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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

     (Mark One)

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

                   For the fiscal year ended: OCTOBER 31, 2000

                                       OR

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

            For the transition period from ___________ to ___________

                         Commission File Number: 0-24852

                              FUELCELL ENERGY, INC.
             (Exact name of registrant as specified in its charter)

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

                DELAWARE                                06-0853042
     (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)                Identification Number)

          3 GREAT PASTURE ROAD
          DANBURY, CONNECTICUT                              06813
     (Address of principal executive                     (Zip Code)
                offices)

        Registrant's telephone number, including area code (203) 825-6000

          Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                    COMMON STOCK, $.0001 PAR VALUE PER SHARE
                                (Title of class)

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

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

The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $889,508,503, which is based on the closing price
of $69.688 on January 23, 2001. On January 23, 2001 there were 15,788,634 shares
of common stock of the registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE CERTAIN INFORMATION CONTAINED IN THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT RELATING TO ITS FORTHCOMING 2001 ANNUAL
MEETING OF STOCKHOLDERS TO BE FILED NOT LATER THAN 120 DAYS AFTER THE END OF
REGISTRANT'S FISCAL YEAR ENDED OCTOBER 31, 2000 IS INCORPORATED BY REFERENCE IN
PART III OF THIS ANNUAL REPORT ON FORM 10-K.

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                              FUELCELL ENERGY, INC.

                                      INDEX
                                      -----

            DESCRIPTION                                              PAGE NUMBER
            -----------                                              -----------
PART I
- ------
  Item 1    Business                                                        3
  Item 2    Properties                                                     29
  Item 3    Legal Proceedings                                              29
  Item 4    Submission of Matters to a Vote of Security Holders            29

PART II
- -------
  Item 5    Market for the Registrant's Common Equity and Related
              Stockholder Matters                                          29
  Item 6    Selected Financial Data                                        30
  Item 7    Management's Discussion and Analysis of Financial
              Condition and Results of Operations                          31
  Item 7A   Quantitative and Qualitative Disclosures about Market Risk     34
  Item 8    Financial Statements and Supplementary Data                    34
  Item 9    Changes In and Disagreements with Accountants on
              Accounting and Financial Disclosure                          34

PART III
- --------
  Item 10   Directors and Executive Officers of the Registrant             34
  Item 11   Executive Compensation                                         34
  Item 12   Security Ownership of Certain Beneficial Owners
              and Management                                               35
  Item 13   Certain Relationships and Related Transactions                 35

PART IV
- -------
  Item 14   Exhibits, Financial Statement Schedules and Reports
              on Form 8-K                                                  35

Signatures



                                       2




FORWARD-LOOKING STATEMENT DISCLAIMER

When used in this Report, the words "expects", "anticipates", "estimates",
"should", "will", "could", "would", "may", and similar expressions are intended
to identify forward-looking statements. Such statements include statements
relating to the development and commercialization schedule for our fuel cell
technology and products, future funding under government research and
development contracts, the expected cost competitiveness of our technology, and
the timing and availability of products under development. These and other
forward looking statements contained in this Report are subject to risks and
uncertainties, known and unknown, that could cause actual results to differ
materially from those forward-looking statements, including, without limitation,
general risks associated with product development and introduction, changes in
the utility regulatory environment, potential volatility of energy prices,
government appropriations, the ability of the government to terminate its
development contracts at any time, rapid technological change, and competition,
as well as other risks contained under Item 1 "Business-Risk Factors" of this
Report. We cannot assure that we will be able to meet any of our development or
commercialization schedules, that the government will appropriate the funds
anticipated by us under our government contracts, that the government will not
exercise its right to terminate any or all of our government contracts, that any
of our products or technology, once developed, will be commercially successful,
or that we will be able to achieve any other result anticipated in any other
forward-looking statement contained herein. The forward-looking statements
contained herein speak only as of the date of this Report. Except for ongoing
obligations to disclose material information under the federal securities laws,
we expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any such statement to reflect any change in our
expectations or any change in events, conditions or circumstances on which any
such statement is based.


                                     PART I

ITEM 1.  BUSINESS


INTRODUCTION

FuelCell Energy, Inc. is a leading developer of carbonate fuel cell technology
for stationary power generation and has developed a proprietary patented
carbonate fuel cell, which we believe has significant advantages in terms of
fuel efficiency and cost over competing fuel cells for stationary power
generation. A fuel cell is a device which electrochemically converts the
chemical energy of a hydrocarbon fuel into electricity without the combustion of
fuel. The fuel cell system feeds a fuel, such as natural gas, into the fuel cell
where the fuel and air undergo an electrochemical reaction to produce
electricity.

From our founding in 1969, we focused on developing fuel cells and specialized
batteries. These efforts resulted in us obtaining various patents and expertise
in these electrochemical technologies. For the last seventeen years we have
concentrated on developing products availing ourselves of substantial funding
from the United States Department of Energy ("DOE"), the United States
Department of Defense ("DOD"), and other outside sources such as
MTU-Friedrichshafen GmbH ("MTU"), a division of DaimlerChrysler, to whom we have
licensed our fuel cell internationally. We are transitioning from a research and
development company to a company focusing on commercializing our products.

Our patented fuel cell technology is known as the Direct FuelCell(R) because it
introduces the hydrocarbon fuel, such as pipeline natural gas, directly into the
fuel cell without requiring external reforming for producing hydrogen. This
"one-step" operation results in a more efficient, simpler and more
cost-effective energy conversion system compared with most other fuel cells
which utilize complex external reforming equipment to convert the fuel to
hydrogen. The Direct FuelCell(R) has demonstrated grid-connected operation at
Santa Clara in 1996 and 1997 and recently in Danbury, CT from February of 1999
to June of 2000, and in Bielefeld, Germany since November of 1999.

On February 22, 1999, we effected a spin-off to our stockholders of 100% of the
shares of Evercel, Inc. ("Evercel"), a wholly-owned subsidiary of ours. In
connection with this transaction, we transferred to Evercel the principal
assets, liabilities, and intellectual property related to our battery
operations. Following the transfer, we distributed to our stockholders in a
tax-free distribution, one share of Evercel common stock for every three shares
of our common stock. We are currently concentrating our efforts on the
commercialization of our carbonate fuel cell, the Direct FuelCell(R).



                                       3




BACKGROUND

Information contained in this Annual Report concerning the electric power supply
industry and the distributed generation market, our general expectations
concerning this industry and this market, and our position within this industry
are based on market research, industry publications, other publicly available
information and on assumptions made by us based on this information and our
knowledge of this industry and this market, which we believe to be reasonable.
Although we believe that the market research, industry publications and other
publicly available information are reliable, including the sources that we cite
in this Annual Report, they have not been independently verified by us and,
accordingly, we cannot assure you that such information is accurate in all
material respects. Our estimates, particularly as they relate to our general
expectations concerning the electric power supply industry and the distributed
generation market, involve risks and uncertainties and are subject to change
based on various factors, including those discussed under "Risk Factors" in Item
1 of this Annual Report.

As used in this Annual Report, all degrees refer to Fahrenheit ((degree)F), and
kilowatt and megawatt numbers designate nominal or rated capacity of the
referenced power plant. As used in this Annual Report, "efficiency" or
"electrical efficiency" means the ratio of the electrical energy (AC) generated
in the conversion of a fuel to the total energy contained in the fuel; "overall
energy efficiency" refers to efficiency based on the electrical output plus
useful heat output of the power plant; "kilowatt" (kW) means 1,000 watts;
"megawatt" (MW) means 1,000,000 watts; "megawatt hour" (MWh) is equal to 1 MW of
power supplied to or taken from an electric circuit steadily for one hour; and
"kilowatt hour" (kWh) is equal to 1 kW of power supplied to or taken from an
electric circuit steadily for one hour.

RECENT DEVELOPMENTS

On December 8, 2000 we were notified that the People's Republic of China has
approved the transfer to Evercel of our 50.5% ownership in the Xiamen Three
Circles-ERC Battery Corp. Joint Venture, which was deconsolidated in February,
1999 pursuant to the spin-off of Evercel. As a result of this approval, the
license agreement with Evercel is terminated.

On December 8, 2000 we reduced our investment to 24.5% in the Xiamen-ERC High
Technology Joint Venture, Inc. by transferring a 42.17% ownership to Evercel
pursuant to the receipt of a certificate of approval from the People's Republic
of China.

On November 21, 2000, we received approval at a special shareholder meeting to
increase the number of authorized shares of our common stock from 20,000,000 to
150,000,000.

On September 13, 2000, we paid an additional stock dividend of one additional
share for every one share of our common stock held on September 6, 2000, the
record date. All per share data and the number of shares of common stock in this
Report have been adjusted retroactively to give effect to the stock dividend.

On June 29, 2000, we entered into a $4,000,000 loan agreement with the
Connecticut Development Authority. The loan is secured by machinery and
equipment purchased by us under the loan. The promissory note is payable monthly
over six and one-half years, with interest computed annually based on the ten
year U.S. Treasury note rate plus 2 1/2%. To date, we have not borrowed any
monies pursuant to this agreement.

On June 7, 2000, our common stock began trading on the Nasdaq National Market
under the ticker symbol FCEL. The stock formerly traded on the American Stock
Exchange under the symbol FCL.

On April 19, 2000, we sold 2,600,000 shares of common stock through a follow-on
offering, at $23.50 per share for gross proceeds of $61.1 million.

On November 16, 1999, we paid a stock dividend of one additional share of common
stock for every two shares of our common stock held on November 1, 1999, the
record date. All per share data and the number of shares of common stock in this
Report have been adjusted retroactively to give effect to the stock dividend.



                                       4


OUR DIRECT FUELCELL(R) TECHNOLOGY

We have been developing fuel cell technology since our founding in 1969 and
carbonate fuel cells since the mid-1970s. Fuel cell systems represent an
environmentally friendly alternative power generation source when compared to
traditional combustion technologies, such as gas turbines or internal combustion
engines that can potentially yield a lower cost of electricity, primarily
because of lower fuel and maintenance costs. A fuel cell converts a hydrocarbon
fuel, such as natural gas, into electricity without combustion of the fuel. The
only by-products of the fuel cell are heat and water and limited emissions of
carbon dioxide.

A fuel cell power plant can be thought of as having two basic segments: the fuel
cell stack module, the part that actually produces the electricity, and the
"balance of plant" ("BOP"), which includes various fuel handling and processing
equipment, including pipes and blowers, computer controls, inverters to convert
the DC output of the fuel cell to AC and other related equipment.

Our carbonate fuel cell, known as the Direct FuelCell(R), operates at
approximately 1200(degree)F, which is a higher temperature than most other fuel
cells. This is an optimal temperature that avoids the use of precious metal
electrodes required by lower temperature fuel cells, such as Polymer Electrolyte
Membrane ("PEM") and phosphoric acid, and the more expensive metals and ceramic
materials required by higher temperature fuel cells, such as solid oxide. As a
result, less expensive electrocatalysts and readily available metals are used in
our design and high quality by-product heat energy is available for
cogeneration.

The following table shows our estimates of the electrical efficiency, operating
temperature, proposed capacity range and certain other operating characteristics
of single cycle PEM, phosphoric acid, carbonate (Direct FuelCell(R)) and solid
oxide fuel cells operating on hydrocarbon fuels such as natural gas:




                                  ELECTRICAL    OPERATING     PROPOSED
FUEL CELL                         EFFICIENCY   TEMPERATURE    CAPACITY    BY-PRODUCT
  TYPE           ELECTROLYTE          %         (degree)F      RANGE       HEAT USE
- -----------      -----------      ----------   -----------    --------    ----------
                                                            

PEM                 Polymer          30-35       180          25 kW to       Warm
                   Membrane                                    250 kW        Water

Phosphoric
Acid              Phosphoric         35-40       400          50 kW to     Hot Water
                     Acid                                      200 kW

CARBONATE      POTASSIUM/LITHIUM     50-57       1200        250 KW TO       HIGH
(DIRECT           CARBONATE                                    3 MW        PRESSURE
FUELCELL(R))                                                                STEAM

Solid Oxide       Stabilized         45-50       1800         25 kW to       High
               Zirconium dioxide                               3 MW        Pressure
                   Ceramic                                                  Steam



Our Direct FuelCell(R) is so named because of its ability to generate
electricity directly from a hydrocarbon fuel, such as natural gas, by reforming
the fuel inside the fuel cell itself to produce hydrogen. We believe that this
"one-step" reforming process results in a simpler, more efficient and
cost-effective energy conversion system compared with external reforming fuel
cells. External reforming fuel cells, such as PEM and phosphoric acid, generally
use complex, external fuel processing equipment to convert the fuel into
hydrogen. This external equipment increases capital cost and reduces electrical
efficiency.

Our Direct FuelCell(R) has been demonstrated using a variety of hydrocarbon
fuels, including natural gas, methanol, ethanol, biogas and coal gas. Our
commercial Direct FuelCell(R) power plant products are expected to achieve an
electrical efficiency of between 50% and 57%. Depending on location, application
and load size, we expect that a cogeneration configuration will reach an overall
energy efficiency of between 70% and 80%.



                                       5


Conventional non-nuclear power plants burn a hydrocarbon, such as coal, oil or
natural gas, to create heat. The heat boils water, converting it to steam, which
rotates a turbine, which produces electricity. Some large power plants use a
combined cycle approach where the gas is fired in the turbines and the exhaust
heat produces steam, which generates additional power in steam turbines. Each
step in these processes consumes some of the potential energy in the fuel, and
the combustion process typically creates emissions of sulfur and nitrogen
oxides, carbon monoxide, soot and other air pollutants.

Because of the non-combustion, non-mechanical power generation process, fuel
cells are more efficient than comparable conventional power plants. Emissions of
sulfur and nitrogen oxides from fuel cells are nearly zero, and other pollutants
are minimal or non-existent. With the only moving parts being the air blower, in
contrast to large rotating turbines, fuel cells are quieter than these turbines.
Also, since they are quieter than other power generation sources, fuel cells can
be located near the customer and provide both electrical and thermal energy. In
addition, fuel cells typically achieve high efficiency at extremely small sizes,
allowing fuel cells to satisfy the needs of the distributed generation market,
such as providing electrical power to a hospital or a retail store.

THE ELECTRIC POWER SUPPLY INDUSTRY AND DISTRIBUTED GENERATION

According to the DOE's report ENERGY INFORMATION ADMINISTRATION ENERGY OUTLOOK
2001, a projected 231,000 MW of new generating capacity will be needed by 2010
to meet the growing demand for electricity in the United States and to offset
planned retirements of existing generating capacity. It is estimated that up to
37% of this new capacity will be fulfilled through distributed generation
technologies. We believe that through 2020 approximately $300 to $500 billion of
facilities and equipment for new generating capacity and for replacement of
retired capacity will be required to meet the growing demand for electricity in
the United States. Reliance upon the existing infrastructure has been and
continues to be problematic due to capacity constraints, environmental concerns
and other issues. In addition, utility deregulation is creating new challenges
and opportunities in the electric power supply industry. This evolving
competitive industry environment, coupled with the consumer demand for more
reliable, accessible and competitively priced sources of electric power, is
driving traditional energy providers to develop new strategies and seek new
technologies for electricity generation, transmission and distribution.

One solution to meet the growing worldwide demand for electricity is distributed
generation.

The Distributed Power Coalition of America defines distributed generation as
"any small scale power generation technology that provides electric power at a
site closer to customers than central station generation." Distributed
generation should play a growing role in electricity generation in the United
States and around the world due to five related global trends.

The first and most important trend is electricity deregulation, resulting in
part from the Energy Policy Act of 1999, which called for open access for
consumers. In deregulation, the traditional electric utilities will no longer be
integrated providers of electricity to a captive geographic area. Most
deregulation policies focus on separating the utility's three business lines
(generation, transmission/distribution and marketing). Most legislation intends
to create competitive markets in the generation and marketing of power while
leaving the distribution function as a regulated operation, much the way natural
gas was deregulated in the late 1980s and early 1990s. Thus, deregulation will
allow new entrants into the electricity generation business, as customers will
be free to choose power producers and marketers. In addition, "green power"
initiatives and pollution credit legislation associated with deregulation favor
clean fuel cell power plants.

The second trend accelerating distributed generation is the rapid improvement of
electricity generation technology, especially small gas turbines and fuel cells.
These improvements have resulted in dramatically lower costs for smaller
operating units and increased operating efficiency, allowing these technologies
to begin to become cost competitive with traditional grid-based electrical
generation.

A third related trend is the need for today's increasingly digital economy to
have reliable power, often referred to as "high nines" reliability. Modern
electrical components are intolerant of voltage surges, sags or spikes and power
interruptions can cause computers and other sensitive equipment to be out of
service for prolonged periods of time or cause the loss of data entirely. A 1999
study by the Electric Power Research Institute estimated that electric power
problems annually cost U.S. industry more than $30 billion. In March 2000, the



                                       6



DOE released a report of the findings and recommendations of its Power Outage
Study Team, which included removing barriers to distributed generation and
adopting energy efficient technologies. Distributed generation technology, and
fuel cells in particular, may promise power that is more reliable and less
susceptible to disturbances due to its proximity to the user and the nature of
its electrochemical generation.

A fourth trend is capacity constraints. We believe that expansion of the
existing electricity infrastructure may not reliably meet growth in the demand
for electricity. Electric power demand is increasing as a function of global
technology and population expansion and as a substitute for other energy
sources. According to industry sources, capacity reserve margins, which
represent the amount of excess generation capacity available during peak usage
periods, have decreased in the United States from 33% in 1982 to 14% in the
summer of 1999. According to the report titled "Electricity Technology Roadmap:
Powering Progress," electricity now accounts for about 40% of total energy used
in the US and other countries with similar economic development. In addition,
global electrification has the potential to reduce resource consumption growth
by up to 50% by 2050. Increasing the existing and aging infrastructure to
address the increasing demand for electricity will be capital intensive, time
consuming and may be restricted by environmental concerns. Fuel cells could be a
key element in resolving electric power shortages through distributed generation
in areas such as California.

The final trend is an increasing worldwide awareness of environmental issues,
especially air pollution. One step to reducing air pollution is cutting down on
the amount of electricity generated by oil and coal-fired power plants. Most
distributed generation technologies use natural gas, biogas or diesel fuel. Fuel
cells are one of the cleanest methods for generating electric power. These five
trends are converging rapidly in the United States.

In its 1999 report on SMALL SCALE POWER GENERATION, Business Communications Co.,
Inc. states that fuel cells have emerged as one of the most promising
technologies for meeting the growing worldwide energy needs. They project that
during the period between 1998 and 2003, distributed generation will grow at an
average annual rate of 14.9% in the United States and 28.4% worldwide, and that
the total annual market in 2003 for fuel cells can be expected to reach $1.1
billion in the United States. We expect this trend to grow beyond 2003 as fuel
cells gain market acceptance and fuel cell product cost begins to challenge the
product cost of traditional generating technologies. According to a report
published in 1999 by Allied Business Intelligence, Inc., total global stationary
fuel cell generating capacity is expected to grow to 13,669 MW in 2010.

We believe that the growth of the distributed generation market combined with
the continuing deregulation of the utility industry, and the increasing demands
for higher efficiency, higher quality, more reliable, more environmentally
friendly and lower cost power generation capacity, provide market opportunities
for our Direct FuelCell(R) products.

OUR PRODUCTS AND TARGET MARKETS

Our initial market entry commercial products will be rated at 250 kW, 1 MW and 2
MW in capacity. We have designed our mature commercial products in three
configurations: 300 kW, 1.5 MW and 3 MW. Our products are targeted for utility,
commercial and industrial customers in the growing distributed generation market
for applications up to 10 MW. We are also developing new products, based on our
existing power plant design, for applications in the 10 to 50 MW range. All our
designs use the basic single fuel cell stack incorporated in our 300 kW
sub-megawatt class product as the building block for our 1.5 MW and 3 MW
products. All three of our products will offer the capability for cogeneration
where the heat by-product is suitable for high-pressure steam, district heating
and air conditioning.

Our sub-megawatt class product is a skid-mounted, compact power plant that could
be used to power a light industrial or commercial facility, 100 home subdivision
or other similar sized applications. Additional units could subsequently be
added to meet incremental demand growth. We expect to bring our sub-megawatt
class product to market in late 2001.

Customers with larger power requirements will look to our megawatt class power
plants that combine several fuel cell stacks to provide increased power output.
The megawatt class products are designed to meet the power requirements of
customers such as industrial facilities, data centers, shopping centers,
wastewater treatment plants, office buildings, hospitals and hotels. We expect
to bring our megawatt class products to market in 2002.



                                       7


We expect that the initial capital cost of our Direct FuelCell(R) power plant
products will be higher on a per kW basis than that of alternative power
generation sources, such as gas turbines. We believe, however, that once our
products have achieved full and sustained commercial production, as discussed
below, the higher projected efficiency of our products (and the resulting lower
total fuel costs) will make the cost of generating electricity using our Direct
FuelCell(R) power plants competitive with the cost of generating electricity
using other alternative power generation technologies.

We are targeting our initial commercialization efforts for the following
stationary power applications:

     o    customers with a requirement for premium power quality or 24 hour a
          day, 7 day a week reliability;

     o    industrial and commercial customers who can make use of the high
          quality heat by-product for cogeneration;

     o    customers with opportunity fuels such as wastewater treatment gas or
          other waste gases from industrial processes;

     o    customers in regions where air pollution requirements are particularly
          strict;

     o    those seeking to address electric grid distribution or transmission
          shortages or congestion;

     o    utility and non-utility power producers who want to improve their
          knowledge of fuel cell technology; and

     o    customers who combine several of the above characteristics.

