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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
            THE SECURITIES EXCHANGE ACT OF 1934

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR
            15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR
            15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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000-31083 (Commission File Number)

MILLENNIUM CELL INC.(Exact Name of
            Registrant as Specified in Its Charter)

Delaware(State or Other
                        Jurisdiction ofIncorporation or Organization)
                   
                   22-3726792 (I.R.S. Employer
                        Identification Number)1 Industrial Way West, Eatontown,
                        New Jersey(Address of Principal Executive Offices)
                   
                   07724 (Zip Code)(732) 542-4000(Registrant's Telephone Number,
                        Including Area Code)


Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
            $.001 par value per share

Indicate by check mark whether the registrant (1) has filed all reports
            required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
            1934 during the preceding 12 months (or for such shorter period that the
            registrant was required to file such reports), and (2) has been subject to such
            filing requirements for the past 90 days. Yes    [X] No    [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
            Item 405 of Regulation S-K is not contained herein, and will not be contained,
            to the best of registrant's knowledge, in definitive proxy or information
            statements incorporated by reference in Part III of this Form 10-K or any
            amendment to this Form 10-K.    [X]

Indicate by check mark whether the registrant is an accelerated filer (as
            defined in Rule 12b-2 of the Securities Exchange Act of 1934).
            Yes    [ ]    No    [X]

The aggregate market value of the registrant's common stock held by
            non-affiliates as of March 1, 2003 was $45,095,738.

The number of shares outstanding of the registrant's common stock as of
            March 1, 2003 was 29,664,602.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement dated March 17,
            2003 to be delivered to stockholders in connection with the Annual Meeting of
            Stockholders to be held April 23, 2003 is incorporated by reference into Part
            III.

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Table of Contents

Item
                   
                   Description
                   
                   PagePART IItem 1.
                   
                   Business
                   
                   1Item 2.
                   
                   Properties
                   
                   9Item 3.
                   
                   Legal Proceedings
                   
                   9Item 4.
                   
                   Submission of Matters to a Vote of
                        Security Holders
                   
                   9PART IIItem 5.
                   
                   Market for the Registrant's Common Equity
                        and Related Shareholder Matters
                   
                   10Item 6.
                   
                   Selected Financial Data
                   
                   10Item 7.
                   
                   Management's Discussion and Analysis of
                        Results of Operations and Financial Condition
                   
                   11Item 7A.
                   
                   Quantitative and Qualitative Disclosure
                        of Market Risk
                   
                   20Item 8.
                   
                   Financial Statements and Supplementary
                        Data
                   
                   22Item 9.
                   
                   Changes in and Disagreements with
                        Accountants on Accounting and Financial Disclosure
                   
                   22PART IIIItem 10.
                   
                   Directors and Executive Officers of the
                        Registrant
                   
                   23Item 11.
                   
                   Executive Compensation
                   
                   23Item 12.
                   
                   Security Ownership of Certain Beneficial
                        Owners and Management
                   
                   23Item 13.
                   
                   Certain Relationships and Related Party
                        Transactions
                   
                   23Item 14.
                   
                   Controls and Procedures
                   
                   23Item 15
                   
                   Exhibits, Financial Statement Schedules,
                        and Reports on Form 8-K
                   
                   24


i

This report contains forward-looking statements (within the meaning of
            the Private Securities Litigation Reform Act of 1995) that are subject to risks
            and uncertainties. Statements contained herein that are not statements of
            historical fact may be deemed to be forward-looking information. When we use
            words such as "plan," "believe," "expect," "anticipate," "intend" or similar
            expressions, we are making forward-looking statements. You should not rely on
            forward-looking statements because they are subject to a number of assumptions
            concerning future events, and are subject to a number of uncertainties and
            other factors, many of which are outside of our control, that could cause
            actual results to differ materially from those indicated. Please note that we
            disclaim any intention or obligation to update or revise any forward-looking
            statements whether as a result of new information, future events or otherwise.
            These factors include, but are not limited to, the following: (i) the cost and
            timing of development and market acceptance of, and the availability of
            components and raw materials required by, a hydrogen fuel storage and delivery
            system, (ii) competition from current, improving and alternate power
            technologies, (iii) our ability to access the proceeds of our secured debenture
            financing program, (iv) our ability to protect our intellectual property, (v)
            our ability to achieve budgeted revenue and expense amounts, (vi) our ability
            to generate revenues from the sale or license of, or provision of services
            related to, our technology, (vii) our ability to form strategic alliances or
            partnerships to help promote our technology and achieve market acceptance,
            (viii) our ability to generate design, engineering, or management services
            revenue opportunities in the hydrogen generation or fuel cell markets and (ix)
            other factors discussed herein under the caption "Investment Considerations"
            and other factors detailed from time to time in our filings with the Securities
            and Exchange Commission.

PART I

Item 1.    Business.

General

We were formed as a Delaware limited liability company in 1998, organized
            and began operations on January 1, 1999 and converted into a Delaware
            corporation on April 25, 2000. We are an emerging technology company engaged in
            the business of developing innovative fuel systems for the safe storage,
            transportation and generation of hydrogen for use as an energy source.

Our Hydrogen Storage and Delivery Technology

We have developed and applied for patents for a proprietary process
            called Hydrogen on DemandTM that safely generates hydrogen
            from environmentally friendly raw materials. Our technology can be used to
            generate hydrogen for use by fuel cells in the production of electricity,
            generate hydrogen for use by modified internal combustion engines, and provide
            hydrogen for other industrial purposes. In the proprietary process, the energy
            potential of hydrogen is carried in the chemical bonds of sodium borohydride,
            which in the presence of a catalyst releases hydrogen. The primary input
            components of the reaction are water and sodium borohydride, a derivative of
            borax, which is found in substantial natural reserves globally.

We believe Millennium Cell is unique among hydrogen fuel companies
            because our technology is scalable to applications from small (cellular phones,
            personal digital assistants) to large (auxiliary power units, scooters,
            automobiles).

In its simplest form, our sodium borohydride technology provides the
            ability to store and transport hydrogen in a liquid or solid form. Because
            hydrogen provides the energy used by fuel cells to create electricity, this is
            the equivalent of transporting clean electricity as a liquid or solid —
            safely and conveniently. To put this in another perspective, an aqueous
            solution containing 35% by weight sodium borohydride and water used as the
            hydrogen source to power a fuel cell will have an energy density that is equal
            to or greater than that of the same volume of gasoline consumed in an internal
            combustion engine.

Our solution of sodium borohydride in water creates a fuel that delivers
            a non-flammable, energy dense and convenient source of hydrogen to power fuel
            cells or internal combustion engines. To generate

1

hydrogen, the fuel makes contact with a catalyst. The catalyst is
            typically a non-volatile metal that may include ruthenium and/or cobalt. Once
            in contact with the catalyst, the sodium borohydride reacts to form hydrogen
            gas, which can be used immediately or stored in a tank. The byproducts of our
            hydrogen-generating process are primarily heat and borax, a type of sodium
            borate, which can be recycled to form sodium borohydride.

The hydrogen-generating chemical reaction used in our process eliminates
            the pollutants and undesirable emissions of typical hydrocarbon-based energy
            systems, which combust fossil fuels such as gasoline, natural gas and diesel.
            Sodium borohydride-based energy systems have favorable energy density,
            power-to-weight and volume characteristics when compared to the mobile hydrogen
            power sources now in use.

We have used our hydrogen generation system to power an operating
            series-hybrid sports utility vehicle and two other vehicles, including a fuel
            cell vehicle and a former New York City taxicab that burns hydrogen in its
            internal combustion engine. DaimlerChrysler has incorporated our Hydrogen on
            DemandTM system into its full size, fuel cell minivan the Town
            and Country® NatriumTM. PSA Peugeot Citröen
            debuted its H2O vehicle, powered by a Hydrogen on DemandTM
            fuel system at the Paris Auto Show in 2002. We believe that sodium borohydride
            fuel could be distributed for transportation purposes through fleet refueling
            centers, and eventually in the future through the existing network of
            neighborhood gasoline stations.

The supply chain for consumer electronics and distributed generation
            applications will evolve, based on customer need and convenience. For example,
            portable and specialty power requirements are today satisfied with consumer
            purchases of self-contained solid-state disposable batteries and liquid fuels
            like butane lighters. Residential and commercial power needs are met with
            propane tank exchange businesses and delivery of home heating oil or gases.
            Millennium Cell's Hydrogen on DemandTM technology is designed
            to integrate well with diverse customer fueling requirements because of the
            unique safety and convenience of our water-based sodium borohydride fuel.

Advantages over Existing Hydrogen Storage Technologies

We believe that the Company's hydrogen generation technology and its
            underlying characteristics of safety, portability and environmental
            compatibility make it an attractive alternative to existing technologies for
            many applications. We believe our core competitive advantage is that our
            technology solves two critical problems related to the use of hydrogen as a
            fuel: generation and storage. Our Hydrogen on DemandTM system
            stores the energy of hydrogen in the chemical bonds of sodium borohydride, as a
            dry powder or a non-flammable liquid. Hydrogen is released only when it is
            needed, and because it is consumed on demand, no costly storage technology is
            required. We believe that this is a considerable advantage when compared to
            other means of generating and storing hydrogen.

We believe that our proprietary Hydrogen on DemandTM
            hydrogen generation system offers advantages for use in fuel cells over other
            methods of generating hydrogen fuel which often require the storage of hydrogen
            in bulky and potentially explosive tanks or consume polluting hydrocarbon fuels
            in high temperature reformation processes. Current methods of storing
            significant amounts of hydrogen in vehicles require use of large tanks of
            liquid (cryogenic) or compressed gaseous hydrogen. For a 3,000-pound automobile
            to achieve a range of 300 miles using a proton exchange membrane ("PEM") fuel
            cell system, the equivalent of four large tanks of compressed gaseous hydrogen
            at 5,000 psi would be required. These tanks take up valuable space on the
            vehicle that was intended for passenger and/or cargo. Both of these systems are
            cumbersome, voluminous and potentially hazardous, as an accident that damages a
            full tank of either liquid or gaseous hydrogen might result in an extremely
            powerful explosion. In contrast, equivalent hydrogen storage in a Hydrogen
            on DemandTM system weighs less, requires less volume, and takes
            up none of the vehicle's original passenger or cargo space, while posing less
            flammability or explosion risk than gasoline, compressed, or cryogenic
            hydrogen.

Advantages of our system are both environmental and economic, as our
            system is not complex and we envision the ability to retain in use much of the
            current infrastructure now used for distribution of transportation fuels. The
            recycling process to regenerate the discharged fuel into sodium borohydride is
            envisioned to be feed stock neutral — meaning that the least
            expensive locally available source of energy

2

can be used, including natural gas, waste oil, coal, hydroelectric,
            geothermal, nuclear or solar energy. If carbon fuels are used in the
            regeneration process, the emissions associated with these fuels are
            concentrated locally and can be controlled as a single point source, unlike
            conventional gasoline burning automobiles, which scatter emissions throughout
            an area with no real method of control.

Hydrocarbon fuels such as gasoline, when combusted, release into the
            atmosphere carbon monoxide and carbon dioxide, both pollutants. Additional
            pollutants are also created, such as oxides of nitrogen — a key component
            of smog. By contrast, our process uses no carbon, while still taking advantage
            of the significant power potential of hydrogen. Neither of the reaction's
            byproducts, water and borax, is a pollutant. There is no "exhaust" in the
            conventional sense — water is harmlessly vented into the air as vapor.
            The byproduct captured in our system can be recycled into sodium borohydride,
            the key input in our process.

Fossil fuel reformers produce hydrogen from gasoline, natural gas
            (methane) or other fossil fuels. As compared to Hydrogen on
            DemandTM, this technology results in lower purity hydrogen and
            creates polluting emissions from the carbon, sulfur and nitrogen compounds
            inherent in the fossil fuel. Additionally, hydrogen from reformers contains
            carbon monoxide, which if not removed, will poison fuel cells. Reformers have
            high system complexity and correspondingly high capital costs. Finally,
            hydrogen generated from fossil fuels must still be stored, either compressed in
            cylinders or liquefied and stored as a cryogenic liquid. Both of these storage
            mechanisms have limited consumer appeal, particularly for transportation and
            residential power applications.

Metal hydrides are another option for storing the energy produced by
            hydrogen. However, metal hydride systems still require an infrastructure for
            hydrogen gas and require a source of heat to desorb hydrogen. Electrolysis is
            also used to generate hydrogen from water, but provides no means of storing it.
            These systems also consume electricity in the process, with low conversion
            efficiency and are designed only for stationary use.

Market Opportunity for Our Technology

The events of September 11th underscored the need for
            increased energy independence in the United States and have contributed to the
            elevation of energy issues in national priorities. President Bush's call in the
            2003 State of the Union address for increased spending to accelerate the
            development of the hydrogen economy, specifically the Bush Administration's
            FreedomCAR and Hydrogen Fuel initiative demonstrate the depth of the
            government's interest in fuel cell development for transportation and
            distributed generation. The administration has also announced a proposal for
            overall reduction of CO2 emissions. With energy issues center stage both from a
            geopolitical and an environmental standpoint, 2003 will be a year ripe with
            opportunities to demonstrate how Hydrogen on DemandTM can
            contribute to both national objectives: cleaner energy created within our own
            borders.

Government authorities in North America, Europe and Japan continue to
            impose stringent environmental standards generally and have increased support
            for the development of clean and efficient technologies to significantly
            improve or replace existing combustion-based technologies. While environmental
            considerations provided the initial impetus for automobile manufacturers to
            seek alternatives to the use of the internal combustion engine, we believe that
            these manufacturers are beginning to recognize that fuel cell powered vehicles
            will provide consumers with higher fuel efficiency, lower noise and vibration,
            enhanced passenger comfort and performance and new vehicle design options, and
            potentially lower capital and maintenance costs.

An immediate market opportunity exists in the growing worldwide consumer
            demand for quiet, clean and environmentally friendly products in the
            distributed generation markets. Promising applications include portable power
            and uninterrupted power source (UPS) products for use in densely populated
            areas where noise pollution is a significant concern and for use indoors or in
            other areas where high noise and high emissions of internal combustion engine
            generators pose significant problems. We believe that public concern over
            pollution is focusing attention on the use of environmentally cleaner methods
            of power generation that can use non-renewable natural resources more
            efficiently.

3

Portable Consumer Electronics Market

We believe that the highest growth battery market segment is that which
            includes advanced rechargeable battery technologies powering portable consumer
            electronics products such as cell phones, portable computers and digital
            imaging devices. For these devices, hydrogen-fueled fuel cells offer the
            potential for longer runtimes and more convenient refueling than batteries. We
            believe our Hydrogen on DemandTM system has significant
            potential in these markets due to its unique safety characteristics, high
            energy density and low fuel and system cost.

Our activities in these markets include the development of partnerships
            with companies who will commercialize our technology into these high value
            markets. Our partners include developers of complementary fuel cells,
            manufacturers of consumer electronics devices who are demanding longer runtimes
            and companies whose strength in retail distribution will establish placement of
            fuel cartridges where consumers can conveniently purchase replacement fuel.

In 2003, we expect to announce several partnerships in which Millennium
            Cell will be combining resources to develop products that will advance the
            commercialization of our technology. We expect to negotiate subsequent
            licensing agreements that will allow our partners to market our technology into
            the target markets.

Distributed Generation Markets

There is a growing worldwide consumer demand for quiet, clean power. The
            largest applications include portable and stationary power generators and power
            sources for small consumer electronics devices. In each of these markets, users
            demand power that is clean, reliable, quiet, affordable and packaged
            efficiently.

Portable power generators are commonly used in densely populated areas
            where noise pollution is a significant concern and indoors or in other areas
            where the high noise and high emissions of internal combustion engine
            generators pose significant problems. We believe that portable power generators
            fueled by our Hydrogen on DemandTM system will have
            advantages over existing portable generators and can provide consumers with the
            power they need in a package that is small and durable with low noise and
            emissions, particularly in comparison to diesel fueled generators.

In October 2000, we entered into a joint development agreement with
            Ballard Power Systems to further develop our proprietary hydrogen generation
            system for use with Ballard's portable power fuel cell products. In 2002, our
            joint development agreement with Ballard was successfully completed. Ballard
            has retained an option to license our Hydrogen on DemandTM
            technology for portable fuel cell and stationary internal combustion engine
            applications.

Stationary power generation has experienced rapid growth due to the
            demand for reliable power for critical use applications, primarily standby
            power for telecommunications systems, Internet data centers and health care
            facilities. Hydrogen fuel and fuel cells are capable of providing a more
            favorable economic and space utilization solution than incumbent lead-acid
            batteries. We believe our Hydrogen on DemandTM system can
            deliver a safe, high energy density and low cost solution to fueling fuel cells
            for these applications. In 2002 we entered into a cooperative development
            agreement with Aperion Energy Systems to co-develop and market Hydrogen on
            DemandTM products for stationary power requirements in the
            telecom and utility regulation markets. Upon completion of this agreement,
            Aperion can license Hydrogen on DemandTM technology from us
            to manufacture and sell products based on Hydrogen on
            DemandTM systems.

Transportation Markets

The transportation market continues to be driven by mandates associated
            with emissions. In North America, the California regulations (which mandate
            certain percentages of automobiles sold in the state to meet zero and/or low
            emissions levels), are motivating vehicle manufacturers worldwide to accelerate
            efforts to produce environmentally-friendly, clean, and efficient vehicles such
            as fuel cell powered vehicles and battery-powered vehicles. We expect further
            mandates will impact marine vessels using diesel-powered engines and we are
            focused on identifying opportunities where fuel cells and our very unique
            hydrogen fuel proposition may be used.

4

The year 2002 marked a number of accomplishments for the company in the
            transportation market. Our partner DaimlerChrysler conducted worldwide
            demonstrations of the Town and Country® NatriumTM
            mini-van which is powered by a fuel cell using our Hydrogen on
            DemandTM hydrogen storage fuel system. DaimlerChrysler also
            formally agreed to fund the continued development of Hydrogen on
            DemandTM technology and identified a follow-on project in which
            we are now engaged. In September, PSA Peugeot Citröen debuted its new
            hydrogen powered vehicle, the H2O at the Paris Auto Show.

We are supporting our partners as they demonstrate cutting edge vehicles
            with the fuel infrastructure. We are also working to provide mixed fuel at the
            point of use as well as providing for return of the discharged fuel (borate
            solution) safely and in an environmentally correct way. U.S. Borax, with whom
            we have a joint development agreement, has agreed to help with the disposal of
            the borate solution by absorbing it into their operations worldwide and
            re-using it. This agreement is expected to be adequate to handle the quantities
            of discharged fuel that are likely to be generated near-term. Longer-term, as
            use of the fuel becomes widespread, we anticipate the construction of recycling
            facilities to regenerate the borate solution into fresh fuel.

Our current fuel formulation uses sodium hydroxide as a stabilizer. This
            results in the discharged fuel having a pH above 12.5, which requires more
            specialized handling when transported in accordance with Environmental
            Protection Agency ("EPA") guidelines. We are working with the EPA and expect to
            receive a waiver such that discharged material can be shipped to U.S. Borax for
            processing. Our intent is to develop alternative means of stabilization so that
            the discharged fuel would have a pH below 12.5.

