Delaware (State or other jurisdiction of incorporation or organization)

84-1079971 (I.R.S. employer Identification number)

				Page No.
PART I.		FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS:
		Consolidated Balance Sheets—June 30, 2002 and December 31, 2001 (Unaudited)		3
		Consolidated Statements of Operations—Three Months Ended June 30, 2002 and 2001 (Unaudited)		4
		Consolidated Statements of Operations—Six Months Ended June 30, 2002 and 2001 (Unaudited)		5
		Consolidated Statements of Cash Flows—Six Months Ended June 30, 2002 and 2001 (Unaudited)		6
		Notes to Consolidated Financial Statements (Unaudited)		8
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		20
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28
PART II.		OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS		29
ITEM 2.		CHANGES IN SECURITIES AND USE OF PROCEEDS		29
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		29
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K		30
SIGNATURES				31

		June 30, 2002				December 31, 2001
		Unaudited
ASSETS
Current assets
Cash and cash equivalents		$	1,583,266			$	604,252
Trade accounts receivable			716,744				738,442
Unbilled revenue			908,013				359,079
Other receivables			135,554				93,522
Prepaid expenses			293,895				253,983
Debt issue costs, net of accumulated amortization			15,865				145,954
Deferred job costs			297,671				352,714
Total current assets			3,951,008				2,547,946
Property, plant and equipment, net of accumulated depreciation			298,739				309,510
Patents, net of accumulated amortization			1,690,092				1,712,095
Investment in K-Fuel, LLC			349,600				351,454
Goodwill, net of accumulated amortization			4,456,368				7,370,355
Intangibles, net of accumulated amortization			3,709,719				1,261,083
Debt issue costs, net of accumulated amortization			87,544				108,503
Prepaid royalty			498,000				498,000
Other assets			254,723				157,857
TOTAL ASSETS		$	15,295,793			$	14,316,803
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	2,312,790			$	2,312,526
Accrued expenses			800,237				579,892
Interest payable			458,872				472,049
Deferred revenue			1,482,669				1,028,750
Deferred income			104,489				152,684
Short-term notes payable to directors			450,000				450,000
Obligations to repurchase Pegasus preferred stock, net			—				2,508,788
Convertible debentures, net			3,349,020				7,195,326
Liability for warrants			10,383,134				—
Current maturities of long-term debt			1,305,000				5,250,329
Total current liabilities			20,646,211				19,950,344
Deferred revenue, less current portion			372,047				423,673
Convertible long-term debt, less current maturities			3,061,449				2,957,005
Long-term debt, less current maturities			110,000				130,000
Total liabilities			24,189,707				23,461,022
Commitments and Contingencies (Note 11)
Minority interest			5,138,182				4,534,045
Redeemable common stock, 4,941,450 and 141,450 shares issued and outstanding			8,924,319				424,350
Stockholders’ deficit
Preferred stock, $.001 par value, 20,000,000 shares authorized; none issued			—				—
Common stock, $.001 par value, 80,000,000 shares authorized; and 30,499,429 and 28,956,104 shares issued and outstanding			30,499				28,956
Note receivable and other			(390,669	)			—
Additional paid-in capital			73,916,475				72,136,810
Accumulated deficit			(96,512,720	)			(86,268,380	)
Total stockholders’ deficit			(22,956,415	)			(14,102,614	)
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK AND STOCKHOLDERS’ DEFICIT		$	15,295,793			$	14,316,803

		Three Months Ended June 30,
		2002				2001
		Unaudited
OPERATING REVENUES
Pegasus software licenses and services		$	1,252,924			$	529,004
OPERATING COSTS & EXPENSES
Cost of Pegasus software licenses and services, excluding depreciation and amortization			898,031				379,244
Marketing, general and administrative expenses			3,874,024				1,085,600
Pegasus software research and development			144,418				212,121
K-Fuel demonstration plant and laboratory			43,662				36,376
Depreciation and amortization			538,829				662,663
Total operating costs and expenses			5,498,964				2,376,004
OPERATING LOSS			(4,246,040	)			(1,847,000	)
Other expense, net			(574,972	)			(12,189	)
Interest expense			(1,802,074	)			(1,144,744	)
Equity in (loss) income of unconsolidated affiliates			(376	)			438
NET LOSS			(6,623,462	)			(3,003,495	)
Deemed dividend attributable to warrant holder			(399,446	)			—
Accretion of redeemable common stock			(6,848,276	)			—
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS		$	(13,871,184	)		$	(3,003,495	)
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)		$	(0.41	)		$	(0.12	)
Weighted-average common shares outstanding			34,180,000				25,389,000

		Six Months Ended June 30,
		2002				2001
		Unaudited
OPERATING REVENUES
Pegasus software licenses and services		$	2,503,885			$	776,954
OPERATING COSTS & EXPENSES
Cost of Pegasus software licenses and services, excluding depreciation and amortization			1,665,157				608,764
Marketing, general and administrative expenses			5,240,269				2,239,440
Pegasus software research and development			280,969				352,857
K-Fuel demonstration plant and laboratory			106,577				89,778
Depreciation and amortization			864,055				1,377,188
Total operating costs and expenses			8,157,027				4,668,027
OPERATING LOSS			(5,653,142	)			(3,891,073	)
Other expense, net			(610,669	)			(37,923	)
Interest expense			(3,980,145	)			(1,894,229	)
Equity in (loss) income of unconsolidated affiliates			(384	)			3,009
NET LOSS			(10,244,340	)			(5,820,216	)
Deemed dividend attributable to warrant holder			(399,446	)			—
Accretion of redeemable common stock			(6,961,591	)			—
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS		$	(17,605,377	)		$	(5,820,216	)
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)		$	(0.55	)		$	(0.23	)
Weighted-average common shares outstanding			32,189,000				25,336,000

		Six Months Ended June 30,
		2002				2001
		Unaudited
OPERATING ACTIVITIES
Net loss		$	(10,244,340