Our commercialization efforts after these initial applications will largely
depend on how the distributed generation market develops as well as on our
ability to lower the cost of our products. We believe our efforts will continue
to focus on commercial and industrial end markets where self-generation is a
viable option. We will focus on energy service providers, specialty
distributors, utilities and original equipment manufacturers (OEMs) as potential
buyers and distributors of our products.

In connection with the DOE's Vision 21 program, we are designing a 40 MW
ultra-high electrical efficiency power system that will combine our Direct
FuelCell(R) and a gas turbine that we expect will compete for applications
between 10 and 50 MW in the distributed generation market. In addition, because
of the ability to operate on a variety of hydrocarbon fuels, we are currently
developing in conjunction with the U.S. Navy, a Direct FuelCell(R) power plant
to provide power to ships using diesel fuel. An additional, related market would
be the cruise ship industry, which we believe has substantial "hotel" power
needs. We believe that all the power required by a cruise ship, except for
propulsion, could be provided by a diesel-powered Direct FuelCell(R) power
plant. A diesel-powered fuel cell could also be used by many island communities
that have limited natural gas or similar resources and rely on the use of diesel
fuel for the generation of electricity. Lastly, the U.S. Coast Guard Research
and Development Center recently awarded us a contract to design and install a 3
kW fuel cell power system, using methanol for fuel, at the Cape Henry Lighthouse
in Virginia. The field test of the system, planned for the second quarter of
2001, is expected to demonstrate fuel cell capabilities at remote sites.

We believe that the advantages of our Direct FuelCell(R) technology include the
following:

     o    HIGH EFFICIENCY. The high efficiency, internal fuel reforming system
          incorporated within our Direct FuelCell(R) leads to a simpler, more
          cost-effective power plant with superior operating characteristics
          that offer a variety of benefits to energy providers and end users.
          The elimination of external reforming contributes to higher operating
          efficiency, lower fuel use and, therefore, lower operating costs
          compared to competing fuel cell technologies.

     o    OPTIMAL OPERATING TEMPERATURE. Our Direct FuelCell(R) operates at a
          temperature of approximately 1200(degree)F. This temperature generates
          high quality by-product heat that provides superior energy
          efficiencies and allows the use of multiple fuels. This operating



                                       8


          temperature avoids combustion of the fuel, and as a result, reduces
          pollutants to a minimal level. It also allows the fuel cell to be
          built with less expensive and commonly available materials.

     o    ATMOSPHERIC PRESSURE. Our Direct FuelCell(R) operates at atmospheric
          pressure. This enables it to be constructed at a lower cost than other
          fuel cell systems, such as PEM and solid oxide, that operate in a
          pressurized environment. This also allows our Direct FuelCell(R) to
          operate unattended, with lower maintenance intervals, and greatly
          enhances the fuel cell stack operating lifetime.

     o    MULTIPLE FUEL CAPACITY. Because of the internal fuel reforming system
          and the high operating temperature, our Direct FuelCell(R) has the
          capability to operate using multiple fuel sources, including natural
          gas, oil, gasoline, diesel, propane, methanol, ethanol, biogas and
          coal gas. We think that this provides a distinct competitive advantage
          in that it enables our Direct FuelCell(R) to be used in a variety of
          applications where the supply or delivery of natural gas is limited.

     o    SCALABILITY. Our power plant design is modular, allowing several units
          to be combined to provide incremental power capabilities. This allows
          our Direct FuelCell(R) to be utilized by a wide range of customers
          with different power needs.

OUR FUEL CELL DEVELOPMENT PROGRAM

SUCCESSFUL FIELD TRIALS AND DEMONSTRATION PROJECTS. We have extensive experience
in testing our products in a variety of conditions and settings and on a range
of fuels. Some significant demonstrations include the following:

     o    SANTA CLARA DEMONSTRATION PROJECT. During 1996 and 1997, we operated
          our "proof-of-concept" megawatt scale fuel cell plant in Santa Clara,
          California. The Santa Clara plant achieved a peak power output of 1.93
          MW, 7% above rated power, and an electrical efficiency of 44%, a
          record for a single cycle fossil fuel power plant of this kind. The
          Santa Clara plant also achieved record low emissions of sulfur and
          nitrogen oxides. The demonstration involved the largest carbonate fuel
          cell power plant in the world and the largest fuel cell of any type
          operated in the United States. The Santa Clara plant operated at
          various electrical outputs for almost one year and was connected to
          the utility grid for half of that time. Despite encountering equipment
          problems unrelated to the basic fuel cell technology resulting from a
          defect in applying insulator materials to certain connectors, the
          Santa Clara plant achieved most of the goals that were set for the
          project and established new milestones. After operation of the Santa
          Clara plant ended in March 1997, all of the fuel cell stacks were
          returned to us for comprehensive analysis. We used the results of this
          analysis, along with the results of ongoing research and development
          activities, to develop a commercial fuel cell design significantly
          more compact, reliable and cost-effective than the Santa Clara plant
          design. The fuel cell stack design used at the Danbury and Bielefeld,
          Germany sites were developed with cells that are approximately 50%
          larger in area, 40% lighter per unit area, and 30% thinner than the
          Santa Clara plant design. These improvements have doubled the power
          output from a fuel cell stack. Our current fuel cell power plant
          design will be capable of producing the same output as the Santa Clara
          plant with a footprint one-ninth as large. We believe that this
          reduction in size and increase in power per fuel cell stack will
          result in significant manufacturing cost savings.

     o    DANBURY PROJECT. In February 1999, we began operating a 250 kW Direct
          FuelCell(R) grid-connected power plant at our headquarters in Danbury,
          CT. The plant operated on pipeline natural gas and ran for
          approximately 11,800 hours before being disconnected for evaluation as
          scheduled and to prepare the facility for a new sub-scale test of a
          fuel cell/turbine system under the DOE's Vision 21 program. In March
          1999, the plant reached maximum power of 263 kW, which we believe to
          be the highest ever produced by a single carbonate fuel cell stack.
          Before being disconnected, this power plant delivered more than 1.8
          million kWh to our Danbury facility and demonstrated a wear rate of
          .03% per 1,000 hours. The ruggedness of this product design was
          demonstrated in planned stress tests, such as rapid ramp-up thermal
          cycling tests, and simulated emergency fuel loss. These tests verified
          that the Direct FuelCell(R) could be maintained in the field despite
          operating stresses and fuel supply and power failures, without
          decreasing performance meeting our expectations and projections.



                                       9



     o    BIELEFELD, GERMANY PROJECT. In November 1999, MTU, a licensee of our
          technology, commissioned a 250 kW power plant at the University of
          Bielefeld in Bielefeld, Germany. The power plant is a skid-based,
          sub-megawatt power plant designed by MTU that incorporates our Direct
          FuelCell(R) as its fuel cell component. The Bielefeld plant has
          achieved a peak electrical efficiency of 45%. Employing cogeneration
          applications that use the heat by-product to produce process steam for
          the University and district heating, the plant has achieved an overall
          energy efficiency of 77%.

     o    COMMERCIAL DESIGN ENDURANCE PROJECT. Between April 1998 and July 2000,
          we operated an 8 kW, multiple fuel, commercial stack design fuel cell
          at our Danbury, CT facility. This unit generated electricity for
          approximately 17,500 hours. This project, together with other test
          data, enables us to project expected commercial performance.

PLANNED FIELD TRIALS AND DEMONSTRATION PROJECTS. We expect to conduct various
field trial projects, including the following:

     o    OHIO COAL MINE METHANE PROJECT. In October 2000, the DOE's National
          Energy Technology Laboratory selected us to design, construct and
          operate a 250 kW Direct FuelCell(R) power plant, utilizing coal mine
          methane gas, at the Harrison Mining Corporation coal mine in Cadiz,
          Ohio. The $5.4 million cost for the three-year program will be shared
          equally with the DOE and is subject to the annual congressional
          appropriations process. We were selected for this project to
          demonstrate the ability of our Direct FuelCell(R) to generate
          electricity using coal mine methane emissions that otherwise escape
          into the atmosphere.

     o    KING COUNTY, WASHINGTON. In January 2001, we signed a agreement with
          King County to deliver a 1 MW Direct FuelCell(R) power plant using
          municipal wastewater digester gas. We anticipate delivery of this
          Direct FuelCell(R) power plant in 2002. The two-year demonstration
          project will be cost-shared equally by King County, through a
          cooperative grant to the County from the Environmental Protection
          Agency, and us. The total value of the contract is $18.8 million.

     o    SOUTHERN COMPANY SERVICES, INC. - ALABAMA MUNICIPAL ELECTRIC AUTHORITY
          - MERCEDES-BENZ U.S. INTERNATIONAL, INC. In conjunction with Southern
          Company Services, Inc. (Southern), the Alabama Municipal Electric
          Authority (AMEA) and Mercedes-Benz U.S. International, Inc.
          (Mercedes-Benz), we have agreed to build and install a 250 kW fuel
          cell power plant at the Mercedes-Benz facility in Tuscaloosa, Alabama
          utilizing MTU's design. We began construction on October 6, 2000 and
          expect this field demonstration to be operational in the spring of
          2001. Southern and AMEA have each agreed to contribute $1 million to
          this project and have options to negotiate exclusive arrangements with
          us for the sale, distribution and service of our Direct FuelCell(R)
          power plants in several southern states that must be exercised no
          later than December 31, 2001.

          This agreement will continue through December 31, 2001. Southern may
          terminate this agreement, at any time, upon 60 days written notice to
          us, and AMEA may terminate this agreement, at any time, upon 30 days
          written notice to us. Upon termination, Southern or AMEA, as the case
          may be, will pay us for any costs, noncancellable commitments incurred
          prior to termination and fair closeout costs to support our work under
          this agreement.

     o    LOS ANGELES DEPARTMENT OF WATER AND POWER. LADWP has selected us to
          install a 250 kW fuel cell power plant at its headquarters in Los
          Angeles. The installation of this power plant will help LADWP gain
          knowledge and experience in the installation, maintenance and
          operation of fuel cell power plants. The agreement that we entered
          into in May 2000 provides for LADWP to contribute $2.4 million to this
          project. We expect to install the 250 kW power plant during the second
          quarter of 2001 and for it to be operational by the middle of 2001.

          Under the agreement, we are required to pay LADWP annual royalties of
          2% of net sales revenues, beginning when sales of fuel cells reach 50
          MW per year, and continuing until the earlier of termination of the
          agreement or the payment to LADWP of $5 million in royalties.



                                       10


     o    GLOBAL ENERGY CLEAN COAL PROJECT. In late 1999, the DOE transferred a
          long-standing clean coal project to a wholly owned subsidiary of
          Global Energy, Inc., a Cincinnati based independent power producer.
          This project is one of the largest power plant projects in the federal
          clean coal technology program, and is the first clean coal technology
          plant to employ a fuel cell. The objective of this project is to
          demonstrate an innovative coal gasification technology along with a
          megawatt class carbonate fuel cell power plant. The clean, low-cost
          fuel generated by this process will be used to fire gas turbines and
          to demonstrate the operation of a 2 MW fuel cell power plant. The 2 MW
          fuel cell power plant is part of a $432 million 400 MW project funded
          in part by the DOE. We are named in the project contract as the
          supplier of the fuel cell technology, and have entered into a
          sub-contract for the design, construction and operation of the 2 MW
          fuel cell power plant. We expect this fuel cell power plant to be
          operational in 2003. Under the $34 million program, up to $17 million
          in DOE funding will be available to us under this project, subject to
          the annual congressional appropriations process. We plan to obtain
          other financing for the remaining cost of the power plant.

In addition to our planned demonstrations, MTU expects to conduct field trials
and demonstration projects of its sub-megawatt power plant, which utilizes our
Direct FuelCell(R) as its fuel cell component. In 2001, MTU plans to demonstrate
the following:








     o    RHON CLINIC PROJECT. The State of Bavaria, the Rhonklinikum AG Bad
          Neustadt/S, a public company operating approximately 40 German
          hospitals, the local gas supplier, Ferngas Nordbayern GmbH, and MTU
          have agreed to build and operate a 250 kW power plant. The purpose of
          this field trial is to demonstrate the viability of a fuel cell power
          plant in a hospital environment. The power plant is expected to be
          commissioned and to start operation in 2001. The electrical power will
          be fed into the local clinic grid and the hot exhaust air will be used
          to produce process steam for clinic use.

PRINCIPAL GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS

Since 1976, we have worked on the development of our Direct FuelCell(R)
technology with various government agencies, including the DOE, the U.S. Navy,
the U.S. Coast Guard, the Department of Defense, the Defense Advance Research
Projects Agency and the National Aeronautics and Space Administration. Our
revenues have been principally derived from U.S. government and industry
research and development contracts. Government funding, principally from the
DOE, provided approximately 87%, 87% and 99% of our revenue for the fiscal years
ended 2000, 1999 and 1998, respectively. From the inception of our carbonate
fuel cell development program in the mid-1970s to date, approximately $370
million has been invested via DOE and related utility programs to support the
development, demonstration and field testing of our Direct FuelCell(R)
technology. This includes funding we have received from the DOE of approximately
$219 million. We have complemented the DOE's funding with additional support
from a variety of other sources that have contributed approximately $150
million.

We have historically performed our services under government-funded contracts or
agreements that usually require performance over a period of one to five years
and often require cost share funding as a condition to receiving any amounts
allocated under these agreements. However, congressional budget limits could
prolong the contracts. Generally, our U.S. government research and development
contracts are subject to the risk of termination at the convenience of the
contracting agency. Furthermore, these contracts, irrespective of the amounts
allocated by the contracting agency, are subject to annual congressional
appropriations and the results of government or agency sponsored audits of our
cost reduction efforts and our cost projections. We can only receive funds under
contracts ultimately made available to us annually by Congress as a result of
the appropriations process.

We currently receive our government funding primarily from a cooperative
agreement with the DOE. This agreement covers the design, scale up, construction
and testing of carbonate fuel cells operating on natural gas. Major development
emphasis under this agreement focuses on fuel cell and total power plant cost
reduction and improved endurance.

In December 1994, we entered into a Cooperative Agreement with the DOE pursuant
to which they agreed to provide funding to support the continued development and
improvement of our commercial products. This agreement has recently been
extended for three additional years, through 2003, and will provide $40 million
of funding over this period, subject to annual approval by the U.S. Congress.
The current aggregate dollar amount of the DOE contract is $213 million with the
DOE providing $135 million in funding. As a condition to receiving any amounts
allocated under this agreement, the balance of the funding must be provided by
us, our partners or licensees, other private agencies and utilities, including
any amounts spent by our customers and other third parties on development, field
test and demonstration projects.

The U.S. government and the DOE have certain rights relating to our intellectual
property as described under "Proprietary Rights." Lastly, under this cooperative
agreement, we must pay the DOE 10% of all license and royalty income received
from MTU, up to a total of $500,000.

Since 1989, the DOE has also granted us numerous Small Business Innovation
Research awards and other awards to research and develop various aspects of
carbonate fuel cell components and PEM fuel cells.

In May 2000, the DOE, under the Vision 21 Program, selected us for a $3.1
million project ($2.4 million of which will be funded by the DOE) to develop a
high utilization fuel cell and key system components, and to perform a sub-scale
test of a fuel cell/turbine system utilizing a 250 kW Direct FuelCell(R). We
expect to commence this test at our headquarters in Danbury, CT in the spring of
2001 utilizing a Capstone microturbine. Under the Vision 21 Program, we are
designing a 40 MW ultra-high efficiency, fuel cell/turbine power plant based on
our existing Direct FuelCell(R) technology.



                                       11



Currently we are working on Direct FuelCell(R) power plants for marine
applications under programs with the U.S. Navy and the U.S. Coast Guard. These
power plants are required to operate on liquid fuels such as diesel. We have
already produced a fuel cell-compatible fuel from marine diesel using a compact
fuel processing system. In 1999, a sub-scale fuel stack was tested on this fuel
under conditions simulating marine requirements. Another sub-scale stack was
successfully tested for shock and vibration tolerance. In May 2000, we were
awarded $16.5 million by the U.S. Navy ($12.8 million of which will be funded by
the U.S. Navy) to continue development work under Phase II of this project,
leading to a 625 kW land based demonstration at the Philadelphia Navy Yard which
is expected to be delivered in 2003.

STRATEGIC ALLIANCES AND LICENSE AGREEMENTS

In 2000, we entered into significant strategic alliances with an affiliate of
Enron North America Corp. (Enron), PPL EnergyPlus LLC (PPL), a subsidiary of PPL
Corporation, and Marubeni Corporation of Japan (Marubeni).

ENRON. In September 2000, we entered into a non-exclusive cooperative alliance
agreement with Enron pursuant to which we agreed to provide Enron access to our
customers and the development and placement of our products. Under this
agreement, Enron has agreed to directly or indirectly purchase, over a two-year
period, 55MW of power generation utilizing FuelCell products. In connection with
this alliance agreement, an affiliate of Enron purchased 80,290 shares of our
common stock for $5 million and we issued two-year warrants to purchase
1,300,000 shares of our common stock at exercise prices ranging from
approximately $62 to $81 per share. The warrants will only be exercisable if
Enron purchases at least 55MW of our products by September 29, 2002. For
accounting purposes, we expect that the fair value of these warrants will be
netted against the revenues attributable to the purchase of our products by
Enron. We believe that Enron will use a portion of our products that it may
purchase to satisfy various states' requirements for renewable or green energy
sources. The alliance agreement requires Enron to either purchase at least 55MW
of our products by September 2002, or pay us a penalty.

PPL. In September 2000, we entered into a distributor agreement with PPL
pursuant to which PPL agreed to become the first distributor of our Direct
FuelCell(R) products in North America. PPL has agreed to use its reasonable
efforts to promote and sell our products, on a non-exclusive basis, throughout
North America. PPL has agreed to order at least 1.25 MW of our field trial
products by March 2001 at agreed-upon prices and to establish the next minimum
order amount by the end of 2003. In connection with this distributor agreement,
an affiliate of PPL purchased 212,608 shares of our common stock for $10
million. The agreement terminates on December 31, 2004, subject to three-year
extensions. Prior to December 31, 2004, PPL may terminate the agreement upon 60
days' written notice to us and, after December 31, 2004, either party may
terminate the agreement upon 60 days' written notice.

MARUBENI. Under an agreement with Marubeni that we entered into in February
2000, we agreed to supply Marubeni, and Marubeni agreed to site and test, based
on customer commitment, our Direct FuelCell(R) power plants in Japan and other
select Asian markets. Marubeni will provide field trial marketing, management
and distribution services under this agreement. Pursuant to this agreement,
Marubeni has ordered five sub-megawatt class Direct FuelCell(R) power plants. In
connection with this agreement, Marubeni has an option, prior to October 1,
2001, to negotiate an exclusive arrangement with us for the sale, distribution
and service of our Direct FuelCell(R) power plants in Japan and other select
Asian markets. This agreement will continue through December 31, 2001. Marubeni
may terminate this agreement, at any time, upon 30 days' written notice to us.
Upon termination, Marubeni will pay us for any costs and noncancellable
commitments incurred prior to termination to support our work under this
agreement.

Our other significant relationships include the following:

BATH IRON WORKS. In August 1999, we entered into an agreement with the Advanced
Technology Division of Bath Iron Works, a General Dynamics company, to develop
an advanced Direct FuelCell(R) plant for defense marine applications. We expect
this agreement to lead to the development of the first new power generation
technology for surface ships since nuclear power was adopted for aircraft
carriers, addressing the market for advanced marine power systems. This
agreement continues through 2004, and may be terminated by either Bath Iron
Works or us, upon 30 days' written notice.


                                       12



FLUOR DANIEL, INC. We have a long-standing relationship with Fluor Daniel, Inc.,
a subsidiary of Fluor Corporation (Fluor Daniel), one of the largest
engineering, procurement, construction and technical services companies in the
world. Fluor Daniel's Oil, Gas & Power unit has been working with us providing
architectural, design, engineering and construction management services in
developing, based on our specifications, the balance of plant systems required
to support our fuel cells in natural gas and coal fueled power plants. Fluor
Daniel is a resource that we expect will continue to provide us with the
technical and management expertise and experience required for designing and
optimizing our fuel cell power plants.

In addition to our strategic relationships, we have entered into several
licensing agreements, including the following:

MTU. In 1989, we entered into a license agreement with DASA, a German aerospace
and aircraft equipment manufacturer and a subsidiary of Daimler Benz
Corporation, one of the largest industrial companies in Europe. In 1993, that
agreement was transferred to a subsidiary of DASA, MTU, now a DaimlerChrysler
subsidiary.

In December 1999, the 1989 license agreement was replaced by a revised MTU
license agreement, in which we granted MTU an exclusive license to use our
Direct FuelCell(R) patent rights and know-how in Europe and the Middle East, and
a non-exclusive license in South America and Africa, subject to certain rights
of us and others, in each case for a royalty. Under this agreement, MTU has
granted us an exclusive, royalty-free license to use any improvements to our
Direct FuelCell(R) made by MTU anywhere in the world except Europe and the
Middle East. In addition, MTU has agreed to negotiate a license grant of any
separate fuel cell know-how it develops once it is ready for commercialization.
Under this agreement, we have also agreed to sell our Direct FuelCell(R)
components and stacks to MTU at cost, plus a modest fee. The new MTU agreement
continues through December 2004 and may be extended for additional 5-year terms,
at the option of MTU, by written notice at least 180 days prior to expiration.
Upon termination, MTU will retain a non-exclusive license to use our Direct
FuelCell(R) patent rights and know-how for a royalty.

