<PAGE>   1

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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 DECEMBER 31, 1999
                                       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 0-21926

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

               GEORGIA                                    34-1621925
   (State or other jurisdiction of                     (I.R.S. Employer
   incorporation or organization)                     Identification No.)

                4600 HIGHLANDS PARKWAY, SUITE G, SMYRNA, GEORGIA
                    (Address of principal executive offices)

                                      30082
                                   (Zip Code)

       Registrant's telephone number, including area code: (770) 433-2127

       Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR
VALUE

       Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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. Yes [X] 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 the 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. [X]

       The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on the OTC
Bulletin Board on February 15, 2000, was approximately $25,941,656.

       As of February 15, 2000, the registrant had 24,850,263 shares of Common
Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

       Certain portions of the Proxy Statement for the registrant's 2000 Annual
Meeting of Shareholders are incorporated by reference to the extent indicated in
Part III of this Form 10-K.
================================================================================



<PAGE>   2



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       ----
<S>        <C>  <C>                                                                    <C>
PART I
------
Item       1.   Business...........................................................       3
           2.   Properties.........................................................       7
           3.   Legal Proceedings..................................................       7
           4.   Submission of Matters to a Vote of Security Holders................       7
                Executive Officers of the Registrant...............................       8

PART II
-------
Item       5.   Market for Registrant's Common Equity and Related Stockholder
                Matters............................................................       9
           6.   Selected Financial Data............................................       9
           7.   Management's Discussion and Analysis of Financial Condition and
                Results of Operations..............................................      10
          7A.   Quantitative and Qualitative Disclosures about Market Risk.........      12
           8.   Financial Statements and Supplementary Data........................      12
           9.   Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure...............................................      12

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

PART IV
-------
Item      14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K....      14
</TABLE>


                                       2
<PAGE>   3




                                     PART I

ITEM 1.  BUSINESS.

GENERAL

       AER Energy Resources, Inc. (the "Company" or "AER Energy") was
incorporated in 1989 and has been engaged in the development and
commercialization of high energy density zinc-air batteries. Until 1998, the
Company's operations were focused primarily on developing and improving its
technology, setting up the manufacturing process, testing and selling
rechargeable zinc-air batteries, recruiting personnel, and similar activities.
In 1998, the Company changed its strategy to research and product development of
zinc-air technology with its focus in primary (disposable), rather than
rechargeable, batteries and plans to commercialize the technology through
alliances with large established battery and original equipment manufacturers
("OEMs").

       In September 1998, the Company announced its Technology Licenses and
Services ("TLAS") Agreement with Duracell Inc., a subsidiary of The Gillette
Company, making Duracell the first licensee of the Company's primary
(non-rechargeable) zinc-air technology. Under the terms of the TLAS Agreement,
the Company agrees to license certain of its primary zinc-air related battery
technology and license the rights to its then existing patents to Duracell. In
addition, Duracell agreed to fund certain joint product development projects
with the Company during 1999. Duracell will own technology developed under the
projects it funds, and the Company will have rights to utilize the technology.
Duracell also has options to obtain certain other license rights.

       The Company continues to be a development stage company. Revenues from
rechargeable battery sales, which began in August 1994, were minimal. Due to the
change in Company focus, the Company has ceased marketing its rechargeable
battery products. Revenues in the form of license fees and research and
development funds from its new strategy commenced in the fourth quarter of 1998
related to the TLAS Agreement and continued through 1999. New alliances and
license agreements will be sought which would eventually bring the Company out
of the development stage.

       In November 1997, the Company was issued a United States patent for its
"Diffusion Air Manager" technology. The Diffusion Air Manager can extend
zinc-air battery storage life by isolating the cells in zinc-air batteries from
exposure to air during periods when the battery is in storage or not in use.
Because of its simplicity, small size and enhanced storage life capability, the
Company believes that the Diffusion Air Manager may allow the Company to
capitalize on the opportunities in hand-held electronic products like
camcorders, cellular telephones, cordless telephones, digital cameras, and
hand-held computers. It is this technology that will be used to seek to attract
more large established battery and consumer electronic equipment manufacturers
into alliances for joint product development, manufacturing, and licensing.

       The Company was formed in 1989 to develop and commercialize high energy
density zinc-air batteries using the technology licensed from Dreisbach
Electromotive, Inc. ("DEMI"). DEMI was formed in 1982 to conduct research and
development on electric vehicles and battery systems utilizing, among others,
zinc-air technology. DEMI's zinc-air development programs included applications
for electric vehicles and portable products. The Company and DEMI entered into a
license agreement (the "DEMI License") in July 1989 whereby DEMI granted to the
Company exclusive worldwide rights to DEMI's zinc-air battery patents and
technology (including trade secrets) for all applications other than motor
vehicles for so long as the Company wishes to use such licensed rights. DEMI has
retained the rights to zinc-air technology for motor vehicle applications and to
its other technologies for motor vehicle applications and batteries producing
over 500 watts of continuous power output.

TECHNOLOGY OVERVIEW

       The market for batteries is currently being served by a variety of
different battery technologies, some of which were first commercialized
approximately 100 years ago. Each of these battery technologies offers certain
attributes such as energy density, energy storage capacity, cost, configuration
and service life which make it best suited for particular product applications.
Choosing the appropriate battery to serve a given application involves matching
the battery's characteristics to the user's application requirements. The
Company is not aware of any single battery technology that can ideally serve all
applications.

       The battery industry is broadly segmented into two types of batteries:
primary and rechargeable. Primary batteries are used until fully discharged,
then discarded, and are typically priced below rechargeable batteries. In
contrast, rechargeable batteries are discharged and then can be recharged to
almost full capacity to be used again.


                                       3
<PAGE>   4

       The Company believes important battery characteristics include energy
density, energy storage capacity, cell voltage and discharge voltage profile.
Energy density can be calculated based on either the weight or volume of the
battery. For a given amount of energy, higher energy density by weight yields
lighter batteries and higher energy density by volume yields smaller batteries.
Energy storage capacity refers to the limits on a battery's ability to store
energy safely and practically. Batteries with high-energy storage capacity may
more easily be configured to deliver increased operating time. Cell voltage
determines the number of individual cells that must be connected in series to
provide the overall voltage required to operate a specific product. Generally,
batteries requiring fewer cells to achieve a given battery voltage are more
reliable and facilitate original equipment product design. The shape of a
battery's discharge voltage profile defines the range of voltage over which a
product must operate to utilize all of the energy stored in the battery. A
battery with a flat discharge profile delivers a more consistent level of
voltage throughout the battery's discharge cycle and may simplify an OEM product
design and contribute to better operating efficiency.

       The Company believes its primary zinc-air batteries offer a unique
combination of high energy density by weight and volume, and high-energy storage
capacity. In addition, the Company's primary zinc-air battery cell has a
relatively flat discharge voltage profile.

       Zinc-air batteries are known to exhibit superior energy density compared
to other types of batteries due to their ability to absorb oxygen directly from
the atmosphere to fuel the chemical reaction that generates electricity. It is
this superior energy density that provides zinc-air batteries with their long
runtime capability. However, if stored in an open-to-air condition, the storage
life of zinc-air batteries can be greatly effected by the humidity in the air.
As a result, the use of primary zinc-air batteries has been relegated to small
applications in which the battery operates continuously once it is placed in
service. For this reason, primary zinc-air batteries have been predominantly
used in hearing aids. In order to develop a broadly marketable zinc-air battery,
AER Energy needed to develop an air management system to isolate the battery's
zinc-air cells from exposure to air during customer storage. The Company's early
air manager designs for rechargeable zinc-air batteries were bulky and
relatively expensive since they involved the use of sliding doors or
electromechanical devices to seal the battery case and isolate the zinc-air
cells from exposure to air. In November 1997, the Company was issued a patent on
its Diffusion Air Manager, an air management system that consists of openings
configured as tubes to admit air into the battery enclosure and a small fan to
draw air through the tubes. The Diffusion Air Manager can be applied to both
primary and rechargeable zinc-air batteries. In addition, because of its
simplicity, small size, and improvement in zinc-air battery storage life, the
Diffusion Air Manager is expected to expand the number of applications that are
appropriate for primary and rechargeable zinc-air battery technology. The
Company believes that the market for primary zinc-air batteries is larger and
more easily penetrated than the market for rechargeable batteries and, as a
consequence, will continue to focus on primary batteries.

BUSINESS STRATEGY

       The Company's strategy is to capitalize on the need for long runtime
batteries by mobile workers and other consumers dissatisfied with the runtime of
their portable electronic devices powered by other batteries. The following are
key elements of the Company's current strategy:

        1. Generate revenues from license fees, development contracts and
        royalties.

        2. Focus research and development on primary zinc-air battery
        technology.

        3. Pursue market opportunities through relationships with major battery
        and electronic product manufacturers.

        4. Maintain lower operating costs consistent with the current business
        direction.

PRODUCTS

       Due to the capability of the Diffusion Air Manager to be applied to
primary zinc-air batteries, AER Energy changed its focus in 1998 to primary
batteries from rechargeable batteries. The path to market for the primary
battery is normally faster and Company licensees would have the responsibility
for sales and marketing.

       Primary batteries produced by Company licensees would most likely be used
in hand-held electronic devices, such as cellular telephones, cordless
telephones, camcorders, digital cameras, and hand-held computers. Due to the
long runtime and anticipated low cost of the batteries, they could also be used
in some applications that are served today by rechargeable batteries.


                                       4
<PAGE>   5


MARKETING AND LICENSING

       The main objective of AER Energy's marketing and licensing effort is to
find large established battery and consumer electronic equipment manufacturers
who recognize the advantages of the Company's zinc-air technology and who are
able to fulfill the manufacturing and sales roles of bringing the commercial
battery products to market.

RESEARCH AND DEVELOPMENT

       The Company's primary technological assets are the patents that its
research and development efforts have produced over the years, with the more
recent success being the development and patenting of Diffusion Air Manager
technology, which is the foundation of AER Energy's entry into the primary
battery market. The Company plans to continue to work to reduce the size and
cost of zinc-air batteries. While AER Energy is now a research and development
company, it still maintains a small assembly operation to produce prototype
batteries for evaluation testing.

       A majority of the Company's expenses to date have been for research and
development. The Company's research and development expenses for the last three
years averaged $4.17 million per year and have aggregated $39.20 million from
inception to December 31, 1999. A portion of the Company's 1999 research and
development expenses has been funded under the TLAS Agreement.

ENVIRONMENTAL MATTERS

       The Company is subject to various United States federal, state and local
standards that govern the storage, use and disposal of various chemicals used in
and waste materials produced during the manufacture of its zinc-air batteries,
including zinc, carbon, potassium hydroxide, solvents and adhesives. These
standards include the Environmental Protection Agency's regulations governing
the amount of zinc in the manufacturing waste stream and state and local
regulations governing fire protection, air quality standards and employee
safety, training and preparedness.

       During 1996, the Company eliminated the addition of mercury to its
zinc-air cells and batteries without sacrificing size, weight or power. Under
federal regulations, the Company's zinc-air batteries with no added mercury are
not considered hazardous waste and can be disposed of as household garbage.
However, some of the chemicals currently used in its batteries, such as zinc
metal and potassium hydroxide, may subject its batteries to regulation in the
future.

