DESCRIPTION OF BUSINESS

Business Development

          Electro Energy Inc. is a Florida corporation, which was originally formed on December 29, 1993 under the name MCG Diversified, Inc. (“MCG”). Effective June 9, 2004, pursuant to the Agreement of Merger and Plan of Reorganization, dated May 7, 2004 (the “Merger Agreement”), among privately held Electro Energy, Inc. (“EEI”), a Delaware corporation, MCG and EEI Acquisition Corp. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of MCG, the Merger Sub merged with and into EEI, with EEI remaining as the surviving corporation (the “Merger”).

          Although MCG acquired EEI as a result of the Merger, the stockholders of EEI hold a majority of the voting interest in the combined enterprise. Immediately prior to the Merger, EEI had 23 stockholders. Additionally, the Merger resulted in EEI’s management and Board of Directors assuming operational control of MCG.

          The following lists a summary of the structure of the Merger and matters completed in connection therewith:

The Merger Agreement may be found at Exhibit 2.1 to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 24, 2004.

Our Business Prior to the Merger

          Prior to the Merger, MCG did not have any meaningful operations. After the merger, the Company succeeded to the business of EEI as its sole line of business.

Our Business Following the Merger

Overview

          We develop bipolar nickel-metal hydride batteries. Our business strategy has historically been to seek government funding to support the development of our novel battery concept. From 1992 to 2003, we received approximately $18 million of government funding for bipolar nickel-metal hydride battery development. Our programs have been supported by the U.S. Army (for field radios and silent watches), the Naval Air Systems Command and the U.S. Air Force (for use in F-18 and F-16 fighter aircraft), the Ballistic Missile Defense Organization (BMDO), the National Aeronautics and Space Administration (NASA), the National Institutes of Health (NIH), the Department of Energy (DOE), The Partnership for a New Generation of Vehicle (PNGV) and the State of Connecticut. These programs have focused on basic materials technology and prototype development of specialty bipolar nickel-metal hydride batteries for military communications, satellites, aircraft auxiliary power, medical applications and hybrid electric vehicles. We intend to use the technology and products developed by us as a springboard into commercial applications and manufacturing. Our management is refining our commercial market opportunities while pursuing additional development activities. In this way, we aim to minimize our exposure in entering niche markets while maximizing our ability to capitalize on our product strengths and our understanding of our customers’ requirements.

          In October 2003, we acquired the battery operations of Eagle Picher Technologies, LLC in Colorado Springs, Colorado. Eagle Picher is a diversified company engaged in the manufacture of specialty batteries, chemicals and electronic materials. The Colorado Springs operation had been established by Eagle Picher in 1976 and has been primarily engaged in the manufacture of specialty nickel-cadmium (also known by the chemical element symbol “Ni-Cd”) batteries for satellites and aircraft applications. As a result of an internal restructuring of priorities, Eagle Picher management decided to close down its Colorado Springs battery operation in 2003. We believe that the acquisition of this facility enhances our capabilities, broadens our product lines and presents new business opportunities for us. We entered into agreements with Eagle Picher that included an asset purchase of the existing inventory, the equipment in the facility, a lease of the 43,000 square-foot building that belongs to Eagle Picher, a technology license, a supply agreement to continue to produce sintered nickel plaque and striker assemblies for Eagle Picher and a services agreement to continue to operate groundwater remediation on behalf of Eagle Picher. We created a wholly-owned subsidiary, Mobile Energy Products Inc. d/b/a Electro Energy Mobile Products, Inc., to operate the Colorado Springs operation and employ the existing staff of 33 individuals to continue the operations of the facility. The plan for Mobile Energy Products is to continue the Colorado Springs operations, supply components to Eagle Picher, manufacture and sell specialty nickel-cadmium batteries, use the Colorado Springs operation to help transition our bipolar nickel-metal hydride battery to a broader mix of applications and to broaden the product mix to include lithium rechargeable batteries. The Colorado Springs operation is one of three organizations worldwide that produce specialty nickel-cadmium batteries for satellites and one of two that is qualified by the U.S. government.

          The first list below, “Aircraft Program Highlights,” shows past aerospace programs that have purchased batteries produced by the Colorado Springs operation and from which Mobile Energy Products is pursuing additional business. The second list below, “Super Nickel-Cadmium Program Highlights,” shows the Super NiCd ^TM and Magnum ^TM satellite batteries still in operation that have been produced at the Colorado Springs facility for such aerospace companies as Lockheed Martin and Hughes Aircraft. Mobile Energy Products is the only U.S. supplier of these batteries. Mobile Energy Products’ main competitor, SAFT, is located in Europe.

Government Funding for Development

          The U.S. Government sponsors research and development programs designed to improve the performance and safety of existing battery systems and to develop new battery systems. In 2003, we were awarded government sponsored contracts for approximately $3.0 million, which are ongoing. These efforts are directed at developing prototype batteries and manufacturing technology development. We have received a total of $18.0 million since inception for the development of our bipolar nickel-metal hydride battery.

          Effective March 31, 2004, we were awarded a new 12-month contract by the U.S. Army, valued at approximately $850,000, to continue the development of its bipolar nickel-metal hydride batteries for uses in military communications and field equipment.

          In March 2004, we received a commitment for $500,000 investment for technology development from In-Q-Tel, Inc., a private venture investment fund supporting technologies of interest to the U.S. government. In consideration for the In-Q-Tel contract, we issued to it warrants to purchase 268,594 shares of common stock, for no consideration, exercisable within five years of issuance. In March 2004, we received $150,000 and established a warrant subscription receivable for the balance of $350,000. As of September 2004, $150,000 has been collected and a $200,000 balance remains to be collected. We also granted In-Q-Tel the right to have an observer attend our board meetings, which right terminated on the closing of the merger. The funding from In-Q-Tel will be directed at demonstrating the feasibility of utilizing our proprietary bipolar wafer design, developed for nickel-metal hydride (known by the chemical element symbol “Ni-MH”) batteries for other battery chemistries. If the results prove encouraging in the initial nine-month program, additional funding from In-Q-Tel, or the government, for further development of complete battery systems could occur but cannot be assured.

