UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-KSB/A

(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, 2004 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 disclosure of delinquent filers in response to Item 405 of Regulation S-B is
not 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.

State Issuer's revenues for its most recent fiscal year: $6,759,793.

The
aggregate market value of the voting common equity held by non-affiliates was
$38,521,803 based upon the closing sales price of Common Stock on April 21, 2005
of $6.68 per share.

As of April 21, 2005, 12,854,047 shares of Common Stock, par value $.001 per share, were outstanding.

# DOCUMENTS
INCORPORATED BY REFERENCE

None

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## ELECTRO ENERGY INC.

## INDEX

|Part I     |  | Description                                                                                                      | PageNumber
|---------- |  | ---------------------------------------------------------------------------------------------------------------- | ----------
|Item 1     |  | Description of Business                                                                                          | 1         
|Item 2     |  | Description of Property                                                                                          | 4         
|Item 3     |  | Legal Proceedings                                                                                                | 4         
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                              | 5         
|           |  |                                                                                                                  |           
|Part II    |  |                                                                                                                  |           
|Item 5     |  | Market for Common Equity and Related Stockholder Matters                                                         | 5         
|Item 6     |  | Management's Discussion and Analysis or Plan of Operation                                                        | 6         
|Item 7     |  | Financial Statements                                                                                             | 13        
|Item 8     |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                             | 13        
|Item 8A    |  | Controls and Procedures                                                                                          | 13        
|Item 8B    |  | Other Information                                                                                                | 13        
|           |  |                                                                                                                  |           
|Part III   |  |                                                                                                                  |           
|Item 9     |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act | 14        
|Item 10    |  | Executive Compensation                                                                                           | 16        
|Item 11    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                  Matters | 18        
|Item 12    |  | Certain Relationships and Related Transactions                                                                   | 20        
|Item 13    |  | Exhibits                                                                                                         | 21        
|Item 14    |  | Principal Accountant Fees and Services                                                                           | 22        
|           |  |                                                                                                                  |           
|Signatures |  |                                                                                                                  | 23        

EXPLANATORY NOTE

This  Amendment on Form 10-KSB/A to Electro  Energy  Inc.s (the  "Company" or the  "Registrant")  Annual Report on Form 10-KSB for the
year ended  December 31, 2004 (the "Original  Filing")  which was filed with the Securities and Exchange  Commission on March 30, 2005,
is being filed to amend the Original Filing as follows:

[X] Part III is amended to insert  required  disclosures  previously  reported to be  incorporated  by  reference  in the  Registrants
forthcoming definitive information statement.

In addition, the Registrant is including herewith currently dated certifications.

---



## 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).

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

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

| |  | On July 16, 2004, the Company completed a private placement of shares of its
series A convertible preferred stock and warrants to purchase common stock, and
received at the closing of the private placement gross proceeds of $5,501,000.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4,999,800 shares of common stock owned by one of MCGs former directors
were repurchased and cancelled by the Company for an aggregate consideration of
$100.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

---



| |  | 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 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.

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

## Business

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

In October 2003, we
acquired the battery operations of 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 (also
known by the chemical element symbol 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. We believe that the acquisition of this facility
enhances our capabilities, broadens our product lines and presents new business
opportunities for us. The acquisition of the Colorado personnel, technology, and
market positioned EEI as a viable supplier to the U.S. military and
international spacecraft Industry. We entered into agreements with EaglePicher
that included an asset purchase of the existing inventory, the equipment in the
facility, a lease of the 43,000 square-foot building that belongs to
EaglePicher, a technology license, a supply agreement to continue to produce
sintered nickel plaque and striker assemblies for EaglePicher, a services
agreement to continue to operate groundwater remediation on behalf of
EaglePicher and a contract to deliver a satellite battery for a Korean
satellite. We are currently using the facility to pursue and rebuild our Ni-Cd
business and as a testing and development area for government products. We do
not presently intend to convert our Ni-Cd facilities to accommodate the
production of nickel-metal hydride products because we believe the Colorado
Ni-Cd facility, which is currently certified for the production of products for
manned spaceflight, is more valuable with that qualification than it would be as
converted. While we have no current plans to convert the Colorado facility to
nickel-metal hydride, we may decide in the future to re-evaluate the use of the
facility for nickel-metal hydride product production.

Under the 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.

---



We also received from
EaglePicher 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, we are 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, we 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.

We created a wholly-owned
subsidiary, Mobile Energy Products Inc. d/b/a Electro Energy Mobile Products,
Inc., to operate the Colorado Springs operation and employ the existing staff of
33 individuals to continue the operations of the facility. The plan for Mobile
Energy Products is to continue the Colorado Springs operations, supply
components to EaglePicher, manufacture and sell specialty nickel-cadmium
batteries, use the Colorado Springs operation to help transition our bipolar
nickel-metal hydride battery to a broader mix of applications and to broaden the
product mix to include lithium rechargeable batteries. The Colorado Springs
operation is one of three organizations worldwide that produce specialty
nickel-cadmium batteries for satellites and one of two that is qualified for
U.S. government applications. Management believes that the supply agreement with
EaglePicher will provide financial benefit to EEI as a result of an anticipated
material increase in satellite replacements, regardless of whether the batteries
used are our own or EaglePichers. We have substantially improved the
relationship between the Colorado facility personnel and the previous owner and
believe that the relationship will result in increased sales. Additionally, we
have substantially reduced scrap, improved profit and are supplying high quality
components to EaglePicher. The supply agreement has also allowed us to improve
our own quality and lower our operational costs in the development and
manufacture of our batteries.

Our Ni-Cd processes have
been developed and refined over the past twenty years to deliver an extremely
long life product. Our nickel-metal hydride processes are currently being
transitioned to our 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 we do not anticipate licensing our
manufacturing technology at this time.

Suppliers

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

We also use a low-pressure
metal hydride (AB5) alloy in our development and fabrication
processes. There are many alloy suppliers, but we are presently working with
Santoku, formally Rhodia, and Treibacher Auermet. We have not to date
experienced any shortages in the availability of the alloy, although an effort
to optimize the alloy for expanding applications and lower cost is ongoing.

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

Significant Customers

The Company had two
customers with sales of 10% or more of total sales in 2004 and 2003. Net sales
to the Companys two major customers, EaglePicher Technologies, LLC and
U.S. Airforce Mantech represented approximately 59% in 2004 and 21% in 2003.
Accounts receivable from these customers amounted to $157,951 and $370,878 as of
December 31, 2004 and 2003, respectively.

---



Intellectual Property

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

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

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, 2004 was approximately $1,701,603 compared with backlog of approximately
$5,367,061 as of December 31, 2003. 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, 2004,
the Company had 67 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 less than one year to five 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 HOLDERSS

There were no 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, 2004.

## PART II

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

As of December 31, 2004,
the Companys common stock is listed for trading on the NASDAQ SmallCap
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.OB. 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, 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    

| | Year Ended December 31, 2003 |  | High |  | Low
| | ---------------------------- |  | ---- |  | ---
| |                              |  |      |  |    
| | First Quarter                |  | n/a  |  | n/a
| | Second Quarter               |  | n/a  |  | n/a
| | Third Quarter                |  | n/a  |  | n/a
| | Fourth Quarter               |  | n/a  |  | n/a

As of December 31, 2004, there were 12,447,453 shares of the Companys common
stock issued and outstanding.

As of March 18, 2005, there were approximately 150
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 900 beneficial shareholders.

The Company did not pay
cash dividends on its common stock in 2004 and 2003. 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.

