**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-K**





**FOR
      ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
      15(D)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





þ  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





**For
      the Fiscal Year Ended December 31, 2005**





**☐**  **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**000-31083**


**(Commission
      File Number)**





**MILLENNIUM
      CELL INC.**


**(Exact
      Name Of  Registrant As Specified In Its Charter)**





**Delaware**
              **(State
                or Other Jurisdiction of**
              **Incorporation
                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 if the registrant is a well-known seasoned issuer, as defined
      in
      the Rule 405 of the Securities Act of 1933. Yes **☐** No þ




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes **☐** No þ





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 þ  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. **☐**




Indicate
      by check mark whether the registrant is a
      large
      accelerated filer, an
      accelerated filer ,
      or a
      non-accelerated filer. (as
      defined See
      definition of “accelerated filer” and “large accelerated filer” in Rule
      12b-2 of the Securities Exchange Act of 1934).





Large
                accelerated filer**☐**
            
            Accelerated
                filer**☐**
            
            Non-accelerated
                filerþ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Securities Exchange Act of 1934) Yes **☐**  No þ




The
      aggregate market value of the registrant's common stock held by non-affiliates
      as of March 22, 2006 was $72,982,432.




The
      number of shares outstanding of the registrant's common stock as of March 22,
      2006 was 47,700,936.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant's definitive proxy statement dated March 27, 2006 to be
      delivered to stockholders in connection with the Annual Meeting of Stockholders
      to be held on May 2, 2006 are incorporated by reference into Part III.











**TABLE
      OF CONTENTS**










**Item**
            **Description**
            **Page****PART
                I**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            6Item
                1B.
            Unresolved
                Staff Comments
            11Item
                2.
            Properties
            11Item
                3.
            Legal
                Proceedings
            11Item
                4.
            Submission
                of Matters to a Vote of Securities Holders
            11**PART
                II**Item
                5.
            Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            12Item
                6.
            Selected
                Financial Data
            13Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            13Item
                7A.
            Quantitative
                and Qualitative Disclosure About Market Risk
            22Item
                8.
            Financial
                Statements and Supplementary Data
            22Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            22Item
                9A.
            Controls
                and Procedures
            22Item
                9B.
            Other
                Information
            22**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Registrant
            23Item
                11.
            Executive
                Compensation
            23Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            23Item
                13.
            Certain
                Relationships and Related Transactions
            23Item
                14.
            Principal
                Accountant Fees and Services
            23**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            24







i








Unless
      the context otherwise requires, all references to “Millennium Cell,” “we,” “us,”
“our,” and the “Company” include Millennium Cell Inc., a Delaware corporation,
      and its wholly-owned, presently inactive subsidiary,MCE
      Ventures LLC.




Unless
        the context otherwise requires, all references in this Annual Report to our
        Series A Convertible Preferred Stock and Series C Convertible
        Preferred Stock shall be deemed to refer to our Series A2 Convertible
        Preferred Stock and Series C2 Convertible Preferred Stock, respectively, to
        reflect the exchange offers we completed on June 30, 2005 with respect to
        such securities, which are described in our Current Report on Form 8-K filed
        with the Securities and Exchange Commission on May 17, 2005.




**MARKET
      AND INDUSTRY DATA**




We
      operate in an industry in which it is difficult to obtain precise industry
      and
      market information. We have generally obtained the market and competitive
      position data in this Annual Report from independent industry publications,
      reports by independent market research firms, from surveys or studies published
      by third-party sources and other public sources, including various
      Frost and Sullivan Market Research Reports (“Frost
      & Sullivan 2004”).





We
      believe that these industry publications, surveys, studies and publicly
      available information are reliable. However, we cannot assure you of the
      accuracy and completeness of such information. We have not independently
      verified such industry and market data. Industry and market data may change
      and
      cannot always be verified with complete certainty due to limits on the
      availability and reliability of raw data, the voluntary nature of the data
      gathering process and other limitations and uncertainties inherent in any
      statistical survey of the industry or markets in which we operate. As a result,
      you should be aware that industry and market data in this Annual Report, and
      estimates and beliefs based on that data, may not be reliable.





In
      addition, we have made statements in this Annual Report regarding our industry
      and our position in the industry based on our good faith belief, our own
      knowledge and experience and our own investigation of market conditions. We
      cannot assure you that any of these assumptions are accurate or correctly
      reflect our position in the industry. None of our internal surveys, estimates
      or
      information have been verified by any independent sources, and we cannot
      guarantee that a third party using different methods to assemble, analyze or
      compute market data would obtain or generate the same result.






**FORWARD-LOOKING
      STATEMENTS**





This
      Annual Report contains forward-looking statements (within the meaning of the
      Private Securities Litigation Reform Act of 1995). These forward-looking
      statements reflect our current view about future events and financial
      performance and 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,”“on target” and “intend” or similar
      expressions, we are making forward-looking statements. Investors should
      not rely on forward-looking statements because they are subject to a variety
      of
      risks, uncertainties and other factors that could cause actual results to differ
      materially from our expectations, and we expressly do not undertake any duty
      to
      update forward-looking statements or to publicly announce revisions to any
      of
      the 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 raise capital at the times, in the amounts and at
      costs and terms that are acceptable to fund the development and
      commercialization of our hydrogen fuel storage and delivery technology and
      our
      business plan, (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, (ix)
      our
      ability to secure government funding of our research and development and
      technology demonstration projects and (x) other factors discussed under the
      caption “Risk Factors”.




ii


**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. Our current business focus is to develop hydrogen batteries comprised
      of a fuel cell and our proprietary hydrogen storage technology for use in
      portable electronic devices for the consumer, medical, military and industrial
      markets. We believe hydrogen batteries can offer runtime, weight, safety and
      cost advantages versus existing battery solutions. We are developing this
      technology in partnership with corporate and government entities.





**Our
      Hydrogen Battery Technology**




Our
      hydrogen battery technology provides a unique way to safely store and deliver
      hydrogen energy in a “battery” sized package. These systems utilize our
      proprietary *Hydrogen
      on Demand* ® technology and provide what we believe to be an excellent value proposition
      for
      a number of high performance applications. In one architecture of our system,
      the energy is stored in a sodium borohydride fuel blend, which, when exposed
      to
      a catalyst releases hydrogen (stored energy) instantly. The fuel blends used
      in
      our hydrogen battery technology are comprised of a combination of water, sodium
      borohydride and other chemicals. Other methods of hydrogen generation using
      sodium borohydride under development may use different catalysts and/or fuel
      blends.





The
      hydrogen produced by our hydrogen battery technology is converted into
      electricity by a fuel cell. A fuel cell transforms hydrogen and oxygen directly
      into electrical power and produces power as long as the hydrogen and oxygen
      are
      supplied to it. There are two main categories of proton exchange membrane (PEM)
      fuel cells that we currently work with: “active” fuel cells and “passive” fuel
      cells. The main difference between active and passive fuel cells is that active
      fuel cells require more active components (which increase system complexity
      and
      cost) to reach optimal performance and increased robustness while passive fuel
      cells are designed to work with little to no active control. As a result of
      this
      difference, passive fuel cells are much less expensive to produce and smaller,
      but cannot operate in extreme conditions. Accordingly, for applications that
      demand a low cost solution or a very small fuel cell, passive fuel cells will
      be
      the preferred solution. Applications which require robustness and higher power
      output (over 30 watts) will generally need an active fuel cell. Both types
      of
      fuel cells are fully compatible with our hydrogen battery technology and we
      partner with companies to integrate the appropriate fuel cells with our hydrogen
      battery technology to fully address applications in our target
      markets.





We
      produce hydrogen batteries that are comprised of a combination of our partners’
fuel cells and disposable fuel cartridges based on our technology. The fuel
      cells in some cases will be integrated into the electronics of the device and
      in
      other cases external to the device, depending on the application requirements.
      Hydrogen is supplied to the fuel cell by our safe, easy-to-use disposable fuel
      cartridges which will in many devices fit into the existing rechargeable battery
      bay. In a laptop computer, the user would still have the option of using their
      rechargeable battery while away from the outlet, but will offer a new extended
      runtime option for when they will be away from an outlet for extended periods
      of
      time. This feature enhances user mobility and convenience. Using multiple fuel
      cartridges, portable devices can operate as long as needed without the need
      for
      battery recharging or connection to an electrical wall outlet.





**Business
      Strategy**





Our
      primary business model is to license our technology to fuel cell manufacturers,
      original equipment manufacturers (OEMs) and other product-focused entities
      so
      that they can integrate fuel cells with our fuel technology to develop hydrogen
      batteries that meet their specifications. We expect we may have to manufacture
      some of our systems initially at low volumes but we do not expect to continue
      manufacturing production longer term. We will also seek to license our fuel
      cartridge technology to companies that are interested and able to distribute
      replacement cartridges in sufficient quantities and locales to meet mass market
      users’ needs.





To
      date,
      we have secured key fuel cell partnerships that cover all four of our key market
      segments: portable power sources for military, industrial, medical and consumer
      electronics devices. These companies with whom we have partnered have different
      technologies with different strengths that we expect to utilize to fully address
      our focus markets. Some of these partners focus on active fuel cell products
      that are generally higher power and are robust enough for professional and
      military use, but are too large and costly for most consumer use. For other
      applications, there are inexpensive and thin fuel cells that are suitable for
      lighter duty. We believe that ultimately there are opportunities in our target
      markets for both active and passive fuel cells and each are compatible for
      use
      with our hydrogen storage technology.






1





*Strategic
      Relationship with The Dow Chemical Company*





To
      accelerate the path towards product commercialization, we entered into a
      strategic relationship with The Dow Chemical Company (“Dow”) on April 25, 2005.
      Dow is a leader in science and technology, providing innovative chemical and
      plastic products and services to many essential consumer markets. With annual
      sales of $46 billion, Dow serves customers in more than 175 countries and a
      wide
      range of markets. In this three-year collaboration, the two companies will
      strive for the commercialization of Millennium Cell’s hydrogen battery
      technology in the military and/or consumer electronics markets. Dow will supply
      product design, chemical and material analysis, and product development
      resources to help create products that are successful for these markets. With
      successful achievement of defined milestones towards these goals, Dow will
      progressively increase its human resources and equity ownership in Millennium
      Cell. Dow could also become a manufacturer and distributor of products such
      as
      fuel cartridges to serve these markets.




The
        Dow
        joint development agreement describes a series of four milestones involving
        military and/or consumer electronics applications. Each milestone is achieved
        upon our successful completion of one of either the defined military objectives
        or consumer objectives for such milestone. Completion of all milestones is
        designed to culminate in a finished
        cartridge and fuel cell system that is commercially
        available for
        either military or consumer use. We believe that the military objectives
        necessary to achieve the first milestone under the Dow joint development
        agreement will be completed upon delivery
        by Protonex Technology Corporation of the final prototype system of a 30-watt
        power source for field testing by the US Air Force and/or the US Army, which
        delivery is expected to occur in
        March
        or April of  2006. See “ Licensees
        and Development Programs.”


*Licensees
      and Development Programs*





Our
      first
      licensee in the military market was Protonex Technology Corporation. In 2003,
      Millennium Cell and Protonex entered into a joint development and licensing
      agreement that resulted in collaborative efforts towards the military market.
      Under the agreement, Protonex licensed Millennium Cell’s technology for use in
      the manufacture and sale of complete hydrogen batteries to customers. The
      objective of the agreement is to combine Protonex active fuel cells with
      Millennium Cell’s hydrogen storage technology to create a hydrogen battery that
      is lighter and less expensive than the most commonly used military batteries.





Millennium
      Cell is a sub-contractor to Protonex in the development of a 30-watt power
      source (“P2”) for the US Air Force Research Laboratory (“USAFRL”) and the US
      Army Research Office (“USARO”) under two separate funded programs. According to
      our research, the Protonex P2 is 62% lighter and 20% less expensive over the
      course of 30 missions as compared with the lithium sulfur dioxide battery used
      today for this application. Today, a soldier on a 72-hour mission needs to
      carry
      13 batteries that weigh an aggregate of about 29 pounds. Our solution would
      be
      comprised of a fuel cell module accompanied by 3 fuel cartridges and would
      collectively weigh about 11 pounds. Additionally, our system has the ability
      to
      monitor the amount of energy (run-time) remaining in the fuel cartridge at
      any
      given time. This is significant for a military operation as soldiers returning
      from missions with partially depleted batteries will often dispose of them
      in
      favor of a fresh battery when going on the next mission. This is a tremendous
      waste of energy and adds unnecessary cost.





Millennium
      Cell and Protonex publicly demonstrated the initial prototype (“P1”) developed
      under these programs at the Tactical Power Sources Symposium on January 31,
      2005
      and the P2 unit on November 14, 2005 at the Fuel Cell Seminar. Protonex plans
      to
      deliver the final prototype system for field testing by the US Air Force and/or
      the US Army in the first quarter of 2006. We are also using this fuel cell
      system as a platform to enter the industrial and medical markets. To that end,
      in February 2006, Protonex exercised an option under the joint development
      and
      licensing agreement to license our technology for these markets.





In
      February 2006, we entered into a joint development and licensing agreement
      with
      Jadoo Power Systems, Inc. As part of the agreement, Jadoo licensed Millennium
      Cell’s technology for use in certain industrial and military applications.
      Similar to our agreement with Protonex, Jadoo and Millennium Cell plan to work
      together to combine Jadoo’s active fuel cells with our hydrogen storage
      technology to create a hydrogen battery. Jadoo is currently a manufacturer
      of
      fuel cell power systems whose products are used today in broadcast video and
      surveillance applications. The current hydrogen storage technology being used
      is
      metal hydride technology. It is our belief that substantial savings in weight,
      cost and increased run time are possible by replacing the metal hydride with
      our
      hydrogen storage technology.





Also
      in
      February of 2006, we entered into a joint development and stock purchase
      agreement with Gecko Energy Technologies, Inc. (“Gecko”). Gecko is a development
      stage private company whose passive fuel cell technology is small, inexpensive
      and mostly suitable for light duty consumer and industrial applications under
      30
      watts. The companies agreed to work together to develop hydrogen batteries
      that
      utilize Gecko’s fuel cells and Millennium Cell’s hydrogen storage technology as
      part of a three year effort. In accordance with the Gecko joint development
      agreement, Millennium Cell purchased 22.8% of Gecko’s outstanding common stock
      in exchange for $450,000 in cash and a one-year services commitment (which
      the
      parties valued at $500,000). We committed to purchase an additional 25.2% of
      Gecko’s outstanding common stock by no later than December 31, 2006 in exchange
      for $1,050,000 in the form of cash and/or Millennium Cell common stock in our
      sole discretion. In addition, Millennium Cell received an option, exercisable
      annually, to purchase up to an additional 32% of Gecko’s outstanding common
      stock using any combination of cash and our common stock at our sole discretion
      in years two and three of the arrangement. We believe the arrangement with
      Gecko
      provides us with a complementary technology for consumer electronics and other
      markets as well as the potential for a significantly appreciable
      asset.






2





We
      have
      continued our program for the development of a hydrogen battery for the notebook
      computer market. Our current consumer electronics prototype incorporates our
      fuel cartridge and a fuel cell to produce a system that has the potential to
      provide a full day of runtime for a portable notebook computer. Our fuel
      cartridge is intended to be a disposable, one-time-use item that fits in the
      computer’s battery cavity while the flat panel fuel cell is to be integrated
      into the back of the LCD screen of the notebook computer. Our current
      proof-of-concept prototype system operates a notebook computer for three
      continuous hours at nominal and peak operating conditions. Later in 2006, we
      intend to reach over six hours of runtime from a single hydrogen fuel cartridge.
      Our goal with this system is to demonstrate to OEMs that our systems are ready
      to be considered for design into their devices.





We
      have
      demonstrated consumer electronics prototypes at the Intel Developers Forum
      in
      September 2004 and again in March 2005 to expose our technology to OEMs and
      other interested parties and show them that we have a path to deliver a full
      day
      of run time for their devices within the required space. We have been very
      encouraged by the feedback we have received at these shows and we are working
      to
      secure commitments from OEMs to design-in our hydrogen batteries to power their
      devices.





*Market
      Opportunity for Our Licensees Products*





As
      portable electronic devices continue to become more advanced and look to offer
      greater capabilities and functionality, device manufacturers, service providers
      and consumers are seeking significantly increased and longer lasting power.
      Since we believe that batteries presently used in these devices are approaching
      their technological limits, the power gap that already exists between
      ever-increasing power demands of electronic applications and the amount of
      power
      in the batteries will increase even more. We believe that since hydrogen
      batteries have greater energy density, weigh less and in many cases are more
      affordable than current battery technology, hydrogen batteries using our
      technology should provide a major technological leap as compared to current
      battery technology.





Our
      licensees’ products are being designed to significantly increase device run time
      compared to existing lithium-ion batteries using the same volume and less
      weight. Our technology eliminates the need to stay tied to an electrical wall
      outlet for recharging as well as providing for an instantaneous replacement
      through the use of disposable fuel cartridges. Upon commercial success of our
      products, portable electronics devices will be "truly wireless", capable of
      going anywhere, anytime with no need to plug in or wait for a
      recharge.





Due
      to
      the scalability of our technology from milliwatts to kilowatts, we have the
      ability to address a number of significant markets without the need to develop
      alternative pathways to deliver the energy. This is a substantial advantage
      over
      many competing energy technologies.





*Target
      Markets*




We
      are
      addressing the military portable power market first. The military is well known
      as a proving ground for new technologies and is facing problems for which we
      believe that our technology is an attractive solution. A recent Frost and
      Sullivan report indicated that a profound problem facing the military today
      is
      the steady increase in energy demand driven by the power hungry new equipment
      used by soldiers. (Frost and Sullivan 2004) Such equipment includes
      laser-designators, chemical-biological sensors, uniform ventilators, exoskeleton
      enhancements, night vision systems and communication equipment. Considering
      the
      military’s 72-hour mission duration requirements for certain applications, the
      capabilities of traditional batteries have been far exceeded. From our alliances
      with Protonex, Gecko, Jadoo and other future partners, we plan to offer hydrogen
      batteries that will deliver better performance at a lower cost than the
      batteries used today. Each year in peacetime conditions, the military uses
      more
      than $150 million worth of batteries for soldier power in training missions.
      (Frost and Sullivan 2004) In wartime, the cost of batteries can be much larger.
      We expect this market to grow as the soldiers of the future utilize more high
      tech equipment. We are also considering other applications within the military
      that could benefit from our technology, such as low power wireless sensors,
      battery chargers and unmanned vehicles.





We
      plan
      to use the products developed for the military with Protonex as one platform
      for
      entering medical and industrial markets, each of which has a diverse customer
      base with unique energy storage needs and challenges. We also plan to leverage
      our newest licensee, Jadoo, and our development activities with Gecko, to
      penetrate these markets further. The energy demand for portable medical and
      industrial equipment has seen a sharp rise and shows no signs of leveling off.
      Driven by an aging population, an increase in decentralized care centers and
      a
      need for equipment and services closer to patients’ required point of treatment,
      the total battery market for medical equipment is approaching $500 million
      and
      continues to grow. (Frost and Sullivan 2004) Portable diagnostic equipment,
      mobile medical carts and patient mobility equipment such as wheelchairs and
      scooters are some examples of medical equipment that need extended runtime
      and
      lighter energy sources. The current battery market for industrial equipment
      is
      equally as large at approximately $500 million. (Frost and Sullivan 2004) We
      are
      also considering portable video, power tools, wireless sensors and ruggedized
      information technology devices as target applications in industrial and medical
      markets for our hydrogen battery technology.






