Operating Company's lease agreement; and goodwill
that arose in connection with the acquisition of an Operating Company. Other
assets also includes deferred debt expense relating to the Company's issuances
of subordinated convertible debentures, and patents, licenses, and other
intangible assets arising from the Thermo Trilogy and biosys acquisitions (Note
3). These assets are being amortized using the straight-line method over their
estimated useful lives, which range from 5 to 30 years. These assets were $12.2
million and $19.9 million, net of accumulated amortization of $4.5 million and
$8.2 million, at fiscal year-end 1996 and 1997, respectively.

In addition, other assets includes an investment in a joint venture of $1.2
million and $1.5 million at fiscal year-end 1996 and 1997, respectively.

Other Deferred Items

Other deferred items in the accompanying 1997 balance sheet includes
obligations under an Operating Company lease to cover projected short-falls in
lease payments beginning in 2000, as described above under the caption "Revenue
Recognition." In addition, other deferred items includes rent that has been
recognized ratably for financial reporting purposes in connection with an
Operating Company's lease agreement at fiscal year-end 1996 and 1997 (Note 7),
and deferred income in connection with the termination of a power-sales
agreement at fiscal year-end 1996 (Note 10).

Foreign Currency

All assets and liabilities of the Company's foreign subsidiary are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation". Resulting translation adjustments are reflected as a
separate component of shareholders' investment titled "Cumulative translation
adjustment". Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for the three years
presented.

F-10
<PAGE> 70
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Split

All share and per share information, except for share information in the
accompanying 1996 balance sheet, was restated in fiscal 1996 to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend, which
was distributed in October 1996.

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,
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.

Presentation

Certain amounts in fiscal 1995 and 1996 have been reclassified to conform
to the presentation in the fiscal 1997 financial statements.

Interim Financial Statements

The financial statements as of April 4, 1998, and for the six-month periods
ended March 29, 1997, and April 4, 1998, are unaudited but, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair presentation of results for these interim periods. The six-month periods
ending March 29, 1997, and April 4, 1998, include 26 and 27 weeks, respectively.
The results of operations for the six-month period ended April 4, 1998, are not
necessarily indicative of the results to be expected for the entire year.

2. AVAILABLE-FOR-SALE INVESTMENTS

The Company's marketable equity securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded currently as a component of shareholders'
investment titled "Net unrealized gain on available-for-sale investments." As of
September 27, 1997, the Company held one long-term available-for-sale
investment, an investment in the common stock of KFx, Inc. (KFx), described
below.

In fiscal 1995, the Company purchased 1,500,000 shares of KFx common stock
for $3.0 million, representing an approximate 7% equity interest in KFx. In
fiscal 1996, the Company purchased an additional 1,500,000 shares of KFx common
stock for $3.0 million, representing an additional 7% equity interest in KFx. In
fiscal 1997, the Company purchased an additional 1,250,000 shares of KFx common
stock for $2.5 million pursuant to the purchase agreement, bringing its total
equity interest in KFx to approximately 18%. The fair market value of this
investment at September 27, 1997, was $12.5 million. Simultaneously with the
execution of the purchase agreement, KFx granted to the Company a warrant to
purchase an additional 7,750,000 shares at $3.65 per share, as well as a warrant
to purchase further shares of the common stock of KFx at market value, defined
so that the number, when added to all other shares of such common stock owned by
the Company, would result in the Company owning 51% of the common stock of KFx
on a fully-diluted basis. These warrants are exercisable from January 1, 2000,
through July 1, 2001.

F-11
<PAGE> 71
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS AND PROJECT UNDER DEVELOPMENT

Acquisitions

In January 1997, Thermo Trilogy acquired substantially all of the assets of
biosys, inc. (biosys), a biopesticide company, for $11.2 million in cash and the
assumption of certain liabilities. Allocation of the purchase price for this
acquisition was based on an estimate of the fair value of the net assets
acquired.

In May 1996, the Company, through two wholly owned subsidiaries, acquired
the assets of the biopesticides division of W.R. Grace & Co. (renamed Thermo
Trilogy), which develops, manufactures, and markets environmentally friendly
products used for pest control, for $8.1 million in cash and the assumption of
certain liabilities. In addition, the Company will pay a royalty fee of seven
percent on annual sales of the acquired business in excess of $14.0 million
through the year 2000.

The aggregate cost of these acquisitions approximated the fair value of the
net assets acquired. These acquisitions have been accounted for using the
purchase method of accounting and their results have been included in the
accompanying financial statements from their respective dates of acquisition.

Based upon unaudited data, the following table presents selected financial
information for the Company and biosys on a pro forma basis, assuming the
companies had been combined since the beginning of fiscal 1996. The effect of
the acquisition of Thermo Trilogy is not included in the pro forma data as it
was not material to the Company's results of operations.

<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues............................................... $172,569 $185,108
Net income............................................. 3,931 17,674
Earnings per share:
Basic................................................ .17 .72
Diluted.............................................. .15 .52
</TABLE>

The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of biosys
been made at the beginning of fiscal 1996.

Project Under Development

In August 1995, the Company, through two wholly owned subsidiaries, entered
into a Limited Partnership Agreement with KFx Wyoming, Inc., a subsidiary of
KFx, to develop, construct, and operate a 500,000-ton-per-year subbituminous
coal-beneficiation plant near Gillette, Wyoming. The Company has provided
approximately $50.0 million, and is committed to provide up to an additional
$5.0 million, for the design, construction, and operation of the plant and will
have a 95% equity interest in the project. During the first quarter of fiscal
1997, a fire occurred which caused certain delays with respect to the
commencement of commercial operations of the facility, with substantially all
repair costs anticipated to be reimbursable by insurance proceeds. Commercial
operation of the facility is now expected to begin during the first half of
fiscal 1998. The Company has also made an investment in KFx (Note 2).

4. SHAREHOLDERS' INVESTMENT

In June 1996, the Company sold 330,000 shares of its common stock in a
private placement at $16.08 per share, for net proceeds of $5.0 million.

In February 1995, the Company sold 3,500,334 shares of its common stock in
an initial public offering at $8.50 per share, for net proceeds of $27.5
million.

F-12
<PAGE> 72
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net assets of certain Operating Companies are generally restricted as
to the amounts that can be transferred to the parent company in the form of
dividends, loans or advances, pursuant to certain lease or debt agreements. As
of September 27, 1997, net assets of certain subsidiaries of approximately $94.0
million were not restricted from distribution.

At September 27, 1997, the Company had reserved 16,486,355 unissued shares
of its common stock for possible issuance under stock-based compensation plans
and for issuance upon possible conversion of the Company's convertible
obligations.

5. EMPLOYEE BENEFIT PLANS

Stock-based Compensation Plans

Stock Option Plans

The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans permit the grant of nonqualified and
incentive stock options. A third plan permits the grant of a variety of stock
and stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. To date, only
nonqualified stock options have been awarded under these plans. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over periods ranging from four to ten years after the
first anniversary of the grant date, depending on the term of the option, which
may range from five to twelve years. Nonqualified stock options may be granted
at any price determined by the Board Committee, although incentive stock options
must be granted at not less than the fair market value of the Company's stock on
the date of grant. To date, all options have been granted at fair market value.
The Company also has a directors' stock option plan that provides for the grant
of stock options to outside directors pursuant to a formula approved by the
Company's shareholders. Options awarded under this plan are exercisable six
months after the date of grant and expire three to seven years after the date of
grant. In addition to the Company's stock-based compensation plans, certain
officers and key employees may also participate in the stock-based compensation
plans of Thermo Electron.

A summary of the Company's stock option information is as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ----------------- -----------------
RANGE OF WEIGHTED WEIGHTED
NUMBER OPTION NUMBER AVERAGE NUMBER AVERAGE
OF PRICES OF EXERCISE OF EXERCISE
SHARES PER SHARE SHARES PRICE SHARES PRICE
------ ------------- ------ -------- ------ --------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
period............................... 1,539 $4.00 - $6.00 1,491 $ 4.96 1,439 $ 6.55
Granted........................... -- -- 309 11.48 264 14.13
Exercised......................... (22) 4.00 - 5.83 (349) 4.16 (369) 4.46
Forfeited......................... (26) 4.00 - 5.83 (12) 6.98 (53) 8.21
----- ----- -----
Options outstanding, end of period..... 1,491 $4.00 - $6.00 1,439 $ 6.55 1,281 $ 8.64
===== ============= ===== ====== ===== ======
Options exercisable.................... 1,491 $4.00 - $6.00 1,439 $ 6.55 1,281 $ 8.64
===== ============= ===== ====== ===== ======
Options available for grant............ 662 365 353
===== ===== =====
Weighted average fair value per share
of options granted during year....... $ 4.49 $ 5.72
====== ======
</TABLE>

F-13
<PAGE> 73
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of the Company's stock options at September 27,
1997, is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE
RANGE OF OF CONTRACTUAL EXERCISE
EXERCISE PRICES SHARES LIFE PRICE
--------------- --------- ----------- --------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
$ 5.50 - $10.22..................................... 949 6.8 years $ 6.65
10.23 - 14.94..................................... 261 9.0 years 13.98
14.95 - 19.66..................................... 71 5.9 years 15.55
-----
$ 5.50 - $19.66..................................... 1,281 7.2 years $ 8.64
=====
</TABLE>

Employee Stock Purchase Program

Substantially all of the Company's employees are eligible to participate in
an employee stock purchase program sponsored by the Company and Thermo Electron,
under which employees can purchase shares of the Company's and Thermo Electron's
common stock. Prior to November 1, 1996, the program was sponsored by Thermo
Electron. Under this program, the applicable shares of common stock can be
purchased at the end of a 12-month plan year at 95% of the fair market value at
the beginning of the period, and shares purchased are subject to a six-month
resale restriction. Prior to November 1, 1995, shares of Thermo Electron's
common stock could be purchased at 85% of the fair market value at the beginning
of the period, and shares purchased were subject to a one-year resale
restriction. Shares are purchased through payroll deductions of up to 10% of
each participating employee's gross wages.

Pro Forma Stock-based Compensation Expense

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards in
fiscal 1996 and 1997 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income and
earnings per share would have been as follows:

<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income:
As reported............................................ $17,780 $22,545
Pro forma.............................................. 17,565 22,159
Earnings per share:
Basic:
As reported......................................... .76 .92
Pro forma........................................... .75 .90
Diluted:
As reported......................................... .54 .64
Pro forma........................................... .53 .63
</TABLE>

F-14
<PAGE> 74
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Compensation expense for options granted is reflected over the vesting period;
therefore, future pro forma compensation expense may be greater as additional
options are granted.

The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Volatility............................................. 26% 26%
Risk-free interest rate................................ 6.0% 6.1%
Expected life of options............................... 6.1 years 6.4 years
</TABLE>

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

401(k) Savings Plans

Substantially all of the Company's corporate, full-time employees are
eligible to participate in Thermo Electron's 401(k) savings plan. Contributions
to the Thermo Electron 401(k) savings plan are made by both the employee and the
Company. Company contributions are based upon the level of employee
contributions. Employees of the Operating Companies who meet eligibility
requirements may participate in a separate defined contribution plan.
Contributions to the plan are made by both the employee and the Operating
Companies. The Operating Companies' contributions are based on the level of
employee contributions. The Company contributed and charged to expense for these
plans $157,000, $279,000, and $401,000 in fiscal 1995, 1996, and 1997,
respectively.

6. INCOME TAXES

The components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal............................................... $1,647 $2,899 $ 3,214
State................................................. 393 1,286 486
------ ------ -------
2,040 4,185 3,700
------ ------ -------
Deferred:
Federal............................................... 3,257 2,485 9,250
State................................................. 730 601 1,465
------ ------ -------
3,987 3,086 10,715
------ ------ -------
$6,027 $7,271 $14,415
====== ====== =======
</TABLE>

F-15
<PAGE> 75
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% in fiscal 1995 and 1996 and 35% in fiscal 1997 to income before
provision for income taxes and minority interest due to the following:

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory rate.......... $ 5,929 $ 8,951 $13,403
Increases (decreases) resulting from:
State income taxes, net of federal tax.............. 741 1,245 1,268
Minority interest expense........................... (390) (434) (466)
Tax losses and credits benefited.................... (270) (2,528) --
Nondeductible expenses.............................. 17 37 210
------- ------- -------
$ 6,027 $ 7,271 $14,415
======= ======= =======
</TABLE>

Tax losses and credits benefited during fiscal 1996 relate to the
resolution of certain tax contingencies.

Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of the following:

<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred (prepaid) income taxes:
Depreciation.............................................. $40,924 $48,377
Partnership allocations................................... 577 --
Available-for-sale investments............................ 5,487 1,557
State tax net operating loss carryforwards................ (1,789) (2,570)
Capitalized costs......................................... (5,253) (324)
Other reserves and accruals............................... (2,994) (3,974)
------- -------
36,952 43,066
Valuation allowance....................................... 3,665 2,570
------- -------
$40,617 $45,636
======= =======
</TABLE>

The valuation allowance relates to uncertainty surrounding the realization
of certain state tax loss carryforwards and, in 1996, stock option exercises not
benefited. The decrease in the valuation allowance in fiscal 1997 primarily
relates to the realization of the benefit of stock options exercised. State tax
loss carryforwards of approximately $19 million will begin to expire in 1998.
The long-term due from parent company in the accompanying balance sheet
represents amounts due from Thermo Electron for tax benefits arising from the
Company's operations.

7. COMMITMENTS

Leases

During fiscal 1997, the Company entered into a seven-year fixed rate lease
agreement with a third party for office space that expires in 2003. The
Company's commitment under this agreement is approximately $300,000 per year,
net of sublease income of $178,000 per year. In 1995 and 1996 and during part of
fiscal 1997, the Company leased its office facilities from Thermo Electron. The
agreement called for the Company to pay rent based on Thermo Electron's
occupancy costs per square foot. The accompanying statement of income includes
expenses of $143,000, $177,000, and $27,400 in fiscal 1995, 1996, and 1997,
respectively, under the agreement with Thermo Electron.

F-16
<PAGE> 76
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Certain Operating Companies have operating lease agreements for their
facilities expiring in various years through 2010. The lease agreements provide
for renewal of each of the leases for additional periods ranging from one to
five years at the Operating Companies' option. In general, renewal options are
at the lower of a predetermined percentage of the average annual lease rental
during the lease terms or the fair market rental as determined by an independent
appraisal. In general, at the end of the lease terms or renewal terms, the
Operating Companies have a right of first refusal or an option to purchase the
facilities, at their fair market value, as determined by an independent
appraisal. During fiscal 1995, the Company amended an existing facility
operating lease, which resulted in the agreement being treated as a capital
lease (Note 11).

Lease payments under the operating leases are made to the owner of the
facility only to the extent that power revenues exceed essential operating
expenses, as defined, up to certain specified maximum levels (Note 8). Subject
to the foregoing, as of September 27, 1997, the contractual amounts payable
pursuant to the lease agreements total approximately $148.4 million over the
remaining initial lease terms, averaging approximately $16.0 million per year.
The Company recognizes rent expense ratably over the respective lease terms. The
accompanying statement of income includes expenses from operating leases
(excluding the operating lease with Thermo Electron) of $13.4 million, $15.2
million, and $15.5 million in fiscal 1995, 1996, and 1997, respectively.

Fuel Supply

The Operating Companies have entered into fuel supply agreements with
various suppliers guaranteeing the purchase of certain minimum quantities of
acceptable fuel at negotiated prices and terms. The Operating Companies
purchased $13.8 million, $20.0 million, and $20.4 million of fuel under such
contracts in fiscal 1995, 1996, and 1997, respectively. The agreements call for
price adjustments based on certain published indices or stated rates over their
terms expiring between 1997 and 2005. See Note 8 for fuel supply agreements with
related parties.

8. RELATED-PARTY TRANSACTIONS

Corporate Service Agreement

The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company pays Thermo Electron annually an amount equal to 1.0% of the
Company's revenues. The Company paid an annual fee equal to 1.20% of the
Company's revenues in calendar year 1995. Beginning in calendar year 1998, the
Company will pay an annual fee equal to 0.8% of the Company's revenues. The
annual fee is reviewed and adjusted annually by mutual agreement of the parties.
For these services, the Company was charged $1.3 million, $1.6 million, and $1.8
million in fiscal 1995, 1996, and 1997, respectively. Management believes that
the service fee charged by Thermo Electron is reasonable and that such fees are
representative of the expenses the Company would have incurred on a stand-alone
basis. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationships among Thermo Electron and its
majority-owned subsidiaries). For additional items such as employee benefit
plans, insurance coverage, and other identifiable costs, Thermo Electron charges
the Company based upon costs attributable to the Company.

F-17
<PAGE> 77
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fuel Supply

A portion of the fuel used by the Operating Companies' facilities is
obtained under agreements with related parties of the Operating Companies or
their joint venture partners (Note 7). During fiscal 1995, 1996, and 1997, the
Company paid $2.9 million, $4.6 million, and $4.2 million, respectively, under
these agreements.

Management Fees

One of the Operating Companies has entered into management agreements with
a related party of its joint venture partner for the day-to-day operation of its
facility and the procurement and management of fuel. During fiscal 1995, 1996,
and 1997, the Company paid $253,000, $350,000, and $368,000, respectively, under
these agreements.