In 1992, MTU formed a European consortium (ARGE) with RWE Energie, the largest
electric utility in Germany, Ruhrgas, the largest natural gas supplier in
Germany and Elkraft, a large Danish utility. The activities of this group
complement our efforts to design and manufacture natural gas and coal gas fueled
carbonate fuel cell systems based on our designs.

During 1998, MTU designed and built a 250 kW cogeneration fuel cell unit which
incorporates our fuel cell assemblies and uses an innovative integration of a
portion of the balance of plant into the fuel cell stack module itself, with the
expectation of reducing costs to the power plant as a whole. The design is
compact and especially suitable for cogeneration applications.

In July 1998, we entered into a cross-licensing and cross-selling agreement with
MTU pursuant to which we have granted MTU a non-exclusive license to use our
balance of plant know-how (excluding fuel cell technology included in the 1999
license agreement) in Europe, the Middle East, South America and Africa, and MTU
has granted us a worldwide, non-exclusive license to use MTU's balance of plant
know-how (excluding fuel cell technology included in the 1999 license
agreement), in all territories except Europe and the Middle East. Each party is
required to pay to the other a royalty for each kW of rating which uses the
licensed balance of plant know-how of the other. MTU is not required to pay us
royalties under this agreement if MTU is obligated to pay us royalties under the
1999 license agreement. This agreement continues through 2003 and may be
extended by written notice at least 180 days prior to expiration.

SANTA CLARA. In 1993, we obtained an exclusive license, including rights to
sublicense, to use the balance of plant technology we developed under the Santa
Clara plant contract. The license specifically excludes fuel cell and fuel cell
stack technology. The license becomes non-exclusive after 2005 or earlier, at
the option of Santa Clara, if we do not meet certain commercialization
milestones. Under this license, royalties are $15 per kilowatt (subject to
consumer price index and other upward adjustments) on North American sales of
commercial fuel cell power plant stacks of capacities of 100 kW or more which
use the licensed balance of plant technology.

In addition to the above royalties, the license to use the Santa Clara balance
of plant technology in connection with fuel cell plants sold or licensed outside
North America, is subject to the quarterly payment by us of license fees equal
to the lesser of (a) 2% of the proportional gross revenues from the sale of that
portion of each fuel cell plant that uses the Santa Clara balance of plant
technology or (b) 1% of the total gross revenue from the sale of each fuel cell
plant that uses the Santa Clara balance of plant technology. We must also pay
Santa Clara 25% of any fees we receive for sublicensing the Santa Clara balance
of plant technology.



                                       13


ELECTRIC POWER RESEARCH INSTITUTE. In 1988, we entered into a license agreement
with the Electric Power Research Institute (EPRI), granting us an unreserved,
non-exclusive, worldwide license to use carbonate fuel cell proprietary data we
developed under certain contracts with EPRI. We have agreed to pay EPRI a
one-time fee of approximately $50,000 within six months of our first commercial
sale of a carbonate fuel cell stack greater than one megawatt in size using the
carbonate fuel cell proprietary data we developed under the EPRI contracts and a
royalty of 0.5% to 1% of net commercial sales of carbonate fuel cell stacks
which use this proprietary data. Our obligation to make royalty payments
continues until the later of the expiration of all patents licensed to us by
EPRI, or fifteen years from our first commercial sale of a carbonate fuel cell
stack which uses EPRI's proprietary data.

OUR STRATEGY

Our business objective is to be the leading provider of carbonate fuel cell
products for stationary power generation. We plan on being the first to provide
high quality, low-cost sub-megawatt and megawatt class fuel cell power plants to
the distributed generation market. We plan to manufacture our proprietary fuel
cell stack components and to purchase balance of plant equipment from suppliers
as modularized packages that will be delivered to the power plant site for
assembly with our fuel cell stack components. We plan on continuing to be an
industry leader in carbonate fuel cell technology focused on expanding our
proprietary technology and developing future applications, products and markets
for that technology, including diesel fueled marine-based applications. To
accomplish our objective, we plan to:

FOCUS ON OUR SUPERIOR TECHNOLOGY FOR STATIONARY MARKETS. We believe that our
Direct FuelCell(R) is the fuel cell technology most suited to stationary power
generation based on its highly efficient operating characteristics and the
ability to use multiple hydrocarbon fuels such as natural gas, oil, gasoline,
diesel, propane, methanol, ethanol, biogas and coal gas. We plan to continue to
focus on the distributed generation market where we believe that our technology
and our power plant product design afford us a significant competitive
advantage. We also plan to develop new products, based on our existing power
plant design, for applications in the 10 to 50 MW range, and for marine and
stationary applications utilizing diesel fuel.

DEMONSTRATE OUR SUPERIOR TECHNOLOGY. We plan to conduct additional
demonstrations of our Direct FuelCell(R) in various applications and utilizing a
range of fuels. We are planning demonstrations in 2001 in the United States at
the Mercedes-Benz facility in Tuscaloosa, Alabama, utilizing MTU's design, and
at LADWP's headquarters in Los Angeles. MTU has scheduled a demonstration at the
Rhon Clinic, a hospital in Bavaria, Germany, in 2001, both utilizing our Direct
FuelCell(R) components. In connection with our strategic alliance with Marubeni,
additional demonstrations are planned in 2001 for Japan and Asia. In addition,
we plan to perform a sub-scale test of a fuel cell/turbine system utilizing a
250kW Direct FuelCell(R) in 2001 at our Danbury, CT facility. As these
demonstration projects progress, we believe that we will begin to take
commercial orders for our sub-megawatt class commercial products in late 2001.

DEVELOP DISTRIBUTION ALLIANCES AND CUSTOMER RELATIONSHIPS. We anticipate
multiple third-party distribution channels to service our customers. In the
United States, we initially expect our products to be sold to power generation
product suppliers, value-added distributors and energy service providers. In
September 2000, we selected PPL as the first North American distributor of our
Direct FuelCell(R) products. In Europe, we plan to manufacture and deliver fuel
cell components to our licensee MTU, who will package the fuel cell power plants
for distribution. In Asia, we initially expect to sell power plants through
distributors, and then, as volume increases, through the delivery of fuel cell
components to OEMs. We plan to leverage our existing relationships and the
success of our field trials and demonstration projects into long-term
distributor and OEM relationships while continuing to pursue additional
distribution partners.

ACHIEVE PROFITABILITY BY REDUCING COSTS. As a result of the simple design of our
Direct FuelCell(R), we plan to focus our fuel cell component cost reduction
efforts on improving manufacturing processes, reducing purchased material cost
through economies of scale and improving the performance of our fuel cells. Our
strategy for reducing the balance of plant cost is to develop strategic
alliances with equipment suppliers who will recognize the potential mutual
benefit of joint cost reduction programs.



                                       14



EXPAND MANUFACTURING CAPACITY. Our current manufacturing facility is capable of
producing 5 MW of fuel cells per year. We are expanding our current production
capacity at our new facility in Torrington, CT to 50 MW per year in late 2001.
We expect to increase our manufacturing capacity in stages to 400 MW in 2004.

BENEFIT FROM STRATEGIC RELATIONSHIPS AND ALLIANCES. We plan to continue to
develop and benefit from strategic alliances with leading developers, suppliers,
manufacturers and distributors of electrical power and electric power systems
and components. We plan to leverage our relationships with Enron, PPL and others
to ensure maximum exposure and distribution of our Direct FuelCell(R) products.
We further expect these alliances will develop into mutually beneficial
relationships where the ability of each party to lower costs of their respective
components of the Direct FuelCell(R) power plant will make competitive pricing
more achievable. As demonstrated by our recent agreements with Enron and PPL,
our objective is to establish long-term relationships while also requiring some
form of immediate commitment, whether in the form of an equity investment, a
down payment on purchase orders or otherwise.

CREATE BRAND AWARENESS. We are working to develop in our target markets the
association of our Direct FuelCell(R) name with the highest quality stationary
fuel cell products. We are also working to have the design of our Direct
FuelCell(R) accepted as the industry standard for stationary fuel cell systems.

AGGRESSIVELY PROTECT INTELLECTUAL PROPERTY. We plan to aggressively protect our
intellectual property, through the use of patents, trademarks, trade secret
protection, confidentiality procedures and confidentiality agreements. We
believe that our intellectual property affords us a distinct competitive
advantage, and that protecting our intellectual property is an essential part of
preserving this advantage.

DEVELOP PRODUCTS FOR THE 10 TO 50 MW DISTRIBUTED GENERATION MARKETS. We plan to
continue our research and development, leveraging our existing technology to
develop additional commercial applications for the 10 to 50 MW distributed
generation market. For example, in connection with the DOE's Vision 21 program,
we plan to design a 40 MW ultra-high electrical efficiency system that will
combine our Direct FuelCell(R) and a gas turbine. We estimate that this system
could reach an electrical efficiency of approximately 75%.

DEVELOP DIRECT FUELED APPLICATIONS FOR ADDITIONAL MARKETS. We plan to continue
our research and development related to diesel fueled applications for our
technology. In conjunction with the U.S. Navy and the U.S. Coast Guard, we are
developing a fuel processing system to convert diesel fuel into a fuel
compatible with our existing fuel cell technology. This product would have
significant opportunities for "hotel" power on military and civilian ships as
well as for stationary applications on islands that are dependent on diesel as
their primary fuel source.

DEVELOP NEXT GENERATION PRODUCTS. We are currently developing and plan to
continue developing next generation fuel cell power plant technologies that have
the potential to significantly reduce the cost per kWh by increasing the power
output and cell life of our power plant products.

COST REDUCTION PROGRESS

We regularly review and revise our cost reduction plans. The DOE has on several
occasions assigned an independent outside auditor to examine our present and
projected cost figures to determine if the DOE's continued support of us through
development contracts will achieve its intent of creating commercially viable
fuel cell power generation technology in the world. In 1999, at the request of
the DOE, we presented our cost projections to a panel of independent
consultants. Our presentation indicated that our commercial design fuel cell
would be capable of being manufactured, delivered and installed by 2005 at a
cost per kW of approximately $1,200 (assuming full and sustained commercial
production of at least 400 MW of fuel cells per year). Although subject to a
number of assumptions and uncertainties, some of which are beyond our control,
including the price of fuel, we believe that, by 2005, such a cost per kW for MW
plants would result in a cost of generating electricity of between 5 and 7 cents
per kWh.

If this cost reduction is achieved, from a cost per kWh standpoint, our Direct
FuelCell(R) will be an economically attractive source of energy in many places
in the United States. According to the DOE, electricity prices currently vary
substantially depending on the region of the country. Prices in the highest cost
region (New York, with an average price of over 10 cents per kWh in 1998) are
almost 2.5 times as expensive as in the lowest cost region (the northwest United
States). The DOE predicts that, even in a competitive environment, electricity
prices in New York will be 8.88 cents per kWh in 2005 and 8.84 cents per kWh in
2012. We believe that our Direct FuelCell(R) will be a viable alternative as
transmission and distribution costs, as well as losses in efficiency due to
transmission and distribution, will be substantially lessened or eliminated with
our products. Based on recent experiences in California, notwithstanding
deregulation, average power prices have actually increased.



                                       15



We believe that the sale of commercial products before achievement of our cost
reduction goals is possible to a market of "early adopters." Energy users that
are unable to or choose not to site traditional combustion based generation or
users that need more reliable electricity sources than that provided by the grid
or diesel back-up generators may be willing to pay higher prices per kW to
obtain the power that they need. We believe that these "early adopters" will
likely be municipalities in heavy smog areas as well as hospitals and data
centers. We believe that these customers will enable us to increase volume and
subsequently execute our cost reduction, which we believe will eventually
provide a lower cost product and therefore greater market potential to more
traditional commercial and industrial customers.

We plan to achieve our cost goals through a combination of factors, including
manufacturing process improvements, economies of scale, completion or
elimination of first time or one of a kind costs, and through technology
maturation that increases power output without additional product cost. These
factors are described below:

         MANUFACTURING COST REDUCTION: Manufacturing costs are being reduced by
         multi-faceted efforts including supplier management, material and labor
         utilization, vertical integration and engineering for manufacturing
         efficiencies.

         ECONOMIES OF SCALE: Volume directly affects purchased material cost and
         reduces fixed cost allocation. Volume also has a secondary effect on
         direct labor by providing justification to invest in capital projects
         for improved productivity.

         FIRST TIME COSTS: The elimination of first time development and
         engineering costs is a large and straightforward element of our cost
         reduction plan. At commercial volumes, power plant installations are
         expected to be virtually identical. Furthermore, indirect costs
         associated with developing the initial field trail projects will not
         exist.

         IMPROVED PERFORMANCE: Power plant performance is a critical factor.
         Power output has a direct impact on capital cost as measured in cost
         per kW, and efficiency, decay rate and availability all affect the cost
         of electricity which is the best measure of the value of our products.
         Our research and development activities have made and are expected to
         continue to make substantial progress in these areas. For example, if
         we are successful in our ongoing research and development efforts, we
         might expect that stack life could increase from five years for the
         first stack replacement in a 30 year plant, to between seven and eight
         years for the last stack replacement, with additional gains in power
         and efficiency.

COMPETITION

We are competing primarily on the basis of fuel efficiency, environmental
considerations and cost. We believe that the carbonate fuel cell enjoys
competitive advantages over other fuel cells. These benefits include higher fuel
efficiency which leads to lower fuel cost, significantly lower emissions,
scalability and potentially lower operating, maintenance and generation costs
because of less complex BOP. We believe that we are more advanced in the
development of carbonate fuel cells than other manufacturers.

Several companies in the United States are involved in fuel cell development,
although we believe that we are the only domestic company engaged in the
development and production of carbonate fuel cells. Emerging technologies in our
target distributed generation market include small gas turbines, PEM fuel cells,
phosphoric acid fuel cells and solid oxide fuel cells. Major competitors using
or developing these technologies include Capstone Turbine Corporation, Elliot
Energy Systems and Honeywell International Inc. in the case of gas turbines,
Ballard Power Systems, Inc., H. Power Corp., International Fuel Cells and Energy
Partners L.C. in the case of PEM fuel cells, ONSI Corporation in the case of
phosphoric acid fuel cells, and Siemens Westinghouse Electric Company and
Mitsubishi Heavy Industries, Ltd. in the case of solid oxide fuel cells. Each of
these competitors has the potential to capture market share in our target
market. Plug Power Inc. also has announced plans to test models of its 5-10 kW
PEM fuel cells for residential applications. We believe that PEM fuel cells are
less efficient than our Direct FuelCell(R) and, therefore, have higher fuel
costs and are more complex and have higher BOP costs. In any event, we believe
that existing PEM developers are focused primarily on transportation, premium
power and small residential applications.



                                       16



In Asia, at least three manufacturers have demonstrated varying levels of
interest in developing and marketing carbonate fuel cells. Some have larger
marketing and sales departments than we do and have a history of producing and
selling electric generation equipment. One of these manufacturers has
demonstrated extended operation of a 200 kW carbonate fuel cell. Two of these
manufacturers have jointly demonstrated extended operation of a 100 kW carbonate
fuel cell and recently tested a 1 MW plant. One of these companies is expected
to concentrate on 700-800 kW sized modules for distributed generation. We
believe that most of these companies use the more complex and less efficient
approach of using external fuel processing equipment to produce hydrogen fuel.

In Europe a company in Germany, and a Spain/Italy consortia, are actively
engaged in carbonate fuel cell development and are potential competitors. Our
licensee, MTU, and its partners have conducted the most significant activity in
Europe.

We must also compete with companies manufacturing more established combustion
equipment, including various engines and turbines, which are currently in use
and have established operating and cost features. Significant competition comes
from the gas turbine industry that has recently made progress in improving fuel
efficiency and reducing pollution in large size combined cycle natural gas
fueled generators. Efforts are underway to extend these advantages to small size
machines. We believe these smaller gas turbines will not be able to match our
fuel cell efficiency or environmental characteristics.

MANUFACTURING

We currently manufacture fuel cells at our 63,000 square foot facility in
Torrington, CT. At present, the capacity of this plant is approximately 5 MW per
year on a single shift basis. We are currently in the process of replacing our
facility with a new 65,000 square foot facility under construction in
Torrington, CT. The move to our new facility will occur in early 2001, and will
require an estimated one-month slowdown of our manufacturing efforts. We are in
the process of expanding the production capacity at this new facility to 50 MW
per year in late 2001. We estimate that the cost of this expansion in 2001 will
be approximately $15.7 million.

We believe that virtually all of the raw materials used in our products are
readily available from a variety of vendors in the United States and Canada.
However, certain manufacturing processes that are necessary to transform the raw
materials into component parts for fuel cells are presently available only
through a small number of foreign manufacturers. We believe that these
manufactured products eventually will be obtainable from United States suppliers
as demand for these items increases. To achieve our cost reduction goals, we
plan to develop strategic alliances with equipment suppliers to supply the
balance of plant for our Direct FuelCell(R) products, which we expect to be
delivered to power plant sites as a modularized package for assembly with our
fuel cell stack components.

RESEARCH AND DEVELOPMENT

A significant portion of our research and development has been funded by
government contracts, and is classified as research and development expense in
our consolidated financial statements. For the fiscal years ended 2000, 1999 and
1998, total research and development expense, including amounts received from
the DOE, other government agencies and our customers, and amounts that have been
self-funded, was $13.1 million, $13.2 million and $16.8 million, respectively.

PROPRIETARY RIGHTS

We rely primarily on a combination of copyright and trademark laws, trade
secrets, patents, confidentiality procedures (including, in some instances, the
encryption of certain technical information) and confidentiality agreements and
investors' rights agreements with our strategic partners and employees to
protect our proprietary rights. We have obtained patents and will continue to
make efforts to obtain patents, when available, in connection with our
technologies. We have 43 U.S. and 98 international patents (in certain cases
covering the same technology in multiple jurisdictions) covering our fuel cell
technology. Of the 43 U.S. patents, 34 relate to our Direct FuelCell(R)
technology. We also have submitted 9 U.S. and 27 international patent
applications. The patents that we have obtained will expire between 2001 and
2018, and the average remaining life of our patents is approximately 9 years.
Some of our intellectual property is not covered by any patent or patent
application and includes trade secrets and other know-how that is not
patentable, particularly as it relates to our manufacturing processes and
engineering design. In addition, some of our intellectual property includes
technologies and processes that may be similar to the patented technologies and
processes of third parties. Certain of our intellectual property has been
licensed to us on a non-exclusive basis from third parties who may also license
such intellectual property to others, including our competitors.



                                       17


Many of our United States patents are the result of government-funded research
and development programs, including the DOE cooperative agreement. Our patents
that were the result of government-funded research prior to January 1988 (the
date that we qualified as a "small business") are owned by the United States
government and have been licensed to us. This license is revocable only in the
limited circumstances where it has been demonstrated that we are not making an
effort to commercialize the invention. Our patents that were the result of
government-funded research after January 1988 automatically belong to us because
of our "small business" status. We expect to continue to qualify as a "small
business" for the remainder of the three-year extension of the DOE cooperative
agreement.

However, all of our United States patents that have resulted from
government-funded research are subject to the risk of exercise of "march-in"
rights by the government. March-in rights refer to the right of the United
States government or government agency to exercise its non-exclusive,
royalty-free, irrevocable worldwide license to any technology developed under
contracts funded by the government if the contractor fails to continue to
develop the technology. In addition, these "march-in" rights permit the United
States government to take title to these patents and license the patented
technology to third parties if the contractor fails to utilize the patents. We
believe, however, that the likelihood of the United States government exercising
these rights is remote and would only occur if we ceased our commercialization
efforts.

GOVERNMENT REGULATION

We presently are, and our fuel cell power plants will be, subject to various
federal, state and local laws and regulations relating to, among other things,
land use, safe working conditions, handling and disposal of hazardous and
potentially hazardous substances and emissions of pollutants into the
atmosphere. We believe that emissions of sulfur dioxide and nitrogen oxide from
our fuel cell power plants will be much lower than conventional combustion-based
generating stations, and well within existing and proposed regulatory limits.
The primary emissions from our megawatt class power plants, assuming no
cogeneration application, will be humid flue gas (that will be discharged at a
temperature of approximately 700-800(degree)F), water (that will be discharged
at a temperature of approximately 10-20(degree)F above ambient air temperatures)
and carbon dioxide. In light of the high temperature of the gas emissions, we
will likely be required by regulatory authorities to site or configure our power
plants in a way that will allow the gas to be vented at acceptable and safe
distances. We believe that this regulation of the gas emissions will be similar
to the regulation of other power plants with similar heat and discharge
temperatures. The discharge of water from our power plants will likely require
permits whose terms will depend on whether the water is permitted to be
discharged into a storm drain or into the local wastewater system. Lastly, as
with any use of hydrocarbon fuel, the discharge of particulates will have to
meet emissions standards. While individual plants will have very low carbon
monoxide emissions, there could be additional permitting requirements in smog
non-attainment areas with respect to carbon monoxide if a number of our units
are aggregated together.

