UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-KSB

(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                                  OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005 or

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
                                             For the transition period from _____ to _____

Commission file number:

|Electro Energy Inc.                                           
|--------------------------------------------------------------
|(Exact name of small business issuer in its charter)          
|                                                              
|Florida                                                       
|(State or other jurisdiction of incorporation or organization)

|30 Shelter Rock RoadDanbury, CT          |  | 06810     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)

Issuer's telephone number: (203) 797-2699

Securities Registered Under Section 12(b) of the Exchange Act: None

Securities Registered Under Section 12(g) of the Exchange Act:Common Stock, $0.001 par value(Title of class)

Check whether the Issuer (1) has filed all reports required to be filed by
 Section 13 or 15(d) of the Exchange Act during the past 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    No

Check if there is no disclosure of delinquent filers in response to Item 405 of
     Regulation S-B contained in this form, and no disclosure will be contained,
     to the best of registrant's knowledge, in definitive proxy or
  information                                       statements incorporated by
                                                    reference in Part III of
                                                    this Form 10-KSB or any
                                                    amendment to this Form
                                                    10-KSB.

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes    No

State Issuer's revenues for its most recent fiscal year: $3,861,650.

The aggregate  market value of the
voting  common equity held by  non-affiliates was  $27,786,395  based upon the closing
sales price of Common Stock on February 28, 2006 of $3.18 per share.

As of February 28, 2006, 16,654,931
shares of Common Stock, par value $.001 per share, were outstanding.

# DOCUMENTS INCORPORATED BY REFERENCE

None.

---



---

## ELECTRO ENERGY INC.

## INDEX

|Part I     |  | Description                                                                                                                       | PageNumber
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------- | ----------
|Item 1     |  | Description of Business                                                                                                           | 1         
|Item 2     |  | Description of Property                                                                                                           | 5         
|Item 3     |  | Legal Proceedings                                                                                                                 | 5         
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                                               | 5         
|           |  |                                                                                                                                   |           
|Part II    |  |                                                                                                                                   |           
|Item 5     |  | Market for Common Equity and Related Stockholder Matters                                                                          | 6         
|Item 6     |  | Management's Discussion and Analysis or Plan of Operation                                                                         | 7         
|Item 7     |  | Financial Statements                                                                                                              | F-1       
|Item 8     |  | Changes In and Disagreements With
        Accountants on Accounting and Financial Disclosure                                      | 17        
|Item 8A    |  | Controls
        and Procedures                                                                                                   | 17        
|Item 8B    |  | Other Information                                                                                                                 | 17        
|           |  |                                                                                                                                   |           
|Part III   |  |                                                                                                                                   |           
|Item 9     |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
                  16(a) of the Exchange Act | 18        
|Item 10    |  | Executive Compensation                                                                                                            | 20        
|Item 11    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                  Matters                  | 23        
|Item 12    |  | Certain Relationships and Related Transactions                                                                                    | 26        
|Item 13    |  | Exhibits                                                                                                                          | 27        
|Item 14    |  | Principal Accountant Fees and Services                                                                                            | 28        
|           |  |                                                                                                                                   |           
|Signatures |  |                                                                                                                                   | 29        

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# Forward-looking
Statement Disclaimer

Forward-looking
statements in this report, including without limitation, statements related to the
Companys plans, strategies, objectives, expectations, intentions and adequacy of
resources, are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such forward-looking
statements involve risks and uncertainties including without limitation the following: (i)
the Companys plans, strategies, objectives, expectations and intentions are subject
to change at any time at the discretion of the Company; (ii) the Companys plans and
results of operations will be affected by the Companys ability to manage its growth;
and (iii) other risks and uncertainties indicated from time to time in the Companys
filings with the Securities and Exchange Commission.

In
some cases, you can identify forward-looking statements by terminology such as
may, will, should, could,
expects, plans, intends, anticipates,
believes, estimates, predicts, potential
or continue or the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance, or
achievements. Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of such statements. We are under no duty to update any of the
forward-looking statements after the date of this report.

# PART I

# Item 1.  DESCRIPTION OF
BUSINESS

# Business Development

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

MCG
issued 9,497,557 unregistered shares of common stock, options to purchase 2,332,121 shares
of common stock and warrants to purchase 526,444 shares of common stock to the former
security holders of EEI in exchange for 100% of the outstanding capital stock, options and
warrants of EEI. As MCG did not have any meaningful operations prior to the merger, the
transaction was treated as a recapitalization of EEI, and accounted for, on an historical
cost basis. Moreover, the financial statements set forth in this report for all periods,
prior to the recapitalization, are the financial statements of EEI and the common stock of
EEI has been retroactively restated to give effect to the exchange for MCG common stock.

Although
MCG acquired EEI as a result of the Merger, the stockholders of EEI hold a majority of the
voting interest in the combined enterprise. Immediately prior to the Merger, EEI had 23
stockholders. Additionally, the Merger resulted in EEIs management and Board of
Directors assuming operational control of MCG. At the conclusion of the Merger, MCGs
stockholders owned approximately 22% of the issued and outstanding shares of the
Companys common stock, based on 12,197,453 shares outstanding after the Merger. The
Board of Directors and shareholders amended MCGs Amended and Restated Articles of
Incorporation to change the corporate name of MCG to Electro Energy Inc. and
to increase the authorized number of shares of capital stock to 50,010,000 shares,
consisting of 50,000,000 shares of Common Stock, $.001 par value per share and 10,000
shares of Preferred Stock, $.001 par value per share.

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

---



On
October 1, 2003, EEI, through its wholly-owned subsidiary Mobile Energy Products, Inc.,
acquired the power systems operations of EaglePicher Technologies, LLC
(EaglePicher) in exchange for a note payable amounting to $450,000 and the
assumption of $138,482 in accounts payable and accrued liabilities. The Company incurred
acquisition costs of $158,903. The fair value of the net assets acquired was $567,390. The
power systems operation had been established by EaglePicher in 1976 engaged in the
manufacture of specialty nickel-cadmium batteries for satellites and aircraft
applications. As a result of an internal restructuring of priorities, EaglePicher
management decided to close down its power systems battery operation in 2003. In
connection with the asset purchase agreement, the Company also entered into a ten year
technology license agreement, a five year supply agreement, a five year real estate lease
agreement, and a ground water remediation services agreement.

# Business

Principal Products and
Services

EEI
Technologies, Inc. (EEI) is primarily engaged in the research and development
of battery technologies since 1992. Historically, EEI has performed research and
development services under fixed price contracts primarily with the U.S. military and
government agencies. The business strategy has historically been to seek government
funding to support the development of our battery concepts with the intent to use the
technology developed as a springboard into commercial applications and manufacturing. The
development work has focused on basic materials technology and prototype development of
specialty bipolar nickel-metal hydride batteries and bipolar lithium-ion batteries using a
unique, patented flat wafer cell design, in addition to low maintenance nickel-cadmium
batteries. The cells can be made in any shape and are therefore applicable to a wide
variety of military and commercial applications. Wafer cells are stacked one on top of
another to create multi-cell batteries with the required energy capacity and voltage for a
given application. EEI has supplied prototype batteries to various commercial and
government customers for use in military communications, satellites, aircraft auxiliary
power, standby power, and medical applications.

Management
is researching commercial market opportunities while pursuing additional development
activities. Management is targeting the automotive industry, where battery technology is
needed to support the rapidly growing hybrid electric vehicle market, plug-in electric vehicle market, and manufacturers
upgrading to more powerful 42 volt starting batteries from the 12 volt systems used today.
The electric bicycle and scooter market is growing, particularly in Asia where governments
are encouraging a switch to electric power to reduce pollution. Management believes that
high performance electric scooters have a market in the U.S. also and is searching for a
partner in this market. The cordless power tool market is rapidly growing and management
believes EEI batteries provide better energy capacity and a better environmental profile.

EEI
is also engaged in the manufacture of specialty battery products. In October 2003, EEI
acquired the power systems operations of EaglePicher Technologies, LLC
(EaglePicher) in Colorado Springs, Colorado. EaglePicher is a diversified
company engaged in the manufacture of specialty batteries, chemicals and electronic
materials. The Colorado Springs operation had been established by EaglePicher in 1976 and
has been primarily engaged in the manufacture of specialty nickel-cadmium
(Ni-Cd) batteries for satellites and aircraft applications. As a result of an
internal restructuring of priorities, EaglePicher management decided to close down its
Colorado Springs battery operation in 2003. For EEI, the acquisition provided an
established product line, capacity for manufacturing, personnel with complementary skills
broadening the chemistry portfolio and manufacturing opportunities, and a facility
certified for the production of products for manned spaceflight. The specialty battery
products produced include components for battery power systems used in satellites and
aircraft in connection with a five year supply agreement with EaglePicher, as well as,
custom orders from government agencies.

Competitive Business
Conditions

Under
a five year supply agreement with EaglePicher, EEI is the sole source supplier for
components for battery power systems used in military satellites and military aircraft.
Pricing under the supply agreement is fixed, subject to possible adjustment under periodic
value engineering reviews and based on material cost escalations. The agreement is
renewable upon the mutual consent of the parties.

---



EEI
also entered into a ten year, non-exclusive, worldwide technology license agreement for
the use of certain technologies and processes involving the use and sale of nickel plaque
and the manufacture and sale of vented nickel-cadmium and sealed nickel-cadmium batteries.
Under the license agreement, EEI is obligated to pay a royalty to EaglePicher of (a)
one-half of one percent (0.5%) of the sale price upon the sale of nickel-metal hydride
products which utilize the nickel plaque technology, (b) three percent (3%) of the sale
price upon the sale of vented nickel-cadmium and sealed nickel-cadmium products utilizing
the vented nickel-cadmium and sealed nickel cadmium technologies and (c) such royalties
that the parties may agree upon for the sale of products other than nickel-metal hydride
and vented nickel-cadmium and sealed nickel-cadmium products utilizing the nickel plaque
technology. Also under the license agreement, EaglePicher agreed, upon the terms and
conditions thereunder, not to compete with EEI in the manufacture or sale of prismatic
nickel-cadmium batteries or cells for aircraft, space or government applications or
bi-polar or nickel-metal hydride batteries or cells. Additionally, EEI agreed, upon the
terms and conditions of the license agreement, not to compete with EaglePicher in the
manufacture or sale of nickel-hydrogen products or the sale of nickel plaque, nickel
plaque technologies or striker assemblies to third parties. EEI may extend the term of the
license prior to expiration upon terms mutually agreeable to the parties. EEI may
terminate the license agreement at any time prior to expiration.

Management
plans to continue to supply components to EaglePicher, manufacture and sell specialty
nickel-cadmium batteries, transition EEIs bipolar nickel-metal hydride battery to a
broader mix of applications and to broaden the product mix to include lithium rechargeable
batteries. The Colorado Springs operation is one of three organizations worldwide that
produce specialty nickel-cadmium batteries for satellites and one of two that is qualified
for U.S. government applications. EEIs Ni-Cd processes have been developed and
refined over the past twenty years to deliver an extremely long life product.

EEIs
nickel-metal hydride processes are currently being transitioned to a commercial line. The
commercial line will contain a mix of proprietary and commercially available equipment.
These processes and equipment are not currently patent-protected and management does not
anticipate licensing our manufacturing technology at this time.

Suppliers

Management
has been working with our suppliers in the development of our bipolar nickel-metal hydride
battery. The construction of the bipolar nickel-metal hydride battery utilizes a large
percentage of nickel-metal, nickel based hydride alloys, and hydroxides, as well as other
metal products and plastics. Therefore, management has built a good working relationship
with suppliers for both nickel-hydroxide and metal hydride. Management has supply
relationships with Tanaka, a Japanese supplier, and is evaluating sources of supply from
China. INCO of Canada, a supplier of specialty nickel powders and nickel-based chemicals,
has also become a supplier to the Company.

The
Company uses a low-pressure metal hydride (AB5) alloy in development and
fabrication processes. There are many alloy suppliers, but management is working with
Treibacher Auermet, an Austrian based company with years of technical experience and a
strong history as a U.S. supplier of AB5 alloy. The Company has not experienced any
shortages in the availability of the alloy, although efforts to optimize the alloy for
expanding applications and lower cost is ongoing.

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

---



Significant Customers

The
Company had three customers with sales of 10% or more of total sales in 2005. Net sales to
the Companys three major customers, U.S. Airforce Mantech, Sandia National
Laboratories, and EaglePicher Technologies, LLC represented approximately 64.2% in 2005.
Accounts receivable from these customers amounted to $185,418 and $407,547 as December 31,
2005 and 2004, respectively. The Company had two customers with sales of 10% or more of
total sales in 2004. Net sales to such customers, U.S. Airforce Mantech and EaglePicher
Technologies, LLC, represented approximately 59.0% in 2004.

On
April 11, 2005, Eagle Picher, Inc. and its affiliates announced its voluntary Chapter 11
bankruptcy filing. Eagle Picher, Inc.s public releases state they are in the process
of reorganizing, and certain assets will be liquidated to meet financial obligations. In
2005, revenue from EaglePicher declined $2.3 million, or 79% compared to 2004. Management
believes the portion of the company which produces batteries is believed to be a viable
business entity and is expected to continue operations either as part of a reorganized
business or under new ownership because its operations are a part of national defense. In
any event, the components which EEI produces are expected to be required to the extent
that the need for products that utilize these components continues to exist, and that any
successor or reorganized entity places similar orders through us.

Intellectual Property

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

We
hold eight issued United States patents, which expire beginning in 2012 and ending in
2022. We also hold four issued foreign patents and a number of pending foreign patent
applications, which cover the technology that is the subject of the United States patents.
These include (i) bipolar electrochemical battery of stacked wafer cells; (ii) method of
making electrodes for bipolar electrochemical battery; (iii) method for preparing
conductive electrochemically active material; and (iv) bipolar electrochemical battery
systems. In addition, we have new applications pending and a number of new inventions for
which we intend to file additional patent applications both domestically and
internationally as we continue to improve our existing technology, develop new technology
and make advances to our bipolar nickel-metal hydride battery.

We
are not aware of any current infringement upon any of our patents.

Government Regulation

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

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

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

---



Backlog

Our
backlog as of December 31, 2005 was approximately $3,189,861 compared with backlog of
approximately $1,701,603 as of December 31, 2004. Backlog refers to the aggregate revenues
remaining to be earned at a specified date under contracts we hold. Due to the long-term
nature of our government contracts, fluctuations from year to year are not an indication
of any future trend. Although backlog reflects business that is considered firm,
cancellations or scope adjustments may occur and will be reflected in our backlog when
known.

Employees

As
of December 31, 2005, the Company had 58 full time employees, none of whom are covered by
union contracts. Employee relations are considered good and no foreseeable problems with
the work force are evident.

# Item 2.  DESCRIPTION OF
PROPERTY

Electro
Energy Inc.s principal executive offices are located at 30 Shelter Rock Road,
Danbury, Connecticut 06810. The Company leases manufacturing facilities in the United
States totaling 57,000 square feet. The leased facilities are occupied under leases for
terms ranging from month to month to four years with options to extend the leases for an
additional one to five years. Management believes that the Companys facilities are
adequate for the foreseeable future.

# Item 3.  LEGAL PROCEEDINGS

Management
is not aware of any pending or threatened legal proceeding of any type or nature related
to us, our business or our officers and directors. The Company is not a party to any legal
proceedings either as plaintiff or defendant.

# Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

In
a filing with the U.S. Securities and Exchange Commission on Form DEF14C Definitive
Information Statement on December 5, 2005, an Information Statement and Notice of Action
Taken Without a Meeting of Shareholders was furnished to shareholders of record as of
December 5, 2005, to inform them of the November 23, 2005 approval by written consent of
shareholders owning a majority, as of the record date, of our outstanding shares of common
stock and series A convertible preferred stock, the only classes of voting securities
outstanding as of the record date, of the following actions taken:

(a)                 the
issuance, pursuant to the terms of our proposed acquisition of a Florida
          battery manufacturing facility described in this information statement, of
          5,750,000 shares of our common stock, plus the potential issuance of up to an
          additional 3,000,000 shares of our common stock upon the exercise of warrants
          issued in connection with this acquisition, which shares in the aggregate could
          exceed 19.99%, or the cap amount, of the outstanding shares of our common stock
          immediately prior to our proposed convertible secured note private placement
          described in the information statement, an action for which prior shareholder
          approval is required by NASD Marketplace Rules applicable to companies whose
          securities are quoted on the Nasdaq Capital Market; and

(b)                 the
issuance, pursuant to the terms of our proposed convertible secured note
          private placement, of a potential number of shares of our common stock upon the
          conversion of the convertible secured notes in accordance with their terms,
          which shares in the aggregate could exceed the cap amount, either alone or
          together with the shares to be issued in the acquisition, an action for which
          prior shareholder approval is also required by applicable NASD Marketplace
          Rules.

