Excerpt from HPI 10-K annual report filed with SEC on May 18, 2007
HYDROGEN POWER, INC.

The Hydrogen Economy. The U.S. Department of Energy’s (DOE) Office of Energy Efficiency and Renewable Energy has articulated the following vision for a secure energy future:

“Over the next 20 years, U.S. energy consumption is expected to grow by 30 percent, while domestic energy production is expected to grow by only 25%. As consumption outpaces production, our dependence on imported petroleum threatens to increase, endangering our economy and standard of living, and compromising our national energy security. Fortunately, another promising scenario for our energy future is emerging – one that relies on hydrogen-powered fuel cell systems to produce electricity for our vehicles, homes and even large buildings, using abundant domestic resource. Through its Hydrogen, Fuel Cells, and Infrastructure Technologies Program, the U.S. DOE furthers the technologies vital to a hydrogen energy future.

The mission of the Hydrogen, Fuel Cells & Infrastructure Technologies Program is to research, develop, and validate fuel cells and hydrogen production, delivery, and storage technologies for transportation and stationary applications. The objectives of the program are to:

• Dramatically reduce dependence on foreign oil
• Promote the use of diverse, domestic, and sustainable energy resources
• Reduce carbon emissions from energy production and consumption
• Increase the reliability and efficiency of electricity generation"

On the hydrogen production side, the Program is seeking ways to reduce the cost of generating hydrogen from a variety of conventional and new technologies and sources. Through application of its proprietary technology, Hydrogen Power, Inc. (HPI) has the potential to become a player in this challenging new alternative energy arena.

HPI Technology. We have sub-licensed a patented technology developed at the University of British Columbia (UBC) for producing hydrogen gas in a process called "Hydrogen Now™." The sublicense is a license from GHTI, the majority shareholder of HPI, for use of technology it has licensed from the University of British Columbia, and enhancements made thereby ("GHTI Sublicense"); any sublicenses by GHTI require consent of UBC. The GHTI Sublicense grants to HPI exclusive rights to use the Technology and any UBC improvements and to market, manufacture and distribute the products in the United States, Mexico, Central and South America; and non-exclusive rights to market and distribute the products using the technology and any UBC improvements in Canada, and certain non-exclusive rights to trademarks and service marks; GHTI further granted to HPI the non-exclusive, non-transferable rights to develop, modify, enhance and improve the technology. GHTI reserved all other rights including its rights to develop, enhance, market, facilitate, sublicense, install, maintain and support the technology except as expressly granted to HPI for Canada (on a non-exclusive basis), the United States, Mexico, Central and South America (on an exclusive basis). The GHTI Sublicense also provides that HPI agrees that all developments, enhancements, modifications or improvements to the technology developed, modified, enhanced or improved by HPI shall be owned by GHTI. HPI believes it has made several such material enhancements and improvements. The GHTI Sublicense provides for payments to GHTI by HPI, of which a payment of $329,774 was due and payable at December 31, 2006. Failure to cure a default in payment after 30 days notice can result in termination of the Sublicense. Although UBC improvements are provided as part of the Sublicense, there currently exists some issues with UBC as to the scope of that term, and not all improvements made by UBC have been assigned to GHTI. If not rectified, this could result in competitive technologies developed by UBC existing in the market. This is a summary only, and for a complete review of the terms and conditions, please consult the exhibits hereto.

The Hydrogen Now patented system creates pure hydrogen from the reaction of aluminum and water by a powerful water-split reaction. Hydrogen Now can be used to generate hydrogen on-site and on-demand without electricity, thus offering the potential to overcome significant transportation and storage problems. The Hydrogen Now process has the potential to supply hydrogen at customized rates and pressures. The term of the sub-license pursuant to which HPI has its rights to the Hydrogen Now technology, as well as the license pursuant to which HPI’s sub-licensor has its rights to the technology, expires on the date on which the last patent covered by the sub-license and license expires, which is currently no sooner than February 2021.

Aluminum is the third most abundant element (after oxygen and silicon) in the earth’s crust and water is widely available. In addition, waste or scrap aluminum may be used in the reaction process and the by-products can be recycled.

We were established to commercialize patented technology for a new method of producing hydrogen through an aluminum-assisted water split reaction process called Hydrogen Just in Time™ and Hydrogen Now. Consumers do not have convenient access to hydrogen as they have with gasoline, electricity, or natural gas. Hydrogen in its gaseous form is a difficult element to transport or store. Hydrogen produced from the electrolysis of water is costly; the reforming of fossil fuels -- still in the development stage --is also expensive due to the requisite hardware costs, and has not progressed beyond small scale applications. Steam reformation of natural gas is very mature and produces large amounts of commercial hydrogen which currently comes from this reformer process.