Thermo Electron Guarantees

Thermo Electron has issued an operating standards support agreement for
each of the facilities leased or financed by the Operating Companies. These
agreements provide that Thermo Electron will loan the Operating Companies, on a
subordinated basis, enough funds to meet their lease or debt payments in the
event the power plants are unable to generate power at a designated level and
such inability is related to the design, construction, operation, or maintenance
of the plants and not caused by certain uncontrollable circumstances.

Thermo Electron has also guaranteed the lease payments of one of the
Operating Companies under certain events. Under the terms of this guarantee,
Thermo Electron will loan funds to the Operating Company to cover any shortfall
in its lease payment in the event and to the extent the terms of the Operating
Company's power purchase agreements are changed by Public Service Company of New
Hampshire (PSNH; Note 9). No such payments have been required under this
guarantee.

The Company and Thermo Electron have entered into a Master Guarantee
Reimbursement Agreement through which the Company will reimburse Thermo Electron
in the event that Thermo Electron is required to make any payments pursuant to
guarantees, including those guarantees described above.

Operating Lease

See Note 7 for a description of the Company's operating lease with Thermo
Electron.

Long-term Obligations

See Note 11 for long-term obligations of the Company held by Thermo
Electron.

Repurchase Agreement

The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.

9. CONTINGENCIES

Two of the Operating Companies have rate orders from the New Hampshire
Public Utilities Commission (NHPUC) to sell all of their power to PSNH. An
agreement between Northeast Utilities, parent to PSNH, and the State of New
Hampshire, arising from the settlement of PSNH bankruptcy proceedings, contains
language to the effect that PSNH will seek to renegotiate some of the terms of
certain rate orders with small power producers and that the state will support
PSNH in such efforts. PSNH has commenced discussions with these two Operating
Companies and other small power producers through which it is seeking to
renegotiate the rate orders applicable to the Company's and other facilities.
The state, acting through NHPUC, has indicated that it supports such efforts.
Any resolution is subject to the approval of NHPUC.

F-18
<PAGE> 78
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Should the matter not reach resolution, the Company does not believe that PSNH
has the right to take unilateral action to reduce the price of purchased power
under such arrangements. Rejection of the Company's rate orders would result in
a claim for damages by the Company and could be the subject of lengthy
litigation. In January 1997, PSNH's parent company, Northeast Utilities,
disclosed in a filing with the Securities and Exchange Commission that if a
proposed deregulation plan for the New Hampshire electric utility industry were
adopted, PSNH could default on certain financial obligations and seek bankruptcy
protection. In February 1997, NHPUC voted to adopt a deregulation plan, and in
March 1997, PSNH filed suit to block the plan. In March 1997, the federal
district court issued a temporary restraining order which prohibits the NHPUC
from implementing the deregulation plan as it affects PSNH, pending a
determination by the court whether PSNH's claim could then be heard by the
court. In April 1997, the court ruled that it could now hear the case and
ordered that the restraining order would continue indefinitely pending the
outcome of the suit. In addition, in March 1997, the Company, along with a group
of other biomass power producers, filed a motion with the NHPUC seeking
clarification of the NHPUC's proposed deregulation plan regarding several
issues, including purchase requirements and payment of current rate order prices
with respect to the Company's energy output. An unfavorable resolution of this
matter, including the bankruptcy of PSNH, could have a material adverse effect
on the Company's results of operations and financial position.

The Company is contingently liable with respect to lawsuits and matters
that arose in the normal course of business. In the opinion of management, these
contingencies will not have a material adverse effect on the financial position
or results of operations of the Company.

10. TERMINATION OF POWER-SALES AGREEMENT

On August 2, 1993, in exchange for a cash payment, the Company agreed to
terminate a power-sales agreement with a utility, which required the utility to
purchase the power that was to be generated by the Company's 55-megawatt natural
gas cogeneration facility under development in Staten Island, New York.

Under the agreement, the Company received $18.0 million in a series of
payments through May 1997, plus interest at 5.8%. The Company would have been
obligated to return $8.2 million of this amount if the Company had elected to
proceed with the Staten Island facility and the plant were to commence
commercial operation before January 1, 2000. Accordingly, the Company deferred
recognition of $8.2 million through fiscal 1996, pending final determination of
the project's status, with the deferred revenue being included in other deferred
items in the accompanying 1996 balance sheet.

During fiscal 1997, the Company determined that due to continuing economic
conditions in the domestic energy market it would not be feasible to design,
construct, and commence commercial operation of the Staten Island facility prior
to January 1, 2000. As a result, the refund obligation terminated and the
previously deferred revenue was recognized during fiscal 1997.

F-19
<PAGE> 79
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:

<TABLE>
<CAPTION>
1996 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
8.3% Nonrecourse tax-exempt revenue bonds, Series 1989,
payable in semi-annual installments, with a final payment
in December 2000.......................................... $ 24,700 $ 20,700
8.3% Nonrecourse tax-exempt revenue bonds, Series 1990,
payable in semi-annual installments, with a final payment
in December 2000.......................................... 26,500 22,000
6.0% Nonrecourse tax-exempt revenue bonds, Series 1991,
payable in semi-annual installments, with a final payment
in June 2000.............................................. 43,500 35,200
4.0% Subordinated convertible debentures, due January 2001,
convertible at $6.33 per share, due to Thermo Electron.... 68,500 68,500
Noninterest-bearing subordinated convertible debentures, due
March 2001, convertible at $13.56 per share............... 31,727 12,148
4.875% Subordinated convertible debentures, due April 2004,
convertible at $16.50 per share........................... -- 50,000
-------- --------
194,927 208,548
Less: Current portion of long-term obligations.............. 16,800 26,100
-------- --------
$178,127 $182,448
======== ========
</TABLE>

The annual requirements for long-term obligations are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................... $ 26,100
1999........................................... 18,100
2000........................................... 19,200
2001........................................... 95,148
2002........................................... --
Thereafter..................................... 50,000
--------
$208,548
========
</TABLE>

The Company's noninterest-bearing subordinated convertible debentures, as
well as the 4.875% subordinated convertible debentures, are guaranteed on a
subordinated basis by Thermo Electron. In fiscal 1996 and 1997, $5.3 million and
$19.6 million principal amount, respectively, of the noninterest-bearing
subordinated convertible debentures were converted into 388,862 shares and
1,443,869 shares, respectively, of the Company's common stock.

The tax-exempt revenue bonds were issued by the California Pollution
Control Financing Authority to finance the construction of the Delano I and
Delano II facilities. The obligations are credit-enhanced by a letter of credit
issued by a bank group. Repayment of the debt is an obligation of Delano and the
obligations are nonrecourse to the Company. As of September 27, 1997, Delano I
and Delano II plant and equipment totaling approximately $173.0 million were
collateral for this debt.

On June 30, 1995, the Mendota Operating Company entered into a First
Amendment to its Project Lease. The Amendment, effective April 1, 1995,
modified, among other terms of the lease, the lease term, the base rent, the
application of cash flow from the facility, and the lessee's option to purchase
the facility. The terms of the lease, as amended, met the requirements for
treatment as a capital lease and accordingly, the facility has been recorded as
an asset of the Company in the amount of $47.0 million and is included in
property, plant, and equipment, net in the accompanying balance sheet.

F-20
<PAGE> 80
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The future minimum lease payments under the amended lease are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $12,033
1999........................................................ 12,033
2000........................................................ 12,868
-------
36,934
Less: Amount representing interest.......................... 5,780
-------
Present value of minimum lease payments..................... 31,154
Less: Current portion....................................... 8,912
-------
Long-term capital lease obligations......................... $22,242
=======
</TABLE>

See Note 13 for information pertaining to the fair value of the Company's
long-term obligations.

12. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

Revenues from three electric utility customers as a percentage of total
revenues were approximately 22%, 36%, and 36% in fiscal 1995; 21%, 36%, and 36%
in fiscal 1996; and 18%, 31%, and 32% in fiscal 1997.

At fiscal year-end 1996 and 1997, substantially all accounts receivable due
to the Company were from its four electric utility customers. The Company does
not normally require collateral or other security to support its accounts
receivable. Management does not believe that this concentration of credit risk
has or will have a significant negative impact on the Company.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist mainly of cash and cash
equivalents, restricted funds, accounts receivable, long-term available-for-sale
investments, due from parent company, current portion of long-term obligations,
accounts payable, due to parent company, long-term obligations, forward exchange
contracts, and interest rate swaps. The carrying amounts of these financial
instruments, with the exception of long-term available-for-sale investments, due
from parent company, long-term obligations, forward exchange contracts, and
interest rate swaps, approximate fair value due to their short-term nature.

The Company's long-term available-for-sale investments are carried at fair
value in the accompanying balance sheet. The fair value was determined based on
a quoted market price. See Note 2 for the fair value information pertaining to
this financial instrument. The carrying amount of due from parent company in the
accompanying balance sheet approximates fair value.

F-21
<PAGE> 81
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During fiscal 1997, the Company entered into a forward exchange contract to
hedge certain customer deposits denominated in currencies other than its foreign
subsidiary's local currency. The purpose of the Company's foreign currency
hedging activities is to protect the Company's local currency cash flows related
to the customer deposits from fluctuations in foreign exchange rates. The amount
of foreign exchange contracts at year-end 1997 was $1.0 million. The carrying
amount and fair value of the Company's long-term obligations and off-balance
sheet financial instruments are as follows:

<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term obligations:
Convertible obligations............... $100,227 $199,696 $130,648 $224,294
Other long-term obligations........... 109,054 111,727 74,042 64,861
-------- -------- -------- --------
$209,281 $311,423 $204,690 $289,155
======== ======== ======== ========
Off-balance-sheet financial instruments:
Interest rate swaps receivable
(payable).......................... $ (2,673) $ 9,199
Foreign exchange contract payable..... -- 69
</TABLE>

The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year ends. The fair value of convertible obligations at fiscal year-end 1996 and
1997 exceeds the carrying amount primarily due to the market price of the
Company's common stock exceeding the conversion price of the convertible
obligations.

Interest rate swap agreements are in place on the borrowings associated
with the Delano I and Delano II facilities and are with a different
counter-party than the holders of the underlying debt. These swaps have terms
expiring in December 2000 commensurate with the final maturity of the debt. The
swaps have effectively converted floating rate debt to fixed rate borrowings.
Interest expense is adjusted with changes in the interest rate and management
believes any credit risk is remote. The notional amount of the swap agreements
was $95.7 million and $127.0 million at fiscal year-end 1996 and 1997,
respectively. The fair value of such agreements is the estimated amount that the
Company would pay upon termination of the contract, taking into account the
change in market interest rates and creditworthiness of the counterparties.
During fiscal 1996 and 1997, the average variable rate received under the swap
agreement was 3.6% and 3.5%, respectively.

The fair value of forward exchange contracts is the estimated amount that
the Company would be required to pay if it were to terminate the contract,
taking into account the change in foreign exchange rates.

14. UNAUDITED QUARTERLY INFORMATION

<TABLE>
<CAPTION>
FIRST SECOND THIRD(A) FOURTH
------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Revenues.................................... $34,296 $33,505 $35,316 $46,959
Gross profit................................ 10,107 6,945 10,852 20,289
Net income.................................. 3,052 609 3,024 11,095
Earnings per share:
Basic..................................... .13 .03 .13 .46
Diluted................................... .10 .02 .09 .30
</TABLE>

F-22
<PAGE> 82
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FIRST SECOND(b) THIRD FOURTH(c)
------- --------- ------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues.................................. $38,514 $38,674 $43,524 $59,479
Gross profit.............................. 12,260 9,793 14,682 30,220
Net income................................ 4,300 952 3,598 13,695
Earnings per share:
Basic................................... .18 .04 .15 .56
Diluted................................. .12 .04 .11 .37
</TABLE>

- ---------------
(a) Reflects the May 1996 acquisition of the biopesticides division of W.R.
Grace & Co.

(b) Reflects the January 1997 acquisition of the business of biosys, inc.

(c) Reflects the inclusion of $8.2 million of previously deferred revenue in
connection with the termination of a power-sales agreement relating to a
cogeneration facility in Staten Island, New York.

15. SUBSEQUENT EVENTS

Acquisition

In November 1997, the Company's Thermo Trilogy Corporation subsidiary
acquired the sprayable bacillus thuringiensis (Bt) -- biopesticide business of
Novartis AG and its affiliates (the Bt business of Novartis) for $19.1 million
in cash and the assumption of certain liabilities.

This acquisition has been accounted for using the purchase method of
accounting, and the results of operations of the Bt business of Novartis have
been included in the accompanying financial statements from the date of
acquisition. The cost of this acquisition equaled the estimated fair value of
the tangible net assets acquired. Allocation of the purchase price was based on
an estimate of the fair value of the net assets acquired and is subject to
adjustment upon finalization of the purchase-price allocation. The Company has
gathered no information that indicates the final allocation will differ
materially from the preliminary estimate.

Purchase of Power-Generation Facilities

In January 1998, the Company, through a wholly owned subsidiary's
participation in a joint venture, purchased an 83% interest in the assets of a
12-megawatt energy center near Tabor, Czech Republic, along with the business of
five auxiliary boilers in the town of Pribram, Czech Republic, for $6.9 million
in cash.

In March 1998, the Company acquired two power-generation facilities and
related sites in California for approximately $9.5 million in cash and the
assumption of certain liabilities.

Issuance of Stock by Subsidiary

In the first six months of fiscal 1998, the Company's Thermo Trilogy
subsidiary sold 1,942,821 shares of its common stock in private placements at
$8.25 per share for net proceeds of $14.9 million, resulting in a gain of $6.3
million. Following the private placements, the Company owned 80% of Thermo
Trilogy's outstanding common stock.

Earnings per Share

During the quarter ended January 3, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share." As a result, all
previously reported earnings per share have been

F-23
<PAGE> 83
THERMO ECOTEK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

restated. Basic earnings per share have been computed by dividing net income by
the weighted average number of shares outstanding during the period. Diluted
earnings per share have been computed assuming the conversion of convertible
obligations and the elimination of the related interest expense, and the
exercise of stock options, as well as their related income tax effects. Basic
and diluted earnings per share were calculated as follows:

<TABLE>
<CAPTION>
NINE
MONTHS
ENDED YEAR ENDED SIX MONTHS ENDED
--------- ----------------------------------- --------------------
SEPT. 30, SEPT. 30, SEPT. 28, SEPT. 27, MARCH 29, APRIL 4,
1995 1995 1996 1997 1997 1998
--------- ----------- --------- --------- --------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BASIC
Net income............................... $10,264 $12,540 $17,780 $22,545 $ 5,252 $13,456
------- ------- ------- ------- ------- -------
Weighted average shares.................. 22,477 21,796 23,528 24,613 24,772 24,460
------- ------- ------- ------- ------- -------
Basic earnings per share................. $ .46 $ .58 $ .76 $ .92 $ .21 $ .55
======= ======= ======= ======= ======= =======
DILUTED
Net income............................... $10,264 $12,540 $17,780 $22,545 $ 5,252 $13,456
Effect of:
Convertible debentures................. 1,295 1,726 1,644 2,374 836 1,579
Majority-owned subsidiary's dilutive
securities.......................... -- -- -- -- -- (4)
------- ------- ------- ------- ------- -------
Income available to common shareholders,
as adjusted............................ $11,559 $14,266 $19,424 $24,919 $ 6,088 $15,031
------- ------- ------- ------- ------- -------
Weighted average shares.................. 22,477 21,796 23,528 24,613 24,772 24,460
Effect of:
Convertible debentures................. 10,816 10,816 12,262 13,746 12,649 14,458
Stock options.......................... 522 402 502 381 451 343
------- ------- ------- ------- ------- -------
Weighted average shares, as adjusted..... 33,815 33,014 36,292 38,740 37,872 39,261
------- ------- ------- ------- ------- -------
Diluted earnings per share............... $ .34 $ .43 $ .54 $ .64 $ .16 $ .38
======= ======= ======= ======= ======= =======
</TABLE>

The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. At April 4, 1998, there were 44,200 of such options
outstanding, with exercise prices ranging from $19.23 to $19.25 per share.

Conversion of Convertible Securities

In May 1998, Thermo Electron converted its 4.0% subordinated convertible
debentures into 10,821,485 shares of Company common stock.

F-24
<PAGE> 84

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of biosys, inc.:

In our opinion, the accompanying consolidated balance sheets of
discontinued operations and the related consolidated statements of discontinued
operations, of cash flows of discontinued operations and of shareholders' equity
(deficit) of discontinued operations present fairly, in all material respects,
the financial position of biosys, inc. and its subsidiaries (the "Company") at
December 31, 1995 and 1996, and the results of their discontinued operations and
their cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

As discussed in Notes 1 and 2 to the consolidated financial statements,
biosys, inc. and certain of its wholly-owned subsidiaries filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code
during 1996. Subsequent to December 31, 1996, the Company sold substantially all
of its productive assets, ceased operations and filed a plan of liquidation with
the United States Bankruptcy Court for the District of Maryland which plan is
currently awaiting confirmation. The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. As more fully described in Note 3 to the consolidated financial
statements, the results of operations are presented as discontinued operations,
and accrued expenses include the estimated costs of the liquidation of the
Company. As a consequence, substantial doubt exists about the Company's ability
to continue as a going concern. As more fully described in Notes 7 and 8 to the
consolidated financial statements, a significantly larger amount of claims have
been cumulatively asserted against the Company than are reflected as liabilities
in the consolidated financial statements.