COMPETITION

       The development and marketing of battery products is highly competitive.
The industry consists primarily of major domestic and international companies,
the vast majority of which have financial, technical, marketing, sales,
manufacturing, distribution and other resources and name recognition
substantially greater than those of the Company as well as established positions
in the market and established ties with OEMs. This competitive situation is one
reason AER Energy changed its strategy to one which anticipates licensing its
technology to large established battery and consumer electronic equipment
manufacturers.

       The Company has at least one competitor, Electric Fuel Corporation,
currently developing primary zinc-air batteries for portable electronic
products. Electric Fuel Corporation has started to manufacture and market
primary zinc-air batteries for cellular telephones. Electric Fuel Corporation's
zinc-air batteries do not incorporate air management control. In addition, the
Company believes that its major competitors will also be makers of
nickel-cadmium, nickel-metal hydride and lithium-based batteries, some, if not
all, of whom are candidates to be AER Energy licensees. Such competitors and
potential licensees include Moltech Power Systems, Sanyo Electric Co., Ltd.,
Toshiba Corporation, Matsushita Electric Industrial Co., Ltd., SAFT and Varta
Batterie AG, who, among others, currently manufacture nickel-cadmium or
nickel-metal hydride batteries or both. Sony Corporation, Sanyo Electric Co.,
Ltd. and Matsushita Electric, among others, are marketing lithium-ion batteries
that are designed for use with portable computers, video cameras and cellular
telephones. Sony Corporation, Sanyo Electric Co., and Matsushita Electric
announced the availability of lithium polymer batteries in 1999. Valence
Technology, Inc., Ultralife Batteries, Inc., Electro Fuel Inc., and Thomas &
Betts Corporation are also engaged in the research and development of
lithium-polymer batteries, most of which are not yet commercially available. In
addition, companies such as Sony, Matsushita Electric, Sanyo, SAFT, Rayovac,
Tadiran Electronic Industries, Eveready, Duracell and Toshiba, and possibly
other companies, may have active research and development programs to develop
new high energy density batteries. No assurance can be given that such companies
will not develop batteries similar or superior to the Company's zinc-air
batteries.


                                       5
<PAGE>   6


PATENTS AND LICENSES

       The Company relies on certain technology for which either the Company or
DEMI has sought patent protection, including certain patents licensed to the
Company by DEMI. The Company has sought to protect any technology it believes to
be proprietary by obtaining patents for such technology both in the United
States and in certain countries abroad. Where appropriate, the Company will
prosecute infringements to its patent rights. However, there can be no assurance
that any particular infringement will be prosecuted, or if prosecuted, that it
will be successful. The Company also relies upon its trade secrets, know-how,
continuing technological innovations and its ability to exploit new
opportunities to develop and maintain its competitive position.

       The Company has been granted 35 United States patents, 7 European
patents, 3 Canadian patents, and 9 Japanese patents. In addition, the Company
has filed 26 United States and 31 foreign patent applications as of December 31,
1999. It is the Company's intention to continue filing new patent applications
in the United States, Japan, Europe and Canada, as appropriate, for the
technology, products and product improvements developed through its research and
product development activities.

       The Company believes that its most significant intellectual property
benefits are derived from its air manager patents and pending applications. The
air manager system regulates the flow of air within the battery during use and
isolates the zinc-air cells from air during storage, both critical variables
affecting zinc-air battery performance and storage life. The Company has been
issued 7 United States patents on its air manager system. The Company also has
15 United States patent applications pending on its designs relating to its air
manager system. The Company believes its most significant air manager patents
are No. 5,691,074 and No. 5,919,582, which cover the Company's Diffusion Air
Manager and expire in 2015. The Company's early air manager designs were bulky
and relatively expensive since they involved the use of sliding doors or
electromechanical devices. The Company's current Diffusion Air Manager consists
of openings that are configured as tubes to admit air into the battery enclosure
and a small fan to draw air through the tubes. The Company believes the
Diffusion Air Manager is a simple, low cost solution to the storage life
problems encountered by both rechargeable and primary zinc-air battery designs.

       Through the DEMI License, the Company has exclusive rights to ten DEMI
patents (except for motor vehicle applications) which have been issued in the
United States and two that have been issued in Japan. The DEMI patents relate to
air manager systems, an electrolyte recirculating system, a flexible cell case
which allows for zinc anode volume change during charge and discharge, a
continuous consumable anode, a coated air electrode and a method for attaching
zinc-air batteries to electronic products. The Company is not currently
utilizing any of the technology embodied in the DEMI patents.

       The Company and DEMI entered into the DEMI License in July 1989 whereby
DEMI granted to the Company the exclusive worldwide rights to DEMI's zinc-air
battery patents and technology (including trade secrets) for all applications
other than motor vehicles for so long as the Company wishes to use such licensed
rights. The DEMI License includes the right to sublicense and it covers any new
zinc-air technology developed or acquired by DEMI, or by Mr. Cheiky, DEMI's
former principal scientist, prior to expiration of his employment agreement with
DEMI. For these rights, the Company has agreed to pay DEMI royalties of 4% of
net sales through July 19, 2004, subject to certain minimum amounts and possible
increases or decreases to a maximum of 4% and a minimum of 2%, as specified in
the DEMI License (except for sales by Duracell which are set at 4%). The
applicable percentage of royalties is currently 4% of net sales. After July 19,
2004, the Company may continue to use such licensed technology without payment
of further royalties. In order to maintain exclusive rights to the technology
covered by the DEMI License, the Company paid minimum royalties to DEMI for the
first ten years of the DEMI License (through 1999). Effective in 1993, the DEMI
License was amended so that, under certain circumstances, some or all of the
royalties due under the DEMI License are payable to the shareholders of DEMI
rather than to DEMI. DEMI has also agreed to the terms of a proposed OEM air
manager license agreement to be entered into by the Company and any OEMs
licensing the air manager system, which provides that 4% of the royalties the
Company receives from sublicensing the air manager system will be payable to
DEMI, subject to the reduction as provided in the proposed agreement.

       In order to manufacture air electrodes for its zinc-air batteries, the
Company purchased production equipment and licensed the accompanying air
electrode and process technology pursuant to a 1993 agreement (the "Westinghouse
License") with Westinghouse Electric Corporation ("Westinghouse"). Under the
Westinghouse License, the Company is obligated to pay royalties of 1% of its
revenues from sales of zinc-air battery products up to $300,000, followed by
royalties of 0.5% of such revenues up to an additional $350,000, at which time
no further royalties for product sales will be due. In addition, for ten years,
from 1993 to 2003, the Company will pay Westinghouse the greater of (i) 50% of
any sublicense fees it receives if it sublicenses the technology licensed from
Westinghouse, or (ii) 0.5% of sublicensee product sales. The Company is not
currently using the Westinghouse technology.

       In September 1998, the Company executed the TLAS Agreement with Duracell
Inc. pursuant to which the Company's zinc-air battery technology has been
licensed to Duracell on primarily a non-exclusive basis. Under the agreement,
Duracell funded certain


                                       6
<PAGE>   7

product development projects with the Company during 1999. In return, Duracell
owns the technology developed under the product development projects it funded.
The Company has certain royalty-bearing and royalty-free rights to utilize the
technology funded by Duracell. Duracell also has certain non-exclusive rights to
the Company's technology and certain option rights to obtain an exclusive
license of the Company's technology to manufacture and sell certain battery
cells.

       In addition to potential patent protection, the Company attempts to
protect its trade secrets and other proprietary information through secrecy
agreements with customers, suppliers, employees and consultants, and other
security measures. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful.

EMPLOYEES

       At December 31, 1999, the Company had 35 employees. Of the total number
of personnel, 9 were engaged in research and development, 15 were engaged in
product development, assembly and prototype operations, and 11 were in marketing
and general and administrative functions. In conjunction with its current
strategy implemented in 1998, the Company has maintained a reduced number of
employees during 1999 (it had 39 and 85 employees, respectively, at December 31,
1998 and 1997). The Company's success will depend in large part on its ability
to retain skilled and experienced employees. None of the Company's employees are
covered by a collective bargaining agreement, and the Company considers its
relations with its employees to be good.

FORWARD LOOKING STATEMENTS

       This report contains statements which, to the extent that they are not
recitations of historical fact, may constitute "forward looking statements"
within the meaning of applicable federal securities laws and are based on the
Company's current expectations and assumptions. These expectations and
assumptions are subject to a number of risks and uncertainties which could cause
actual results to differ materially from those anticipated, which include but
are not limited to the following: ability of the Company to achieve development
goals, ability of the Company to commercialize its battery technology, ability
of the Company to license its technology, ability of the Company to implement
its new strategy, development of competing battery technologies, ability of the
Company to protect its proprietary rights to its technology, improvements in
conventional battery technologies, demand for and acceptance of the Company's
products in the marketplace, ability to obtain commitments from battery
manufacturers and OEMs, impact of any future governmental regulations, impact of
pricing or material costs, ability of the Company to raise additional funds and
other factors affecting the Company's business that are beyond the Company's
control. All forward looking statements contained in this report are intended to
be subject to the safe harbor protection provided by applicable federal
securities laws.

ITEM 2.  PROPERTIES.

       The Company currently leases 24,840 square feet of administrative,
engineering, testing and product development office space in Smyrna, Georgia.
The Company believes that its existing facilities and equipment, together with
any equipment to be purchased with existing cash, will be adequate to conduct
its operations. Management does not anticipate needing additional space in the
near future, but believes that if needed, the Company would be able to secure
additional space at reasonable rates.

ITEM 3.  LEGAL PROCEEDINGS.

       The Company is not currently a party to, and no property of the Company
is presently the subject of, any pending legal proceeding.

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

       No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.


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<PAGE>   8








EXECUTIVE OFFICERS OF THE REGISTRANT.

       The executive officers of the Company as of February 11, 2000 were as
follows:

<TABLE>
<CAPTION>
                 NAME             AGE                     POSITION
                 ----             ---                     --------
       <S>                        <C>   <C>
       David W. Dorheim            50   President, Chief Executive Officer and
                                          Director
       R. Dennis Bentz             49   Vice President -- Product and Process
                                          Development
       Frank M. Harris             47   Vice President -- Marketing and Licensing
       J. T. Moore                 60   Vice President -- Chief Financial
                                          Officer, Treasurer and Secretary
       Lawrence A. Tinker, Ph.D    47   Vice President -- Advanced Technology
</TABLE>

       David W. Dorheim joined the Company in 1989 as President, Chief Executive
Officer and a director. From 1985 to 1989, Mr. Dorheim was Vice President,
Battery Assembly Division, Gates Energy Products, Inc., with responsibility for
assembly operations in Juarez, Mexico, Newcastle, England and Hong Kong as well
as a design center in El Paso, Texas. Prior to 1985, Mr. Dorheim held various
marketing and sales positions with the General Electric Battery Division in
Gainesville, Florida, including Regional Sales Manager and Manager of Marketing
Programs. Mr. Dorheim is a director of DEMI.