3





The
      “power gap” between what current battery technology can provide versus what
      portable electronic devices require is growing rapidly in the consumer
      electronics market as well. Our hydrogen battery technology provides a major
      technological leap as compared to current battery technology in terms of energy
      density, lightweight operation and in many cases affordability. Our solutions
      can be integrated into devices, which other fuel cell related technologies
      have
      to date been unable to demonstrate. We believe that Millennium Cell’s energy
      dense fuel cartridge together with a flat panel, passive fuel cell (such as
      the
      one offered by Gecko) has the potential to meet the user demand for increased
      mobility in consumer markets as well as in certain industrial, medical and
      military applications.





The
      total
      market for rechargeable batteries in consumer electronics currently stands
      at
      nearly $3 billion and is growing at an annual rate of more than 10%. (Frost
      and
      Sullivan 2004) At more than $1 billion, (Frost and Sullivan 2004) the laptop
      computer market is by far the largest market segment and is in need of an
      extended runtime power source. Within the next several years, laptop computer
      shipments are projected to overtake desktop shipments (Frost and Sullivan 2004),
      further intensifying the demand for extended runtime solutions. In addition,
      we
      believe that the products being developed for the laptop market will be able
      to
      serve as a platform for entering the broader consumer electronics market. In
      addition to consumers, there is a growing need for instant connectivity and
      increased runtime in handheld computers, personal digital assistants, cellular
      phones, and other crossover devices that provide increased mobility,
      connectivity and new functionality for first responders, military and other
      professionals in mission critical roles.





**Fuel
      Distribution and Infrastructure**





We
      intend
      to evolve the fueling and refueling supply chain for hydrogen batteries based
      on
      customer need and convenience. Today, consumer electronic device power
      requirements are satisfied by the purchase of self-contained solid-state
      disposable batteries and rechargeable battery systems. In the future, we expect
      that the hydrogen battery supply chain will be similar to that used by
      disposable batteries today. Millennium Cell's technology is designed to
      integrate well with diverse customer fueling requirements because of the unique
      safety and convenience in storing, transporting, distributing, and using sodium
      borohydride fuel.





An
      important attribute of our technology is our development of a variety of novel
      sodium borohydride fuel blends. Our fuel is non-flammable and safe when handled
      appropriately. Our fuel can be shipped in solid or liquid forms and we expect
      that hydrogen batteries for each fuel type will become successful for different
      applications to best meet our customers’ needs. We are currently working to
      obtain the required approvals from the appropriate regulatory organizations
      that
      will enable our technology to gain broader acceptance in applications where
      consumers would desire the ability to carry or use hydrogen batteries in
      passenger aircraft. We believe this is limiting to only certain applications
      in
      consumer electronics markets and thus will not affect product introductions
      in
      other markets. We have a plan in place to secure these approvals in sufficient
      time so as to not delay our timetable for consumer electronics market
      entry.




**Research
      and Development**





To
      develop lower cost ways to manufacture sodium borohydride, we are executing
      two
      multi-year U.S. Department of Energy programs with Air Products and Chemicals,
      Inc. and the Rohm and Haas Company as our subcontractors. Lower cost sodium
      borohydride will enable longer-term, more cost-sensitive markets and will also
      increase the already attractive economics of our technology for use in portable
      power applications. We believe that we have discovered a significantly less
      expensive way to manufacture sodium, one of the main ingredients in the
      production of sodium borohydride. According to company estimates, sodium as
      a
      raw material represents more than half of the manufactured cost of sodium
      borohyride. This breakthrough has the potential to lower the total manufactured
      cost of sodium borohydride by up to 25%. We are actively engaged in licensing
      negotiations of this new technology with multiple chemical producers that
      manufacture sodium or use sodium as a raw material in their
      products.





We
      also
      continue to develop new technologies which will produce higher energy density
      and enable longer device runtimes. These technologies are at various stages
      of
      development but we expect to consider them for integration into our licensees
      products within the next few years.





We
      have
      several development programs underway with both the U.S. Department of Energy
      and various branches of the U.S. Department of Defense. These programs together
      represent a significant portion of our overall revenues and cost-shared program
      reimbursements. As the U.S. government represents a single customer, the loss
      of
      one or more of these programs could have a material adverse effect on our
      business or financial condition.






4





**Intellectual
      Property Rights**





Our
      hydrogen energy systems are the culmination of work reflected in more than
      90
      patents (either granted or pending) that, we believe, collectively position
      us
      as a leader in system and fuel blend technologies used to convert sodium
      borohydride to hydrogen energy for use in portable electronic device
      applications.





We
      own 15 U.S. and 14 non-U.S. patents, which cover a wide variety of
      devices, systems, uses and applications for various boron chemistries. We have
      filed an additional 30 U.S. and 35 non-U.S. patent applications. Our earliest
      patent expires in 2015 and the most recently filed applications, if issued,
      will
      not expire until 2026.





Our
      intellectual property strategy is to select key Millennium Cell inventions
      and
      take appropriate measures to protect our rights to practice and license these
      inventions. We rely on a combination of patents, trade secrets, trademarks,
      and
      license and confidentiality agreements to protect and derive income from 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.




There
      are
      other companies who claim to be working on the generation of hydrogen or
      electricity from sodium borohydride. We believe we are strongly positioned
      in
      these areas as a result of several years of intellectual property and know-how
      development. We actively monitor competitive activity and will enforce our
      patent rights to the fullest extent.





**Competition**





We
      expect
      our products to compete with fuel cell based power systems that utilize both
      direct and indirect energy conversion methods. Direct conversion may involve
      fuels such as methanol, ethanol and sodium borohydride that are converted into
      electrons through a direct fuel cell system. The indirect method of energy
      conversion is to generate hydrogen and convert it to electricity through a
      fuel
      cell in a two-step process. This is the method utilized by Millennium Cell’s
      Hydrogen on Demand® technology. There are competing solutions which also use an
      indirect method based on another fuel such as methanol. Our primary competitors
      are companies developing hydrogen storage and generation technologies such
      as
      Ultracell, Trulite and HyEnergy. Secondary competitors include companies
      developing small fuel cells for the portable electronics market such as MTI
      Micro Fuel Cells and Medis Technologies.





We
      believe other large electronic device companies may also be developing fuel
      cells based on competing fuel sources for the portable electronics market.
      Toshiba Corporation, NEC Corporation, Hitachi, Ltd., Casio Computer Co. Ltd.,
      Samsung Electronics Co. Ltd. and Sony Corporation have all publicly disclosed
      information about their fuel cell development programs. Those companies all
      possess greater financial resources than Millennium Cell. Toshiba, Hitachi
      and
      other Japanese corporations have announced their intention to unify the
      technical standards for micro fuel cells powered by methanol that they are
      each
      developing, in the hope of boosting the market for such fuel cells. We believe
      that there are other companies that we may not know of that are also developing
      fuel cells and competing fuel sources for portable electronic
      devices.




We
      also
      expect indirect competition from companies who manufacture and design existing
      battery products (both disposable and rechargeable). Existing battery products
      are the incumbent solution with the significant advantage of having commercially
      available products today. These companies are continuously investing in further
      research and development to improve their existing products and explore
      alternative technologies.




We
      expect
      products using our hydrogen battery technology to compete on the basis of
      reduced volume and weight, increased length of operating time, greater
      convenience and lower cost.





**Raw
      Materials**





Sodium
      borohydride is manufactured from a base material called borax. According to
      our
      estimates, 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 lakes 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 limited number of 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. We believe there are significant
      opportunities to improve this manufacturing technology which are being pursued
      under our research programs with the U.S. Department of Energy and
      others.






5





In
      as
      much 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
      March 6, 2006, we had a total staff of 34 employees, of which 21 are scientists,
      engineers and other professionals. We expect to hire a few employees within
      the
      product development and research functions during 2006.





**Available
      Information**





We
      file
      annual, quarterly and current reports, proxy statements and other information
      with the Securities and Exchange Commission (the “Commission”). You may read and
      copy any document we file with the Commission at the Commission’s Public
      Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the
      Commission at 1-800-SEC-0330 for further information on the operation of the
      Public Reference Room. Our Commission filings are also available to the public
      from the Commission’s Website at “http://www.sec.gov.”





We
      maintain a Website at “http://www.MillenniumCell.com” (this is not a hyperlink,
      you must visit this website through an Internet browser). Our Annual Report
      on
      Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
      and
      amendments to those reports filed or furnished pursuant to Section 13(a) or
      15(d) of the Securities Exchange Act of 1934, are available free of charge
      through our Website as soon as reasonably practicable after we electronically
      file such materials with, or furnish it to, the Commission. Our Website and
      the
      information contained therein or connected thereto are not incorporated into
      this Annual Report on Form 10-K.





**Item
      1A.  Risk Factors.**





If
      any of
      the factors or conditions summarized in the following risks actually occurs,
      our
      business prospects, financial condition and results of operations could be
      materially harmed, and the trading price of our common stock could decrease.
      The
      risks and uncertainties described below are those that we currently believe
      may
      materially affect us. Other
      sections of this
      Annual Report may
      include additional factors that could have an effect on our business and
      financial performance. Additional risks and uncertainties of which we are unaware or which we currently
      deem immaterial also may become important factors that affect us, our business
      and our prospects.





*Risks
      Relating To Our Business*





**We
      are a development stage company, which has only been in business for a limited
      time.**





We
      completed our initial public offering in August 2000. Due to the nature of
      the
      emerging industries in which we compete, some aspects of our business plan
      rest
      on the beliefs formed by our management and have not necessarily been supported
      by independent sources. As a result, there can be no guarantee as to the
      adequacy of our business plan and there is a limited basis for evaluating us.





**We
      have incurred substantial losses and expect continued losses for the next 24
      to
      36 months. There can be no assurance that we can achieve profitability, and
      even
      if we do become profitable, that we can sustain
      profitability.**





We
      have
      incurred substantial losses since our formation and had an accumulated deficit
      equal to $95,935,887 as of December 31, 2005. We expect to continue to incur
      net
      losses for the next 24 to 36 months as we continue to make significant
      investments in commercialization activities. It continues to be difficult to
      predict accurately the timing and rate of market adoption, if any, of products
      using our technology. Accordingly, we cannot determine with certainty when
      or if
      we will achieve profitability, and even if we do achieve profitability, whether
      we can sustain or increase profitability.







6








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





We
      expect
      our revenues and operating results to vary significantly from quarter to
      quarter. In addition, the Company will be required to incur interest expense
      upon conversion of the unsecured convertible debentures or preferred stock
      into
      common stock at the time of, and to the extent of, such conversion. As a result
      of each of the foregoing, quarter-to-quarter comparisons of our revenues,
      interest expense and operating results may not be meaningful. In addition,
      due
      to our stage of development, we cannot predict our future revenues or results
      of
      operations accurately. It is possible that in one or more future quarters our
      operating results will fall below the expectations of securities analysts and
      investors. If this happens, the trading price of our common stock may decline.





**We
      may be subject to litigation resulting from common stock volatility, 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.**





The
      stock
      market has, from time to time, experienced extreme price and volume
      fluctuations. Many factors may cause the market price for our common stock
      to
      decline, perhaps substantially, including:





--
            failure
                to meet our product development and commercialization
                milestones,





--
            demand
                for our common stock,





--
            technological
                innovations by competitors or in competing
                technologies,





--
            investor
                perception of our industry or our prospects, or





--
            general
                technology or economic trends.





In
      the
      past, companies that have experienced volatility in the market price of their
      stock have been the subject of securities class action litigation. As a result,
      we may be involved in a securities class action litigation in the future. Such
      litigation often results in substantial costs and a diversion of management’s
      attention and resources and could have a negative effect on our business and
      results of operation.





**If
      we or our collaborative partners fail to perform under our joint development
      and
      research agreements, our ability to commercialize our proposed products could
      be
      impaired.**





Our
      success depends upon maintaining our relationships with our current
      collaborative partners and other parties with whom we have strategic and other
      relationships and obtaining additional joint research and development partners
      for the development, testing, manufacturing, marketing and commercialization
      of
      our proposed products. In addition, we may depend on our partners’ and other
      parties’ expertise and dedication of sufficient resources to develop and
      commercialize our proposed products. We have granted, and may in the future
      grant, to our research and development partners, rights to license and
      commercialize products developed under research and development arrangements.
      Under these arrangements, our research and development partners may control
      key
      decisions relating to the development of such products. The rights of our
      research and development partners would limit our flexibility in considering
      alternatives for the commercialization of our products. If we fail to
      successfully develop these relationships, or if our research and development
      partners fail to successfully develop or commercialize any of our products,
      it
      may delay or prevent us from developing or commercializing our proposed products
      in a competitive and timely manner and would have a material adverse effect
      on
      our business.





**We
      may need future capital to complete our product development and
      commercialization plans. If we are able to raise additional capital, it may
      dilute our existing stockholders or restrict our ability to operate our
      business.**





Our
      working capital requirements continue to be significant. To date, we have been
      dependent primarily on the net proceeds of our initial public offering and
      private placements of convertible debt and equity securities. Our working
      capital requirements depend and will continue to depend on numerous factors,
      including the timing of revenues, the expense involved in commercializing our
      products, realizing cost reductions on our technology, and the cost involved
      in
      protecting our proprietary rights. We currently have no committed sources of,
      or
      other arrangements with respect to, additional financing. Our existing capital
      resources may not be sufficient to fund our future operations. If additional
      working capital is required, it may dilute our existing stockholders or restrict
      our ability to run our business.







7





**We
      rely on government funding for certain research and development and technology
      demonstration projects.**





We
      receive reimbursement from government sources for certain of our research and
      development and technology demonstration projects, particularly from the
      Department of Defense and the Department of Energy. Loss of any of such funding
      for any reason or a material decrease in funding
      for research may have a material adverse effect on our business and
      operations.





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





We
      have
      attracted a highly skilled management team and specialized workforce, including
      scientists, engineers, researchers and marketing professionals. Our future
      success is dependant in part on attracting and retaining qualified management
      and technical personnel. Our inability to hire qualified personnel on a timely
      basis, or the departure of key employees, could materially and adversely affect
      our development and commercialization plans and therefore, our business,
      prospects, results of operations and financial condition.





**If
      we are unable to continue to complete prototype development and engineering
      of
      commercially viable hydrogen battery technology, we will not be able to build
      our business as anticipated.**





We
      have
      developed a number of prototype systems and are continuing our efforts to
      improve their overall performance, reduce their cost and to ensure they are
      safe
      to operate. In addition, while we are conducting tests to predict the overall
      life of our systems, we have not yet demonstrated all of the cost and
      performance requirements required for commercialization of products that utilize
      our technology. Accordingly, if we are unable to complete prototype development
      and engineering of commercially viable hydrogen battery technology, we will
      not
      be able to develop our business as anticipated.





**Failure
      to meet milestones and performance goals with potential customers could delay
      or
      impede commercialization of our technology. Potential purchasers of our systems
      may decline to purchase our technology or choose to purchase alternate
      technologies.**





We
      have
      established product development and commercialization milestones and a timeline
      for achieving development goals related to product specifications and system
      cost parameters. Delays and/or missed milestones may have a material impact
      on
      our commercialization schedule and may result in breaches of certain development
      agreements in connection with our established relationships. If any such breach
      or other non-performance causes a customer to terminate our relationship,
      potential customers may choose alternative technologies or result in delays
      that
      could allow potential competitors to gain market advantages.





**Our
      hydrogen battery technology may only be commercially viable as a component
      of
      other companies’ products, and these companies may choose not to include our
      systems in their products.**





To
      be
      commercially viable, our hydrogen battery technology must be integrated with
      a
      fuel cell and, in most cases into products manufactured by OEMs. Such OEMs
      may
      not be able to manufacture appropriate products or, if they do manufacture
      such
      products, may choose not to use our technology. Any integration, design,
      manufacturing or marketing problems encountered by OEMs could adversely affect
      the market for our hydrogen generation systems and our financial
      results.





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





We
      have
      demonstrated our hydrogen battery technology in the past and we plan to conduct
      additional demonstrations in public and in private in the future. We also expect
      our customers to conduct field testing and pilot programs to evaluate products
      which utilize our technology. Although to date we have not experienced
      significant problems in demonstration or testing, future demonstrations and
      testing could encounter problems for a number of reasons, including the failure
      of our technology, the failure of the technology of others, the failure to
      combine these technologies properly and the failure to maintain and service
      the
      test systems properly. Many of these potential problems and delays are beyond
      our control. In addition, field test programs, by their nature, involve delays
      and modifications. Any problem or perceived problem with our field tests could
      hurt our reputation and the reputation of our products, which could impede
      the
      development of our business.





**Our
      failure to obtain, maintain or protect the right to use certain intellectual
      property may negatively affect our business.**





Our
      future success and competitive position depends in part upon our ability to
      obtain or maintain certain proprietary intellectual property to be used in
      our
      principal products. This may be achieved in part by prosecuting claims against
      others who we believe are infringing on our rights and by defending claims
      of
      intellectual property infringement by our competitors. While we are not
      currently engaged in any material intellectual property litigation, we could
      become subject to lawsuits in which it is alleged that we have infringed the
      intellectual property rights of others or we could commence lawsuits against
      others who we believe are infringing upon our rights. Our involvement in
      intellectual property litigation could result in significant expense to us,
      adversely affecting the development of sales of the challenged product or
      intellectual property and diverting the efforts of our technical and management
      personnel, whether or not such litigation is resolved in our favor. In the
      event
      of an adverse outcome as a defendant in any such litigation, we may, among
      other
      things, be required to:






8


-- pay
      substantial damages,





--    
      c ease
      the
      development, manufacture, use, sale or importation of products that infringe
      upon other patented intellectual property,





-- expend
      significant resources to develop or acquire non-infringing intellectual
      property,





-- discontinue
      processes incorporating infringing technology, or





-- obtain
      licenses to the infringing intellectual property.





An
      adverse outcome as plaintiff, in addition to the costs involved, may, among
      other things, result in the loss of the patent in a suit by a holding of
      invalidity or unenforceability, significantly increase competition as a result
      of the holding, and require the payment of penalties resulting from
      counterclaims by the defendant.





Accordingly,
      we cannot assure you that:





-- any
      of
      the patents owned by us or other patents that other parties license to us in
      the
      future will not be invalidated, circumvented, challenged,
      rendered  unenforceable or licensed to others,





-- any
      of
      our pending or future patent applications will be issued with the breadth of
      claim coverage sought by us, if issued at all, or





-- any
      patents owned by or licensed to us, although valid, will not be dominated by
      a
      patent or patents to others having broader claims.





In
      addition, effective patent, trademark, copyright and trade secret protection
      may
      be unavailable, limited or not applied for in certain foreign
      countries.





We
      also
      seek to protect our proprietary intellectual property, including intellectual
      property that may not be patented or patentable, in part by confidentiality
      agreements. We cannot assure you that these agreements will not be breached,
      that we will have adequate remedies for any breach or that such persons will
      not
      assert rights to intellectual property arising out of these
      relationships.