As discussed in Note 8 to the financial statements, in July 1997 a former
customer of the Company filed a claim contending that biosys, inc. has failed to
perform under an exclusive marketing agreement between the former customer and
biosys, inc. Based upon this alleged breach of the marketing agreement and
biosys, inc.'s inability to perform under such agreement, the former customer
has asserted a claim of approximately $9 million, representing their alleged
lost margin for the remaining term of the marketing agreement. It is the
Company's intention to object to the allowance of such claim. The ultimate
outcome of the matter cannot presently be determined, and no provision for any
liability that may result has been made in the financial statements.

The consolidated financial statements do not include any adjustments
relating to the amounts that ultimately will be paid to settle the Company's
liabilities; as a result of the liquidation process, such amounts may be
substantially different from their carrying values.

PRICE WATERHOUSE LLP

Falls Church, Virginia
August 7, 1997

F-25
<PAGE> 85

BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS OF DISCONTINUED OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1995 1996 1996
HISTORICAL HISTORICAL PRO FORMA
---------- ---------- -----------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 1,755 $ 961 $ 8,021
Accounts receivable, net................................ 3,009 2,363 1,040
Inventories, net........................................ 4,086 3,262 --
Property and equipment, net............................. 6,421 6,117 --
Goodwill................................................ 380 3,606 --
Other assets, net....................................... 706 623 --
--------- --------- ---------
$ 16,357 $ 16,932 $ 9,061
========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities not subject to compromise:
Accounts payable...................................... $ 4,767 $ 2,512 $ 116
Debt -- prepetition................................... 9,674 3,562 --
Accrued expenses...................................... 3,309 966 966
Deferred credits...................................... 931 214 21
Estimated costs through completion of liquidation..... -- 2,512 2,765
--------- --------- ---------
Total liabilities not subject to compromise........ 18,681 9,766 3,868
--------- --------- ---------
Liabilities subject to compromise -- prepetition........ -- 11,660 9,686
--------- --------- ---------
Total liabilities.................................. 18,681 21,426 13,554
--------- --------- ---------
Commitment and contingencies (Note 8)
Shareholders' deficit:
Series A convertible preferred stock, $.001 par value;
5,000,000 shares authorized, 520 shares issued and
outstanding on December 31, 1996................... -- 1 1
Common stock, $.001 par value; 30,000,000 shares
authorized; 5,598,828 and 9,548,610 issued and
outstanding at December 31, 1995 and 1996,
respectively....................................... 6 9 9
Additional paid-in capital............................ 126,315 146,651 146,651
Accumulated deficit................................... (128,592) (151,154) (151,154)
Cumulative translation adjustment..................... (53) (1) --
--------- --------- ---------
Total shareholders' deficit........................ (2,324) (4,494) (4,493)
--------- --------- ---------
$ 16,357 $ 16,932 $ 9,061
========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-26
<PAGE> 86

BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues:
Product sales............................................. $ 22,679 $ 22,846
Contract research and development......................... 320 903
-------- --------
Total revenues......................................... 22,999 23,749
-------- --------
Operating costs and expenses:
Cost of product sales..................................... 21,241 21,245
Research and development.................................. 7,006 5,685
Marketing and selling..................................... 4,301 3,108
General and administrative................................ 3,520 5,607
Purchased research and development........................ -- 6,000
Costs of mergers.......................................... 4,175 --
-------- --------
Total operating costs and expenses..................... 40,243 41,645
-------- --------
Loss from operations........................................ (17,244) (17,896)
-------- --------
Non-operating income and expenses:
Interest and other expense................................ (1,415) (1,313)
Interest and other income................................. 119 48
-------- --------
Total non-operating income and expenses................ (1,296) (1,265)
-------- --------
Reorganization and estimated expenses through liquidation,
net....................................................... -- (3,401)
-------- --------
Net loss.................................................... (18,540) (22,562)
Preferred stock dividends and accretion..................... -- (1,844)
-------- --------
Net loss applicable to common shares........................ $(18,540) $(24,406)
======== ========
Net loss per share.......................................... $ (4.04) $ (3.17)
======== ========
Weighted average common shares and equivalents.............. 4,587 7,688
======== ========
</TABLE>

See accompanying notes to consolidated financial statements

F-27
<PAGE> 87

BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS OF DISCONTINUED OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(18,540) $(22,562)
Adjustments to reconcile net loss to net cash used in
operating activities:
Purchased research and development..................... -- 6,000
Depreciation and amortization.......................... 1,589 2,567
Common stock and warrants issued for loan origination
and modification...................................... 85 153
Loss on disposal of assets............................. 49 --
Changes in assets and liabilities:
Accounts receivable.................................. (1,130) 942
Inventories.......................................... (543) 1,528
Other assets......................................... 336 (146)
Accounts payable and accrued expenses................ 4,188 3,044
Estimated costs through completion of liquidation.... -- 2,512
Deferred credits..................................... 399 (717)
-------- --------
Net cash used in operating activities....................... (13,567) (6,679)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment..................... (845) (888)
Proceeds from sale of property and equipment.............. 547 --
Proceeds from sale of short-term investments.............. 76 --
Net cash acquired in AgriDyne acquisition................. -- 1,742
-------- --------
Net cash provided by (used in) investing activities......... (222) 854
-------- --------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs........... 3,012 --
Exercise of stock options and warrants.................... 24 8
Issuance of convertible preferred stock, net of issuance
costs.................................................. -- 7,254
Payments on debt.......................................... (1,186) (2,450)
Proceeds from issuance of debt............................ 5,325 182
Restricted cash........................................... -- --
-------- --------
Net cash provided by financing activities................... 7,175 4,994
-------- --------
Effect of exchange rate changes on cash..................... (8) 37
-------- --------
Net decrease in cash and cash equivalents................... (6,622) (794)
Cash and cash equivalents at beginning of year.............. 8,377 1,755
-------- --------
Cash and cash equivalents at end of year.................... $ 1,755 $ 961
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-28
<PAGE> 88

BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
OF DISCONTINUED OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
------------------- ------------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- ------ ---------- ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 2,133,605 $ 213 4,106,838 $ 4 $122,983 $(110,052) $(58) $ 13,090
Issuance of common stock
to retire preferred
stock.................. (2,133,605) (213) 573,878 1 212
Issuance of common stock
upon exercise of
options and warrants... 51,398 109 109
Issuance of common
stock.................. 866,714 1 3,011 3,012
Net loss................. (18,540) (18,540)
Translation adjustment... 5 5
---------- ----- ---------- ----- -------- --------- ---- --------
Balance at December 31,
1995................... 5,598,828 6 126,315 (128,592) (53) (2,324)
Issuance of common stock
in connection with
acquisition of
AgriDyne............... 1,888,121 1 12,924 12,925
Issuance of preferred
stock.................. 780 1 7,253 7,254
Issuance of common stock
upon exercise of
options and warrants... 8,718 161 161
Conversion of preferred
stock into common
stock.................. (260) 2,052,943 2 (2)
Net loss................. (22,562) (22,562)
Translation adjustment... 52 52
---------- ----- ---------- ----- -------- --------- ---- --------
Balance at December 31,
1996................... 520 $ 1 9,548,610 $ 9 $146,651 $(151,154) $ (1) $ (4,494)
========== ===== ========== ===== ======== ========= ==== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-29
<PAGE> 89

BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY

During the year ended December 31, 1996, biosys, inc. and its domestic
subsidiaries, Crop Genetics International Corporation ("CGI") and AgriDyne
Technologies, Inc. ("AgriDyne") and its U.K. subsidiary, Agrisense-BCS, Limited
("BCS"), herein collectively referred to as "biosys" or the "Company," engaged
in the development, production and sale of bioinsecticides used to detect,
monitor and control harmful insects. The Company also had a division which
produced high yielding seedcane for the sugarcane industry.

On September 27, 1996, biosys, inc. and CGI, filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in
the United States Bankruptcy Court for the District of Maryland (the "Bankruptcy
Court"). On November 15, 1996, AgriDyne also filed a voluntary petition for
relief under Chapter 11. biosys, inc., CGI and AgriDyne are herein collectively
referred to as the "Debtors" and the filing of voluntary petitions under Chapter
11 are referred to as the "Filings." BCS did not file for bankruptcy protection.

As discussed in Note 2 on January 17, 1997, substantially all of the assets
of the Debtors, including the stock of BCS, were sold to Thermo Trilogy
Corporation in accordance with the Asset Purchase Agreement. In conjunction with
the sale, Thermo Trilogy Corporation also assumed certain contractual
obligations of biosys. The Company ceased the manufacture and sale of commercial
products concurrent with the sale of assets.

The proceeds from the sale of assets are expected to be distributed to the
Debtor's creditors in accordance with a Joint Plan of Liquidation which has been
filed with Bankruptcy Court. The Company does not expect that there will be any
funds remaining for the Company's common or preferred shareholders. See Note 2
for further discussion of the bankruptcy proceedings.

NOTE 2 -- STATUS OF CHAPTER 11 PROCEEDINGS

During 1996, the Company continued to experience negative cash flow from
operations. Despite certain funding and collaborative initiatives pursued by the
Company during 1996 and prior periods, the Company was, for a variety of
reasons, not successful in procuring adequate funding to satisfy operational and
creditor needs. Accordingly, as discussed in Note 1, during 1996 the Debtors
filed voluntary petitions under Chapter 11 in order to obtain relief from their
creditors. Subsequent to the date of the Filings, the Debtors have been
operating as debtors-in-possession pursuant to federal bankruptcy laws.
Schedules were filed by the Debtors with the Bankruptcy Court setting forth the
assets and liabilities of the Debtors as of the date of the Filings as shown by
the Debtors' accounting records. Creditors, with certain limited exceptions,
were required to file proof of claims by January 28, 1997 (in the case of
biosys, inc. and CGI creditors) and March 18, 1997 (in the case of AgriDyne
creditors). Substantial differences between amounts shown by the Debtors and
claims filed by creditors are currently being investigated and, where not
resolved, may be subject to objection in the normal course of bankruptcy
proceedings. The amount and settlement terms for any such disputed liabilities
are subject to approval by the Bankruptcy Court. No provision has been recorded
as of December 31, 1996, for possible settlements, if any, as such amount is not
determinable. See Note 8.

From the date of the Filings through the sale of assets to Thermo Trilogy
Corporation, the operations of the Company were funded by the use of existing
cash and working capital resources with the oversight of the secured creditors,
The Official Committee of Unsecured Creditors ("Creditors' Committee") and the
Bankruptcy Court.

On December 24, 1996, the Debtors entered into an Asset Purchase Agreement
with Thermo Trilogy Corporation. Pursuant to the Asset Purchase Agreement,
Thermo Trilogy Corporation agreed to purchase substantially all of the Company's
assets, excluding certain cash and trade accounts receivable balances and
including the common stock of BCS, for $11 million in cash and the assumption of
certain contractual obligations of the Company. On January 7, 1997, the
Bankruptcy Court approved the Asset Purchase

F-30
<PAGE> 90
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Agreement and the sale was consummated on January 17, 1997. At the time of sale,
the cash paid and contractual obligations assumed by Thermo Trilogy Corporation
exceeded the carrying value of the assets sold by biosys by approximately
$253,000. This gain has been offset against accrued reorganization and
liquidation expenses at December 31, 1996. See Note 3. In conjunction with the
sale of the Company's assets on January 17, 1997, the Company paid one of its
secured creditors approximately $3,562,000, representing outstanding principal
balance and accrued interest, pursuant to an Order of the Bankruptcy Court.

The Consolidated Balance Sheets include unaudited pro-forma information
presenting the Company's balance sheet at December 31, 1996, as if the
transactions with Thermo Trilogy Corporation and the Company's secured creditor
as described above had been consummated on December 31, 1996. The pro forma
adjustments made to the Consolidated Balance Sheets are as follows:

F-31
<PAGE> 91
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PRO FORMA CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 961 $10,622(a) $ 8,021
(3,562)(b)
Accounts receivable, net................................ 2,363 (1,323)(a) 1,040
Inventories, net........................................ 3,262 (3,262)(a) --
Property and equipment, net............................. 6,117 (6,117)(a) --
Goodwill................................................ 3,606 (3,606)(a) --
Other assets, net....................................... 623 (623)(a) --
--------- ------- ---------
$ 16,932 $(7,871) $ 9,061
========= ======= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities not subject to compromise:
Accounts payable...................................... $ 2,512 $(2,396)(a) $ 116
Debt -- prepetition................................... 3,562 (3,562)(b) --
Accrued expenses...................................... 966 966
Deferred credits...................................... 214 (193)(a) 21
Estimated costs through completion of liquidation..... 2,512 253(a) 2,765
--------- ------- ---------
Total liabilities not subject to compromise... 9,766 (5,898)(a) 3,868
--------- ------- ---------
Liabilities subject to compromise -- prepetition........ 11,660 (1,974)(a) 9,686
--------- ------- ---------
Total liabilities............................. 21,426 (7,872) 13,554
--------- ------- ---------
Shareholders' deficit:
Convertible preferred stock, par value................ 1 1
Common stock, par value............................... 9 9
Additional paid-in capital............................ 146,651 146,651
Accumulated deficit................................... (151,154) (151,154)
Cumulative translation adjustment..................... (1) 1(a) --
--------- ------- ---------
Total shareholders' deficit................... (4,494) 1 (4,493)
--------- ------- ---------
$ 16,932 $(7,871) $ 9,061
========= ======= =========
</TABLE>

- ---------------
(a) To reflect the sale, consummated on January 17, 1997, of substantially all
of the Company's assets, including the stock of BCS, to Thermo Trilogy
Corporation in exchange for $11,000,000 in cash and the assumption by Thermo
Trilogy Corporation of certain contractual obligations of the Company.

(b) To reflect the repayment of the outstanding principal balance and accrued
interest due to one of the Company's secured creditors in conjunction with
the sale of assets described above.

On April 28, 1997, the Debtors, together with the Creditors' Committee,
filed a Joint Plan of Liquidation with the Bankruptcy Court. On June 13, 1997,
the Debtors, together with the Creditors' Committee, filed a Joint Disclosure
Statement. A hearing to approve or disapprove the Joint Disclosure Statement has
been

F-32
<PAGE> 92
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

scheduled for August 19, 1997. Upon approval of the Joint Disclosure Statement,
the Bankruptcy Court will schedule a confirmation hearing on the Joint Plan of
Liquidation to be followed by the appointment of a liquidating agent if the
Joint Plan of Liquidation is confirmed.

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

As the Company was in the process of selling substantially all of its
assets to Thermo Trilogy Corporation at December 31, 1996, the financial
statements as of and for the year ended December 31, 1996, have been prepared as
those of a discontinued operation. Therefore, the historical cost basis has been
used, and the Company has accrued all operating results and estimated costs to
be incurred through the date of its pending liquidation as of December 31, 1996.
The gain on sale of the Company's assets to Thermo Trilogy Corporation described
in Note 2 has been offset against this accrual. The valuation of assets and
liabilities necessarily requires many estimates and assumptions and there are
substantial uncertainties in carrying out the liquidation.

The accompanying balance sheets are presented without segregation of
current assets and current liabilities. This unclassified presentation avoids
possible misunderstandings as to the relationships between current and
noncurrent assets and liabilities. With the subsequent sale of substantially all
of biosys' assets and the planned liquidation, all assets and liabilities became
current. See Notes 1 and 2.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
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. Particularly sensitive estimates include liabilities subject
to compromise, estimated costs through completion of liquidation and the
AgriDyne purchase price allocation (Note 4). Actual results could differ from
those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of biosys and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Revenue Recognition

Revenue from the sale of the Company's products, as well as from products
manufactured for others, is recognized upon shipment. Provision is made for
expected sales returns and allowances when revenue is recognized. Contract
research and development revenues are recognized as related expenses are
incurred in accordance with the contract terms.

Cash Equivalents

Cash equivalents consist of highly liquid investments with original
maturities of three months or less.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," (SFAS 107) requires companies to disclose
the fair value of financial instruments, both assets and liabilities, recognized
and not recognized in the balance sheets, for which it is practicable to
estimate fair

F-33
<PAGE> 93
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

value. For purposes of this disclosure, the fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between two willing parties, other than in a forced liquidation or
sale. Fair value is based on quoted market prices for the same or similar
instruments. The carrying amount of the Company's financial assets approximates
fair value due to the short maturity of these financial instruments.

The uncertainty related to the outcome of the Filings and the resulting
effect upon the ultimate value of the Company's liabilities adds significantly
to the uncertain nature of any estimate of fair value. The disposition of the
Company's liabilities in the bankruptcy proceedings could occur at significantly
different amounts from fair value estimates which can be made at this time. The
liabilities of the Company which are subject to compromise are subject to
adjustment at the direction of the Bankruptcy Court. Additionally, the timing of
the ultimate payment of these liabilities, as well as the inclusion of interest,
late fees and other similar costs, is also subject to determination by the
Bankruptcy Court. Accordingly, it is not practicable to determine the fair value
of the liabilities of the Company.

Inventories

Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight line method over the estimated useful lives of
the assets, which range from three to ten years. Depreciation of leasehold
improvements is computed using the shorter of the remaining lease term or the
estimated useful life of the improvements.