---



As
of the date of the shareholder consent, there were issued and outstanding a total of
16,508,203 shares of common stock and 180 shares of series A preferred stock. With respect
to each of the actions approved by the shareholder consent, each share of our common stock
entitled its holder to one vote, and each share of series A preferred stock entitled its
holder to 400 votes. Accordingly, as of the date of the shareholder consent, the holders
of our common stock were entitled to an aggregate of 16,508,203 votes, and the holders of
the series A preferred stock were entitled to an aggregate of 72,000 votes with respect to
each of the matters referred to above. The shareholder consent was signed by holders of
8,602,988 (or 51.9%) of the 16,580,203 votes that were entitled to be cast on these
matters. There were no votes cast against or withheld by the voting shareholders.

As
of the date of the filing of this Form 10-KSB, these two contemplated transactions have
not occurred.

There
were no other matters submitted to a vote of the security holders of the Company through
the solicitation of proxies or otherwise during the fourth quarter of the year ended
December 31, 2005.

# PART II

# Item 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since
December 31, 2004, the Companys common stock is listed for trading on the NASDAQ
Capital Market under the symbol EEEI. Prior to December 31, 2004, our common
stock was quoted on the Over-the-Counter Bulletin Board (OTCBB) under the
symbol EEEI. Our common stock had been quoted on the OTCBB since June 10,
2004. Prior to that date, there was no active market for our common stock, which traded in
the public market under the symbol MCGV.OB, representing MCG Diversified, Inc.
The following table sets forth the high and low sales prices and the high and low bid
prices, as applicable, per share of common stock for the periods indicated. These prices
represent inter-dealer quotations without retail markup, markdown, or commission and may
not necessarily represent actual transactions.

| | Year Ended December 31, 2005 |  | High    |  | Low     
| | ---------------------------- |  | ------- |  | --------
| |                              |  |         |  |         
| | First Quarter                |  | $ 12.70 |  | $   7.55
| | Second Quarter               |  | 10.00   |  | 4.84    
| | Third Quarter                |  | 6.97    |  | 3.20    
| | Fourth Quarter               |  | 5.23    |  | 2.75    

| | Year Ended December 31, 2004 |  | High     |  | Low     
| | ---------------------------- |  | -------- |  | --------
| |                              |  |          |  |         
| | First Quarter                |  | n/a      |  | n/a     
| | Second Quarter               |  | $   5.40 |  | $   3.10
| | Third Quarter                |  | 6.77     |  | 4.10    
| | Fourth Quarter               |  | 14.50    |  | 6.10    

As
of December 31, 2005, there were 16,599,719 shares of the Companys common stock
issued and outstanding.

As
of February 28, 2006, there were approximately 200 record owners of Electro Energy
Inc.s common stock. However, a significant number of the shares of the
Companys common stock are held in street name and are therefore held by
several beneficial owners. The Company estimates that it has a total of approximately
3,400 beneficial shareholders.

The
Company did not pay cash dividends on its common stock in 2005 and 2004. We do not expect
to pay cash dividends on our common stock in the foreseeable future. We currently intend
to retain our earnings, if any, for use in our business. Any dividends declared in the
future will be at the discretion of our Board of Directors.

The
following table sets forth, as of the year ended December 31, 2005, information with
respect to the Companys compensation plans and individual compensation arrangements
to which the Company is a party, if any, under which equity securities of the Company are
authorized for issuance:

---



|Plan Category                                              | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights | Number of securitiesremaining available forfuture issuance
|---------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------------
|                                                          
|                                                           | (a)                                                                                     | (b)                                                                     | (c)                                                       
|                                                          
|Equity compensation plans approved by security holders     |                                                                                         |                                                                         |                                                           
|1993 Stock Compensation Plan                               | 667,353                                                                                 | $1.19                                                                   | 380,376                                                   
|2005 Stock Compensation Plan                               | 650,000                                                                                 | $5.78                                                                   | 2,350,000                                                 
|Equity compensation plans not approved by security holders | N/A                                                                                     | N/A                                                                     | N/A                                                       
|                                                          
|Total                                                      | 1,317,353                                                                               | $3.23                                                                   | 2,730,376                                                 

# Item 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

You
should read the following discussion and analysis together with the financial statements
and related notes included elsewhere in this report. This discussion may contain
forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in any forward-looking statements as a result of
many factors.

# Results of Operations

# Year Ended December 31,
2005 Compared to Year Ended December 31, 2004

Net Revenue

Consolidated
net revenue for 2005 was $3,861,650 compared with $6,759,793 for 2004, a decrease of
$2,898,143, or 42.9%. Of the revenue decrease, $2,353,074 was attributable to a reduction
of revenues from products produced primarily by Mobile Energy Products, Inc.
(MEP), whose product manufacturing operations were acquired on October 1, 2003
from EaglePicher Technologies, LLC (EaglePicher) and by revenue decreases of
$545,069 for the services operations. Consolidated contract backlog as of December 31,
2005 was $3,189,861.

Consolidated
net revenue included net revenue pursuant to a supply agreement with EaglePicher amounting
to $626,254, or 16.2% and $2,958,935, or 44% for 2005 and 2004, respectively. On April 11,
2005, Eagle Picher, Inc. and its affiliates announced its voluntary Chapter 11 bankruptcy
filing. Eagle Picher, Inc.s public releases state they are in the process of
reorganizing, and certain assets will be liquidated to meet financial obligations.
Management believes the portion of the company which produces batteries is believed to be
a viable business entity and is expected to continue operations either as part of a
reorganized business or under new ownership because its operations are a part of national
defense. In any event, management expects the components which we produce would be
required to the extent that the need for products that utilize these components continues
to exist, and that any successor or reorganized entity places similar orders through us.

Net
revenue from products for 2005 was $880,587 and $3,233,661 for 2004, a decrease of
$2,353,074, or 72.8%. The decrease resulted primarily from a reduction in order volume
amounting to $2,332,681 from EaglePicher, whom the Company has a supply agreement, in
addition to a one time order shipped in the third quarter of 2004 for $309,326, offset by
increases in sales to new customers of $286,812. The main cause of the MEP revenue
decrease was reduced orders for sinter plaque and strikers. The quantities ordered for
these components are a function of EaglePicher demand for the products that utilize these
components and inventories on hand. Our supply agreement only provides the Company would
be the exclusive supplier of these components to the extent required by EaglePicher for a
five year term. We had no advance notice from EaglePicher for the steep decline in orders.
At the time we entered into the supply agreement with EaglePicher, we recognized that the
level of initial orders was somewhat higher than expected on a year to year basis and was
a result of inventory build up at EaglePicher and accelerated demand related to increased
military spending in 2004, but there was no reason to anticipate an ultimate decrease in
order quantities over the long run. As of December 31, 2005, we have orders of $340,517
for components from EaglePicher. EaglePicher has not shared with us their expected order
needs, however, management expects orders from EaglePicher to improve in 2006 over 2005
levels.

---



As
a result of EaglePichers financial status and decreased supply needs, we made
certain staff reductions, effective as of second quarter 2005. However, as the overall
business plan for the Colorado Springs operation, it is and was always the plan to broaden
the product mix and activities to reduce dependence on Eagle Picher component orders. To
that end, we have received contracts to develop Lithium and Thermal batteries, are using
that capability to develop manufacturing of Nickel-Metal Hydride batteries, and are
pursuing orders for Nickel Cadmium batteries in the Colorado Springs facility.

Net
revenue from services for 2005 was $2,981,063 compared with $3,526,132 for 2004, a
decrease of $545,069, or 15.5%. The primary reasons for the decrease in the research and
development services operations business related to reduced revenues from the U. S. Army
and U.S. Department of Energy where the timing of the services provided within the
contract term were more substantial in the prior year in addition to a reversal of
revenues of $41,414 previously recorded in the fourth quarter of 2004 associated with the
Companys expectation of recovering additional costs expended for general
administration and overhead costs due to concluding fixed price contracts where the funds
are deemed insufficient and the expenses cannot be recovered. The decrease was offset by
an increase related to the addition of a development agreement entered into on March 31,
2005 with a private venture capital firm generating revenues of $136,097 (net of a $13,903
discount recorded in connection with the amortization of the value of warrants issued as
an inducement to enter into the development agreement) in 2005. See Related Parties below.
In addition, the decline in revenues for the services operations resulted from a
redirection of staff toward internally funded research and development initiatives.

The
underlying government and commercial contracts pertaining to net revenue from services for
the periods mentioned are primarily with the U.S. Air Force, U.S. Army, U.S. Navy, U.S.
government agencies, and commercial customers with performance periods that commenced
April 30, 2003 and continue through March 31, 2007 requiring deliverables involving
periodic status reports and in certain cases prototypes. Most government contracts are
negotiated as cost plus fixed fee (CPFF), while others are firm fixed price
(FFP), milestone or cost share (CPCS) type contracts. Commercial
orders are contracted by purchase order (PO). At the completion of each
contract and after all contract requirements have been met, a final invoice is submitted,
audited, and satisfied. In the event overhead and general and administrative rates are
recalculated at less than billed amounts, a credit is issued to the buying party. In past
history, the Company has received complete contract funding on all awards as agreed.

Gross (Loss) Profit

Consolidated
gross (loss) for 2005 was ($753,667) (20.0% of net revenue) compared to gross profit of
$690,044 (10.2% of net revenue) for 2004, a decrease of $1,443,711. The gross profit
decrease was primarily due to operating below planned capacity in 2005. As a result, the
Companys operating margin included unabsorbed overhead incurred in 2005.

Gross
loss from products for 2005 was $602,882 (68.5% of net revenue from products) and gross
profit from products for 2004 was $333,558 (4.9% of net revenue from products). The
Company operated below planned capacity in 2005 primarily from the loss of revenue from
EaglePicher. Of the decrease in gross profit, $235,011 is related to the reduction in
volume and the remaining change is primarily the result of unabsorbed overhead incurred in
2005 from excess capacity. Management expects to return to near full capacity in 2006
fulfilling its contract backlog.

---



The
components of costs of revenues for products include direct materials, direct labor, and
an operating overhead allocation based upon direct labor usage. An operating overhead cost
pool is estimated to support the forecasted manufacturing activities in advance of the
year. The overhead is assigned as product is produced based upon direct labor usage using
an absorption method. Any unabsorbed overhead is expensed in the period incurred.

Gross
loss from services for 2005 was $150,785 (5.1% of net revenue from services) compared to
gross profit of $356,486 (10.1% of net revenue from services) for 2004. The gross profit
from services pertains to gross profit earned on its research and development contracts
with the U.S. government and its agencies. The Company has taken on certain contracts on a
cost only basis or at a loss in order to satisfy quality results. Management believes that
its participation in these contracts will benefit the Companys technological
advancement and generation of commercial revenues in the long-term. The decrease in net
revenue from services over prior year resulted in a $56,744 decrease in gross profit. The
Company reversed revenues of $41,414 previously recorded in 2004 associated with its
expectation of recovering additional costs expended for general administration and
overhead costs due to concluding fixed price contracts where the funds are deemed
insufficient and the expenses cannot be recovered. In addition, the Companys direct
costs and general administration and overhead costs exceeded recoverable negotiated rates
in 2005 contributing $366,945 to the decrease in gross profit. The Company generated
revenues from services of $356,578 from an extension of a contract containing a zero
profit provision contributing toward the change in gross profit. The decrease in gross
profit was also driven by a non-cash expense of $27,807 related to the value of warrants
issued in connection with a development agreement entered into on March 31, 2005 with a
private venture capital firm. The Company generated revenues from services of $136,097
(net of a $13,903 discount recorded in connection with the amortization of the value of
warrants issued as an inducement to enter into the development agreement) from this
contract at a zero profit. See Related Parties below.

The
components of costs of revenues for services include direct materials, direct labor, an
operating overhead allocation based upon direct labor usage, and a general and
administrative overhead allocation based upon the percentage of contract costs relative to
the total. Overhead and general and administrative expenses are billable at contracted
fixed rates during the course of the year. Spending in excess of the contracted amount can
be recovered provided there are funds available in the contract sufficient to cover the
excess expenses and the adjustment is approved by the Defense Contract Audit Agency. A
rate of spending below the billed contracted fixed rates during the course of the year may
result in a return of funds to the contract.

General and
Administrative Expenses

SG&A
expenses for 2005 were $1,866,478 (48.3% of net revenue) compared with $1,692,990 (25.0%
of net revenue) for 2004, an increase of $173,488.

The
increase in SG&A for 2005 was primarily a result of increasing the Companys
support from professional service providers and increasing its general and administrative
staffing to satisfy compliance with reporting requirements as a public company since the
reverse merger in June 2004. The increase included accounting and legal services of
$90,551, salaries for additional administrative personnel of $92,338, investor relations
expenses of $10,917, other public company related expenses of $15,113, and other expenses
of $4,136, offset by a reduction in recruiting expenses of $34,476.

The
increase in SG&A for 2005 also included selling expenses of $137,372 and marketing
samples of $69,130, for the establishment of a sales and marketing organization to drive
revenue generation and diversify the customer base for commercial products and continuity
of research and development services contracts. The Company expects to continue to
experience similar expenditures throughout 2006.

These
increases in SG&A were offset by a non-cash decrease of $211,683 of expense related to
the amortization of stock-based compensation expense from the issuance of stock options in
2004 and 2005. The decrease primarily relates to the reversal of the amount previously
amortized but not vested for certain stock options forfeited in 2005 offset by the
remaining amount of deferred compensation expensed. The deferred compensation expense
related to stock options issued during 2004 was $1,592,178. During 2005, certain of these
stock options were forfeited and a related net adjustment of $608,526 was made to lower
the deferred compensation amount. The remaining balance of the deferred compensation
amount for employee stock options as of December 31, 2005 was $371,405 and will be fully
amortized through December 2007. During 2005, the Company recorded $81,260 of deferred
compensation expense in connection with stock options issued to consultants. The remaining
balance of the deferred compensation amount as of December 31, 2005 was $71,102 and will
be fully amortized through June 2009.

---



Research and Development
Expenses

Research
and development (R&D) expenses for 2005 were $688,114 (17.8% of net
revenue) compared with $312,953 (4.6% of net revenue) for 2004, an increase of $375,161,
or 119.9%. The nature of the R&D expenses in 2005 relates to experimentation with
Nickel Metal Hydride chemistry for application with electric hybrid vehicles and power
tools and development of low maintenance Nickel Cadmium batteries. R&D conducted
applying the Companys patented bipolar design to Lithium Ion batteries is in
connection with a development agreement with a venture capital firm. The venture capital
firm will make direct equity investments over a 14 month period in exchange for the
Companys common stock under a stock purchase agreement. The nature of the R&D
expenses in 2004 relate to a milestone contract from a venture capital firm for research
of certain battery technologies. In March 2004, EEI had issued warrants to purchase
156,250 shares of its EEI Preferred Stock in connection with a contract to receive a total
of $500,000 in cash funding from a venture capital firm for intended use in the research
and development of certain battery technologies. The contract provided for scheduled
payments to the Company if it performs certain research and development activities over a
nine-month period. The Company fulfilled its obligation under this contract in the first
quarter of 2005. Certain research and development contracts require the Company to
subsidize research and development efforts outside the scope of the contract. The Company
has the obligation to fulfill the cost sharing arrangement alone or obtain partners
willing to help subsidize the cost. Any costs that the Company does not obtain a partner
to share with is recorded as research and development expense. These expenses are not
recoverable under ordinary research and development contracts and are expenses incurred by
the Company to advance technological research.

Interest (Income) Expense

Interest
income, net for 2005 was $17,579, compared with interest expense, net of $287,124 for the
same period of 2004, a decrease of $304,703. The decrease was primarily related to the
retirement of notes payable to related parties. Concurrent with the merger, the Company
converted its notes payable to related parties and related accrued interest amounting to
$1,100,000 and $86,000, respectively into shares of its common stock. The notes carried
interest at 10% annum and were due on demand maturing in November 2004. In addition, the
Company invested its cash proceeds from the private placement into an interest bearing
money market account.

Net Loss

Net
loss was $3,290,680 and $1,603,023 for 2005 and 2004, respectively.

Net Loss Attributable to
Common Stockholders

Net
loss attributable to common stockholders for 2005 was $3,290,680 or $0.23 cents per share
(basic and diluted), compared to a net loss of $5,347,055 or $0.51 per share (basic and
diluted) for 2004.

In
2004, the Company recorded a one-time, non-cash item to recognize deemed dividends on
preferred stock in the amount of $3,744,032. Of this amount, $3,290,216 resulted from the
beneficial conversion of the underlying shares of common stock associated with issuance of
new series A convertible preferred stock and detachable warrants in June and July 2004. In
accordance with Emerging Issues Task Force (EITF) 98-5 and EITF 00-27, the
series A convertible preferred stock was considered to have an embedded beneficial
conversion feature because the conversion price was less than the fair value of the
Companys common stock. This beneficial conversion feature is calculated after the
warrants have been valued with proceeds allocated on a relative value basis. This series A
convertible preferred stock was fully convertible at the issuance date, therefore the
full, beneficial conversion feature of $3,290,216 was recorded as a deemed dividend with a
corresponding credit to additional paid-in capital. In accordance with EITF D-42, an
additional $453,816 deemed dividend resulted from an inducement for the conversion of the
old EEI series A convertible preferred stock into share of the Companys common
stock.