          Effective May 18, 2004, we entered into an amendment to our existing contract with the U.S. Air Force, increasing the contract’s value by approximately $1,700,000. The amendment provides for a 12 month continuation of the manufacturing technology development of our bipolar nickel-metal hydride batteries for use in aircraft. The initial $400,000 of development work under the amendment is authorized, with the remaining work subject to further funding authorization.

Battery Technology

          A battery is an electrochemical apparatus used to store energy and release energy in the form of electricity. There are two types of batteries: primary and rechargeable batteries, or secondary batteries. A primary, or disposable, battery is used until discharged and then discarded. A rechargeable, or secondary, battery can, after discharge, be recharged and used again. Our bipolar nickel-metal hydride batteries are designed to be rechargeable.

          Rechargeable batteries can often be used in battery applications where primary batteries are most commonly employed, but only where it is cost effective. We are conducting research and development of an advanced, rechargeable bipolar nickel-metal hydride battery designed to compete with other rechargeable batteries. Primary batteries are, in most cases, too costly for widespread use in applications currently utilizing rechargeable batteries.

          No one battery system is ideal for all applications. There are numerous performance variables which vary in importance by application. Each commercially available battery system is stronger in certain areas and weaker in others. Important variables include:

          The needs of various battery applications place a different priority on these characteristics, and thus require different solutions. In addition, for each anode/cathode combination there are many alternative ways to design a battery, involving choices of electrolyte and electrode materials and how components are shaped and manufactured. Design choices involve trade-offs and, as a result, improvement in one element of a battery’s performance often comes at a sacrifice of another characteristic. A battery optimized for just one characteristic may not be competitive if its performance in other areas is inferior.

          We selected bipolar nickel-metal hydride for development because of its potential to offer superior performance for battery-powered applications at lower cost than many other commercially available battery configurations.

          Below are key characteristics of how battery systems are measured and compared:

          Energy Density measures the capability of the battery to store energy, in watt-hours per kilogram, which is critical to a battery’s competitiveness. The greater the energy density, the lower the weight and generally the smaller the package required to store and deliver a given amount of energy. Nickel-metal hydride has about twice the energy density of lead-acid systems and also has higher energy density than nickel-cadmium. Nickel-zinc has an energy density comparable to nickel-metal hydride.

          Specific Power measures the ability to deliver power on demand and satisfy the needs of a high current-drain device. Lead-acid is typically the best known for starting a car. In power tools, HEV and EV applications, this characteristic is as important as energy density or total capacity. In lower current-drain applications like laptops or hearing aids, energy density and practical run-time are more important and lithium-ion and high energy-density, low current-drain zinc-air systems are commonly used.

          Cycle Life is a measure of how many times the battery can be recharged before it is replaced, which is important in affecting the cost in use and, to an extent, convenience. Discharge and recharge cycles can be repeated a number of times in rechargeable batteries, but the achievable number of cycles (cycle life) varies among technologies and is an important competitive factor. All rechargeable batteries experience a small, but measurable loss in energy with each cycle. The industry commonly measures cycle life in number of cycles a battery can achieve until 80% of the battery’s initial energy capacity remains.

          Cost is obviously important to the success of a battery system. With automated production lines, lead-acid is currently the lowest cost rechargeable battery. In volume production, we believe that our bipolar nickel-metal hydride battery will be less expensive than other nickel-metal hydride batteries and other rechargeable batteries. However, because we have not yet produced any of our bipolar nickel-metal hydride batteries for volume production, there can be no assurance that our estimates of cost of volume production of our batteries will be accurate.

          Environmental and Safety Issues surround most battery systems. Both nickel and metal hydride, while not entirely harmless, are relatively benign compared to other high-performance, rechargeable electrode materials. Lead is toxic, however there are currently systems in place in the developed world to recycle lead. There is pressure in Europe to ban or require recycling of nickel-cadmium batteries due to the toxic nature of cadmium. Nickel-metal hydride batteries can be disposed of in landfills, but are presently recycled due to the high value of their materials. The prospect of stricter environmental legislation relating to the manufacture, disposal and recycling of batteries containing lead or cadmium, both of which are hazard and toxic, if enacted, could enhance the attractiveness of our bipolar nickel-metal hydride battery.

          The “established high-volume” portion of this market comprises the so-called “4C applications”: cordless power tools, cell phones, computers (laptop) and camcorders. Cordless power tools will be a prime marketing target for our technology because of the premium price paid for high power and low volume.

          Another target market for us is the “specialty high-performance” segment (military and industrial applications), where customers are willing to pay a premium for exceptional performance.

          In addition, there are “emerging market” segments for 42-volt and hybrid vehicles, electric bicycles and scooters, and distributed energy systems, which are currently growing and may become significant.

          The figure below shows global market share by geographic region. These figures indicate that we would potentially be able to serve worldwide markets of $18 billion through our plans to market and manufacture and enter into strategic joint ventures and licenses.

          The table below shows projected markets that we will target for our batteries.

          The table below demonstrates our bipolar nickel-metal hydride batteries’ price and performance advantage over conventional nickel-metal hydride and nickel-cadmium batteries. This is the basis for regarding the markets for these two battery types as being available to our bipolar nickel-metal hydride batteries. This table also demonstrates our bipolar nickel-metal hydride batteries’ price advantages over lithium and its ability to meet or exceed lithium’s small size for a given energy requirement (known as volumetric energy density). Based on this, we believe that a significant portion of the power tool market (which we expect will continue to grow) can be served by our bipolar nickel-metal hydride batteries rather than lithium batteries.

          The total market for our bipolar nickel-metal hydride batteries may be divided into three segments: (i) established high performance markets, (ii) specialty high performance markets and (iii) emerging markets.

Established High Performance Markets

          Total 2001 revenues for the established high performance markets segment were as follows: $3.08 billion for conventional nickel-metal hydride and nickel cadmium batteries plus a portion of the $3.61 billion lithium ion market.

          The figure below shows, on the left, the projected 2001 market by chemistry forecast by the Santa Clara Group, an independent research firm, and, on the right, our potential market share for bipolar nickel-metal hydride batteries in the medium term.