Long-lived Assets

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS 121). Upon adoption of the
SFAS 121, the Company evaluated its long-lived assets using projected
undiscounted future cash flows and operating results for each of the Company's
divisions and determined that no material impairment existed at January 1, 1996.
The Company continued to evaluate its long-lived assets for impairment
throughout 1996 and determined that no material impairment existed.

Foreign Currency Translation

Assets and liabilities of the Company's foreign subsidiary are translated
to U.S. dollars at year-end exchange rates. Revenue and expense items are
translated at average exchange rates prevailing during the year. Translation
adjustments are accumulated as a separate component of shareholders' deficit.
Transaction gains and losses are included in results of operations and have not
been significant.

Interest Expense

The accrual of interest on prepetition indebtedness ceased subsequent to
the date of the Filings as a result of the related debt being considered
liabilities subject to compromise in the bankruptcy proceedings. If these costs
had continued to accrue subsequent to the date of the Filings, total interest
expense for the year ended December 31, 1996, would have been increased by
approximately $116,000. Cash paid for interest approximated $1,277,000 and
$1,228,000 in 1996 and 1995, respectively.

F-34
<PAGE> 94
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net Loss Per Share

Net loss per share has been computed using the weighted average number of
common shares outstanding during each period presented. Common equivalent shares
for options and warrants granted but not exercised and for convertible preferred
stock are not included in the calculation as their effect would be antidilutive.

Accounting for Stock Options

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). In accordance with SFAS 123, the Company has elected to continue to
measure compensation expense for its stock option plans using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has not recognized any
compensation expense for stock options granted under its stock option plans. The
Company has calculated the pro-forma information required to be disclosed under
SFAS 123 for options granted in 1996 and 1995 using the appropriate pricing
models prescribed by SFAS 123 and determined that, had compensation expense been
recorded commensurate to the fair value of options granted on the grant date,
the pro-forma impact on the Company's net loss and net loss per share for such
periods was not material. Accordingly, no pro-forma amounts are presented.

Reverse Stock Split

Effective March 15, 1996, the Company effected a one for two and one-half
reverse stock split of its common stock (the "Reverse Stock Split"). All common
stock share information in the accompanying consolidated financial statements
and related footnotes has been adjusted to reflect the Reverse Stock Split.

Reclassifications

Certain prior year information has been reclassified to conform with
current year presentation.

NOTE 4 -- BUSINESS COMBINATIONS

AgriDyne Technologies Inc.

On March 15, 1996, the Company acquired AgriDyne Technologies Inc.
("AgriDyne") in a merger whereby AgriDyne became a wholly-owned subsidiary of
the Company. To effect the merger, the Company issued approximately 1.9 million
shares of its common stock in exchange for all of the outstanding shares of
AgriDyne common stock based on a conversion ratio of 0.28664 of a share of
biosys common stock for each share of AgriDyne common stock, after giving effect
to a one for two and one-half reverse stock split of biosys common stock
effected immediately prior to the merger.

F-35
<PAGE> 95
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company and AgriDyne initially entered into an Agreement and Plan of
Merger in April 1995. The final purchase price of AgriDyne was determined as the
market value of the Company's 1.9 million shares of common stock on the date of
the final amendment to the Agreement and Plan of Merger in December 1995 and
certain direct costs to effect the merger. The Company allocated this purchase
price to the identifiable tangible and intangible assets and liabilities of
AgriDyne and assigned the excess purchase price to goodwill as follows (in
thousands):

<TABLE>
<S> <C>
Identifiable tangible and intangible assets and liabilities:
Cash...................................................... $ 2,041
Accounts receivable....................................... 338
Inventory................................................. 673
Equipment................................................. 121
In-process research and development....................... 6,000
Other assets.............................................. 199
Accrued expenses.......................................... (105)
-------
Total identifiable tangible and intangible assets and
liabilities........................................... 9,267
Goodwill.................................................. 4,325
-------
$13,592
=======
</TABLE>

In accordance with generally accepted accounting principles, the Company's
estimate of purchased in-process research and development was expensed
immediately. Goodwill acquired in this transaction was to be amortized over its
estimated useful life of three years, of which $1.1 million of amortization
expense was recorded in the fourth quarter of 1996.

The results of operations of AgriDyne have been included in the Company's
financial statements since the date of acquisition. The following unaudited pro
forma results of the Company for the years ended December 31, 1995 and 1996
assume that the transaction had taken place on the first day of the respective
periods and include the non-recurring $6 million write-off of in-process
research and development (in thousands, except per share data):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Total revenues, net......................................... $25,129 $23,997
Net loss.................................................... (28,270) (23,163)
Net loss applicable to common shares........................ $ (4.37) $ (2.87)
</TABLE>

Crop Genetics International Corporation

On March 31, 1995, the Company completed a merger with CGI. In exchange for
all of CGI's outstanding equity securities, the Company issued approximately 1.4
million shares of common stock. The acquisition was accounted for using the
pooling-of-interests method and the separate balance sheets, statements of
operations, cash flows and shareholders' equity of the Company and CGI for
periods prior to March 31, 1995, were restated on a combined basis for all
periods presented. During 1995, the Company incurred $3,723,000 in merger,
severance and relocation costs associated with the merger.

F-36
<PAGE> 96
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenues and net loss of the separate companies included in the combined
statement of operations through the merger date of March 31, 1995, are as
follows (in thousands):

<TABLE>
<S> <C>
Revenues:
biosys................................................. $ 5,921
CGI.................................................... 99
-------
$ 6,020
=======
Net loss:
biosys................................................. $(2,682)
CGI.................................................... (3,423)
-------
$(6,105)
=======
</TABLE>

NOTE 5 -- DETAILS OF BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
Accounts receivable:
Trade receivables...................................... $ 2,993,000 $ 2,850,000
Other receivables...................................... 304,000 66,000
Less allowance for doubtful accounts................... (288,000) (553,000)
----------- ------------
$ 3,009,000 $ 2,363,000
=========== ============
Inventories:
Raw materials.......................................... $ 3,130,000 $ 2,329,000
Work-in-process........................................ 225,000 141,000
Finished goods......................................... 814,000 1,259,000
Deferred growing costs................................. 471,000 450,000
Less reserve for obsolescence.......................... (554,000) (917,000)
----------- ------------
$ 4,086,000 $ 3,262,000
=========== ============
Property and equipment:
Land and improvements.................................. $ 220,000 $ 220,000
Machinery and equipment................................ 9,721,000 11,243,000
Furniture and fixtures................................. 567,000 608,000
Leasehold improvements................................. 4,045,000 4,101,000
----------- ------------
14,553,000 16,172,000
Less accumulated depreciation.......................... (8,132,000) (10,055,000)
----------- ------------
$ 6,421,000 $ 6,117,000
=========== ============
Accrued expenses:
Merger costs (Note 4).................................. $ 1,633,000 $ --
Accrued compensation and benefits...................... 169,000 126,000
Other.................................................. 1,507,000 840,000
----------- ------------
$ 3,309,000 $ 966,000
=========== ============
</TABLE>

F-37
<PAGE> 97
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- INDEBTEDNESS

During 1995, the Company entered into a working capital line of credit with
a bank that allowed for borrowings of up to $5,250,000 subject to certain
limitations based upon the value of substantially all of the Company's assets
which were used for collateral. In 1995 and 1996, $5,250,000 and $3,500,000,
respectively, were outstanding under the line of credit. During 1995 and 1996,
the Company sought and received extensions to stated dates of repayment;
however, the Company was unable to negotiate an extension of the final repayment
date of September 30, 1996. Interest on borrowings is charged at the bank's
prime rate plus 3% (11.25% as of December 31, 1996). In conjunction with the
closing of the sale of Company's assets to Thermo Trilogy Corporation in January
1997, pursuant to an Order of the Bankruptcy Court, the Company paid the bank
approximately $3,562,000, representing outstanding principal balance and accrued
interest.

During 1995, the Company paid fees of $100,000 and issued to the lender
warrants to purchase 45,992 shares of common stock at exercise prices ranging
from $5.00 to $7.00 per share. The warrants were exercisable at various dates
through January 31, 2001. The warrant shares are subject to adjustment for
certain changes in capital structure and have registration rights. The warrants
were valued at $58,000 and recorded as interest expense in 1995. During 1996,
the Company issued to the lender warrants to purchase 173,333 shares of common
stock at an exercise price of the lesser of $3 per share or the lowest closing
price per common share during the duration of the line of credit facility. The
warrants were valued at $97,000 and recorded as interest expense in 1996. In
addition, the warrants issued in 1995 were re-priced to the same exercise price
as the warrants issued in 1996.

CGI had borrowings of $3,400,000 under a credit facility. At December 31,
1996, approximately $2,450,000 was outstanding under this credit facility. The
borrowing bears interest at the bank's prime rate plus 0.5% (8.75% at December
31, 1996). Future principal payments on the credit facility are subject to
bankruptcy proceedings. Borrowings under this debt facility are secured by
substantially all of the equipment of CGI. CGI has instituted an adversary
proceeding in order to determine the validity, extent and priority of the bank's
secured claim against CGI in the bankruptcy proceeding. A joint motion by the
Debtors, unsecured creditors committee, and the lender to approve a settlement
agreement establishing the bank's secured claim at approximately $548,000 is
before the Bankruptcy Court for approval, but the Bankruptcy Court has not yet
ruled on the motion. If the Bankruptcy Court approves the settlement, the
remainder of the bank's claim will be treated as an unsecured claim. The entire
principal balance of $2,450,000 outstanding at December 31, 1996, is included in
liabilities subject to compromise in the Consolidated Balance Sheets.

In December 1994, the Company entered into a borrowing arrangement under
which the Company borrowed $2,180,000, secured by certain property and
equipment. At December 31, 1996, approximately $1,395,000 was outstanding under
this arrangement. Future principal payments on the debt are subject to
bankruptcy proceedings. biosys, inc. has instituted an adversary proceeding in
order to determine the validity, extent and priority of the lender's secured
claim against biosys, inc. in the bankruptcy proceeding. This determination will
assist in establishing the amount to be paid to the lender as a secured claim.
The remainder of the lender's claim will be treated as an unsecured claim. The
entire principal balance of $1,395,000 outstanding at December 31, 1996, is
included in liabilities subject to compromise in the Consolidated Balance
Sheets.

In connection with the December 1994 borrowing and subsequent amendments,
the Company issued to the lender warrants to purchase 55,179 shares of common
stock at prices ranging from $7.525 to $8.125 per share. These warrants are
exercisable at various dates through November 1, 2000. The warrant shares are
subject to adjustment for certain changes in capital structure and have certain
registration rights. The warrants were valued at $138,000 and included in other
long-term assets as a debt issuance cost. The warrants are being amortized over
the term of the debt and $32,000 and $58,000 was recognized as related interest
expense

F-38
<PAGE> 98
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during 1996 and 1995, respectively. The effective rate of interest on this
borrowing, including the amortization of the value of the warrants, is
approximately 18%.

No amounts are currently available for additional borrowings under any of
the Debtors borrowing agreements.

NOTE 7 -- LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise under the bankruptcy proceedings include
substantially all current and long-term unsecured or undersecured liabilities as
of the date of the Filings. Pursuant to the provisions of the Bankruptcy Code,
payment of those liabilities may not be made except pursuant to a plan of
liquidation or Bankruptcy Court order while the Debtors continue to operate as
debtors-in-possession. The Debtors believe that they have performed all required
notification procedures under bankruptcy law with regards to known or potential
claimants for the purpose of identifying all prepetition claims against the
Debtors. While the Company believes that the amounts recorded reflect known bona
fide unsecured and undersecured liabilities, the amounts ultimately allowed by
the Bankruptcy Court may be significantly different.

A significantly larger amount of claims have been cumulatively filed
against the Debtors than are reflected as prepetition liabilities in the
financial statements. Furthermore, there are (i) individual creditors that have
not filed claims, (ii) claims filed for unspecified amounts, and (iii) claims
for specific items which are not reflected as liabilities in the financial
statements.

The amount recorded as liabilities subject to compromise is significantly
less than filed claims because the cumulative total of filed claims includes:
(i) claims that have been discharged or waived subsequent to their filing, (ii)
duplicate filings of single items in all three bankruptcy cases, (iii) claims
currently or potentially subject to negotiated compromise, (iv) claims filed by
participants in a certain limited partnership (v) claims filed by the common and
preferred shareholders of the Debtors, and (vi) numerous errors or otherwise
currently unresolved differences.

It is currently not possible to precisely determine the ultimate total
amount of claims which will be allowed by the Bankruptcy Court and the final
resolution of the disputed or negotiated claims. However, total prepetition
liabilities reflected in the consolidated financial statements represents
management's best current estimate of all known prepetition liabilities given
the facts and circumstances of which management is currently aware.

NOTE 8 -- LITIGATION AND DISPUTED CLAIMS

The Debtors and the Creditors' Committee have identified certain claims
filed in the three bankruptcy cases which are either duplicative or the amount
of which the Debtors dispute. The Debtors intend to file objections to
duplicative claims in order to have only one claim allowed for each creditor.
The Debtors also intend to object to claims subject to other than de minimis
disputed amounts. Claims which cannot be resolved by agreement will have to be
determined by the Bankruptcy Court. The resolution by the Bankruptcy Court is
subject to the Court's schedule, however, the Debtors estimate that claims
subject to objection may be resolved by the Bankruptcy Court within two to six
months, or longer, after the filing of the objections. Significant disputed
creditor claims, settlements and other contingencies are discussed below.

A lender has asserted that the Debtor owes amounts in addition to the
principal and interest amounts already repaid. The lender had filed additional
claims totaling approximately $850,000 representing unpaid interest calculated
at a default rate, late charges, attorney's fees, collection costs, and certain
alleged put right liabilities arising from warrants issued by the Debtor to the
lender. The Creditors' Committee has filed an objection with the Bankruptcy
Court to the allowance of certain claims filed by the lender. The Creditors'
Committee, the Debtors and the lender have reached an agreement in principle
resolving these outstanding
F-39
<PAGE> 99
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

claims for $425,000. A motion seeking approval of this proposed settlement will
be filed with the Bankruptcy Court. Liabilities subject to compromise at
December 31, 1996, include $425,000 for the amount to be paid under the proposed
settlement.

biosys, inc. and the Creditors' Committee instituted an adversary
proceeding against two banks to enjoin them from paying or honoring certain
letters of credit in the approximate total amount of $441,000 for which biosys,
inc. is the account party and which biosys, inc. and the Creditors' Committee
contend have expired. With the consent of the banks, a preliminary injunction
was entered by the Bankruptcy Court enjoining payment of the letters of credit.
A trial on the merits has been scheduled for February, 1998. No liability has
been recorded as of December 31, 1996, due to the uncertainty of the outcome of
these disputed claims; however, in connection with the sale of assets to Thermo
Trilogy Corporation described in Note 2, the Debtors agreed to place an amount
in excess of the claims in an escrow account pending the resolution of this
matter.

The owner of property previously occupied by the Debtors filed duplicate
claims in the biosys, inc. and CGI bankruptcy cases for damages arising from the
rejection of a lease in the approximate amount of $8,400,000 in each case.
Certain postpetition amounts were also outstanding for unpaid rent. The Debtors,
the property owner and the Creditors' Committee have reached an agreement as to
the payment of all obligations to the property owner on account of the lease.
The Debtors have agreed to pay $425,000 in full and final satisfaction of all
claims of the property owner. A motion approving the proposed settlement is
pending before the Bankruptcy Court. Liabilities subject to compromise at
December 31, 1996, include $425,000 for the amount to be paid under the proposed
settlement.

Certain preferred stockholders of biosys, inc. have filed a motion for an
order compelling conversion of their preferred stock to common stock. The
Debtors do not anticipate that there will be any recovery for the biosys, inc.
preferred stockholders on account of their equity interests in biosys, inc. Some
of the preferred stockholders have filed proof of claims in the biosys, inc.
bankruptcy estate totaling approximately $4,450,000 asserting unsecured creditor
claims in connection with biosys, inc.'s failure to convert their preferred
stock to common stock. It is the Debtors intention to object to the allowance of
such claims. No liability has been recorded as of December 31, 1996, due to the
uncertainty of the outcome of these disputed claims.

Subsequent to the January 1997 sale of the Company's assets to Thermo
Trilogy Corporation described in Note 2, in July 1997, a former customer of the
Company filed a claim contending that biosys, inc. has failed to perform under
an exclusive marketing agreement between the former customer and biosys, inc.
Based upon this alleged breach of the marketing agreement and biosys, inc.'s
inability to perform under such agreement, the former customer has asserted a
claim of approximately $9 million, representing their alleged lost margin for
the remaining term of the marketing agreement. It is the Company's intention to
object to the allowance of such claim. No liability has been recorded as of
December 31, 1996, due to the uncertainty of the outcome of these disputed
claims.

The Debtors believe that certain purchasers of one of the Company's
bioinsecticide products may file claims alleging that such products failed to
adequately disrupt pink bollworm mating, thereby damaging their cotton crops
harvested in Arizona in September and October of 1996. To date, no such claim
has been asserted and no liability has been recorded as of December 31, 1996,
due to the uncertainty of these unasserted claims.