Pursuant to the National Environmental Protection Act, since 1991, each local
DOE procurement office must file and have approved by the DOE in Washington,
D.C., appropriate documentation for environmental, safety and health impacts
with respect to procurement contracts entered into by that local office. The
costs associated with compliance with environmental regulations are generally
recoverable under our cost reimbursable contracts. In certain cases, contract
work may be delayed until the approval is received.



                                       18



EMPLOYEES

As of October 31, 2000, we had 152 full-time employees, of which approximately
73 were engineers, scientists and other degreed professionals and 79 were
professional, technical, administrative and manufacturing support personnel. We
consider relations with our employees to be satisfactory.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company and their ages are as follows:

      NAME                 AGE             POSITION WITH THE COMPANY
      ----                 ---             -------------------------

Jerry D. Leitman           58       President , Chief Executive Officer and
                                    Director

Dr. Hansraj C. Maru        56       Executive Executive Vice President, Chief
                                    Technical Officer and Director

Christopher R. Bentley     58       Executive Executive Vice President, Chief
                                    Operating Officer and Director

Joseph G. Mahler           48       Vice President, Chief Financial Officer,
                                    Treasurer & Corporate Secretary

Herbert T. Nock            51       Senior Vice President of Marketing and Sales


JERRY D. LEITMAN. Mr. Leitman has been President, Chief Executive Officer and a
director since August 1997. Mr. Leitman was previously President of ABB Asea
Brown Boveri's global air pollution control businesses from 1992 to 1995. Prior
to joining ABB, Mr. Leitman was Group Executive Vice President of FLAKT AB, a
Swedish multinational company, responsible for FLAKT's worldwide industrial
businesses from 1989 to 1992. Mr. Leitman is also a director and a member of the
Compensation Committee of Esterline Technologies Inc. Mr. Leitman obtained both
a BS and MS in Mechanical Engineering from the Georgia Institute of Technology
in 1965 and 1967, respectively. Mr. Leitman also serves as Chairman of the Board
of Evercel.

DR. HANSRAJ C. MARU. Dr. Maru has been Executive Vice President and a director
since December 1992 and was appointed Chief Technology Officer in August 2000.
Dr. Maru was Chief Operating Officer from December 1992 to December 1997. Prior
to that he was Senior Vice President--Research and Development. Prior to joining
us in 1977, Dr. Maru was involved in fuel cell development at the Institute of
Gas Technology. Dr. Maru received a Ph.D. in Chemical Engineering from the
Illinois Institute of Technology in 1975.

CHRISTOPHER R. BENTLEY. Mr. Bentley has been a director since June 1993,
Executive Vice President since September 1990 and Chief Operating Officer since
August 2000. Mr. Bentley was President of Fuel Cell Manufacturing Corporation,
our former subsidiary, from September 1990 to December 1997. From 1985 through
1989, he was Director of Manufacturing (1985), Vice President and General
Manager (1985-1988) and President (1988-1989) of the Turbine Airfoils Division
of Chromalloy Gas Turbine Corporation, a major manufacturer of gas turbine
hardware. Mr. Bentley received a BSME from Tufts University in 1966.

JOSEPH G. MAHLER. Mr. Mahler joined us in October 1998 as Vice President, Chief
Financial Officer, Corporate Secretary and Treasurer. From 1993 to 1998, Mr.
Mahler was Vice President--Chief Financial Officer at Earthgro, Inc. and prior
to that, he was a partner at Ernst & Young. Mr. Mahler received a BS in
Accounting from Boston College in 1974.

HERBERT T. NOCK. Mr. Nock joined us in August 2000 as Senior Vice President of
Marketing and Sales. Mr. Nock previously worked for General Electric's Power
Systems business for 29 years, most recently as Product General Manager for
small gas turbine products. Mr. Nock received his BS in Mechanical Engineering
from Worcester Polytechnic Institute in 1971 and his MBA from Boston College in
1977.



                                       19




                                  RISK FACTORS
                                  ------------

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AS WELL AS THE OTHER
INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM
10K. IF ANY OF THESE RISKS OCCUR, OUR BUSINESS, PROSPECTS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION COULD BE HARMED.

WE HAVE RECENTLY INCURRED LOSSES AND ANTICIPATE CONTINUED LOSSES AND
NEGATIVE CASH FLOW

We are currently transitioning from a research and development company that has
been primarily dependent on government contracts to a company focusing on
commercial products. As such, we have not achieved profitability since our
fiscal year ended October 31, 1997 and expect to continue to incur net losses
and generate negative cash flow until we can produce sufficient revenues to
cover our costs. We incurred a net loss of $4,459,000 for the fiscal year ended
October 31, 2000. Even if we achieve our objective of bringing our first
commercial product to market in late 2001, we anticipate that we will continue
to incur losses and generate negative cash flow until we can cost-effectively
produce and sell our Direct FuelCell(R) products, which we do not expect to
occur for several years. Even if we do achieve profitability, we may be unable
to sustain or increase our profitability in the future. We may never become
profitable. For the reasons discussed in more detail below, there are
substantial uncertainties associated with our achieving and sustaining
profitability.

OUR COST REDUCTION STRATEGY MAY NOT SUCCEED OR MAY BE SIGNIFICANTLY DELAYED

Our cost reduction strategy is based on the assumption that a significant
increase in production will result in the realization of economies of scale. In
addition, certain aspects of our cost reduction strategy rely on advancements in
our manufacturing process and engineering design that, to a large degree, are
currently not ascertainable. A failure by us to achieve a lower cost structure
through economies of scale and improvements in the manufacturing process and
engineering design would have a material adverse effect on our commercialization
plans and, therefore, our business, prospects, results of operations and
financial condition.

We expect the production costs of our initial commercial products to be higher
than their sales prices. We recognize that successfully implementing our
strategy and obtaining a significant share of the distributed generation market
will require that we offer our Direct FuelCell(R) products at competitive
prices, which can only be accomplished when production costs are cut
substantially from current levels. If we are unable to produce Direct
FuelCell(R) products at competitive prices relative to alternative technologies
and products, our target market customers will be unlikely to buy our Direct
FuelCell(R) products.

Our Direct FuelCell(R) products produce electricity from a variety of
hydrocarbon fuels, such as natural gas and methanol. If these fuels are not
readily available or if their prices are such that electricity produced by our
products costs more than electricity provided through other generation sources,
our products would be less economically attractive to potential energy users. In
addition, we have no control over the prices of several types of competitive
energy sources such as oil, gas or coal. Significant decreases in the price of
these inputs could also have a material adverse effect on our business because
other generation sources could be more economically attractive to consumers than
our Direct FuelCell(R) products.

COMMERCIALIZATION OF OUR PRODUCTS IS DEPENDENT ON CONDUCTING
SUCCESSFUL FIELD TRIALS

One key aspect of our strategy is to leverage the success of our field trials
and demonstration projects into long-term distributor-type relationships that
will result in these distributors marketing our Direct FuelCell(R) products
directly to energy customers. For example, MTU is currently field testing a 250
kW power plant in Bielefeld, Germany that incorporates our Direct FuelCell(R) as
its fuel cell component. We believe that our fuel cell commercialization program
is dependent upon us conducting one or more additional commercial field trials
of our power plants and completing substantial additional research and
development. We have planned several field trials and demonstration projects in
2001 for our sub-megawatt and megawatt class stationary fuel cell power plants.
We have not yet, however, conducted any field trials of our proposed commercial
design megawatt class products.

Field trials and demonstration projects may encounter problems and delays for a
number of reasons, including the failure of our technology, the failure of the
technology of others, the failure to combine these technologies properly and the
failure to maintain and service the test prototypes properly. Many of these



                                       20



potential problems and delays are beyond our control. A failure by us to conduct
field trials and demonstration projects of our megawatt class products or a
failure to site the scheduled sub-megawatt power plants and complete these
commercial field trials and research and development as currently planned could
delay the timetable by which we believe we can begin to commercially sell our
Direct FuelCell(R) products. The failure of planned commercial field trials to
perform as well as we anticipate could also have a material adverse effect on
our commercialization plans, including the ability to enter into long-term
distributor-type relationships for our Direct FuelCell(R) products. Any delay,
performance failure or perceived problem with our field trials could hurt our
reputation in the distributed generation market and, therefore, could have a
material adverse effect on our business, prospects, results of operations and
financial condition.

WE CURRENTLY FACE AND WILL CONTINUE TO FACE SIGNIFICANT COMPETITION

Our Direct FuelCell(R) products currently face and will continue to face
significant competition. Technological advances in alternative energy products
or improvements in the electric grid or other fuel cell technologies may
negatively affect the development or sale of some or all of our products or make
our products uncompetitive or obsolete prior to commercialization or afterwards.
Other companies, some of which have substantially greater resources than us, are
currently engaged in the development of products and technologies that are
similar to, or may be competitive with, certain of our products and
technologies.

As our Direct FuelCell(R) products have the potential to replace existing power
sources, competition with our products will come from current power
technologies, from improvements to current power technologies and from new
alternative power technologies, including other types of fuel cells. The
distributed generation market, our target market, is currently serviced by
several 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 and nuclear powered generators.

We believe that we are the only domestic company exclusively engaged in the
development and production of carbonate fuel cells. In Asia, at least three
manufacturers have demonstrated varying levels of interest in developing and
marketing carbonate fuel cells. One of these manufacturers has demonstrated
extended operation of a 200 kW carbonate fuel cell. Two of these manufacturers
have jointly demonstrated extended operation of a 100 kW carbonate fuel cell and
recently tested a 1 MW plant. In Europe, there are several companies engaged in
carbonate fuel cell development that are potential competitors. Our licensee,
MTU, and its partners have conducted the most significant activity in Europe.

Other types of fuel cell and alternative energy technologies are being actively
pursued by a number of companies. The selection choice of alternative energy
technologies has not yet been identified by customers. Emerging technologies in
our target distributed generation market include small gas turbines, PEM fuel
cells, phosphoric acid fuel cells and solid oxide fuel cells. Major competitors
using or developing these technologies include Capstone Turbine Corporation,
Elliot Energy Systems and Honeywell International Inc. in the case of small gas
turbines, Ballard Power Systems, Inc., H Power Corp., International Fuel Cells
and Energy Partners L.C. in the case of PEM fuel cells, ONSI Corporation in the
case of phosphoric acid fuel cells, and Siemens Westinghouse Electric Company
and Mitsubishi Heavy Industries, Ltd. in the case of solid oxide fuel cells.
Each of these competitors has the potential to capture market share in our
target market, which could have a material adverse effect on our position in the
industry.

WE MAY NOT MEET OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION MILESTONES

We have established product development and commercialization milestones that we
use to assess our progress toward developing commercially viable Direct
FuelCell(R) products. These milestones relate to technology and design
improvements as well as to dates for achieving development goals. To gauge our
progress, we operate, test and evaluate our Direct FuelCell(R) products under
actual conditions. If our systems exhibit technical defects or are unable to
meet cost or performance goals, including power output, useful life and
reliability, our commercialization schedule could be delayed and potential
purchasers of our initial commercial Direct FuelCell(R) products may decline to
purchase them or choose to purchase alternative technologies. We expect to enter
the commercial market with our sub-megawatt class product in late 2001 and with
our megawatt class products in 2002. We cannot be sure that we will successfully
achieve our milestones in the future or that any failure to achieve these
milestones will not result in potential competitors gaining advantages in our
target market. Failure to meet publicly announced milestones might have a
material adverse effect on our operations and our stock price.



                                       21



WE HAVE NO EXPERIENCE MANUFACTURING OUR DIRECT FUELCELL(R) PRODUCTS ON A
COMMERCIAL BASIS

To date, we have focused primarily on research and development, and
demonstrations, and we have no experience manufacturing our Direct FuelCell(R)
products on a commercial basis. We are currently expanding our production
capacity from our current capacity of 5 MW per year to 50 MW per year in late
2001. We expect that we will increase our manufacturing capacity in stages to
400 MW in 2004. We cannot be sure that we will be able to achieve our planned
increases in production capacity. Also, as we scale up our production capacity,
we cannot be sure that unplanned failures or other technical problems relating
to the manufacturing process will not occur.

If our business grows more quickly than we anticipate, our existing and planned
manufacturing facilities will quickly become inadequate and we may need to seek
out new or additional space, at considerable cost to us. If our business does
not grow as quickly as we expect, our existing and planned manufacturing
facilities would in part represent excess capacity for which we may not recover
the cost; in that circumstance, our revenues may be inadequate to support our
committed costs and our planned growth, and our gross margins and business
strategy would suffer.

Even if we are successful in achieving our planned increases in production
capacity, we cannot be sure that we will do so in time to meet our product
commercialization schedule or to satisfy the requirements of our customers.
Given our dependence on government research and development contracts and the
necessity of providing government entities with substantial amounts of
information, our sales process has historically been long and time-consuming. We
will need to shorten the time from initial contact to final product delivery if
we hope to expand production, reach a wider customer base and forecast revenues
with any degree of certainty. Additionally, we cannot be sure that we will be
able to develop efficient, low-cost manufacturing capabilities and processes
(including automation) that will enable us to meet our cost goals and
profitability projections. Our failure to shorten the sales cycle for our Direct
FuelCell(R) products or to develop these advanced manufacturing capabilities and
processes, or meet our cost goals, could have a material adverse effect on our
business, prospects, results of operations and financial condition.

OUR COMMERCIALIZATION PLANS ARE DEPENDENT ON MARKET ACCEPTANCE OF OUR DIRECT
FUELCELL(R) PRODUCTS

Our commercialization plans, which include bringing our sub-megawatt class
product to market in late 2001, are dependent upon market acceptance of, as well
as enhancements to, our Direct FuelCell(R) products. Fuel cell systems represent
an emerging market, and we cannot be sure that potential customers will accept
fuel cells as a replacement for traditional power sources. As is typical in a
rapidly evolving industry, demand and market acceptance for recently introduced
products and services are subject to a high level of uncertainty and risk. Since
the distributed generation market is new and evolving, it is difficult to
predict with certainty the size of the market and its growth rate. The
development of a market for our Direct FuelCell(R) products may be affected by
many factors that are out of our control, including:

     o    the cost competitiveness of our Direct FuelCell(R) products;

     o    the future costs of natural gas and other fuels used by our Direct
          FuelCell(R) products;

     o    consumer reluctance to try a new product;

     o    consumer perceptions of the safety of our Direct FuelCell(R) products;

     o    the pace of utility deregulation nationwide, which could affect the
          market for distributed generation;

     o    local permitting and environmental requirements; and

     o    the emergence of newer, more competitive technologies and products.

If a sufficient market fails to develop or develops more slowly than we
anticipate, we may be unable to recover the losses we will have incurred in the
development of our Direct FuelCell(R) products and may never achieve
profitability.


                                       22



As we begin to commercialize our Direct FuelCell(R) products, as a way of
encouraging market acceptance, we will need to develop warranties and other
terms and conditions relating to our products that will be acceptable to the
marketplace, develop a service organization or third party service relationship
that will aid in servicing our products and obtain self-regulatory
certifications, if available, with respect to our products. Failure to achieve
any of these objectives may also slow the development of a sufficient market for
our products and, therefore, have a material adverse effect on our results of
operations.

OUR GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS ARE CRITICAL TO THE
IMPLEMENTATION OF OUR COMMERCIALIZATION PLANS

Since 1995, our revenues have been principally derived from a long-term
cooperative agreement with the U.S. Department of Energy (DOE). This agreement
covers the design, scale-up, construction and testing of direct carbonate fuel
cells operating on natural gas. Excluding cost share funding, the present
estimated value of this agreement with the DOE, which expires in December 2003,
is $135 million of which $26 million remains to be funded. This agreement is
critical to the continued development and commercialization of our technology
and our products.

Generally, our U.S. government research and development contracts, including the
DOE cooperative agreement, are subject to the risk of termination at the
convenience of the contracting agency. Furthermore, these contracts,
irrespective of the amounts allocated by the contracting agency, are subject to
annual congressional appropriations and the results of government or agency
sponsored audits of our cost reduction efforts and our cost projections. We can
only receive funds under these contracts ultimately made available to us
annually by Congress as a result of the appropriations process. Accordingly, we
cannot be sure whether or not we will receive the full amount allocated by the
DOE under the DOE cooperative agreement or the full amounts allocated under our
other government research and development contracts. We also cannot be sure that
we will be able to finance or otherwise meet the cost sharing requirements of
these contracts, which are conditions to receiving any amounts allocated under
these contracts. Failure to receive the full amounts allocated under any of our
government research and development contracts could materially adversely affect
our commercialization plans and, therefore, our business, prospects, results of
operations and financial condition.

THE UNITED STATES GOVERNMENT HAS CERTAIN RIGHTS RELATING TO OUR
INTELLECTUAL PROPERTY

Many of our United States patents are the result of government-funded research
and development programs, including the DOE cooperative agreement. Our patents
that were the result of government-funded research prior to January 1988 (the
date that we qualified as a "small business") are owned by the United States
government and have been licensed to us. This license is revocable only in the
limited circumstances where it has been demonstrated that we are not making an
effort to commercialize the invention. Our patents that were the result of
government-funded research after January 1988 automatically belong to us because
of our "small business" status.

However, all of our United States patents that have resulted from
government-funded research are subject to the risk of the exercise of "march-in"
rights by the government. March-in rights refer to the right of the United
States government or government agency to exercise its non-exclusive,
royalty-free, irrevocable worldwide license to any technology developed under
contracts funded by the government if the contractor fails to continue to
develop the technology. These "march-in" rights permit the United States
government to take title to these patents and license the patented technology to
third parties if the contractor fails to utilize the patents. In addition, our
government-funded research and development agreements also require us to agree
that we will not use or sell any invention subject to that agreement unless the
products embodying the invention, or produced through the use of such invention,
will be substantially manufactured in the U.S.

The failure to continue to qualify as a "small business" under applicable
government regulations, and the related inability to own our patents developed
with government funds if we do not so qualify (unless we obtain a waiver from
the government), or the exercise or enforcement of "march-in" or other rights by
the government could materially adversely affect our business, prospects,
results of operations and financial condition.



                                       23



OUR FUTURE SUCCESS AND GROWTH IS DEPENDENT ON OUR DISTRIBUTION STRATEGY

We do not plan to establish a direct distribution infrastructure for our Direct
FuelCell(R) products. A key aspect of our strategy is to use multiple
third-party distribution channels to ultimately service our diverse customer
base. Depending on the needs of the customer, our Direct FuelCell(R) products
could be distributed through a value added distributor who could provide a
package of our products and various other components such as flywheels and
battery storage devices; through an energy services company who could arrange
various ancillary services for the customer; or through power generation
equipment suppliers. For example, we recently entered into a distribution
agreement with PPL Energy Plus as the first North American distributor of our
Direct FuelCell(R) products. In addition, we anticipate that our Direct
FuelCell(R) components will be distributed through original equipment
manufacturers (OEMs), such as MTU, who will then integrate our Direct
FuelCell(R) components into power plant products.

We cannot assure you that we will enter into distributor relationships that are
consistent with, or sufficient to support, our commercialization plans or our
growth strategy or that these relationships will be on terms favorable to us.
Even if we enter into these types of relationships, we cannot assure you that
the distributors with which we form relationships will focus adequate resources
on selling our products or will be successful in selling them. Some of these
distributor arrangements have or will require that we grant exclusive
distribution rights to companies in defined territories. These exclusive
arrangements could result in us being unable to enter into other arrangements at
a time when the distributor with which we form a relationship is not successful
in selling our products or has reduced its commitment to marketing our products.
To the extent we enter into distributor relationships, the failure of these
distributors in assisting us with the marketing and distribution of our products
may adversely affect our financial condition and results of operations.

We cannot be sure that MTU will continue to, or OEMs will, manufacture or
package products using our Direct FuelCell(R) components. In this area, our
success will largely depend upon our ability to make our products compatible
with the power plant products of OEMs and the ability of these OEMs to sell
their products containing our products. In addition, some OEMs may need to
redesign or modify their existing power plant products to fully incorporate our
products. Accordingly, any integration, design, manufacturing or marketing
problems encountered by MTU or OEMs could adversely affect the market for our
Direct FuelCell(R) products and, therefore, our business, prospects, results of
operations and financial condition.

WE DEPEND ON THIRD PARTY SUPPLIERS FOR THE DEVELOPMENT AND SUPPLY OF KEY
COMPONENTS FOR OUR DIRECT FUELCELL(R) PRODUCTS

We purchase several key components of our products from other companies and will
rely on third-party suppliers for the balance-of-plant components in our Direct
FuelCell(R) products. There are limited suppliers for some of the key components
of our Direct FuelCell(R) products. A supplier's failure to develop and supply
components in a timely manner or to supply components that meet our quality,
quantity or cost requirements or technical specifications or our inability to
obtain alternative sources of these components on a timely basis or on terms
acceptable to us could harm our ability to manufacture our Direct FuelCell(R)
products. In addition, to the extent the processes that our suppliers use to
manufacture components are proprietary, we may be unable to obtain comparable
components from alternative suppliers.

We do not know when or whether we will secure long-term supply relationships
with any of our suppliers or whether such relationships will be on terms that
will allow us to achieve our objectives. Our business, prospects, results of
operations and financial condition could be harmed if we fail to secure
long-term relationships with entities who will supply the required components
for our Direct FuelCell(R) products.