          The reason that the nickel-cadmium chemistry presently continues to prevail in a number of markets is that it offers the lowest cost system and performs best at high power. For example, nickel-cadmium batteries dominate the cordless power tool market. Our bipolar nickel-metal hydride battery technology reduces the cost of the nickel-metal hydride battery to be competitive with nickel-cadmium. The increased power capability makes it an ideal candidate for cordless power tools. Further, our bipolar nickel-metal hydride batteries do not contain cadmium, a highly toxic material. In view of these factors, we believe that our bipolar nickel-metal hydride battery could capture as much as 50% of the nickel-cadmium market in the medium term, and also supplant a significant portion of the market held by lower power and more expensive existing nickel-metal hydride technology. The greatest growth area by application is in the cordless power tool market, followed by computers and cell phones, with the lowest growth area being camcorders (a relatively established market at this time).

          Our bipolar nickel-metal hydride battery, with its flat cell design, is able to package 3.4 Ah (compared to 2.5 Ah) at the same volume. This represents a 35% advantage in run-time. As the markets for these products expand, cost becomes a greater consideration in battery selection. Accordingly, there is an overwhelming emphasis on reducing the price to broaden the market. The bipolar nickel-metal hydride battery would have a significant cost advantage and would compete very favorably against existing nickel-metal hydride and nickel-cadmium products. We therefore believe that up to 50% of the nickel-metal hydride market could be captured by our proprietary bipolar configuration. The impact of the bipolar nickel-metal hydride battery on the lithium battery market is less clear, since lithium batteries are lighter in weight per unit of stored energy. However, considering that bipolar nickel-metal hydride is comparable on a volumetric energy density basis at higher voltages and will be significantly lower in cost, we believe that we could capture up to 25% of these two markets. The lithium battery system gains weight as voltage and power increase due to additional complexity. We estimate that above 50 volts the systems are comparable with respect to weight and volume. However, we believe that our systems will have the advantages of lower cost and higher power.

          Another way to analyze the potential size of the bipolar nickel-metal hydride battery market is to assume that it could capture 25% of each of the market segments by application, as reflected in the figure “Projected Battery Market Share by Chemistry” above. Each of these approaches predicts very significant markets for the bipolar nickel-metal hydride battery. At a 10% compounded growth rate, the worldwide portable battery market is predicted to be $8 billion in 2005. A 25% share for the bipolar nickel-metal hydride battery would mean a market size of $2 billion.

          The market analysis described above is based on forecasts of the predicted mix of battery-powered products now in existence. The flat and flexible shape of the bipolar battery along with its other favorable characteristics could open up new product opportunities. This could further expand the markets and create a unique U.S. technology. Critical military applications would benefit by having a U.S. source for high power batteries.

Specialty High Performance Markets

          Specialty high performance applications, not including military applications, are lower volume markets that will pay a premium for exceptional performance, such as part 135 and 91 aircraft, utility energy systems, telecom and critical UPS systems. This market can be served by our manufacturing line on an incrementally profitable basis. Total 2001 revenues for the specialty high performance markets segment were $325 million in 2001, representing 15% growth over 2000.

          This product is ideally suited to the military applications that we are already pursuing which include military communications, space applications and military aircraft applications (for which we have developed, on a cost-sharing basis, batteries for F-16 and F-18 fighter aircraft). We have been able to package three times the energy in the same volume and weight as the Hawker lead acid, while providing four times the emergency load capacity at ambient temperature. Although this market is small, serving it is advantageous to us. The development funds and experience gained in manufacturing products for these demanding customers has supported our technology development and continues to position us in that market segment. In addition, the OEM5 serving the military and space agencies for such applications typically also produce commercial products requiring comparable batteries, so that serving this market provides us with commercial sales opportunities.

Emerging Markets

          Emerging markets include applications such as hybrid cars and electric bicycles and scooters, including the 42-volt starting application now served by the 12-volt lead acid battery.

          Both Honda and Toyota have launched hybrid cars using conventional nickel-metal hydride batteries in the U.S. market. The potential size of this market is significant. Approximately 50,000 of these automobiles have been produced to date.

          The potential size of the electric bicycle/scooter market, located mainly in Asia, and to a lesser extent in Europe, is also significant. In these countries bicycles and scooters are widely used as commuter vehicles. Our bipolar nickel-metal hydride technology makes it possible to convert this huge market from gasoline to electric, because, for the first time, adequate range at a modest price is possible through our technology. Most major cities in Asia are experiencing significant air pollution caused by emissions from gas powered bicycles and scooters. Several governments are acting to replace such vehicles with electric counterparts. The availability of bicycles and scooters using our batteries could enhance and accelerate this effort. As an example of the forces behind this market, according to published reports, Taiwan has 12.0 million motor scooters, with an additional 1.0 million purchased each year. Based on our research, we believe that Taiwan is eager to replace these motor scooters with a “green” alternative, and that the country is offering to potential electric scooter buyers incentives that pay substantially all the cost of a scooter’s battery set. As a second example, Shanghai, China initially ordered all 715,000 gas-powered bicycles and scooters off its streets by the year 2000, but subsequently delayed that deadline to 2005 because of the limited availability of electric counterparts.

Business Strategy

          Our long-term strategy is to position our technology to be used in battery-powered products with global markets in excess of $500 million through either direct manufacturing or licensing arrangements. We will continue to manufacture specialty nickel cadmium batteries at Colorado Springs, continue government-funded research and development and begin other specialty battery manufacturing at both our Danbury and Colorado Springs locations. We are committed to demonstrating the competitive position of bipolar nickel-metal hydride batteries in multiple markets to avoid the risk of dependence on a single market.

          Develop prototype/commercial batteries to serve the established commercial markets, particularly cordless power tool markets and mobile applications. Prototypes will be developed to meet the specifications and target prices of potential large OEM customers. Successful testing by customers is intended to demonstrate the superior performance of our batteries and establish the basis for future sales. The cordless power tool industry is an ideal entry market for our technology, due, in part, to the high power technology, coupled with the industry practice to design the tool around the battery, in order to meet the customer requirements for weight and balance.

          Identify and consummate important strategic alliances. This will include possible acquisitions, licenses and joint ventures that will position us with key customers to further grow our business. We have benefited from a technical exchange with a major Japanese battery manufacturer for over a year, which may lead to a broader relationship.

