U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   Form 10-KSB

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 (NO FEE REQUIRED)
For the transition period from ______________________  to ______________________

1934 Act Commission File Number    1-12756
                                ------------------------------------------------

                        Rotary Power International, Inc.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

  Delaware                                      13-3632860
--------------------------------------------------------------------------------
(State or other jurisdiction             (I.R.S. Employer Identification Number)
 of incorporation or organization)

  PO Box 128, Wood-Ridge, New Jersey             07075-0128
--------------------------------------------------------------------------------
(Address of principal executive offices)             (Zip Code)
Issuer's telephone number, including area code     973/777-7373
                                               ---------------------------------

Securities registered under Section 12(b) of the Exchange Act:

                                            Name of each exchange on which
   Title of each class                                registered
  Common Stock                                            None
--------------------------------------------------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
  None
--------------------------------------------------------------------------------
              (Title of each class)

    Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. 
Yes [ ] No [X]

    Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

    State issuer's revenues for its most recent fiscal year $413,310
                                                           
    The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $1,808,982 which is based on the closing price of
$0.69 on August 4, 1998.

    The number of shares of Common Stock outstanding on August 4, 1998 was
5,968,516.

    Transitional Small Business Disclosure Format:  Yes [ ] No [X].


                       DOCUMENTS INCORPORATED BY REFERENCE
No information is incorporated by reference.

<PAGE>



                            FORM 10-KSB ANNUAL REPORT

                                      INDEX

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>       <C>                                                               <C>
PART I
------
Item 1.   Description of Business .....................................       3
Item 2.   Description of Property .....................................      17
Item 3.   Legal Proceedings ...........................................      17
Item 4.   Submission of Matters to a Vote of Security Holders .........      17

PART II
-------
Item 5.   Market for Common Equity and Related Stockholder Matters ....      18
Item 6.   Management's Discussion and Analysis or Plan of Operation ...      19
Item 7.   Financial Statements ........................................     F-1
Item 8.   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure ...................................      27

PART III
--------
Item 9.   Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act ..........      28
Item 10.  Executive Compensation ......................................      29
Item 11.  Security Ownership of Certain Beneficial Owners and
           Management .................................................      32
Item 12.  Certain Relationships and Related Transactions ..............      33
Item 13.  Exhibits and Reports on Form 8-K ............................      34

          Signatures ..................................................      58

</TABLE>

<PAGE>



PART I
ITEM 1.   DESCRIPTION OF BUSINESS

General

Rotary Power International, Inc. (the "Company") is in the business of
developing and manufacturing rotary engines for commercial and military use.
Based upon tests conducted by the Company and independent testing companies, the
Company believes that its rotary engines have demonstrated important benefits
which will allow them to compete favorably with reciprocating diesel, gasoline
and natural gas engines and turbines in chosen major market segments.

The Company believes that the rotary design of its engines provides advantages
over other internal combustion engine designs. Rotary engines do not have
reciprocating parts. The compact nature of the power train of a rotary engine
results in a high power-to-weight ratio. Since a rotary engine does not require
the use of conventional connecting rods between the rotors and the crankshaft,
engine volume reduction is realized making the power density of the rotary
engine superior to a conventional four-stroke reciprocating engine. The Company
believes that its patented SCORE(TM) engine technology offers several advantages
over reciprocating engines, such as multi-fuel capability, superior size and
weight characteristics for a given power output, low vibration, greater
reliability and design simplicity with a high commonality of parts and, in a
natural gas-fueled version, lower emissions of oxides of nitrogen. The Company
also believes that its SCORE(TM) engine can be manufactured and produced at a
significantly lower cost than turbines and will operate with better fuel economy
than turbines. The SCORE(TM) engine is also ideally configured to operate at
high efficiency on heavy fuels, which include diesel and jet fuel and their
derivatives.

The Company believes that its rotary engines can be successfully marketed to a
wide variety of commercial industrial and marine markets following appropriate
pre-production programs which include cost reduction, value improvement, pilot
production run, accelerated reliability testing, and field trials.

Through the fiscal year ended 12/31/96, the Company earned substantially all of
its revenues from research and development contracts and subcontracts with the
U.S. Government. However, during 1996, the Company finished the last of its U.S.
Marine Corps research and development contracts and does not anticipate any
major government research and development contracts on any of its engines in the
future, with the possible exception of the Series 40 engine in Unmanned Aerial
Vehicles and Auxiliary Power Units. The end of the Company's military contract
business came earlier than the Company had anticipated and before the Company's
commercial engine activities had reached a point where they are profitable.

In 1996, the Company, in response to the loss of the military contract business,
began redirecting its efforts mainly to produce engines for commercial markets.
The Company believes that its 580 Series rotary engine currently undergoing a
cost reduction and manufacturing engineering program ("Value Improvement
Program") to reduce its manufacturing cost, can be successfully marketed to a
wide variety of commercial and industrial markets, including the marine market,
the power generation, compressor, refrigeration and chiller markets.

                                       3
<PAGE>



The Company's accelerated Value Improvement and pilot production of the 580
Series commercial marine engine, and its commercial product thrusts with the 65
Series industrial and marine engine programs were severely curtailed in the
fourth quarter of 1996 due to the failure of Hydrolance Maritime Transport, Inc.
to meet its financial commitment to the Company. Beginning in October of 1996
the Company was forced to layoff more than 50% of its personnel by year-end and
seek new financing for its continued operations.

In December 1996, the Company reached an agreement with PowerCold Corporation
(formerly known as International Cryogenic Systems Corporation) whereby
PowerCold invested $1,000,000 in the Company in exchange for 2,000,000 shares of
the Company's common stock. Simultaneously, the Company and PowerCold agreed in
principle to merge the two companies in a stock-for-stock acquisition whereby
the Company would have become a wholly-owned subsidiary of PowerCold. The
acquisition agreement with PowerCold was terminated in August, 1997 and the
merger never took place.

During the first four months of 1997, the Company experienced negative cash flow
from operations, including net interest paid, of $375,000 per month. By July,
1997, PowerCold had loaned the Company $217,000. This money was used to meet the
payroll which was owed to employees (other than the payroll for the week ended
May 23, 1997) and to pay certain outstanding payables. Apart from this loan,
neither PowerCold nor the Company was able to secure equity or debt financing in
this time period. As of May 23, 1997, therefore, the Company terminated all of
its remaining employees in an effort to reduce its costs until it could raise
the additional funding required for continued operations. After May 23, 1997, a
few employees resumed work on a full or part-time basis for the Company and its
subsidiary, Rotary Power Marine, Inc. and those employees have been paid for
their time (exclusive of earned vacation pay, which has been largely settled
since then).

The Company was not successful in raising additional equity throughout the
remainder of 1997. On November 24, 1997 Mr. Richard M.H. Thompson, sole
Director, President and CEO of the Company, appointed Mr. Ken Brody sole
Director, President and CEO of the Company. Thereafter Mr. Thompson resigned
from these positions.

Commencing in June, 1997, and in each month thereafter, the Company failed to
make its monthly payments to the Trustee for the Company's 1992 bond financing
with the New Jersey Economic Development Authority (NJEDA), and as a result, the
bondholder's Trustee declared an event of default on July 2 under the terms of
the Trust Indenture.

On December 24, 1997, the Company issued $10,000,000 maturing principal amount
of 10.412% zero-coupon bonds, due December 15, 2007, to yield approximately $3.6
million. This money, together with approximately $2.9 million of the net
proceeds from the sale of FICO strips held as collateral for the NJEDA bonds,
was used to redeem and pay off the NJEDA bond issue for approximately $6.5
million.

On October 30, 1997, following a Notice to Quit and Surrender Possession of the
space leased by the Company, the landlord, Curtiss-Wright, locked the premises.
Unpaid rent at that point was $591, 850. In order to regain limited access, the
Company paid $10,000 to Curtiss-Wright in December, and also reached agreement
to settle the arrearage and prepay rent to February 28, 1998. The value of the
settlement rent was approximately $706,000. In accordance with the settlement,
the Company issued

                                       4
<PAGE>



a 4% promissory note to Curtiss-Wright for $400,000 due January 1, 2003, and
paid Curtiss-Wright $115,000 in February, 1998.

"Safe Harbor" Statement

Forward looking statements made herein are based on current expectations of the
Company that involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include
interruptions or cancellation of existing contracts, the impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks and an inability to arrange additional
debt or equity financing.

Markets and Business Environment

The commercial redirection of the Company's products has identified three areas
where the Company's products are believed to have intrinsic advantages over
reciprocating engines: marine propulsion and shipboard use; energy generation,
and refrigeration/compressors.

Recent successful hull designs, such as FastShip and catamaran ferries, strongly
favor lightweight, powerful engines. Furthermore, a combination of environmental
pressures are forcing redesign of many traditional engines, such as two-stroke
diesels, outboards, ship engines and stationery generators, all developments
favorable to the Company's products. These redesigned engines are more
expensive, heavier and even less competitive with rotary engines, whose
environmental virtues are innate.

Stringent requirements for reduction of ship emissions, now scheduled for
implementation in 2003, are to be measured on a fleet basis. By replacing
non-propulsion engines in shipping fleets with the Company's low-emissions
engines, some fleets will be able to meet emissions requirements without refit
to the propulsion engines. Refitting a ship's main engines to meet the proposed
emission standards is much more costly than the replacement of non-propulsion
engines with less polluting SCORE engines.

Two major factors in the business environment strongly favor the Company's
products in the energy market: the deregulation of power, now the law in several
states and expected to spread to other states and countries, and the retuning of
major refineries toward the production of diesel fuels over gasoline. This
latter trend comes in response to the world-wide environmental pressures that
favor the economy of diesel, and will result in an increase in the cost and
declining availability of high-grade gasolines and a price reduction and
increase in the availability of diesel fuels. The Company's SCORE technology
allows a single engine, unmodified, to run on either fuel, but produces the
expected economies when run on diesel.

Reserves of natural gas far exceed reserves of oil. The Company has developed
SCORE engines running on gaseous fuels, including natural gas. Together with
light weight screw compressors, these

                                       5
<PAGE>



engines satisfy a large market for electricity peak-shaving in buildings,
shopping malls and supermarkets, as well as cold-storage facilities and gas
field storage facilities.

Electricity supplied by large utilities remains scarce in developing nations and
is expensive in other countries with limited natural energy resources, such as
Japan. Light weight, powerful engine driven generators based on the Company's
SCORE engines can be airlifted to locations inaccessible by truck, such as
fishing villages in Alaska and rural clothing factories in South America. These
units can be installed on rooftops where conventional units would require major
structural reinforcement. Because they are SCORE engines, they can run on any
locally available fuel.

In other markets, especially where generators can be mortgaged as part of a long
life asset, the cost of power generation with the Company's products may be
significantly less than the peak price per kilowatt, and owning a generator
allows flexibility when dealing with power contracts that stipulate minimum and
maximum usage, which are common on the Pacific Rim. The deregulation of power
provides an opportunity to sell excess power back to the utility grid, which
encourages users to install larger private generators than would be required for
peak shaving alone.

Internationally, the Company finds itself in a favorable position in Pacific Rim
countries, with possible alliances with a major Japanese kairetsu and a major
Korean chaibol, as well as promising contacts in China and Taiwan. These
prospects have sought us out as suppliers to give their products, primarily in
the energy market, a competitive thrust, and frequently to enable the creation
of hitherto impossible products, such as quiet, 750KW 50/60 HZ truck-mounted
generators capable of negotiating Japan's narrow streets, or a hatchable engine
to replace an aging engine in a generator on a submarine.

History

The Company, a Delaware corporation, was formed on October 23, 1991 for the
purpose of purchasing substantially all of the assets and the business of the
Rotary Engine Division (the "Division") from John Deere Technologies
International, Inc. ("JDTI"), which it completed on December 31, 1991. JDTI, a
wholly-owned subsidiary of Deere and Company, was, at the time, the leading
company in the United States in the development and production of prototype
rotary engines and the Company believes that JDTI was, at that time, the only
company in the world producing large rotary engines. JDTI purchased its rotary
engine division from the Curtiss-Wright Corporation ("Curtiss-Wright") in 1984.
Curtiss-Wright had operated its rotary engine division since 1958.

As a result of its acquisition of the assets of the Division, the Company is the
sole owner of all of the rotary engine assets of JDTI and Curtiss-Wright,
including the proprietary technology and currently enforceable patent rights
developed by JDTI from 1984 to 1991 and Curtiss-Wright from 1958 to 1984.

In 1992, the Company acquired certain fixed assets of Defense Group Industries
Inc. ("DGII") and substantially all of the fixed assets of ROTEC Manufacturing
and Engineering Corp. ("ROTEC"), including all of the intellectual property of
these companies. These assets had been used by these companies for the
development of a small multi-fuel rotary engine (now, the Company's 40 Series
engine).

                                       6
<PAGE>



As a result of the transactions described above, the Company has accumulated an
extensive data base of rotary engine technology. The Company's data base
includes rotary engine designs and data derived from more than 90,000 hours of
rotary engine tests in a variety of sizes from 70 to 40,967 cubic centimeters
displacement per rotor. The Company has continued to maintain and expand this
data base.

In October 1992, the Company entered into a license agreement with Wankel GmbH
(the "Wankel Licensing Agreement"), to license Wankel GmbH's technology,
know-how and approximately 70 patents and patent applications in six countries
relating to all of its small rotary engines. Under the Wankel Licensing
Agreement, the Company was not required to pay a license fee but was obligated
to pay minimum annual royalty payments, commencing with a $100,000 payment in
January 1994. The Company was also obligated to pay earned royalties on sales of
small rotary engines using the Wankel technology, but the Company was permitted
to offset royalties with work subcontracted to Wankel under the Company's
development contracts.

The Company advised Wankel GmbH on January 10, 1996 that, due to Wankel's
failure to deliver the know-how or drawings required to be supplied under the
provisions of the Wankel License Agreement, the Company was terminating the
Agreement, effective immediately, and withholding the minimum royalty payment
due Wankel on January 31, 1996. On September 19, 1996, Wankel although objecting
to RPI's method of termination, agreed, through its attorneys, to terminate the
Wankel License Agreement by mutual consent effective September 20, 1996.

The Company, realizing the need to increase the commercial content of its
business and reduce its reliance on military/ government programs, formed an
Industrial Products Group within the Company in March of 1994 to develop and
sell natural gas rotary engines into commercial industrial markets. The Company
executed a Development Agreement with Mazda North America (MANA) of Flat Rock,
Michigan and Mazda Motor Corporation (MC) of Hiroshima, Japan on December 7,
1993 for import of rotary short block engines converted to a natural gas
configuration agreed upon by MC Engineering and the Company's Engineering
Department. The Company acquired the services of highly experienced individuals
as sales and marketing personnel through a consulting agreement to lead this
initiative. A natural gas version of the Mazda rotary was developed during the
1994 and 1995 calendar years designated the 65 Series Natural Gas Rotary Engine
("NGRE").

