Document:

<PAGE>

Exhibit No.
10.46       -      Participation Agreement, dated August 5, 1997, by and
                   between H Power Corp. and Sacramento Municipal
                   Utility District ("SMUD I").

<PAGE>

                                                        SMUD Contract No. H-126

                           PARTICIPATION AGREEMENT

This Participation Agreement (Agreement) is entered into by and between H
POWER SYSTEMS CORPORATION, a New Jersey Corporation (H Power), and Sacramento
Municipal Utility District, a municipal utility district in the State of
California ("SMUD"). SMUD and H Power are hereinafter referred to collectively
as the "Parties" and individually as a "Party."

                               RECITALS

Whereas, SMUD, H Power, Hydrogen Burner Technologies, Incorporated (HBTI), and
Aerojet General Corporation (Aerojet), on February 10, 1995 entered into a
Memorandum of Understanding for the purpose of providing evidence of financial
and technology commitments relative to the Fuel Cell Hybrid Vehicle Project
(Project) to the Defense Advanced Research Projects Agency (DARPA); and

Whereas, DARPA has authorized, through Cooperative Agreement No.
MDA972-95-1-0010, funding of nine hundred thousand dollars ($900,000) to
partially fund development of fuel cell and fuel reformer systems based on
Aerojet's platelet technologies as part of the Project; and

Whereas, Aerojet General Corporation and SMUD on December 13, 1994 entered
into Participation Agreement No. F-783 for the purpose of carrying out certain
Project work as described in said agreement; and

Whereas, subsequent to Aerojet and SMUD having executed and materially
performed Project work under Participation Agreement No. F-783, H Power has
acquired rights to platelet technologies from Aerojet for use in development
and commercialization of fuel cell and fuel reformer designs; and

Whereas, SMUD is Program Manager of funds provided by DARPA to carry out the
Fuel Cell Hybrid Vehicle Project utilizing Aerojet and H Power's platelet
technologies; and

Whereas, final DARPA funding approval was obtained on April 28, 1995; and

Whereas, by separate agreement, attached hereto as Attachment 3, DARPA has
agreed to permit the Parties to incur allowable costs prior to receiving
DARPA's final funding approval; and

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                                                        SMUD Contract No. H-126

Whereas, the Parties agree to act in good faith to incur only costs allowable
under federal cost guidelines; and

Whereas, H Power and SMUD previously entered into Participation Agreement G-225
for the term of the Project ending April 28, 1997; and

Whereas, DARPA has modified Cooperative Agreement MDA972-95-1-0010 to span the
term through July 28, 1998.

NOW, THEREFORE, H Power and SMUD agree as follows:

1.       DEFINITIONS.

A.       EFFECTIVE DATE.     This Agreement shall be effective upon the first
business day following the date upon which the authorized representatives for
the Parties shall have executed this Agreement.

B.       FUNDING DATE.       The Funding Date for this Agreement shall be the
first business day following execution of a final funding agreement between
SMUD and DARPA, executed April 28, 1995.

2.       PROJECT FUNDING

A.       The Parties agree that receipt of DARPA funds is a condition
         precedent to SMUD's duty to release any funds under this Agreement.

B.       SMUD agrees to provide an additional ten thousand dollars ($10,000)
         in in-kind or cash project contributions as matching funds for the
         Project.

D.       H Power agrees to provide a minimum of four hundred thirty-three
         thousand dollars ($433,000) to fund the Project, as project
         contributions and matching funds for the Project, as allowable
         Project costs as further defined in paragraph 5.B below. Said funds
         may be direct contributions by H Power, or obtained through
         subcontract from other Project participants. Should H Power exceed
         the minimum project contributions required of H Power, said increase
         will have no effect on the amount obligated to be paid to H Power by
         SMUD or DARPA.

E.       SMUD agrees to provide to H Power funds received from DARPA in the
         amount of five hundred fifty-five thousand dollars ($555,000). These
         funds shall be provided in accordance

                                      2

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                                                        SMUD Contract No. H-126

         with paragraph 5.F of this Agreement. The portion of these funds paid
         to H Power under Participation Agreement G-225 amounted to $250,000,
         thus DARPA funds remaining to be paid to H Power amount to $305,000.

3.       PROJECT PARTICIPATION.     H Power hereby agrees to participate in
the Project. Insofar as it may be applicable to H Power as a participant, H
Power shall fully comply with and be bound by the terms and conditions
applicable to the Project as directed by DARPA, pursuant to DARPA Grant Number
MDA972-95-1-0010, attached hereto as Attachment Number 4, and by this
reference is made a part of this Agreement. H Power shall cooperate with SMUD
as may be reasonably necessary or advisable to ensure that SMUD fulfills its
obligations with respect to the project.

4.       PROJECT SCOPE.

A.       H Power and SMUD agree to participate in the Project, as set forth in
this Agreement, inclusive of attachments and exhibits. Attachment No. 1, the
Statement of Work for the Project, provides the general description of tasks
and subtasks applicable to the Project.

B.       It is mutually understood that any contracted work with Hydrogen
Burner Technologies, Inc. (HBTI) shall be coordinated by H Power. Contract
administration of the current contracts with Aerojet and HBTI shall be in
accordance with Participation Agreement No. G-225 and this Agreement No.
H-126, as applicable.

5.       ADMINISTRATIVE REQUIREMENTS AND COST PRINCIPLES.

A.       Federal government administrative requirements and cost principles
are applicable to this Project including, but not limited to the following:
         1)    "Cost Principles for State and Local Governments", Office of
               Management and Budget (OMB) Circular A-87;
         2)    "Uniform Administrative Requirements for Grants-In-Aid to State
               and Local Governments", OMB Circular A-102;
         3)    "Audits of State and Local Governments", Office of Management
               and Budget (OMB) Circular A-128.

B.       Matching funds shall meet the requirements of "allowable costs" and
shall have the meaning ascribed to such term in the Office of Management and
Budget's circular A-87, "Cost Principles for State and Local Governments." In
the event Aerojet incurs a cost determined by

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                                                        SMUD Contract No. H-126

DARPA or other federal authority to be ineligible as an "allowable cost", H
Power will reimburse SMUD for the ineligible amount

C.       H Power shall be responsible for contract administration of contracts
with Hydrogen Burner Technologies, Inc. for fuel cell stack development and
fuel reformer development.

D.       The following administrative data pertains to this contract:

H Power Project Manager:             Sanjiv Malhotra - Telephone (916) 924-6650
                                                             FAX (916) 924-3266
SMUD Contract Manager:               Michael Wirsch - Telephone (916) 732-6754
                                                            FAX (916) 732-6839
SMUD Project Manager:                Steven Rutter - Telephone (916) 732-6766
                                                           FAX (916) 732-6839

Charge Costs to:      Cost Center 518,
                      Payments to Aerojet - Work Order No. 701261
                      Cost Element 713, Program IX

E.       INVOICES AND PAYMENTS.
         1)    Under Participation Agreement G-225, an initial payment of
         $120,000 was made to H Power following execution of G-225. Payments
         to H Power are contingent upon receipt of funds from DARPA.

         2)    Milestone payments shall be based on completion of payable
         milestones as described in Attachment 1, Statement of Work. Upon
         completion of a payable milestone, H Power shall submit documentation
         describing and certifying such completion. Payments shall be made on
         the basis of milestone accomplishments as follows:

               a)  Completion of Subtasks 1.4, 1.6.2, 3.1  $130,000 (paid under
                                                                      G-225)

               b)  Completion of Subtasks 1.1.2, 1.2, 1.3,
                    1.4, 1.5, 3.4                          $ 93,000

               c)  Completion of Subtasks 1.6.3, 2.1, 3.5  $ 65,000

               d)  Completion of Subtasks 2.2, 2.3, 2.4,
                    2.5, 2.6                               $ 50,000

               e)  Completion of Subtasks 2.7.1 and 2.7.2  $ 20,000

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                                                        SMUD Contract No. H-126

               f)  Completion of 2.7.3 and 2.7.4           $ 27,000

               g)  Completion of Subtasks 2.9.1            $ 40,000

               h)  Completion of Subtasks 2.9.2            $  5,000

               i)  Completion of Subtasks 1.7.2.10, 3.6    $  5,000

                                                           --------
                          Total under Contract H-126       $305,000

         4)    Invoices shall be directed to:

                      Accounting Department - MS 27
                      Sacramento Municipal Utility District
                      P.O. Box 15830
                      Sacramento, CA 95852-1830

         5)    Payment of amounts invoiced for milestone accomplishment
         reimbursements shall be due within twenty business days following
         receipt of invoice and documentation of expenditures. Invoices shall
         state the amount requested to be reimbursed and the amount to be
         reported to DARPA as a project contribution. Reports of Project
         contributions may be made separate from invoices.