---



# Related Parties

The
Company has agreements with certain related parties who provide consulting services to the
Company. Related party services of an administrative nature were included in general and
administrative-related parties as an operating expense in the amount of $44,779 for 2005
compared with $96,523 for 2004. The Company has an agreement with the owner of E.F.S.
Management Systems, a shareholder of the Companys common stock, to provide
accounting services. The Company has an agreement with Jack T. Brown, a shareholder of the
Companys common stock, to provide consulting services.

On
March 31, 2005, the Company entered into a development agreement to receive a total of
$450,000 in cash funding from In-Q-Tel, a shareholder of the Companys common stock,
for intended use in the research and development of certain battery technologies. The
contract provides for scheduled payments to the Company if it performs certain research
and development activities over a 24-month period. The Company has entered into a
sub-contract agreement with Rutgers University to perform certain of these activities for
$350,000. In connection with this development agreement, the Company entered into an
agreement whereby the Company will issue warrants to In-Q-Tel containing certain cashless
provisions to purchase up to 15,000 shares of the Companys common stock upon
exercise. The warrants are exercisable at $9.06 per share over a four-year period expiring
in March 2009. The weighted average fair value of the warrants at the date of issuance
using the Black Scholes option-pricing model is estimated at $5.58 per warrant. The total
estimated value of the warrants, amounting to $83,767 was recorded as cost of
services-related parties expense and other accrued liability. Further, a deferred contract
cost and additional paid-in capital was recorded as of the date of issuance. The number of
warrants that are exercisable are directly proportional to the amount of the scheduled
payments that are received by the Company for performance of the development agreement.

The
weighted average fair value of the warrants using the Black Scholes option-pricing model
was revalued on December 31, 2005 at $3.06 per warrant. Accordingly, the total estimated
value of the warrants was reduced by $42,057 to $41,710. The amount was recorded as a
reduction of cost of services-related parties expense and other accrued liability.
Further, a reduction of deferred contract cost and additional paid-in capital was
recorded. During 2005, the Company achieved certain milestones and recognized $150,000 of
gross revenue from services rendered related to this development agreement. The relative
value of the warrants of $13,903 was recorded as a reduction to cost of services-related
parties expense and other accrued liability. In addition, a discount to revenue and a
reduction in deferred contract costs was recorded. As of December 31, 2005 the remaining
deferred contract cost was $27,807.

Financial ConditionLiquidity and Capital
Resources

The
Companys working capital, current ratio and long-term debt to equity ratio are as
follows:

|                               | 2005       |  | 2004      
|------------------------------ | ---------- |  | ----------
|Working capital                | $1,428,795 |  | $3,971,928
|Current ratio                  | 3.06       |  | 7.37      
|Long-term debt to equity ratio | 2.3%       |  | 6.1%      

---



The
Companys long-term debt was $266,407 as of December 31, 2005. Current maturities of
long-term debt are $205,214 as of the same period. During 2005, debt decreased by $198,359
compared to total debt at December 31, 2004.

The
Company has a non-interest bearing note payable to EaglePicher requiring three annual
installments of $150,000 that commenced in October 2004 and is secured by assets acquired
in connection with the purchase of its Colorado Springs energy business. As of December
31, 2005, the note payable had a face value of $150,000 with a remaining discount to fair
value of $5,979. During 2005, the Company accreted an additional $12,834 of interest at an
effective rate of 5%, increasing the fair value of the note payable to $144,021.

On
December 31, 2004, the Company refinanced three notes payable with Connecticut
Innovations, Incorporated (CII) into a new note payable in the amount of
$183,579. The note payable has a three-year term with principal payments of $61,193 plus
applicable interest at a fixed rate of 5% to be made annually on December 31st. During
2005, the Company made repayments in the amount of $61,193 plus interest in the amount of
$9,179.

During
2005, warrants were exercised for proceeds of $730,528 in exchange for 826,079 shares of
common stock. As of December 31, 2005, 1,225,333 warrants are outstanding with expiration
dates ranging from July 16, 2007 through March 31, 2009. The maximum potential future
proceeds from the exercise of the warrants outstanding are $2,564,658. The weighted
average exercise price of the outstanding warrants is $2.09.

During
2005, options were exercised for proceeds of $607,524 for 1,387,579 shares of common
stock. As of December 31, 2005, 1,317,353, options are outstanding. The maximum potential
future proceeds from the exercise of the options vested and in-the-money as of December
31, 2005 is $1,680,232.

The
Companys government contracts are each individually negotiated under their own terms
and conditions with reference to the Federal Acquisition Regulations and are typically
fully funded cost-reimbursement type. There is usually an 85% limitation placed on the
fixed fee whereby 15% is withheld by the government until all contract requirements are
satisfied and closeout documents submitted. There are no obligations for royalties.

In
March 2004, the Company issued warrants to purchase 156,250 shares of its Preferred Stock
in connection with a contract to receive a total of $500,000 in cash funding from
In-Q-Tel, Inc., a private venture capital firm, for intended use in the research and
development of certain battery technologies. The contract provided for scheduled payments
to the Company if it performs certain research and development activities over a
nine-month period. The warrants are exercisable at $0.00 (zero dollars) per share over a
five-year period expiring in March 2009. Concurrent with merger, the Company and the
holder of the warrant have agreed to modify the warrant to provide for the issuance of
268,594 shares of the Companys common stock upon exercise. The warrants were
recorded as additional paid-in capital and a warrant subscription receivable. The Company
collected $350,000 in 2004 and $150,000 in 2005 and fulfilled its obligations.

On
October 17, 2005, the Company entered into a Stock Purchase Agreement with In-Q-Tel,
pursuant to which In-Q-Tel has agreed to purchase 241,692 shares of unregistered common
stock and warrants to purchase 75,829 shares of unregistered common stock at an exercise
price of $3.11 per share. The total purchase price for the stock and warrants is $800,000
and is expected to be paid over the course of 14 months following the closing, conditioned
upon the Company achieving certain development milestones. In 2005, the Company issued
30,208 shares of unregistered common stock, collecting $100,000, and issued 9,476 warrants
in connection with this agreement. The Company intends to direct the proceeds toward
research and development to demonstrate the incorporation of Bipolar Li-ion Cell
Technology into Bipolar Lithium Ion Batteries.

Concurrent
with the merger and on June 30, 2004 and July 15, 2004, the Company completed a private
placement of 5,501 units at a purchase price of $1,000 per unit. Each unit consists of one
share of Series A Preferred stock, convertible into 400 shares of common stock, and a
detachable warrant to purchase 200 shares of common stock at an exercise price of $2.50.
Gross proceeds from the private placement amounted to approximately $5,501,000 and net
proceeds amounted to approximately $4,590,000. Gross proceeds allocated to the issuance of
the Series A Convertible Preferred stock amounted to $3,290,216 and resulted in a
beneficial conversion feature in that amount and was deemed a preferred stock dividend to
the holders.

---



Net
cash used in operating activities totaled $3,211,595 and $1,319,853 for 2005 and 2004,
respectively. During 2005, the Company began to build inventory components primarily for
future use in generating revenue from services in anticipation of pending contract awards.
The Company made certain advance payment to suppliers for equipment in the amount of
$134,928. The Company made certain pre-payments of deferred items associated with sales of
its common stock and its due diligence of a potential asset purchase amounting to $114,372
and $211,968 respectively. The Company had accrued expenses primarily related to equipment
purchases and for legal services in connection with the potential asset purchase and
related financing.

The
Company invested $946,086 in equipment in 2005, compared with $228,863 in 2004. Current
year equipment additions relate primarily to the construction in progress for production
equipment for the development of its nickel metal hydride and lithium-ion product lines.
The Company estimates the remaining cost to complete the current construction in progress
projects as $120,000. Prior year additions relate primarily to the purchase of electronic
data processing and lab equipment.

On
May 13, 2005, the company entered into a non binding letter of intent with Topspin
Partners, LP., a merchant bank (Topspin). If the acquisition contemplated by
the letter of intent is consummated, the Company would purchase from an affiliate of
topspin all of the operating assets relating to a lithium ion and nickel based
rechargeable cell and battery manufacturing facility located near Gainesville, Florida.

On
March 31, 2006, the Company entered into this Asset Purchase Agreement with Lithium
Nickel Asset Holding Company I, Inc., a Delaware corporation (Seller),
pursuant to which the Company has agreed to purchase certain assets from Seller relating
to the manufacture of lithium-ion and nickel based rechargeable cells and batteries. The
total purchase price for the assets consists of 5,750,000 unregistered shares of common
stock of the Company (the Consideration Shares) and a six year warrant to
purchase up to 2,000,000 shares of common stock of the Company at an exercise price of
$7.00 per share. Of that total amount, 1,000,000 of the Consideration Shares will be held
in escrow, pursuant to an Escrow Agreement to be signed at closing in order to secure
Sellers indemnification obligations under the Asset Purchase Agreement. The Company
also is required to include up to 1,150,000 of the Consideration Shares in subsequent
registration statements.

At
the closing, the Company and Seller also intend to enter into lease agreements pursuant
to which the Company shall lease from Seller certain real property to be owned by Seller
at Closing and which is located at 12781 NW Highway 441, Alachua, Florida. In connection
therewith, and in addition to rental payments, the Company shall also tender to Seller
1,000,000 four year warrants to purchase shares of common stock of the Company at an
exercise price of $7.00.

Further,
4,600,000 shares of the Consideration Shares and the warrants received by Seller in
connection with the purchase and the lease agreements will be subject to a lock-up
agreement restricting the ability of Seller to transfer such Consideration Shares and
warrants for a period of two years after the closing. Sellers obligations to close
will be conditioned upon the Company obtaining financing in connection with the
transaction. EEEI intends to use the acquired assets to develop and manufacture battery
technologies, product and systems. This closing is contingent upon the Company obtaining
financing of approximately $10,000,000 to $11,000,000.

On
August 8, 2005, the Company entered into a one-year agreement with an investment banking
firm to act as the Companys sole placement agent in connection with the
structuring, issuance and sale of securities of the Company to obtain financing. The
Company has secured financing in an amount satisfactory to complete a private placement
of senior secured convertible notes which will be released from escrow concurrently with
the closing of the asset acquisition expected in April 2006. The securities offered have
not been registered under the Securities Act of 1933, as amended, and may not be offered
or sold in the United States absent registration or an applicable exemption from
registration requirements.

---



The
Company has begun to construct equipment internally to maintain its specialized staffing
and to advance its initiative for commercialization of its nickel metal hydride and
lithium ion product lines. In connection with the continued negotiations with Topspin
Partners, LLC to acquire assets formerly operated by Energizer, the Company expects to
raise investor financing to retrofit the equipment suited for its patented bipolar stacked
wafer concept and for business development. Cash expected to be generated from operating
activities, together with funds available resulting from the proceeds of the private
placement, are expected, under current conditions, to be sufficient to finance the
Companys planned operations over the next twelve months.

Off-balance Sheet
Arrangements

We
have not entered into any transactions with unconsolidated entities in which we have
financial guarantees, subordinated retained interests, derivative instruments or other
contingent arrangements that expose us to material continuing risks, contingent
liabilities or any other obligations under a variable interest in an unconsolidated entity
that provides us with financing, liquidity, market risk or credit risk support.

# Application of Critical
Accounting Policies

Our
financial statements and accompanying notes are prepared in accordance with generally
accepted accounting principles used in the United States. Preparing financial statements
requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, and expenses. These estimates and assumptions are affected
by managements application of accounting policies. We believe that understanding the
basis and nature of the estimates and assumptions involved with the following aspects of
our consolidated financial statements is critical to an understanding of our financials.

Revenue Recognition

In
general, our Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to the
customer is fixed or determinable, and collectability is reasonably assured. The following
policies reflect specific criteria for the various revenues streams of our Company:

Revenue
on our research and development type contracts with the U.S. Government and its
agencies are typically cost plus type contracts that contain a fixed fee
element and/or a cost sharing arrangement. We are reimbursed for actual material, labor
and overhead costs as we incur them up to the funding limit of the contract. We submit our
cost structure annually to the Defense Contract Audit Agency (DCAA) for approval to use
our rates on government contracts. Throughout the life of each contract we estimate the
cost to complete. When we estimate that a contract will exceed the funding amount we will
seek additional funding from our customer or another outside source. Contract terms allow
us to stop work should additional funding not be available. Should we decide to complete a
contract without funding we will expense the cost as we incur it.

Contracts
with milestone billing provisions are fixed cost type contracts. Revenue is recognized
once the milestone has been achieved.

Revenue
on commercial contracts is recognized when we ship our batteries or services have been
rendered.

Stock-Based Compensation

Our
Company accounts for equity instruments issued to employees for services based on the fair
value of the equity instruments issued and accounts for equity instruments issued to other
than employees based on the fair value of the consideration received or the fair value of
the equity instruments, whichever is more reliably measurable.

---



In
December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004)
(SFAS No. 123R), Share-Based Payment which revised SFAS No. 123,
Accounting for Stock-Based Compensation. This statement supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. The revised statement addresses
the accounting for share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based compensation transactions using
APB 25 and requires that the compensation costs relating to such transactions be
recognized in the consolidated statement of operations. The revised statement is effective
as of the first interim period beginning after December 15, 2005 for small business
filers. The Company will adopt the provisions of SFAS No. 123R on January 1, 2006 using
the modified prospective method and the Black Scholes option pricing model and the effect
of implementing will result in additional stock based compensation expense of
approximately $2.4 million of costs that will be expensed over a four year period from
2006 through 2009.

---



Inventory Valuation

Inventories
are stated at the lower of cost or market on a first in first out basis. A reserve for
inventory obsolescence is maintained and is based upon assumptions about current and
future product demand, inventory whose shelf life has expired and market conditions. A
change in any of these variables may require additional reserves to be taken.

Allowances for Doubtful
Accounts

We
maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of the ability to make payments,
additional allowances may be required, which would increase our expenses during the
periods in which any such allowances were made. The amount recorded as an allowance for
doubtful accounts in each period is based upon an assessment of the likelihood that we
will be paid on our outstanding receivables, based on customer-specific as well as general
considerations. To the extent that our estimates prove to be too high, and we ultimately
collect a receivable previously determined to be impaired, we may record a reversal of the
provision in the period of such determination. The Company recorded an allowance for
doubtful accounts of $5,652 and 20,554 as of December 31, 2005 and 2004, respectively.

Accounting for Income
Taxes

In
preparing our consolidated financial statements, we are required to estimate our income
taxes in each of the jurisdictions where we operate. This process involves estimating
actual current tax exposure, together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income, and to the extent that we believe
that recovery is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance, we must include an expense within the tax provision of
the statement of income in each period in which the allowance is increased.

Significant
judgment is required in determining the provision for income taxes, deferred tax assets
and liabilities, and any valuation allowance, against our deferred tax assets. In the
event that actual results differ from these estimates or the estimates are adjusted in
future periods, then we may need to establish an additional valuation allowance, which
could materially impact our financial position and results of operations. The Company has
concluded that a full valuation allowance was appropriate for the deferred tax asset.

Research and Development
Expenses

Research
and development expenses are incurred to develop our battery technologies. They are funded
by the Company and expensed as incurred.

# Recent Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004)
(SFAS No. 123R), Share-Based Payment which revised SFAS No. 123,
Accounting for Stock-Based Compensation. This statement supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. The revised statement addresses
the accounting for share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based compensation transactions using
APB 25 and requires that the compensation costs relating to such transactions be
recognized in the consolidated statement of operations. The revised statement is effective
as of the first interim period beginning after December 15, 2005 for small business
filers. The Company is will adopt the provisions of SFAS No. 123R on January 1, 2006 using
the modified prospective method and the Black Scholes option pricing model and the effect
of implementing will result in additional stock based compensation expense of
approximately $2.4 million of costs that will be expensed over a four year period from
2006 through 2009.

---



In
June 2005, the FASB ratified EITF Issue No. 05-2, The Meaning of Conventional
Convertible Debt Instrument in EITF Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in a Companys Own
Stock, which addresses when a convertible debt instrument should be considered
conventional for the purpose of applying the guidance in EITF No. 00-19. EITF
No. 05-2 also retained the exemption under EITF No. 00-19 for conventional convertible
debt instruments and indicated that convertible preferred stock having a mandatory
redemption date may qualify for the exemption provided under EITF No. 00-19 for
conventional convertible debt if the instruments economic characteristics are more
similar to debt than equity. EITF No. 05-2 is effective for new instruments entered into
and instruments modified in periods beginning after June 29, 2005.

EITF
Issue No. 05-4, The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock addresses financial instruments, such as stock purchase warrants, which are
accounted for under EITF No. 00-19 that may be issued at the same time and in
contemplation of a registration rights agreement that includes a liquidated damages
clause. The consensus for EITF No. 05-4 has not been finalized.

In
September 2005, the FASB ratified EITF Issue No. 05-7, Accounting for Modifications
to Conversion Options Embedded in Debt Instruments and Related Issues, which
addresses whether a modification to a conversion option that changes its fair value
affects the recognition of interest expense for the associated debt instrument after the
modification, and whether a borrower should recognize a beneficial conversion feature, not
a debt extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt).