---



## 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, 2004 Compared to Year Ended December 31, 2003

Net Revenue

Consolidated net revenue
for 2004 was $6,759,793 compared with $4,120,024 for 2003, an increase of
$2,639,769 , or 64.1%. Of the revenue increase, $2,650,168 was attributable to
consolidating the revenues of Mobile Energy Products, Inc. (MEP),
whose product manufacturing operations were acquired on October 1, 2003 from
EaglePicher Technologies, LLC (EaglePicher) offset by revenue
decreases of $10,399 for the services operations.

Consolidated net revenue
included net revenue pursuant to a supply agreement with EaglePicher amounting
to $2,958,935, or 44%, and $619,360, or 15.0% for 2004 and 2003, respectively.

Net revenue from services
2004 was $3,265,832 compared with $3,276,231 for 2003, a decrease of $10,399, or
0.3%. The primary reason for the decline in the research and development
services operations business was related to delays in timely receipt of new
pending and continuations of existing U.S. government research and development
contracts.

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, NASA, and
commercial customers with performance periods that commenced July 1, 2000 and
continue through December 30, 2005 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.

Net revenue from products
for 2004 was $3,493,961 and $843,793 for 2003, an increase of $2,650,168, or
314.1%. The increase was attributable to consolidating the revenues of MEP. The
Company began generating revenue from the manufacture and shipment of products
on October 1, 2003 as a result of its purchase of the operations of the former
EaglePicher managed by MEP. Net revenue from products included net revenue
pursuant to a supply agreement with EaglePicher amounting to $2,958,935, or
84.7%, and $619,360, or 73.4% for 2004 and 2003, respectively.

Gross Profit

Consolidated gross profit
for 2004 was $690,044 (10.2% of net revenue) compared to $523,461 (12.7% of net
revenue) for 2003, a decrease of $166,583. The gross profit decrease was mainly
driven by consolidating the revenues and cost of revenues of MEP. MEP operated
below full capacity in the fourth quarter of 2004. As a result, the
Companys operating margin included unabsorbed overhead incurred in the
period. The Company expects this trend to continue into the first quarter of
2005.

Gross profit from services
for 2004 was $260,227 (8.0% of net revenue) compared to $319,958 (9.8% of net
revenue) for 2003. 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 typical gross profit attainable under these contracts ranges
from 6-10%.

---



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.

Gross profit from products
for 2004 was $429,817 (12.3% of net revenue) and gross profit from products for
2003 was $203,503 (24.1% of net revenue). The Company began generating revenue
from the manufacture and shipment of products on October 1, 2003 as a result of
its purchase of the operations of the former EaglePicher managed by MEP. In
2004, the Company shipped a custom order that represented 5% of products revenue
with a lower gross margin compared with its routine orders. In addition, MEP
operated below full capacity in the fourth quarter of 2004. As a result, the
Companys operating margin included unabsorbed overhead incurred in the
period. The Company expects this trend to continue into the first half of
2005.

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.

General and Administrative Expenses

General and administrative
(G&A) expenses for 2004 were $1,692,990 (25.0% of net revenue)
compared with $410,296 (10.0% of net revenue) for 2003, an increase of
$1,282,694 . Of the increase, $61,554, or 4.8% was mainly driven by
consolidating the general and administrative expenses of MEP. The Company began
generating revenue from the manufacture and shipment of products on October 1,
2003 as a result of its purchase of the former operations of EaglePicher managed
by MEP. The remaining increase in G&A for 2004 was primarily a result of
increasing its 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
reverse merger required an audit of the prior two years of financial statements
of the surviving entity. In addition, the Company was required to file a current
report on form 8-K reporting the details of the merger and other required
filings with the Securities & Exchange Commission. The remaining increase in
G&A for 2004 included professional recruiting services of $94,420,
accounting and legal services of $311,762 , salaries for a chief financial
officer and executive assistant of $97,696, selling expenses of $45,402 ,
investor relations expenses of $166,612, other public company related expenses
of $73,155, and other expenses of $15,049. The Company expects to continue to
experience similar expenditures into 2005. Additionally, $417,044 was related to
the amortization of stock-based employee compensation expense related to the
issuance of stock options to employees for 2004. The deferred compensation
expense related to stock options issued to employees during 2004 was $1,592,178.
The remaining balance as of December 31, 2004 was $1,175,134 and will be fully
amortized through December 2007.

Research and Development Expenses

Research and development
(R&D) expenses for 2004 were $312,953 (4.6% of net revenue). No
R&D expenses were incurred in 2003. 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 provides 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 cost the Company does
not obtain a partner to share 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 Expense

Interest expense for 2004
was $287,124, compared with $151,706 for the same period of 2003, an increase of
$135,418. The increase was primarily related to the increase of accretion of
deferred interest related to the 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.

The Company had a $100,000
secured line of credit with a bank which is due on demand and subject to annual
renewals. Advances bore interest at 1.0% over the banks prime lending rate
(6.15% as of December 31, 2004) and were personally guaranteed by a stockholder
of the Company. The Company made repayments in the amount of $100,000 in the
second quarter. The line of credit was closed in March 2005. Interest expense
related to the line of credit amounted to $2,780 and $5,213 for 2004 and 2003,
respectively.

Net Loss

Net loss for 2004 was $1,603,023, compared to a net loss of $38,541 for 2003.

Net Loss Attributable to Common Stockholders

Net loss attributable to
common stockholders for 2004 was $5,347,055 or $0.51 cents per share (basic and
diluted), compared to a net loss of $38,541 or zero per share (basic and
diluted) for 2003.

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 a technical nature provided by Eskra Technical
Products, Inc. were included in cost of services-related parties in the amount
of $127,126 for 2003. Michael Eskra is the owner of Eskra Technical Products,
Inc., contracted as an outside consultant. In July 1999, Michael Eskra was
appointed President and member of the board of directors. On January 1, 2004,
Michael Eskra became an employee of the Company. In 2004, any technical services
provided by Michael Eskra in the context as an employee are included in cost of
services.

Related party services of
an administrative nature were included in general and administrative-related
parties as an operating expense in the amount of $96,523 for 2004 compared with
$220,519 for 2003. Of these amounts, general and administrative services
provided by Michael Eskra as the owner of Eskra Technical Products, Inc. were
included in general and administrative-related parties as an operating expense
for 2003 in the amount of $68,218. In 2004, any general and administrative
services provided by Michael Eskra in the context as an employee are included in
general and administrative expense. The remainder of the amounts recorded in
general and administrative-related parties are the result of other related party
agreements. 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
and business management services and supervision of accounting personnel. The
Company has an agreement with Jack T. Brown, a shareholder of the Companys
common stock, to provide consulting services. The Company had an agreement with
Cassidy & Associates, a former shareholder of the Companys common
stock, to provide lobbying services. The owner of Alvin J. Salkind Associates is
a former member of the board of directors and is a shareholder of the
Companys common stock.

---



Financial
ConditionLiquidity and Capital Resources

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

|                               | 2004       |  | 2003      
|------------------------------ | ---------- |  | ----------
|Working capital                | $3,971,928 |  | $(758,726)
|Current ratio                  | 7.37       |  | 0.64      
|Long-term debt to equity ratio | 6.1%       |  | -47.5%    

The Company had a $100,000
unsecured line of credit with a bank which is due on demand and subject to
annual renewals. Advances bear interest at 1.0% over the banks prime
lending rate (6.15% as of December 31, 2004) and were personally guaranteed by a
stockholder of the Company. The Company made repayments in the amount of
$100,000 in 2004. The line of credit was closed in March 2005.

The Companys
long-term debt was $464,766 as of December 31, 2004. Current maturities of
long-term debt are $211,193 as of the same period. During 2004, debt decreased
by $206,153 compared to total debt at December 31, 2003.

The Company made repayments
on a note payable requiring 24 monthly installments of $5,042 commencing July
2002 and on a note payable requiring 12 monthly installments of $2,744
commencing January 2004 bearing interest at 9% in the amount of $45,375 and
$31,382, respectively.