G.       AUDITS.

         1)    In addition to the audit rights DARPA or the Federal government
               may have, SMUD shall have the right to audit Project specific
               documents and records during normal business hours at H Power's
               offices during the term of this Agreement and for a period of
               three (3) years after the expiration or earlier termination of
               this Agreement.

         2)    The OMB Circular noted above in paragraph 5.A.3 requires that a
               single audit of this project be performed annually. SMUD and H
               Power are required to have an independent single audit performed
               within twelve months of the end of the year in which Federal
               funds were first received.

6.        TERM. This agreement shall commence upon the effective date and
shall, unless earlier terminated pursuant to paragraph 26 and subject to
paragraph 26, continue in effect until February 28, 1998.

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                                                        SMUD Contract No. H-126

7.        PROJECT REPORTS.

A.        MONTHLY REPORTS.  H Power shall provide to SMUD a monthly summary
report of all activities during the previous month toward accomplishing
Project objectives. Included in the monthly report shall be the status of
Project tasks, the current projection for completion of tasks, a summary of
expenditures during the applicable month, a projection of future costs for the
Project, and a discussion of problems and potential problems that SMUD may
need to take action upon or communicate to DARPA.

B.        QUARTERLY REPORTS.  H Power shall provide to SMUD a quarterly
summary report of Project activities for each calendar quarter of the Project.
This report shall include the status of those Project tasks for which H Power
is responsible, a projection for completion of Project tasks, a summary of
Project expenditures including the portion of the expenditures made as
contributions to the Project and those for which H Power has or will request
reimbursement from DARPA funds, a projection of future expenditures for the
Project, technical reports that should be transmitted to DARPA, and Project
concerns which may require resolution by SMUD or DARPA.

C.        FINAL REPORT.  H Power shall provide to SMUD a final report upon
completion of the Project summarizing the findings, conclusions, technology
developments, and other technical information obtained through the Project
Information relative to predicted performance, predicted or estimated future
production costs, and value of the Project to DARPA and the Project
participants shall also be included in the final report and related to
information as presented in the Project proposal to DARPA. Final Project
expenditure totals shall be included in this report. This report will be
supplemented by information from other Project participants prior to submittal
to DARPA.

8.        COMPARATIVE LIABILITY.

H Power and SMUD, respectively, as indemnitor, will indemnify the other, as
indemnitee, save it harmless from any and all loss, damage, expense and
liability resulting from injuries to or death of persons, including but not
limited to employees of either party hereto, and damage to or destruction of
property, including but not limited to the property of either party hereto,
arising out of or in any way connected with the performance of this Agreement
or any operations hereunder by indemnitor, its agents or employees, excepting
only such injury, death, damage or destruction as may be caused by the sole
negligence or willful misconduct of the indemnitee, its agents or employees.
Indemnitor shall, upon indemnitee's request, defend at its sole cost any suit
asserting a claim covered by this indemnity.

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                                                        SMUD Contract No. H-126

It is the intent of the parties hereto that, where negligence is determined to
have been contributory, principles of comparative negligence will be followed
and each party shall bear the proportionate cost of any loss, damage, expense
and liability attributable to that party's negligence.

9.        LIMITATION OF LIABILITY.

Neither SMUD nor H Power shall have liability with respect to their
obligations hereunder or otherwise for consequential, exemplary, special,
incidental or punitive damages. The total limit of liability arising under
this Agreement, for any reason and upon any cause of action, shall be limited
to the amount paid by SMUD to H Power under this Agreement. This limitation
applies to all causes of action in the aggregate, including without
limitation, breach of contract, breach of warranty, negligence, strict
liability, misrepresentations and other torts.

10.       INSURANCE REQUIREMENTS.

Without limiting any of the other obligations or liabilities of H Power, H
Power shall comply with all provisions of Attachment 2 (SMUD Form X-2,
INSURANCE REQUIREMENTS) and shall, by no later than the effective date of this
Agreement, provide SMUD with a Certificate of Insurance evidencing the
required coverage, and evidencing that SMUD, its directors, officers,
representatives, agents, and employees are included as additional insureds.

11.       RESOLUTION OF DISPUTES.

H Power and SMUD shall make a good faith effort to implement this Agreement in
a manner which is acceptable to both Power and SMUD. If H Power and SMUD
should disagree over any matter arising out of this Agreement, H Power and
SMUD shall endeavor to resolve such disagreement through informal
consultation. Any dispute arising under this Agreement that is not settled by
agreement of the Parties shall be submitted to the exclusive jurisdiction of
the courts of the State of California. SMUD and H Power each waives its right
to a jury trial in any dispute arising under this Agreement.

12.       FOREIGN ACCESS TO TECHNOLOGY.  This Section is taken from RA 94-24
Proposer Information Package. Any reference to "Consortium" in this Section
shall mean Aerojet, H Power, HBTI, and SMUD, collectively or individually.

                                       7

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                                                        SMUD Contract No. H-126

A.        DEFINITIONS.

          "Foreign Firm or Institution" means a firm or institution organized
under the laws of a country other than the Unites States, its territories, or
possessions. The term includes, for purposes of this Agreement, any agency or
instrumentality of a foreign government; and firms, institutions or business
organizations which are owned or substantially controlled by foreign
governments, firms, institutions, or individuals.

          "Know-How" means all information including, but not limited to
discoveries, formulas, materials, inventions, processes, ideas, approaches,
concepts, techniques, methods, software, programs, documentation, procedures,
firmware, hardware, technical data, specifications, devices, apparatus and
machines.

          "Technology" means discoveries, innovations, Know-How and
inventions, whether patentable or not, including computer software, recognized
under U.S. law as intellectual creations to which rights of ownership accrue,
including, but not limited to, patents, trade secrets, maskworks, and
copyrights developed under this Agreement.

B.        GENERAL

          The Parties agree that research findings and technology developments
in electric-hybrid vehicle technology may constitute a significant enhancement
to the national defense, and to the economic vitality of the United States.
Accordingly, access to important technology developments under this Agreement
by Foreign Firms or Institutions must be carefully controlled. The controls
contemplated in this Article are in addition to, and are not intended to
change or supersede, the provisions of the International Traffic in Arms
Regulation (22 CFR pt. 121 et seq.), the DoD Industrial Security Regulation
(DoD 5220.22-R) and the Department of Commerce Export Regulation (15 CFR pt.
770 et seq.).

C.        RESTRICTIONS ON SALE OR TRANSFER OF TECHNOLOGY TO FOREIGN FIRMS OR
          INSTITUTIONS

          1.  In order to promote the national security interests of the United
              States and to effectuate the policies that underlie the
              regulations cited above, the procedures stated in subparagraphs
              C.2, C.3, and C.4 below shall apply to any transfer of
              Technology. For purposes of this paragraph, a transfer includes
              a sale of the company, and sales or licensing of Technology.
              Transfers do not include:

              (a)  sales of products or components, or

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                                                        SMUD Contract No. H-126

              (b)  licenses of software or documentation related to sales of
                   products or components, or

              (c)  transfer to foreign subsidiaries of the Consortium
                   participants for purposes related to this Agreement, or

              (d)  transfer which provides access to Technology to a Foreign
                   Firm or Institution which is an approved source of supply or
                   source for the conduct of research under this Agreement
                   provided that such transfer shall be limited to that
                   necessary to allow the firm or institution to perform its
                   role under this Agreement.

          2.  The Consortium shall provide timely notice to DARPA of any
              proposed transfers from the Consortium of Technology developed
              with DARPA funding under this Agreement to Foreign Firms or
              Institutions. If DARPA determines that the transfer may have
              adverse consequences to the national security interests of the
              United States, the Consortium, its vendors, and DARPA shall
              jointly endeavor to find alternatives to the proposed transfer
              which obviate or mitigate potential adverse consequences of the
              transfer but which provide substantially equivalent benefits to
              the Consortium.

          3.  In any event, the Consortium shall provide written notice to the
              DARPA Program Manager and Agreement Administrator of any proposed
              transfer to a foreign firm or institution at least sixty (60)
              calendar days prior to the proposed date of transfer. Such
              notice shall cite this Article and shall state specifically what
              is to be transferred and the general terms of the transfer.
              Within thirty (30) calendar days of receipt of the Consortium's
              written notification, the DARPA Agreement Administrator shall
              advise the Consortium whether it consents to the proposed
              transfer. In cases where DARPA does not concur or in sixty (60)
              calendar days after receipt DARPA provides no decision, the
              Consortium may utilize the procedures under Article VI, Disputes.
              No transfer shall take place until a decision is rendered.