The Company signed an exclusive four year agreement with the Hussmann
Corporation on October 16, 1995 for the 65 Series natural gas rotary engine
(NGRE) for supermarket refrigeration equipment and food store heating. Hussmann
supplies such equipment to 48% of the 31,000 supermarkets in the United States.

The Company signed a teaming agreement with Teledyne Vehicle Systems (TVS) of
Muskegon, Michigan on July 25, 1995 to work together on the development,
marketing, manufacture and sale of the Company's 580 Series rotary engine for
the United States Marine Corps (USMC). General Dynamics Land Systems Inc.
(GDLS), a wholly-owned subsidiary of General Dynamics Corporation, bought the
assets of TVS in 1996. The Company transferred its teaming agreement with TVS to
GDLS. This agreement terminated when the United States Marine Corps and General
Dynamics Land Systems Division did not select the Company's rotary engine for
their Advanced Amphibious Assault Vehicle in June of 1996.

                                       7
<PAGE>



To further augment its commercial product thrust, the Company created a
wholly-owned subsidiary called Rotary Power Marine, Inc. ("RPM") on July 26,
1995 to address the commercial pleasure craft marine market. RPM purchased
essentially all of the assets of Rotary Marine Industries ("RMI") of Sandpoint,
Idaho on August 30, 1995. RMI was developing a marine rotary engine utilizing
the Mazda RX-7 automobile short block under an agreement with MANA and MC. This
agreement was terminated and the Company signed a new 65 Series rotary marine
gasoline engine agreement with MANA and MC on November 10, 1995. All RMI
manufacturing operations have been moved from Spokane, Washington to the
Company's Wood-Ridge, New Jersey plant. The General Office of RPM is at the
Company's headquarters in Wood-Ridge, New Jersey.

The Company signed a Distributor Agreement on the 580 Series diesel marine
engine family with Abejon on October 5, 1995. The area of responsibility of
Abejon is the states and provinces bordering the Pacific coast of Mexico, Canada
and the United States, including Hawaii. Abejon's area of responsibility was
increased to all of the United States during the equity investment negotiation
discussed in the following paragraph.

In addition, in February, 1996, Abejon invested a total of $4 million to
purchase one million shares of the Company's Common Stock at a price of $4.00
per share. Simultaneously with the sale of the Common Stock, the Company loaned
$3,750,000 to Hydro Lance, an affiliate of Abejon. Hydro Lance repaid $850,000
of the loan plus interest. A $1 million repayment which was due on September 30,
1996 was not paid and no further scheduled payments were received in 1996 or
during 1997. As a result of this default, certificates for 822,916 shares of the
Company's common stock, issued to Abejon, were cancelled.

In December 1996, the Company concluded an agreement with PowerCold whereby
PowerCold invested $1,000,000 in the Company in exchange for 2,000,000 shares of
the Company's Common Stock. Simultaneously, the Company and PowerCold agreed in
principle to merge the two companies in a stock-for-stock acquisition, whereby
the Company would become a wholly-owned subsidiary of PowerCold. The Company and
PowerCold signed a Plan and Agreement of Merger on March 21, 1997. This Plan and
Agreement was never completed and was terminated in August, 1997.

Technology

  History

The Wankel GmbH rotary engine, upon which the Company's rotary engines are
based, was first demonstrated in 1954 and is named after its developer, the late
Dr. Felix Wankel, a specialist in the design of sealing devices.

In 1958, Curtiss-Wright obtained the first license for rotary engine technology
from Wankel GmbH, which gave Curtiss-Wright an exclusive license for North
America and certain non-exclusive rights outside of North America.
Curtiss-Wright's research and development efforts initially involved gasoline
rotary engines with a wide range of power for use in military vehicles and
aircraft, and for various commercial uses including automobiles, aircraft,
marine pleasure craft and lawn mowers. In the 1960's, the early rotary engines
experienced serious problems with gas sealing and poor reliability. These
problems were primarily caused by the unavailability of materials that would
permit the principles of the rotary engine to be successfully transformed into
competitive performance engines. In the past 16 years, enormous progress in
materials technology, such as the development of advanced ceramic

                                       8
<PAGE>



material, has significantly contributed to the solution of past sealing and
reliability problems. The Company and its predecessors and Mazda Motors
Corporation ("Mazda"), utilizing advances in material science and machining
technology, have independently addressed and solved these early rotary engine
problems. Testing of ceramic apex seals has shown an order of magnitude
improvement in apex seal wear over the metal seal. Further, apex seal design
refinements have resulted in a significant reduction in side housing surface
wear.

Curtiss-Wright also initiated work on the stratified charge rotary engine in the
mid-1960's in order to provide the advantage of multi-fuel capability for use in
military vehicles and aircraft. JDTI purchased the rotary engine division of
Curtiss-Wright in 1984, including, without limitation, the license agreement
with Audi NSU/Wankel GmbH, and thereafter continued to develop stratified charge
rotary engines, leading to a series of patents covering stratified charge
technology, seal design, cooling systems and new longer life materials. In 1984,
JDTI canceled the license agreement with Audi NSU/Wankel GmbH when it realized
that its recently developed technology was more important to its future business
than the technology being licensed from Audi NSU/Wankel GmbH, which, by that
time, was already in the public domain.

Since its acquisition of the assets of the Division, the Company has continued
to develop and improve the rotary engine. These developments and improvements
include reduction in fuel consumption and emissions, the use of ceramics for
increased durability, the use of high speed electronic fuel injection systems
and controls, and increased power density. The Company's rotary engine
technology has now advanced to the point that its 580 Series engine, producing
1000 horsepower, and its 40 Series engine, producing 15 horsepower, have both
successfully completed a 400 hour test operating on the standard North Atlantic
Treaty Organization ("NATO") test cycle.

  Description of the SCORE(TM) Engine

The patented stratified charge combustion concept is used by the Company in its
SCORE(TM) engines in order to improve the burning of the fuel in the elongated
combustion chamber. In this process, exemplified by the 580 Series
implementation, there are two high-pressure injection nozzles. The pilot
injector injects a small amount of fuel that is ignited by an electrically
energized source. This creates a pilot flame which ignites a larger amount of
fuel which is injected by the main injector into a stationary flame front as the
rotor sweeps past it, creating a layered (stratified) charge. This dual
injection system results in more complete combustion of the fuel, reducing
emissions, improving fuel economy and allows the engine to run on a wide range
of fuels which burn at different rates (omnivorous).

The injection and ignition system of the SCORE(TM) engine allows the engine to
operate using heavy fuels over a wide horsepower and speed range without the
additional weight required by a reciprocating diesel engine. The SCORE(TM)
engine is configured to operate at high efficiency on heavy fuels, which include
diesel and jet fuel and their derivatives. Diesel fuel is the fuel of choice for
the commercial marine marketplace because of safety of operation and
desirability for insurance coverage.

Engine Products

                                       9
<PAGE>

The Company currently has five different displacement rotary engines as
exhibited in the following table. As reported earlier, the Company is in the
process of selling its 65 Series natural gas and 65 Series gasoline marine
engine product lines.

The heavy fuel (Diesel) 580 Series is the primary product thrust by the Company.
Company equity and external funding will be used to put this family of engines
into the commercial marine marketplace. Outside funding has been proposed for
the natural gas variant of the 580 Series. The 70 Series was developed in the
late 1980s by the Deere & Company Rotary Engine Division for military power
generation and for commercial and pleasure craft marine applications. It was put
on the shelf in 1990 and requires an upgrading to take advantage of the
technology and material advancements over the past eight years.

The 170 Series has been shelved until commercial funding for the final
development of this engine is obtained.

The series designation for each family, the displacement per rotor, the current
and potential horsepower per rotor and the maximum potential horsepower of each
family of the Company's rotary engines, are listed below:

<TABLE>
<CAPTION>
                        Displacement per              Current             Potential Family
  Family                     Rotor               Horsepower/Rotor         Horsepower Range
  ------                ----------------         ----------------         ----------------
<S>                     <C>                          <C>                    <C>
                                                                            (1-6 Rotors)
 40 Series HF*          0.407 liters                   15-50                   15-200(4)
 65 Series NG**         0.65  liters(s)                   40                   40-120(3)
 65 Series G***         0.65  liters(s)                  100                  100-300(3)
 70 Series HF*          0.67  liters                  80-125                   80-500(4)
170 Series HF*          1.72  liters                 200-325                 200-1200(4)
580 Series HF*           5.8  liters                 450-520                 450-3000(6)
580 Series NG**          5.8  liters                     250                 250-1500(6)

</TABLE>

          *HF = Heavy Fuel (Diesel, Jet and Gasoline Fuels)
         **NG = Natural Gas
         ***G = Gasoline
          (S) = Production stopped in 1997, assets partially sold 
          ( ) = Number of rotors per engine at top of horsepower range

Modularity is one of the attributes of the rotary engine that does not exist
with reciprocating engines. A given rotor and rotor housing configuration
constitute a unit power module. In each module the rotor and rotor housing are
identical. Engines from one rotor up to six rotors can be constructed either by
stacking the modules or by coupling 2-rotor engines into 4- and 6-rotor
versions. The latter is the preferred choice by the Company for all rotary
engines exceeding two rotors.

The power output is then equal to the power of the power module unit times the
number of rotors or number of power module units. The addition of each module
entails adding an intermediate housing (to separate the rotor housings, provide
a bearing support and accommodate cooling provisions) and lengthening the
crankshaft, or by coupling 2-rotor engines together. Accessory items, such as
the starter and pumps, must be re-sized to accommodate the increased engine
size, but, because of this modularity, the commonality of parts between
different models of engines in the same family is greater than 90%, reducing
manufacturing cost and spare parts inventory.

                                       10
<PAGE>



Research and Development Contracts

The Company does not currently have any research and development contracts for
rotary engines with the U.S. Government or any commercial company. All contracts
with the U.S. Government have been stopped pending close-out and government
property disposal in accordance with applicable government property regulations.

Commercial Markets

The Company believes that the rotary engines which it was developing for the
military can be modified and adapted for use in a wide variety of commercial and
industrial markets, including the commercial and pleasure craft marine market,
the power generation, air compressor, chiller and refrigeration markets. Set
forth below is a description of the various marine, commercial and industrial
markets to which the Company has sold or believes, working on its own or through
manufacturers, distributors, and dealers it can successfully sell its engines.
There can be no assurance that the Company will be able to sell its engines
successfully into any of these markets.

        Commercial and Recreational Marine Markets - 580 Series

The Company believes that there is a substantial market for its rotary engines
in the 1000 to 3000 horsepower category, and multiples thereof, for use in ferry
boats and other commercial marine craft and yachts. The Company believes that
the size, weight, smoothness of operation, acceleration and diesel fuel
capability of the SCORE(TM) 580 Series engines give this engine advantages in
the marine environment over reciprocating engines. The Company further believes
that the weight advantage of SCORE(TM) engines may result in reduced draft,
improved fuel economy and higher payloads in boats using SCORE(TM) engines than
in boats using reciprocating engines. The compact size advantage of the rotary
engine also allows for smaller engine compartments, which may be of significance
to boat designers.

         Industrial Markets - 580 Series

With successful and profitable production of the 580 Series diesel-fueled
engines for commercial marine applications, the Company believes there is a
substantial industrial market in power generation including stationary, mobile
and standby operations. The natural gas variant of the 580 Series engines, for
which the Company will solicit funding, has excellent potential in the
industrial markets of power generation, refrigeration, cooling, water cooling,
process and compression.

In 1992, the Company initiated a natural gas development program which continued
development originally started through funding from the Gas Research Institute.
The Company's natural gas development program on its 580 Series engines is
intended to lead to the production of low emission rotary engines suitable for
use in areas with stringent air quality regulations. Due to its unique geometry,
the rotary engine is able to operate at a very lean fuel to air ratio compared
to reciprocating engines. This ratio results in relatively low emissions of
oxides of nitrogen, without some of the negative side effects, such as the
adverse effect on fuel economy and hydrocarbon emissions, experienced with
reciprocating engines. As a result of an internal development program at the
Company, a 580 Series prototype engine operating on natural gas has demonstrated
emissions of oxides of nitrogen of less than 1.0 gram per horsepower hour,
compared to the 4.0 gram limit specified for 1998 by the California Air
Resources Board ("CARB"), for heavy-duty vehicles of greater than 14,000 pounds.
Further, based

                                       11
<PAGE>

upon the Company's interpretation of the CARB specification, levels of non-
methane hydrocarbons and carbon monoxide were also well under CARB emissions
requirements without after treatment.

Military Markets

In looking at the potential of the Company's commercial SCORE(TM) products in
defense, there are many prospects for engine/propulsion systems requiring the
power density and multi-fuel capability advantages of the Company's SCORE(TM).
These opportunities will be addressed by the Company following successful
commercial market introduction and production of the 580 and/or 70 Series
engines. There are no assurances that any military prototype and production
orders will be received. The Company, both by intention and due to adverse
circumstances, had in 1995 and 1996 significantly reduced its reliance on
military/government R&D programs in its move toward commercial business in the
future.

         Unmanned Aerial Vehicles

The Company believes that a potential market exists for use of its 40 Series
engines in Unmanned Aerial Vehicles ("UAVs") utilized by the Armed Forces.
Unmanned Aerial Vehicle systems greatly improve the quality and timeliness of
battlefield information while reducing the risk of capture or loss of personnel,
thus allowing faster and more informed decision-making by battlefield
commanders. The Company believes that the U.S. Government will increase its
funding for development and procurement of UAV systems over the next few years,
even as funding for manned weapon systems is being decreased.

Commercial opportunities for UAV technology include crop- spraying, package
delivery, atmosphere sampling, communications relay, border patrols, aerial
photography and scouting for forest fires.

The Company believes that its 40 Series heavy-fueled rotary engine is the only
heavy-fueled engine currently in advanced development that can deliver between
50 and 60HP per rotor within the weight, size and specific fuel consumption
requirements of the military UAV market. As discussed earlier, the Company won
the Heavy Fuel Engine subcontract for the TRW/IAI Hunter UAV from Lockheed
Martin in November 1994, which subcontract was terminated for the convenience of
Lockheed Martin, TRW/IAI and the U.S. Army on August 4, 1995. The entire Hunter
UAV program was terminated for the convenience of the Government early in 1996.
Its replacement will be the Tactical UAV (formerly Short Range Maneuver UAV).
The Company is in pursuit of the Heavy Fuel Engine development for this Tactical
UAV to be used by the U.S. Army and U.S. Navy. The request for a proposal for a
family of heavy fuel engines for military Outrider (Tactical) and Predator UAV
was not issued by the government in 1997 as expected. Its delay is due to the
lack of funds and indecision by the U.S. Army and U.S. Navy on operational
procedures; however, the Company will remain vigilant of this potential
opportunity. There is no assurance that the Company will be awarded a Heavy Fuel
Engine contract for its 40 Series multi-fuel rotary engine.

