<PAGE>

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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

   FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                                  (MARK ONE)

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


                    For the fiscal year ended May 31, 2002


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


                For the transition period from        to


                        COMMISSION FILE NUMBER: 0-31195


                                 H POWER CORP.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  DELAWARE                          22-3010742
        (STATE OR OTHER JURISDICTION             (I.R.S. EMPLOYER
        OF INCORPORATION OR ORGANIZATION)     IDENTIFICATION NUMBER)

              60 MONTGOMERY STREET, BELLEVILLE, NEW JERSEY 07109
         (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (973) 450-4400
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                     NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $.001 PER SHARE.

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

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

     As of July 31, 2002, 53,882,828 shares of the Registrant's Common Stock
were issued and outstanding. The aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant, based upon the closing
sale price of $0.86 on The Nasdaq National Market on July 31, 2002, was
$36,616,858.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement relating to the Registrant's
2002 Annual Meeting of Stockholders are incorporated by reference into Part III
of this report to the extent described therein.
--------------------------------------------------------------------------------

<PAGE>



ITEM 1. BUSINESS


OVERVIEW

     We design, develop, manufacture and sell proton-exchange membrane, or PEM,
fuel cell power sources. Our goal is to be a leading international provider of
hydrogen based and fossil fuel based fuel cell power sources to both premium
power users and original equipment manufacturers (OEMs). The premium power
market consists of the telecommunication, standby generation and
uninterruptible power supply industries which we believe will support the
initial relatively high prices of these systems. In fiscal 2002, we completed
and launched the pre-commercial version of the EPAC500, a 500 watt fuel cell
based power source, which can be used for primary or back-up power for a wide
variety of industrial applications. The EPAC is a modular product and up to
four units can be connected together to power applications requiring up to two
kilowatts. This product incorporates our experience gained over the last four
years in field trials of direct hydrogen powered portable systems in the range
of 15 to 500 watts. During fiscal 2002, we also continued the development of
our residential co-generation units, or RCUs, which provide up to 4.5 kilowatts
of continuous electrical power and up to 6 kilowatts of heat (approximately
20,000 btus). In May 2002, we completed the shipments of our beta program
deliveries to our marketing partner, Energy Co-Opportunity, Inc. The RCU has
been designed to provide the electricity needs of an average home in the United
States. The RCU incorporates a fuel processor based on steam reforming which
processes fossil fuels, such as propane or natural gas, to high quality
hydrogen for the fuel cell. Our RCU has been designed to operate independently
off the electric grid with load-following capabilities. In addition, we are
developing a 500 watt cogeneration fuel cell system using Osaka Gas Co., Ltd.'s
proprietary compact steam reformer, for residential applications in Japan. Our
strategy for fiscal 2003 is to focus on the commercialization of our direct
hydrogen based products, because we believe such products will have immediate
near-term commercial applicability, and to continue developing our other
product lines.

     We were founded in 1989 and incorporated in the State of Delaware, and
have developed, own or have been granted the exclusive rights to patents,
proprietary technology and trade secrets covering fuel cells and ancillary
systems, particularly fuel cell stacks and fuel processors. Fuel cells are
devices that generate electricity efficiently and cleanly from the
electrochemical reaction of a fuel, such as hydrogen, and oxygen. Hydrogen is
typically derived from conventional fuels including natural gas or propane,
while oxygen is derived from the air. Our PEM fuel cells are designed to
provide electricity for a wide range of portable and stationary applications.
Our fuel cell systems can provide on-site power to replace or supplement the
electric grid for use in residences, farms, small commercial establishments,
industrial facilities, and telecom applications.

     The initial target market for our direct hydrogen products will be for
various telecommunications and industrial applications, to be used as either a
stand-alone primary power source, or as a back-up power source. We have been
demonstrating and field testing our EPAC systems since February 2002 and other
direct hydrogen systems both domestically and internationally since 1998.
During fiscal 2002, we successfully completed several field trials of our
direct hydrogen products with industrial users for critical load applications.
Our initial target market for our residential cogeneration products will be
rural, remote homes. We anticipate selling to our initial target market once
the cost of the RCU has been significantly reduced, and its reliability
increased, through ECO Fuel Cells LLC, created by Energy Co-Opportunity, Inc.
(collectively "ECO"), an association of approximately 300 rural electric
cooperatives. We believe that as our products gain acceptance in the market and
are manufactured in large quantities, their cost will decline. We expect that
this cost reduction, combined with their increased reliability, will enable
these products to provide electricity competitively for a wide variety of
applications and geographical territories.


INDUSTRY AND MARKET TRENDS

     The U.S. Department of Energy's (DOE) Energy Information Administration's
Annual Energy Outlook 2002 projects a 32% increase in energy demand over the
next two decades while the DOE's Distributed Energy Resources Program expects
that 20% of all new electrical generation will come from


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distributed generation by 2010. While this steady, annual projected increase in
demand for electrical energy continues, the utility industry faces challenges
from deregulation both in the US and overseas. We believe that fuel cells, a
clean and efficient source of high quality power, will help alleviate the
strain on the electrical transmission, distribution and generating
infrastructure and can help reduce the environmental impact of emissions from
electrical generating facilities.

     Electric Power Research Institute (EPRI), an electric utility industry
trade group, estimates that electrical outages cost the US about $119 billion
per year and Sandia National Laboratories estimates the cost at about $150
billion per year. The North American Electric Reliability Council (NERC), the
independent organization promoting bulk electric system reliability and
security, says that planned investment in the US electric transmission capacity
has fallen by about half since 1992. NERC also indicates there has been a
ten-fold increase over the last several years of transmission loading
procedures and this trend indicates an increasing strain on the electrical
system and the need to increase investments in our electrical infrastructure.

     Fuel cells can help alleviate this strain by being installed at a
customer's site and providing continuous high quality power compared to the
power grid and the intermittent power available from other distributed
generation alternatives such as wind and solar power. We believe that these
modular and clean energy sources provide an option to customers concerned about
meeting their premium power requirements. Sandia National Laboratories reports
that power disruptions such as local under and over voltages occur daily. We
believe that fuel cells would eliminate disruptions caused by these localized
conditions.

     According to Frost & Sullivan, an independent research firm, the world
fuel cell market is projected to grow to over $32 billion by 2010. With over 2
billion people in the world without electrical power, the need for clean,
efficient electrical power is strong. Fuel cells can also be used for backup
emergency power, and as battery replacements. Allied Business Intelligence
(ABI) reports over 40 billion batteries are made annually. We believe that the
following market trends favor the deployment of fuel cells:

o    Growing demand for premium power to supply the expanding digital economy;

o    Increasing concern about the safety and security of centralized power
     generating facilities;

o    Increasing problems to site and build transmission and generating
     facilities;

o    Increasing desire by utilities to avoid costly transmission, maintenance
     and distribution expenditures;

o    Continuing privatization and deregulation of utilities, which is likely to
     expand the market for alternative power; and

o    Increasing regulation of the environmental impact of conventional fossil
     fuel and nuclear power generation and transmission.

OUR STRATEGY

     Our short-term goal is to be a leading international provider of both
hydrogen based and fossil fuel based fuel cell power sources to both premium
power users and original equipment manufacturers. Our long-term goal, as
product costs are reduced, is to provide these products to more price sensitive
mass markets. We are focused on commercial opportunities that could produce
near-term revenues. The following are key elements in our strategy:

o    Penetrate Markets for Direct Hydrogen Fuel Cell Products. We will seek to
     increase sales of our direct hydrogen fuel cell systems, both domestically
     and internationally on a commercial basis, while we continue to supply
     demonstration and evaluation models of these systems to a broad range of
     customers with multiple potential applications. We believe that the premium
     power market will support initially higher prices for these systems.

o    Strengthen and Expand Our Strategic Relationships. We are seeking to
     strengthen our existing domestic and international strategic relationships
     with customers such as ECO, Mitsui & Co., Ltd., PSA Peugeot Citroen, Osaka
     Gas, Naps Systems Oy and Gaz de France as well as aggressively pursuing
     additional financial, manufacturing, marketing and distribution
     partnerships.


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<PAGE>

o    Focus on Existing Markets For Stationary Power Products. We are continuing
     to develop our RCU to increase its reliability and decrease its cost. We
     are currently field testing new designs of the RCU with increased
     reliability and intend to distribute these products initially to rural
     areas through ECO. We will also continue field testing of our 500 watt
     cogeneration fuel cell systems in Japan with Osaka Gas with the goal of
     increasing system efficiency and developing a product acceptable for mass
     commercial sales in Japan and Europe. In the future, our goal is for
     manufacturing efficiencies and technology advances to lead to cost
     reductions that will make our products attractive to the more
     price-sensitive, larger market of grid-connected urban and suburban
     locations.

     The competitiveness of our products depends on several factors, including
the application and the environment in which they will be operated. Another
major factor is cost to the customer. We have embarked on a cost reduction
program to reduce the cost of all of our products. During the fiscal year we
reduced the materials cost of our RCU by approximately 20 percent for
production of single units and at the same time increased the reliability of
the RCU in excess of 100 percent; however, substantial additional cost
reductions and increases in reliability will be necessary in order for us to
reach the mass market for our RCU products. Other traditional residential power
sources for remote locations, such as internal combustion engine-generators,
may currently be less expensive but may not be as attractive as a higher priced
fuel cell because of their noise, pollution, and frequent maintenance
requirements.


OUR PRODUCTS

     Our current products consist of PEM fuel cell power sources for stationary
and portable applications. Our lower power products typically have power
ratings of up to 1,000 watts, are air cooled and utilize hydrogen as the
primary fuel. Our higher power products have power ratings in excess of 1,000
watts, are water cooled and use either direct hydrogen, or fossil fuels such as
natural gas or propane as the primary fuel.


DIRECT HYDROGEN PRODUCTS

     Fuel cell systems operating directly on hydrogen can be used for either
primary or back-up power to provide electricity to a wide array of power
electronic equipment. Some advantages of direct hydrogen fuel cell systems
compared to fossil fuel based systems are that they are simpler, which makes
them more reliable, smaller, lighter and less costly to produce. Systems
operating on direct hydrogen have short start-up times, typically less than
five minutes which makes them ideal for use in emergency and back-up
applications. In response to the continuing demand for premium power sources,
we have produced a commercial fuel cell system--the EPAC--operating directly on
hydrogen. The EPAC has a continuous power output of 25 to 500 watts, with
voltage output options of 120 VAC at 60Hz or 48V regulated or unregulated DC.
The EPAC is a modular product allowing up to four units to be combined for a
total power output of 2 kilowatts. Our direct hydrogen products can be used in
diverse applications such as remote cell towers, back-up power for
telecommunications, homes and commercial buildings, as a battery charger for
small electric vehicles, solar and radio applications and for auxiliary power
units, but to date, sales have been limited. The EPAC is manufactured at our
Monroe, North Carolina plant and our product development activities are
targeted towards capitalizing on market opportunities for near term commercial
sales of these power sources.

     We are currently developing the H Core 5000, a higher power direct
hydrogen power source at 5000 watts, which is a combined heat and electrical
generator. We expect this product will be used as a fuel cell based power
source for entire communities (sustainable communities). We will also offer the
H Core 5000 to OEMs for inclusion in their products. Prototypes of this product
are expected to be available in fiscal 2003.


FOSSIL FUELED BASED PRODUCTS

     Stationary fuel cell power sources using fossil fuels can provide on-site
power to replace or supplement the electric grid for use in residences, small
commercial establishments and industrial facilities. Our fuel cells' low
emissions, low noise and high efficiency will allow them to be installed near
or at the end-user's location, which will eliminate expensive transmission and
distribution costs.


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<PAGE>

     We are developing two versions, one for an average U.S. and one for an
average Japanese home, of the RCU, a combined heat and electrical co-generator
sized to provide all the electricity needs for such homes. The RCU 4500 is a
500 watt to 4.5 kilowatt continuous, load following AC power source with the
ability to handle peak power demands of up to 10 kilowatts, and power spikes of
up to 20 kilowatts. Our RCU 4500 system processes propane or natural gas, using
our proprietary steam-reforming technology. In addition, we are designing our
RCU 4500 to provide for net metering, which we believe will eventually allow
our customers to sell power back to the grid. We are continuing to improve the
reliability of the RCU 4500 and are beta testing systems at selected customer
sites. Under the terms of our agreement with ECO, we will continue to make
shipments of our RCUs to ECO in fiscal 2003 and 2004 with the substantial
majority of shipments to occur in calendar years 2005 through 2008.

     We are also developing the RCU 500, a 500-watt cogeneration system
utilizing our proprietary fuel cell stack technology with Osaka Gas'
proprietary steam reforming technology. We have completed the shipments of
alpha units to Osaka Gas and will commence the shipment of next generation
products in the latter part of calendar 2002 for beta testing in Japan.

     The economics of replacing grid-delivered electricity with home-generated
power are sensitive to fuel efficiency and we believe that our steam reforming
technology will provide a competitive advantage over other types of fuel
processing in the markets we serve. Our fuel cell stack operates at near
atmospheric pressure, which allows the use of an air blower, instead of a
compressor. This results in substantially lower power consumption, greater fuel
efficiency, less system complexity and less noise.

PEM FUEL CELL TECHNOLOGY

     A PEM fuel cell is a device that silently produces electricity through an
electrochemical reaction in which hydrogen and oxygen are combined to generate
electricity, with usable heat and water as the principal by-products. The
hydrogen used in the process is derived from fuels such as natural gas,
propane, methanol or other petroleum products and the oxygen is drawn from the
air. Our fuel cells consist principally of two electrodes, the anode and the
cathode, separated by a polymer electrolyte membrane. Each of the electrodes is
coated on one side with a platinum-based catalyst. Hydrogen fuel is fed into
the anode and air enters through the cathode. In the presence of the platinum
catalyst, the hydrogen molecule splits into two protons and two electrons. The
electrons from the hydrogen molecule flow through an external circuit creating
an electric current. Protons from the hydrogen molecule are transported through
the polymer electrolyte membrane and combine at the cathode with the electrons
and oxygen from the air, to form water and generate by-product heat. Individual
fuel cells are positioned between electrically conducting bipolar plates and
combined into a fuel cell stack.

     The voltage of a stack of cells is proportional to the number of cells.
The number of cells in a stack and the cell surface area determine the amount
of electrical power that can be generated. The DC power produced by a fuel cell
stack is either applied directly to a DC load or converted to AC power by an
inverter. The heat generated in the process can be used in cogeneration heating
and offers the potential to enhance significantly the overall efficiency of a
PEM fuel cell system. Compared with currently available energy storage and
production alternatives, fuel cell systems have a combination of
characteristics that make them attractive for a wide variety of current niche
applications. Typically, fuel cell systems are attractive to users of
electricity who require portability, mobility, an independent off-grid power
source, a remotely located electrical power source or an on-site backup power
source when the grid fails. Fuel cell systems, nonetheless, today are
significantly more expensive than other currently available energy storage and
production alternatives.

     Other types of fuel cells have been under development for a variety of
applications, but we believe that PEM fuel cells have distinct advantages over
each of these for near-term commercialization. PEM fuel cells can provide power
ranging from milliwatts to kilowatts, depending on their size and
configuration. PEM fuel cells operate at low temperatures, which allows for
faster start-ups. They also respond rapidly to changes in demand for power.
Some other types of fuel cells, however, have a greater tolerance to operating
on different fuels than PEM fuel cells and are more suitable for high (hundreds
of kilowatts) power applications. Nonetheless, we believe that PEM fuel cells
have greater potential for near-term commercialization in systems that can be
used in commercial, industrial and consumer products.


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<PAGE>

     We also believe that PEM fuel cells are better suited for small portable
and mobile applications than other types of fuel cells. While PEM fuel cells
are advantageous in many respects, they are significantly more expensive and
generally have a longer start-up time than combustion-powered generators.
Unlike PEM fuel cells, combustion-powered generators are also widely available
today in the marketplace. However, PEM fuel cell systems have inherent
operational and environmental advantages over combustion-powered generators:




<TABLE>
<CAPTION>
ATTRIBUTE                                             ADVANTAGE
---------                                             ---------
<S>                                                   <C>
Fuel cells are electrochemical, rather than           Greater efficiency and lower operating costs
combustion powered generators.                        through fuel savings.
Fuel cells are virtually pollution and odor free.     More suitable for home use; can be located within
                                                      the home or business.
Fuel cells are reliable and require minimal           Better adapted to intermittent use in back up
maintenance.                                          power systems.
Even small units can efficiently recover by-          Greater fuel economy through cogeneration of
product heat.                                         power and heat.
</TABLE>

STATUS OF OUR TECHNOLOGY

     Our in-house PEM fuel cell system development efforts have concentrated on
fuel cell components, fuel cell stacks, system components and system
integration, as well as hydrogen storage and generation subsystems. The
proprietary technologies that we have developed include:

o    formulation and fabrication of electrodes and membrane-electrode
     assemblies;

o    design and fabrication of bipolar plates;

o    management of heat and water within the fuel cell stack and overall system;

o    fabrication and assembly methodologies for cells and stacks;

o    hydrogen fuel storage and generation; and

o    steam reforming technology.

     Our Fuel Cell Stacks. Our development program has emphasized the design
and fabrication technologies for fuel cell stacks. The design characteristics
differ between "higher-power" multi-kilowatt stacks, which are used for
stationary power applications, and "lower-power" stacks, which are used for
portable power and battery replacement. Our proprietary, low-power stack design
achieves compactness and internal humidification, and provides user-friendly
features such as external air-cooling and non-humidified reactants.

     We cool high-power stacks by directing a flow of water through them. This
approach allows the stacks to operate at a higher power output and provides a
simple method for recovery of by-product heat for hot water and space heating.
We maintain an active development program on our higher power stacks, focusing
on design features, component performance and costs. These stacks have
progressively yielded higher output power, higher efficiency and lower power
loss from auxiliary components than those of previous designs.

     Integrated Systems. Our low-power fuel cell systems generally incorporate
means of hydrogen storage and supply. Examples are pressurized hydrogen
vessels, metal-hydride canisters and chemical hydrides that generate hydrogen
upon reaction with water. We typically integrate pressurized hydrogen or
metal-hydride units into our fuel cell systems. To expand the utility of our
portable and mobile fuel cell systems in the marketplace, we require fuel
reformers that extract hydrogen from common, widely available fuels such as
natural gas, liquid propane or methanol. For these fuels, we are working with
selected outside development companies to obtain fuel processing technologies
suitable for use in PEM fuel cell systems. We expect these fuel reformers to be
completed and available in the next two to four years.


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     During the year, we continued to develop fuel reformers for our stationary
power systems which are fabricated by suitable outside contractors in
accordance with our specifications. We have integrated our fuel processor with
our fuel cell systems for the beta testing phase of the RCU. We continue to
evaluate and optimize our proprietary fuel reforming technology, which we
believe will contribute to the overall system efficiency. We are also
evaluating fuel processors that are available from outside sources to determine
the suitability for their use in our systems. We have integrated Osaka Gas'
compact proprietary steam reforming technology with our 500 watt fuel cell
system.

     We have continued to test power conditioning hardware, primarily DC-to-AC
inverters, from several outside suppliers. These sub-systems have been
integrated within our fuel cell systems, where they are evaluated in regard to
their performance characteristics. We continue to monitor their prospects for
availability and cost as well. We are also continuing our optimization
activities related to the system controller.

     Before we can ship our RCU on a commercial basis, we need to increase
system efficiency and reliability and significantly lower costs. There is no
assurance that we will be able to achieve the necessary cost reductions
required for mass commercialization of our RCUs.


PRODUCT DEVELOPMENT AND COMMERCIALIZATION

     Our research and development has been funded internally and from work
performed under government contracts. For the fiscal years ended 2002, 2001 and
2000, total research and development expense was $18.9 million, $13.5 million
and $5.3 million, respectively. Our research team continues to focus on
improving PEM fuel cell performance by working to optimize materials and
processes. These activities are critical to achieving a higher cell power
density, which leads directly to smaller, lighter, lower-cost and more
fuel-efficient fuel cell stacks and systems. Our development team improves the
designs of our existing products, generates new product concepts and develops
pre-prototype and prototype hardware. The team also upgrades methods for the
removal of heat from a fuel cell and for cell humidification, thereby
increasing the utility of existing products. During fiscal 2002, we continued
developing direct methanol fuel cell technology, which uses methanol to power
the fuel cell. Our research and development teams made advances in the fuel
cell stack assembly design to increase output and allow the fuel cell units to
function effectively under adverse conditions. The activities of our fuel cell
development team are complemented by the multi-kilowatt system development
efforts at our subsidiary, H Power Enterprises of Canada Inc. These efforts,
carried out by our system integration engineers, provides for the
specification, procurement, evaluation and optimization of key subsystem
hardware such as fuel processors and power conditioners, as well as overall
system assembly. Our HPEC fuel processor group has designed, developed and
manufactured steam reformers using natural gas or propane, and continues to
focus on optimizing the steam reformer to increase its efficiency, which we
believe will give our RCU a competitive advantage over fuel cell systems that
use other types of fuel processors.

     During fiscal 2002, we completed the development of the pre-commercial
version of a 500 watt direct hydrogen fuel cell system, the EPAC. In February
2002, we launched the pre-commercial version of the EPAC by placing a limited
number of units in the field for test and evaluation. We also developed a
modular design of the EPAC whereby the output of the system was increased to
two kilowatts. The modular EPAC was successfully field-tested as the primary
source of power for a critical load application. In August 2002, we announced
the commercial launch of our EPAC product and expect to begin shipments in
September 2002. The RCU field-test systems have been upgraded during 2002.
These deliver 4.5 kW of net AC power, and improvement in reliability and
efficiency have been realized. We have continued to ship and install these
units for ECO and for other customers, and we continue to utilize feedback from
the field to incorporate improvements into planned future versions of our
products.