          4.  Except as provided in subparagraph C.1 above and in the event
              the transfer of Technology to Foreign Firms or Institutions is
              approved by DARPA, the Consortium shall (a) refund to DARPA funds
              paid for the development of the Technology and (b) negotiate a
              license with the Government to the Technology under terms that
              are reasonable under the circumstances.

                                       9

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                                                        SMUD Contract No. H-126

13.       PROJECT PROPERTY OWNERSHIP

Title to all nonexpendable and expendable tangible personal property purchased
or otherwise created through the direct Project work of H Power shall be
deemed to have vested in H Power upon purchase, fabrication, manufacture or by
other means of acquisition. The Project vehicle which will result from
completion of vehicle integration activities of H Power, as further described
in the Statement of Work, will remain in complete and functional condition,
with fuel cell power system installed until such time as H Power determines
that the power system must be removed, but no earlier than December 1, 1998.
The Parties may extend this time by mutual written agreement.

14.       PATENT RIGHTS

Subject to the limitations as specified in 48 CFR 227 and 252, as amended, and
37 CFR 401.14 of July 1, 1987, which titles and sections are incorporated by
reference, H Power shall retain the rights to all patents and other
intellectual property resulting from this Project.

Invention disclosures are to be submitted to the Administrative Grants Officer
for DARPA Grant No. MDA972-95-1-0010, who will forward them directly to the
Counsel for Patent Matters, (Code OOCC1), Office of the Chief of Naval
Research, Department of the Navy, Arlington, Virginia 22217-5000. The Counsel
for Patent Matters will represent the Administrative Grants Officer with
regard to invention reporting matters arising under this Project.

15.       RIGHTS IN TECHNICAL DATA AND COMPUTER SOFTWARE

Subject to the limitations as specified in 48 CFR 227 and 252, as amended,
incorporated herein by this reference, H Power shall retain the rights to
technical data and computer software developed or resulting from this Project.

16.       ACKNOWLEDGMENT OF SPONSORSHIP

A.  In the release of information relating to this Project, such release shall
include a statement to the effect that (1) the Project was or is sponsored by
the Defense Advanced Research Projects Agency, (2) the content of the
information does not necessarily reflect the position or the policy of the
Government, and (3) no official endorsement should be inferred.

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                                                        SMUD Contract No. H-126

B.  For the purposes of this paragraph, information includes news releases,
articles, manuscripts, brochures, advertisements, still and motion pictures,
speeches, trade association proceedings, symposia, etc.

17.       EQUAL EMPLOYMENT OPPORTUNITY.

H Power shall not discriminate against any employee or applicant for
employment on account of race, religion, gender or sex, color or national
origin, handicap or age. H Power shall ensure that this requirement is applied
to applicants and employees in actions including, but not limited to
employment, upgrading, promotion, demotion or transfer, recruitment or
recruitment advertising, layoff or termination, rates of pay or other forms of
compensation and selection for training, including apprenticeships.

18.       MINORITY/WOMEN OWNED BUSINESS ENTERPRISES.

It is the policy of SMUD that minority and women business enterprises shall
have the maximum opportunity to participate in SMUD's contracts. In this
regard, SMUD shall take the necessary and reasonable steps in accordance with
the solicitation upon which this contract is based, to ensure that minority
and women business enterprises have the maximum opportunity to participate in
this contract to the extent applicable. H Power shall not discriminate on the
basis of race, religion, sex, color or national origin, handicap or age in the
award or performance of any contract or subcontract resulting or relating to
these services.

19.       ASSIGNMENT.

Neither Party may assign this Agreement, either in whole or in part, without
the prior written consent of the other Party.

20.       NO JOINT VENTURE.

It is expressly acknowledged and agreed that the Parties have NOT entered into
a joint venture of any kind in regard to the subject matter of this Agreement
and this Agreement shall not be construed to constitute a joint venture
between the Parties for any purpose whatsoever.

21.       FORCE MAJEURE.

Neither Party shall be considered in default in the performance of its
obligations under this Agreement to the extent that the performance of any
obligation is prevented or delayed by any cause, existing, or future, which is
beyond the reasonable control of the affected Party.

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                                                        SMUD Contract No. H-126

22.       CALIFORNIA LAW.

This Agreement shall be construed and interpreted in accordance with the laws
of the State of California, without regard to its conflict of laws provisions.

23.       ENTIRE AGREEMENT.

This Agreement constitutes the entire agreement between the Parties concerning
the subject matter of this Agreement, and supersedes any prior understanding
or agreement between the Parties regarding the Project, whether oral or
written.

24.       AMENDMENTS.

This Agreement shall be amended only in writing, and any such amendments shall
be identified specifically as amendments to this Agreement, and shall be duly
executed by both Parties.

25.       DEFAULT.

H Power shall be deemed to be in default under this Agreement which shall
constitute a material breach of this Agreement if H Power fails to perform
fully any material provision of this Agreement and such failure continues for
a period of twenty (20) business days after written notice of such
nonperformance. Upon written notice of nonperformance, H Power shall proceed
with all due diligence to cure such failure. Upon such continuing default,
SMUD may, with the concurrence of DARPA, elect to suspend performance under
this Agreement until such default is cured or terminate this Agreement.

26.       TERMINATION.

Either Party may terminate this Agreement for cause at any time upon the
giving of no less than 60 days prior written notice to the other Party. As
used in the preceding sentence, "cause" may include, but not necessarily be
limited to, (i) a determination by SMUD that a default has occurred, (ii) a
determination by either Party, and with the concurrence of DARPA, that the
Project Tasks have been completed, (iii) a determination by either Party,
with the concurrence of DARPA, that the Project Tasks are no longer relevant
to the stated objectives of the Project. Upon notice of termination, H Power
shall immediately cease work under this Agreement and shall take all steps
reasonably necessary to mitigate any costs or expenses for which SMUD or DARPA
may be liable hereunder. Notwithstanding anything to the contrary contained
herein, SMUD shall not be liable for any cost or expense incurred by H Power
after termination of this Agreement.

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                                                        SMUD Contract No. H-126

27.       WARRANTY.

H Power warrants that the services provided hereunder shall conform with the
highest standards of care and practice appropriate to the nature of the
technical and professional services rendered, that the personnel performing
such services shall be qualified and competent to perform the services
assigned to them, and that the performance of such personnel shall reflect
their best professional knowledge and judgment.

IN WITNESS THEREOF, the parties hereto have caused their duly authorized
representatives to execute this Agreement as of the dates shown below.

H POWER SYSTEMS CORPORATION

By:
      --------------------------------       --------------------
      Arthur Kaufman, Vice President                Date
      Technology and Engineering

SACRAMENTO MUNICIPAL UTILITY DISTRICT

By:     /s/ Jan Schori                             8/5/97
      --------------------------------       --------------------
      Jan Schori, General Manager

Approved as to form:

  /s/ Leslie A. Dunsworth
--------------------------------------

                                      13

<PAGE>

                                                             Attachment No. 1

                                STATEMENT OF WORK
                                      H POWER

TASK 1 - FUEL CELL STACK DEVELOPMENT

    The Consortium shall design, fabricate, test and demonstrate a fuel cell
    powered vehicle using a Proton Exchange Membrane (PEM) fuel cell stack,
    with a power output of approximately 10 kilowatts fueled by compressed
    hydrogen.

Subtask 1.1: Fuel Cell Engineering

    1.1.1 Requirements inputs for the fuel cell stack will be generated,
    including target voltage, power, envelope, interfaces, testing
    requirements, and auxiliary system requirements.

    1.1.2 Scaling algorithms generated by Aerojet for sizing larger and
    smaller stacks will be completed or reviewed. Stack supply requirements
    definition will be finalized, including auxiliaries for metering hydrogen
    and air from facility supplies plus a closed loop water cooling system.
    Test instrumentation and diagnostic equipment definition will be
    finalized.

Subtask 1.2: Low Cost, Light Weight Separator Development

    Approximately 160 full size separators will be built for performance
    testing in a full stack.

    Various fabrication processes will be evaluated to select an approach
    with a target mass production cost of $40 to $100/kW. Processes will be
    selected for low cost mass production, and for compatability with
    advanced membrane electrode assemblies. High rate production techniques
    will be selected. This effort will be oriented toward low cost methods of
    creating internal fluid flow passages and bonding the thin sheets
    together using methods scaleable to high rate production.