          Establish and operate our first production line. Initially, we intend to target specialty markets which are willing to pay a premium for extraordinary performance (targeted production line start-up is early 2005). We anticipate $0.5 million, $5.0 million and $10.0 million in revenues from specialty markets in 2005, 2006 and 2007, respectively. We believe that these markets can be grown to $14.5 million by 2008. This prototype production line will be used to address the multiple market opportunities described in this prospectus and to assist us in identifying the market available to our bipolar nickel-metal hydride battery. We believe that additional lines will be necessary to fully address the full market potential of this technology. We plan to continue to produce specialty nickel-cadmium batteries and components at our Colorado Springs facility with a yearly revenue stream of $3 million to $4 million.

          Develop prototype batteries (on a cost-shared basis) with strategic customers to serve emerging markets . Emerging markets include aircraft, automotive, 42-volt and hybrid electric cars, and electric scooters/bicycles, on a basis to be negotiated with OEMs. We successfully demonstrated performance and cycle life under a cost share program with PNGV. Prototypes will be further developed to meet the specifications and target prices of potential large OEM customers. Our management plans to only cost share projects that are believed to have significant commercial potential within a five-year time frame.

          Maintain continued government support. We plan to continue government supported development at the rate of approximately $3 million to $4 million annually to support the design and development of batteries for specialty applications and continue advancements in our technology. We have a current backlog of government funded and pending development projects of approximately $2 million.

Target Market Segment Strategy

          We initially targeted the military and associated markets due to the availability of research and developmental funding. We are now positioned to enter the specialty manufacturing stage of product development, where we plan to initially target the military. The military is a great consumer of batteries and often pays a premium for performance. We then intend to target other users and consumer OEM5. We believe this strategy will enhance our business because:

          We currently have no plans to enter the retail over-the-counter or peg-board markets that consumer battery companies such a as Duracell, Eveready and Rayovac presently dominate in the United States. We may, however, consider licensing arrangements with one or some of these companies.

          Based on our understanding of battery market opportunities, competitive technologies and the performance advantages of bipolar nickel-metal hydride batteries, we have developed the following strategy for commercializing our battery business. This strategy is summarized below.

Specialty Batteries

          We are in a preferred position to pursue battery products in the specialty market for space, aircraft and military equipment based on our relationship with governmental agencies. Aircraft currently utilize nickel-cadmium and lead acid batteries for auxiliary power and starting applications. We are engaged in a program to develop a bipolar nickel-metal hydride aircraft battery for the F-16. Thus far, in addition to the elimination of toxic cadmium and lead, the battery energy and power density were improved by a factor of two. We intend to pursue this market with ongoing and government development projects.

          The space battery business is currently utilizing nickel-hydrogen and nickel-cadmium rechargeable batteries. Development efforts are underway to develop lithium versions of satellite and space batteries. Our bipolar nickel-metal hydride technology offers a factor-of-two weight improvement over the nickel-hydrogen and nickel-cadmium batteries now used. We believe that our bipolar nickel-metal hydride battery will capture a significant segment of this market due to the weight savings of our battery. This market is willing to pay a premium for a performance/weight advantage.

          There are a number of applications for military and portable electronics that presently use rechargeable conventional nickel-metal hydride batteries or non-rechargeable batteries. We believe that the replacement of these batteries with our bipolar nickel-metal hydride batteries would be cost effective. Therefore, we will continue to pursue government-funded development efforts and prototyping products in this area, to position us for high volume manufacturing opportunities.

Cordless Power Tools

          The power tool market is also rapidly expanding. Consumers are requesting more powerful electric drills, saws, screwdrivers, nail drivers and other cordless power tools. Industrial and consumer applications exist that encompass a range of requirements and pricing. To date, the battery of choice for all these applications has been nickel-cadmium cylindrical cells. The nickel-cadmium battery has been selected based on its characteristics of good power and modest price. However, there is a considerable desire on the part of power tool makers to replace nickel-cadmium batteries with a battery that would be more environmentally friendly. In some countries, the use of nickel-cadmium batteries is restricted. However, conventional coiled cells typically cannot provide adequate, cost-effective power capability. Recently, some manufacturers have begun the use of cylindrical nickel-metal hydride cells for the power tool requirements. Because of their design, we believe that bipolar nickel-metal hydride batteries can compete successfully in the cordless power tool market. In doing so, our battery will provide 50% more power and twice the energy of nickel-cadmium batteries at a lower manufacturing cost. We believe that our proprietary bipolar wafer design with its inherent high power capabilities will become a preferred product for this market. We intend to allocate resources to developing prototypes for sampling to select OEM manufacturers in this market.

Starting, Lighting and Ignition (SLI) Applications

          Starting, lighting and ignition batteries for conventional automobiles are a major business sector for the rechargeable battery industry. Lead acid is the 12-volt battery of choice for this application based on its low cost. We do not anticipate that any other battery type could make serious inroads in this market in the near term because of severe cost restrictions. Therefore, this market is not a targeted area for our technology.

          However, there has been a worldwide decision to gradually move the voltage level for conventional automobiles from 12 volts to 42 volts. For the higher voltage applications, our battery may have a future potential but the applications are still uncertain. The Society of Automotive Engineers has agreed that 42 volts should be the standard voltage. The timing of such a move is still in the planning stages with some projections as early as 2005 and with others as far out as the 2010 model year. We intend to closely follow this market and build prototype batteries where appropriate.

Electric and Hybrid Vehicles

Emergency Power Back-up/Load Leveling

          There is a broad spectrum of needs for batteries for emergency power back-up, utility load leveling, peak shaving and customer demand side purposes. These markets are driven mainly by initial battery cost and life. The lead acid battery system has been the battery of choice to date. If an alternate battery type were developed that was cost effective on a life cycle basis it could find a share of this market. In 2001, we received a U.S. Department of Energy contract to develop the cell chemistry for distributed power batteries. This contract, which was directed at high power and power quality applications, resulted in revenues of approximately $1.2 million in 2002 and $1.3 million in 2003. This contract was extended through February 2005.