MANUFACTURING

     In January 2001, we entered into a lease for a 90,000 square foot
manufacturing facility in Monroe, North Carolina. The facility was opened in
July 2001. We hired key personnel and will continue the staffing process over
the next several years. Training of technical staff commenced in August 2001.
We are


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currently producing all fuel cell stacks and direct hydrogen power systems in
our Monroe facility. We also lease a total of approximately 27,000 square feet
in two buildings in Belleville, New Jersey and a total of 30,900 square feet in
two buildings in Saint Laurent, a suburb near Montreal, Canada, where we have
the capability for limited manufacturing. We anticipate that our existing
facilities, including our new manufacturing plant, will provide sufficient
capacity through fiscal year 2005. Our goal is to achieve system cost
reductions as we move into higher-volume manufacturing phases. We are focusing
our efforts on overall system design, component and subsystem integration,
assembly and quality control processes. We are utilizing third-party
manufacturing and engineering support to assist us in achieving our objectives.
As we reach successively higher volumes of production, we believe that we can
achieve substantial cost reductions through improved equipment and operator
efficiencies, and by taking advantage of high-volume orders in the purchase of
materials. Our strategy involves third party suppliers who, with our
assistance, can design, develop and/or manufacture subsystems and components
that we expect will achieve our cost and reliability targets. Several of our
suppliers of key components or materials are working with us in cooperative
technology development programs to improve and optimize system performance
through a closer sharing of development data than is typical in a vendor/user
relationship.


SALES AND MARKETING

     We plan to market and sell our products globally through distribution
channels that we consider to be appropriate for the particular product and
geographical area. Our immediate focus is to access markets that offer
near-term opportunities for the sale of our direct hydrogen products. We are
strengthening our existing strategic relationships and pursuing new marketing
and distribution partnerships with companies that have established distribution
networks. We will also be seeking to generate revenues from sales of our
products to federal and state governmental agencies.

     In the U.S., ECO will initially sell, market and distribute our power
products in the counties in which rural electric cooperatives are active. We
are also working closely with ECO to train participating cooperatives in the
installation and maintenance of our products. ECO has also created programs to
secure early orders of our commercial fuel cells by creating awareness of the
product through presentations in cooperative territories. In addition to our
ECO distribution channel, we believe that other types of companies may choose
to enter into agreements to distribute our power products. These may include
natural gas and propane distributors, electric utilities, manufacturers and
distributors of electric and heating equipment, and homebuilders.

     We are also actively seeking business arrangements with major companies
that will distribute our fossil fuel based and direct hydrogen fuel cell
products in the U.S. and in industrialized regions such as Europe and Japan, as
well as in developing countries. We expect that these distributors will have
existing sales organizations, and that some of them will have the capability,
or will acquire it, to install and service our products. We already have a
distribution arrangement with Mitsui to sell our fuel cell products in Japan
and Naps Systems Oy for certain sections of Europe. Mitsui will also assist in
developing new strategic partners for sales, marketing and distribution in
Japan.


OUR ECO RELATIONSHIP

     ECO is a national energy services cooperative, incorporated in Delaware in
1998. ECO provides its members with products and services to help them take
advantage of new energy technologies, supports them in their acquisition of
natural gas and propane companies, obtains energy products and services and
provides consulting services. Currently, approximately 300 of the more than 900
rural electric cooperatives in the U.S. are ECO members (who are also its
owners). ECO is controlled by a board of directors who are elected by these
same cooperative members. Electric cooperatives have a service territory that
includes some 80% of the U.S. counties in 47 states. These cooperatives supply
power to approximately 14 million U.S. households, farms and small businesses.
The 300 rural cooperatives which are currently ECO members service in excess of
9 million homes.

     In April 2002, we entered into a second amended and restated fuel cell
operating agreement with ECO, which provides for ECO to purchase $81 million of
our fuel cell products. The agreement further


                                       7
<PAGE>

provides for ECO to market our direct hydrogen fuel cell products in addition
to the RCU 4500. We also repurchased from ECO for $2.1 million the exclusivity
granted to it under the original operating agreement, with certain limited
exceptions. We believe this will result in greater flexibility for us to enter
into strategic relationships and market our products in those territories where
previously the cooperative members had an exclusive arrangement with us. We
also amended the delivery schedule in the operating agreement, whereby we will
start shipping RCUs in the third calendar quarter of 2002 with deliveries to be
completed by calendar year 2008. The substantial majority of the deliveries are
scheduled to take place in calendar years 2005 to 2008. The schedule also
includes approximately $76 million of purchases of RCUs and $5 million of
purchases of our direct hydrogen products. The agreement provides for
significant reductions in the price of the RCUs over the term of the agreement.
The agreement also calls for quarterly meetings to review the delivery
schedules and to ensure that any changes to deliveries will be made in the best
interests of completing the deliveries on time and in meeting the requirements
of ECO's customers.

     We also expanded our relationship with ECO in April 2002, by entering into
three agreements, a Sales and Marketing Services Agreement, a Test Reporting
and Field Services Agreement and a Memorandum of Agreement (MOA) for a
sustainable fuel cell community project. Under the terms of the Sales and
Marketing Agreement, ECO will work with H Power to identify potential new
markets, applications and distribution channels for our fuel cell products.
Under the terms of the Test Reporting and Field Services Agreement, ECO will
support us in the installation, maintenance and the setting up of the field
service infrastructure to service our fuel cell products. Under the MOA, ECO
will work on the development of a sustainable community that includes the
generation, storage, transmission of hydrogen, and distribution of hydrogen
based fuel cells. We have agreed to pay ECO up to $5.4 million through December
31, 2003, in exchange for the services under these agreements of which $904,000
has been incurred through May 31, 2002. ECO has already started its marketing
efforts nationwide. The success of ECO's marketing plan will depend on its
successful efforts to generate the necessary working capital to finance its
sales efforts and to purchase products from us. In addition, the success of
ECO's marketing program will depend on our ability, within a reasonable period
of time, to reduce the cost of our fuel cell system and increase its efficiency
and reliability, as well as general market acceptance of fuel cells as an
alternative to existing power generation solutions.

     In August 1999, ECO purchased 5,000,000 shares of our common stock
(reflecting a 5-for-1 stock split effected on July 24, 2000) for an aggregate
purchase price of $15,000,000 and as of May 31, 2002, continued to hold
4,750,000 of these shares. In April, 2002, ECO implemented an amended 10b5-1
plan to sell shares of H Power common stock.

     During the year, we installed several of our next generation beta units
for testing purposes in various cooperatives throughout the country. These
locations were chosen based on geography, climatic conditions (e.g.,
temperature and humidity) and traditional load curves. The data obtained from
these test units will be used to further develop our fuel cell size, design and
operational components.

     The shipment of the initial test and evaluation units for the alpha stage
testing was completed in December 2000, at the same time we commenced shipments
of our beta units for evaluation. As we analyzed the test results with ECO, in
July of 2001, we mutually determined to stop shipments of our beta units and to
extend the beta test program to make modifications to the unit to enhance
performance and increase efficiency. In February 2002, we commenced shipments
of next generation beta units to ECO incorporating modifications to the units,
which increased their reliability. As of May 31, 2002, we have completed the
shipments of beta units to ECO. To the extent that our sales to third parties
require us to lower the price of the RCUs that ECO has committed to purchase,
the aggregate purchase price under our ECO agreement will be correspondingly
reduced. ECO's financial ability to perform under the agreement and to purchase
units from us is dependent on our being able to offer timely, reliable and
competitive fuel cells and its ability to raise necessary funding for its
marketing program and to resell the units to its primary customer base, the
rural electric cooperatives.

OUR MARKETING AND TECHNOLOGY DEVELOPMENT ALLIANCES

     We intend to aggressively pursue additional manufacturing, marketing and
distribution alliances, and the following represents some of the significant
relationships that we have established:


                                       8
<PAGE>

     Mitsui & Co., Ltd. In May 2000, we entered into a renewable two-year
distribution arrangement with Mitsui & Co., Ltd. Under the terms of this
arrangement, we granted Mitsui the right to distribute and sell our fuel cell
products in Japan. This agreement has been renewed through May 2003. The terms
and conditions of each purchase and sale of our fuel cell products by and to
Mitsui, if any, will be determined through the negotiation of separate purchase
and sales contracts. In September 2001, we formed H Power Japan, a Japanese
corporation headquartered in Tokyo. Both H Power and Mitsui have a 50%
ownership in the newly created company. H Power Japan's initial activity is to
perform a feasibility and market study for a sales and distribution network in
Japan.

     Ball Aerospace & Technologies Corp. In September 2000, we signed a
memorandum of understanding with Ball Aerospace & Technologies Corp., a
subsidiary of Ball Corporation, whereby H Power will supply fuel cell stacks
capable of supplying between 10 and 500 watts of electricity for Ball's PPS-15,
PPS-50 and PPS-100 portable power systems sold to the U.S. military and others
requiring similar sophisticated power sources.

     SGL Carbon LLC. In October 2000, we entered into a Memorandum of
Understanding with SGL Carbon LLC, to jointly develop cost-effective graphite
plate components customized for use in our PEM fuel cell systems. Although the
MOU has expired, we continue to work closely with SGL in developing and
evaluating the performance of low cost graphite plate components.

     Osaka Gas Co., Ltd. In April 2001, we entered into a second joint study
agreement with Osaka Gas Co., Ltd. to develop alpha units of 500 watt
cogeneration fuel cell systems using our proprietary fuel cell systems and
Osaka Gas' proprietary steam reforming technology. We have completed the
shipments of the alpha units to Osaka gas pursuant to such agreement whereby
they will be field tested in Japan. In June 2002, we entered into a third joint
study agreement to develop beta systems of the 500 watt cogeneration fuel cell
systems. The objective will be to develop and offer one kilowatt and 500 watt
cogeneration systems in Japan where the demand for low power alternative energy
systems is strong.

     Air Products and Chemicals Inc. In January 2001, we entered into two
letters of intent with Air Products and Chemicals Inc., to jointly investigate
forming a business alliance to serve the emerging market for small sub-kilowatt
portable and mobile hydrogen-based fuel cell systems, and to jointly conduct an
analysis and development effort to pursue the market for hydrogen-based fuel
cell power systems used in high-value, critical service telecom back-up power
applications

     Gaz de France. In May 2001, we amended our original memorandum of
understanding with Gaz de France, whereby GDF will be our preferred partner for
the development of fuel cells in France. As part of the amendment to the MOU,
GDF agreed to purchase six of our beta residential cogeneration units. With
GDF's cooperation, we have begun the process of obtaining mandatory
certifications and standards marking necessary for the use and sale of our
products within any European Union member country.

     Naps Systems Oy. In June 2001, we entered into a distribution and
development agreement with Naps Systems Oy, a subsidiary of Fortum Corporation,
located in Finland. Naps Systems will distribute our standard and customized
off-grid fuel cell systems in select Asian and European countries. The
agreement also calls for us and Naps Systems to work toward the further
development of fuel cell products for off-grid use, and both companies will
work toward the marketing and selling of such future products. During fiscal
2002, Naps chose one of our cogeneration systems for a sustainable energy
project in Sweden. This fuel cell system is intended to be the core energy
source for an Environmental Information Center, fueled by stored hydrogen
produced through a photovoltaic solar system combined with an electrolyzer. In
August 2002, Naps Systems ordered five of our H Core 500 systems for
demonstration with their European-based customers.

     PSA Peugeot Citroen. In December 2001, we entered into a joint development
agreement with Peugeot to develop low power fuel cells that will be used in
light duty vans. The 7-kilowatt fuel cells will be used as range extenders to
increase the range an electric powered car. We expect to receive minimum
revenues of $2 million over three years from this agreement.

INTELLECTUAL PROPERTY

     We have a total of 22 patents issued or allowed of which 18 are in the
U.S. and one is in each of Europe, Taiwan, Russia and Singapore. These issued
patents will remain in effect for the next 13 to 17


                                       9
<PAGE>

years. In addition, we currently have nine patent applications pending in the
U.S. alone relating to fuel cell technology containing proprietary features
arising from our development efforts. We also have filed numerous "Document
Disclosures" with the U.S. Patent and Trademark Office in preparation for
submitting corresponding patent applications. We have also accumulated
substantial trade secrets and "know-how" since our inception relating to fuel
cell stacks, fuel cell design, fuel processing technology and assembly, and we
rely on confidentiality agreements to protect many of these trade secrets and
know-how. We believe, however, that our success is substantially dependent on
the knowledge, experience and technical expertise of our employees. In this
regard, all of our employees are required to enter into agreements providing
for confidentiality and the assignment of rights to inventions made by them
while employed by us. These agreements also contain non-competition and
non-solicitation clauses for the term of employment and for one year
thereafter.


COMPETITION

     We compete against existing and emerging technologies in our targeted
markets for stationary and portable applications. We compete primarily on the
basis of reliability, efficiency, cost and environmental considerations.
Competitors that we are aware of who are developing PEM fuel cells include:
Plug Power Inc., International Fuel Cells, a unit of United Technologies Corp.,
Ballard Power Systems Inc., Avista Corp., IdaTech Corporation, Nuvera Fuel
Cells Inc., Hydrogenics Corporation, Toyota Motor Corporation, Sharp
Corporation, Toshiba Corporation and Global Thermoelectric Inc. A number of
major manufacturing and automotive companies also have in-house PEM fuel cell
development efforts. The markets for electricity are intensely competitive.
There are many companies engaged in all areas of traditional and alternative
electric power generation in the United States, Canada and abroad, including,
among others, major electric, oil, chemical, natural gas and specialized
electronic firms, as well as universities, research institutions and foreign
government-sponsored companies. These firms are engaged in forms of power
generation such as solar and wind power, reciprocating diesel engines and
microturbines as well as grid-supplied electricity. Many of these entities have
substantially greater financial, research and development, manufacturing and
marketing resources than we have.

     We also compete with companies that are developing other types of fuel
cells. In addition to PEM fuel cells, phosphoric acid fuel cells, molten
carbonate fuel cells, solid oxide fuel cells and alkaline fuel cells are
generally considered to have viable commercial applications. These fuel cells
differ with regard to cell materials and operating temperature. While all fuel
cell types have potential environmental and efficiency advantages over
traditional power sources, we believe that PEM fuel cells can be manufactured
less expensively and are more efficient and more practical in small-scale
applications.

     We believe that our systems will also compete with other distributed
generation technologies, including microturbines, solar and wind powered
systems and engine-generators, and with current conventional power sources such
as batteries and on-grid electricity. We believe that for certain premium power
markets, our fuel cells will be quieter, environmentally cleaner, more
efficient and less expensive than other distributed generation technologies.
However, the cost of electricity provided through the grid is substantially
less than the cost of electricity provided by our fuel cells, and it may be
several years before the cost of fuel cells decline to the level necessary to
compete with the grid.


GOVERNMENT REGULATION

     We do not believe that we will be subject to existing federal and state
regulatory commissions governing traditional electric utilities and other
regulated entities. We anticipate, however, that our products and their
installation will be subject to oversight and regulation at the local level in
accordance with state and local ordinances relating to building codes, safety,
pipeline connections and related matters. Any government regulation may depend,
in part, upon whether a system is placed outside or inside a home. Product
safety standards have been established covering the overall fuel cell system
(ANSI Z21.83) and the power conversion electronics (UL 1741). Our product is
being designed in compliance with these standards. At this time, we do not know
which jurisdictions, if any, will impose regulations upon our products or
installation. We also do not know the extent to which any existing or new
regulations may impact our ability to distribute, install and service our
products. Once our products reach the


                                       10
<PAGE>

commercialization stage and we begin distributing our systems to our early
target markets, federal, state or local government entities or competitors may
seek to impose regulations. We intend to encourage the standardization of
industry codes to avoid having to comply with differing regulations on a
state-by-state or locality-by-locality basis.


EMPLOYEES

     As of May 31, 2002, we employed 183 persons. None of our employees are
represented by a labor union. We consider our relationships with our employees
to be satisfactory. All key employees have signed confidentiality and
non-competition agreements. These agreements prohibit our employees from
disclosing any of our confidential information at any time during or after
their employment with us and prohibit them from competing with us for one year
following termination of their employment.


RISK FACTORS

     We believe that the occurrence of any or some combination of the following
factors could have a material adverse effect on our business, financial
condition and results of operations.


WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL NEEDED TO OPERATE AND GROW
OUR BUSINESS, THEREBY REQUIRING US TO SCALE BACK OR CEASE OPERATIONS.

     Our capital requirements in connection with our development and commercial
activities have been and will continue to be significant. We will require
substantial additional funds to continue the research, development and testing
of our technologies and products, to obtain patent protection relating to our
technologies when appropriate, and to manufacture and market our products. We
believe that we will need to raise additional funds to achieve
commercialization of our products. There is no assurance that any additional
financing will be available on commercially attractive terms, in a timely
fashion, in sufficient amounts, or at all. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our then
current stockholders will be reduced. If adequate funds are not available, we
may have to scale back our operations, including our product development,
manufacturing and marketing activities, all of which could cause us to lose
both customers and market share and ultimately cease operations.

     We anticipate incurring substantial losses over at least the next several
years and believe that our current cash balances will provide sufficient
capital to fund operations at least through May 31, 2003.


WE MAY NEVER SUCCESSFULLY COMPLETE THE RESEARCH AND DEVELOPMENT REQUIRED TO
COMMERCIALIZE OUR FUEL CELL SYSTEMS.

     We are currently in the research and development stage of our residential
cogeneration fuel cell systems. We have shipped and installed to ECO and other
customers a limited number of alpha and beta fuel cell units for testing
purposes. We must significantly decrease the costs of our fuel cell systems and
improve their overall efficiency in order to begin viable commercialization of
our fuel cell products. Although we have entered into an agreement with ECO for
the sale of our residential cogeneration fuel cell products, we have not yet
produced a commercially viable fuel cell system. We may not successfully
complete our research and development program and accordingly we may never have
commercial sales of our residential cogeneration fuel cell products.


WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION, WE EXPECT FUTURE LOSSES AND WE
MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.

     We have incurred net losses each year since our inception in 1989 and had
an accumulated loss of approximately $95 million as of May 31, 2002. We expect
to continue to incur net losses at least through our fiscal year 2005 and these
losses may be substantial. To implement our business strategy, we will have to
incur a high level of fixed operating expenses and we will continue to incur
considerable research and development expenses and capital expenditures.
Further, we expect the cost to produce our initial products to be higher than
their sales price. Accordingly, if we are unable to generate substantial
revenues


                                       11
<PAGE>

and positive cash flows we will not achieve profitability. Even if we do
achieve profitability, we may not be able to sustain or increase our
profitability on a quarterly or annual basis. Our ability to generate future
revenues will depend on a number of factors, many of which are beyond our
control. These factors include the rate of market acceptance of our products,
regulatory developments and general economic trends. Due to these factors, we
cannot anticipate with any degree of certainty what our revenues, if any, will
be in future periods. You have limited historical financial data and operating
results with which to evaluate our business and our prospects. As a result, you
should consider our prospects in light of the early stage of our business in a
new and rapidly evolving market.


OUR DIRECT HYDROGEN PRODUCTS REPRESENT AN EMERGING TECHNOLOGY WHICH MAY GIVE
RISE TO PROBLEMS REGARDING SUPPLY OF COMPONENT PARTS, COMMERCIAL ACCEPTANCE AND
GOVERNMENT REGULATION.

     Our direct hydrogen products, such as the EPAC operating system, are
fueled in part through compressed hydrogen cylinders. Distribution channels for
some of our intended markets are in their infancy, which may make it difficult
or expensive for our customers to obtain hydrogen for use with our products,
which could affect the marketability and profitability of our direct hydrogen
products. Distribution of hydrogen cylinders is currently subject to specific
regulation by the U.S. government. Should the government decide to impose
changes in the regulations on the handling of compressed hydrogen cylinders,
such regulations may affect the cost or availability of such cylinders, which
could affect the marketability and profitability of our direct hydrogen
products. Building codes and standards relating to the use of hydrogen may make
it expensive or impossible for our customers to use hydrogen as a fuel in some
of our intended markets. Any changes to building codes and standards relating
to the use of hydrogen could make it more expensive or impossible for our
customers to use hydrogen as a fuel in some of our intended markets.

     As our direct hydrogen products contain emerging technologies, there are
currently few competitors with similar product offerings. The inability of
consumers to compare our products to other products may negatively affect
consumer confidence in our products, which would accordingly have negative
effects on our profitability and marketability. In addition our product uses
components which incorporate new technology, it is possible that these
components might be in short supply or may be discontinued by our current
suppliers.


OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE ARE NOT
ABLE TO DEMONSTRATE COMPLIANCE WITH THE CONTINUED LISTING REQUIREMENTS.

     Our common stock is currently listed on The Nasdaq National Market under
the symbol "HPOW." However, there is a significant risk that we may be delisted
from The Nasdaq National Market. In order for our common stock to continue to
be quoted on The Nasdaq National Market, we must satisfy various listing
maintenance standards established by Nasdaq. Under these listing maintenance
standards, if the closing bid price of our common shares is under U.S. $1.00
per share for a specified period of time, Nasdaq may delist our common shares
from trading on The Nasdaq National Market.