Subtask 1.3: Fuel Cell Separator Sealing

    This subtask will develop a repeatable process for sealing separators,
    membrane electrode assemblies and fluid manifolds. The sealing approach
    will be able to seal over a range of ambient to 30 psi. The sealing
    approach will be compatible with mass production techniques. H Power will
    support Aerojet in sealing development and will fabricate seals for
    stack assemblies.

<PAGE>

Subtask 1.4: Membrane Electrode Development

        Advanced membrane electrode assemblies (MEA) will be developed
        compatible with the second generation separator design. Approximately
        160 MEA's will be fabricated for the fuel cell stack.

Subtask 1.5: Fuel Cell Stack Assembly

        Ancillary stack components will be procured or fabricated, including
        stack end plates for short and full stacks and humidifiers, fittings,
        plumbing, filters, etc. for the full stack(s). The fuel cell stack will
        be assembled and leak checked. The stack and auxiliary systems will be
        assembled, instrumentation and diagnostic equipment will be installed,
        including pressure, temperature, flow, current and voltage for recording
        on a digital data acquisition system.

Subtask 1.6 Fuel Cell Bench Test

        1.6.1 Support will be provided to preliminary short stack tests.

        1.6.2 Support will be provided to a second series of short stack tests.

        1.6.3 A comprehensive series of full stack tests will be performed.
        Performance data will be collected provided to the DARPA National Data
        Center.

Subtask 1.7 Final Fuel Cell Technical Report

        A written report will be prepared for submittal to DARPA. The report
        will include test results, conclusions, design and other
        recommendations, and other significant findings of this Project Task.

TASK 2: HYDROGEN FUEL CELL VEHICLE INTEGRATION

        The Consortium shall integrate the fuel cell stack from Task 1 into an
        electric vehicle, together with compressed hydrogen fuel system,
        auxiliary systems, controls, instrumentation and diagnostics. Tests will
        be performed to evaluate stack efficiency, dynamic load following and
        vehicle operating characteristics.

Subtask 2.1: Vehicle Systems Engineering

        Demonstration vehicle integration requirements will be defined,
        including physical, control and power train interfaces, acceleration
        profiles, peaking battery requirements, hydrogen storage, and auxiliary
        power requirements. Models shall be used to estimate vehicle range

<PAGE>

     and performance and to trade fuel cell vs. peaking battery sizing. Layout
     drawings will be prepared depicting the installation of the fuel cell
     module and hydrogen storage bottles in the vehicle.

Subtask 2.2: Thermal Management System

     The thermal management system is required to maintain the stack at its
     desired operating temperature. Part of the thermal management system is
     contained in the fuel cell stack module. This subtask provides the
     radiator, water pump, deionizer, fans, valves and fluid lines and other
     hardware to complete the system.

Subtask 2.3: Hydrogen Storage

     This subtask provides the hydrogen storage system, including storage
     bottles selected to fit the vehicle, plus regulator, filling adaptors,
     feed lines, and control and emergency shutoff valves.

Subtask 2.4: Air Supply

     A commercial air compressor capable of providing 15 to 30 psi air to the
     fuel cell stack will be procured, together with inlet filter, purge
     valve, and supply lines.

Subtask 2.5: Control System

     Control and safety requirements will be defined and documented. High
     level charts depicting control flows will be developed. Hydrogen leak
     detectors and other sensors will be specified and located, along with
     emergency devices and alarms. Control algorithms will be developed.
     Control interfaces with the fuel cell systems will be designed. Control
     components will be procured and assembled for a control system bench
     test and calibration.

Subtask 2.6: Peaking Batteries

     No formal H Power work required for selection or installation of peaking
     batteries.

Subtask 2.7: Fuel Cell Power Conversion

     Specify, subcontract for, review the design performance, and install
     jointly with SMUD, a Power Conversion Subsystem (PCS) for the fuel cell
     system under development. The PCS shall be based on an "up-chopper" or
     other power conversion device using electrical power from the fuel cell
     stack to produce output voltage and current compatible with the traction
     battery system and other propulsion system power demands and components.
     The PCS shall also provide electrical isolation of the fuel cell stack
     from the remainder of the propulsion system. The following specific work
     items are included:

<PAGE>

    2.7.1 H Power shall prepare a written performance and design
specification for the PCS, and submit for review and approval by SMUD prior
to awarding a subcontract for the PCS.

    2.7.2 H Power shall award and administer the purchase contract with the
supplier of the PCS.

    2.7.3 H Power shall perform the design integration of the PCS into the
overall fuel cell propulsion system.

    2.7.4 H Power shall perform the physical integration of the PCS into the
Project vehicle, with the assistance of SMUD.

Subtask 2.8: Electric Drive System Integration

    This task provides the modifications to integrate the fuel cell system
with the vehicle drive train. Wiring harnesses will be designed and
fabricated for the main drive current and for auxiliaries. The harnesses will
be integrated into the vehicle wire harnesses. Drive train tests will be
conducted on a dynamometer, oriented toward basic safety and functional
checks.

Subtask 2.9: Vehicle Installation & Tests

    2.9.1 The fuel cell stack module and the auxiliary systems will be
installed in the test and demonstration vehicle.

    2.9.2 The hydrogen fuel cell vehicle will be tested including
dynamometer, acceleration, lead following, road handling, and regenerative
braking tests. Performance data will be collected and reported to the DARPA
National Data Center.

Subtask 2.10: Final Vehicle Demonstration Technical Report

    A written report will be prepared for submittal to DARPA. The report will
include test results, conclusions, design and other recommendations, and
other significant findings of this Project Task.

TASK 3--REFORMER DEVELOPMENT

    The Consortium shall design, fabricate and test a reformer capable of
operating with one or more logistical fuels (CNG, Propane, methanol, ethanol,
diesel, jet fuel, gasoline). The reformer will include and integral heat
exchanger that preheats the fuel and air using reformer exhaust to maximize
efficiency while minimizing outlet temperature and

<PAGE>

    corresponding wast heat. Steam injection will be incorporated to drive the
    CO-H2 shift reaction.

Subtask 3.1: Reformer Systems Engineering

    Support to the requirements definition and analyses for the reformer
    will be provided.

Subtask 3.2: Workhorse Reformer

    NO H Power work is required for the workhorse reformer.

Subtask 3.3: Platelet Reformer Design

    No H Power work is required for the platelet reformer design.

Subtask 3.4: Reformer Fabrication

    The reformer components excluding the platelet injector will be
    fabricated. The reformer will be assembled and leak checked.

Subtask 3.5: Reformer Test

    The reformer will be installed in a test facility with instrumentation
    and gas composition diagnostics. The reformer will be tested to
    determine quality and composition of reformate gas. Hydrogen yield will
    be determined and compared with theory. Reformer efficiency and turndown
    ratio will be determined. Performance data will be collected and reported
    to the DARPA National Data Center.

Subtask 3.6: Final Reformer Development Technical Report

    A written report will be prepared for submittal to DARPA. The report will
    include test results, conclusions, design and other recommendations, and
    other significant findings of this project task.

TASK 6 PROGRAM MANAGEMENT AND ADMINISTRATION

    The Parties shall administer and coordinate Project activities and shall
    be responsible for fiscal management, data collection, and reporting. The
    Parties, with DARPA Program

<PAGE>

     Manager participation and review, will prepare an overall annual program
     plan which will be presented at an annual site review. At quarterly
     intervals, the Parties will provide a technical and business status
     report. The Parties will provide special technical reports on significant
     events (target accomplishments, key tests, experiments, symposia
     presentations, Triannual National Review). The Parties will submit
     documentation describing the accomplishment of deliverable items as
     delineated or otherwise referenced in the DARPA Cooperative Agreement.
     The Parties will provide a final report making full disclosure of all
     major accomplishments under this Agreement.

Subtask 6.1: Fuel Cell Development Management

     H Power and SMUD will jointly perform the above management and
     administration tasks for the fuel cell stack development task. H Power
     shall have primary responsibility for administration and management of
     subcontracts relating to fuel cell stack development, with assistance
     from SMUD.

Subtask 6.2: Hydrogen Fuel Cell Vehicle Integration Management

     H Power and SMUD will jointly perform the above management and
     administration tasks for the hydrogen fuel cell vehicle integration
     task. H Power shall have primary responsibility for administration and
     management of subcontracts relating to vehicle integration, with
     assistance as necessary from SMUD.

