<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-KSB

(MARK ONE)
      [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1997

                                       OR
      [ ]         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                  For the transition period from                   to

                         Commission File Number 1-10446

                         LITHIUM TECHNOLOGY CORPORATION
                 (Name of Small Business Issuer in Its Charter)

            DELAWARE                                       13-3411148
   (State or Other Jurisdiction of                      (I.R.S. Employer
   Incorporation or Organization)                       Identification No.)

                5115 CAMPUS DRIVE, PLYMOUTH MEETING, PENNSYLVANIA
                    (Address of Principal Executive Offices)

                                      19462
                                   (Zip Code)

                                 (610) 940-6090
                (Issuer's Telephone Number, Including Area Code)



      Securities registered under Section 12(b) of the Exchange Act: NONE.


         Securities registered under Section 12(g) of the Exchange Act:

                                  Common Stock
                                Par Value, $0.01

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
<PAGE>   2
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB.[ ]

State issuer's revenues for its most recent fiscal year. None for the fiscal
year ended December 31, 1997.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days.

             Approximately $18,284,597 as of February 27, 1998. The
           aggregate market value was based upon the mean between the
          closing bid and asked price for the common stock as quoted by
                       the NASD Electronic Bulletin Board.


                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS


Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]


                    APPLICABLE ONLY TO CORPORATE REGISTRANTS


State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 27, 1998, 21,016,361
shares of common stock.


                       DOCUMENTS INCORPORATED BY REFERENCE


If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security-holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). None.


Transitional Small Business Disclosure Format (check one): Yes [  ]     No [X]
<PAGE>   3
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                              PAGE

<S>                                                                                                           <C>
PART I

         Item  1.  Description of Business...................................................................... 1
         Item  2.  Description of Property......................................................................11
         Item  3.  Legal Proceedings............................................................................11
         Item  4.  Submission of Matters to a Vote of Security Holders..........................................11


PART II

         Item  5.  Market for the Company's Common Equity and Related Stockholder Matters.......................11
         Item  6.  Management's Discussion and Analysis or Plan of Operation....................................13
         Item  7.  Financial Statements.........................................................................17
         Item  8.  Changes in and Disagreements with Accountants on Accounting
                    and Financial Disclosure....................................................................18


PART III

         Item  9.  Directors, Executive Officers, Promoters and Control Persons;
                   Compliance with Section 16(a) of the Exchange Act............................................18
         Item 10.  Executive Compensation.......................................................................20
         Item 11.  Security Ownership of Certain Beneficial Owners and Management...............................27
         Item 12.  Certain Relationships and Related Transactions...............................................30
         Item 13.  Exhibits and Reports on Form 8K..............................................................33


FINANCIAL STATEMENTS

         Independent Auditors' Reports...................................................................F-2 to F-3

         Consolidated Financial Statements:

         Consolidated Balance Sheet at December 31, 1997........................................................F-4

         Consolidated Statements of Operations for the Years Ended December 31, 1997 and
            1996, and the Period from July 21, 1989 (Date of Inception) to December 31, 1997 (As Restated)......F-5

         Consolidated Statements of Changes in Stockholders' Deficiency for the Period from
             July 21, 1989 (Date of Inception) to December 31, 1997 (As Restated)........................F-6 to F-8

         Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996, and 
             the Period from July 21, 1989 (Date of Inception) to December 31, 1997 (As Restated).......F-9 to F-10

         Notes to Consolidated Financial Statements....................................................F-11 to F-22
</TABLE>
<PAGE>   4
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS

         Lithium Technology Corporation (the "Company" or "LTC") is a
development stage company engaged in the business of developing and seeking to
commercialize unique, solid-state, lithium-ion polymer and lithium metal polymer
rechargeable batteries. The Company believes that its battery technology, which
is currently in the prototype development phase, is capable of providing up to
four times the performance of current rechargeable batteries. The Company's
objective is the commercialization of such technology, inclusive of moving from
laboratory-scale product prototypes and related prototype processes to full
scale market introduction, achieving cost-competitiveness, and establishing
manufacturing operations and distribution channels. The Company's
commercialization focus is on the rapidly growing portable electronics market
segment (notebook computers and wireless communications devices). The Company's
patented and proprietary composite cell construction and low-cost manufacturing
process are equally applicable to lithium-ion polymer technology and lithium
metal polymer technology. The Company intends to pursue both chemistries --
"lithium-ion polymer technology" and "lithium metal polymer technology" which
are discussed and differentiated below -- for specific portable electronics
applications. The Company's immediate objective is the commercialization of its
"lithium-ion polymer technology." The Company's operating results consist solely
of operating losses attributable to research and development, general and
administrative expenses and interest expense. The Company has generated no
revenues from operations.

         During the last four years, the Company has recruited a new management
team and a core technical staff with commercialization and battery technology
expertise. A modern research facility has been leased and research and product
and manufacturing process development is continuing at an accelerated pace.
During 1997, the Company extended through mid-1998 the employment agreements
pursuant to which Thomas R. Thomsen serves as the Company's Chief Executive
Officer, David J. Cade serves as the Company's President and Chief Operating
Officer, and Dr. George Ferment serves as the Company's Executive Vice President
of Operations and Chief Technical Officer. Mr. Thomsen was elected to the
Company's Board of Directors in 1995. Mr. Cade and Dr. Ferment were elected to
the Company's Board of Directors in 1997.

         The Company's strategy is to establish manufacturing operations and
distribution channels through the development of strategic alliances with
partners of global prominence from whom the Company will seek assistance in
bringing the technology to the manufacturing stage and participation in the
distribution and sale of the Company's products on a world-wide basis. To
advance this strategy, (i) in December 1997, the Company signed a letter of
intent to establish a strategic manufacturing joint venture with Elite Material
Co., Ltd. (EMC) of Taiwan contemplating a 40,000 square foot joint venture
manufacturing facility in Taiwan (Taiwan Manufacturing Plant-TMP) to produce
lithium-ion polymer batteries; the TMP is expected to begin production in late
1999 and negotiations are continuing toward the completion of definitive
agreements; and (ii) in January 1998 the Company signed a letter of intent
contemplating an agreement with a major global notebook computer manufacturer
to complete the development of a specific battery for its notebook computers.
Previously, in 1996 the Company entered into a two-year technology development
agreement with a Japanese consortium based on the Company's proprietary lithium
metal polymer rechargeable battery technology. There can be no assurance as to
the completion of definitive agreements with respect to, or the implementation
of, the TMP and/or the notebook computer battery development relationship or
other strategies referred to herein. 
         
         On September 22, 1997, the Company entered into a Senior Secured
Convertible Note Purchase Agreement (the "1997 Note Purchase Agreement") with
Lithium Link LLC (the "Lender") for the sale of $5.5 million of the Company's
Senior Secured Convertible Notes (the "1997 Notes"). See "Management's
Discussion and Analysis--Liquidity, Capital Resources, and Financial Condition"
for details.


                                        1
<PAGE>   5
         In early 1996 the Company installed a continuous flow coating and
laminating pilot line, referred to as the Demonstration Manufacturing Facility
(DMF). The DMF has been undergoing trial runs and modifications/upgrades over
the past two years and will be used to fabricate the Company's lithium-ion
polymer cell samples for distribution to selected original equipment
manufacturers (OEMs) which has been on-going since the second quarter of 1997.
The DMF is currently evolving into the Plymouth Meeting Manufacturing Plant
(PMMP). It is anticipated that an additional expenditure of approximately $3.5
million in equipment and engineering services will be required in 1998 to
achieve initial production levels for specific OEM battery pack applications
pending the start of production at the Taiwan Manufacturing Plant. There can be
no assurance that such new capital will be available on terms satisfactory and
favorable to the Company. See "Management's Discussion and Analysis --
Liquidity, Capital Resources, and Financial Condition" for details.

         In October 1996, the Company completed a bridge financing pursuant to
which the Company issued $1.75 million principal amount convertible notes (the
"1996 Notes") to two purchasers (the "1996 Note Purchasers"). The Company did
not repay the $1.75 million principal of the 1996 Notes on the March 24, 1997
maturity date and, accordingly, pursuant to the terms of the 1996 Note Purchase
Agreements, the Company and the 1996 Note Purchasers placed in escrow an
additional 6,201,550 shares of the Company's common stock (the "Escrowed
Shares"). In August 1997, the Company and the 1996 Note Purchasers agreed to the
restructuring of the 1996 Notes. Thereafter, the Company satisfied and paid in
full the 1996 Notes in accordance with the restructuring agreement pursuant to
which on September 22, 1997, the Company paid $100,000 to the 1996 Note
Purchasers to reduce the principal amount of the 1996 Notes; during September
1997 through November 1997, the 1996 Note Purchasers sold 2,163,158 Escrowed
Shares which further reduced the principal amount of the 1996 Notes by
$1,650,000; and 32,350 Escrowed Shares were issued to the 1996 Note Purchasers
to satisfy interest obligations. Of the remaining Escrowed Shares, 12.5% or
473,160 Escrowed Shares were issued to the 1996 Note Purchasers and 87.5% or
3,532,882 Escrowed Shares were retired by the Company.

         The Company had cash of $3,836,000 at December 31, 1997 including cash
held in escrow. In the absence of new capital, such cash is sufficient to meet
the Company's operating needs through approximately June 30, 1999 other than
financing for the development of manufacturing capacity, including the
obtaining of additional financing of approximately $2.7 million for
approximately $3.5 million in equipment expenditures that is currently estimated
to be required in 1998 to achieve sustained production levels. The Company has
developed and is implementing appropriate strategies to minimize expenses and
conserve cash. As noted above, there can be no assurance that the Company will
obtain needed capital on terms favorable and acceptable to the Company. For
details see "Management's Discussion and Analysis -- Liquidity, Capital
Resources, and Financial Condition."

         The Company is a corporation organized under the laws of the State of
Delaware on December 28, 1995. The Company's predecessor -- Lithium Technology
Corporation (a Nevada corporation previously named Hope Technologies, Inc.) --
merged with and into the Company in a reincorporation merger that became
effective on February 8, 1996. In connection with the reincorporation on
February 8, 1996, the Company also implemented a recapitalization of its
outstanding common stock and convertible preferred stock, a reverse stock split,
the ratification of an amendment to the Company's 1994 Stock Incentive Plan, and
ratification of a Directors Stock Option Plan. Until 1994, the Company had been
named Hope Technologies, Inc. (HTI), consisting of two subsidiaries: Hope


                                        2
<PAGE>   6
Industries, Inc. (Industries) and Lithion Corporation. Industries was the
operating arm of the Company and it manufactured professional and industrial
photoprocessing and X-ray equipment. Lithion was engaged in rechargeable battery
research and development. By the end of 1993, Industries was divested and since
such time the Company has focused on commercialization of battery technology and
developing strategic alliance partners of global prominence. The Company
currently has one subsidiary, Lithion Corporation, which is wholly-owned by the
Company.