In
September 2005, the FASB also ratified the EITFs Issue No. 05-8, Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature, which
discusses whether the issuance of convertible debt with a beneficial conversion feature
results in a basis difference arising from the intrinsic value of the beneficial
conversion feature on the commitment date (which is treated recorded in the
shareholders equity for book purposes, but as a liability for income tax purposes),
and, if so, whether that basis difference is a temporary difference under FASB Statement
No. 109, Accounting for Income Taxes. This Issue should be applied by
retrospective application pursuant to Statement 154 to all instruments with a beneficial
conversion feature accounted for under Issue 00-27 included in financial statements for
reporting periods beginning after December 15, 2005.

EITF
Issues 05-7 and 05-8 did not have did not have material effect on the Companys
financial statements.

---



# Item 7.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL
STATEMENTS

|Report of Independent Registered Public Accounting Firm    | F-1
|---------------------------------------------------------- | ---
|Consolidated Balance Sheets                                | F-2
|Consolidated Statements of Operations                      | F-4
|Consolidated Statements of Changes in Stockholders' Equity | F-5
|Consolidated Statements of Cash Flows                      | F-6
|Notes to Consolidated Financial Statements                 | F-8

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
StockholdersElectro Energy Inc. and Subsidiaries

We have audited the accompanying
consolidated balance sheets of Electro Energy Inc. and the Subsidiaries (the
Company) as of December 31, 2005 and 2004 and the related consolidated
statements of operations, changes in stockholders equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Electro Energy Inc. and Subsidiaries as of December 31, 2005 and
2004, and the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of
America.

/s/ Marcum & Kliegman LLP
February 24, 2006 except for Note 12b as to
which the date is February 28, 2006, Notes 12c
and 12,d as to which the date is March 31,2006
New York, New York

---



|ELECTRO ENERGY INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember 31, 2005 and 2004                
|---------------------------------------------------------------------------------------------------------
|                                                                                                         
|ASSETS                                                                                                   
|                                                                                                         
|                                                                                                         
|                                                                                                         
|CURRENT ASSETS                                                                                           
|Cash and cash equivalents                                                                                
|Accounts receivable, net of allowance for doubtful accounts           of $5,652 and $20,554, respectively
|Inventories                                                                                              
|Prepaid expenses and other current assets                                                                
|                                                                                                         
|                                                                                                         
|Total Current Assets                                                                                     
|                                                                                                         
|PROPERTY AND EQUIPMENT, Net                                                                              
|                                                                                                         
|SECURITY DEPOSIT                                                                                         
|                                                                                                         
|                                                                                                         
|TOTAL ASSETS                                                                                             
|                                                                                                         
|                                                                                                         
|The accompanying notes are an integral part of these consolidated financial statements.                  

---



|ELECTRO ENERGY INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                              
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                              
|CURRENT LIABILITIES                                                                                                                                                                                                                                                                                                           
|Current maturities of long-term debt                                                                                                                                                                                                                                                                                          
|Accounts payable                                                                                                                                                                                                                                                                                                              
|Accounts payable - related parties                                                                                                                                                                                                                                                                                            
|Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                              
|Total Current Liabilities                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                              
|OTHER LIABILITIES                                                                                                                                                                                                                                                                                                             
|Long term debt, less current maturities                                                                                                                                                                                                                                                                                       
|Deferred rent                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                              
|Total Other Liabilities                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                              
|TOTAL LIABILITIES                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                              
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                 
|STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                          
|Preferred stock, $0.001 par value, 10,000 shares authorized;
                
Series A Convertible Preferred Stock, 5,600 shares
                
designated; 5,501 shares issued, 180 and 4,951 outstanding in 2005
                
and 2004, respectively ($180,000 and $4,951,000
                
liquidation preference)
|Common stock, $0.001 par value, 50,000,000 shares
                
authorized; 16,599,719 and 12,447,453 shares issued
                
and outstanding in 2005 and 2004, respectively                                                                                                                                        
|Additional paid-in capital                                                                                                                                                                                                                                                                                                    
|Deferred compensation expense                                                                                                                                                                                                                                                                                                 
|Deferred contract costs                                                                                                                                                                                                                                                                                                       
|Warrant subscription receivable                                                                                                                                                                                                                                                                                               
|Accumulated deficit                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                              
|TOTAL STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                              
|TOTAL LIABILITIES AND
                
STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                              
|The accompanying notes are an integral part of these consolidated financial statements.                                                                                                                                                                                                                                       

---



|ELECTRO ENERGY INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFor the Years Ended December 31, 2005 and 2004                
|---------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|NET REVENUE                                                                                                                            
|Services                                                                                                                               
|Products                                                                                                                               
|                                                                                                                                       
|TOTAL NET REVENUE                                                                                                                      
|                                                                                                                                       
|COST OF REVENUE                                                                                                                        
|Cost of services                                                                                                                       
|Cost of products                                                                                                                       
|                                                                                                                                       
|TOTAL COST OF REVENUE                                                                                                                  
|                                                                                                                                       
|GROSS (LOSS) PROFIT                                                                                                                    
|                                                                                                                                       
|OPERATING EXPENSES                                                                                                                     
|Selling, general and administrative (including non cash compensation of $205,361           and $417,044 in 2005 and 2004, respectively)
|Selling, general and administrative - related parties                                                                                  
|Research and development                                                                                                               
|                                                                                                                                       
|TOTAL OPERATING EXPENSES                                                                                                               
|                                                                                                                                       
|OPERATING LOSS                                                                                                                         
|                                                                                                                                       
|INTEREST EXPENSE                                                                                                                       
|Interest (income) expense, net                                                                                                         
|Interest expense - related parties                                                                                                     
|                                                                                                                                       
|TOTAL INTEREST (INCOME) EXPENSE                                                                                                        
|                                                                                                                                       
|NET LOSS                                                                                                                               
|                                                                                                                                       
|DEEMED DIVIDENDS ON PREFERRED STOCK                                                                                                    
|                                                                                                                                       
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                                                                           
|                                                                                                                                       
|NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS - BASIC AND DILUTED                                                             
|                                                                                                                                       
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED                                                                         
|                                                                                                                                       
|The accompanying notes are an integral part of these consolidated financial statements.                                                

---



|ELECTRO ENERGY INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYFor the Years Ended December 31, 2005 and 2004
|--------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|BALANCES - January 1, 2004                                                                                                                  
|Proceeds from exercise of employee stock options                                                                                            
|Stock options issued to employees                                                                                                           
|Amortization of deferred compensation expense                                                                                               
|Conversion of notes payable to stockholders and related accrued interest into common stock                                                  
|Reverse merger with MCG Diversified, Inc.                                                                                                   
|Issuance of warrants                                                                                                                        
|Proceeds from warrant subscription receivable                                                                                               
|Net proceeds from issuance of preferred stock and warrants                                                                                  
|Conversion of preferred stock into common stock                                                                                             
|Proceeds from exercise of warrants                                                                                                          
|Net loss                                                                                                                                    
|Deemed dividends on preferred stock                                                                                                         
|                                                                                                                                            
|BALANCE - December 31, 2004                                                                                                                 
|Proceeds from exercise of employee stock options                                                                                            
|Forfeiture of stock options issued to employees                                                                                             
|Amortization of deferred compensation expense                                                                                               
|Issuance of stock options                                                                                                                   
|Issuance and amortization of warrants                                                                                                       
|Proceeds from issuance of common stock                                                                                                      
|Proceeds from warrant subscription receivable                                                                                               
|Conversion of preferred stock into common stock                                                                                             
|Proceeds from exercise of warrants                                                                                                          
|Net loss                                                                                                                                    
|Deemed dividends on preferred stock                                                                                                         
|                                                                                                                                            
|BALANCE - December 31, 2005                                                                                                                 
|                                                                                                                                            
|                                                                                                                                            
|The accompanying notes are an integral part of these consolidated financial statements.                                                     

---



|ELECTRO ENERGY INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended December 31, 2005 and 2004
|-----------------------------------------------------------------------------------------------------------------------
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                   
|Net loss                                                                                                               
|                                                                                                                       
|Adjustments to reconcile net loss to net

        cash used in operating activities:                                   
|Deferred rent                                                                                                          
|Interest accretion                                                                                                     
|Depreciation and amortization                                                                                          
|Amortization of deferred expenses                                                                                      
|Changes in operating assets and liabilities:                                                                           
|Accounts receivable                                                                                                    
|Inventories                                                                                                            
|Prepaid expenses and other current assets                                                                              
|Accounts payable                                                                                                       
|Accounts payable - related parties                                                                                     
|Interest payable                                                                                                       
|Interest payable - related parties                                                                                     
|Accrued expenses and other current liabilities                                                                         
|                                                                                                                       
|TOTAL ADJUSTMENTS                                                                                                      
|                                                                                                                       
|                                                                                                                       
|NET CASH USED IN                        
  OPERATING ACTIVITIES                                                        
|                                                                                                                       
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                   
|Purchases of property and equipment                                                                                    
|Payment of security deposit                                                                                            
|                                                                                                                       
|NET CASH USED IN                        
  INVESTING ACTIVITIES                                                        
|                                                                                                                       
|                                                                                                                       
|The accompanying notes are an integral part of these consolidated financial statements.                                

---



|ELECTRO ENERGY INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended December 31, 2005 and 2004
|-----------------------------------------------------------------------------------------------------------------------
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                   
|Repayments under bank line of credit                                                                                   
|Repayments of long term debt                                                                                           
|Repayments under notes payable - related parties                                                                       
|Proceeds from issuance of preferred stock and warrants                                                                 
|Issuance costs of preferred stock and warrants                                                                         
|Proceeds from issuance of warrants                                                                                     
|Proceeds from warrant subscription receivable                                                                          
|Proceeds from issuance of common stock                                                                                 
|Proceeds from exercise of warrants and employee stock options                                                          
|                                                                                                                       
|                                                                                                                       
|NET CASH PROVIDED BY                        
  FINANCING ACTIVITIES                                                    
|                                                                                                                       
|NET (DECREASE) INCREASE IN CASH AND                        
  CASH EQUIVALENTS                                         
|                                                                                                                       
|CASH AND CASH EQUIVALENTS - Beginning                                                                                  
|                                                                                                                       
|                                                                                                                       
|CASH AND CASH EQUIVALENTS - Ending                                                                                     
|                                                                                                                       
|                                                                                                                       
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                                                      
|Cash paid for:                                                                                                         
|Interest                                                                                                               
|Income taxes                                                                                                           
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                                                
|Conversion of notes payable and related accrued interest into common stock                                             
|Issuance of warrants in exchange for warrant subscription receivable                                                   
|Issuance of warrants for deferred contract costs                                                                       
|                                                                                                                       
|The accompanying notes are an integral part of these consolidated financial statements.                                

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  The Company

OrganizationOn
June 9, 2004, Electro Energy, Inc. (EEI), a Delaware corporation, entered into
a merger with MCG Diversified, Inc. (MCG), incorporated in December 1993 in
the State of Florida. MCG issued 9,497,557 unregistered shares of common stock for 100% of
the outstanding common stock of EEI on a one-to-one basis. As MCG did not have any
meaningful operations prior to the merger, the transaction was treated as a
recapitalization of EEI, and accounted for on an historical cost basis for all periods
presented. The financial statements set forth in this report for all periods are the
financial statements of EEI and the common stock of EEI has been retroactively restated to
give effect to the exchange for MCG common stock. Immediately following the merger, MCG
changed its name to Electro Energy Inc. (New EEI). On September 29, 2004, EEI
changed its name to EEI Technologies, Inc.

The
consolidated financial statements presented are those of New EEI and its wholly-owned
subsidiary, EEI. Additionally, the accounts of EEI include the accounts of Mobile Energy
Products, Inc. (MEP), a wholly-owned subsidiary incorporated June 11, 2003,
from its inception. Collectively, they are referred to herein as the Company.
On October 1, 2003 the Company, through its MEP subsidiary acquired the Colorado Springs
energy business of EaglePicher Technologies, LLC (EaglePicher).

Managements
Liquidity Plans

As
of December 31, 2005, the Company had working capital of $1,428,795 and cash and cash
equivalents of $591,664. The Company incurred a loss from operations of $3,308,259 for
the year ended December 31, 2005. Cash flow used in operating and investing activities
was $3,211,595 and $946,086, respectively. Cash flow provided by financing activities was
$1,376,859. During 2005 and the first quarter of 2006, management has been actively
pursuing the acquisition of major manufacturing capacity and seeking financing to
continue its commercialization plans of its patented battery design.

The
Company entered into an Asset Purchase Agreement with Lithium Nickel Asset Holding
Company I, Inc. (Seller), a Delaware corporation, pursuant to which the
Company has agreed to purchase certain assets from Seller relating to the manufacture of
lithium-ion and nickel based rechargeable cells and batteries. (See Note 12d). The total
purchase price for the assets consists of 5,750,000 unregistered shares of common stock
of the Company and a warrant to purchase up to 2,000,000 shares of common stock of the
Company at an exercise price of $7.00 per share. At the closing, the Company and Seller
also intend to enter into lease agreements pursuant to which the Company shall lease from
Seller certain real property to be owned by Seller at Closing and which is located at
12781 NW Highway 441, Alachua, Florida. In connection therewith, and in addition to
rental payments, the Company shall also tender to Seller 1,000,000 warrants to purchase
shares of common stock of the Company at an exercise price of $7.00.

On
August 8, 2005, the Company entered into a one-year agreement with an investment banking
firm to act as the Companys sole placement agent in connection with the
structuring, issuance and sale of securities of the Company to obtain financing. The
Company has secured financing in an amount satisfactory to complete a private placement
of senior secured convertible notes which will be released from escrow concurrently with
the closing of the aforementioned asset acquisition expected April 7, 2006. (See Note
12d). The securities offered have not been registered under the Securities Act of 1933,
as amended, and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements.

As
of March 30, 2006, the Company has approximately $250,000 (unaudited) of cash and expects
to receive net proceeds from the issuance of senior secured convertible notes in April
2006. Management believes that the Company once the net proceeds have been received will
have sufficient liquidity available to meet operating requirements for the next twelve
months.

While
the Company expects the closing of the asset acquisition to occur prior to April 7, 2006,
in the event that it does not the investors in the senior secured convertible notes may
exercise rescission rights to rescind their investment. In 2006, the Company plans to use
a portion of the proceeds for additional investment in equipment and leasehold
improvements at the Alachua plant of $1,300,000. The Company plans to use additional
working capital to start up operations at the Alachua plant and for development of sales
and marketing efforts and new product development.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of BusinessThe
Company is engaged in the development of products for use in providing energy and
specifically focuses upon development of bipolar nickel metal hydride batteries and other
battery chemistries and primarily provides contract research and development to the United
States Government or its agencies.

Additionally,
the Company also has commercially viable products marketed and sold primarily to the
United States Government or its agencies. These products include batteries for aircraft,
satellite and satellite launch vehicles.

NOTE 2  Summary of
Significant Accounting Policies

Principles of
ConsolidationThe
consolidated financial statements include the accounts of New EEI and MEP. All significant
intercompany balances and transactions have been eliminated in consolidation.

ReclassificationsCertain
accounts in the prior year financial statements have been reclassified for comparative
purposes to conform with the presentation in the current year financial statements. These
reclassifications have no effect on previously reported income.

Use of EstimatesThe
preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.

Concentration of Credit
RiskFinancial
instruments that potentially subject the Company to significant concentrations of credit
risk consist of cash and accounts receivable.

The
Company maintains its cash accounts at high quality financial institutions with balances,
at times, in excess of federally insured limits. As of December 31, 2005, the Company had
cash balances in excess of federally insured limits of $615,148. The Company also has
substantial cash balances which are invested in a money market account with a bank.

Concentrations
of credit risk with respect to accounts receivable are limited because the Companys
customers are primarily the United States Government or its agencies. Credit risk with
respect to trade accounts receivable from private entities is not significant.

Accounts ReceivableAccounts
receivable are based on contracted amounts and the Company generally invoices on a
progressive basis as work is completed or upon delivery. The Company does not expect
significant charges for bad debts related to its accounts receivable as its customers
consist of primarily the United States Government or its agencies.

Allowances for Doubtful
AccountsThe
Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of the ability to make payments,
additional allowances may be required, which would increase the Companys expenses
during the periods in which any such allowances were made. The amount recorded as an
allowance for doubtful accounts in each period is based upon an assessment of the
likelihood that the Company will be paid on our outstanding receivables, based on
customer-specific as well as general considerations. To the extent that our estimates
prove to be too high, and the Company ultimately collects a receivable previously
determined to be impaired, the Company may record a reversal of the provision in the
period of such determination. The Company recorded an allowance for doubtful accounts of
$5,652 and $20,554 as of December 31, 2005 and 2004, respectively.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

InventoriesInventories
are valued at the lower of cost or market, with cost determined on the first-in, first out
basis. The Companys products are produced on a make-to-order basis and, as a result,
the Company does not carry finished goods inventory. The raw materials inventory and work
in process inventory are adjusted to net realizable value based upon a periodic impairment
review.