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, 2004, the note payable had a face value of $300,000
with a remaining discount to fair value of $18,813. During 2004, the Company
accreted an additional $19,365 of interest at an effective rate of 5%,
increasing the fair value of the note payable to $281,187.

The Company had three notes
payable with Connecticut Innovations, Incorporated (CII). CII notes
payable provided working capital for specific contract research and development
projects. The terms of these notes provide for royalty payments due CII in the
event such projects yield a commercially viable product or patented process. The
royalty payment will equal 15% of licensing or royalty fees earned by the
Company related to the specified projects limited to 200% of the original
principal balance of the related note. The Company has not realized revenues
subject to royalties related to the CII notes payable for 2004. On December 31,
2004, the Company refinanced its debt with 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.

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.

Concurrent with the merger,
the Company 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 the Company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 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. The Company paid $12,115 of remaining interest payable related
to the notes payable in cash in December 2004.

---



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 provides 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 as
of December 31, 2004. The outstanding warrant subscription receivable was
$150,000 as of December 31, 2004. The Company satisfied its contractual
obligations in the first quarter of 2005.

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 $1,319,853 for 2004 with net cash provided by operating
activities of $188,423 for 2003. Thirty-seven percent of accounts receivable as
of December 31, 2004 are past due compared with 44% as of December 31, 2003. The
past due accounts receivable are primarily with four customers and the Company
believes those accounts will be collected in full during the first quarter of
2005. During 2004, the Company paid certain aged accounts payable and accrued
interest to certain related parties and CII. In addition, the Company made
certain prepayments for insurance policies and the establishment of an investor
relations fund managed by an outside consulting firm. The Company expects to
amortize these prepayments over applicable benefit periods, however, these
prepayments are refundable to the Company upon termination of the insurance
policies or consulting arrangement. The Company accrued expenses primarily
relating to legal and accounting services in connection with the preparation of
its SEC filings.

The Company invested
$228,863 in property and equipment in 2004, compared with $50,323 for 2003.
Current year additions relate primarily to the purchase of $35,361 of electronic
data processing equipment, and $10,000 of laboratory equipment, and $183,500 of
production equipment. Prior year additions relate primarily to the purchase of
$3,796 of electronic data processing equipment and $46,309 of laboratory
equipment.

Cash expected to be
generated from operating activities, together with funds available resulting
from the proceeds of the private placement of series A convertible preferred
stock, are expected, under current conditions, to be sufficient to finance the
Companys planned operations over the next twelve months. Over that same
period, the Company expects to make an investment of $1.0 million in plant,
property, and equipment to expand its manufacturing capabilities to manufacture
its patented bipolar nickel-metal hydride batteries.

## 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.

Our Company accounts for
stock based compensation in accordance with SFAS 123, Accounting for
Stock-Based Compensation. The provisions of SFAS 123 allow companies to
either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in APB Opinion 25, Accounting
for Stock Issued to Employees (APB 25) but disclose the pro forma effects
on net income (loss) had the fair value of the options been expensed. Our
Company has elected to continue to apply APB 25 in accounting for its stock
option incentive plans.

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 $20,554 and zero as of December 31, 2004 and 2003,
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 self funded
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 June 15, 2005. The Company is
currently evaluating the provisions of SFAS No. 123R and will adopt it on August
1, 2005 as required.

In November 2004, the FASB
ratified the consensus reached by the Emerging Issues Task Force
(EITF), on Issue No. 03-13, Applying the Conditions in
Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report
Discontinued Operations. The Issue provides a model to assist in
evaluating (a) which cash flows should be considered in the determination of
whether cash flows of the disposal component have been or will be eliminated
from the ongoing operations of the entity and (b) the types of continuing
involvement that constitute significant continuing involvement in the operations
of the disposal component. Should significant continuing ongoing involvement
exist, then the disposal component shall be reported in the results of
continuing operations on the consolidated statements of operations and cash
flows.

In November 2004, the FASB
issued SFAS No. 151, Inventory Costs, which amends the
guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of so abnormal. In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The Company is currently
evaluating the provisions of SFAS No. 151 and will adopt it on
November 1, 2005, as required.

---



## Item 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The full text of the
Companys audited consolidated financial statements for the
fiscal years ended December 31, 2004 and 2003 begins on page F-1 of this Report.

## 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     | 68  | Founder, Chairman of the Board of Directors and Chief Executive Officer                                                  
|Joseph Engelberger  | 79  | Member of the Board of Directors                                                                                         
|Warren D. Bagatelle | 66  | Member of the Board of Directors                                                                                         
|Farhad Assari       | 44  | Member of the Board of Directors                                                                                         
|Audra J. Mace       | 34  | Chief Financial Officer and Secretary                                                                                    
|Albert J. Estrada   | 39  | Vice President, Marketing and Sales                                                                                      
|Paula Ralston       | 45  | Operations Manager - Danbury, Connecticut office                                                                         
|Dr. Jack Brown      | 72  | Manager - Washington, D.C. office and Technical Advisor                                                                  
|Rolan Farmer        | 61  | Operations Manager - Mobile Energy Products Group, Colorado Springs,
                                            Colorado
|Dr. Alvin Salkind   | 74  | Chief Scientific Advisor                                                                                                 
|                    |     |                                                                                                                          

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

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

Farhad Assari has
been involved in the international investment management business for the past
20 years, working in Europe, the Middle East and Africa as well as the U.S.
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.

---



Audra J. Mace has
served as our Secretary and Chief Financial Officer 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.

Albert J. Estrada is
our Vice President, Marketing and Sales. Prior to joining us in October 2004,
Mr. Estrada served as Senior Director of Sales, North America for Alcatel Space,
a division of Alcatel (Paris: CGEP.PA), Europes leading satellite
communications manufacturer, since April 2004. In this position, Mr. Estrada was
responsible for sales of commercial satellites to the North American satellite
operators and direct broadcast service providers. Previously, from June 1999 to
April 2004, Mr. Estrada served as Director, Americas Sales & Marketing, for
Space Systems/Loral, a leading global satellite communications manufacturer.
There, he was responsible for marketing, strategy and sales of commercial
satellites within the competitive Americas region. Mr. Estrada formerly held key
business development positions with DIRECTV, Inc. as Director of Distribution
and Sales and with DIRECTV Latin America as Director of Marketing.

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

Dr.  Jack Brown is the Manager of our  Washington  D.C.  office and has been a  Technical  Advisor to the Company on a retained
independent  consultant  basis since 1992. Dr. Brown is in charge of our governmental  marketing and is directly  involved with meeting
customers  and  assisting in business  and  technical  issues.  Dr.  Brown  assists in  formulating  government  business  strategy and
technology  thrusts.  Dr. Brown has 45 years of experience in the battery/fuel  cell field and had a 35-year career with  Westinghouse,
where he served as Manager of Fuel Cell and Battery  Research  and  Development.  Dr.  Brown spent much of his career at  Westinghouse,
where he held positions from engineer  through senior  management.  When Dr. Brown left  Westinghouse  he was Laboratory  Director.  He
has  authored  over 100  technical  papers and 15 patents.  Dr. Brown  received  his Ph.D.  degree,  majoring in  Electrochemistry  and
Physical Metallurgy, at Case Western Reserve University.

Rolan C. Farmer is
the Operations Manager of the Companys Mobile Energy Products Group,
located in Colorado Springs, Colorado. Mr. Farmer joined Electro Energy in
October 2003. Mr. Farmer has over 38 years experience in the battery industry.
After graduating with a B.S in Mechanical Engineering from the University of
Missouri, Mr. Farmer began his career with EaglePicher as an engineer in the
Thermal Battery Department in Joplin, Missouri. Over the next 12 years, Mr.
Farmer served as Project Engineer, Program Manager, Manager of Contract
Administration, and Marketing Manager. Since 1976, Mr. Farmer has been located
in Colorado Springs and served as Operations Manager, Plant Manager, General
Manager and Corporate Vice President of EaglePicher. His responsibilities
included profit and loss for all Colorado operations. During his 38 years with
EaglePicher, Mr. Farmer has been involved with many different battery systems,
including, thermal, silver-zinc, nickel-hydrogen, nickel-cadmium and nickel-zinc
batteries.