We will continue our efforts in 2003 to develop partnerships and to
            participate in new demonstrations not only in automotive fuel cell
            applications, but also in hydrogen burning internal combustion engine
            applications. We are also working to develop applications in a number of
            different areas, including marine, personal transportation (bicycles and
            scooters), heavy-duty truck (onboard auxiliary power), and fuel cell powered
            bus fleets, golf carts and forklift trucks.

Military

The need for advanced energy storage technologies is increasingly
            important in military applications. National security considerations include
            the need to relieve our nation's dependence on foreign oil, to provide
            plentiful, secure sources of power for our armed forces around the world and to
            provide energy for consumers during emergencies such as the attack of September
            11, 2001. Our military consumes more petroleum than any other single entity in
            the country and possibly, the world. This large and costly fuel consumption is
            the impetus behind efforts to find alternative fuels to power our
            ever-increasing defense presence around the world.

In 2003, we will be increasingly focused on developing military markets
            for our technology. In 2002, we delivered two units to TACOM, which are
            currently being evaluated. We anticipate a continuing relationship with TACOM.
            We are also working to learn more about how we can support efforts to integrate
            fuel cell and hydrogen internal combustion engine technology into military
            requirements in Future Combat Systems and into programs that are developing
            technology for the soldier of the future, like the Objective Force Warrior
            program.

The potential advantages of Millennium Cell's technology for military
            applications include high volumetric and gravimetric storage density, ease of
            transport and refueling, modular conceptual design, high purity hydrogen
            stream, zero emissions at the point of use, quiet operation with a low thermal
            signature and minimal parasitic load, long term fuel storage, simple and robust
            design — and perhaps most compelling, the fact that our hydrogen fuel is
            non-flammable and non-explosive, providing safety advantages in transport and
            in combat. For tactical and non-tactical ground transportation, for individual
            soldier power, for shipboard energy demands and in the air, Hydrogen on
            DemandTM has the potential to solve many of the energy
            challenges facing the military of the 21st century.

Supply Chain

Our supply chain plan is focused primarily on the global joint
            development and licensing of a proprietary process for the manufacture and
            regeneration of sodium borohydride with large, industrial partners including
            borate producers, industrial hydrogen providers, chemical providers, and major
            energy

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producers (including oil, gas, and electricity companies). If market
            acceptance of our technology increases in the transportation, portable power
            and battery markets, we believe that this increase in demand for sodium
            borohydride will result in the need for additional global manufacturing
            capacity. By licensing our process, we believe a significant revenue stream
            could be generated. The goal of our research and development efforts in the
            area of sodium borohydride production is to lower raw costs by significantly
            reducing the amount of energy that is required in the current manufacturing
            process.

Sodium borohydride is currently a specialty chemical that is produced by
            a few manufacturers located in the United States and Europe. We seek to ensure
            the short-term and long-term supply of sodium borohydride for energy
            applications. This will involve collaboration with present and future producers
            of this chemical. In addition, we will continue to evaluate ways to ensure an
            affordable supply of sodium borohydride to our potential partners and
            customers. During 2002, we made progress in our joint development agreements
            with System Consulting, U.S. Borax and Air Products and Chemicals. We believe
            partnerships like these may lead to an affordable, adequate supply of sodium
            borohydride to support commercialization of products that utilize our
            technology.

We believe that we can successfully compete in the small portable power
            markets with sodium borohydride at its current price, however, it will be
            necessary to scale-up production of the chemical to be cost competitive in some
            of the distributed generation and transportation markets.

Our Strategy

Our goal is to convert what we believe to be a superior technology in our
            sodium borohydride chemistry from the development and demonstration stage to
            commercialization. We believe that the characteristics of our sodium
            borohydride technology will capitalize on the growing need for a safe method of
            storing and releasing hydrogen across a variety of markets, a higher energy
            output alternative fuel and the necessity of preserving the environment. To
            achieve our goal, we have implemented the following strategy:

| | • | Pursue
                   Ventures with Fuel Cell Companies.We are pursuing
                   ventures with manufacturers of fuel cells. We believe that our Hydrogen on
                   DemandTM system will provide a solution for existing fuel cell
                   companies whose products and markets require the generation and storage of
                   hydrogen. We will seek to leverage these relationships to further our brand
                   awareness and decrease the time to commercialization.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Build
                   Relationships with Stationary and Portable Power Generation OEMs and System
                   Integrators.We plan to pursue relationships with
                   manufacturers of portable power sources and standby power generators. We
                   believe our technology can be used to deliver hydrogen as a fuel for modified
                   internal combustion engines, which could significantly reduce emissions
                   currently generated by diesel fuel. We also believe that our Hydrogen on
                   DemandTM system, when used in conjunction with a fuel cell can
                   provide a more economically favorable solution than lead acid batteries. We
                   believe our technology will be uniquely positioned to deliver a safe and clean
                   hydrogen source for indoor and outdoor applications.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Develop
                   Strategic Relationships with Key Consumer Electronics
                   Manufacturers.We are pursuing relationships with
                   key consumer electronics manufacturers. We believe such relationships, if
                   developed, could facilitate the commercialization, distribution and consumer
                   acceptance of our fuel technology into early fuel cell adopter markets for
                   cellular phones, personal digital assistants, digital cameras, etc.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Continue
                   to Build Relationships with the Transportation Manufacturing
                   Community.We are pursuing relationships with
                   automotive manufacturers and component system providers because we believe they
                   will be the key to capitalizing on transportation opportunities in the future.
                   As many of the top tier global automotive manufacturers continue to allocate
                   resources to research and development of alternative fuel technologies, we
                   believe that our technology will be an attractive choice and could position our
                   technology as a leader in the alternative fuel market.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

| | • | Build
                   Relationships with Fleet Operators.We plan to
                   pursue opportunities with operators of fleets of vehicles. Fleet vehicle
                   operations are an ideal application for our technology because of the high
                   volume of consumption and the number of vehicles serviced through a single
                   location.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Lower
                   the Costs of Sodium Borohydride.Sodium borohydride is currently a
                   specialty chemical that is produced by a few manufacturers located in the
                   United States and Europe. We believe that we can compete in the portable power
                   markets at the current price of sodium borohydride, but it will be necessary to
                   scale-up production of the chemical to be cost competitive in the
                   transportation markets. We have filed patent applications for the primary
                   production and regeneration of sodium borohydride. We believe that this new
                   chemistry will lower the cost of sodium borohydride by reducing or eliminating
                   some of the costly raw materials that are required today to manufacture sodium
                   borohydride.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Build
                   Relationships with Government and Military
                   Agencies.    We are actively pursuing sources of
                   government funding, including grants, appropriations and direct sales and
                   working to build constructive relationships across government agencies and
                   legislative bodies. We believe that the increased visibility of hydrogen in the
                   national energy debate will be advantageous as increased emphasis is placed on
                   finding efficient hydrogen storage and delivery mechanisms.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Advance
                   our Proprietary Technology.Through commercial
                   development, we continue to take steps to advance our proprietary technology.
                   We believe that our continuing efforts in this area will allow us to establish
                   technological leadership in our target markets, while also positioning us to
                   potentially develop applications for other markets.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Develop
                   Market Awareness Generally.We have relationships
                   with state and federal governmental agencies and are also involved in several
                   hydrogen and environmental organizations and events. Through these continuing
                   relationships, we believe that our technology will become more visible to a
                   broader group of individuals and companies in our target markets.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Intellectual Property Rights

Our intellectual property strategy is to identify key intellectual
            property developed by us in order to protect it appropriately. In addition, we
            seek to use and assert such intellectual property to our competitive advantage.
            We rely on a combination of patents, trade secrets, trademarks, and license and
            nondisclosure agreements to protect our proprietary technology.

We use patents as the frontline means of protecting our technological
            advances and innovations, such as our proprietary hydrogen generators,
            components, materials, operating techniques and systems and, therefore, the
            enforcement of our patents is critical to our business. We have adopted a
            proactive approach to identifying patentable inventions and securing patent
            protection through the timely filing and aggressive prosecution of patent
            applications. Patent applications are filed in the United States and
            internationally, in countries carefully chosen based on the likely value and
            enforceability of intellectual property rights.

We own six U.S. and seven non-U.S. patents, which cover a wide variety of
            devices, systems, uses and applications for various boron chemistries. We have
            filed an additional 16 U.S. and 25 non-U.S. patent applications. We have also
            filed three U.S. trademark applications. Our earliest patent expires in 2015
            and the most recently filed applications, if issued, will not expire until
            2023.

Our intellectual property program includes a strong competitor-monitoring
            element. We actively monitor the patent position, technical developments and
            other activities of companies operating in all of the potential markets for our
            products. We expect activities relating to assertion and enforcement of our
            intellectual property rights to increase as the market develops.

Commercialization Process

In the near-term, we do not anticipate manufacturing on a large-scale.
            Our initial focus is in the portable and stationary power and automotive areas,
            and is based on our belief that we will be able to validate our technology.
            Once this is accomplished, we will seek partnerships with fuel cell companies
            and

7

others in the power generation markets and with automotive original
            equipment manufacturers ("OEMs") or their suppliers. Our business focus will be
            on licensing our hydrogen generation technology with vehicle manufacturers,
            utilities and other companies requiring fuel cell technologies. Over the next
            several years, our current plans for commercialization are as follows:

| | • | Commercial
                   Testing and Licensing for Hydrogen Generation
                   Systems.We intend to seek additional relationships,
                   such as our agreements with DaimlerChrysler and Ballard, to test our system in
                   vehicle and other fuel cell applications. If we can successfully complete
                   demonstration units, we will attempt to develop stronger relationships with
                   OEMs and with a view to entering into licensing arrangements.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Distribution
                   of Sodium Borohydride Fuel.We are working to
                   develop fuel distribution mechanisms for distributed generation and
                   transportation applications. We believe that because our fuel is a liquid, much
                   of the existing transportation fuel delivery infrastructure can be retained.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Research,
                   Development and Engineering.This is a current
                   aspect of our business, and we will continue to pursue the research and
                   development of sodium borohydride for the foreseeable future as a source of
                   hydrogen, for use directly in fuel cells and for other potential markets.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and Development

Our research team focuses on improving our sodium borohydride
            characteristics for use as a hydrogen source as well as in direct fuel cell
            technology by working to optimize cost performance of materials and processes.
            In order to most effectively achieve these plans, our facility in Eatontown,
            New Jersey houses sophisticated research and development equipment.

Competition

Our hydrogen generation and storage technology is versatile and can be
            customized for use in many applications and geographic markets. Due to the
            number of potential applications and markets in which our technology can be
            used, it is difficult to identify a specific competitor or group of competitors
            or estimate the size of the eventual primary markets for our technology. We
            evaluate new and interesting applications for our technology on a continuous
            basis. As stated elsewhere in this Form 10-K, we intend to focus in the
            near-term on developing and demonstrating our technology for use in multiple
            markets, including the small portable, distributed generation and
            transportation markets. As our business development and product demonstration
            activities continue, we may be able to better identify our primary markets and
            our competitors within these markets.

Due to political and environmental concerns, there is great interest in
            the development of hydrogen technology and products. This interest may cause
            companies and individuals to attempt to develop hydrogen generation and storage
            technology, resulting in increased competition. These potential competitors may
            possess significantly more resources, both financial and otherwise. As
            discussed above, we believe that our hydrogen generation technology possesses
            attractive characteristics that give it a competitive advantage over many
            alternative hydrogen technologies, however, there can be no assurances that we
            will successfully compete with potential new technologies or be able to fund
            the commercialization of our technology on a mass scale.

Raw Materials

Sodium borohydride is manufactured from a base material called borax.
            There are approximately 600 million metric tons of borax raw materials
            worldwide, and the United States is among the largest holders of borax reserves
            in the world. Borax is most commonly found in dried lake or sea beds, and it is
            mined at the surface using drag lines, whereby buckets are continuously dragged
            across the ground scraping borax from the surface. Currently, a few
            manufacturers make sodium borohydride as a specialty chemical. Despite the
            great quantities of reserves and current annual production of borax, there are
            few commercial applications that require sodium borohydride today. The most
            common application for sodium borohydride is for use as a bleaching agent in
            the paper industry. Up until now, the relatively limited commercial uses of
            sodium borohydride have allowed manufacturing to continue using technology from
            the early 1950s.

8

Inasmuch as we intend to focus primarily on research and development, and
            not on large scale manufacturing, we do not believe that our costs to comply
            with federal, state and local provisions that have been enacted or adopted
            regulating the discharge of materials into the environment, or otherwise
            relating to the protection of the environment, will have a material effect on
            our capital expenditures, earnings or competitive position.

Human Resources

As of February 28, 2003, we had a total staff of 40 employees, of which
            26 are scientists, engineers and other professionals. We have no plans to
            increase our staff in 2003.

Item 2.    Properties.

Our principal offices are located at 1 Industrial Way West, Eatontown,
            New Jersey 07724, currently occupying 32,500 square feet. Our amended lease
            will expire in 2008, with five and three year options to renew through 2016. We
            believe that the current facilities will be sufficient for our operations in
            the foreseeable future.

Item 3.    Legal Proceedings.

From time to time, we may be involved in litigation relating to claims
            arising in the normal course of business. We do not believe that any such
            litigation would have a material adverse effect on our results of operations or
            financial condition.

Item 4.    Submission of Matters to a Vote of
            Security Holders.

A Special Meeting of Shareholders was held on January 23, 2003. The
            meeting was called to approve issuance of $8.5 million of secured debentures to
            an accredited investor as required by the rules of the NASDAQ. There were no
            shareholder proposals. The results of the voting were as follows:

Proposal (1):
                   
                   Votes For
                   
                   Votes Against
                   
                   Abstained
                   
                   Total VotesApproval of issuance of debentures as
                        required by the rules of the NASDAQ
                   
                   
                   19,155,103
                   
                   
                   
                   309,178
                   
                   
                   
                   55,030
                   
                   
                   
                   19,519,311


There were no broker non-votes.

9

PART II

Item 5.    Market for the Registrant's Common Equity
            and Related Shareholder Matters.

Market Price and Dividend Information

Price Range of Common Stock

Our common stock has been quoted and traded on the NASDAQ National Market
            under the symbol "MCEL" since August 9, 2000. The following table sets forth
            the high and low closing sale prices for our common stock as reported by
            NASDAQ.

Common StockPriceFiscal year ending December 31,
                        2002
                   
                   High
                   
                   LowFirst quarter
                   
                   $
                   6.48
                   
                   
                   $
                   3.45Second quarter
                   
                   $
                   4.25
                   
                   
                   $
                   2.77Third quarter
                   
                   $
                   3.01
                   
                   
                   $
                   1.90Fourth quarter
                   
                   $
                   2.83
                   
                   
                   $
                   1.78Fiscal year ending December 31,
                        2001First quarter
                   
                   $
                   12.50
                   
                   
                   $
                   6.09Second quarter
                   
                   $
                   12.70
                   
                   
                   $
                   5.81Third quarter
                   
                   $
                   9.50
                   
                   
                   $
                   3.45Fourth quarter
                   
                   $
                   6.00
                   
                   
                   $
                   3.00


As of March 1, 2003, there were approximately 213 holders of record of
            our common stock. The closing sale price of our common stock on March 1, 2003
            was $1.93 per share.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We
            currently intend to retain our future earnings, if any, to finance the
            expansion of our business and do not expect to pay any dividends in the
            foreseeable future.

Payment of future cash dividends, if any, will be at the discretion of
            our board of directors after taking into account various factors, including our
            financial condition, operating results, current and anticipated cash needs and
            plans for expansion.

Item 6.    Selected Financial Data.

The following table presents selected historical financial data for the
            twelve months ended December 31, 2002, 2001, 2000 and 1999 (year of inception).
            Our selected financial data should be read in conjunction with "Management's
            Discussion and Analysis of Financial Condition and Results of Operations" and
            the historical financial statements and related notes included elsewhere in
            this Form 10-K.

10

|                                                              |  |                                                        |             |                                                        |  |                                                        |             |                                                                              |  |                                                    |             |   |  |   |            |   |  |   |             |   |  | 
|------------------------------------------------------------- |  | ------------------------------------------------------ | ----------- | ------------------------------------------------------ |  | ------------------------------------------------------ | ----------- | ---------------------------------------------------------------------------- |  | -------------------------------------------------- | ----------- | - |  | - | ---------- | - |  | - | ----------- | - |  | 
|                                                              |  | Twelve MonthsEndedDecember
                   31, 2002 |             | Twelve MonthsEndedDecember
                   31, 2001 |  | Twelve MonthsEndedDecember
                   31, 2000 |             | Period FromJanuary 1,
                   1999(inception) toDecember 31, 1999 |  | CumulativeAmounts
                   FromInception
|Statement of Operations Data                                  |  |                                                        |             |                                                        |  |                                                        |             |                                                                              |  |                                                    |             |   |  |   |            |  
|Revenue                                                       |  | $                                                      | 719,392     |                                                        |  | $                                                      | —           |                                                                              |  | $                                                  | —           |   |  | $ | —          |   |  | $ | 719,392     |  
|Cost of revenue                                               |  |                                                        | 690,059     |                                                        |  |                                                        | —           |                                                                              |  |                                                    | —           |   |  |   | —          |   |  |   | 690,059     |  
|Gross margin                                                  |  |                                                        | 29,333      |                                                        |  |                                                        | —           |                                                                              |  |                                                    | —           |   |  |   | —          |   |  |   | 29,333      |  
|Product development and marketing                             |  |                                                        | 5,788,315   |                                                        |  |                                                        | 5,513,172   |                                                                              |  |                                                    | —           |   |  |   | —          |   |  |   | 11,301,487  |  
|General and administrative                                    |  |                                                        | 4,052,943   |                                                        |  |                                                        | 4,726,543   |                                                                              |  |                                                    | 3,173,393   |   |  |   | 164,953    |   |  |   | 12,117,832  |  
|Restructuring expense                                         |  |                                                        | 104,982     |                                                        |  |                                                        | —           |                                                                              |  |                                                    | —           |   |  |   | —          |   |  |   | 104,982     |  
|Non-cash charges                                              |  |                                                        | 4,148,251   |                                                        |  |                                                        | 7,341,461   |                                                                              |  |                                                    | 10,785,381  |   |  |   | —          |   |  |   | 22,275,093  |  
|Depreciation and amortization                                 |  |                                                        | 710,975     |                                                        |  |                                                        | 473,031     |                                                                              |  |                                                    | 256,820     |   |  |   | 57,007     |   |  |   | 1,497,833   |  
|Research and development                                      |  |                                                        | 1,515,376   |                                                        |  |                                                        | 2,624,823   |                                                                              |  |                                                    | 2,131,684   |   |  |   | 820,128    |   |  |   | 7,092,011   |  
|Total operating expenses                                      |  |                                                        | 16,320,842  |                                                        |  |                                                        | 20,679,030  |                                                                              |  |                                                    | 16,347,278  |   |  |   | 1,042,088  |   |  |   | 54,389,238  |  
|Loss from operations                                          |  |                                                        | (16,291,509 | )                                                      |  |                                                        | (20,679,030 | )                                                                            |  |                                                    | (16,347,278 | ) |  |   | (1,042,088 | ) |  |   | (54,359,905 | )
|Other income                                                  |  |                                                        | 234,963     |                                                        |  |                                                        | —           |                                                                              |  |                                                    | —           |   |  |   | —          |   |  |   | 234,963     |  
|Interest income, net                                          |  |                                                        | 300,299     |                                                        |  |                                                        | 1,226,701   |                                                                              |  |                                                    | 678,194     |   |  |   | 10,811     |   |  |   | 2,216,005   |  
|Equity in losses of affiliate                                 |  |                                                        | (367,714    | )                                                      |  |                                                        | —           |                                                                              |  |                                                    | —           |   |  |   | —          |   |  |   | (367,714    | )
|Net loss                                                      |  |                                                        | (16,123,961 | )                                                      |  |                                                        | (19,452,329 | )                                                                            |  |                                                    | (15,669,084 | ) |  |   | (1,031,277 | ) |  |   | (52,276,651 | )
|Preferred stock amortization                                  |  |                                                        | —           |                                                        |  |                                                        | —           |                                                                              |  |                                                    | 2,150,881   |   |  |   | —          |   |  |   | 2,150,881   |  
|Net loss applicable to common
                   stockholders |  | $                                                      | (16,123,961 | )                                                      |  | $                                                      | (19,452,329 | )                                                                            |  | $                                                  | (17,819,965 | ) |  | $ | (1,031,277 | ) |  | $ | (54,427,532 | )
|Loss per share — basic and
                   diluted         |  | $                                                      | (.58        | )                                                      |  | $                                                      | (.71        | )                                                                            |  | $                                                  | (.69        | ) |  | $ | (.04       | ) |  | $ | (2.08       | )
|                                                              |  |                                                        |             |                                                        |  |                                                        |             |                                                                              |  |                                                    |             |   |  |   |            |   |  |   |             |  
|                                                              |  | December 31, 2002                                      |             | December 31, 2001                                     
|Balance Sheet Data                                            |  |                                                        |             |                                                        |  |                                                        |             |                                                                             
|Total assets                                                  |  | $                                                      | 14,165,811  |                                                        |  | $                                                      | 20,239,973  |                                                                             
|Secured debentures                                            |  | $                                                      | 2,399,988   |                                                        |  | $                                                      | —           |                                                                             
|                                                             

Item 7.    Management's Discussion and Analysis of
            Results of Operations and Financial Condition.