         Auxiliary Power Units

                                       12
<PAGE>



With developmental success for unmanned vehicles resulting in production of the
40 Series engines the Company will pursue auxiliary power unit military
opportunities. There is no assurance that any new auxiliary power unit business
will be acquired with the U.S. Government.

Regulation

         Product Regulation - Government

The demand for some of the Company's products is affected by various federal,
state and local energy and environmental laws and regulations. All of these laws
and regulations are subject to revocation or amendment, and the Company cannot
predict what effect revocation or amendment may have on the Company's sales,
business or operations.

The 580 Series natural gas engine development which the Company will reactivate
upon receipt of equity funding will be subject to various provisions of recent
amendments to the Clean Air Act, as well as energy and environmental legislation
enacted at state and local levels which may be more stringent than federal laws.

Although federal regulatory standards have been imposed only in connection with
on-highway (i.e., truck and bus) vehicles, the United States Environmental
Protection Agency, in accordance with the 1990 Clean Air Act amendments, has
proposed regulations for engines in non-road equipment and vehicles of 50
horsepower or higher, including agricultural and construction vehicles with full
implementation expected in 2000. Initial regulations for marine engines are
expected in 2001, however will apply to outboards and personal watercraft only.
Emission regulations on inboard, inboard/ outboard and stern drives is not
expected before 2005. In addition, in early 1992, the California Air Resources
Board finalized regulations for certain off-highway equipment and vehicles using
engines rated at 175 horsepower or greater that began in 1996. Proposed
regulations require reduced NOx emissions, which favor the Company's SCORE
technology engines.

Like all electric power-generating and other fossil fuel- burning systems, the
generators, chillers and cogeneration products that the Company may sell engines
for demonstration and product sales must comply with federal, state and local
environmental laws and regulations. Regulation of products such as those to be
sold by the Company is conducted primarily at the state and local levels, where
standards can vary. In particular, applicable environmental standards in
California are stricter than comparable federal guidelines. The Company believes
that its natural gas engines comply with applicable federal and state
environmental standards, including those currently in effect in California,
though the Company cannot predict whether its products will comply with all
environmental standards promulgated in the future. The Company does not believe
that the costs and effects of complying with environmental laws relating to the
Company's business will have a material adverse effect on the company's business
or operations.

Natural gas is one of the many alternative fuels which are addressed by these
new laws and regulations. Others include methanol, ethanol, liquefied petroleum
gas, hydrogen, electricity and reformulated gasoline. Although the Company
believes that natural gas will become a preferred alternative fuel, there can be
no assurance of this or that existing and future laws or regulations or their
enforcement will create material long-term demand for natural gas fueled
vehicles.

                                       13
<PAGE>



         Product Regulation - Marine Industry Regulations

Marine engines are required to comply with certain regulations promulgated by
the U.S. Coast Guard. The Company's 580 Series marine engines are being designed
and produced to comply with U.S. Coast Guard regulations. Marine engine
emissions regulation is expected in the year 2003. The U.S. is signatory to the
proposed IMO (International Maritime Organization) regulations which, for the
first time, specify exhaust stack emission units for shipping on the high seas.
The fleet emissions standards will favor RPI's engines in shipboard applications
as auxiliary power and propulsion. Finally, in order to qualify for passenger
vessels, the Company's larger engines should be submitted for classification by
one or a few marine classification agencies, such as American Bureau of
Shipping, or Lloyd's Registry.

         Environmental Regulation

The Company operates its facility in compliance with Federal, New Jersey, and
local environmental laws and regulations. Provisions in the Company's lease with
Curtiss-Wright Corporation hold the Company harmless from fines, suits,
procedures, claims and/or actions associated with environmental hazards or
clean-ups arising from or resulting from prior or subsequent use of the premises
by Curtiss-Wright or others for whom the Company is not responsible.

The discharge of pollutants to the waters of the State of New Jersey is
controlled and restricted by the New Jersey Department of Environmental
Protection ("NJDEP") in accordance with applicable laws and regulations. The
Company uses clean, non-contact water in a closed loop system for cooling
engines and test equipment. The cooling water is analyzed and treated monthly.
Discharge is for emergency only. Since the Company has never discharged water
during its operation, the NJDEP determined that as of March 21, 1995, the
Company is no longer required to submit monthly discharge monitor reports.

Outdoor noise levels resulting from operations are in accordance with the town
of Wood-Ridge Ordinance.

The Company has NJDEP stack permits for control apparatus and equipment.

The Company has no underground storage tanks. Short term fuel and fuel oil
storage is contained in above ground tanks surrounded by containment walls. The
Company has a Spill Prevention Control & Countermeasures Plan, as required by
federal regulations.

The Company has filed a Notification of Hazardous Waste Activity in compliance
with the Resource Conservation and Recovery Act. Transportation and disposal of
hazardous waste is handled by Safety Kleen Corporation in accordance with
applicable federal and State of New Jersey regulations. The Company maintains a
transport manifest of all hazardous waste removal from the facility.

Manufacturing and Assembly

The Company has sufficient capital equipment and manufacturing space available
to support its current operations. The Company has adequate capacity to
manufacture and test prototypes and limited production quantities of the 70
Series and 580 Series SCORE(TM) engines, and to assemble and test

                                       14
<PAGE>



engine-alternator units based on these engines. The Company has retained
sufficient machining capability to manufacture the critical features of the
major housing components.

The Company purchases many of the components used in its rotary engines and
completely assembles each engine at its facilities. The Company believes that
virtually all of the parts necessary to manufacture its engine, such as rotors,
crankshafts, castings, and forgings, are available from a variety of vendors in
the United States and Canada.

Sales & Service

The primary task of an engine manufacturer must be to produce high quality
engines in quantity at a marketable price, with good availability and strong
service. The Company's sales and service policies are directed toward these
ends.

Major accounts, such as SeaBank and Marubeni, continue to be serviced directly
by Company executives and Company personnel in international sales management.
For major accounts, the solicitation of orders, contract management, delivery
and service logistics and production orders will remain with the Company, even
though the contracts originate elsewhere, and commissions may be payable on
these orders.

Providing engines to special markets is the business of the Company's Master
Engine Distributors, each one having a contractual segment of a vertical market
and a territory and engine line. Master Distributors are required to stock
engines and meet minimum sales targets, make a substantial investment, and to
provide service where practical. In 1997 the Company had one Master Distributor;
the Company anticipates that several more will be added in 1998.

Aside from purchased components such as starters, pumps and injectors, a typical
two-rotor engine has only three moving parts. This core of the engine,
consisting of the housing and internal parts, is called a Power Core. Any
problem internal to an engine is remedied by a replacement of the Power Core.
Therefore, rotary engines do not require as extensive a parts and service
network as required for reciprocating diesels.

Master Engine Distributors are responsible for service for all external
components and to stock replacement Power Cores. The Company has sufficient
spare parts and Power Cores to service existing engines in the domestic market.

PowerCold and its subsidiaries and acquisitions continue to market the Company's
products in refrigeration markets, as well as oil field development and
stationary engines for peak load shaving applications.

                                       15
<PAGE>



Intellectual Property

The Company believes that it owns or has license and patent protection for
certain elements of the technology necessary to develop and produce its rotary
engine. The Company owns approximately 24 patents and four new patent
applications covering the design, materials, and manufacture of its rotary
engine. These patents cover the concepts used in the SCORE(TM) engine combustion
system and certain areas of the design and materials used in the sealing
elements and in other critical technology areas. These patents cover not only
the design currently used in the engines, but also those concepts that have been
identified for future research and development. A portion of the patents and
intellectual property of the Company is subject to the rights of the U.S.
Government for military uses.

The Company does not consider any one or group of its patents to be of such
importance that their expiration, termination, or invalidity would materially
affect the Company business. There can be no assurance that the issued patents
or the licensed rights of the Company will fully, or even partially protect the
Company's technology from competitors approaches, or that new patent
applications will be allowed.

Competition

The Company's success depends upon its ability to maintain a competitive
position in the development and commercialization of its rotary engine
technology in relation to other existing and emerging technologies and upon its
ability to displace current four-stroke and two-stroke reciprocating engines and
turbines, all of which have an established and dominant position in the field.
The Company expects competition from automobile engine manufacturers and other
engine manufacturing firms specializing in the development of both diesel and
gasoline reciprocating engines.

In addition, the Company may face competition from engineering firms developing
small gas turbines and small fuel cells for sale to industry. These companies
may have substantially greater resources for research, development and
manufacturing than the Company. Despite the fact that the Company has developed
and patented its rotary engine technology, it is possible that the Company's
competitors may succeed in developing technologies and products that are more
effective or commercially acceptable than those developed by the Company.

Employees

As of December 31, 1997, the Company had one employee.

Until the first quarter of 1997, the Company had been able to attract and retain
the engineers, professionals and other personnel required by its business. Due
to the financial difficulties encountered by the Company since October 1996, it
may be more difficult to recruit and retain employees in the future. None of the
Company's employees is represented by a labor union and the Company considers
relations with its employees to be good.


PART I

                                       16
<PAGE>



ITEM 2. DESCRIPTION OF PROPERTY

Property

The Company leased 127,640 square feet of space from Curtiss-Wright at an
average annual lease expense of $500,000 per year on a three-year lease ending
December 31, 1994. The Company exercised a three-year renewal option extending
the lease term to December 31, 1997 at an average annual lease expense of
$575,000. The facility is located at 1 Passaic Street, Wood-Ridge, New Jersey
07075. Approximately 54,000 square feet at the facility are used by the Company
for manufacturing and assembly. Twelve fully instrumented engine test cells,
with the capability of testing engines from 10 to 3,350 horsepower, occupy a
further 20,000 square feet. The balance of the facility includes offices for
design, development engineering, marketing, and administration. Due to the
Company's financial problems in the last quarter of 1996 and throughout 1997,
the Company was in default on its lease obligations in the amount of $591,850 as
of December 15, 1997.

On December 22, 1997, the Company negotiated a settlement of the rents due
Curtiss-Wright until February 28, 1998. As part of the settlement, the Company
gave up the 54,000 square foot manufacturing area and consolidated its
manufacturing in the test cell areas. In addition to the test cells, the Company
occupies approximately 10,000 square feet of office space.


PART I
ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to, and the Company's property is not the subject of,
any material pending legal proceedings, nor, to the Company's knowledge is any
material legal proceeding threatened.

PART I
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Due to the lack of available capital and the cessation of operations, the
Company did not hold an annual meeting of the stockholders in 1997.

As of the close of business on January 30, 1997, Messrs. Warren D. Bagatelle,
James P. Wade and James M. Beggs resigned as Directors of the Company.

On March 31, 1997, the Directors of the Company elected Francis L. Simola,
Chairman, CEO and President of PowerCold, to fill a vacancy on the Board of
Directors and also to serve as the Secretary of the Company. Simultaneously
therewith, based on a written demand received from counsel to PowerCold and on
the belief that Mr. Simola's election as a Director and Secretary of the Company
had become effective, the four other Directors of the Company, Richard M.H.
Thompson, Robert L. Osborn, William T. Figart and Ken Brody, resigned as
Officers and/or Directors of the Company effective April 1, 1997. On June 17,
1997, Mr. Simola informed the previous Officers and Directors of the Company in
writing that he did not, and had not, accepted the positions of Director and
Secretary of the Company. After several consultations with Mr. Simola, on July
16, 1997, Messrs. Thompson,

                                       17
<PAGE>



Osborn and Figart, three of the four former Directors who had resigned effective
April 1, 1997, held a meeting, rescinding their resignations as Directors and
elected Mr. Thompson as President and CEO of the Company to serve as such at
least through the effective date, if any, of the merger with PowerCold.

Following the July 16, 1997 Board Meeting Messrs. Figart and Osborn resigned as
Directors of the Company.

On November 24, 1997, Mr. Richard M.H. Thompson appointed Mr. Ken Brody, a
former Director of the Company and principal in Abejon Rotary Power, President,
Sole Director, and Chief Executive Officer of the Company, and then Mr. Thompson
resigned.


Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock ("Common Stock"), par value $.01, has been publicly
traded since February 9, 1994. The Common Stock traded in the over-the-counter
market on the National Association of Securities Automated Quotation System
(NASDAQ) Small Capitalization Issues under the symbol RPII and on the Pacific
Stock Exchange (PSE) under the symbol RPX until December 14, 1996 in the case of
NASDAQ and December 4, 1996 in the case of the PSE. The common stock of the
Company was deleted from NASDAQ on December 19, 1996 and was suspended from the
PSE on December 4, 1996. Since December 19, 1996 it has traded on the Over The
Counter Bulletin Board ("OTCBB"). On July 23, 1998, the trading symbol for the
common stock changed to RPIN on OTCBB.

There was no public market for the Company's Common Stock prior to February 9,
1994.

The following table sets forth the range of high and low bid and ask prices of
the Common Stock on the NASDAQ for the fiscal quarters indicated, as reported by
NASDAQ. All over the counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.

COMMON STOCK
------------
<TABLE>
<CAPTION>
                                 BID                       ASK
                        --------------------     -----------------------
                          HIGH         LOW         HIGH            LOW
                        --------------------     -----------------------
<S>                      <C>          <C>        <C>             <C>
Year Ended 12/31/97
First Quarter             .625        .15625     1.03125          .22
Second Quarter            .3125       .13         .375            .18
Third Quarter             .14         .04         .18             .0499
Fourth Quarter            .1          .03125      .135            .04
Year Ended 12/31/96
First Quarter            3 5/8       2           4               2 3/8
Second Quarter           3 3/8       2           3 11/16         2 1/4
Third Quarter            2 5/8       0 3/4       3               0 15/16
Fourth Quarter            .21875      .0625       .28125          .15625

</TABLE>

                                       18
<PAGE>



The Company has never paid any dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Board of
Directors of the Company currently anticipates retaining any available earnings
for the growth and expansion of the Company's business. The declaration and
payment of future cash dividends, if any, generally would depend upon the
Company's earnings, financial condition, results of operations, current and
anticipated capital requirements, plans for expansion, if any, future prospects,
restrictions under then existing credit and other debt instruments and
arrangements and other factors deemed relevant by the Board of Directors.