Dr. Alvin Salkind has been a member of the Board of Directors of EEI  Technologies,  Inc.  since 1992.  Dr. Salkind has over 40
years of  experience  in the  electrochemical  battery  field,  and was the former  Director of Research at ESB Inc. (now Exide Battery
Company).  Dr.  Salkind also serves as the Scientific  Advisor to the Company as a consultant on a number of Electro  Energy  projects.
Dr. Salkind is a Professor and Director of the Battery and  Electrochemical  Systems Center at Rutgers University (since 1979) and also
Professor and Chief of the  Bioengineering  Section of the Department of Surgery at UMDNJ/Robert Wood Johnson Medical School at Rutgers
University  (since 1970).  Dr. Salkind received his Ph.D. in Chemical  Engineering  from the Polytechnic  Institute in New York and had
additional  graduate and management  training at Penn State  University  and the Harvard  Business  School.  Dr. Salkind has had a dual
academic-industrial  career,  which includes 25 years of industrial  experience in electrochemical  operations,  focusing batteries and
electro-medical devices.

---



Michael D. Eskra, formerly
the President, Chief Operating Officer and a director of EEI, resigned from his
positions with the Company effective March 22, 2005. Mr. Eskras
resignation was previously reported by the Company on a current report on Form
8-K filed with the Securities and Exchange Commission on March 29, 2005.

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, 2004, Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended December 31, 2004, and written representations
furnished to us, Mr. Assari failed to file on a timely basis one report on Form
4 concerning a purchase and sale of securities. There is no other person who, at
any time during the fiscal year, was a director, officer, or beneficial owner of
more than ten percent of any class of our securities that failed to file on a
timely basis reports required by section 16(a) of the Exchange Act during the
fiscal year ended December 31, 2004.

Code of Ethics

The Company has not yet
adopted a corporate code of ethics. The Companys Board of Directors is
considering establishing a code of ethics to deter wrongdoing and promote honest
and ethical conduct; provide full, fair, accurate, timely and understandable
disclosure in public reports; comply with applicable laws; ensure prompt
internal reporting of code violations; and provide accountability for adherence
to the code. The Company plans to implement a code of ethics prior to December
31, 2005.

## Item 10.
EXECUTIVE COMPENSATION

The following Summary
Compensation Table sets forth all compensation earned, in all capacities, during
the fiscal years ended December 31, 2002, 2003 and 2004 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($)           | Bonus($)               | OtherAnnualCompen-sation($)
|                            |          |                     |                        |                            
|Martin G. Klein             | 2004     | $ 150,000           | $            0         | $            0             
|CEO of EEI                  | 2003     | 133,278             | 0                      | 0                          
|                            | 2002     | 150,000             | 0                      | 0                          
|                            |          |                     |                        |                            
|Michael D. Eskra            | 2004     | $ 235,000           | $            0         | $            0             
|President and COO of        | 2003     | 0                   | 0                      | 195,844                    
|EEI (2)                     | 2002     | 0                   | 0                      | 183,963                    
|                            |          |                     |                        |                            
|Marguerite Godels           | 2004     | $            0      | $            0         | $            0             
|President of MCG (3)        | 2003     | 0                   | 0                      | 36,000                     
|                            | 2002     | 0                   | 0                      | 36,000                     
|                            |          |                     |                        |                            

|(1) | All amounts are for the 12 months ended December 31 of the year indicated.                                                                                                                                                                                                                                                                                               
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                          
|(2) | Mr. Eskra's affiliate,  Eskra Technical Products,  Inc., received the noted compensation during 2002 and 2003 pursuant to
        a consulting  agreement with EEI. Mr. Eskra became an employee of EEI on January 1, 2004.  Mr. Eskra  resigned  effective
        March 22, 2005.                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                          
|(3) | Ms. Godels  resigned as an officer as of June 9, 2004. The amount in 2002 represents  $5,208 in paid  compensation to Ms.
        Godels and $30,792 in compensation  that was foregone as contributed  capital.  The amount in 2003  represents  $3,110 in
        paid compensation to Ms. Godels and $32,890 in compensation that was foregone as contributed capital.

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

Prior to the assumption of
the 1993 Stock Compensation Plan of EEI, as discussed below, we did not have a
stock option plan, long-term incentive plan or other similar plans for officers,
directors and employees, and no stock options or SAR grants were granted in the
last fiscal year or were outstanding.

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.

As of December 31, 2004, we maintained no other employment agreements with our officers or other employees.

---



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 April 21, 2005, 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                                                         |                                        |                                           
|                                                                        |                                        |                                           
|Stephen Okinow and Alison Klein77 Hill Side AvenueShort Hills, NJ 07078 | 657,435                                | 5.1%(3)                                   
|                                                                        |                                        |                                           
|Michael D. Eskra2595 Highway ISaukville, WI 53080                       | 1,252,979(4)                           | 9.0%(5)                                   
|                                                                        |                                        |                                           
|Executive
Officers and Directors                                        |                                        |                                           
|                                                                        |                                        |                                           
|Martin G. Klein                                                         | 5,129,912                              | 39.9%                                     
|Warren D. Bagatelle                                                     | 1,988,189(6)                           | 14.9%(7)                                  
|Joseph Engelberger                                                      | 313,717                                | 2.4%                                      
|Farhad Assari                                                           | 137,050(8)                             | 1.1%(9)                                   
|Audra J. Mace                                                           | 25,000                                 | 0.2%(10)                                  
|Albert J. Estrada                                                       | --                                     | --                                        
|Directors and executive officers as a group(six persons)                | 7,593,868                              | 56.3%(11)                                 
|                                                                        |                                        |                                           

|(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 April 21, 2005, 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  12,854,047  shares of common stock  outstanding  on April 21, 2005;  does not include
       1,866,400 shares of common stock issuable upon conversion of series A convertible preferred stock.                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) | Based upon (i) 12,854,047 shares of common stock  outstanding,  plus (ii) 20,000 shares of common stock issuable upon conversion
       of series A convertible preferred stock, plus (iii) 10,000 shares of common stock issuable upon the exercise of warrants.                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Includes 225,877 shares of common stock owned by Eskra Technical Products, Inc., an affiliate of Mr. Eskra.                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(5) | Based upon (i)  12,854,047  shares of common  stock  outstanding,  plus (ii)  1,027,102  shares of common  stock  issuable  upon
       exercise of options.                                                                                                                                                                                                                                                                                                                 

---



|(6)  | 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) 53,719  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) 167,420 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.  Mr.  Bagatelle
       expressly disclaims beneficial ownership of the common stock owned or acquirable by the other investors.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(7)  | Based upon (i) 12,854,047 shares of common stock  outstanding,  plus (ii) 60,000 shares of common stock issuable upon conversion
       of series A convertible preferred stock, plus (iii) 425,270 shares of common stock issuable upon the exercise of warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(8)  | Includes  9,000 shares of common stock held by Investrust,  LLC, an affiliate of Mr.  Assari,  and 63,850 shares of common stock
       issuable to Investrust,  LLC, and 64,200 shares of common stock issuable to Merkantil 7, Inc., an affiliate of Mr. Assari,  upon
       the conversion of shares of series A convertible preferred stock and the exercise of warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(9)  | Based upon (i) 12,854,047 shares of common stock  outstanding,  plus (ii) 60,800 shares of common stock issuable upon conversion
       of series A convertible preferred stock, plus (iii) 67,250 shares of common stock issuable upon the exercise of warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(10) | Based upon (i)  12,854,047  shares of common  stock  outstanding,  plus (ii) 25,000  shares of common  stock  issuable  upon the
       exercise of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(11) | Based  upon (i)  12,854,047  shares of common  stock  outstanding,  plus (ii)  120,800  shares  of common  stock  issuable  upon
       conversion of series A convertible  preferred  stock,  plus (iii) 492,520  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. (the "Compensation Plan").