The following discussion should be read in conjunction with our financial
            statements and the notes thereto appearing elsewhere in this Form 10-K.

General

We were formed as a Delaware limited liability company on December 17,
            1998, and organized and began operations on January 1, 1999 (inception date).
            We were converted into a Delaware corporation on April 25, 2000 when all of the
            outstanding equity interests of the limited liability company were converted
            into shares of common stock of the corporation. Unless otherwise indicated, all
            information that we present in this Form 10-K for any date or period gives
            effect to the conversion as if it had occurred on that date or as of the
            beginning of that period and all references to common stock for periods before
            the conversion mean our issued and outstanding membership interests.

Overview

We have developed a patent-pending process called Hydrogen on
            DemandTM that safely generates pure hydrogen or electricity from
            environmentally friendly raw materials. In the process, the energy potential of
            hydrogen is carried in the chemical bonds of sodium borohydride, which in the
            presence of a catalyst releases hydrogen or produces electricity. The primary
            input components of the reaction are water and sodium borohydride, a derivative
            of borax, which is found in substantial natural reserves globally. Hydrogen
            from this system can be used to power fuel cells, as well as fed directly to
            internal combustion engines. We also have patents covering boron-based
            longer-life batteries. Our goal is to convert our technology from the research
            and development stage to commercialization.

11

Our losses have resulted primarily from costs associated with product
            development and research and development activities as well as non-cash
            amortization of preferred stock and non-cash charges related to the issuance of
            stock options and warrants to employees and third parties. As a result of
            planned expenditures in the areas of research, product development and
            marketing and additional non-cash charges relating to employee stock options,
            we expect to incur additional operating losses for the foreseeable future.

Results of Operations

Year Ended December 31, 2002 versus 2001

Revenues.    We recorded $719,392 of revenues
            during the year ended December 31, 2002. The revenues were attributable to
            sales of prototype Hydrogen on DemandTM systems and design
            and engineering services. There were no revenues in 2001.

In the near-term, revenues are expected to be derived substantially from
            up-front license fees, research contracts with various federal, state and local
            agencies, collaborations with other companies, management services, and royalty
            payments or joint venture revenue from licensees or strategic partnerships.
            Revenues will be recognized in the period in which technology is delivered,
            licensing revenues are earned, or as services are performed.

Cost of Revenues.    We recorded cost of
            revenues of $690,059 during the year ended December 31, 2002. Cost of revenues
            on prototype unit sales during the development stage are allocated from the
            Product Development and Marketing expense and Research and Development expense
            line items on the income statement depending on the nature of the project.
            There was no cost of revenues in the year ended December 31, 2001.

Product Development and Marketing
            Expense.    Product development and marketing expenses
            for the year ended December 31, 2002 were $5,788,315 compared to $5,513,172 for
            the year ended December 31, 2001, an increase of $275,143. This increase is
            mostly attributable to increased business development resources dedicated to
            penetrating markets in the portable power and military applications in addition
            to spending on programs that support our technology's continued evolution from
            research to commercialization.

General and Administrative Expense.    General
            and administrative expenses were $4,052,943 for the year ended December 31,
            2002 compared to $4,726,543 for the year ended December 31, 2001, a decrease of
            $673,600. The decrease was a result of increased efficiency of our
            administrative and finance organizations as well as the impact of headcount
            reductions in those organizations during the second quarter of 2002.

Restructuring Expense.    Restructuring
            expense was $104,982 for the year ended December 31, 2002. During the second
            quarter of 2002, the Company incurred and paid restructuring expenses for
            severance and legal costs related to 14 employee separations. There was no
            restructuring expense in 2001.

Non-cash Charges.    Non-cash charges were
            $4,148,251 for the year ended December 31, 2002 compared to $7,341,461 for the
            year ended December 31, 2001, a decrease of $3,193,210. The decrease was mostly
            attributable to the substantial completion of vesting in 2001 of warrants
            issued to affiliates during 2000 and the forfeiture of certain unvested
            employee options during the fourth quarter of 2001. Included in the charges was
            an accrual for approximately $225,000 for Board of Directors' compensation for
            meetings held in 2002 that will be paid to the directors in shares of the
            Company's common stock in 2003.

Depreciation and Amortization.    Depreciation
            and amortization was $710,975 for the year ended December 31, 2002 compared to
            $473,031 for the year ended December 31, 2001, an increase of $237,944. This
            increase reflects depreciation on our newly completed lab and facilities
            expansion program in 2002.

Research and Development Expense.    Research
            and development expenses were $1,515,376 for the year ended December 31, 2002
            compared to $2,624,823 for the year ended December 31, 2001, a decrease of
            $1,109,447. The decrease is primarily attributable to the cost reduction
            efforts announced in May 2002.

Other Income.    Other income was $234,963 for
            the year ended December 31, 2002. This income was derived from the Company's
            participation in the New Jersey Emerging Technology and Biotechnology

12

Financial Assistance Program. This program allows certain companies to
            transfer New Jersey Net Operating Losses to other companies. This program, if
            continued by the state in future years, may produce similar cash inflows for
            the Company each year.

Interest Income, net.    Net interest income
            was $300,299 for the year ended December 31, 2002 compared to $1,226,701 for
            the year ended December 31, 2001, a decrease of $926,402. The decrease in net
            interest income was the result of declining average cash balances and interest
            rate decreases from 2001 to 2002 in addition to interest expense and
            amortization of discount incurred on the $3.5 million unsecured debentures
            issued in December 2002. The total interest expense incurred for the year ended
            December 31, 2002 for the $3.5 million unsecured debentures was $39,176.

Interest expense will increase substantially in 2003 for interest
            payments and amortization of discounts recorded upon issuance of an additional
            $8.5 million secured debentures, which were issued in January 2003 and for the
            full impact of the $3.5 million unsecured debentures which mature in June 2003.
            To the extent the unsecured debentures are converted into common shares, the
            pro rata portion of the discount and charges related to the beneficial
            conversion features will be recorded as interest expense. Total interest
            expense of approximately $1.3 million will be incurred prior to June 30, 2003
            for the amortization of the original issue discount, other issue costs and cash
            interest payments on the $3.5 million unsecured debentures. As the timing of
            conversions will be based on stock market conditions and operating cash needs,
            it is difficult to predict the amount of the interest expense that will be
            recorded in 2003 for the $8.5 million secured debentures that were issued in
            the first quarter of 2003.

Equity in losses of affiliate.    In July
            2002, the Company agreed to acquire a 50% interest in a European alkaline fuel
            cell company (the "Affiliate"). The Company's investment is accounted for by
            the equity method. According to the purchase agreement, the Company was
            responsible to record its portion of the Affiliate's losses from July 1, 2002
            through December 31, 2002. The losses recorded by the Company during this
            period were $367,714.

Year Ended December 31, 2001 versus 2000

Total Revenues.     During 2001 and 2000, we
            did not recognize any revenues related to the sale or license of our
            technology.

Product Development and Marketing
            Expense.    Product development and marketing expenses
            were $5,513,172 for the year ended December 31, 2001. These expenses include
            business development and marketing activities and efforts to customize our
            technology in accordance with agreements with partners as well as for general
            business development. We did not incur product development and marketing
            expenses in the year ended December 31, 2000.

General and Administrative Expense.    General
            and administrative expenses were $4,726,543 for the year ended December 31,
            2001 compared to $3,173,393 in 2000, an increase of $1,553,150. This was due
            largely to the full year impact of our financial, administrative and investor
            relation organizations (including salary and related benefits costs)
            established during the latter half of 2000. Occupancy costs also increased as
            we tripled the size of our facilities in 2001.

Non-cash Charges.    Non-cash charges were
            $7,341,461 for the year ended December 31, 2001 compared to $10,785,381 in
            2000, a decrease of $3,443,920. Non-cash charges recorded in 2001 were related
            to continuing amortization of below market options granted to employees and
            non-employee board members in 2000 of $5,875,136 and the fair value of warrants
            issued to affiliates in 2000 of $1,466,325. Non-cash charges for the year ended
            December 31, 2000 included a non-cash compensation charge of $5,840,780 for the
            grant of company stock options to employees and non-employee board members
            below market, the fair value of warrants issued to affiliates of $2,875,631 and
            $2,068,970 for the issuance of common stock in connection with the termination
            of the royalty agreement.

Depreciation and Amortization.    Depreciation
            and amortization was $473,031 for the year ended December 31, 2001 compared to
            $256,820 in 2000, an increase of $216,211. This increase in depreciation and
            amortization is related to the addition of certain laboratory equipment and
            leasehold improvements in our newly expanded facilities.

13

Research and Development Expense.     Research
            and development expenses were $2,624,823 for the year ended December 31, 2001
            compared to $2,131,684 in 2000, an increase of $493,139. The increase is
            primarily attributable to increased staffing and research projects as required
            to further the development of our technology.

Interest Income.     Net interest income was
            $1,226,701 for the year ended December 31, 2001 compared to $678,194 in 2000,
            an increase of $548,507. The increase in interest income is primarily the
            result of higher average balances in 2001 resulting from the proceeds of the
            initial public offering in August 2000 coupled with our long-term investment
            strategy established in January 2001.

Preferred Stock Amortization.    Preferred
            stock amortization of $2,150,881 for the year ended December 31, 2000
            represents a non-cash charge to the common stockholders in connection with the
            May 2000 issuance of the preferred stock at less than the initial public
            offering price, which was converted into common stock in August 2000.

Liquidity and Capital Resources

General

Since the inception date, we have financed our operations primarily
            through our initial public offering in August 2000 and private placements of
            equity and debt securities. In 1999, we issued $1,250,000 of membership
            interests in Millennium Cell LLC for cash, which subsequently were converted
            into our common stock as of April 25, 2000. We also received a capital
            contribution of $500,000 in the first quarter of 2000, and in May 2000, we sold
            759,368 shares of Series A preferred stock, which automatically converted into
            759,368 shares of common stock upon the completion of our initial public
            offering. The net proceeds from our initial public offering totaled
            approximately $29.9 million and the net proceeds from the private placement and
            debt securities totaled $5.9 million as of December 31, 2002.

Ballard Power Systems

In October 2000, we received $2.4 million in cash from Ballard Power
            Systems Inc. as an advance for prospective royalties pursuant to a product
            development agreement between Ballard and us. In addition, we granted to
            Ballard a warrant to purchase up to 400,000 shares of our common stock, which
            was terminated as part of the strategic investment discussed below. Upon
            completion of certain stages of product development, the parties agreed to
            negotiate in good faith for the grant of a license of our technology to Ballard
            in certain fields of use, at which time prepaid royalties may be earned and the
            warrants will be issued and recorded at fair value.

On November 8, 2002, we agreed with Ballard that the product development
            milestones have been achieved and agreed to convert the $2.4 million refundable
            royalty payment into an investment in our company in the form of secured
            convertible debentures due November 8, 2005. The Ballard debentures are secured
            by a standby letter of credit issued by Wachovia Bank, National Association,
            with an aggregate face amount equal to the outstanding principal. We pledged to
            the bank as collateral $2.4 million of funds previously reported under cash and
            cash equivalents on the accompanying balance sheet. We will not have the
            ability to use this cash until the bank pledges are released upon conversion of
            the Ballard debentures to common stock. The debentures are convertible at a
            conversion price of $4.25, subject to anti-dilution adjustments and certain
            price protection in the event the Company initiates the conversion. As part of
            the purchase agreement entered into between Ballard and us, Ballard retains the
            option to license the non-exclusive right to manufacture and sell products with
            our Hydrogen on DemandTM technology for specific portable
            fuel cell products and stationary internal combustion engine generators.

Private Placement Transactions

On June 19, 2002, the Company entered into a private placement financing
            transaction with two institutional and accredited investors pursuant to the
            terms of a securities purchase agreement among the Company and the purchasers.
            The private placement was exempt from registration under the Securities Act of
            1933, as amended, pursuant to Section 4(2) of such Act. The placement consisted
            of the sale of 1,075,269 shares of common stock for gross proceeds of $3.0
            million and warrants to purchase 268,817 shares of common stock (with an
            exercise price of $3.93 per share).

14

Pursuant to the terms of the June 19, 2002 purchase agreement, one of the
            investors was obligated to acquire $12 million in secured convertible
            debentures, convertible into common stock of the Company, subject to certain
            terms and conditions, and related warrants. Subsequent to this transaction, the
            Company and the investor agreed the debentures would not be issued under the
            June 19, 2002 purchase agreement. Accordingly, the Company withdrew its request
            for registration on Form S-3 with the SEC for the common stock underlying the
            debentures and related warrants.

On October 31, 2002, the Company entered into a separate private
            placement financing transaction with the same two institutional and accredited
            investors pursuant to the terms of a new purchase agreement among the Company
            and the purchasers. The private placement was exempt from registration under
            the Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act.
            The placement consisted of the sale of 588,790 shares of common stock and
            warrants (with an exercise price of $2.32) to purchase 147,198 shares of common
            stock of the Company for gross proceeds of $1.0 million. Pursuant to the terms
            of the purchase agreement, one of the investors agreed to acquire $12 million
            of secured and unsecured debentures, convertible into common stock of the
            Company, subject to certain terms and conditions, and warrants. Convertible
            unsecured debentures with a principal amount of $3.5 million and warrants to
            acquire 242,678 shares (with an exercise price of $3.00 per share) were issued
            on December 26, 2002 following effectiveness of the registration statement
            relating to the underlying shares of common stock. Interest accrues at a rate
            of 4% per annum with payments due quarterly. The unsecured debentures are due
            June 30, 2003, subject to six thirty-day extensions, subject to the mutual
            consent of the Company and the investor.

On January 23, 2003, the Company's shareholders approved the issuance of
            $8.5 million of secured debentures and warrants to acquire 589,376 shares at a
            special meeting of shareholders and the secured debentures were issued on
            January 30, 2003. Interest accrues at money market rates with payments due
            quarterly. The secured debentures are secured by a standby letter of credit
            issued by Wachovia Bank, National Association, with an aggregate face amount
            equal to the outstanding principal of the secured debentures and are due in
            January 2006. The Company pledged to the bank as collateral the proceeds from
            the sale of the secured debentures. Therefore, the Company does not have the
            ability to use the proceeds from the sale of the secured debentures until the
            bank pledges are released upon conversion to unsecured debentures.

The Company is obligated in the future to register the resale of shares
            issuable on conversion of the $8.5 million principal amount of secured
            debentures following exchange of such secured debentures for unsecured
            debentures. Each time the principal amount of outstanding unsecured debentures
            is less than $1.0 million, a portion of the $8.5 million of secured debentures
            will automatically convert into unsecured debentures in increments of $3.0
            million, $3.0 million and $2.5 million upon effectiveness of the registration
            statement relating to the underlying shares of common stock.

The following table summarizes the number of common shares that have been
            registered by the Company for potential resale in conjunction with (i) the sale
            of shares by the Company to private accredited investors in June and October
            2002, (ii) shares issuable upon exercise of outstanding warrants and (iii)
            shares issuable upon conversion of $3.5 million principal amount of outstanding
            unsecured debentures:

RegistrationStatement Number
                   
                   Effective Date of
                        RegistrationStatement
                   
                   Sales ofCommon Stock
                   
                   Common StockIssuable
                        UponExercise ofWarrants
                   
                   Common StockIssuable
                        UponConversion of$3.5 MillionUnsecuredDebentures
                   
                   Total CommonStock
                        Registered333-92144
                   
                   10/04/02
                   
                   
                   1,075,268
                   
                   
                   
                   268,817
                   
                   
                   
                   —
                   
                   
                   
                   1,344,085333-101061
                   
                   12/23/02
                   
                   
                   588,790
                   
                   
                   
                   389,876
                   
                   
                   
                   2,973,847
                   
                   
                   
                   3,952,513333-103104
                   
                   2/25/03
                   
                   
                   —
                   
                   
                   
                   589,376
                   
                   
                   
                   —
                   
                   
                   
                   589,376Total
                   
                   
                   
                   
                   1,664,058
                   
                   
                   
                   1,248,069
                   
                   
                   
                   2,973,847
                   
                   
                   
                   5,885,974


The unsecured convertible debentures in principal amount of $3.5 million
            are convertible under three different scenarios:

15

| | • | At
                   the option of the holder, at any time and from time to time at $4.25 per share.
| | - | -----------------------------------------------------------------------------------------------------

| | • | At
                   the option of the Company, if (1) the average closing prices of the Company's
                   common stock during any consecutive 30 trading days is equal to or greater than
                   $5.10 per share and (2) the closing price for each of 15 trading days which
                   need not be consecutive is equal to or greater than $5.10.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | The
                   Company may also convert $300,000 (or up to $2.5 million with investor consent)
                   of unsecured debentures each 10 trading days at an adjusted conversion price
                   equal to the volume weighted average of current market prices discounted from
                   4% to 12%. The discount to the adjusted conversion price depends on the
                   cumulative amount of debentures converted as of the respective dates of
                   conversion.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The secured convertible debentures in principal amount of $8.5 million
            are convertible at the option of the holder, at any time and from time to time
            at $4.25 per share. Following exchange of secured debentures for unsecured
            debentures, the debentures so exchanged are convertible at the option of the
            Company under the two circumstances set forth above.