WE DEPEND ON OUR INTELLECTUAL PROPERTY, AND OUR FAILURE TO PROTECT THAT
INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND SUCCESS

Failure to protect our existing intellectual property rights may result in the
loss of our exclusivity or the right to use our technologies. If we do not
adequately ensure our freedom to use certain technology, we may have to pay
others for rights to use their intellectual property, pay damages for
infringement or misappropriation or be enjoined from using such intellectual
property. We rely on patent, trade secret, trademark and copyright law to
protect our intellectual property. The patents that we have obtained will expire
between 2001 and 2018 and the average remaining life of our patents is
approximately nine years. Some of our intellectual property is not covered by
any patent or patent application and includes trade secrets and other know-how



                                       24



that is not patentable, particularly as it relates to our manufacturing
processes and engineering design. In addition, some of our intellectual property
includes technologies and processes that may be similar to the patented
technologies and processes of third parties. If we are found to be infringing
third-party patents, we do not know whether we will able to obtain licenses to
use such patents on acceptable terms, if at all. Our patent position is subject
to complex factual and legal issues that may give rise to uncertainty as to the
validity, scope and enforceability of a particular patent. Accordingly, we
cannot assure you that:

     o    any of the U.S. patents or foreign patents owned by us or other
          patents that third parties license to us will not be invalidated,
          circumvented, challenged, rendered unenforceable or licensed to
          others; or

     o    any of our pending or future patent applications will be issued with
          the breadth of claim coverage sought by us, if issued at all.

In addition, effective patent, trademark, copyright and trade secret protection
may be unavailable, limited or not applied for in certain foreign countries.

We also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors' rights agreements with
our strategic partners and employees. We cannot assure you that these agreements
will not be breached, that we will have adequate remedies for any breach or that
such persons or institutions will not assert rights to intellectual property
arising out of these relationships. Certain of our intellectual property has
been licensed to us on a non-exclusive basis from third parties who may also
license such intellectual property to others, including our competitors. If our
licensors are found to be infringing third-party patents, we do not know whether
we will be able to obtain licenses to use the intellectual property licensed to
us on acceptable terms, if at all.

If necessary or desirable, we may seek extensions of existing licenses or
further licenses under the patents or other intellectual property rights of
others. However, we can give no assurances that we will obtain such extensions
or further licenses or that the terms of any offered licenses will be acceptable
to us. The failure to obtain a license from a third party for intellectual
property that we use at present could cause us to incur substantial liabilities,
and to suspend the manufacture or shipment of products or our use of processes
requiring the use of such intellectual property.

While we are not currently engaged in any material intellectual property
litigation, we could become subject to lawsuits in which it is alleged that we
have infringed the intellectual property rights of others or commence lawsuits
against others who we believe are infringing upon our rights. Our involvement in
intellectual property litigation could result in significant expense to us,
adversely affecting the development of sales of the challenged product or
intellectual property and diverting the efforts of our technical and management
personnel, whether or not such litigation is resolved in our favor.

OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL

Our future success is substantially dependent on the continued services and on
the performance of our executive officers and other key management, engineering,
scientific, manufacturing and operating personnel, particularly Jerry Leitman,
our President and Chief Executive Officer, and Dr. Hansraj Maru and Christopher
Bentley, our Executive Vice Presidents. The loss of the services of any
executive officer, including Mr. Leitman, Dr. Maru and Mr. Bentley, or other key
management, engineering, scientific, manufacturing and operating personnel could
materially adversely affect our business. Our ability to achieve our development
and commercialization plans will also depend on our ability to attract and
retain additional qualified management and technical personnel. Recruiting
personnel for the fuel cell industry is highly competitive. We do not know
whether we will be able to attract or retain additional qualified management and
technical personnel. Our inability to attract and retain additional qualified
management and technical personnel, or the departure of key employees, could
materially adversely affect our development and commercialization plans and,
therefore, our business, prospects, results of operations and financial
condition.



                                       25


OUR MANAGEMENT MAY BE UNABLE TO MANAGE RAPID GROWTH EFFECTIVELY

We expect to rapidly expand our manufacturing capabilities, accelerate the
commercialization of our products and enter a period of rapid growth, which will
place a significant strain on our senior management team and our financial and
other resources. The proposed expansion will expose us to increased competition,
greater overhead, marketing and support costs and other risks associated with
the commercialization of a new product. Our ability to manage our rapid growth
effectively will require us to continue to improve our operations, to improve
our financial and management information systems and to train, motivate and
manage our employees. Difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by such a rapid expansion
could harm our business, prospects, results of operations and financial
condition.

WE MAY BE AFFECTED BY ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION

As we begin to commercialize our Direct FuelCell(R) products, we will be subject
to federal, state or local regulation with respect to, among other things,
emissions and siting. Assuming no cogeneration applications are utilized in
conjunction with our larger plants, they will discharge humid flue gas at
temperatures of approximately 700-800(degree)F, water at temperatures of
approximately 10-20(degree)F above ambient air temperatures and carbon dioxide.
These emissions will require permits that we expect (but cannot assure) will be
similar to those applicable to generating units. In addition, it is possible
that industry specific laws and regulations will be adopted covering matters
such as transmission scheduling, distribution and the characteristics and
quality of our products, including installation and servicing. This regulation
could limit the growth in the use of carbonate fuel cells, decrease the
acceptance of fuel cells as a commercial product and increase our costs and,
therefore, the price of our Direct FuelCell(R) products. Accordingly, compliance
with existing or future laws and regulations as we begin to commercialize and
site our products could have a material adverse effect on our business,
prospects, results of operations and financial condition.

UTILITY COMPANIES COULD CHARGE FEES TO OUR CUSTOMERS THAT COULD MAKE OUR
PRODUCTS LESS DESIRABLE

Utility companies commonly charge fees to larger, industrial customers for
disconnecting from the electric grid or for having the capacity to use power
from the electric grid for back up purposes. These fees could increase the cost
to our customers of using our Direct FuelCell(R) products and could make our
products less desirable, thereby harming our business, prospects, results of
operations and financial condition. In addition, there are no uniform standards
for interconnection policies or requirements.

CHANGES IN GOVERNMENT REGULATIONS AND ELECTRIC UTILITY INDUSTRY RESTRUCTURING
MAY AFFECT DEMAND FOR OUR DIRECT FUELCELL(R) PRODUCTS

The market for electricity generation products is heavily influenced by federal
and state governmental regulations and policies. Changes in regulatory standards
or policies could reduce the level of investment in the research and development
of alternative energy sources, including fuel cells, and could result in a
reduction in the potential demand for our Direct FuelCell(R) products. Our
target market, the distributed generation market, is driven by deregulation and
restructuring of the electric utility industry in the United States and
elsewhere and by the requirements of utilities, independent power producers and
end users. Deregulation of the electric utility industry is subject to
government policies that will determine the pace and extent of deregulation.
Changes in government and public policy over time could affect deregulation and
adversely affect our prospects for commercializing our Direct FuelCell(R)
products and our financial results. We cannot predict how the deregulation and
restructuring of the electric utility industry will ultimately affect the market
for our Direct FuelCell(R) products.

WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL TO COMPLETE OUR PRODUCT DEVELOPMENT
AND COMMERCIALIZATION PLANS

Our product development and commercialization schedule could be delayed if we
are unable to fund our research and development activities, our field trials and
demonstration projects or the development of our manufacturing capabilities.
Future capital requirements are dependent upon many factors, including, but not
limited to, the rate at which we expand production volume capabilities, the
amount used to fund demonstration projects and field trials, the level of
government funding provided to us and our investment in new technology. In
addition to the proceeds from offerings of our securities and expected
government funding, we believe it is likely that we will need additional funding
to expand our manufacturing capabilities to the level where volume efficiencies
can be achieved consistent with our plans to fully commercialize our products.
Some of our potential strategic business partners have invested in us and others
have indicated interest in investing in us. However, additional financing may
not be available and, if available, it may not be available on terms favorable
to us, or our stockholders. If additional funds are raised through the issuance
of equity securities, the percentage ownership of our then current stockholders
will be reduced. If adequate funds are not available to satisfy either short or
long-term capital requirements, we may be required to limit operations in a
manner inconsistent with our commercialization plans.




                                       26


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

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

OUR PRODUCTS USE INHERENTLY DANGEROUS, FLAMMABLE FUELS, OPERATE AT HIGH
TEMPERATURES AND GENERATE ELECTRICAL POWER, EACH OF WHICH COULD SUBJECT OUR
BUSINESS TO PRODUCT LIABILITY CLAIMS

Our business exposes us to potential product liability claims that are inherent
in hydrogen and products that use hydrogen. Hydrogen is a flammable gas and
therefore a potentially dangerous product. Hydrogen is typically generated from
gaseous and liquid fuels that are also flammable and dangerous, such as propane,
natural gas or methane, in a process known as reforming. Natural gas and propane
could leak into a residence or commercial location and combust if ignited by
another source. In addition, our Direct FuelCell(R) products operate at high
temperatures and generate significant electrical power, which could each expose
us to potential liability claims. Any accidents involving our products or other
hydrogen-based products could materially impede widespread market acceptance and
demand for our Direct FuelCell(R) products. In addition, we may be held
responsible for damages beyond the scope of our insurance coverage. We also
cannot predict whether we will be able to maintain our insurance coverage on
acceptable terms.

WE ARE SUBJECT TO RISKS INHERENT IN INTERNATIONAL OPERATIONS

Since we plan to market our Direct FuelCell(R) products both inside and outside
the United States, our success depends, in part, on our ability to secure
foreign customers and our ability to manufacture products that meet foreign
regulatory and commercial requirements. We have limited experience developing
and manufacturing our products to comply with the commercial and legal
requirements of international markets. In addition, we are subject to tariff
regulations and requirements for export licenses, particularly with respect to
the export of certain technologies. We face numerous challenges in our
international expansion, including unexpected changes in regulatory
requirements, fluctuations in currency exchange rates, longer accounts
receivable requirements and collections, difficulties in managing international
operations, potentially adverse tax consequences, restrictions on repatriation
of earnings and the burdens of complying with a wide variety of foreign laws.

WE HAVE LARGE AND INFLUENTIAL STOCKHOLDERS

MTU currently owns approximately 8.7% of our outstanding common stock (based
upon the shares of our common stock outstanding as of October 31, 2000). Loeb
Investors Co. LXXV and Warren Bagatelle (a managing director of an affiliate of
Loeb Investors Co. LXXV) collectively own approximately 5.49% of our outstanding
common stock (based upon the shares of our common stock outstanding as of
October 31, 2000). These ownership levels could make it difficult for a third
party to acquire our common stock or have input into the decisions made by our
board of directors, which include Michael Bode of MTU, Warren Bagatelle and
Thomas L. Kempner (Chairman and Chief Executive Officer of an affiliate of Loeb
Investors Co. LXXV). MTU is also a licensee of our technology and a purchaser of
our Direct FuelCell(R) products. Therefore, it may be in MTU's interest to
possess substantial influence over matters concerning our overall strategy and
technological and commercial development. In addition, MTU's ownership interest
could raise a conflict of interest if MTU is experimenting with competing
technologies for its own products.



                                       27



OUR STOCK PRICE HAS BEEN AND COULD REMAIN VOLATILE

The market price for our common stock has been and may continue to be volatile
and subject to extreme price and volume fluctuations in response to market and
other factors, including the following, some of which are beyond our control:

     o    failure to meet our product development and commercialization
          milestones;

     o    due to our stage of development, variations in our quarterly operating
          results from the expectations of securities analysts or investors; o
          downward revisions in securities analysts' estimates or changes in
          general market conditions;

     o    announcements of technological innovations or new products or services
          by us or our competitors;

     o    announcements by us or our competitors of significant acquisitions,
          strategic partnerships, joint ventures or capital commitments;

     o    additions or departures of key personnel;

     o    investor perception of our industry or our prospects;

     o    insider selling or buying;

     o    demand for our common stock; and

     o    general technological or economic trends.

In the past, following periods of volatility in the market price of their stock,
many companies have been the subject of securities class action litigation. If
we became involved in a securities class action litigation in the future, it
could result in substantial costs and diversion of management's attention and
resources and could harm our stock price, business, prospects, results of
operations and financial condition.

PROVISIONS OF DELAWARE AND CONNECTICUT LAW AND OF OUR CHARTER AND BY-LAWS MAY
MAKE A TAKEOVER MORE DIFFICULT

Provisions in our certificate of incorporation and by-laws and in Delaware and
Connecticut corporate law may make it difficult and expensive for a third party
to pursue a tender offer, change in control or takeover attempt that is opposed
by our management and board of directors. Public stockholders who might desire
to participate in such a transaction may not have an opportunity to do so. These
anti-takeover provisions could substantially impede the ability of public
stockholders to benefit from a change in control or change our management and
board of directors.

FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE

Substantial sales of our common stock in the public market, or the perception by
the market that such sales could occur, could lower our stock price or make it
difficult for us to raise additional equity capital in the future. As of October
31, 2000, we had 15,730,710 shares of common stock outstanding. Of these shares,
as of that date, 15,437,812 shares of our common stock are freely tradable
subject, in some cases, to the volume and manner of sale limitations under Rule
144 under the Securities Act. As of that date, 292,898 shares of our common
stock will become available for sale at various later dates upon the expiration
of various restrictions on resale.

In addition, as of October 31, 2000, 2,640,183 shares of our common stock were
required to be reserved for issuance under our stock option and other benefit
plans and 1,300,000 shares of our common stock were required to be reserved for
issuance pursuant to outstanding warrants. As of October 31, 2000, options to
purchase 1,847,467 shares of our common stock were issued and outstanding under
our stock option plans at a weighted average exercise price of $12.08 per share,
of which options to purchase 892,593 shares had vested. The outstanding warrants
to purchase 1,300,000 shares of our common stock have not yet vested.

As of October 31, 2000, the holders of up to 292,898 shares of our common stock
had the right, subject to various conditions and the expiration of various time
periods, to require us to file registration statements covering their shares or
to include their shares in registration statements that we may file for
ourselves or for other stockholders. By exercising their registration rights and
selling a large number of shares, these holders could cause the price of our
common stock to fall.

We cannot predict if future sales of our common stock, or the availability of
our common stock for sale, will harm the market price for our common stock or
our ability to raise capital by offering equity securities.



                                       28



ITEM 2. PROPERTIES

We currently own and occupy approximately 72,000 square feet in two
interconnected single story buildings on 10.8 acres, of which approximately 5.4
acres are currently used, in Danbury, CT. Additionally, we currently lease a
63,000 square foot facility in Torrington, CT for our manufacturing operations.
This lease expires March 15, 2001 and the annual lease cost is approximately
$305,000.

We have entered into a ten year lease agreement for a new 65,000 square foot
facility in Torrington, CT for our manufacturing operations. This facility will
replace our current facility in Torrington. We expect to move into this facility
in early 2001. The annual lease cost is $430,000 in the first five years and
$494,000 for the last five years, in addition to taxes, utilities and operating
expenses. We have an option to extend the lease for an additional five years
with an annual lease cost of $569,000.


ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings that, either individually
or taken as a whole, could materially harm our business, prospects, results of
operations or financial condition.


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

None

PART II

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

Our common stock has been publicly  traded since June 25, 1992.  From  September
21, 1994 through February 25, 1997, it was quoted on the Nasdaq National Market,
and from  February  26, 1997  through June 6, 2000 it was traded on the American
Stock  Exchange.  Since June 7, 2000, it has been quoted on the Nasdaq  National
Market under the symbol "FCEL." On January 23, 2001 there were approximately 290
common stockholders of record.


The following table sets forth the range of high and low prices of our common
stock on the American Stock Exchange and the Nasdaq National Market, as
applicable.

                                                       High          Low
                                                     --------      -------
     YEAR ENDED OCTOBER 31, 1999
       First Quarter...........................        $5.13        $3.88

       Second Quarter..........................         4.83         2.69

       Third Quarter...........................         6.46         3.50

       Fourth Quarter..........................        10.58         5.38


     YEAR ENDED OCTOBER 31, 2000
       First Quarter...........................       $31.50        $8.42

       Second Quarter..........................        47.75        15.75

       Third Quarter...........................        40.56        18.00

       Fourth Quarter..........................       108.75        31.63



We have never paid a cash dividend on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently anticipate
retaining all of our earnings to finance future growth. Under the terms of our
Loan Agreement with First Union National Bank, we may not, without the written
consent of First Union National Bank, declare or pay any dividend.

Unregistered Securities

An affiliate of Enron purchased 80,290 shares of our common stock for $5 million
and an affiliate  of PPL  purchased  212,608  shares of our common stock for $10
million.  These shares are exempt from  registration  under  Section 4(2) of the
Securities Act of 1933.

                                       29



ITEM 6.  SELECTED FINANCIAL DATA

The following selected consolidated financial data presented below as of the end
of each of the years in the five-year period ended October 31, 2000 have been
derived from our audited consolidated financial statements together with the
notes thereto included elsewhere in this Report (the "Consolidated Financial
Statements"). The data set forth below is qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report.



                                (Dollars in thousands, except for per share amounts)

                                           2000            1999            1998            1997            1996
                                       ------------    ------------    ------------    ------------    ------------
                                                                                        
Revenues:
Research and development contracts     $     17,986    $     18,553    $     24,318    $     24,830    $     29,446
Product sales and revenues                    2,729           1,412              --              --              --
                                       ------------    ------------    ------------    ------------    ------------
  Total revenues                             20,715          19,965          24,318          24,830          29,446
Costs and expenses:
  Cost of product sales and revenues          4,968           1,025              --              --              --
  Administrative and selling expense          7,917           6,615           6,986           6,081           4,858
  Depreciation                                1,473           1,362           1,529           1,768           1,919
  Research and development (a)               13,090          13,210          16,848          16,912          22,155
                                       ------------    ------------    ------------    ------------    ------------
Income (loss) from operations                (6,733)         (2,247)         (1,045)             69             514

License fee income, net                         266           1,527             678             650             357
Interest expense                               (141)           (169)           (269)           (354)           (503)
Interest and other income, net                2,138             195             267             307             442
                                       ------------    ------------    ------------    ------------    ------------
Income (loss) before provision
  for income taxes                           (4,470)           (694)           (369)            672             810
Provision for income taxes                       --             291              13             247             301
Minority interest                                11              --              --              --              --
                                       ------------    ------------    ------------    ------------    ------------
Net income (loss)                      $     (4,459)   $       (985)   $       (382)   $        425    $        509
                                       ============    ============    ============    ============    ============

  Basic and diluted earnings
    (loss) per share:                  $      (0.32)   $      (0.08)   $      (0.03)   $       0.04    $       0.04

  Basic and diluted shares
    outstanding                          14,148,797      12,453,428      12,243,054      11,863,520      11,388,960
                                       ------------    ------------    ------------    ------------    ------------

  Working capital                      $     71,817    $      7,204    $     10,234    $      6,366    $      8,087
  Total assets                               91,028          19,831          26,843          21,433          23,540
  Long - term debt                               --           1,625           1,944           2,699           4,363
  Total shareholder's equity                 83,251          14,815          15,870          14,769          14,062

(a) Includes costs of:
  Research and development under
    contracts                          $     11,173    $     11,397    $     14,590    $     15,642    $     20,895
  Research and development costs              1,917           1,813           2,258           1,270           1,260
                                       ------------    ------------    ------------    ------------    ------------
                                       $     13,090    $     13,210    $     16,848    $     16,912    $     22,155
                                       ============    ============    ============    ============    ============




                                       30




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

OVERVIEW
- --------
We currently obtain our revenues primarily from government and industry funded
research and development contracts and license fees. These contracts are
generally multi-year, cost reimbursement type contracts. The majority of these
are United States Government contracts that are dependent upon the government's
continued allocation of funds. We are currently transitioning from a research
and development company to a company focusing on commercializing our products.

Under a cost-reimbursement contract, we are reimbursed for reasonable and
allocable costs of the materials, subcontracts, direct labor, overhead, general
and administrative expenses, independent research and development costs, and bid
and proposal preparation costs, provided the total of such costs do not exceed
the reimbursement limits set by the contract. In addition, some of these
contracts bear a fixed fee or profit. The profitability to us of these contracts
depends upon charging direct costs to contracts, maintaining adequate control of
overhead costs and general and administrative expenses so they do not exceed the
approved billing rates, and limiting the aggregate reimbursable costs to the
allowable amounts set by the contract.

In addition, our commercial demonstration and field trial contracts are either
fixed price contracts or cost-sharing type contracts. In performance of a firm
fixed price contract, we are paid the price that is set in advance without
regard to the costs actually incurred in performance, subject to certain excess
profit limitations. In a cost sharing type contract, we agree in advance to
contribute or cause to be contributed an agreed upon amount of funds, third
party services or in-kind services toward fulfilling the objective of the
contract. Except for our cost contributions, the contract operates in
substantially the same manner as a cost reimbursement type contract. At present,
most of our contracts are cost shared and no fee or profit is allowed. The
government contracts and agreements provide for a cost-of-money recovery based
upon capital investment in facilities employed in contract performance.

Since 1983, when we began to shift our emphasis from fuel cells for military use
to commercial applications, our primary focus has been researching and
developing carbonate fuel cells. The funding received for this research has
represented a substantial portion of our revenues.

We will continue to seek research and development contracts for all of our
product lines. To obtain contracts, we must continue to prove the benefits of
our technologies and be successful in our competitive bidding. Failure to obtain
these contracts could have an adverse effect upon us.