Subtask 6.3: Fuel Reformer Development Management

     H Power and SMUD will jointly perform the above described management and
     administration tasks for the reformer development task. Aerojet shall
     have primary responsibility for administration and management of
     subcontracts relating to reformer development, with assistance as
     necessary from SMUD.

<PAGE>

                             INSURANCE REQUIREMENTS

INSTITUTING PART OF CONTRACT NO. G-225/H-126         DATED: OCTOBER 10, 1995
                                 -----------                ----------------
                                                            & JULY 10, 1997

             OR CONSTITUTING PART OF INVITATION NO.
                                                    -------------------

PF OF COVERAGE

XXX Liability including:

Comprehensive Form

Premises/Operations

Underground Explosion & Collapse

Hazard (XCU), where applicable

Products/Completed Operations

Contractual

Independent Contractors, where applicable

Broad Form Property Damage

Personal Injury

Aircraft, including Passengers

Other
      -----------------------------

=============================================

Professional Liability Including:

Errors and Omissions

=============================================

Automobile Liability Including:

All Owned Vehicles (Private Passenger/Commercial)

Hired/Leased Vehicle

  Owned or Borrowed

=============================================

Workers' Compensation Including:

U.S.L.&H., where applicable and Employer's Liability

                 MINIMUM LIABILITY LIMITS
                                               Each
                                             Occurrance      Aggregate

Bodily Injury                               $1,000,000      $1,000,000
                                            ----------      ----------
Property Damage                             $1,000,000      $1,000,000
                                            ----------      ----------
        OR

Combined Single Limit (CSL)                        $1,000,000
                                                   -----------

Bodily Injury                               $  N/A          $  N/A
                                            ----------      ----------
Property Damage                             $  N/A          $  N/A
                                            ----------      ----------
        OR

Combined Single Limit (CSL)                        $   N/A
                                                   -----------

Bodily Injury                               $1,000,000      $1,000,000
                                            ----------      ----------
Property Damage                             $1,000,000      $1,000,000
                                            ----------      ----------
        OR

Combined Single Limit (CSL)                        $1,000,000
                                                   -----------
                                            $1,000,000   Each Employee
                                            ----------
                                            $1,000,000   Each Accident
                                            ----------

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

Such insurance as is afforded above shall be considered primary as respects
the Sacramento Municipal Utility District (SMUD); its directors, officers,
representatives, agents and employees, respectively, and any other insurance
effected or procured by SMUD shall be excess of and shall not contribute with
such other insurance. The policy or policies providing these coverages, with
the exception of Workers' Compensation and Employer's Liability coverage,
shall name SMUD, its directors, officers, representatives, agents, and
employees as additional insureds as respects work performed pursuant to or
incidental to this contract, and shall contain a cross liability provision.
Pursuant to the terms of this contract, insurance effected or procured by
Contractor shall not reduce or limit Contractor's obligation to indemnify and
defend SMUD for claims made or suits brought which result from or in
connection with the performance of this contract. These coverages, when
written on an occurrence form, shall be maintained during the entire term of
the contract. Coverages written on a claims-made form, and all professional
errors and omissions coverages, shall be maintained during the entire term of
the contract and further until one year following termination and acceptance
of all work under the contract.

The Contractor shall, before commencing work under this contract, arrange for
the delivery of a certificate of insurance completed by its insurance
carrier, agent or broker certifying that at least the minimum insurance
coverages as required above are in effect and specifying whether the
liability coverages are written on an Occurrence form or a claims-made form,
and that the coverages will not be cancelled or changed without thirty (30)
days advance written notice to:

                     SACRAMENTO MUNICIPAL UTILITY DISTRICT
                              P.O. BOX  15830

<PAGE>

                                                                 ATTACHMENT 3

                             DEPARTMENT OF THE ARMY
            UNITED STATES ARMY INTELLIGENCE CENTER AND PORT HUACHUCA
   [SEAL]              PORT HUACHUCA, ARIZONA 8500-0000                 [SEAL]

                               November 18, 1994

Reply To Attention of
Directorate of Contracting
Operations Division

Sacramento Municipal Utility District
P.O. Box 15830, MS 30-A
Sacramento, California 95852-1830

Dear. Mr. Wirsch:

    This office has received your proposal for electric and hybrid electric
vehicle program technology. The proposal was submitted to this office by the
Advanced Research Projects Agency for processing a definitized Other
Transaction.

The Agreements Administrator has determined that the incurrence of costs before
the effective date of the agreement is necessary to ensure compliance with
the proposed delivery schedule. The Government and the Consortium agree as
follows:

                 ADVANCE AGREEMENT TO AUTHORIZE INCURRENCE OF
                         COSTS UNDER PROPOSED AGREEMENT
         FOR RESEARCH AND DEVELOPMENT ON ELECTRIC AND HYBRID ELECTRIC
                          VEHICLE TECHNOLOGY PROGRAM

FIRST: In the event that an agreement is awarded for the research and
development described above, costs incurred prior to the effective date of the
agreement shall be an allowable expense, provided that the individual costs
therein shall be:

    a. Otherwise allowable, allocable, and reasonable.

    b. Incurred no sooner than 15 November 1994.

    c. Incurred specifically for the research and development described in the
Consortium proposal cited above.

    d. Applicable to the Consortium share of the cost of the effort.

SECOND: It is understood and agreed by the parties to this agreement (the
Government and the Consortium) that this agreement deals with the treatment
of costs incurred, prior to the effective date of any agreement, in the event
of award of an agreement.

<PAGE>

    This agreement does not require the Consortium to incur such costs and
any costs incurred are at the risk of the Consortium, pending execution of an
award. All financial liability for such costs vests with the Consortium.

    11/30/94                                /s/ Jan Schori
----------------                            ---------------------------------
DATE                                        CONTRACTOR (Name and Title)

    18 Nov 94                               /s/Gloria Golden
----------------                            ---------------------------------
DATE                                        Gloria Golden
                                            Agreements Administrator
                                            Directorate of Contracting
                                            Port Huachuca, Arizona

<PAGE>

                                                           Attachment No. 4
                                                           G-225

                                                Grant No.: MDA972-95-1-0010
                                                Page 1

                                                ARPA Order No.: B878/B878.02
                                                Effective Date: April 28, 1995

GRANTOR: Advanced Research Projects Agency
         Contracts Management Office
         3701 North Fairfax Drive
         Arlington, VA 22203-1714
         (Attn: Angela M. Coonce, 703/696-2382)

GRANTEE: Sacramento Municipal Utility District (SMUD)
         6201 "S" Street
         Sacramento, CA 95814-3514

         Contractor Establishment Code:  0-024-544K

TOTAL GRANT AMOUNT: $3,310,000

ACCOUNTING AND APPROPRIATION DATA:

ARPA Order B878/B878.02
ACRN: AA 9740400 1820 B878 P4K40 2525 DPAC 4 5210 503733 $3,310,000

AUTHORITY: This Grant is issued pursuant to the authority of 10 U.S.C. 2358.

                                   GRANT SCHEDULE

1. PURPOSE: The purpose of this Grant is to fund research in support of the
Advanced Research Projects Agency (ARPA) Advanced Systems Technology Office
(ASTO) Electric and Hybrid Electric Vehicle Program. This effort shall be
carried out generally as set forth in the Grantee's proposal entitled
"Advanced Research Projects Agency RA 94-24, Electric and Hybrid Vehicle
Technology Program" dated October 21, 1994, and statement of work, copies of
which are in the possession of both parties. This proposal was submitted in
response to RA 94-24 Technology Development for Military for the Electric and
Commercial Applications Vehicle Program.

2. TERM: The term of this Grant commences on the effective date of this Grant
and continues through twenty-four (24) months thereafter. OPTION: The term of
this Grant may be extended by an additional thirty-six (36) months upon
unilateral exercise of the option.

3. TERMS AND CONDITIONS: This Grant is subject to the General Terms and
Conditions set forth in the attached Exhibit A, entitled "Grant General Terms
and Conditions for Educational Institutions,

<PAGE>

                                                   Grant No.: MDA972-95-1-0010
                                                   Page 2

Nonprofit Organizations and State and Local Governments", and to any special
terms and conditions in this Grant Schedule.

4. PROJECT OFFICER: The Project Officer representing the Government under this
Grant is John Gully, ARPA/Advanced Systems Technology Office (ASTO),
telephone (703) 696-2348.

5. ADMINISTRATIVE GRANTS OFFICER: The Administrative Grants Officer for this
Grant (AGO) is CAO Code N63374, Office of Naval Research, Seatle Regional
Office, Northeast 45th Street, Suite 350, Seatle, WA 98105-4631.