       R. Dennis Bentz joined the Company in 1990 as Vice President --
Manufacturing. His title was changed in 1998 to Vice President -- Product and
Process Development to reflect his role in the Company's current strategy.
Duracell International, Inc., a battery manufacturer, employed Mr. Bentz from
1978 to 1990. Mr. Bentz's last four years at Duracell were spent as Product
Engineering Manager, with responsibility for product and process design of
alkaline, lithium and primary zinc-air batteries. Prior to 1987, Mr. Bentz
managed the Duracell development and testing facility in Tarrytown, New York and
served as Engineering Manager and Product Engineer.

       Frank M. Harris joined the Company in 1990 as Vice President -- Marketing
and Sales. His title was changed in 1998 to Vice President -- Marketing and
Licensing to reflect his role in the Company's current strategy. From 1987
through 1989, Mr. Harris was employed by International Components Corporation, a
Chicago-based manufacturer of battery chargers, as Vice President of Engineering
and Director of Sales. From 1986 to 1987, Mr. Harris served as Manager of
Marketing Programs for a lighting product line of the General Electric Lighting
Business Group. From 1981 to 1986, Mr. Harris worked with the battery business
of General Electric where he held positions in market research and served as
manager of private label battery marketing.

       J. T. Moore joined the Company in September 1998 as Vice President --
Chief Financial Officer, Treasurer and Secretary. He previously served as Chief
Financial Officer of Dyad Corporation, a computer software developer, from 1997
to 1998, Executive Vice President of Eastern European Capital, an international
investment company, from 1995 to 1997, and International Chief Financial
Officer/Director of Finance for Turner Broadcasting Company, an international
broadcasting company, from 1993 to 1995. His experience also includes Arthur
Andersen, LLP and Marriott Corporation. Mr. Moore is a certified public
accountant.

       Lawrence A. Tinker, Ph.D joined the Company in 1993 as Vice President --
Engineering. His title was changed in 1998 to Vice President -- Advanced
Technology to reflect his role in the Company's current strategy. During the
prior five years, Dr. Tinker was employed by Gates Energy Products, Inc., where
his most recent position was Manager, Technology for aerospace batteries. In
this position, Dr. Tinker managed a group of scientists responsible for
developing nickel-cadmium, nickel-metal hydride and nickel-hydrogen aerospace
battery systems. Prior to 1988, Dr. Tinker was employed by Ballard Research Inc.
for six years, where he managed the research and development effort for
rechargeable lithium battery systems.


                                       8
<PAGE>   9



                                     PART II

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

       From its initial public offering date in July 1993 to March 14, 1999, the
Company's common stock traded on the NASDAQ National Market ("Nasdaq") under the
symbol "AERN". From March 15, 1999 to March 29, 1999, the Company's common stock
traded on the Nasdaq SmallCap Market under the symbol "AERNC". From March 30,
1999 to the present, the Company's common stock is traded under the symbol
"AERN" on the OTC Bulletin Board ("OTCBB").

       The following table sets forth, for the quarters indicated, the high and
low sales prices for the Company's common stock on the Nasdaq, Nasdaq SmallCap
and OTCBB. Nasdaq and Nasdaq SmallCap quotations are based on actual
transactions and not bid prices.

<TABLE>
<CAPTION>
                                                                 PRICE
                                                        ------------------
                  QUARTER ENDED:                           HIGH      LOW
                ------------------                      --------   -------
                <S>                                     <C>        <C>
                March 31, 1998..................          1   7/8    1 1/8
                June 30, 1998...................          1 23/32    11/16
                September 30, 1998..............          1  5/16    17/32
                December 31, 1998...............          1  3/16     9/16

                March 31, 1999..................            15/16     9/32
                June 30, 1999...................            21/32     7/32
                September 30, 1999..............              3/8     3/16
                December 31, 1999...............            51/64    13/64
</TABLE>

       On December 31, 1999, the closing price of the common stock as reported
on the OTCBB was $0.266 per share. On February 11, 2000, there were 298 holders
of record of the Company's common stock. This number excludes shareholders
holding stock under nominee or street name accounts with brokers.

       The Company has not declared a cash dividend on its common stock since
inception. The Company has incurred operating losses since inception and
anticipates that for the foreseeable future, earnings, if any, will be retained
for the operation and growth of its business. Accordingly, the Company does not
anticipate paying any dividends in the foreseeable future.

ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                                                                     PERIOD FROM
                                                                                                                    JULY 17, 1989
                                                                                                                      (DATE OF
                                                                      YEARS ENDED DECEMBER 31,                      INCEPTION) TO
                                                    ------------------------------------------------------------     DECEMBER 31,
      STATEMENTS OF OPERATIONS DATA:                  1999        1998         1997         1996          1995          1999
----------------------------------------------      -------      -------      -------      -------      --------    -------------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>          <C>          <C>          <C>          <C>         <C>
License fees and research and
development revenues ...........................     $ 1,947      $   350      $    --      $    --     $     --       $  2,297
Product sales ..................................          --           --          108           23          159            338
Cost of product sales ..........................          --           --       (2,675)      (1,311)      (2,179)        (6,759)
                                                     -------      -------      -------      -------     --------       --------
                                                       1,947          350       (2,567)      (1,288)      (2,020)        (4,124)
Total costs and expenses .......................       5,592        7,360        7,022        7,330        8,870         64,236
                                                     -------      -------      -------      -------     --------       --------
Operating loss .................................      (3,645)      (7,010)      (9,589)      (8,618)     (10,890)       (68,360)

Net loss .......................................     $(3,487)     $(6,632)     $(8,766)     $(7,559)    $(10,198)      $(64,577)
                                                     -------      -------      -------      -------     --------       --------
Net loss per common share (basic and diluted) ..     $ (0.14)     $ (0.27)     $ (0.36)     $ (0.33)    $  (0.59)      $  (4.00)
                                                     =======      =======      =======      =======     ========       ========
</TABLE>



<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                     -----------------------------------------------------
   BALANCE SHEET DATA:                1999       1998       1997        1996        1995
--------------------------------     ------     ------     -------     -------    --------
                                                       (IN THOUSANDS)
<S>                                  <C>        <C>        <C>         <C>         <C>
Total assets ...................     $2,581     $5,335     $12,057     $20,688     $18,895
Total long-term liabilities ....     $  288     $   --     $     2     $     3     $     7
Total liabilities ..............     $  981     $  285     $   494     $   512     $   703
</TABLE>


                                       9
<PAGE>   10

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

GENERAL

       The Company was incorporated in 1989 and has been engaged in the
development and commercialization of high energy density zinc-air batteries.
Until 1998, the Company's operations were focused primarily on developing and
improving its technology, setting up the manufacturing process, testing and
selling rechargeable zinc-air batteries, recruiting personnel, and similar
activities. In 1998, the Company changed its strategy to research and product
development of zinc-air technology with a focus in primary (disposable), rather
than rechargeable, batteries and plans to commercialize the technology through
alliances with large established battery manufacturers and OEMs. This change
allows the Company to capitalize on the capability of its patented Diffusion Air
Manager technology and opportunities in hand-held electronic products like
camcorders, cellular telephones, cordless telephones, digital cameras, and
hand-held computers. The Diffusion Air Manager is a simplified method of
isolating the cells in zinc-air batteries from exposure to air during periods
when the battery is in storage or not in use.

       In September 1998, the Company announced its Technology Licenses and
Services ("TLAS") Agreement with Duracell Inc., a subsidiary of The Gillette
Company, making Duracell the first licensee of the Company's zinc-air
technology. Under the TLAS Agreement, Duracell agrees to license the rights to
the Company's then existing patents. In addition, Duracell funded certain joint
product development projects with the Company in 1999. Duracell owns technology
developed under the projects it funds, and the Company will have rights to
utilize the technology. Duracell also has options to obtain certain other
license rights.

       As of December 31, 1999, Duracell had paid the Company $3.0 million under
the TLAS Agreement, which will be recognized as revenue when it is earned. For
1999 and 1998, $1.93 million and $0.35 million, respectively, of these payments
were recognized as license fees and research and development revenues in the
Company's Statements of Operations.

       Throughout 2000, the Company plans to seek additional license agreements
for its patented zinc-air technology with other companies, and focus on the
development of prototype primary zinc-air batteries that utilize Diffusion Air
Manager technology.

RESULTS OF OPERATIONS

       Revenues for 1999, 1998, and 1997 were $1.95 million, $0.35 million, and
$0.11 million, respectively. Virtually all of the 1999 and 1998 license fees and
research and development revenues arose from the TLAS Agreement with Duracell.
Revenues during 1997 were attributable to battery product sales.

       The Company's cost of product sales for 1997 was $2.68 million. The high
cost of sales in 1997 was due primarily to manufacturing inefficiencies and high
material costs resulting from low production volumes and start up of production
processes.

       Research and development expenses decreased 21% to $3.74 million in 1999
from $4.75 million in 1998. This decrease resulted primarily from reduced
personnel-related expenses, due to fewer employees in 1999 than in 1998, and a
decrease in patent attorney legal fees. These employee reductions are associated
with the Company's change in focus during 1998. The 18% increase to $4.75
million in 1998 from $4.02 million in 1997 was in line with the increased
emphasis on research and development in 1998.

       Marketing, general and administrative expenses decreased 29% to $1.86
million in 1999 from $2.61 million in 1998. This decrease resulted primarily
from a decrease in the provision for obsolete inventory, lower personnel-related
expenses, lower corporate legal fees, and decreases in travel expenses and trade
show activities. The 13% decrease to $2.61 million in 1998 from $3.00 million in
1997 resulted primarily from lower personnel-related costs, lower advertising
and similar marketing expenses, and decreased travel.

       Interest income decreased in both 1999 and 1998 as a result of lower cash
and cash equivalents balances throughout each year in comparison with the
previous year.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

       The Company financed its operations from inception through July 1993 with
debt and private placements of common stock. In July 1993, the Company received,
net of underwriting discounts and commissions but before deducting expenses,
proceeds of $16.3 million from its initial public offering of 2,500,000 shares
of common stock. In August 1993, the Company issued 311,700 additional shares
pursuant to the exercise of the underwriters' over-allotment option, and
received additional proceeds of $2.0 million, net of underwriting discounts and
commissions. In November 1994, the Company closed a second public offering of
2,500,000 shares of its


                                       10
<PAGE>   11

common stock, generating proceeds of $12.3 million, net of underwriting
discounts and commissions but before deducting expenses. In December 1994,
150,000 additional shares were issued pursuant to the underwriters'
over-allotment option, generating additional proceeds of $0.74 million, net of
underwriting discounts and commissions.

       In November 1995, the Company issued $10.68 million principal amount of
8% convertible subordinated debentures due November 17, 1997. Through November
17, 1997, a holder of a debenture could have elected to convert the debenture
into common stock of the Company at a conversion price equal to the lesser of
$3.60 per share or a percentage ranging from 85% to 100% of the average closing
bid price for the five trading days immediately prior to the conversion. In
connection with the transaction, the Company paid to a placement agent $0.84
million in fees and delivered warrants to purchase 225,590 shares of the
Company's common stock at an exercise price of $4.32 per share. The warrants
expired in 1998. During 1996, $9.78 million in principal plus accrued interest
was converted into 5,394,992 shares of common stock at an average conversion
price of $1.86 per share. During 1997, the remaining $0.90 million in principal
plus accrued interest was converted into 518,683 shares of common stock at an
average conversion price of $1.93 per share.