     Nasdaq sent us a letter dated August 6, 2002 in which it informed us that
we no longer meet Nasdaq's minimum $1.00 per share requirement. The letter gave
us 90 days within which we can regain compliance with this requirement. In the
event that we are unable to do so, we can request that we be moved to the
Nasdaq SmallCap Market, and we will be granted an additional 90 days to come
into compliance with the maintenance requirements for the Nasdaq SmallCap
Market. In the event that our common stock is eventually delisted from the
Nasdaq, trading in our common stock would thereafter be conducted in, the
over-the-counter markets in the so-called "pink sheets" or the OTC Bulletin
Board. The delisting of our common stock from The Nasdaq National Market would
result in a material reduction in some or all of the following, each of which
may have a material adverse effect on our investors:

o    the liquidity of our common stock;

o    the market price of our common stock;

o    the number of institutional investors that will consider investing in our
     common stock;


                                       12
<PAGE>

o    the number of investors in general that will consider investing in our
     common stock;

o    the number of market makers in our common stock;

o    the availability of information concerning the trading prices and volume of
     our common stock;

o    the number of broker-dealers willing to execute trades in shares our common
     stock; and

o    our ability to obtain financing for the continuation of our operations.


IF OUR SECURITIES WERE DELISTED FROM THE NASDAQ NATIONAL MARKET, THEY MAY BE
TREATED AS "PENNY STOCKS", WHICH WOULD FURTHER REDUCE THE LIQUIDITY IN OUR
COMMON STOCK AND MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.

     If our common stock were delisted from The Nasdaq National Market, it
could become subject to the SEC's "Penny Stock" rules. "Penny stocks" generally
are equity securities with a price of less than $5.00 per share that are not
registered on certain national securities exchanges or quoted on the Nasdaq
system. Broker-dealers dealing in our common stock would then be subject to the
disclosure rules for transactions involving penny stocks which require the
broker-dealer to determine if purchasing our common stock is suitable for a
particular investor. The broker-dealer must also obtain the written consent of
purchasers to purchase our common stock. The broker-dealer must also disclose
the best bid and offer prices available for our stock and the price at which
the broker-dealer last purchased or sold our common stock. These additional
burdens imposed upon broker-dealers may discourage them from effecting
transactions in our common stock, which could make it difficult for investors
to sell their shares and, hence, limit the liquidity of our common stock.
Certain institutions and investors will not invest in penny stocks.


ANY ADVERSE CHANGE IN OUR RELATIONSHIP WITH ECO FUEL CELLS, LLC WOULD DELAY OUR
ABILITY TO GENERATE REVENUES.

     We believe that a substantial portion of our revenues over the next two to
three years will be derived from sales of our RCUs and direct hydrogen systems
to ECO. However, we have not yet fully developed and produced any products we
have agreed to sell to ECO. Economic and technical difficulties may prevent us
from completing development of all of our products.

     We are heavily dependent on our relationship with ECO to effect the
development, sale and distribution of our RCU products. To date, ECO is the
only significant domestic entity with whom we have entered into a distribution
agreement for any of our products. In addition, our relationship with ECO
provides for extensive testing arrangements for our prototype fuel cells, and
the feedback we have received and continue to receive pursuant to our ECO
relationship is significant in the research and development aspect of our
products. Any adverse change in our relationship with ECO would have a
detrimental effect on our ability to generate revenues for sales of our fuel
cell products, not only with regard to sales to ECO but also with regard to the
development of our products for sales to other customers.


THE INABILITY OF ECO TO OBTAIN FUNDING NECESSARY TO MAINTAIN OPERATIONS WOULD
AFFECT OUR REVENUES UNDER OUR AGREEMENT WITH ECO.

     ECO's financial ability to perform under its agreement with us is
dependent on its ability to purchase RCUs and other products from us and resell
such units to its customer base. This in turn depends on our ability to produce
in a timely fashion, reliable and competitive fuel cells for ECO's customers.
Also, in order to provide additional funding for its marketing and sales
programs, ECO has implemented a 10b5-1 plan to sell shares of our common stock.
Should ECO be unable to sell its shares of our common stock at adequate prices
or within a reasonable period of time, it is possible that ECO may encounter
liquidity problems, which may affect its ability to perform under our
agreement, which would in turn affect the revenues we would receive pursuant to
the agreement.


WE MAY NOT BE ABLE TO DEVELOP THE NECESSARY TECHNOLOGY TO INTRODUCE AND MARKET
OUR PRODUCTS IN A TIMELY FASHION, IF AT ALL.

     Our product and technology development efforts are subject to
unanticipated and significant delays, expenses and technical or other problems,
as well as the possible lack of funding to complete this


                                       13
<PAGE>

development. Our success will depend upon our products and technologies meeting
acceptable cost and performance criteria, and upon their timely introduction
into the marketplace. None of our proposed products and technologies may ever
be successfully developed, and even if developed, they may not actually perform
as designed. Failure to develop or significant delays in the development of our
products and technology would have a material adverse effect on our ability to
both sell our products and to generate sufficient cash to achieve
profitability.


FAILURE OF OUR FIELD TESTS COULD NEGATIVELY IMPACT DEMAND FOR OUR PRODUCTS.

     We are currently field testing a number of our products. At the end of
fiscal 2002, beta stage RCUs were undergoing field tests. We have and may
continue to encounter problems and delays during these field tests for a number
of reasons, including the failure of our technology or the technology of third
parties, as well as our failure to maintain and service our prototypes
properly. Accordingly, any further delays, problems or perceived problems with
our field tests could materially harm our reputation and impair market
acceptance of, and demand for, our products.


ALTERNATIVES TO OUR TECHNOLOGY COULD RENDER OUR PRODUCTS OBSOLETE PRIOR TO
INITIAL COMMERCIAL SALES OF OUR PRODUCTS.

     PEM fuel cells represent one of a variety of alternative energy products
being developed as a supplement to the electric grid that have potential
residential, commercial and industrial applications. Other such products
include solar power, wind power and other types of fuel cell technologies.
Improvements to the existing electric transmission system are also being
implemented. Technological advances in alternative energy products or other
fuel cell technologies, and improvements in the electric grid may render our
fuel cell systems obsolete prior to commercialization.


A MASS MARKET FOR OUR FUEL CELL PRODUCTS MAY NEVER DEVELOP.

     Our commercialization plans are dependent upon a market developing for our
fuel cell products, particularly in rural communities. Fuel cell systems
represent an emerging technology, and we cannot be sure that potential
customers will adopt fuel cells as a replacement for traditional power sources.
The development of a market for our fuel cell products may be affected by many
factors that are out of our control, including the cost competitiveness of our
products, the future costs of fuels used by our products, consumer reluctance
to try a new product, the pace of utility deregulation nationwide which could
affect the market for distributed generation, environmental requirements, and
the emergence of newer, more competitive technologies and products. If a
sufficient market fails to develop or develops more slowly than we anticipate,
we may be unable to recover the losses we will have incurred in the development
of our fuel cell products and may never achieve profitability. Our fuel cell
products are currently more expensive than other proven alternatives for power
generation. Failure to reduce the cost of our fuel cells may also slow the
development of a sufficient market for our products and, therefore, have a
material adverse effect on our results of operations.


OUR COST REDUCTION PROGRAM MAY NOT SUCCEED OR MAY BE SIGNIFICANTLY DELAYED, AND
WE MAY THEREFORE NOT BE ABLE TO MANUFACTURE OR COMMERCIALIZE OUR PRODUCTS IN A
COST-EFFECTIVE MANNER.

     We have begun a cost reduction program to reduce the cost of our products.
The current costs of production for our products prohibit these products from
being commercially viable. A failure by us to lower our cost structure would
have an adverse effect on our commercialization plans and, therefore, our
business, prospects, results of operations and financial condition. We expect
the production costs of our initial commercial products to be higher than their
sales prices.

     Most of our product sales to date have been limited to demonstration and
prototype models. We may not be able to produce or commercialize any of our
products in a cost-effective manner, and, if produced, we may not be able to
successfully market these products. There can be no assurance that sufficiently
high production levels will ever occur or that sales prices will ever exceed
production costs. If we are unable to produce fuel cell products at competitive
prices relative to alternative products, our potential customers will be
unlikely to buy our products.


                                       14
<PAGE>

WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE THE EXPANSION OF OUR OPERATIONS.

     The opening of our new manufacturing facility in July 2001 placed
significant demands on our managerial, technical, financial and other
resources. We will be required to make significant investments in our
engineering and logistics systems, financial and management information systems
and to retain, motivate and effectively manage our employees. There can be no
assurance that our management skills and systems currently in place will enable
us to implement our strategy or enable us to attract and retain skilled
management and production personnel. Our failure to manage our growth
effectively or to implement our strategy would have a material adverse effect
on our ability to produce products and meet our contractual obligations.


WE MAY NOT BE ABLE TO MEET OUR ADJUSTED PRODUCT DEVELOPMENT AND
COMMERCIALIZATION MILESTONES.

     We have established adjusted product development and commercialization
milestones and a timeline for achieving development goals related to
technology, design improvements and sub-system cost reduction goals. Delays and
missed milestones have had and may continue to have a material impact on our
commercialization schedule. If we continue to experience delays in meeting our
development goals or our systems experience technical defects or if we are
unable to meet cost or performance goals, including system efficiency, gross
power output, useful life and reliability, our commercialization commencement
schedule could be delayed beyond the end of calendar 2002. In such event, ECO
and other potential purchasers of our commercial systems may choose alternative
technologies and any delays could allow potential competitors to gain market
advantages.


WE HAVE NO EXPERIENCE MANUFACTURING FUEL CELLS ON A COMMERCIAL BASIS.

     While we have successfully produced prototype models of our fuel cells, we
have focused primarily on research and development and have no experience
manufacturing fuel cell systems on a commercial basis. In July 2001, we opened
a 90,000 square foot manufacturing facility and we are continuing to develop
our manufacturing capabilities and processes. We do not know whether or when we
will be able to develop efficient manufacturing capabilities and processes that
will enable us to meet the quality, price, engineering, design and production
standards or production volumes required to successfully market our fuel cell
systems at lower production costs. Even if we are successful in developing our
manufacturing capabilities and processes, we may not be able to meet our
commercialization schedule or to satisfy the requirements of our distributors
or customers.


BECAUSE WE DEPEND ON THIRD-PARTY SUPPLIERS, WE MAY EXPERIENCE DELAYS IN
RECEIVING KEY MATERIALS AND COMPONENTS NECESSARY TO PRODUCE OUR FUEL CELL
SYSTEMS.

     We depend on third parties for the manufacture and assembly of materials
and components used to make our products. If any of our suppliers are unable or
unwilling to provide us with materials and components on commercially
reasonable terms, or at all, delays in identifying and contracting for
alternative sources of supply would adversely affect our ability to develop,
manufacture and market our products. In addition, some of these materials and
components, including the polymer electrolyte membranes and bipolar plates, are
purchased from a single or limited number of supply sources.


WE MAY NOT BE ABLE TO SELL OUR FUEL CELL SYSTEMS IF THEY ARE NOT COMPATIBLE
WITH THE PRODUCTS OF THIRD-PARTY MANUFACTURERS OR OUR POTENTIAL CUSTOMERS.

     Our success will depend upon our ability to make our products compatible
with the products of third-party manufacturers. In addition, our mobile and
portable products will be successful only if our potential customers redesign
or modify their existing products to fully incorporate our products and
technologies. Our failure to make our products and technologies compatible with
the products of third-party manufacturers or the failure of potential customers
to redesign or make necessary modifications to their existing products to
accommodate our products would cause our products to be significantly less
attractive to customers.


                                       15
<PAGE>

THE FUELS ON WHICH OUR FUEL CELL PRODUCTS RELY MAY NOT BE READILY AVAILABLE ON A
COST-EFFECTIVE BASIS.

     Our fuel cell products require oxygen and hydrogen to operate. While
ambient air supplies the necessary oxygen, our fuel cells derive hydrogen from
fuels such as natural gas, propane, methanol and other petroleum products. Even
if these fuels are available to us, if their prices are such that electricity
produced by our systems would cost more than electricity provided through the
grid, potential users would have less of an economic incentive to purchase our
units.


WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN A HIGHLY COMPETITIVE MARKET.

     The development and marketing of fuel cells and fuel cell systems is
extremely competitive. In many cases, we compete directly with alternative
energy and entrenched power-generation and power-storage technologies. In
addition, a number of firms throughout the world have established PEM fuel cell
development programs. Competitors range from development stage companies to
major domestic and international companies, many of which have:

o    substantially greater financial, technical, marketing and human resource
     capabilities;

o    established relationships with original equipment manufacturers;

o    name-brand recognition; and

o    established positions in the markets that we have targeted for penetration.

     These or other companies may succeed in developing and bringing to market
products or technologies that are more cost-effective than those being
developed by us or that would render our products and technology obsolete or
non-competitive in the marketplace.


WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

     Our ability to compete effectively will depend, in part, on our ability to
maintain the exclusive ownership of our technology and manufacturing processes
through a combination of patent and trade secret protection, non-disclosure
agreements and other arrangements. Patents may not be issued under pending
applications and any issued patents that we hold may not provide adequate
protection for our products or processes. Moreover, patent applications filed
in foreign countries are subject to laws, rules and procedures that differ from
those of the United States and any resulting patents may be difficult to
enforce.

     There can be no assurance that our competitors will not either
independently develop proprietary information that is the same or similar to
ours or obtain access to our proprietary information. In addition, there can be
no assurance that we would prevail if challenges to our intellectual property
rights are asserted by third parties against us. We could incur substantial
costs defending patent infringement suits brought by others and prosecuting
patent infringement suits against third party infringers. Moreover, some
foreign countries provide significantly less patent protection than the United
States. Competitors' products may infringe upon our patents and the cost of
protecting our rights may be substantial, if not cost prohibitive, thereby
undermining our ability to protect our products effectively.

     We rely on confidentiality agreements with our employees and third parties
to protect our unpatented proprietary information, know-how and trade secrets
but we have no effective means to enforce compliance with the terms of these
agreements.


GOVERNMENT REGULATION COULD IMPOSE BURDENSOME REQUIREMENTS AND RESTRICTIONS
THAT COULD IMPAIR DEMAND FOR OUR STATIONARY FUEL CELL PRODUCTS.

     Stationary power systems, such as our RCUs, cannot be operated without
permits in some of the markets in which we will be marketing and selling our
products. At this time, we do not know which jurisdictions will impose
regulations upon our stationary fuel cell products as these regulations may
depend, in part, upon whether a fuel cell system is placed outside or inside a
home. In addition, our stationary fuel cell products and their installation may
be subject to oversight and regulation at the local


                                       16
<PAGE>

level in accordance with state and local ordinances relating to building codes,
safety, pipeline connections and related matters. We also do not know the
extent to which any existing regulations may impact our ability to distribute,
install and service our stationary fuel cell products. Once our stationary fuel
cell products reach the commercialization stage and we begin distributing our
systems to our target early markets, federal, state or local government
agencies may seek to impose regulations. Any government regulation of our
stationary fuel cell products, whether at the federal, state or local level,
including any regulations relating to installation and servicing of these
products, may increase our costs and the price of our systems, and may have a
negative impact on our revenue and profitability.


ANY ACCIDENTS INVOLVING THE FLAMMABLE FUELS USED WITH OUR PRODUCTS COULD IMPAIR
THEIR MARKET ACCEPTANCE.

     Our fuel cell products use hydrogen which is typically generated from
gaseous and liquid fuels, such as propane, natural gas or methanol in a process
known as reforming. While our fuel cell products do not use these fuels in a
combustion process, natural gas and propane are flammable fuels that could leak
into a residence or commercial location and combust if ignited by another
source. Since our products have not yet gained widespread market acceptance,
any accidents involving our systems or other fuel cell-based products could
materially impede demand for our products. In addition, we may be held
responsible for damages beyond the scope of our insurance coverage.


WE COULD BE LIABLE FOR ENVIRONMENTAL DAMAGES RESULTING FROM OUR RESEARCH,
DEVELOPMENT AND MANUFACTURING OPERATIONS.

     Our business exposes us to the risk of harmful substances escaping into
the environment, resulting in personal injury or loss of life, damage to or
destruction of property, and natural resource damage. Depending on the nature
of the claim, our current insurance policies may not adequately reimburse us
for costs incurred in settling environmental damage claims, and in some
instances, we may not be reimbursed at all. Our business is subject to numerous
federal, state and local laws, regulations and policies that govern
environmental protection. These laws and regulations have changed frequently in
the past and it is reasonable to expect additional changes in the future. Our
operations may not comply with future laws and regulations and we may be
required to make significant unanticipated capital and operating expenditures.
If we fail to comply with applicable environmental laws and regulations,
governmental authorities may seek to impose fines and penalties on us or to
revoke or deny the issuance or renewal of operating permits and private parties
may seek damages from us. Under those circumstances, we might be required to
curtail or cease operations, conduct site remediation or other corrective
action, or pay substantial damage claims.

UTILITY COMPANIES COULD PLACE BARRIERS ON OUR ENTRY INTO THE MARKET FOR
RESIDENTIAL POWER, WHICH WOULD REDUCE DEMAND FOR OUR PRODUCTS.

     Utility companies often charge fees to industrial customers for using less
electricity, using the grid for backup purposes only or disconnecting from the
grid altogether. Though these fees are not currently charged to residential
users, it is possible that utility companies could charge similar fees to
residential customers in the future. These fees could increase the cost to
residential customers of using our stationary power products, making them less
cost-effective and less attractive to potential customers.

BECAUSE OUR MAJOR CUSTOMER HAS A REPRESENTATIVE ON OUR BOARD OF DIRECTORS,
CONFLICTS OF INTEREST MAY ARISE.

     A representative of ECO is currently a member of our Board of Directors
and we have agreed to use our best efforts to nominate one designee of ECO at
each election of our Board of Directors. ECO is our principal customer and
strategic partner in the marketing and sales of our RCUs. The presence of a
representative of our major customer on our Board could influence certain
decisions and present a conflict of interest.


WE MAY BECOME SUBJECT TO RISKS INHERENT IN INTERNATIONAL OPERATIONS INCLUDING
CURRENCY EXCHANGE RATE FLUCTUATIONS, TARIFF REGULATIONS AND LEGAL REQUIREMENTS
GENERALLY.

     If we sell or license our products or technologies outside the United
States, we will be subject to the risks associated with fluctuations in
currency exchange rates. We do not intend to enter into any hedging


                                       17
<PAGE>

or other similar agreements or arrangements to protect us against any of these
currency risks. We also may be subject to tariff regulations and requirements
for export licenses, particularly with respect to the export of certain
technologies, unexpected changes in regulatory requirements, longer accounts
receivable requirements and collections, difficulties in managing international
operations, potentially adverse tax consequences, restrictions on repatriation
of earnings and the burdens of complying with a wide variety of foreign laws.

     We have limited experience developing, and no experience manufacturing,
our products to comply with the commercial and legal requirements of
international markets. Our success in international markets will depend, in
part, on our ability to secure relationships with foreign sub-distributors and
our ability to manufacture products that meet foreign regulatory and commercial
requirements. Additionally, our planned international operations are subject to
other inherent risks, including potential difficulties in enforcing contractual
obligations and intellectual property rights in foreign countries.


OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO BE VOLATILE IN THE FUTURE.

     Our quarterly operating results are likely to vary significantly in the
future. Fluctuations in our quarterly financial performance may result from,
for example:

o    unevenness in demand and orders for our products;

o    significant short-term capital expenses as we develop our manufacturing
     processes and facilities;

o    a shortage of the raw materials used in the production of our fuel cell
     systems; and

o    difficulties with our manufacturing operations.

     Because of these anticipated fluctuations, our sales and operating results
in any fiscal quarter are likely to be inconsistent, may not be indicative of
our future performance and may be difficult for investors to properly evaluate.



OUR SUCCESS DEPENDS ON ATTRACTING AND RETAINING KEY PERSONNEL.

     We have attracted a highly skilled management team and specialized
workforce, including scientists, engineers, researchers, manufacturing and
marketing professionals. Our future success is dependant in part on attracting
and retaining qualified management and technical personnel. Our inability to
hire qualified personnel on a timely basis, or the departure of key employees,
could materially and adversely affect our development and commercialization
plans and therefore, our business, prospects, results of operations and
financial condition.


OUR STOCK PRICE HAS BEEN AND COULD REMAIN VOLATILE.

     The market price for our common stock has been and may continue to be
volatile and subject to extreme price and volume fluctuations in response to
market and other factors. The market price of our common stock can be impacted
by variations in our actual and anticipated results, changes in our earnings
estimates by research analysts, our failure to meet analysts' performance
expectations and lack of liquidity. In addition, stock markets, particularly
The Nasdaq National Market, have experienced extreme price and volume
fluctuations, and the market prices of securities of technology companies have
been highly volatile. These fluctuations are often unrelated to operating
performance and may adversely affect the market price of our common stock.


BECAUSE WE DO NOT INTEND TO PAY ANY DIVIDENDS, STOCKHOLDERS MUST RELY ON STOCK
APPRECIATION FOR ANY RETURN ON THEIR INVESTMENT IN OUR COMMON STOCK.

     We have not paid any dividends on our common stock and we do not intend to
declare and pay any dividends on our common stock. Earnings, if any, are
expected to be retained by us to finance and expand our business.