In order to exercise the Company's options to convert the debentures
            certain equity conditions must be satisfied as follows:

| | (i) | the
                   number of authorized but unissued and otherwise unreserved shares of common
                   stock is sufficient for such issuance;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | such
                   shares of common stock are registered for resale pursuant to an effective
                   registration statement, and the prospectus thereunder is available for use to
                   sell such shares or all such shares may be sold without volume restrictions
                   pursuant to Rule 144(k) under the Securities Act;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | the
                   common stock is listed or quoted (and is not suspended from trading) on The
                   NASDAQ National Market or SmallCap Market or other eligible market and such
                   shares of common stock are approved for listing;
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | no
                   event of default nor any event that with the passage of time and without being
                   cured would constitute an event of default has occurred and not been cured,
                   and
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) | no
                   public announcement of a pending or proposed change of control transaction has
                   occurred that has not been consummated.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Warrants may not be exercised and debentures may not be converted to the
            extent that a holder thereof would then beneficially own, together with its
            affiliates, more than 9.999% of our common stock then outstanding subsequent to
            the applicable conversion or exercise.

In accordance with APB No. 14, "Accounting for Convertible Debt and Debt
            Issued with Stock Purchase Warrants", the Company determined that the relative
            fair value of the unsecured debentures was $3,008,017 after issuance. The
            resulting discount of $491,983 is being amortized as interest expense, using
            the effective interest method, over the original maturity period of six months.
            During the year ended December 31, 2002, the Company recognized a non-cash
            charge to interest expense of $21,865 for the amortization of the discount. To
            the extent conversions of unsecured debentures into common stock are made prior
            to the maturity date of the debentures, the Company will record as interest
            expense a ratable proportion of the discount associated with the face value of
            the debentures converted.

In accordance with Emerging Issues Task Force ("EITF") No. 00-27,
            "Application of Issue No. 98-5 to Certain Convertible Instruments" ("EITF No.
            00-27"), and EITF No. 98-5, "Accounting for Convertible Securities with
            Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"
            ("EITF No. 98-5"), and after considering the terms of the transaction, the
            Company determined that the unsecured debentures contained an initial
            beneficial conversion feature ("BCF"). The BCF existed because of a discount
            that will be given to the investor in the event of a company-initiated
            conversion of the unsecured debentures prior to maturity. These discounts will
            range from 4% to 12%, depending on the amount of debentures converted into
            common stock. Accordingly, at time of conversion, the Company will record as
            interest expense any applicable BCF based on the fair value of the conversion
            feature on that date in the event of an early conversion of the unsecured
            debentures into

16

common stock. As no unsecured debentures were converted as of December
            31, 2002, no interest expense was recorded for BCF during that period. The
            secured debentures will have similar features.

Sources and Uses of Cash

As of December 31, 2002, we had $7,987,127 in cash and cash equivalents
            and restricted cash of $2,963,050. Cash used in operations totaled $11,388,768,
            $11,139,147 and $1,525,538 in 2002, 2001 and 2000, respectively, and related to
            funding our net operating losses. The restricted cash comprised $2.4 million of
            cash used for collateral in connection with Ballard's strategic investment in
            the Company and $0.6 million of cash used for collateral as security deposit
            held by our landlord in connection with the Company's amended lease agreement.
            These funds used will not be available for use in operations until the letters
            of credit have been reduced or terminated.

Investing activities provided/(used) cash of $7,037,933, $(12,751,441)
            and $(701,659) in 2002, 2001 and 2000, respectively. Investing activities
            consisted primarily of purchases and maturities of investments in high-grade
            government bonds and bank certificates of deposit, purchases of laboratory
            equipment necessary for the continuation of our research and development
            activities, cash restricted as collateral, and patent registration costs. We
            expect capital expenditures to decrease substantially as the Company completed
            its facilities and lab expansion in 2002. We will continue to register, pursue
            and defend patents on our technology.

In July 2002, the Company agreed to acquire a 50% interest in a European
            alkaline fuel cell company. The Company's investment is accounted for by the
            equity method. According to the purchase agreement, the Company was responsible
            to record its portion of the Affiliate's losses from July 1, 2002 through
            December 31, 2002. The losses recorded by the Company during this period were
            $367,714. The Company's investment in the Affiliate was $167,412 at December
            31, 2002 and approximated the underlying fair value of our portion of the net
            assets of the Affiliate at that date.

In April 2001, the Company amended its main operating lease to provide
            for additional space for the Company's principal operating offices and
            laboratories. As of November 2001, we occupy all facilities contemplated in the
            lease agreement. The amended lease will expire in 2008 and will contain options
            to renew for an additional 8 years and will require the Company to pay its
            allocated share of taxes and operating cost in addition to the annual base rent
            payment. Future minimum annual lease commitments including allocated taxes and
            maintenance under the amended operating leases are as follows:

2003
                   
                   $
                   484,3102004
                   
                   
                   484,3102005
                   
                   
                   484,3102006
                   
                   
                   484,3102007
                   
                   
                   484,310Thereafter
                   
                   
                   443,950Total
                   
                   $
                   2,865,500


17

Rent expense under the operating lease was approximately $507,310,
            $288,498 and $128,435 for the years ended December 31, 2002, 2001, and 2000,
            respectively.

In connection with the amended lease agreement, the Company issued a
            letter of credit to the landlord for $588,972 in lieu of a cash security
            deposit. The letter of credit was collateralized with a portion of the
            Company's cash and is classified as Restricted Cash. The funds used for
            collateral will not be available for use in operations.

Between January 1999 and April 2000, we received an aggregate of $227,522
            from a recoverable grant award from the State of New Jersey Commission on
            Science and Technology. The funds were used to partially fund costs directly
            related to development of our fuel cell technology. The recoverable grant is
            required to be repaid when we generate net income in a fiscal year. The
            repayment obligation, which begins in June 2001, ranges from 1% to 5% of net
            income over a ten-year period and shall not exceed 200% of the original grant.
            We are obligated to repay the unpaid amount of the original grant at the end of
            the ten-year period. As of December 31, 2002, no repayments have been made.

In December 2002, the Company received net proceeds of $234,963 from the
            sale of New Jersey Net Operating Losses in conjunction with the New Jersey
            Emerging Technology and Biotechnology Financial Assistance Program. This
            program allows certain companies to apply to transfer New Jersey Net Operating
            Losses to other companies. This program, if continued by the state in future
            years, may produce similar cash inflows for the Company.

We believe that our current cash and cash equivalents, together with cash
            available from the financings (see footnote 11) together with future
            conversions of the secured and unsecured debentures will be sufficient to
            satisfy anticipated cash needs of our operations into the latter half of 2004.
            If cash consumption is higher than anticipated, we may seek additional
            financing within this time frame. We may raise additional funds through public
            or private financings, collaborative relationships or other arrangements. We
            cannot assure you that additional funding, if sought, will be available or will
            be on terms favorable to us. Further, any additional equity financing may be
            dilutive to stockholders, and debt financing, if available, may involve
            restrictive covenants. Our failure to raise capital when needed may harm our
            business and operating results.

Critical Accounting Policies

Application of Critical Accounting
            Policies

The discussion and analysis of our financial condition and results of
            operations is based on our consolidated financial statements, which have been
            prepared in accordance with accounting principles generally accepted in the
            United States. The preparation of these financial statements requires us to
            make estimates and judgments that affect our reported assets and liabilities,
            revenues and expenses, and other financial information. Actual results may
            differ significantly from these estimates under different assumptions and
            conditions. In addition, our reported financial condition and results of
            operations could vary due to a change in the application of a particular
            accounting standard.

We regard an accounting estimate underlying our financial statements as a
            "critical accounting estimate" if the accounting estimate requires us to make
            assumptions about matters that are highly uncertain at the time of estimation
            and if different estimates that reasonably could have been used in the current
            period, or changes in the estimate that are reasonably likely to occur from
            period to period, would have had a material effect on the presentation of
            financial condition, changes in financial condition, or results of operations.

Our significant accounting policies are more fully described in Note 2 to
            our consolidated financial statements. Not all of these significant accounting
            policies, however, require management to make difficult, complex or subjective
            judgments or estimates. Our management has discussed our accounting policies
            with the audit committee of our board of directors, and we believe that our
            estimates relating to revenue recognition, convertible debt and stock options
            described below fit the definition of "critical accounting estimates."

Revenue Recognition

The Company's near term revenues will be derived substantially from
            contracts that require the Company to deliver hydrogen generation technology,
            management services, system design and prototype

18

systems and licensing of technology for test and evaluation. It is
            anticipated that revenues will be recognized in the period in which the
            technology is delivered or licensed revenue is earned.

Convertible Debt

The Company accounts for the issuance and conversion of convertible debt
            in accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued
            with Stock Purchase Warrants". As a result, the Company has and will record
            original issue discounts to the extent the fair value of the debt is below the
            face value of the instrument and amortize the discount over the life of the
            instrument. To the extent conversions of debt into common stock are made prior
            to the maturity date of the instrument, the Company will record as interest
            expense a ratable proportion of the discount associated with the face value of
            the debt converted.

The Company accounts for issuances of convertible debt in accordance with
            Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5
            to Certain Convertible Instruments" ("EITF No. 00-27"), and EITF No. 98-5,
            "Accounting for Convertible Securities with Beneficial Conversion Features or
            Contingently Adjustable Conversion Ratios" ("EITF No. 98-5"). As a result of
            certain conversion price discounts included within the Company's outstanding
            debt instruments, the Company will record interest expense resulting from
            Beneficial Conversion Features as described under the caption "Liquidity and
            Capital Resources" above.

Stock Options

The Company has recorded non-cash charges in 2002, 2001 and 2000 to the
            fair value of warrants issued to certain affiliates and third parties. Certain
            affiliates have the ability to earn new awards based on defined milestones and
            service periods. The accounting methodology requires a re-valuing of the
            related earned warrants at each reporting period using a Black-Scholes pricing
            model. Due to this variable accounting methodology, it is difficult to predict
            the amount of additional non-cash charges the company will incur related to
            these warrants. The fair value of the Company's options and warrants issued to
            affiliates was estimated at the date of grant using a Black-Scholes
            option-pricing model.

The Company also records non cash charges for the difference between the
            grant price and market price on the date of grant related to certain stock
            options issued to employees and elected directors below market prices as
            defined by APB No. 25. The non-cash charge is recognized ratably over the
            related vesting period of the respective option contracts.

The Company also discloses pro forma information regarding net income and
            earnings per share that is required by SFAS No. 148. This information is
            required to be determined as if the Company had accounted for its employee
            stock options under the fair value method of that statement. The fair value of
            options granted for the fiscal years ended December 31, 2002, 2001 and 2000 has
            been estimated at the date of grant using a Black-Scholes option-pricing model.

The Black-Scholes option valuation model was developed for use in
            estimating the fair value of traded options that have no vesting restrictions
            and are fully transferable. In addition, option valuation models require the
            input of highly subjective assumptions, including the expected stock price
            volatility. The Company's options have characteristics significantly different
            from those of traded options, and changes in the subjective input assumptions
            can materially affect the fair value estimate. Due to these highly subjective
            assumptions, the non-cash charges incurred in 2002, 2001 and 2000 for warrants
            issued to affiliates and the pro forma disclosures of net loss and loss per
            share for fiscal 2002, 2001 and 2000, are not likely to be representative of
            non-cash charges and the pro forma effects on net loss and loss per share,
            respectively, in future years.

Impact of Recently Issued Accounting Standards

In December 2002, the Financial Accounting Standards Board ("FASB")
            issued FAS No. 148, Accounting for Stock-Based Compensation-Transition and
            Disclosure. FAS 148 amends FAS No. 123, Accounting for Stock-Based
            Compensation, to provide alternative methods of transition for a voluntary
            change to the fair value based method of accounting for stock-based employee
            compensation. In addition, FAS 148 amends the disclosure requirements of FAS
            123 to require prominent disclosures in both annual

19

and interim financial statements about the method of accounting for stock
            based employee compensation and the effect of the method used on reported
            results. The provisions of FAS 148 are effective for financial statements for
            fiscal years and interim periods ending after December 15, 2002. The disclosure
            provisions of FAS 148 have been adopted by the Company (see Note 2 of the Notes
            to the Consolidated Financial Statements). FAS 148 did not require the Company
            to change to the fair value based method of accounting for stock-based
            compensation.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
            Associated with Exit or Disposal Activities". This Standard addresses financial
            accounting and reporting for costs associated with exit or disposal activities
            and requires companies to recognize costs associated with exit or disposal
            activities when they are incurred rather than at the date of a commitment to an
            exit or disposal plan. This Standard nullifies EITF Issue No. 94-3, "Liability
            Recognition for Certain Employee Termination Benefits and Other Costs to Exit
            an Activity (including Certain Costs Incurred in a Restructuring)". This
            Standard is effective for exit or disposal activities initiated after December
            31, 2002. As all costs related to our May 14, 2002 restructuring activities
            were incurred as of June 30, 2002, we do not expect this to have a material
            effect on our financial position or results of operations.

Item 7A.    Quantitative and Qualitative Disclosure
            of Market Risk.

Market risk represents the risk of loss that may impact our financial
            position, operating results or cash flows due to changes in U.S. interest
            rates. This exposure is directly related to our normal operating activities.
            Our cash and cash equivalents are invested with high quality issuers and are
            generally of a short-term nature. As a result, we do not believe that near-term
            changes in interest rates will have a material effect on our future results of
            operations.

Our systems' ability to produce energy depends on the availability of
            sodium borohydride, which has a limited commercial use and is not manufactured
            in vast quantities. There are currently only two major manufacturers of sodium
            borohydride and there can be no assurance that the high cost of this specialty
            chemical will be reduced. Once we commence full operations in the future, we
            may need to enter into long-term supply contracts to protect against price
            increases of sodium borohydride. There can be no assurance that we will be able
            to enter into these agreements to protect against price increases.

Investment Considerations

We have decided to make disclosures in accordance with Item 303 of SEC
            Regulation S-K of important qualitative risk factors that should be considered
            along with those described in our other filings with the Securities and
            Exchange Commission prior to making an investment in our common stock. Our
            business, the results of operations and the trading price of our common stock
            could be harmed by any of the following factors:

| | • | We
                   are a development stage company, which has only been in business for a short
                   time. In addition, many aspects of our business plan rest on beliefs formed by
                   our management and have not necessarily been supported by independent sources.
                   As a result, your basis for evaluating us is limited.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   have incurred substantial losses and expect losses for the foreseeable future.
                   Accordingly, we may not be able to achieve profitability, and even if we do
                   become profitable, we may not be able to sustain profitability.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   expect our future operating results to vary significantly quarter to quarter,
                   and increase the likelihood that we may fail to meet the expectations of
                   securities analysts and investors at any given time.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | A
                   substantial number of shares of common stock have been, and are expected in the
                   near future to be, registered for resale in connection with the issuance of
                   common stock to private investors and the issuance of our common stock after
                   conversion of outstanding debentures and exercise of outstanding warrants.
                   Resale of a significant number of shares into the public markets could depress
                   the trading price of our common stock and make it more difficult for our
                   stockholders to sell equity securities in the future.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

| | • | Our
                   debentures are subject to a number of restrictive covenants, including a
                   requirement that our common stock remain listed on a National Exchange and
                   requirements as to the trading prices of our common stock. If we are unable to
                   maintain a listing on either NASDAQ National Market or NASDAQ SmallCap Market,
                   the debentures may be called by the holders. Furthermore, if the NASDAQ
                   National Market or SmallCap listing is not maintained, shareholders might find
                   it more difficult to liquidate their investment.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   have appealed a notice of delisting from the NASDAQ National Market. If we are
                   not successful in the appeal, the shares of our common stock will not be traded
                   on the NASDAQ National Market but instead, if we meet the continued listing
                   requirements of the NASDAQ SmallCap Market, trading of our common stock would
                   be conducted on the NASDAQ SmallCap Market or other nationally recognized
                   markets or the over the counter market on the so called "pink sheets" or, if
                   available, NASD's "Electronic Bulletin Board."
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   may be required to issue more shares of common stock to the holders of the
                   debentures and the warrants as a result of the anti-dilution provisions of the
                   debentures and the warrants. In addition, subject to the satisfaction of
                   numerous conditions, we have the right to force conversion of the unsecured
                   debentures at a discount to current market prices. Sales of substantial amounts
                   of common stock could reduce the market price for our common stock and make it
                   more difficult for stockholders to sell their shares.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | The
                   proceeds of the unsecured debentures and the secured debentures, when available
                   to us, are expected to be used to fund our product development and
                   commercialization plans. Access to the funds from the secured debentures is
                   subject to numerous conditions and is dependent on consent of the holder to an
                   accelerated conversion schedule. We can provide no assurance that all the
                   proceeds of the secured debentures will ultimately be available. Even if all
                   the proceeds of the secured debentures are available to us, additional funding
                   may nonetheless be necessary if budgeted expenses exceed expectations or
                   revenues fall short of projections. If we are able to raise additional capital,
                   it may be on unacceptable terms to us, may dilute your ownership or may
                   restrict our ability to run our business.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   may be subject to litigation if our common stock price is volatile, which may
                   result in substantial costs and a diversion of our management's attention and
                   resources and could have a negative effect on our business and results of
                   operations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   may be unable to complete development of commercially viable hydrogen
                   generation systems.
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | • | Any
                   perceived problem while conducting demonstrations of our technology could hurt
                   our reputation and the reputation of our products, which would impede the
                   development of our business.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Some
                   of the raw materials that the hydrogen generation systems use are expensive and
                   are not manufactured in large quantities. Therefore, the energy produced by our
                   systems may cost more than energy provided through conventional and alternative
                   systems. Accordingly, our systems may be less attractive to potential users.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | If
                   we cannot develop and demonstrate lower cost processes for the manufacture of
                   sodium borohydride, our commercialization plans may be hindered.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | A
                   mass market for fuel cells, hydrogen generation systems or batteries may never
                   develop or may take longer to develop than we anticipate.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   are heavily dependent on companies or governmental agencies that would include
                   our hydrogen generation systems in their products and to develop the
                   infrastructure required to use of our technologies in certain applications or
                   markets.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Failure
                   to meet cost or performance goals with potential customers could delay or
                   impede commercialization of our technology.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

| | • | Changes
                   in environmental policies could result in automobile manufacturers abandoning
                   their interest in fuel cell powered vehicles. This may substantially lessen the
                   market for our products and harm the development of our business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Since
                   zero emission vehicle requirements can be met without using fuel cells,
                   automobile manufacturers may use other technologies to meet regulatory
                   requirements.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Any
                   accidents involving our products or the raw materials used in our products
                   could impair their market acceptance.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   will continue to face intense competition from alternative power technologies
                   and may be unable to compete successfully.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   depend on our intellectual property and may not be able to protect the rights
                   to that intellectual property. Our failure to protect this intellectual
                   property could adversely affect our future growth and success.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Our
                   future plans could be adversely affected if we are unable to attract or retain
                   key personnel.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | • | We
                   do not intend to pay any dividends.
| | - | ---------------------------------------------------------

Item 8.    Financial Statements and Supplementary
            Data.