MARKET SUMMARY

         The worldwide battery market consists of a variety of segments, such as
household "disposable" batteries, automotive batteries, and high performance
rechargeable batteries for portable electronic devices. Virtually all segments
are growing and experiencing a technological revolution with the important
driving forces being technology/portability and environmental issues. In
particular, miniaturization of electronic devices has fueled explosive market
growth in mobile electronic products, including notebook and palmtop computers,
wireless communications handsets, wireless multimedia devices, camcorders and
medical applications. Battery power, size and shape shortcomings have been the
limiting factors in product engineering and design. Improved batteries are
necessary to increase operating times and mobility. There is also increasing
demand for environmentally friendly batteries. Lead-acid, alkaline and nickel
cadmium (NiCd) batteries, unlike the Company's battery, contain metals such as
lead, mercury and cadmium, which have become environmental and public health
concerns.

         This growth has created a worldwide search for advanced rechargeable
battery systems with much longer run times with lighter weights and lower
costs, and which are environmentally friendly. The Company believes that its
lithium-polymer battery technology may be capable of filling these demands.
There can be no assurance, however, that the Company will be able to achieve
the technological breakthroughs that will be necessary in order to ultimately
achieve commercialization and/or obtain financings or generate revenues in
order to sustain the Company's on-going research and development phase or to
undertake the design and construction of the TMP, DMF and PMMP, including the
obtaining of additional financing of approximately $2.7 million for
approximately $3.5 million in equipment expenditures that is currently estimated
to be required in 1998 to achieve sustained production levels, discussed herein
and other manufacturing-related facilities.

THE BATTERY TECHNOLOGY

         The Company's lithium metal polymer rechargeable battery design is
based upon an integrated approach employing a patented and proprietary cell
construction using high performance fiber webs, and a flexible solid polymer
electrolyte. The Company's lithium metal technology incorporates a lithium alloy
foil anode and a composite vanadium oxide cathode. The Company's lithium-ion
polymer technology uses fiber webs for both the anode and cathode. One advantage
of this approach is the use of a solid polymer electrolyte rather than the
traditional liquid electrolyte technology. Unlike the liquid electrolyte used in
most batteries, the Company's battery electrolyte is a thin, flat, solid plastic
which reduces weight and volume, and improves safety. The Company's research and
development and marketing strategy is to seek to distinguish the Company's
battery products from competitors' products as to the following features: energy
density, run time, self-discharge rate, design flexibility, thin, flat
lightweight form factor, cost, user safety and environmental safety. The
Company's ability to implement this strategy is highly dependent upon the
Company's ability to achieve its technology research and development,
manufacturing scale-up, and financing objectives and overcome the related
uncertainties as discussed herein.

         The ability to manufacture so called "laminated batteries" (See
"Glossary") with consistent high quality and low cost is a critical
commercialization challenge and the Company believes its strategic advantage
lies in its patented manufacturing approach. The Company's composite electrolyte
and composite electrode technology lends itself to the use of commonly used thin
film manufacturing equipment and proven process methodology. These composites
act as traveling carriers in the manufacturing process, starting as rolls that
are then coated with electrolyte or oxide materials using existing and proven
coating technology. Such traveling carriers are usually called "traveling webs"


                                        3
<PAGE>   7
or simply "webs". "Web" processing is a common practice in the paper, textile,
thin film, barrier plastics, floor covering, and packing industries. Other
companies also attempting to commercialize lithium-polymer batteries do not use
this Company-patented and proprietary approach and therefore use more complex
and hence costly manufacturing methods. The Company's approach, which involves
fewer separate operations, offers significant promise for lower production costs
and consistent quality. The Company's web-handling and coating techniques are
expected to result in a lower cost manufacturing process for lithium-ion polymer
cells because of: (1) fewer laminate components; (2) fewer processing steps; (3)
better bonding; (4) better structural stability; (5) lower defect rates higher
yields; and (6) web coating enables easier cell assembly. In addition, superior
battery performance is expected because of: (1) fiber webs give higher
gravametric energy density than metal grids; (2) better pulse discharge rate;
and (3) equivalent cycle life.

INTELLECTUAL PROPERTY

         The Company holds twenty-three issued U.S. patents and nine pending
patent applications on its technology. The Company also has other proprietary
knowledge that is in the patent disclosure stage or that it protects as trade
secrets. The Company's early patents relate to materials and construction for
lightweight solid-state rechargeable batteries. The later patents and
applications relate to improvements to the technology contained in the first
patent or to other key aspects of rechargeable battery technology.

         There are other companies with lithium-polymer battery technology
patents; however, the Company believes its patents to be unique from those of
its competitors in that they focus upon composite cathode structure, composite
electrolyte structure, alloy anode and packaging. The earliest of the Company's
patents expires 2003. There is no current or, to the Company's knowledge,
threatened litigation on its patents. See "Description of Business-Competition".

The following table sets forth the patents currently held by the Company:


<TABLE>
<CAPTION>
Patent Number               Description                                                        Year of Expiration
-------------               -----------                                                        ------------------
<S>                         <C>                                                                <C> 
4,576,883                   Electrode Construction for Solid State Electrochemical Cell        2003
4,794,059                   Lightweight Solid Rechargeable Batteries                           2005
4,808,496                   Electrode Construction for Solid State Electrochemical Cell        2006
4,816,357                   Intensification of Ion Exchange in Lithium Batteries               2006
4,861,690                   Lightweight Battery Construction                                   2006
4,888,206                   Method and Apparatus for Coating a Substrate with Alkaline         2006
                            or Alkaline Earth Metals
4,960,655                   Lightweight Batteries                                              2007
5,006,431                   Solid State Polymer Electrolyte for Batteries                      2008
5,053,295                   Lightweight Electroconductive Solderless Internal Cell             2008
                            Connector for Alkaline or Alkaline Earth Metal Batteries
5,057,385                   Battery Packing Construction                                       2008
5,057,651                   Lightweight Electroconductive Wire                                 2008
</TABLE>


                                        4
<PAGE>   8
<TABLE>
<CAPTION>
Patent Number               Description                                                        Year of Expiration
-------------               -----------                                                        ------------------
<S>                         <C>                                                                <C> 
5,006,554                   Fire and Moisture Proof Anode Construction for Alkaline            2008
                            Metal or Alkaline Earth Metal Batteries
5,102,752                   Solid State Composite Electrolyte for Batteries                    2009
5,350,647                   Electrodes for Electrochemical Devices                             2011
5,378,558                   Solid State Composite Electrolyte for Electrochemical              2012
                            Devices
5,422,200                   Battery Packaging Construction for Alkali Metal Multicell          2012
                            Batteries
5,443,602                   Apparatus and Method for Automatic Mass Production and             2012
                            Packaging of Electrochemical Cells
5,521,023                   Composite Electrolytes for Electrochemical Devices                 2013
5,529,707                   Lightweight Composite Polymeric Electrolytes for                   2013
                            Electochemical Devices
5,597,658                   Rolled Single Cell and Bi-Cell Electrochemical Devices and         2014
                            Method of Manufacturing Same
5,650,243                   Battery Packaging Construction using Flexible Plastic Barrier      2014
                            Structures
5,655,313                   Apparatus for Fluidized Vacuum Drying and Gas Treatment            2014
                            for Powered, Granular, or Flaked Material
5,705,084                   Polymer Alloy Electrolytes for Electrochemical Devices             2015
</TABLE>

         With respect to licensing relationships, the Company has: (i) granted a
license to Lithium Link LLC with respect to certain lithium-ion polymer battery
intellectual property; (ii) granted a license to Valence Technology Corporation
("Valence") with respect to certain technology and entered into a cross-license
with Valence with respect to certain technology; and (iii) granted certain
license/distributorship option rights pursuant to the Japanese consortium
technology development agreement noted above.

TECHNOLOGY DEVELOPMENT HISTORY

         The Company's advanced rechargeable battery technology is based on
nearly fifteen years of specific research and development and nearly forty years
of experience in plastics, thin films and emulsions. With the divestiture of
Hope Industries in late 1993, the Company successfully raised capital from
outside sources, narrowed the Company's focus, and renewed development of its
rechargeable battery technology. During 1994, the Company was re-staffed with
needed technical personnel, and critical research, including historical test
data such as capacity and cycle life, was reconfirmed. During 1995, the Company
concentrated its efforts on improving its base line technology in the crucial
areas of weight reduction, design flexibility, rechargeability, self-discharge,
safety, capacity and cycle life. The research and development effort has also
focused on the carbon fiber web used to build the cathode structure, the
proprietary lithium metal alloy used as the anode structure, the polymer
electrolyte structure, and thermal curing of the polymer as opposed to
expensive and complicated electron beam methodology. Improvements have also
been made in sealing which has resulted in a patented, fireproof anode concept
and improved current-collection technology has been developed through
lightweight, embedded fiber construction. The Company has also advanced its
technology by developing a solid state lithium-ion polymer battery using
proprietary web structures in both the anode and cathode with excellent cycle
life and which demonstrate the utility of the Company's manufacturing
technology for use in other battery chemistries. During 1996, the Company
focused on improving its patented manufacturing approach which is unique to the
battery industry. In March 1996, a prototype continuous flow coating and
laminating line -- referred to as the Demonstration Manufacturing Facility
(DMF) --was installed. Since then, the DMF has been undergoing continuing
upgrade and trial runs. In 1997, the DMF was upgraded and distribution of DMF
made lithium-ion polymer cells samples commenced to selected Original Equipment
Manufacturers (OEMs). During 1998, development and distribution of prototype
battery packs has commenced to certain OEMs and is on-going.


                                        5
<PAGE>   9
         For the period July 1989 through October 1993, the Company had
accumulated net losses attributable to activities associated with the battery
technology of $1,801,000. For the period November 1993 through December 1997,
the Company had accumulated net losses of $31,240,000 of which $67,000 was
incurred during 1993, $3,776,000 was incurred during 1994, $8,849,000 was
incurred during 1995, $4,384,000 was incurred during 1996, and $14,164,000 was
incurred during 1997 (including interest expense of approximately $9,821,000
relating to the beneficial conversion feature of certain debt issued by the
Company). Therefore, the Company's aggregate accumulated losses for the battery
technology through December 1997 are $33,041,000 (including interest expense of
approximately $17,841,000 relating to the beneficial conversion features of
certain debt issued by the Company). The Company spent approximately $1,079,000
and $1,399,000 on research and development activities during 1996 and 1997,
respectively. These funds were derived from the Company's debt and equity
financings as discussed in this report as opposed to operating revenues.

BUSINESS STRATEGY

         The Company's business strategy is to commercialize a new generation of
solid state lithium-ion polymer and lithium metal polymer batteries based on
fifteen years of research and development and a strong patent portfolio covering
both the battery construction and manufacturing process unique to the battery
industry. The proprietary technology uses high performance fibers in composite
battery structures and low-cost web coating/handling methods for manufacturing.
This technology encompasses lithium-ion polymer batteries (market entry expected
in 1998) and lithium alloy polymer batteries (market entry expected in three to
five years). The Company's target market is mobile communications and computing
applications which showcase the Company's thin, flat lightweight form factor and
long run-times. The Company's long term objectives include the development
and/or licensing of battery technology for a variety of other applications
including microelectronics, electric vehicles, aerospace and defense and solar
cells.