                                       18
<PAGE>

ITEM 2. PROPERTIES


     Our principal executive offices were recently relocated to Belleville, New
Jersey where we lease through two separate leases approximately 27,000 square
feet in two buildings in an industrial park. Each of these leases was due to
expire in July 2002 and has been extended to July 2003 with an option to renew
for an additional year to July 2004. In January 2001, we entered into a lease
for a 90,000 square foot manufacturing facility in Monroe, North Carolina. This
lease expires in ten years from date of occupancy with two successive five-year
renewal options. In June 2001, HPEC leased approximately 28,000 square feet in
an industrial park near Montreal which expires in May 2011 with an option to
renew for an additional five years. HPEC also leases an additional 2,900 square
feet of manufacturing space near Montreal, which expires in March 2003.


ITEM 3. LEGAL PROCEEDINGS


     We are not a party to any material pending legal proceedings, nor is any
of our property, including intellectual property, the subject of any material
pending legal proceedings.


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



     None.


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


     Market Information. Our common stock is traded on the Nasdaq National
Market under the symbol "HPOW". As of May 31, 2002, we had 362 stockholders of
record. However management believes that a significant number of shares are
held by brokers under a "nominee name" and that the actual number of beneficial
shareholders exceeds 18,000. The following table sets forth the high and low
last reported sale prices for the common stock for each fiscal quarter since
August 8, 2000, the effective date of our initial public offering.




<TABLE>
<CAPTION>
                                                 CLOSING SALES PRICES
                                              --------------------------
                                                  HIGH           LOW
<S>                                              <C>           <C>
2000
  1st Quarter (from August 8, 2000) .........    $28.50        $12.625
  2nd Quarter ...............................    $35.938       $ 5.25
2001
  3rd Quarter ...............................    $11.625       $ 5.25
  4th Quarter ...............................    $16.00        $ 5.25
  1st Quarter ...............................    $14.25        $ 2.75
  2nd Quarter ...............................    $ 5.30        $ 2.58
2002
  3rd Quarter ...............................    $ 4.43        $ 2.23
  4th Quarter ...............................    $ 2.95        $ 1.20
</TABLE>

     Dividend Policy. We have never declared or paid cash dividends on our
common stock and do not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of dividends will depend
upon capital requirements and limitations imposed by our credit agreements, if
any, and such other factors as our Board of Directors may consider.


EQUITY COMPENSATION PLAN INFORMATION


     The following table gives information about our common stock that may be
issued upon exercise of (1) options granted pursuant to our 2000 Stock Option
Plan and (2) options granted pursuant to equity compensation plans not approved
by security holders as of May 31, 2002.


                                       19
<PAGE>


<TABLE>
<S>                     <C>                          <C>                       <C>
  PLAN CATEGORY          NUMBER OF SECURITIES         WEIGHTED-AVERAGE          NUMBER OF SECURITIES
                         TO BE ISSUED UPON            EXERCISE PRICE OF         REMAINING AVAILABLE FOR
                         EXERCISE OF OUTSTANDING      OUTSTANDING OPTIONS,      FUTURE ISSUANCE UNDER
                         OPTIONS, WARRANTS AND        WARRANTS AND RIGHTS       EQUITY COMPENSATION
                         RIGHTS                                                 PLANS (EXCLUDING
                                                                                SECURITIES REFLECTED IN
                                                                                COLUMN (a))

                                      (A)                       (B)                          (C)
  Equity compensation          1,591,845                    $ 9.65                    2,158,155
  plans approved by
  security holders
  Equity compensation          3,190,625                    $ 7.04                      N/A
  plans not approved by
  security holders

                               ---------                    ------                    ---------
  TOTAL                        4,782,470                    $ 7.91                    2,158,155
                               =========                    ======                    =========
</TABLE>

   (1) Includes option grants to the following parties as follows:

   a. Options to purchase 500,000 shares of Common Stock, granted in July
   1999, which became exercisable in full on the date of grant and which
   expire five years from the date of grant, granted to Norman Rothstein, a
   former director and former officer of the Company.

   b. Options to purchase 300,000 shares of Common Stock, granted in April
   2000, which became exercisable in full on the date of grant and which
   expire five years from the date of grant, granted to Mr. Rothstein.

   c. Options to purchase 500,000 shares of Common Stock, granted in July
   1999, which became exercisable in full on the date of grant and which
   expire five years from the date of grant, granted to Frederick Entman, a
   former director and former officer of the Company.

   d. Options to purchase 300,000 shares of Common Stock, granted in April
   2000, which became exercisable in full on the date of grant and which
   expire five years from the date of grant, granted to Mr. Entman.

   e. Options to purchase 500,000 shares of Common Stock granted to H. Frank
   Gibbard, Chief Executive Officer and a director of the Company, in December
   1999, 50% of which became exercisable in October 2000 and the remaining 50%
   of which became exercisable in October 2001, and which expire five years
   from the date of grant.

   f. Options to purchase 15,625 shares of Common Stock granted to Arthur
   Kaufman, Chief Technology Officer of the Company, in March 2000, 33 1/3% of
   which became exercisable on the date of grant, and the remaining 66 2/3% of
   which shall become exercisable in two annual installments starting in March
   2001 and which expire five years from the date of grant.

   g. Options to purchase 225,000 shares of Common Stock granted to Thomas
   Michael, Vice President -- Administration of the Company, in December 1999,
   which shall become exercisable in three annual installments starting in
   October 2000, and which expire five years from the date of grant.

   h. Options to purchase (i) 250,000 shares of Common Stock granted in
   December 1999, which shall become exercisable in three annual installments
   starting in December 2000 and (ii) 125,000 shares of Common Stock granted
   in February 2000, which shall become exercisable in three annual
   installments starting in December 2000, and which expire in December 2004,
   granted to William Zang, Chief Financial Officer and a director of the
   Company.


                                       20

<PAGE>


   i. Options to purchase 125,000 shares of Common Stock granted to Jean-Guy
   Chouinard, Vice-President Business Development of H Power Enterprises of
   Canada, Inc., granted in December 1999, 33 1/3% of which became exercisable
   on the date of grant, and the remaining 66 2/3% of which shall become
   exercisable in two annual installments starting in December 2000, and which
   expire five years from the date of grant.

   j. Options to purchase 100,000 shares of Common Stock granted to Thomas
   Russo, a former director of the Company, granted in July 1999, which became
   exercisable in full on the date of grant, and which expire in July 2004.

   k. Options to purchase 250,000 shares of Common Stock granted to NBG
   Technologies, a Company controlled by members of Mr. Rothstein's family,
   granted in March 2000, which became exercisable in full on the date of
   grant and which expire five years from the date of grant.


     These option grants have been made to officers, directors and consultants
and have been generally granted with an exercise price equal to the fair market
value of the Common Stock on the date of grant.



     USE OF PROCEEDS


     During the year ended May 31, 2001, net proceeds, after underwriting
commissions and additional expenses, of approximately $102 million were
received in conjunction with the Company's initial public offering of its
securities pursuant to Registration Statement (Registration No. 333-34234) on
Form S-1, declared effective by the Securities and Exchange Commission on
August 8, 2000. As of May 31, 2002, $44 million has been used to fund operating
activities and $9.4 million has been used to fund capital expenditures for
plant and equipment. The remainder of the net proceeds are invested in a
variety of investment grade securities, including money market funds and
government and corporate obligations with maturities of less than one year.


                                       21
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA


     The selected financial data set forth below as of and for the years ended
May 31, 2002, 2001, 2000, 1999 and 1998 have been derived from financial
statements, including those set forth elsewhere in this annual report on Form
10-K, audited by PricewaterhouseCoopers LLP, independent accountants. The
following should be read in conjunction with the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
annual report on Form 10-K:


<TABLE>
<CAPTION>
                                                                  FISCAL YEAR ENDED MAY 31,
                                                                         (UNAUDITED)
                                               ----------------------------------------------------------------
                                                    2002          2001         2000         1999        1998
                                               -------------- ------------ ------------ ----------- -----------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>            <C>          <C>          <C>         <C>
STATEMENT OF OPERATIONS
 DATA:
 Revenues:
 Products ....................................   $  1,820      $   1,474    $     677    $    501    $     99
 Contracts ...................................        756          2,169        3,003         517         619
                                                 --------      ---------    ---------    --------    --------
 Total revenues ..............................      2,576          3,643        3,680       1,018         718
                                                 --------      ---------    ---------    --------    --------
OPERATING EXPENSES:
 Cost of revenues--products ..................      3,613          2,499          848         614         355
 Cost of revenues--contracts .................        568          2,994        2,609         466         436
 Research and development ....................     18,905         13,466        5,339       3,051       2,813
 Selling, general and administrative .........      9,158         11,846       12,565       3,813       3,514
 Other costs .................................        677             --           --          --          --
                                                 --------      ---------    ---------    --------    --------
 Total operating expenses ....................     32,921         30,805       21,361       7,944       7,118
                                                 --------      ---------    ---------    --------    --------
Loss from operations .........................    (30,345)       (27,162)     (17,681)     (6,926)     (6,400)
Interest and other income, net ...............      2,435          5,011          746         182         723
Interest expense .............................         (5)            --          (77)        (22)        (41)
                                                 --------      ---------    ---------    --------    --------
 Net loss ....................................   $(27,915)     $ (22,151)   $ (17,012)   $ (6,766)   $ (5,718)
                                                 ========      =========    =========    ========    ========
 Net loss attributable to common
   stockholders ..............................   $(27,915)     $ (22,192)   $ (17,222)   $ (6,976)   $ (5,928)
                                                 ========      =========    =========    ========    ========
 Loss per share, basic and diluted ...........   $  (0.52)     $   (0.44)   $   (0.49)   $  (0.24)   $  (0.20)
                                                 ========      =========    =========    ========    ========
 Weighted average shares outstanding,
   basic and diluted .........................     53,853         50,415       34,879      29,015      29,011
</TABLE>


<TABLE>
<CAPTION>
                                                                     AS OF MAY 31,
                                                                      (UNAUDITED)
                                               ---------------------------------------------------------
                                                  2002       2001       2000        1999        1998
                                               ---------- ---------- ---------- ----------- ------------
                                                                    (IN THOUSANDS)
<S>                                            <C>        <C>        <C>        <C>         <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
 investments .................................  $59,758    $ 93,372   $ 11,257   $     242   $   4,961
Working capital (deficit) ....................   60,279      94,974     13,213      (1,955)      4,476
Total assets .................................   73,752     105,350     18,650       3,472       7,436
Long-term debt ...............................      125          65         67          69           4
Minority interest ............................       --          --      5,000       5,000       5,000
Mandatorily redeemable convertible
 performed stock .............................       --          --     15,327      15,327      15,327
Total stockholders' equity (deficit) .........   69,737      97,424     (6,938)    (20,464)    (14,356)

</TABLE>

                                       22
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     This Annual Report on Form 10-K and the following discussion contain
statements which are not historical facts and are considered forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements contain projections of our future results of
operations or of our financial position or state other forward-looking
information. In some cases you can identify these statements by forward-looking
words such as "anticipate", "believe", "could", "estimate", "expect", "intend",
"may", "should", "will" and "would" or similar words. You should not rely on
these forward-looking statements because our actual results may differ
materially from those indicated by these forward-looking statements as a result
of a number of important factors, including, but not limited to, the risk
factors discussed elsewhere in this Annual Report on Form 10-K.


OVERVIEW

     We design, develop, market and manufacture proton-exchange membrane, or
PEM fuel cells and fuel cell systems. Fuel cells are devices that produce
electrical energy without combustion and its associated environmental
contaminants. The fuel cell systems we make and market are designed to
complement or replace conventional power sources, such as batteries and
electric power generators. The use of alternative electric power systems is
desirable in situations where conventional power sources cannot adequately,
economically or technologically supply the power required.

     We were incorporated in June 1989 under the laws of the State of Delaware.
A substantial portion of our business activity, from our inception, was
development of products subject to various government contracts. The most
significant of these contracts were used to develop fuel cell powered vehicles,
stationary power systems, communications backup power systems and diesel
reformers. Although these contracts have historically accounted for a
substantial portion of our revenues, they have diminished in importance as a
result of our focus on commercialization of our fuel cell systems.

     In 1997, we began to use our technologies to develop higher power,
stationary PEM fuel cell products for use as primary and supplemental on-site
electric power systems for residential use. In August 1999, we entered into a
ten-year agreement with ECO, an association of approximately 300 U.S. rural
electric cooperatives. The agreement provided for the purchase of $81 million
of our fuel cell products which ECO would market, sell, install and service
through the rural electric cooperatives. In April 2002, the Company and ECO
amended the Agreement (the "Amended Agreement") which continues to provide for
the purchase of $81 million of fuel cell products from the Company. The Company
and ECO also amended the products and delivery schedule to include both
stationary and portable products, increased the unit prices of the products,
extended the period of time for the delivery of the substantial majority of the
products to 2005 through 2008, and reduced the number of prototype units to be
delivered to 21 at a fixed price of $1,380,500.

     We also expanded our relationship with ECO in April 2002 by entering into
three agreements, a Sales and Marketing Services Agreement, a Test Reporting
and Field Services Agreement and a Memorandum of Agreement (MOA) for a
sustainable fuel cell community project. Under the terms of the Sales and
Marketing Agreement, ECO will work with H Power to identify potential new
markets, applications and distribution channels for our fuel cell products.
Under the terms of the Test Reporting and Field Services Agreement, ECO will
support us in the installation, maintenance and the setting up of the field
service infrastructure to service our fuel cell products. Under the MOA, ECO
will work on the development of a sustainable community that includes the
generation, storage, transmission of hydrogen, and distribution of hydrogen
based fuel cells. We have agreed to pay ECO up to $5.4 million through December
31, 2003, in exchange for the services under these agreements.

     In December 2001, we entered into a memorandum of agreement (the "December
MOA") with ECO that amends, in certain respects, the August 1999 agreement.
Under the terms of the December MOA, we re-purchased ECO's exclusive rights to
sell and distribute the Company's stationary products in areas of the U.S.
served by rural electric cooperatives. A limited number of exclusive
distribution agreements with ECO's licensed members may remain in effect. The
December MOA also grants ECO the non-exclusive right to distribute our other
fuel cell products. As consideration for the above, we paid


                                       23
<PAGE>

ECO $2,100,000 (which is the remaining unrecognized revenue related to the
initial distribution rights fees) and reduced deferred revenue on the balance
sheet by this amount.

     During August 2001, we and Mitsui formed H Power Japan which is a Japanese
corporation headquartered in Tokyo. We contributed $84,282 for a 50% ownership
interest in the newly created corporation, which is being accounted for using
the equity method of accounting. H Power Japan's activities include performing
a feasibility study related to the sale and distribution of our fuel cell
products in Japan and potentially in other countries.

     We have a limited history of generating revenues and our products have
only been recently introduced or are still under development. Through May 31,
2002, we have incurred accumulated losses of approximately $95 million since
our inception in 1989 and we anticipate incurring significant losses in the
future. Most of our operating expenses will be fixed or increasing in the near
term. Therefore, if we are unable to generate significant revenues, our net
losses in any given quarter could be greater than expected. In addition, to the
extent our beta units do not perform to expectations, our commercialization
schedule could be further delayed. You have limited historical financial data
and operating results with which to evaluate our business and our prospects. As
a result, you should consider our prospects in light of the early stage of our
business in a new and rapidly evolving market. We anticipate that a substantial
portion of our revenues over the next two to three years will be derived from
sales of our stationary and portable units to ECO and Mitsui. The costs of our
products are currently higher than we originally anticipated. After the
substantial completion of our extended beta test program, we anticipate that
limited commercial shipments of our stationary products will commence in late
calendar year 2002. These units will be priced substantially higher than
competing products and will be used primarily for demonstration purposes by
early adopters. As a result, revenues from larger scale commercial shipments
are not expected to begin until calendar year 2005, if then.


RESULTS OF OPERATIONS


COMPARISON OF THE YEARS ENDED MAY 31, 2002 AND MAY 31, 2001

     Revenues. Revenues were $2,576,000 for the year ended May 31, 2002
compared to $3,643,000 for the year ended May 31, 2001, a decrease of
$1,067,000 or 29%. Our revenues for the year ended May 31, 2002 were derived
approximately 71% from product revenues and 29% from contract revenues. Product
revenues for the year ended May 31, 2002 were $1,820,000, an increase of
$346,000 from $1,474,000 for the year ended May 31, 2001. Contract revenues for
the year ended May 31, 2002 were $756,000, a decrease of $1,414,000 from
$2,170,000 for the year ended May 31, 2001. The increase in product revenues
for the annual comparative periods is principally due to our emphasis on the
commercialization of our fuel cell products which resulted in increased sales
of our stationary and portable power products to primarily Mitsui and PSA
Peugeot Citroen. The decrease in contract revenues for the annual comparative
periods is a result of our decreased emphasis on government contracts. Contract
revenue for the year ended May 31, 2002 was principally derived from the
alpha/beta phase of the ECO contract and a contract to develop fuel cells for
PSA Peugeot Citroen. We believe that our contract revenues will continue to
decline in the future as the final planned alpha/beta units under our contract
with ECO are delivered, and as we are not actively pursuing government
contracts and are concentrating our efforts on our commercial products.

     Cost of Revenues. Cost of revenues was $4,181,000 for the year ended May
31, 2002 compared to $5,493,000 for the year ended May 31, 2001, a decrease of
$1,312,000. The decrease in cost of revenues is principally due to the
estimated loss accrued for the alpha/beta phase of the ECO contract of
$1,280,000 in the year ended May 31, 2001. During the year ended May 31, 2002,
no additional loss on this contract was incurred. In addition, we and ECO
amended our operating agreement in April 2002 which reduced the number of
alpha/beta units to be delivered to ECO from 32 to 21 units and reduced certain
of our obligations under the alpha/beta phase of the contract. This resulted in
a $454,000 reduction in both cost of revenues and the estimated loss accrual in
fiscal year 2002. Currently, our cost of material is higher than we anticipated
and we have excess production capacity, therefore, we anticipate that our cost
of revenues will exceed our revenues for at least the next year, until we are
able to reduce material costs and increase production.


                                       24
<PAGE>

     Research and Development. Research and development costs were $18,905,000
for the year ended May 31, 2002 compared to $13,466,000 for the year ended May
31, 2001. The increase in research and development costs of $5,439,000 is
primarily the result of additional stationary and portable fuel cell prototype
systems which were built and tested in an effort to accelerate the development
of these systems. Salaries and employee related costs increased by $1,324,000
for fiscal year 2002 when compared to the same period last year. During the
year ended May 31, 2002 costs of materials and supplies related to the building
of test units and other development activities, including the write down of
obsolete and excess components, increased by approximately $3,772,000 when
compared to the same period last year. The remaining increases in research and
development costs are primarily related to fees paid to outside suppliers as
well as research facilities and related overhead expenses.

     Selling, General and Administrative. Selling, general and administrative
costs were $9,158,000 for the year ended May 31, 2002 compared to $11,846,000
for the year ended May 31, 2001, a decrease of $2,688,000. During the year
ended May 31, 2001, the Company incurred stock compensation charges of
$4,400,000 related to stock options exercised by two former consultants and
directors. Excluding the non-cash stock compensation charge in the year ended
May 31, 2001, selling, general and administrative expenses increased
$1,712,000. This increase consists of an increase in selling expenses of
$2,249,000 which includes sales and marketing related services provided by ECO
of $904,000. The remaining increase in selling expenses is primarily due to
increases in personnel and their related costs and costs associated with the
promotion of our portable power products. The increase in selling expenses is
offset by reduced general and administrative expenses associated with our
continuing emphasis on cost controls.

     Other Costs: During the year ended May 31, 2002, other expenses of $677,000
were incurred as we prepared for production in our North Carolina manufacturing
facility. These pre-production expenses include personnel, recruiting and
training costs of $397,000 and costs for rent, utilities, insurance and other
facility related costs totaling $280,000.

     Interest Income and Other, Net. Interest income and other, net was
$2,436,000 for the year ended May 31, 2002 compared to $5,011,000 for the year
ended May 31, 2001, a decrease of $2,575,000. This decrease was primarily a
result of less interest income earned due to lower interest rates and our
reduced short-term investment balances.

     Interest Expense. Interest expense related to equipment financing for the
year ended May 31, 2002 was $5,465. There was no interest expense recorded for
the year ended May 31, 2001.


COMPARISON OF THE YEARS ENDED MAY 31, 2001 AND MAY 31, 2000

     Revenues. Revenues were $3,643,000 for the year ended May 31, 2001
compared to $3,680,000 for the year ended May 31, 2000, a decrease of $37,000
or 1%. Our revenues for the year ended May 31, 2001 were derived approximately
60% from contract revenues and 40% from product revenues. Contract revenues for
the year ended May 31, 2001 were $2,169,000, a decrease of $834,000 from
$3,003,000 for the year ended May 31, 2000. Product revenues for the year ended
May 31, 2001 were $1,474,000, an increase of $797,000 from $677,000 for the
year ended May 31, 2000. The decrease in contract revenues and the increase in
product revenues for the annual comparative periods is principally due to our
emphasis on commercialization of our fuel cell products. Contract revenues for
the year ended May 31, 2001 were principally derived from contracts with the
National Institute of Standards & Technology to build and demonstrate a 5
kilowatt fuel cell system for primary and backup power for telecommunication
systems and the alpha/beta phase of the ECO contract. Product revenues for the
year ended May 31, 2001 were derived from sales of stationary high power units
to Mitsui, Hydro Quebec and Gaz de France and sales of low power portable
systems to various customers. With the exception of the alpha/beta phase of the
ECO contract, we believe that our contract revenues will continue to decline in
the future as we are concentrating our efforts on our commercial products and
are not actively pursuing government contracts.