On August 1, 1998, there were approximately 750 common stockholders of record.

The following table sets forth all equity securities sold by the Company during
the fiscal year ending December 31, 1997 that were not registered under the
Securities Act. All such equity securities sold by the Company were shares of
Common Stock.

<TABLE>
<CAPTION>
SALE DATE                   SHARES        CONSIDERATION         PERSONS TO WHOM SOLD
---------                   ------        ------------          --------------------
                                          (Price/Share)
<S>                         <C>                <C>              <C>
December 20, 1996           2,000,000          $0.50            PowerCold Corp.((1))

March 13, 1997                150,000          $0.50            Rickel Securities, Inc. and its affiliates((2))

</TABLE>
----------------------------------
((1)) Sold in connection with the Plan and Agreement of Merger. Such shares were
      sold in December 1996, but were not delivered to the purchaser until
      January 1997.
((2)) Sold as consideration for services rendered in connection with the sale of
      the FICO Strips.

      All of the Common Stock listed above was issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 and no public offering was involved. All of the purchasers acquired the
Common Stock for investment, and there was no general advertising or general
solicitation in connection with the offer and sale of the Common Stock. The
Company believes that each purchaser was given or had access to detailed
financial and other information with respect to the Company and in connection
with these sales.


PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

General Overview

The Company and its wholly-owned subsidiary, Rotary Power Marine, Inc. ("RPM")
are engaged in the research, development, demonstration and production of rotary
engines and electric power generation units capable of operating on a variety of
liquid fuels and natural gas. The Company's strategic thrust

                                       19
<PAGE>



is to penetrate commercial engine markets. The Company's commercialization
efforts are focusing on natural gas rotary engines for industrial markets and
liquid fuel engines for the commercial and recreational marine markets.

On December 31, 1991, the Company acquired substantially all of the fixed
assets, patents, know-how and technology and other tangible and intangible
assets of the Rotary Engine Division (the "Division") of John Deere Technologies
International, Inc. ("JDTI"). The purchase price was $9.3 million consisting of
$4.2 million of cash and notes, which have been paid, and a non-interest bearing
deferred acquisition obligation of $5.1 million payable over thirteen years.
JDTI and Deere & Company retained all liabilities, including potential liability
for claims resulting from JDTI's contract performance for the U.S. Government.

Pursuant to the purchase agreement with JDTI, the Company has an obligation to
pay JDTI earned deferred payments for applicable rotary engines sold. The
deferred payments are 3.0% of the first $100 million of engine sales, 2.5% of
the next $100 million, 1.5% of the next $100 million up to $300 million and 0.5%
of all applicable rotary engine sales thereafter. These earned deferred payments
are reduced by the amount of the deferred obligations of $5.1 million discussed
above. The Company did not make a payment of $150,000 on January 30, 1997. Also,
in 1996 the Company was unable to make the full payment of $150,000 which was
due to the seller on January 30, 1996, deferring the remaining $75,000 balance
to January 30, 1997, which was not paid.

To date, the Company has earned substantially all of its revenues from contracts
or subcontracts with the U.S. Government. All these contracts have been
completed or otherwise terminated, and the Company does not anticipate
substantial revenues from the U.S. Government in the future.

In 1995, the Company established RPM, a wholly-owned subsidiary, which acquired
certain assets of Rotary Marine Industries, Inc. (RMI) for approximately
$165,000 and a royalty on future 65 Series rotary marine engine sales. RPM
produces rotary engines for commercial and recreational marine markets. RPM's
business has been unprofitable due to sales volume well below initial
projections, while RPM also competed for capital from projects related to the
Company's main businesses. Therefore, management has decided to divest the
Series 65 engine inventory and related assets, as well as the Company's
non-exclusive right to purchase engines under its contract with Mazda, and
redirect the recovered capital into the Company's operations. The subsidiary,
RPM, will be redirected to the manufacture of the alternator assemblies and
other components of the Company's power generation units.

In accordance with its plans to redirect the RPM subsidiary, the Company signed
a contract for the sale of a portion of RPM's 65 Series gasoline marine pleasure
craft engine inventory and some associated production equipment with Rotary
Power Marine Corporation, a New York corporation, on June 4, 1998, which closed
on July 28, 1998. Under this agreement the purchaser will also assume the Rotary
Power Marine name and trademark.

Pursuant to the Company's licensing agreement with Wankel GmbH (the "Wankel
Licensing Agreement"), the Company had an obligation to pay Wankel GmbH royalty
fees for all small rotary engines up to and including 650 cubic centimeters per
rotor (the "Licensed Engines") sold by the Company in varying amounts through
the year 2008. However, the Company advised Wankel GmbH

                                       20
<PAGE>

on January 10, 1996, that know-how required to be supplied under the provisions
of the Wankel License Agreement was not delivered. The Wankel License Agreement
was terminated by mutual consent on September 19, 1996, with no further payments
due.

To obtain additional working capital for its planned operations in 1998, the
Company signed a contract with Rotary Power Enterprise, Inc. ("RPE") on July 2,
1998 for the sale of its 65 Series Natural Gas Rotary Engine product line and a
Distributor Agreement for the Natural Gas fueled 580 Series engines. Upon
completion of the transaction, which is subject to the fulfillment of various
closing conditions, the Mazda NGRE agreements and the Hussmann agreement will be
included in the sale of the 65 Series Natural Gas engine product line asset to
RPE. The anticipated proceeds from this sale includes the release of a lien for
$217,000, issued to secure a loan by PowerCold to the Company.

Business Environment

The Company has targeted significant potential commercial markets for the
Company's small and lightweight rotary engines and power generating units,
operating with reduced vibrations and emissions. Such potential markets include
the stationary gaseous fuel industrial market (chillers, compressors,
generators, and refrigeration units), the commercial and recreational marine
market, and the electrical power generation market. In addition, through Master
Distributor Agreements with value-added resellers of the Company's products, the
Company anticipates sales in heavy off-road trucking, military vehicles, and the
general aviation market. During 1994 and 1995, the Company accelerated the
product development of natural gas rotary engines for the commercial and
industrial markets. In addition, in 1995, the Company received and delivered its
first commercial order for a 580 Series rotary marine engine. Early in 1996, the
Company received an order from Abejon Rotary Power Corporation (Abejon) for nine
twin rotor and two six rotor 580 Series rotary marine engines. The Company has
distribution agreements in place with Abejon for the 580 Series marine engines.

Results of Operations

Twelve months ended December 31, 1997 vs Twelve months ended December 31, 1996

Financial results of the Company for the year ended December 31, 1997, represent
the results of five months of operations severely limited by funding followed by
seven months of plant closure. Revenue for 1997 decreased by 92% due to the
completion of all U.S. Government contracts and seven months of non-operation.
The net loss of $5,032,819 increases the Company's net operating loss
carryforward to approximately $15 million. This loss includes write-offs of
$1,541,183 in anticipation of the disposition of assets and the change in
markets.

Cost of revenues decreased 51% to $3.0 million, which includes an inventory
reduction of $1.3 million and $475,000 of gross margin reduction taken on the
Series 580 Mark I engine build.

General and administrative expenses decreased 43% to $1.3 million primarily due
to the May layoff of virtually all employees, with rent and other fixed expenses
making up the bulk of the continuing expenses after that date.

                                       21
<PAGE>



Research and development expenses decreased 74% to $0.4 million again due to the
May layoff. Engineering staff worked on the development of the gaseous fueled
engines and the Series 580 value improvement program until the layoff.

Although expenses for 1997 were sharply curtailed, the reduction in revenues was
abrupt, resulting in a loss of $4.3 million from operations, exceeding the 1996
loss by less than 2%.

Interest expense, reflecting the interest on the NJEDA bonds, remained roughly
the same in 1997 as in 1996. Interest income decreased by 59% due to the
liquidation of a portion of the FICO Strips and the exchange of the remaining
FICO Strips for a different issue of FICO Strips with a lower yield.

In 1997, the Company had other income of $148,188 consisting of the net of the
realized gain on the retirement of the NJEDA bonds of $167,445 and a loss on the
disposal of assets of $19,257. In 1996, the Company incurred other net expenses
of $59,000.

As part of this restructuring, the Company redeemed and paid off all $6.5
million of its NJEDA bonds outstanding by liquidating the balance of its FICO
strips, applying $2.9 million of the net proceeds from the FICO strips towards
the NJEDA bonds, and floating a new $10,000,000 maturing principal amount of
ten-year, 10.412% bonds due December 15, 2007, which raised the remaining
balance, $3.6 million. The liquidation of the FICO strips resulted in a gain of
$479,014. Redemption of the NJEDA bonds cured various default conditions under
the loan agreement with the NJEDA. The new bonds are callable any time at their
accreted value and are zero-coupon bonds, preserving the Company's cash flow
during the restructuring and for some time thereafter. The Indenture of Trust
for these bonds requires the Company to establish and maintain a Bond Reserve
Fund equal to 50% of the principal amount of the then outstanding bonds on
December 31. 2000. With no bonds called, the requirement for this Bond Reserve
Fund would be $2,457,000 on January 1, 2001.

In conjunction with the restructuring of long-term debt, the Company negotiated
a settlement of the $705,890 rents due its landlord, Curtiss-Wright, until
February 28, 1998, by paying $125,000 in cash ($115,000 of which is a current
liability at year-end), and a $400,000 note, due January 1, 2003, bearing
interest at 4% and secured by any excess unsecured collateral after the
satisfaction of provisions in the bond Security Agreement. The Company also
agreed to relinquish its 54,000 square foot manufacturing facility to
Curtiss-Wright, and to renegotiate a lease for the Company's executive office
space and the existing Engine Test Facility. At this time the Company has
complied in all respects with its agreements with Curtiss-Wright and has
consolidated its manufacturing facilities within the Engine Test facilities.

As at the end of the year the Company had entered into discussions with an
auctioneer for the conversion of underutilized production machinery and
furniture to capital for payment of the Company's general debts. This
transaction was consummated in February, 1998.

As a result of the above, net loss for the Company increased from $4970,054 in
1996 to $5,031,819 in 1997.

                                       22
<PAGE>

During early 1998 the Company advanced a plan to negotiate its ordinary debts
via a composition of creditors, which was carried out, successfully, by the end
of June, 1998. No filing under any bankruptcy or reorganization statute was
required.

Twelve months ended December 31, 1996 vs Twelve months ended December 31, 1995

Revenue for 1996 decreased 37%, or $3,339,000, to $5,768,000 compared to
$9,107,000 in 1995. The decrease in revenue was due to a decline in all the
Company's research and development contracts with the U.S. Government,
including, in particular, a decline of $211,000 in the company's principal
contract received in December 1994 from the USMC (United States Marine Corp) to
design, test and deliver a five-rotor 580 Series engine at a 2600HP rating; and
decreased revenue of $2,660,000 from a contract awarded in November 1994 by
Lockheed Martin for development and delivery of 40 Series turbocharged engines
for the U.S. Army's Joint Tactical Unmanned Aerial Vehicle (JT-UAV) Hunter
aircraft. This contract was terminated for the convenience of the Government as
of August 4, 1995. On March 1, 1996, the Company and Lockheed Martin entered
into a termination settlement agreement relating to the JT-UAV contract pursuant
to which the Company received payment of the settlement amount less amounts
previously paid to the Company. Applicable write-off of receivables were taken
in the 1995 period. Other declines in contract revenue were $793,000 in the
Basic USMC 580 Series contract, $159,000 in a 40 Series Dual-Use APU contract
with Martin Marietta and decreased revenue of $88,000 from other small contract
activity. The decreases in revenue discussed above were offset by increased
revenue of $90,000 from a small NASA contract; $308,000 on a new contract to
build and demonstrate an 8.5kW APU powered by the 40 Series engine for the
command version of the USMC AAV and $39,000 from two other small contracts. In
addition to the above, as a result of the Company's commercialization efforts,
the Company realized increased commercial revenues in 1996 in the amount of
$539,000 from the sale of its 65 Series natural gas and marine engines.

Cost of revenue decreased 1%, or $42,000 in 1996 as compared to 1995. This
reduction resulted from a decrease in costs on government programs due to the
substantial reduction in government revenues from 1995 to 1996 offset by an
increase of approximately $785,000 released to the costs of the pre-production
580 Series commercial marine engine and $788,000 due to the increased
pre-production costs on the commercial 65 Series engines.

General and administrative expenses decreased 10% or $259,000, from $2,614,000
in 1995 to $2,355,000 in 1996. The decrease was primarily due to (i) lower
salaries and benefits in 1996 of $178,000, (ii) a $30,000 decrease in legal
costs incurred in 1996, (iii) the elimination of royalty expense associated with
the Wankel GmbH License Agreement of $105,000, (iv) reduced expenses associated
with consultants of $60,000, and (v) reduced travel and other expenses of
$26,000. These decreases were offset by increases in expenses of $178,000 to
support the Company's Rotary Power Marine, Inc. subsidiary.

Research and development expenses decreased 17%, or $340,000, from $2,006,000 in
1995 to $1,666,000 in 1996. This decrease was due to a reduction in most of the
Company's independent research and development projects: the development of 65
Series engines running on natural gas for industrial purposes; the development
of the 580 Series natural gas engine; the finalization of the design of the 65
Series marine engine and all 40 Series engine applications and costs associated
with

                                       23
<PAGE>

NASA and other aviation engine related proposals. These reductions in research
and development expenditures were offset by an increase of $686,000 in the
development, marinization and value improvement program on the 580 Series
commercial marine engine.

Loss from operations increased 170% from a $1,586,000 loss in 1995 to a
$4,284,000 loss in 1996. This increase in the Company's loss from operations was
as a result of sharply lower revenues and a gross margin loss offset by only
small reductions in general and administrative and research and development
expenditures. The gross margin loss was due primarily to the loss on the
pre-production 65 Series and 580 Series pre-production engines.

Interest expense remained approximately the same in 1996 as in 1995 ($998,000 in
1996 and $1,001,000 in 1995). The 1996 amount included approximately $724,000
interest paid on the Company's 1992 bond financing with the New Jersey Economic
Development Authority ("NJEDA") and $274,000 of interest on the deferred
acquisition obligation owed to JDTI. The interest expense for the 1995 period
included approximately $737,000 of interest paid on the NJEDA bond financing and
$263,000 of interest on the deferred debt obligation owed to JDTI.