         Consummation of corporate alliances is also an important step in the
commercialization plan. The Company's strategy contemplates that these corporate
partners will bring technology and funding support through equity, joint
technology and development programs, licensing of the technology, and
manufacturing and distribution rights. Extensive discussions have been and
continue to be held with numerous potential corporate partners from the United
States, the Pacific Rim and Europe. As noted above, in March 1996, the Company
entered into a two-year technology development agreement with a Japanese
consortium headed by Mitsubishi Materials Corporation. The LTC-Mitsubishi
Materials alliance was successful for both parties. Since the development
program achieved Mitsubishi Materials' objectives regarding LTC's lithium alloy
polymer technology, their visiting scientist at LTC is returning to Japan to
participate in a Mitsubishi Materials battery R&D project focused on electric
vehicle applications. Mitsubishi Materials and LTC expect to continue exchanging
appropriate technical information and Mitsubishi Materials has expressed its
intention to remain as a shareholder of LTC. According to the terms of the 1996
Agreement, certain provisions pertaining to technology ownership, option rights
for manufacturing and distribution of LTC's future lithium alloy polymer battery
products, and confidential treatment of information, survived the March 1998
expiration of the agreement.

         The Company is also actively seeking other strategic partners to assist
in the commercialization of its lithium-ion polymer technology and has had
discussions with a number of globally prominent companies in this


                                        6
<PAGE>   10
regard, although there can be no assurance as to the consummation of any such
strategic alliances. Toward advancing this strategy, the Company has engaged the
consulting services of Chase Manhattan Bank, Mitsubishi Trust & Banking
Corporation, and Interlink Management Corporation. In addition, in December
1997, the Company signed a letter of intent to establish a strategic
manufacturing partnership with Elite Material Co., Ltd. (EMC) of Taiwan
contemplating a 40,000 square foot joint venture manufacturing facility in
Taiwan. The Taiwan plant is expected to begin production in late 1999. In
January 1998, the Company signed a letter of intent contemplating an agreement
with a major global notebook computer manufacturer to complete the development
of a specific battery for its notebook computers.

         During March 1996, a benchtop continuous flow coating/laminating line
-- referred to above as the Demonstration Manufacturing Facility ("DMF") -- was
installed by the Company. This line has been used to further define the
Company's manufacturing technology, to sharpen manufacturing cost estimates,
produce market test samples and then serve as the initial production facility
for battery cells which will be manually assembled into battery packs for
Original Equipment Manufacturer ("OEMs"). The Company has already begun
multi-cell configuration designs for battery packs of two specific electronic
devices of two OEMs. Thereafter, based on design data obtained from the DMF, the
Company must successfully augment the DMF equipment in establishing the Plymouth
Meeting Manufacturing Plant (PMMP) reflecting the cost, quality, reliability,
and performance required for the various target market applications. It is
anticipated that the PMMP and associated equipment will cost approximately $3.5
million to construct in the 1998 time frame.

         The PMMP, according to the Company's current strategy, will be located
within the Company's existing facility in Plymouth Meeting, Pennsylvania. Plant
equipment augmentation will require approximately 12 months. The Company
intends to finance the overall currently estimated $20 million total required
for capital equipment, plant augmentation and operating expenses at Plymouth
Meeting, and operating expenses and establishment of the strategic
manufacturing joint venture in Taiwan in order to bring the Company to the
initial commercial production stage at approximately the end of 1998 for the
PMMP and by the fourth quarter of 1999 for the Taiwan plant. The Company has
thus far successfully raised approximately $14.8 million through the private
sale of its securities including the recent sale of $5.5 million of the 1997
Notes described above. There can be no assurances that the approximately $20
million in incremental capital needed for attaining commercial viability of the
Company's battery technology will be obtained. If the Company is unable to
raise sufficient capital, it will be forced to curtail research and development
expenditures which, in turn, will delay, and could prevent, the completion of
the commercialization process. See "Management's Discussion and Analysis --
Liquidity, Capital Resources, and Financial Conditions".

         There can be no assurance that the Company will be able to meet the
technological objectives, finalize definitive agreements, implement and complete
plant/equipment plans, and/or satisfy the capital requirements that the Company
believes are necessary to convert its battery technology into successful
commercial products. There can be no assurance that the Company's products will
generate any revenues, will not encounter technical problems when used, will be
successfully marketed, will be produced at a competitive cost, or will achieve
customer acceptance or, if commercial products are developed and revenues
produced, that the Company will be profitable. The likelihood of the success of
the Company must be weighed against the problems, expenses, difficulties,
complications and delays frequently encountered in developing and marketing a
new product.

         The Company believes that the "web" construction of its battery (See
"Glossary") is unique compared to other emerging lithium-polymer approaches. It
allows the Company to use proven and well understood equipment from the textile,
barrier plastics and paper coating industries. This manufacturing approach
presents the flexibility to utilize alternative component chemistries as
required to meet specific OEMs' application operating parameters. While the
Company is confident that this approach increases the probability of success in
commercializing the technology, there can be no assurances of that success.


                                        7
<PAGE>   11
COMPETITION

         Competition in the battery industry is intense. The industry consists
of developmental stage companies and major domestic and international companies,
many of which have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly greater than those of the
Company.

         The Company believes that its lightweight, thin, low-cost, high energy,
rechargeable battery is uniquely appropriate for the high-growth portable
electronics market (notebook computers, cellular telephones and other wireless
devices). Longer term, its technology may have significant potential for the
emerging Electric Vehicle (EV) market. The portable electronics markets are
currently served mainly by Nickel-Cadmium ("NiCd") batteries and
Nickel-Metal-Hydride ("NiMH") batteries. NiCd batteries suffer from lower energy
density, memory effect, short shelf life (high self-discharge rate) and
environmental problems. It is anticipated, however, that NiCd batteries will
continue to be a force in the marketplace for the foreseeable future. NiMH
batteries have a somewhat higher energy density than NiCd batteries. However,
they too have a short shelf life and they cost more than NiCd batteries. Liquid
electrolyte ("Lithium-Ion") batteries are beginning to dominate the portable
electronics marketplace, particularly in high end computer and cell phone
applications. These batteries have higher energy density but suffer from short
shelf life and higher cost.

         The Company's test data has demonstrated that the Company's lithium
metal polymer rechargeable battery test cells offer three to four times the
energy density of NiCd batteries, two to three times that of NiMH batteries, and
about two times that of lithium-ion batteries. Additionally, the Company
believes that its technology and approach to manufacturing offer significantly
lower production costs. The competition from these current technologies will be
challenging because the products using such technologies are entrenched and
produced by large companies such as Sony, Eveready, Sanyo, and Panasonic that
have large resource bases.

         Competition in the high energy-density arena comes mainly from other
emerging companies such as AER (Air-Zinc), licensees of Bellcore lithium ion
polymer technology, including Ultralife and Valence, Moltech (Li-Metal Polymer)
and Poly-Plus (Li-Metal Polymer). A number of these competitors are seeking to
move their technologies from the laboratory to commercialization and face
similar challenges that the Company faces. The Company believes that its focus
on the manufacturing process presents superior commercialization potential,
since it has a lower cost potential and can be readily adapted to run various
component chemistries including lithium-ion polymer. Additionally, its "web"
construction has the inherent ability to provide higher energy densities and to
accept future technological advances. The Company believes that its lithium-ion
polymer and lithium-metal polymer battery products also will be competitively
superior from an environmental point of view because the Company's batteries can
be disposed of with less risk of adverse impact on the environment due to the
design features and the materials utilized in the Company's product.

RAW MATERIALS

         Certain materials used in the Company's products are available only
from a limited number of sources. The industry currently has sufficient capacity
to meet the Company's needs. However, there can be no assurances that sources
and the currently adequate supply of raw materials will continue.

EQUIPMENT AND FACILITIES

         The Company has outfitted a modern research and development facility
with appropriate equipment and instrumentation. At 12,400 square feet, this
modern facility has sufficient space to meet the Company's near-term needs,
including the DMF and pilot manufacturing line.

EMPLOYEES

         During the last four years, the Company hired a new management team and
a core technical staff. The staff has the required expertise in technology,
commercialization, process development, battery engineering,


                                        8
<PAGE>   12
electrochemistry international marketing, fund-raising and strategic alliance
development. As of March 31, 1998, the Company had a total of fourteen
employees, of whom eleven were employed full-time by the Company. The Company
anticipates that it will need to hire approximately three technical employees
and approximately one management employee in order to advance the Company's
research and development efforts and manufacturing scale-up in 1998, and that
the Company will have approximately 21 to 28 employees by the end of 1998. The
Company believes that individuals having appropriate expertise are readily
available in the workforce at compensation levels consistent with the Company's
business plan and compensation policies.

GOVERNMENT REGULATION, SAFETY, ENVIRONMENTAL COMPLIANCE

         The Company's products incorporate lithium, which is known to cause
explosions and fires if not properly handled. Although the Company believes that
its batteries do not present safety risks substantially different from those
inherent in currently-marketed lithium-ion batteries, there can be no assurance
that safety problems will not develop in the future. The Company intends to
incorporate safety policies in its manufacturing processes designed to minimize
safety risks, although there can be no assurance that an accident in its
facilities will not occur. Any accident, whether occasioned by the use of a
battery or the Company's manufacturing operations, could result in significant
production delays or claims for damages resulting from injuries, which would
adversely affect the Company's operations and financial condition.

         Prior to the commercial introduction of the Company's batteries into a
number of markets, the Company will seek to obtain approval of its products by
one or more of the organizations engaged in testing product safety, such as
Underwriters Laboratories. Such approvals could require significant time and
resources from the Company's technical staff and, if redesign were necessary,
result in a delay in the introduction of the Company's products.

         Pursuant to the regulations of the United States Department of
Transportation ("DOT"), a permit is required to transport lithium across state
lines. The International Air Transport Association ("IATA") similarly regulates
the international shipment of lithium. Although the Company believes that DOT
has granted permits for, and IATA has allowed, the transport of rechargeable
lithium-based batteries to be shipped or used by the general public, there can
be no assurance that DOT or IATA will grant such a permit to the Company or that
changes in such regulations, or in their enforcement, will not impose costly
requirements or otherwise impede the transport of lithium. In addition, the DOT
and IATA approval processes will require significant time and resources from the
Company's technical staff and if redesign were necessary, could delay the
introduction of the Company's products.

         Various regulatory agencies will have jurisdiction over the operation
of any manufacturing facilities established by the Company. Because of the risks
generally associated with the use of lithium, the Company expects rigorous
enforcement. No assurance can be given that the Company will not encounter any
difficulties in complying with applicable health and safety regulations.