     Cost of Revenues. Cost of revenues was $5,493,000 for the year ended May
31, 2001 compared to $3,458,000 for the year ended May 31, 2000, an increase of
$2,035,000. The increase in the cost of revenues is principally due to the
accrual of losses estimated for the alpha/beta phase of the ECO contract of
$1,280,000 discussed in Note 1 of the consolidated financial statements and the
increased cost of product


                                       25
<PAGE>

revenues resulting from increasing sales and increasing costs associated with
adding additional manufacturing capacity required to produce our products in
larger quantities. We anticipate that our cost of revenues will exceed our
revenues for the foreseeable future as we increase our capacity consistent with
increasing demand for our products. Cost of revenues as a percentage of
revenues will continue to increase in the foreseeable future as we continue to
add manufacturing capacity, principally in our new North Carolina facility.

     Research and Development. Research and development costs were $13,466,000
for the year ended May 31, 2001 compared to $5,339,000 for the year ended May
31, 2000. The increase in research and development costs of $8,127,000 is
primarily the result of costs associated with the continuing development of our
high power fuel cell systems and the development of our portable and mobile
systems. Salaries and employee related costs increased by $2,538,000 for the
fiscal year 2001 when compared to the same period the previous year. During the
year ended May 31, 2001 costs of materials and supplies related to the building
of test units and other development activities, including the write down of
obsolete and excess components, increased by approximately $4,611,000 when
compared to the same period the previous year. The remaining increases in
research and development costs were primarily related to fees paid to outside
suppliers as well as research facilities and related overhead expenses. In May
2001, our Canadian operations moved into a new facility and incurred
non-recurring costs associated with this move, including the write off of
unamortized leasehold improvements.

     Selling, General and Administrative. Selling, general and administrative
costs were $11,846,000 for the year ended May 31, 2001 compared to $12,565,000
for the year ended May 31, 2000, a decrease of $719,000. During the year ended
May 31, 2001, the Company incurred stock compensation charges of $4,400,000
related to stock options exercised by two former consultants and directors.
During the year ended May 31, 2000, the Company incurred charges for cash
payments totaling $2,100,000 to terminate our agreements with the two former
consultants and directors and NBG Technologies, Inc., and an associated stock
compensation charge of $5,175,000 relating to the issuance of stock options
granted concurrently with the termination of those agreements and payment of
services. Excluding these non-cash stock compensation charges and nonrecurring
cash payments in both years, selling, general and administrative expenses
increased $2,156,000. This increase consisted primarily of $770,000 in salaries
and employee related expenses, $617,000 in professional services and supplies
including professional services related to site identification, lease
negotiations and lease preparation for our facilities in Montreal, North
Carolina and New Jersey and other expenses concurrent with the growth of our
operations.

     Interest Income and Other, Net. Interest income and other, net was
$5,011,000 for the year ended May 31, 2001 compared to $746,000 for fiscal
2000, an increase of $4,265,000. This increase was primarily a result of
interest income earned from the investment of the net proceeds of our initial
public offering which was concluded in August 2000. This increase was partially
offset by a loss on foreign exchange for the year ended May 31, 2001 of
$137,000 compared to a loss of $23,000 for the year ended May 31, 2000.

     Interest Expense. There was no interest expense recorded for the year
ended May 31, 2001. Interest expense for the year ended May 31, 2000 was
$77,000.


LIQUIDITY AND CAPITAL RESOURCES

     Our capital requirements depend on numerous factors, including, but not
limited to, completion of our product development activities, expansion of
manufacturing operations that allow us to produce our products in a cost
effective manner, and market acceptance of our systems. We have allocated
substantial capital resources to the expansion of our manufacturing capacity to
meet anticipated commercial production requirements. We continue to make
significant expenditures on the development of our PEM fuel cell systems. In
addition, we are expanding our sales and marketing efforts. We will need to
raise additional funds to execute our business plan and achieve
commercialization. There can be no assurance that any additional financing will
be available on commercially attractive terms, in a timely fashion, in
sufficient amounts, or at all. If additional funds are raised through the
issuance of equity securities, the percentage ownership of our then current
stockholders will be reduced. In addition, we intend to seek strategic partners
and suppliers for technical and/or financial assistance in completing the
development of our stationary power and other products for sale to ECO and
other customers. In the event we are


                                       26
<PAGE>

unsuccessful in entering into such strategic arrangements, we may be unable to
complete the development of our stationary power and other products which would
impact our ability to timely deliver to ECO and other customers.

     At May 31, 2002, we had net working capital of approximately $60,279,000
which included cash and cash equivalents and short-term investments totaling
$59,758,000, compared to net working capital of $94,974,000 which included cash
and cash equivalents, restricted cash and short-term investments of $93,872,000
at May 31, 2001. The decrease in net working capital is primarily due to the
reduction of cash and cash equivalents and short-term investments which have
been used to fund operating activities and capital expenditures.

     Net cash used by operating activities for the year ended May 31, 2002 was
$27,929,000 compared to $16,242,000 for the year ended May 31, 2001. For the
year ended May 31, 2002 and 2001, cash was primarily used to fund the net losses
of $27,915,000 and $22,151,000 respectively. The non-cash portion of the net
losses consists primarily of depreciation and amortization which was $1,418,000
for the year ended May 31, 2002 and stock compensation expense and depreciation
and amortization of $5,184,000 for the year ended May 31, 2001. Cash in the
amount of $2,100,000 was also used to re-purchase ECO's exclusive rights to sell
and distribute our stationary products in certain areas of the U.S. Offsetting
these uses of cash was a reduction in inventories of $2,200,000 due primarily to
increased product sales and increased efforts to control inventory balances.

     Net cash provided by and used by investing activities was $19,692,000 and
$46,984,000 for years ended May 31, 2002 and 2001, respectively. For the year
ended May 31, 2002, we made net sales of short-term investments of $26,096,000
and had capital expenditures of $6,404,000. For the year ended May 31, 2001, we
had net purchases of short-term investments of $44,107,000 and had capital
expenditures of $2,877,000 We believe that we will have to spend approximately
$2,000,000 for additional capital expenditures during fiscal 2003 to support
our continuing product development, manufacturing and commercialization
activities.

     In January 2001, we signed a ten-year lease for approximately 90,000
square feet of manufacturing and office space in Monroe, North Carolina. This
lease has two five-year renewal options exercisable at the end of the 10th
year. We occupied the facility in July 2001. The annual base rental rate for
this facility is approximately $308,000, subject to annual inflation
adjustments. In addition to the base rent, we are responsible for the cost of
maintenance, taxes and insurance.

     We currently occupy space in New Jersey in two facilities. Leases for
these facilities were due to expire in July 2002 and have been extended to July
2003 with an option to renew for an additional year to July 2004.

     The lease for our former facility in Canada was terminated in July 2001,
prior to the September 2001 expiration date, for an insignificant cost. We
signed a ten-year binding Offer to Lease for a facility in Canada with
approximately 28,000 square feet in January 2001. We commenced our operations
in this facility in May 2001. This lease has a five-year renewal option
exercisable at the end of the 10th year. The annual base rental rate for this
facility for the first and second five year periods is approximately $171,000
and $198,000, respectively. In addition to the base rent, we are responsible
for the cost of maintenance, taxes and insurance. We also lease an additional
facility in Canada with 2,900 square feet which expires in March 2003.

     Based on our current business plan, we believe that the net proceeds from
our IPO will be adequate to fund our operations at least through May 31, 2003.
We are implementing business plans to provide for adequate funds for operations
through May 31, 2004, although there are no assurances that such plans will be
successful. The successful execution of our business plan includes meeting
revenue estimates, the continuation of our product development activities,
continued expansion of our manufacturing operations, and the expansion of sales
and marketing to support the commercialization of our fuel cell systems. We
anticipate that we will incur substantial losses over at least the next few
years due to expenditures for these activities. The successful commercialization
and introduction of our products may be affected by the cost competitiveness of
our products, the future costs of fuels used by our products, consumer
reluctance


                                       27

<PAGE>


to try a new product, the pace of utility deregulation nationwide and the
emergence of newer, more competitive technologies and products. These factors
may affect our ability to secure additional funding which we will pursue during
fiscal 2003. In the event we are unable to secure adequate additional funding
during fiscal 2003, we expect to scale back our operations.


CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and related footnotes. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies
which we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:

     Revenue Recognition: We derive our revenue from primarily two sources,
product revenue and contract revenue. As described below, significant
management judgments and estimates must be made and used in connection with the
revenue recognized in any accounting period.

     Revenues from sales of products are recognized when the product has been
shipped and the Company has met its obligations under the sales contract.
Revenues from sales of products requiring the Company to perform installation
are recognized when installation has been completed. Revenues from sales of
products allowing a customer acceptance period are recognized at the conclusion
of the acceptance period. Revenues from sales of test and evaluation products
which are used by customers primarily for research and development purposes and
are sold without a right of return and without a customer acceptance period,
are recognized when the product has been shipped.

     Revenues on contracts include reimbursed direct costs and allowable
allocated indirect costs incurred, plus recognized profits. Profit is
recognized on cost-reimbursable contracts as costs are incurred, and under
fixed-price contracts on the cost-to-cost method or the units of delivery
method of the percentage-of-completion method. When it is determined that a
loss will result from the performance of a contract, the entire amount of the
estimated ultimate loss is charged against income. The impact of revisions in
contract estimates are recognized on a cumulative catch up basis in the period
in which revisions are made. The complexity of the estimation process and all
issues related to the percentage-of-completion method of contract accounting
affect the amounts reported in our financial statements. A number of internal
and external factors affect our cost estimates including labor rates, future
materials prices and customer specification and testing requirements changes.
The revenues related to contracts which qualify as best-efforts research and
development arrangements are treated as an offset to the Company's research and
development expenses. Revenues from product distribution rights fees related to
our agreement with ECO were deferred and recognized as contract revenue on a
straight-line basis over the term of the distribution agreement. As of May 31,
2002, there are no additional product distribution rights fees included in
deferred revenue that will be recognized as contract revenue in future periods.

     Inventories: We value our inventory at the lower of the actual cost to
purchase and/or manufacture the inventory or the current estimated market value
of the inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements. In addition, our
industry is characterized by technological change, frequent new product
development and product obsolescence that could result in an increase in the
amount of obsolete inventory quantities on hand. Therefore, any significant
unanticipated changes in our forecasts or technological developments could have
a significant impact on the value of our inventory and our reported operating
results.

     Product Warranty: We offer warranties of various lengths to our customers
depending upon the specific product and terms of the customer purchase
agreement. We typically negotiate varying terms regarding warranty coverage and
length of warranty dependant upon the product involved and the type


                                       28

<PAGE>


of customer. Our typical warranties require us to repair or replace defective
product during the warranty period at no cost to the customer. As of the balance
sheet date, we record an estimate for warranty related costs for products sold
based on our historical experience and expectation of future conditions. While
we believe that our estimated liability for product warranties is adequate and
that the judgment applied is appropriate, the estimated liability for product
warranties could differ materially from future actual warranty costs.

     Long-Lived Assets: Long-lived assets including plant, equipment,
intangible and certain other long-lived assets are amortized over their useful
lives. We periodically review the useful lives and the carrying values of our
long-lived assets for continued appropriateness. We record impairment losses on
long-lived assets used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amount of those items.


CONTRACTUAL OBLIGATIONS


     The following table summarizes our contractual obligations in the fiscal
years subsequent to May 31, 2002:




<TABLE>
<CAPTION>
     CONTRACTUAL                     LESS THAN       1 TO 3       4 TO 5       AFTER 5
     OBLIGATIONS         TOTAL         1 YEAR        YEARS         YEARS        YEARS
-------------------- ------------- ------------- ------------- ------------ ------------
<S>                  <C>           <C>           <C>           <C>          <C>
Obligations to ECO    $4,445,334    $3,520,002    $  925,332    $       --   $       --
Long-term debt           139,415        14,890        53,954        70,571           --
Operating leases       4,856,168       629,865     1,507,263     1,080,691    1,638,349
                      ----------    ----------    ----------    ----------   ----------
Total                 $9,440,917    $4,164,757    $2,486,549    $1,151,262   $1,638,349
                      ==========    ==========    ==========    ==========   ==========
</TABLE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


     Our financial market risk includes risks associated with international
operations and related foreign currencies, as we have a significant operation
in Canada. Expenses in this operation are incurred in Canadian dollars and,
therefore, are subject to foreign currency exchange risk. Through May 31, 2002,
we have not experienced any significant negative impact on our operations as a
result of fluctuations in foreign currency exchange rates. In addition, our
international business is subject to the risks typical of an international
business including, but not limited to, differing economic conditions, changes
in political climate, differing tax structures and other legal regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially and adversely affected by changes in these and
other factors.


     The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. We maintain our portfolio of cash, cash equivalents and
short-term investments in a variety of securities, including both government
and corporate obligations and money market funds. We do not utilize any
derivative financial instruments, derivative commodity instruments or other
market risk sensitive instruments, positions or transactions in any material
fashion. We believe that the investment-grade securities we hold are not
subject to any material risks arising from changes in interest rates, however,
they may be subject to changes in the financial standing of the issues of these
securities.


                                       29
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of H Power Corp.:


     In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 49 present fairly, in all material
respects, the financial position of H Power Corp. and its subsidiary at May 31,
2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended May 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) on page 50 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, NJ
July 31, 2002




                                       30
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEET




<TABLE>
<CAPTION>
                                                                                     MAY 31,
                                                                       -----------------------------------
                                                                             2002               2001
                                                                       ----------------   ----------------
<S>                                                                    <C>                <C>
ASSETS
Current assets
 Cash and cash equivalents .........................................    $  41,678,324      $  49,440,059
 Short-term investments ............................................       18,079,617         43,931,759
 Restricted cash ...................................................               --            500,000
 Account receivable net of allowance for doubtful accounts of
   $60,000 at May 31, 2002 and 2001, respectively ..................        1,316,828            755,257
 Unbilled receivables ..............................................           58,333            214,825
 Inventories, net ..................................................        2,098,421          4,300,912
 Tax credit receivable .............................................          174,418            325,013
 Prepaid expenses and other current assets .........................          762,828          1,367,275
                                                                        -------------      -------------
   Total current assets ............................................       64,168,769        100,835,100
Plant and equipment, net ...........................................        8,800,313          3,627,135
Patents, net of accumulated amortization of $69,291 and $49,627 at
 May 31, 2002 and 2001, respectively ...............................          368,370            347,532
Restricted cash ....................................................           50,000             50,000
Other assets .......................................................          364,167            490,404
                                                                        -------------      -------------
   Total assets ....................................................    $  73,751,619      $ 105,350,171
                                                                        =============      =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
 Current maturities of long-term debt ..............................    $     136,765      $     121,875
 Accounts payable ..................................................        1,492,720          2,871,904
 Accrued expenses ..................................................        1,659,251          2,240,876
 Deferred revenue ..................................................          601,163            626,743
                                                                        -------------      -------------
   Total current liabilities .......................................        3,889,899          5,861,398
Deferred revenue ...................................................               --          2,000,005
Long-term debt .....................................................          124,525             65,003
                                                                        -------------      -------------
   Total liabilities ...............................................        4,014,424          7,926,406
                                                                        -------------      -------------
Stockholders' equity
 Common stock--$.001 par value; 150,000,0000 shares authorized at
   May 31, 2002 and May 31, 2001; 53,882,828 shares issued and
   outstanding at May 31, 2002; 53,820,746 shares issued and
   outstanding at May 31, 2001 .....................................           53,883             53,820
 Additional paid-in capital ........................................      164,770,005        164,746,068
 Accumulated deficit ...............................................      (94,813,464)       (66,898,269)
 Accumulated other comprehensive loss ..............................         (273,229)          (477,854)
                                                                        -------------      -------------
   Total stockholders' equity ......................................       69,737,195         97,423,765
                                                                        -------------      -------------
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................    $  73,751,619      $ 105,350,171
                                                                        =============      =============
</TABLE>

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

                                       31
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF OPERATIONS




<TABLE>
<CAPTION>
                                                                           YEAR ENDED MAY 31,
                                                           --------------------------------------------------
                                                                 2002             2001             2000
                                                           ---------------- ---------------- ----------------
<S>                                                        <C>              <C>              <C>
REVENUES
 Products ................................................  $   1,819,605    $   1,473,722    $     677,440
 Contracts ...............................................        756,107        2,169,568        3,002,847
                                                            -------------    -------------    -------------
 Total revenues ..........................................      2,575,712        3,643,290        3,680,287
                                                            -------------    -------------    -------------
OPERATING EXPENSES
 Cost of revenues--products ..............................      3,612,683        2,498,730          848,767
 Cost of revenues--contracts .............................        568,083        2,994,418        2,608,828
 Research and development ................................     18,905,323       13,466,017        5,338,727
 Selling, general and administrative (including non-cash
   stock compensation expense of $4,400,000 and
   $5,175,079 in the years ended May 31, 2001 and 2000,
   respectively) .........................................      9,158,161       11,846,220       12,565,380
 Other costs .............................................        677,230               --               --
                                                            -------------    -------------    -------------
 Total operating expenses ................................     32,921,480       30,805,385       21,361,702
                                                            -------------    -------------    -------------
 Loss from operations ....................................    (30,345,768)     (27,162,095)     (17,681,415)
 Interest and other income, net ..........................      2,436,038        5,010,727          746,034
 Interest expense ........................................         (5,465)              --          (77,025)
                                                            -------------    -------------    -------------
   Net loss ..............................................  $ (27,915,195)   $ (22,151,368)   $ (17,012,406)
                                                            =============    =============    =============
 Loss per share attributable to common stockholders,
   basic and diluted .....................................  $       (0.52)   $       (0.44)   $       (0.49)
                                                            =============    =============    =============
 Weighted average shares outstanding, basic and diluted ..     53,853,478       50,415,340       34,879,061
                                                            =============    =============    =============
</TABLE>

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

                                       32
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND
                          COMPREHENSIVE NET LOSS




<TABLE>
<CAPTION>
                                                                                                  ACCUMULATED
                                          COMMON STOCK          ADDITIONAL                           OTHER            TOTAL
                                     -----------------------      PAID-IN        ACCUMULATED     COMPREHENSIVE    STOCKHOLDERS'
                                        SHARES      AMOUNT        CAPITAL          DEFICIT            LOSS       EQUITY (DEFICIT)
                                     ------------ ---------- ---------------- ----------------- --------------- -----------------
<S>                                  <C>          <C>        <C>              <C>               <C>             <C>
Balance (deficiency)--May 31,
 1999 ..............................  29,015,195   $29,016     $  7,663,950     $ (27,734,495)    $ (422,855)     $ (20,464,384)
Sale of common stock ...............   8,160,000     8,160       22,979,124                                          22,987,284
Issuance of common stock upon
 conversion of debt ................     840,000       840        2,099,160                                           2,100,000
Issuance of common stock upon
 exercise of stock options .........      75,000        75           59,925                                              60,000
Issuance of warrants ...............                                150,000                                             150,000
Stock option compensation
 expense ...........................                              5,175,079                                           5,175,079
Other comprehensive loss:
 Net loss ..........................                                              (17,012,406)                      (17,012,406)
 Foreign currency translation
  adjustments ......................                                                                  66,320             66,320
                                                                                                                  -------------
 Other comprehensive loss ..........                                                                                (16,946,086)
                                     ------------ ---------- ---------------- ----------------- --------------- -----------------
Balance (deficiency)--May 31,
 2000 ..............................  38,090,195    38,091       38,127,238       (44,746,901)      (356,535)        (6,938,107)
Sale of common stock ...............   7,000,000     7,000      101,595,793                                         101,602,793
Issuance of common stock upon
 conversion of preferred stock .....   6,000,000     6,000       15,320,766                                          15,326,766
Issuance of common stock upon
 exercise of stock options .........     781,170       781          304,219                                             305,000
Issuance of common stock upon
 conversion of minority interest       1,666,665     1,666        4,998,334                                           5,000,000
Issuance of common stock in
 payment of dividends to DQE
 Enterprises, Inc. .................     282,716       282             (282)                                                 --
Stock option compensation
 expense ...........................                              4,400,000                                           4,400,000
Other comprehensive loss:
 Net loss ..........................                                              (22,151,368)                      (22,151,368)
 Foreign currency translation
  adjustments ......................                                                                  53,521             53,521
 Unrealized loss on short-term
  investments ......................                                                                (174,840)          (174,840)
                                                                                                                  -------------
 Other comprehensive loss ..........                                                                                (22,272,687)
                                     ------------ ---------- ---------------- ----------------- --------------- -----------------
Balance (deficiency)--May 31,
 2001 ..............................  53,820,746    53,820      164,746,068       (66,898,269)      (477,854)        97,423,765
Issuance of common stock upon
 exercise of stock options .........      62,082        63           23,937                                              24,000
Other comprehensive loss:
 Net loss ..........................                                              (27,915,195)                      (27,915,195)
 Foreign currency translation
  adjustments ......................                                                                 (38,733)           (38,733)
 Unrealized gain on
  short-term investments ...........                                                                 243,358            243,358
                                                                                                                  -------------
 Other comprehensive loss ..........                                                                                (27,710,570)
                                     ------------ ---------- ---------------- ----------------- --------------- -----------------
Balance (deficiency)--May 31,
 2002 ..............................  53,882,828   $53,883     $164,770,005     $ (94,813,464)    $ (273,229)     $  69,737,195
                                      ==========   =======     ============     =============     ==========      =============
</TABLE>