Because we receive a significant portion of our revenues from contracts with the
DOE and other government agencies, our future revenues and income could be
materially affected by changes in government agency procurement policies, a
reduction in expenditures for the services provided by us, and other risks
generally associated with government contracts. In general, our government
contracts may be terminated, in whole or in part, at the convenience of the
government. A reduction or delay in our government funding could have a material
adverse effect on our ability to commercialize our fuel cell technology.

In July 2000, the DOE extended the cooperative agreement for three additional
years and has funded $13.5 million for the 2001 period. Approximately $26
million remains to be funded by the DOE for the remaining period. In conjunction
with this extension, we must provide additional cost share funding.

On February 22, 1999, we effected a spin-off to our stockholders of 100% of the
shares of Evercel, a wholly-owned subsidiary of ours. In connection with this
transaction, we transferred to Evercel net assets of $669,000 representing the
principal assets and liabilities related to our battery group that was engaged
in the development and commercialization of a patented, nickel-zinc rechargeable
battery. Following the transfer, we distributed to our stockholders in a
tax-free distribution, one share of Evercel Common Stock for every three shares
of our common stock.



                                       31


RESULTS OF OPERATIONS

2000 COMPARED TO 1999. Revenues increased 4% to $20,715,000 in the 2000 period
from $19,965,000 in the 1999 period. The increase was due to a $1,317,000
increase in demonstration project revenues, partially offset by a reduction of
$567,000 on our research and development contracts.

Cost of product sales and revenues increased to $4,968,000 in the 2000 period
from $1,025,000 in the 1999 period. The increase was due to new demonstration
projects.

Administrative and selling expenses increased 20% to $7,917,000 in the 2000
period from $6,615,000 in the 1999 period. Increased employment costs, an
increase in state franchise taxes paid on our increased equity, an increase in
the completion of service billings to Evercel and other costs of
commercialization accounted for the increase. Depreciation expense increased 8%
to $1,473,000 in the 2000 period from $1,362,000 in the 1999 period as a result
of capital purchases.

Total research and development expenses decreased to $13,090,000 in the 2000
period from $13,210,000 in the 1999 period. The decrease was primarily the
result of timing of the award of new contracts. We estimate that these new
contracts will increase research and development expenses in the 2001 period.

Income from operations resulted in a loss of $6,733,000 in the 2000 period
compared to a loss of $2,247,000 in the 1999 period. The increased loss was due
to costs incurred on demonstration projects, increased administrative and
selling costs associated with our commercialization efforts.

License fee income, net, decreased 83% to $266,000 in the 2000 period compared
to $1,527,000 in the 1999 period. The 1999 period included the recognition of a
$1,300,000 deferred license fee associated with the Nan Ya license agreement
that was transferred to Evercel as part of the February 1999 spin-off.

Interest expense decreased to $141,000 in the 2000 period from $169,000 in the
1999 period. The decrease is attributable to the reduction of our indebtedness.

Interest and other income, net, increased to $2,138,000 in the 2000 period from
$195,000 in the 1999 period. The increase is a result of interest earned on the
cash proceeds from our follow-on offering in April 2000, and investments from
Enron and PPL.

We believe that, due to our efforts to commercialize our Direct FuelCell(R)
technology, we have and will continue to incur losses. No tax benefit has been
recognized related to current year losses and other deferred tax assets, as
management believes it is unlikely that the benefit from these assets will be
realized.


1999 COMPARED TO 1998. Revenues decreased 18% to $19,965,000 in the 1999 period
from $24,318,000 in the 1998 period. The decrease in research and development
revenue was due to the reduction in revenues from the Cooperative Agreement with
the U. S. Department of Energy partially offset by an increase in revenues from
the U.S. Navy for the development of the Direct FuelCell(R) for ship service
applications. We recognized $1,412,000 in product sales and revenues for the
commercial development of our Direct FuelCell(R).

Cost of revenues amounted to $1,025,000 in the 1999 period resulting from
increased spending in the development of fuel cell component manufacturing
processes.

Administrative and selling expenses decreased 5% to $6,615,000 in the 1999
period from $6,986,000 in the 1998 period. The decrease in the 1999 period
reflects the impact of the spin-off of Evercel, in February 1999 partially
offset by increased costs relating to the commercialization of the our Direct
Fuel Cell(R) technology. Depreciation expense decreased 11% to $1,362,000 in the
1999 period from $1,529,000 in the 1998 period. The decrease was the result of
the completion of the depreciation of machinery and equipment originally
installed in our Torrington, CT facility and the transfer of fixed assets to
Evercel.

Total research and development expenses decreased 22% to $13,210,000 in the 1999
period compared to $16,848,000 in the 1998 period. The decrease in research and
development costs under contracts was due to reduced activities on government
funded programs. The decrease in research and development costs was the result
of the transfer of the research and development efforts for nickel zinc
batteries to Evercel.



                                       32



License fee income, net increased 125% to $1,527,000 in the 1999 period from
$678,000 in the 1998 period. In 1999 we recognized previously deferred license
fee income of $1,300,000 resulting from the successful testing of Evercel's
nickel zinc battery technology.

Interest expense decreased 37% to $169,000 in the 1999 period from $269,000 in
the 1998 period. The decrease resulted from lower interest rates and the
reduction of notes payable to primary lenders.

Interest and other income, net decreased 27% to $195,000 in the 1999 period from
$267,000 in the 1998 period. In the 1999 period, we recognized as other expense
$84,000 of one time costs, associated with our investment in the joint venture
with Xiamen Three Circles Co. Ltd. These costs offset increased interest income
on higher interest rates earned on invested funds.

The effective tax rate increased to 41.9% in the 1999 period from 3.6% in the
1998 period. The increase was due primarily to an increase in the valuation
allowance relating to limited foreign tax credit carryforwards and state net
operating loss carryforwards. The valuation allowance was increased due to a
limited carryforward period and the probability that the carryforward will not
be realized.

LIQUIDITY AND CAPITAL RESOURCES

Our operations are funded primarily through cash generated from operations,
borrowings, and sales of equity. Cash from operations includes revenue from
government contracts and cooperative agreements, demonstration projects, license
fees, interest income and sales of fuel cell components primarily to MTU.

At October 31, 2000, we had working capital of $71,817,000 including $74,754,000
of cash and cash equivalents, compared to working capital of $7,204,000
including $6,163,000 of cash and cash equivalents at October 31, 1999. The
increase in working capital is due to the increase in cash and cash equivalents
as we raised net proceeds of $57,566,000 after $3,535,000 of underwriting
discounts, commissions, fees, and other expenses in April 2000 from the sale of
2,600,000 shares of common stock. In September 2000, PPL EnergyPlus, LLC, a
subsidiary of PPL Corp., made an equity investment of $10,000,000 for 212,608
shares of our common stock. In October 2000, ECT Merchant Investments Corp., a
subsidiary of Enron North America Corp., made an equity investment of $5,000,000
for 80,290 shares of common stock. We acquired $4,155,000 in fixed assets and
repaid $341,000 of debt during the year ended October 31, 2000.

The proceeds from the sale of common stock will be used to support the
commercialization of our Direct FuelCell(R) products. Proceeds will be used to
purchase additional manufacturing equipment as well as for general corporate
purposes including research and development, field trial support and working
capital.

At October 31, 2000, we had $1,625,000 of debt. This credit facility is
scheduled to be paid in monthly installments of $13,000 plus interest with
$1,550,000 due in a balloon payment in June 2001. It is our intention to
refinance the balloon payment. We have entered into a $4,000,000 loan agreement
with the Connecticut Development Authority that will be used to purchase
equipment for the manufacturing facility. To date, we have not borrowed any
monies pursuant to this agreement.

We are increasing our manufacturing capacity to 50MW per year at our Torrington,
CT facility. This will require approximately $16,000,000 to be spent on
equipment and facilities in 2001. In addition, we are planning to spend an
additional capital at our Danbury, CT facility.

In addition to increasing manufacturing capacity, proceeds will be used for
general corporate purposes including research and development, field trial
support and working capital. Working capital requirements will consist primarily
of increases in inventory as additional demonstrations and field trials of our
Direct FuelCell(R) products are conducted and material purchases increase.
Proceeds will also be used to support the cost of early field trials and
demonstration projects that will likely exceed revenue from these projects.

We anticipate that our existing capital resources together with anticipated
revenues will be adequate to satisfy our planned financial requirements and
agreements through 2001.



                                       33


In December 1994, we entered into a Cooperative Agreement with the DOE pursuant
to which they agreed to provide funding through 1999 to support the continued
development and improvement of our commercial product. This agreement has
recently been extended for three additional years, through 2003, with funding
subject to annual approval by the U.S. Congress. The current aggregate dollar
amount of that contract is $212,679,000 with the DOE providing $134,712,000 in
funding. Of that amount, approximately $26,200,000 remains to be funded by the
DOE. The balance of the funding is expected to be provided by us, our partners
or licensees, other private agencies and utilities. Approximately 70% of the
non-DOE portion has been committed or credited to the project in the form of
in-kind or direct cost share from non-U.S. government sources. It is anticipated
that the balance of non-DOE funding will be obtained timely.

In addition to the DOE Cooperative Agreement, we have received a $3,125,000
24.2% cost-shared contract under the Vision 21 program to develop a Direct
FuelCell(R)/turbine power plant by 2002, a $16,500,000 20% cost-shared contract
from the U.S. Navy to demonstrate a marine fuel cell power plant operating on
diesel fuel by 2003 and a $5,362,000 50% cost-shared contract with the DOE to
develop a Direct FuelCell(R) utilizing coal methane gas. We have also signed and
agreement with King County, Washington to deliver in 2002 a one mega-watt Direct
FuelCell(R) power plant using municipal wastewater digester gas. The project
will be cost-shared equally by King County and us and has a total value of
$18,800,000.

In November 2000, we filed a shelf registration statement with the Securities
and Exchange Commission that will allow us to sell debt securities, preferred
stock and common stock in an amount up to $250,000,000 for manufacturing
equipment, manufacturing facilities, and other capital expenditures to support
our commercialization activities and for general corporate purposes, including
research and development, field trial support and working capital.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST
         RATE EXPOSURE

Our exposure to market risk for changes in interest rates, relates primarily to
our investment portfolio and long term debt obligations. The investment
portfolio includes short-term United States Treasury instruments with maturities
averaging three months or less. Cash is invested overnight with high credit
quality financial institutions. Our note payable expires in 2001. Based on our
overall interest exposure at October 31, 2000, including all interest rate
sensitive instruments, a near-term change in interest rate movements of 1% would
affect our consolidated results of operations by approximately $747,000
annually, based on the investment of our cash balance at October 31, 2000.

CURRENCY RATE EXPOSURE

Our functional currency is the U.S. dollar. To the extent we expand our
international operations, we will be exposed to increased risk of currency
fluctuation. For fiscal 2001 and beyond, we will be purchasing materials for
various projects in foreign countries. Many of these purchases will be
denominated in the currency of the related region. In order to protect the
purchase price from currency fluctuations, we intend, from time to time, to
enter into forward contracts to purchase foreign currency. Changes in the market
value of the futures contracts are included as part of the acquisition price of
the materials inventory and are realized when the project is ultimately
completed.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and Supplementary Data are listed under
Part IV, Item 14, in this report.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in part under the caption
"Executive Officers of the Company" contained in Part I hereof and the remainder
is incorporated herein by reference to "Election of Directors" in our Proxy
Statement for our Annual Meeting of Shareholders to be held on March 28, 2001
(the "2001 Proxy Statement") to be filed with the SEC within 120 days from the
fiscal year end.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the
Section captioned "Executive Compensation " to be contained in the 2001 Proxy
Statement to be filed with the SEC within 120 days from fiscal year end.



                                       34




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to the
Section captioned "Security Ownership of Certain Beneficial Owners and
Management" to be contained in the 2001 Proxy Statement to be filed with the SEC
within 120 days from fiscal year end.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the
Section captioned "Certain Relationships and Related Transactions" to be
contained in the 2001 Proxy Statement to be filed with the SEC within 120 days
from fiscal year end.

PART IV

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

(A)  (1) FINANCIAL STATEMENTS

1)   Independent Auditors' Report

     KPMG LLP (See page F-2, hereof.)

2)   Consolidated Balance Sheets as of October 31, 2000 and 1999 (See page F-3
     hereof.)

3)   Consolidated Statements of Income (Loss) for the Years Ended October 31,
     2000, 1999 and 1998 (See page F-4, hereof.)

4)   Consolidated Statements of Changes in Shareholders' Equity for the
     Years Ended October 31, 2000, 1999 and 1998 (See page F-5, hereof.)

5)   Consolidated Statements of Cash Flows for the Years Ended October 31, 2000,
     1999 and 1998 (See page F-6, hereof.)

6)   Notes to Consolidated Financial Statements.

(A)  (2) FINANCIAL STATEMENT SCHEDULES

Supplement schedules are not provided because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.



                                       35



(A)  (3) EXHIBITS

                          (A) (3) EXHIBITS TO THE 10-K
                          ----------------------------
EXHIBIT                                                                METHOD OF
  NO.     DESCRIPTION                                                   FILING
- --------------------------------------------------------------------------------

2         Distribution Agreement between the Company and Evercel,
          dated as of February 16, 1999 (incorporated by reference to
          exhibit of the same number contained in the Company's 8-K
          dated February 22, 1999)

3.1       Certificate of Incorporation of the Registrant, as amended,
          July 12, 1999 (incorporated by reference to exhibit of the
          same number contained in the Company's 8-K dated September
          21, 1999)

3.2       Restated By-Laws of the Registrant, dated July 13,1999
          (incorporated by reference to exhibit of the same number
          contained in the Company's 8-K dated September 21, 1999)

4         Specimen of Common Share Certificate (incorporated by
          reference to exhibit of the same number contained in the
          Company's Annual Report on form 10KA for fiscal year ended
          October 31, 1999)

10.6      **License Agreement, dated February 11, 1988, between EPRI
          and the Company (confidential treatment requested)
          (incorporated by reference to exhibit of the same number
          contained in the Company's Registration Statement on Form
          S-1 (File No. 33-47233) dated April 14, 1992)

10.21     *FuelCell Energy, Inc. 1988 Stock Option Plan (incorporated
          by reference to exhibit of the same number contained in the
          Company's Amendment No. 1 to its Registration Statement on
          Form S-1 (File No. 33-47233) dated June 1, 1992)

10.26     Addendum to License Agreement, dated as of September 29,
          1989, between Messerschmitt-Bolkow-Blohm and the Company
          (incorporated by reference to exhibit of the same number
          contained in the Company's Amendment No. 3 to its
          Registration Statement on Form S-1 (File No. 33-47233) dated
          June 24, 1992)

10.27     Cross-Licensing and Cross-Selling Agreement, as amended
          December 15, 1999, between the Company and MTU Motoren-Und
          Turbinen-Union Friedrichshafen GmbH ("MTU") (incorporated by
          reference to exhibit of the same number contained in the
          Company's 10-Q for the period ended January 31, 2000).

10.31     License Agreement For The Santa Clara Demonstration Project
          between the Company and the Participants in the Santa Clara
          Demonstration Project, dated September 16, 1993
          (incorporated by reference to exhibit of the same number
          contained in the Company's 10-KSB for fiscal year ended
          October 31, 1993, dated January 18, 1994)

10.32     Security Agreement for the Santa Clara Demonstration
          Project, dated September 16, 1993 (incorporated by reference
          to exhibit of the same number contained in the Company's
          10-KSB for fiscal year ended October 31, 1993, dated January
          18, 1994)

10.33     Guaranty By FuelCell Energy, Inc., dated September 16, 1993
          for the Santa Clara Demonstration Project (incorporated by
          reference to exhibit of the same number contained in the
          Company's 10-KSB for fiscal year ended October 31, 1993,
          dated January 18, 1994)

10.34     Guaranty by Fuel Cell Manufacturing Corporation, dated
          September 16, 1993 for the Santa Clara Demonstration Project
          (incorporated by reference to exhibit of the same number
          contained in the Company's 10-KSB for fiscal year ended
          October 31, 1993, dated January 18, 1994)



                                  36



                          (A) (3) EXHIBITS TO THE 10-K
                          ----------------------------
EXHIBIT                                                                METHOD OF
  NO.     DESCRIPTION                                                   FILING
- --------------------------------------------------------------------------------

10.36     *The FuelCell Energy, Inc. Section 423 Stock Purchase Plan
          (incorporated by reference to exhibit of the same number
          contained in the Company's 10-KSB for fiscal year ended
          October 31, 1994 dated January 18, 1995)

10.39     **Cooperative Agreement, dated December 20, 1994, between
          the Company and the United States Department of Energy,
          Cooperative Agreement #DE-FC21-95MC31184 (confidential
          treatment requested) (incorporated by reference to exhibit
          of the same number contained in the Company's 10-KSB for
          fiscal year ended October 31, 1994 dated January 18, 1995)

10.40     Loan and Security Agreement between the Company and MetLife
          Capital Corporation. (incorporated by reference to exhibit
          of the same number contained in the Company's 10-KSB for
          fiscal year ended October 31, 1995 dated January 17, 1996)

10.41     *Amendment No. 2 to the FuelCell Energy, Inc. Section 423
          Stock Purchase Plan (incorporated by reference to exhibit of
          the same number contained in the Company's 10-Q for the
          period ended April 30, 1996 dated June 13, 1996)

10.42     *Amendments to the FuelCell Energy, Inc. 1988 Stock Option
          Plan (incorporated by reference to exhibit of the same
          number contained in the Company's 10-Q for the period ended
          April 30, 1996 dated June 13, 1996)

10.43     Loan Agreements with First Union Bank of Connecticut, dated
          June 28, 1996 (incorporated by reference to exhibit of the
          same number contained in the Company's 10-Q for the period
          ended July 31, 1996 dated September 12, 1996)

10.44     Notes in favor of First Union Bank of Connecticut, dated
          June 28, 1996 (incorporated by reference to exhibit of the
          same number contained in the Company's 10-Q for the period
          ended July 31, 1996 dated September 12, 1996)

10.45     Security Agreements with First Union Bank of Connecticut,
          dated June 28, 1996 (incorporated by reference to exhibit of
          the same number contained in the Company's 10-Q for the
          period ended July 31, 1996 dated September 12, 1996)

10.47     Amendment of Cooperative Agreement dated September 5, 1996
          between the Company and the United States Department of
          Energy, Cooperative Agreement #DE-FC21-95MC31184
          (incorporated by reference to exhibit of the same number
          contained in the Company's 10-K for the fiscal year ended
          October 31, 1998)

10.48     *Employment Agreement between FuelCell Energy, Inc. and the
          Chief Financial Officer, Treasurer and Secretary, dated
          October 5, 1998 (incorporated by reference to exhibit of the
          same number contained in the Company's 10-K for the fiscal
          year ended October 31, 1998)

10.49     *Employment Agreement between FuelCell Energy, Inc. and the
          President and Chief Executive Officer, dated August 1, 1997
          (incorporated by reference to exhibit of the same number
          contained in the Company's 10-K for the fiscal year ended
          October 31, 1997)

10.50     Technology Transfer and License Agreement between the
          Company and the Joint Venture owned jointly by the Xiamen
          Daily-Used Chemicals Co., Ltd. of China and Nan Ya Plastics
          Corporation of Taiwan, dated February 21, 1998 (incorporated
          by reference to exhibit of the same number contained in the
          Company's 10-Q for the period ended April 30, 1998)**.

                                       37


10.51     Technology Transfer and License Contract, dated May 29, 1998
          for Ni-Zn Battery Technology among Xiamen ERC Battery Corp.,
          Ltd., and Xiamen Daily-Used Chemicals Co., Ltd. And the
          Company (incorporated by reference to exhibit of the same
          number contained in the Company's 10-Q for the period ended
          July 31, 1998)**.

10.52     Cooperative Joint Venture Contract, dated as of July 7,
          1998, between Xiamen Three Circles Co., Ltd. And the Company
          for the establishment of Xiamen Three Circles-ERC Battery
          Corp., Ltd., a Sino Foreign Manufacturing Joint Venture
          (incorporated by reference to exhibit of the same number
          contained in the Company's 10-Q for the period ended July
          31, 1998)**.

10.53     Amendment to the FuelCell Energy, Inc. 1988 Stock Option
          Plan, as amended (incorporated by reference to exhibit of
          the same number contained in the Company's 10-Q for the
          period ended July 31, 1998).

10.54     The FuelCell Energy, Inc. 1998 Equity Incentive Plan
          (incorporated by reference to exhibit of the same number
          contained in the Company's 10-Q for the period ended July
          31, 1998).

10.55     Lease agreement dated March 8, 2000 between the Company and
          Technology Park Associates, L.L.C. (incorporated by
          reference to exhibit of the same number contained in the
          Company's 10-Q for the period ended April 30, 2000).

10.56     Security agreement dated June 30, 2000 between the Company
          and the Connecticut Development Authority (incorporated by
          reference to exhibit of the same number contained in the
          Company's 10-Q for the period ended July 31, 2000).

10.57     Loan agreement dated June 30, 2000 between the Company and
          the Connecticut Development Authority (incorporated by
          reference to exhibit of the same number contained in the
          Company's 10-Q for the period ended July 31, 2000).

21        Subsidiaries of the Company (incorporated by reference to
          exhibit of the same number contained in the Company's
          Registration Statement on Form S-1, (File No. 33-47233)
          dated April 14, 1992)

23.1      Consent of KPMG LLP

          * Management Contract or Compensatory Plan or Arrangement

          **Confidential Treatment has been granted for portions of
            this document


(b)  The following Current Reports on Form 8-K were filed by the
     Registrant during the last quarter of the fiscal year 2000.