       In May 1996, the Company issued 1,584,158 shares of its common stock, and
warrants to purchase 835,000 additional shares, in a private placement at an
aggregate purchase price of $10.00 million. The transaction generated proceeds
of $9.37 million, net of expenses. The warrants have an exercise price of
$6.3125 per share and expire in 2001. The value of the warrants is included in
common stock on the balance sheet.

       As of December 31, 1999, the Company had cash and cash equivalents of
$1.76 million. The Company anticipates using these funds as needed to fund
capital equipment purchases, research and product development efforts, marketing
and licensing activities, production of prototype zinc-air battery products,
development of alliances with battery manufacturers and OEMs, working capital
and general corporate purposes as determined by management.

       Net cash and cash equivalents used in operating, investing, and financing
activities decreased 58% to $2.49 million in 1999 from $5.96 million in 1998.
This decrease resulted primarily from the $2.60 million received from Duracell
under the TLAS Agreement during 1999 and the 24% decrease in total costs and
expenses for 1999 compared to 1998.

       Net cash used in operating activities decreased to $5.93 million in 1998
from $8.24 million in 1997. This change in net cash used in operating activities
is primarily due to the decreases in cost of sales and total costs and expenses
related to the 1998 change in Company focus.

       During the years ended December 31, 1998 and 1997, cash used in investing
activities was $0.04 million and $0.28 million, respectively, which primarily
reflected the purchase of manufacturing and battery testing equipment.

       Financing activities during 1998 and 1997 provided no significant cash.

       As discussed in Note 6 to the Financial Statements, the Company has
agreed to pay DEMI royalties pursuant to the DEMI License. During 1999, the last
required payment to DEMI was made for minimum royalty fees. The Company recorded
royalty expense related to the DEMI License for the years ended December 31,
1999, 1998, and 1997 and for the period from inception to December 31, 1999 of
$0.05 million, $0.10 million, $0.10 million, and $1.39 million, respectively.

       As discussed in Note 7 to the Financial Statements, under the
Westinghouse License, for use of the Westinghouse technology, the Company is
required to pay royalties of 1% of revenues up to $300,000 followed by 0.5% of
revenues up to $350,000, after which no further product sales royalties would be
due. The Company is not using the Westinghouse technology in its primary
zinc-air batteries, therefore, no payments are being made to Westinghouse.

       At December 31, 1999, the Company had available net operating loss
carryforwards for income tax purposes of approximately $59.16 million and
research and development credit carryforwards of approximately $1.38 million.
These carryforward items will both begin to expire in 2004 and are both subject
to certain limitations on annual utilization related to changes in ownership of
the Company. These limitations could significantly reduce the amount of the net
operating loss carryforwards and the research and development credit
carryforwards available to the Company in the future.

       The Company currently anticipates that its existing cash and cash
equivalents balance will fund operations and continue technology development at
the current level of activity into the second quarter of 2000. The Company will
need to raise additional funds through additional license agreements, research
and development contracts, debt or equity. There is no assurance that the


                                       11
<PAGE>   12

needed funds will be raised. If sufficient funds are not raised, the Company
will be required to severely curtail or terminate operations.

       The market price of the Company's common stock has fluctuated
significantly since it began to be publicly traded in July 1993 and may continue
to be highly volatile. Factors such as the ability of the Company to achieve
development goals, ability of the Company to commercialize its battery
technology, ability of the Company to license its technology, development of
competing battery technologies, ability of the Company to protect its
proprietary rights to its technology, improvements in conventional battery
technologies, demand for and acceptance of the Company's products in the
marketplace, ability to obtain commitments from battery companies and OEMs,
impact of any future governmental regulations, impact of pricing or material
costs, ability of the Company to raise additional funds, general market
conditions and other factors affecting the Company's business that are beyond
the Company's control may cause significant fluctuations in the market price of
the Company's common stock. The market prices of the stock of many high
technology companies have fluctuated substantially, often unrelated to the
operating or research and development performance of the specific companies.
Such market fluctuations could adversely affect the market price for the
Company's common stock.

       On March 30, 1999, the common stock of the Company ceased trading on the
Nasdaq SmallCap Market, moving to over-the-counter stock trading on the OTC
Bulletin Board.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

       In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
137 establishes accounting and reporting standards for all derivative
instruments. SFAS 137 is effective for fiscal years beginning after June 15,
2000. The Company does not currently have any derivative instruments and,
accordingly, does not expect the adoption of SFAS 133, as amended by SFAS 137,
to have an impact on its financial position or results of operations.

YEAR 2000 DISCLOSURE

       The "Year 2000" issue was the result of some computer programs being
written using two digits instead of four digits to define an applicable year.
Time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000 which could potentially result in miscalculations or system
failure. The Year 2000 issue was believed to affect all companies and
organizations, including the Company. The Company believes its transition to the
Year 2000 has been successful. To date, there have been no internal operational,
testing or accounting software problems and no interruptions of service with
third parties. The total costs incurred by the Company in capital expenditures,
personnel time and other expenses related to the Year 2000 issue was
approximately $0.10 million.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

       The Company has invested a portion of its cash and cash equivalents in
high-rated corporate debt financial instruments that mature in 90 days or less.
The Company has historically held, and plans in the future to hold, all such
instruments until maturity. If the instruments were, for some reason not
anticipated, redeemed earlier than their maturity, there might be a gain or loss
on the transaction. The Company has no transactions that qualify for treatment
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities".

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

       Reference is made to the Index to Financial Statements on Page F-1 of the
Financial Statements of the Company filed as part of this report.

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

    None.


                                       12
<PAGE>   13



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

       The information concerning the nominees for Directors of the Company set
forth under "Election of Directors" in the Company's Proxy Statement for its
2000 Annual Meeting of Shareholders is incorporated herein by reference in
response to the information required by this Item 10.

       Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 set forth under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for its 2000
Annual Meeting of Shareholders is incorporated herein by reference in response
to the information required by this Item 10.

       Information concerning the Executive Officers of the Company is contained
in a separate section captioned "Executive Officers of the Registrant" in Part I
of this report and is incorporated herein by reference in response to the
information required by this Item 10.

ITEM 11. EXECUTIVE COMPENSATION.

       The information set forth under "Executive Compensation" in the Company's
Proxy Statement for its 2000 Annual Meeting of Shareholders is incorporated
herein by reference in response to the information required by this Item 11.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       The information set forth under "Voting Securities" in the Company's
Proxy Statement for its 2000 Annual Meeting of Shareholders is incorporated
herein by reference in response to the information required by this Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       The information set forth under "Certain Transactions" and "Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy Statement
for its 2000 Annual Meeting of Shareholders is incorporated herein by reference
in response to the information required by this Item 13.


                                       13
<PAGE>   14


                                     PART IV

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

(a) Documents:

       (1)    The following financial statements of the Company and Report of
              Independent Auditors are filed as part of this Report.

              Balance Sheets as of December 31, 1999 and 1998

              Statements of Operations for the years ended December 31, 1999,
              1998, and 1997, and for the period from July 17, 1989 (date of
              inception) to December 31, 1999

              Statements of Stockholders' Equity for the years ended December
              31, 1999, 1998, and 1997, and for the period from July 17, 1989
              (date of inception) to December 31, 1999

              Statements of Cash Flows for the years ended December 31, 1999,
              1998, and 1997, and for the period from July 17, 1989 (date of
              inception) to December 31, 1999

              Notes to Financial Statements

              Report of Independent Auditors

       (2)    Financial Statement Schedules:

              Financial statement schedules have been omitted either because
              they are not applicable or because the information that would be
              included in such schedules is included elsewhere in the financial
              statements or the notes thereto.

       (3)    Exhibits:

<TABLE>
<CAPTION>
              EXHIBIT
              NUMBER                       DESCRIPTION OF EXHIBITS
              ------      -----------------------------------------------------
              <S>         <C> <C>
                3.1       --  Articles of Incorporation of the Company, as
                              amended.(1)
                3.2       --  Bylaws of the Company, as amended.(1)
                4.1       --  See Articles II and VII of the Company's Articles
                              of Incorporation located within Exhibit 3.1.
                4.2       --  See Articles 2, 3 and 4 of the Company's Bylaws
                              located within Exhibit 3.2.
               10.1       --  License Agreement dated July 19, 1989 among the
                              Company, Dreisbach Electromotive, Inc. and Mike
                              Cheiky.(2)
               10.2*      --  AER Energy Resources, Inc. 1992 Stock Option Plan,
                              as amended.(2)
               10.3*      --  Form of Non-Qualified Stock Option Agreement.(3)
               10.4*      --  Form of Incentive Stock Option Agreement.(3)
               10.5       --  Agreement dated May 12, 1993 between the Company
                              and Westinghouse Electric Corporation.(2)
               10.6*      --  Form of Indemnity Agreement with Directors.(2)
               10.7       --  Consent to Partial Assignment of Royalties and
                              Amendment No. 2 to License Agreement dated as of
                              October 15, 1993 among the Company, Dreisbach
                              Electromotive, Inc. and Mike Cheiky.(4)
               10.8       --  Amended and Restated DEMI/AER Air Manager
                              Agreement dated October 15, 1993 among the
                              Company, Dreisbach Electromotive, Inc. and Mike
                              Cheiky.(4)
               10.9*      --  AER Energy Resources, Inc. 1993 Non-Employee
                              Directors' Restricted Stock Award Plan.(4)
               10.10*     --  Form of Director's Restricted Stock Award
                              Agreement.(5)
               10.11*     --  Stock Option Agreement dated November 2, 1989 by
                              and between David W. Dorheim and Aerobic Power
                              Systems, Inc. (now AER Energy Resources, Inc.).(6)
               10.12*     --  Stock Option Agreement dated February 8, 1991 by
                              and between R. Dennis Bentz and AER Energy
                              Resources, Inc.(6)
               10.13*     --  Stock Option Agreement dated July 1, 1990 by and
                              between Frank M. Harris and Aerobic Power Systems,
                              Inc. (now AER Energy Resources, Inc.).(6)
               10.14      --  Lease Agreement dated November 15, 1993 between
                              AER Energy Resources, Inc. and Highlands Park
                              Associates.(7)
               10.15      --  Lease Agreement dated March 25, 1994 between AER
                              Energy Resources, Inc. and Highlands Park
                              Associates.(7)
               10.16*     --  Stock Option Agreement dated December 20, 1994
                              between H. Douglas Johns and AER Energy Resources,
                              Inc.(8)
</TABLE>