6. PROJECT MANAGER: The SMUD Project Manager, Michael J. Wirsch, shall be
responsible for this effort. The Grantee agrees to notify the Grantor before
changing the Project Manager.

7. GRANT FUNDING:

    a. This Grant is fully funded in the amount of $3,310,000.

    b. Option for an additional three year effort in the amount of
$10,304,650, if and to the extent exercised, shall be exercised within
twenty-four (24) months after effective date of Grant.

8. PAYMENT: Upon acceptance of the terms and conditions of this Grant and
submission of an invoice or public voucher by the Grantee to the AGO, the
Grantee shall be entitled to a payment of $3,310,000. This payment is
expected to cover work performed during the twenty-four (24) month term of
the Grant (and any preaward costs as applicable). Payment will be initiated
upon receipt of the Grantee's invoice by the AGO who will certify and
transmit it for payment to the Naval Regional Finance Center, Crystal Mall
#3, Washington, DC 20371. The invoice shall be submitted to sextuplicate in
accordance with the following schedule:

<TABLE>
<CAPTION>

PAYMENT NUMBER            AMOUNT            PAYMENT DATE
   <S>                   <C>               <C>
   1                     $956,000          Quarterly, commencing effective date of Grant
   2-4                   $233,000          Quarterly, commencing 27 July 1995
   5-8                   $413,750          Quarterly, commencing 27 April 1996

</TABLE>

Preaward costs were authorized November 15, 1994 under this Grant.

9. REPORTS AND REPORTS DISTRIBUTION: Reports shall be furnished as specified
below:

    9.1 REPORT TYPES:

    a. Quarterly R&D Status Report - This report shall keep the Government
informed of the Grantee activity and progress toward accomplishment of Grant
objectives and advancement in state-of-the-art on the research and
development involved.

    b. Special Technical Reports - These reports, due as required, shall
document the results of a significant task, test, event or symposium.

<PAGE>

                                                   Grant No.: MDA972-95-1-0010
                                                   Page 3

    c. Final Technical Report - This report, due upon completion of the
Grant, shall document the result of the complete effort. The ARPA technical
point of contact (POC) for this effort is:

    John Gully
    ARPA
    (703) 696-2348
    jgully@darpa.mil

    9.2 REPORT DISTRIBUTION:

<TABLE>
<CAPTION>

ADDRESSES                                  REPORT TYPES                   NUMBER OF COPIES
<S>                                       <C>                            <C>
Project Officer (Technical POC)            All                            Two

Administrative Grants Officer              All                            One

ARPA/OASB Library                          Final Technical Report         One

Defense Technical Information Center       Final Technical Report         Two
Attn: DTIC-DFAC
Cameron Station
Alexandria, VA 22304-6145

ARPA/ASTO (Attn: Paul O'Leary)             Quarterly R&D Status Report    One

</TABLE>

10. TITLE TO PROPERTY: Title to all real property and equipment purchased by
the Grantee with grant funds shall vest in the Sacramento Municipal Utility
District (SMUD) in accordance with the provisions of Office of Management and
Budget (OMB) Circular A-102. Title to all equipment shall vest in the
Sacramento Municipal Utility District (SMUD) upon acquisition.

11. AUDIT: The Comptroller General and the Inspector General of the
Department of Defense shall have direct access to sufficient records and
information of the Grantee, as they determine, to ensure full accountability
for federal funds.

12. UNIFORM ADMINISTRATIVE REQUIREMENTS: This Grant shall be administered in
accordance with the provisions of OMB Circular A-102.

13. UNIFORM COST PRINCIPLES: This Grant is subject to the uniform cost
principles of OMB Circular A-87.

14. CIVIL RIGHTS ACT: This Grant is subject to the compliance requirements of
the "Civil Rights Act of 1964", 78 Stat. 241 (P.L.88-352) relating to
nondiscrimination in Federally-assisted programs.

15. DRUG-FREE REQUIREMENTS: This Grant is subject to the requirements of the
Drug-Free Workplace Act of 1988 and the Drug-Free Schools and Communities Act
Amendments of 1989.

<PAGE>

                                                   Grant No.: MDA972-95-1-0010
                                                   Page 4

16. REVOCATION: Either party may terminate this Grant in whole or in part, upon
notice to and consultation with the other party, and upon agreement of
the other parties that continuation of the project would not produce
beneficial results commensurate with the further expenditure of funds. In
addition, the Grants Officer may revoke this Grant upon a finding that the
Grantee has failed materially to comply with the provisions of the Grant.

FOR Sacramento Municipal               FOR the United States of America,
Utility District                       the Advanced Research Projects Agency

Accepted By:                           By:

/s/ Jan Schori                         /s/ Angela M. Coonce
-----------------------------          -----------------------------
(Grantee)                              Angela M. Coonce
                                       (Grants Officer)
Jan Schori
General Manager                        28 April 1995
-----------------------------          -----------------------------
(Title)                                (Date)

May 1, 1995
-----------------------------
(Date)

<PAGE>

                                                     Grant No. MDA972-95-1-0010
                                                             EXHIBIT A - Page 2

1. FEDERAL REQUIREMENTS

This Grant is subject to the laws and regulations of the United States. If
any statute expressly prescribes policies or specific requirements that
differ from the requirements, standards, provisions, or terms and conditions
of this Grant, the provisions of the statute shall govern.

2. ORDER OF PRECEDENCE

Any inconsistency or conflict in the terms and conditions specified in this
Grant shall be resolved according to the following order of precedence:

(a) The Grant Schedule

(b) Terms and Conditions in Exhibit A of this Grant

3. ADMINISTRATION AND COST PRINCIPLES

Applicable to this Grant, and incorporated herein by reference, are the
requirements, standards, and provisions of the appropriate OMB Circulars and
attachments thereto, as revised as of the effective date of this Grant,
listed below. For purposes of this paragraph, the term "appropriate" is
determined by the organizational nature of the Grantee (educational
institution, nonprofit organization, state or local government).

(a) A-110. "Uniform Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals, and Other Nonprofit Organizations."

(b) A-21. "Cost Principles for Educational Institutions"

(c) A-122. "Cost Principles for Nonprofit Organizations"

(d) A-87. "Cost Principles for State and Local Governments"

(e) A-102. "Uniform Administrative Requirements for Grants-In-Aid to State
and Local Governments"

(f) A-88. "Indirect Cost Rates, Audit and Audit Follow-up at Educational
Institutions"

4. RESEARCH RESPONSIBILITY

The Grantee has full responsibility for the conduct of the research activity
supported by this Grant, in accordance with the Grantee's proposal, and the
terms and conditions specified in this Grant.

Grantees are encouraged to suggest or propose to discontinue or modify
unpromising lines of investigation or to explore interesting leads which may
appear during the development of the research. However, they must consult the
Project Officer through the Administrative Grants Officer before
significantly deviating from the objectives or overall program of the
research originally proposed.

5. AMENDMENT OF GRANT

The only method by which this Grant can be amended is by a formal, written
amendment signed by either the Grants Officer or the Administrative Grants
Officer. No other communications, whether oral or in writing, are valid.

<PAGE>

                                                    Grant No. MDA972-95-1-0010
                                                            EXHIBIT A - Page 1

                                     EXHIBIT A
                         GRANT GENERAL TERMS AND CONDITIONS
             FOR EDUCATIONAL INSTITUTIONS, NONPROFIT ORGANIZATIONS
                           AND STATE AND LOCAL GOVERNMENTS

ARTICLE

1.  Federal Requirements
2.  Order of Precedence
3.  Administration and Cost Principles
4.  Research Responsibilities
5.  Amendment Grant
6.  Prior Approvals
7.  Principal Investigator
8.  Restrictions on Printing
9.  Publications
10. Acknowledgement of Sponsorship
11. Grantee-Acquired Property
12. Patent Rights
13. Rights in Technical Data and Computer Software
14. Human Subject
15. Animal Welfare
16. Research Involving Recombinant DNA Molecules
17. Foreign Travel Approval
18. Activities Abroad
19. Civil Rights Act
20. Clean Air and Water
21. U.S. Flag Carriers
22. Security
23. Officials Not to Benefit
24. Subawards and Contracts/Subcontracts

<PAGE>

                                                    Grant No. MDA972-95-1-0010
                                                            EXHIBIT A - Page 3

6. PRIOR APPROVALS (Universities only)

The provisions of this Article are applicable to universities only.

a. All prior approvals required by OMB Circulars A-21 and A-110 are waived
hereby except for the following:

(1) Change of scope or objectives as required by Article 4 of the Terms and
Conditions entitled "Research Responsibility."