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 Plan 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 the Compensation Plan. As of December 31, 2004, stock options
to purchase an aggregate of 2,332,121 shares of common stock have been granted
to 21 employees under the Compensation Plan, at exercise prices ranging from
$.26 to $2.00 per share.

The Compensation Plan 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 Plan,
including the exercise price, the number of shares subject to the stock option
and conditions of exercise. Stock options granted under the Compensation Plan
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
Plan 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 Plan 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.

The following table sets
forth, as of the year ended December 31, 2004, 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 securities
                                        remaining available for
                                        future issuance
|------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                       |                                                                                         |                                                                         |                                                                                                                                             
|                                                                                                       | (a)                                                                                     | (b)                                                                     | (c)                                                                                                                                         
|                                                                                                       |                                                                                         |                                                                         |                                                                                                                                             
|Equity compensation plans approved by security holders
                   1993 Stock Compensation Plan | 2,332,121                                                                               | $  .74                                                                  | 228,674                                                                                                                                     
|                                                                                                       |                                                                                         |                                                                         |                                                                                                                                             
|Equity compensation plans not approved by security
holders                                             | N/A                                                                                     | N/A                                                                     | N/A                                                                                                                                         
|                                                                                                       |                                                                                         |                                                                         |                                                                                                                                             
|Total                                                                                                  | 2,332,121                                                                               | $  .74                                                                  | 228,674                                                                                                                                     

## 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)                                                                                                                          
|10.2        |  | Employment Agreement, dated as of December 31, 2003, between Electro Energy, Inc. and Michael
                   D. Eskra, as assigned to 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 ofElectro
                   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 Godelsand Charles P.
                   Godels, P.A.(2)                                                                                  
|10.8        |  | Form of Private Placement Subscription Agreement.(2)                                                                                                                                                         
|10.9        |  | Registration Rights Agreement.(2)                                                                                                                                                                            
|10.10       |  | Asset Purchase Agreement, dated as of October 1, 2003, by and between EaglePicher Technologies,
                   LLC and Mobile Energy Products, Inc.(5)                                                   
|10.11       |  | Security Agreement, dated as of October 1, 2003, by and between EaglePicher Technologies, LLC
                   and Mobile Energy Products, Inc.(5)                                                         
|10.12       |  | Supply Agreement, dated as of October 1, 2003, by and between EaglePicher Technologies, LLC and
                   Mobile Energy Products, Inc.(5)                                                           
|10.13       |  | License Agreement, dated as of October 1, 2003, by and between EaglePicher Technologies, LLC
                   and Mobile Energy Products, Inc.(5)                                                          
|10.14       |  | Groundwater Remediation Operating Agreement, dated as of October 1, 2003, by and
between EaglePicher Technologies, LLC and Mobile Energy Products, Inc.(5)                                                   
|10.15       |  | Lease Agreement, dated as of October 1, 2003, by and between EaglePicher Technologies, LLC and
                   Mobile Energy Products, Inc.(5)                                                            
|10.16       |  | Assignment and Assumption of Contracts Agreement, dated as of October 1, 2003,
by and between EaglePicher Technologies, LLC and Mobile Energy Products,
Inc.(5)                                              
|10.17       |  | Secured Promissory Note, dated October 1, 2003, from Mobile Energy Products, Inc. to
                   EaglePicher Technologies, LLC.(5)                                                                    
|21.1        |  | Subsidiaries of the Company.(6)                                                                                                                                                                              
|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 Registration Statement on Form SB-2/A filed with the Securities
     and Exchange Commission on February 17, 2005.                     
|(6) | 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, 2004 and 2003, and fees billed for
other services rendered by Marcum & Kleigman, LLP.

| |                        |   | 2004    |  |   | 2003   
| | ---------------------- | - | ------- |  | - | -------
| | Audit Fees (1)         | $ | 130,900 |  | $ | 118,688
| | Audit-Related Fees (2) | $ | 69,400  |  | $ | -0-    
| | Tax Services (3)       | $ | -0-     |  | $ | -0-    
| | All Other Fees         | $ | 1,233   |  | $ | -0-    

| | (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.                                                                                                                                                                                                                                                                                                                                                

Prior
to the engagement of M&K, Randall N. Drake, C.P.A. (Drake) was
the Companys independent public accountant. Drake billed the Company an
aggregate of $3,625 for professional services rendered in connection with the
audit of the Companys annual and quarterly financial statements for the
fiscal year ended December 31, 2003. Additionally, Drake billed the Company $500
for its review covering the fiscal quarter ended March 31, 2004.

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: | April 29, 2005 |                    
| |       |                |                    

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.

| |       |                |  | /s/ Martin G. Klein                        
| | ----- | -------------- |  | -------------------------------------------
| |       |                |  |                                            
| |       |                |  | Name: Martin G. Klein                      
| | Date: | April 29, 2005 |  | Title: Chairman and Chief Executive Officer
| |       |                |  |                                            

| |       |                |  | /s/ Audra J. Mace                           
| | ----- | -------------- |  | --------------------------------------------
| |       |                |  |                                             
| |       |                |  | Name: Audra J. Mace                         
| | Date: | April 29, 2005 |  | Title: Chief Financial Officer and Secretary
| |       |                |  |                                             

| |       |                |  | /s/ Joseph Engelberger  
| | ----- | -------------- |  | ------------------------
| |       |                |  |                         
| |       |                |  | Name: Joseph Engelberger
| | Date: | April 29, 2005 |  | Title: Director         
| |       |                |  |                         

| |       |                |  | /s/ Warren D. Bagatelle  
| | ----- | -------------- |  | -------------------------
| |       |                |  |                          
| |       |                |  | Name: Warren D. Bagatelle
| | Date: | April 29, 2005 |  | Title: Director          
| |       |                |  |                          

| |       |                |  | /s/ Farhad Assari  
| | ----- | -------------- |  | -------------------
| |       |                |  |                    
| |       |                |  | Name: Farhad Assari
| | Date: | April 29, 2005 |  | Title: Director    
| |       |                |  |                    

---



ELECTRO ENERGY INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

|Report of Independent Registered Public Accounting Firm                 | F-2
|----------------------------------------------------------------------- | ---
|Consolidated Balance Sheets                                             | F-3
|Consolidated Statements of Operations                                   | F-5
|Consolidated Statements of Changes In Stockholders' (Deficiency) Equity | F-6
|Consolidated Statements of Cash Flows                                   | F-7
|Notes to Consolidated Financial Statements                              | F-9

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Electro 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, 2004 and 2003 and the
related consolidated statements of operations, changes in stockholders
(deficiency) 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, 2004 and 2003, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.