                                       14
<PAGE>   15


<TABLE>
              <S>        <C>  <C>

               10.17*    --   Consulting Agreement dated December 20, 1994
                              between H. Douglas Johns and AER Energy Resources,
                              Inc.(9)
               10.18     --   Form of Convertible Debenture Subscription
                              Agreement.(10)
               10.19     --   Form of 8% Convertible Debenture due November 17,
                              1997.(10)
               10.20     --   Registration Rights Agreement.(10)
               10.21     --   Warrant to Purchase Common Stock.(10)
               10.22     --   Amendment No. 3 to License Agreement and
                              Termination of Technology Assignment Agreement
                              dated December 26, 1995.(11)
               10.23     --   Securities Purchase Agreement, dated as of May 20,
                              1996, by and between FW AER Partners, L.P. and AER
                              Energy Resources, Inc.(12)
               10.24     --   Warrant to Purchase Common Stock.(12)
               10.25*    --   Agreement between H. Douglas Johns and AER Energy
                              Resources, Inc. dated November 7, 1996, amending
                              Mr. Johns' Consulting Agreement and Stock Option
                              Agreement.(13)
               10.26     --   Technology Licenses and Services Agreement, dated
                              as of September 24, 1998, by and between Duracell
                              Inc. and AER Energy Resources, Inc.(14)
               21        --   Subsidiaries of the Company.(2)
               23        --   Consent of Ernst & Young LLP, Independent
                              Auditors.
               27        --   Financial Data Schedule (for SEC use only).
</TABLE>

----------

    *   Indicates management contract or compensatory plan or arrangement.
    (1) Filed on June 17, 1993 as an Exhibit to Amendment No. 2 to the
        Registrant's  Registration  Statement on Form S-1
        (File No. 33-62668) and incorporated herein by reference.
    (2) Filed on May 14, 1993 as an Exhibit to the Registrant's Registration
        Statement on Form S-1 (File No. 33-62668) and incorporated herein by
        reference.
    (3) Filed on October 5, 1993 as an Exhibit to the Registrant's Registration
        Statement on Form S-8 (File No. 33-69982) and incorporated herein by
        reference.
    (4) Filed on October 29, 1993 as an Exhibit to the Registrant's Quarterly
        Report on Form 10-Q (File No. 0-21926) for the quarter ended September
        30, 1993 and incorporated herein by reference.
    (5) Filed on September 24, 1993 as an Exhibit to the Registrant's
        Registration Statement on Form S-8 (File No. 33-69462) and incorporated
        herein by reference.
    (6) Filed on March 25, 1994 as an Exhibit to the Registrant's Annual Report
        on Form 10-K (File No. 0-21926) for the year ended December 31, 1993 and
        incorporated herein by reference.
    (7) Filed on September 23, 1994 as an Exhibit to the Registrant's
        Registration Statement on Form S-1 (File No. 33-84300) and incorporated
        herein by reference.
    (8) Filed on February 2, 1995 as an Exhibit to the Registrant's Registration
        Statement on Form S-8 (File No. 33-89068) and incorporated herein by
        reference.
    (9) Filed on March 23, 1995 as an Exhibit to the Registrant's Annual Report
        on Form 10-K (File No. 0-21926) for the year ended December 31, 1994 and
        incorporated herein by reference.
   (10) Filed on December 13, 1995 as an Exhibit to the Registrant's  Form 8-K
        (File No. 0-21926) and incorporated herein by reference.
   (11) Filed on March 28, 1996 as an Exhibit to the Registrant's Annual Report
        on Form 10-K (File No. 0-21926) for the year ended December 31, 1995 and
        incorporated herein by reference.
   (12) Filed on May 20, 1996 as an Exhibit to the Registrant's Form 8-K (File
        No. 0-21926) and incorporated herein by reference.
   (13) Filed on March 27, 1997 as an Exhibit to the Registrant's Annual Report
        on Form 10-K (File No. 0-21926) for the year ended December 31, 1996 and
        incorporated herein by reference.
   (14) Filed on September 24, 1998 as an Exhibit to the Registrant's  Form 8-K
        (File No. 0-21926) and incorporated herein by reference.


(b) Reports on Form 8-K filed in the fourth quarter of 1999:

    The registrant did not file any reports on Form 8-K during the quarter ended
December 31, 1999.


                                       15
<PAGE>   16


                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on February 15, 2000.

                                      AER ENERGY RESOURCES, INC.

                                      By:   /s/ DAVID W. DORHEIM
                                      -----------------------------------------
                                      David W. Dorheim,
                                      President and Chief Executive Officer

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


<TABLE>
<CAPTION>
         SIGNATURE                            TITLE                        DATE
---------------------------     --------------------------------     -----------------
<S>                             <C>                                  <C>

     /s/ JON A. LINDSETH          Chairman                           February 15, 2000
---------------------------
       Jon A. Lindseth

    /s/ DAVID W. DORHEIM          Director, President and Chief      February 15, 2000
---------------------------        Executive Officer
     David W. Dorheim

       /s/ J. T. MOORE            Vice President -- Chief Financial  February 15, 2000
---------------------------        Officer, Treasurer and
         J. T. Moore               Secretary (Principal Accounting
                                   Officer and Principal Financial
                                   Officer)

     /s/ DAVID G. BROWN           Director                           February 15, 2000
---------------------------
       David G. Brown

     /s/ JAMES W. DIXON           Director                           February 15, 2000
---------------------------
       James W. Dixon

   /s/ WILLIAM L. JACKSON         Director                           February 15, 2000
---------------------------
     William L. Jackson

     /s/ JOHN L. WILKES           Director                           February 15, 2000
---------------------------
       John L. Wilkes
</TABLE>


                                       16

<PAGE>   17

                           AER ENERGY RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                            PAGE
                                                            ----
               <S>                                          <C>
               Report of Independent Auditors..........     F-2

               Financial Statements

                  Balance Sheets.......................     F-3

                  Statements of Operations.............     F-4

                  Statements of Stockholders' Equity...     F-5

                  Statements of Cash Flows.............     F-6

                  Notes to Financial Statements........     F-7
</TABLE>


                                      F-1
<PAGE>   18



                         REPORT OF INDEPENDENT AUDITORS

The Stockholders and Board of Directors
AER Energy Resources, Inc.

       We have audited the accompanying balance sheets of AER Energy Resources,
Inc. (a development stage company) as of December 31, 1999 and 1998, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999 and for the period from
July 17, 1989 (date of inception) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

       We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide 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 AER Energy
Resources, Inc. (a development stage company) as of December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999 and for the period from July 17, 1989
(date of inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

       The accompanying financial statements have been prepared assuming AER
Energy Resources, Inc. will continue as a going concern. As more fully described
in Note 1, the Company has incurred recurring operating losses and negative cash
flows from operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. These financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.

                                            /s/ ERNST & YOUNG LLP
                                            ----------------------------------
                                            Ernst & Young LLP


Atlanta, Georgia
January 14, 2000

                                      F-2
<PAGE>   19

                           AER ENERGY RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                      ------------------------------
                                                                                           1999              1998
                                                                                      ------------      ------------

<S>                                                                                   <C>               <C>
                                      ASSETS
Current assets:
   Cash and cash equivalents                                                          $  1,761,268      $  4,249,868
   Trade accounts receivable                                                                31,070                --
   Inventories                                                                              82,198            52,729
   Prepaid expenses and other current assets                                                83,355            51,414
                                                                                      ------------      ------------
Total current assets                                                                     1,957,891         4,354,011
Equipment and improvements:
   Machinery and equipment                                                               3,104,958         3,228,772
   Office equipment                                                                        300,810           479,061
   Leasehold improvements                                                                  218,790           262,856
                                                                                      ------------      ------------
                                                                                         3,624,558         3,970,689
   Less accumulated depreciation                                                        (3,012,647)       (3,006,211)
                                                                                      ------------      ------------
                                                                                           611,911           964,478
Other assets                                                                                11,191            16,841
                                                                                      ------------      ------------
TOTAL ASSETS                                                                          $  2,580,993      $  5,335,330
                                                                                      ============      ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                                   $     70,583      $     79,089
   Accrued royalties - related party                                                            --            30,000
   Deferred revenue                                                                        431,250            50,000
   Other accrued expenses                                                                  191,873           125,901
                                                                                      ------------      ------------
Total current liabilities                                                                  693,706           284,990
Long-term liabilities - deferred revenue                                                   287,500                --
Stockholders' equity:
   Preferred stock, no par value:
      Authorized - 10,000,000 shares; no shares issued and outstanding                          --                --
   Common stock, no par value:
      Authorized - 100,000,000 shares; issued and outstanding - 24,850,263 shares
       at December 31, 1999 and 24,862,263 shares at December 31, 1998                  66,580,384        66,593,140
   Unearned stock compensation                                                             (66,808)         (115,840)
   Deficit accumulated during the development stage                                    (64,913,789)      (61,426,960)
                                                                                      ------------      ------------
Total stockholders' equity                                                               1,599,787         5,050,340
                                                                                      ------------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $  2,580,993      $  5,335,330
                                                                                      ============      ============
</TABLE>


See notes to financial statements.


                                      F-3
<PAGE>   20


                           AER ENERGY RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                                  PERIOD FROM
                                                                                                                  JULY 17,1989
                                                                                                                    (DATE OF
                                                                        YEARS ENDED DECEMBER 31,                  INCEPTION) TO
                                                            ------------------------------------------------       DECEMBER 31,
                                                                1999              1998              1997              1999
                                                            ------------      ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>               <C>
License fees and research and development revenues          $  1,946,970      $    350,000      $         --      $  2,296,970

Product sales                                                         --                --           108,399           338,174
   Cost of product sales                                              --                --        (2,675,098)       (6,758,985)
                                                            ------------      ------------      ------------      ------------
   Gross margin on product sales                                      --                --        (2,566,699)       (6,420,811)
                                                            ------------      ------------      ------------      ------------
                                                               1,946,970           350,000        (2,566,699)       (4,123,841)
                                                            ------------      ------------      ------------      ------------
Costs and expenses:
   Research and development
   - related party                                                    --                --                --         1,145,913
   - other                                                     3,736,317         4,746,681         4,023,876        38,053,741
   Marketing, general and administrative
   - related party                                                50,000            99,931            95,663         1,388,695
   - other                                                     1,806,038         2,513,215         2,902,998        23,647,290
                                                            ------------      ------------      ------------      ------------
Total costs and expenses                                       5,592,355         7,359,827         7,022,537        64,235,639
                                                            ------------      ------------      ------------      ------------
Operating loss                                                (3,645,385)       (7,009,827)       (9,589,236)      (68,359,480)
Interest income                                                  158,556           378,318           823,422         4,046,694
Interest expense - related parties                                    --                --                --          (264,445)
                                                            ------------      ------------      ------------      ------------
Net loss                                                    $ (3,486,829)     $ (6,631,509)     $ (8,765,814)     $(64,577,231)
                                                            ============      ============      ============      ============

Net loss per share (basic and diluted)                      $      (0.14)     $      (0.27)     $      (0.36)     $      (4.00)
                                                            ============      ============      ============      ============
Weighted average shares outstanding (basic and diluted)       24,853,452        24,839,403        24,616,762        16,154,638
</TABLE>


See notes to financial statements.