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

                                       33
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS




<TABLE>
<CAPTION>
                                                                               YEAR ENDED MAY 31,
                                                              -----------------------------------------------------
                                                                     2002              2001              2000
                                                              ----------------- ----------------- -----------------
<S>                                                           <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss ...................................................   $ (27,915,195)    $ (22,151,368)    $ (17,012,406)
 Adjustments to reconcile net loss to net cash used by
   operating activities:
 Depreciation and amortization ..............................       1,418,314           783,705           654,917
 Obsolescence and lower of cost or market allowances ........         154,080           940,857                --
 Loss on disposal of equipment ..............................           9,549            79,760             3,263
 Provision for impaired assets ..............................              --           415,146                --
 Stock option compensation expense ..........................              --         4,400,000         5,175,079
 Warrants issued in payment of services .....................              --                --           150,000
 Changes in assets and liabilities:
   Accounts receivables .....................................        (561,571)          123,053          (743,081)
   Unbilled receivables .....................................         156,492              (275)          (28,267)
   Inventories ..............................................       2,048,411        (3,940,770)         (959,880)
   Tax credit receivable ....................................         150,595           605,104          (285,326)
   Prepaid expenses and other assets ........................         596,848          (165,470)       (1,683,599)
   Accounts payable .........................................      (1,379,185)        1,674,101          (203,112)
   Accrued expenses .........................................      (1,470,314)        2,124,759           700,129
   Deferred revenue .........................................      (2,025,585)          (73,825)        2,450,573
   Estimated losses on uncompleted contracts ................         888,690        (1,056,453)               --
                                                                -------------     -------------     -------------
    Total adjustments .......................................         (13,676)        5,909,692         5,230,696
                                                                -------------     -------------     -------------
    Net cash used by operating activities ...................     (27,928,871)      (16,241,676)      (11,781,710)
                                                                -------------     -------------     -------------
CASH FLOWS FROM INVESTING ACTIVITIES
 Net sales (purchases) of short-term investments ............      26,095,501       (44,106,599)               --
 Capital expenditures for plant and equipment ...............      (6,403,694)       (2,877,225)       (1,124,691)
 Proceeds from sale of equipment ............................              --                --             4,209
                                                                -------------     -------------     -------------
    Net cash provided (used) by investing activities ........      19,691,807       (46,983,824)       (1,120,482)
                                                                -------------     -------------     -------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Proceeds from issuance of common stock .....................          24,000       101,907,793        23,047,284
 Proceeds from related party borrowings .....................              --                --         1,461,987
 Repayment of related party borrowings ......................              --                --          (654,641)
 Repayments of long-term debt ...............................          (9,938)           (3,110)               --
 Cash pledged as collateral .................................              --          (550,000)               --
 Return of cash pledged as collateral .......................         500,000                --                --
 Other ......................................................              --                --            (2,364)
                                                                -------------     -------------     -------------
    Net cash provided by financing activities ...............         514,062       101,354,683        23,852,266
                                                                -------------     -------------     -------------
Effect of exchange rate changes on cash and cash
 equivalents ................................................         (38,733)           53,521            65,174
                                                                -------------     -------------     -------------
    Net (decrease) increase in cash and cash equivalents           (7,761,735)       38,182,704        11,015,248
Cash and cash equivalents at beginning of period ............      49,440,059        11,257,355           242,107
                                                                -------------     -------------     -------------
Cash and cash equivalents at end of period ..................   $  41,678,324     $  49,440,059     $  11,257,355
                                                                =============     =============     =============
SUPPLEMENTAL CASH FLOW INFORMATION
 Equipment purchased under capital leases ...................   $      84,350                --                --
 Cash paid for interest .....................................   $       5,465                --     $      99,829
 Conversion of related party borrowings to equity ...........              --                --     $   2,100,000
 Conversion of preferred stock to equity ....................              --     $  15,326,766                --
 Conversion of minority interest to equity ..................              --     $   5,000,000                --
</TABLE>

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

                                       34
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGIFICANT ACCOUNTING POLICIES

     Nature of Business. H Power Corp. (the "Company") was organized on June 6,
1989 under the laws of the State of Delaware. The Company designs, develops,
markets and manufactures proton-exchange membrane fuel cells and fuel cell
systems designed to provide electricity for a wide range of stationary and
portable applications.

     Initial Public Offering. In August 2000, the Company completed an initial
public offering, (the "IPO") of 7,000,000 shares of common stock for a gross
aggregate offering price of $112 million. The Company incurred underwriting
commissions of approximately $7.8 million and additional expenses aggregating
approximately $2.6 million in connection with the IPO.

     Liquidity. Our current business plan includes the completion of our
product development activities and the expansion of sales and marketing efforts
to support the commercialization of our fuel cell systems. The successful
commercialization and introduction of our products may be affected by the cost
competitiveness of our products, the future costs of fuels used by our
products, consumer reluctance to try a new product, the pace of utility
deregulation nationwide and the emergence of newer, more competitive
technologies and products. We are dependent on a limited number of third
parties for the manufacture, assembly and supply of certain key materials and
components used to make our products. A disruption in the supply of these
materials or the inability to obtain them on commercially reasonable terms
would adversely affect our ability to develop, manufacture and market our
products. These factors may affect our ability to secure additional funding
which we will pursue during fiscal year 2003.

     Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its Canadian subsidiary, H
Power Enterprises of Canada, Inc. ("HPEC"). All significant intercompany
accounts and transactions are eliminated.

     Stock Split. The Company declared a 5:1 stock split effective July 24,
2000 for stockholders of record at the close of business on July 21, 2000. This
stock split increased the number of common shares outstanding by 30,472,156
shares. All references in the consolidated financial statements referring to
share prices, conversion rates, per share amounts, stock option plans and
common shares issued and/or outstanding have been adjusted retroactively for
the 5-for-1 stock split.

     Use of Estimates. Preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in its consolidated financial statements and accompanying notes. The
most significant estimates made in preparing these consolidated financial
statements relate to contract revenues and costs, allowance for bad debts and
valuation of inventories and deferred income tax benefits. Actual results could
differ from those estimates.

     Cash and Cash Equivalents. Cash and cash equivalents represent cash and
highly liquid investments with maturities of three months or less.

     At May 31, 2002 and 2001, restricted cash in the amount of $50,000 and
$550,000, respectively, is pledged as collateral for a letter of credit related
to the lease and build out of the Company's North Carolina facility. The
amounts are recorded under the balance sheet caption "Restricted cash."

     Short-Term Investments. Short-term investments are considered to be
available for sale and consist of investments in corporate and government
agency debt securities with maturities greater than three months. The
investments are carried at fair market value with the difference between cost
and fair market value of these investments reflected in other comprehensive
loss as a separate component of stockholders' equity. At May 31, 2002, the fair
market value of these investments exceeded the cost by $243,358 and at May 31,
2001, the cost of these investments exceeded the fair market value by $174,840.

     Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
primarily of cash, cash equivalents, short-term investments


                                       35
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1. SUMMARY OF SIGIFICANT ACCOUNTING POLICIES (CONTINUED)

and accounts receivable. The Company maintains its cash, cash equivalents and
short-term investments at high quality financial institutions and limits the
amount of credit exposure to any one institution. The Company had cash balances
on deposit at financial institutions at May 31, 2002 and 2001 that exceeded the
$100,000 amount insured by the F.D.I.C.

     The Company's receivables are derived from sales to commercial customers
and U.S. government agencies. For the fiscal year ended May 31, 2002, 2001 and
2000, the number of commercial customers and percentage of consolidated
revenues is as follows: 2002-three commercial customers represented 64% of
consolidated revenues, 2001-two commercial customers represented 48% of
consolidated revenues and 2000-one commercial customer represented 10% of
consolidated revenues. Amounts due to the Company in accounts receivable from
these customers were $1,128,369 and $332,410 at May 31, 2002 and 2001,
respectively. For the fiscal year ended May 31, 2001, two government contracts
represented 33% of consolidated revenues and for the fiscal year ended May 31,
2000, three government contracts represented 73% of consolidated revenues.
Amounts due to the Company in accounts receivable and unbilled receivables
under these government contracts were $284,719 and $546,840 at May 31, 2001 and
2000, respectively.

     The Company anticipates that a substantial portion of revenues and
accounts receivable over the next several years will be derived from sales of
our products to ECO Fuel Cells, LLC, a subsidiary of Energy Co-Opportunity,
Inc. ("ECO") as discussed in Note 8 and Mitsui & Co., Ltd.

     Inventories, Net. Inventories, which include materials, labor, and
overhead, are valued at the lower of cost or market using the first-in,
first-out method.

     Plant and Equipment, Net. Plant and equipment are stated at cost, net of
accumulated depreciation. Repairs and maintenance costs are expensed as
incurred; major renewals and betterments are capitalized. When assets are sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss on the disposition is reflected
in current operations. Depreciation is determined on a straight-line basis for
financial reporting purposes and on an accelerated method for tax purposes.
Estimated useful lives are generally 3 to 7 years for furniture and office
equipment, 5 to 10 years for machinery and equipment and the lesser of the
lease terms of 5 to 10 years or the estimated useful lives of the related
assets for leasehold improvements.

     Patents. Certain costs associated with obtaining and licensing patents are
amortized on a straight-line basis over their estimated useful lives of up to
17 years. Costs associated with patents are capitalized as incurred.
Amortization of such costs begins once the patent has been issued.

     Amortization expense for the fiscal years ended May 31, 2002, 2001 and
2000 was $19,664, $15,339 and $15,402, respectively. During the fiscal year
ended May 31, 2001, the Company discontinued the application process for
patents in certain foreign countries and charged $104,353 to research and
development expense for expenditures capitalized in previous fiscal years.

     Long-Lived Assets. The Company reviews long-lived assets including
intangible assets for impairment. Whenever facts or circumstances indicate that
the carrying amount of an asset may not be recoverable, the carrying amount of
the asset is adjusted to fair value. Recoverability of assets to be held and
used is measured by comparison of the carrying amount of an asset to future
undiscounted net cash flows, expected to be generated by the asset. If an
impairment is identified, the asset is written down to fair value. Fair value
is based on estimated proceeds upon disposal or discounted cash flows.

     Foreign Currency Translation. The financial statements of HPEC were
prepared in Canadian dollars and translated into U.S. dollars based on the
current exchange rate in effect at the end of the period for the balance sheet
and a weighted-average rate for the period on the statement of operations.
Translation adjustments are reflected as foreign currency translation
adjustments in stockholders' equity and accordingly have no effect on net
income. Transaction gains and losses, which are not material, are included in
the statement of operations.


                                       36
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1. SUMMARY OF SIGIFICANT ACCOUNTING POLICIES (CONTINUED)

     Revenue Recognition. Revenues from sales of products are recognized when
the product has been shipped and the Company has met its obligations under the
sales contract. These obligations vary based on the specific product type and
customer. Revenues from sales of products requiring the Company to perform
installation are recognized when installation has been completed. Revenues from
sales of products allowing a 30 day customer acceptance period are recognized
at the conclusion of the acceptance period. Revenues from sales of test and
evaluation products used by customers primarily for research and development
purposes are sold without a right of return and without a customer acceptance
period. Revenues from sales of test and evaluation products are recognized when
the product has been shipped. Revenues from product distribution rights fees
are deferred upon receipt and recognized into revenue on a straight-line basis
over the term of the distribution agreement.

     Revenues on contracts include reimbursed direct costs and allowable
allocated indirect costs incurred, plus recognized profits. Profit is recognized
on cost-reimbursable contracts as costs are incurred, and under fixed-price
contracts on the cost-to-cost method of the percentage-of-completion method (see
further discussion of the ECO agreements in Note 8). Revenues recognized on
contracts in excess of related billings are reflected as unbilled receivables.
When it is determined that a loss will result from the performance of a
contract, the entire amount of the estimated ultimate loss is charged against
income. The impact of revisions in contract estimates are recognized on a
cumulative catch up basis in the period in which revisions are made. The
revenues related to contracts which qualify as best-efforts research and
development arrangements are treated as an offset to the Company's research and
development expenses.

     Government contract costs, including indirect expenses, are subject to
audit and adjustment by the Defense Contract Audit Agency. Contract costs
through 1999 have been finalized, and contract revenues for the current and
prior years have been recorded in amounts which are expected to be realized
upon final settlement. In management's opinion, the results of such audits will
not have a material effect on the Company's financial position, results of
operations or cash flows.

     Research and Development. Research and development expenses consist
principally of expenditures for research conducted by the Company. Costs for
contracts that qualify as best-efforts arrangements are recognized as research
and development expenses. All research and development costs are expensed as
incurred.

     Under certain arrangements in which a third party funds a portion of
research and development costs on a specific project, the direct materials and
labor costs of that project are recorded as costs of revenues-contracts while
overhead and general and administrative expenses allowable for inclusion in the
cost reimbursement calculation are recorded as selling, general and
administrative expenses.

     Cost of revenues-contracts does not include research and development costs
related to the technology and design of systems associated with the ECO
contract inasmuch as the Company retains exclusive ownership of the related
intellectual property and can benefit from its use elsewhere in its operations.


     401 (k) Retirement Plan. The Company has a contributory 401(k) Retirement
Plan for eligible employees. Under the Plan, employees may generally contribute
from 1% to 15% of their salary, however, not in excess of IRS limitations.
Employees are 100% vested in their own contributions plus earnings at all
times. The Company may provide matching contributions based on the employees'
contributions. The Company incurred $131,027 and $15,382 in expense during the
year ended May 31, 2002 and 2001, respectively, for matching contributions to
this plan.

     Income Taxes and Tax Credits. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax basis. A subjective assessment, which includes anticipating


                                       37

<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1. SUMMARY OF SIGIFICANT ACCOUNTING POLICIES (CONTINUED)

future income, is used in assessing the likelihood of realizing deferred tax
assets. Recoverable tax credits arising from the acquisition of capital assets
are recorded as a deduction from the cost of the assets acquired while those
arising from current expenses are deducted from those expenses in the year of
expenditure. All amounts receivable at the end of fiscal 2001 have been
collected. In addition, amounts receivable at May 31, 2002 are expected to be
received during fiscal 2003.

     H Power Japan. During August 2001, the Company and Mitsui & Co., Ltd.
formed H Power Japan which is a Japanese corporation headquartered in Tokyo.
The Company contributed $84,282 for a 50% ownership interest in the newly
created corporation. The Company's investment in H Power Japan is accounted for
using the equity method of accounting. The investment is included in prepaid
expenses and other current assets on the consolidated balance sheet as its
initial activities primarily involve marketing expenditures in the upcoming
year.

     Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all quarters of fiscal years beginning after June
15, 2000. The adoption of this statement by the Company on June 1, 2001 has not
impacted the Company's financial position or results of operations because the
Company has not purchased any derivative instruments or entered into any
hedging activities, and no derivatives embedded in contracts have been
identified.

     In July 2001, the FASB issued SFAS 141, "Business Combinations" (SFAS 141)
and SFAS 142, "Goodwill and other Intangible Assets" (SFAS 142). SFAS 141
applies to all business combinations initiated after June 30, 2001, and
requires these business combinations be accounted for using the purchase method
of accounting. SFAS 142 applies to all goodwill and intangibles acquired in a
business combination. Under the SFAS 142, all goodwill, including goodwill
acquired before initial application of the standard, will not be amortized but
will be tested for impairment within six months of adoption of the statement,
and at least annually thereafter. Intangible assets other than goodwill will be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS 142 is effective for fiscal years
beginning after December 15, 2001, and must be adopted as of the beginning of a
fiscal year. The adoption of these standards in fiscal 2002 has not had a
material impact on the Company's financial condition or results of operations.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. SFAS No. 144 requires companies to separately report
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
SFAS No. 144 is effective for all quarters of fiscal years beginning after
December 15, 2001. The Company anticipates that the adoption of this Statement
will not have a material effect on its financial condition or results of
operations.

     In July 2002, the FASB issued SFAS No.146, Accounting for Costs Associated
with Exit or Disposal Activities. The standard requires companies to recognize
costs associated with exit or disposal activities

                                       38
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1. SUMMARY OF SIGIFICANT ACCOUNTING POLICIES (CONTINUED)

when they are incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 replaces Issue 94-3. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.


2. INVENTORIES, NET


     Inventories, net consist of the following:



<TABLE>
<CAPTION>
                                                                               MAY 31,
                                                                   -------------------------------
                                                                         2002             2001
                                                                   ---------------   -------------
<S>                                                                <C>               <C>
   Raw materials ...............................................    $  1,370,895      $3,121,568
   Work in process .............................................         305,565       1,089,526
   Finished goods ..............................................       1,516,898       1,030,675
   Obsolescence and lower of cost or market allowances .........      (1,094,937)       (940,857)
                                                                    ------------      ----------
   Total inventories, net ......................................    $  2,098,421      $4,300,912
                                                                    ============      ==========
</TABLE>

3. PLANT AND EQUIPMENT, NET


     Plant and equipment, net consists of the following:



<TABLE>
<CAPTION>
                                                         MAY 31,
                                              -----------------------------
                                                   2002            2001
                                              -------------   -------------
<S>                                           <C>             <C>
   Furniture and office equipment .........   $2,646,695       $1,600,025
   Machinery and equipment ................    3,488,970        2,236,118
   Leasehold improvements .................    6,230,738        2,051,765
                                              ----------       ----------
   Total plant and equipment ..............   12,366,403        5,887,908
   Less: Accumulated depreciation .........    3,566,090        2,260,773
                                              ----------       ----------
   Total plant and equipment, net .........   $8,800,313       $3,627,135
                                              ==========       ==========

</TABLE>

     Depreciation expense for the fiscal years ended May 31, 2002, 2001 and
2000 was $1,305,317, $737,255 and $639,515, respectively. During the year ended
May 31, 2001, the Company evaluated for impairment, certain research and
development assets that it planned to dispose of and recorded an impairment
write down of $310,793 which is included in research and development expenses.


                                       39
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. ACCRUED EXPENSES


     Accrued expenses consist of the following:



<TABLE>
<CAPTION>
                                                         MAY 31,
                                              -----------------------------
                                                   2002            2001
                                              -------------   -------------
<S>                                           <C>             <C>
   Salaries and related expenses ..........    $  825,801      $1,015,265
   Estimated loss on ECO contract .........       167,763       1,056,453
   Product warranty .......................       273,040          21,000
   Other ..................................       392,647         148,158
                                               ----------      ----------
   Total accrued expenses .................    $1,659,251      $2,240,876
                                               ==========      ==========
</TABLE>

5. LONG-TERM DEBT


     Long-term debt consists of the following:



<TABLE>
<CAPTION>
                                                                           MAY 31,
                                                                  -------------------------
                                                                      2002          2001
                                                                  -----------   -----------
<S>                                                               <C>           <C>
   Note payable, interest at 10%; unsecured, past due .........    $121,875      $121,875
   Government loan, non-interest bearing ......................      65,003        65,003
   Equipment notes payable, due monthly, collateralized by
    related equipment .........................................      74,412            --
                                                                   --------      --------
   Total ......................................................     261,290       186,878
   Less current portion .......................................     136,765       121,875
                                                                   --------      --------
   Long-term debt, less current portion .......................    $124,525      $ 65,003
                                                                   ========      ========

</TABLE>

     The past due note payable originated in 1991, the proceeds of which were
used for general corporate purposes and were originally due in 1993. The due
date was extended until 1997 by mutual agreement between the parties. The
lender filed for bankruptcy and is currently in the process of liquidation. The
note is past due pending resolution of these matters, and is included in the
current portion. Due to the significant uncertainty surrounding the repayment
of this note, no interest expense was recorded in the years ended May 31, 2002
and 2001.


     The proceeds from a government loan which originated in the year ended May
31, 1999 were used to finance the last phase of the development of a specific
product by HPEC. The loan does not bear any interest and HPEC must repay the
loan by paying 1% of the revenue earned on the sale of the product. The period
of the loan is ten years or whenever the loan is paid, whichever comes first.


     Principal payments on long-term debt for the fiscal years ended May 31 are
due as follows: 2003--$14,890; 2004--$16,341; 2005--$17,933; 2006--$19,680;
2007--$5,568 and subsequent to 2007--$65,003.


6. COMMITMENTS


     The Company leases facilities under operating leases expiring on various
dates through 2011. Rent expense for the fiscal years ended May 31, 2002, 2001
and 2000 was $691,448, $259,261 and, $218,376, respectively. Aggregate minimum
annual payments under noncancellable operating lease agreements for the five
fiscal years subsequent to May 31, 2002 are: 2003--$629,865; 2004--$508,353;
2005--$499,455; 2006--$499,455 and 2007--$527,891.


     The Company has employment agreements with six of its key officers, two of
whom are directors. The agreements with its officers expire during October 2002
through September 2004. These agreements provide for base salaries with
increases and bonuses at the discretion of the Board of Directors.


                                       40
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES


     Deferred tax assets are comprised of the following:



<TABLE>
<CAPTION>
                                                              MAY 31,
                                                -----------------------------------
                                                      2002               2001
                                                ----------------   ----------------
<S>                                             <C>                <C>
   Plant and equipment ......................    $     254,778      $     313,094
   Inventory allowances .....................          485,731            140,071
   Accrued contract loss ....................           67,404            421,947
   Accrued liabilities and other ............        1,176,562            619,468
   Deferred revenue .........................          208,167            887,555
   Stock compensation .......................        2,415,874          2,426,758
   Net operating loss carryforwards .........       29,171,337         18,708,578
                                                 -------------      -------------
   Less valuation allowance .................       33,779,853         23,517,471
   Net deferred tax asset ...................      (33,779,853)       (23,517,471)
                                                 -------------      -------------
                                                 $          --      $          --
                                                 =============      =============

</TABLE>

     A full valuation allowance is recorded against the deferred tax assets as
realization of these benefits is not considered to be more likely than not.