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





Certain
      sodium borohydride fuel solutions used by our technology have a high pH, and
      may
      be corrosive and harmful to human skin. In powder form, it can be fatal if
      swallowed and may cause skin burns in contact with moist skin. The long-term
      health effects of the fuel have not been evaluated. If spilled in the ground
      or
      water it could adversely impact plant, marine or animal life. Furthermore,
      if
      pure sodium borohydride comes into contact with water, it could generate
      flammable hydrogen gas. In solid form, pure sodium borohydride is also
      combustible and could produce hazardous and/or flammable decomposition products
      in a fire.





*Risks
      Relating To Our Securities*





**If
      we fail to comply with certain obligations in respect of our Series C Preferred
      Stock, we may be subject to mandatory redemption obligations at the option
      of
      certain preferred stockholders which, if exercised, could have a material
      adverse effect on our financial condition and our
      business.**





In
      the
      event that we fail to comply with certain obligations regarding the conversion
      of shares of Series C Preferred Stock or the authorization and registration
      of
      shares of common stock issuable upon conversion thereof, then in addition to
      financial penalties that may be payable by us, the holders of our Series C
      Preferred Stock may at their option require us to redeem the affected shares
      at
      a premium price. In addition, if any such redemption event occurs with respect
      to holders of the Series C Preferred Stock, then the holders of our Series
      A
      Convertible Preferred Stock and Series B Convertible Preferred Stock, pursuant
      to the terms thereof, shall have a right to require us to redeem their shares
      of
      Series A Convertible Preferred Stock or Series B Convertible Preferred Stock
      up
      to an amount equal to the percentage of Series C Preferred Stock so redeemed.
      If
      we are required to redeem a significant number of shares of our preferred stock
      in a short period of time, such event may have a material adverse effect on
      our
      financial condition and our business.






9





**We
      may be required to issue more shares of common stock upon adjustment of the
      conversion price of our outstanding preferred stock and unsecured convertible
      debentures or the exercise price of our outstanding warrants, resulting in
      dilution of our existing stockholders.**





The
      conversion or exercise of some or all of our outstanding preferred stock,
      convertible debentures, options and warrants will dilute the ownership interests
      of our stockholders. If we sell common stock or common stock equivalents
      (excluding certain specified types of issuances) at a price per share that
      is
      below the then-applicable conversion price of our outstanding Series A
      Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or unsecured
      convertible debentures, and/or below the then-applicable exercise price of
      certain of our outstanding warrants, then the conversion price or exercise
      price, as the case may be, of such securities may adjust downward and, as a
      result, the amount of shares of common stock issuable upon conversion or
      exercise of such securities would increase. As a result of the foregoing, we
      may
      be required to issue more shares of common stock than previously anticipated
      which would result in the dilution of our existing stockholders.





**Sales
      of substantial amounts of common stock in the public market could reduce the
      market price of our common stock and make it more difficult for us and our
      stockholders to sell our equity securities in the future.**





A
      substantial number of shares of our common stock have been registered for resale
      in connection with the issuance of preferred stock, convertible debentures
      and
      warrants to private and accredited institutional investors. Resale of a
      significant number of these registered shares into the public market could
      depress the trading price of our common stock and make it more difficult for
      our
      stockholders to sell equity securities in the future. In addition, to the extent
      other restricted shares become freely available for sale, whether through an
      effective registration statement or under Rule 144 of the Securities Act of
      1933, as amended (the “Securities Act”), or if we issue additional shares that
      might be or become freely available for sale, our stock price could decrease.





**Our
      outstanding debentures are subject to mandatory prepayments at the option of
      the
      holders thereof upon certain conditions which, if exercised, will have a
      material adverse effect on our financial condition and our business.**





Our
      outstanding debentures are subject to mandatory prepayments at the option on
      the
      holders thereof upon certain conditions, including the occurrence of an event
      of
      default. Such prepayment obligations are exercisable by the holders of the
      debentures at prepayment amounts equal to 100% or 105% of the principal amount
      of such outstanding debentures, plus accrued but unpaid interest thereon and
      other applicable costs and expenses.




The
      election by the holders of our outstanding debentures to exercise any such
      prepayment obligations may have a material adverse effect on our financial
      condition and our business. We believe that generally, an event of default
      with
      respect to our outstanding debentures will only occur at a time, if at all,
      that
      we are experiencing other financial difficulties and, accordingly, any election
      of a mandatory prepayment obligation may have a compounding material adverse
      effect on our ability to handle such difficulties.




**We
      do not intend to pay any dividends on our common stock.**





We
      have
      not declared and paid any dividends on our common stock and we do not intend
      to
      declare and pay any dividends on our common stock. Earnings, if any, will be
      re-invested in our business. We have dividend payment obligations on our Series
      C Preferred Stock and expect to have dividend payment obligations on our Series
      B Preferred Stock when issued, each of which will have priority in the payment
      of the dividends over our common stock.





*Risks
      Relating To Our Industry*





**A
      mass market for our products may never develop or may take longer to develop
      than we anticipate.**





A
      mass
      market may never develop for hydrogen batteries, or may develop more slowly
      than
      we anticipate. Fuel cells and products that utilize hydrogen to generate energy
      represent an emerging category of power sources, and we cannot know certainty
      to
      what extent, if any end-users will want to purchase and use them. The
      development of a mass market for these systems may be affected by many factors,
      some of which are beyond our control, including:





10


-- the
      acceptance in mass markets of hydrogen as an alternative fuel
      source,





-- the
      cost
      competitiveness of our hydrogen generation systems,





-- acceptance
      of fuel cells as a reliable cost competitive energy source,





-- the
      emergence of newer, more competitive technologies and products,





-- the
      future cost of sodium borohydride,





-- regulatory
      requirements,





-- consumer
      perceptions of the safety of our products, and





-- consumer
      reluctance to try a new product.





If
      a mass
      market fails to develop or develops more slowly than we anticipate, we may
      be
      unable to recover the losses we will have incurred in the development of our
      products and we may never achieve profitability.





**We
      will continue to face intense competition from energy technology companies
      and
      may be unable to compete successfully.**





Our
      products face and will continue to face significant competition. New
      developments in technology may negatively affect the development or sale of
      some
      or all of our products or make our products uncompetitive or obsolete. A large
      number of corporations, national laboratories and universities in the United
      States, Canada, Europe and Asia are pursuing alternative hydrogen storage and
      delivery technologies. These entities, many of which have substantially greater
      resources than we do, are currently engaged in the development of products
      and
      technologies that are similar to, or may be competitive with, certain of our
      products and technologies.





As
      others
      learn of the potential of fuel cells to replace existing power sources and
      the
      benefits provided when hydrogen is used to power those fuel cells, we expect
      there to be increased competition in the hydrogen delivery and storage product
      segment. This competition will come from current storage technologies, from
      improvements to current storage technologies and from new storage technologies.
      We intend to compete in each of our target markets based on that market’s
      desired product characteristics, such as safety, cost, size, environmental
      impact, ease of use and a variety of other attributes. Depending on the specific
      desired attributes of each market and application, our technology may or may
      not
      be able to compete successfully. Failure to compete in each of our target
      markets will have a material adverse effect on our business and
      operations.





**Item
      1B.   Unresolved Staff Comments.**





None.





**Item
      2.   Properties.**





Our
      principal offices are located at One 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. In 2005, we
      entered into a one-year sublease agreement to rent to a third party
      approximately 5,000 square feet of office space in our facility. In accordance
      with the terms of the Gecko joint development agreement, we permit employees
      of
      Gecko to use approximately 1,500 square feet of combined office and lab space
      to
      perform Gecko’s enumerated services under such agreement. We believe that the
      current facilities will be sufficient for our operations in the foreseeable
      future.





**Item
      3.   Legal Proceedings.**





We
      are
      not aware of any pending or threatened legal actions other than disputes arising
      in the ordinary course of our business that would, if determined adversely
      to
      us, have a material adverse effect on our business and operations.





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





No
      matters were submitted to a vote of our security holders during the fourth
      quarter of the fiscal year covered by this Annual Report.





11











**PART
      II**





**Item
      5.   Market For The Registrant's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities.**





**Market
      Price And Dividend Information**





*Price
      Range of Common Stock*





Our
      common stock is traded on the NASDAQ Capital Market under the symbol "MCEL".
      The
      following table sets forth the high and low closing bid prices for our common
      stock as reported by NASDAQ.








**Common
                Stock Price****High**
            **Low****Fiscal
                Year Ending December 31, 2005**Fourth
                quarter
            $2.07
            $1.31Third
                quarter
            $2.57
            $1.48Second
                quarter
            $1.99
            $1.33First
                quarter
            $2.72
            $0.95**Fiscal
                Year Ending December 31, 2004**Fourth
                quarter
            $1.39
            $0.81Third
                quarter
            $1.90
            $1.21Second
                quarter
            $2.65
            $1.71First
                quarter
            $3.00
            $1.77





As
      of
      March 1, 2006, there were approximately 294 holders of record of our common
      stock. The closing bid price of our common stock on March 1, 2006 was $1.64
      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. In accordance with the terms of our Series C Preferred Stock, we
      are
      required to pay dividends on a quarterly basis on the outstanding balance of
      the
      Series C Preferred Stock at a rate of 7% per year . Under
      the terms of our Series A Preferred Stock and Series C Preferred Stock, the
      payment of dividends on our common stock may be subject to the approval of
      the
      holders thereof .





Payment
      of future cash dividends on our common stock, 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,
      plans for expansion and any applicable contractual restrictions or limitations.





*Sales
      of Unregistered Securities*





In
      the
      fourth quarter of 2005, we converted $300,000 of Redeemable Series C Preferred
      Stock into 150,000 shares of common stock. This transaction was exempt from
      registration under the Securities Act of 1933, as amended, pursuant to Sections
      3(a)(9) and 4(2) of such Act.


12


**Item
        6.   Selected Financial Data.**





The
      following table presents selected historical financial data for the twelve
      months ended December 31, 2005, 2004, 2003, 2002 and 2001. 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.




**Twelve
                  Months**
              
              **Twelve
                  Months**
              
              **Twelve
                  Months**
              
              **Twelve
                  Months**
              
              **Twelve
                  Months**
              
              **Cumulative****Ended**
              
              **Ended**
              
              **Ended**
              
              **Ended**
              
              **Ended**
              
              **Amounts
                  From****Dec.
                  31, 2005**
              
              **Dec.
                  31, 2004**
              
              **Dec.
                  31, 2003**
              
              **Dec.
                  31, 2002**
              
              **Dec.
                  31, 2001**
              
              **Inception****Statement
                  of Operations Data:**
                Revenue
              
              $
              416,902
              
              $
              198,474
              
              $
              466,859
              
              $
              719,392
              
              $
              —
              
              $
              1,801,627Cost
                  of revenue
              
              
              382,318
              
              
              198,474
              
              
              409,449
              
              
              690,059
              
              
              —
              
              
              1,680,300Gross
                  margin
              
              
              34,584
              
              
              —
              
              
              57,410
              
              
              29,333
              
              
              —
              
              
              121,327Product
                  development and marketing
              
              
              3,580,729
              
              
              3,396,469
              
              
              5,294,419
              
              
              5,788,315
              
              
              5,513,172
              
              
              23,573,104General
                  and administrative
              
              
              5,396,694
              
              
              4,262,066
              
              
              3,835,873
              
              
              4,052,943
              
              
              4,726,543
              
              
              25,612,465Restructuring
                  expense
              
              
              —
              
              
              —
              
              
              —
              
              
              104,982
              
              
              —
              
              
              104,982Non-cash
                  charges
              
              
              3,519,991
              
              
              796,286
              
              
              2,164,634
              
              
              4,148,251
              
              
              7,341,461
              
              
              28,756,004Depreciation
                  and amortization
              
              
              291,649
              
              
              516,172
              
              
              681,358
              
              
              710,975
              
              
              473,031
              
              
              2,987,012Research
                  and development
              
              
              609,534
              
              
              474,609
              
              
              1,020,102
              
              
              1,515,376
              
              
              2,624,823
              
              
              9,196,256Total
                  operating expenses
              
              
              13,398,597
              
              
              9,445,602
              
              
              12,996,386
              
              
              16,320,842
              
              
              20,679,030
              
              
              90,229,823Loss
                  from operations
              
              
              (13,364,013
              )
              
              (9,445,602
              )
              
              (12,938,976
              )
              
              (16,291,509
              )
              
              (20,679,030
              )
              
              (90,108,496
              )Interest
                  income (expense), net
              
              
              (1,623,118
              )
              
              (1,770,102
              )
              
              (2,897,077
              )
              
              300,299
              
              
              1,226,701
              
              
              (4,074,292
              )Equity
                  in losses of affiliate
              
              
              —
              
              
              —
              
              
              (488,364
              )
              
              (367,714
              )
              
              —
              
              
              (856,078
              )Loss
                  before income taxes
              
              
              (14,987,131
              )
              
              (11,215,704
              )
              
              (16,324,417
              )
              
              (16,358,924
              )
              
              (19,452,329
              )
              
              (95,038,866
              )Benefit
                  from income taxes
              
              
              386,692
              
              
              410,726
              
              
              221,480
              
              
              234,963
              
              
              —
              
              
              1,253,861Net
                  loss
              
              
              (14,600,439
              )
              
              (10,804,978
              )
              
              (16,102,937
              )
              
              (16,123,961
              )
              
              (19,452,329
              )
              
              (93,785,005
              )Preferred
                  stock amortization
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,150,881
              )Net
                  loss applicable to common stockholders
              
              $
              (14,600,439
              )
              $
              (10,804,978
              )
              $
              (16,102,937
              )
              $
              (16,123,961
              )
              $
              (19,452,329
              )
              $
              (95,935,886
              )Loss
                  per share — basic and
                diluted
              
              $
              (.34
              )
              $
              (.29
              )
              $
              (.51
              )
              $
              (.58
              )
              $
              (.71
              )
              $
              (3.11
              )







**December
                31,**
            
            **December
                31,****2005**
            
            **2004****Balance
                Sheet Data:**Total
                assets
            $
            15,034,393
            
            $
            13,305,998Redeemable
                Series C Preferred Stock
            $
            5,035,416
            
            $
            —Convertible
                unsecured debentures
            $
            2,399,988
            
            $
            5,
                137,355Convertible
                secured debentures
            $
            —
            
            $
            2,399,988Refundable
                grant obligation
            $
            156,329
            
            $
            177,174








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





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.





**Overview**





We
      are
      engaged in the development of hydrogen battery technology for use primarily
      in
      portable electronic devices for the, military, medical, industrial and consumer
      markets. We are developing this technology in partnership with corporate and
      government entities. Hydrogen on Demand® is the trademarked name for our
      proprietary hydrogen energy storage and delivery technology. Our technology
      is
      based on the culmination of work reflected in more than 90 patents (granted
      or
      pending) that collectively provide us with a leading position in the system
      and
      fuel blend technology used to convert sodium borohydride to hydrogen energy
      for
      use in portable electronic device applications.





13


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, 2005 versus 2004**





*Revenues* .
      We
      recorded $416,902 of revenues during the year ended December 31, 2005 compared
      with revenues of $198,474 in 2004, an increase of $218,428. The increase was
      mainly attributable to revenues earned from engineering and design services
      rendered under our contract with Concurrent Technologies Corporation (“CTC”)
      that began in the fourth quarter of 2004, and design services rendered under
      a
      new contract signed with Electronic Machining s.r.l. in the third quarter of
      2005, which provided us an additional $80,000 in revenue. While in the
      development stage, our revenues are expected to fluctuate from year to year
      with
      the timing of prototype development and design services.





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 $382,318 during the year ended December 31, 2005,
      as compared with $198,474 for the year ended December 31, 2004, an increase
      of
      $183,844.  The
      increase was mainly attributable to the addition of the CTC program in the
      fourth quarter of 2004. Gross margin realized in 2005 was a result of design
      services revenue rendered for Electronic Machining, a new customer in 2005.
      Cost
      of revenues during the development stage represent the Product Development
      and
      Marketing expense and Research and Development expense associated with the
      revenues earned.





*Product
      Development and Marketing Expense* .
      Product
      development and marketing expenses for the year ended December 31, 2005 were
      $3,580,729 compared to $3,396,469 for the year ended December 31, 2004, an
      increase of $184,260. This increase is mostly attributable to an increase in
      the
      marketing staff in the first quarter of 2005, as well as costs incurred to
      update our corporate image and to create a new company website.





*General
      and Administrative Expense* .
      General
      and administrative expenses were $5,396,694 for the year ended December 31,
      2005
      compared to $4,262,066 for the year ended December 31, 2004, an increase of
      $1,134,628. The increase was mainly the result of the professional fees
      associated with the consummation of the joint development arrangement with
      The
      Dow Chemical Company (“Dow”), the Series C Preferred Stock private placement
      consummated with certain institutional investors, and the exchange offers with
      respect to our outstanding Series A Preferred Stock and Series C Preferred
      Stock. We also incurred higher legal costs associated with intellectual property
      development.





*Non-Cash
      Charges* .
      Non-cash charges were $3,519,991 for the year ended December 31, 2005 as
      compared to $796,286 for the year ended December 31, 2004, an increase of
      $2,723,705.  The
      non-cash charge increase is a result of the issuance of 155,724 shares of Series
      A Preferred Stock to Dow as part of the joint development arrangement. This
      resulted in a non-cash charge of $2,413,722 which was recorded as a product
      development expense.





The
      following is a breakdown by function of non-cash charges as of December
      31:








**2005**
            
            **2004**Product
                development expense
            $
            2,556,423
            
            $
            100,738General
                and administrative expense
            
            920,499
            
            
            673,100Research
                and development expense
            
            43,069
            
            
            22,448Total
            $
            3,519,991
            
            $
            796,286







14


*Depreciation
      and Amortization* .
      Depreciation and amortization expense were $291,649 for the year ended December
      31, 2005 compared to $516,172 for the year ended December 31, 2004, a decrease
      of $224,523. This decrease was mainly attributable to more assets becoming
      fully
      depreciated in fiscal 2005 than were added during the year.





*Research
      and Development Expense* .
      Research and development expenses were $609,534 for the year ended December
      31,
      2005 compared to $474,609 for the year ended December 31, 2004, an increase
      of
      $134,925. The increase is primarily due to increased number of employees in
      our
      research and development department and professional fees as compared to the
      prior year. We are reimbursed for expenses under the Department of Energy
      (“DOE”) program for the joint research of electrochemical pathways to
      manufacture sodium borohydride, which are recorded as a reduction to research
      and development expense. Reimbursements under the DOE program totaled $825,183
      and $860,750 for 2005 and 2004, respectively.





*Interest
      Expense* .
      Net
      interest expense was $1,623,118 for the year ended December 31, 2005 compared
      to
      interest expense of $1,770,102 for the year ended December 31, 2004, a decrease
      of $146,984. The
      decrease in net interest expense was caused mainly by reduced charges for
      beneficial conversion features and fewer conversions of convertible instruments
      into common stock during 2005 than in 2004. Interest expense is comprised of
      interest on the Series C Preferred Stock dividend, debenture principal, charges
      for beneficial conversion features, amortization of original issue discounts
      and
      issue costs on convertible debentures and preferred stock.