AgriDyne and CGI each received from the United States Environmental
Protection Agency, Region VIII ("EPA") a Notice of Potential Liability and
Request for Information for the RAMP Industries Site in Denver, Colorado, dated
January 24, 1997, notifying AgriDyne and CGI of their respective potential
liability for response costs incurred or to be incurred at the RAMP Industrial
Site in Denver. The potential liability of AgriDyne and CGI relate to activities
which took place prior to 1995. These letters also included Requests for
Information regarding those entities' involvement at the Site and attached
historical documentation purportedly indicating that both entities generated
certain hazardous substances that were disposed of at the Site. In

F-40
<PAGE> 100
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

May 1997, written notification was received from the EPA that Native Plants (the
predecessor company to AgriDyne) shipped a limited amount of hazardous waste to
the Site for disposal and also is considered a potentially responsible party at
the Site. The Company has responded to the EPA's requests for information. The
Company contends that AgriDyne and CGI are de minimis parties and therefore
subject to a limited, allocated share of the response costs; however, the
Company may be jointly and severally liable for additional amounts. Moreover,
CGI intends to challenge the EPA's preliminary determination and assert that the
transporter of any hazardous waste, as opposed to CGI, made the decision to
dispose of the waste at the Site. If the EPA accepts CGI's challenge, CGI's
liability would be further reduced, however, it is uncertain at this time
whether the EPA will accept this challenge. No liability has been recorded as of
December 31, 1996, due to the uncertainty of the outcome of this matter.

NOTE 9 -- CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY

Series A Preferred Stock

On March 26, 1996, biosys completed the sale of an aggregate of 780 shares
of biosys Series A Preferred Stock (the "Preferred Shares") at $10,000 per share
or an aggregate purchase price of $7.8 million, net of placement fees of
approximately $550,000, to a group of institutionally accredited investors in a
private placement (the "Preferred Share Financing"). The Preferred Shares were
offered and sold in reliance on the exemption from registration under the
Securities Act set forth in Regulation D under the Securities Act. In connection
with the issuance of the Preferred Shares, warrants to purchase up to 80,889
shares of biosys common stock were issued to the placement agent and related
parties (the "Warrants"). The Warrants are exercisable over a five-year term and
have an exercise price of $6.75.

The Preferred Shares may be converted into biosys common stock at a
conversion price which is the lower of (i) $6.75, or (ii) 85% of the average
closing bid price for the five trading days prior to the date the investor gives
notice of conversion. At the date of issuance, the Preferred Shares were
immediately convertible into biosys common stock at a conversion price of $6.75
per common share. However, the ability to convert such shares at the discount
from market value, as described above, was based on a schedule set forth in the
agreement governing the Preferred Shares. Inasmuch as the Preferred Shares
provided for conversion into biosys common stock at a discount, the accompanying
Statement of Discontinued Operations reflects a corresponding amount of
accretion in arriving at net loss available to common shares which was recorded
in the fourth quarter of 1996. The Preferred Shares principal amount accretes at
an annual rate of 8%, payable in stock upon conversion to biosys common stock.
The Preferred Shares may be redeemed at the option of the Company at the time of
conversion at a price that would give the investor the same return as he would
have received had he converted on the day the redemption occurs and sold the
common stock upon conversion. The Preferred Shares have certain other conversion
and redemption rights. Such rights are not expected to be exercised due to the
Company's pending liquidation.

During 1996, 260 Preferred Shares were converted into 2,052,943 shares of
common stock at an average conversion price of approximately $1.30. The Company
has not allowed any shareholders to convert Preferred Shares into shares of
common stock subsequent to the Company's filing for bankruptcy on September 27,
1997. As discussed in Note 8, this matter is currently the subject of
litigation.

Options

The Company has an incentive stock option plan (the "Option Plan") which is
administered, and terms of option grants are established, by the Company's Board
of Directors (the "Board"). Under the terms of the Option Plan, options covering
the purchase of common stock may be granted to directors, employees and
consultants of the Company at prices not less than the fair market value of such
common stock at the date of grant. Options granted are exercisable over time and
generally vest 20% on a date specified by the Board and

F-41
<PAGE> 101
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

vest thereafter in equal monthly increments over four years. To date, all
options granted under the Option Plan have been for a term of ten years after
grant. The shares subject to expired options become available for future grants.
Generally, in the event of a transfer of control of the Company, the stock
option agreements used in conjunction with the Option Plan provide that the
Board shall either cause all outstanding options to become vested and
immediately exercisable or arrange for the successor or surviving entity to
assume such options. As of December 31, 1996, a total of 1,015,115 shares of
common stock were reserved under the Option Plan.

The Company maintains an outside directors' stock option plan (the
"Directors' Option Plan"), which is administered by the Board. Under the terms
of the Directors' Option Plan, options to purchase common stock are granted to
outside directors upon appointment and after each annual meeting of the
stockholders of the Company at prices equal to the fair market value of such
common stock at the date of grant. Options granted are exercisable over time and
vest 50% six months after the date of grant and 50% one year after the date of
grant. Options granted under the Directors' Option Plan are for a term of ten
years and any expired or canceled options become available for future grants.
Generally, in the event of a transfer of control of the Company, the stock
option agreements used in conjunction with the Directors' Option Plan provide
that the Board shall either cause all outstanding options to become vested and
immediately exercisable or arrange for the successor or surviving entity to
assume such options. As of December 31, 1996, a total of 40,000 shares of common
stock were reserved under the Directors' Option Plan.

The following table summarizes activity under these Option Plans:

<TABLE>
<CAPTION>
SHARES
UNDER
OPTION EXERCISE PRICE
-------- ------------------
<S> <C> <C>
Balance at December 31, 1994........................... 589,434 $0.45 -- 98.425
Options canceled..................................... (179,140) $0.45 -- 98.425
Options granted...................................... 220,960 $4.375 -- 5.12
Options exercised.................................... (51,398) $0.45 -- 15.625
--------
Balance at December 31, 1995........................... 579,856 $0.45 -- 29.05
Options canceled..................................... (32,620) $0.45 -- 29.05
Options granted...................................... 244,980 $5.625 -- 17.01
Options exercised.................................... (4,493) $0.45 -- 4.5313
--------
Balance at December 31, 1996........................... 787,723 $0.45 -- 20.625
========
Options exercisable at December 31, 1996............... 349,850 $0.45 -- 20.625
========
</TABLE>

The Company expects no further stock option grants or exercises due to the
Company's pending liquidation and the anticipated lack of funds remaining for
common stockholders after bankruptcy proceedings.

Reincorporation

On March 30, 1995, in connection with the CGI merger, the Company's
Certificate of Incorporation was amended to increase the authorized number of
shares of common stock from 8,000,000 to 12,000,000 and to increase the
authorized number of shares of Preferred Stock from 1,000,000 to 5,000,000.

NOTE 10 -- INCOME TAXES

As a result of recurring losses, the Company has provided full valuation
allowances as of December 31, 1996 and 1995 against its deferred tax assets.
Given the sale of substantially all of the Company's assets and the pending
liquidation of the Company, disclosure of deferred tax amounts is not considered
meaningful. At December 31, 1996, the Company had net operating loss
carryforwards of approximately $96 million for Federal tax purposes which expire
between 1998 and 2010 and other net operating loss carryforwards in

F-42
<PAGE> 102
BIOSYS, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

several states and the United Kingdom. Due to past changes in the Company's
ownership, certain of these net operating loss carryforwards are significantly
restricted in their utilization. Further changes in the Company's ownership
would cause there to be additional annual limitations on the amount of
unrestricted carryforwards which can be utilized.

NOTE 11 -- SEGMENT INFORMATION

The Company is engaged in one industry segment. One customer accounted for
22% of total revenues for each of the years ended December 31, 1996 and 1995.
One customer accounted for 12% of accounts receivable at December 31, 1996.
Substantially all of the Company's customers are in the bioagricultural and
consumer insecticide economic sector.

Information about the Company's operations in different geographical
locations for the years ended December 31, 1996 and 1995 is shown below. The
Company's areas of operation outside the United States are primarily in Europe.
Revenues from unaffiliated customers represent total net revenues from the
respective geographical areas after elimination of intercompany transactions.
Intraenterprise revenues represent intercompany sales in 1996 and 1995.
Operating loss is net revenues less operating costs and expenses pertaining to
specific geographic areas. Identifiable assets are those assets used in the
geographic areas and are reflected after elimination of intercompany balances.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revenues from unaffiliated customers:
United States............................................. $ 13,251,000 $ 13,616,000
Europe.................................................... 9,748,000 10,133,000
------------ ------------
$ 22,999,000 $ 23,749,000
============ ============
Intraenterprise revenues:
United States............................................. $ 3,036,000 $ 1,942,000
Europe.................................................... 63,000 538,000
------------ ------------
$ 3,099,000 $ 2,480,000
============ ============
Operating (loss) income:
United States............................................. $(17,661,000) $(18,436,000)
Europe.................................................... 417,000 540,000
------------ ------------
$(17,244,000) $(17,896,000)
============ ============
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Identifiable assets:
United States............................................. $ 12,337,000 $ 13,224,000
Europe.................................................... 4,020,000 3,708,000
------------ ------------
$ 16,357,000 $ 16,932,000
============ ============
</TABLE>

NOTE 12 -- RELATED PARTY TRANSACTIONS

During 1995, the Company paid approximately $76,000 to a company for
marketing services. A former member of the Company's Board was an officer of
this company.

F-43
<PAGE> 103

THERMO ECOTEK CORPORATION

PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FISCAL YEAR ENDED SEPTEMBER 27, 1997
(UNAUDITED)

In January 1997, Thermo Ecotek Corporation (the Company) acquired certain
assets of biosys, inc., a biopesticide company, for $11.2 million in cash and
the assumption of certain liabilities. This acquisition has been accounted for
using the purchase method of accounting, and its results have been included in
the accompanying financial statements from the date of acquisition.

The following unaudited pro forma combined condensed statement of income
sets forth the results of operations for the fiscal year ended September 27,
1997, as if the acquisition of biosys had occurred on September 29, 1996.
biosys' historical statement of income represents its results for the period
from September 29, 1996, through January 17, 1997, the date of its acquisition
by the Company. The pro forma results of operations are not necessarily
indicative of future operations or the actual results that would have occurred
had the acquisition of biosys been made on September 29, 1996. This statement
should be read in conjunction with the accompanying notes and the respective
historical financial statement of the Company and biosys appearing elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ -----------------------
THERMO ECOTEK BIOSYS ADJUSTMENTS COMBINED
------------- ------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES..................................... $180,191 $ 4,917 $ -- $185,108
-------- ------- ------- --------
Costs and Operating Expenses:
Cost of revenues........................... 113,236 4,521 (122) 117,635
Selling, general and administrative
expenses................................ 18,260 2,868 182 21,310
Research and development expenses.......... 1,597 1,346 -- 2,943
Write-off of acquired technology........... -- 3,875 -- 3,875
-------- ------- ------- --------
133,093 12,610 60 145,763
-------- ------- ------- --------
Operating Income (Loss)...................... 47,098 (7,693) (60) 39,345
Interest Income.............................. 5,089 -- (190) 4,899
Interest Expense............................. (13,926) (139) 139 (13,926)
Other Income (Expense)....................... 33 (42) -- (9)
-------- ------- ------- --------
Income (Loss) Before Provision for Income
Taxes and Minority Interest................ 38,294 (7,874) (111) 30,309
Provision for Income Taxes................... 14,415 -- (3,114) 11,301
Minority Interest Expense.................... 1,334 -- -- 1,334
-------- ------- ------- --------
Net Income (Loss)............................ $ 22,545 $(7,874) $ 3,003 $ 17,674
======== ======= ======= ========
EARNINGS PER SHARE:
Basic...................................... $ .92 $ .72
======== ========
Diluted.................................... $ .64 $ .52
======== ========
WEIGHTED AVERAGE SHARES:
Basic...................................... 24,613 24,613
======== ========
Diluted.................................... 38,740 38,740
======== ========
</TABLE>

See notes to pro forma combined condensed statement of income.

F-44
<PAGE> 104

THERMO ECOTEK CORPORATION

NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(UNAUDITED)

NOTE 1 -- PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED STATEMENT OF
INCOME (IN THOUSANDS, EXCEPT IN TEXT)

<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
SEPTEMBER 27,
1997
--------------
DEBIT (CREDIT)
<S> <C>
COST OF REVENUES
Decrease in the depreciation expense for leasehold
improvements and fixed assets of biosys due to abandonment
of certain facilities..................................... $ (122)
-------
GENERAL AND ADMINISTRATIVE EXPENSES
Service fee of 1.0% of the revenues of biosys for services
provided under a services agreement between the Company
and Thermo Electron Corporation for the fiscal year ended
September 27, 1997........................................ 49
Amortization over 14 years of patents, trademarks,
intellectual property, and product technology acquired
through the acquisition of biosys......................... 132
-------
182
-------
INTEREST INCOME
Decrease in interest income earned attributable to the lower
cash position as a result of the total cash payments of
$11,223,000, less cash acquired of $378,000, to acquire
biosys, calculated using the average 90-day Commercial
Paper Composite Rate plus 25 basis points, or 5.78%....... 190
-------
INTEREST EXPENSE
Decrease in interest expense as a result of the elimination
of biosys' short-term debt and long-term obligations
(included in liabilities subject to compromise) not
included as part of the purchase of biosys................ (139)
-------
PROVISION FOR INCOME TAXES
Income tax provision associated with the adjustments above
calculated at the Company's statutory income tax rate of
39%....................................................... (43)
Income tax benefit related to biosys' pre-tax loss
calculated at the Company's statutory income tax rate of
39%....................................................... (3,071)
-------
(3,114)
-------
</TABLE>

F-45
<PAGE> 105

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 18
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Capitalization........................ 19
Selected Financial Information........ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 29
Relationship with Thermo Electron..... 50
Management............................ 53
Description of Capital Stock.......... 55
Underwriting.......................... 56
Legal Opinions........................ 57
Experts............................... 57
Additional Information................ 58
Incorporation of Certain Documents by
Reference........................... 58
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

4,500,000 Shares

[ECOtek LOGO]

Common Stock

-----------------
PROSPECTUS
----------------
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
CIBC OPPENHEIMER
, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 106

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the American
Stock Exchange listing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 27,384
American Stock Exchange listing fee......................... 45,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 40,000
Printing and engraving expenses............................. 150,000
Transfer agent fees......................................... 5,000
Miscellaneous............................................... 82,616
--------
Total............................................. $500,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Delaware General Corporation Law and the Registrant's Certificate of
Incorporation and By-Laws limit the monetary liability of directors to the
Registrant and to its stockholders and provide for indemnification of the
Registrant's officers and directors for liabilities and expenses that they may
incur in such capacities. In general, officers and directors are indemnified
with respect to actions taken in good faith in a manner reasonably believed to
be in, or not opposed to, the best interests of the Registrant, and with respect
to any criminal action or proceeding, actions that the indemnitee had no
reasonable cause to believe were unlawful. The Registrant also has
indemnification agreements with its directors and officers that provide for the
maximum indemnification allowed by law.

Thermo Electron has an insurance policy which insures the directors and
officers of Thermo Electron and its subsidiaries, including the Registrant,
against certain liabilities which might be incurred in connection with the
performance of their duties.

Under the Underwriting Agreement, the Underwriters are obligated, under
certain circumstances, to indemnify directors and officers of the Registrant
against certain liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1
hereto.

ITEM 16. EXHIBITS

See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement

II-1
<PAGE> 107

relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.

(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation and By-Laws of the Registrant and the laws of the State of
Delaware, or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

II-2
<PAGE> 108

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Waltham, Commonwealth of Massachusetts, on this 11th
day of May, 1998.