Interest income was higher in 1996 by 5% or $19,000 due primarily to interest
from the Hydro Lance loan and a small increase in interest earned from certain
obligations issued by the Financing Corporation, a mixed ownership government
corporation chartered by the Federal Home Loan Bank and Board (the "FICO
Strips"), which serve as collateral for the NJEDA bonds. Interest income in 1996
was offset by a reduction in the interest income from investing the remainder of
the net proceeds of the Company's initial public offering of Common Stock. Other
Net Expense decreased by $33,000 from $92,000 in 1995 to $59,000 in 1996. This
decrease is due to a lower loss on disposal of fixed assets of $61,000 in 1996
as compared to $163,000 in 1995, which was offset by a realized gain in 1995 of
$68,000 on the sale of Securities Available for Sale.

As a result of the above, net loss increased from $2,326,171 in 1995 to
$4,970,054 in 1996.

Management

As of November 24, 1997, Richard M. H. Thompson was succeeded by Ken Brody as
President, Chief Executive Officer and Sole Director. Mr. Brody, at one time a
Director of the Company, came in for the express purpose of restructuring the
Company's finances, markets and directions. Mr. Brody then hired back John Mack
as Chief Engineer, along with several of the Company's experienced and loyal
administrative, engineering and production people to create a core staff. As
further decision support for the restructuring, the Company retains the
consulting services of William T. Figart, former Director and officer, and Gary
LaBouff, former Vice President of Engineering. Subsequent events have shown this
team to be effective, flexible and capable of carrying forward the Company's
mission.

In order to retain topnotch employees without investing heavily in management
infrastructure and benefits, the Company leases its employees, except the
President, from Employee Solutions Inc. as of February 15, 1998. Under ESI
leasing arrangement the Company's employees get medical insurance, workers
compensation and an employee-contribution 401K plan.

                                       24
<PAGE>

Other

The Company does not consider the impact of inflation to be significant to the
results of its operations in the periods from January 1, 1995, to December 31,
1997, due to the nature of its cost reimbursement contracts with the U.S.
Government. Thereafter, inflation at recent rates are not considered a factor in
the Company's performance.

Liquidity and Capital Resources


During 1997, cash was used to (i) maintain the Company in a viable condition,
(ii) redeem the NJEDA bonds, (iii) fund the continued development of the
Company's industrial engines, and (iv) fund the Value Improvement Program on the
Series 580 engines.

The Company's stock subscription agreement with Hydro Lance Maritime Transport
defaulted in the fourth quarter of 1996 after bringing in $800,000 of equity,
for which Abejon Rotary Power Corporation, a party to the subscription
agreement, received 177,084 shares of common stock. Abejon further committed
$500,000 to the Company as a deposit against an order of fifteen Series 580
two-rotor production units for marine use. The Company acknowledges this order
and retains the deposit.

In December, 1996, the Company concluded an agreement with PowerCold, whereby
PowerCold invested $1,000,000 in the Company in exchange for 2,000,000 of the
Company's Common Stock. Simultaneously, the Company and PowerCold agreed to
merge the two companies in a stock-for-stock acquisition, whereby the Company
would become a wholly-owned subsidiary of PowerCold. This merger was never
consummated and was terminated in August, 1997.

Working capital decreased from $588,000 at December 31, 1996, to a deficit of
$1,796,287 by December 31, 1997. This decrease was due to (i) a decrease in cash
and receivables of roughly $1.0 million; (ii) a decrease in inventories of $1.3
million; and (iii) a $500,000 increase in the deferred acquisition obligation
due JDTI. These were offset by the $328,000 held by the Trustee for the NJEDA to
complete the liquidation of long-term debt due to NJEDA bondholders.

In March 1997, the Company received $1,000,000 from the Trustee for the NJEDA
bondholders for the proceeds of the sale of FICO strips held by the Trustee as
collateral for the bondholders. The remaining proceeds from the sale were
reinvested in FICO strips with a different maturity and redeposited with the
Trustee to continue to serve as collateral for the bondholders..

The Company's current and anticipated cash resources, including proceeds from
anticipated sales of assets in 1998, is sufficient to enable the Company to meet
its anticipated operating needs until September, 1998.

 The Company will solicit external funding for the completion of the production
design of the 40 Series family of engines for commercial and/or military
applications.

Year 2000 Compliance

The Company's accounting, manufacturing, order entry, bill of materials, and
inventory systems are currently being converted to a new system and will be
compliant with processing requirements for the

                                       25
<PAGE>

year 2000 by the fourth quarter of 1998. There are no other systems considered
material to the Company's operations that would be vulnerable to this problem.

                                       26
<PAGE>



PART II
ITEM 7. FINANCIAL STATEMENTS

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                        Consolidated Financial Statements
                 for the years ended December 31, 1997 and 1996

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                        ROTARY POWER INTERNATIONAL, INC.

                                    CONTENTS

<TABLE>
<CAPTION>
<S>                                                                       <C>
Report of Independent Accountants                                         F-2

Consolidated Balance Sheets - December 31, 1997 and 1996                  F-3

Consolidated Statements of Operations for the Years
  Ended December 31, 1997 and 1996                                        F-4

Consolidated Statements of Changes in Stockholders'
  Equity (Deficiency) for the Years Ended
  December 31, 1997 and 1996                                              F-5

Consolidated Statements of Cash Flows for the Years
  Ended December 31, 1997 and 1996                                        F-6

Notes to Financial Statements                                             F-7 - F-20

</TABLE>
<PAGE>

                         ROTARY POWER INTERNATIONAL K-1



<PAGE>


                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors of
  Rotary Power International, Inc.

We have audited the accompanying consolidated balance sheets of Rotary Power
International, Inc. and subsidiary (the "Company") as of December 31, 1997 and
1996, and the consolidated statements of operations, changes in stockholders'
equity (deficiency), and cash flows for the years then ended. 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 audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rotary Power
International, Inc. and subsidiary as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 18 to the
financial statements, the Company's significant operating losses and deficiency
in working capital raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.



DEMETRIUS & COMPANY, L.L.C.

Wayne, New Jersey
July 22, 1998

                                                                             F-2
<PAGE>

                ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

                                     ASSETS

<TABLE>
<CAPTION>

                                                                                     1997            1996
                                                                                 ------------    ------------
<S>                                                                             <C>              <C>
Current assets:
     Cash and cash equivalents                                                   $     42,894    $    633,597
     Cash held by trustee                                                             328,113
     Accounts receivable                                                               42,723         452,015
     Other receivables                                                                 15,000           9,083
     Inventories                                                                    1,341,665       2,657,030
     Other current assets                                                                 500           9,814
                                                                                 ------------    ------------
         Total Current Assets                                                       1,770,895       3,761,539

Fixed assets                                                                        1,280,794       2,279,959
Patents                                                                               615,817         677,399
Investment held by Trustee                                                          3,925,761
Other assets, net                                                                     266,214         664,154
                                                                                 ------------    ------------
                                                                                 $  3,933,720    $ 11,308,812
                                                                                 ============    ============

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
     Current portion of long-term debt                                           $    274,275    $    183,750
     Accounts payable                                                                 939,274       1,103,167
     Loan Payable                                                                     216,768
     Accrued liabilities                                                              904,865       1,096,638
     Other current liabilities                                                        507,000         564,904
     Deferred acquistion obligation - current                                         725,000         225,000
                                                                                 ------------    ------------
         Total Current Liabilities                                                  3,567,182       3,173,459

Long-term liabilities:
     Deferred acquisition obligation                                                2,644,049       2,857,143
     Long-term debt                                                                 3,631,265       6,629,167
     Note Payable                                                                     400,000
                                                                                 ------------    ------------
         Total Liabilities                                                         10,242,496      12,659,769
                                                                                 ------------    ------------

Commitments and contingencies

Stockholders' deficiency:
     Preferred stock, 500,000 shares authorized Common stock, par value $.01;
      10,000,000 shares authorized; 5,968,516 for 1997 and 6,641,432 for 
      1996 shares issued and outstanding                                               59,685          66,414
     Subscription receivable                                                       (3,150,000)
     Paid-in capital                                                               11,336,367      14,404,638
     Accumulated deficit                                                          (17,704,828)    (12,672,009)
                                                                                 ------------    ------------
             Total Stockholders' Deficiency                                        (6,308,776)     (1,350,957)
                                                                                 ------------    ------------
                                                                                 $  3,933,720    $ 11,308,812
                                                                                 ============    ============
</TABLE>

The accompanying notes are an integral part of the statements.               F-3

<PAGE>

                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

                                                        1997            1996
                                                        ----            ----
<S>                                                 <C>             <C>          
Revenues                                            $    413,310    $  5,768,143
                                                    ------------    ------------
Costs and expenses:                               
      Cost of revenues                                 2,979,763       6,031,334
      General and administrative                       1,349,473       2,354,788
      Research and development                           434,412       1,666,366
                                                    ------------    ------------
                                                  
            Total Cost and Expenses                    4,763,648      10,052,488
                                                    ------------    ------------
                                                  
            Loss From Operations                      (4,350,338)     (4,284,345)
                                                  
Other income (expense):                           
      Interest expense                                  (983,618)       (998,581)
      Interest income                                    152,949         371,869
      Other, net                                         148,188         (58,997)
                                                    ------------    ------------
                                                  
            Total Other Expense                         (682,481)       (685,709)
                                                    ------------    ------------
                                                  
            Net Loss                                $ (5,032,819)   $ (4,970,054)
                                                    ============    ============
                                                  
                                                  
Net loss per common share - primary:                $      (0.82)   $      (1.10)
Weighted average common shares outstanding:            6,118,880       4,502,265
</TABLE>

                                             
The accompanying notes are an integral part of the statements.              F-4
<PAGE>

                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                            Series 1 Convertible
                                                     Preferred Stock         Common Stock         
                                                    --------------------------------------------  Subscriptions       Paid-In
                                                     Shares    Value      Shares     Par Value      Receivable        Capital
                                                    -----------------------------------------------------------------------------
<S>                                                 <C>        <C>         <C>         <C>            <C>            <C>        
Balance at December 31, 1995                                               3,391,432   $ 33,914       $        --    $ 8,823,879

     Issuance of common stock                                              3,250,000     32,500        (3,150,000)     5,580,759
     Net change in unrealized gain (loss) on
       securities available-for-sale, net of tax
     Net loss
                                                    -----------------------------------------------------------------------------

Balance at December 31, 1996                                               6,641,432     66,414        (3,150,000)    14,404,638

     Cancellation of common stock                                           (822,916)    (8,229)        3,150,000     (3,141,771)
     Issuance of common sotck                                                150,000      1,500                           73,500
     Net loss
                                                    -----------------------------------------------------------------------------

Balance at December 31, 1997                                               5,968,516   $ 59,685       $        --   $ 11,336,367
                                                    =============================================================================

<CAPTION>
                                                                         Unrealized
                                                                         Gain (Loss)
                                                                        on Securities
                                                      Accumulated         Available         Stockholders'
                                                        Deficit            For Sale      Equity (Deficiency)
                                                    -------------------------------------------------------
<S>                                                   <C>                 <C>                  <C>         
Balance at December 31, 1995                          $ (7,701,955)       $ 297              $  1,156,135  
                                                                                                           
     Issuance of common stock                                                                   2,463,259  
     Net change in unrealized gain (loss) on                                                               
       securities available-for-sale, net of tax                           (297)                     (297) 
     Net loss                                           (4,970,054)                            (4,970,054) 
                                                    -------------------------------------------------------
                                                                                                           
Balance at December 31, 1996                           (12,672,009)          --                (1,350,957) 
                                                                                                           
     Cancellation of common stock                                                                          
     Issuance of common sotck                                                                      75,000  
     Net loss                                           (5,032,819)                            (5,032,819) 
                                                    -------------------------------------------------------
                                                                                                           
Balance at December 31, 1997                          $(17,704,828)       $  --              $ (6,308,776) 
                                                    =======================================================
</TABLE>   


The accompanying notes are an integral part of the statements.              F-5
<PAGE>

                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                                       1997              1996
                                                                                                  ---------------   ---------------
<S>                                                                                               <C>               <C>
Cash flows from operating activities:
Net loss                                                                                            $ (5,032,819)     $ (4,970,054)
Adjustments to reconcile to net cash used in operating activities:
     Depreciation                                                                                        955,988           943,748
     Amortization                                                                                         80,017            95,052
     Interest, net                                                                                       145,501           (13,002)
     Other                                                                                               117,681           (61,262)
     Deposit surrender for rent payment                                                                   50,000
     Rent payment with long term note payable                                                            400,000
     Gain on sale of long term investment                                                               (651,639)
     Write off deferred issuance cost                                                                    471,145
     Loss on disposals of fixed assets                                                                    19,257            60,638
     Loss on contract close                                                                              152,641
     Inventory write down                                                                              1,369,285
     Changes in assets and liabilities:
         Accounts receivable                                                                             256,651         1,285,838
         Other receivables                                                                                (5,917)            6,653
         Inventories                                                                                     (53,920)       (1,615,330)
         Other current assets                                                                              9,314              (434)
         Other assets                                                                                    (25,663)
         Accounts payable                                                                               (163,893)          572,979
         Accrued liabilities                                                                            (191,773)          799,275
         Other current liabilities                                                                       (57,904)          523,403
         Other long-term liabilities                                                                                       (25,000)
                                                                                                  ---------------   ---------------
            Net Cash Used in Operating Activities                                                     (2,156,048)       (2,397,496)
                                                                                                  ---------------   ---------------
Cash flows from investing activities:
     Purchase of securities available-for-sale                                                                            (647,422)
     Sales of securities available-for-sale                                                                              1,277,633
     Purchase of long term investment                                                                 (1,583,112)
     Sale of long term investment                                                                      6,381,108
     Proceeds from the sale of fixed assets                                                               20,000
     Purchases of fixed assets                                                                                            (144,199)
                                                                                                  ---------------   ---------------
            Net Cash Provided by Investing Activities                                                  4,817,996           486,012
                                                                                                  ---------------   ---------------
Cash flows from financing activities:
     Loan Payable                                                                                        216,768
     Repayment of long-term debt                                                                      (6,538,642)         (170,833)
     Issuance of long-term debt                                                                        3,631,265
     Deferred issuance cost                                                                             (233,929)
     Issuance of common stock                                                                                            2,463,259
     Payment of deferred acquistion obligation                                                                             (75,000)
                                                                                                  ---------------   ---------------
            Net Cash Provided by  (Used in) Financing Activities                                      (2,924,538)        2,217,426
                                                                                                  ---------------   ---------------
            Net Increase (Decrease) in Cash                                                             (262,590)          305,942

Cash and cash equivalents at beginning of year                                                           633,597           327,655
                                                                                                  ---------------   ---------------
            Cash and Cash Held in Escrow at End of Year                                             $    371,007      $    633,597
                                                                                                  ===============   ===============
Supplemental disclosures of cash flow information:
     Interest paid during the year                                                                  $    692,578      $    786,689
     Income taxes paid during the year                                                                   --                --
</TABLE>

See Note 17 for supplemental cash flow information


The accompanying notes are an integral part of the statements.               F-6

<PAGE>

                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


1.       GENERAL

         Rotary Power International, Inc. ("RPI" or the "Company") and its
         wholly-owned subsidiary, Rotary Power Marine, Inc. are engaged in the
         development, demonstration and production of rotary engines capable of
         operating on a variety of liquid fuels and natural gases. The Company's
         strategic thrust is to penetrate commercial engine markets. The
         Company's commercialization efforts are focusing on natural gas rotary
         engines for commercial refrigeration, compressors and generators, and
         on diesel engines in the commercial and recreational marine market and
         for commercial generator sets.