Industry Analysis - Bipolar Nickel-Metal Hydride Batteries

          We believe we must become a successful producer of bipolar nickel-metal hydride batteries in order to fully develop our technology value and command the highest possible licensing fees. This is partly because our product is unique, and its processing requires different equipment than what is generally available in the industry. We will, however, continue to pursue on a global basis, the licensing of our technology to, or joint venturing with, manufacturers to assist us in expanding market penetration.

          We believe that, as a producer, it is important to work with both the purchasing groups and design engineers of military and consumer electronic OEMs. Our products will be competing with products that are familiar to the design engineers. We offer designers a lighter, smaller and higher power product. We have found designers to be relatively open to our new technology. We believe that we will be very cost competitive, but we do not have the extensive real-world testing in the designers’ products that our competitors have. We therefore must use the various contacts and testing by the military to induce designers to embrace our products.

Industry Participants

          There are several players involved in the worldwide rechargeable battery industry. The industry is divided by chemistry: lead acid, nickel, lithium and others. There are many small development houses that perform contract work and support the larger companies, at times crossing technology boundaries. In the battery industry these small research houses are often first to develop a vast majority of new technology.

          The lead acid industry has carved out the commodity automotive SLI market. They produce low cost batteries extremely efficiently, at times at only $1/battery profit ($2/kwh). This market shows slow growth and is not currently of interest to us. There are a few small consumer applications that still use lead acid batteries in cylindrical and flat plate configurations. We believe that we or others will penetrate these niche markets in the short term. Lead acid competes solely on initial cost, since its cycle life is not good in applications requiring high power and cycle life. In late 2000, Johnson Controls, Inc. purchased Optima Batteries. We believe that Johnson Controls intends to use the Optima technology along with the technology gained from its license from Bolder Technologies to meet the 42 Volt SLI market. We doubt whether the lead-acid technology will meet all the demands of the 42 Volt market, but the combination of both technologies plus Johnson Controls’ strong automotive ties may allow it to merge into the 42 Volt market and even slow the total conversion to 42 Volt market by the automotive manufacturers. Exide does not appear to have a product for the 42 Volt market at this time and has filed for reorganization under bankruptcy. Exide may be able to regroup as a lower cost producer, possibly further delaying automotive migration to non lead acid batteries. Delphi Automotive appears to be investigating lithium systems for the application, but, by its own report, has had limited success.

          The nickel battery business is made up of several large companies and a few small companies like us. Nickel batteries normally include cadmium, hydrogen, hydride and zinc. Cadmium batteries had been the backbone of portable electronics until environmental concerns of cadmium toxicity led to its replacement by the hydride system. There are two basic hydride systems in the marketplace, commonly known as AB ₂ and AB ₅ . The AB ₂ system is manufactured by Ovonic. Ovonic has had an aggressive licensing and litigation campaign to make industry participants use its hydride of AB ₂ , but even with the licensing agreements in place, most companies are using the AB ₅ low-pressure system. This is due primarily to that system’s easier battery design, and reproducible active materials. We do not believe that the Ovonics patents are relevant to its design. SAFT of France, SANYO, Matsushita (Panasonic) of Japan, Gold Peak, Great Power and Shida Battery of China are the predominate players. The nickel zinc system has been under development for a long time. If successful, it would be a lower cost system compared to other conventional nickel batteries but long life is an issue in many applications. Evercel was the most recent developer/manufacturer, but appears to have not been able to create a viable product for its selected markets.

          The rechargeable lithium battery industry is also growing rapidly. The development of the intercalated carbon electrode has improved the safety of the lithium system significantly. There are many smaller companies developing the technology and they have identified the key development hurdles to be addressed. The rechargeable lithium battery leader is Sony of Japan. The majority of developers worldwide are using the Sony technology as the baseline with only modest improvements being made. The systems offer good energy but lower power than most nickel systems. The systems can operate at a slightly higher temperature than nickel batteries but do not operate at temperatures below -10°C, an unacceptable limitation for many applications. Sanyo is second to Sony in market share in this chemistry. The development funds from In-Q-Tel will provide us with an opportunity to evaluate the applicability of our wafer cell design to the lithium chemistry and if successful, it will add to our product mix and be a significant advancement to the baseline technology. The development is directed initially at a specialty application but has strong commercial application potential.

Our Solution

Bipolar Nickel-Metal Hydride Technology

          We have developed a unique, advanced-design bipolar nickel-metal hydride battery that is high power high energy, long life, clean, safe, and low cost to be used in a broad range of applications. The primary use of the funds obtained in the private placement is to commercialize this technology.

          Bipolar nickel-metal hydride battery technology provides considerable performance advantages over conventional battery systems. The bipolar nickel-metal hydride battery design also delivers superior energy density and cost advantages over conventional nickel-metal hydride and nickel cadmium battery designs. Bipolar nickel-metal hydride batteries are approximately one half the weight and size and have three times the life of the best commercially available lead acid batteries.

          Our patented bipolar battery design and plastic bonded electrode technology represent established technological advancements in the nickel-metal hydride battery industry for high volume, high power applications. This technology also offers what we believe to be a sustainable cost advantage over conventional nickel-metal hydride and nickel cadmium battery designs. This cost advantage positions our bipolar battery technology to be the most likely technology to meet the performance and cost requirements of many consumer electronics (power tools), commercial bikes, scooters, hybrid electric vehicles (HEV5) and distributed energy applications.

Importance of Bipolar Nickel-Metal Hydride Technology

          Our bipolar nickel-metal hydride battery technology offers a sustainable cost advantage with high energy density and high power density capabilities. The bipolar wafer cell and plastic bonded electrode technologies are unique in their cost-to-performance ratio. The improvements in energy density from the bipolar wafer cell and the plastic bonded electrodes are significant when viewed in light of the design goals for many applications.

          A number of manufacturers around the world are pursuing the development of conventional cylindrical and prismatic battery designs for the nickel-metal hydride system. The most notable manufacturers are Matsushita Electric Industrial Co., Ltd., Sanyo Electric Co., Ltd. and Toshiba Corp. in Japan, SAFT of France, and Cobasys, formerly Texaco (GM)-Ovonic, in the United States. This attests to the cost/performance advantages of the basic nickel-metal hydride battery chemistry. This cost performance ratio is enhanced by our technology.