THERMO ECOTEK CORPORATION

By: /s/ BRIAN D. HOLT

--------------------------------------
Brian D. Holt
President and Chief Executive Officer

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers and directors of Thermo Ecotek Corporation,
hereby constitute and appoint John N. Hatsopoulos, Paul F. Kelleher, Seth H.
Hoogasian, Sandra L. Lambert and Melissa F. Riordan, and each of them singly,
our true and lawful attorneys with full power to them, and each of them singly,
to sign for us and in our names in the capacities indicated below, the
Registration Statement on Form S-2 filed herewith and any and all amendments to
said Registration Statement (including any subsequent Registration Statement for
the same offering which may be filed under Rule 462(b)), and generally to do all
such things in our names and on our behalf in our capacities as officers and
directors to enable Thermo Ecotek Corporation to comply with the provisions of
the Securities Act and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them, to said Registration Statement and any
and all amendments thereto.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ FRANK JUNGERS Chairman of the Board and May 11, 1998
- --------------------------------------------------- Director
Frank Jungers

/s/ BRIAN D. HOLT President, Chief Executive May 11, 1998
- --------------------------------------------------- Officer and Director
Brian D. Holt (Principal Executive
Officer)

/s/ JOHN N. HATSOPOULOS Senior Vice President, Chief May 11, 1998
- --------------------------------------------------- Financial Officer and
John N. Hatsopoulos Director (Principal
Financial Officer)

/s/ PAUL F. KELLEHER Chief Accounting Officer May 11, 1998
- --------------------------------------------------- (Principal Accounting
Paul F. Kelleher Officer)

/s/ JERRY P. DAVIS Director May 11, 1998
- ---------------------------------------------------
Jerry P. Davis

/s/ GEORGE N. HATSOPOULOS Director May 11, 1998
- ---------------------------------------------------
George N. Hatsopoulos

/s/ WILLIAM A. RAINVILLE Director May 11, 1998
- ---------------------------------------------------
William A. Rainville

/s/ SUSAN F. TIERNEY Director May 11, 1998
- ---------------------------------------------------
Susan F. Tierney
</TABLE>

II-3
<PAGE> 109

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement among Thermo Trilogy Corporation,
Thermo Ecotek International Holdings, Inc., and W.R. Grace &
Co. -- Conn. dated March 5, 1996 (filed as Exhibit 2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 30, 1996 [File No. 1-13572] and incorporated
herein by reference).
2.2 Asset Purchase Agreement among Thermo Trilogy Corporation,
biosys, inc., Crop Genetics International Corporation, and
AgriDyne Technologies, Inc. dated December 24, 1996 (filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K
filed January 31, 1997 [File No. 1-13572] and incorporated
herein by reference).
4.1 Fiscal Agency Agreement dated as of March 14, 1996, among
the Registrant, Thermo Electron Corporation, and Chemical
Bank as fiscal agent, relating to $37 million principal
amount of noninterest-bearing subordinated convertible
debentures due 2001 (filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
30, 1996 [File No. 1-13572] and incorporated herein by
reference).
4.2 Fiscal Agency Agreement dated as of April 15, 1997, among
the Registrant, Thermo Electron Corporation, and Bankers
Trust Company as fiscal agent, relating to $50 million
principal amount of 4 7/8% Convertible Subordinated
Debentures due 2004 (filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
29, 1997 [File No. 1-13572] and incorporated herein by
reference).
5 Opinion of Seth H. Hoogasian, Esq.
10.1 Asset Transfer Agreement between Thermo Electron Corporation
and the Registrant dated January 2, 1990 (filed as Exhibit
10.1 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).
10.2 Corporate Services Agreement dated January 3, 1993, between
Thermo Electron Corporation and the Registrant (filed as
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
10.3 Thermo Electron Corporate Charter as amended and restated
effective January 3, 1993 (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
10.4 Amended and Restated Tax Allocation Agreement dated as of
December 4, 1996, between Thermo Electron and the Registrant
(filed as Exhibit 10.4 to the Registrant's Report on Form
10-K for the fiscal year ended September 28, 1996 [File No.
1-13572] and incorporated herein by reference).
10.5 Master Repurchase Agreement dated as of January 1, 1994,
between the Registrant and Thermo Electron Corporation
(filed as Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended January 3, 1998 [File No.
1-13572] and incorporated herein by reference).
10.6 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 19, 1997, between Thermo
Electron and the Registrant (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 3, 1998
[File No. 1-13572] and incorporated herein by reference).
10.7 Lease Agreement dated as of December 2, 1991, between Thermo
Electron and the Registrant (filed as Exhibit 10.7 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
</TABLE>
<PAGE> 110

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.8 Purchase and sale of $38,500,000 principal amount 4%
subordinated convertible note due 2001 (filed as Exhibit
10.8 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).

10.9 Purchase and sale of $30,000,000 principal amount 4%
subordinated convertible note due 2001 (filed as Exhibit
10.9 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).

10.10 Power Purchase Agreement between Mendota Biomass Power, Ltd.
and Pacific Gas and Electric Company dated May 7, 1984
(filed as Exhibit 10.10 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).

10.11 Project Lease between Chrysler Capital Corporation and
Mendota Biomass Power, Ltd. dated October 30, 1989 (filed as
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).

10.12 First Amendment to Project Lease between Chrysler Capital
Corporation and Mendota Biomass Power, Ltd., dated June 30,
1995 (filed as Exhibit 1 to the Registrant's Current Report
on Form 8-K dated June 30, 1995 and incorporated herein by
reference).

10.13 Mendota Biomass Power, Ltd. Limited Partnership Agreement
dated December 10, 1986 (filed as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).

10.14 Rate Order and Interconnection Agreement between Whitefield
Power and Light Company and Public Service Company of New
Hampshire dated September 4, 1986 (filed as Exhibit 10.13 to
the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682] and incorporated herein by reference).

10.15 Wood Supply Contract between North County Procurement, Inc.
and Whitefield Power and Light Company dated June 4, 1993
(filed as Exhibit 10.14 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).

10.16 Leasing Agreement between BankBoston Leasing Services Inc.
and Gorbell Thermo Electron Power Company dated December 24,
1987 (filed as Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.17 Amended and Restated Wood Supply Contract between Linkletter
and Sons and Gorbell Thermo Electron Power Company dated
January 15, 1993 (filed as Exhibit 10.16 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.18 Power Purchase Agreement between Gorbell Thermo Electron
Power Company and Central Maine Power Company dated February
3, 1984, as amended (filed as Exhibit 10.17 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).

10.19 Reduced Power Operation Agreement between Gorbell Thermo
Electron Power Company and Central Maine Power Company dated
January 14, 1994 (filed as Exhibit 10.18 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.20 Joint Venture Agreement establishing Gorbell Thermo Electron
Power Company dated September 13, 1985 (filed as Exhibit
10.19 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-86682] and incorporated herein by reference).

10.21 Leasing Agreement between BankBoston Leasing Services, Inc.
and Hemphill Power and Light Company dated December 23, 1987
(filed as Exhibit 10.20 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).

10.22 Rate Order Support Agreement between Hemphill Power and
Light Company and Thermo Electron dated December 23, 1987
(filed as Exhibit 10.21 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
</TABLE>
<PAGE> 111

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.23 Wood Supply Contract between Durgin & Crowell Lumber
Company, Inc. and Hemphill Power and Light Company dated
June 4, 1985 (filed as Exhibit 10.22 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.24 Fuel Supply Contract between Springfield Management Company
and Hemphill Power and Light Company dated June 4, 1985, as
amended (filed as Exhibit 10.23 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.25 Rate Order and Interconnection Agreement between Hemphill
Power and Light Company and Public Service Company of New
Hampshire dated June 26, 1986 (filed as Exhibit 10.24 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).

10.26 Joint Venture Agreement establishing Hemphill Power and
Light Company dated June 4, 1985 (filed as Exhibit 10.25 to
the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682] and incorporated herein by reference).

10.27 Letter Agreement dated July 15, 1988, among the partners of
Hemphill Power and Light Company amending various agreements
(filed as Exhibit 10.26 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).

10.28 Letter Agreement dated January 1, 1990, between the partners
of Hemphill Power and Light Company (filed as Exhibit 10.27
to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682] and incorporated herein by reference).

10.29 Assignment and Assumption Agreement of Delano II plant by
Delano Energy Company, Inc. dated December 1, 1993 (filed as
Exhibit 10.28 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).

10.30 Loan Agreement between California Pollution Control
Financing Authority ("CPCFA") and Delano Energy Company,
Inc. dated August 1, 1989, as supplemented on May 1, 1990
(Delano I; filed as Exhibit 10.29 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.31 Indenture of Trust between CPCFA and Bankers Trust Company
dated August 1, 1990, as supplemented on May 1, 1990 (Delano
I; filed as Exhibit 10.30 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).

10.32 Indenture of Trust between CPCFA and Bankers Trust Company
dated October, 1991 (Delano II; filed as Exhibit 10.31 to
the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-86682] and incorporated herein by reference).

10.33 Loan Agreement between CPCFA and Delano Energy Company, Inc.
dated October 1, 1991 (filed as Exhibit 10.32 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).

10.34 Power Purchase Contract between Southern California Edison
Co. and Signal Delano Energy Company, Inc. dated July 31,
1987 (filed as Exhibit 10.33 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.35 Amended Restated Reimbursement Agreement among Chemical
Trust Company of California ("CTCC"), Delano Energy Company,
Inc. and ABN AMRO Bank N.V. and other banks dated December
31, 1993 (filed as Exhibit 10.34 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).

10.36 Amended and Restated Lease Agreement between CTCC and Delano
Energy Company, Inc. dated December 31, 1993 (filed as
Exhibit 10.35 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).
</TABLE>
<PAGE> 112

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.37 Biomass Fuel Supply Contract between the Registrant and
Delano Energy Company, Inc. dated December 31, 1993 (filed
as Exhibit 10.36 to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).

10.38 Agreement between Consolidated Edison Company of New York,
Inc. and Staten Island Cogeneration Corporation (filed as
Exhibit 10.37 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference).

10.39 Power Purchase Agreement between Woodland Biomass Power,
Ltd. and Pacific Gas & Electric Company dated May 7, 1987
(filed as Exhibit 10.38 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).

10.40 Stock Purchase Agreement dated as of August 18, 1995,
between the Registrant and KFx, Inc. (filed as Exhibit 10.40
to the Registrant's Transition Report on Form 10-K for the
nine months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference). Pursuant to Item
601(b)(2) of Regulation S-K, schedules to this Agreement
have been omitted. The Company hereby undertakes to furnish
supplementally a copy of such schedules to the commission
upon request.

10.41 Stock Purchase Warrant issued by KFx, Inc. to the Company
dated August 18, 1995 (filed as Exhibit 10.41 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference).

10.42 Stock Purchase Warrant issued by KFx, Inc. to the Company
dated August 18, 1995 (filed as Exhibit 10.42 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference).

10.43 Limited Partnership Agreement of KFx Fuel Partners, L.P.
dated as of August 18, 1995 (filed as Exhibit 10.43 to the
Registrant's Transition Report on Form 10-K for the nine
months ended September 30, 1995 [File No. 1-13572] and
incorporated herein by reference). (Certain portions of this
Exhibit have been omitted subject to an application for
confidential treatment filed with the Commission pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934).

10.44 Turnkey Design and Construction Agreement dated as of August
18, 1995, between KFx Fuel Partners, L.P. and Walsh
Construction Company, a Division of Guy F. Atkinson Company
(filed as Exhibit 10.44 to the Registrant's Transition
Report on Form 10-K for the nine months ended September 30,
1995 [File No. 1-13572] and incorporated herein by
reference). (Certain portions of this Exhibit have been
omitted subject to an application for confidential treatment
filed with the Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934).

10.45 Lease Agreement between Manufacturers Hanover Trust Company
of California and Woodland Biomass Power, Ltd. dated
December 29, 1989 (filed as Exhibit 10.39 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).

10.46 Incentive Stock Option Plan of the Registrant (filed as
Exhibit 10.44 to the Registrant's Registration Statement on
Form S-1 [Reg. No 33-86682] and incorporated herein by
reference). (Maximum number of shares issuable in the
aggregate under this plan and the Registrant's Nonqualified
Stock Option Plan is 1,350,000 shares, after adjustment to
reflect share increase approved in December 1993 and 3-for-2
stock split effected in October 1996).

10.47 Nonqualified Stock Option Plan of the Registrant (filed as
Exhibit 10.45 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-86682] and incorporated herein by
reference). (Maximum number of shares issuable in the
aggregate under this plan and the Registrant's Incentive
Stock Option Plan is 1,350,000 shares, after giving effect
to share increase approved in December 1993 and 3-for-2
stock split effected in October 1996).

10.48 Equity Incentive Plan of the Registrant (filed as Exhibit
10.40 to the Registrant's Registration Statement on Form S-1
(Reg. No. 33-86682) and incorporated herein by reference).
</TABLE>
<PAGE> 113

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.49 Deferred Compensation Plan for Directors of the Registrant
(filed as Exhibit 10.41 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-86682] and incorporated
herein by reference).
10.50 Amended and Restated Directors Stock Option Plan of the
Registrant (filed as Exhibit 10.42 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-86682] and
incorporated herein by reference).
10.51 Thermo Ecotek Corporation -- Thermo Trilogy Corporation
Nonqualified Stock Option Plan (filed as Exhibit 10.51 to
the Registrant's Report on Form 10-K for the fiscal year
ended September 28, 1996 [File No. 1-13572] and incorporated
herein by reference).
10.52 Thermo Trilogy Corporation Equity Incentive Plan (filed as
Exhibit 10.52 to the Registrant's Report on Form 10-K for
the fiscal year ended September 28, 1996 [File No. 1-13572]
and incorporated herein by reference.
10.53 Form of Indemnification Agreement between the Registrant and
its officers and directors (filed as Exhibit 10.43 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-86682] and incorporated herein by reference).
In addition to the stock-based compensation plans of the
Registrant, the executive officers of the Registrant may be
granted awards under stock-based compensation plans of
Thermo Electron Corporation, for services rendered to the
Registrant or to affiliated corporations. The terms of such
plans are substantially the same as those of the
Registrant's Equity Incentive Plan.
10.54 Restated Stock Holding Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.54 to the Registrant's
Report on Form 10-K for the fiscal year ended September 27,
1997 [File No. 1-13572] and incorporated herein by
reference).
10.55 First Amendment to Power Purchase Agreement dated November
6, 1997, between Woodland Biomass Power, Ltd. and Pacific
Gas and Electric Company (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 3, 1998
[File No. 1-13572] and incorporated herein by reference).
(Certain portions of this Exhibit have been omitted subject
to an application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934).
10.56 Second Amendment to Power Purchase Agreement dated November
6, 1997, between Mendota Biomass Power, Ltd. and Pacific Gas
and Electric Company (filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 3, 1998
[File No. 1-13572] and incorporated herein by reference).
(Certain portions of this Exhibit have been omitted subject
to an application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Seth H. Hoogasian, Esq. (contained in Exhibit 5).
24 Power of Attorney (see Signature Page).
27 Financial Data Schedule.
</TABLE>

<PAGE> 1

Exhibit 1

THERMO ECOTEK CORPORATION

4,500,000 Shares(1)

Common Stock

UNDERWRITING AGREEMENT

_____________, 1998

PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
CIBC OPPENHEIMER CORP.
As a Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292

Ladies and Gentlemen:

THERMO ECOTEK CORPORATION, a Delaware corporation (the "Company"), and
its parent corporation, Thermo Electron Corporation, a Delaware corporation
("Thermo Electron") hereby confirm their agreement with the several underwriters
named in Schedule I hereto (the "Underwriters"), for whom you have been duly
authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.

1. SECURITIES. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the several Underwriters an aggregate of
4,500,000 shares (the "Firm Securities") of the Company's Common Stock, par
value $.10 per share ("Common Stock"). The Company also proposes to issue and
sell to the several Underwriters not more than 675,000 additional shares of
Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities", and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities".

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THERMO ELECTRON. The
Company and Thermo Electron jointly and severally represent and warrant to, and
agree with, each of the several Underwriters that:

(a) The Company meets the requirements for use of Form S-2 under the
Securities Act of 1933, as amended (the "Act"). A registration statement on
such Form (File No. 333- ) with respect to the Securities, including a
prospectus subject to completion, has been filed by the Company with the
Securities and Exchange Commission (the "Commission") under the Act, and
one or more amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will file with
the Commission a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall
have been filed, in such registration

- -------------------------
(1) Plus an option to purchase from Thermo Ecotek Corporation up to 675,000
additional shares to cover over-allotments.

<PAGE> 2

statement), with such changes or insertions as are required by Rule 430A
under the Act or permitted by Rule 424(b) under the Act, and as have been
provided to and approved by the Representatives prior to the execution of
this Agreement, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the
Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by
the Representatives prior to the execution of this Agreement. The Company
may also file a related registration statement with the Commission pursuant
to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration shall be effective upon filing
with the Commission. As used in this Agreement, the term "Original
Registration Statement" means the registration statement initially filed
relating to the Securities, as amended at the time when it was or is
declared effective, including (A) all financial schedules and exhibits
thereto, (B) all documents (or portions thereof) incorporated by reference
therein filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and (C) any information omitted therefrom pursuant to Rule
430A under the Act and included in the Prospectus (as hereinafter defined);
the term "Rule 462(b) Registration Statement" means any registration
statement filed with the Commission pursuant to Rule 462(b) under the Act
(including the Registration Statement and any Preliminary Prospectus or
Prospectus incorporated therein at the time such Registration Statement
becomes effective); the term "Registration Statement" includes both the
Original Registration Statement and any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to
completion filed with such registration statement or any amendment thereto
(including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective), including all documents (or portions thereof)
incorporated by reference therein filed under the Exchange Act; the term
"Prospectus" means:

(A) the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or

(B) if no prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement, including,
in the case of clauses (A) or (B) of this sentence, all documents (or
portions thereof) incorporated by reference therein filed under the
Exchange Act.

(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. When any Preliminary Prospectus was filed
with the Commission, it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act, the Exchange Act and the respective rules and
regulations of the Commission thereunder, and (ii) did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it (i) contained or will contain
all statements required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of, the Act, the
Exchange Act and the respective rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission pursuant to Rule
424(b) (or, if the Prospectus or part thereof or such amendment or supplement is
not required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the

<PAGE> 3

Prospectus was or is declared effective), on the date when the Prospectus is
otherwise amended or supplemented and on the Firm Closing Date and any Option
Closing Date (both as hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act, the Exchange Act and
the respective rules and regulations of the Commission thereunder and (ii) did
not or will not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (b) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein.

(c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration has not been declared effective (i) the Company has filed a Rule
462(b) Registration Statement in compliance with and that is effective upon
filing pursuant to Rule 462(b) and has received confirmation of its receipt and
(ii) the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.

(d) The Company and each of its subsidiaries have been duly organized and
are validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the laws of all
other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified does not amount to a
material liability or disability to the Company and its subsidiaries, taken as a
whole.

