Advanced prosthetic knees for transfemoral amputees are currently based on controlled damper mechanisms. Such devices require little energy to operate, but can only produce negative or zero joint power, while normal knee joint function requires alternative phases of positive and negative work. The inability to generate positive work may limit the user’s functional capabilities, may cause undesirable adaptive behavior, and may contribute to excessive metabolic energy cost for locomotion. In order to overcome these problems, we present a novel concept for an energy-storing prosthetic knee, consisting of a rotary hydraulic actuator, two valves, and a spring-loaded hydraulic accumulator. In this paper, performance of the proposed device will be assessed by computational modeling and by simulation of functional activities. A computational model of the hydraulic system was developed, with methods to obtain optimal valve control patterns for any given activity. The objective function for optimal control was based on tracking of joint angles, tracking of joint moments, and the energy cost of operating the valves. Optimal control solutions were obtained, based on data collected from three subjects during walking, running, and a sit-stand-sit cycle. Optimal control simulations showed that the proposed device allows near-normal knee function during all three activities, provided that the accumulator stiffness was tuned to each activity. When the energy storage mechanism was turned off in the simulations, the system functioned as a controlled damper device and optimal control results were similar to literature data on human performance with such devices. When the accumulator stiffness was tuned to walking, simulated performance for the other activities was sub-optimal but still better than with a controlled damper. We conclude that the energy-storing knee concept is valid for the three activities studied, that modeling and optimal control can assist the design process, and that further studies using human subjects are justified.