The
      components of interest expense were as follows for the years ended December
      31,
      2005 and 2004 (in millions):





**2005**
              
              **2004**Beneficial
                  conversion feature (BCF)
              $
              0.2
              
              $
              0.5Amortization
                  of debt discount
              
              0.9
              
              
              0.8Amortization
                  of debt issue costs
              
              0.4
              
              
              0.4Other
                  interest, net
              
              0.1
              
              
              0.1Total
                  Interest Expense
              $
              1.6
              
              $
              1.8






*Benefit
      from Income Taxes* .
      Benefit
      from income taxes was $386,692 for the year ended December 31, 2005 as compared
      to $410,726 in 2004. This benefit was derived from our participation in the
      New
      Jersey Emerging Technology and Biotechnology Financial Assistance Program.
      This
      program allows certain companies to transfer New Jersey net operating losses
      to
      other companies. The amount allowed for sale each year varies and cannot be
      accurately predicted. This program, if continued by the state in future years,
      may provide us with similar cash inflows each year if we continue to incur
      net
      operating losses.





**Results
      of Operations**





**Year
      Ended December 31, 2004 versus 2003**





*Revenues* .
      We
      recorded $198,474 of revenues during the year ended December 31, 2004 compared
      with revenues of $466,859 in 2003. The decrease was mainly attributable to
      engineering and design services under a short-term contract that was performed
      during 2003 that were non-recurring in the current year. While in the
      development stage, our revenues are expected to fluctuate from year to year
      with
      the timing of prototype development and design services.





*Cost
      of Revenues.* We
      recorded cost of revenues of $198,474 during the year ended December 31, 2004,
      down from $409,449 for the year ended December 31, 2003. The decline in cost
      of
      revenue was attributable to fewer sales of large prototype systems and services
      to the transportation markets and more sales of smaller systems designed for
      the
      consumer electronics market.





*Product
      Development and Marketing Expense* .
      Product
      development and marketing expenses for the year ended December 31, 2004 were
      $3,396,469 compared to $5,294,419 for the year ended December 31, 2003, a
      decrease of $1,897,950. This decrease is mostly attributable to ongoing cost
      reduction activities and our cost-shared development program as a subcontractor
      to Protonex for the U.S. Air Force. Under this program, one-half of our incurred
      costs are reimbursed and recorded as reductions to operating expense. This
      program began during the second quarter of 2004.





15


*General
      and Administrative Expense* .
      General
      and administrative expenses were $4,262,066 for the year ended December 31,
      2004
      compared to $3,835,873 for the year ended December 31, 2003, an increase of
      $426,193. The increase was driven mainly by the accrual of separation costs
      of
      approximately $591,000 as a result of the resignation of our previous President
      and Chief Executive Officer in March 2004. The separation costs were comprised
      of salary, benefits and other costs in satisfaction of his employment contract.
      The remaining costs will be paid according to the following
      schedule:





2005
            $
            278,6322006
            
            31,7892007
            
            7,947Total
            $
            318,368





The
      unfavorable effect of the separation costs was mostly offset by the impact
      of
      ongoing cost reduction programs, including headcount reductions made early
      in
      2004, and the recovery of indirect costs under U.S. government funded cost-share
      programs which began in 2004.





*Non-cash
      Charges* .
      Non-cash charges were $796,286 for the year ended December 31, 2004 as compared
      to $2,164,634 for the year ended December 31, 2003, a decrease of $1,368,348.
      The decrease was mostly attributable to the completion of vesting in 2003 of
      below market value options issued to employees during 2000.





The
      following is a breakdown by function of non-cash charges as of December
      31:





**2004**
            
            **2003**Product
                development expense
            $
            100,738
            
            $
            163,219General
                and administrative expense
            
            673,100
            
            
            1,889,540Research
                and development expense
            
            22,448
            
            
            111,875Total
            $
            796,286
            
            $
            2,164,634





*Depreciation
      and Amortization* .
      Depreciation and amortization was $516,172 for the year ended December 31,
      2004
      compared to $681,358 for the year ended December 31, 2003, a decrease of
      $165,186. This was attributable to more assets becoming fully depreciated in
      fiscal 2004 than were added during the year.





*Research
      and Development Expense* .
      Research and development expenses were $474,609 for the year ended December
      31,
      2004 compared to $1,020,102 for the year ended December 31, 2003, a decrease
      of
      $545,493. The decrease is mainly attributable to the reimbursement of expenses
      under the Department of Energy (“DOE”) program for the joint research of
      electrochemical pathways to manufacture sodium borohydride. This program
      reimburses us for 80% of our qualifying costs under the program.





*Interest
      Expense* .
      Net
      interest expense was $1,770,102 for the year ended December 31, 2004 compared
      to
      interest expense of $2,897,077 for the year ended December 31, 2003, a decrease
      of $1,126,975. The decrease was attributable to the issuance and subsequent
      conversion of the debentures issued in December 2002 and January 2003 through
      a
      private placement financing. As the unsecured debentures were converted into
      common shares, the pro rata portion of the discount and charges related to
      the
      beneficial conversion features was recorded as interest expense. During fiscal
      2004, approximately $5.3 million of the debentures issued in the private
      placement financing had been converted to common stock as compared to $11.3
      million in fiscal 2003.







16




The
        components of interest expense were as follows for the years ended December
        31,
        2004 and 2003 (in millions):




**2004**
              
              **2003**Beneficial
                  conversion feature (BCF)
              $
              0.5
              
              $
              1.4Amortization
                  of debt discount
              
              0.8
              
              
              0.9Amortization
                  of debt issue costs
              
              0.4
              
              
              0.6Other
                  interest, net
              
              0.1
              
              
              0.0Total
                  Interest Expense
              $
              1.8
              
              $
              2.9







*Benefit
      from Income Taxes.* Benefit from income taxes was $410,726 for the year
      ended December 31, 2004 as compared to $221,480 in 2003. This income was derived
      from our participation in the New Jersey Emerging Technology and Biotechnology
      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 provide us with similar cash inflows each
      year
      if we continue to incur net operating losses.







**Liquidity
      and Capital Resources**





*General*





Since
      our
      inception, we have financed our operations primarily through our initial public
      offering in August 2000 and private placements of equity and debt securities.
      The net proceeds from our initial public offering totaled approximately $29.9
      million and we generated net proceeds from private placement transactions in
      2002 and 2003 totaling $14.1 million. In 2004, we received net proceeds of
      approximately $9.4 million from a separate private placement transaction. In
      April 2005, we received net proceeds of approximately $9.6 million for the
      issuance of redeemable Series C Preferred Stock.





*Convertible
      Debentures*





On
      November 8, 2002, we issued to the Ballard Power Systems Inc. (“Ballard”) a
      $2.4 million secured convertible debenture with a maturity date of November
      8, 2005. On September 30, 2005, Ballard sold its debenture in equal amounts
      to
      three accredited institutional investors (the “Investors”) in a private
      transaction. In connection with such transfer, we issued an $800,000 secured
      convertible debenture, in substance identical to the Ballard debenture, to
      each
      of the Investors. On November 8, 2005, we issued an amended and restated
      convertible debenture (each, a “New Debenture”) to each of the Investors as
      consideration for the Investors’ agreement to surrender their original
      debentures and cancel the standby letters of credit issued by Wachovia Bank,
      National Association, that secured the original debentures, thus enabling us
      to
      use the formerly restricted cash for our operations. The principal changes
      to
      the term of the debentures consisted of the reduction of the initial conversion
      price from $4.25 to $2.25 per share, an extension of the maturity date to
      September 30, 2007, and the provision for 6% quarterly interest payments to
      the
      holders. We relied on the exemption from registration under Section 3(a)(9)
      of the Securities Act in connection with the issuance of the New Debentures.
      No
      gain or loss was required to be recognized by us upon the exchange. In
      accordance with EITF 00-27 (“Application of Issue No. 98-5 to Certain
      Convertible Instruments”) and EITF 98-5 (“Accounting for Convertible Securities
      with Beneficial Conversion Features or Contingently Adjustable Conversion
      Ratios”), we will be required to record a Beneficial Conversion Feature (“BCF”)
      interest charge if the Company elects to convert debentures early at a discount.





*Private
      Placement Transactions*





During
      2002, 2003 and 2004, we entered into a series of private placement financing
      transactions with three different institutional and accredited investors
      pursuant to the terms of separate securities purchase agreements among
      Millennium Cell and the purchasers. The private placements were exempt from
      registration under the Securities Act of 1933, as amended, pursuant to Section
      4(2) of such Act. The placements collectively raised $26.0 million dollars
      through the sale of $4.0 million in common stock and the issuance of $22.0
      million in convertible debentures. As of December 31, 2005, all $22.0 million
      of
      debentures have been converted into 11,931,537 shares of common stock.





*Series
      C Preferred Stock*




On
      April
      25, 2005, we consummated a private placement financing transaction with seven
      institutional and accredited investors pursuant to the terms of a securities
      purchase agreement with such investors.  Pursuant to the terms of the
      agreement, the investors paid $10 million in cash for 10,000 shares of our
      redeemable Series C Preferred Stock (“Series C”) (which shares were subsequently
      exchanged for a like number of shares of redeemable Series C2 Preferred Stock
      in
      an exchange offer conducted by us). Each Series C share is convertible into
      500
      hundred shares of our common stock, at any time, at an initial conversion price
      equal to $2 per share subject to adjustment based upon customary anti-dilution
      provisions, or lower based upon the market price of our common stock during
      the
      ten trading days preceding conversion. The shares of Series C bear a 7%
      cumulative dividend payable quarterly in shares of common stock or cash, at
      our
      option, and are junior to the Series A and Series B preferred stock in
      liquidation preference. The Series C is subject to mandatory redemption by
      us
      three years after issuance and can be settled in cash or with our common stock.
      As a result, the Series C is recorded as a liability in accordance with FAS
      150
      (“ Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity”). Additionally,
      we issued to the investors three-year warrants to purchase an aggregate of
      1.25
      million shares of our common stock at an exercise price equal to $2 per share,
      subject to adjustment based on customary antidilution protections. The warrants
      were valued at $1,021,928 at the date of issuance and were recorded as a
      discount to debt and as additional paid-in-capital on the balance sheet and
      will
      be amortized as interest expense throughout the term of the Series C or as
      they
      are converted, whichever comes first





17


Under
      the
      Series C purchase agreement with the investors, we are required to restrict
      funds for future dividends to be paid with respect to the Series C. As a result,
      these funds, which amounted to approximately $1,800,000 at issuance, were
      classified as restricted cash on the balance sheet. As of December 31, 2005,
      we
      issued 54,117 shares valued at $109,128 in satisfaction of the quarterly
      dividend payments with respect to Series C. Total dividends of $369,753, which
      include dividends paid in cash and common stock were recorded as interest
      expense since the Series C was recorded as a liability as of December 31, 2005..
      According to the Series C purchase agreement, as dividends are issued or paid,
      and conversions are executed, the restricted cash is released ratably to our
      non-restricted cash accounts. As of December 31, 2005, approximately $4.5
      million of the Series C have been converted into 2,323,743 shares of our common
      stock and we have transferred $796,286 from the restricted cash account for
      the
      conversions that were executed.





We
      relied
      on the exemption from registration under Section 4(2) of the Securities Act
      in
      connection with the Series C issuance. We filed a registration statement
      with the SEC, which covered the resale of shares of common stock underlying
      the
      Series C and shares underlying the warrants issued to the Series C holders,
      and
      it was declared effective on July 27, 2005.





*Series
      A Preferred Stock*





On
      April
      25, 2005, we consummated the first closing under a joint development arrangement
      with Dow. In connection with the closing, we issued 155,724 shares of Series
      A
      Preferred Stock to Dow (which shares were subsequently exchanged for a like
      number of shares of Series A2 Preferred Stock in an exchange offer conducted
      by
      us), each share of which is convertible into ten shares of our common stock.
      As
      a result of the Series A issuance in exchange for services rendered by Dow
      in
      conjunction with the joint development arrangement, we recorded a non-cash
      charge of $2,413,722 as product development expense based on the market value
      of
      the underlying common stock as of April 25, 2005. The Series A has substantially
      the same rights of our common stock, therefore the Series A was valued based
      on
      the close of our common stock on April 25, 2005. We relied on the exemption
      from
      registration under Section 4(2) of the Securities Act of 1933 in connection
      with
      the issuance.





The
      purpose of the joint development arrangement is for the two companies to jointly
      develop portable power solutions based on our Hydrogen on Demand® energy systems
      coupled with a fuel cell. The joint development agreement has a three-year
      term
      and each party may terminate the joint development agreement under certain
      conditions. The joint development arrangement contemplates a series of four
      milestones designed to culminate in a commercially available product. The
      milestones are focused on military and/or consumer electronics applications.
      Achievement of milestones, as defined in the joint development arrangement,
      in
      either military or consumer electronics applications will be sufficient to
      trigger equity transactions at Dow’s option





Upon
      the
      successful completion of each of the four milestones, Dow has a right, but
      not
      an obligation, to purchase a number of shares of our Series B Preferred Stock
      which is convertible into a number of shares of our common stock that could
      be
      purchased for $1,250,000 (based upon a purchase price equal to the volume
      weighted average price for the 30-trading day period prior to the date of
      issuance). If Dow purchases shares of our Series B Preferred Stock, they will
      also receive warrants to purchase a number of shares of our common stock that
      equals 25% of the number of shares of common stock issuable upon conversion
      of
      the Series B Preferred Stock. If Dow purchases shares of our Series B Preferred
      Stock in such instances, we will issue to Dow additional shares of Series A
      Preferred Stock such that Dow will own a certain percentage of our capital
      stock
      as of the date of issuance as provided in the Dow Stock Purchase Agreement.
      If
      Dow elects not to purchase shares of our Series B Preferred Stock upon
      completion of any milestone, we will issue to Dow a lesser number of additional
      shares of Series A Preferred Stock.








18








*Subsequent
      Events*





*Gecko*





On
      February 15, 2006, we entered into a three-year joint development program with
      Gecko Energy Technologies, Inc. (“Gecko”) to collaborate on the development and
      commercialization of portable fuel cell systems for use in military, medical,
      industrial and consumer electronics applications. These products will pair
      our
      patented Hydrogen on Demand® technology with Gecko’s thin planar Proton Exchange
      Membrane (PEM) fuel cells to create a hydrogen battery that is lighter, smaller
      and less expensive than traditional batteries for a variety of applications.
      Gecko’s efforts are focused on the development of an easy-to-manufacture fuel
      cell that provides portable device makers with design flexibility by allowing
      the thin power source to be part of the exterior surface of the device itself.





In
      addition to the joint development program, we have acquired approximately 23%
      of
      the outstanding common stock of Gecko in exchange for $450,000 in cash and
      a
      one-year commitment of services and facilities valued at $0.5 million. Later
      in
      the year, we will increase our position to a total of 48% of Gecko’s outstanding
      common stock by investing another $1.05 million in cash or our common stock.
      As
      part of the transaction, we received the right to increase our position, at
      our
      sole option, up to a total of 80% of Gecko’s outstanding common stock over the
      remaining two years of the agreement at fair value of the common stock on the
      date of the acquisition.





*New
      Debenture Conversion*





On
      February 24, 2006, we converted an aggregate $500,000 of the New Debentures
      into
      331,125 shares of common stock. We recorded a beneficial conversion feature
      charge of $35,000 in conjunction with the conversion.








*Sources
      and Uses of Cash*





As
      of
      December 31, 2005, we had $11,675,877 in cash and cash equivalents and
      restricted cash of $1,582,059. Cash used in operations totaled $8,356,591,
      $7,271,862 and $9,856,825 in 2005, 2004 and 2003, respectively, and related
      to
      funding our net operating losses.





Excluding
      changes in restricted cash, investing activities used cash of $194,286, $143,642
      and $405,952 in 2005, 2004 and 2003, respectively. Investing
      activities in 2005 consisted of patent registration costs while in 2004 we
      also
      purchased laboratory equipment to support our research.  Restricted
      cash is comprised of $1.0 million as security on Series C Preferred dividends
      and $0.6 million of cash used for collateral as security deposit held by our
      landlord in connection with the amended lease agreement. These funds used will
      not be available for use in operations until the letters of credit have been
      reduced or terminated. The $1.0 million of restricted cash related to the Series
      C Preferred will be available to us ratably as dividends are paid to the holders
      or as they are converted, whichever comes first.





*Off-Balance
      Sheet Arrangements*





We
      had no
      off-balance sheet arrangements as of December 31, 2005.





*Commitments
      and Contingencies*





In
      April
      2001, we amended our main operating lease for our facility to provide for
      additional space for our principal operating offices and laboratories. The
      amended lease will expire in 2008 and contains options to renew for an
      additional eight years and will require us to pay our allocated share of taxes
      and operating costs in addition to the annual base rent payment. Future minimum
      annual lease commitments excluding estimated allocated taxes and maintenance
      under the amended operating leases are noted below.





In
      connection with the amended lease agreement, we issued a letter of credit to
      the
      landlord for $588,972 in lieu of a cash security deposit. We collateralized
      the
      letter of credit with a portion of our cash and classified the letter of credit
      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 technology. The recoverable grant is required to be repaid
      when we generate net sales in a fiscal year. The repayment obligation, which
      began in June 2001, escalates from 1% to 5% of net sales over a ten-year period.
      We are obligated to repay the unpaid amount of the original grant at the end
      of
      the ten-year period. As of December 31, 2005, we have repaid approximately
      $21,000 and an additional $49,611 was paid in the first quarter of 2006.





19




The
      contractual obligations discussed above are outlined in the following
      table:




**Payment
                  due in fiscal years****Contractual
                Obligations**
              **Total**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010**Operating
                  lease - Facility
              $
              1,412,570
              
              $
              484,310
              
              $
              484,310
              
              $
              443,950
              
              $
              3⁄4
              
              $
              3⁄4Refundable
                  grant obligation
              
              205,940
              
              
              49,611
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4
              
              
              156,329Capital
                    lease obligations
              
              6,173
              
              
              6,173
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4Redeemable
                    Series C Preferred Stock (1)
              
              5,035,416
              
              
              3⁄4
              
              
              3⁄4
              
              
              5,035,416
              
              
              3⁄4
              
              
              3⁄4Convertible
                    unsecured debentures (1)
              
              2,399,988
              
              
              3⁄4
              
              
              2,399,988
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4Total
              $
              9,060,087
              
              $
              540,094
              
              $
              2,884,298
              
              $
              5,479,366
              
              $
              —
              
              $
              156,329






*(1)*
            *Redeemable
                Series C Preferred Stock and Convertible unsecured debentures are
                convertible into common stock or can be satisfied with cash.*





We
      received net proceeds from the sale of New Jersey net operating losses (NOLs)
      in
      conjunction with the New Jersey Emerging Technology and Biotechnology Financial
      Assistance Program of $386,692, $410,726 and $221,480 in 2005, 2004 and 2003,
      respectively. This program allows certain companies to apply to transfer New
      Jersey NOLs to other companies. This program, if continued by the state in
      future years, may provide us with similar cash inflows if we continue to incur
      NOLs.





We
      believe that our current cash and cash equivalents and cash from our
      cost-sharing agreements will be sufficient to fund our operations through 2007.
      We may raise additional funds through public or private financing, collaborative
      relationships or other arrangements. We cannot be assured 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."