In the present form of our technology noted in US patents 6,440,385 and 6,582,676, hydrogen is generated from a non-reversible water split reaction using aluminum mechanically alloyed with water soluble inorganic salts (WIS) catalysts. Under normal circumstances, scientists would use strong acids or alkalis to dissolve the film around aluminum. We use a mixture of ground aluminum, alumina, a non-metallic additive (catalyst) and water to prevent formation of a non-reactive layer and create a continuous reaction until the aluminum is depleted. The process operates at normal pressures and temperatures. The mechanism of the present technology involves pit corrosion of the passivation layer by aggressive anions. Prevention of the passivation layer makes possible a feasible hydrogen generation system. The nonreversible nature of the reaction allows us to produce pressurized gas without the need for compressors. We are presently investigating commercial applications that would involve the use of our proprietary technology to generate hydrogen for specific applications in a cheaper, lighter, and safer manner in comparison to conventional hydrogen production solutions.

Our technology does not require any supplemental energy, electrical or otherwise, to produce high purity hydrogen gas that can be used in fuel cell and hydrogen storage applications to generate electricity. The reaction produces an aluminum hydroxide byproduct which can be recycled and reused in the hydrogen generation process. The hydrogen generation process for which we have acquired technology rights under the sub-license has never been used for commercial purposes and there is no assurance that we will be able to apply the process for commercial purposes. Our technology is still in the development stage.

On-site production of compressed hydrogen negates the need for compressed liquefied hydrogen transportation. Further, the spent fuel from our technology is environmentally inert and easily recycled back into aluminum or can be used in a number of different commercial applications.

Our objective is to develop and market our licensed proprietary hydrogen production process for use in commercial applications that require hydrogen, but where hydrogen storage and/or distribution is too costly or not feasible. Our management believes, based on their product and market review, that our hydrogen production process may be a commercially viable process for: (1) small volume hydrogen production for various industrial applications; and (2) fuel cell applications where on-demand hydrogen is required or is an advantage such as for selected portable power, stationary and mobile back-up generator power, and small scale transportation applications. Our new COO and Principal Executive is currently assessing, with his advisors, the technology and possible applications thereof. Thus, possible application areas, and any others contained in this document should be considered tentative.

Our functional technology development laboratory is equipped to carry out hydrogen-related testing, research and engineering. We have working arrangements with two university laboratories – the Department of Metals and Materials Engineering at the University of British Columbia, Canada and the Department of Metals at the University of Washington, Seattle – to make use of the larger, more sophisticated pieces of equipment already available at those facilities. We are at the early stage of testing and evaluating the commercial application of the licensed technology and the design and engineering of prototypes.

HPI's Laboratory. We recently consolidated our corporate headquarters office in downtown Seattle with our R & D laboratory at 201 Elliott Avenue, occupying 3,000 square feet of leased lab and office space. We currently have nine employees (seven technical), and over the next year this number is not expected to increase appreciably since it is our intent to augment internal development efforts through use of external sources, including partnerships and outsourcing arrangements with selected industry players. It is anticipated that internal R & D expenses over the next year will remain at a level of approximately $1 million.

Our laboratory does not have any issues regarding environmental concerns. The city of Seattle has verified that waste from our spent fuel is not considered a hazard, and has authorized its disposal as simple unregulated municipal waste. We recycle all paper and plastics, and take all waste metals to recycling yards. Our technology is completely non-toxic, and when lab technicians are working with loose powder, face masks are used to avoid dust inhalation.

Competition. Since hydrogen power generation technologies have the potential to replace existing power products, competition will come from improvements to current power technologies and from new alternative energy technologies. Each of our target markets is currently serviced by existing manufacturers with existing customers and suppliers. These manufacturers use proven and widely accepted technologies such as internal combustion engines and turbines as well as coal, oil, electricity and nuclear powered generators.

There are a number of companies using reforming technologies for hydrogen generation, including H2Gen, Harvest Energy Technology, and HyGear. Reformers are also used for large and small scale fuel cells by such companies as IdaTech, Nuvera, Plug Power and Protonex. Alternative hydrogen generation and storage technologies are being used by Millenium Cell, Ultracell, Quinetics,and others. While many of these companies are further down the commercialization and productization road than HPI, our hydrogen generation technology is cheaper than a reformer-based approach for our target applications, and we believe that our technology is superior to other non-reforming hydrogen generation technologies in terms of cost, weight, safety and use of non-toxic materials.

Additionally, there are competitors working on developing technologies using other than hydrogen power generation systems (such as fuel cells, advanced Lithium-ion batteries, battery/fuel cell hybrids and hybrid battery/ICEs) in each of Hydrogen Power's targeted markets. Some of these technologies are as capable of fulfilling existing and proposed regulatory requirements as our technology.

There are many different individuals, institutions and companies across the United States, Canada, Europe and Japan, including corporations, national laboratories and universities that are actively engaged in the development and manufacture of alternative energy technologies including hydrogen generation technologies. Each of these competitors has the potential to capture market share in any of our future target markets."