         Federal, state and local regulations impose various environmental
controls on the storage, use and disposal of certain chemicals and metals used
in the manufacture of lithium-polymer batteries. Although the Company believes
its activities will conform to current environmental regulations, there can be
no assurances that changes in such regulations will not impose costly equipment
or other requirements. Any failure by the Company to adequately control the
discharge of hazardous wastes could also subject it to future liabilities.


                                        9
<PAGE>   13
<TABLE>
<CAPTION>
                           GLOSSARY OF TECHNICAL TERMS
<S>                                   <C>                               
Alkaline Metals.....................  The elements which are in Group 1A of the Periodic Table including
                                      lithium, sodium and potassium.
Anode...............................  The electrode in a battery which releases electrons to an external circuit
                                      and ions into the electrolyte.
Cathode.............................  The electrode in a battery which accepts electrons from the external circuit
                                      and ions from the electrolyte.
Electrolyte.........................  The medium in a battery which provides the ion transport mechanism
                                      between the anode and cathode.
Electron............................  An elementary particle having a negative charge.
Energy Density......................  The total quantity of electrical energy in a battery, expressed as a function
                                      of volume (e.g., Watt-hours per liter) or weight (e.g., Watt-hours per
                                      kilogram).
Ion.................................  An atom or a molecule that has acquired an electrical charge by the loss
                                      or gain or electrons.
Laminated Battery...................  A battery composed of thin sheets of anode, electrolyte and cathode that
                                      have been bonded together.
Lead Acid Battery...................  A rechargeable battery with electrodes made of lead compounds and with
                                      an electrolyte containing acid.
Lithium.............................  A soft, low density alkali earth metal with high electrochemical potential.
Lithium Polymer Battery.............  A battery which has a polymer electrolyte rather than the liquid electrolyte
                                      found in conventional batteries.  Also known as "solid state" or "plastic"
                                      batteries.
Lithium Metal Polymer Battery ......  A lithium polymer battery which uses pure lithium foil or lithium alloy
                                      foil as the anode and lithiated oxides in the cathode.
Lithium-Ion  Polymer Battery ........ A lithium polymer battery which uses lithiated graphite or carbon anode rather 
                                      than lithium metal foil and lithiated oxides in the cathode.
Memory Effect.......................  The undesirable characteristic of NiCd batteries to lose energy storage
                                      capacity on each recharge after a partial discharge.
Polymer.............................  A large molecule that is made by bonding together many smaller identical
                                      molecules.
Primary Battery.....................  A battery that is not rechargeable.
Rechargeable Battery................  A battery that, after discharge, may be restored close to the fully charged
                                      state by the passage of electric current through the battery in the opposite
                                      direction to that of discharge.
Self-Discharge Rate.................  The rate at which a charged battery loses energy while not in use.
Web.................................  A non-woven net composed of thin fibers that have been randomly placed
                                      in all directions and bonded together to form an open mesh structure of
                                      continuous length.
</TABLE>


                                       10
<PAGE>   14
ITEM 2.           DESCRIPTION OF PROPERTY

         The Company leases a 12,400 square foot research facility and corporate
headquarters in a free-standing building at 5115 Campus Drive in Plymouth
Meeting, Pennsylvania, near Philadelphia. This facility includes sufficient
laboratory and office space to allow the Company to expand its research efforts
and to construct its DMF. The lease commenced on November 1, 1994 for a term of
5 years with a base rent of $122,400 per year. Management expects that the
facility will be suitable for the Company's currently planned operations. The
Company believes that its properties and assets are adequately covered by
appropriate insurance.

ITEM 3.           LEGAL PROCEEDINGS

         In August 1996, civil actions were commenced against the Company by
Richard Perlman, a former director of the Company, and Christy & Viener, former
legal counsel to the Company, respectively. The two suits were commenced in the
United States District Court for the Southern District of New York. The Company
subsequently filed its own lawsuit against Christy & Viener and Mr. Perlman in
United States District Court for the Eastern District of Pennsylvania. Mr.
Perlman's complaint alleges that he is entitled to monetary damages and specific
performance of registration rights relating to certain warrants of the Company
that have not been registered and to which he claims entitlement. The Company
has declared such warrants and related documents void. Christy & Viener's
complaint alleges non-payment of legal fees incurred in connection with the
rendering of legal services. The Company believes these actions to be meritless
and intends to vigorously defend both actions and to assert all available
defenses and counterclaims.

         The Company's lawsuit against Christy & Viener, a New York City law
firm, includes claims arising out of Christy & Viener's alleged fraud, legal
malpractice and conflicts of interest flowing from the fraudulent issuance of
the same warrants that form the basis of Perlman's action. The complaint asserts
claims for alleged violations of Federal securities laws, the Racketeer
Influenced and Corrupt Organizations Act, and fiduciary duties owed by the law
firm and its partners to the Company. The complaint names as defendants: Christy
& Viener and William Gray, Steven Berger, and Franklin Viele, each a partner in
the firm. The complaint includes similar claims against a fifth defendant, Mr.
Perlman as noted above, a former financial advisor to the Company and former
member of its Board of Directors, flowing from the fraudulent issuance of
warrants to him.

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

         No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1997.

                                     PART II

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

         Unless otherwise noted, the figures used in this Item have been
adjusted to reflect the effect of the Company's 1-for-30 reverse stock split in
February 1996.

MARKET INFORMATION

         The Company's common stock is traded only in the over-the-counter
markets, and "bid" and "asked" price quotations of dealers who make a market in
the common stock are quoted on the NASD Electronic Bulletin Board. The Company's
common stock is traded under the symbol "LITH". The following table sets forth
certain information with respect to the high and low bid prices for the
Company's common stock as of the close of each of the four calendar quarters of
1997 and 1996 and as of the last practical date prior to the date of this
Report. Such


                                       11
<PAGE>   15
quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or
commissions, and may not represent actual transactions.

<TABLE>
<CAPTION>
                                                                       Bid Prices for Common Stock
                                                                       ---------------------------
                                                                       High             Low
                                                                       ----             ---
<S>                                                                    <C>              <C>
1997
Fourth Quarter                                                         $1.45            $0.89
Third Quarter                                                          $1.4375          $0.75
Second Quarter                                                         $1.00            $0.34375
First Quarter                                                          $1.4375          $0.5625

1996
Fourth Quarter                                                         $1.8125          $0.6875
Third Quarter                                                          $2.25            $1.125
Second Quarter                                                         $4.625           $2.125
First Quarter                                                          $7.50            $1.50
</TABLE>

         As of March 31, 1998, there were approximately 647 holders of record of
the Company's common stock.

DIVIDEND POLICY

         The Company has never paid cash dividends on its common stock and does
not presently anticipate paying cash dividends in the foreseeable future. It is
anticipated that earnings, if any, will be retained for use in the business of
the Company for an indefinite period. Payments of dividends in the future, if
any, will depend, among other things, on the Company's ability to generate
earnings, its need for capital, and its financial condition. Additionally, the
Company's ability to pay dividends is limited by applicable state law.
Declaration of dividends in the future will remain within the discretion of the
Company's Board of Directors which will review its dividend policy from time to
time.

RECENT SALES OF COMMON STOCK

         In May 1996, the Company issued an aggregate of 1,650,000 warrants to
two consultants pursuant to the terms of consulting agreements entered into by
the Company. These warrants included certain anti-dilutive provisions which as
of September 22, 1997 had entitled the two consultants to purchase approximately
2,640,000 shares of the Company's common stock at exercise prices of $0.96 and
$1.60 per share. In December 1997, in consideration for removing all
anti-dilution provisions from the warrants (except for those activated by a
stock split, reverse stock split or a stock dividend) and for reducing the term
of the warrants from ten years to five years and for other consideration, the
Company amended the warrants to the two consultants by increasing the aggregate
amount to 3,080,000 warrants at an exercise price of $0.85 per share and reduced
the warrant exercise period from ten years to five years. In addition, the
consulting agreements were terminated upon payment of an additional $150,000 to
the two consultants.

         Between January 1997 and March 1997, the Company issued an aggregate of
493,186 shares of its common stock to the holders of its $1.75 million 1996
Notes for penalties and maturity extensions pursuant to the 1996 Note Purchase
Agreements. Between September 1997 and November 1997, the Company issued an
aggregate of 2,668,668 shares of its common stock to (i) repay the remaining
$1,650,000 of principal due the 1996 Note Purchasers, (ii) to satisfy interest
obligations, and (iii) to comply with obligations to share 12.5% of the
remaining Escrowed Shares, as defined, with the 1996 Note Purchasers.

         In September 1997, the Company issued 500,000 warrants to a consultant
exercisable at $0.40 per share in connection with consulting services.


                                       12
<PAGE>   16
         In November 1997, warrants to purchase 100,000 shares of the Company's
common stock were exercised at an exercise price of $0.14 per share. The
warrants had been granted in July and August of 1997 in connection with the
Company obtaining a bridge loan of $500,000.

         In December 1997, the Company agreed to issue 200,000 warrants to a
consultant exercisable at $1.25 per share, and in June 1997, the Company agreed
to issue 100,000 warrants to a consultant exercisable at $3.60 per share, each
in connection with consulting services.

         During 1997, the Company granted an aggregate of 93,334 common stock
options pursuant to the Director's Stock Option Plan and an aggregate of
1,017,500 common stock options pursuant to the 1994 Stock Incentive Plan.

          There were no underwriters involved in any of the transactions
described above. The sales and issuances of common stock described above were
deemed to be exempt from registration under the Securities Act pursuant to
Section 4(2) thereof based on the investor's suitability and/or representations
furnished by the securityholders.

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

         The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report.

         Subsequent to the issuance of the 1996 financial statements,
management determined that the accounting treatment of the convertible notes
issued in 1994 and 1995 did not reflect the intrinsic value of the beneficial
conversion feature of those notes. As a result, the financial statements for the
year ended December 31, 1996 and for the period from July 21, 1989 (date of
inception) to December 31, 1996, and for the years ended December 31, 1994 and
1995 have been restated from amounts previously reported to reflect the
appropriate accounting treatment for the beneficial conversion features. The
effect of the restatement is to record the discount as interest expense for each
period with an offsetting credit to additional paid-in capital. The restatement
had no impact on total stockholders' equity or total assets.  

GENERAL

         The Company is a development stage company engaged in the business of
developing and seeking to commercialize unique, solid state, lithium-ion
polymer and lithium metal polymer rechargeable batteries. The Company has
generated no revenues and has no commercial operations to date. The Company has
been unprofitable since inception, expects to incur substantial additional
operating losses over the next few years and needs significant additional
financing to repay existing indebtedness and to continue the development and
commercialization of its technology. The Company does not expect to generate
any significant revenues from operations during the fiscal year ending December
31, 1998. The Company believes that its battery technology, which is currently
in the prototype development phase, is capable of providing up to four times
the performance of current rechargeable batteries. The Company's objective is
the commercialization of such technology, inclusive of moving from
laboratory-scale product prototypes and related prototype processes to full
scale market introduction, achieving cost-competitiveness, and constructing a
manufacturing plant. The Company's commercialization focus is on the rapidly
growing portable electronics market segment (notebook computers and wireless
communications devices). The Company's patented and proprietary composite cell
construction and low-cost manufacturing process are equally applicable to
lithium-ion polymer technology or lithium metal polymer technology. The Company
intends to pursue both chemistries for specific portable electronics
applications.