                                      F-4
<PAGE>   21



                           AER ENERGY RESOURCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                       STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                     Common Stock
                                                            Convertible     ------------------------------
                                                            Debentures         Shares           Amount
                                                          ------------------------------------------------
<S>                                                       <C>                <C>              <C>
Issuance of common stock:
    For cash ranging from $0.02 to $6.31 per share,
       inception to May 1996                               $       --        10,005,908       $ 20,622,292
    For cash in public offerings for $5.25 and $7.00
       per share, July 1993 to December 1994                       --         5,461,700         30,257,263
    For promissory notes ranging from $0.89 to $1.89
       per share, February 1990 to January 1993                    --           135,450            169,675
    For exchange of debt ranging from $1.22 to $1.89
       per share, May 1991 to July 1992                            --         3,079,305          4,438,934
 Exercise of stock options ranging from $0.89
    to $5.00 per share, May 1994 to June 1996                      --           108,600            133,546
 Payments received on promissory notes                             --                --                 --
 Shares granted under Restricted Stock Award
    Plan (Note 3)                                                  --           129,500          1,179,672
 Shares canceled under Restricted Stock Award
    Plan (Note 3)                                                  --           (18,000)          (144,000)
 Compensation under Restricted Stock Award
    Plan                                                           --                --           (195,750)
 Cancellation of promissory note                                   --           (21,375)           (40,375)
 Sale of convertible debentures for cash,
    November 1995                                           9,834,500                --                 --
 Interest payable on convertible debentures                   315,121                --                 --
 Conversion of debentures into common stock                (9,240,423)        5,394,992          9,240,423
 Grant of compensatory stock options                               --                --             14,063
 Net loss and comprehensive loss, inception to
    December 31, 1996                                              --                --                 --
                                                           -----------------------------------------------
Balance at December 31, 1996                                  909,198        24,276,080         65,675,743
 Conversion of debentures into common stock                  (930,635)          518,683            930,635
 Interest payable on convertible debentures                    21,437                --                 --
 Shares granted under Restricted Stock Award
    Plan                                                           --            14,250             29,783
 Shares canceled under Restricted Stock Award
    Plan                                                           --           (18,000)          (116,813)
 Compensation under Restricted Stock Award
    Plan                                                           --                --                 --
 Forgiveness of promissory notes                                   --                --                 --
 Net loss and comprehensive loss                                   --                --                 --
                                                           -----------------------------------------------
Balance at December 31, 1997                                       --        24,791,013         66,519,348
 Exercise of stock options at $0.89 per share,
    January 1998                                                   --            11,250             10,012
 Shares granted under Restricted Stock Award
    Plan                                                           --            60,000             63,780
 Compensation under Restricted Stock Award
    Plan                                                           --                --                 --
 Payments received on promissory notes                             --                --                 --
 Forgiveness of promissory notes                                   --                --                 --
 Net loss and comprehensive loss                                   --                --                 --
                                                           -----------------------------------------------
Balance at December 31, 1998                                       --        24,862,263         66,593,140
 Shares canceled under Restricted Stock Award
    Plan                                                           --           (12,000)           (12,756)
 Compensation under Restricted Stock Award
    Plan                                                           --                --                 --
 Net loss and comprehensive loss                                   --                --                 --
                                                           -----------------------------------------------
Balance at December 31, 1999                               $       --        24,850,263       $ 66,580,384
                                                           ===============================================

<CAPTION>

                                                                                             Deficit
                                                           Notes                           Accumulated
                                                         Receivable       Unearned         During the          Total
                                                        from Common         Stock          Development     Stockholders'
                                                        Stock Sales     Compensation          Stage            Equity
                                                        -------------------------------------------------------------------
<S>                                                     <C>               <C>              <C>             <C>
Issuance of common stock:
    For cash ranging from $0.02 to $6.31 per share,
       inception to May 1996                              $      --       $        --       $         --       $ 20,622,292
    For cash in public offerings for $5.25 and $7.00
       per share, July 1993 to December 1994                     --                --                 --         30,257,263
    For promissory notes ranging from $0.89 to $1.89
       per share, February 1990 to January 1993            (169,675)               --                 --                 --
    For exchange of debt ranging from $1.22 to $1.89
       per share, May 1991 to July 1992                          --                --                 --          4,438,934
 Exercise of stock options ranging from $0.89
    to $5.00 per share, May 1994 to June 1996                    --                --                 --            133,546
 Payments received on promissory notes                       57,425                --                 --             57,425
 Shares granted under Restricted Stock Award
    Plan (Note 3)                                                --        (1,179,672)                --                 --
 Shares canceled under Restricted Stock Award
    Plan (Note 3)                                                --           144,000                 --                 --
 Compensation under Restricted Stock Award
    Plan                                                         --           707,217                 --            511,467
 Cancellation of promissory note                             40,375                --                 --                 --
 Sale of convertible debentures for cash,
    November 1995                                                --                --                 --          9,834,500
 Interest payable on convertible debentures                      --                --           (315,121)                --
 Conversion of debentures into common stock                      --                --                 --                 --
 Grant of compensatory stock options                             --                --                 --             14,063
 Net loss and comprehensive loss, inception to
    December 31, 1996                                            --                --        (45,693,079)       (45,693,079)
                                                        -------------------------------------------------------------------
Balance at December 31, 1996                                (71,875)         (328,455)       (46,008,200)        20,176,411
 Conversion of debentures into common stock                      --                --                 --                 --
 Interest payable on convertible debentures                      --                --            (21,437)                --
 Shares granted under Restricted Stock Award
    Plan                                                         --           (29,783)                --                 --
 Shares canceled under Restricted Stock Award
    Plan                                                         --           116,813                 --                 --
 Compensation under Restricted Stock Award
    Plan                                                         --           116,543                 --            116,543
 Forgiveness of promissory notes                             35,937                --                 --             35,937
 Net loss and comprehensive loss                                 --                --         (8,765,814)        (8,765,814)
                                                        -------------------------------------------------------------------
Balance at December 31, 1997                                (35,938)         (124,882)       (54,795,451)        11,563,077
 Exercise of stock options at $0.89 per share,
    January 1998                                                 --                --                 --             10,012
 Shares granted under Restricted Stock Award
    Plan                                                         --           (63,780)                --                 --
 Compensation under Restricted Stock Award
    Plan                                                         --            72,822                 --             72,822
 Payments received on promissory notes                        2,000                --                 --              2,000
 Forgiveness of promissory notes                             33,938                --                 --             33,938
 Net loss and comprehensive loss                                 --                --         (6,631,509)        (6,631,509)
                                                        -------------------------------------------------------------------
Balance at December 31, 1998                                     --          (115,840)       (61,426,960)         5,050,340
 Shares canceled under Restricted Stock Award
    Plan                                                         --            12,756                 --                 --
 Compensation under Restricted Stock Award
    Plan                                                         --            36,276                 --             36,276
 Net loss and comprehensive loss                                 --                --         (3,486,829)        (3,486,829)
                                                        -------------------------------------------------------------------
Balance at December 31, 1999                              $      --       $   (66,808)      $(64,913,789)      $  1,599,787
                                                        ===================================================================
</TABLE>

See notes to financial statements.


                                      F-5
<PAGE>   22



                           AER ENERGY RESOURCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                                       PERIOD FROM
                                                                                                                       JULY 17,1989
                                                                                                                         (DATE OF
                                                                             YEARS ENDED DECEMBER 31,                  INCEPTION) TO
                                                                  -----------------------------------------------       DECEMBER 31,
                                                                      1999              1998             1997              1999
                                                                  -----------      ------------      ------------      ------------
<S>                                                               <C>              <C>               <C>               <C>
OPERATING ACTIVITIES:
Net loss                                                          $(3,486,829)     $ (6,631,509)     $ (8,765,814)     $(64,577,231)
Adjustments to reconcile net loss to net cash used
     in operating activities:
   Depreciation and amortization                                      428,364           467,191           519,212         3,844,166
   Amortization of unearned stock compensation                         36,276            72,822           116,543           737,108
   Grant of compensatory stock options                                     --                --                --            14,063
   Forgiveness of promissory notes                                         --            33,938            35,937            69,875
   Loss on disposal of equipment                                        1,019                --            28,679            68,289
   Deferred rental expense                                                 --            (2,112)             (845)               --
   Accretion of discount on short-term investments
      and marketable securities                                       (75,852)               --                --          (263,259)
   Changes in operating assets and liabilities:
      Trade accounts receivable                                       (31,070)              116             3,359           (31,070)
      Inventories                                                     (29,469)          238,549          (190,879)          (82,198)
      Prepaid expenses and other assets                               (26,291)           98,060            28,663           (78,015)
      Accounts payable                                                 (8,506)         (140,141)           50,319            70,583
      Accrued royalties - related party                               (30,000)               --                --                --
      Deferred revenue                                                668,750            50,000                --           718,750
      Other accrued expenses                                           65,972          (117,145)          (66,809)          350,807
                                                                  -----------      ------------      ------------      ------------
Net cash used in operating activities                              (2,487,636)       (5,930,231)       (8,241,635)      (59,158,132)

INVESTING ACTIVITIES:
Purchases of equipment and improvements                               (76,816)          (38,783)         (279,922)       (4,150,693)
Purchases of short-term investments and marketable securities      (3,224,148)               --                --       (14,736,444)
Purchase of license agreement                                              --                --                --          (250,000)
Proceeds from sales/maturities of short-term investments and
     marketable securities                                          3,300,000                --                --        15,000,000
Changes in other assets                                                    --                --                --          (140,501)
                                                                  -----------      ------------      ------------      ------------
Net cash used in investing activities                                    (964)          (38,783)         (279,922)       (4,277,638)

FINANCING ACTIVITIES:
Proceeds from revolving credit note to related parties                     --                --                --         5,430,000
Issuance of convertible debentures, net of issuance costs                  --                --                --         9,834,500
Payments on notes payable to related parties                               --                --                --        (1,150,000)
Payments received on promissory notes                                      --             2,000                --            59,425
Issuance of common stock upon exercise of stock options                    --            10,012                --           143,558
Issuance of common stock, net of issuance costs                            --                --                --        50,879,555
                                                                  -----------      ------------      ------------      ------------
Net cash provided by financing activities                                  --            12,012                --        65,197,038
                                                                  -----------      ------------      ------------      ------------
(Decrease) increase in cash and cash equivalents                   (2,488,600)       (5,957,002)       (8,521,557)        1,761,268
Cash and cash equivalents at beginning of period                    4,249,868        10,206,870        18,728,427                --
                                                                  -----------      ------------      ------------      ------------
Cash and cash equivalents at end of period                        $ 1,761,268      $  4,249,868      $ 10,206,870      $  1,761,268
                                                                  ===========      ============      ============      ============

Supplemental disclosure of non-cash financing activities:
   Upon the resignation of one member of the Company's Board
    of Directors, 12,000 non-vested shares of common stock,
    issued under the 1993 Non-Employee Directors' Restricted
    Stock Award Plan, were forfeited and returned to authorized
    and unissued shares.                                          $    12,756      $         --      $         --      $     12,756
                                                                  ===========      ============      ============      ============
</TABLE>

See notes to financial statements.


                                      F-6
<PAGE>   23

                           AER ENERGY RESOURCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

1. SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

       AER Energy Resources, Inc. (the "Company") was incorporated on July 17,
1989 and has been engaged in the development and commercialization of high
energy density zinc-air batteries. Until 1998, the Company's operations were
focused primarily on developing and improving its technology, setting up the
manufacturing process, testing and selling rechargeable zinc-air batteries,
recruiting personnel, and similar activities. In 1998, the Company changed its
strategy to research and product development of zinc-air technology with a focus
in primary (disposable), rather than rechargeable, batteries and to
commercialize the technology through alliances with large established battery
manufacturers and OEMs. This change allows the Company to capitalize on the
capability of its patented Diffusion Air Manager technology and opportunities in
hand-held electronic products like camcorders, cellular telephones, cordless
telephones, digital cameras, and hand-held computers.