Property and EquipmentProperty
and equipment are recorded at cost. The costs of additions and betterments are capitalized
and expenditures for repairs and maintenance are expensed in the period incurred. When
items of property and equipment are sold or retired, the related costs and accumulated
depreciation are removed from the accounts and any gain or loss is included in income.

Revenue RecognitionIn
general, the Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to the
customer is fixed or determinable, and collectability is reasonably assured. The following
policies reflect specific criteria for the various revenues streams of the Company:

Revenue
is recognized at the time the product is delivered. Provision for sales returns will be
estimated based on the Companys historical return experience. Revenue is presented
net of returns.

Revenue
on the Companys research and development type contracts with the U.S. Government and
its agencies are typically cost plus type contracts that contain a fixed
fee element and/or a cost sharing arrangement. The Company is reimbursed for actual
material, labor and overhead costs as incurred up to the funding limit of the contract.
The Company submits a cost structure annually to the Defense Contract Audit Agency (DCAA)
for approval to use the Companys rates on government contracts. Throughout the life
of each contract the Company estimates the cost to complete. When the Company estimates
that a contract will exceed the funding amount management will seek additional funding
from the customer or another outside source. Contract terms allow the Company to stop work
should additional funding not be available. Should management decide to complete a
contract without funding the Company will accrue the loss on the contract when the cost is
estimated to exceed the revenue.

Contracts
with milestone billing provisions are fixed cost type contracts. Revenue is recognized
once the milestone has been achieved.

Revenue
on commercial contracts is recognized when the Company delivers batteries or services have
been rendered.

Significant CustomersThe
Company had three customers with sales of 10% or more of total sales in 2005. Net sales to
the Companys three major customers, U.S. Airforce Mantech, Sandia National
Laboratories, and EaglePicher Technologies, LLC represented approximately 64% in 2005.
Accounts receivable from these customers amounted to $185,418 and $407,547 as December 31,
2005 and 2004, respectively. The Company had two customers with sales of 10% or more of
total sales in 2004. Net sales to such customers, U.S. Airforce Mantech and EaglePicher
Technologies, LLC, represented approximately 59% in 2004.

Product WarrantyThe
Company is responsible for providing warranty coverage on certain products. Based on
historical warranty claims, the Company accrues the estimated costs of the warranty
coverage at the time of sale. As of December 31, 2005, the estimated liability is zero.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and
AmortizationDepreciation
and amortization is provided for under the straight-line method based upon the estimated
useful lives of the respective assets. Leasehold improvements are amortized under the
straight-line method over the lesser of the term of the related lease or the estimated
useful lives of the assets.

Income TaxesThe
Company recognizes deferred taxes under the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are recognized
for differences between the financial statement and tax basis of assets and liabilities at
current enacted statutory tax rates for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected to be
realized.

Fair Value of Financial
InstrumentsThe
carrying amounts reported in the consolidated financial statements for current assets and
current liabilities qualifying as financial instruments are a reasonable estimate of their
fair value. The fair value of long-term debt is estimated to approximate fair market value
based on the current rates offered to the Company for debt of the same remaining
maturities.

Stock-Based CompensationAs
permitted under SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, which amended SFAS No. 123 (SFAS 123), Accounting for
Stock Based Compensation, the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangements, as defined by Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and related interpretations including
Financial Accounting Standards Board Interpretations No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB No. 25. For the
years ended December 31, 2005 and 2004, the Company recorded compensation expense in
general administrative expenses amounting to $195,203 and $417,044, respectively, related
to stock options granted to employees.

Prior
to the merger discussed in Note 1, the Company accounted for options granted to employees
by computing proforma compensation cost utilizing the Black Scholes option pricing model
and the minimum value method. This method computes the value assigned to the options based
on a number of valuation assumptions but excludes the concept of volatility which measures
the changes in value that publicly traded securities regularly experience. Pursuant to the
aforementioned merger, the Company continues to compute the fair value of newly granted
options utilizing the Black Scholes option pricing model but now includes the volatility
measure which generally gives rise to a higher amount of proforma compensation than the
minimum value method as the volatility utilized in the calculation increases the value of
the options and therefore the proforma compensation charge also increases.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The
following table illustrates the effect on net loss if the Company had applied the fair and
minimum value recognition provisions of SFAS 123 to stock-based compensation for the years
ended December 31, 2005 and 2004:

| |                                                                                                                              | 2005 |             | 2004
| | ---------------------------------------------------------------------------------------------------------------------------- | ---- | ----------- | ----
| |                                                                                                                              |      |             |     
| | Net loss attributable to common stockholders as reported                                                                     | $    | (3,290,680) |     
| | Add:  stock-based employee compensationexpense included in reported net loss                                                 |      | 195,203     |     
| | Deduct:  total stock-based employee compensationexpense determined under fair and minimumvalue-based methods for all options |      | (750,103)   |     
| |                                                                                                                              |      |             |     
| | Proforma net loss attributable to common stockholders                                                                        | $    | (3,845,580) |     
| |                                                                                                                              |      |             |     
| | Proforma net loss per share attributable to commonstockholders (basic and diluted)                                           | $    | (0.26)      |     
| |                                                                                                                              |      |             |     

The
fair value and minimum value of options at date of grant was estimated using an
option-pricing model with the following weighted average assumptions:

| |                          | 2005 |        | 2004
| | ------------------------ | ---- | ------ | ----
| |                          |      |        |     
| | Expected Life (Years)    |      | 10     |     
| | Interest Rate            |      | 4.002% |     
| | Annual Rate of Dividends |      | -%     |     
| | Volatility               |      | 113.5% |     

The
weighted average fair value and minimum value of the options at date of grant using the
Black Scholes option-pricing model is estimated at $4.44 and $3.36 per option for the
years ended December 31, 2005 and 2004, respectively.

Research and DevelopmentResearch
and development expenses are incurred to develop our battery technologies. They are self
funded and expensed as incurred. Research and development expenses for the years ended
December 31, 2005 and 2004 were $ 688,114 and $312,953, respectively.

Loss Per ShareBasic
loss per share is computed by dividing the net loss applicable to common shares by the
weighted average number of common shares outstanding during the period. The weighted
average number of shares has been given retroactive effect to the recapitalization.
Diluted loss per share adjusts basic loss per share for the effects of convertible
securities, warrants, stock options and other potentially dilutive financial instruments,
only in the periods in which such effect is dilutive. The shares issuable upon the
conversion of preferred stock, the exercise of stock options and warrants are excluded
from the calculation of net loss per share as their effect would be antidilutive.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities
that could potentially dilute earnings per share (EPS) in the future that were
not included in the computation of diluted loss per share consist of the following as of
December 31, 2005 and 2004:

| |                                               | 2005 |           | 2004
| | --------------------------------------------- | ---- | --------- | ----
| |                                               |      |           |     
| |                                               |      |           |     
| | Preferred stock convertible into common stock |      | 72,000    |     
| | Warrants to purchase common stock             |      | 1,225,333 |     
| | Options to purchase common stock              |      | 1,317,353 |     
| |                                               |      |           |     
| | Total potential common shares                 |      | 2,614,686 |     
| |                                               |      |           |     

Recent Accounting
PronouncementsIn
December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004)
(SFAS No. 123R), Share-Based Payment which revised SFAS No. 123,
Accounting for Stock-Based Compensation. This statement supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. The revised statement addresses
the accounting for share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based compensation transactions using
APB 25 and requires that the compensation costs relating to such transactions be
recognized in the consolidated statement of operations. The revised statement is effective
as of the first interim period beginning after December 15, 2005 for small business
filers. The Company will adopt the provisions of SFAS No. 123R on January 1, 2006 using
the modified prospective method and the Black Scholes option pricing model and the effect
of implementing will result in additional stock based compensation expense approximately
$2.4 million of costs that will be expensed over a four year period from 2006 through
2009.

In
June 2005, the FASB ratified EITF Issue No. 05-2, The Meaning of Conventional
Convertible Debt Instrument in EITF Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in a Companys Own
Stock, which addresses when a convertible debt instrument should be considered
conventional for the purpose of applying the guidance in EITF No. 00-19. EITF
No. 05-2 also retained the exemption under EITF No. 00-19 for conventional convertible
debt instruments and indicated that convertible preferred stock having a mandatory
redemption date may qualify for the exemption provided under EITF No. 00-19 for
conventional convertible debt if the instruments economic characteristics are more
similar to debt than equity. EITF No. 05-2 is effective for new instruments entered into
and instruments modified in periods beginning after June 29, 2005.

EITF
Issue No. 05-4, The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock addresses financial instruments, such as stock purchase warrants, which are
accounted for under EITF No. 00-19 that may be issued at the same time and in
contemplation of a registration rights agreement that includes a liquidated damages
clause. The consensus for EITF No. 05-4 has not been finalized.

In
September 2005, the FASB ratified EITF Issue No. 05-7, Accounting for Modifications
to Conversion Options Embedded in Debt Instruments and Related Issues, which
addresses whether a modification to a conversion option that changes its fair value
affects the recognition of interest expense for the associated debt instrument after the
modification, and whether a borrower should recognize a beneficial conversion feature, not
a debt extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt).

In
September 2005, the FASB also ratified the EITFs Issue No. 05-8, Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature, which
discusses whether the issuance of convertible debt with a beneficial conversion feature
results in a basis difference arising from the intrinsic value of the beneficial
conversion feature on the commitment date (which is treated recorded in the
shareholders equity for book purposes, but as a liability for income tax purposes),
and, if so, whether that basis difference is a temporary difference under FASB Statement
No. 109, Accounting for Income Taxes. This Issue should be applied by
retrospective application pursuant to Statement 154 to all instruments with a beneficial
conversion feature accounted for under Issue 00-27 included in financial statements for
reporting periods beginning after December 15, 2005.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EITF
Issues 05-7 and 05-8 did not have did not have material effect on the Companys
financial statements.

NOTE 3  Inventories

Inventories
consist of the following as of December 31, 2005 and 2004:

| |                  | 2005 |         | 2004
| | ---------------- | ---- | ------- | ----
| |                  |      |         |     
| | Raw materials    | $    | 256,185 |     
| | Work in progress |      | 88,265  |     
| |                  |      |         |     
| | Total            | $    | 344,450 |     
| |                  |      |         |     

NOTE 4  Property
and Equipment

Property
and equipment consists of the following as of December 31, 2005 and 2004:

| |                                                  | 2005 |           | 2004 |   | Useful Lives
| | ------------------------------------------------ | ---- | --------- | ---- | - | ------------
| |                                                  |      |           |      |   |             
| | Equipment (1)                                    | $    | 1,652,276 |      | $ | 706,190     
| | Leasehold improvements                           |      | 30,359    |      |   | 30,359      
| |                                                  |      |           |      |   |             
| |                                                  |      | 1,682,635 |      |   | 736,549     
| |                                                  |      |           |      |   |             
| | Less:  Accumulated depreciation and amortization |      | 308,013   |      |   | 203,276     
| |                                                  |      |           |      |   |             
| | Property and Equipment, Net                      | $    | 1,374,622 |      | $ | 533,273     
| |                                                  |      |           |      |   |             

(1)Included
in equipment is $868,809 of construction in progress which has           not been placed
in service as of December 31, 2005 and therefore not depreciated           during the
year then ended.

Depreciation
and amortization expense for the years ended December 31, 2005 and 2004 was $104,737 and
$46,337, respectively.

NOTE 5  Bank Line
of Credit

The
Company had a $100,000 unsecured line of credit which is due on demand and subject to
annual renewals. Advances bear interest at 1.0% over the banks prime lending rate
(approximately 6.15% as of December 31, 2004) and were personally guaranteed by a
stockholder of the Company. The line of credit was paid off during 2004 and was closed in
March 2005. Interest expense related to the line of credit amounted to $2,780 for the year
ended December 31, 2004

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6  Long-Term
Debt

Long-term
debt consists of the following as of December 31, 2005 and 2004:

| |                                                                                                                                                                                                                                                          |                                                                  |   | 2005    |         | 2004
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | - | ------- | ------- | ----
| |                                                                                                                                                                                                                                                          |                                                                  |   |         |         |     
| |                                                                                                                                                                                                                                                          |                                                                  |   |         |         |     
| | Note payable to Connecticut Innovations, Incorporated ("CII") commencing December 2004 and maturing December 2007 with interest at 5% per annum and annual installments of $61,193                                                                       |                                                                  | $ | 122,386 |         | $   
| |                                                                                                                                                                                                                                                          |                                                                  |   |         |         |     
| | Non-interest bearing note payable to EaglePicher Technologies, LLC requiring three annual installments of $150,000 commencing in October 2004 and is secured by assets acquired in connection with the purchase of its Colorado Springs energy business: |                                                                  |   |         |         |     
| |                                                                                                                                                                                                                                                          | Face Value                                                       |   |         | 150,000 |     
| |                                                                                                                                                                                                                                                          | Remaining discount to fair value (effective interest rate of 5%) |   |         | (5,979) |     
| |                                                                                                                                                                                                                                                          |                                                                  |   |         |         |     
| |                                                                                                                                                                                                                                                          | Fair Value                                                       |   |         | 144,021 |     
| |                                                                                                                                                                                                                                                          |                                                                  |   |         |         |     
| |                                                                                                                                                                                                                                                          | Total long-term debt                                             |   |         | 266,407 |     
| | Less:  current maturities                                                                                                                                                                                                                                |                                                                  |   | 205,214 |         |     
| |                                                                                                                                                                                                                                                          |                                                                  |   |         |         |     
| |                                                                                                                                                                                                                                                          | Total long-term debt, less current maturities                    |   | $       | 61,193  |     
| |                                                                                                                                                                                                                                                          |                                                                  |   |         |         |     

Interest expense related to the long-term debt of CII amounted to $9,179 and
$15,844 for the years ended December 31, 2005 and 2004, respectively.

Accretion
of the discount related to the long-term debt of EaglePicher Technologies, LLC amounted to
$12,834 and $19,365 for the years ended December 31, 2005 and 2004, respectively.

Maturities
of long-term debt as of December 31, 2005 are as follows:

|For the Year EndingDecember 31, | Amount
|------------------------------- | ------
|                                |       
|2006                            | $     
|2007                            |       
|                                |       
|Total                           | $     
|                                |       

NOTE 7 
Stockholders Equity

Preferred StockThe
Company has authorized 10,000 shares of preferred stock, par value $0.001 per share, of
which 5,600, are designated as Series A Convertible Preferred Stock (Series A
Preferred) as specified in the Certificate of Designation (the
Certificate).

Each
share of Series A Preferred is convertible at the option of the holder and automatically
upon the occurrence of certain events, as defined in the Certificate, into 400 shares of
the Companys common stock and has a liquidation preference of $1,000 per share. The
conversion rate and liquidation preference are subject to adjustment as specified in the
Certificate. Each share of the Series A Preferred is entitled to votes equal to the number
of shares of common stock it is convertible into at the time of the voting. During the
year ended December 31, 2004, the Company issued 5501 shares of Series A Preferred stock
in a private placement. (See below.)

During
the year ended December 31, 2005 and 2004, 4,771 and 550 shares of Series A Preferred were
converted into 1,908,400 and 220,000 shares of common stock, respectively.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common StockThe
Company has authorized 50,000,000 shares of common stock, par value $0.001. As of December
31, 2005, the Company had reserved 3,000,000 shares of common stock for issuance under its
1993 Stock Compensation Plan (the 1993 Plan), as well as 3,000,000 shares of
common stock for issuance under its newly adopted 2005 Stock Compensation Plan (the
2005 Plan). On June 9, 2004, the Companys common stock was split 1.719
to 1. The effects of the stock split have been given retroactive effect in these financial
statements for all periods presented. During years ended December 31, 2005 and 2004, the
Company issued 1,387,579 and 439,205 shares of common stock in connection with the
exercise of employee stock options for proceeds of $607,524 and $7,000, respectively.

During
the years ended December 31, 2005 and 2004, warrants were exercised for proceeds of
$730,528 and $75,000 in exchange for 826,079 and 30,000 shares of common stock,
respectively.

On
October 17, 2005, the Company entered into a Stock Purchase Agreement with a venture
capital firm (See Note 9) whereby the Company issued 30,208 shares of unregistered common
stock.

Stock OptionsAs
of December 31, 2004, the Company had reserved 3,000,000 shares of common stock for
issuance under its 1993 Plan. The options vest ratably over a four-year period and are
exercisable up to 10 years from the date of grant.

On
June 28, 2005, the Company adopted its 2005 Plan. The purpose of the 2005 Plan is to
enable the Company to attract, retain and motivate key employees, directors and, on
occasion, consultants, by providing them with stock options. Stock options granted under
the 2005 Plan may be either incentive stock options, as defined in Section 422A of the
Internal Revenue Code of 1986, or non-qualified stock options. The Company has reserved
3,000,000 shares of common stock for issuance under the 2005 Plan. The Company granted
700,000 stock options during the year ended December 31, 2005, 200,000 of which were
issued in connection with an employment agreement, 475,000 issued to directors and
employees, and 25,000 of which were issued in connection with a consulting agreement. As
of December 31, 2005, unexercised stock options to purchase an aggregate of 1,317,353
shares of common stock have been granted to 23 employees, directors, or consultants under
the 1993 Plan and the 2005 Plan, at exercise prices ranging from $.26 to $6.76 per share.