          Our bipolar nickel-metal hydride battery is a unique, clean, safe battery technology that is ideally suited for many applications.

          Conventional cylindrical and small prismatic nickel-metal hydride batteries have become commercial successes as rechargeable power sources for a variety of portable electronic equipment. Conventional nickel-metal hydride batteries are utilized in the two major automotive HEVs, the Toyota Prius and the Honda Insight, and have been demonstrated as a high-performance option in the General Motors EV1 (an all-electric vehicle). The commercial success of nickel-metal hydride electric vehicle batteries will require a lower cost with better energy density than provided by conventional nickel-metal hydride batteries. Our technology has been proven to meet the life requirements under accelerated testing for HEV applications.

Nickel-Metal Hydride Battery Systems

          Environmental considerations have become paramount in this decade and will drive the evolving battery market. Lead acid and nickel-cadmium chemistries suffer from the presence of undesirable heavy metals. It is generally accepted that lead acid batteries do not offer an acceptable energy density for many applications. Highly toxic cadmium has rendered nickel-cadmium batteries undesirable for commercial products. The overriding goal of eliminating highly toxic materials from rechargeable batteries, the environmentally benign characteristic of the nickel-metal hydride system, and the entry of the nickel-metal hydride system into the commercial marketplace in small spirally wound cylindrical cells have elevated this system’s appeal.

          Nickel-metal hydride batteries have the potential to become the preferred system for many future applications based on its high power density and high energy density, sealed maintenance-free operation, and long stable cycle-life. While lithium rechargeable batteries have higher energy per unit of weight than nickel-metal hydride batteries, they are costly, complex to control during charge and discharge, and potentially hazardous due to the reactivity of lithium and the electrolyte. In fact, in applications where the volume of a flat shaped battery is of primary importance, our bipolar nickel-metal hydride batteries out perform lithium rechargeable batteries, but at a much lower cost, while delivering higher power. We plan to continue to also sell specialty nickel-cadmium batteries and lithium batteries in the future. No one battery type does all things for all applications and some chemistries are best suited for a given application. By having a broad mix of products, we can be more responsive to customer needs, making competitive, superior products for many applications.

Our Bipolar Nickel-Metal Hydride Battery System

          For more than a century, conventional rechargeable batteries have been based on a design geometry that is termed monopolar. Unlike a bipolar cell, monopolar cells have no electrically conductive “bipolar” plate that simultaneously contacts both a positive and negative electrode. Rather, the current in the individual electrodes in a monopolar cell is conducted through a comparatively torturous path of wire grids and edge leads, through tabs to external cell terminals. These monopolar cells are then connected in series through a bus bar to create a battery of the desired voltage. An automotive battery, for example, has six 2.0 Volt cells in series (in a single battery case).

          Unfortunately, traditional monopolar designs do not use space efficiently. Current must flow through a long resistive pathway in the plane of the electrodes, through the wire grids, tabs and interconnections. Not only do these connections take up valuable space and add weight, but they also create bottlenecks, which degrade high-power performance, that is essential for many present and future battery applications.

          A bipolar design, in contrast, maximizes space allocation and power by eliminating the monopolar electrode interconnects, tabbing, and current collector grids. The pathway for current is the cell thickness.

          We have developed a unique approach to the design of a bipolar battery based on the use of stackable wafer cells. Our bipolar nickel-metal hydride battery design consists of a stack of flat single wafer cells. Each 1.2-volt unit cell is contained in a sealed conductive envelope such that the cell faces act as positive and negative cell terminals. Current flows through the cell interfaces. Batteries of a desired voltage are constructed by stacking the cells like a deck of cards in an outer container. This design approach eliminates weight and volume normally taken up by individual cell terminals and cases as well as internal components such as current collectors and grids. The result is higher energy power density for the bipolar batteries.

          In many battery applications, charge and discharge rate capability is paramount. Rate capability in bipolar batteries is significantly improved because current flow is perpendicular to the electrode plane, across the electrode interface(s), bypassing the bottlenecks encountered in a monopolar design.

          Because there are no leads attached to individual electrodes, the components can be symmetric, and thereby are well suited to low-cost manufacture. Cost-savings are also attributable to the use of plastic-bonded electrode technology. These highly conductive electrodes are fabricated from a dry mix process that is far less costly than the traditional multi-step labor-intensive techniques used to manufacture plaque-based or nickel foam based electrodes. The wafer cell design scales well to large systems.

Competitive Comparison and Competitors

          We have developed a bipolar nickel-metal hydride battery that is up to 50% more powerful, 40% smaller, 30% less costly to manufacture, compared to other nickel-metal hydride batteries. Nickel-metal hydride batteries are direct replacements for nickel-cadmium batteries and are environmentally friendly, containing no toxic heavy metals such as lead and cadmium, or organic solvents, such as those used in lithium batteries. Nickel-metal hydride batteries have excellent cold weather performance, providing power in harsh environments where other battery technologies would be unable to function.

          We face competition from a number of companies including established and new manufacturers of batteries, and manufacturers of alternative power sources, most of which are significantly larger and have greater financial and marketing resources.

Procurement of Government Contracts

          We will compete for most of our government development contracts in an open bidding process. Requests for Proposals (RFP5) are generally advertised in FedBizOpps, an electronic government publication. Bids are generally due from 30 to 60 days after the release of the RFP and the ensuing proposal evaluation process generally requires three to six months.

          We have typically bid on three types of government contracts: (I) CPFF, (ii) T&M and (iii) fixed price. CPFF contracts provide for reimbursement for all of our allowable costs and a fixed profit. T&M contracts require us to provide a certain number of labor hours at a rate prescribed by the contract. We are reimbursed for the hours spent on T&M contracts at the prescribed labor rate for each category and for all materials utilized. The fee in a T&M contract is generally slightly higher than for CPFF contracts. Fixed-price contracts require us to deliver the work product described in the work statement at a fixed price, which has the largest risk to us, but generally also has the largest potential profit margin. In the year ended December 31, 2003, approximately, 78%, 0% and 22% of Electro Energy’s government contract revenues were derived from CPFF, T&M and fixed-price contracts, respectively.