         In 1995, the Company established a wholly-owned subsidiary, Rotary
         Power Marine, Inc. ("RPM") which acquired certain assets of Rotary
         Marine Industries, Inc. for approximately $165,000 and a royalty on
         future 65 Series rotary marine engine sales. RPM produces rotary
         engines for commercial and recreational marine markets. RPM's primary
         customers consist of builders of commercial and recreational marine
         boats as well as distributors of engines, who sell to a diverse
         customer base.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a.       Principles of Consolidation

                  The consolidated financial statements include the accounts of
                  the Company and its wholly-owned subsidiary, RPM. All
                  significant intercompany accounts and transactions have been
                  eliminated.

         b.       Cash and Cash equivalents

                  Cash and cash equivalents consist of cash and highly liquid
                  investments with an original maturity of three months or less.

         c.       Inventories

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

                                                                             F-7
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         d.       Fixed Assets

                  Fixed assets are stated at cost, less accumulated depreciation
                  provided on the straight-line method over the estimated useful
                  lives of the respective assets. Assets under construction are
                  depreciated over their respective useful lives when they are
                  placed in service.

                  When fixed assets are sold or otherwise disposed of, the cost
                  and related accumulated depreciation are removed from the
                  accounts and any resulting gain or loss is reflected in the
                  statement of operations for the period.

         e.       Revenue Recognition

                  Revenues from the commercial sales of engines are recognized
                  when shipped to the customer.

                  Revenues on long-term contracts, including government cost
                  reimbursement contracts, are recognized on the percentage of
                  completion method. Percentage of completion is measured by
                  costs (including applicable general and administrative)
                  incurred and accrued to date compared to total estimated
                  costs.

                  Contracts typically extend over a period of one or more years.
                  In accordance with industry practice, receivables include
                  amounts relating to contracts and programs having production
                  cycles longer than one year. Provisions for estimated losses,
                  if any, are made in the period in which such losses are
                  determined.

                  Revenues billed to the U.S. Government and its agencies
                  directly and through prime contractors were approximately $
                  -0- and $5,127,000 for the years ended December 31, 1997 and
                  1996, respectively. Revenues billed to the U.S. Government
                  represented 89% of the Company's total revenues in 1996.


                                                                             F-8
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         f.       Estimates

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the reported
                  amounts of assets and liabilities, and 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
                  the estimates.

         g.       Patents

                  Purchased patents are amortized on a straight-line basis over
                  the useful lives, generally seventeen years. Amortization
                  expense was $61,582 for each of the years ended December 31,
                  1997 and 1996. Accumulated amortization was $369,490 and
                  $307,908 for the years ended December 31, 1997 and 1996,
                  respectively.

         h.       Income Taxes

                  Deferred income taxes are recorded to reflect the tax
                  consequences on future years of temporary differences between
                  the tax bases of assets and liabilities, principally
                  inventory, fixed assets, accrued liabilities and deferred
                  acquisition obligation, and their financial reporting amounts
                  at each year-end and net operating loss carryforwards.

         i.       Net Loss Per Common Share

                  Primary and fully diluted net loss per common share is based
                  on the net loss divided by the weighted average number of
                  common shares outstanding during the period. The exercise of
                  stock options and warrants was not assumed as their effect
                  would be anti-dilutive.

         j.       Stock Based Compensation

                  In accordance with the provisions of SFAS No. 123, the Company
                  applied APB Opinion 25 and related interpretations in
                  accounting for its stock option plans, and accordingly, does
                  not recognize compensation cost.


                                                                             F-9
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


3.       ACCOUNTS RECEIVABLE

         Accounts receivable at December 31, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
                                        1997       1996      
                                      --------   --------    
         <S>                          <C>        <C>         
         U.S. Government:                                    
               Other unbilled costs              $ 61,732    
         Commercial                   $ 42,723    390,283    
                                      --------   --------    
                                                             
                    Total             $ 42,723   $452,015    
                                      ========   ========    
</TABLE>                     

         Other unbilled costs are subject to future negotiation and are expected
         to be billed and collected within one year.

4.       INVENTORIES

         Inventories at December 31, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                               1997         1996   
                           ----------   ---------- 
         <S>               <C>          <C>        
         Fuel and oil      $    1,344   $    1,344 
         Parts                399,496      972,807 
         Work in process      767,069    1,467,970 
         Finished goods       173,756      214,909 
                           ----------   ---------- 
                                                   
                           $1,341,665   $2,657,030 
                           ==========   ========== 
</TABLE> 

         At December 31, 1997, the Company has inventory at cost totaling
         $1,908,705. The Company has estimated the net realizable value of the
         parts and engines to be $1,341,665. While the ultimate outcome of the
         net realizable value may differ, management believes that any
         additional loss will not have a material impact on the Company's
         financial position.


                                                                            F-10
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997

5.       FIXED  ASSETS

         Fixed assets at December 31, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                                         Useful Lives           1997           1996     
                                                            -----------    -----------  
<S>                                             <C>         <C>            <C>          
Machinery and equipment                         7           $ 5,439,417    $ 5,489,594  
Furniture and fixtures                          7                68,388         68,388  
Office equipment                                7                59,444         59,444  
Computer equipment                              5               333,796        333,796  
Autos and trucks                                5                 8,500          8,500  
Boats                                           5                27,195         32,108  
Tooling                                         3               564,598        564,598  
Demonstration equipment                         3               261,663        261,663  
Construction in process                         -                25,941         32,941  
                                                            -----------    -----------  
                                                              6,788,942      6,851,032  
                                                                                        
      Less accumulated depreciation                          (5,508,148)    (4,571,073) 
                                                            -----------    -----------  
                                                                                        
                                                            $ 1,280,794    $ 2,279,959  
                                                            ===========    ===========  
</TABLE>

6.       OTHER ASSETS

         Other assets as of December 31, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
                                                 1997        1996   
                                              ---------   --------- 
         <S>                                  <C>         <C>       
         Deferred issuance cost               $ 233,929             
         Deferred financing costs                         $ 632,054 
         Capitalized production cost             25,663             
         Deposits                                 6,622      56,622 
         Other                                              117,680 
                                              ---------   --------- 
                                                266,214     806,356 
              Less Accumulated Amortization        --      (142,202)
                                              ---------   --------- 
                                                                    
                                              $ 266,214   $ 664,154 
                                              =========   ========= 
</TABLE> 


                                                                            F-11
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


7.       ACCRUED LIABILITIES

         Accrued liabilities at December 31, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
                                     1997         1996
                                  ----------   ----------
<S>                               <C>          <C>       
Provision for loss on contracts   $  697,821   $  876,861
Contract adjustments                  62,000       62,000
Professional fees                     15,338       71,938
Other                                129,706       85,839
                                  ----------   ----------

                                  $  904,865   $1,096,638
                                  ==========   ==========
</TABLE>


8.       DEFERRED ACQUISITION OBLIGATION

         Pursuant to the acquisition of certain assets at the Company's
         inception in 1991, a deferred acquisition obligation was incurred,
         which as of December 31, 1997 and 1996 is payable to the seller as
         follows:

<TABLE>
<CAPTION>
                                        1997          1996
                                   -----------    -----------
<S>                                <C>            <C>
$150,000 per annum, payable
   January 31, 1996 through 1997   $   225,000    $   225,000
$500,000 per annum, payable
   January 31, 1998 through 2006     4,500,000      4,500,000
                                   -----------    -----------
      Total remaining payments       4,725,000      4,725,000
Less:
   Unamortized discount at 10%      (1,355,951)    (1,642,857)
   Current portion                    (725,000)      (225,000)
                                   -----------    -----------
      Long term portion            $ 2,644,049    $ 2,857,143
                                   ===========    ===========
</TABLE>
         The Company did not make a payment of $150,000 on January 30, 1997.
         Also, in 1996 the Company was unable to make the full payment of
         $150,000 which was due to the seller on January 31, 1996, but paid
         $75,000, deferring the remaining balance of $75,000 to January 30,
         1997, which was not paid.

         The fair value of this obligation approximates carrying value. In
         addition to the deferred acquisition obligation, the Company may be
         required to make additional payments to the seller based upon a certain
         percentage of engine sales. No additional payments were made in 1997
         and 1996.

                                                                            F-12
<PAGE>

                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997



8.       DEFERRED ACQUISITION OBLIGATION (Continued)

         The Company is in negotiations with Deere & Company with regard to the
         fixed minimum payments due to John Deere Technologies International
         ("JDTI") under the deferred acquisition obligation.

9.       LOAN PAYABLE AND NOTE PAYABLE

         a.       Loan Payable

                  In May and June 1997, Powercold Corp., a shareholder, loaned
                  the Company a total of $216,768. The loan is non-interest
                  bearing. It is management's intention to pay back the loan in
                  1998.

         b.       Note Payable

                  In December 1997, the Company issued a $400,000 promissory
                  note to its landlord for satisfaction of rent due through
                  December 31, 1997. The note is due January 1, 2003 and bears
                  interest at 4% per annum. The note is collateralized by a
                  second position in inventory and property and equipment.

10.      LONG-TERM DEBT

         Long-term debt as of December 31, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
     `                                                 1997          1996    
                                                  -----------    ----------- 
         <S>                                      <C>            <C>         
         $10,000,000 aggregate principal amount                              
         of 10.412% bonds due December 15, 2007   $ 3,631,265                
         New Jersey Economic Development                                     
           Authority Bonds                            274,275    $ 6,812,917 
                Less current portion                 (274,275)      (183,750)
                                                  -----------    ----------- 
                                                                             
                                                  $ 3,631,265    $ 6,629,167 
                                                  ===========    =========== 
</TABLE> 


         On December 22, 1997, the Company sold obligations issued by the
         Financing Corporation, a mixed ownership government corporation
         chartered by the Federal Home Loan Bank Board (the "FICO Strips"),
         which were collateral for the New Jersey Economic Development Authority
         bonds ("NJEDA"). Proceeds from the sale totaled $3,797,997 resulting in
         a gain of $479,014.


                                                                            F-13
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


10.      LONG-TERM DEBT (Continued)

         Also on December 22, 1997, the Company issued $10,000,000 aggregate
         maturing principal amount of 10.412% bonds due December 15, 2007. Total
         proceeds from the issuance was $3,631,265, and bond discount is being
         amortized over the bonds' life. The bonds are collateralized by certain
         property and equipment. On or prior to December 31, 2000, the Company
         shall deposit into a Bond Reserve Fund an amount equal to at least 50%
         of the principal amount of bonds outstanding on such date.

         As a result of these events, the Company used the proceeds to pay off
         $6,465,725 of the NJEDA bonds. As of December 31, 1997, $274,275 of the
         NJEDA bonds was outstanding. The bond trustee was holding in escrow the
         balance due, and on January 22, 1998, the balance due was paid in full
         by the trustee.

11.      COMMITMENTS AND CONTINGENCIES

         The U.S. Government's Defense Contract Audit Agency has performed final
         indirect rate audits of the Company's contract costs for the years
         ended December 31, 1992, 1993, 1994 and 1995; the results of the audits
         did not have a material effect on the Company's financial position or
         results of its operations. A final indirect rate audit and an audit of
         contract costs for the year ended December 31, 1996 have not yet been
         performed. The Company provides for potential adjustments from such
         audits and believes that any adjustments from such audits will not have
         a material effect on the Company's financial position or results of
         operations.

         The Company leases office, factory and laboratory space under an
         operating lease expiring in 1997 (see Note 9b). The Company is
         currently negotiating a new lease with its landlord. Rent expense for
         the years ended December 31, 1997 and 1996 was $551,000 and $451,000,
         respectively, net of sublease income. Rent expense is recognized on a
         straight-line basis over the term of the lease. The excess of rent
         expense accrued on a straight-line basis over rental payments is
         included in other liabilities on the Company's balance sheet.

         In 1992, the Company entered into a license and technical assistance
         agreement with the Wankel GmbH, the rights and obligations of which
         were assigned to Wankel Rotary GmbH ("Wankel"), a subsidiary of Gneiser
         GmbH.


                                                                            F-14
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


11.      COMMITMENTS AND CONTINGENCIES (Continued)

         On January 10, 1996, however, the Company advised Wankel that due to
         Wankel's failure to deliver the know-how required to be supplied under
         the provisions of the Wankel License Agreement the Company was
         terminating the Agreement effective immediately, and withholding the
         minimum royalty payment of $200,000 for calendar year 1996 due on
         January 31, 1996. Wankel advised the Company on September 19, 1996,
         that it accepted the cancellation of the Wankel license agreement by
         mutual consent.

         In connection with the acquisition of certain assets of Rotary Marine
         Industries, Inc. ("RMI") in 1995, the Company may be required to make
         additional payments to RMI of 2 1/2% of 65 Series rotary marine engine
         sales between 1997 and 2005.

12.      RELATED PARTY TRANSACTIONS

         Ken Brody, President of the Company, is an officer and shareholder of
         Abejon Rotary Power Corporation (Abejon). At December 31, 1997 and
         1996, the Company has an advance payable to Abejon of $500,000 for
         future sales of engines. The advance is recorded in other current
         liabilities.

13.      SHAREHOLDERS' EQUITY

         Preferred Stock:

         The Company is authorized to issue 500,000 shares of preferred stock,
         $.01 par value per share. The Company's Board of Directors, may issue
         from time to time the authorized and unissued shares of Preferred Stock
         in one or more series, and may determine as to each series the dividend
         rights and terms, conversion rights, voting rights, redemption rights
         and terms, liquidation preferences, sinking funds and any other rights,
         preferences, privileges and restrictions applicable to each such series
         of Preferred Stock.

         The Company has designated Series 1 convertible preferred stock and
         Series 2 (nonvoting) preferred stock. None of the Series 1 or Series 2
         preferred stock was outstanding at December 31, 1997 and 1996.
         Furthermore, with the completion of the Company's initial public
         offering, neither the Series 1 or Series 2 preferred stock is available
         for issuance. At December 31, 1997 and 1996 437,340 shares of preferred
         stock were issuable.