     None


                                       38



                                TABLE OF CONTENTS


                                                                         PAGE

Independent Auditors' Report                                             F- 2

Consolidated Balance Sheets - October 31, 2000 and 1999                  F- 3

Consolidated Statements of Income (Loss) for the Years ended
  October 31, 2000, 1999 and 1998                                        F- 4

Consolidated Statements of Changes in
  Shareholders' Equity for the Years ended October 31,
  2000, 1999 and 1998                                                    F- 5

Consolidated Statements of Cash Flows for the Years
  Ended October 31, 2000, 1999 and 1998                                  F- 6

Notes to Consolidated Financial Statements                               F- 7


                                      F- 1



                          INDEPENDENT AUDITORS' REPORT


The Board of Directors of
FuelCell Energy, Inc.:


We have audited the accompanying consolidated balance sheets of FuelCell Energy,
Inc. as of October 31, 2000 and 1999, and the related consolidated statements of
income (loss),  changes in  shareholders'  equity and cash flows for each of the
years in the  three-year  period  ended  October 31,  2000.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of FuelCell Energy,  Inc. as of
October 31, 2000 and 1999,  and the results of their  operations  and their cash
flows for the each of the years in the three-year  period ended October 31, 2000
in conformity with accounting principles generally accepted in the United States
of America.

/s/ KPMG LLP
- ------------
    KPMG LLP

Stamford, CT
December 12, 2000

                                      F-2



                              FUELCELL ENERGY, INC.
                           Consolidated Balance Sheets
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)

                                                           2000          1999
                                                     ----------    -----------
    ASSETS

    Current assets:
       Cash and cash equivalents                   $    74,754     $    6,163
       Accounts receivable, net                          3,459          2,332
       Inventories                                         305          1,204
       Deferred income taxes                               291            291
       Other current assets                                596            405
                                                     ----------     ----------
            Total current assets                        79,405         10,395

    Property, plant and equipment, net                   9,794          7,195
    Other assets, net                                    1,829          2,241
                                                     ----------     ----------

            Total assets                           $    91,028     $   19,831
                                                     ==========     ==========

    LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:
       Current portion of long-term debt           $     1,625     $      341
       Accounts payable                                  1,626            484
       Accrued liabilities                               3,557          1,787
       Deferred license fee income                          38             29
       Customer advances                                   742            550
                                                     ----------     ----------
            Total current liabilities                    7,588          3,191

    Long-term
    liabilities:
       Long-term debt                                       --          1,625
                                                     ----------     ----------
            Total liabilities                            7,588          4,816
                                                     ----------     ----------

    Minority interest                                      189            200
                                                     ----------     ----------

    Shareholders'
    equity:


       Shareholders' equity:
          Common stock, ($.0001 par value);
            20,000,000 shares authorized:
            and 15,730,710 and 12,651,744
            shares  issued and outstanding
            at October 31, 2000 and 1999,                    2              1
            respectively
          Additional paid-in capital                    87,035         14,141
          Retained earnings(deficit)                    (3,786)           673
                                                     ----------     ----------
            Total shareholders' equity                  83,251         14,815
                                                     ----------     ----------

            Total liabilities and shareholders'
              equity                               $    91,028     $   19,831
                                                     ==========     ==========


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





                              FUELCELL ENERGY, INC.
                    Consolidated Statements of Income (Loss)
                         October 31, 2000, 1999 and 1998
                (Dollars in thousands, except per share amounts)


                                                                                      
                                                       2000                 1999                1998
                                                 ---------------      ---------------      -------------

Revenues
Research and development contracts             $         17,986     $         18,553      $      24,318
Product sales and revenue                                 2,729                1,412                 --
                                                 ---------------      ---------------      -------------
     Total revenues                                      20,715               19,965             24,318

Costs and expenses:
    Cost of product sales and revenues                    4,968                1,025                 --
    Administrative and selling expenses                   7,917                6,615              6,986
    Depreciation                                          1,473                1,362              1,529
    Research and development (a)                         13,090               13,210             16,848
                                                 ---------------      ---------------      -------------
         Total costs and expenses                        27,448               22,212             25,363
                                                 ---------------      ---------------      -------------

Loss from operations                                     (6,733)              (2,247)            (1,045)

License fee income, net                                     266                1,527                678

Interest expense                                           (141)                (169)              (269)
Interest and other income, net                            2,138                  195                267
                                                 ---------------      ---------------      -------------

Loss before provision for
    income taxes                                         (4,470)                (694)              (369)

Provision for income taxes                                   --                  291                 13

Minority interest                                            11                   --                 --
                                                 ---------------      ---------------      -------------

Net loss                                       $         (4,459)    $          (985)      $        (382)
                                                 ---------------      ---------------      -------------

Loss per share:

   Basic and diluted  loss per share           $         (0.32)     $         (0.08)      $      (0.03)
                                                 ---------------      ---------------      -------------

    Basic and diluted shares outstanding             14,148,797           12,453,428         12,243,054
                                                 ---------------      ---------------      -------------

(a) Includes cost of:
     Research and development under contracts  $         11,173     $         11,397      $      14,590
     Research and development costs                       1,917                1,813              2,258
                                                 ---------------      ---------------      -------------
                                               $         13,090     $         13,210      $      16,848
                                                 ---------------      ---------------      -------------



                                      F-4
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.





                              FUELCELL ENERGY, INC.
                  Statements of Changes in Shareholders' Equity
                         October 31, 2000, 1999 and 1998
                (Dollars in thousands, except per share amounts)


                                                                                   

                                             SHARES
                                               OF                        ADDITIONAL   RETAINED        TOTAL
                                             COMMON           COMMON      PAID-IN     EARNINGS     SHAREHOLDERS'
                                             STOCK             STOCK      CAPITAL    (DEFICIT)        EQUITY

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

Balance at October 31, 1997                 12,001,950     $      1    $  11,459    $ 2,709       $    14,169

Compensation for stock options
  granted                                                                    239                          239
Issuance of common stock under
  benefit plans                                 45,678                       172                          172
Common stock retired                            (6,066)                      (31)                         (31)
Stock options exercised                        346,258                       718                          718
Tax effect of disposition of stock
  options                                                                    385                          385
Net loss                                                                               (382)             (382)
                                          -------------     --------    ---------  -----------     ------------

Balance at October 31, 1998                 12,387,820     $      1    $  12,942    $ 2,327       $    15,270
Compensation for stock options
  granted                                                                    133                          133
Issuance of common stock under
    benefit plans                               38,776                       138                          138
Common stock retired                           (13,424)                      (87)                         (87)
Stock options exercised                        148,572                       415                          415
Preferred stock conversion                      90,000                       600                          600
Transfer of net assets to Evercel,
  Inc.                                                                                 (669)             (669)
Net loss                                                                               (985)             (985)
                                          -------------     --------    --------- -----------      ------------

Balance at October 31, 1999                 12,651,744     $      1    $  14,141    $   673       $    14,815
Compensation for stock options
  granted                                                                    134                          134
Issuance of common stock under
  benefit plans                                  8,948                        59                           59
Issuance of common stock for
  follow-on offering in April 2000
                                             2,600,000            1       57,565                       57,566
Issuance of common stock to Enron
  and PPL                                      292,898                    15,000                       15,000
Stock options exercised                        187,542                       394                          394
Common stock retired for cashless
exercise of options                            (10,422)                     (258)                        (258)
Net loss                                                                             (4,459)           (4,459)
                                          -------------     --------    --------- -----------      -----------

Balance at October 31, 2000                 15,730,710     $      2     $ 87,035   $ (3,786)      $    83,251
                                          =============     ========    ========= ===========      ============



                                      F-5
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.







                              FUELCELL ENERGY, INC.
                      Consolidated Statements of Cash Flows
                         October 31, 2000, 1999 and 1998
                (Dollars in thousands, except per share amounts)


                                                                                                                 

                                                                    2000                1999            1998
                                                              ----------------    -----------------  -----------------

Cash flows from operating activities:
   Net income (loss)                                        $          (4,459) $         (985)   $      (382)
   Adjustments to reconcile net income
      (loss) to net cash provided by
      operating activities:
        Compensation for options granted                                  134             133           239
        Depreciation and amortization                                   1,880           1,770         1,942
        Deferred income taxes                                               --            605          (738)
        (Gain) loss on disposal of property                                82             (15)            6
        Minority interest                                                 (11)             --             --
        (Increase) decrease in operating assets:
          Accounts receivable                                          (1,127)          1,445          (985)
          Inventories                                                     899          (1,174)           17
          Other current assets                                           (191)            241          (367)
Increase (decrease) in operating liabilities:
    Accounts payable                                                    1,142            (136)         (245)
    Accrued liabilities                                                 1,770              98         1,746
    Customer advances                                                     192            (620)           --
    Deferred license fee income                                             9          (1,300)        1,283
                                                              ----------------    -------------   -----------

        Net cash provided by operating activities                         320              62         2,516
                                                              ----------------    -------------   -----------

Cash flows from investing activities:
   Capital expenditures                                                (4,155)         (1,244)       (1,650)
   Proceeds from sale of fixed assets                                       --            603             --
   Payments on other assets                                                 6            (213)           (3)
                                                              ----------------    -------------   -----------

        Net cash used in investing activities                          (4,149)           (854)       (1,653)
                                                              ----------------    -------------   -----------

Cash flows from financing activities:
   Transfer of minority interest to Evercel, Inc.                           --         (3,082)           --
   Repayment on long-term debt                                           (341)           (733)       (1,701)
   Sale of minority interest in joint venture                               --              --        3,220
   Proceeds from follow-on offering in April 2000, net                 57,566               --            --
   Tax effect of stock options exercised                                    --              --          262
   Common stock issued for PPL and Enron                               15,000               --            --
   Common stock issued for Option and Stock Purchase Plans                195             466           858
                                                              ----------------    -------------   -----------

        Net cash provided by (used) in financing                       72,420          (3,349)        2,639
          activities
                                                              ----------------    -------------   -----------

Net increase (decrease) in cash and cash equivalents                   68,591          (4,141)        3,502

Cash and cash equivalents-beginning of year                             6,163          10,304         6,802
                                                              ----------------    -------------   -----------

Cash and cash equivalents-end of year                      $           74,754 $         6,163    $   10,304
                                                              ================    =============   ===========

Cash paid during the period for:
   Interest                                                $              129 $           158    $      269
   Income taxes                                                           210             104           620

Other non cash transactions:
   Conversion of preferred stock                                            --            600             --
   Net assets transferred to Evercel, Inc.                                  --            669             --



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




                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF BUSINESS

     FuelCell Energy,  Inc. is engaged in the development and  commercialization
     of carbonate  fuel cell  technology  for stationary  power  generation.  We
     manufacture  carbonate fuel cells,  generally on a contract basis. However,
     we are currently in the process of  commercializing  our Direct FuelCell(R)
     technology and expect to incur losses as we expand our product development,
     commercialization program and manufacturing operations.

     Our revenue is primarily generated from agencies of the U.S. government and
     customers  located  throughout  the  United  States,  Europe  and Asia.  We
     generally  do  not  require  collateral  in  providing  credit  except  for
     international  sales  where a deposit  may be  required  with the  purchase
     orders.

     PRINCIPLES OF CONSOLIDATION

     The accompanying financial statements include our accounts and the accounts
     of our subsidiary: Xiamen-ERC High Technology Joint Venture, Inc. a 66-2/3%
     owned joint venture formed between us and the City of Xiamen, PRC.

     CASH AND CASH EQUIVALENTS

     Cash  equivalents  consist  primarily of investments in a money market fund
     with  original  maturities  averaging  three  months  or  less  at  date of
     acquisition.  We place our  temporary  cash  investments  with high  credit
     quality financial institutions.

     INVENTORIES

     Inventories  consist  principally  of raw  materials  and are stated at the
     lower of cost or market.

     PROPERTY, PLANT AND EQUIPMENT

     Property,  plant  and  equipment  are  stated  at  cost,  less  accumulated
     depreciation provided on the straight-line method over the estimated useful
     lives of the respective assets. Leasehold improvements are amortized on the
     straight-line  method over the shorter of the estimated useful lives of the
     assets or the term of the lease.

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

     INTELLECTUAL PROPERTY

     Intellectual  property  including  patents  and  know-how  is carried at no
     value.

     IMPAIRMENT OF LONG LIVED ASSETS

     We review  long-lived  assets  and  certain  identifiable  intangibles  for
     impairment  whenever events or changes in  circumstances  indicate that the
     carrying  amount  of an asset  may not be  recoverable.  Recoverability  of
     assets to be held and used is  measured  by a  comparison  of the  carrying
     amount  of an asset  to  future  undiscounted  net  cash  flows,  excluding
     interest  costs,  expected to be generated by the asset. If such assets are
     considered to be impaired,  the  impairment to be recognized is measured by
     value of the assets.  Assets to be disposed of are reported at the lower of
     the carrying amount or fair value less costs to sell.

                                      F-7



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






     REVENUE/LICENSE FEE REVENUE, RECOGNITION

     Revenues and fees on long-term contracts, including demonstration and field
     trial contracts and government and commercial cost reimbursement contracts,
     are     recognized     on     the     percentage-of-completion      method.
     Percentage-of-completion is measured by costs (including applicable general
     and  administrative)  incurred  and  accrued to date as  compared  with the
     estimated total costs for each contract.  Contracts typically extend over a
     period  of one  or  more  years.  In  accordance  with  industry  practice,
     receivables  include  amounts  relating to contracts  and  programs  having
     production  cycles  longer than one year and a portion  thereof will not be
     realized within one year. Provisions for estimated losses, if any, are made
     in the  period in which such  losses  are  determined  to be  probable.  We
     recognized  approximately  $469,  $2,579,  and $74, of  long-term  contract
     revenues from our corporate  shareholders during fiscal years ended October
     31, 2000, 1999 and 1998, respectively.

     License fee income  arises  from  license  agreements  whereby we grant the
     right to use our patents and know-how.  Amounts are generally  deferred and
     recognized ratably over the respective terms of the agreements.  In 1999 we
     recognized  deferred  license  fee  income  of  $1,300  resulting  from the
     successful  testing  of  Evercel's  nickel  zinc  battery  technology.   We
     recognized  approximately  $292, $250 and $266 of license fee income during
     each of the fiscal  years ended  October 31, 2000,  1999 and 1998,  under a
     license agreement with MTU.

     Revenues  from the U.S.  Government  and its agencies  directly and through
     primary contractors were $17,961,  $17,386, and $24,221 for the years ended
     October 31, 2000, 1999 and 1998, respectively.

     INCOME TAXES

     Income  taxes are  accounted  for under  the  asset and  liability  method.
     Deferred  tax  assets and  liabilities  are  recognized  for the future tax
     consequences  attributable to differences  between the financial  statement
     carrying  amounts of existing assets and  liabilities and their  respective
     tax bases and  operating  loss and tax credit  carryforwards.  Deferred tax
     assets and  liabilities  are measured  using enacted tax rates  expected to
     apply to taxable income in the years in which those  temporary  differences
     are expected to be recovered or settled.  The effect on deferred tax assets
     and  liabilities  of a change in tax rates is  recognized  in income in the
     period that includes the enactment date. A valuation  allowance is recorded
     against  deferred  tax  assets  if it is  unlikely  that some or all of the
     deferred tax assets will be realized.

     STOCK OPTION PLAN

     Statement of Financial  Accounting  Standard ("SFAS") No. 123,  "Accounting
     for Stock-Based  Compensation,"  which encourages  entities to recognize as
     expense over the vesting period the fair value of all stock-based awards on
     the date of grant.  Alternatively,  SFAS No. 123 also  allows  entities  to
     continue  to apply the  provisions  of APB  Opinion  No. 25 and provide pro
     forma net income and pro forma earnings per share  disclosures for employee
     stock option grants as if the  fair-value-based  method defined in SFAS No.
     123 had been applied.  We apply the  recognition  provisions of APB Opinion
     No. 25 and provide the pro forma disclosure  provisions of SFAS No. 123. As
     such,  compensation  expense is  recorded  on the  measurement  date to the
     extent that the current  market price of the  underlying  stock exceeds the
     exercise price.

     FASB  Interpretation  No. 44 (FIN 44) "Accounting for certain  transactions
     involving stock compensation",  is an interpretation of APB Opinion No. 25.
     FIN 44  clarifies  the  application  of APB No. 25 for a number of  issues,
     including   the   definition   of   an   employee,    compensatory   versus
     non-compensatory plans, modifications of plan terms, and accounting for the
     exchange of stock  compensation  awards in a business  combination.  FIN 44
     became effective July 1, 2000.

                                      F-8



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






     EARNINGS PER SHARE (EPS)

     Basic EPS is computed by dividing income  available to common  stockholders
     by the weighted  average  number of common  shares  outstanding  during the
     period.  The  computation  of diluted EPS is similar to the  computation of
     basic  EPS  except  that  it  gives  effect  to  all  potentially  dilutive
     instruments that were outstanding  during the period.  In 2000 and 1999, we
     computed  diluted  EPS  without   consideration  to  potentially   dilutive
     instruments  due to the losses  incurred  by us. All per share data and the
     number of shares of common  stock in this  report  have been  retroactively
     adjusted  to  reflect  the  three-for-two  stock  dividend,   which  became
     effective  November  16, 1999 and the  two-for-one  stock  dividend,  which
     became effective September 13, 2000.

     USE OF ESTIMATES

     Management has made a number of estimates and  assumptions  relating to the
     reporting of assets and liabilities and the disclosure of contingent assets
     and  liabilities to prepare these  financial  statements in conformity with
     generally accepted accounting principles.  Actual results could differ from
     those estimates.

     RECENT ACCOUNTING PRONOUNCEMENTS

     SFAS NO. 133 - SFAS No. 133  "Accounting  for  deritative  instruments  and
     hedging  activities".  It requires that an entity  recognize all derivative
     instruments  as either assets or  liabilities in the statement of financial
     position and measure  those  instruments  at fair value.  As amended,  this
     statement is effective  for all fiscal  quarters of fiscal years  beginning
     after June 15,  2000.  We do not expect the  adoption of this  statement on
     November 1, 2000, to have a material  impact on our  financial  position or
     results of  operations  because  we do not  currently  purchase  derivative
     instruments or enter into hedging activities,  and no derivatives  embedded
     in contracts have been identified.

     FASB  Interpretation  No. 44 (FIN 44) "Accounting for certain  transactions
     involving stock compensation". An Interpretation of APB Opinion No. 25, FIN
     44  clarifies  the  application  of APB  No.  25 for a  number  of  issues,
     including   the   definition   of   an   employee,    compensatory   versus
     non-compensatory plans, modifications of plan terms, and accounting for the
     exchange of stock  compensation  awards in a business  combination.  FIN 44
     became  effective  July 1, 2000.  The  adoption  of FIN 44 had no  material
     impact on our financial position or results of operations.

(2)  SPIN-OFF OF EVERCEL, INC., JOINT VENTURES AND LICENSE AGREEMENTS

     On February 22, 1999, we effected a spin-off to our stockholders of 100% of
     the  shares of  Evercel.  We had  previously  transferred  to  Evercel  the
     principal  assets  and  liabilities  of  our  battery  business  group.  We
     distributed to our  stockholders in a tax-free  distribution,  one share of
     Evercel Common Stock for every three shares of our common stock held on the
     record date of February 19, 1999.

     On February 22, 1999, the effective date of the spin-off, we deconsolidated
     the  financial  statements  of  Evercel  and the  Joint  Venture  from  our
     consolidated  financial statements.  As part of the spin-off of Evercel, we
     transferred  capital  assets  (net),   prepaid  spin-off  costs,   accounts
     receivable and short-term  liabilities  amounting to $1,228, $501, $36, and
     $1,096, respectively.

                                      F-9



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






     During 1998 we also formed a joint venture with the City of Xiamen,  China,
     called  Xiamen-ERC High Technology  Joint Venture,  Inc. This joint venture
     has been  formed to fund  other  entities,  such as Xiamen  University,  to
     conduct  research  in  advanced  electrochemical  technologies,  which will
     benefit  Xiamen and us. We have  invested  $400 of capital  into this joint
     venture for a 66-2/3% ownership through October 31, 2000. In December 2000,
     pursuant to the receipt of a  certificate  of  approval  from the  People's
     Republic of China,  we transferred a 42.17%  ownership in the joint venture
     to Evercel. (See "Subsequent Events" footnote 14).

(3)  ACCOUNTS RECEIVABLE

     Accounts  receivable  at  October  31,  2000  and  1999  consisted  of  the
     following:

                                                2000              1999
                                           ----------------    --------------

          U.S. Government:
               Amount billed                     $   2,435         $   1,850
               Unbilled recoverable costs               --                52
               Retainage                                98               185
                                           ----------------    --------------
                                                     2,533             2,087
                                           ----------------    --------------
          Commercial Customers:
               Amount billed                           311               235
               Unbilled recoverable costs              606                 1
               Retainage                                 9                 9
                                           ----------------    --------------
                                                       926               245
                                           ----------------    --------------
                                                 $   3,459         $   2,332
                                           ----------------    --------------

Retainage represents amounts that may be collected over more than one year.

Unbilled recoverable costs represent amounts of revenue recognized on costs
incurred on contracts in progress that will be billed within the next 30 days.
The balances billed but not paid by customers pursuant to retainage provisions
in the contracts will be due upon completion of the contracts and acceptance by
the customer.