See Index to Financial Statements and Financial Statement Schedule in
            Item 15.

Item 9.    Changes In and Disagreements With
            Accountants on Accounting and Financial Disclosure.

None.

22

PART III

Item 10.    Directors and Executive Officers of the
            Registrant.

Incorporated herein by reference is the information appearing under the
            caption "Election of Directors" in the Company's definitive proxy statement for
            its 2003 Annual Meeting of Stockholders.

Item 11.    Executive Compensation.

Incorporated herein by reference is the information appearing under the
            caption "Executive Compensation" in the Company's definitive proxy statement
            for its 2003 Annual Meeting of Stockholders.

Item 12.    Security Ownership of Certain Beneficial
            Owners and Management.

Equity Compensation Plan Information

As of December 31, 2002
                   
                   Number of securitiesto be issued
                        upon exercise of outstanding options,warrants and rights
                   
                   Weighted-averageexercise price
                        ofoutstanding options,warrants and rights
                   
                   Number of securitiesremaining
                        available forfuture issuance underequity compensationplans
                        (excluding securitiesreflected in column (a))Plan category
                   
                   (a)
                   
                   (b)
                   
                   (c)Equity compensation plan approved by
                        security holders(1)
                   
                   
                   4,345,829
                   
                   
                   $
                   5.06
                   
                   
                   
                   4,154,171Equity compensation plans not approved
                        by security holders
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   —Total
                   
                   
                   4,345,829
                   
                   
                   $
                   5.06
                   
                   
                   
                   4,154,171


|
|
|
|

|(1) | This
                   plan is our Amended and Restated 2000 Stock Option Plan.
|--- | --------------------------------------------------------------------------------

Other information required by this Item is incorporated by reference from
            the information appearing under the caption "Common Stock Ownership of
            Principal Stockholders and Management" in our definitive proxy statement for
            our 2003 Annual Meeting of Stockholders.

Item 13.    Certain Relationships and Related Party
            Transactions.

Incorporated herein by reference is the information appearing under the
            caption "Certain Transactions" in the Company's definitive proxy statement for
            its 2003 Annual Meeting of Stockholders.

Item 14.    Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

The Company's Chief Executive Officer and Acting Chief Financial Officer
            has evaluated the effectiveness of the Company's disclosure controls and
            procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
            Securities Exchange Act of 1934, as amended) as of a date within 90 days prior
            to the filing date of this annual report. Based on such evaluation, he has
            concluded that, as of the evaluation date, the Company's disclosure controls
            and procedures are effective in alerting him on a timely basis to material
            information relating to the Company required to be included in the Company's
            reports filed or submitted under the Exchange Act.

(b) Changes in Internal Controls.

Since the evaluation date, there have not been any significant changes in
            the Company's internal controls or in other factors that could significantly
            affect such controls.

23

Item 15.    Exhibits, Financial Statement Schedules,
            and Reports on Form 8-K.

|(a) | Documents
                   filed as part of this report
|--- | ---------------------------------------------------------

|1. | Financial
                   Statements
|-- | ---------------------------------------

The financial statements and notes are listed in the Index to Financial
            Statements on page F-1 of this report.

|2. | Financial
                   Statement Schedules
|-- | ------------------------------------------------

None of the schedules for which provision is made in the applicable
            accounting regulations under the Securities Exchange Act of 1934, as amended,
            are required.

|3. | Exhibits
|-- | --------

The following documents are filed as Exhibits to this report on Form 10-K
            or incorporated by reference herein. Any document incorporated by reference is
            identified by a parenthetical referencing the SEC filing which included such
            document.

Exhibit No.
                   
                   
                   
                   Description2.1†
                   
                   —
                   
                   Certificate of Conversion of Millennium
                        Cell LLC to Millennium Cell Inc. (incorporated by reference to the Registration
                        Statement filed on Form S-1, Registration No. 333-37896)3.1†
                   
                   —
                   
                   Certificate of Incorporation of
                        Millennium Cell Inc. (incorporated by reference to the Registration Statement
                        filed on Form S-1, Registration No. 333-37896)3.2†
                   
                   —
                   
                   By-Laws of Millennium Cell Inc.
                        (incorporated by reference to the Registration Statement filed on Form S-1,
                        Registration No. 333-37896)3.3†
                   
                   —
                   
                   Certificate of Amendment to Certificate
                        of Incorporation of Millennium Cell Inc. (incorporated by reference to the
                        Registration Statement filed on Form S-1, Registration No. 333-37896)3.4†
                   
                   —
                   
                   Certificate Eliminating Reference to the
                        Series A Convertible Preferred Stock from the Certificate of Incorporation of
                        Millennium Cell Inc. (incorporated by reference to the Quarterly Report on Form
                        10-Q filed on May 13, 2002)3.5†
                   
                   —
                   
                   Certificate of Amendment of Certificate
                        of Incorporation of Millennium Cell Inc. (incorporated by reference to the
                        Quarterly Report on Form 10-Q filed on May 13, 2002)4.2†
                   
                   —
                   
                   Specimen stock certificate representing
                        the Registrant's Common Stock (incorporated by reference to the Registration
                        Statement filed on Form S-1, Registration No. 333-37896)4.5†
                   
                   —
                   
                   First Warrant to Purchase 224,014 shares
                        of Common stock dated June 19, 2002 (incorporated by reference to Exhibit 4.5
                        to the Current Report on Form 8-K filed on June 26, 2002)4.6†
                   
                   —
                   
                   First Warrant to Purchase 44,803 shares
                        of Common Stock dated June 19, 2002 (incorporated by reference to Exhibit 4.6
                        to the Current Report on Form 8-K filed on June 26, 2002)4.7.1
                   
                   —
                   
                   Closing Warrant No. 1 to purchase 73,599
                        shares of Common Stock dated October 31, 20024.7.2
                   
                   —
                   
                   Closing Warrant No. 2 to purchase 73,599
                        shares of Common Stock dated October 31, 20024.8
                   
                   —
                   
                   First Warrant to purchase 242,678 shares
                        of Common Stock dated December 26, 20024.9
                   
                   —
                   
                   Second Warrant to purchase 589,376 shares
                        of Common Stock dated January 30, 2003


24

Exhibit No.
                   
                   
                   
                   Description4.10.1
                   
                   —
                   
                   Unsecured Convertible Debenture No. 1
                        dated December 26, 20024.10.2
                   
                   —
                   
                   Unsecured Convertible Debenture No. 2
                        dated December 26, 20024.11†
                   
                   —
                   
                   Form of Exchange Convertible Debenture
                        (incorporated by reference to Registration Statement No. 333-101061 on Form S-3
                        filed on November 7, 2002)4.12
                   
                   —
                   
                   Secured Convertible Debenture in
                        aggregate principal amount of $8.5 million dated January 30, 20034.13†
                   
                   —
                   
                   Secured Convertible Debenture issued to
                        Ballard Power Systems, Inc. (incorporated by reference to Exhibit 4.13 to the
                        Quarterly Report on Form 10-Q for the quarter ended September 30, 2002)10.1†
                   
                   —
                   
                   Agreement for Recoverable Grant Award,
                        dated as of April 1999, by and between State of New Jersey Commission on
                        Science and Technology and Millennium Cell LLC (incorporated by reference to
                        the Registration Statement filed on Form S-1, Registration No. 333-37896)10.2†
                   
                   —
                   
                   Amended and Restated Agreement, dated as
                        of August 1, 2000, by and among Millennium Cell Inc., GP Strategies Corporation
                        and Steven Amendola (incorporated by reference to the Registration Statement
                        filed on Form S-1, Registration No. 333-37896)10.3†
                   
                   —
                   
                   Assignment, dated as of May 24, 2000, by
                        Steven Amendola in favor of Millennium Cell Inc. (incorporated by reference to
                        the Registration Statement filed on Form S-1, Registration No. 333-37896)10.4†
                   
                   —
                   
                   Employment Agreement, dated as of May 16,
                        2000, by and between Stephen S. Tang and Millennium Cell Inc. (incorporated by
                        reference to the Registration Statement filed on Form S-1, Registration No.
                        333-37896)10.5†
                   
                   —
                   
                   Employment Agreement, dated as of August
                        2, 2000, by and between Steven C. Amendola and Millennium Cell Inc.
                        (incorporated by reference to the Registration Statement filed on Form S-1,
                        Registration No. 333-37896)10.6†
                   
                   —
                   
                   Amended and Restated Millennium Cell Inc.
                        2000 Stock Option Plan, Amended effective December 1, 2001 (incorporated by
                        reference to Exhibit 10.6 to the Annual Report on Form 10-K filed on March 25,
                        2002)10.7†
                   
                   —
                   
                   Proprietary Rights Agreement, effective
                        as of May 1, 2000, between DaimlerChrysler Corporation and Millennium Cell Inc.
                        (incorporated by reference to the Registration Statement filed on Form S-1,
                        Registration No. 333-37896)10.8†
                   
                   —
                   
                   Assignment and Assumption of License
                        Agreement, dated as of December 17, 1998, by and between GP Strategies
                        Corporation and Millennium Cell LLC (incorporated by reference to the
                        Registration Statement filed on Form S-1, Registration No. 333-37896)10.9†
                   
                   —
                   
                   Employment Agreement, dated as of
                        September 6, 2000, by and between Millennium Cell Inc. and Norman R. Harpster,
                        Jr. (incorporated by reference to the Quarterly Report on Form 10-Q filed on
                        November 1, 2000)10.10†
                   
                   —
                   
                   Lease Agreement, dated as of April 4,
                        2001, by and between Millennium Cell Inc. and Ten-Thirty Five Associates,
                        Limited Partnership (incorporated by reference to the Quarterly Report on Form
                        10-Q filed on May 11, 2001)


25

Exhibit No.
                   
                   
                   
                   Description10.11†
                   
                   —
                   
                   Separation Agreement, dated as of
                        December 11, 2001, by and between Millennium Cell Inc. and Steven C. Amendola
                        (incorporated by reference to the Annual Report on Form 10-K filed on March 25,
                        2002)10.12†
                   
                   —
                   
                   Consulting Agreement, dated as of
                        December 11, 2001, by and between Millennium Cell Inc. and Steven C. Amendola
                        (incorporated by reference to the Annual Report on Form 10-K filed on March 25,
                        2002)10.13†
                   
                   —
                   
                   Confidentiality Agreement, dated as of
                        December 11, 2001, by and between Millennium Cell Inc. and Steven C. Amendola
                        (incorporated by reference to the Annual Report on Form 10-K filed on March 25,
                        2002)10.14†
                   
                   —
                   
                   Securities Purchase Agreement dated as of
                        June 19, 2002 between the Company and the Purchasers (incorporated by reference
                        as Exhibit 4.3 to the Current Report on Form 8-K filed on June 26, 2002)10.15†
                   
                   —
                   
                   Registration Rights Agreement dated as of
                        June 19, 2002 between the Company and the Purchasers (incorporated by reference
                        as Exhibit 4.4 to the Current Report on Form 8-K filed on June 26, 2002.)10.16†
                   
                   —
                   
                   Securities Purchase Agreement dated as of
                        October 31, 2002 among the Company and the Purchasers named therein
                        (incorporated by reference to Exhibit 10.16 to Registration Statement No.
                        333-101061 on Form S-3 filed on November 7, 2002)10.17†
                   
                   —
                   
                   Registration Rights Agreement dated as of
                        October 31, 2002 among the Company and the Purchasers named therein
                        (incorporated by reference to Exhibit 10.17 to Registration Statement No.
                        333-101061 on Form S-3 filed on November 7, 2002)10.18†
                   
                   —
                   
                   Option Agreement dated as of November 8,
                        2002, between the Company and Ballard Power Systems, Inc. (incorporated by
                        reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q for the quarter
                        ended September 30, 2002)10.19†
                   
                   —
                   
                   Securities Purchase Agreement dated as of
                        November 8, 2002 Company and Ballard Power Systems, Inc. (incorporated by
                        reference to Exhibit 10.19 to the Quarterly Report on Form 10-Q for the quarter
                        ended September 30, 2002)10.20†
                   
                   —
                   
                   Registration Rights Agreement dated as of
                        November 8, 2002 between the Company and Ballard Power Systems, Inc.
                        (incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form
                        10-Q for the quarter ended September 30, 2002)10.21†
                   
                   —
                   
                   Continuing Letter of Credit Agreement
                        dated January 30, 2003 between the Company and Wachovia Bank, National
                        Association (incorporated by reference to Exhibit 10.21 to Registration
                        Statement No. 333-103104 on Form S-3 filed February 11, 2003)10.22†
                   
                   —
                   
                   Security Agreement dated January 30, 2003
                        between the Company and Wachovia Bank, National Association (incorporated by
                        reference to Exhibit 10.22 to the Registration Statement No. 333-103104 on Form
                        S-3 filed on February 11, 2003)10.23†
                   
                   —
                   
                   Letter of Credit securing $8.5 million
                        Secured Convertible Debentures (incorporated by reference to Exhibit 10.23 to
                        the Registration Statement No. 333-103104 on Form S-3 filed on February 11,
                        2003.)10.24
                   
                   —
                   
                   Severance, Release and Consulting
                        Agreement between the Company and Norman "Chip" Harpster, Jr. effective
                        February 14, 2003.


26

Exhibit No.
                   
                   
                   
                   Description10.25
                   
                   —
                   
                   Amended and Restated Employment Agreement
                        between the Company and Stephen S. Tang dated as of January 1, 2002.10.26
                   
                   —
                   
                   Continuing Letter of Credit Agreement
                        dated November 8, 2002 between the Company and Wachovia Bank, National
                        Association relating to the Secured Convertible Debentures issued to Ballard
                        Power Systems, Inc.10.27
                   
                   —
                   
                   Security Agreement dated November 8, 2002
                        between the Company and Wachovia Bank, National Association relating to the
                        Secured Convertible Debentures issued to Ballard Power Systems, Inc.10.28
                   
                   —
                   
                   Letter of Credit securing $2.4 million
                        Secured Convertible Debentures issued for the benefit of Ballard Power Systems,
                        Inc.23.1
                   
                   —
                   
                   Consent of Ernst & Young99.1†
                   
                   —
                   
                   License Agreement, dated July 31, 1997,
                        by and between Steven C. Amendola and National Patent Development Corporation
                        (incorporated by reference to the Registration Statement filed on Form S-1,
                        Registration No. 333-37896)99.2
                   
                   —
                   
                   Certification of Chief Executive Officer
                        Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                        Sarbanes-Oxley Act of 200299.3
                   
                   —
                   
                   Certification of Acting Chief Financial
                        Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
                        of Sarbanes-Oxley Act of 2002


|
|
|
|

|† | Previously
                   filed.
|- | ------------------------------------

The Company will furnish, without charge, to a security holder upon
            request a copy of the proxy statement, portions of which are incorporated
            herein by reference thereto. The Company will furnish any other exhibit at
            cost.

|(b) | Reports
                   on Form 8-K
|--- | --------------------------------------

The following reports were filed under Form 8-K during the last quarter
            of the period covered by this report:

Form 8-K filed November 5, 2002. On October 31, 2002, we entered into a
            $1 million private placement transaction with two accredited investors.
            Accordingly, we issued 588,790 shares of common stock and warrants to purchase
            147,198 shares of common stock at an exercise price of $2.32 to the investors.

Form 8-K filed December 13, 2002. On December 13, 2002, we reported that
            we had presented a compliance program to The NASDAQ Stock Market, Inc. after
            receiving their letter informing us that as of September 30, 2002, we did not
            meet the minimum $10 million stockholders' equity requirement for continued
            listing on the NASDAQ National Market under Maintenance Standard 1, as set
            forth in the NASDAQ Marketplace Rule 4450(a)(3).

27

SIGNATURES

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

MILLENNIUM CELL INC.

By: /s/    STEPHENS.TANG

|
|
|
|

Stephen S. Tang President, Chief Executive Officer, Acting Chief
            Financial Officer

Date: March 17, 2003

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

Signature
                   
                   Title
                   
                   Date/s/    STEPHENS.TANG
                   
                   President, Chief Executive
                        Officer,Acting Chief Financial Officer, and Director
                   
                   March 17, 2003Stephen S. Tang/S/JOHND.GIOLLI
                   
                   Controller and
                        PrincipalAccounting Officer
                   
                   March 17, 2003John D. Giolli/s/    G.CHRISANDERSEN
                   
                   Director
                   
                   March 17, 2003G. Chris Andersen/s/    KENNETHR.BAKER
                   
                   Director
                   
                   March 17, 2003Kenneth R. Baker/s/    WILLIAMH.FIKE
                   
                   Director
                   
                   March 17, 2003William H. Fike/s/    ALEXANDERMACLACHLAN
                   
                   Director
                   
                   March 17, 2003Alexander MacLachlan/s/    ZOLTANMERSZEI
                   
                   Director
                   
                   March 17, 2003Zoltan Merszei/s/    H.DAVIDRAMM
                   
                   Director
                   
                   March 17, 2003H. David Ramm/s/    JAMESL.RAWLINGS
                   
                   Director
                   
                   March 17, 2003James L. Rawlings


28

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Stephen S. Tang, President and Chief Executive Officer of Millennium
            Cell Inc., certify that:

1.    I have reviewed this annual report on Form 10-K
            of Millennium Cell Inc.;

2.    Based on my knowledge, this annual report does
            not contain any untrue statement of a material fact or omit to state a material
            fact necessary to make the statements made, in light of the circumstances under
            which such statements were made, not misleading with respect to the period
            covered by this annual report;

3.    Based on my knowledge, the financial
            statements, and other financial information included in this annual report,
            fairly present in all material respects the financial condition, results of
            operations and cash flows of the registrant as of, and for, the periods
            presented in this annual report;

4.    I am responsible for establishing and
            maintaining disclosure controls and procedures (as defined in Exchange Act
            Rules 13a-14 and 15d-14) for the registrant and I have:

a) designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its consolidated
            subsidiaries, is made known to me by others within those entities, particularly
            during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date of this
            annual report (the "Evaluation Date"); and

c) presented in this annual report my conclusions about the effectiveness
            of the disclosure controls and procedures based on my evaluation as of the
            Evaluation Date;

5.    I have disclosed, based on my most recent
            evaluation, to the registrant's auditors and the audit committee of
            registrant's board of directors (or persons performing the equivalent
            function):

a) all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to record,
            process, summarize and report financial data and have identified for the
            registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal controls;
            and

6.    I have indicated in this annual report whether
            or not there were significant changes in internal controls or in other factors
            that could significantly affect internal controls subsequent to the date of my
            most recent evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

By:     /s/ STEPHEN S. TANGStephen S.
            TangPresident and Chief Executive Officer

March 17, 2003

29

CERTIFICATION OF ACTING CHIEF FINANCIAL OFFICER

I, Stephen S. Tang, Acting Chief Financial Officer of Millennium Cell
            Inc., certify that:

1.    I have reviewed this annual report on Form 10-K
            of Millennium Cell Inc.;

2.    Based on my knowledge, this annual report does
            not contain any untrue statement of a material fact or omit to state a material
            fact necessary to make the statements made, in light of the circumstances under
            which such statements were made, not misleading with respect to the period
            covered by this annual report;

3.    Based on my knowledge, the financial
            statements, and other financial information included in this annual report,
            fairly present in all material respects the financial condition, results of
            operations and cash flows of the registrant as of, and for, the periods
            presented in this annual report;

4.    I am responsible for establishing and
            maintaining disclosure controls and procedures (as defined in Exchange Act
            Rules 13a-14 and 15d-14) for the registrant and I have:

a) designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its consolidated
            subsidiaries, is made known to me by others within those entities, particularly
            during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date of this
            annual report (the "Evaluation Date"); and

c) presented in this annual report my conclusions about the effectiveness
            of the disclosure controls and procedures based on my evaluation as of the
            Evaluation Date;

5.    I have disclosed, based on my most recent
            evaluation, to the registrant's auditors and the audit committee of
            registrant's board of directors (or persons performing the equivalent
            function):

a) all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to record,
            process, summarize and report financial data and have identified for the
            registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal controls;
            and

6.    I have indicated in this annual report whether
            or not there were significant changes in internal controls or in other factors
            that could significantly affect internal controls subsequent to the date of my
            most recent evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

By:     /s/ STEPHEN S. TANGStephen S.
            TangActing Chief Financial Officer

March 17, 2003

30

INDEX TO FINANCIAL STATEMENTS

PageReport of Independent Auditors
                   
                   
                   F-2Balance Sheet as of December 31, 2002
                        and 2001
                   
                   
                   F-3Statement of Operations for the fiscal
                        years ended December 31, 2002, 2001 and 2000
                   
                   
                   F-4Statement of Stockholders' Equity for
                        the period from January 1, 2000 to December 31, 2002
                   
                   
                   F-5Statement of Cash Flows for the fiscal
                        years ended December 31, 2002, 2001 and 2000
                   
                   
                   F-6Notes to Financial Statements
                   
                   
                   F-7


F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders Millennium Cell Inc.