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

         The Company has financed its operations since inception with
convertible debt and private placements of common and preferred stock and has
raised approximately $14.8 million, including, most recently, $5.5 million from
the September 1997 sale of convertible notes described herein (the "1997
Notes").

         At December 31, 1997, the Company had cash of $3,836,000 (including
cash equivalents and cash held in escrow), fixed assets of $422,000 and other
assets of $687,000. The Company's total liabilities were $6,379,000 consisting
of accounts payable, accrued salaries, and accrued expenses in the amount of
$879,000 and the 1997 Notes due July 1, 2002 in the amount of $5,500,000. The
Company had net working capital of $2,972,000 on December 31, 1997. 

         The Company's net working capital was increased by approximately
$4,602,000 from December 31, 1996 to December 31, 1997. The Company's cash,
cash equivalents and cash held in escrow increased by approximately $2,448,000 
from December


                                       13
<PAGE>   17
31, 1996 to December 31, 1997. The increase in net working capital and in cash
and cash equivalents (including cash held in escrow) is attributable primarily
to (i) the sale of the $5,500,000 1997 Notes (See below) and (ii) reduced
operating expenses as compared to the corresponding period in 1996 primarily
for the reasons discussed below in "Results in Operations". 

         The Company's stockholders deficiency was $1,419,000 at December 31,
1997, after giving effect to an accumulated deficit of $39,906,000 which
consisted of $33,041,000 accumulated deficit during the development stage from
July 21, 1989 through December 31, 1997 and $6,865,000 accumulated deficit from
prior periods. The Company expects to incur substantial operating losses as it
continues its commercialization efforts.

         In October 1996, the Company completed a bridge financing pursuant to
which the Company issued $1.75 million principal amount convertible notes (the
"1996 Notes") to two purchasers (the "1996 Note Purchasers"). The Company did
not repay the $1.75 million principal of the 1996 Notes on the March 24, 1997
maturity date and, accordingly, pursuant to the terms of the 1996 Note Purchase
Agreements, the Company and the 1996 Note Purchasers placed in escrow an
additional 6,201,550 shares of the Company's common stock (the "Escrowed
Shares"). In August 1997, the Company and the 1996 Note Purchasers agreed to the
restructuring of the 1996 Notes. Thereafter, the Company satisfied and paid in
full the 1996 Notes in accordance with the restructuring pursuant to which on
September 22, 1997, the Company paid $100,000 to the 1996 Note Purchasers to
reduce the principal amount of the 1996 Notes; during September 1997 through
November 1997, the 1996 Note Purchasers sold 2,163,158 Escrowed Shares which
further reduced the principal amount of the 1996 Notes by $1,650,000; and 32,350
Escrowed Shares were issued to the 1996 Note Purchasers to satisfy interest
obligations. Of the remaining Escrowed Shares, 12.5% or 473,160 Escrowed Shares
were issued to the 1996 Note Purchasers and 87.5% or 3,532,882 Escrowed Shares
were retired by the Company.

         On September 22, 1997, the Company entered into a Senior Secured
Convertible Note Purchase Agreement (the "1997 Note Purchase Agreement") with
Lithium Link LLC (the "Lender") for the sale of $5.5 million of the Company's
Senior Secured Convertible Notes (the "1997 Notes"). The Company is obligated
to borrow, and the Lender is obligated to loan, the entire $5.5 million
principal amount. The proceeds of the sale of the 1997 Notes are disbursed to
the Company from an escrow account bi-monthly over a period ending in July 1998
and in amounts varying between $550,000 and $1,630,000 based on a
pre-determined disbursement schedule. The bi-monthly fundings are subject to
the Company's satisfaction of certain conditions subsequent set forth in the
1997 Note Purchase Agreement, none of which relate to operating or financial
milestones. The Company has received from the escrow account $2.17 million of
the $5.5 million funding as of December 31, 1997 and $3.32 million of the $5.5
million funding as of March 31, 1998. Interest accrues at 8.5% and is payable
annually, at the Company's election in cash or the Company's Common Stock. The
principal of the 1997 Notes is payable on or before July 1, 2002. The 1997
Notes are convertible into the Company's Common Stock at a conversion price of
$.28 per share. The Company has recorded the intrinsic value of the beneficial
conversion feature of the 1997 Notes as a charge to interest expense at its
then fair value of $9,821,000. The holders of the 1997 Notes have two demand
registration rights and "piggyback" registration rights, subject to conditions
set forth in the Note Purchase Agreement.

         While the Company's operating plan seeks to minimize the Company's
capital requirements, commercialization of the Company's battery technology will
require substantial amounts of additional capital. Subject to the availability
of necessary capital, the Company expects that research and development and
production expenses will increase significantly as it continues to advance its
battery technology and develop products for commercial applications. The
Company's working capital and capital requirements will depend upon numerous
factors, including, without limitation, the progress of the Company's research
and development program, the levels and resources that the Company devotes to
the development of manufacturing and marketing capability, technological
advances, the status of competitors, the Company's continuing compliance with
the conditions contained in the Note Purchase Agreement, and the ability of the
Company to establish collaborative arrangements with other companies to provide
research and development funding to the Company and to manufacture and market
the Company's products.


                                       14
<PAGE>   18
         The Company believes that as of December 31, 1997, it has sufficient
capital resources to meet the Company's needs and satisfy the Company's
obligations through approximately June 1999 other than financing for the
development of manufacturing capacity, including the obtaining of additional
financing of approximately $2.7 million for approximately $3.5 million in
equipment expenditures that is currently estimated to be required in 1998 to
achieve sustained production levels, based on the Company's current strategies
and subject to the uncertainties discussed in this report. The Company does not
currently have sufficient cash to achieve all its development and production
objectives, including the 1998 installation of the pilot manufacturing line and
repayment of long-term liabilities. Continuation of the Company's operations is
dependent upon its ability to raise additional financing. In order to raise
sufficient capital for its future growth and repayment of the 1997 Notes, the
Company will be required to sell additional debt or equity securities.

         There can be no assurances that the incremental capital needed for
attaining commercial viability of the Company's battery technology, which the
Company currently estimates at $20 million (without regard to repayment of the
$5,500,000 1997 Notes) can be obtained. If the Company is unable to raise
sufficient capital, it will be forced to curtail research and development
expenditures which, in turn, will delay, and could prevent, the completion of
the commercialization process.

         As discussed above in this report, the Company has entered into two
letters of intent: one with Elite Material Co., Ltd. (EMC) contemplating a
joint venture manufacturing facility in Taiwan (Taiwan Manufacturing Plant -
TMP) and one with a major global notebook computer manufacturer to complete the
development of a specific battery for such manufacturer's notebook computers.
The implementation and completion of either or both of these projects will
require the Company to make material commitments for capital expenditures to
the extent contained in definitive agreements as entered into in furtherance of
the current letters of intent. See "Description of Business -- Overview and
Recent Developments." The Company's current estimates of these commitments and
expected sources of funds are included in the discussion above relating to the
Company's $20 million estimate of the incremental capital needed for attaining
commercial viability of its battery technology.

RESULTS OF OPERATIONS

         The Company had no revenues for the years ended December 31, 1997 and
1996. Engineering, research and development expenses were $1,399,000 for the
year ended December 31, 1997 compared to $1,079,000 in 1996. The increase of
$320,000 results from decreased contract research activities and increased lab
supplies and salaries as the Company continues to accelerate its
commercialization efforts.

         General and administrative expenses were $1,654,000 for the year ended
December 31, 1997 compared to $3,216,000 in 1996. The decrease of $1,562,000 was
due to decreased legal costs of approximately $1.4 million and decreased
amortization of debt issue costs of $313,000 offset by increased consulting
expenses. 

         Interest expense increased to $1,290,000 (net of interest income of
$86,000) for the year ended December 31, 1997 compared to $89,000 (net of
interest income of $58,000) in 1996. The increase in interest expense for the
comparable periods is attributable to the Company's convertible term notes and
the issuance of certain additional shares in connection with the Company's
exercise if its right to extend the maturity date for repayment of the
Convertible Notes. The Company has also recorded the intrinsic value of the
beneficial conversion feature of the Senior Secured Convertible Notes as a
charge to interest expense at its then fair value of $9,821,000.

PLAN OF OPERATIONS FOR THE COMPANY

         The Company's strategy is to commercialize a new generation of solid
state lithium-ion polymer and lithium metal polymer batteries based on fifteen
years research and development and a strong patent portfolio covering both the
battery construction and manufacturing process unique to the battery industry.
The proprietary technology uses high performance fibers in composite battery
structures and low-cost web coating/handling methods for manufacturing. This
technology encompasses lithium-ion polymer batteries (market entry in 1998) and
lithium alloy polymer batteries (market entry in three to five years). The
Company's target market is mobile communications and computing applications
which showcase the Company's thin, flat lightweight form factor and long
run-times. The Company's long term objectives include the development and/or
licensing of battery technology for a variety of other applications including
microelectronics, electric vehicles, aerospace and defense and solar cells.
There can be no assurance, however, that the Company will be able to achieve the
technological breakthroughs that will be necessary in order to ultimately
achieve commercialization and/or obtain financings or generate revenues in order
to sustain the Company's on-going research and development phase or to undertake
the design and construction of the DMF and its equipment augmentation, discussed
herein, and other manufacturing-related facilities including commercial
production at the Plymouth Meeting Manufacturing Plant (PMMP) and commercial
production at the Taiwan Manufacturing Plant (TMP).


                                       15
<PAGE>   19
         During 1994, the Company recruited a new management team and a core
technical staff with commercialization and battery technology expertise. A
modern research facility was leased in late 1994 and product development has
continued at an accelerated pace. At March 31, 1998, the management team and
technical staff consisted of eleven full-time employees. The staff has the
required expertise in technology, commercialization, process development,
battery engineering, electrochemistry and strategic alliance development. During
1996, the Company entered into employment agreements with Thomas R. Thomsen as
the Company's Chief Executive Officer, David J. Cade as the Company's President
and Chief Operating Officer, and Dr. George R. Ferment as the Company's
Executive Vice President and Chief Technical Officer. In May 1997, these
employment agreements were extended for one year.

         The Company's development and commercialization plan currently has the
following milestones:

                  (i) hand-made cell samples tested by potential strategic
partners in 1995 (accomplished);

                  (ii) installation of a Demonstration Manufacturing Facility
(DMF) continuous flow coating and laminating unit in first quarter of 1996
(accomplished);

                  (iii) upgrade of the DMF and distribution of DMF-made
lithium-ion polymer cell samples to selected Original Equipment Manufacturers
(OEMs) beginning in early 1997 (accomplished);

                  (iv) distribution of prototype battery packs to selected OEMs
in early 1998 (on-going);

                  (v) installation of larger scale lamination and backend
assembly equipment at PMMP, with initial commercial production at PMMP in late
1998;

                  (vi) initial production at the Taiwan factory (scheduled for
late 1999) with the capability of ramping up to hundreds of thousands of
notebook computer batteries per month; and

                  (vii) construction of additional manufacturing facilities in
the United States and Europe in the 2000-2001 timeframe once market demand
exceeds initial manufacturing capacity.