20








*Revenue
      Recognition*





Our
      near-term revenues will be derived substantially from contracts that require
      the
      Company to deliver hydrogen generation technology, management services, system
      design and prototype systems and licensing of technology for test and
      evaluation. Revenues are recognized in the period in which the technology is
      delivered or licensed revenue is earned.





*Convertible
      Debt*





We
      account 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, we have 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,
      we will record as interest expense a ratable proportion of the discount
      associated with the face value of the debt converted.





We
      account 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 our outstanding debt instruments,
      we
      will record interest expense resulting from BCFs as described under the caption
      "Liquidity and Capital Resources" above.





*Stock
      Options*





We
      have
      recorded non-cash charges in 2005, 2004 and 2003 of the fair value of warrants
      issued to a board member, 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 we will incur related to these warrants.





We
      also
      record 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. As of June 30, 2003, all of these options were vested and
      there will be no further charges.





We
      also
      disclose 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
      we had accounted for its employee stock options under the fair value method
      of
      that statement. We have estimated the fair value of options granted for the
      fiscal years ended December 31, 2005, 2004 and 2003 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. Our
      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 2005, 2004 and 2003 for warrants issued to
      affiliates and the pro forma disclosures of net loss and loss per share for
      fiscal 2005, 2004 and 2003, 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 2004, the Financial Accounting Standards Board issued
      SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which
      requires companies to measure and recognize compensation expense for all
      stock-based payments at fair value. SFAS 123R will become effective for all
      registrants as of the first fiscal year beginning after June 15, 2005.
      Therefore, our required effective date is January 1, 2006. Our current
      estimate of the annual net loss effect in 2006 of adopting SFAS 123R in
      January 2006 is to increase net loss by approximately $340,000.





21




In
      May
      2005, the FASB issued SFAS Statement No. 154, “Accounting Changes and
      Error Corrections” (“SFAS 154”). SFAS 154 is a replacement of
      Accounting Principles Board Opinion No. 20 (“APB 20”) and FASB
      Statement No. 3. SFAS 154 provides guidance on the accounting for and
      reporting of accounting changes and error corrections. It establishes
      retrospective application, or the latest practicable date, as the required
      method for reporting a change in accounting principle and the reporting of
      a
      correction of an error. SFAS 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15,
      2005 and we will adopt this standard on January 1, 2006. We do not expect
      that the adoption of SFAS 154 will have any impact on our consolidated
      results of operations, financial condition and cash flows.







**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. As a result, we may be subject to commodity price risk
      in
      the future and there can be no assurance that we will be able to enter into
      agreements to protect against such risk.





**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.





**Item
      9A. Controls and Procedures.**




We
      maintain a system of internal and disclosure controls and procedures designed
      to
      ensure that information required to be disclosed by us in the reports we file
      or
      submit under the Securities Exchange Act of 1934, is recorded, processed,
      summarized and reported on a timely basis, and that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure.





Our
      management, under
      the
      supervision and with
      the
      participation of our Chief Executive Officer and our Chief Financial Officer,
      have evaluated the effectiveness of our disclosure controls and procedures
      (as
      such term is defined in Rules 13a-15(e) or 15d-15(e)) under the Securities
      Exchange Act of 1934, as amended) as of the end of the period covered by this
      Annual Report. Based on such evaluation, our Chief Executive Officer and our
      Chief Financial Officer they have concluded that, as of the evaluation date,
      our
      disclosure controls and procedures are effective in alerting them on a timely
      basis to material information relating to us required to be included in our
      reports filed or submitted under the Securities Exchange Act of 1934.




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      also conducted an evaluation of any changes in internal controls over financial
      reporting that occurred during the last fiscal quarter. That evaluation did
      not
      identify any significant changes to the Company’s internal control over
      financial reporting that have materially affected, or are reasonably likely
      to
      materially affect, the Company’s internal control over financial
      reporting.





**Item
      9B. Other Information.**





None.





22


**PART
        III**





**Item
      10. Directors and Executive Officers of the Registrant.**





Information
      regarding Section 16(a) compliance, the Audit Committee, our Code of Conduct
      and
      background of the directors appearing under the captions “Election of
      Directors,”“Security Ownership of Principal Stockholders and Management” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement
      for the 2006 annual meeting of stockholders is hereby incorporated by
      reference.





**Item
      11. Executive Compensation.**





Information
      regarding executive compensation appearing under the caption “Executive
      Compensation” in the Company’s Proxy Statement for the 2006 annual meeting of
      stockholders is hereby incorporated by reference.





**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**





Information
      regarding the security ownership of certain beneficial owners and management
      appearing under the captions “Executive Compensation” and “Security Ownership of
      Principal Stockholders and Management” in our Proxy Statement for the 2006
      annual meeting of stockholders is hereby incorporated by reference.





**Item
      13. Certain Relationships and Related Transactions.**





Information
      regarding certain relationships and related transactions appearing under the
      caption “Certain Relationships and Related Transactions” in our Proxy Statement
      for the 2006 annual meeting of stockholders is hereby incorporated by
      reference.





**Item
      14. Principal Accountant Fees & Services.**





Information
      appearing under the captions “Fees Paid to the Company’s Auditors” in our Proxy
      Statement for the 2006 annual meeting of stockholders is hereby incorporated
      by
      reference.











23










**PART
      IV**





**Item
      15. Exhibits and Financial Statement Schedules.**





(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 Annual 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.**
              
              **Description**2.1†
              —
              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 Exhibit 3.4 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 Exhibit 3.5 to the Quarterly Report
                  on Form
                  10-Q filed on May 13, 2002)3.6†
              —
              Designations
                  of Preferences, Limitations, and Relative Rights of Series A
                  Convertible Preferred Stock (incorporated by reference to Exhibit
                  4.1 to
                  the Current Report on Form 8-K filed on April 26, 2005 (first
                  filing))3.7†
              —
              Designations
                  of Preferences, Limitations, and Relative Rights of Series B
                  Convertible Preferred Stock (incorporated by reference to Exhibit
                  4.2 to
                  the Current Report on Form 8-K filed on April 26, 2005 (first
                  filing))3.8†
              —
              Certificate
                  of Designations, Preferences and Rights of Series C Convertible
                  Preferred Stock (incorporated by reference to Exhibit 4.1 to the
                  Current
                  Report on Form 8-K filed on April 26, 2005 (second
                  filing))3.9†
              —
              Designations
                  of Preferences, Limitations, and Relative Rights of Series A2
                  Convertible Preferred Stock (incorporated by reference to Exhibit
                  3.9 to
                  Registration Statement No. 333-126418 on Form S-3 filed on July
                  6,
                  2005)3.10†
              —
              Certificate
                  of Amendment to the Designations of Preferences, Limitations, and
                  Relative
                  Rights of Series B Convertible Preferred Stock (incorporated by
                  reference to Exhibit 3.10 to Registration Statement No. 333-126418
                  on Form
                  S-3 filed on July 6, 2005)3.11†
              —
              Certificate
                  of Designations, Preferences and Rights of Series C2 Convertible
                  Preferred Stock (incorporated by reference to Exhibit 3.11 to Registration
                  Statement No. 333-126418 on Form S-3 filed on July 6,
                  2005)3.12*
              —
              Certificate
                  Eliminating Reference to the Series A Convertible Preferred Stock
                  from the Certificate of Incorporation of Millennium Cell
                  Inc.3.13*
              —
              Certificate
                  Eliminating Reference to the Series C Convertible Preferred Stock
                  from the Certificate of Incorporation of Millennium Cell
                  Inc.4.1†
              —
              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)4.2†
              —
              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)4.3†
              —
              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)4.4†
              —
              Closing
                  Warrant No. 1 to purchase 73,599 shares of Common Stock dated October
                  31,
                  2002 (incorporated by reference to Exhibit 4.7.1 to the Annual
                  Report on
                  Form 10-K filed on March 17, 2003)4.5†
              —
              Closing
                  Warrant No. 2 to purchase 73,599 shares of Common Stock dated October
                  31,
                  2002 (incorporated by reference to Exhibit 4.7.2 to the Annual
                  Report on
                  Form 10-K filed on March 17, 2003)4.6†
              —
              First
                  Warrant to purchase 242,678 shares of Common Stock dated December
                  26, 2002
                  (incorporated by reference to Exhibit 4.8 to the Annual Report
                  on Form
                  10-K filed on March 17, 2003)4.7†
              —
              Form
                  of Warrant issuable to The Dow Chemical Company (incorporated by
                  reference
                  to Exhibit 10.7 to the Current Report on Form 8-K filed on February
                  28,
                  2005)4.8†
              —
              Form
                  of Warrant to Purchase Common Stock dated April 25, 2005 (incorporated
                  by
                  reference to Exhibit 10.2 to the Current Report on Form 8-K filed
                  on April
                  26, 2005 (second filing))4.9†
              —
              Form
                  of Convertible Debenture Due on September 30, 2007 (incorporated
                  by
                  reference to Exhibit 4.1 to the Current Report on Form 8-K filed
                  on
                  November 14, 2005)4.10*
              —
              Warrant
                  to purchase 195,000 of Common Stock dated April 25,
                  200510.1†
              —
              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 Exhibit the Registration Statement
                  filed on
                  Form S-1, Registration No. 333-37896)10.2†
              —
              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)10.3†
              —
              Securities
                  Purchase Agreement dated as of June 19, 2002 between the Company
                  and the
                  Purchasers (incorporated by reference to Exhibit 4.3 to the Current
                  Report
                  on Form 8-K filed on June 26, 2002)10.4†
              —
              Registration
                  Rights Agreement dated as of June 19, 2002 between the Company
                  and the
                  Purchasers (incorporated by reference to Exhibit 4.4 to the Current
                  Report
                  on Form 8-K filed on June 26, 2002)10.5†
              —
              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)10.6†
              —
              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)10.7†
              —
              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 filed on November 14, 2002)10.8†
              —
              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 filed on November 14,
                  2002)10.9*
              —
              Change-in-Control
                  Agreement between the Company and Adam Briggs dated as of July
                  28, 2004
                  and Schedule of Other Change-in-Control Agreements.10.10†
              —
              Securities
                  Purchase Agreement dated as of January 16, 2004 between the Company
                  and
                  the purchaser named therein. (incorporated by reference to Exhibit
                  10.24
                  to Registration Statement No. 333-112519 on Form S-3 filed on February
                  5,
                  2004)10.11†
              —
              Registration
                  Rights Agreement dated as of January 16, 2004 between the Company
                  and the
                  purchaser named therein. (incorporated by reference to Exhibit
                  10.25 to
                  Registration Statement No. 333-112519 on Form S-3 filed on February
                  5,
                  2004)10.12†
              —
              Employment
                  Agreement, dated as of July 20, 2004, by and between Millennium
                  Cell Inc.
                  and H. David Ramm. (incorporated by reference to Exhibit 10.1 to
                  the
                  Current Report on Form 8-K filed on July 28, 2004)10.13†
              —
              Restricted
                  Stock Grant Agreement, dated as of July 20, 2004, by and between
                  Millennium Cell Inc. and H. David Ramm. (incorporated by reference
                  to
                  Exhibit 10.2 to the Current Report on Form 8-K filed on July 28,
                  2004)10.14†
              —
              Agreement,
                  dated as of July 20, 2004, by and between Millennium Cell Inc.
                  and DKRW
                  Energy LLC. (incorporated by reference to Exhibit 10.3 to the Current
                  Report on Form 8-K filed on July 28, 2004)10.15†
              —
              Employment
                  Agreement, dated as of August 12, 2005, by and between Millennium
                  Cell
                  Inc. and H. David Ramm. (incorporated by reference to Exhibit 10.1
                  to
                  the Current Report on Form 8-K filed on August 12,
                  2005)10.16†
              —
              Restricted
                  Stock Grant Agreement, dated as of August 12, 2005, by and between
                  Millennium Cell Inc. and H. David Ramm. (incorporated by reference
                  to
                  Exhibit 10.2 to the Current Report on Form 8-K filed on August
                  12, 2005)10.17†
              —
              Agreement,
                  dated as of August 12, 2005, by and between Millennium Cell Inc.
                  and DKRW
                  Energy LLC. (incorporated by reference to Exhibit 10.3 to the Current
                  Report on Form 8-K filed on August 12, 2005)10.18†
              —
              Stock
                  Purchase Agreement, dated February 28, 2005, by and between Millennium
                  Cell Inc. and The Dow Chemical Company (incorporated by reference
                  to
                  Exhibit 10.1 to the Current Report on Form 8-K filed on February
                  28, 2005)10.19†
              —
              Amendment
                  No. 1, dated as April 25, 2005, to Stock Purchase Agreement by
                  and between
                  Millennium Cell Inc. and The Dow Chemical Company (incorporated
                  by
                  reference to Exhibit 10.9 to the Current Report on Form 8-K filed on
                  April 26, 2005 (first filing))10.20†
              —
              Registration
                  Rights Agreement, dated as April 25, 2005, by and between Millennium
                  Cell
                  Inc. and The Dow Chemical Company (incorporated by reference to
                  Exhibit 10.5 to the Current Report on Form 8-K filed on April
                  26, 2005 (first filing))10.21†
              —
              Investor
                  Rights Agreement, dated April 25, 2005, by and between Millennium
                  Cell
                  Inc. and The Dow Chemical Company (incorporated by reference to
                  Exhibit 10.4 to the Current Report on Form 8-K filed on February 28,
                  2005)10.22†
              —
              Joint
                  Development Agreement, dated April 25, 2005, by and between Millennium
                  Cell Inc. and The Dow Chemical Company (incorporated by reference
                  to
                  Exhibit 10.2 to the Current Report on Form 8-K filed on February
                  28, 2005)10.23†
              —
              Cross
                  Licensing and Intellectual Property Agreement, dated April 25,
                  2005, by
                  and between Millennium Cell Inc. and The Dow Chemical Company
                  (incorporated by reference to Exhibit 10.3 to the Current Report
                  on Form 8-K filed on February 28, 2005)10.24†
              —
              Standstill
                  Agreement, dated April 25, 2005, by and between Millennium Cell
                  Inc. and
                  The Dow Chemical Company (incorporated by reference to Exhibit 10.6
                  to the Current Report on Form 8-K filed on February 28,
                  2005)10.25†
              —
              Patent
                  Assignment Agreement and License, dated April 25, 2005, by and
                  between
                  Millennium Cell Inc. and The Dow Chemical Company (incorporated
                  by
                  reference to Exhibit 10.8 to the Current Report on Form 8-K
                  filed on February 28, 2005)10.26†
              —
              Securities
                  Purchase Agreement, dated April 20, 2005, by and among Millennium
                  Cell
                  Inc. and the investors listed on the Schedule of Buyers attached
                  thereto
                  (incorporated by reference to Exhibit 10.1 to the Current Report on
                  Form 8-K filed on April 26, 2005 (second filing))10.27†
              —
              Registration
                  Rights Agreement, dated April 20, 2005, by and among Millennium
                  Cell Inc.
                  and the investors listed on the Schedule of Buyers attached thereto
                  (incorporated by reference to Exhibit 10.3 to the Current Report on
                  Form 8-K filed on April 26, 2005 (second filing))10.28†
              —
              Form
                  of Voting Agreement, dated April 25, 2005, by and among Millennium
                  Cell
                  Inc. and the stockholders name therein (incorporated by reference
                  to
                  Exhibit 10.6 to the Current Report on Form 8-K filed on April 26,
                  2005
                  (second filing))10.29†
              —
              Security
                  Agreement, dated April 25, 2005, by Millennium Cell Inc. in favor
                  of
                  Portside Growth & Opportunity Fund, as collateral agent for the Buyers
                  (incorporated by reference to Exhibit 10.4 to the Current Report on
                  Form 8-K filed on April 26, 2005 (second filing))10.30†
              —
              Account
                  Control Agreement, dated April 25, 2005, by and among Millennium
                  Cell
                  Inc., Portside Growth & Opportunity Fund, as agent for the Buyers, and
                  Wachovia Bank, National Association (incorporated by reference
                  to Exhibit
                  10.5 to the Current Report on Form 8-K filed on April 26, 2005
                  (second filing))31.1*
              —
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
                  Act
                  of 2002.31.2*
              —
              Certification
                  of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
                  Act
                  of 200232.1*
              —
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Section
                  906 of Sarbanes-Oxley Act of 2002


†
      Previously filed.


*
      Filed
      herewith.








24





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:






**Date
                  Filed or**
                **Furnished**
              **Item
                  No.**
              **Description**October
                  27, 2005
              Item
                  2.02
              Millennium
                  Cell Inc. issued a press release to report its financial results for
                  the quarter ending, September 30, 2005.November
                  15, 2005
              Item
                  3.02
              Millennium
                  Cell Inc. issued an amended and restated convertible debenture to
                  each of three institutional investors (the “Investors”) as consideration
                  for the Investors’ agreement (i) to surrender their secured convertible
                  debentures, maturing on November 8, 2005, that they had purchased
                  from an
                  unaffiliated third party on September 30, 2005 (the “Original Debentures”)
                  and (ii) to cancel the standby bank letters of credit that secured
                  the
                  Original Debentures.













25
 
   **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/ H. DAVID
      RAMM


H.
      David
      Ramm


Chief
      Executive
      Officer








Date:
      March 29, 2006





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/
                  H. DAVID RAMM
                H.
                  David Ramm
              Chief
                  Executive Officer and Director
              March
                  29, 2006/s/
                  JOHN D. GIOLLI
                John
                  D. Giolli
              Chief
                  Financial Officer
              March
                  29, 2006/s/
                  G. CHRIS ANDERSEN
                G.
                  Chris Andersen
              Director
              March
                  29, 2006/s/
                  KENNETH R. BAKER
                Kenneth
                  R. Baker
              Director
              March
                  29, 2006/s/
                  ALEXANDER MACLACHLAN
                Alexander
                  MacLachlan
              Director
              March
                  29, 2006/s/
                  PETER A. MCGUIGAN
                Peter
                  A. McGuigan
              Director
              March
                  29, 2006/s/
                  ZOLTAN MERSZEI
                Zoltan
                  Merszei
              Director
              March
                  29, 2006/s/
                  JAMES L. RAWLINGS
                James
                  L. Rawlings
              Director
              March
                  29, 2006/s/
                  RICHARD L. SANDOR
                Richard
                  L. Sandor
              Director
              March
                  29, 2006/s/ JOHN R. WALLACE
                John R. Wallace
              Director
              March
                  29, 2006














26





**INDEX
        TO FINANCIAL STATEMENTS**




**Page**Report
                  of Independent Auditors
              F-2Balance
                  Sheet as of December 31, 2005 and 2004
              F-3Statement
                  of Operations for the fiscal years ended December 31, 2005, 2004
                  and 2003
                  and cumulative amounts from inception
              F-4Statement
                  of Stockholders' Equity for the period from December 31, 2002 to
                  December
                  31, 2005
              F-5Statement
                  of Cash Flows for the fiscal years ended December 31, 2005, 2004
                  and 2003
                  and cumulative amounts from inception
              F-7Notes
                  to Financial Statements
              F-8







F-1




**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**


The
      Board
      of Directors and Stockholders


Millennium
      Cell Inc.