We have audited the accompanying consolidated balance sheets of
            Millennium Cell Inc. (a development stage company) as of December 31, 2002 and
            2001, and the related consolidated statements of operations, stockholders'
            equity and cash flows for each of the three years in the period ended December
            31, 2002. 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 auditing standards generally
            accepted in the United States. Those standards require that we plan and perform
            the audit to obtain reasonable assurance about whether the consolidated
            financial statements are free of material misstatement. An audit includes
            examining, on a test basis, evidence supporting the amounts and disclosures in
            the consolidated financial statements. An audit also includes 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 consolidated financial position
            of Millennium Cell Inc. at December 31, 2002 and 2001 and the results of its
            consolidated operations and its cash flows for each of the three years in the
            period ended December 31, 2002 in conformity with accounting principles
            generally accepted in the United States.

/s/ ERNST &YOUNG LLP

New York, New York February 10, 2003

F-2

MILLENNIUM CELL INC.(a development stage enterprise)

BALANCE SHEET

Assets
                   
                   December 31,2002
                   
                   December 31,2001Current assets:Cash and cash equivalents
                   
                   $
                   7,987,127
                   
                   
                   $
                   6,348,763Accounts receivable
                   
                   
                   234,015
                   
                   
                   
                   129,000Prepaid expenses
                   
                   
                   337,589
                   
                   
                   
                   352,198Deferred financing costs
                   
                   
                   313,690
                   
                   
                   
                   —Held-to-maturity investments
                   
                   
                   —
                   
                   
                   
                   11,067,175Total current assets
                   
                   
                   8,872,421
                   
                   
                   
                   17,897,136Property and equipment, net
                   
                   
                   1,526,983
                   
                   
                   
                   1,177,483Intangible assets, net
                   
                   
                   590,269
                   
                   
                   
                   530,706Investment in affiliate
                   
                   
                   167,412
                   
                   
                   
                   —Restricted cash
                   
                   
                   2,963,050
                   
                   
                   
                   588,972Security deposits
                   
                   
                   45,676
                   
                   
                   
                   45,676$
                   14,165,811
                   
                   
                   $
                   20,239,973Liabilities and stockholders'
                        equityCurrent liabilities:Accounts payable
                   
                   $
                   612,651
                   
                   
                   $
                   223,101Accrued employee compensation
                   
                   
                   —
                   
                   
                   
                   940,837Accrued expenses
                   
                   
                   615,006
                   
                   
                   
                   454,890Convertible unsecured debentures (face
                        value of $3.5 million, net of discount)
                   
                   
                   3,029,882
                   
                   
                   
                   —Deferred income
                   
                   
                   —
                   
                   
                   
                   2,528,988Total current liabilities
                   
                   
                   4,257,539
                   
                   
                   
                   4,147,816Convertible secured debentures
                   
                   
                   2,399,988
                   
                   
                   
                   —Refundable grant obligation
                   
                   
                   227,522
                   
                   
                   
                   227,522Commitments and contingenciesStockholders' equity:Preferred stock, $.001 par value;
                        5,000,000 authorized shares, none issued and outstanding
                   
                   
                   —
                   
                   
                   
                   —Common stock, $.001 par value;
                        authorized 70,000,000 shares and 29,027,491 and 27,292,077 shares issued
                        and outstanding as of December 31, 2002 and 2001, respectively
                   
                   
                   29,027
                   
                   
                   
                   27,292Additional paid-in capital
                   
                   
                   61,679,267
                   
                   
                   
                   54,140,914Deficit accumulated during development
                        stage
                   
                   
                   (54,427,532
                   )
                   
                   
                   (38,303,571
                   )Total stockholders' equity
                   
                   
                   7,280,762
                   
                   
                   
                   15,864,635$
                   14,165,811
                   
                   
                   $
                   20,239,973


See accompanying notes.

F-3

MILLENNIUM CELL INC.(a development stage enterprise)

STATEMENT OF OPERATIONS

Twelve MonthsEndedDecember
                        31,2002
                   
                   Twelve MonthsEndedDecember
                        31,2001
                   
                   Twelve MonthsEndedDecember
                        31,2000
                   
                   CumulativeAmounts
                        FromInceptionRevenue
                   
                   $
                   719,392
                   
                   
                   $
                   —
                   
                   
                   $
                   —
                   
                   
                   $
                   719,392Cost of revenue
                   
                   
                   690,059
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   690,059Gross margin
                   
                   
                   29,333
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   29,333Product development and marketing
                   
                   
                   5,788,315
                   
                   
                   
                   5,513,172
                   
                   
                   
                   —
                   
                   
                   
                   11,301,487General and administrative
                   
                   
                   4,052,943
                   
                   
                   
                   4,726,543
                   
                   
                   
                   3,173,393
                   
                   
                   
                   12,117,832Restructuring expense
                   
                   
                   104,982
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   104,982Non-cash charges
                   
                   
                   4,148,251
                   
                   
                   
                   7,341,461
                   
                   
                   
                   10,785,381
                   
                   
                   
                   22,275,093Depreciation and amortization
                   
                   
                   710,975
                   
                   
                   
                   473,031
                   
                   
                   
                   256,820
                   
                   
                   
                   1,497,833Research and development
                   
                   
                   1,515,376
                   
                   
                   
                   2,624,823
                   
                   
                   
                   2,131,684
                   
                   
                   
                   7,092,011Total operating expenses
                   
                   
                   16,320,842
                   
                   
                   
                   20,679,030
                   
                   
                   
                   16,347,278
                   
                   
                   
                   54,389,238Loss from operations
                   
                   
                   (16,291,509
                   )
                   
                   
                   (20,679,030
                   )
                   
                   
                   (16,347,278
                   )
                   
                   
                   (54,359,905
                   )Other income
                   
                   
                   234,963
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   234,963Interest income, net
                   
                   
                   300,299
                   
                   
                   
                   1,226,701
                   
                   
                   
                   678,194
                   
                   
                   
                   2,216,005Equity in losses of affiliate
                   
                   
                   (367,714
                   )
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   (367,714
                   )Net loss
                   
                   
                   (16,123,961
                   )
                   
                   
                   (19,452,329
                   )
                   
                   
                   (15,669,084
                   )
                   
                   
                   (52,276,651
                   )Preferred stock amortization
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   2,150,881
                   
                   
                   
                   2,150,881Net loss applicable to common
                        stockholders
                   
                   $
                   (16,123,961
                   )
                   
                   $
                   (19,452,329
                   )
                   
                   $
                   (17,819,965
                   )
                   
                   $
                   (54,427,532
                   )Loss per share — basic and
                        diluted
                   
                   $
                   (.58
                   )
                   
                   $
                   (.71
                   )
                   
                   $
                   (.69
                   )
                   
                   $
                   (2.08
                   )Weighted — average number of
                        shares outstanding
                   
                   
                   28,022,872
                   
                   
                   
                   27,217,591
                   
                   
                   
                   25,787,672
                   
                   
                   
                   26,111,405


See accompanying notes.

F-4

MILLENNIUM CELL INC. (a development stage enterprise)

STATEMENT OF STOCKHOLDERS' EQUITY

|                                                                                               |  |              |            |                 |  |                                               |        |                                        |  |                                               |          |   |  |   |            |   |  |   |            |   |  |   |             |   |  |   |             |   |  | 
|---------------------------------------------------------------------------------------------- |  | ------------ | ---------- | --------------- |  | --------------------------------------------- | ------ | -------------------------------------- |  | --------------------------------------------- | -------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ----------- | - |  | - | ----------- | - |  | 
|                                                                                               |  | Common Stock |            | Preferred Stock |  | Additional
                   Paid-in Capital |        | Accumulated
                   Deficit |  | Total
                   Stockholder's Equity
|                                                                                               |  | Shares       |            | Amount          |  | Shares                                        |        | Amount                                
|Balance at January 1, 2000                                                                     |  |              | 23,679,714 |                 |  | $                                             | 23,680 |                                        |  |                                               | —        |   |  | $ | —          |   |  | $ | 1,226,320  |   |  | $ | (1,031,277  | ) |  | $ | 218,723     |  
|Capital contribution                                                                           |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 500,000    |   |  |   | —           |   |  |   | 500,000     |  
|Redemption of common stock held by GPS
                   and termination of royalty agreement |  |              | (623,401   | )               |  |                                               | (623   | )                                      |  |                                               | —        |   |  |   | —          |   |  |   | 2,068,763  |   |  |   | —           |   |  |   | 2,068,140   |  
|Issuance of preferred stock                                                                    |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | 759,368  |   |  |   | 2,146,446  |   |  |   | —          |   |  |   | —           |   |  |   | 2,146,446   |  
|Conversion of preferred stock to
                   common stock                               |  |              | 759,368    |                 |  |                                               | 759    |                                        |  |                                               | (759,368 | ) |  |   | (2,146,446 | ) |  |   | 2,145,687  |   |  |   | —           |   |  |   | —           |  
|Amortization of preferred stock                                                                |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 2,150,881  |   |  |   | (2,150,881  | ) |  |   | —           |  
|Issuance of common stock from
                   initial public offering                       |  |              | 3,352,300  |                 |  |                                               | 3,352  |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 29,850,865 |   |  |   | —           |   |  |   | 29,854,217  |  
|Non-cash compensation charges for
                   issuance of stock options                 |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 8,716,411  |   |  |   | —           |   |  |   | 8,716,411   |  
|Net loss                                                                                       |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | —          |   |  |   | (15,669,084 | ) |  |   | (15,669,084 | )
|Balance at December 31, 2000                                                                   |  |              | 27,167,981 |                 |  |                                               | 27,168 |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 46,658,927 |   |  |   | (18,851,242 | ) |  |   | 27,834,853  |  
|Issuance of common stock from exercise
                   of options                           |  |              | 48,500     |                 |  |                                               | 48     |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 140,602    |   |  |   | —           |   |  |   | 140,650     |  
|Issuance of common stock from exercise
                   of warrants                          |  |              | 75,596     |                 |  |                                               | 76     |                                        |  |                                               | —        |   |  |   | —          |   |  |   | (76        | ) |  |   | —           |   |  |   | —           |  
|Non-cash compensation charges for
                   issuance of stock options                 |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 7,341,461  |   |  |   | —           |   |  |   | 7,341,461   |  
|Net loss                                                                                       |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | —          |   |  |   | (19,452,329 | ) |  |   | (19,452,329 | )
|Balance at December 31, 2001                                                                   |  |              | 27,292,077 |                 |  |                                               | 27,292 |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 54,140,914 |   |  |   | (38,303,571 | ) |  |   | 15,864,635  |  
|Issuance of common stock in private
                   placement transactions                  |  |              | 1,664,058  |                 |  |                                               | 1,664  |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 2,959,615  |   |  |   | —           |   |  |   | 2,961,279   |  
|Fair value of warrants issued with
                   unsecured debentures                     |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 491,983    |   |  |   | —           |   |  |   | 491,983     |  
|Issuance of common stock
                   fromexercise of options                            |  |              | 28,000     |                 |  |                                               | 28     |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 81,172     |   |  |   | —           |   |  |   | 81,200      |  
|Issuance of common stockfor 401(k)                                                             |  |              | 43,356     |                 |  |                                               | 43     |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 82,332     |   |  |   | —           |   |  |   | 82,375      |  
|Non-cash compensation charges for
                   issuance of stock options                 |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | 3,923,251  |   |  |   | —           |   |  |   | 3,923,251   |  
|Net loss                                                                                       |  |              | —          |                 |  |                                               | —      |                                        |  |                                               | —        |   |  |   | —          |   |  |   | —          |   |  |   | (16,123,961 | ) |  |   | (16,123,961 | )
|Balance at December 31, 2002                                                                   |  |              | 29,027,491 |                 |  | $                                             | 29,027 |                                        |  |                                               | —        |   |  | $ | —          |   |  | $ | 61,679,267 |   |  | $ | (54,427,532 | ) |  | $ | 7,280,762   |  
|                                                                                              

See accompanying notes.

F-5

MILLENNIUM CELL INC. (a development stage enterprise)

STATEMENT OF CASH FLOWS

|                                                                                               |  |                                                       |             |                                                       |  |                                                       |             |                                                    |  |   |             |   |  |   |             |   |  | 
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ----------- | ----------------------------------------------------- |  | ----------------------------------------------------- | ----------- | -------------------------------------------------- |  | - | ----------- | - |  | - | ----------- | - |  | 
|                                                                                               |  | Twelve MonthsEndedDecember
                   31,2002 |             | Twelve MonthsEndedDecember
                   31,2001 |  | Twelve MonthsEndedDecember
                   31,2000 |             | CumulativeAmounts
                   FromInception
|Operating activities                                                                           |  |                                                       |             |                                                       |  |                                                       |             |                                                    |  |   |             |   |  |   |             |  
|Net loss                                                                                       |  | $                                                     | (16,123,961 | )                                                     |  | $                                                     | (19,452,329 | )                                                  |  | $ | (15,669,084 | ) |  | $ | (52,276,651 | )
|Adjustments to reconcile net loss to
                   net cash used in operating activities: |  |                                                       |             |                                                       |  |                                                       |             |                                                    |  |   |             |   |  |   |             |  
|Depreciation and amortization                                                                  |  |                                                       | 710,975     |                                                       |  |                                                       | 473,031     |                                                    |  |   | 256,820     |   |  |   | 1,497,833   |  
|Amortization of discount on unsecured
                   debentures                            |  |                                                       | 21,865      |                                                       |  |                                                       | —           |                                                    |  |   | —           |   |  |   | 21,865      |  
|Amortization of deferred financing
                   costs                                    |  |                                                       | 14,590      |                                                       |  |                                                       | —           |                                                    |  |   | —           |   |  |   | 14,590      |  
|Losses on investment in affiliate                                                              |  |                                                       | 367,714     |                                                       |  |                                                       | —           |                                                    |  |   | —           |   |  |   | 367,714     |  
|Non-cash charges                                                                               |  |                                                       | 4,148,251   |                                                       |  |                                                       | 7,341,461   |                                                    |  |   | 10,785,381  |   |  |   | 22,275,093  |  
|Changes in operating assets and
                   liabilities:                                |  |                                                       |             |                                                       |  |                                                       |             |                                                    |  |   |             |   |  |   |             |  
|Accounts receivable                                                                            |  |                                                       | (105,015    | )                                                     |  |                                                       | (129,000    | )                                                  |  |   | —           |   |  |   | (234,015    | )
|Prepaid expenses and other assets                                                              |  |                                                       | 14,609      |                                                       |  |                                                       | (186,256    | )                                                  |  |   | (148,393    | ) |  |   | (383,265    | )
|Accounts payable and accrued
                   expenses                                       |  |                                                       | (308,796    | )                                                     |  |                                                       | 684,946     |                                                    |  |   | 879,750     |   |  |   | 1,310,032   |  
|Due to affiliate                                                                               |  |                                                       | —           |                                                       |  |                                                       | —           |                                                    |  |   | (30,000     | ) |  |   | —           |  
|Deferred income                                                                                |  |                                                       | (129,000    | )                                                     |  |                                                       | 129,000     |                                                    |  |   | 2,399,988   |   |  |   | 2,399,988   |  
|Net cash used in operating
                   activities                                       |  |                                                       | (11,388,768 | )                                                     |  |                                                       | (11,139,147 | )                                                  |  |   | (1,525,538  | ) |  |   | (25,006,816 | )
|Investing activities                                                                           |  |                                                       |             |                                                       |  |                                                       |             |                                                    |  |   |             |   |  |   |             |  
|Purchase of property and equipment                                                             |  |                                                       | (999,939    | )                                                     |  |                                                       | (956,854    | )                                                  |  |   | (493,568    | ) |  |   | (2,780,452  | )
|Patent registration costs                                                                      |  |                                                       | (120,099    | )                                                     |  |                                                       | (138,440    | )                                                  |  |   | (208,091    | ) |  |   | (584,633    | )
|Investment in affiliate                                                                        |  |                                                       | (535,126    | )                                                     |  |                                                       | —           |                                                    |  |   | —           |   |  |   | (535,126    | )
|Increase in restricted cash                                                                    |  |                                                       | (2,374,078  | )                                                     |  |                                                       | (588,972    | )                                                  |  |   | —           |   |  |   | (2,963,050  | )
|(Purchase)/redemption of
                   held-to-maturity investments, net                  |  |                                                       | 11,067,175  |                                                       |  |                                                       | (11,067,175 | )                                                  |  |   | —           |   |  |   | —           |  
|Net cash provided by (used in)
                   investing activities                         |  |                                                       | 7,037,933   |                                                       |  |                                                       | (12,751,441 | )                                                  |  |   | (701,659    | ) |  |   | (6,863,261  | )
|Financing activities                                                                           |  |                                                       |             |                                                       |  |                                                       |             |                                                    |  |   |             |   |  |   |             |  
|Proceeds from sale of common stock                                                             |  |                                                       | 81,200      |                                                       |  |                                                       | 140,650     |                                                    |  |   | 33,523,000  |   |  |   | 34,994,850  |  
|Underwriting and other expenses of
                   initial public offering                  |  |                                                       | —           |                                                       |  |                                                       | —           |                                                    |  |   | (3,669,613  | ) |  |   | (3,669,613  | )
|Proceeds from issuance of unsecured
                   debentures                              |  |                                                       | 3,500,000   |                                                       |  |                                                       | —           |                                                    |  |   | —           |   |  |   | 3,500,000   |  
|Proceeds from equity private placement                                                         |  |                                                       | 2,736,279   |                                                       |  |                                                       | —           |                                                    |  |   | —           |   |  |   | 2,736,279   |  
|Deferred financing costs                                                                       |  |                                                       | (328,280    | )                                                     |  |                                                       | —           |                                                    |  |   | —           |   |  |   | (328,280    | )
|Proceeds from capital contribution                                                             |  |                                                       | —           |                                                       |  |                                                       | —           |                                                    |  |   | 500,000     |   |  |   | 500,000     |  
|Payment of note payable                                                                        |  |                                                       | —           |                                                       |  |                                                       | —           |                                                    |  |   | (250,000    | ) |  |   | (250,000    | )
|Proceeds from grant                                                                            |  |                                                       | —           |                                                       |  |                                                       | —           |                                                    |  |   | 33,900      |   |  |   | 227,522     |  
|Proceeds from sale of preferred stock                                                          |  |                                                       | —           |                                                       |  |                                                       | —           |                                                    |  |   | 2,146,446   |   |  |   | 2,146,446   |  
|Net cash provided by financing
                   activities                                   |  |                                                       | 5,989,199   |                                                       |  |                                                       | 140,650     |                                                    |  |   | 32,283,733  |   |  |   | 39,857,204  |  
|Net increase (decrease) in cash and
                   cash equivalents                        |  |                                                       | 1,638,364   |                                                       |  |                                                       | (23,749,938 | )                                                  |  |   | 30,056,536  |   |  |   | 7,987,127   |  
|Cash and cash equivalents, beginning
                   of period                              |  |                                                       | 6,348,763   |                                                       |  |                                                       | 30,098,701  |                                                    |  |   | 42,165      |   |  |   | —           |  
|Cash and cash equivalents, end of
                   period                                    |  | $                                                     | 7,987,127   |                                                       |  | $                                                     | 6,348,763   |                                                    |  | $ | 30,098,701  |   |  | $ | 7,987,127   |  
|                                                                                              

Non-Cash Transactions:

In August 2002, the Company issued 43,356 shares of common stock with an
            issued value of $82,375 to the Company's 401(k) Plan as employer matching
            contributions.