       Due to the change in Company focus, the Company has ceased marketing its
rechargeable battery products. The Company began selling its first rechargeable
battery products in August 1994, but sales from these products were minimal. The
Company's current strategy is to generate revenues from license fees,
development contracts and royalties related to its primary zinc-air battery
technology. As discussed in Note 7, an agreement with Duracell Inc. supporting
this current focus was executed in 1998.

GOING CONCERN

       Since inception, the Company's operations have been principally engaged
in the development of its technology and products. As a result, the Company has
incurred significant operating losses and negative cash flows from operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
may result from the outcome of this uncertainty.

       The Company currently anticipates that its existing cash and cash
equivalents balance will fund operations and continue technology development at
the current level of activity into the second quarter of 2000. The Company will
need to raise additional funds through additional license agreements, research
and development contracts, debt or equity. There is no assurance that the needed
funds will be raised. If sufficient funds are not raised, the Company will be
required to severely curtail or terminate operations.

USE OF ESTIMATES

       The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

       In accordance with FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Based on the Company's estimate of future
undiscounted cash flows, the Company expects to recover the carrying amounts of
its remaining fixed assets. The Company's estimates of future undiscounted cash
flows have taken into consideration its change in focus during 1998. Such
estimates contemplate the Company entering into license agreements and research
and development agreements similar to the 1998 agreement with Duracell
throughout the remaining lives of the Company's fixed assets. The Company will
likely need working capital infusions from yet unidentified sources to bridge
shortfalls in cash flow before such license or research and development
agreements are executed and generating cash. If the Company is unable to enter
into such agreements, raise needed working capital, or perform as anticipated, a
writedown of long-lived assets to fair value may be


                                      F-7
<PAGE>   24

required. During the years ended December 31, 1999, 1998 and 1997, the Company
recorded write-offs of obsolete equipment with a net book value of $1,019, $0,
and $28,679, respectively, as part of marketing, general and administrative
expenses.

CONCENTRATIONS OF CREDIT RISK

       Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
As of December 31, 1999 and 1998, the Company maintained approximately 87% and
76%, respectively, of its cash and cash equivalents, consisting of short
duration, high-rated corporate debt securities, under the management of a high
credit quality, third party financial institution custodian.

CASH AND CASH EQUIVALENTS

       Cash and cash equivalents consist of cash, bank deposits and highly
liquid investments with maturities of three months or less when purchased and
are stated at cost, which approximates market.

INVENTORIES

       Inventories are valued at lower of cost or market, using the first-in,
first-out (FIFO) method. The inventory balances at December 31, 1999 and 1998 of
$82,198 and $52,729, respectively, consist entirely of raw materials.

EQUIPMENT AND IMPROVEMENTS

       Equipment and improvements are stated at cost. Depreciation of equipment
and improvements is computed using the straight-line method over their estimated
useful lives, ranging from three to seven years. Certain equipment is used to
advance the development of production processes, refine product designs for
production and produce batteries for laboratory and field testing. Amortization
of leasehold improvements is recorded over the shorter of the lives of the
related assets or the lease terms. During the year ended December 31, 1999, the
Company recorded a write-off of fully depreciated obsolete equipment of
$418,966.

REVENUE RECOGNITION

       License fee revenues are recognized over the period earned and research
and development revenues are recognized over the period the services are
performed. Revenues from product sales are recognized when the products are
shipped.

INCOME TAXES

       The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are likely to be in effect
when the differences are expected to reverse. At December 31, 1999 and 1998, the
Company recorded a 100% valuation allowance against any deferred tax assets.

RESEARCH AND DEVELOPMENT

       Research and development costs are charged to expense as incurred.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

       In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
137 establishes accounting and reporting standards for all derivative
instruments. SFAS 137 is effective for fiscal years beginning after June 15,
2000. The Company does not currently have any derivative instruments and,
accordingly, does not expect the adoption of SFAS 133, as amended by SFAS 137,
to have an impact on its financial position or results of operations.

RECLASSIFICATIONS

       Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.


                                      F-8
<PAGE>   25

2. LEASES

       The Company leases office and manufacturing space under operating leases
that expire in 2001. Rent expense under the operating leases for the years ended
December 31, 1999, 1998, and 1997 and for the period from inception to December
31, 1999 was $188,959, $221,899, $213,431, and $1,454,043, respectively. Future
minimum lease payments by year and in the aggregate under the operating leases
consist of the following at December 31, 1999:

<TABLE>
<CAPTION>
                      Year ended December 31,
                      <S>                           <C>
                      2000..................        $ 159,931
                      2001..................          124,035
                                                    ---------
                                                    $ 283,966
                                                    =========
</TABLE>

3. 1993 NON-EMPLOYEE DIRECTORS' RESTRICTED STOCK AWARD PLAN

       The Company's 1993 Non-Employee Directors' Restricted Stock Award Plan
provides for the grant of up to an aggregate of 240,000 shares of the Company's
common stock to directors of the Company who are not officers or employees of
the Company. In general, the plan provides for awards of 15,000 shares of common
stock to each non-employee director once every five years, with 3,000 shares
vesting after each year of his or her service as a director. At December 31,
1999, 155,750 shares of the Company's common stock were outstanding pursuant to
this plan.

       The total number of restricted shares granted during the years ended
December 31, 1999, 1998 and 1997 were zero, 60,000, and 14,250, respectively.
The weighted-average fair values of restricted shares granted for the years
ended December 31, 1998 and 1997 were $1.06 and $2.09, respectively.

       Total compensation expense incurred under this plan for the years ended
December 31, 1999, 1998 and 1997 were $0.04 million, $0.07 million, and $0.12
million, respectively, and are included in marketing, general and administrative
costs and expenses.

4. STOCKHOLDERS' EQUITY

       On May 20, 1996, the Company issued 1,584,158 shares of its common stock,
and warrants to purchase an additional 835,000 shares, in a private placement at
an aggregate purchase price of $10,000,000, as discussed in Note 9.

       On November 29, 1995, the Company reserved 225,590 shares of common stock
for issuance in connection with a warrant delivered to the placement agent of
$10,675,000 principal amount of 8% convertible subordinated debentures, as
discussed in Note 10. The warrants expired unexercised in 1998.

       During the period from inception to December 31, 1994, the Company issued
shares of stock to officers and employees of the Company in exchange for notes
receivable. These notes were secured by the shares of common stock issued and
bear interest at 10%. The notes required payments of interest only through 1993.
In December 1994, the notes were amended to include full recourse against the
borrowers in the event of nonpayment with principal and accrued interest payable
in equal annual installments in 1997 and 1998. The amended notes also included a
forgiveness provision for the entire indebtedness contingent on the continued
employment of the makers of the notes. Pursuant to the forgiveness provision,
$33,938 and $35,937 of outstanding principal were forgiven and recorded as
compensation expense in the Statement of Operations on December 1, 1998 and
1997, respectively.

       During 1991, a major stockholder and another stockholder exchanged notes
due from the Company in the amount of $2,400,000 plus accrued interest of
$125,545 for 2,066,355 shares of the Company's common stock. During 1992, a
major stockholder of the Company advanced $1,880,000 to the Company under a
revolving credit note bearing interest at prime plus 2%. During 1992, the
stockholder exchanged the outstanding balance plus accrued interest of $33,389
for 1,012,950 shares of the Company's common stock.

       At December 31, 1999, the Company had reserved 2,426,500 shares of common
stock for the future issuance of restricted stock awards and stock options, and
the future exercise of stock options and warrants.


                                      F-9
<PAGE>   26



5. STOCK OPTIONS

       Under a stock option agreement, dated in 1994 and amended in 1996, with a
member of the Board of Directors, the Company granted the director an option to
acquire 25,000 shares of the Company's common stock at an exercise price of
$2.125 per share. The option is 100% vested and expires in 2004.

       During 1992, the Company adopted the 1992 Stock Option Plan whereby
options may be granted to employees to purchase shares of common stock at prices
not less than the fair value of the shares on the date of the grant for
incentive stock options and not less than 50% of the fair value of the shares on
the date of the grant for non-qualified stock options. Options become vested in
accordance with the terms of each option agreement. In general, options become
fully vested in five years. Options granted in 1999 provide for full vesting to
occur on the fifth anniversary of the grant date, with the possibility of
accelerated vesting occurring on December 31, 2001. Acceleration of vesting on
December 31, 2001 will be measured based upon the Company's ability to
internally generate cash flows sufficient to meet its operating needs. No option
shall be exercisable within the first six months following the date of grant and
no incentive stock option shall be exercisable after the expiration of ten years
from the grant date. On May 9, 1996, the Company amended the 1992 Stock Option
Plan to increase the number of shares reserved for future issuance to 1,500,000.

       On March 1, 1996, the Compensation Committee of the Company's Board of
Directors approved a plan to reprice certain options to purchase shares of the
Company's common stock granted to employees pursuant to the 1992 Stock Option
Plan. The options were repriced effective March 22, 1996. Options originally
priced from $4.63 to $8.00 per share were repriced at $3.19 per share, the
closing market price of the common stock on March 22, 1996. Each of the repriced
options, whether or not vested, could not be exercised for a period of one year
ending February 28, 1997. Options to purchase a total of 790,000 shares of
common stock were repriced, of which 71,000 were fully vested prior to
repricing.

       The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

       Pro forma information regarding net loss and net loss per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999
and 1997, respectively: risk-free interest rate of 5.9% and 5.4%; a dividend
yield of 0%; volatility factors of the expected market price of the Company's
common stock of 171% and 82%; and a weighted-average expected option life of
five years.

       The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employee stock options.

       For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because SFAS
123 is applicable only to options granted subsequent to December 31, 1994, its
pro forma effect has not been fully reflected until 1999. The Company's pro
forma information follows (in thousands except for loss per share information):

<TABLE>
<CAPTION>
                                                FOR THE YEARS ENDED
                                                    DECEMBER 31,
                                     -------------------------------------------
                                       1999             1998              1997
                                     --------         --------         ---------
<S>                                  <C>              <C>              <C>
Pro forma net loss ..........        $ (3,623)        $ (6,751)        $  (9,428)
Pro forma net loss per share:
  Basic and diluted .........        $  (0.15)        $  (0.27)        $   (0.38)
</TABLE>


                                      F-10
<PAGE>   27




       A summary of option activity related to the 1992 Stock Option Plan
follows:


<TABLE>
<CAPTION>
                                                                                             WEIGHTED
                                                                                             AVERAGE
                                                                            OPTION           EXERCISE
                                                                            SHARES        PRICE PER SHARE
                                                                            ------        ---------------
<S>                                                                      <C>              <C>
Outstanding at December 31, 1996(1) .............................           900,625         $   3.37
  Granted .......................................................            60,000             2.38
  Canceled ......................................................           (59,000)            4.39
                                                                          ---------
Outstanding at December 31, 1997 ................................           901,625             3.26
  Canceled ......................................................          (236,000)            3.42
                                                                          ---------
Outstanding at December 31, 1998 ................................           665,625             3.21
  Granted .......................................................           665,000             0.25
  Canceled ......................................................          (100,000)            1.75
  Expired .......................................................           (32,625)            1.89
                                                                          ---------
Outstanding at December 31, 1999 ................................         1,198,000         $   1.72
                                                                          =========
Outstanding at December 31, 1999:
  Exercise price of $0.25 with a weighted-average remaining
    contractual life of 9.5 years ...............................           620,000         $   0.25
  Exercise price ranging from $2.06 to $3.19 with a
    weighted-average remaining contractual life of 4.9 years ....           540,000             3.18
  Exercise price ranging from $3.88 to $6.19 with a
     weighted-average remaining contractual life of 6.3 years ...            38,000             5.03
                                                                          ---------
                                                                          1,198,000         $   1.72
                                                                          =========
Options exercisable at December 31, 1999:
  Exercise price of $0.25 .......................................                --         $     --
  Exercise price ranging from $2.06 to $3.19 ....................           475,000             3.19
  Exercise price ranging from $3.88 to $6.19 ....................            24,000             5.03
                                                                          ---------
                                                                            499,000         $   3.27
                                                                          =========

 Options exercisable at December 31, 1998:                                  450,625         $   3.15
                                                                          =========

 Options exercisable at December 31, 1997:                                  409,100         $   3.18
                                                                          =========
</TABLE>

----------
(1)    Exercise price reflects repricing to $3.19 per share on March 22, 1996.