We
      have
      audited the accompanying consolidated balance sheets of Millennium Cell Inc.
      as
      of December 31, 2005 and 2004, and the related consolidated statements of
      operations, stockholders’ equity and cash flows for each of the three years then
      ended, and for the period of January 1, 1999 (inception) through December 31,
      2005. These consolidated financial statements are the responsibility of the
      Company's management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (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. We were
      not
      engaged to perform an audit of the Company's internal control over financial
      reporting. Our audits included consideration of internal control over financial
      reporting as a basis for designing audit procedures that are appropriate in
      the
      circumstances, but not for the purpose of expressing an opinion on the
      effectiveness of the Company's internal control over financial reporting.
      Accordingly, we express no such opinion. An audit also includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the consolidated
      financial statements, assessing the accounting principles used and significant
      estimates made by management, and 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, 2005 and 2004, and the consolidated results of their
      operations and their cash flows for each of the three years then ended, and
      for
      the period January 1, 1999 (inception) through December 31, 2005, in conformity
      with U.S. generally accepted accounting principles.








/s/
      ERNST
& YOUNG LLP








New
      York,
      New York


February
      10, 2006




F-2


**MILLENNIUM
      CELL INC.**


**(a
      development stage enterprise)**





**CONSOLIDATED
      BALANCE SHEETS**




**December
                    31,**
                
                **December
                    31,****Assets**
                
                **2005**
                
                **2004**Current
                    assets:Cash
                    and cash equivalents
                
                $
                11,675,877
                
                $
                8,217,840Restricted
                    cash
                
                
                373,868
                
                
                2,445,500Accounts
                    receivable - trade
                
                
                36,808
                
                
                73,474Accounts
                    receivable - government
                
                
                112,462
                
                
                372,776Prepaid
                    expenses
                
                
                237,867
                
                
                261,467Deferred
                    financing costs
                
                
                102,270
                
                
                97,366Total
                    current assets
                
                
                12,165,284
                
                
                11,468,423Property
                    and equipment, net
                
                
                450,138
                
                
                663,576Patents
                    and licenses, net
                
                
                654,876
                
                
                538,802Restricted
                    cash
                
                
                1,582,059
                
                
                589,521Deferred
                    financing costs
                
                
                136,360
                
                
                —Security
                    deposits
                
                
                45,676
                
                
                45,676$
                15,034,393
                
                $
                13,305,998**Liabilities
                    and stockholders' equity**Current
                    liabilities:Accounts
                    payable
                
                $
                521,615
                
                $
                282,586Accrued
                    expenses
                
                
                893,868
                
                
                593,698Accrued
                    separation costs
                
                
                —
                
                
                318,368Short-term
                    portion of capital lease obligation
                
                
                6,173
                
                
                37,036Short-term
                    portion of refundable grant obligation
                
                
                49,611
                
                
                28,766Deferred
                    compensation
                
                
                101,050
                
                
                65,037Convertible
                    unsecured debentures
                
                
                2,399,988
                
                
                5,137,335Convertible
                    secured debentures
                
                
                —
                
                
                2,399,988Deferred
                    income
                
                
                —
                
                
                85,000Total
                    current liabilities
                
                
                3,972,305
                
                
                6,547,826Redeemable
                    Series C preferred stock, net of discount
                
                
                5,035,416
                
                
                —Refundable
                    grant obligation
                
                
                156,329
                
                
                177,174Capital
                    lease obligation
                
                
                —
                
                
                2,669Commitments
                    and contingenciesStockholders'
                    equity:Series
                    A preferred stock, $.001 par value; 1,694,724 authorized shares,
                    155,724
                    issued and outstanding as of December 31, 2005
                
                
                2,413,722
                
                
                —Series
                    B preferred stock, $.001 par value; 1,539,000 authorized shares,
                    none
                    issued and outstanding as of December 31, 2005.
                
                
                —
                
                
                —Common
                    stock, $.001 par value; authorized 70,000,000 shares and 46,454,375
                    and
                    39,113,963 shares issued and outstanding as of December 31, 2005
                    and 2004,
                    respectively
                
                
                46,454
                
                
                39,114Additional
                    paid-in capital
                
                
                99,942,349
                
                
                85,663,479Deferred
                    compensation
                
                
                (596,296
                )
                
                (188,805
                )Deficit
                    accumulated during development stage
                
                
                (95,935,886
                )
                
                (81,335,447
                )Total
                    stockholders' equity
                
                
                5,870,343
                
                
                4,178,341$
                15,034,393
                
                $
                13,305,998







See
      accompanying notes.


F-3


**MILLENNIUM
      CELL INC.**


**(a
      development stage enterprise)**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Twelve
                  Months**
              
              **Twelve
                  Months**
              
              **Twelve
                  Months**
              
              **Cumulative****Ended**
              
              **Ended**
              
              **Ended**
              
              **Amounts****December
                  31,**
                **2005**
              
              **December
                  31,**
                **2004**
              
              **December
                  31,**
                **2003**
              
              **From**
                **Inception******Revenue
              
              $
              416,902
              
              $
              198,474
              
              $
              466,859
              
              $
              1,801,627Cost
                  of revenue
              
              
              382,318
              
              
              198,474
              
              
              409,449
              
              
              1,680,300Gross
                  margin
              
              
              34,584
              
              
              —
              
              
              57,410
              
              
              121,327Product
                  development and marketing
              
              
              3,580,729
              
              
              3,396,469
              
              
              5,294,419
              
              
              23,573,104General
                  and administrative
              
              
              5,396,694
              
              
              4,262,066
              
              
              3,835,873
              
              
              25,612,465Restructuring
                  expense
              
              
              —
              
              
              —
              
              
              —
              
              
              104,982Non-cash
                  charges
              
              
              3,519,991
              
              
              796,286
              
              
              2,164,634
              
              
              28,756,004Depreciation
                  and amortization
              
              
              291,649
              
              
              516,172
              
              
              681,358
              
              
              2,987,012Research
                  and development
              
              
              609,534
              
              
              474,609
              
              
              1,020,102
              
              
              9,196,256Total
                  operating expenses
              
              
              13,398,597
              
              
              9,445,602
              
              
              12,996,386
              
              
              90,229,823Loss
                  from operations
              
              
              (13,364,013
              )
              
              (9,445,602
              )
              
              (12,938,976
              )
              
              (90,108,496
              )Interest
                  expense, net
              
              
              (1,623,118
              )
              
              (1,770,102
              )
              
              (2,897,077
              )
              
              (4,074,292
              )Equity
                  in losses of affiliates
              
              
              —
              
              
              —
              
              
              (488,364
              )
              
              (856,078
              )Loss
                  before income taxes
              
              
              (14,987,131
              )
              
              (11,215,704
              )
              
              (16,324,417
              )
              
              (95,038,866
              )Benefit
                  from income taxes
              
              
              386,692
              
              
              410,726
              
              
              221,480
              
              
              1,253,861Net
                  loss
              
              
              (14,600,439
              )
              
              (10,804,978
              )
              
              (16,102,937
              )
              
              (93,785,005
              )Preferred
                  stock amortization
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,150,881
              )Net
                  loss applicable to common stockholders
              
              $
              (14,600,439
              )
              $
              (10,804,978
              )
              $
              (16,102,937
              )
              $
              (95,935,886
              )Loss
                  per share — basic and diluted
              
              $
              (.34
              )
              $
              (.29
              )
              $
              (.51
              )
              $
              (3.11
              )Weighted
                  — average number of shares outstanding
              
              
              43,405,306
              
              
              37,226,377
              
              
              31,564,345
              
              
              30,843,984





See
      accompanying notes.





F-4


**MILLENNIUM
        CELL INC.**


**(a
      development stage enterprise)**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**





**Additional**
            
            
            
            
            
            
            
            **Total****Common
                Stock**
            
            **Paid-in**
            
            **Deferred**
            
            **Series
                A**
            
            **Accumulated**
            
            **Stockholder's****Shares**
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **Preferred**
            
            **Deficit**
            
            **Equity**Balance
                at December 31, 2002
            
            
            29,027,491
            
            
            29,027
            
            
            61,679,267
            
            
            —
            
            
            —
            
            
            (54,427,532
            )
            
            7,280,762Issuance
                of common stock in private placement transactions
            
            
            5,468,001
            
            
            5,468
            
            
            11,294,533
            
            
            —
            
            
            —
            
            
            —
            
            
            11,300,001Beneficial
                conversion feature on private placement transactions
            
            
            —
            
            
            —
            
            
            1,356,825
            
            
            —
            
            
            —
            
            
            —
            
            
            1,356,825Fair
                value of warrants issued with secured debentures
            
            
            —
            
            
            —
            
            
            471,923
            
            
            —
            
            
            —
            
            
            —
            
            
            471,923Issuance
                of common stock fromexercise
                of options
            
            
            50,000
            
            
            50
            
            
            144,950
            
            
            —
            
            
            —
            
            
            —
            
            
            145,000Issuance
                of restricted stock in conjunction with tender offer
            
            
            197,599
            
            
            198
            
            
            395,000
            
            
            (395,198
            )
            
            —
            
            
            —
            
            
            —Common
                stock under deferred compensation plan
            
            
            —
            
            
            —
            
            
            —
            
            
            (32,315
            )
            
            —
            
            
            —
            
            
            (32,315
            )Amortization
                of deferred compensation for restricted stock
            
            
            —
            
            
            —
            
            
            —
            
            
            69,086
            
            
            —
            
            
            —
            
            
            69,086Issuance
                of common stock to Board of Directors
            
            
            201,289
            
            
            201
            
            
            404,354
            
            
            —
            
            
            —
            
            
            —
            
            
            404,555Issuance
                of common stock for 401(k)
            
            
            84,672
            
            
            85
            
            
            143,139
            
            
            —
            
            
            —
            
            
            —
            
            
            143,224Non-cash
                compensation charges for issuance of stock options
            
            
            —
            
            
            —
            
            
            1,894,961
            
            
            —
            
            
            —
            
            
            —
            
            
            1,894,961Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (16,102,937
            )
            
            (16,102,937
            )Balance
                at December 31, 2003
            
            
            35,029,052
            
            $
            35,029
            
            $
            77,784,952
            
            $
            (358,427
            )
            $
            —
            
            $
            (70,530,469
            )
            $
            6,931,085Issuance
                of common stock in private placement transactions
            
            
            3,162,034
            
            
            3,162
            
            
            5,296,839
            
            
            —
            
            
            —
            
            
            —
            
            
            5,300,001Beneficial
                conversion feature on private placement transactions
            
            
            —
            
            
            —
            
            
            497,757
            
            
            —
            
            
            —
            
            
            —
            
            
            497,757Issuance
                of stock for deferred financing costs
            
            
            377,846
            
            
            378
            
            
            813,445
            
            
            —
            
            
            —
            
            
            —
            
            
            813,823Issuance
                of common stock fromexercise
                of options
            
            
            115,532
            
            
            115
            
            
            345,208
            
            
            —
            
            
            —
            
            
            —
            
            
            345,323Common
                stock under deferred compensation plan
            
            
            —
            
            
            —
            
            
            (27,216
            )
            
            169,622
            
            
            —
            
            
            —
            
            
            142,406Issuance
                of stock for interest payments
            
            
            90,671
            
            
            91
            
            
            142,426
            
            
            —
            
            
            —
            
            
            —
            
            
            142,517Issuance
                of common stock to Board of Directors
            
            
            126,817
            
            
            127
            
            
            226,751
            
            
            —
            
            
            —
            
            
            —
            
            
            226,878Issuance
                of stock for merit program
            
            
            51,800
            
            
            52
            
            
            130,996
            
            
            —
            
            
            —
            
            
            —
            
            
            131,048Issuance
                of stock for executive compensation
            
            
            100,000
            
            
            100
            
            
            199,900
            
            
            —
            
            
            —
            
            
            —
            
            
            200,000Issuance
                of common stock for 401(k)
            
            
            60,211
            
            
            60
            
            
            103,712
            
            
            —
            
            
            —
            
            
            —
            
            
            103,772Non-cash
                compensation charges for issuance of stock options
            
            
            —
            
            
            —
            
            
            148,709
            
            
            —
            
            
            —
            
            
            —
            
            
            148,709Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (10,804,978
            )
            
            (10,804,978
            )Balance
                at December 31, 2004
            
            
            39,113,963
            
            $
            39,114
            
            $
            85,663,479
            
            $
            (188,805
            )
            $
            —
            
            $
            (81,335,447
            )
            $
            4,178,341(continued)






F-5




**(a
      development stage enterprise)**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**(continued)**





**Additional**
            
            
            
            
            
            
            
            **Total****Common
                Stock**
            
            **Paid-in**
            
            **Deferred**
            
            **Series
                A**
            
            **Accumulated**
            
            **Stockholder's****Shares**
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **Preferred**
            
            **Deficit**
            
            **Equity**Balance
                at December 31, 2004
            
            
            39,113,963
            
            $
            39,114
            
            $
            85,663,479
            
            $
            (188,805
            )
            $
            —
            
            $
            (81,335,447
            )
            $
            4,178,341Issuance
                of common stock in private placement transactions
            
            
            5,625,205
            
            
            5,625
            
            
            9,918,373
            
            
            —
            
            
            —
            
            
            —
            
            
            9,923,998Beneficial
                conversion feature on private placement transactions
            
            
            —
            
            
            —
            
            
            168,000
            
            
            —
            
            
            —
            
            
            —
            
            
            168,000Issuance
                of stock for deferred financing costs
            
            
            52,477
            
            
            53
            
            
            62,447
            
            
            —
            
            
            —
            
            
            —
            
            
            62,500Issuance
                of common stock fromexercise
                of options
            
            
            120,288
            
            
            120
            
            
            288,571
            
            
            —
            
            
            —
            
            
            —
            
            
            288,691Common
                stock under deferred compensation plan
            
            
            —
            
            
            —
            
            
            —
            
            
            127,181
            
            
            —
            
            
            —
            
            
            127,181Issuance
                of stock for interest payments
            
            
            178,829
            
            
            179
            
            
            297,215
            
            
            —
            
            
            —
            
            
            —
            
            
            297,394Issuance
                of common stock to Board of Directors
            
            
            138,485
            
            
            138
            
            
            219,148
            
            
            —
            
            
            —
            
            
            —
            
            
            219,286Issuance
                of stock for warrants
            
            
            589,376
            
            
            589
            
            
            883,475
            
            
            —
            
            
            —
            
            
            —
            
            
            884,064Issuance
                of stock for executive compensation
            
            
            50,000
            
            
            50
            
            
            85,450
            
            
            —
            
            
            —
            
            
            —
            
            
            85,500Issuance
                of common stock for 401(k)
            
            
            110,952
            
            
            111
            
            
            163,920
            
            
            —
            
            
            —
            
            
            —
            
            
            164,031Issuance
                of restricted stock for merit awards
            
            
            474,800
            
            
            475
            
            
            1,044,085
            
            
            (1,044,560
            )
            
            —
            
            
            —
            
            
            —Vesting
                of restricted stock awards
            
            
            —
            
            
            —
            
            
            —
            
            
            417,824
            
            
            —
            
            
            —
            
            
            417,824Amortization
                of restricted stock awards
            
            
            —
            
            
            —
            
            
            —
            
            
            125,347
            
            
            —
            
            
            —
            
            
            125,347Warrants
                issued in connection with Series C preferred stock
            
            
            —
            
            
            —
            
            
            1,021,928
            
            
            —
            
            
            —
            
            
            —
            
            
            1,021,928Issuance
                of Series A preferred stock, 155,724 shares issued
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,413,722
            
            
            —
            
            
            2,413,722Deferred
                compensation plan
            
            
            —
            
            
            —
            
            
            —
            
            
            (33,283
            )
            
            —
            
            
            —
            
            
            (33,283
            )Non-cash
                compensation charges for issuance of stock options
            
            
            —
            
            
            —
            
            
            126,258
            
            
            —
            
            
            —
            
            
            —
            
            
            126,258Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (14,600,439
            )
            
            (14,600,439
            )Balance
                at December 31, 2005
            
            
            46,454,375
            
            $
            46,454
            
            $
            99,942,349
            
            $
            (596,296
            )
            $
            2,413,722
            
            $
            (95,935,886
            )
            $
            5,870,343





See
      accompanying notes.




F-6


**MILLENNIUM
      CELL INC.**


**(a
      development stage enterprise)**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Twelve
                Months**
            
            **Twelve
                Months**
            
            **Twelve
                Months****Ended**
            
            **Ended**
            
            **Ended**
            
            **Cumulative****December
                31,**
            
            **December
                31,**
            
            **December
                31,**
            
            **Amounts
                From****2005**
            
            **2004**
            
            **2003**
            
            **Inception****Operating
                activities**Net
                loss
            
            $
            (14,600,439
            )
            $
            (10,804,978
            )
            $
            (16,102,937
            )
            $
            (93,785,005
            )Adjustments
                to reconcile net loss to net cash used in operation
                activitiesDepreciation
                and amortization
            
            
            291,649
            
            
            516,172
            
            
            681,358
            
            
            2,987,012Amortization
                of discount on unsecured debentures
            
            
            856,509
            
            
            773,623
            
            
            926,832
            
            
            2,578,829Amortization
                of deferred financing costs
            
            
            429,507
            
            
            367,932
            
            
            582,054
            
            
            1,394,083Non-cash
                interest charges
            
            
            297,394
            
            
            142,517
            
            
            —
            
            
            439,911Beneficial
                conversion feature on PIPE financing
            
            
            168,000
            
            
            497,757
            
            
            1,356,825
            
            
            2,022,582Losses
                on investment in affiliate
            
            
            —
            
            
            —
            
            
            488,364
            
            
            856,078Non-cash
                charges
            
            
            3,519,991
            
            
            796,286
            
            
            2,164,634
            
            
            28,756,004Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            296,980
            
            
            (405,006
            )
            
            192,771
            
            
            (149,270
            )Prepaid
                expenses and other assets
            
            
            23,600
            
            
            3,993
            
            
            72,130
            
            
            (283,542
            )Accounts
                payable and accruedexpenses
            
            
            445,218
            
            
            754,842
            
            
            (218,856
            )
            
            2,291,237Deferred
                income
            
            
            (85,000
            )
            
            85,000
            
            
            —
            
            
            2,399,988Net
                cash used in operating activities
            
            
            (8,356,591
            )
            
            (7,271,862
            )
            
            (9,856,825
            )
            
            (50,492,093
            )**Investing
                Activities**Purchase
                of property and equipment
            
            
            —
            
            
            (97,585
            )
            
            (7,409
            )
            
            (2,885,446
            )Patent
                registration costs
            
            
            (194,286
            )
            
            (46,057
            )
            
            (77,591
            )
            
            (902,567
            )Investment
                in affiliate
            
            
            —
            
            
            —
            
            
            (320,952
            )
            
            (856,078
            )Increase/(decrease)
                in restricted cash
            
            
            1,452,963
            
            
            (36,642
            )
            
            (35,329
            )
            
            (1,582,058
            )Net
                cash (used in) provided by investing activities
            
            
            1,258,677
            
            
            (180,284
            )
            
            (441,281
            )
            
            (6,226,149
            )**Financing
                activities**Proceeds
                from sale of common stock
            
            
            1,172,755
            
            
            345,324
            
            
            145,000
            
            
            39,394,207Underwriting
                and other expenses ofinitial
                public offering
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,669,613
            )Proceeds
                from issuance of debentures
            
            
            —
            
            
            9,428,806
            
            
            8,500,000
            
            
            21,428,806Proceeds
                from redeemable Series C preferred stock
            
            
            10,000,000
            
            
            —
            
            
            —
            
            
            10,000,000Deferred
                financing costs
            
            
            (583,272
            )
            
            (79,077
            )
            
            (291,027
            )
            
            (1,281,656
            )Capital
                lease obligation payments
            
            
            (33,532
            )
            
            (29,240
            )
            
            (17,239
            )
            
            (80,011
            )Proceeds
                from capital contribution
            
            
            —
            
            
            —
            
            
            —
            
            
            500,000Payment
                of note payable
            
            
            —
            
            
            —
            
            
            —
            
            
            (250,000
            )Proceeds
                from grant, net
            
            
            —
            
            
            —
            
            
            (21,582
            )
            
            205,940Proceeds
                from sale of preferred stock
            
            
            —
            
            
            —
            
            
            —
            
            
            2,146,446Net
                cash provided by financing activities
            
            
            10,555,951
            
            
            9,665,813
            
            
            8,315,152
            
            
            68,394,119Net
                increase (decrease) in cash and cash equivalents
            
            
            3,485,037
            
            
            2,213,667
            
            
            (1,982,954
            )
            
            11,
                675,877Cash
                and cash equivalents, beginning of period
            
            
            8,217,840
            
            
            6,004,173
            
            
            7,987,127
            
            
            —Cash
                and cash equivalents, end of period
            
            $
            11,675,877
            
            $
            8,217,840
            
            $
            6,004,173
            
            $
            11,675,877





**Supplemental
      Cash Flow Data:**





Please
      see Note 3 for more information.