/s/ Marcum & Kliegman LLP

March 3, 2005 (except for
Note 13, which is dated March 22, 2005)
New York, New York

---



|ELECTRO ENERGY INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember 31, 2004 and 2003               
|--------------------------------------------------------------------------------------------------------
|                                                                                                        
|ASSETS                                                                                                  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|CURRENT ASSETS                                                                                          
|Cash and cash equivalents                                                                               
|Accounts receivable, net of allowance for doubtful accounts           of $20,554 and $- 0-, 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, 2004 and 2003                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                  
|LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|CURRENT LIABILITIES                                                                                                                                                                                                                                               
|Bank line of credit                                                                                                                                                                                                                                               
|Current maturities of long-term debt                                                                                                                                                                                                                              
|Notes payable - related parties                                                                                                                                                                                                                                   
|Accounts payable                                                                                                                                                                                                                                                  
|Accounts payable - related parties                                                                                                                                                                                                                                
|Interest payable                                                                                                                                                                                                                                                  
|Interest 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' (DEFICIENCY) EQUITY                                                                                                                                                                                                                                 
|Preferred stock, $0.001 par value, 10,000 shares authorized;
                
Series A Convertible Preferred Stock, 5,600 shares 
                
designated; 5,501 shares issued, 4,951 outstanding in 2004
                
($4,951,000 liquidation preference)
|Common stock, $0.001 par value, 50,000,000 shares
                
authorized; 12,447,453 shares issued and outstanding in
                
2004, 8,038,985 shares issued and outstanding in 2003                                                                 
|Additional paid-in capital                                                                                                                                                                                                                                        
|Deferred compensation expense                                                                                                                                                                                                                                     
|Warrant subscription receivable                                                                                                                                                                                                                                   
|Accumulated deficit                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|TOTAL STOCKHOLDERS' (DEFICIENCY) EQUITY                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|TOTAL LIABILITIES AND
                
STOCKHOLDERS' (DEFICIENCY) 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, 2004 and 2003
|-----------------------------------------------------------------------------------------------------------------------
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|NET REVENUE                                                                                                            
|Services                                                                                                               
|Products                                                                                                               
|                                                                                                                       
|TOTAL NET REVENUE                                                                                                      
|                                                                                                                       
|COST OF REVENUE                                                                                                        
|Cost of services                                                                                                       
|Cost of services - related parties                                                                                     
|Cost of products                                                                                                       
|                                                                                                                       
|TOTAL COST OF REVENUE                                                                                                  
|                                                                                                                       
|GROSS PROFIT                                                                                                           
|                                                                                                                       
|OPERATING EXPENSES                                                                                                     
|General and administrative (including non cash compensation of $417,044 in 2004)                                       
|General and administrative - related parties                                                                           
|Research and development                                                                                               
|                                                                                                                       
|TOTAL OPERATING EXPENSES                                                                                               
|                                                                                                                       
|OPERATING (LOSS) INCOME                                                                                                
|                                                                                                                       
|INTEREST EXPENSE                                                                                                       
|Interest expense                                                                                                       
|Interest expense - related parties                                                                                     
|                                                                                                                       
|TOTAL INTEREST 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 SHARES USED IN COMPUTING NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS - 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' (DEFICIENCY) EQUITYFor the Years Ended December 31, 2004 and 2003
|---------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|BALANCE - January 1, 2003                                                                                                                                
|Warrants issued in connection with notes payable to stockholders                                                                                         
|Net loss                                                                                                                                                 
|                                                                                                                                                         
|BALANCE - December 31, 2003                                                                                                                              
|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                                                                                                                              
|                                                                                                                                                         
|                                                                                                                                                         
|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, 2004 and 2003
|-----------------------------------------------------------------------------------------------------------------------
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                   
|Net loss                                                                                                               
|                                                                                                                       
|Adjustments to reconcile net loss to net

        cash (used in) provided by operating activities:                     
|Interest accretion                                                                                                     
|Depreciation and amortization                                                                                          
|Amortization of deferred compensation expense                                                                          
|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) PROVIDED BY                        
  OPERATING ACTIVITIES                                          
|                                                                                                                       
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                   
|Acquistion of business, net of cash acquired                                                                           
|Purchases of property and equipment                                                                                    
|Receipt (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, 2004 and 2003
|-----------------------------------------------------------------------------------------------------------------------
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                   
|Repayments under bank line of credit                                                                                   
|Repayments of long-term debt                                                                                           
|Borrowings of long-term debt                                                                                           
|(Repayments) borrowings 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 exercise of stock options and warrants                                                                   
|                                                                                                                       
|                                                                                                                       
|NET CASH PROVIDED BY                        
  FINANCING ACTIVITIES                                                    
|                                                                                                                       
|NET 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                                                
|Issuance of notes payable, net of discount                                                                             
|Assumption of accounts payable and accrued liabilities                                                                 
|Conversion of notes payable and related accrued interest into common stock                                             
|Issuance of warrants in exchange for warrant subscription receivable                                                   
|                                                                                                                       
|The accompanying notes are an integral part of these consolidated financial statements.                                

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - The Company

Organization
            
On 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. 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. Immediately following the
merger, MCG changed its name to Electro Energy Inc. (New EEI).

The consolidated financial
statements presented are those of New EEI and its wholly-owned subsidiary, EEI.
Additionally, the accounts of New 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). (See Note 8.)

Nature of Business
            
The 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 Consolidation
            
The consolidated financial
statements include the accounts of New EEI and MEP from June 11, 2003
(inception) to December 31, 2004. All significant intercompany balances and
transactions have been eliminated in consolidation.

Reclassifications
            
Certain 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 Estimates
            
The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles 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 Risk
            
Financial instruments that
potentially subject the Company to significant concentrations of credit risk
consist of cash and accounts receivable.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company maintains its
cash accounts at financial institutions with balances, at times, in excess of
federally insured limits. As of December 31, 2004, the Company had cash balances
in excess of federally insured limits of $238,069. 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 Receivable
            
Accounts 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 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 $20,554 and zero as of December 31, 2004 and 2003,
respectively.

Inventory
            
Inventory is 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 a 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 Equipment
            
Property 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 Recognition
            
In 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 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. As of December 31,
2004, the Company has recorded additional revenue of $200,000 and a related
receivable for $200,000 pursuant to its submission to DCAA for 2004 settled
rates.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 deliver our batteries or services have been rendered.

Significant Customers
            
The
Company had two customers with sales of 10% or more of total sales in 2004 and
2003. Net sales to the Companys two major customers, EaglePicher
Technologies, LLC and U.S. Airforce Mantech represented approximately 59% in
2004 and 21% in 2003. Accounts receivable from these customers amounted to
$157,951 and $370,878 as of December 31, 2004 and 2003, respectively.

Product Warranty
            
The 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, 2004, the estimated liability
is zero.

Depreciation and Amortization
            
Depreciation 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 Taxes
            
The 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 Instruments
            
The 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 Compensation
            
As 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 year ended December 31, 2004, the Company recorded compensation expense
in general administrative expenses amounting to $417,044 related to 710,245
stock options granted to employees.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Upon becoming a public company 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.

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, 2004 and 2003:

| |                                                                                                                              | 2004 |             | 2003
| | ---------------------------------------------------------------------------------------------------------------------------- | ---- | ----------- | ----
| |                                                                                                                              |      |             |     
| | Net loss attributable to common stockholders as reported                                                                     | $    | (5,347,055) |     
| | Add:  stock-based employee compensationexpense included in reported net loss                                                 |      | 417,044     |     
| | Deduct:  total stock-based employee compensationexpense determined under fair and minimumvalue-based methods for all options |      | (820,513)   |     
| |                                                                                                                              |      |             |     
| | Proforma net loss attributable to common stockholders                                                                        | $    | (5,750,524) |     
| |                                                                                                                              |      |             |     
| | Proforma net loss per share attributable to commonstockholders (basic and diluted)                                           | $    | (0.55)      |     
| |                                                                                                                              |      |             |     

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:

| |                          | 2004 |          | 2003
| | ------------------------ | ---- | -------- | ----
| |                          |      |          |     
| | Expected Life (Years)    |      | 10       |     
| | Interest Rate            |      | 3.250%   |     
| | Annual Rate of Dividends |      | --%      |     
| | Volatility               |      | 177.510% |     

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 $2.14 per option during 2004 and there were
no options granted in 2003.