(2) Change of key personnel as required by Article 7 of the Terms and
Conditions entitled "Principal Investigator."

(3) Foreign travel as required by Article 17 of the Terms and Conditions
entitled "Foreign Travel Approval."

(4) Extension of the expiration period of this Grant.

b. PREAWARD COSTS

(1) Grantees may incur preaward costs of up to ninety (90) days prior to the
effective date of the Grant award.

(2) Preaward costs as incurred by the Grantee must be necessary for the
effective and economical conduct of the project and the costs must be
otherwise allowable in accordance with the appropriate cost principles.

(3) Any preaward costs are made at the Grantee's risk. The incurring of
preaward costs by the Grantee does not impose any obligations on the
Government in the absence of appropriations, if an award is not subsequently
made or if an award is made for a lesser amount than the Grantee expected.

c. UNOBLIGATED BALANCES

In the absence of any specific notice to the contrary, Grantees are
authorized to carry forward unexpected balances to subsequent funding periods.

7. PRINCIPAL INVESTIGATOR

Support for the project may not continue without the active direction of the
Principal Investigator (PI) approved for, and identified in, this Grant. If
the approved PI (1) severs his or her connection with the Grantee, or (2)
otherwise relinquishes active direction of the project, either permanently or
for a significant length of time (three months or more), then the Grantee
must either:

(a) appoint a replacement PI with the approval of the Project Officer, or

(b) relinquish the Grant, in which case the Grant shall be terminated for
convenience in accordance with Attachment L of OMB Circular A-110.

8. RESTRICTIONS ON PRINTING

Unless otherwise authorized in writing by the Grants Officer, reports, data or
other written material produced using funds provided by this Grant and
submitted hereunder shall be reproduced only by duplicating processes and
shall not exceed 5,000 single page reports or a total of 25,000 pages of a
multiple page report. These restrictions do not preclude the writing,
editing, preparation of manuscript or reproducible copy of related
illustrative materials if required as a part of this Grant, or incidental
printing such as forms or materials necessary to be used by the Grantee.

<PAGE>

                                                     Grant No. MDA972-95-1-0010
                                                             EXHIBIT A - Page 4

to respond to the terms of the Grant. To satisfy the requirements of the
Defense Technical Information Center, at least one copy of each technical
report submitted to the Defense Technical Information Center must be black
typing or reproduction of black on white paper or suitable for reproduction
by photographic techniques. Reprints of published technical articles are not
within the scope of this paragraph.

9. PUBLICATION

Publication of results of the research project in appropriate professional
journals is encouraged as an important method of recording and reporting
scientific information. One copy of each paper planned for publication shall
be submitted to the Project Officer simultaneously with its submission for
publication. Following publication, copies of published papers shall be
submitted to the Project Officer.

10. ACKNOWLEDGEMENT OF SPONSORSHIP

(a) The Grantee agrees that in the release of information relating to this
Grant, such release shall include a statement to the effect that (1) the
project or effort depicted was or is sponsored by the Defense Advanced
Research Projects Agency, (2) the content of the information does not
necessarily reflect the position or the policy of the Government, and (3) no
official endorsement should be inferred.

(b) For the purpose of this article, information includes news releases,
articles, manuscripts, brochures, advertisements, still and motion pictures,
speeches, trade association proceedings, symposia, etc.

(c) Nothing in the foregoing shall affect compliance with the requirements of
the clause entitled "Security."

11. GRANTEE-ACQUIRED PROPERTY

Title to all nonexpendable and expendable tangible personal property
purchased by the Grantee with grant funds shall be deemed to have vested in
the Grantee upon purchase, unless stated otherwise in this Grant schedule.

12. PATENT RIGHTS

Patent rights are as specified in 48 CFR 227 and 252, as amended, and 37 CFR
404.14 of July 1, 1987, which titles and sections are incorporated herein by
reference.

Invention disclosures are to be submitted to the Administrative Grants
Officer who will forward them directly to the Counsel for Patent Matters,
(Code OOCCl), Office of the Chief of Naval Research, Department of the Navy,
Arlington, Virginia 22217-5000. The Counsel for Patent Matters will represent
the Administrative Grants Officer with regard to invention reporting matters
arising under this Grant.

13. RIGHTS IN TECHNICAL DATA AND COMPUTER SOFTWARE

Rights in Technical Data and Computer Software are as specified in 48 CFR 227
and 252, as amended, incorporated in this Grant by reference.

14. HUMAN SUBJECTS

Grant funds may NOT be used for research that uses uninformed or nonvoluntary
humans as experimental subjects. The Grantee is responsible for the
protection of the rights and welfare of any human subjects involved in
research.

<PAGE>

                                                    Grant No. MDA972-95-1-0010
                                                            EXHIBIT A - Page 5

development, and related activities supported by this Grant. The Grantee
agrees to comply, as appropriate, with the following directive and
regulations which are incorporated in the Grant by reference:

(a) DoD Directive 3216.2, DoD Directive 3216.2. "Protection of Human Subjects
in DoD Supported Research." 7 January 1983;

(b) DHHS Regulations. "Protection of Human Subjects" (45 Code of Federal
Regulations, Part 46) of 26 January 1981, as amended; and

(c) FDA Regulations (21 Code of Federal Regulations, subchapters A, D, and H).

15. ANIMAL WELFARE

Any Grantee performing research on warm blooded vertebrate animals shall
comply with the Laboratory Animal Welfare Act of 1966, as amended (7 U.S.C.
2131 et seq.), and the regulations promulgated thereunder by the Secretary of
Agriculture (9 CFR Subchapter A, Parts 1 through 4) pertaining to the care,
handling, and treatment of vertebrate animals held or used for research,
teaching, or other activities supported by Federal awards. In addition, the
Grantee shall comply with the provisions of DoD Directive 3216.1 and clause
52.235-7003 of the DoD Federal Acquisition Regulation Supplement.

The Grantee is also expected to ensure that the guidelines described in DHHS
Publication No. (NIH) 85-23. "Guide for the Care and Use of Laboratory
Animals," are followed and to comply with the U.S. Government Principles for
the Utilization and Care of Vertebrate Animals Used in Testing, Research and
Training," included as an Appendix to the NIH Guide.

16. RESEARCH INVOLVING RECOMBINANT DNA MOLECULES

Any Grantee performing research involving recombinant DNA molecules and/or
organism and viruses containing recombinant DNA molecules agrees, by
acceptance of this award, to comply with the National Institutes of Health
"Guidelines for Research Involving Recombinant DNA Molecules," Nov 1984 (49
CFR 46266-46291, or such later revision of those guidelines as may be
published in the Federal Register.

17. FOREIGN TRAVEL APPROVAL

Foreign travel requires liaison with the Project Officer for advance
approval. Grantee is cautioned that such advance approval could require 90
days in certain situations.

18. ACTIVITIES ABROAD

The Grantee shall assure that project activities carried on outside the
United States are coordinated, as necessary, with appropriate Government
authorities and that appropriate licenses, permits, or approvals are obtained
prior to undertaking proposed activities. The awarding agency does not assume
responsibility for Grantee compliance with the laws and regulations of the
country in which the activity(ies) is (are) to be conducted.

19. CIVIL RIGHTS ACT

Grantees shall comply with the provisions of the Civil Rights Act of 1964, as
amended, and implementing regulations, and the Assurance of Compliance which
the Grantee must have on file prior to award of this Grant. Said Act, as
amended, and regulations are incorporated in this Grant by reference.

<PAGE>

                                                     Grant No. MDA972-95-1-0010
                                                             EXHIBIT A - Page 6

20. CLEAN AIR AND WATER

If the amount of the Grant exceeds $100,000, the Grantee shall comply with
the Clean Air Act (42 U.S.C. 1857), as amended; the Water Pollution Control
Act (33 U.S.C. 1251), as amended; Executive Order No. 11738; and the related
regulations of the Environmental Protection Agency (40 CFR. Part 15). Said
regulations, Executive Order, and Acts are incorporated in this Grant by
reference.

21. U.S. FLAG CARRIERS

The Grantee shall comply with Section 5 of the International Air
Transportation Fair Competitive Practices Act of 1974; the Comptroller
General's Guidelines for Implementation of said Act, March 12, 1976; and
Comptroller General's Decision B-138942, clarifying the guidelines. Such Act
and guidelines are incorporated into this Grant by reference.