See
      accompanying notes.





F-7


**MILLENNIUM
          CELL INC.**
 **(a
          development stage enterprise)**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**
 **Note
          1 — Basis of Presentation**





Millennium
      Cell Inc. (the "Company"), was incorporated on December 17, 1998 and organized
      on January 1, 1999 (inception). 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 is focused on
      commercialization of hydrogen batteries for use primarily in portable electronic
      devices for the military, medical, industrial and consumer markets. These
      hydrogen batteries offer runtime, weight, safety and cost advantages in an
      attractive form factor versus traditional batteries. Millennium Cell is
      developing this technology in partnership with corporate and government
      entities.








**Note
      2 — Significant Accounting Policies**





*Principles
      of Consolidation*





The
      consolidated financial statements include the accounts of the Company 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.





*Accounts
      receivable*





Accounts
      receivable - trade is comprised of agreements with third parties from revenue
      agreements. Accounts receivable - government represents amounts due under the
      Company’s cost-sharing programs.





*Concentration
      of Credit Risk*





Financial
      instruments, which potentially expose the Company to concentrations of credit
      risk, consist principally of cash investments and trade receivables. The Company
      places its cash investments with highly rated financial institutions and in
      U.S.
      government issued securities. At times, such investments may be in excess of
      the
      FDIC insurance limit. The Company’s limited customer base increases its
      concentrations of credit risk with respect to trade receivables. The Company
      routinely assesses the financial strength of its customers.





*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.





*Property
      and Equipment*





Property
      and equipment are stated at cost. Machinery and equipment and furniture and
      fixtures are depreciated over three years. Leasehold improvements are amortized
      over the estimated useful lives of the assets or initial lease terms, whichever
      is shorter. Repairs and maintenance are charged to expense as incurred.








*Patents
      and Licenses*





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 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 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.





F-8




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


*Investment
      in Affiliate*





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.





In
      July
      2002, the Company agreed to acquire a 50% non-controlling interest in a European
      alkaline fuel cell company (the "Affiliate"). During the period from July 2002
      to June 2003, the Company directly and indirectly provided limited funding
      for
      their proportionate share of the Affiliate’s operating expenses. As of June 30,
      2003, the Company had written off its Investment in Affiliate on the balance
      sheet and determined the fair value of the investment was zero. During the
      third
      quarter of 2003, the Company decided to abandon its interest in the Affiliate.
      No gain or loss was recognized upon this event.





*Restricted
      Cash*





Cash
      that
      is pledged as collateral under the Company's amended facilities lease agreement
      and restricted funds for future dividends on the Redeemable Series C Preferred
      Stock (“Series C”) is classified as restricted cash on the consolidated balance
      sheet.





*Revenue
      Recognition*





Revenues
      over the past three fiscal years were derived primarily from engineering and
      design services. While in the development stage, the Company’s revenue is
      expected to fluctuate from year to year with the timing of prototype development
      and design services.





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





*Cost-Sharing
      Programs*





The
      Company participates in a number of government programs, which provide the
      Company with funding to offset the costs of product development and research.
      As
      the Company’s full costs are not billable under these programs, the billable
      costs are shown as reductions of operating expenses in the accompanying
      consolidated statements of operations in the period in which the costs are
      incurred on a time and materials basis.





The
      following table is a breakdown of the reduction of operating expenses as a
      result of the cost-sharing programs, which began in 2004, by function for the
      12
      months ended December 31:





****
            ****
            **2005**
            ****
            **2004**Product
                development expense
            
            $
            141,743
            
            $
            233,629General
                and administrative expense
            
            $
            293,252
            
            $
            229,033Research
                and development expense
            
            $
            605,103
            
            $
            745,446Total
            
            $
            1,040,098
            
            $
            1,208,108








*Product
      Development and Marketing Costs*





Product
      development and marketing costs are expensed as incurred.








F-9




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


*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.





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 loss and loss per share, if the
      Company had applied the fair value recognition provisions of SFAS 123 to
      stock-based employee compensation:








**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Net
                loss attributable to common stockholders - as reported
            
            $
            (14,600,439
            )
            $
            (10,804,978
            )
            $
            (16,102,937
            )Plus:
                Stock-based compensation expense included in reported net
                loss
            
            
            1,106,269
            
            
            796,286
            
            
            2,164,634Less:
                Total stock-based compensation expense determined using the fair
                value
                method
            
            
            (1,636,608
            )
            
            (1,576,863
            )
            
            (6,125,215
            )Net
                loss attributable to common stockholders - pro forma
            
            $
            (15,130,778
            )
            $
            (11,585,555
            )
            $
            (20,063,518
            )Net
                loss per share attributable to common stockholders - As reported
            
            $
            (0.34
            )
            $
            (0.29
            )
            $
            (0.51
            )Net
                loss per share attributable to common stockholders - Pro
                forma
            
            $
            (0.35
            )
            $
            (0.31
            )
            $
            (0.64
            )





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:





**Year
                Ended December 31,****2005**
            **2004**
            **2003**Expected
                dividend yield
            —
            —
            —Expected
                stock price volatility
            .89
            .57
            .69Risk-free
                interest rate
            4.45%
            3.48%
            3.68%Expected
                option term
            5
                years
            5
                years
            5
                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 were $1.28,
        $1.14 and $1.44 in fiscal 2005, 2004 and 2003, respectively.
  F-10


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


In
      December 2004, the Financial Accounting Standards Board issued
      SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which
      requires companies to measure and recognize compensation expense for all
      stock-based payments at fair value. SFAS 123R will become effective for all
      registrants as of the first fiscal year beginning after June 15, 2005.
      Therefore, the Company’s required effective date is January 1, 2006. The
      Company’s current estimate of the annual net loss effect in 2006 of
      adopting SFAS 123R in January 2006 is approximately $340,000. The Company
      will use the prospective method and the Black-Scholes option valuation model
      to
      record compensation expense for stock options.





*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.





In
      October 2004, the FASB ratified Emerging EITF No. 04-8, "The Effect of
      Contingently Convertible Debt on Diluted Earnings Per Share." Their conclusion
      was that beginning with reporting periods ending after December 15, 2004 (i)
      contingently convertible debt instruments are subject to the if-converted method
      under SFAS No. 128, "Earnings Per Share," regardless of the contingent features
      included in the instrument, and (ii) prior period earnings per share would
      have
      to be restated. With the ratification of EITF No. 04-8, the Company was required
      to include such potentially issuable shares, if dilutive, in its diluted
      earnings per share calculation beginning with the fourth quarter 2004 reporting
      period. Our secured and unsecured convertible debentures, as well as our Series
      C Preferred Stock, are contingently convertible debt instruments that are
      potentially convertible into approximately 4,600,000, 3,700,000 and 300,000
      shares of common stock for 2005, 2004 and 2003, respectively. These contingently
      convertible shares have not been included
      in the computation of diluted net loss per share for the years ended December
      31, 2005, 2004 and 2003, respectively, as their effects would have been
      anti-dilutive. Please
      see Notes 7 and 11 for more information.




Options
      to purchase 4,277,249, 4,017,191 and 4,422,476 shares of common stock have
      not
      been included in the computation of diluted net loss per share for the years
      ended December 31, 2005, 2004 and 2003, respectively, as their effects would
      have been anti-dilutive. Please see Note 12 for more information.





Warrants
      to purchase 2,066,015, 1,405,391 and 1,405,391 shares of common stock have
      not
      been included in the computation of diluted net loss per share for the years
      ended December 31, 2005, 2004 and 2003, respectively, as their effects would
      have been anti-dilutive. Please see Notes 7 and 12 for more information.





*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 $33,609,000 and $29,609,000 at December 31,
      2005 and 2004, 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 carryforwards
      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.




















F-11







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


*Other
      Recently Issued Accounting Standards*





In
      May
      2005, the FASB issued SFAS Statement No. 154, “Accounting Changes and
      Error Corrections” (“SFAS 154”). SFAS 154 is a replacement of
      Accounting Principles Board Opinion No. 20 (“APB 20”) and FASB
      Statement No. 3. SFAS 154 provides guidance on the accounting for and
      reporting of accounting changes and error corrections. It establishes
      retrospective application, or the latest practicable date, as the required
      method for reporting a change in accounting principle and the reporting of
      a
      correction of an error. SFAS 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15,
      2005 and the Company will adopt this standard on January 1, 2006. The
      Company does not expect that the adoption of SFAS 154 will have any impact
      on the Company’s consolidated results of operations, financial condition and
      cash flows.





*Reclassifications*





Amounts
      previously reported as "Product Development and Engineering" have been
      reclassified and shown as "Research and Development" for all periods presented.
      Additionally, sales of net operating losses in the State of New Jersey
      previously recorded as “Other Income” have been reclassified and shown as
“Benefit from Income Taxes” for all periods presented. Certain other amounts
      have been reclassified to conform to the current year's presentation.





**Note
      3 — Supplemental Cash Flow Information**





The
      Company funded its vested matching contributions in connection with its 401(k)
      plan for employees with 110,952, 60,211 and 84,672 shares of common stock with
      a
      market value of $164,031, $103,772 and $143,224 in fiscal 2005, 2004 and 2003,
      respectively.





The
      Company made non-cash payments to the members of the Board of Directors in
      lieu
      of cash compensation of $219,286, $226,878 and $404,555 in 2005, 2004 and 2003,
      respectively.





In
      March
      2005, the Company issued 474,800 shares of restricted stock to employees with
      a
      fair market value of $1,044,560. These shares will vest in five years, or
      earlier, upon meeting certain accelerated vesting criteria, as defined. During
      the twelve months ended December 31, 2005, the
      Company recorded $543,171 in non-cash charges for restricted stock issued to
      employees that includes the amortization of restricted stock issued in March
      2005 and the vesting of 189,920 shares of restricted stock during March 2005
      based on the Company’s performance of certain acceleration of vesting features
      in the restricted stock plan. The
      Company will recognize additional non-cash charges of $501,389 through 2009,
      or
      earlier if other accelerated vesting features are met.





Interest
      paid during 2005, 2004 and 2003 totaled $128,493, $88,749 and $104,337,
      respectively. Non-cash interest during 2005 and 2004 was $297,394 and $142,517,
      respectively. The Company also issued debentures in 2005, 2004 and 2003 which
      resulted in non-cash transactions. Please see Note 11 for more
      information.





In
      December 2005, the Company issued 100,000 options to a member of the Board
      of
      Directors for his contribution towards the negotiation of the joint development
      arrangement. The Company recorded a non-cash charge of $126,258. Please see
      Note
      13 for more information.





**Note
      4 — Income Taxes**




The
      components of the benefit for income taxes are as follows:


**Year Ended December 31,**


**2005**
            
            **2004**
            ****
            **2003**Current
                benefit:Federal
            
            $
            —
            
            $
            —
            
            $
            —State
            
            
            (386,692
            )
            
            (410,726
            )
            
            (221,480
            )Deferred
                provision:Federal
            
            
            —
            
            
            —
            
            
            —State
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            (386,692
            )
            $
            (410,726
            )
            $
            (221,480
            )







F-12




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


The
      income tax benefits recorded for the years ended December 31, 2005, 2004 and
      2003 were derived from the Company's participation in the New Jersey Emerging
      Technology and Biotechnology Financial Assistance Program. This program allows
      certain qualified companies to be compensated for the transfer of their New
      Jersey net operating losses to other companies.





Significant
      components of the Company’s net deferred taxes as of December 31, 2005 and 2004
      are as follows:





**Year
      Ended December
      31,**


**2005**
            
            **2004**Stock
                based compensation
            
            $
            8,898,000
            
            $
            8,757,000Net
                operating loss carryforwards
            
            
            22,545,000
            
            
            18,946,000Research
                and development credits
            
            
            1,770,000
            
            
            1,490,000Depreciation
                and amortization
            
            
            396,000
            
            
            382,000Deferred
                revenue
            
            
            —
            
            
            34,000Other
            
            
            —
            
            
            —Valuation
                reserve
            
            
            (33,609,000
            )
            
            (29,609,000
            )Net
                deferred tax asset
            
            
            —
            
            
            —





The
      Company has provided a full valuation allowance in 2005 and 2004 for its
      deferred tax assets since the realization of these future benefits is not
      considered more likely than not. The amount of deferred tax assets considered
      realizable is subject to change based on estimates of future taxable income
      during the carryforward period. If the Company achieves profitability, these
      deferred tax assets would be available to offset future income taxes. The
      Company assesses the need for the valuation allowance at each balance sheet
      date
      based on all available evidence.





As
      of
      December 31, 2005, the Company had available net operating loss carryforwards
      of
      approximately $57,300,000 for federal income tax purposes and approximately
      $41,500,000 for state income tax purposes. The federal carryforwards will begin
      to expire in 2020, and the state carryforwards will begin to expire in 2007.
      In
      addition, at December 31, 2005 the Company had available federal research and
      development tax credit carryforwards of approximately $1,180,000 that begin
      to
      expire in 2020 and state research and development credits of approximately
      $590,000.





The
      reconciliation of income tax expense computed at the U.S. federal statutory
      rate
      to the recorded provision (benefit) for income taxes is as follows:





**** **Year
      Ended December 31,**


**2005**
            ****
            **%**
            ****
            **2004**
            ****
            **%**
            ****
            **2003**
            ****
            **%**Tax
                at U.S. statutory rate
            
            $
            (5,246,000
            )
            
            35.0
            
            $
            (3,925,000
            )
            
            35.0
            
            $
            (5,636,000
            )
            
            35.0State
                tax (benefit), net of federal tax effect
            
            
            (584,000
            )
            
            3.9
            
            
            (647,000
            )
            
            5.8
            
            
            (942,000
            )
            
            5.8Research
                and experimentation tax credit
            
            
            (58,000
            )
            
            0.4
            
            
            (130,000
            )
            
            1.2
            
            
            (193,000
            )
            
            1.2Interest
                expense
            
            
            681,000
            
            
            (4.5
            )
            
            655,000
            
            
            (6.1
            )
            
            —
            
            
            —Other
            
            
            13,308
            
            
            (0.1
            )
            
            (4,726
            )
            
            —
            
            
            94,000
            
            
            (0.5
            )Valuation
                allowance
            
            
            4,807,000
            
            
            (32.1
            )
            
            3,641,000
            
            
            (32.2
            )
            
            6,455,520
            
            
            (40.1
            )Provision
                (benefit) for income taxes
            
            $
            (386,692
            )
            
            2.6
            
            $
            (410,726
            )
            
            3.7
            
            $
            (221,480
            )
            
            1.4








**Note
      5 — Property And Equipment**





Property
      and equipment consist of the following at December 31:





**2005**
            
            **2004**Machinery
                and equipment
            
            $
            1,329,655
            
            $
            1,329,655Furniture
                and fixtures
            
            
            402,125
            
            
            402,125Leasehold
                improvements
            
            
            1,290,078
            
            
            1,290,0783,021,858
            
            
            3,021,858Accumulated
                depreciation
            
            
            (2,571,720
            )
            
            (2,358,282
            )Property
                and equipment, net
            
            $
            450,138
            
            $
            663,576







F-13




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






The
      Company recorded depreciation expense of $213,438, $443,523 and $611,062 for
      the
      fiscal years ended December 31, 2005, 2004 and 2003, respectively.





In
      the
      second quarter of 2003, the Company entered into a three-year capital lease
      for
      approximately $86,000 to purchase software. The software is classified as
      machinery and equipment and the amortization of the leased assets are included
      in depreciation expense in the accompanying financial statements. The lease
      term
      is three years and contains a bargain purchase option at the end of the lease.





**Note
      6 — Patents and Licenses**





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





**2005**
            
            **2004**Patent
                and license costs
            
            $
            1,010,496
            
            $
            816,211Accumulated
                amortization
            
            
            (355,620
            )
            
            (277,409
            )Patents
                and licenses, net
            
            $
            654,876
            
            $
            538,802





The
      Company recorded amortization expense of $78,211, $72,649 and $70,296 for the
      fiscal years ended December 31, 2005, 2004 and 2003, respectively. Amortization
      of patents and licenses is estimated to be approximately $78,000 per year over
      the next five years and $265,000 thereafter.





**Note
      7 — Convertible Debentures**





On
      November 8, 2002, the Company issued to the Ballard Power Systems Inc.
      (“Ballard”) a $2.4 million secured convertible debenture with a maturity
      date of November 8, 2005. On September 30, 2005, Ballard sold its debenture
      in
      equal amounts to three accredited institutional investors (the “Investors”) in a
      private transaction. In connection with such transfer, the Company issued an
      $800,000 secured convertible debenture, in substance identical to the Ballard
      debenture, to each of the Investors. On November 8, 2005, the Company issued
      an
      amended and restated convertible debenture (each, a “New Debenture”) to each of
      the Investors as consideration for the Investors’ agreement to surrender their
      original debentures and cancel the standby letters of credit issued by Wachovia
      Bank, National Association, that secured the original debentures, thus enabling
      the Company to use the formerly restricted cash for the Company’s operations.
      The principal changes to the term of the debentures consisted of the reduction
      of the initial conversion price from $4.25 to $2.25 per share, an extension
      of
      the maturity date to September 30, 2007, and the provision for 6% quarterly
      interest payments to the holders. The Company relied on the exemption from
      registration under Section 3(a)(9) of the Securities Act in connection with
      the issuance of the New Debentures. No gain or loss was required to be
      recognized by the Company upon the exchange. In accordance with EITF 00-27
      (“Application of Issue No. 98-5 to Certain Convertible Instruments”) and EITF
      98-5 (“Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios”), the Company will be required to
      record a Beneficial Conversion Feature (“BCF”) interest charge if the Company
      elects to convert debentures early at a discount.