Research and Development
            
Research 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, 2004 and 2003 were $312,953 and zero, respectively.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loss Per Share
            
Basic 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 attributable to common shares 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.

Securities that could
potentially dilute earning 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, 2004 and 2003:

| |                                                               | 2004 |           | 2003
| | ------------------------------------------------------------- | ---- | --------- | ----
| |                                                               |      |           |     
| |                                                               |      |           |     
| | Preferred stock convertible into common stock                 |      | 1,980,400 |     
| | Notes payable - related parties convertible into common stock |      | -         |     
| | Warrants to purchase common stock                             |      | 2,099,184 |     
| | Options to purchase common stock                              |      | 2,332,121 |     
| |                                                               |      |           |     
| | Total potential common shares                                 |      | 6,411,705 |     
| |                                                               |      |           |     

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 June 15, 2005. The Company is
currently evaluating the provisions of SFAS No. 123R and will adopt it on August
1, 2005 as required.

In November 2004, the FASB
ratified the consensus reached by the Emerging Issues Task Force
(EITF), on Issue No. 03-13, Applying the Conditions in
Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report
Discontinued Operations. The Issue provides a model to assist in
evaluating (a) which cash flows should be considered in the determination of
whether cash flows of the disposal component have been or will be eliminated
from the ongoing operations of the entity and (b) the types of continuing
involvement that constitute significant continuing involvement in the operations
of the disposal component. Should significant continuing ongoing involvement
exist, then the disposal component shall be reported in the results of
continuing operations on the consolidated statements of operations and cash
flows.

In November 2004, the FASB
issued SFAS No. 151, Inventory Costs, which amends the guidance in
ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material. This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so
abnormal. In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The Company is currently evaluating the provisions
of SFAS No. 151 and will adopt it on November 1, 2005, as required.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - Inventories

Inventories consists of the following as of December 31, 2004 and 2003:

| |                  | 2004 |         | 2003
| | ---------------- | ---- | ------- | ----
| |                  |      |         |     
| | Raw materials    | $    | 202,531 |     
| | Work in progress |      | 41,961  |     
| |                  |      |         |     
| | Total            | $    | 244,492 |     
| |                  |      |         |     

NOTE 4 - Property and Equipment

Property and equipment consists of the following as of December 31, 2004 and 2003:

| |                                                  | 2004 |         | 2003 |   | Useful Lives
| | ------------------------------------------------ | ---- | ------- | ---- | - | ------------
| |                                                  |      |         |      |   |             
| | Equipment                                        | $    | 706,190 |      | $ | 477,327     
| | Leasehold improvements                           |      | 30,359  |      |   | 30,359      
| |                                                  |      |         |      |   |             
| |                                                  |      | 736,549 |      |   | 507,686     
| |                                                  |      |         |      |   |             
| | Less:  Accumulated depreciation and amortization |      | 203,276 |      |   | 156,939     
| |                                                  |      |         |      |   |             
| | Property and Equipment, Net                      | $    | 533,273 |      | $ | 350,747     
| |                                                  |      |         |      |   |             

Depreciation and amortization expense for the years ended December 31,
2004 and 2003 was $46,337 and $59,317 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% and 5.00% as of December 31, 2004 and 2003, respectively)
and were personally guaranteed by a stockholder of the Company. Advances under
the line of credit amounted to zero and $100,000 as of December 31, 2004 and
2003, respectively. The line of credit was closed in March 2005. Interest
expense related to the line of credit amounted to $2,780 and $5,213 for the
years ended December 31, 2004 and 2003, respectively.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - Long-Term Debt

Long-term debt consists of the following as of December 31, 2004 and 2003:

| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  | 2004    |          | 2003
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------- | -------- | ----
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| | Notes payable to Connecticut Innovations, Incorporated (CII):                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| |                                                                                                                                                                                                                                                          | Commencing June 1997 and maturing June 2007 with interest at 2.0% per annum and monthly installments of $375 in the first four years and interest at 10.0% per annum and monthly installments of $1,389 thereafter, refinanced December 2004           |  | $       | -        |     
| |                                                                                                                                                                                                                                                          | Commencing September 1998 and maturing September 2008 with interest at 2.0% per annum and monthly installments of $300 in the first four years and interest at 10.0% per annum and monthly installments of $1,112 thereafter, refinanced December 2004 |  |         | -        |     
| |                                                                                                                                                                                                                                                          | Commencing November 1998 and maturing November 2008 with interest at 2.0% per annum and monthly installments of $298 in the first four years and interest at 10.0% per annum and monthly installments of $1,102 thereafter, refinanced December 2004   |  |         | -        |     
| |                                                                                                                                                                                                                                                          | Commencing December 2004 and maturing December 2007 with interest at 5% per annum and annual installments of $61,193                                                                                                                                   |  |         | 183,579  |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         | 183,579  |     
| | Note payable requiring 24 monthly installments of $5,042 commencing July 2002 bearing interest at 5.2%.                                                                                                                                                  |                                                                                                                                                                                                                                                        |  | -       |          |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| | Note payable requiring 12 monthly installments of $2,744 commencing January 2004 bearing interest at 9%.                                                                                                                                                 |                                                                                                                                                                                                                                                        |  | -       |          |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| | 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                                                                                                                                                                                                                                             |  |         | 300,000  |     
| |                                                                                                                                                                                                                                                          | Remaining discount to fair value (effective interest rate of 5%)                                                                                                                                                                                       |  |         | (18,813) |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| |                                                                                                                                                                                                                                                          | Fair Value                                                                                                                                                                                                                                             |  |         | 281,187  |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| |                                                                                                                                                                                                                                                          | Total long-term debt                                                                                                                                                                                                                                   |  |         | 464,766  |     
| | Less:  current maturities                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                        |  | 211,193 |          |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     
| |                                                                                                                                                                                                                                                          | Total long-term debt, less current maturities                                                                                                                                                                                                          |  | $       | 253,573  |     
| |                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                        |  |         |          |     

The Company had three notes payable with Connecticut Innovations,
Incorporated (CII). CII notes payable provided working capital for
specific contract research and development projects. The terms of these notes
provide for royalty payments due CII in the event such projects yield a
commercially viable product or patented process. The royalty payment will equal
15% of licensing or royalty fees earned by the Company related to the specified
projects limited to 200% of the original principal balance of the related note.
The Company has not realized revenues subject to royalties related to the CII
notes payable for 2004. On December 31, 2004, the Company refinanced its debt
with 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.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest expense related to
the long-term debt of CII amounted to $15,844 and $15,071 for the years ended
December 31, 2004 and 2003, respectively.

Accretion of the discount
related to the long-term debt of EaglePicher Technologies, LLC amounted to
$19,365 and $3,335 for the years ended December 31, 2004 and 2003, respectively.

Maturities of long-term debt as of December 31, 2004 are as follows:

|For the Year Ending December 31, | Amount
|-------------------------------- | ------
|                                 |       
|2005                             | $     
|2006                             |       
|2007                             |       
|                                 |       
|Total                            | $     
|                                 |       

NOTE 7 - Stockholders' Equity

Preferred Stock
            
The Company has authorized
10,000 shares of preferred stock, par value $0.001 per share, of which 5,600,
increased from 5,500 in September 2004, 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 5,501 shares of the Series A Preferred stock in a
private placement (see below).

Concurrent with the merger,
100,000 shares of EEI Series A Convertible Preferred Stock, $.01 par value
(EEI Preferred Stock), originally convertible into 85,950 shares of
EEI common stock, were converted into 214,875 shares of EEI common stock. The
common stock issued in excess of it original terms, valued at $453,816, was
deemed a preferred stock dividend to the holders. This value was measured by
multiplying the additional 128,925 shares issued by the $3.52 market price of
the Companys common stock on the conversion date.