22. SECURITY

The Grantee shall not be granted access to classified information under this
Grant. If security restrictions should happen to apply to certain aspects of
the proposed research, the Grantee will be so informed. In the event that the
scientific work under this Grant may need classification, or involve access
to or storage of any classified data, the Government shall make its decision
on the need to classify, or require such access or storage, within 30 days
after receipt of written notice from the Grantee. If the decision is
affirmative, the Government shall invoke the clause in OMB Circular A-UO,
Attachment L, paragraph 4.b, entitled, "Termination for Convenience."

23. OFFICIALS NOT TO BENEFIT

No member of, or delegate to, Congress, or resident commissioner, shall be
admitted to any share or part of this Grant, or to any benefit arising from
it. However, this clause does not apply to this Grant to the extent that this
Grant is made with a corporation for the corporation's general benefit.

24. SUBAWARDS AND CONTRACTS/SUBCONTRACTS

The applicable Federal cost principles for subawards and
contracts/subcontracts under this Grant shall be those otherwise applicable
to the type of organization receiving the subaward, contract or subcontract.
In addition to OMB Circular A-21, the other applicable cost principles are:

(a) OMB Circular A-122, applicable to other nonprofit organizations, except
those specifically exempted by the circular.

(b) Subpart 31.2 of the Federal Acquisition Regulation (48 CFR 31.2),
applicable to commercial firms and those nonprofit organizations specifically
exempted from the provisions of OMB Circular A-122.

(c) OMB Circular A-87 (34 CFR 255), for state and local governments.

(d) 45 CFR 74, Appendix E, for hospitals.

<PAGE>

                CERTIFICATIONS FOR GRANT NO. MDA972-95-1-0010

1. The undersigned certifies, to the best of his or her knowledge and belief,
that the grantee organization

(a) Pursuant to the requirements of OMB Circular A-129, is not delinquent on
any Federal debt.

(b) Pursuant to Executive Order 12549 and implementing rule, is presently not
debarred, suspended, proposed for debarment, declared ineligible or
voluntarily excluded from covered transactions by any Federal department or
agency.

(c) Pursuant to Public Law 100-690 and implementing final rule, effective 24
July 1990, will provide a drug-free workplace. The place of performance is:

6201 S Street                 Sacramento, CA                     95817
-------------------------------------------------------------------------------
[Street Address]              [City, County, State]              [Zip code]

(d) Is in compliance with the provisions of DoD Directive 5500.11,
"Nondiscrimination in Federally Assisted Programs", which implements Title VI
of the Civil Rights Act of 1964.

2. The following certification applies only to actions exceeding $100,000.00:

Section 1352, Title 31, U.S.C. (Public Law 101-121, Section 319) entitled,
"Limitation on use of appropriated funds to influence certain Federal
contracting and financial transactions."

(1) No Federal appropriated funds have been paid or will be paid by or on
behalf of the undersigned, to any person for influencing or attempting to
influence an officer or employee of an agency, a Member of Congress, an
Officer or employee of Congress, or an employee of a Member of Congress in
connection with the awarding of any Federal contract, the making of any
Federal Grant, the making of any Federal loan, the entering into of any
cooperative agreement, and the extension, continuation, renewal, amendment,
or modification of any Federal contract, grant, loan or cooperative agreement.

(2) If any funds other than Federal appropriated funds have been paid or will
be paid to any person for influencing or attempting to influence an officer
or employee of any agency, a Member of Congress, an officer or employee of
Congress, or an employee of a Member of Congress in connection with the
Federal contract, grant, loan, or cooperative agreement, the undersigned
shall complete and submit Standard Form LLL, "Disclosure Form to Report
Lobbying," in accordance with its instructions.

(3) The undersigned shall require that the language of this certification be
included in the award documents for all subawards at all tiers (including
subcontracts, subgrants, and contracts under grants, loans, and cooperative
agreements) and that all subrecipients shall certify and disclose accordingly.

This certification is a material representation of fact upon which reliance
was placed when this transaction was made or entered into. Submission of this
certification is a prerequisite for making or entering into this transaction
imposed by Section 1352, Title 31, U.S. Code. Any person who fails to file
the required certification shall be subject to a civil penalty of not less
than $10,000.00 and not more than $100,000.00 for each such failure.

Jan Schori, General Manager
-------------------------------------------------------------------
[Typed Name and Title of Official responsible for this transaction]

Jan Schori
--------------------------------------------------------
[Signature of Official responsible for this transaction]

Sacramento Municipal Utility District
------------------------------------------
[Name of Organization/Institution]

          May 1, 1995
---------------------------------
[Date]<PAGE>

EXHIBIT NO.
-----------

10.47        -  Contract Change No. 1 to SMUD I.

<PAGE>
                                                                     Page 1 of 2

                                                                 CONTRACT CHANGE

SMUD
   SACRAMENTO MUNICIPAL UTILITY DISTRICT / / 6201 S. Street, P.O. Box 15830,
                    Sacramento CA 95852-1830 (916) 452-3211

                                                      --------------------------
                                                        FOR INTERNAL USE ONLY
                                                      --------------------------

CONTRACT NO. H-126            CHANGE NO. 1            W.O./DIST. NO. ___________
             --------------             ------------

Electric Transportation Program                       PROJECT __________________
----------------------------------------------------
                    CONTRACT TITLE

DARPA Fuel Cell Hybrid Vehicle Project                COST CENTER ______________
----------------------------------------------------
                    CONTRACT SCOPE
__________________________________________________    RESOURCE _________________

     THIS AGREEMENT made by and between SACRAMENTO MUNICIPAL UTILITY DISTRICT,
hereinafter called the District, and H Power Corporation

hereinafter designated as Contractor, WITNESSETH: That the parties hereto
mutually agree to the following changes in the above numbered contract between
the parties, hereinafter called the "original contract":

Replace paragraph 5.G.2. Audits, as follows:

          2) H Power shall have an audit of Federal Financial Assistance
          performed in accordance with generally accepted auditing standards,
          "Government Auditing Standards" issued by the Comptroller General of
          the United States and Office of Management and Budget (OMB) Circular
          A-133. This audit shall be performed annually within 7 months of the
          end of the calendar year for each year federal funds are received
          including the year in which the Agreement expires or is terminated.

Amend Section 6. Term as follows:

          Unless earlier terminated pursuant to paragraph 26 and subject to
          paragraph 26, this Agreement shall continue in effect until February
          28, 1999.

Revise paragraph 5.D Administrative & Cost Principles, as follows:

          Charge Costs To: Cost Center 518, Fuel Cell Hybrid - Work Order No.
          702061 Cost Element 713, Program IX.

      This Contract Change is subject to all provisions of the original contract
and all provisions of any previous Contract Changes which are not expressly
superseded in this Contract Change.

SACRAMENTO MUNICIPAL UTILITY DISTRICT                H Power Corporation
                                            ------------------------------------
                                                        Contractor

By      /s/ Jan Schori       2/23/98        By   /s/ Arthur Kaufman    2/27/98
    ---------------------------------          ---------------------------------
                           Date                                       Date

Type Name     JAN SCHORI                    Type Name    ARTHUR KAUFMAN
          ---------------------------                 --------------------------

Title  General Manager                      Title  V.P.,Technology & Engineering
      -------------------------------             ------------------------------

<PAGE>

                                                                     Page 2 of 2

                                                    CONTRACT CHANGE CONTINUATION

                                            Contract No. H-126      Change No. 1

Replace Section 13, Project Property Ownership, with the following:

          Title to all nonexpendable and expendable tangible personal property
          purchased or otherwise created through the direct Project work of H
          Power shall be deemed to have vested in H Power upon purchase,
          fabrication, manufacture or by other means of acquisition. The Project
          vehicle which will result from completion of vehicle integration
          activities of H Power, as further described in the Statement of Work,
          will remain in complete and functional condition, with fuel cell power
          system installed, excepting periods of time the system may be needed
          for other directly related power system development activities, until
          such time as H Power determines that the power system must be removed,
          but no earlier than February 28, 1999. The Parties may extend this
          time by mutual written agreement.

Revise paragraph 5.E.4) as follows:

          4) Invoices shall be directed to:

                 Sacramento Municipal Utility District
                 Accounts Payable, MS B302
                 P.O. Box 15830
                 Sacramento, CA 95852-1830

      This Contract Change is subject to all provisions of the original contract
and all provisions of any previous Contract Changes which are not expressly
superseded in this Contract Change.

SACRAMENTO MUNICIPAL UTILITY DISTRICT   /s/ JS                    /s/ AK
                                      --------                  ----------
                                       INIT.                    CONTRACTOR INIT.

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