         The Company estimates that completion of phases (iv) through (vi)
through the end of 1998 will cost the Company approximately $20 million in
capital expenditures and operating costs. There can be no assurances that the
Company will meet these development milestones on the time schedule outlined
above. In connection with achieving and implementing manufacturing capability
and commercialization, the Company expects to hire significant additional
personnel. 

         During March 1996, a continuous flow coating/laminating line --
referred to previously in this "Plan of Operation" as the Demonstration
Manufacturing Facility ("DMF") -- was installed by the Company. This line has
been used to further define the Company's manufacturing technology, to sharpen
manufacturing cost estimates, and then serve as the initial production facility
for battery cells which will be manually assembled into battery packs for
Original Equipment Manufacturer ("OEM") customers. Thereafter, based on design
data obtained from the DMF, the Company must successfully augment the DMF
equipment to construct a manufacturing line (Plymouth Meeting Manufacturing
Plant -- PPMP) reflecting the cost, quality, reliability, and performance
required for the various target market applications. It is anticipated that the
PMMP will cost approximately $3.5 million to construct in the 1998-9 time frame.
The PMMP will be located within the Company's existing facility in Plymouth
Meeting, Pennsylvania. During the next twelve months after the date of this
report, the Company expects to incur expenses of approximately $3,500,000 for
the purchase of equipment and services at the PMMP based on the Company's
current strategies and subject to the uncertainties discussed in this report and
the availability of capital. The Company intends to finance the overall
estimated $20 million total capital equipment and operating expense required to
bring the Company to the initial commercial production stage at approximately
the end of 1998 by means of private and/or public equity or debt financings.


                                       16
<PAGE>   20
         The Company does not currently have sufficient cash to achieve all its
development and production objectives, including the 1998 installation of the
pilot manufacturing line and repayment of the 1997 Notes and $2.7 million for
equipment purchases. As noted above (See "Liquidity, Capital Resources, and
Financial Condition") the Company believes that as of December 31, 1997 it has
sufficient capital resources to meet the Company's needs and satisfy the
Company's obligations through approximately June 1999 based on the Company's
current strategies and subject to the uncertainties discussed in this report. In
order to raise sufficient capital for its future growth and repayment of the
1997 Notes discussed above, the Company will be required to sell additional debt
or equity securities. Such new capital is planned to be sought from several
sources, including strategic partners, although the Company has no commitments
for new capital as of the date of this report. The Company is also seeking to
raise additional capital for its activities beyond 1997, which may result in
substantial dilution to the Company's existing stockholders. The Company will
seek to expand its strategic alliances which would provide capital from joint
development programs, license fees or an additional equity investment.
Discussions are continuing with companies in Japan, Korea, Taiwan, Europe and
the United States. However, there can be no assurances that additional capital
will be available to the Company on a timely basis or on acceptable terms. In
addition, there can be no assurance that the Company will be able to meet the
technological objectives and/or satisfy the capital requirements that the
Company believes are necessary to convert battery technology into successful
commercial products. There can be no assurance that the Company's products will
generate any revenues, will not encounter technical problems when used, will be
successfully marketed, will be produced at a competitive cost, or will achieve
customer acceptance or, if commercial products are developed and revenues
produced, that the Company will be profitable. The likelihood of the success of
the Company must be weighed against the problems, expenses, difficulties,
complications and delays frequently encountered in developing and marketing a
new product.

SAFE HARBOR STATEMENT

         The Private Securities Litigation Reform Act of 1995 provides a new
"safe harbor" for certain forward-looking statements. Statements contained in
this report that are not historical facts are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those stated in the forward-looking statements. Factors that
could cause actual results to differ materially include, among others: general
economic conditions, changes in laws and government regulations, fluctuations in
demand for the Company's products, the Company's ability to consummate strategic
alliances, technology development problems, and the Company's ability to
successfully finance future plant and equipment plans, as well as its current
ongoing operations.

ITEM 7.  FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                                             <C>    
         The Company's financial statements, as itemized below, appear in a
         separate section of this report following Item 13.

         Independent Auditors' Reports                                                                   F-2 to F-3

         Consolidated Financial Statements:

         Consolidated Balance Sheet at December 31, 1997                                                        F-4

         Consolidated Statements of Operations for the Years Ended December 31, 1997
         and 1996 and the Period from July 21, 1989 (Date of Inception) to December 31, 1997 (As Restated)      F-5

         Consolidated Statements of Changes in Stockholders' Deficiency for the
         Period from July 21, 1989 (Date of Inception) to December 31, 1997 (As Restated)                F-6 to F-8

         Consolidated Statements of Cash Flows for the Years Ended December 31, 1997
</TABLE>


                                       17
<PAGE>   21
<TABLE>
<S>                                                                                                    <C>
         and 1996 and the Period from July 21, 1989 (Date of Inception) 
         to December 31, 1997 (As Restated)                                                             F-9 to F-10

         Notes to Consolidated Financial Statements                                                    F-11 to F-22
</TABLE>

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

         In 1997, the Company terminated its engagement of its previous
independent accounting firm and engaged the firm of Deloitte & Touche, LLP as
reported in the Company's reports on Form 8-K dated December 18, 1997 and
December 23, 1997.

                                    PART III

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

         The following table sets forth information concerning the directors and
executive officers of the Company as of the date of this report:

<TABLE>
<CAPTION>
         NAME                               AGE               POSITION
         ----                               ---               --------
<S>                                         <C>               <C>
         Thomas R. Thomsen                  62                Chairman of the Board and Chief Executive Officer
         David J. Cade                      60                Director, President and Chief Operating Officer
         William H. Chu                     61                Director
         George R. Ferment                  58                Director, Executive Vice President of Operations and
                                                              Chief Technical Officer
         Stephen F. Hope                    55                Director
         Ralph D. Ketchum                   71                Director
         Gerald M. Labush                   50                Director
         John D. McKey, Jr.                 54                Director
         William D. Walker                  56                Treasurer and Chief Financial Officer
</TABLE>

         Thomas R. Thomsen was appointed Chief Executive Officer of the Company
on May 9, 1996. Mr. Thomsen was elected a director of the Company, effective
February 22, 1995, and was elected Chairman of the Board of the Company,
effective August 7, 1995. Mr. Thomsen was President of AT&T Technology Systems
from 1983 to 1990 and was a director of AT&T Credit Corp., Sandia Corporation
and Rennselear Polytechnic Institute from 1984 to 1990. Mr. Thomsen currently
serves as a director of Transcript International and the Pioneer Foundation and
is on the Executive Committee of the University of Nebraska Technology Park,
L.L.C. Mr. Thomsen holds a Master's Degree from MIT and a BSME from the
University of Nebraska.

         David J. Cade was elected President and Chief Operating Officer of the
Company in May 1996. Mr. Cade served as the Company's Vice President of
Marketing from August 1994 to May 1996 and was elected as an officer in October
1994. Mr. Cade was elected a director of the Company in August, 1997. Mr. Cade
has over thirty years of experience in senior business development, marketing,
sales and international strategic alliances in global telecommunications
systems, electronics and information technologies. From February 1988 to October
1992, Mr. Cade was Vice President of Marketing and Business Development for
COMSAT Systems Division and from October 1992 until April 1994, Mr. Cade was
Vice President of Sales and Marketing at Interdigital Communications
Corporation, a Philadelphia company that manufacturers wireless telephone
systems for customers worldwide. Previously, Mr. Cade held managerial positions
with AT&T, Martin Marietta (now Lockheed Martin) and the Department of Defense.
Mr. Cade holds an MBA from Syracuse University and an undergraduate degree from
the University of Illinois.


                                       18
<PAGE>   22
         William H. Chu was elected a director of the Company, effective
December 1, 1997, to fill one of the two then existing vacancies on the Board of
Directors. Since February, 1982, Dr. Chu has served as the chairman, and chief
executive officer of, and been a shareholder in, Elite Material Co., Ltd., a
manufacturing firm in Taiwan which produces high quality laminates for printed
circuit boards. Dr. Chu holds a B.S. in Chemical Engineering from the National
Taiwan University, and an M.S. in Chemical Engineering, an M.S. in Physical
Chemistry and a Ph.D. in Polymer Science, all from the University of
Massachusetts.

         George R. Ferment, Ph.D. was elected Executive Vice President of
Operations and Chief Technical Officer of the Company in May 1996. Dr. Ferment
previously served as the Company's Vice President of Technology and Engineering
from October 1994 to May 1996 and from March 1994 through October 1994, as
Director of Technology Development. Dr. Ferment was elected a director of the
Company in August, 1997. Dr. Ferment has over 25 years of technology experience
in product and process development with extensive background in plastic and
polymer science. His early experience was in research and development of fibers
and polymers at Celanese Corporation. Dr. Ferment spent 14 years at GAF/Tarkett
Corporation where he rose to the position of General Manager (October 1983 - May
1988). From October 1989 to October 1993, Dr. Ferment was Group Director of
Campbell Soup Company where he had worldwide responsibility for the company's
diverse packaging technology development programs. Dr. Ferment received his
Master's Degree and Ph.D. in Chemical Engineering from the New Jersey Institute
of Technology.

         Stephen F. Hope currently serves as a director of the Company and was a
President, Chairman of the Board and Treasurer of the Company from October 1990
through April 1994. He is a director of Lithion Corporation, a wholly-owned
subsidiary of the Company. Mr. Hope has an ongoing consulting arrangement with
the Company with respect to the battery technology that is being developed by
the Company. He received a B.A. from Dartmouth University in 1965 and is a
member of the Society of Manufacturing Engineers and the Society of
Photo-Finished Engineers. Mr. Hope was Director and the President of Hope
Industries, Inc., a previously wholly-owned subsidiary of the Company, from 1985
through December 1993. Hope Industries, Inc. filed for reorganization under the
Bankruptcy Code in April 1993 and its Plan of Reorganization was confirmed on
May 6, 1994.

         Ralph D. Ketchum was elected a director of the Company, effective July
1, 1994. He has been President of RDK Capital, Inc. ("RDK Capital") since
January 1987. RDK Capital is a general partner of RDK Capital Limited
Partnership, an investment limited partnership. Mr. Ketchum served as Chief
Executive Officer and Chairman of the Board of Heintz Corporation ("Heintz"), a
majority owned subsidiary of RDK Capital Limited Partnership. In August 1993,
Heintz filed for protection under Chapter 11 of the United States Bankruptcy
Code in the Bankruptcy Court of the Eastern District of Pennsylvania. Mr.
Ketchum was Senior Vice President and Group Executive of the Lighting Group,
General Electric Company from 1980 to 1987. He also serves as a director of
Metropolitan Savings Bank, Oglebay-Norton Corporation, Thomas Industries and
Pacific Scientific, Inc.