(e) The Company and each of its subsidiaries have full power (corporate
and other) to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus); and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.

(f) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and, except for directors' qualifying shares and as otherwise set
forth in the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus, are owned beneficially by the Company free and
clear of any security interests, liens, encumbrances, equities or claims.

(g) The Company has an authorized, issued and outstanding capitalization
as set forth in the Prospectus or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus. All of the issued shares of capital stock of
the Company have been duly authorized and validly issued and are fully paid and
nonassessable. The Firm Securities and the Option Securities have been duly
authorized and at the Firm Closing Date or the related Option Closing Date (as
the case may be), after payment therefor in accordance herewith, will be validly
issued, fully paid and nonassessable. No holders of outstanding shares of
capital stock of the Company are entitled as such to any preemptive or other
rights to subscribe for any of the Securities, and no holder of securities of
the Company has any right which has not been fully exercised or waived to
require the Company to register the offer or sale of any securities owned by
such holder under the Act in

3
<PAGE> 4

the public offering contemplated by this agreement.

(h) The capital stock of the Company conforms in all material respects to
the description thereof contained in the Prospectus or, if the Prospectus not in
existence, the most recent Preliminary Prospectus.

(I) Except as disclosed in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus, there are not outstanding (A)
securities or obligations of the Company or any of its subsidiaries convertible
into or exchangeable for any capital stock of the Company or any such
subsidiary, (B) warrants, rights or options to subscribe for or purchase from
the Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C) obligations of the
Company or any such subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.

(j) The financial statements and schedules included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) fairly present the financial position of the
entities purported to be shown thereby and their results of operations and
changes in financial condition as of the dates and periods therein specified.
Such financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Selected Financial Information" in the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus fairly present, on the basis stated in the Prospectus (or
such Preliminary Prospectus), the information included therein.

(k) Arthur Andersen LLP, who have certified certain financial statements
of the Company and its consolidated subsidiaries and delivered their report with
respect to the audited consolidated financial statements and schedules included
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act, the Exchange Act and the related published
rules and regulations thereunder.

(l) The execution and delivery of this Agreement have been duly authorized
by the Company, and this Agreement has been duly executed and delivered by the
Company.

(m) No legal or governmental proceedings are pending to which the Company
or any of its subsidiaries is a party or to which the property of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and no such proceedings have
been threatened against the Company or any of its subsidiaries or with respect
to any of their respective properties; and no contract or other document is
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement that is not described
therein (or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) or filed as required.

(n) The issuance, offering and sale of the Securities to the Underwriters
by the Company pursuant to this Agreement, the compliance by the Company with
the other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as

<PAGE> 5

amended) is not effective under the Act as of the time of execution hereof, such
as may be required (and shall be obtained as provided in this Agreement) under
the Act, or (ii) conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties are bound, or the charter
documents or by-laws of the Company or any of its subsidiaries, or any statute
or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or any of its
subsidiaries.

(o) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus, neither the Company nor any
of its subsidiaries has sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding and there has not been any material
adverse change, or any development involving a prospective material adverse
change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.

(p) The Company has not, directly or indirectly, (i) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.

(q) The Company has not distributed and, prior to the later of (i) the
Closing Date and (ii) the completion of the distribution of the Securities, will
not distribute any offering material in connection with the offering and sale of
the Securities other than the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or other materials, if any permitted by the Act.

(r) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (1) the Company and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).

(s) The Company and each of its subsidiaries have good and marketable
title in fee simple to all material items of real property and marketable title
to all material items of personal property owned by each of them, in each case
free and clear of any security interests, liens, encumbrances, equities, claims
and other defects, except such as do not materially and adversely affect the
value of such property and do not interfere with the use made or proposed to be
made of such property by the Company or such subsidiary, and any real property
and

<PAGE> 6

buildings held under lease by the Company or any such subsidiary are held under
valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere with the use made or proposed to be made of such
property and buildings by the Company or such subsidiary, in each case except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).

(t) No labor dispute with the employees of the Company or any of its
subsidiaries exists or is threatened or imminent that could result in a material
adverse change in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company and its subsidiaries, taken as
a whole, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).

(u) The Company and its subsidiaries own or are entitled to use under a
valid license all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary nor Thermo Electron
has received any notice of infringement of or conflict with asserted rights of
any third party with respect to any of the foregoing which is reasonably likely
to result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).

(v) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).

(w) Except as described in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), no subsidiary of the
Company is currently prohibited, directly or indirectly, from paying any
dividends to the Company, from making any other distribution on such
subsidiary's capital stock, from repaying to the Company any loans or advances
to such subsidiary from the Company or from transferring any of such
subsidiary's property or assets to the Company or any other subsidiary of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).

(x) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its subsidiaries, taken as a whole,
except as described in or contemplated by the

<PAGE> 7

Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).

(y) The Company will conduct its operations in a manner that will not
subject it to registration as an investment company under the Investment Company
Act of 1940, as amended, and this transaction will not cause the Company to
become an investment company subject to registration under such Act.

(z) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole) and has
paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently being
contested in good faith or as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).

(aa) Neither the Company nor any of its subsidiaries is in violation of any
federal or state law or regulation relating to occupational safety and health or
to the storage, handling or transportation of hazardous or toxic materials and
the Company and its subsidiaries have received all permits, licenses or other
approvals required of them under applicable federal and state occupational
safety and health and environmental laws and regulations to conduct their
respective businesses, and the Company and each such subsidiary is in compliance
with all terms and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals which would not, singly or in the
aggregate, result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).

(bb) Each certificate signed by any officer of the Company or Thermo
Electron and delivered to the Representatives or counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company or Thermo
Electron, as the case may be, to each Underwriter as to the matters covered
thereby.

(cc) Except for the shares of capital stock of each of the subsidiaries
owned by the Company and such subsidiaries, neither the Company nor any such
subsidiary owns any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm, partnership, association or
other entity, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).

(dd) There are no holders of securities of the Company, who, by reason of
the filing of the Registration Statement, have the right (and have not waived
such right) to request the Company to register under the Act, or to include in
the Registration Statement, securities held by them.

(ee) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization;

<PAGE> 8

and (4) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.

(ff) No default exists, and no event has occurred which, with notice or
lapse of time or both, would constitute a default in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties is bound or may be affected in any
material adverse respect with regard to property, business or operations of the
Company and its subsidiaries.

1A. REPRESENTATIONS AND WARRANTIES OF THERMO ELECTRON. Thermo Electron
represents and warrants to, and agree with, each Underwriter that:

(a) Thermo Electron has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware and is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of all other jurisdictions where the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified does not amount to a material liability or
disability to the Thermo Electron and its subsidiaries, taken as a whole.

(b) There has not been any material adverse change, or any development
involving a prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth, or results of operations
of Thermo Electron and its subsidiaries, taken as a whole from the date as of
which information is given in the most recent quarterly or annual report filed
by Thermo Electron pursuant to the Exchange Act, except any as may have been
disclosed to the public.

(c) Except as may be described in its filings under the Exchange Act,
Thermo Electron is not, nor with the giving of notice or lapse of time or both
would Thermo Electron be, in violation of or in default under, nor will the
execution or delivery hereof or consummation of the transactions contemplated
hereby result in a violation of, or constitute a default under, the corporate
charter, by-laws or other governing documents of Thermo Electron, or any
material agreement, indenture or other instrument to which Thermo Electron is a
party or by which it is bound, or to which any of its properties is subject, nor
will the performance by Thermo Electron of its obligations hereunder violate any
existing law, rule, administrative regulation or decree of any court or any
governmental agency or body having jurisdiction over Thermo Electron or any of
its properties, or result in the creation or imposition of any lien, charge,
claim or encumbrance upon any property or asset of Thermo Electron, which would
be material to Thermo Electron and its subsidiaries, taken as a whole. Except
for such permits and authorizations as have been obtained, no consent, approval,
authorization or order of, or filing with, any court, governmental agency or
body or any financial institution is required on the part of Thermo Electron in
connection with the consummation of the transactions contemplated by this
Agreement (no representation being made as to any jurisdiction outside the
United States or as to the securities or "Blue Sky" laws of certain
jurisdictions).

(d) The execution and delivery of this Agreement have been duly authorized
by Thermo Electron, and this Agreement has been duly executed and delivered by
Thermo Electron.

(e) Thermo Electron owns, of record and beneficially, the number of shares
of Common Stock of the Company set forth in the Prospectus, free and clear of
any liens, encumbrances, claims or restrictions, except that certain of such
shares are reserved for

<PAGE> 9

issuance pursuant to stock option and other benefit plans under which options to
purchase Common Stock of the Company owned by Thermo Electron are granted to
certain employees, directors or consultants of Thermo Electron and its
subsidiaries.

(f) The most recent Annual Report on Form 10-K of Thermo Electron and any
subsequent reports filed pursuant to the Exchange Act complied as of the date
thereof in all material respects with the Exchange Act and the rules and
regulations thereunder.

(g) Neither Thermo Electron nor any subsidiary of Thermo Electron has,
directly or indirectly, (i) taken any action designed to cause or to result in,
or that has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities or (B) paid or agreed
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.

3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES. (a) On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company, at a purchase
price of $_______ per share, the number of Firm Securities set forth opposite
the name of such Underwriter in Schedule 1 hereto. One or more certificates in
definitive form for the Firm Securities that the several Underwriters have
agreed to purchase hereunder, and in such denomination or denominations and
registered in such name or names as the Representatives request upon notice to
the Company at least 48 hours prior to the Firm Closing Date, shall be delivered
by or on behalf of the Company to the Representatives for the respective
accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the purchase price therefor by wire transfer in same-day funds
(the "Wired Funds") to the account of the Company. Such delivery of and payment
for the Firm Securities shall be made at the offices of Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts at 9:30 A.M., Eastern time, on __________,
1998, or at such other place, time or date as the Representatives and the
Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date". The Company will make such certificate
or certificates for the Firm Securities available for checking and packaging by
the Representatives at the offices in New York, New York of the Company's
transfer agent or registrar or of Prudential Securities Incorporated at least 24
hours prior to the Firm Closing Date.

For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Securities as contemplated by the Prospectus,
the Company hereby grants to the several Underwriters an option to purchase,
severally and not jointly, the Option Securities. The purchase price to be paid
for any Option Securities shall be the same price per share as the price per
share for the Firm Securities set forth above in paragraph (a) of this Section
3. The option granted hereby may be exercised as to all or any part of the
Option Securities from time to time within thirty days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. The Representatives
may from time to time exercise the option granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate amount of Option Securities as to which the several Underwriters are
then exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days

<PAGE> 10

after such exercise of the option and, in any event, shall not be earlier than
the Firm Closing Date. The time and date set forth in such notice, or such other
time on such other date as the Representatives and the Company may agree upon or
as the Representatives may determine pursuant to Section 9 hereof, is herein
called the "Option Closing Date" with respect to such Option Securities. Upon
exercise of the option as provided herein, the Company shall become obligated to
sell to each of the several Underwriters, and, subject to the terms and
conditions herein set forth, each of the Underwriters (severally and not
jointly) shall become obligated to purchase from the Company, the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
Shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.

(b) The Company hereby acknowledges that the wire transfer by or on behalf
of the Underwriters of the purchase price for any Shares does not constitute
closing of a purchase and sale of the Shares. Only execution and delivery of a
receipt for Shares by the Underwriters indicates completion of the closing of a
purchase of the Shares from the Company. Furthermore, in the event that the
Underwriters wire funds to the Company prior to the completion of the closing of
a purchase of Shares, the Company hereby acknowledges that until the
Underwriters execute and deliver a receipt for the Shares, by facsimile or
otherwise, the Company will not be entitled to the Wired Funds and shall return
the Wired Funds to the Underwriters as soon as practicable (by wire transfer of
same-day funds) upon demand. In the event that the closing of a purchase of
Shares is not completed and the Wired Funds are not returned by the Company to
the Underwriters on the same day the Wired Funds were received by the Company,
the Company agrees to pay to the Underwriters in respect of each day the Wired
Funds are not returned by it, in same-day funds, interest on the amount of such
Wired Funds in an amount representing the Underwriters' cost of financing as
reasonably determined by Prudential Securities Incorporated.

(c) It is understood that any of you, individually and not as one of the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.

4. OFFERING BY THE UNDERWRITERS. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.

5. COVENANTS OF THE COMPANY. The Company and Thermo Electron, jointly and
severally, covenant and agree with each of the Underwriters that:

(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required, the
Company will file the Prospectus and any amendment or supplement thereto with
the Commission in the manner and within the time period required by Rule 434 and
424(b) under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the Exchange Act and
the respective rules and

<PAGE> 11

regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) will not file with the Commission the prospectus or the amendment referred
to in the third sentence of Section 2(a) hereof, any amendment or supplement to
such prospectus or any amendment to the Registration Statement or any Rule
462(b) Registration Statement of which the Representatives shall not previously
have been advised and furnished with a copy for a reasonable period of time
prior to the proposed filing and as to which filing the Representatives shall
not have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Representatives or counsel for the Underwriters,
any amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the several Underwriters, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Representatives of each
such filing or effectiveness.

(b) The Company will advise the Representatives, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Original Registration
Statement or any Rule 462(b) Registration Statement or any post-effective
amendment thereto or any order directed at any document incorporated by
reference in the Registration Statement or the Prospectus or any amendment or
supplement thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
(ii) the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing any Preliminary Prospectus or the
Prospectus or for additional information. The Company will use its best efforts
to prevent the issuance of any such stop order and, if any such stop order is
issued, to obtain the withdrawal thereof as promptly as possible.

(c) The Company will arrange for the qualification of the Securities for
offering and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Securities, PROVIDED, HOWEVER, that in connection therewith the Company shall
not be required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.

(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act, the Exchange Act or
the respective rules or regulations of the Commission thereunder, the Company
will promptly notify the Representatives thereof and, subject to Section 5(a)
hereof, will prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus that corrects such statement or omission or effects such compliance.

<PAGE> 12

(e) The Company will, without charge, provide (i) to the Representatives
and to counsel for the Underwriters a conformed copy of the registration
statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (ii) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company, not
later than (A) 6:00 PM, Eastern time, on the date of determination of the public
offering price, if such determination occurred at or prior to 10:00 AM, Eastern
time on such date of (B) 2:00 PM, Eastern time, on the business day following
the date of determination of the public offering price, if such determination
occurred after 10:00 AM, Eastern time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Representatives may reasonably request for purposes
of confirming orders that are expected to settle on the Firm Closing Date.

(f) The Company, as soon as practicable, will make generally available to
its securityholders and to the Representatives a consolidated earnings statement
of the Company and its subsidiaries that satisfies the provisions of Section
11(a) of the Act and Rule 158 thereunder.

(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.

(h) The Company and Thermo Electron shall not during the 180-day period
following the date of this Agreement, without the prior written consent of
Prudential Securities Incorporated, offer, sell or contract to sell, or
otherwise dispose of (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or Thermo Electron or any subsidiary of Thermo
Electron or any person in privity with the Company or Thermo Electron or any
subsidiary of Thermo Electron) directly or indirectly, or announce the offering
of, any other shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock (except for the issuance of shares of
Common Stock pursuant to existing stock option, purchase and compensation plans,
or upon conversion of any currently outstanding convertible securities described
in the Prospectus or the issuance of shares of Common Stock as consideration for
the acquisition of one or more businesses provided that such Common Stock may
not be resold prior to the expiration of the 180-day period referenced above, or
sales of shares of Common Stock by the Company to Thermo Electron), or sell or
grant options, rights or warrants with respect to any shares of Common Stock
(other than the grant of options pursuant to existing stock option, purchase and
compensation plans), otherwise than in accordance with this Agreement or as
contemplated in the Prospectus.

(i) The Company and Thermo Electron will not, directly or indirectly, (i)
take any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or (B) pay or agree
to pay

<PAGE> 13

to any person any compensation for soliciting another to purchase any other
securities of the Company.

(j) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.

(k) If the Company elects to rely on Rule 462(b), the Company shall both
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated
under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this
Agreement and (ii) the time confirmations are sent or given, as specified by
Rule 462(b)(2).

(l) The Company will cause the Securities to be duly authorized for
listing by the American Stock Exchange prior to the Firm Closing Date.

6. EXPENSES. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus, the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel,
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission (and the National
Association of Securities Dealers, Inc.) relating to the Securities, (vii) the
listing of the Securities on the American Stock Exchange, (viii) meetings with
prospective investors in the Securities (other than shall have been specifically
approved by the Representatives to be paid for by the Underwriters) and (ix)
advertising relating to the offering of the Securities (other than shall have
been specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Securities. The Company shall not in
any event be liable to any of the Underwriters for the loss of anticipated
profits from the transactions covered by this Agreement.