                                                                            F-15
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


13.      SHAREHOLDERS' EQUITY (Continued)

         Preferred Stock: (Continued)

         In connection with the successful completion of the Company's initial
         public offering of its common stock in 1994, the Series 1 convertible
         preferred stock and accumulated dividends were converted into 734,598
         shares of common stock.

         Common Stock:

         On March 13, 1997, the Company issued 150,000 shares as commission for
         the sale of FICO strips.

         On March 21, 1997, the Company sent notice to Hydro Lance Maritime
         Transport, Inc. (Hydro) and Abejon Rotary Power Corporation (Abejon),
         declaring the occurrence of an event of default under the Company's
         loan agreement with Hydro and Abejon. The event of the default was
         declared as a result of Hydro's failure to make a principal payment of
         $175,000 and an interest payment of $28,435, both of which were due to
         the Company on December 20, 1996. In its notice to Hydro and Abejon,
         the Company elected to declare the principal of and interest on the
         loan and other amounts payable under the loan agreement to be
         immediately due and payable and to take possession of and execute upon
         822,916 shares of the Company's common stock which are owned by Abejon
         and were pledged as collateral and security for the obligations of
         Hydro under the loan agreement. In its notice, the Company also
         reserved any and all of its rights and remedies with respect to other
         shares of the Company's common stock owned by Abejon.

         During 1996, the Company issued a total of 3,250,000 shares of its
         common stock. Warrants to purchase 250,000 shares of common stock at a
         price of $2.50 per share were exercised.

         On February 16, 1994, the Company completed an initial public offering
         of 800,000 shares of its common stock at $8 per share. The Company
         received proceeds of $5,824,000, net of underwriting discounts and
         commissions. The net proceeds, less related costs and expenses, were
         credited to capital stock and paid-in capital. The Company's common
         shares are traded on the Over the Counter Bulletin Board.

         In connection with the initial public offering, the Company sold to the
         underwriters, for $800, warrants to purchase from the Company 80,000
         shares of common stock at $9.60 per share, which are exercisable for a
         period of four years commencing February 9, 1995.


                                                                            F-16
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


13.      SHAREHOLDERS' EQUITY (Continued)

         There were 45,000 warrants to purchase common stock outstanding at
         December 31, 1997, which are exercisable between 1998 and 1999 at
         $4.625.

         At December 31, 1997 and 1996, 177,000 and 566,000 shares of common
         stock, respectively, have been reserved for exercise of warrants and
         stock options.

14.      STOCK OPTION PLAN

         In 1992, the Board of Directors adopted the 1992 Stock Option Plan (the
         "Plan"). Under the terms of the Plan, incentive stock options to
         purchase up to 400,000 shares of common stock may be granted to key
         employees and directors of the Company at the fair market value at the
         date of grant (or 110% of the fair market value for grants issued to
         holders of more than 10% of the voting stock of the Company). Options
         granted under the Plan become exercisable in whole or in part from time
         to time as determined by the Board of Directors, provided, however, in
         no event shall any option become exercisable earlier than the date six
         months following the date on which the option is granted. Options
         granted under the Plan shall have a maximum term of ten years from the
         date of grant. The option price must be paid in full on the date of
         exercise in cash or in common shares of the Company having a fair
         market value on the date of exercise equal to the option price. Stock
         options outstanding are exercisable commencing one year after grant at
         a rate of either 20% or 25% of such shares in each succeeding year.

         Option status and activity were as follows for the years ended 
         December 31:

<TABLE>
<CAPTION>
                                                       1997        1996   
                                                     --------    -------- 
         <S>                                          <C>         <C>     
         Outstanding, beginning of year               291,000     342,200 
         Canceled ($.19125 to $5.00 1997 and 1996)   (239,000)    (51,200)
                                                     --------    -------- 
         Outstanding ($3.00 per share)                                    
           end of year                                 52,000     291,000 
                                                     ========    ======== 
                                                                          
         Available for grant                           95,000      95,000 
                                                     ========    ======== 
                                                                          
         Exercisable                                   31,200     216,200 
                                                     ========    ======== 
</TABLE> 


                                                                            F-17
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


15.      EMPLOYEE BENEFITS

         The Company is the sponsor of a defined contribution retirement savings
         plan. All employees of the Company are eligible for participation after
         one year of service. The Company matches 100% of pre-tax contributions
         up to 3.0% of the participant's total salary. The Company recorded
         $14,576 and $89,913 of matching contributions and $1,206 and $5,637 of
         administrative expenses related to this plan in 1997 and 1996,
         respectively.

         The Company has established an incentive compensation plan to provide
         incentive compensation to the Company's officers and key employees. Any
         awards must be approved by the Board of Directors and are paid in
         quarterly installments and shall not exceed 100% of the participant's
         salary. There were no such awards granted or accrued during 1997 and
         1996.

16.      INCOME TAXES

         Deferred tax accounts as of December 31, 1997 and 1996 comprise the
following:

<TABLE>
<CAPTION>
                                          1997           1996      
                                      -----------    -----------   
         <S>                          <C>            <C>           
         Deferred tax assets          $ 6,371,549    $ 4,592,000   
                                                                   
         Deferred tax liabilities         (24,595)      (121,000)  
                                      -----------    -----------   
                                                                   
         Deferred tax assets, net       6,346,954      4,471,000   
                                                                   
         Valuation allowance           (6,346,954)    (4,471,000)  
                                      -----------    -----------   
                                                                   
            Net deferred tax assets   $      --      $      --     
                                      ===========    ===========   
</TABLE> 


         As of December 31, 1997, the Company has federal and state net
         operating loss carryforwards available for tax purposes of
         approximately $14,934,508 and $13,971,648 expiring through 2012 and
         2006, respectively.


                                                                            F-18
<PAGE>
                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


17.      SUPPLEMENTAL CASH FLOW INFORMATION

         The Company recorded $145,536 and $287,461 of accreted interest income
         on the FICO Strips during 1997 and 1996, respectively.

         During 1996, the Company issued 1,000,000 common shares for $250,000
         and a subscription receivable of $3,750,000 and received payment of
         $600,000. During 1997, 822,916 shares of the Company's common stock
         were canceled, and the subscription receivable of $3,150,000 was offset
         against paid in capital.

         During 1997, the Company issued 150,000 common shares at $0.50 per
         share as commission for the sale of FICO strips.

         During 1996, the Company recorded $61,262 of income related to the
         increase in the cash surrender value of life insurance policies on
         certain officers. In 1997, the Company forfeited the cash surrender
         value of $117,681 to certain officers as additional compensation.

         Additionally, the Company recorded imputed interest expense of $286,906
         and $199,462 on its deferred acquisition obligation during December 31,
         1997 and 1996, respectively.

18.      GOING CONCERN

         As shown in the accompanying financial statements, the Company incurred
         net losses of $5,032,819 and $4,970,054 during the years ended December
         31, 1997 and 1996, respectively. As of December 31, 1997 the Company
         had working capital deficiency of $1,796,287 and its total liabilities
         exceeded total assets by $6,308,776. These factors, as well as the
         uncertain conditions the Company faces regarding obtaining financing or
         additional capital investment create uncertainty about the Company's
         ability to continue as a going concern. In 1997, Management reduced
         current liabilities by paying NJEDA bonds with the proceeds of the sale
         of FICO strips and issuance of new long-term bonds. In January 1998,
         the Company auctioned fixed assets resulting in net proceeds of
         $575,000 and in May 1998, a settlement was reached with unsecured
         creditors, reducing account payable approximately $491,000. (See Note
         19). The ability of the Company to continue as a going concern is
         mainly dependent on obtaining financing and marketing of its commercial
         products. The financial statements do not include any adjustments that
         might be necessary if the Company is unable to continue as a going
         concern.


                                                                            F-19
<PAGE>

                 ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


19.      SUBSEQUENT EVENTS

         On January 27, 1998 the Company held an auction of certain property and
         equipment. Proceeds , net of commissions of $46,280, totaled $575,000
         resulting in a gain of $198,730.

         In May 1998, unsecured vendors agreed to settle accounts payable
         balances as follows:

         a. In cash, 10% of the accounts payable balance.

         b. In stock, 15% of the remaining balance.

         As a result, $56,171 was paid to vendors, $491,303 was forgiven by
         vendors, and 73,695 shares of common stock were issued.


                                                                            F-20

<PAGE>



PART II
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE


        NONE
















                                       27
<PAGE>



PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
        PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
        ACT

                                   MANAGEMENT

    The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>

                                            Position with the
    Name                       Age          Company
    ----                       ---          -------
<S>                            <C>          <C>
    Kenneth Leighton Brody     56           President and Chief Executive
                                            Officer and Sole Director
</TABLE>

Ken Brody was a director of the Company from February 1996 until March, 1997. He
was President of Abejon Rotary Power Corporation, a marine engine and
electronics distributor, a post he held since May 1995. Mr. Brody has also been
Chairman of Hydro Lance Maritime Transport Corporation, a builder of high-speed
ferries. From April 1991 he has been General Manager and a partner of Cadenza
Marine, a marine electronics service and sales firm. From February 1985 through
December 1991, Mr. Brody was a Principal in Pragma Associates, a computer
science consulting firm. Mr. Brody is a Certified Public Accountant and holds a
United States Coast Guard Captain's license. He attended Rensselaer Polytechnic
Institute as a physics major and completed a VLSI Design Course at the
Massachusetts Institute of Technology in 1980.

      COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

The Securities Exchange Act of 1934 requires the Company's executive officers
and directors, and any persons owning more than 10% of a class of the Company's
stock to file certain reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Copies of these reports must
also be furnished to the Company.

Based solely on a review of copies of reports filed with the SEC and
representations of certain officers, directors and shareholders owning more than
10% of the Company's Common Stock, the Company believes that, during 1997, all
such requirements imposed on such persons have been complied with.

                                       28
<PAGE>



PART III
ITEM 10
                             EXECUTIVE COMPENSATION


The following table sets forth the compensation during the last three fiscal
years of the Chief Executive Officer and each of the other four most
highly-compensated executive officers of the Company (the "Named Executive
Officers") whose annual salary and bonus, if any, exceeded $100,000 for services
in all capacities to the Company during the last fiscal year.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                         Long Term
                                                                        Compensation
                                            Annual Compensation            Awards
                                            -------------------         ------------
                                                      Securities
              Annual      underlying     All Other
Compensation    Other                                         Compensation options/
Name and Principal Position  Year   Salary($)   Bonus($)        $         SARS(#)       ($)(1)
---------------------------  ----   ---------   --------  ------------  -----------  ---------
<S>                          <C>     <C>         <C>           <C>         <C>        <C>
Kenneth L. Brody
  President and              1997    $  7,500       --                      --
  Chief Executive Officer

Richard M.H. Thompson        1997    $ 64,623       --                      --        $76,495(1)
  President and              1996    $203,850       --                      --        $16,927(2)
  Chief Executive Officer    1995    $220,512    $44,102                    --        $16,448(3)

</TABLE>
------------------------------
    ((1)) This reflects the cash surrender value of split-dollar life insurance
re-assigned to Mr. Thompson on his termination.

    ((2)) This amount reflect the premiums the Company pays for Group Term Life
Insurance in excess of $50,000.

                                       29
<PAGE>



The following two tables set forth certain information with respect to (i)
option grants to the Named Executive Officers during the fiscal year ended
December 31, 1997, and (ii) the aggregated number and value of options
exercisable and unexercisable by the Named Executive Officers as of December 31,
1997.


                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
                NUMBER OF        PERCENT OF
               SECURITIES      TOTAL OPTIONS/        EXERCISE
               UNDERLYING       SARS GRANTED            OR             
              OPTIONS/SARS      TO EMPLOYEES         BASE PRICE     EXPIRATION
NAME           GRANTED (#)     IN FISCAL YEAR          ($/SH)          DATE
----          ------------     --------------        ----------     ----------
<S>             <C>                <C>                 <C>             <C>
None granted in 1997

</TABLE>


               AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
                           AND FY-END OPTION/SAR VALUE

<TABLE>
<CAPTION>
                                                   NUMBER OF          VALUE OF
                                                  UNEXERCISED        UNEXERCISED
                                                  OPTIONS/SARS      IN-THE-MONEY
                          SHARES                    AT FY-END      OPTIONS/SARS AT
                         ACQUIRED                   12/31/97       FY-END 12/31/97
                            ON         VALUE      EXERCISABLE/       EXERCISABLE/
                         EXERCISE    REALIZED    UNEXERCISABLE      UNEXERCISABLE
      NAME                  (#)        ($)            (#)            ($)      (1)
      ----               --------    --------    -------------     --------------
<S>                        <C>         <C>          <C>                <C>
Richard M.H. Thompson      -0-         -0-          24,000(2)          -0-
John Mack                  -0-         -0-           7,200(1)          -0-

</TABLE>


(1) Based upon a closing price of $0.08 per share of the Company's Common Stock
    on December 29, 1997 on the OTCBB minus the respective option exercise
    price, none of the options were in-the-money.
(2) Exercisable, up to three months after termination (2/24/98). They were not
    exercised, and the options have expired.


                                       30
<PAGE>



Compensation Pursuant to Plans

  Stock Option Plan.

Effective 1992, the Board of Directors of the Company (the "Board") adopted the
Stock Option Plan. Under the terms of the Stock Option Plan, options to purchase
up to 400,000 shares of Common Stock may be granted to officers, key employees
and non-employee directors of the Company. The Board or a committee designated
by the Board in accordance with the requirements of Rule 16b-3 promulgated under
Section 16(b) of the Securities Exchange Act of 1934, as amended, is authorized
to grant options intended to qualify as "incentive stock options" under Section
422 of the Internal Revenue Code and options not intended to qualify as
incentive stock options ("non-qualifying stock options"), and to select
employees and non-employee directors of the Company and to determine the
participants, the number of options to be granted and other terms and provisions
of each option.

The exercise price of any incentive stock options granted under the Stock Option
Plan may not be less than 100 percent of the fair market value of the Common
Stock of the Company at the time of the grant. In the case of incentive stock
options granted to holders of more than 10 percent of the voting power of the
Company, the exercise price may not be less than 110 percent of the fair market
value nor shall the option by its terms be exercisable more than 5 years after
the date the option is granted.