          The nature of our government contracts requires ongoing interaction between our key management and technical personnel and the various government agencies. These interactions provide us with useful insight with respect to our customers’ needs, and lead to opportunities through solicited or unsolicited proposals to address these needs. Our management has also historically participated on several energy and power committees such as the SAE Power Systems and NASA review panels. In addition, through our ongoing contracts and our efforts to position itself as a technology resource to government groups, we have improved our ability to expand our business opportunities.

Suppliers

          We have been working with our suppliers in the development of our bipolar nickel-metal hydride battery. The construction of the bipolar nickel-metal hydride battery utilizes a large percentage of nickel-metal and its alloys, hydride materials and plastics. Therefore, we have built a good working relationship with our suppliers for both nickel-hydroxide and metal hydride. We have supply relationships with UMEX, 0MG and Tanaka, a Japanese supplier. INCO of Canada, a supplier of specialty nickel powders and nickel-based chemicals, has also become a supplier to us.

          We also use a low-pressure metal hydride (AB ₅ ) alloy in our development and fabrication processes. There are many alloy suppliers, but we are presently working with Santoku, formally Rhodia, and Treibacher Auermet. We have not to date experienced any shortages in the availability of the alloy, although an effort to optimize the alloy for expanding applications and lower cost is ongoing.

          Other materials utilized in our design, such as metal foils, plastics and adhesives, are commodities and should not become a supply issue. However, due to possible formulation changes, we will continue to monitor these materials, and ask the manufacturers to notify us if formulations are changed so that we can seek other materials if necessary.

Future Products

          We plan on continued use of government support to facilitate product and technology development. By capitalizing on our proven ability to obtain grants, Small Business Innovation Research contracts (SBIR) and application contracts, we intend to continue our development of customized power sources and apply those developed technologies to both the government and commercial market sectors. We have typically responded annually to three to five SBIRs along with three to four major application specific programs.

          Since our founding, we had not been actively trying to apply our technology to commercial products since the technology was not ready to be deployed on a large-scale basis. However, in late 2003, we reached a point in the development of our technology where niche marketing and product definition is only limited by our ability to manufacture. The technology has been thoroughly evaluated and its capabilities and weaknesses have been assessed. We are now able to apply the technology towards specific applications. Our present government contracts have expanded our potential products into aerospace, including NASA and commercial satellite power, electric and hybrid vehicles, aircraft, military pulse power missions, distributed energy and power systems. Future commercial opportunities which we intend to exploit include cordless power tools, utility and residential peak shaving, power factoring and conditioning systems, electric bikes and scooters, EV5 and HEVs.

          In pursuing the commercial development of our technology, we will add a marketing individual who will make commercial customer contacts, gain insight into market opportunities and interface with customers to coordinate the development of special prototypes for various market segments.

Intellectual Property

          We regard our battery technology and production processes as proprietary and rely primarily on a combination of domestic and foreign patent and trade secret laws of general applicability, employee confidentiality and invention assignment agreements, licensing and OEM protection agreements and other intellectual property protection methods to safeguard our technology and processes.

          We hold seven issued United States patents, which expire beginning in 2012 and ending in 2020. We also hold four issued foreign patents and a number of pending foreign patent applications, which cover the technology that is the subject of the United States patents. These include (i) bipolar electrochemical battery of stacked wafer cells; (ii) method of making electrodes for bipolar electrochemical battery; and (iii) method for preparing conductive electrochemically active material. In addition, we have new applications pending and a number of new inventions for which we intend to file additional patent applications both domestically and internationally as we continue to improve our existing technology, develop new technology and make advances to our bipolar nickel-metal hydride battery.

Government Regulation

          Because of our participation in government contracts, we will be subject to audit from time to time for our compliance with government regulations by various agencies, including the Defense Contract Audit Agency, the Defense Investigative Service and the Office of Federal Control Compliance Programs. These and other governmental agencies may also periodically conduct inquiries or investigations that may cover a broad range of our activity. Responding to any such audits, inquiries or investigations may involve significant expense and divert management attention. In addition, an adverse finding in any such audit, inquiry or investigation could involve penalties that may be significant.

          Our facilities will also be subject to a broad range of federal, state and local laws and regulations relating to the environment, including those governing discharges to the air, water and land, the handling and disposal of solid and hazardous substances and wastes and the remediation of contamination associated with releases of hazardous substances at our facilities and at off-site disposal locations. Risk of environmental liability is inherent in our business, and there can be no assurance that material environmental costs will not arise in the future. In particular, we might incur capital and other costs to comply with increasingly stringent environmental laws and enforcement policies.

          We believe that we operate our business in material compliance with applicable government regulations.

          The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors, officers and significant employees are as follows:

          Martin G. Klein is the Chairman of our Board of Directors and our Chief Executive Officer. Mr. Klein is the founder of EEI, and has over 40 years of experience in the advanced battery field. In 1970, prior to forming EEI, Mr. Klein was one of the founding principals of Energy Research Corporation (now Fuel Cell Energy Inc.) and served as its Executive Vice President through 1990 and as a director through 1992. Mr. Klein has developed and worked on several battery chemistries and fuel cell systems. Prior to his association with Energy Research Corporation, he held positions in the battery field at U.S. Army Signal Corps, Yardney Electric Corp., Electrochimica Corp., and Electro Optical Systems. Mr. Klein, considered an expert in the field of electrochemistry, has contributed to many of the fundamental reference books on the subject and has authored numerous technical papers. Mr. Klein provided consulting services and served as an assistant professor at Rutgers University from 1990 to 1992. Mr. Klein holds more than 15 patents in the field of advanced electrochemical systems and has a bachelor’s degree in Chemical Engineering.

          Michael D. Eskra is our President, Chief Operating Officer and a member of our Board of Directors, and has over 20 of years experience in the rechargeable battery business. Prior to joining the company, Mr. Eskra worked at General Motors and Johnson Controls, Inc. During the 13 years at Johnson Controls, Inc. (Sears DieHard and Interstate Batteries), Mr. Eskra held several positions including process engineer, plant engineering manager, plant superintendent, plant manager, program manager, and Manager of the Advanced Battery Business Unit, where he also was part of the company’s strategy board. These positions were directly related to the development and commercialization of new technologies and products. At General Motors he served as assistant platform manager for the Electric Vehicle Program, staff engineer of Advanced Technology Vehicles (all electric and hybrid vehicles), and as a member of the Technical and Business Management Team of the United States Advanced Battery Consortium (USABC) and the Partnership for New Generation Vehicle (PNGV), for the development of hybrid vehicles. Mr. Eskra presented to the U.S. Congress, former Vice President Al Gore, and the National Science Foundation the USABC and PNGV technology program strategy and funding requirements. Mr. Eskra assisted the automotive companies in the strategy and preparation of the testimony to the U.S. Justice Department for the formation of the pre-competitive R&D partnerships to alleviate antitrust concerns. Mr. Eskra is the holder of five patents related to batteries.