(4)  PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment at October 31, 2000 and 1999 consisted of the
     following:


                                                               ESTIMATED
                                  2000           1999         USEFUL LIFE
                               -----------  -------------   -------------

     Land                       $     524      $     524              --
     Building and improvements      4,449          4,581        30 years
     Machinery and equipment       11,724         14,618       3-8 years
     Furniture and fixtures         1,138          1,415      6-10 years
     Construction in progress       3,552            527
                               -----------  -------------
                                   21,387      $  21,665

     Less, accumulated
      depreciation
      and amortization            (11,593)       (14,470)
                               -----------  -------------
       Total                     $  9,794      $   7,195
                               -----------  -------------


                                      F-10



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






(5)  OTHER ASSETS

     Other assets at October 31, 2000 and 1999 consisted of the following:

                                    2000              1999
                             --------------     ---------------

     Power Plant License        $    1,653        $       1,937
     Other                             176                  304
                             --------------     ---------------
     Total                      $    1,829        $       2,241
                             --------------     ---------------

     The Power Plant License is being amortized over 10 years on a straight-line
     basis.  Accumulated  amortization was $1,942, $1,658, and $1,374 at October
     31, 2000, 1999 and 1998, respectively.

(6)  ACCRUED LIABILITIES

     Accrued  liabilities  at  October  31,  2000  and  1999  consisted  of  the
     following:

                                                     2000              1999
                                               -----------------     -----------
     Accrued payroll and employee
      benefits                                       1,780          $ 1,124
     Accrued contract and operating
      Costs                                          1,455              418
     Accrued taxes and other                           322              245
                                               -----------------     -----------
     Total                                     $     3,557          $ 1,787
                                               -----------------     -----------

(7)  LONG-TERM DEBT

     Long-term debt at October 31, 2000 and 1999 consisted of the following:

                                                     2000              1999
                                               -----------------     -----------
       Note payable (a)                                $     --     $   191
       Note payable (b)                                   1,625       1,775
                                               -----------------     -----------
                                                          1,625       1,966

            Less - current portion                       (1,625)       (341)
                                               -----------------     -----------
            Long-term debt, less current
             portion                                   $     --     $ 1,625
                                               -----------------     -----------

     (a)  During 1995, we entered into a $2,500 credit  facility with GE Capital
          (formerly  MetLife Capital  Corporation,  an affiliate of Metropolitan
          Life Insurance Company).  Repayment of this note commenced during 1996
          period and was fully repaid in February 2000.

     (b)  During 1996, we entered into a five-year term loan facility with First
          Union National Bank,  which is payable in monthly  installments of $13
          plus  interest.  The loan scheduled to be fully repaid in June 2001 at
          which time a balloon  payment of $1,550 is due.  Interest on this note
          is payable at LIBOR plus 1.75%, or 8.37% at October 31, 2000 and 7.17%
          at October 31, 1999.The  weighted  average  interest rates for October
          31, 2000, 1999 and 1998 were 8.10%, 6.92% and 7.38% respectively.

          The borrowings under the First Union Bank agreement are collateralized
          by a substantial portion of our equipment and a first  mortgage on our
          Danbury, CT location.  The credit agreement  associated with the Notes
          above require us to maintain certain  financial  covenants,  including
          tangible net worth,  debt service coverage and liabilities to tangible
          net worth.  We are in effective  compliance  with all  covenants as of
          October 31, 2000.

                                      F-11



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






 (8) COMMITMENTS AND CONTINGENCIES

     We lease  certain  computer and office  equipment  and the  Torrington,  CT
     manufacturing  facility,  and  office  space  in  Washington,   D.C.  under
     operating  leases  expiring on various dates through 2004. Rent expense was
     $611,  $517 and $472 for the fiscal years ended October 31, 2000,  1999 and
     1998,  respectively.  Aggregate  minimum  annual  payments  under the lease
     agreements  for the five years  subsequent  to October 31, 2000 are:  2001,
     $660; 2002, $592; 2003, $574; 2004, $526; and 2005, $462.

     We have royalty  agreements with MTU, Santa Clara,  Electric Power Research
     Institute  (EPRI)  and  LADWP  pursuant  to  which  we have  agreed  to pay
     royalties  based upon certain  milestones or events relating to the sale of
     carbonate  fuel  cells.  Through  October  31,  2000,  we have not paid any
     royalties.  In connection with certain contracts and grants from the United
     States  Department  of Energy  (DOE),  we have agreed to pay DOE 10% of the
     annual license income received from MTU-Friedrichshafen GmbH ("MTU"), up to
     $500 in total. Through 2000, we have paid to DOE a total of $280.

(9)  SHAREHOLDERS' EQUITY

     In 1999,  60,000 shares of Preferred "C" were converted to 60,000 shares of
     our common stock.

     We have issued warrants  enabling Enron to purchase up to 1,300,000  shares
     of common stock  at exercise prices ranging from $62 to $81 per share.  The
     warrants will only be exercisable  if Enron  purchases at least 55MW of our
     products by September  29, 2002.  There is a six-month  restriction  on the
     resale of the shares, and the warrants are  non-transferable.  The alliance
     agreement  with  Enron  requires  Enron to  purchase  at least 55 MW of our
     products by September 29, 2002, or pay us a penalty.

     At October 31, 2000,  2,640,183  shares of common stock have been  reserved
     for issuance  pursuant to our stock option plans, and our Section 423 Stock
     Purchase Plan.

(10) STOCK OPTION PLAN

     The Board has adopted 1988 and 1998 Stock Option  Plans  (collectively  the
     Plans).  Under the terms of the Plans,  options to purchase up to 3,603,000
     shares of common stock may be granted to our  officers,  key  employees and
     directors.  Pursuant  to the  Plans,  the  Board  is  authorized  to  grant
     incentive  stock  options or  nonqualified  options and stock  appreciation
     rights to our officers and key employees and may grant nonqualified options
     and stock  appreciation  rights to our  directors.  Stock options and stock
     appreciation  rights have  restrictions as to  transferability.  The option
     exercise  price shall be fixed by the Board but,  in the case of  incentive
     stock options,  shall not be granted at an exercise price less than 100% of
     the fair market  value of the shares  subject to the option on the date the
     option is granted.  Stock appreciation rights may be granted in conjunction
     with options granted under the Plans.  Stock options that have been granted
     are exercisable  commencing one year after grant at the rate of 25% of such
     shares in each succeeding  year.  There were no stock  appreciation  rights
     outstanding  at October  31,  2000 and 1999.  Costs for fixed  awards  with
     pro-rata vesting are recognized on a straight-line basis.

     In 1997,  in  connection  with the hiring of our Chief  Executive  Officer,
     options were granted to purchase  447,000 shares of our common stock at the
     Purchase  price of $3.294  per share (the  market  value at the date of the
     grant). We also granted options to purchase an additional 303,000 shares at
     $3.294 per share based upon the  approval of the  shareholders  at the 1998
     annual meeting of the shareholders.

                                      F-12



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






     The per share weighted-average fair value of stock options granted in 2000,
     1999 and 1998 was  $11.82,  $8.43 and $7.99,  respectively,  on the date of
     grant  using the Black  Scholes  option-pricing  model  with the  following
     weighted-average assumptions:

                                   RISK FREE
                     DIVIDEND    INTEREST RATE      EXPECTED       VOLATILITY
          YEAR         RATE          RANGE            LIFE           FACTOR
      ----------  ------------ ----------------  -------------   ---------------

          2000          0%       5.79 - 6.80%      7.7 years          .6884
          1999          0%       5.20 - 5.34%       10 years          .6300
          1998          0%       4.31 - 4.43%       10 years          .5495


     The  following  table  summarizes  the Plan's  activity for the years ended
     October 31, 2000, 1999 and 1998:

                                                                WEIGHTED AVERAGE
                                          NUMBER OF SHARES       OPTION PRICE
                                         --------------------   ----------------

     Outstanding at October 31, 1997            1,253,456          $2.90
         Granted                                  453,000          $3.64
         Exercised                               (346,258)         $2.09
         Cancelled                                 (9,000)         $4.09
                                            --------------

     Outstanding at October 31, 1998            1,351,198          $3.24
         Granted                                  309,380          $3.06
         Exercised                               (148,572)         $2.80
         Cancelled                                 (9,000)         $4.09
                                            --------------

     Outstanding at October 31, 1999            1,503,006          $3.13
         Granted                                  538,003         $33.64
         Exercised                               (187,542)         $2.10
         Cancelled                                 (6,000)        $13.19
                                            --------------

     Outstanding at October 31, 2000            1,847,467         $12.08
                                            --------------


     The following table summarizes  information about stock options outstanding
     and exercisable at October 31, 2000:


                                                                             

                                        OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
                                          WEIGHTED AVERAGE
                                             REMAINING       WEIGHTED AVERAGE                       WEIGHTED AVERAGE
 RANGE OF EXERCISE         NUMBERS        CONTRACTUAL LIFE    EXERCISE PRICE    NUMBER EXERCISABLE   EXERCISE PRICE
       PRICE             OUTSTANDING

      $ 3.00 - 25.00          1,439,467            6.96             $ 4.14             892,593             $ 3.25
       26.00 - 75.00            360,000            9.57              34.64                   -                  -
       76.00 - 97.00             48,000            9.95              81.04                   -                  -
                      ------------------                                        -----------------
      $ 3.00 - 97.00          1,847,467            7.55            $ 12.08             892,593             $ 3.25
                      ==================                                        =================


                                      F-13




                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






EMPLOYEE  STOCK  PURCHASE  PLAN
Our shareholders adopted a Section 423 Stock Purchase Plan (the "ESPP") on April
30,  1993,  and the plan was last  amended on October 6, 1999.  The total shares
allocated to the Plan are 450,000.  Under the ESPP, our eligible  employees have
the right to subscribe  to purchase  shares of common stock at the lesser of 85%
of the mean  between  the high and low  market  prices  on the  first day of the
purchase period or the last day of the purchase period. An employee may elect to
have up to 25% of annual base pay withheld in equal installments  throughout the
designated payroll-deduction period for the purchase of shares. The value of the
employee's subscription may not exceed $25,000 or 900 shares in any one calendar
year. An employee may not participate in the ESPP if such employee,  immediately
after the  option is  granted,  owns  stock  possessing  5% or more of the total
combined  voting  power or value of our capital  stock.  As of October 31, 2000,
there were 266,101  shares of Common Stock reserved for issuance under the ESPP.
These  shares  may be  adjusted  for any  future  stock  splits.  The ESPP  will
terminate  when all shares  reserved  have been  subscribed  for and  purchased,
unless  terminated   earlier  or  extended  by  the  Board  of  Directors.   The
Compensation  Committee of the Board of Directors  administers  the ESPP.  As of
October 31, 2000, the number of employees enrolled and participating in the ESPP
was 50 and the total number of shares purchased under the ESPP was 183,899.  For
purposes of the pro-forma  calculation,  compensation cost is recognized for the
fair value of the  employee's  purchase  rights,  which was estimated  using the
Black  Scholes  option  pricing  model  with  the  following   assumptions   for
subscription periods beginning in fiscal 2000, 1999 and 1998:


         DIVIDEND      RISK FREE      EXPECTED       VOLATILITY
  YEAR    RATE      INTEREST RATE      LIFE           FACTOR
- ------- ---------- --------------- -------------  --------------
  2000     0%           4.77%        6 months          62.5%
  1999     0%           4.83%        6 months          57.9%
  1998     0%           5.43%        6 months          52.7%

The weighted average fair value of those purchase rights granted in 2000, 1999
and 1998 was $1.58, $1.87 and $1.26, respectively.


     Plan activity for the years ended October 31, 2000, 1999 and 1998, was as
     follows:

                                                                 NUMBER OF
                                                                   SHARES
                                                            ------------------

             Balance at October 31, 1997                              359,503
             Issued @ $2.85                                           (20,991)
             Issued @ $4.55                                           (24,687)
                                                            ------------------

             Balance at October 31, 1998                              313,825
             Issued @ $3.69                                            (4,800)
             Issued @ $3.09                                            (3,900)
             Issued @ $3.62                                           (30,076)
                                                            ------------------

             Balance at October 31, 1999                              275,049
             Issued @ $7.28                                            (8,948)
                                                            ------------------

             Balance at October 31, 2000                              266,101
                                                            ------------------


                                      F-14



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)






     No  compensation  cost has been  recognized  for stock options and employee
     stock purchase rights in the consolidated  statements of income (loss). Had
     we determined  compensation  cost based on the fair value at the grant date
     for the stock options and employee stock  purchase  rights in the ESPP, our
     net loss and loss per share would have been the pro forma amounts indicated
     below.

                                              2000       1999         1998
                                             --------- --------- -------------

     Net loss:        As reported           $  (4,459)   (985)        (382)
                      Pro forma             $  (5,564) (2,015)      (1,128)


     Loss per share:  As reported - Basic
                       & Diluted            $   (0.32)  (0.08)       (0.03)
                      Pro forma - Basic
                       & Diluted            $   (0.39)  (0.16)       (0.09)

(11) EMPLOYEE BENEFITS

     The Capital  Accumulation  Plan for employees of FuelCell Energy,  Inc. was
     established  by us on  January  19,  1987 and was last  amended on June 15,
     1999. A three-member pension committee  administers the Plan. The plan is a
     401(k) plan covering full-time our employees who have completed one year of
     service.  We  contribute  an amount equal to 5% of each  participant's  W-2
     compensation to the plan on a monthly basis.  Participants  are required to
     contribute  a minimum  of 3% in order to be  eligible  to  participate  and
     receive a company  match.  An employee  may then  choose to make  voluntary
     contributions  up to an additional  12% of W-2  compensation  out of pretax
     earnings.   Effective  June  1,  1997,   participants  may  make  voluntary
     contributions  up to an additional 6% of W-2  compensation out of after-tax
     earnings. We charged $328, $402, and $435 to expense during the years ended
     October 31, 2000, 1999 and 1998, respectively.

     The FuelCell Energy, Inc. Money Purchase Plan, a defined  contribution plan
     was established by us on May 10, 1976 and was last amended on June 1, 1997.
     The Plan covers our  full-time  employees  who have  completed  one year of
     service.  We  contribute  an amount equal to 4% of each  participant's  W-2
     compensation to the plan on a monthly basis. We charged $264, $312 and $343
     to  expense  during  the  years  ended  October  31,  2000,  1999 and 1998,
     respectively.

(12) INCOME TAXES

     The components of Federal income tax expense  (benefit) were as follows for
     the years ended October 31, 2000, 1999 and 1998:

                                           2000           1999           1998
                                        -----------  ------------    -----------

        Current:
          Federal                         $      -    $    (188)       $    122
          Foreign                                -             -            460
                                        -----------  ------------    ----------
                                                 -         (188)            582
                                        -----------  ------------    ----------

        Deferred:
          Federal                                -          479            (569)
          Foreign                                -            -               -
                                        -----------  ------------    ----------
                                                 -          479            (569)
                                        -----------  ------------    ----------

             Total income tax expense     $      -     $    291        $     13
                                        -----------  ------------    -----------
                                      F-15



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)




     The components of state tax expense that are included in administrative and
     selling  expenses for the years ended October 31, 2000,  1999 and 1998 were
     as follows:

                                               2000        1999         1998
                                          ----------- ----------  -------------

     Current                              $    180      $    48    $     227
     Deferred                                    -          126         (169)
                                          ----------- ----------  -----------
       Total state tax expense            $    180      $   174    $      58
                                          ----------- ----------  -----------


     The  reconciliation  of  the  federal  statutory  income  tax  rate  to our
     effective  income tax rate for the years ended  October 31, 2000,  1999 and
     1998 was as follows:
                                               2000         1999          1998
                                          ----------- ------------   -----------

     Statutory Federal income tax rate      (34.0%)      (34.0%)       (34.0%)
     Nondeductible expenditures                  -         17.4          34.8
     Other, net                                  -           .9           2.8
     Valuation Allowance                     34.0%         57.6             -
                                          ----------- ------------   -----------

     Effective income tax rate                0.0%        41.9%          3.6%
                                          ----------- ------------   -----------


     Our federal and state deferred tax assets and liabilities  consisted of the
     following at October 31, 2000 and 1999:

                                                   2000                  1999
                                              ----------------      ------------

      Deferred tax assets:
          Bad debt                                  $      69        $      31
          Compensation recognized on options              172              183
          Incentive bonuses                               193              189
          Capital loss carryforward                        25               24
          Vacation accrual                                 89               50
          Self-insurance                                   41               50
          Tax credit carryforwards                        296              590
          Santa Clara restoration reserve                 188                -
          Net operating loss                            1,666                -
          Other                                            64               14
                                              ----------------      -----------

      Gross deferred tax assets                         2,803            1,131
          Valuation allowance                          (2,244)            (573)
                                              ----------------      -----------
          Deferred tax assets after
            valuation allowance                           559              558
                                              ----------------      -----------
      Deferred tax liability:
          Accumulated depreciation                       (268)            (267)
                                              ----------------      -----------
          Gross deferred tax liability                   (268)            (267)


          Net deferred tax assets                    $    291           $  291
                                              ----------------      -----------
                                      F-16



                              FUELCELL ENERGY, INC.
                   Notes to Consolidated Financial Statements
                            October 31, 2000 and 1999
                (Dollars in thousands, except per share amounts)




     The federal and state valuation allowance increased  approximately  $1,700,
     this relates primarily to the current year net operating loss.

     We  have  foreign  tax  credits  of   approximately   $296   available  for
     carryforward  that  will  expire  in  2003.  We  have  net  operating  loss
     carryforwards of approximately $4,000 that will expire in 2020.

     Management  believes  it is more  likely  than not that the  remaining  net
     deferred  tax  assets of $291 will be  realized  as the  results  of future
     operations are expected to generate sufficient taxable income to do so.

(13) EARNINGS PER SHARE

     Basic and diluted  earnings per share are  calculated  using the  following
     data:

                                           2000           1999             1998
                                      ------------  ------------     -----------

      Weighted average basic
        Common shares                  14,148,797    12,453,428       12,243,054

      Effect of dilutive securities             -             -                -
                                      ------------  ------------     -----------

      Weighted average basic
        Common shares adjusted
          for diluted calculations     14,148,797    12,453,428       12,243,054
                                      ------------  ------------     -----------

     The  computation of diluted loss per share for fiscal years 2000,  1999 and
     1998 follows the basic  calculation  since common  stock  equivalents  were
     antidilutive. The weighted average shares of dilutive securities that would
     have  been  used  to  calculate  diluted  EPS had  their  effect  not  been
     antidilutive are as follows:

                                          2000                  1999
                                    -----------------     -----------------

       Stock options                   1,748,563             1,459,750

(14) SUBSEQUENT EVENTS

     On December 8, 2000 we were  notified  that the People's  Republic of China
     approved the transfer to Evercel of our 50.5% ownership in the Xiamen Three
     Circles-ERC  Battery  Corp.  joint  venture,  which was  deconsolidated  in
     February  1999  pursuant to the  spin-off  of Evercel.  As a result of this
     approval, the license agreement with Evercel is terminated.


     On December 8, 2000 we reduced our  investment  to 24.5% in the  Xiamen-ERC
     High Technology  Joint Venture,  Inc. by transferring a 42.17% ownership to
     Evercel  pursuant to the  receipt of a  certificate  of  approval  from the
     People's Republic of China.

     On November  21,  2000,  we  received  approval,  at a special  shareholder
     meeting to increase  the number of  authorized  shares of common stock from
     20,000,000 to 150,000,000.

                                      F-17




     PART IV

                                   SIGNATURES

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

FUELCELL ENERGY, INC.

/S/ Jerry D. Leitman
- ---------------------------------------------
Jerry D. Leitman, President


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



                                                               

SIGNATURE                    CAPACITY                                       DATE

                             Chief Executive Officer, President,
                             Director (Principal Executive Officer)         January 25, 2001

/S/ Jerry D. Leitman
- ----------------------------
Jerry D. Leitman
                             Chief Financial Officer, Vice President,
                             Corporate Secretary, Treasurer (Principal      January 25, 2001
                             Accounting and Financial Officer)

/S/ Joseph G. Mahler
- ----------------------------
Joseph G. Mahler

/S/ Warren D. Bagatelle      Director                                       January 25, 2001
- ----------------------------
Warren D. Bagatelle

                             Executive Vice President, Chief Operating      January 25, 2001
/S/ Christopher R. Bentley   Officer and Director
- ----------------------------
Christopher R. Bentley

/S/ Michael Bode             Director                                       January 25, 2001
- ----------------------------
Michael Bode

/S/ James D. Gerson          Director                                       January 25, 2001
- ----------------------------
James D. Gerson

/S/ Thomas L. Kempner        Director                                       January 25, 2001
- ----------------------------
Thomas L. Kempner

/S/ William A. Lawson        Director                                       January 25, 2001
- ----------------------------
William A. Lawson

                             Executive Vice President, Chief Technology     January 25, 2001
                             Officer and Director
- ----------------------------
Hansraj C. Maru

/S/ Bernard S. Baker         Director                                       January 25, 2001
- ----------------------------
Bernard S. Baker


/S/ John A. Rolls            Director                                       January 25, 2001
- ----------------------------
John A. Rolls

/s/ Thomas R. Casten                                                        January 25, 2001
- ----------------------------
Thomas R. Casten             Director