       The weighted-average fair values of options granted during 1999 and 1997
were $0.24 and $1.49, respectively. No options were granted in 1998.

       Prior to adoption of the 1992 Stock Option Plan, the Company entered into
stock option agreements with key employees to purchase common stock of the
Company. All options granted under these stock option agreements expired in
1999. A summary of option activity related to these agreements follows:

<TABLE>
<CAPTION>
                                                                                                   WEIGHTED
                                                                                                    AVERAGE
                                                                                      OPTION       EXERCISE
                                                                                      SHARES    PRICE PER SHARE
                                                                                     --------   ---------------
                    <S>                                                              <C>        <C>
                    Outstanding at December 31, 1996 and 1997...................      212,000    $      .90
                      Canceled..................................................       (9,500)         1.22
                      Exercised.................................................      (11,250)          .89
                                                                                     --------
                    Outstanding at December 31, 1998............................      191,250           .89
                      Expired...................................................     (191,250)          .89
                                                                                     --------
                    Outstanding at December 31, 1999                                       --    $       --
                                                                                     ========
</TABLE>


6. RELATED PARTY TRANSACTIONS

       The Company has a license agreement with Dreisbach Electromotive, Inc.
("DEMI"). Certain of the beneficiaries of this license agreement are also
shareholders of the Company. Under DEMI's agreement, the Company has an
exclusive license to use the patent rights for the purpose of manufacturing and
marketing certain batteries and other products employing similar technology. In
addition, the Company agreed to pay DEMI royalties, beginning in 1991, of 4% of
net sales subject to certain minimum amounts and possible increases or decreases
to a maximum of 4% and a minimum of 2%, as specified in the agreement. The
applicable percentage of royalties is currently 4% of net sales. The Company
recorded total royalty expense related to the DEMI license for the years ended
December 31, 1999, 1998, and 1997 and for the period from inception to December
31, 1999 of $0.05 million, $0.10 million, $0.10 million, and $1.39 million,
respectively. These minimum royalty expenses are included in marketing, general
and administrative



                                      F-11
<PAGE>   28

expenses in the Statements of Operations. Actual royalties due as a percentage
of sales would be included in the cost of sales. During 1999, all minimum
royalty payments under this agreement were completed and paid in full. As of
December 31, 1998, $30,000 of these royalty payments remained unpaid.

       The Company recorded research and development expenses as a part of the
agreement for the period from inception to December 31, 1999 of approximately
$1.15 million, all of which were recorded prior to 1993. No additional amounts
of research and development expenses were required under the agreement after
1992.

7. LICENSE AND RESEARCH AND DEVELOPMENT AGREEMENTS

       On September 24, 1998, the Company executed its TLAS Agreement with
Duracell Inc., a subsidiary of the Gillette Company. Under the terms of the TLAS
Agreement, the Company agrees to license certain of its zinc-air battery
technology to Duracell. In addition, Duracell agreed to fund certain joint
product development projects with the Company in 1999. Under the agreement,
Duracell will own technology developed under the projects it funds, which the
Company will have rights to utilize. Duracell also has options to obtain certain
other license rights. Deferred revenue represents the unamortized portion of the
$1.15 million in license fees received from Duracell under the TLAS Agreement.
Revenues related to this agreement are included in license fees and research and
development revenues in the Statements of Operations.

       On May 12, 1993, the Company executed an agreement with Westinghouse
Electric Corporation ("Westinghouse") whereby the Company obtained exclusive
license and sublicense rights to use Westinghouse's air electrode technology for
portable computer products and non-exclusive license and sublicense rights for
all other portable products. The agreement entitles the Company to improvements
developed or acquired by Westinghouse prior to May 1, 1995. Pursuant to the
agreement, the Company paid an initial license fee of $250,000 and pays 1% of
revenues up to $300,000 followed by 0.5% of revenues up to $350,000, at which
time no further royalties for product sales will be due. In addition, for ten
years, from 1993 to 2003, the Company will pay Westinghouse the greater of (i)
50% of any sublicense fees it receives if it sublicenses the technology licensed
from Westinghouse, or (ii) 0.5% of sublicensee product sales. The Company
purchased specific production equipment for $325,000 from Westinghouse. The
agreement also includes certain provisions requiring additional payments to
Westinghouse if the Company sublicenses the technology. Currently, the Company
is not using technology obtained from Westinghouse in its primary batteries.

8. INCOME TAXES

       A reconciliation of the provision for income taxes to the federal and
state statutory rate of 38% is as follows:

<TABLE>
<CAPTION>

                                                                                    PERIOD FROM
                                                                                   JULY 17, 1989
                                             YEARS ENDED DECEMBER 31,           (DATE OF INCEPTION)
                                     ------------------------------------------   TO DECEMBER 31,
                                        1999           1998            1997             1999
                                     -----------    -----------     -----------     ------------
  <S>                                <C>            <C>             <C>             <C>
  Tax at statutory rate.........     $(1,324,995)   $(2,519,973)    $(3,331,009)    $(24,539,348)
  Research and development
  credits.......................         (84,872)      (112,687)        (43,402)      (1,380,978)
  Other.........................           3,223          9,112           5,831           47,140
  Valuation reserve.............       1,406,644      2,623,548       3,368,580       25,873,186
                                     -----------    -----------     -----------     ------------
                                     $        --    $        --     $        --     $         --
                                     ===========    ===========     ===========     ============
</TABLE>


     The tax effects of temporary differences, credits, and carryforwards that
give rise to significant portions of deferred tax assets consist of the
following:

<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                             -------------------------
                                                 1999          1998
                                             ------------  -----------
          <S>                                <C>           <C>
          Deferred tax assets:
            Net operating loss
              carryforwards..............    $ 22,479,889  $20,774,241
            Depreciation.................         232,285      197,009
            Start-up costs...............       1,710,888    2,080,810
            Research and development
              credits....................       1,380,978    1,296,106
            Warranty reserve.............           3,933       29,034
            License agreement............          50,027       60,842
            Inventory obsolescence.......           5,928       28,500
            Other........................           9,258           --
                                             ------------  -----------
            Gross deferred tax assets....      25,873,186   24,466,542
            Valuation allowance..........     (25,873,186) (24,466,542)
                                             ------------  -----------
          Net deferred tax assets........    $         --  $        --
                                             ============  ===========
</TABLE>


                                      F-12
<PAGE>   29

       At December 31, 1999, the Company had available net operating loss
carryforwards for income tax purposes of approximately $59.16 million and
research and development credit carryforwards of approximately $1.38 million.
These carryforward items will both begin to expire in 2004. Both of these
carryforward items are subject to certain limitations on annual utilization
related to changes in ownership of the Company. These limitations could
significantly reduce the amount of the net operating loss and credit
carryforwards available to the Company in the future.

9. PROCEEDS FROM THE SALE OF COMMON STOCK

       On May 20, 1996, in a private placement at an aggregate purchase price of
$10.00 million, the Company issued 1,584,158 shares of its common stock and
warrants to purchase 835,000 additional shares. The transaction generated
proceeds of $9.37 million, net of expenses. The warrants have an exercise price
of $6.3125 per share and expire in 2001. The value of the warrants is included
in common stock on the balance sheet.

       On November 9, 1994, the Company closed a public offering of 2.5 million
shares of its common stock, generating proceeds of $12.3 million, net of
underwriting discounts and commissions but before deducting expenses. On
December 7, 1994, 150,000 additional shares of common stock were issued pursuant
to the underwriters' over-allotment option, generating additional proceeds of
$0.74 million, net of underwriting discounts and commissions.

       On July 9, 1993, the Company closed an initial public offering of 2.5
million shares of its common stock, generating proceeds of $16.3 million, net of
underwriting discounts and commissions but before deducting expenses. On August
6, 1993, 311,700 additional shares of common stock were issued pursuant to the
underwriters' over-allotment option, generating additional proceeds of $2.0
million, net of underwriting discounts and commissions.

       The net proceeds from the common stock sales have been used to fund
capital equipment purchases, research and development efforts, sales and
marketing activities, production of prototype zinc-air battery products,
development of alliances with battery manufacturers and OEMs, working capital
and general corporate purposes at the Company's discretion.

10. PROCEEDS FROM THE SALE OF CONVERTIBLE DEBENTURES

       On November 29, 1995, the Company issued $10.68 million principal amount
of 8% convertible subordinated debentures due November 17, 1997. Through
November 17, 1997, a holder of a debenture could have elected to convert the
debenture into common stock of the Company at a conversion price equal to the
lesser of $3.60 per share or a percentage ranging from 85% to 100% of the
average closing bid price for the five trading days immediately prior to the
conversion. In connection with the transaction, the Company paid to a placement
agent $0.84 million in fees and delivered warrants to purchase 225,590 shares of
the Company's common stock at an exercise price of $4.32 per share. The warrants
expired in 1998. During 1996, $9.78 million in principal plus accrued interest
converted into 5,394,992 shares of common stock at an average conversion price
of $1.86 per share. During 1997, the remaining $0.90 million in principal plus
accrued interest converted into 518,683 shares of common stock at an average
conversion price of $1.93 per share. Assuming the 1997 debenture conversions
occurred at January 1, 1997, net loss per share for the year ended December 31,
1997 was $(0.35).

11. DEFINED CONTRIBUTION BENEFIT PLAN

       Effective February 1, 1993, the Company adopted the AER Energy Resources
401(k) Plan, a defined contribution benefit plan which qualifies under Section
401(k) of the Internal Revenue Code. All employees of the Company as of February
1, 1993 were eligible to participate in the plan. Employees hired after February
1, 1993 who have completed six months of service with the Company may
participate in the plan. Participants may contribute up to 15% of their base
salary to the plan and any employer matching contribution is discretionary.
There was no employer matching contribution during the years ended December 31,
1999, 1998 or 1997.


                                      F-13