          Joseph Engelberger has been a member of the Board of Directors of EEI since 1992. Mr. Engelberger has over 50 years of experience as an entrepreneur/engineer and has participated in the founding and start-up of a number of high technology companies. Mr. Engelberger was a founding principle of Unimation, and the founding principle of Helpmate Robotics.

          Warren D. Bagatelle has been a Managing Director of Loeb Partners Corporation, an investment banking firm, and a director of Full Cell Energy, Inc. (Nasdaq: FCEL), a world leader in the development of high temperature hydrogen fuel cells for clean electric power generation, since 1988. Mr. Bagatelle is also the Chairman of the Board of VirtualScopics, LLC, a privately-held medical imaging services company.

          Farhad Assari has been involved in the international investment management business for the past 20 years, working in Europe, the Middle East and Africa as well as the U.S. From 2001 to 2003, he built the Miami offices of Neuberger Berman. He is currently the Deputy Head of Credit Suisse Private Advisors in Miami.

          Audra J. Mace is our Secretary and Chief Financial Officer. She has served in senior finance and information technology positions with privately held and publicly traded companies for 12 years, including Mormac Marine Enterprises, Inc, Acme United Corp. and BIC Corporation. Recently, as Director of Finance and Information Technology at Acme United Corp (Amex: ACU), a manufacturer and multi-national wholesale distributor of consumer products, she orchestrated an integral part of the company’s turn-around effort, managing debt restructurings, financial reporting and compliance and reshaping internal controls. As Director of IT, she led the transformation of Acme’s MIS cost center into a strategic IT business partner, overhauling the network infrastructure, implementing a new ERP system, exploiting internet solutions and re-engineering business processes and controls. Ms. Mace is a certified management accountant and has served on the national board of directors of the American Society of Women Accountants.

          Albert J. Estrada is our Vice President, Marketing and Sales. He has served as Senior Director of Sales, North America for Alcatel Space, a division of Alcatel (Paris: CGEP.PA), Europe’s leading satellite communications manufacturer. In this position, Mr. Estrada was responsible for sales of commercial satellites to the North American satellite operators and direct broadcast service providers. Previously, Mr. Estrada served as Director, Americas Sales & Marketing, for Space Systems/Loral, a leading global satellite communications manufacturer. There, he was responsible for marketing, strategy and sales of commercial satellites within the competitive Americas region. Mr. Estrada formerly held key business development positions with DIRECTV, Inc. as Director of Distribution and Sales and with DIRECTV Latin America as Director of Marketing.

           Paula Ralston is the Operations Manager for our Danbury, Connecticut office. Ms. Ralston joined EEI in 1992. Ms. Ralston brings 25 years of broad, hands-on experience in research, development and manufacturing to EEI. Prior to joining EEI, Ms. Ralston was with VISX, formerly Taunton Technologies and the developer of Laser Ophthalmic Surgical equipment (LASIK(TM)). Ms. Ralston also served Perkin Elmer's Micralign division as prototype specialist and program supervisor.

           Dr. Jack Brown is the Manager of our Washington D.C. office and is a Technical Advisor to the Company on a retained independent consultant basis. Dr. Brown is in charge of our governmental marketing and is directly involved with meeting customers and assisting in business and technical issues. Dr. Brown assists in formulating government business strategy and technology thrusts. Dr. Brown has 45 years of experience in the battery/fuel cell field and had a 35-year career with Westinghouse, where he served as Manager of Fuel Cell and Battery Research and Development. Dr. Brown spent much of his career at Westinghouse, where he held positions from engineer through senior management. When Dr. Brown left Westinghouse he was Laboratory Director. He has authored over 100 technical papers and 15 patents. Dr. Brown received his Ph.D. degree, majoring in Electrochemistry and Physical Metallurgy, at Case Western Reserve University.

          Rolan C. Farmer is the Operations Manager of the Company’s Mobile Energy Products Group, located in Colorado Springs, Colorado. Mr. Farmer has over 38 years experience in the battery industry. After graduating with a B.S in Mechanical Engineering from the University of Missouri, Mr. Farmer began his career with Eagle Picher as an engineer in the Thermal Battery Department in Joplin, Missouri. Over the next 12 years, Mr. Farmer served as Project Engineer, Program Manager, Manager of Contract Administration, and Marketing Manager. Since 1976, Mr. Farmer has been located in Colorado Springs and served as Operations Manager, Plant Manager, General Manager and Corporate Vice President of Eagle Picher. His responsibilities included profit and loss for all Colorado operations. During his 38 years with Eagle Picher, Mr. Farmer has been involved with many different battery systems, including, thermal, silver-zinc, nickel-hydrogen, nickel-cadmium and nickel-zinc batteries.

           Dr. Alvin Salkind is a member of the Board of Directors of EEI. Dr. Salkind has over 40 years of experience in the electrochemical battery field, and was the former Director of Research at ESB Inc. (now Exide Battery Company). Dr. Salkind also serves as the Scientific Advisor to the Company as a consultant on a number of Electro Energy projects. Dr. Salkind is a Professor and Director of the Battery and Electrochemical Systems Center at Rutgers University and also Professor and Chief of the Bioengineering Section of the Department of Surgery at UMDNJ/Robert Wood Johnson Medical School at Rutgers University. Dr. Salkind received his Ph.D. in Chemical Engineering from the Polytechnic Institute in New York and had additional graduate and management training at Penn State University and the Harvard Business School. Dr. Salkind has had a dual academic-industrial career, which includes 25 years of industrial experience in electrochemical operations, focusing batteries and electro-medical devices.