Under the terms of the Stock Option Plan, the aggregate fair market value
(determined at the time of grant) of shares issuable upon exercise of incentive
stock options exercisable for the first time during any one calendar year may
not exceed $100,000. Options granted under the Stock Option Plan become
exercisable in whole or in part from time to time as determined by the
committee, provided, however, in no event shall any option become exercisable
earlier than the date six months following the date on which the option is
granted. Options granted under the Stock Option Plan shall have a maximum term
of 10 years from the date of grant. The option price must be paid in full on the
date of exercise and is payable in cash or in Common Stock of the Company having
a fair market value on the date the option is exercised equal to the option
price.

As of December 31, 1997, there were stock options for 31,200 shares outstanding
under the stock option plan.

Employment Agreements

The Company currently has no employment agreements with any of its employees.
All employment agreements with the Company's employees terminated as of December
31, 1996.

Compensation of Directors

It is the policy of the Company to pay $750 per quarterly meeting to its outside
directors. The Company also reimburses all outside directors for reasonable
expenses incurred in connection with the performance of their duties as
directors. In addition, outside directors are eligible to receive stock options
under the Company's Stock Option Plan.

                                       31
<PAGE>



PART III
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

    The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by each person or group that is known by
the Company to be the beneficial owner of more than 5% of its outstanding Common
Stock, each director of the Company and each person named in the Summary
Compensation Table, and all directors and executive officers of the Company as a
group as of July 23, 1997. Unless otherwise indicated, the Company believes that
the persons named in the table below, based on information furnished by such
owners, have sole voting and investment power with respect to the Common Stock
beneficially owned by them, subject to community property laws, where
applicable.

<TABLE>
<CAPTION>
                                        Number of
                                      Common Shares          Percentage
Name and Address                      Beneficially               of
of Beneficial Owner                      Owned                 Class
-------------------                   -------------          ----------
<S>                                    <C>                      <C>
PowerCold Corporation                  2,000,000                33.5
 103 Guadalupe Drive
 Cibolo, Texas 78108
Loeb Investors Co. 104 (2)               933,074                15.6
 61 Broadway
 New York, New York 10006
Richard M.H. Thompson (3)                236,645                 4.0
 6191 N. Ocean Boulevard
 Ocean Ridge, Florida 33435
Abejon Rotary Power Corporation          177,084                 3.0
 4960 North Harbor Drive
 San Diego, CA 92106
Ken Brody(1)
 c/o Abejon Rotary Power Corporation     177,084                 3.0
 4960 North Harbor Drive
 San Diego, CA 92106


All directors and executive
 officers as a group (1 person)         177,084(1)               3.0

</TABLE>

---------------
(1) Includes 177,084 shares of Common Stock owned by Abejon Rotary Power
    Corporation. Mr. Brody is a 24% shareholder in Abejon Rotary Power
    Corporation.
(2) Includes 435,325 shares of Common Stock owned by Loeb Investors Co. 104,
    214,731 Common Shares owned by Loeb Partners Corporation and 198,918 Common
    Shares owned by Warren D. Bagatelle, Managing Director of Loeb Partners
    Corporation. Also includes: (i) 28,221 Common Shares owned by Loeb Holdings
    Corp.; (ii) 13,566 Common Shares owned by HSB Capital; (iii) 14,104 Common
    Shares owned by Loeb Investors Co. 105; (iv) 24,686 Common Shares owned by
    Pinpoint Partners 1; and (v) 3,523 Common Shares owned by the
    Kempner/Perlmuth Trust (collectively, "Loeb Affiliates").
(3) Mr. Thompson's shares include currently exercisable options to purchase
    24,000 Common Shares.

                                       32
<PAGE>



PART III
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    On June 1, 1992, the Company entered into a consulting agreement, as
subsequently amended, with Loeb Partners Corporation (the "Consulting
Agreement"), pursuant to which the Company agreed to retain Loeb Partners
Corporation for the purpose of rendering on-going advisory and management
consulting services to the Company for a period of three years at a fee of
$5,000 per month. During 1995, the Company had paid Loeb Partners Corporation
consulting fees of $25,000. Mr. Bagattelle resigned as Director on March 31,
1997.

    In the future, the Company will not enter into any transactions with
officers, directors or other affiliates unless the transactions are approved by
a majority of disinterested directors. No such transactions were entered into
during 1995, 1996 or 1997.

                                       33
<PAGE>



PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a). EXHIBITS TO 10-KSB

3.1    Certificate of Incorporation of the Company, as amended.((1))

3.2    By-laws of the Company.((1))

3.3    Certificate of Designations, Preferences and Rights and Rights of 
       Preferred Stock of the Company, as amended.((1))

4.0    Warrant Agreement dated June 29, 1992 between the Company and Rickel &
       Associates, Inc.((1))

4.1    Non-Transferable Warrant to Purchase 25,000 Shares of Common Stock of
       Rotary Power International, Inc.((3))

4.2    Non-Transferable Warrant to Purchase 175,000 Shares of Common Stock of
       Rotary Power International, Inc.((3))

4.3    Non-Transferable Warrant to Purchase 200,000 Shares of Common Stock of
       Rotary Power International, Inc.((5))

4.4    Non-Transferable Warrant to purchase 250,000 Shares of Common Stock of
       Rotary Power International, Inc.((8))

10.1   Contract dated August 15, 1989 between the United States Marine Corps and
       John Deere Technologies International, Inc. and novated to the Company,
       as amended.((1))

10.2   Contract dated April 23, 1991 between FMC Corporation and John Deere
       Technologies International, Inc. and novated to the Company, as 
       amended.((1))

10.3   Contract dated January 21, 1993 between the National Aeronautics and
       Space Administration and the Company, as amended.((1))

10.4   Licensing Agreement dated October 20, 1992 between Wankel GmbH and the
       Company.((1))

10.5   Teaming Agreement dated May 10, 1993 between Dornier GmbH and the
       Company.((1))

10.6   Teaming Agreement dated June 30, 1993 between Martin Marietta Corporation
       and the Company.((1))

10.7   Purchase Agreement dated November 15, 1991 between John Deere
       Technologies International, Inc. and the Company.((1))

10.8   Loan Agreement dated June 1, 1992 between New Jersey Economic Development
       Authority and the Company.((1))

                                       34
<PAGE>


10.9   Asset Purchase Agreement dated August 6, 1992 between ROTEC Manufacturing
       and Engineering Corp., Michael Soimar and the Company.((1))

10.10  Asset Purchase Agreement dated August 12, 1992 between Defense Group
       Industries, Inc. and the Company.((1))

10.11  Assignment and Transfer of Receivables Agreement dated April 10, 1992
       between Commerce Funding Corporation and the Company.((1))

10.12  Employment Agreement dated November 1, 1991 between Richard M.H. Thompson
       and the Company, as amended.((1))

10.13  Employment Agreement dated December 16, 1991 between Robert L. Osborn and
       the Company.((1))

10.14  Employment Agreement dated December 16, 1991 between Gary A. LaBouff and
       the Company.((1))

10.15  Consulting Agreement dated June 1, 1992 between Loeb Partners Corporation
       and the Company, as amended by Agreement dated May 3, 1993.((1))

10.16  Lease dated January 1, 1992 between Curtiss-Wright Flight, Inc. and the
       Company, as amended.((1))

10.17  Rotary Power International, Inc. 1992 Stock Option Plan.((1))

10.18  Stockholders Agreement dated December 31, 1991 between the Company and
       its Stockholders.((1))

10.19  Modification P00035, P00036, P00037 and P00038 to the contract between
       the Company and the USMC (incorporated by reference to Exhibit 10.1
       contained in the Company's 10-QSB for the period ending September 30,
       1994, dated November 7, 1994).

10.20  Letter Contract dated November 8, 1994 between Martin Marietta Ordnance
       Systems and the Company.((2))

10.21  Letter Contract dated December 21, 1994 between the USMC and the
       Company.((2))

10.22  Not used

10.23  Teaming Agreement dated July 25, 1995 between Teledyne Vehicle Systems
       and the Company.((4))

10.24  Assets Purchase Agreement dated August 4, 1995 between Rotary Marine
       Industries, Inc. and the Company.((4))

10.25  Engine Distributor Agreement dated October 5, 1995 between Abejon Rotary
       Power Corporation and the Company.((4))

                                       35
<PAGE>



10.26  Sales Agreement dated October 16, 1995 between Hussmann Corporation and
       the Company.((4))

10.27  Modifications P00039 through P00044 to the contract between the Company
       and the USMC referred to in Exhibit 10.1.((6))

10.28  Amendment, dated September 30, 1995, to Employment between Richard M. H.
       Thompson and the Company referred to in exhibit 10.12.*((6))

10.29  Amendment, dated September 30, 1995, to Employment Agreement between
       Robert L. Osborn the Company referred to in exhibit 10.13.*((6))

10.30  Amendment, dated September 30, 1995, to Employment Agreement between Gary
       A. LaBouff and the Company referred to in exhibit 10.14.*((6))

10.31  Agreement by and among Mazda Motor Corporation, Mazda (North America),
       Inc., and the Company dated November 10, 1995 with Addendum.((6))

10.32  Contract dated December 22, 1995 between the United States Marine Corps
       and the Company with modification P00001 thereto.((6))

10.33  Advice to Wankel GmbH, dated January 10, 1996 terminating the Wankel
       Licensing Agreement referred to in exhibit 10.4.((6))

10.34  65 Series Distribution Agreement dated January 22, 1996 between Abejon
       Rotary Power Corporation and the Company.((6))

10.35  Amendment 1, dated February 6, 1996, to Engine Distributor Agreement
       between Abejon Rotary Power Corporation and the Company referred to in
       exhibit 10.25.((6))

10.36  Purchase Order, dated February 6, 1996, from Abejon Rotary Power
       Corporation.((6))

10.37  Consulting Agreement, dated February 6, 1996, pursuant to the sale of
       1,000,000 shares of the Company's Common Stock to Abejon (Abejon) Rotary
       Power Corporation.((6))

10.38  Loan Agreement, dated February 6, 1996, between Abejon, Hydro Lance
       Maritime Transport, Inc. and the Company pursuant to the sale of
       1,000,000 shares of the Company's Common Stock to Abejon (Abejon) Rotary
       Power Corporation.((6))

10.39  Promissory Note, dated February 6, 1996, by Hydro Lance Maritime
       Transport, Inc. pursuant to the sale of 1,000,000 shares of the Company's
       Common Stock to Abejon (Abejon) Rotary Power Corporation.((6))

10.40  Pledge Agreement, dated February 6, 1996, between Abejon and the Company
       pursuant to the sale of 1,000,000 shares of the Company's Common Stock to
       Abejon (Abejon) Rotary Power Corporation.((6))

                                       36
<PAGE>



10.41  Pooling Agreement, dated February 6, 1996, between Abejon, Hydro Lance
       Maritime Transport, Inc. and and Affiliates of the Company pursuant to
       the sale of 1,000,000 shares of the Company's Common Stock to Abejon
       (Abejon) Rotary Power Corporation.((6))

10.42  Settlement Agreement, dated March 1, 1996, between Lockheed Martin
       Ordnance Systems, Inc. and the Company referred to in Exhibit 10.20.((6))

10.43  Deviation From Purchase Agreement between John Deere Technologies
       International, Inc. and the Company, dated February 19, 1996, as referred
       to in exhibit 10.7((7)).

10.44  Investment Banking Consulting Agreement for One Year with R.D. White &
       Company dated June 25, 1996.((9))

10.45  Letter from Shearman & Sterling, attorneys representing Wankel GmbH,
       dated 19 September 1996, to the Company accepting the termination of the
       Wankel License Agreement referred to in exhibit 10.4 by mutual
       consent.((9))

10.46  Vessel Purchase and Sales Agreement (Partial Interest) between Abejon and
       RPI dated as of October 31, 1996.((9))

10.47  Mar-Trans Affiliates LLC: Operating Agreement between Abejon and RPI
       dated as of October 31, 1996.((9))

10.48  Agreement of Merger between International Cryogenic Systems Corporation
       and Rotary Power International dated as of March 21, 1997.((9))

10.49  Security Agreement, dated December 1, 1998, between Sentinel Trust
       Company, trustees for the holders of the $10,000,000 bonds due December
       15, 2007.

10.50  Indenture of Trust between Sentinel Trust Company and Rotary Power
       International, Inc, dated December 1, 1997.

10.51  Curtiss-Wright Security Agreement, dated December 22, 1997.

10.52  Curtiss-Wright Settlement of Claims with RPI, dated December 22, dated
       December 22, 1997.

10.53  Asset Purchase Agreement, dated June 4, 1998, with Rotary Power Marine
       Corporation , for the sale of Series 65 gasoline engines.

10.54  Asset Sale Agreement, dated July 2, 1998, for the sale of certain assets
       of the Company (Series 65 NGRE engines) to Rotary Power Enterprise, Inc.

11     Calculation of Income (Loss) per Common Share filed herewith.

21     Subsidiaries of the Company.

27     Financial Data Schedule**


                                       37
<PAGE>

---------------------------
*    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit to this Form 10-KSB.

**   Filed in Edgar format only.

1    Incorporated by reference to exhibit of the same number contained in the
     Company's Registration Statement on Form SB-2, (File No. 33-71334) dated
     November 5, 1994.

2    Incorporated by reference to exhibit of the same number contained in the
     Company's Form 10-KSB for year ending December 31, 1994.

3    Incorporated by reference to exhibit of the same number contained in the
     Company's Form S-8 (File No. 33-93836) dated June 22, 1995.

4    Incorporated by reference to exhibit of the same number contained in the
     Company's Form 10-QSB for nine months ended September 30, 1995.

5    Incorporated by reference to exhibit of the same number contained in the
     Company's Form S-8 (File No. 33-98584) dated October 26, 1995.

6    Incorporated by reference to exhibit of the same number
     contained in the Company's Form 10-KSB for the year ending
     December 31, 1995.

7    Incorporated by reference to exhibit of the same number
     contained in the Company's Form 10-QSB for the three months
     ended March 31, 1996.

8    Incorporated by reference to exhibit of the same number
     contained in the Company's Form S-8 (File No. 333-06557) dated
     June 21, 1996.

9    Incorporated by reference to exhibit of the same number
     contained in the Company's Form 10-KSB for the year ending
     December 31, 1996.

(b)  Reports on Form 8-K

     The Company did not file any Form 8-K during the last quarter of the
     fiscal year ended December 31, 1997.

                                       38
<PAGE>

                                   SIGNATURES

In accordance with Section 13 of 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

ROTARY POWER INTERNATIONAL, INC.
REGISTRANT

     /s/
-------------------------------------
By: KENNETH LEIGHTON BRODY, PRESIDENT

August 20, 1998
DATE

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

     /s/
    ----------------------
BY: Kenneth Leighton Brody
Director, President and Chief
Executive Officer (Principal Executive Officer & Principal Financial Officer)
DATE: August 20, 1998

                                       58