<PAGE> 14

7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and Thermo Electron contained
herein as of the date hereof and as of the Firm Closing Date, as if made on and
as of the Firm Closing Date, to the accuracy of the statements of the Company's
and Thermo Electron's officers made pursuant to the provisions hereof, to the
performance by the Company and Thermo Electron of their respective covenants and
agreements hereunder and to the following additional conditions:

(a) If the Original Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Original Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., Eastern time, on the date on which the amendment to the registration
statement originally filed with respect to the Securities or to the Registration
Statement, as the case may be, containing information regarding the initial
public offering price of the Securities has been filed with the Commission and
(ii) the time confirmations are sent or given as specified by Rule 462(b)(2), or
with respect to the Original Registration Statement, or such later time and date
as shall have been consented to by the Representatives; if required, the
Prospectus and any amendment or supplement thereto shall have been filed with
the Commission in the manner and within the time period required by Rule 434 and
424(b) under the Act; no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto and no order
directed at any document incorporated by reference in the Registration Statement
or the Prospectus or any amendment or supplement thereto shall have been issued
and no proceedings for that purpose shall have been instituted or threatened or,
to the knowledge of the Company or the Representatives, shall be contemplated by
the Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).

(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Seth H. Hoogasian, Esq., General Counsel of the Company and
Thermo Electron, to the effect that:

(i) the Company, its Significant Subsidiaries, as defined in the
Regulation S-K under the Act (the "Subsidiaries," which shall include
Thermo Trilogy Corporation whether or not it meets the foregoing
definition), and Thermo Electron each has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation and is duly qualified to transact
business as a foreign corporation and is in good standing under the laws of
all other jurisdictions where the ownership or leasing of its respective
properties or the conduct of its respective businesses requires such
qualification, except where the failure to be so qualified does not amount
to a material liability or disability to the Company and its subsidiaries,
taken as a whole, or to Thermo Electron and its subsidiaries, taken as a
whole;

(ii) the Company and each of its subsidiaries have corporate power to
own or lease their respective properties and conduct their respective
businesses as described in the Registration Statement and the Prospectus,
and each of the Company and Thermo Electron has corporate power to enter
into this Agreement and to carry out all the terms and provisions hereof
and thereof to be carried out by it;

(iii) the issued shares of capital stock of each of the subsidiaries
of the

<PAGE> 15

Company have been duly authorized and validly issued, are fully paid and
nonassessable and, except for directors' qualifying shares and as otherwise
set forth in the Prospectus, are owned beneficially by the Company free and
clear of any perfected security interests or, to the best knowledge of such
counsel, any other security interests, liens, encumbrances, equities or
claims;

(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and, to the best of such counsel's knowledge, are fully paid and
nonassessable; all of the issued shares of capital stock of the Company
have been issued in compliance with the registration provisions of all
applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; the Firm Securities have been duly
authorized by all necessary corporate action of the Company and, when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be validly issued, fully paid and nonassessable; the
Securities have been duly authorized for listing, subject to official
notice of issuance, on the American Stock Exchange; no holders of
outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Securities; and
no holders of securities of the Company are entitled to have such
securities registered under the Registration Statement;

(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide a
fair summary of such provisions;

(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and Thermo
Electron, and this Agreement has been duly executed and delivered by the
Company and Thermo Electron;

(vii) no legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of
the Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein, and, to the best knowledge of such counsel, no such
proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of their respective properties; and no
contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein or filed as required;

(viii) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company and Thermo Electron with the other provisions of this Agreement
and the consummation of the other transactions herein contemplated do not
(A) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained and such as may be required under state securities or blue
sky laws, or (B) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument, known to
such

<PAGE> 16

counsel, to which the Company, Thermo Electron or any of the Subsidiaries
is a party or by which the Company, Thermo Electron or any of the
Subsidiaries or any of their respective properties are bound, or the
charter documents or by-laws of the Company, Thermo Electron or any of the
Subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
known to such counsel and applicable to the Company, Thermo Electron or any
of the Subsidiaries;

(ix) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto and no order directed at any document
incorporated by reference in the Registration Statement or the Prospectus
or any amendment or supplement thereto has been issued, and no proceedings
for that purpose have been instituted or threatened or, to the best
knowledge of such counsel, are contemplated by the Commission; and

(x) the Registration Statement originally filed with respect to the
Securities and each amendment thereto and any Rule 462(b) Registration
Statement the Prospectus (in each case, including the documents
incorporated by reference therein but not including the financial
statements and other financial information contained therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act, the Exchange Act and
the respective rules and regulations of the Commission thereunder.

Such counsel shall also state that he has no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and Thermo Electron and public officials.

References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.

(c) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.

(d) The Representatives shall have received from Arthur Andersen LLP a
letter dated the Firm Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent certified public
accountants within the meaning of the Act and the rules and regulations
thereunder, and stating, as of the date of such letter (or, with respect to
matters involving changes or developments since the respective dates as of which
specified financial

<PAGE> 17

information is given in the Prospectus, as of a date not more than five days
prior to the date of such letter), the conclusions and findings of such firm
with respect to the financial information and other matters covered by its
letter delivered to the Representatives concurrently with the execution of this
Agreement. In the event that such letter sets forth any changes, decreases or
increases in various financial statement items from those specified the letter
delivered concurrently with the execution of this Agreement, it shall be a
further condition to the obligations of the Underwriters that (A) such letter
shall be accompanied by a written explanation of the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary, and (B) such changes, decreases or increases do not, in the sole
judgment of the Representatives, make it impractical or inadvisable to proceed
with the purchase and delivery of the Securities as contemplated by the
Registration Statement, as amended as of the date hereof.

References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.

(e) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the principal executive officer and the principal financial or
accounting officer of the Company, in their capacities as such, to the effect
that:

(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date;

(ii) no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto and no order directed at
any document incorporated by reference in the Registration Statement or the
Prospectus or any amendment or supplement thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the
best of the Company's knowledge, are contemplated by the Commission; and

(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company
nor any of its subsidiaries has sustained any loss or interference with
their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding that is material
to the Company and its subsidiaries, taken as a whole, and there has not
been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company and its subsidiaries, taken as a whole, except in
each case as described in or contemplated by the Prospectus.

(e-1) The Representatives shall have received a certificate, dated the Firm
Closing Date,

<PAGE> 18

of the President or any Vice President and the Treasurer or the Secretary of
Thermo Electron, in their capacities as such, to the effect that:

(i) the representations and warranties of the Thermo Electron in
this Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm Closing
Date, does not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the Firm
Closing Date, does not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and the Thermo Electron has performed all covenants and
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Firm Closing Date;

(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither Thermo
Electron nor any of its subsidiaries has sustained any loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding that is material
to Thermo Electron and its subsidiaries, taken as a whole, and there has
not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of Thermo Electron and its subsidiaries, taken as a whole,
except in each case as described in or contemplated by the Prospectus.

(f) On or before the Firm Closing Date, the Representatives and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.

(g) Prior to the commencement of the offering of the Securities, the
Securities shall have been approved for listing on the American Stock Exchange,
subject to official notice of issuance.

All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.

The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.

<PAGE> 19

8. INDEMNIFICATION AND CONTRIBUTION.

(a) The Company and Thermo Electron, jointly and severally, agree to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter or such controlling person may become
subject under the Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:

(i) any untrue statement or alleged untrue statement made by the
Company or Thermo Electron in Section 2 of this Agreement,

(ii) any untrue statement or alleged untrue statement of any material
fact contained in (A) the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"),

(iii) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or

(iv) any untrue statement or alleged untrue statement of any material
fact contained in any audio or visual materials used in connection with the
marketing of the Securities, including without limitation, slides, videos,
films and tape recordings,

and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with
any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that
the Company and Thermo Electron will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or any Application, in reliance upon and in conformity
with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein; and PROVIDED,
FURTHER, that the Company and Thermo Electron will not be liable to any
Underwriter or any person controlling such Underwriter with respect to any
such untrue statement or omission made in any Preliminary Prospectus that
is corrected in the Prospectus (or any amendment or supplement thereto) if
the person asserting any such loss, claim, damage or liability purchased
Securities from such Underwriter but was not sent or given a copy of the
Prospectus (as amended or supplemented), other than the documents
incorporated by reference therein, at or prior to the written confirmation
of the sale of such Securities to such person in any case where such
delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or
supplemented) was a result of noncompliance by the Company with Section
5(d) and (a) of this Agreement. This indemnity

<PAGE> 20

agreement will be in addition to any liability which the Company and Thermo
Electron may otherwise have. The Company will not, without the prior
written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such
Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of
such claim, action, suit or proceeding.

(b) Each Underwriter, severally and not jointly, will indemnity and hold
harmless the Company, Thermo Electron and their respective directors and
officers, and each other person, it any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities to which the Company, Thermo Electron or
any such director, officer or controlling person may become subject under the
Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto or any Application, or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein; and, subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses reasonably incurred by the Company, Thermo Electron or any such
director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or any action in respect
thereof. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.

(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
PROVIDED, HOWEVER, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than

20
<PAGE> 21

reasonable costs of investigation, subsequently incurred by such indemnified
party in connection with the defense thereof, unless (i) the indemnified party
shall have employed separate counsel in accordance with the proviso to the next
preceding sentence (it being understood, however, that in connection with such
action the indemnifying party shall not be liable for the expenses of more than
one separate counsel (in addition to local counsel) in any one action or
separate but substantially similar actions in the same jurisdiction arising out
of the same general allegations or circumstances, designated by the
Representatives in the case of paragraph (a) of this Section 8, representing the
indemnified parties under such paragraph (a) who are parties to such action or
actions) or (ii) the indemnifying party does not promptly retain counsel
satisfactory to the indemnified party or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party.

(d) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 8 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and Thermo Electron on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault of the parties shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or Thermo Electron, on the one
hand, or the Underwriters on the other, the parties' relative intents,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances. The Company, Thermo Electron and the Underwriters agree that it
would not be equitable if the amount of such contribution were determined by pro
rate or per capita allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation that does not take
into account the equitable considerations referred to above in this paragraph
(d). Notwithstanding any other provision of this paragraph (d), no Underwriter
shall be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section

<PAGE> 22

20 of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each director and officer of the Company or Thermo Electron and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, shall have the same
rights to contribution as the Company.

9. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company or Thermo Electron
other than as provided in Section 10 hereof. In the event of any default by one
or more Underwriters as described in this Section 9, the Representatives shall
have the right to postpone the Firm Closing Date or the Option Closing Date, as
the case may be, established as provided in Section 3 hereof for not more than
seven business days in order that any necessary changes may be made in the
arrangements or documents for the purchase and delivery of the Firm Securities
or Option Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.

10. SURVIVAL. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company and Thermo Electron,
their respective officers and the several Underwriters set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or Thermo Electron, any of
their respective officers or directors, any Underwriter or any controlling
person referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.

11. TERMINATION. (a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company or
Thermo Electron shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its respective part to be performed or
satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing
Date or such Option Closing Date, respectively,

(i) the Company or any of its subsidiaries shall have, in the sole
judgment of the Representatives, sustained any loss or interference with
their respective

<PAGE> 23

businesses or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding that is material to the Company and
its subsidiaries, taken as a whole, or there shall have been any material
adverse change, or any development involving a prospective material adverse
change (including without limitation a change in management or control of
the Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, taken as a whole, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or supplement
thereto);

(ii) trading in the Common Stock shall have been suspended by the
Commission or the American Stock Exchange or trading in securities
generally on the New York or American Stock Exchange shall have been
suspended or minimum or maximum prices shall have been established on any
such exchange;

(iii) a banking moratorium shall have been declared by New York,
Massachusetts or United States authorities; or

(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U. S. financial markets that, in the sole judgment
of the Representatives, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof.

(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.

12. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in the
last paragraph on the front cover page and under the heading "Underwriting" in
any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(b) and 8 hereof. The Underwriters confirm that such statements (to
such extent) are correct.

13. NOTICES. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; if sent to the Company, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to the Company at 245
Winter Street, Suite 300, Waltham, Massachusetts 02154, Attention: President;
and if sent to Thermo Electron, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Thermo Electron, 81 Wyman
Street, Waltham, Massachusetts 02154, Attention: General Counsel.

14. SUCCESSORS. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company, Thermo Electron and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions

<PAGE> 24

and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company and Thermo Electron contained in Section 8 of
this Agreement shall also be for the benefit of any person or persons who
control any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 8 of this Agreement shall also be for the benefit of the directors and
officers of the Company and Thermo Electron and any other person or persons who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act. No purchaser of Securities from any Underwriter shall be
deemed a successor because of such purchase.

15. APPLICABLE LAW. The validity and interpretation of this Agreement, and
the terms and conditions set forth herein, shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to any
provisions relating to conflicts of laws.

16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

[Remainder of page intentionally left blank]

24
<PAGE> 25

If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company, Thermo Electron
and each of the several Underwriters.

Very truly yours,

THERMO ECOTEK CORPORATION

By _______________________________________
Title

THERMO ELECTRON CORPORATION

By _______________________________________
Title

The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.

PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
CIBC OPPENHEIMER CORP.

By PRUDENTIAL SECURITIES INCORPORATED

By _________________________________
Jean-Claude Canfin
Managing Director

For itself and on behalf of the Representatives.

25
<PAGE> 26

SCHEDULE 1

UNDERWRITERS

<TABLE>
<CAPTION>
Number of Firm
Securities to
Underwriter be Purchased
- ----------- ------------

<S> <C>
Prudential Securities Incorporated.....
Smith Barney Inc.......................
CIBC Oppenheimer Corp..................

Total ....................... 4,500,000

</TABLE>

<PAGE> 1

Exhibit 5
---------

Thermo Ecotek Corporation
245 Winter Street
Waltham, Massachusetts 02154

May 11, 1998

Thermo Ecotek Corporation
245 Winter Street
Waltham, Massachusetts 02154

Re: Registration Statement on Form S-2 Relating to Shares
of the Common Stock of Thermo Ecotek Corporation
-----------------------------------------------------

Ladies and Gentlemen;

I am General Counsel to Thermo Ecotek Corporation, a Delaware corporation
(the "Company"), and have acted as counsel in connection with the registration
under the Securities Act of 1933, as amended (the "Securities Act"), on Form S-2
(the "Registration Statement"), of 5,175,000 shares of the Company's Common
Stock, $.10 par value per share (the "Common Stock"). Such shares, together with
any shares of Common Stock registered under a registration statement related to
the offering contemplated by the Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act (a "462(b)
Registration Statement"), are collectively referred to herein as the "Shares".

I or a member of my legal staff have reviewed the corporate proceedings
taken by the Company with respect to the authorization of the issuance of the
Shares. I or a member of my legal staff have also examined and relied upon
originals or copies, certified or otherwise authenticated to my satisfaction, of
all corporate records, documents, agreements or other instruments of the Company
and have made all investigations of law and have discussed with the Company's
representatives all questions of fact that I have deemed necessary or
appropriate.

Based upon and subject to the foregoing, I am of the opinion that:

1. The Company is a corporation duly organized, validly existing and in
corporate good standing under the laws of the State of Delaware.

<PAGE> 2

Thermo Ecotek Corporation
May 11, 1998
Page 2

2. The issuance and sale of the Shares registered pursuant to the
Registration Statement have been duly authorized by the Company and the issuance
and sale of the Shares registered pursuant to a 462(b) Registration Statement
will have been duly authorized by the Company prior to their issuance and sale.

3. The Shares, when issued and sold in accordance with the provisions of the
Underwriting Agreement between the Company and the several Underwriters named on
Schedule I thereto (in the form of Exhibit 1 to the Registration Statement) will
be validly issued, fully paid and non-assessable.

I hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement or any 462(b) Registration Statement and to being named
in the related Prospectus.

Very truly yours,

/s/ Seth H. Hoogasian
---------------------------------
Seth H. Hoogasian
General Counsel

<PAGE> 1

Exhibit 23.1

Consent of Independent Public Accountants
-----------------------------------------

To Thermo Ecotek Corporation:

As independent public accountants, we hereby consent to the inclusion
in this Registration Statement and related Prospectus of Thermo Ecotek
Corporation on Form S-2 of our report dated November 3, 1997 (except with
respect to the matters discussed in Note 15 as to which the date is May 6,
1998) and to all references to our Firm included in this Registration Statement
and related Prospectus.

/s/ Arthur Andersen LLP

Boston, Massachusetts
May 6, 1998

<PAGE> 1

Exhibit 23.2

Consent of Independent Accountants

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-2 to register the sale of 4,500,000 shares of
common stock of Thermo Ecotek Corporation of our report dated August 7, 1997
relating to the consolidated financial statements of biosys, inc., for the two
years in the period ended December 31, 1996, which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.

/s/ PRICE WATERHOUSE LLP

Falls Church, Virginia
May 7, 1998

<ARTICLE> 5
<LEGEND>
Exhibit 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ECOTEK CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> APR-04-1998
<CASH> 46,465
<SECURITIES> 0
<RECEIVABLES> 36,655
<ALLOWANCES> 0
<INVENTORY> 23,608
<CURRENT-ASSETS> 128,366
<PP&E> 368,881
<DEPRECIATION> 76,033
<TOTAL-ASSETS> 486,526
<CURRENT-LIABILITIES> 63,087
<BONDS> 106,679
0
0
<COMMON> 2,662
<OTHER-SE> 157,851
<TOTAL-LIABILITY-AND-EQUITY> 486,526
<SALES> 95,016
<TOTAL-REVENUES> 95,016
<CGS> 65,040
<TOTAL-COSTS> 65,040
<OTHER-EXPENSES> 1,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,768
<INCOME-PRETAX> 18,909
<INCOME-TAX> 4,609
<INCOME-CONTINUING> 13,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,456
<EPS-PRIMARY> .55
<EPS-DILUTED> .38

</TABLE>