**Note
      8 — Grant Obligation**





Between
      January 1999 and April 2000, the Company 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 the Company’s technology. The recoverable grant is required to be
      repaid when the Company generates net sales in a fiscal year. The repayment
      obligation, which began in June 2001, escalates from 1% to 5% of net sales
      over
      a ten-year period. The Company is obligated to repay the unpaid amount of the
      original grant at the end of the ten-year period. As of December 31, 2005,
      the
      Company has repaid approximately $21,000 and an additional $49,611 was paid
      in
      the first quarter of 2006.





F-14




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






**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. The
      amended lease will expire in 2008 and will contain options to renew for an
      additional eight 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 excluding estimated allocated taxes and
      maintenance under the amended operating leases are as follows:





2006
            
            
            484,3102007
            
            
            484,3102008
            
            
            443,950Total
            
            $
            1,412,570





Rent
      expense under the operating lease was approximately $649,956, $640,523 and
      $546,710 for the years ended December 31, 2005, 2004, and 2003, 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.





In
      2005,
      the Company began leasing 5,000 square feet to an unrelated third party. The
      lease is a one-year agreement, with an option for a six month extension. The
      lessee agreed to pay the Company a fixed monthly rent of $9,275 per month.





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





**Note
      10 — Rabbi Trust**





In
      2003,
      the Company established a deferred compensation arrangement whereby a portion
      of
      certain Board of Directors fees could be withheld and placed in a Rabbi Trust
      at
      their option. The Company adopted the provisions of Emerging Issues Task Force
      (EITF) 97-14 "Accounting for Deferred Compensation Arrangement Where Amounts
      Are
      Earned and Held in a Rabbi Trust and Invested" which requires the Company to
      consolidate into its financial statements the net assets of the trust. The
      deferred compensation obligation has been classified as a current liability.
      The
      fair value of the Rabbi Trust was $101,050 and is payable in cash or the
      Company’s common stock upon the holders’ request.





**Note
      11 — Private Placement Transactions**





*Private
      Placement Transactions*





During
      2002, 2003 and 2004, we entered into a series of private placement financing
      transactions with three different institutional and accredited investors
      pursuant to the terms of separate securities purchase agreements among the
      Company and the purchasers. The private placements were exempt from registration
      under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such
      Act. The placements collectively raised $26.0 million dollars through the sale
      of $4.0 million in common stock and the issuance of $22.0 million in convertible
      debentures. As of December 31, 2005, all $22.0 million of debentures had been
      converted into 11,931,537 shares of common stock. Due to these conversions,
      the
      Company incurred BCF interest charges for the years ended December 31, 2005,
      2004 and 2003 of $168,000, $497,757 and $1,356,825, respectively.





*Redeemable
      Series C Preferred Stock*




On
      April
      25, 2005, the Company consummated a private placement financing transaction
      with
      seven institutional and accredited investors who paid $10 million for 10,000
      shares of our redeemable Series C Preferred Stock (“Series C”) (which shares
      were subsequently exchanged for a like number of shares of redeemable Series
      C2
      Preferred Stock in an exchange offer conducted by the Company). Each Series
      C
      share is convertible into 500 hundred shares of our common stock, at any time,
      at an initial conversion price equal to $2 per share subject to adjustment
      based
      upon customary anti-dilution provisions, or lower based upon the market price
      of
      our common stock during the ten trading days preceding conversion. The shares
      of
      Series C bear a 7% cumulative dividend payable quarterly in shares of common
      stock or cash, at the Company’s option and are junior to the Series A and Series
      B preferred stock in liquidation preference. The Series C is subject to
      mandatory redemption by the Company three years after issuance and can be
      settled in cash or with the Company’s common stock. As a result, the Series C is
      recorded as a liability in accordance with FAS 150 “ Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity”). Additionally,
      the Company issued to the investors three-year warrants to purchase an aggregate
      of 1.25 million shares of the Company’s common stock at an exercise price equal
      to $2 per share, subject to adjustment based on customary antidilution
      protections. The warrants were valued at $1,021,928 at the date of issuance
      and
      were recorded as a discount to debt and as additional paid-in-capital on the
      balance sheet and is amortized as interest expense throughout the term of the
      Series C or as they are converted, whichever comes first.





F-15




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




Under
      the
      purchase agreement, the Company is required to restrict funds for future
      dividends to be paid to Series C holders. As a result, these funds, which
      amounted to approximately $1,800,000 at issuance, were classified as restricted
      cash on the balance sheet. As of December 31, 2005, the Company issued 54,117
      shares valued at $109,128 in satisfaction of the quarterly dividend payments
      with respect to Series C. Total dividends of $369,753, which include dividends
      paid in cash and common stock were recorded as interest expense since the Series
      C was recorded as a liability as of December 31, 2005. According to the Series
      C
      purchase agreement, as dividends are issued or paid, and conversions are
      executed, the restricted cash is released ratably to our non-restricted cash
      accounts. As of December 31, 2005, approximately $4.5 million of the Series
      C
      have been converted into 2,323,743 shares of the Company’s common stock and the
      Company has transferred $796,286 from the restricted cash account for the
      conversions that were executed.





*Series
      A Preferred Stock*





On
      April
      25, 2005, the Company consummated the first closing under a joint development
      arrangement with The Dow Chemical Company (“Dow”). In connection with the
      closing, we issued 155,724 shares of Series A Preferred Stock to Dow (which
      shares were subsequently exchanged for a like number of shares of Series A2
      Preferred Stock in an exchange offer conducted by the Company), each share
      of
      which is convertible into ten shares of our common stock. As a result of the
      Series A issuance in exchange for services rendered by Dow in conjunction with
      the joint development arrangement, we recorded a non-cash charge of $2,413,722
      as product development expense based on the market value of the underlying
      common stock as of April 25, 2005. The Series A has substantially the same
      rights of our common stock, therefore the Series A was valued based on the
      close
      of our common stock on April 25, 2005.





The
      purpose of the joint development arrangement is for the two companies to jointly
      develop portable power solutions based on our Hydrogen on Demand® energy systems
      coupled with a fuel cell. The joint development arrangement has a three year
      term and each party may terminate the joint development arrangement under
      certain conditions. The joint development arrangement contemplates a series
      of
      four milestones designed to culminate in a commercially available product.
      The
      milestones are focused on military and/or consumer electronics applications.
      Achievement of milestones, as defined in the joint development arrangement,
      in
      either military or consumer electronics applications will trigger equity
      transactions at Dow’s option to purchase an additional $1.25 million of the
      Company’s preferred stock based on the market value of the common stock as
      defined in the joint development arrangement.





Upon
      the
      successful completion of each of the four milestones, Dow has a right, but
      not
      an obligation, to purchase a number of shares of the Company’s Series B
      Preferred Stock which is convertible into a number of shares of the Company’s
      common stock that could be purchased for $1,250,000 (based upon a purchase
      price
      equal to the volume weighted average price for the 30-trading day period prior
      to the date of issuance). If Dow purchases shares of the Company’s Series B
      Preferred Stock, Dow will also receive warrants to purchase a number of shares
      of the Company’s common stock that equals 25% of the number of shares of common
      stock issuable upon conversion of the Series B Preferred Stock. If Dow purchases
      shares of the Company’s Series B Preferred Stock in such instances, the Company
      will issue to Dow additional shares of Series A Preferred Stock such that Dow
      will own a certain percentage of the Company’s capital stock as of the date of
      issuance as provided in the Dow Stock Purchase Agreement. If Dow elects not
      to
      purchase shares of the Company’s Series B Preferred Stock upon completion of any
      milestone, the Company will issue to Dow a lesser number of additional shares
      of
      Series A Preferred Stock.





F-16





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






**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 and
      reserved 8,500,000 shares of common stock, which includes shares that are
      allotted under the 401(k) 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.





The
      following table summarizes option activity under the Plan:








**Weighted****Average****Number
                Of**
            
            **Exercise
                Price****Options**
            
            **Per
                Share**Balance
                at December 31, 2002
            
            
            4,345,829
            
            $
            5.06Granted
                at fair value
            
            
            1,122,840
            
            
            2.30Forfeited
                or terminated
            
            
            (996,093
            )
            
            7.46Exercised
            
            
            (50,000
            )
            
            2.90Balance
                at December 31, 2003
            
            
            4,422,576
            
            $
            3.84Granted
                at fair value
            
            
            642,038
            
            
            2.33Forfeited
                or terminated
            
            
            (931,891
            )
            
            3.61Exercised
            
            
            (115,532
            )
            
            2.98Balance
                at December 31, 2004
            
            
            4,017,191
            
            $
            3.79Granted
                at fair value
            
            
            632,800
            
            
            2.83Forfeited
                or terminated
            
            
            (252,454
            )
            
            2.73Exercised
            
            
            (120,288
            )
            
            2.40Balance
                at December 31, 2005
            
            
            4,277,249
            
            $
            3.50





The
      following is additional information relating to options granted and outstanding
      under the plan as of December 31, 2005:





**Weighted**
            
            **Remaining**
            
            
            
            **Weighted****Average**
            
            **Weighted**
            
            
            
            **Average****Exercise
                Price Range**
            
            **Options**Outstanding
            
            **Exercise
                Price**
            
            **Average**
              **Life
                (Years)**
            
            **Options**
              **Exercisable**
            
            **Exercise
                Price**$0.01
                - $ 2.00
            
            
            496,347
            
            $
            0.67
            
            
            9.89
            
            
            22,534
            
            $
            1.95$2.01
                - $ 2.90
            
            
            2,969,170
            
            
            2.70
            
            
            5.10
            
            
            2,626,842
            
            
            2.75$2.91
                -$
                9.58
            
            
            381,536
            
            
            5.60
            
            
            6.14
            
            
            381,536
            
            
            5.60$10.00
                -$19.63
            
            
            430,196
            
            
            10.39
            
            
            6.00
            
            
            430,196
            
            
            10.394,277,249
            
            $
            3.50
            
            
            6.46
            
            
            3,461,108
            
            $
            4.01





The
      stock
      option table above excludes the warrants to purchase 1,250,000 shares of the
      Company’s common stock issued in connection with the Series C, as well as
      warrants to purchase 816,015 shares of the Company’s common stock that begin to
      expire in 2010.





The
      Company also incurred non-cash charges of $0.1 million, $0.2 million and $0.5
      million in 2005, 2004 and 2003, respectively, related to the fair value of
      warrants issued to affiliates and a board member. The accounting methodology
      for
      these warrants requires a re-valuing of the warrants at each period ending
      market price using a Black-Scholes pricing model. Due to the variable nature
      of
      this accounting methodology, it is difficult to predict the amount of additional
      non-cash charges the Company will incur related to these warrants during future
      periods.




F-17




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






*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 three years. The Company funded the vested matching contributions
      to the plan with 110,952, 60,211 and 84,672 shares of common stock with an
      issued market value of $164,031, $103,772 and $143,224 in fiscal 2005, 2004
      and
      2003, respectively.





**Note
      13 — Related Party Transactions**





In
      October 2004, the Company’s Board of Directors approved a financial advisory
      services agreement with Andersen, pursuant to which Andersen is to act as the
      Company’s Senior Financial Advisor. As Senior Financial Advisor, Andersen is
      required to support the Company’s efforts to raise capital through transactions
      that contemplate issuances of debt, equity and/or convertible securities by
      Millennium to strategic entities and financial investors. In consideration
      therefore, the Company paid Andersen a non-refundable retainer in the amount
      of
      $62,500 in 2004. Further, upon the execution and delivery of definitive
      agreements with respect to a strategic transaction in 2005, Andersen was
      entitled to and received fee equal to $62,500 payable which was paid in shares
      of restricted Common Stock.





In
      2005
      and 2004, respectively, the Company entered into an Employment Agreement and
      a
      Restricted Stock Grant Agreement with Mr. H. David Ramm, a member of the Board
      of Directors, and the Chief Executive Officer, and an Agreement with DKRW Energy
      LLC (“DKRW”), a limited liability company of which Mr. Ramm is a member. The
      Company made a grant to Mr. Ramm of 50,000 and 100,000 shares of restricted
      stock in 2005 and 2004, respectively in accordance with the restricted stock
      agreement. Under the DKRW agreement, the Company agreed to pay a monthly
      retainer of $12,500 and $25,000 to DKRW in connection with Mr. Ramm’s serving as
      the Chief Executive Officer in 2005 and 2004, respectively. The agreement will
      automatically renew on a month-to-month basis unless terminated in writing
      by
      either party.




In
      December 2005, Zoltan Merszei, a member of the Company’s Board of Directors, was
      awarded 100,000 options to purchase the Company’s common stock with an exercise
      price of $1.48 per share.  These options will vest ratably over three
      years.  In December 2005, the Company recorded a non-cash charge of
      $126,258 based on the fair value of the options.  The options were awarded
      by the Board of Directors in recognition of Mr. Merszei’s contributions towards
      the negotiation of the joint development arrangement with Dow, which was
      executed in April 2005 (see note 11). Mr. Merszei is a former member of the
      Board of Directors of Dow and has a family member who is currently employed
      there as well.





**Note
      14 — Subsequent Events (Unaudited)**





*Gecko*





On
      February 15, 2006, the Company entered into a 3-year joint development program
      with Gecko Energy Technologies, Inc. (“Gecko”) to collaborate on the development
      and commercialization of portable fuel cell systems for use in military,
      medical, industrial and consumer electronics applications. These products will
      pair the company’s patented Hydrogen on Demand® technology with Gecko’s thin
      planar Proton Exchange Membrane (PEM) fuel cells to create a hydrogen battery
      that is lighter, smaller and less expensive than traditional batteries for
      a
      variety of applications. Gecko’s efforts are focused on the development of an
      easy-to-manufacture fuel cell that provides portable device makers with design
      flexibility by allowing the thin power source to be part of the exterior surface
      of the device itself.





In
      addition to the joint development program, the Company has acquired
      approximately 23% of the outstanding common stock of Gecko in exchange for
      $0.5
      million in cash and a one-year, commitment of services and facilities valued
      at
      $0.5 million. Later in the year, the Company will increase its position to
      a
      total of 48% of Gecko’s outstanding common stock by investing another $1.0
      million in cash or the Company’s common stock. As part of the transaction, the
      Company received the right to acquire, at its sole option, up to 80% of Gecko
      over the remaining 2 years of the agreement at fair value of the common stock
      on
      the date of the acquisition.





*New
      Debenture Conversion*





On
      February 24, 2006, the Company converted an aggregate $500,000 of the New
      Debentures into 331,125 shares of common stock. The Company recorded a
      beneficial conversion feature charge of $35,000 in conjunction with the
      conversion.


F-18
  **MILLENNIUM
            CELL INC.**
 **(a
            development stage enterprise)**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)**
    **Note
        15 — Quarterly Information (Unaudited)** ***(1)*** ****





**Fiscal
                Year Quarters****First**
            
            **Second**
            
            **Third**
            
            **Fourth**
            
            **Total****(in
                000's, except per share amounts)***Fiscal
                Year ended December 31, 2005*Revenue
            
            $
            80
            
            $
            48
            
            $
            140
            
            $
            149
            
            $
            417Cost
                of revenue
            
            
            80
            
            
            48
            
            
            101
            
            
            153
            
            
            382Gross
                margin
            
            
            —
            
            
            —
            
            
            39
            
            
            (4
            )
            
            35Product
                development & marketing
            
            
            1,081
            
            
            799
            
            
            867
            
            
            834
            
            
            3,581General
                and administrative
            
            
            869
            
            
            1,858
            
            
            1,438
            
            
            1,232
            
            
            5,397Non-cash
                charges
            
            
            505
            
            
            2,525
            
            
            102
            
            
            388
            
            
            3,520Depreciation
                and amortization
            
            
            78
            
            
            64
            
            
            75
            
            
            75
            
            
            292Research
                and development
            
            
            218
            
            
            207
            
            
            99
            
            
            85
            
            
            609Total
                operating expenses
            
            
            2,751
            
            
            5,453
            
            
            2,581
            
            
            2,614
            
            
            13,399Loss
                from operations
            
            
            (2,751
            )
            
            (5,453
            )
            
            (2,542
            )
            
            (2,618
            )
            
            (13,364
            )Interest
                expense, net
            
            
            (367
            )
            
            (331
            )
            
            (817
            )
            
            (108
            )
            
            (1,623
            )Equity
                in losses of affiliates
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Loss
                before income taxes
            
            
            (3,118
            )
            
            (5,784
            )
            
            (3,359
            )
            
            (2,726
            )
            
            (14,987
            )Benefit
                from income taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            387
            
            
            387Net
                loss
            
            
            (3,118
            )
            
            (5,784
            )
            
            (3,359
            )
            
            (2,339
            )
            
            (14,600
            )Loss
                per share — basic and diluted
            
            $
            (.08
            )
            $
            (.14
            )
            $
            (.08
            )
            $
            (.05
            )
            $
            (.34
            )Weighted
                — average number of shares outstanding
            
            
            40,174
            
            
            42,612
            
            
            44,360
            
            
            46,410
            
            
            43,405**First**
            
            
            **Second**
            
            
            **Third**
            
            
            **Fourth**
            
            
            **Total******
            
            **(in
                000's, except per share
                amounts)***Fiscal
                Year ended December 31, 2004*Revenue
            
            $
            25
            
            $
            90
            
            $
            10
            
            $
            73
            
            $
            198Cost
                of revenue
            
            
            25
            
            
            90
            
            
            10
            
            
            73
            
            
            198Gross
                margin
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Product
                development & marketing
            
            
            1003
            
            
            773
            
            
            904
            
            
            717
            
            
            3,396General
                and administrative
            
            
            1,611
            
            
            630
            
            
            783
            
            
            1,238
            
            
            4,262Non-cash
                charges
            
            
            322
            
            
            270
            
            
            126
            
            
            78
            
            
            796Depreciation
                and amortization
            
            
            142
            
            
            150
            
            
            128
            
            
            95
            
            
            516Research
                and development
            
            
            (10
            )
            
            101
            
            
            28
            
            
            356
            
            
            475Total
                operating expenses
            
            
            3,068
            
            
            1,923
            
            
            1,969
            
            
            2,484
            
            
            9,445Loss
                from operations
            
            
            (3,068
            )
            
            (1,923
            )
            
            (1,969
            )
            
            (2,484
            )
            
            (9,445
            )Interest
                expense, net
            
            
            (314
            )
            
            (987
            )
            
            (365
            )
            
            (103
            )
            
            (1,770
            )Equity
                in losses of affiliates
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Loss
                before income taxes
            
            $
            (3,382
            )
            $
            (2,911
            )
            $
            (2,335
            )
            $
            (2,587
            )
            $
            (11,215
            )Benefit
                from income taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            411
            
            
            411Net
                loss
            
            $
            (3,382
            )
            $
            (2,911
            )
            $
            (2,335
            )
            $
            (2,176
            )
            $
            (10,804
            )Loss
                per share — basic and diluted
            
            $
            (.10
            )
            $
            (.08
            )
            $
            (.06
            )
            $
            (.06
            )
            $
            (.29
            )Weighted
                — average number of shares outstanding
            
            
            35,399
            
            
            36,986
            
            
            37,701
            
            
            38,804
            
            
            37,226








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






F-19