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




<TABLE>
<CAPTION>
                                                           MAY 31,
                                              ---------------------------------
                                                    2002              2001
                                              ---------------   ---------------
<S>                                           <C>               <C>
   Current:
    Federal ...............................    $         --      $         --
    State .................................              --                --
                                               ------------      ------------
                                                         --                --
                                               ------------      ------------
   Deferred:
    Federal ...............................      (6,323,779)       (4,835,746)
    State .................................        (894,969)         (705,584)
    Foreign ...............................      (3,043,634)       (2,954,900)
    Change in valuation allowance .........      10,262,382         8,496,230
                                               ------------      ------------
                                                         --                --
                                               ------------      ------------
   Income tax provision (benefit) .........    $         --      $         --
                                               ============      ============

</TABLE>

     The Company has generated net operating loss carryforwards of
approximately $74 million and $48 million as of May 31, 2002 and May 31, 2001,
respectively, which are due to expire between 2022 and 2021. Section 382 of the
Internal Revenue Code of 1986, as amended, places a limitation on the
utilization of federal net operating loss carryforwards when an ownership
change occurs. Generally, an ownership change occurs when a greater than 50%
change in ownership takes place over a three-year test period. The annual
utilization of net operating loss carryforwards generated prior to such change
in ownership is limited, in any one year, to a percentage of the fair market
value of the Company at the time of the ownership change.


     The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to income before
taxes as follows:


                                       41
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7. INCOME TAXES (CONTINUED)


<TABLE>
<CAPTION>
                                                                  YEARS ENDED MAY 31,
                                                             -----------------------------
                                                                  2002            2001
                                                             -------------   -------------
<S>                                                          <C>             <C>
   U.S. statutory rate ...................................        (34.0)%         (34.0)%
   State and local taxes, net of federal benefit .........        (3.19)           (1.6)
   Foreign taxes .........................................        (1.34)            0.8)
   Imputed interest ......................................           --             1.6
   Other .................................................          1.98            3.6)
   Change in valuation allowance .........................         36.55           38.4
                                                                 -------          -----
   Effective tax rate ....................................         0.00%           0.00%
                                                                 =======         ======
</TABLE>

8. ECO RELATIONSHIP AND AGREEMENTS

     ECO is a stockholder of the Company and has a representative on the
Company's Board of Directors.

     In August 1999, the Company entered into an operating agreement (the
"Agreement") with ECO to develop and provide stationary power fuel cells. ECO
paid the Company an initial distribution rights fee of $2,500,000 and agreed to
purchase, market and service the Company's stationary power fuel cell systems
in exchange for the exclusive marketing, distribution and servicing rights to
those areas in the United States that are being serviced by ECO's affiliated
rural electric cooperative members. The payment of $2,500,000 for the initial
distribution rights was recorded in deferred revenue and recognized as revenue
on a straight-line basis over the contractual period. Under the prototype phase
of the Agreement, the Company agreed to develop, deliver, and install a total
of 39 alpha and beta prototype stationary fuel cell systems (the "prototypes")
at a fixed price of $2,680,500, which must meet certain performance
requirements. Completed prototypes will be deployed in the field for testing
purposes. Provided the Company is able to develop a commercial product, ECO has
agreed to purchase products from the Company over several years for a total
price of $81 million. Revenues from the sale of the commercial phase of the
Agreement will be recognized as the commercial systems are shipped and accepted
by the customer and will be classified as product revenues.

     Revenues earned under the prototype phase of the Agreement are recognized
as contract revenue using the units of delivery method and profits applicable
to such revenues are recognized pro-rata as units are delivered based on the
estimated total profits at the completion of the prototype phase of the
Agreement. Losses on the contract are recognized when determined. The impact of
revisions in profit and loss estimates are reflected in the periods in which
the revisions are made. Revenues of $252,000 and cost of revenues of $337,000
previously reported in fiscal 2000 as product revenues and cost of
revenues-products, respectively, have been reclassified to contract revenues
and cost of revenues-contracts in the accompanying consolidated statement of
operations. The difference between amounts previously recognized based on the
timing of customer acceptance of the prototypes is not materially different
from what would have been reported under percentage of completion contract
accounting.

     In January 2001, the Company and ECO amended the prototype phase of the
Agreement to reduce the number of prototypes to be delivered to 32 at a fixed
price of $2,172,000. Results for the year ending May 31, 2001 reflect the
recognition of an estimated loss on this phase of the Agreement of $1,280,000.

     In December 2001, the Company entered into a memorandum of agreement (the
"MOA") with ECO that amended, in certain respects, the Agreement. Under the
terms of the MOA, the Company re-purchased ECO's exclusive rights to sell and
distribute the Company's stationary products in areas of the U.S. served by
rural electric cooperatives. A limited number of exclusive distribution
agreements with ECO's licensed members may remain in effect. The MOA also
grants ECO the non-exclusive right to distribute the Company's other fuel cell
products. As consideration for the above, the Company paid ECO


                                       42
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. ECO RELATIONSHIP AND AGREEMENTS (CONTINUED)

$2,100,000 (which was the remaining unrecognized revenue related to the initial
distribution rights fees) and reduced deferred revenue on the balance sheet by
this amount. At May 31, 2001, $2,222,223 of the initial distribution rights
fees received was included in deferred revenue.

     In April 2002, the Company and ECO amended the Agreement (the "Amended
Agreement"). The Amended Agreement continues to provide for ECO, to purchase
$81 million of the Company's products exclusively from the Company. The Company
and ECO amended the products and delivery schedule to include both stationary
and portable products, increased the unit prices of the products, extended the
period of time for the delivery of the substantial majority of the products to
2005 through 2008, and reduced the number of prototype units to be delivered to
21 at a fixed price of $1,380,500. At May 31, 2002, the Company has $167,763
accrued for the estimated loss on the prototype phase of this contract
obligation.

     In April 2002, the Company and ECO entered into a sales and marketing
services agreement, a test reporting, engineering services and field services
agreement and a memorandum of agreement for the development of a sustainable
fuel cell community. In exchange for ECO's services to be provided under these
agreements, the Company will compensate ECO in an amount totaling $5,400,000
through December 31, 2003. In fiscal year 2002, the Company recorded $904,000
in selling, general and administrative expenses for the value of the services
rendered related to these agreements.

     For the years ended May 31, 2002, 2001 and 2000, the Company recognized
contract revenue of $200,000, $420,000 and $252,000, respectively, under its
agreement with ECO and $118,278, $222,218 and $55,556, respectively, for the
initial distribution rights fees received under the ECO operating agreement.
For the fiscal year ended May 31, 2002, the Company recognized revenue for
sales of portable products to ECO of $18,000. At May 31, 2002, accounts
receivable includes $391,166 which is due from ECO.

     During the year ended May 31, 2002, the Company paid $207,512 to an
entity, in which ECO held a controlling interest, for the development of
product documentation, training manuals and courses.


9. RELATED PARTY TRANSACTIONS

     The Company has a customer/vendor relationship with Fuel Cell Components
and Integrators, Inc. ("FCCI"), a company controlled by a member of the
Rothstein family. The Rothstein family is a principal stockholder of the
Company. A member of the Rothstein family served as a director of the Company
through April 5, 2000. During the year ended May 31, 2002 and 2001 the Company
sold products and services to FCCI totaling $91,755 and $52,300, respectively,
and purchased materials from FCCI totaling $281,365 and $165,173, respectively.

     The Company had an arrangement with NBG Technologies, Inc. ("NBG"),
formerly known as TechMatics Inc., whereby NBG provided the Company with R&D
consulting services. The Rothstein family is a principal stockholder of NBG.
Fees and expenses paid to NBG for consulting services for the fiscal year ended
May 31, 2000 amounted to $45,065. No amounts were paid in the years ended May
31, 2002 and 2001. The Company believes the fees paid were equivalent to those
that would be paid under an arms-length transaction. On March 29, 2000 the
Company terminated all agreements with NBG in exchange for a cash payment of
$100,000 and options to purchase 250,000 shares of the Company's common stock
at an exercise price equal to the initial public offering price of $16 per
share.

     On April 5, 2000, two of the Company's directors resigned from the board
of directors and terminated their agreements with the Company in exchange for
which they each received a cash payment of $1 million and options to purchase
300,000 shares of the Company's common stock at an exercise price equal to the
Company's initial public offering price of $16 per share.


                                       43
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9. RELATED PARTY TRANSACTIONS (CONTINUED)

     The fair value of each stock option granted to the resigning Company
directors and NBG were $5.32 and $6.29, respectively based upon the
Black-Scholes option pricing model which includes weighted average assumptions
for the dividend yield, risk-free interest rate, volatility and expected lives
of 0%, 6.3%, 52% to 58% and 3 to 5 years, respectively. The total expense
related to these option grants of $4,764,510 has been included in selling,
general and administrative expense for the year ended May 31, 2000. During the
year ended May 31, 2001, these resigning Company directors exercised additional
options through a cashless exercise resulting in stock option compensation
expense of $4,400,000 which has been recorded in selling, general and
administrative expense.

10. EMPLOYEE STOCK OPTION PLANS

     In March 2000, the Company amended and restated their May 1996 stock
option plan. Under the stock option plan adopted in March 2000, a maximum of
3,750,000 shares of the Company's common stock have been made available for the
granting of options and stock appreciation rights to officers and other key
employees of the Company at prices not less than 100% of fair market value of a
share of common stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any stock option
granted must equal 110% of the fair market value on the grant date. 10% of such
options granted will generally become exercisable upon date of grant and the
remaining 90% of such options will generally vest ratably over a five year
period. The stock options will generally expire within ten years from the date
of grant. At May 31, 2002, 2001 and 2000, we have granted 989,500, 597,665 and
359,751, respectively, options to purchase common stock under our 2000 plan.

     Under the stock option plan adopted on June 6, 1989, a maximum of
2,500,000 shares of the Company's common stock were made available for the
granting of options and stock appreciation rights to officers and other key
employees of the Company at prices not less than 80% of fair market value of a
share of common stock on the date of grant. Such options generally become
exercisable upon date of grant and expire within five years from the date of
grant. No further options may be granted under this plan.

     The Company has granted options to purchase shares of the Company's common
stock to certain officers and key employees outside of the 1989 and 2000 Stock
Option Plans. Such options generally become exercisable on the date of grant
and expire within five years from the date of grant. These options were
generally granted at the fair market value of the stock on the date of grant.

     The Company has adopted the disclosure only provisions of SFAS No. 123
and, accordingly, applies Accounting Principles Board Opinion ("APB") No. 25
and related interpretations in accounting for its employee stock option plans.
Had the Company elected to recognize compensation expense in accordance with
the provisions of SFAS No. 123, for the stock option awards granted, its net
loss and loss per basic and diluted share attributable to common stockholders
for the fiscal years ended 2002, 2001, and 2000 would have been $(30,717,690),
$(23,629,731) and $(19,922,223) or $(0.57), $(0.47) and $(0.57) per share,
respectively.

     On May 31, 1999, 488,750 employee stock options expired. The Company
extended the life of 481,250 of the options, until May 31, 2002 at the same
option price of $0.80. The options were vested upon extension. Under APB No.
25, the extension created an additional compensation charge for the difference
between the option price and the fair market value of the shares at May 31,
1999 in the amount of $836,125 of which $711,125, $107,000 and $18,000 has been
recorded in selling, general and administrative, research and development and
cost of revenues--contracts, respectively.

     The fair value of the Company's stock options used to compute the pro
forma net loss and loss per share disclosures is the estimated present value on
grant date using the Black-Scholes option pricing model with the following
weighted average assumptions:


                                       44
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. EMPLOYEE STOCK OPTION PLANS (CONTINUED)


<TABLE>
<CAPTION>
                                        YEAR ENDED MAY 31,
                                   -----------------------------
                                      2002      2001      2000
                                   --------- --------- ---------
<S>                                <C>       <C>       <C>
 Dividend yield ..................       0%        0%        0%
 Risk-free interest rate .........    6.82%     6.25%     6.10%
 Volatility (post IPO) ...........   80.79%    72.48%        0%
 Expected life (years) ...........     4.6       4.3       4.0

</TABLE>

     Changes in stock options are as follows:



<TABLE>
<CAPTION>
                                             2002                          2001                        2000
                                 ----------------------------   --------------------------   -------------------------
                                                    WEIGHTED                     WEIGHTED                     WEIGHTED
                                                     AVERAGE                      AVERAGE                     AVERAGE
                                                    EXERCISE                     EXERCISE                     EXERCISE
                                      SHARES          PRICE         SHARES         PRICE         SHARES        PRICE
                                 ---------------   ----------   -------------   ----------   -------------   ---------
<S>                              <C>               <C>          <C>             <C>          <C>             <C>
Beginning balance ............       5,091,116      $  7.56       5,491,625       $ 4.91       1,981,250      $  2.09
Granted or reissued ..........         989,500         5.41         597,665        16.28       3,590,375         6.38
Exercised ....................         (62,082)        1.68        (781,170)        1.70         (75,000)        0.80
Canceled or expired ..........      (1,240,549)        4.82        (217,004)       10.63           (5000)        0.80
                                    ----------      -------       ---------       ------       ---------      -------
Ending balance ...............       4,777,985      $  7.90       5,091,116       $ 7.56       5,491,625      $  4.91
                                    ----------      -------       ---------       ------       ---------      -------
Exercisable ..................       3,500,776      $  7.32       3,684,967       $ 6.30       3,742,194      $  4.73
Weighted average fair value of
 options granted during the
 year ........................                      $  4.57                       $ 9.50                      $  2.19
</TABLE>

     Summarized information about stock options outstanding and exercisable at
May 31, 2002 is as follows:



<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                OPTIONS EXERCISEABLE
                         ------------------------------------------   -----------------------
                                          WEIGHTED-       WEIGHTED                   WEIGHTED
                                             AVG.          AVERAGE                   AVERAGE
                          NUMBER OF       REMAINING       EXERCISE     NUMBER OF     EXERCISE
    EXERCISE PRICE          SHARES      LIFE IN YEARS       PRICE        SHARES       PRICE
----------------------   -----------   ---------------   ----------   -----------   ---------
<S>                      <C>           <C>               <C>          <C>           <C>
              2.50           89,500           9.9            2.50             --         --
              3.00        2,255,000           2.5            3.00      2,041,667       3.00
              3.10          500,000           9.5            3.10        300,000       3.10
              3.60           75,000           9.4            3.60             --         --
             12.36          250,000           9.2           12.36             --         --
             16.00        1,567,410           4.8           16.00      1,150,894      16.00
             18.69           41,075           8.5           18.69          8,215      18.69
--------------------      ---------           ---           -----      ---------      -----
   $2.50 to $18.69        4,777,985           6.1          $ 7.90      3,500,776     $ 7.32
====================      =========           ===          ======      =========     ======

</TABLE>

11. STOCKHOLDERS' EQUITY


     The Company has authorized 10,000,000 shares of preferred stock with a par
value of $.001 per share. There was no preferred stock issued and outstanding
as of May 31, 2002 and 2001.


     The Company's common stockholders are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. The
Company's common stockholders have no preemptive rights or rights to convert
their common stock into any other security.


                                       45
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11. STOCKHOLDERS' EQUITY (CONTINUED)

     On August 25, 1999, ECO purchased 5,000,000 shares of the Company's common
stock, $.001 par value, at a price of $3.00 per share for a total investment of
$15,000,000. In addition to the stock purchase, the Company and ECO entered
into a ten year operating agreement. See Note 8.


     In order to enter into the operating agreement with ECO, the Company
modified its pre-existing agreement with DQE Enterprises to allow ECO to have
exclusive marketing, distribution and servicing rights under the Agreement in
certain geographic areas that had previously been granted to DQE Enterprises.
As part of the consideration for modifying the DQE Enterprises agreement, the
Company agreed to amend article IV B3(a)(i) of the Amended and Restated
Certificate of Incorporation to change the redemption price of the Company's
previously issued Series A convertible preferred stock from $16.50 per share to
$18.00 per share, thus increasing the liquidation value of the Series A
convertible preferred stock by $300,000. Also as part of the consideration, the
Company issued common stock purchase warrants, which were set to expire on July
31, 2001, to purchase 500,000 shares of its common stock at $5.00 per share to
DQE Enterprises. These warrants expired unexercised on July 31, 2001. The
Company recorded a charge to cost of revenues--products totaling $150,000 which
represents the fair value of the warrants on August 25, 1999, their date of
issuance.


     On November 30, 1999, pursuant to its May 25, 1999 agreement with the
Company, Sofinov exercised its conversion right and converted its outstanding
advances at that date of $2,100,000 into 840,000 shares of the Company's common
stock. Furthermore, Sofinov exercised its purchase right in full and purchased
an additional 1,160,000 shares of the Company's common stock for $2,900,000.


     On November 30, 1999, Hydro-Quebec CapiTech Inc. purchased 2,000,000
shares of the Company's common stock, $.001 par value, at a price of $3.00 per
share for a total investment of $6,000,000.


     In conjunction with ECO, Sofinov, and Hydro-Quebec CapiTech Inc.'s
purchases of the Company's common stock, the Company incurred stock issue costs
approximating $913,000.


     On July 7, 2000, the Board of Directors of the Company approved an
increase in the number of authorized preferred and common shares to 10,000,000
and 150,000,000, respectively.


     Upon the closing date of the Company's IPO, convertible preferred
stockholders converted their shares to common stock as follows: DQE Enterprises
converted 200,000 shares of Series A convertible preferred shares to 1,000,000
common shares, Singapore Technologies Kinetics Lt. converted 400,000 shares of
Series B convertible preferred shares to 2,000,000 common shares, Sofinov
converted 600,000 shares of Series C convertible preferred shares to 3,000,000
common shares and outside investors of the Company's subsidiary, HPEC,
converted 333,333 shares of Series C convertible preferred shares (which they
received upon closing of the IPO when they converted their HPEC common stock
into Series C convertible preferred shares of the Company) to 1,666,665 common
shares.


     In June 2001, a consultant exercised 40,000 stock options through a
cashless exercise. Stock option compensation expense of $412,000 relating to
these options was previously recorded in selling, general and administrative
expenses in the fiscal year ended May 31, 2000.


12. EARNINGS PER SHARE


     Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company as calculated under the treasury stock method.


                                       46
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12. EARNINGS PER SHARE (CONTINUED)

     The following table illustrates the calculation of both basic and diluted
EPS:



<TABLE>
<CAPTION>
                                                                               YEAR ENDED MAY 31,
                                                            ---------------------------------------------------------
                                                                   2002                2001                2000
                                                            -----------------   -----------------   -----------------
<S>                                                         <C>                 <C>                 <C>
   BASIC AND DILUTED EARNINGS PER
    SHARE
   Net loss .............................................     $ (27,915,195)      $ (22,151,368)      $ (17,012,406)
   Accrued dividends on Series A Convertible
    Preferred Stock .....................................                --             (40,274)           (210,000)
                                                              -------------       -------------       -------------
   Net loss attributable to common stockholders .........       (27,915,195)        (22,191,642)        (17,222,406)
   Weighted average number of common shares .............        53,853,478          50,415,340          34,879,061
                                                              -------------       -------------       -------------
   Basic and diluted earnings per share .................     $       (0.52)      $       (0.44)      $       (0.49)
                                                              =============       =============       =============

</TABLE>

     If potential common shares were assumed converted, the effect would have
been anti-dilutive to EPS for all periods. These anti-dilutive securities are
summarized below.