In November 2002, the Company and Ballard Power Systems agreed to convert
            a cash advance for deferred royalty income paid by Ballard in October 2000 to a
            strategic investment in the form of Secured Debentures of $2.4 million.

See accompanying notes.

F-6

MILLENNIUM CELL INC.(a development stage
            enterprise)

NOTES TO FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

Millennium Cell Inc. (the "Company"), which was formed to acquire
            substantially all of the assets of the Battery Technology Group of GP
            Strategies Corporation ("GPS"), was incorporated on December 17, 1998 and
            organized on January 1, 1999 (inception), with an initial cash capital
            contribution of $1.25 million of which GPS contributed $50,000.

The Company is a development stage company, as defined in Statement of
            Financial Accounting Standards No. 7, "Accounting and Reporting by Development
            Stage Enterprises." The Company was formed based on an invented, patented and
            developed proprietary chemical process ("Invention") that generates hydrogen
            and electricity from safe, environmentally friendly raw materials. The
            Company's core capability is in the design of a sodium borohydride process
            which can generate hydrogen as a high-energy fuel for the transportation and
            fuel cell markets. The Company has also designed and produced prototype direct
            fuel cells and batteries that utilize the sodium borohydride process to provide
            electricity for the portable and stationary power markets.

Note 2 — Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Millennium
            Cell Inc. and its wholly owned subsidiary, MCE Ventures LLC. MCE Ventures is a
            Delaware limited liability corporation that was formed in 2002 to engage in
            limited strategic investment activities. All significant inter-company
            transactions and accounts have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an
            initial maturity of three months or less to be cash equivalents.

Long-Lived Assets

The Company records impairment losses on long-lived assets when events
            and circumstances indicate that the assets might be impaired and the
            undiscounted estimated cash flows to be generated by the related assets are
            less than the carrying amount of those assets. To date, no impairments have
            occurred.

Property and Equipment

Property and equipment are stated at cost. The Company provides for
            depreciation and amortization using the straight-line method over their
            estimated useful lives as follows:

Asset Classification
                   
                   EstimatedUseful LifeMachinery and equipment
                   
                   3 yearsFurniture and fixtures
                   
                   3 yearsLeasehold improvements
                   
                   3 years


Leasehold improvements are amortized over the estimated useful lives of
            the assets or related lease terms, whichever is shorter. Repairs and
            maintenance are charged to expense as incurred.

Intangible Assets

Certain costs associated with obtaining and licensing patents and
            trademarks are capitalized as incurred and are amortized on a straight-line
            basis over their estimated useful lives of 10 to 17 years,

F-7

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

unless the asset is determined to be impaired. Amortization of such costs
            begins once the patent has been issued. The Company evaluates the
            recoverability of its patent costs at each balance sheet date based on
            estimated undiscounted future cash flows.

Investment in Affiliate

In July 2002, the Company agreed to acquire a 50% interest in a European
            alkaline fuel cell company (the "Affiliate"). The Company's investment is
            accounted for by the equity method. According to the purchase agreement, the
            Company was responsible to record its portion of the Affiliate's losses from
            July 1, 2002 through December 31, 2002. The losses recorded by the Company
            during this period were $367,714.

Investments in which Millennium Cell does not have control, but has the
            ability to exercise significant influence over the operating and financial
            policies, are accounted for under the equity method. Millennium Cell's share of
            net earnings and losses from investments is included in the consolidated
            statement of operations. At December 31, 2002, the carrying value of the
            investments approximates fair value, which is based on the value of the
            underlying collateral.

Restricted Cash

Cash that is pledged as collateral under the Company's amended facilities
            lease agreement and the secured debentures issued to Ballard Power Systems is
            classified as restricted cash on the balance sheet.

Revenue Recognition

Revenues for the year ended December 31, 2002 were derived primarily from
            engineering and design services and sales of prototype systems used by our
            customers to evaluate and demonstrate our technology.

The Company's near term revenues will be derived substantially from
            contracts that require the Company to deliver engineering, design and
            management services, hydrogen generation technology, prototype systems and
            licensing of technology. Revenues will be recognized in the period in which the
            services are performed, technology and/or prototype is delivered or licensed
            revenue is earned.

Product Development and Marketing Costs

Product development and marketing costs are expensed as incurred.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Based Compensation

In December 2002, the Financial Accounting Standards Board ("FASB")
            issued FAS No. 148, Accounting for Stock-Based Compensation-Transition and
            Disclosure. FAS 148 amends FAS No. 123, Accounting for Stock-Based
            Compensation, to provide alternative methods of transition for a voluntary
            change to the fair value based method of accounting for stock-based employee
            compensation. In addition, FAS 148 amends the disclosure requirements of FAS
            123 to require prominent disclosures in both annual and interim financial
            statements about the method of accounting for stock based employee compensation
            and the effect of the method used on reported results. The provisions of FAS
            148 are effective for financial statements for fiscal years and interim periods
            ending after December 15, 2002. The disclosure provisions of FAS 148 have been
            adopted by the Company. FAS 148 did not require the Company to change to the
            fair value based method of accounting for stock-based compensation.

F-8

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
            for Stock-Based Compensation" encourages, but does not require, companies to
            record compensation cost for stock-based employee compensation plans at fair
            value. The Company has elected to account for stock-based compensation using
            the intrinsic value method prescribed in Accounting Principles Board Opinion
            No. 25, "Accounting for Stock Issued to Employees" ("APB 25").

The following table illustrates the effect on net income and earnings per
            share if the Company had applied the fair value recognition provisions of SFAS
            123 to stock-based employee compensation:

Years Ended December 31,2002
                   
                   2001
                   
                   2000Net loss attributable to common
                        stockholders — As reported
                   
                   $ (16,123,961)
                   
                   $ (19,452,329)
                   
                   $ (17,819,965)Deduct: Total stock-based compensation
                        expense determined under fair value based method for all stock option awards
                   
                   (131,765)
                   
                   (1,705,051)
                   
                   (638,983)Net loss attributable to common
                        stockholders — Pro forma
                   
                   $(16,255,726)
                   
                   $(21,157,380)
                   
                   $(18,458,948)Net loss per share attributable to
                        common stockholders — As reported
                   
                   $(0.58)
                   
                   $(0.71)
                   
                   $(0.69)Net loss per share attributable to
                        common stockholders — Pro forma
                   
                   $(0.58)
                   
                   $(0.78)
                   
                   $(0.72)


The fair value of each option grant was estimated on the date of grant
            using the Black-Scholes option-pricing model with the following weighted
            average assumptions:

Years Ended December 31,2002
                   
                   2001
                   
                   2000Expected dividend yield
                   
                   —
                   
                   —
                   
                   —Expected stock price volatility
                   
                   .69
                   
                   .83
                   
                   .92Risk-free interest rate
                   
                   3.68%
                   
                   3.07% – 4.79%
                   
                   6.25%Expected option term
                   
                   5 years
                   
                   3 years
                   
                   0 – 3 years


The Black-Scholes option valuation model was developed for use in
            estimating the fair value of traded options that have no vesting restrictions
            and are fully transferable. In addition, option valuation models require the
            input of highly subjective assumptions, including the expected stock price
            volatility. The Company's options have characteristics significantly different
            from those of traded options, and changes in the subjective input assumptions
            can materially affect the fair value estimate. Based upon the above
            assumptions, the weighted average fair value of stock options granted at market
            was $3.10 and $4.13 in fiscal 2002 and 2001, respectively. In 2000, the fair
            value of stock options granted below market value was $8.39 and the fair value
            of stock options granted at market value was $4.09 per share.

Earnings Per Share

Basic earnings per share (EPS) is computed by dividing income available
            to common stockholders by the weighted average number of common shares actually
            outstanding for the period. Diluted EPS reflects the potential dilution that
            could occur if securities or other contracts to issue common stock were
            exercised or converted into common stock or resulted in the issuance of common
            stock that then shared in the earnings of the Company. Basic and diluted EPS
            were the same for all periods presented herein.

F-9

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

Options to purchase 4,345,829, 4,766,720 and 3,684,471 shares of common
            stock have not been included in the computation of diluted net loss per share
            for the years ended December 31, 2002, 2001 and 2000, respectively, as their
            effects would have been antidilutive.

Warrants to purchase 658,693, 400,000 and 400,000 shares of common stock
            have not been included in the computation of diluted net loss per share for the
            years ended December 31, 2002, 2001 and 2000, respectively, as their effects
            would have been antidilutive.

Income Taxes

The Company is subject to state and federal income taxes and accounts for
            income taxes under the liability method. Accordingly, net deferred tax assets
            and an offsetting valuation allowance of $14,230,516 and $7,780,932 at December
            31, 2002 and 2001, respectively have been recorded due to the uncertainty
            regarding the realization of such deferred tax assets. The significant items
            giving rise to the deferred income taxes were primarily tax loss and credit
            carry forwards and depreciation. The net operating losses will begin to expire
            in 2020.

Use of Accounting Estimates

The preparation of financial statements in conformity with accounting
            principles generally accepted in the United States 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. Actual results could differ from those estimates.

Reclassifications

Amounts previously reported as "Product Development and Engineering" have
            been reclassified and shown as "Research and Development" for all periods
            presented. Certain other amounts have been reclassified to conform to the
            current year's presentation.

Note 3 — Investments

At December 31, 2001, the Company held $11.1 million of held-to-maturity
            investments in U.S. government agency bonds stated at amortized cost, with a
            weighted-average yield of 5.1%. At December 31, 2001, amortized cost
            approximated fair value. Interest income is recognized using the straight-line
            method over the lives of the securities. There were no held-to-maturity
            investments at December 31, 2002.

Note 4 — Property and Equipment

Property and equipment consist of the following at December 31:

2002
                   
                   2001Machinery and equipment
                   
                   $
                   1,144,527
                   
                   
                   $
                   1,106,981Furniture and fixtures
                   
                   
                   402,125
                   
                   
                   
                   356,340Leasehold improvements
                   
                   
                   1,284,028
                   
                   
                   
                   367,4202,830,680
                   
                   
                   
                   1,830,741Accumulated depreciation
                   
                   
                   (1,303,697
                   )
                   
                   
                   (653,258
                   )Property and equipment, net
                   
                   $
                   1,526,983
                   
                   
                   $
                   1,177,483


The Company recorded depreciation expense of $650,439, $425,223, and
            $234,303 for the fiscal years ended December 31, 2002, 2001 and 2000,
            respectively.

F-10

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

Note 5 — Intangible Assets

Patent and license costs consist of the following at December 31:

2002
                   
                   2001Patent and license costs
                   
                   $
                   734,633
                   
                   
                   $
                   614,534Accumulated amortization
                   
                   
                   (144,364
                   )
                   
                   
                   (83,828
                   )$
                   590,269
                   
                   
                   $
                   530,706


The Company recorded amortization expense of $60,536, $47,808, and
            $22,517 for the fiscal years ended December 31, 2002, 2001 and 2000,
            respectively.

Note 6 — Restructuring Charges

During the second quarter of 2002, the Company incurred and paid
            restructuring expenses of approximately $105,000 for severance and legal costs
            related to 14 employee separations. The plan of restructuring was communicated
            and all employee separations were complete prior to June 30, 2002. The costs of
            separation were consistent with the amounts charged to restructuring expense
            during the second quarter of 2002. There are no restructuring reserves at
            December 31, 2002.

Note 7 — Product Development Agreement

In October 2000, we received $2.4 million in cash from Ballard Power
            Systems Inc. as an advance for prospective royalties pursuant to a product
            development agreement between Ballard and us. In addition, we granted to
            Ballard a warrant to purchase up to 400,000 shares of our common stock, which
            was terminated as part of the strategic investment discussed below. Upon
            completion of certain stages of product development, the parties agreed to
            negotiate in good faith for the grant of a license of our technology to Ballard
            in certain fields of use, at which time prepaid royalties may be earned and the
            warrants will be issued and recorded at fair value.

On November 8, 2002, we agreed with Ballard that the product development
            milestones have been achieved and agreed to convert the $2.4 million refundable
            royalty payment into an investment in our company in the form of secured
            convertible debentures due November 8, 2005. The Ballard debentures are secured
            by a standby letter of credit issued by Wachovia Bank, National Association,
            with an aggregate face amount equal to the outstanding principal. We pledged to
            the bank as collateral $2.4 million of funds previously reported under cash and
            cash equivalents on the accompanying balance sheet. We will not have the
            ability to use this cash until the bank pledges are released upon conversion of
            the Ballard debentures to common stock. The debentures are convertible at a
            conversion price of $4.25, subject to anti-dilution adjustments and certain
            price protection in the event the Company initiates the conversion. As part of
            the purchase agreement entered into between Ballard and us, Ballard retains the
            option to license the non-exclusive right to manufacture and sell products with
            our Hydrogen on DemandTM technology for specific portable
            fuel cell products and stationary internal combustion engine generators.

Note 8 — Grant Obligation

In April 1999, the Company received a recoverable grant award from the
            State of New Jersey Commission on Science and Technology ("NJS&T"). The
            funds were used to partially fund costs directly related to the Borohydride
            Fuel Cell technology development. The recoverable grant is required to be
            repaid to NJS&T upon the Company generating net income in a fiscal year.
            The repayment obligation ranges from 1% to 5% of net income over a ten-year
            period and shall not exceed 200% of the original grant. If at the end of the
            tenth year the Company has not repaid at least 100% of the original grant, the

F-11

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

Company is obligated to repay the difference between that amount and the
            cumulative repayments made to date. The original grant amount has been recorded
            as a liability. Additional liability, if any, will be recorded upon the
            attainment of net income in excess of the amount required to establish such
            additional liability.

Note 9 — Commitments and Contingencies

In April 2001, the Company amended its main operating lease to provide
            for additional space for the Company's principal operating offices and
            laboratories. As of November 2001, we occupy all facilities contemplated in the
            lease agreement. The amended lease will expire in 2008 and will contain options
            to renew for an additional 8 years and will require the Company to pay its
            allocated share of taxes and operating cost in addition to the annual base rent
            payment. Future minimum annual lease commitments including allocated taxes and
            maintenance under the amended operating leases are as follows:

2003
                   
                   $
                   484,3102004
                   
                   
                   484,3102005
                   
                   
                   484,3102006
                   
                   
                   484,3102007
                   
                   
                   484,310Thereafter
                   
                   
                   443,950Total
                   
                   $
                   2,865,500


Rent expense under the operating lease was approximately $507,310,
            $288,498 and $128,435 for the years ended December 31, 2002, 2001, and 2000,
            respectively.

In connection with the amended lease agreement, the Company issued a
            letter of credit to the landlord for $588,972 in lieu of a cash security
            deposit. The letter of credit was collateralized with a portion of the
            Company's cash and is classified as Restricted Cash. The funds used for
            collateral will not be available for use in operations.

From time to time, the Company is involved in litigation relating to
            claims arising in the normal course of business. We do not believe that any
            such litigation would have a material adverse effect on our results of
            operations or financial condition.

Note 10 — Capital Transactions

In May 2000, in exchange for approximately $2.2 million, the Company sold
            759,368 shares of Series A preferred stock, which automatically converted into
            759,368 shares of common stock upon completion of the Company's initial public
            equity offering in August 2000. As the issuance price was substantially less
            than the initial public offering price the Company incurred additional
            preferred dividends of approximately $2.2 million from the date of issuance to
            the initial public offering.

Also in May 2000 (as amended in August 2000), the Company terminated a
            royalty agreement with GPS and Steven Amendola by issuing to them options to
            purchase 250,000 common shares at the initial public offering price and 206,897
            shares of common stock, respectively. These agreements resulted in a non-cash
            charge of approximately $2.8 million.

In September 2000, the Company completed its initial public offering
            issuing 3,352,300 shares resulting in net proceeds to the Company of
            approximately $29.9 million.

In December 2001, the Company entered into a separation agreement with
            Steven C. Amendola, its then chief scientific advisor ("CSA") and also entered
            into a consulting agreement and a confidentiality agreement with a company
            wholly owned by the CSA, which expired in September 2002. The significant terms
            of the agreements are:

F-12

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

| | • | $230,000
                   of severance to the CSA was paid in 2001.
| | - | ---------------------------------------------------------------------

| | • | Accelerated
                   vesting of 166,607 stock options initially granted to the CSA while he was an
                   employee of the Company under the Amended and Restated 2000 Stock Option Plan.
                   This resulted in a non-cash charge of $142,602.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Forfeiture
                   by the CSA of approximately 503,321 unvested options. CSA's total vested
                   options equaled 503,322 at December 31, 2001.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

The agreements also require the CSA to honor certain non-compete
            restrictions.