During
the year ended December 31, 2005, 327,189 employee stock options were forfeited and a
related net adjustment of $608,526 was made to lower the previously recorded deferred
compensation amount. The remaining balance of the deferred compensation amount for
employee stock options as of December 31, 2005 was $371,405 and will be fully amortized
through December 2007.

During
the year ended December 31, 2005, the Company recorded $81,260 of deferred compensation
expense in connection with 25,000 stock options issued to a consultant of which $10,158
has been amortized. The remaining balance of the deferred compensation amount as of
December 31, 2005 was $71,102 and will be amortized through June 2009.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock
option activity under the 1993 and 2005 Plans for the years ended December 31, 2005 and
2004 are as follows:

| |                           | Number ofOptions |             | Weighted-AverageExercisePrice
| | ------------------------- | ---------------- | ----------- | -----------------------------
| |                           |                  |             |                              
| | Balance-January 1, 2004   |                  | 2,061,081   |                              
| | Granted                   |                  | 710,245     |                              
| | Exercised                 |                  | (439,205)   |                              
| |                           |                  |             |                              
| | Balance-December 31, 2004 |                  | 2,332,121   |                              
| | Granted                   |                  | 700,000     |                              
| | Exercised                 |                  | (1,387,579) |                              
| | Forfeited                 |                  | (327,189)   |                              
| |                           |                  |             |                              
| | Balance-December 31, 2005 |                  | 1,317,353   |                              
| |                           |                  |             |                              

Stock options outstanding and
exercisable, by price range, as of December 31, 2005 are as follows:

| | Exercise Price | Amount    | Weighted-AverageRemainingContractualLife inYears | Weighted-AverageExercisePrice | AmountExercisable
| | -------------- | --------- | ------------------------------------------------ | ----------------------------- | -----------------
| |                |           |                                                  |                               |                  
| | $0.26          | 50,487    | 4.2                                              | $    0.26                     | 50,487           
| | $1.16          | 541,866   | 7.2                                              | 1.16                          | 253,933          
| | $2.00          | 75,000    | 8.5                                              | 2.00                          | 25,000           
| | $3.94          | 225,000   | 10.0                                             | 3.94                          | -                
| | $6.76          | 425,000   | 9.4                                              | 6.76                          | -                
| |                |           |                                                  |                               |                  
| |                | 1,317,353 | 8.3                                              | $    3.46                     | 329,420          
| |                |           |                                                  |                               |                  

WarrantsThe
Company had previously issued warrants to purchase 412,560 shares of its common stock in
connection with its notes payable to related parties (See Note 8). The warrants are
exercisable at $1.16 per share over a five-year period with expirations beginning in April
2007 through November 2008. The weighted average fair value of the warrants at date of
issuance using the Black Scholes option-pricing model is estimated at $1.08 per warrant.
The total estimated value of the warrants, amounting to $260,207 was recorded as a debt
discount and as additional paid-in capital as of the date of issuance. On June 9, 2004, a
warrant to purchase 154,710 shares of common stock was relinquished by a holder of the
warrant.

In
March 2004, EEI had issued warrants to purchase 268,594 shares of its EEI Preferred Stock
in connection with a contract to receive a total of $500,000 in cash funding from a
venture capital firm for intended use in the research and development of certain battery
technologies. The Company satisfied its contractual obligations in the first quarter of
2005. The outstanding warrant subscription receivable was collected in full during the
year ended December 31, 2005.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additionally,
in June and July 2004, the Company issued 5,501 warrants in a private placement (See
below). Each warrant entitles the holder to purchase 200 shares of common stock at $2.50
per share through July 16, 2007. Also in connection with the private placement, 502,540
warrants to purchase 502,540 shares of common stock at an exercise price of $1.00 expiring
on July 16, 2007 containing certain cashless provisions were issued to the placement
agents.

On
March 31, 2005, the Company issued warrants to purchase 15,000 shares of the
Companys common stock in connection with a contract to receive a total of $450,000
in cash funding from a venture capital firm for intended use in the research and
development of certain battery technologies. (See Note 8)

On
October 17, 2005, the Company entered into a Stock Purchase Agreement with a venture
capital firm. (See Note 9.) During 2005, the Company issued 9,476 warrants in connection
with this agreement.

During
the years ended December 31, 2005 and 2004, warrants were exercised for proceeds of
$730,528 and $75,000 in exchange for 826,079 and 30,000 shares of common stock,
respectively. As of December 31, 2005, 1,225,333 warrants are outstanding with expiration
dates ranging from July 16, 2007 through March 31, 2009. The weighted
average exercise price of the outstanding warrants is $2.09.

Private PlacementConcurrent
with the merger and on June 30, 2004 and July 15, 2004, the Company completed a private
placement of 5,501 units at a purchase price of $1,000 per unit. Each unit consists of one
share of Series A Preferred, convertible into 400 shares of common stock, and a detachable
warrant to purchase 200 shares of common stock at an exercise price of $2.50. Gross
proceeds from the private placement amounted to approximately $5,501,000 and net proceeds
amounted to approximately $4,590,000.

Gross
proceeds allocated to the issuance of the Series A Preferred stock amounted to $3,290,215.
In accordance with Emerging Issues Task Force (EITF) 98-5 and EITF 00-27, the
Series A Preferred was considered to have an embedded beneficial conversion feature
because the conversion price was less than the fair value of the Companys common
stock. This beneficial conversion feature is calculated after the warrants have been
valued with proceeds allocated on a relative value basis. This series A convertible
Preferred was fully convertible at the issuance date, therefore the full amount of
proceeds allocated to the series A Preferred was determined to be the value of the
beneficial conversion feature and was recorded as a deemed dividend with a corresponding
credit to additional paid-in capital.

Warren
G. Bagatelle, a director of the Company, and his spouse currently hold non-controlling
interests in Matrix USA, LLC, a finder in the private placement consummated in July 2004,
which received cash in the amount of $128,500 and equity-based compensation of $61,000 in
the form of Series A Preferred and 112,500 warrants to purchase shares of common stock in
connection with the private placement. Shari Popkin Fleischer, the Chairperson of Matrix
USA, LLC, is a current shareholder of the Company.

NOTE 8  Related
Parties

Notes PayableConcurrent
with the merger, EEI converted its notes payable to a stockholder and individuals and
entities related to a stockholder and related accrued interest, amounting to $1,100,000
and $86,000, respectively, into 1,019,367 shares of its common stock. The notes carried
interest at 10% per annum and were due on demand maturing in November 2004. The notes were
convertible into EEIs common stock at a rate of $1.16 per share. In connection with
the above notes, the Company issued warrants to purchase 412,560 shares of the
Companys common stock at $1.16 per share. On June 9, 2004, a warrant to purchase
154,710 shares of EEI common stock was relinquished by a holder of the warrant. The terms
of the warrants are five years from the issuance of the related notes with expirations
beginning in April 2007 through November 2008. The total estimated value of the warrants
amounted to $260,207 (See Note 7), and represents deferred interest that was to be
accreted over the term of the related notes. Upon conversion of the notes, the remaining
deferred interest, amounting to $107,140, was accreted into interest expense.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accretion
of deferred interest related to the notes payable to related parties amounted to $208,677
for the year ended December 31, 2004. Interest expense related to the notes payable to
related parties amounted to $48,365 for the year ended December 31, 2004.

Consulting ServicesCertain
stockholders and parties related to stockholders have provided consulting services to the
Company for various technical and general and administrative services. Consulting fees
incurred amounted to $44,779 and $96,523 for the years ended December 31, 2005 and 2004,
respectively. Amounts due to these related parties as of December 31, 2005 and 2004 were
$6,735 and $7,525, respectively.

Development AgreementOn
March 31, 2005, the Company entered into a development agreement to receive a total of
$450,000 in cash funding from a private venture capital firm, a shareholder of the
Companys common stock, for intended use in the research and development of certain
battery technologies. The contract provides for scheduled payments to the Company if it
performs certain research and development activities over a 24-month period. The Company
has entered into a sub-contract agreement with Rutgers University to perform certain of
these activities for $350,000. In connection with this development agreement, the Company
entered into an agreement whereby the Company will issue warrants containing certain
cashless provisions to purchase up to 15,000 shares of the Companys common stock
upon exercise. The warrants are exercisable at $9.06 per share over a four-year period
expiring in March 2009. The weighted average fair value of the warrants at the date of
issuance using the Black Scholes option-pricing model is estimated at $5.58 per warrant.
The total estimated value of the warrants, amounting to $83,767, was recorded as cost of
services-related parties expense and other accrued liability. Further, a deferred contract
cost and additional paid-in capital was recorded as of the date of issuance. The number of
warrants that are exercisable are directly proportional to the amount of the scheduled
payments that are received by the Company for performance of the development agreement.

The
weighted average fair value of the warrants using the Black Scholes option-pricing model
was revalued on December 31, 2005 at $3.06 per warrant. Accordingly, the total estimated
value of the warrants was reduced by $42,057 to $41,710. The amount was recorded as a
reduction of cost of services-related parties expense and other accrued liability.
Further, a reduction of deferred contract cost and additional paid-in capital was
recorded. During the year ended December 31, 2005, the Company received an installment of
cash funding and recognized $150,000 of gross revenue from services rendered related to
this development agreement. The relative value of the warrants of $13,903 was recorded as
a reduction to cost of services-related parties expense and other accrued liability. In
addition, a discount to revenue and a reduction in deferred contract costs was recorded.
As of December 31, 2005 the remaining deferred contract cost was $27,807.

NOTE 9  Commitments
and Contingencies

Operating LeasesThe
Company conducts its operations from two facilities, one that is leased under a
noncancelable operating lease expiring in March 2010 requiring minimum monthly payments of
$23,875, and one that is leased on a month to month basis through July 2006 requiring
minimum monthly payments of $9,448, respectively. Rental expense related to facilities
under operating leases amounted to $372,528 and $362,554 for the years ended December 31,
2005 and 2004, respectively.

---



Future
minimum rental payments under the above noncancelable operating leases are as follows:

ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|For the Year EndingDecember 31, | Amount
|------------------------------- | ------
|                                |       
|2006                            | $     
|2007                            |       
|2008                            |       
|2009                            |       
|2010                            |       
|                                |       
|                                | $     
|                                |       

Supply AgreementThe
Company has entered into a five-year agreement to supply EaglePicher with certain products
at agreed-upon prices. Under the agreement, the Company is the sole source supplier for
components for battery power systems used in military satellites and military aircraft.
Pricing under the agreement is fixed, subject to possible adjustment under periodic value
engineering reviews and based on material cost escalations. The agreement is renewable
upon the mutual consent of the parties. The agreement expires September 2008 with renewal
options annually thereafter. Net sales to EaglePicher represented approximately 16.3% and
56.0% of total sales for the years ended December 31, 2005 and 2004, respectively.
Accounts receivable from EaglePicher amounted to $14,165 and $50,228 as of and December
31, 2005 and 2004, respectively. On April 11, 2005 Eagle Picher, Inc. and its affiliates
announced its voluntary Chapter 11 bankruptcy filing.

Executive CompensationThe
Company entered into an employment agreement effective January 1, 2004 through December
31, 2005 with its President and Chief Operating Officer. The agreement provided for
compensation of $235,000 per annum, 343,800 stock options, certain other benefits and
severance payments under certain circumstances, including termination of employment.
Effective March 22, 2005, the Board of Directors accepted the resignation of Michael Eskra
as Director, President, and Chief Operating Officer. In accordance with the employment
agreement, the Company paid him 30 days compensation.

Employment AgreementEffective
May 2, 2005 (Effective Date), the Company entered into an employment agreement
(the Agreement) with Michael E. Reed, pursuant to which Mr. Reed will serve as
the Companys President and Chief Operating Officer. Mr. Reeds employment will
be at-will, and will carry an annual base salary of $190,000. Mr. Reed will be eligible
for an annual bonus based on goals and objectives set by the Board of Directors in
consultation with him. In addition, the Company has agreed to reimburse Mr. Reed for
routine expenses in connection with his relocation to the Danbury, Connecticut area, plus
an amount not to exceed $15,000 for temporary living expenses. In accordance with the
Agreement, Mr. Reed received options to purchase 200,000 shares of common stock (See Note
7) of the Company under the 2005 Plan vesting in equal installments over four years,
commencing on the effective date with an exercise price of $6.76. For the year ended
December 31, 2005, the Company reimbursed Mr. Reed $75,262 in connection with his
relocation.

Asset Purchase AgreementOn
May 13, 2005, the company entered into a non binding letter of intent with Topspin
Partners, LP., a merchant bank (Topspin). If the acquisition contemplated by
the letter of intent is consummated, the Company would purchase from an affiliate of
topspin all of the operating assets relating to a lithium ion and nickel based
rechargeable cell and battery manufacturing facility located near Gainesville, Florida.

The
Company subsequently entered into this Asset Purchase Agreement with Lithium Nickel Asset
Holding Company I, Inc., a Delaware corporation (Seller), pursuant to which
the Company has agreed to purchase certain assets from Seller relating to the manufacture
of lithium-ion and nickel based rechargeable cells and batteries. (See Note 12c).

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On
August 8, 2005, the Company entered into a one-year agreement with an investment banking
firm to act as the Companys sole placement agent in connection with the
structuring, issuance and sale of securities of the Company to obtain financing. (See
Note 12d).

Stock Purchase AgreementOn
October 17, 2005, the Company entered into a Stock Purchase Agreement with a venture
capital firm, pursuant to which a venture capital firm has agreed to purchase 241,692
shares of unregistered common stock of EEEI and warrants to purchase 75,829 shares of
unregistered common stock of EEEI at an exercise price of $3.11 per share. The total
purchase price for the stock and warrants is $800,000 and is expected to be paid over the
course of 14 months following the closing, conditioned upon EEEI achieving certain
development milestones. On October 17, 2005 upon receipt of $100,000 the Company issued
30,208 shares of unregistered common stock and 9,476 warrants in connection with this
agreement. EEEI intends to direct the proceeds toward research and development to
demonstrate the incorporation of Bipolar Li-ion Cell Technology into Bipolar Lithium Ion
Batteries.

NOTE 10  Income
Taxes

The
Company has net operating loss carryforwards (NOLs) of approximately
$5,528,267 as of December 31, 2005 that will be available to offset future taxable income.
The Company has concluded that a full valuation allowance was appropriate for the
NOLs as they are more likely than not to be utilized prior to their expiration. The
deferred tax asset as of December 31, 2005 and 2004 consists of the following:

| |                                   | 2005 |             | 2004 |  
| | --------------------------------- | ---- | ----------- | ---- | -
| |                                   |      |             |      |  
| | Net operating loss carry forwards | $    | 2,153,200   |      | $
| | Stock based compensation          |      | -           |      |  
| |                                   |      |             |      |  
| | Total deferred tax asset          |      | 2,153,200   |      |  
| | Less: valuation allowance         |      | (2,153,200) |      |  
| |                                   |      |             |      |  
| | Total net deferred tax asset      | $    | -           |      | $
| |                                   |      |             |      |  

---



The
expiration of the companys NOLs are as follows:

|For the Year EndingDecember 31, | Amount
|------------------------------- | ------
|                                |       
|2020                            | $     
|2021                            |       
|2022                            |       
|2023                            |       
|2024                            |       
|2025                            | $     
|                                |       
|Total                           | $     
|                                |       

The
reconciliation of the statutory U.S. Federal income tax rate to the Companys
effective income tax rate is as follows:

| |                                             | Year ended December 31,
| | ------------------------------------------- | -----------------------
| |                                             |                        
| |                                             | 2005                   
| |                                             |                        
| |                                             |                        
| | Statutory federal income tax rate (benefit) |                        
| | Nondeductible expenses:                     |                        
| | Permanent differences                       |                        
| | Other temporary differences                 |                        
| | Stock based
compensation                    |                        
| | Net operating loss carry-forward            |                        
| |                                             |                        
| | Effective tax rate                          |                        
| |                                             |                        

NOTE 11  Defined
Contribution Plan

The
Company has a defined contribution 401(k) Savings Plan covering all eligible employees of
the Company. Contributions to the plan are at the discretion of the Board of Directors.
The Company did not contribute to the plan for the years ended December 31, 2005 and 2004.

NOTE 12  Subsequent
Events

a)   On
February 7, 2006 upon receipt of $100,000, the Company issued 30,212 shares of
unregistered common stock and 9,479 warrants in connection with a Stock Purchase Agreement
with a venture capital firm. (See Note 9.)

b)   As
of February 28, 2006, 5,000 and 20,000 shares of common stock have been issued in
connection with the exercise of stock options for proceeds of $5,817 and the exercise of
warrants for proceeds of $50,000, respectively.

c)   On
March 31, 2006, the Company entered into an Asset Purchase Agreement with
          Lithium Nickel Asset Holding Company I, Inc., a Delaware corporation           (Seller),
pursuant to which the Company has agreed to purchase           certain assets from Seller
relating to the manufacture of lithium-ion and nickel           based rechargeable cells
and batteries. The total purchase price for the assets           consists of 5,750,000
unregistered shares of common stock of the Company (the           Consideration
Shares) and a six year warrant to purchase up to           2,000,000 shares of
common stock of the Company at an exercise price of $7.00           per share. Of that
total amount, 1,000,000 of the Consideration Shares will be           held in escrow,
pursuant to an Escrow Agreement to be signed at closing in order           to secure
Sellers indemnification obligations under the Asset Purchase           Agreement.
The Company also is required to include up to 1,150,000 of the           Consideration
Shares in subsequent registration statements.