During 2004, 550 shares of Series A Preferred were converted into 220,000 shares of common stock.

Common Stock
            
The Company has authorized
50,000,000 shares of common stock, par value $0.001. As of December 31, 2004,
the Company had reserved 3,000,000 shares of common stock for issuance under its
1993 Stock Compensation Plan (the 1993 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 the year ended December 31, 2004, the Company issued 439,205
shares of common stock for $7,000 upon the exercise of employee stock options.

During the year ended
December 31, 2004, warrants were exercised for proceeds of $75,000 in
exchange for 30,000 shares of common stock.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Warrants
            
The 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 11). 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 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 provides 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 the merger
with MCG (See Note 1), 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 as of December 31, 2004. The outstanding warrant subscription
receivable was $150,000 as of December 31, 2004. The Company satisfied its
contractual obligations in the first quarter of 2005.

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.

Private Placement
            
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, 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.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options
            
As 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. The Company has elected to continue to
follow the intrinsic value method in accounting for its stock-based employee
compensation arrangements and recorded compensation expense in general and
administrative expenses amounting to $417,044 related to 710,245 stock options
granted to employees for the year ended December 31, 2004.

Stock option activity under the 1993 Plan for the years ended December 31, 2004 and 2003 are  as follows:

| |                           | Number ofOptions |           | Weighted-AverageExercisePrice
| | ------------------------- | ---------------- | --------- | -----------------------------
| |                           |                  |           |                              
| | Balance-January 1, 2003   |                  | 2,061,081 |                              
| | Granted                   |                  | -         |                              
| | Exercised                 |                  | -         |                              
| | Balance-December 31, 2003 |                  | 2,061,081 |                              
| | Granted                   |                  | 710,245   |                              
| | Exercised                 |                  | (439,205) |                              
| |                           |                  |           |                              
| | Balance-December 31, 2004 |                  | 2,332,121 |                              
| |                           |                  |           |                              

Stock options outstanding and exercisable, by price range, as of December 31, 2004 are as follows:

| | Exercise Price | Amount    | Weighted-AverageRemainingContractualLife inYears | Weighted-AverageExercisePrice | AmountExercisable | Weighted-AverageExercisePrice
| | -------------- | --------- | ------------------------------------------------ | ----------------------------- | ----------------- | -----------------------------
| |                |           |                                                  |                               |                   |                              
| | $0.26          | 1,192,126 | 4.6                                              | $    0.26                     | 1,192,126         | $    0.26                    
| | $1.16          | 1,039,995 | 8.4                                              | 1.16                          | 214,876           | 1.16                         
| | $2.00          | 100,000   | 9.5                                              | 2.00                          | 25,000            | 2.00                         
| |                |           |                                                  |                               |                   |                              
| |                | 2,332,121 | 6.5                                              | $    0.74                     | 1,432,002         | $    0.43                    
| |                |           |                                                  |                               |                   |                              

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - Acquisition

On October 1, 2003, the
Company, through its MEP subsidiary acquired the Colorado Springs
energy business of EaglePicher in exchange for a note payable amounting to
$450,000 and the assumption of $138,482 in accounts payable and accrued
liabilities. The note is non-interest bearing requiring three annual
installments of $150,000 and matures October 2006. The notes fair value
was estimated at $408,487 discounted with an effective interest rate of 5%. In
addition, the Company incurred acquisition costs of $158,903. The purchase price
has been allocated to the net assets acquired based on their estimated fair
values on the date of acquisition as follows:

|Accounts receivable   | $ | 202,416  
|--------------------- | - | ---------
|Inventory             |   | 275,750  
|Plant and equipment   |   | 227,706  
|                      |   |          
|Total assets acquired |   | 705,872  
|Liabilities assumed   |   | (138,482)
|                      |   |          
|Net assets acquired   | $ | 567,390  
|                      |   |          

The fair value of the
assets was determined to be the price paid for the assets plus liabilities
assumed and incurred acquisition costs.

The results of operations
for the business acquired are included in the consolidated statements of
operations from the date of the acquisition. The pro forma information below
presents a summary of the results of operations of the Company, assuming the
acquisition occurred at the beginning of the following period:

| |                    | For the Years EndedDecember 31,2003
| | ------------------ | -----------------------------------
| |                    |                                    
| |                    |                                    
| | Net revenue        | $                                  
| |                    |                                    
| | Net loss           | $                                  
| |                    |                                    
| | Net loss per share | $                                  
| |                    |                                    

NOTE 9 - Income Taxes

The Company has net
operating loss carryforwards (NOLs) of approximately $
2,503,824 as of December 31, 2004 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, 2004 and
2003 consists of the following:

| |                                   | 2004 |             | 2003 |  
| | --------------------------------- | ---- | ----------- | ---- | -
| |                                   |      |             |      |  
| | Net operating loss carry forwards | $    | 975,200     |      | $
| | Stock based compensation          |      | 167,000     |      |  
| |                                   |      |             |      |  
| | Total deferred tax asset          | $    | 1,142,200   |      | $
| | Less: valuation allowance         |      | (1,142,200) |      |  
| |                                   |      |             |      |  
| | Total net deferred tax asset      | $    | -           |      | $
| |                                   |      |             |      |  

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The expiration of the Company's NOL's is as follows:

|December 31, | Amount
|------------ | ------
|             |       
|2020         | $     
|2021         |       
|2022         |       
|2023         |       
|2024         |       
|             |       
|Total        | $     
|             |       

NOTE 10 - 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, 2004 and
2003.

NOTE 11 - Related Parties

Notes Payable
            
Concurrent 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 the 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.

Accretion of deferred
interest related to the notes payable to related parties amounted to $208,677
and $40,170 for the years ended December 31, 2004 and 2003, respectively.

Interest expense related to
the notes payable to related parties amounted to $48,365 for the year ended
December 31, 2004. Interest payable and interest expense related to the notes
payable to related parties amounted to $131,292 and $87,917, respectively, as of
and for the year ended December 31, 2003.

Consulting Services
            
Certain 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 $96,523 and $347,645 for the years ended December 31, 2004
and 2003, respectively. Amounts due to these related parties as of December 31,
2004 and December 31, 2003 were $7,525 and $24,366, respectively.

---



ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - Commitments and Contingencies

Operating Leases
            
The Company conducts its
operations from two facilities that are leased under noncancelable operating
leases expiring in July 2005 and March 2010 requiring minimum monthly payments
of $9,344 and $23,875, respectively. The Company has an option to renew the
lease related to one of its facilities through July 2006 with substantially
similar terms. Rental expense related to facilities under operating leases
amounted to $362,554 and $185,585 for the years ended December 31, 2004 and
2003, respectively.

Future minimum rental payments under the above noncancelable operating leases as of December 31, 2004 are as follows:

|For the Year Ending December 31, | Amount
|-------------------------------- | ------
|                                 |       
|2005                             | $     
|2006                             |       
|2007                             |       
|2008                             |       
|2009                             |       
|Thereafter                       |       
|                                 |       
|                                 | $     
|                                 |       

Supply Agreement
            
The
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.

Executive Compensation
            
The Company entered into an
employment agreement effective January 1, 2004 through December 31, 2005 with
its President and Chief Operating Officer. The agreement provides for
compensation of $235,000 per annum, 343,800 stock options, certain other
benefits and severance payments under certain circumstances, including
termination of employment. Compensation expense under this agreement amounted to
$234,998 for year ended December 31, 2004. This agreement has subsequently been
terminated. (See Note 13.)

NOTE 13 - Subsequent Events

Effective March 22, 2005,
the Board of Directors accepted the resignation of Michael Eskra as Director,
President, and Chief Operating Officer and immediately relieved him of his
duties. In accordance with the termination clauses in the employment agreement,
the Company is obligated to pay him 30 days compensation.

---