<TABLE>
<CAPTION>
                                                           YEAR ENDED MAY 31,
                                                 ---------------------------------------
                                                     2002          2001          2000
                                                 -----------   -----------   -----------
<S>                                              <C>           <C>           <C>
   Number of potential common shares .........   4,777,985     5,091,116     11,410,332
</TABLE>

13. INFORMATION ABOUT GEOGRAPHIC AREAS


     The Company operates primarily in one industry segment, that being the
design, development, marketing and manufacturing of proton-exchange membrane
fuel cells and fuel cell systems. The geographic distributions of the Company's
revenues and identifiable assets are summarized in the following table:


<TABLE>
<CAPTION>
                                                           YEAR ENDED MAY 31,
                                          ----------------------------------------------------
                                                2002               2001              2000
                                          ----------------   ---------------   ---------------
<S>                                       <C>                <C>               <C>
   Revenues from external customers
    United States .....................    $   1,052,679      $   2,581,799      $ 3,640,464
    Canada ............................           28,525            185,770           10,702
    Europe ............................          547,673            474,860           19,240
    Asia ..............................          923,714            397,361            9,881
    Other .............................           23,121              3,500               --
                                           -------------      -------------      -----------
                                           $   2,575,712      $   3,643,290      $ 3,680,287

   Assets
    United States .....................    $  95,939,605      $ 116,925,843      $17,360,541
    Canada ............................        3,440,505          5,088,002        2,273,026
                                           -------------      -------------      -----------
    Total identifiable assets .........       99,308,110        122,013,845       19,633,567
    Corporate eliminations ............      (25,628,491)       (16,663,674)        (983,974)
                                           -------------      -------------      -----------
    Total assets ......................    $  73,751,619      $ 105,350,171      $18,649,593
                                           =============      =============      ===========
</TABLE>


                                       47
<PAGE>

                         H POWER CORP. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. QUARTERLY FINANCIAL DATA (UNAUDITED)



<TABLE>
<CAPTION>
                                           FIRST             SECOND            THIRD             FOURTH
                                          QUARTER           QUARTER           QUARTER           QUARTER
                                      ---------------   ---------------   ---------------   ---------------
<S>                                   <C>               <C>               <C>               <C>
   Year ended May 31, 2002
   Revenues .......................    $    371,146      $    794,527      $    346,396      $   1,063,643
   Loss from operations ...........      (8,308,853)       (7,237,882)       (7,019,197)        (7,779,836)
   Net loss .......................      (7,356,637)       (6,556,333)       (6,539,630)        (7,462,595)
   Net loss per share--
    basic and diluted .............    $      (0.14)     $      (0.12)     $      (0.12)     $       (0.14)
   Year ended May 31, 2001
   Revenues .......................    $  1,214,178      $    775,947      $    831,148      $     822,017
   Loss from operations ...........      (4,483,049)       (4,892,268)       (5,116,134)       (12,670,644)
   Net loss .......................      (4,004,443)       (3,531,980)       (3,221,052)       (11,393,893)
   Net loss per share--
    basic and diluted .............    $      (0.10)     $      (0.07)     $      (0.06)     $       (0.21)
   Year ended May 31, 2000
   Revenues .......................    $    824,908      $  1,083,762      $    673,647      $   1,097,970
   Loss from operations ...........      (1,459,430)       (2,323,834)       (2,733,474)       (11,164,677)
   Net loss .......................      (1,460,206)       (2,215,737)       (2,464,973)       (10,871,490)
   Net loss per share--
    basic and diluted (1) .........    $      (0.05)     $      (0.07)     $      (0.07)     $       (0.29)

</TABLE>

----------
(1)   The sum of the four quarters' net loss per share does not equal the
      amount reported for the full year since each quarter is calculated
      separately.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE


None.




                                       48
<PAGE>

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


     Incorporated herein by reference is the information appearing under the
caption "Management" in our definitive proxy statement for our 2002 Annual
Meeting of Stockholders.


ITEM 11. EXECUTIVE COMPENSATION


     Incorporated herein by reference is the information appearing under the
caption "Executive Compensation" in our definitive proxy statement for our 2002
Annual Meeting of Stockholders.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     Incorporated herein by reference is the information appearing under the
caption "Beneficial Ownership of Common Stock" in our definitive proxy
statement for our 2002 Annual Meeting of Stockholders.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     Incorporated herein by reference is the information appearing under the
caption "Certain Relationships and Related Transactions" in our definitive
proxy statement for our 2002 Annual Meeting of Stockholders.


                                    PART IV


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


(a) DOCUMENT LIST


     1. Financial Statements


       The following consolidated financial statements are set forth in Part
II, Item 8 of this report.


H POWER CORP. AND SUBSIDIARY:




<TABLE>
<CAPTION>
                                                                          PAGES
<S>           <C>                                                        <C>
     (i)      Report of Independent Accountants                             30
     (ii)     Consolidated Balance Sheet as of May 31, 2002 and 2001        31
     (iii)    Consolidated Statement of Operations for the years ended
              May 31, 2002, 2001 and 2000                                   32
     (iv)     Consolidated Statement of Changes in Stockholders' Equity
              (Deficit) and Comprehensive Net Loss for the years ended
              May 31, 2002, 2001 and 2000                                   33
     (v)      Consolidated Statement of Cash Flows for the years end
              May 31, 2002, 2001 and 2000                                   34
     (vi)     Notes to Consolidated Financial Statements                 35 to 48
</TABLE>



                                       49
<PAGE>

     2. Supplementary Data and Financial Statement Schedules


       (i) Financial Statement Schedule -- Valuation and Qualifying Accounts
and Reserves:

<TABLE>
<CAPTION>
                                                 ADDITIONS
                                     ---------------------------------
                                        BALANCE AT        CHARGED TO       CHARGED
                                        BEGINNING         COSTS AND       TO OTHER                      BALANCE AT
            DESCRIPTION                 OF PERIOD          EXPENSES       ACCOUNTS     DEDUCTIONS       END PERIOD
----------------------------------   ---------------   ---------------   ----------   ------------   ---------------
<S>                                  <C>               <C>               <C>          <C>            <C>
Allowance for doubtful
 accounts
 Year ended May 31, 1999 .........    $          --     $          --    --           $      --       $          --
 Year ended May 31, 2000 .........               --           (60,000)   --                  --             (60,000)
 Year ended May 31, 2001 .........          (60,000)           (5,610)   --               5,610             (60,000)
 Year ended May 31, 2002 .........          (60,000)          (62,105)   --              62,105             (60,000)
Inventory valuation allowance
 Year ended May 31, 1999 .........               --                --    --                  --                  --
 Year ended May 31, 2000 .........               --                --    --                  --                  --
 Year ended May 31, 2001 .........               --          (940,857)   --                  --            (940,857)
 Year ended May 31, 2002 .........         (940,857)       (1,460,158)   --           1,306,078          (1,094,937)
Deferred tax asset valuation
 allowance
 Year ended May 31, 1999 .........       (7,105,089)       (1,874,296)   --                  --          (8,979,385)
 Year ended May 31, 2000 .........       (8,979,385)       (6,041,856)   --                  --         (15,021,241)
 Year ended May 31, 2001 .........      (15,021,241)       (8,496,230)   --                  --         (23,517,471)
 Year ended May 31, 2002 .........      (23,517,471)      (10,262,382)   --                  --         (33,779,853)
</TABLE>

     All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted

     3. Exhibits Required by Securities and Exchange Commission Regulation S-K

         (a) The following exhibits are filed as part of this Annual Report:

10.64 Second Amended and Restated Fuel Cell Product Operating Agreement dated
      April 10, 2002, by and among ECO Fuel Cells, LLC, H Power Corp. and H
      Power Enterprises of Canada, Inc.*

10.65 Sales and Marketing Services Agreement dated April 10, 2002 among H
      Power Corp., H Power Enterprises of Canada, Inc. and ECO Fuel Cells, LLC.*

10.66 Test Reporting, Engineering Services and Field Services Agreement dated
      April 10, 2002 among H Power Corp., H Power Enterprises of Canada, Inc.
      and ECO Fuel Cells, LLC. *

10.67 Memorandum of Agreement dated April 10, 2002 among H Power Corp., H
      Power Enterprises of Canada, Inc., ECO Fuel Cells, LLC and Energy
      Co-Opportunity, Inc. *

10.68 Form of Stock Option Agreement for equity compensation plans not approved
      by security holders with Schedule of Optionees attached.

10.69 Form of Stock Option Agreement for equity compensation plans not approved
      by security holders with Schedule of Optionees attached.

23.1 Consent of PricewaterhouseCoopers LLP.


Exhibit No.

(b)   The following exhibits are incorporated herein by reference:

3.1   Restated Certificate of Incorporation.(i)

3.2   Amended and Restated By-Laws.(i)

3.5   Restated Certificate of Incorporation

4.1   Registration Rights Agreement, dated March 25, 1996, between H Power Corp.
      and Duquesne Enterprises.(i)


                                       50
<PAGE>

4.2   Investor Rights Agreement, entered into as of May 22, 1996, by and between
      H Power Corp. and Singapore Technologies Automotive Ltd.(i)

4.3   Investor Rights Agreement, entered into as of May 2, 1997, by and between
      H Power Corp. and Sofinov Societe Financiere D'innovation Inc., Societe
      Innovatech Du Grand Montreal and 9042-0175 Quebec Inc.(i)

4.4   Letter Agreement, dated as of May 2, 1997, between certain common
      stockholders of H Power Corp. and Sofinov Societe Financiere D'innovation
      Inc., Societe Innovatech Du Grand Montreal and 9042-0175 Quebec Inc.(i)

4.5   Stockholders' and Voting Agreement, dated as of April 5, 2000, by and
      among H Power Corp. and certain common stockholders.(i)

4.6   Specimen Common Stock Certificate.(i)

10.1  H Power Corp 1989 Stock Option Plan.(i)

10.2  H Power Corp. 2000 Stock Option Plan.(i)

10.3  Amended and Restated Officer's Employment Agreement, dated as of October
      1, 1999, between H Power Corp. and H. Frank Gibbard.(i)

10.4  Executive's Employment Agreement, dated as of October 11, 1999, between H
      Power Corp. and Arthur Kaufman.(i)

10.5  Officer's Employment Agreement dated as of November 1, 1999, between H
      Power Corp. and Thomas H. Michael.(i)

10.6  Officer's Employment Agreement, dated as of November 23, 1999, between H
      Power Corp. and William L. Zang.(i)

10.7  Consulting Agreement made and entered into as of July 28, 1999, between H
      Power Corp. and Frederick Entman.(i)

10.8  Consulting Agreement made and entered into as of July 28, 1999, between H
      Power Corp. and Norman Rothstein.(i)

10.9  Termination Agreement, dated as of April 5, 2000, by and between H Power
      Corp. and Norman Rothstein.(i)

10.10 Termination Agreement, dated as of April 5, 2000, by and between H Power
      Corp. and Frederick Entman.(i)

10.11 Consulting Agreement, dated as of March 15, 2000, between H Power Corp.
      and Millennium Capital Resources, LLC.(i) 10.12 Letter Agreement, dated
      March 10, 2000, between H Power Corp. and R. Michael Fromer.(i)

10.13 Stock Purchase Agreement made and entered into as of August 25, 1999,
      between H Power Corp. and Eco Fuel Cells, LLC.(i)

10.14 Stock Purchase Agreement made and entered into as of November 29, 1999,
      between H Power Corp. and Hydro-Quebec Capitech Inc.(i)

10.15 Stock Purchase Agreement made and entered into as of November 29, 1999,
      between H Power Corp. and Sofinov Societe Financiere D'innovation Inc.(i)

10.16 Letter Agreement, dated May 24, 1999, between H Power Corp. and Sofinov
      Societe Financiere D'innovation Inc.(i)

10.17 Agreement, dated July 28, 1999, between H Power Corp. and Duquesne
      Enterprises, Inc.(i)

10.18 Subscription Agreement, made and entered into on May 2, 1997, by and
      between H Power Corp. and 3362469 Canada Inc.(i)

10.19 Shareholders Agreement made and entered into on May 2, 1997, by and among
      H Power Corp., Sofinov Societe Financiere D'innovation Inc., Societe
      Innovatech Du Grand Montreal, 9042-0175 Quebec Inc. and 3362469 Canada
      Inc.(i)

10.20 Stock Exchange Agreement made and entered into on May 2, 1997, by and
      among H Power Corp. and Sofinov Societe Financiere D'innovation Inc.,
      Societe Innovatech Du Grand Montreal and 9042-0175 Quebec Inc.(i)

10.21 Amended and Restated Stockholders Agreement made and entered into as of
      May 2, 1997, by and among H Power Corp., certain common stockholders of H
      Power Corp., Duquesne Enterprises, Singapore Technologies Automotive Ltd.,
      Sofinov Societe Financiere D'innovation Inc., Societe Innovatech Du Grand
      Montreal and 9042-0175 Quebec Inc.(i)


                                       51
<PAGE>


10.22 Joint Venture Agreement, dated as of December 18, 1998, between H Power
      Corp. and Arthur D. Little, Inc.(i)

10.23 Memorandum of Agreement, dated February 9, 2000, between H Power Corp.,
      Societe Innovatech Du Grand Montreal, Sofinov Societe Financiere
      D'innovation Inc. and 9042-0175 Quebec Inc.(i)

10.24 Agreement, dated February 15, 1995, between H Power Corp. and TechMatics
      Inc.(i)

10.25 Termination Agreement, dated as of March 29, 2000 between H Power Corp.
      and NBG Technologies, Inc. (formerly Techmatics Inc.). (i) 10.26 Letter
      Agreement, dated March 25, 1996, between H Power Corp. and Duquesne
      Enterprises.(i)

10.27 Amended and Restated Fuel Cell Operating Agreement, dated March 9, 2000,
      between H Power Corp., H Power Enterprises of Canada, Inc., and ECO Fuel
      Cells LLC.(i)+

10.28 Agreement dated August 20, 1999, between H Power Corp. and H Power
      Enterprises of Canada Inc.(i)

10.29 Technology Licensing Agreement made and entered into on May 2, 1997, by
      and between H Power Corp. and 3362469 Canada Inc.(i)

10.30 First Amendment to Technology Licensing Agreement, entered into as of
      August 20, 1999, between H Power Corp. and H Power Enterprises of Canada
      Inc.(i)

10.31 Development and License Agreement, dated as of August 17, 1998, by and
      between H Power Enterprises of Canada Inc. and Harvest Energy Technology
      Inc.(i)+

10.32 Letter Agreement, dated November 18, 1999, between H Power Corp. and
      AvantCell Technologies Inc.(i)

10.33 Amending Agreement, dated January 11, 2000 between H Power Corp. and
      AvantCell Technologies Inc.(i)

10.34 Form of Employee's Agreement Re: Inventions, Confidential Information and
      Covenant not to Compete.(i)

10.35 Form of Indemnification Agreement.(i)

10.36 Lease, dated August 8, 1991, between Montbell Associates, L.L.C. and H
      Power Corp. ("Lease I").(i)

10.37 Lease, dated August 8, 1991, between Montbell Associates, L.L.C. and H
      Power Corp. ("Lease II").(i)

10.38 Addendum, dated April 4, 1996, to Leases dated August 8, 1991, between
      Montbell Associates, L.L.C. and H Power Corp.(i)

10.39 Addendum, dated March 29, 1999, to Leases dated August 8, 1991, as
      Modified by Subsequent Addendum dated April 4, 1996 between Montbell
      Associates, L.L.C. and H Power Corp.(i)

10.40 Agreement of Lease, dated September 17, 1997, between SITQ Inc. and H
      Power Enterprises of Canada Inc.(i)

10.41 Lease, dated December 8, 1999, between Khubani Enterprises, Inc. and H
      Power Corp.(i)

10.42 Letter Agreement, dated March 29, 2000, between NBG Technologies, Inc. and
      H Power Corp.(i)

10.43 Transfer of Technology Agreement, dated May 16, 1995, between
      Aerojet-General Corporation and H Power Corp.(i)

10.44 Letter Agreement, dated May 16, 2000, between ECO Fuel Cells LLC and H
      Power Corp.(i)

10.45 Contract between H Power Corp. and the Naval Surface Warfare Center.(i)

10.46 Participation Agreement, dated August 5, 1997, by and between H Power
      Corp. and Sacramento Municipal Utility District ("SMUD I").(i)

10.47 Contract Change No. 1 to SMUD I.(i)

10.48 Contract Change No. 2 to SMUD I.(i)

10.49 Contract Change No. 3 to SMUD I.(i)

10.50 Contract Change No. 4 to SMUD I.(i)

10.51 Agreement between H Power Corp. and USA CECOM Acquisition
      Center--Washington, dated December 23, 1997 (the "CECOM Contract").(i)

10.52 Modification 01 to the CECOM Contract for Fuel Cell/Battery Hybrid.(i)

10.53 Modification 02 to the CECOM Contract for Fuel Cell/Battery Hybrid.(i)


                                       52
<PAGE>


10.54 Modification 03 to the CECOM Contract for Fuel Cell/Battery Hybrid.(i)

10.55 Modification 04 to the CECOM Contract for Fuel Cell/Battery Hybrid.(i)

10.56 Modification 05 to the CECOM Contract for Fuel Cell/Battery Hybrid.(i)

10.57 Lease Agreement dated January 10, 2001 by and between W. F. Harris
      Development, LLC, and H Power Corp.(ii)

10.58 Offer to Lease dated January 8, 2001 by and between Bombardier, Inc. and H
      Power Enterprises of Canada, Inc.(ii)

10.59 Letter Agreement, dated July 26, 2001, between ECO Fuel Cells LLC and H
      Power Corp. (iii) ++

10.60 Officer's Employment Agreement, dated as of June 11, 2001, between H Power
      Corp. and Dudley Castle Wass (iii)

10.61 Shareholder Agreement dated August 6, 2001 between Mitsui & Co., Ltd.,
      Mitsui & Co. (USA), Inc. and H Power Corp. (iv)

10.62 Officer's Employment Agreement, dated as of September 15, 2001 between H
      Power Corp. and Paul McNeill (v)

10.63 Memorandum of Agreement, dated December 12, 2001, between H Power Corp., H
      Power Enterprises of Canada, Inc., ECO Fuel Cells, LLC and Energy
      Co-Opportunity, Inc. (vi)+++

21.1  List of subsidiaries of H Power Corp.(i)


----------

(i)   Incorporated by reference to H Power Corp.'s Registration Statement (file
      No. 333-34234) on Form S-1.

(ii)  Incorporated by reference to H Power Corp.'s Quarterly Report for the
      Quarterly Period Ended February 28, 2001, as filed on April 13, 2001.

(iii) Incorporated by reference to H Power Corp.'s Annual report for the Annual
      Period Ended May 31, 2001, as filed on August 16, 2001.

(iv)  Incorporated by reference to H Power Corp.'s Quarterly Report for the
      Quarterly Period Ended August 31, 2001, as filed on October 11, 2001.

(v)   Incorporated by reference to H Power Corp.'s Quarterly Report for the
      Quarterly Period Ended November 30, 2001, as filed on January 11, 2002.

(vi)  Incorporated by reference to H Power Corp.'s Quarterly Report for the
      Quarterly Period Ended February 28, 2002, as filed on April 3, 2002.

*     A request for confidential treatment was filed for portions of this
      document. Confidential portions have been omitted and filed separately
      with the Commission as required by Rule 24b-2 of the Securities Exchange
      Act of 1934, as amended.

+     Filed in redacted form pursuant to an Order, dated July 2000, by the
      Secretary of the Commission granting confidential treatment pursuant to
      Rule 406 of the Securities Act of 1933, as amended.

++    Filed in redacted form pursuant to an Order, dated January 2002, by the
      Secretary of the Commission granting confidential treatment pursuant to
      Rule 406 of the Securities Act of 1933, as amended.

+++   Filed in redacted form pursuant to an Order, dated May 2002, by the
      Secretary of the Commission granting confidential treatment pursuant to
      Rule 406 of the Securities Act of 1933, as amended.


(B) REPORTS ON FORM 8-K

     None.


(C) EXHIBITS

     The exhibits are as set forth above in the "List of Exhibits" in Item
14(a)(3).


(D) OTHER FINANCIAL STATEMENTS

     Not applicable.

                                       53
<PAGE>

                                  SIGNATURES

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


                                       H POWER CORP.


                                       By: /s/ H. Frank Gibbard
                                         -------------------------------------
                                               H. Frank Gibbard,
                                               Chief Executive Officer


Date: August 23, 2002


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




<TABLE>
<CAPTION>
         SIGNATURE                             TITLE                         DATE
         ---------                             -----                         ----
<S>                           <C>                                      <C>
/s/ H. Frank Gibbard          Chief Executive Officer and Director     August 23, 2002
-------------------------     (Principal Executive Officer)
H. Frank Gibbard

/s/ William L. Zang           Chief Financial Officer and Director     August 23, 2002
-------------------------     (Principal Financial and Accounting
William L. Zang               Officer)

/s/ Gary K. Willis            Director                                 August 23, 2002
-------------------------
Gary K. Willis

/s/Howard L. Clark, Jr        Director                                 August 23, 2002
-------------------------
Howard L. Clark, Jr.

/s/ Leonard A. Hadley         Director                                 August 23, 2002
-------------------------
Leonard A. Hadley

/s/ Rachel Lorey Allen        Director                                 August 23, 2002
-------------------------
Rachel Lorey Allen

/s/ Ivan Roch                 Director                                 August 23, 2002
-------------------------
Ivan Roch

/s/ Robert L. Hance           Director                                 August 23, 2002
-------------------------
Robert L. Hance
</TABLE>

                                       54
<PAGE>

                               INDEX TO EXHIBITS




<TABLE>
<CAPTION>
   EXHIBIT
   NUMBER    DESCRIPTION
   ------    -----------
<S>          <C>
  10.64      Second Amended and Restated Fuel Cell Product Operating Agreement dated
             April 10, 2002, by and among ECO Fuel Cells, LLC, H Power Corp. and H Power
             Enterprises of Canada, Inc. *
  10.65      Sales and Marketing Services Agreement dated April 10, 2002 among H Power
             Corp., H Power Enterprises of Canada, Inc. and ECO Fuel Cells, LLC. *
  10.66      Test Reporting, Engineering Services and Field Services Agreement dated April 10,
             2002 among H Power Corp., H Power Enterprises of Canada, Inc. and ECO Fuel
             Cells, LLC. *
  10.67      Memorandum of Agreement dated April 10, 2002 among H Power Corp., H Power
             Enterprises of Canada, Inc., ECO Fuel Cells, LLC and Energy Co-Opportunity, Inc. *
  10.68      Form of Stock Option Agreement for equity compensation plans not approved by
             security holders with Schedule of Optionees attached.
  10.69      Form of Stock Option Agreement for equity compensation plans not approved by
             security holders with Schedule of Optionees attached.
  23.1       Consent of PricewaterhouseCoopers LLP.
</TABLE>

----------
*     A request for confidential treatment was filed for portions of this
      document. Confidential portions have been omitted and filed separately
      with the Commission as required by Rule 24b-2.


                                       55