---



ELECTRO ENERGY INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At
the closing, the Company and Seller also intend to enter into lease agreements pursuant
to which the Company shall lease from Seller certain real property to be owned by Seller
at Closing and which is located at 12781 NW Highway 441, Alachua, Florida. In connection
therewith, and in addition to rental payments, the Company shall also tender to Seller
1,000,000 four year warrants to purchase shares of common stock of the Company at an
exercise price of $7.00.

Further,
4,600,000 shares of the Consideration Shares and the warrants received by Seller in
connection with the purchase and the lease agreements will be subject to a lock-up
agreement restricting the ability of Seller to transfer such Consideration Shares and
warrants for a period of two years after the closing. Sellers obligations to close
will be conditioned upon the Company obtaining financing in connection with the
transaction. The Company intends to use the acquired assets to develop and manufacture
battery technologies, product and systems. This closing is contingent upon the Company
obtaining financing of approximately $10,000,000 to $11,000,000. (See Note 12d).

d)   
On August 8, 2005, the Company entered into a one-year agreement with an investment banking firm to act as the Companys sole
placement agent in connection with the structuring, issuance and sale of securities of the Company to obtain financing.  On March 31,
2006 the Company has secured financing in the amount of $10,000,000 to $11,000,000 to complete a private placement of 8.5% senior
secured convertible notes due March 31, 2010.  Interest will be paid semiannually or paid in common stock at the Companys option at
a 90% discount to the market value.  The notes may be redeemed by the Company after August 1, 2007 based on certain conditions.
Holders of the notes have put rights on August 1, 2007, April 1, 2008, December 1, 2008, and August 3, 2009 for the greater of 10% of
the aggregate principal amount or $1,000,000.  The Company agrees to use $3,500,000 of the net proceeds for purchase of new
equipment.  The holders have an option to convert the notes at a conversion rate of $3.80.  The notes are senior secured debt with
all of assets of the Company pledged as security except inventory and accounts receivable.  In connection with the notes the Company
will issue 578,947 warrants that are exercisable until March 31, 2010 at an exercise price of $3.80 per share.  The placement agent
will receive 7% of the gross proceeds and a maximum of $50,000 for reimbursement of expenses.  The remaining funds will be released
from escrow concurrently upon the closing of the asset acquisition by April 7, 2006.  In the event that the closing does not occur by
April 7, 2006 the investors may rescind their investment.  The securities offered have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from
registration requirements.

---



# Item 8.   CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On
June 10, 2004, our Board of Directors voted to approve the replacement of Randall N.
Drake, C.P.A. with Marcum & Kliegman, LLP as our independent registered public
accounting firm.

We
have not had any disagreements, whether or not resolved, with our accountants on
accounting and financial disclosures, nor have we had any other changes in our accountants
during our two most recent fiscal years.

# Item 8A.  CONTROLS AND
PROCEDURES

Evaluation of Disclosure
Controls and Procedures

The
Companys Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as
defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of
the end of the period reported in this annual report (the Evaluation Date),
concluded that the Companys disclosure controls and procedures were effective and
designed to ensure that material information relating to the Company is accumulated and
would be made known to them by others as appropriate to allow timely decisions regarding
required disclosures.

Changes in Internal
Controls

The
Company does not believe that there are significant deficiencies in the design or
operation of its internal controls that could adversely affect its ability to record,
process, summarize and report financial data. Although there were no significant changes
in the Companys internal controls or in other factors that could significantly
affect those controls subsequent to the Evaluation Date, the Companys senior
management, in conjunction with its Board of Directors, continuously reviews overall
company policies and improves documentation of important financial reporting and internal
control matters. The Company is committed to continuously improving the state of its
internal controls, corporate governance and financial reporting.

Limitations on the
Effectiveness of Controls

The
Companys management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that its disclosure or internal controls will prevent all errors
or fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.

# Item 8B.  OTHER
INFORMATION

Not
applicable.

---



# PART III

# Item 9.   DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors, Executive
Officers, Promoters and Control Persons

The
following table sets forth information regarding the members of our Board of Directors,
executive officers and significant employees. The directors listed below will serve until
the next annual meeting of our stockholders.

|Name                | Age | Position                                                               
|------------------- | --- | -----------------------------------------------------------------------
|                    |     |                                                                        
|Martin G. Klein     | 69  | Founder, Chairman of the Board of Directors and Chief Executive Officer
|Joseph Engelberger  | 80  | Member of the Board of Directors                                       
|Warren D. Bagatelle | 67  | Member of the Board of Directors                                       
|Farhad Assari       | 45  | Member of the Board of Directors                                       
|Robert Hamlen       | 77  | Member of the Board of Directors                                       
|Audra J. Mace       | 35  | Chief Financial Officer and Secretary                                  
|Michael E. Reed     | 57  | President and Chief Operating Officer                                  
|                    |     |                                                                        

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

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

Joseph
Engelberger has served as a Director since 1992, also serving as a member of the Audit
and Corporate Governance and Nominating Committees since 2004. Mr. Engelberger has over 50
years of experience as an entrepreneur/engineer and has participated in the founding and
start-up of a number of high technology companies. He founded the first industrial robot
company Unimation, Inc. in 1961 later sold to Westinghouse in 1983. Thereafter, he founded
HelpMate Robotics Inc, developing the first successful service robot, HelpMate®, a
robotic hospital courier, later merged with a subsidiary of Cardinal Health in 1999. Mr.
Engelberger retired as CEO of Helpmate in 1992.

Warren
D. Bagatellehas served as a Director since 2004, also serving as Chairman of the
Audit and Corporate Governance and Nominating Committees. He has been a Managing Director
of Loeb Partners Corporation, an investment banking firm, and a director of Fuel Cell
Energy, Inc. (Nasdaq: FCEL), a world leader in the development of high temperature
hydrogen fuel cells for clean electric power generation, since 1988. Mr. Bagatelle is also
the Chairman of the Board of VirtualScopics, Inc. (OTCBB:VSCP.OB), a medical imaging
services company.

Farhad
Assari has served as a Director since 2004, also serving as a member of the Audit and
Corporate Governance and Nominating Committees. Mr. Assari has been involved in the
international investment management business for the past twenty years. He has held senior
executive positions at global financial institutions such as Citibank where he was
responsible for the investment management business throughout Europe, Middle East and
Africa. He is currently the managing director in private banking for a global financial in Europe. Since
2004, Mr. Assari has been a principal of Investrust LLC, a company that invests in growth
companies. From 2001 to 2003, Mr. Assari built the Miami offices of Neuberger Berman.
Prior to that, from 1995 to 2000, he was a Regional Director at Citibank. Mr. Assari
received his Bachelor of Science from New York University (magna cum laude) and completed
his Masters of Business Administration at the Wharton School with distinction.

---



Robert
Hamlen has served as a Director since 2005. His extensive commercial and government
career spans many high-profile organizations including General Electric, EXXON, ALCAN and
the U.S. Army Communications-Electronics R&D Center at Fort Monmouth, N.J., and Ft.
Belvoir, Va., where he was the Chief of Army Power Division. Dr. Hamlen holds over 20
patents, has a B.S. from Lafayette College, a Ph.D. in Physical Chemistry from Johns
Hopkins and completed the Advanced Management Program at the Harvard Business School.

Audra
J. Mace has served as our Chief Financial Officer and Secretary since May 2004. She
has served in senior finance and information technology positions with privately held and
publicly traded companies for 13 years, including Mormac Marine Enterprises, Inc, Acme
United Corp. and BIC Corporation. Prior to employment with us, Ms. Mace served as Global
Finance Manager of the Sheaffer Pen division of BIC Corporation from April 2003 to May
2004. Recently, as Director of Finance and Information Technology at Acme United Corp
(Amex: ACU), from 1998 to 2002, a manufacturer and multi-national wholesale distributor of
consumer products, she orchestrated an integral part of the companys turn-around
effort, managing debt restructurings, financial reporting and compliance and reshaping
internal controls. As Director of IT, she led the transformation of Acmes MIS cost
center into a strategic IT business partner, overhauling the network infrastructure,
implementing a new ERP system, exploiting internet solutions and re-engineering business
processes and controls. Ms. Mace holds a BBA from Pace University and a MBA from Regis
University. Ms. Mace is a certified management accountant and has served on the national
board of directors of the American Society of Women Accountants.

Michael
E. Reed has served as the President and Chief Operating Officer of EEI Technologies,
Inc since May 2005. Prior thereto he served as the Chief Operating Officer of EaglePicher
Horizon Batteries, LLC since 2003. Additionally, since 2002, Mr. Reed has been the
Principal of Reed Ventures, a consulting company focused on assisting technology start-up
companies with securing capital funds. Prior thereto, from 2000 through 2002, Mr. Reed was
the Vice President, Manufacturing and Distribution for Pearle Vision, an autonomous $700
million business unit of retailer Cole National. Before joining Pearle Vision, Mr. Reed
held several management positions within Johnson Controls, Inc., Exide Corporation and
Delco Remy Division of General Motors Corporation. Mr. Reed holds a BSChE in Chemical
Engineering from Purdue University and an M.B.A. from Indiana University.

Audit Committee Financial
Expert

The
Board has determined that Warren D. Bagatelle qualifies as its audit committee
financial expert, as that term is defined in Item 401(e) of Regulation S-B, and is
independent as that term is used in Item 7(d)(3)(iv) of schedule 14A under the
Securities Exchange Act of 1934.

Section 16(a) Beneficial
Ownership Reporting Compliance

Based
upon a review of Forms 3 and 4 and amendments thereto furnished to us during the fiscal
year ended December 31, 2005, Forms 5 and amendments thereto furnished to us with respect
to the fiscal year ended December 31, 2005, and written representations furnished to us,
following persons did not timely file Forms 4: Farhad Assari, Warren Bagatelle, Audra J.
Mace and Michael E. Reed each were late with two reports and J. Albert Estrada was
delinquent with one report.

Code of Ethics

The
Company has adopted a Code of Ethics that applies to its directors, officers and
employees, including its principal executive officer, principal financial officer and
principal accounting officer. The Company publicizes the Code of Ethics through posting
the policy on its website, http://www.electroenergyinc.com. The Company will disclose on
its website any waivers of, or amendments to, our Code of Ethics.

---



# Item 10.  EXECUTIVE
COMPENSATION

The
following Summary Compensation Table sets forth all compensation earned, in all
capacities, during the fiscal years ended December 31, 2005, 2004 and 2003 by the
Companys (i) Chief Executive Officer, and (ii) highly compensated
executive officers, other than the CEO, as determined by Regulation S-B, Item 402 (the
individuals falling within categories (i) and (ii) are collectively referred to as the
Named Executives).

SUMMARY COMPENSATION
TABLE

|                                 |          | Annual Compensation | Long Term Compensation |                              
|-------------------------------- | -------- | ------------------- | ---------------------- | -----------------------------
|                                 |          |                     |                        |                              
|                                 |          |                     |                        |                              
|                                 |          |                     |                        |                              
|Name and Principal Position      | Year (1) | Salary($)           | Bonus($)               | Other Annual Compen-sation($)
|                                 |          |                     |                        |                              
|Martin G. Klein                  | 2005     | $ 150,010           | $       0              | $           0                
|Chairman & Chief                 | 2004     | 136,163             | 0                      | 0                            
|Executive Officer                | 2003     | 133,278             | 0                      | 0                            
|                                 |          |                     |                        |                              
|Audra J. Mace                    | 2005     | $ 130,200           | $       0              | $           0                
|Chief Financial Officer &        | 2004     | 76,928              | 0                      | 0                            
|Secretary                        | 2003     | 0                   | 0                      | 0                            
|                                 |          |                     |                        |                              
|Michael E. Reed(2)               | 2005     | $ 127,890           | $       0              | $           0                
|Former President and             | 2004     | 0                   | 0                      | 0                            
|Chief Operating Officer          | 2003     | 0                   | 0                      | 0                            
|                                 |          |                     |                        |                              
|Michael D. Eskra(3)              | 2005     | $   50,615          | $       0              | $           0                
|President and Chief              | 2004     | 234,999             | 0                      | 0                            
|Operating Officer                | 2003     | 0                   | 0                      | 195,844                      
|                                 |          |                     |                        |                              
|J. Albert Estrada(4)             | 2005     | $ 109,659           | $       0              | $           0                
|Vice
          President  Sales | 2004     | 22,856              | 15,000                 | 0                            
|& Marketing                      | 2003     | 0                   | 0                      | 0                            
|                                 |          |                     |                        |                              

|(1) |  | All
amounts are for the 12 months ended December 31 of the year indicated.
|--- |  | --------------------------------------------------------------------------

|(2) |  | Mr.
Reed was appointed President & Chief Operating Officer of EEI
               Technologies, Inc. effective May 2, 2005. He was paid relocation
compensation of                $73,315.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr.
Eskras affiliate, Eskra Technical Products, Inc., received the noted
               compensation during 2003 pursuant to a consulting agreement. Mr. Eskra
became an                employee of EEI on January 1, 2004. Mr. Eskra resigned as
Director, President                and Chief Operating Officer of Electro Energy Inc.
effective March 22, 2005. He                was paid severance of $19,885 and accrued
vacation of $15,365.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Mr.
Estrada resigned as Vice President  Sales and Marketing of EEI
               Technologies, Inc. as of October 31, 2005.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

---



Options/SAR Grants and
Fiscal Year End Option Exercises and Values

On
June 28, 2005, the Company adopted its 2005 Plan. The purpose of the 2005 Plan is to
enable the Company to attract, retain and motivate key employees, directors and, on
occasion, consultants, by providing them with stock options. Stock options granted under
the 2005 Plan may be either incentive stock options, as defined in Section 422A of the
Internal Revenue Code of 1986, or non-qualified stock options. The Company has reserved
3,000,000 shares of common stock for issuance under the 2005 Plan. The Company granted
700,000 stock options during the year ended December 31, 2005, 200,000 of which were
issued in connection with an employment agreement, 475,000 issued to directors and
employees, and 25,000 of which were issued in connection with a consulting agreement.

---



Option
Grants During 2005

The following table presents
information concerning option grants during 2005 to each Named Executive Officer awarded
pursuant to our existing stock compensation plans:

|Name                  | Number ofSecuritiesUnderlyingOptionsGranted | Percent ofTotalOptionsGranted toEmployeesin 2005 | ExercisePrice PerShare | ExpirationDate
|--------------------- | ------------------------------------------- | ------------------------------------------------ | ---------------------- | --------------
|                      |                                             |                                                  |                        |               
|Audra J. Mace         | 50,000                                      | 14.3%                                            | $6.76                  | 6/27/2015     
|                      | 25,000                                      |                                                  | $3.94                  | 12/14/2015    
|                      |                                             |                                                  |                        |               
|Michael E. Reed       | 200,000                                     | 57.1%                                            | $6.76                  | 5/1/2015      
|                      | 100,000                                     |                                                  | $3.94                  | 12/14/2015    
|                      |                                             |                                                  |                        |               
|J. Albert Estrada (1) | 50,000                                      | 9.5%                                             | $6.76                  | 6/27/2015     
|                      |                                             |                                                  |                        |               

Aggregated
Option Exercises During 2005 and Option Values at December 31, 2005

The following table presents
information concerning the exercise of options during 2005 by each Named Executive
Officer:

|Name            | SharesAcquired onExercise(#) | ValueRealized($) (1) | Number of SecuritiesUnderlying Unexercised
Options at FiscalYear-End (#) | Value of Unexercised In-the-Money Options atFiscal Year-End ($) (2)
|--------------- | ---------------------------- | -------------------- | ------------------------------------------------------------------------ | -------------------------------------------------------------------
|                |                              |                      |                                                                          |                                                                    
|                |                              |                      | Exercisable                                                              | Unexercisable                                                      
|                |                              |                      |                                                                          |                                                                    
|Audra J. Mace   | 25,000                       | $99,500              | 25,000                                                                   | 150,000                                                            
|Michael E. Reed | -                            | -                    | -                                                                        | 300,000                                                            
|                |                              |                      |                                                                          |                                                                    

|(1) |  | The
amounts set forth in the column entitled Value Realized               represent
the fair market value of the ordinary shares underlying the option on                the
date of exercise less the aggregate exercise price of the option.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Market
value of securities underlying in-the-money options as of December 31,
               2005 (based on $4.54 per share, the closing price of Common Stock on the
NASDAQ                Capital Market on December 30, 2005), minus the exercise
price.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreements

In
connection with the resignation of Michael D. Eskra as our President, Chief Operating
Officer and a director effective March 22, 2005, our Board of Directors terminated the
Executive Employment Agreement between EEI and Mr. Eskra, dated December 31, 2003 (the
Employment Agreement), in accordance with the terms of the Employment
Agreement. In accordance with the termination clauses in the employment agreement, the
Company paid Mr. Eskra 30 days compensation. The Employment Agreement contains covenants
prohibiting Mr. Eskra from disclosing confidential information regarding the Company and
requiring that all intellectual property developed by him and relating to the business of
the Company shall be the sole and exclusive property of the Company.