Note 11 — Private Placement Transactions and Subsequent Financing
            Events

On June 19, 2002, the Company entered into a private placement financing
            transaction with two institutional and accredited investors pursuant to the
            terms of a securities purchase agreement among the Company and the purchasers.
            The private placement was exempt from registration under the Securities Act of
            1933, as amended, pursuant to Section 4(2) of such Act. The placement consisted
            of the sale of 1,075,269 shares of common stock for gross proceeds of $3.0
            million and warrants to purchase 268,817 shares of common stock (with an
            exercise price of $3.93 per share).

Pursuant to the terms of the June 19, 2002 purchase agreement, one of the
            investors was obligated to acquire $12 million in secured convertible
            debentures, convertible into common stock of the Company, subject to certain
            terms and conditions, and related warrants. Subsequent to this transaction, the
            Company and the investor agreed the debentures would not be issued under the
            June 19, 2002 purchase agreement. Accordingly, the Company withdrew its request
            for registration on Form S-3 with the SEC for the common stock underlying the
            debentures and related warrants.

On October 31, 2002, the Company entered into a separate private
            placement financing transaction with the same two institutional and accredited
            investors pursuant to the terms of a new purchase agreement among the Company
            and the purchasers. The private placement was exempt from registration under
            the Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act.
            The placement consisted of the sale of 588,790 shares of common stock and
            warrants (with an exercise price of $2.32) to purchase 147,198 shares of common
            stock of the Company for gross proceeds of $1.0 million. Pursuant to the terms
            of the purchase agreement, one of the investors agreed to acquire $12 million
            of secured and unsecured debentures, convertible into common stock of the
            Company, subject to certain terms and conditions, and warrants. Convertible
            unsecured debentures with a principal amount of $3.5 million and warrants to
            acquire 242,678 shares (with an exercise price of $3.00 per share) were issued
            on December 26, 2002 following effectiveness of the registration statement
            relating to the underlying shares of common stock. Interest accrues at a rate
            of 4% per annum with payments due quarterly. The unsecured debentures are due
            June 30, 2003, subject to six thirty-day extensions, subject to the mutual
            consent of the Company and the investor.

On January 23, 2003, the Company's shareholders approved the issuance of
            $8.5 million of secured debentures and warrants to acquire 589,376 shares at a
            special meeting of shareholders and the secured debentures were issued on
            January 30, 2003. Interest accrues at money market rates with payments due
            quarterly. The secured debentures are secured by a standby letter of credit
            issued by Wachovia Bank, National Association, with an aggregate face amount
            equal to the outstanding principal of the secured debentures and are due in
            January 2006. The Company pledged to the bank as collateral the proceeds from
            the sale of the secured debentures. Therefore, the Company does not have the
            ability to use the proceeds from the sale of the secured debentures until the
            bank pledges are released upon conversion to unsecured debentures.

The Company is obligated in the future to register the resale of shares
            issuable on conversion of the $8.5 million principal amount of secured
            debentures following exchange of such secured debentures for

F-13

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

unsecured debentures. Each time the principal amount of outstanding
            unsecured debentures is less than $1.0 million, a portion of the $8.5 million
            of secured debentures will automatically convert into unsecured debentures in
            increments of $3.0 million, $3.0 million and $2.5 million upon effectiveness of
            the registration statement relating to the underlying shares of common stock.

The following table summarizes the number of common shares that have been
            registered by the Company for potential resale in conjunction with (i) the sale
            of shares by the Company to private accredited investors in June and October
            2002, (ii) shares issuable upon exercise of outstanding warrants and (iii)
            shares issuable upon conversion of $3.5 million principal amount of outstanding
            unsecured debentures:

Registration Statement Number
                   
                   Effective Date of
                        Registration Statement
                   
                   Sales of Common Stock
                   
                   Common Stock Issuable Upon
                        Exercise of Warrants
                   
                   Common Stock Issuable Upon
                        Conversion of $3.5 Million Unsecured Debentures
                   
                   Total Common Stock
                        Registered333-92144
                   
                   
                   10/04/02
                   
                   
                   
                   1,075,268
                   
                   
                   
                   268,817
                   
                   
                   
                   —
                   
                   
                   
                   1,344,085333-101061
                   
                   
                   12/23/02
                   
                   
                   
                   588,790
                   
                   
                   
                   389,876
                   
                   
                   
                   2,973,847
                   
                   
                   
                   3,952,513333-103104
                   
                   
                   2/25/03
                   
                   
                   
                   —
                   
                   
                   
                   589,376
                   
                   
                   
                   —
                   
                   
                   
                   589,376Total
                   
                   
                   
                   
                   
                   
                   1,664,058
                   
                   
                   
                   1,248,069
                   
                   
                   
                   2,973,847
                   
                   
                   
                   5,885,974


The unsecured convertible debentures in principal amount of $3.5 million
            are convertible under three different scenarios:

| | • | At
                   the option of the holder, at any time and from time to time at $4.25 per share.
| | - | -----------------------------------------------------------------------------------------------------

| | • | At
                   the option of the Company, if (1) the average closing prices of the Company's
                   common stock during any consecutive 30 trading days is equal to or greater than
                   $5.10 per share and (2) the closing price for each of 15 trading days which
                   need not be consecutive is equal to or greater than $5.10.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | The
                   Company may also convert $300,000 (or up to $2.5 million with investor consent)
                   of unsecured debentures each 10 trading days at an adjusted conversion price
                   equal to the volume weighted average of current market prices discounted from
                   4% to 12%. The discount to the adjusted conversion price depends on the
                   cumulative amount of debentures converted as of the respective dates of
                   conversion.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The secured convertible debentures in principal amount of $8.5 million
            are convertible at the option of the holder, at any time and from time to time
            at $4.25 per share. Following exchange of secured debentures for unsecured
            debentures, the debentures so exchanged are convertible at the option of the
            Company under the two circumstances set forth above.

In order to exercise the Company's options to convert the debentures
            certain equity conditions must be satisfied as follows:

| | (vi) | the
                   number of authorized but unissued and otherwise unreserved shares of common
                   stock is sufficient for such issuance;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vii) | such
                   shares of common stock are registered for resale pursuant to an effective
                   registration statement, and the prospectus thereunder is available for use to
                   sell such shares or all such shares may be sold without volume restrictions
                   pursuant to Rule 144(k) under the Securities Act;
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (viii) | the
                   common stock is listed or quoted (and is not suspended from trading) on The
                   NASDAQ National Market or SmallCap Market or other eligible market and such
                   shares of common stock are approved for listing;
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

| | (ix) | no
                   event of default nor any event that with the passage of time and without being
                   cured would constitute an event of default has occurred and not been cured,
                   and
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (x) | no
                   public announcement of a pending or proposed change of control transaction has
                   occurred that has not been consummated.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Warrants may not be exercised and debentures may not be converted to the
            extent that a holder thereof would then beneficially own, together with its
            affiliates, more than 9.999% of our common stock then outstanding subsequent to
            the applicable conversion or exercise.

In accordance with APB No. 14, "Accounting for Convertible Debt and Debt
            Issued with Stock Purchase Warrants", the Company determined that the relative
            fair value of the unsecured debentures was $3,008,017 after issuance. The
            resulting discount of $491,983 is being amortized as interest expense, using
            the effective interest method, over the original maturity period of six months.
            During the year ended December 31, 2002, the Company recognized a non-cash
            charge to interest expense of $21,865 for the amortization of the discount. To
            the extent conversions of unsecured debentures into common stock are made prior
            to the maturity date of the debentures, the Company will record as interest
            expense a ratable proportion of the discount associated with the face value of
            the debentures converted.

In accordance with Emerging Issues Task Force ("EITF") No. 00-27,
            "Application of Issue No. 98-5 to Certain Convertible Instruments" ("EITF No.
            00-27"), and EITF No. 98-5, "Accounting for Convertible Securities with
            Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"
            ("EITF No. 98-5"), and after considering the terms of the transaction, the
            Company determined that the unsecured debentures contained an initial
            beneficial conversion feature ("BCF"). The BCF existed because of a discount
            that will be given to the investor in the event of a company-initiated
            conversion of the unsecured debentures prior to maturity. These discounts will
            range from 4% to 12%, depending on the amount of debentures converted into
            common stock. Accordingly, at time of conversion, the Company will record as
            interest expense any applicable BCF based on the fair value of the conversion
            feature on that date in the event of an early conversion of the unsecured
            debentures into common stock. As no unsecured debentures were converted as of
            December 31, 2002, no interest expense was recorded for BCF during that period.
            The secured debentures will have similar features.

Note 12 — Stock Options and Employee Benefit Plans

2000 Stock Option Plan

In July 2000, the Company adopted the Amended and Restated 2000 Stock
            Option Plan. 8,500,000 shares of common stock have been reserved for issuance
            under the plan. The plan provides for the granting of the following types of
            awards: stock options, stock warrants, stock appreciation rights, restricted
            stock awards, performance unit awards and stock bonus awards. Options and
            warrants issued under this plan have a life of ten years and generally vest
            ratably over three years. The specific terms and conditions of awards granted
            under the plan are specified in a written agreement between the Company and the
            participant.

F-15

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

The following table summarizes activity under the Plan:

Number ofOptionsand
                        Warrants
                   
                   WeightedAverageExercise
                        Priceper ShareBalance at December 31, 2000
                   
                   
                   3,684,471
                   
                   
                   $
                   3.87Granted at fair value
                   
                   
                   1,714,166
                   
                   
                   
                   7.21Forfeited or terminated
                   
                   
                   (507,821
                   )
                   
                   
                   2.91Exercised
                   
                   
                   (124,096
                   )
                   
                   
                   2.90Balance at December 31, 2001
                   
                   
                   4,766,720
                   
                   
                   
                   5.09Granted at fair value
                   
                   
                   5,000
                   
                   
                   
                   5.16Forfeited or terminated
                   
                   
                   (397,891
                   )
                   
                   
                   5.57Exercised
                   
                   
                   (28,000
                   )
                   
                   
                   2.90Balance at December 31, 2002
                   
                   
                   4,345,829
                   
                   
                   $
                   5.06


The following is additional information relating to options and warrants
            granted and outstanding under the plan as of December 31, 2002:

Exercise Price Range
                   
                   OptionsOutstanding
                   
                   WeightedAverageExercise
                        Price
                   
                   RemainingWeightedAverageLife (Years)
                   
                   OptionsExercisable
                   
                   WeightedAverageExercise
                        Price$  2.90 –
                        $  2.90
                   
                   
                   2,521,760
                   
                   
                   $
                   2.90
                   
                   
                   
                   7.5
                   
                   
                   
                   2,009,260
                   
                   
                   $
                   2.902.91 –
                            8.12
                   
                   
                   711,450
                   
                   
                   
                   4.67
                   
                   
                   
                   8.9
                   
                   
                   
                   84,831
                   
                   
                   
                   5.398.13 –
                          12.49
                   
                   
                   1,048,564
                   
                   
                   
                   9.84
                   
                   
                   
                   8.1
                   
                   
                   
                   613,378
                   
                   
                   
                   9.8912.50 –
                          19.63
                   
                   
                   64,055
                   
                   
                   
                   16.02
                   
                   
                   
                   7.9
                   
                   
                   
                   43,711
                   
                   
                   
                   16.294,345,829
                   
                   
                   $
                   5.06
                   
                   
                   
                   7.9
                   
                   
                   
                   2,751,180
                   
                   
                   $
                   4.75


The Company recorded non-cash charges of approximately $3.8 million, $5.9
            million and $5.8 million in 2002, 2001, and 2000, respectively, related to
            options issued below market to employees and the Board of Directors in 2000.
            The Company will incur additional non-cash charges of approximately $1.9
            million for these options in 2003.

The Company also incurred non-cash charges of $0.1 million, $1.4 million
            and $2.9 million in 2002, 2001, and 2000, respectively, related to the fair
            value of warrants issued to affiliates. Certain affiliates have the ability to
            earn new awards based on certain milestones and service periods. The accounting
            methodology requires a re-valuing of certain earned warrants at each period
            ending market price using a Black-Scholes pricing model. Due to this variable
            accounting methodology, it is difficult to predict the amount of additional
            non-cash charges the company will incur related to these warrants.

The fair value of each option grant was estimated on the date of grant
            using the Black-Scholes option-pricing model with the following weighted
            average assumptions:

F-16

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

Years Ended December 31,2002
                   
                   2001
                   
                   2000Expected dividend yield
                   
                   —
                   
                   —
                   
                   —Expected stock price volatility
                   
                   .69
                   
                   .83
                   
                   .92Risk-free interest rate
                   
                   3.68%
                   
                   3.07% – 4.79%
                   
                   6.25%Expected option term
                   
                   5 years
                   
                   3 years
                   
                   0 – 3 years


Savings Plan

In December 2000, the Company enacted a savings plan that complies with
            Section 401(k) of the Internal Revenue Code. The plan allows employees to
            contribute a portion of their compensation on a pre-tax and/or after-tax basis
            in accordance with specified guidelines. The Company matches in company stock
            in July and December of each fiscal year, on a one to one basis the vested
            portion of employee contributions up to 6% of eligible compensation. Employee
            contributions to this plan began in January 2001. Employer matching stock
            contributions vest ratably over 3 years based on the length of service of the
            employee. In 2002, the Company funded the vested matching contributions to the
            plan with 43,356 shares of common stock with an issued market value of $82,375.
            The Company has reserved 180,000 shares of common stock for the 401(k) plan.

Note 13 — Quarterly Information (unaudited)(1)

Fiscal Year QuartersFirst
                   
                   Second
                   
                   Third
                   
                   Fourth
                   
                   Total(in 000's, except per share
                        amounts)Fiscal Year ended December 31,
                        2002Revenue
                   
                   $
                   360
                   
                   
                   $
                   20
                   
                   
                   $
                   106
                   
                   
                   $
                   233
                   
                   
                   $
                   719Cost of revenue
                   
                   
                   360
                   
                   
                   
                   20
                   
                   
                   
                   106
                   
                   
                   
                   204
                   
                   
                   
                   690Gross Margin
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   29
                   
                   
                   
                   29Product development & marketing
                   
                   
                   1,729
                   
                   
                   
                   1,470
                   
                   
                   
                   1,313
                   
                   
                   
                   1,277
                   
                   
                   
                   5,788General and administrative
                   
                   
                   1,498
                   
                   
                   
                   981
                   
                   
                   
                   891
                   
                   
                   
                   683
                   
                   
                   
                   4,053Restructuring expense
                   
                   
                   —
                   
                   
                   
                   105
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   105Non-cash charges
                   
                   
                   1,118
                   
                   
                   
                   1,075
                   
                   
                   
                   988
                   
                   
                   
                   967
                   
                   
                   
                   4,148Depreciation and amortization
                   
                   
                   174
                   
                   
                   
                   181
                   
                   
                   
                   180
                   
                   
                   
                   176
                   
                   
                   
                   711Research and development
                   
                   
                   364
                   
                   
                   
                   541
                   
                   
                   
                   249
                   
                   
                   
                   362
                   
                   
                   
                   1,515Total operating expenses
                   
                   
                   4,883
                   
                   
                   
                   4,353
                   
                   
                   
                   3,621
                   
                   
                   
                   3,465
                   
                   
                   
                   16,321Loss from operations
                   
                   
                   (4,883
                   )
                   
                   
                   (4,353
                   )
                   
                   
                   (3,621
                   )
                   
                   
                   (3,436
                   )
                   
                   
                   (16,292
                   )Other income
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   235
                   
                   
                   
                   235Interest income (expense)
                   
                   
                   158
                   
                   
                   
                   96
                   
                   
                   
                   52
                   
                   
                   
                   (6
                   )
                   
                   
                   300Equity in losses of affiliates
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   —
                   
                   
                   
                   (368
                   )
                   
                   
                   (368
                   )Net loss
                   
                   $
                   (4,725
                   )
                   
                   $
                   (4,256
                   )
                   
                   $
                   (3,569
                   )
                   
                   $
                   (3,574
                   )
                   
                   $
                   (16,124
                   )Loss per share — basic and
                        diluted
                   
                   $
                   (.17
                   )
                   
                   $
                   (.15
                   )
                   
                   $
                   (.13
                   )
                   
                   $
                   (.12
                   )
                   
                   $
                   (.58
                   )Weighted — average number of
                        shares outstanding
                   
                   
                   27,306
                   
                   
                   
                   27,507
                   
                   
                   
                   28,428
                   
                   
                   
                   28,829
                   
                   
                   
                   28,023


|(1) | Some
                   columns and rows may not foot or cross-foot due to rounding.
|--- | ------------------------------------------------------------------------------------

F-17

MILLENNIUM CELL INC.(a development stage
            enterprise)     NOTES TO FINANCIAL STATEMENTS
            — (Continued)

Fiscal Year QuartersFirst
                   
                   Second
                   
                   Third
                   
                   Fourth
                   
                   Total(in 000's, except per share
                        amounts)Fiscal Year ended December 31,
                        2001(1)Product development & marketing
                   
                   $
                   861
                   
                   
                   $
                   1,307
                   
                   
                   $
                   1,504
                   
                   
                   $
                   1,841
                   
                   
                   $
                   5,513General and administrative
                   
                   
                   849
                   
                   
                   
                   1,368
                   
                   
                   
                   1,279
                   
                   
                   
                   1,231
                   
                   
                   
                   4,727Non-cash charges
                   
                   
                   2,525
                   
                   
                   
                   1,943
                   
                   
                   
                   1,667
                   
                   
                   
                   1,206
                   
                   
                   
                   7,341Depreciation and amortization
                   
                   
                   94
                   
                   
                   
                   113
                   
                   
                   
                   116
                   
                   
                   
                   150
                   
                   
                   
                   473Research and development
                   
                   
                   490
                   
                   
                   
                   633
                   
                   
                   
                   907
                   
                   
                   
                   595
                   
                   
                   
                   2,625Total operating expenses
                   
                   
                   4,819
                   
                   
                   
                   5,364
                   
                   
                   
                   5,473
                   
                   
                   
                   5,023
                   
                   
                   
                   20,679Loss from operations
                   
                   
                   (4,819
                   )
                   
                   
                   (5,364
                   )
                   
                   
                   (5,473
                   )
                   
                   
                   (5,023
                   )
                   
                   
                   (20,679
                   )Interest income
                   
                   
                   399
                   
                   
                   
                   326
                   
                   
                   
                   248
                   
                   
                   
                   254
                   
                   
                   
                   1,227Net loss
                   
                   $
                   (4,420
                   )
                   
                   $
                   (5,038
                   )
                   
                   $
                   (5,225
                   )
                   
                   $
                   (4,769
                   )
                   
                   $
                   (19,452
                   )Loss per share — basic and
                        diluted
                   
                   $
                   (.16
                   )
                   
                   $
                   (.19
                   )
                   
                   $
                   (.19
                   )
                   
                   $
                   (.17
                   )
                   
                   $
                   (.71
                   )Weighted — average number of
                        shares outstanding
                   
                   
                   27,168
                   
                   
                   
                   27,183
                   
                   
                   
                   27,253
                   
                   
                   
                   27,265
                   
                   
                   
                   27,218


|(1) | Some
                   columns and rows may not foot or cross-foot due to rounding.
|--- | ------------------------------------------------------------------------------------

F-18