Effective
May 2, 2005 (Effective Date), the Company entered into an Employment Agreement
(the Agreement) with Michael E. Reed, pursuant to which Mr. Reed will serve as
President and Chief Operating Officer of EEI Technologies, Inc. Mr. Reeds employment
will be at-will, and will carry an annual base salary of $190,000. Mr. Reed will be
eligible for an annual bonus based on goals and objectives set by the Board of Directors
in consultation with him. In addition, the Company has agreed to reimburse Mr. Reed for
routine expenses in connection with his relocation to the Danbury, Connecticut area, plus
an amount not to exceed $15,000 for temporary living expenses. In accordance with the
Agreement, Mr. Reed received options to purchase 200,000 shares of common stock of the
Company under the 2005 Stock Compensation Plan vesting in equal installments over four
years, commencing on the Effective Date with an exercise price of $6.76. For the year
ended December 31, 2005, the Company reimbursed Mr. Reed $75,262 in connection with his
relocation.

---



Compensation of Directors

Outside
directors are paid their expenses for attending each meeting of the directors and are paid
a fixed sum for attendance at each meeting of the directors. No payment precludes any
director from serving our company in any other capacity and being compensated for the
service. Members of special or standing committees may be allowed like reimbursement and
compensation for attending committee meetings. The Company records an expense and assumes
a liability on the date meetings are held.

# Item 11.   SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of
Certain Beneficial Owners and Management

The
following table sets forth information regarding the number of shares of our common stock
beneficially owned on February 28, 2006, by:

| |  |  | each
person who is known by us to beneficially own 5% or more of our common stock,
| | - |  | ----------------------------------------------------------------------------------

| |  |  | each
of our directors and executive officers, and
| | - |  | -------------------------------------------------

| |  |  | all
of our directors and executive officers, as a group.
| | - |  | --------------------------------------------------------

Unless
otherwise indicated, the address of each of the persons listed below is Electro Energy
Inc., 30 Shelter Rock Road, Danbury, Connecticut 06810.

|Name and Address ofBeneficial Owner                        | Number of Shares BeneficiallyOwned (1) |     | Percentage of Shares BeneficiallyOwned (2)
|---------------------------------------------------------- | -------------------------------------- | --- | ------------------------------------------
|                                                           |                                        |     |                                           
|5% Stockholders                                            |                                        |     |                                           
|                                                           |                                        |     |                                           
|Michael D. Eskra2595 Highway ISaukville, WI 53080          | 1,021,357                              | (3) |                                           
|                                                           |                                        |     |                                           
|Executive Officers and Directors                           |                                        |     |                                           
|Martin G. Klein                                            | 5,124,912                              |     |                                           
|Warren D. Bagatelle                                        | 1,944,170                              | (4) |                                           
|Joseph Engelberger                                         | 313,717                                |     |                                           
|Farhad Assari                                              | 88,700                                 | (6) |                                           
|Robert Hamlen                                              | --                                     |     |                                           
|Audra J. Mace                                              | 50,000                                 |     |                                           
|Michael E. Reed                                            | --                                     |     |                                           
|Directors and executive officers as a group(seven persons) | 7,521,499                              |     |                                           
|                                                           |                                        |     |                                           

|(1) |  | Unless
otherwise indicated, includes shares owned by a spouse, minor children,                by
relatives sharing the same home and entities owned or controlled by the named
               person. Also includes shares if the named person has the right to acquire
such                shares within 60 days after February 28, 2006, by the exercise of any
warrant,                stock option or other right. Unless otherwise noted, shares are
owned of record                and beneficially by the named person.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



|(2) |  | Unless
otherwise indicated, based upon 16,654,931 shares of common stock
               outstanding on February 28, 2006; does not include 72,000 shares of common
stock                issuable upon conversion of series A convertible preferred stock.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes
147,642 shares of common stock owned by Eskra Technical           Products, Inc., an
affiliate of Mr. Eskra.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
(i) 497,707 shares of common stock outstanding and 85,950                shares of common
stock issuable upon the exercise of warrants held by Mr.                Bagatelle, (ii)
9,700 shares of common stock outstanding held by HSB Capital, an                affiliate
of Mr. Bagatelle, (iii) 428,689 shares of common stock outstanding and
               115,950 shares of common stock issuable upon the conversion of shares of
series                A convertible preferred stock and the exercise of warrants held by
the Trust FBO                Thomas L. Kempner, (iv) 428,689 shares of common stock
outstanding and 115,950                shares of common stock issuable upon the
conversion of shares of series A                convertible preferred stock and the
exercise of warrants held by the Trust FBO                Alan H. Kempner, Jr., (v)
94,115 shares of common stock outstanding held by                Shari Popkin Fleischer,
and (vi) 107,974 shares of common stock issuable upon                the conversion of
shares of series A convertible preferred stock and the                exercise of
warrants held by Matrix USA, LLC, and 59,446 shares of common stock.                Mr.
Bagatelle expressly disclaims beneficial ownership of the common stock owned
               or acquirable by the other investors.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Based
upon (i) 16,654,931 shares of common stock outstanding, plus (ii) 60,000
               shares of common stock issuable upon conversion of series A convertible
               preferred stock, plus (iii) 365,824 shares of common stock issuable upon
the                exercise of warrants.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes
20,000 shares of common stock held by Mr. Assari, 42,800 shares of                common
stock held by Merkantil 7, Inc., and 4,500 shares of common stock held by
               Investrust, LLC, each, an affiliate of Mr. Assari, and 21,400 shares of
common                stock issuable to Merkantil 7, Inc., upon the exercise of warrants.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Based
upon (i) 16,654,931 shares of common stock outstanding, plus (ii) 21,400
               shares of common stock issuable upon the exercise of warrants.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Based
upon (i) 16,654,931 shares of common stock outstanding, plus (ii) 25,000
               shares of common stock issuable upon the exercise of options.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Based
upon (i) 16,654,931 shares of common stock outstanding, plus (ii) 60,000
               shares of common stock issuable upon conversion of series A convertible
               preferred stock, plus (iii) 454,474 shares of common stock issuable upon
the                exercise of warrants, plus (iv) 25,000 shares of common stock issuable
upon                exercise of options.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Securities Authorized For
Issuance Under Equity Compensation Plans

In
connection with the merger, we adopted and assumed all of EEIs obligations under the
1993 Stock Compensation Plan of Electro Energy, Inc. On June 28, 2005, the Company adopted
the 2005 Stock Compensation Plan. Together these plans are referred to herein as the
Compensation Plans.

The
purpose of the Compensation Plan is to enable us to attract, retain and motivate key
employees, directors and, on occasion, consultants, by providing them with stock options.
Stock options granted under the Compensation Plans may be either incentive stock options,
as defined in Section 422A of the Internal Revenue Code of 1986, or non-qualified stock
options. We have reserved 3,000,000 shares of common stock for issuance under each
Compensation Plan. As of December 31, 2005, stock options to purchase an aggregate of
1,317,353 shares of common stock have been granted to 23 employees, directors, or
consultants under the Compensation Plan, at exercise prices ranging from $.26 to $6.76 per
share.

---



The
Compensation Plans will be administered by the compensation committee of the Board of
Directors, or by the Board of Directors as a whole. The Board of Directors has the power
to determine the terms of any stock options granted under the Compensation Plans,
including the exercise price, the number of shares subject to the stock option and
conditions of exercise. Stock options granted under the Compensation Plans are generally
not transferable, vest in four equal annual installments and are exercisable during the
lifetime of the optionee only by such optionee. The exercise price of all incentive stock
options granted under the Compensation Plans must be at least equal to the fair market
value of the shares of common stock on the date of the grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all classes of
our stock, the exercise price of any incentive stock option granted must be equal to at
least 110% of the fair market value on the grant date. The term of all incentive stock
options under the Compensation Plans may not exceed ten years, or five years in the case
of 10% owners. The specific terms of each stock option grant must be approved by the
compensation committee or the Board of Directors and are reflected in a written stock
option agreement.

---



# Item 12.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

Immediately
prior to the merger discussed herein, holders of EEIs shareholder notes in the
aggregate outstanding principal amount of approximately $1,186,000 and EEIs
preferred stock with an aggregate liquidation value of $250,000 converted their notes and
preferred stock into an aggregate of 1,234,242 shares of EEIs common stock. Martin
G. Klein, our Chairman and Chief Executive Officer, and Warren G. Bagatelle, a director,
were the holders of $500,000 and $228,667 in principal amount of the shareholder notes,
respectively. Neither Mr. Klein nor Mr. Bagatelle received any compensation, consideration
or inducement to convert their shareholder notes different than any other holder doing so.
No related party owned any of EEIs preferred stock.

Mr.  Bagatelle
and his spouse currently hold non-controlling interests in Matrix USA,           LLC, a
finder in the private placement consummated in July 2004, which received           cash
in the amount of $128,500 and equity-based compensation of $61,000 in the           form
of Series A Convertible Preferred Stock and 112,500 warrants to purchase           shares
of common stock in connection with the private placement. Shari Popkin
          Fleischer, the Chairperson of Matrix USA, LLC, is a current shareholder of the
          Company.

Martin
G. Klein, our Chairman and Chief Executive Officer, personally guaranteed certain of
EEIs indebtedness, including a line of credit from Fleet Bank in the amount of
$100,000, which was repaid with a portion of the proceeds of the private placement, and a
certain equipment lease. The line of credit was closed and the Company accepted a buy-out
option for the equipment lease in March 2005.

---



# Item 13. EXHIBITS

|Exhibit No. |  | Description                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                              
|2.1         |  | Agreement of Merger and Plan of Reorganization among MCG Diversified, Inc., EEI Acquisition
                   Corp. and Electro Energy, Inc., dated May 7, 2004.(2)                                         
|3.1         |  | Articles of Incorporation of MCG Diversified, Inc.(3)                                                                                                                                                        
|3.2         |  | Amended and Restated Articles of Incorporation of MCG Diversified, Inc.(3)                                                                                                                                   
|3.3         |  | Bylaws of MCG Diversified, Inc.(2)                                                                                                                                                                           
|3.4         |  | Articles of Amendment to the Amended and Restated Articles of Incorporation of MCG Diversified,
                   Inc.(4)                                                                                   
|3.5         |  | Articles of Amendment Designating Series A Convertible Preferred Stock of MCG Diversified,
                   Inc.(2)                                                                                        
|3.6         |  | Articles of Amendment to the Amended and Restated Articles of Incorporation of MCG Diversified,
                   Inc. changing the name of the company to Electro Energy, Inc.(2)                          
|4.1         |  | Form of Three-Year Warrant to Purchase Common Stock.(2)                                                                                                                                                      
|10.1        |  | 1993 Stock Compensation Plan of Electro Energy, Inc., as adopted by the Company.(2)                                                                                                                          
|10.3        |  | Indemnification Agreement, dated as of June 7, 2004, among MCG Diversified, Inc., Electro
                   Energy, Inc., Marguerite Godels, Jay D. Solomon, Laura L. Larsen, Brian Bell and Dale Salmon.(2)
|10.4        |  | Form of Lock-Up Letter between Electro Energy, Inc. and former holders of securities of Electro
                   Energy, Inc.(2)                                                                           
|10.5        |  | Form of Lock-Up Letter between Electro Energy, Inc. and certain former named holders of
                   securities of Electro Energy, Inc.(2)                                                             
|10.6        |  | Form of Lock-Up Letter between Electro Energy, Inc. and Michael D. Eskra.(2)                                                                                                                                 
|10.7        |  | Form of Lock-Up Letter between MCG Diversified, Inc. and Marguerite Godels and Charles P.
                   Godels, P.A.(2)                                                                                 
|21.1        |  | Subsidiaries of the Company.(5)                                                                                                                                                                              
|31.1        |  | Section 302 Certification of Chief Executive Officer.(1)                                                                                                                                                     
|31.2        |  | Section 302 Certification of Chief Financial Officer.(1)                                                                                                                                                     
|32.1        |  | Section 906 Certification of Chief Executive Officer.(1)                                                                                                                                                     
|32.2        |  | Section 906 Certification of Chief Financial Officer.(1)                                                                                                                                                     
|            |  |                                                                                                                                                                                                              

|(1) |  | Filed
herewith.
|--- |  | ---------------

|(2) |  | Incorporated
by reference to the Companys Current Report on Form 8-K filed           with the
Securities and Exchange Commission on June 24, 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated
by reference to the Companys Registration Statement on Form           SB-2 filed
with the Securities and Exchange Commission on June 17, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated
by reference to the Companys Quarterly Report on Form 10-QSB           for the
quarterly period ended September 30, 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated
by reference to the Companys Annual Report on Form 10-KSB for           the year
ended December 31, 2004 filed with the Securities and Exchange           Commission on
March 30, 2005.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



# Item 14.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES

# Audit and Non Audit Fees

The
following table presents fees for professional audit services rendered by Marcum &
Kleigman, LLP (M&K) for the audit of Electro Energys annual
financial statements for the years ended December 31, 2005 and 2004, and fees billed for
other services rendered by Marcum & Kleigman, LLP.

| |                        |   | 2005    |  |   | 2004    | 
| | ---------------------- | - | ------- |  | - | ------- | 
| | Audit Fees (1)         | $ | 105,500 |  | $ | 137,545 | 
| | Audit-Related Fees (2) | $ | 72,390  |  | $ | 66,452  | 
| | Tax Services (3)       | $ | -0-     |  | $ | -0-     | 
| | All Other Fees         | $ | 14,504  |  | $ | 11,426  | 

|(1) |  | Audit fees consist of fees for professional services rendered for the audit of
          Electro Energy Inc.s financial statements and review of financial
          statements included in Electro Energy Inc.s quarterly reports.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Audit-related
fees are fees principally for professional services rendered in           connection with
accounting consultations and additional audit procedures related           to corporate
acquisitions, consultations and additional audit procedures           concerning the
initial adoption or consideration of new financial accounting and           reporting
standards, consultations regarding SEC reporting and disclosure           matters
pertaining to the Companys annual form 10-KSB filing.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Tax
service fees consist of compliance fees for the preparation of original tax
          returns as well as tax consulting and planning related fees.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

Each
of the permitted non-audit services has been pre-approved by the Audit Committee or the
Audit Committees Chairman pursuant to delegated authority by the Audit Committee,
other than de minimus non-audit services for which the pre-approval requirements are
waived in accordance with the rules and regulations of the SEC.

# Audit Committee
Pre-Approval Policies and Procedures

The
Audit Committee charter provides that the Audit Committee will pre-approve the fees and
other significant compensation to be paid to the independent auditors.

---



# SIGNATURES

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

| |       |                | ELECTRO ENERGY INC.
| | ----- | -------------- | -------------------
| |       |                |                    
| |       |                |                    
| |       |                | By:                
| |       |                |                    
| |       |                |                    
| | Date: | March 31, 2006 |                    
| |       |                |                    

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

| |       |                | By: | /s/ Martin G. Klein                        
| | ----- | -------------- | --- | -------------------------------------------
| |       |                |     |                                            
| |       |                |     | Name: Martin G. Klein                      
| | Date: | March 31, 2006 |     | Title: Chairman and Chief Executive Officer
| |       |                |     |                                            

| |       |                | By: | /s/ Audra J. Mace                           
| | ----- | -------------- | --- | --------------------------------------------
| |       |                |     |                                             
| |       |                |     | Name: Audra J. Mace                         
| | Date: | March 31, 2006 |     | Title: Chief Financial Officer and Secretary
| |       |                |     |                                             

| |       |                | By: | /s/ Joseph Engelberger  
| | ----- | -------------- | --- | ------------------------
| |       |                |     |                         
| |       |                |     | Name: Joseph Engelberger
| | Date: | March 31, 2006 |     | Title: Director         
| |       |                |     |                         

| |       |                | By: | /s/ Warren D. Bagatelle  
| | ----- | -------------- | --- | -------------------------
| |       |                |     |                          
| |       |                |     | Name: Warren D. Bagatelle
| | Date: | March 31, 2006 |     | Title: Director          
| |       |                |     |                          

| |       |                | By: | /s/ Farhad Assari  
| | ----- | -------------- | --- | -------------------
| |       |                |     |                    
| |       |                |     | Name: Farhad Assari
| | Date: | March 31, 2006 |     | Title: Director    
| |       |                |     |                    

| |       |                | By: | /s/ Robert Hamlen  
| | ----- | -------------- | --- | -------------------
| |       |                |     |                    
| |       |                |     | Name: Robert Hamlen
| | Date: | March 31, 2006 |     | Title: Director    
| |       |                |     |                    

---