         Gerald M. Labush was elected a director of the Company, effective
December 6, 1995. Since 1979, he has been an attorney in private practice at the
law offices of Gerald M. Labush in New York City.

         John D. McKey, Jr. was elected a director of the Company, effective
September 8, 1995. He has since September 1993, been a partner at the law firm
of McCarthy, Summers, Bobko & McKey, P.A., and, from June 1986 to September
1993, was a partner at Kohn, Bobko, McKey & Higgins, P.A. Mr. McKey formerly
served as a director of Publishing Company of North America and currently serves
as a director of Consolidated Capital of North America, Inc.

         William D. Walker was elected Treasurer and Chief Financial Officer of
the Company, effective September 8, 1995. Mr. Walker was Vice President of
Finance of Simon LG Industries, Inc., a manufacturer of machinery for the paper
industry, from October 9, 1990 to March 31, 1994. Mr. Walker was, from May 1994
until September 1995, an independent financial consultant, including to the
Company (from August, 1994 to his election as Treasurer and Chief Financial
Officer). On October 6, 1995, Mr. Walker was elected Chairman of LG Industries,
Inc., the successor of Simon LG Industries, Inc.


                                       19
<PAGE>   23
         The Company's directors hold office until the next annual meeting of
the Company's stockholders and until their successors have been duly elected and
qualified. The Company's directors do not receive compensation for their
services in that capacity.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own, directly or
indirectly, more than ten percent (10%) of the registered class of the Company's
equity securities to file reports of ownership and changes in ownership on Forms
3, 4 and 5 with the Securities and Exchange Commission ("SEC") and the National
Association of Securities Dealers. Officers, directors and greater than ten
percent (10%) beneficial owners are required by SEC regulation to furnish the
Company with copies of all Forms 3, 4 and 5 they file.

         Based solely on the Company's review of the copies of such forms and
any amendments, if any, it has received, the Company believes that all of its
officers, directors and greater than ten percent (10%) beneficial owners
complied with all filing requirements applicable to them with respect to
transactions during the fiscal year ended December 31, 1997, except for the
following: each of William D. Walker, the Company's Chief Financial Officer,
Gretchen N. Deming, the Company's Secretary, David J. Cade, George R. Ferment,
Stephen F. Hope, Ralph D. Ketchum, Gerald M. Labush and John D. McKey, Jr., each
a Director of the Company, filed, in January 1998, one late Form 4 with respect
to one transaction.

ITEM 10.  EXECUTIVE COMPENSATION

         The following table sets forth information concerning the compensation
paid by the Company during the three years ended on December 31, 1997 to (i) the
Chief Executive Officer of the Company and (ii) all other executive officers of
the Company, or any of its subsidiaries, who were serving in such capacity on
December 31, 1997 and received total salary and bonus in excess of $100,000
during fiscal year 1997 (collectively, "Named Executive Officers"). Unless
otherwise noted, the figures used in this "Executive Compensation" section have
been adjusted to reflect the effect of the Company's one-for-thirty reverse
stock split on February 8, 1996.

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                                    LONG-TERM
                                                                                                   COMPENSATION
                                                                                                AWARDS SECURITIES
                                                                                                    UNDERLYING
       NAME AND PRINCIPAL                                 ANNUAL COMPENSATION                    OPTIONS/SARS (#)
            POSITION                  YEAR                       SALARY            BONUS
<S>                                   <C>                      <C>               <C>           <C>       
Thomas R. Thomsen,                    1997                     $185,000 (2)            0                413,334(3)
Chairman of the Board of              1996                     $118,708 (2)            0                 13,334
Directors and Chief                   1995                            0                0
Executive Officer (1)

David J. Cade, President and          1997                     $140,000          $15,000                 189,314(5)(6)
Chief Operating Officer (4)           1996                     $134,711                0                 266,667
                                      1995                     $125,000          $11,000

George R. Ferment,                    1997                     $130,000          $15,000                 221,370(8)(9)
Executive Vice President of           1996                     $126,474                0                 200,001
Operations and Chief                  1995                     $120,000          $28,000
Technical Officer (7)
</TABLE>


                                       20
<PAGE>   24
(1)      Thomas R. Thomsen was appointed Chief Executive Officer of the Company
         on May 9, 1996.

(2)      Based on Mr. Thomsen's annual salary of $185,000 as provided for in his
         employment agreement dated May 5, 1996. Mr. Thomsen volunteered to
         defer his annual salary until October 1997. The Company has been
         accruing the full amount of his annual salary during this period. In
         1997, the Board of Directors approved the issuance of 246,623 shares
         of the Company's common stock to Mr. Thomsen in satisfaction of 
         $100,000 of accrued but unpaid salary.

(3)      Mr. Thomsen was granted 13,334 (post-split) stock options on February
         22, 1995 exercisable at $3.00 per share (post-split). These 13,334
         stock options were cancelled on February 8, 1996 and replaced the same
         day with a grant of 13,334 stock options exercisable at $0.90 per share
         in connection with the repricing of directors' options. (See "Executive
         Compensation - Stock Option Repricing" for details). On May 9, 1996,
         Mr. Thomsen was granted 400,000 stock options exercisable at $2.5625
         per share pursuant to Mr. Thomsen's employment agreement. These 400,000
         stock options were cancelled on November 1, 1997 and replaced the same
         day with a grant of 400,000 stock options exercisable of $0.58 per
         share in connection with the repricing of employees' options. (See
         "Executive Compensation - Stock Option Repricing" for details).

(4)      David J. Cade was appointed the Company's President and Chief Operating
         Officer on May 9, 1996. Mr. Cade was also elected a Director of the
         Company on August 5, 1997.

(5)      Mr. Cade was granted 133,333 stock options on July 24, 1996 at an
         exercise price of $1.33 and 55,981 stock options on December 11, 1996
         at an exercise price of $0.78. These 189,314 stock options and 166, 667
         stock options granted in 1994 and 1995 were cancelled on November 1,
         1997 and replaced the same day with a grant of 355,981 stock options
         exercisable at $0.58 per share in connection with the repricing of
         employees' options. (See "Executive Compensation - Stock Option
         Repricing" for details).

(6)      Mr. Cade was granted 316,001 stock options on December 2, 1997 at an
         exercise price of $1.00.

(7)      George R. Ferment was appointed the Company's Executive Vice President
         of Operations and Chief Technical Officer on May 9, 1996. Dr. Ferment
         was also elected a Director of the Company on August 5, 1997.

(8)      Dr. Ferment was granted 133,333 stock options on July 24, 1996 at an
         exercise price of $1.33 and 88,037 stock options on December 11, 1996
         at an exercise price of $0.78. These 221,370 stock options and 166,668
         stock options granted in 1994 and 1995 were cancelled on November 1,
         1997 and replaced the same day with a grant of 388,038 stock options
         exercisable at $0.58 per share in connection with the repricing of
         employees' options. (See "Executive Compensation - Stock Option
         Repricing" for details).

(9)      Dr. Ferment was granted 316,000 stock options on December 2, 1997 at an
         exercise price of $1.00.

OPTION GRANTS IN FISCAL YEAR 1997

         The following table sets forth stock options granted to each of the
Named Executive Officers during fiscal year 1997 to purchase shares of Common
Stock (including options repriced during fiscal year 1997).


                                       21
<PAGE>   25
<TABLE>
<CAPTION>
               NAME                       NUMBER OF              % OF TOTAL       EXERCISE     EXPIRATION
                                          SECURITIES              OPTIONS/        OR BASE         DATE
                                          UNDERLYING            SARS GRANTED       PRICE
                                           OPTIONS/             TO EMPLOYEES      ($/SH.)
                                             SARS                 IN FISCAL
                                          GRANTED (#) (1)          YEAR (2)
<S>                                       <C>                    <C>              <C>          <C>
Thomas R. Thomsen                          400,000 (3)             15.2%             $0.58        5/9/06
David J. Cade (4)                          355,981 (4)             13.5%             $0.58       7/24/06
                                           316,001 (5)             12.0%             $1.00       12/2/07
George R. Ferment                          388,038 (6)             14.7%             $0.58       7/24/06
                                           316,000 (7)             12.0%             $1.00       12/2/07
</TABLE>

(1)      The Company's stock option plans contain provisions for the
         acceleration of vesting rights upon the occurrence of certain events.

(2)      The percentage of total options granted to each of the Named Executive
         Officers takes into account stock options issued to directors as well
         as those issued to employees. (See "Executive Compensation -- Directors
         Stock Option Plan" for details).

(3)      On May 9, 1996, Mr. Thomsen was granted 400,000 stock options
         exercisable at $2.5625 per share pursuant to Mr. Thomsen's employment
         agreement. These 400,000 stock options were cancelled on November 1,
         1997 and replaced the same day with a grant of 400,000 stock options
         exercisable at $0.58 per share in connections with the repricing of
         employees' options. (See "Executive Compensation - Stock Option
         Repricing" for details). These options are exercisable in equal amounts
         as previously disclosed.

(4)      Mr. Cade was granted 133,333 stock options on July 24, 1996 at an
         exercise price of $1.33 and 55,981 stock options on December 11, 1996
         at an exercise price of $0.78. These 189,314 stock options and 166,667
         stock options granted in 1994 and 1995 were cancelled on November 1,
         1997 and replaced the same day with a grant of 355,981 stock options
         exercisable at $0.58 per share in connection with the repricing of
         employees' options. (See "Executive Compensation - Stock Option
         Repricing" for details). These options are exercisable in equal amounts
         as previously disclosed.

(5)      Mr. Cade was granted 316,001 stock options on December 2, 1997 at an
         exercise price of $1.00 (exercisable in equal amounts on December 2,
         1997, December 2, 1998, December 2, 1999 and December 2, 2000).

(6)      Dr. Ferment was granted 133,333 stock options on July 24, 1996 at an
         exercise price of $1.33 and 88,037 stock options on December 11, 1996
         at an exercise price of $0.78. These 221,370 stock options and 166,668
         stock options granted in 1994 and 1995 were cancelled on November 1,
         1997 and replaced the same day with a grant of 388,038 stock options
         exercisable at $0.58 per share in connection with the repricing of
         employees' options. (See "Executive Compensation - Stock Option
         Repricing" for details). These options are exercisable in equal amounts
         as previously disclosed.

(7)      Dr. Ferment was granted 316,000 stock options on December 2, 1997 at an
         exercise price of $1.00 (exercisable in equal amounts on December 2,
         1997, December 2, 1998, December 2, 1999 and December 2, 2000).


                                       22
<PAGE>   26
OPTIONS EXERCISED AND OPTIONS OUTSTANDING

         The following table sets forth information with respect to (i) options
exercised by each of the Named Executive Officers in fiscal year 1997 (none) and
(ii) the number and value of options held by each of the Named Executive
Officers at the end of fiscal year 1997. The calculations to determine the
unexercised value of options held at December 31, 1997 are based on the closing
"bid" price of $0.99 per share of Common Stock on December 31, 1997.

             AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1997 AND
                       DECEMBER 31, 1997 OPTION/SAR VALUES


<TABLE>
<CAPTION>
          NAME                    SHARES                VALUE          NUMBER OF                 VALUE OF
                               ACQUIRED ON           REALIZED ($)     SECURITIES              UNEXERCISED IN
                               EXERCISE (#)                           UNDERLYING                THE MONEY
                                                                      UNEXERCISED              OPTIONS/SARS
                                                                     OPTIONS/SARS             AT FY-END ($)
                                                                     AT FY-END (#)             EXERCISABLE/
                                                                     EXERCISABLE/             UNEXERCISABLE
                                                                     UNEXERCISABLE
<S>                            <C>                   <C>            <C>                      <C> 
Thomas R. Thomsen                     0                    0        406,667 / 6,667          $164,600 / $600
David J. Cade                         0                    0        345,882 / 326,100        $109,421 / $3,653
George R. Ferment                     0                    0        345,244 / 358,794        $109,160 / $49,936
</TABLE>

STOCK INCENTIVE PLAN

         In February 1994 the Board of Directors of the Company established the
1994 Stock Incentive Plan (the "Stock Plan") to aid the Company in attracting,
retaining and motivating officers and key employees, whether or not they are
directors of the Company, and consultants and other advisors to the Company by
providing them with incentives for making significant contributions to the
growth and profitability of the Company. In February 1994, Majestic Hopes, LLC,
as the majority stockholder of the Company at that time, approved the adoption
of the Stock Plan and on February 8, 1996 ratified an amendment to the Stock
Plan, increasing from 1,333,333 to 2,666,667 (after giving effect to the 1 for
30 reverse stock split on February 8, 1996) the number of shares available for
issuance of awards granted under the Stock Plan. On December 2, 1997, the Board
of Directors approved an increase of the number of shares available for issuance
of awards granted under the Stock Plan to 5,333,334 subject to approval by the
Company's shareholders. The Stock Plan terminates in February 2004.

         Set forth below is a brief description of the principal features of the
Stock Plan.

         The Stock Plan authorizes the Company to grant stock options, both
incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code) and non-qualified stock options, SARs and awards payable in stock,
restricted stock or cash. All of such awards may be granted singly, in
combination or in tandem, or in substitution for awards granted previously under
the Stock Plan or any other Stock Plan of the Company. In addition, the Stock
Plan permits the Company to extend dividend equivalency rights to awards made
thereunder. The payment or exercise of any awards, including stock options,
under the Stock Plan may be conditioned on the satisfaction of various criteria,
such as the achievement of specific business objectives, attainment of growth
rates and other comparable measurements of the Company's performance. It is
expected that, while some or all of the awards referred to above may be made
from time to time, the Company will principally grant stock options pursuant to
the Stock Plan.


                                       23
<PAGE>   27
         The Stock Plan makes available a maximum of 5,333,334 shares of the
Company's Common Stock for issuance for awards granted under the Stock Plan. The
aggregate number of shares of Common Stock which may be the subject of an award
for any participant may not exceed 666,667 shares in any fiscal year. Shares
related to awards (or portions thereof) that are forfeited, canceled,
terminated, expire unexercised, surrendered in exchange for other awards, or
settled in cash in lieu of shares or in any other manner such that shares
covered by an award are not and will not be issued, shall be restored to the
total number of shares available for issuance pursuant to awards granted under
the Stock Plan. As of December 31, 1997, there were outstanding options with
respect to 2,761,514 shares of Common Stock under the Stock Plan. As of December
31, 1997, options with respect to 1,665,001 shares of Common Stock were fully
vested.

         The Stock Plan provides that, in the event of a stock split, stock
dividend, combination or reclassification of shares, recapitalization, merger or
similar event, proportional adjustments will be made in (a) the number of shares
of the Company's Common Stock (i) reserved for issuance under the Stock Plan,
(ii) available for options or other awards and (iii) covered by outstanding
awards, (b) the prices related to outstanding awards, and (c) the appropriate
fair market value and other price determinations for such awards. In addition,
equitable adjustments will be made in the event of any other change affecting
the Company's Common Stock or any distribution (other than normal cash
dividends) to stockholders of the Company.

         The Stock Plan provides that it shall be administered by a committee
designated by the Board of Directors, and consist of at least two directors who
are not officers or employees of the Company or any of its subsidiaries. The
committee that administers that Stock Plan (the "Stock Plan Committee")
currently consists of Ralph Ketchum and Gerald Labush. The Stock Plan Committee
has the sole authority, among other things, to grant awards; determine the term,
conditions and limitations of awards; establish rules, procedures, regulations
and guidelines relating to the Stock Plan generally and to interpret the Stock
Plan and award agreements entered into pursuant to the Stock Plan. The Stock
Plan Committee may also effect the continuation, acceleration or modification of
awards under the Stock Plan in certain circumstances including events that might
constitute a change in control of the Company.

         Generally, a Stock Plan participant may exercise or receive payment of
an award only while employed by or associated with the Company or a subsidiary
of the Company, except that, under some circumstances, and subject to
restrictions and limitations imposed by the Stock Plan Committee, the Stock Plan
Committee may permit exercise by, or payment to, participants who have retired
or become disabled, or who otherwise have had their employment or association
terminated. In addition, if a participant dies while still employed or
associated with the Company or a subsidiary thereof, the estate, and heirs or
beneficiaries of the deceased participant may, subject to restrictions and
limitations imposed by the Stock Plan Committee, exercise or receive payment in
respect to awards held by the participant at the time of death. In general,
awards granted under the Stock Plan are not assignable or transferrable by a
participant, except under the limited circumstances contemplated by the Stock
Plan.

         The exercise price of an option granted under the Stock Plan will be
not less than the fair market value of the Company's Common Stock on the date of
grant. The exercise price of an option must be paid in full in cash at the time
of exercise, or, if permitted by the Stock Plan Committee, may be paid in whole
or in part by (a) tendering shares of Common Stock or surrendering another award
granted under the Stock Plan or another benefit stock plan of the Company, (b)
delivering a promissory note issued by the participant to the Company containing
terms and conditions determined by the Stock Plan Committee or (c) any other
means acceptable to the Stock Plan Committee. In order to enable the Company to
satisfy any tax payment obligations resulting from any exercise of, or other
payment on, an award under the Stock Plan, the Company has the right, among
other things, to withhold an appropriate amount from such payment or to withhold
an appropriate number of shares of the Company's Common Stock receivable by the
participant for payment thereof.

         The Stock Plan may not, without the approval of the stockholders as set
forth therein, be amended to (i) materially increase the aggregate number shares
of the Company's Common Stock that may be issued under the Stock Plan (except
for adjustment pursuant to Section 14 of the Stock Plan, as described above)
(ii) materially


                                       24
<PAGE>   28
increase the benefits accruing to participants or (iii) materially modify the
eligibility requirements of the Stock Plan. The Stock Plan may not be changed in
such a way as to alter, impair, amend, modify, suspend or terminate any rights
of a participant or any obligation of the Company under any award theretofore
granted in any manner adverse to such participant without the consent of such
participant.

STOCK OPTION REPRICING

         In June, 1997, the Board of Directors approved the exchange of options
held by each employee (including executive officers) under the Company's Stock
Plan for new options. The new options provide for an exercise price of $0.58 per
share, the then estimated fair market value of the common stock as of the
repricing. The Board of Directors determined such exchange to be appropriate in
order to sustain the incentivization of all of its employees. As a condition for
such repricing, the Company imposed the requirement that such new options would
not become exercisable until the later of (i) the closing of the Senior Secured
Convertible Note Purchase Agreement between Lithium Link, LLC and the Company or
(ii) November 1, 1997. As a result of this stock option repricing, the Company
cancelled a total of 1,529,357 stock options and granted the same number of new
stock options at the aforementioned $0.58 exercise price per share.

         In connection with the 1997 repricing of certain stock options under
the Stock Plan, the Stock Plan Committee concluded repricing was advisable and
in the best interests of the Company in order to, among other things, provide
incentive to management and employees in the absence of salary raises in 1997.
The Stock Plan Committee based its conclusion, on several factors including the
following: (i) all of options that were repriced were exercisable at various
strike prices that were greater than the current fair market value of the
Company's common stock as of the repricing date; (ii) the Company is in a very
competitive industry and must compete for personnel with several companies that
have substantially greater financial and other resources than those of the
Company; and (iii) the Company, in order to gain and maintain its competitive
advantage, must attract, motivate and retain its key personnel in an effort to
develop, refine, market and exploit its technology. Accordingly, the Company
cancelled the specified existing stock options, and granted new stock options,
with an exercise price of $.58 per share, the fair market value of the Company's
common stock as of June 5, 1997. Other than a change in vesting terms ( See
"Stock Option Repricing" above), the repriced options are identical to the
cancelled options.

COMPENSATION OF DIRECTORS

         Directors receive no cash compensation for serving on the Company's
Board of Directors. Each Non-Employee Director receives an option to purchase
13,334 shares of Common Stock as described below under the caption "Directors
Stock Option Plan" upon election to the Board. Other arrangements pursuant to
which certain directors were compensated in 1997 pursuant to the Company's
Directors Stock Option Plan are set forth below under "Directors Stock Option
Plan".

DIRECTORS STOCK OPTION PLAN

         In August 1995, the Board of Directors adopted the Directors Stock
Option Plan (the "Directors Plan") and on February 8, 1996, Majestic Hopes, LLC,
as the majority stockholder, ratified the adoption of the Directors Plan. The
Directors Plan authorizes the granting of up to 333,333 options. The members of
the Committee administering the Directors Plan are Thomas R. Thomsen, David Cade
and Ralph Ketchum. The purpose of the Directors Plan is to aid the Company in
attracting, retaining and motivating independent directors by providing them
with incentives for making significant contributions to the growth and
profitability of the Company. The Directors Plan is designed to accomplish this
goal by the granting of stock options, thereby providing participants with a
proprietary interest in the growth, profitability and success of the Company.

         Directors of the Company who are not officers or employees of the
Company or any subsidiary thereof ("Non-Employee Directors") are eligible to
receive grants of stock options pursuant to the Directors Plan. Under the
Directors Plan, non-qualified stock options to purchase shares of the Company's
Common Stock shall be granted


                                       25
<PAGE>   29
automatically to Non-Employee Directors at the times specified in the Directors
Plan. Each Non-Employee Director receives an initial option to purchase 13,334
shares of the Common Stock on the date on which such director first becomes
eligible to participate in the Directors Plan. Thereafter, as long as a
Non-Employee Director remains eligible to participate in the Directors Plan,
such director will receive on the date the Company consummates a joint venture
agreement with an investment in the Company of at least $3,000,000, options to
acquire up to an additional 20,000 shares. On December 2, 1997, options to
purchase an additional 20,000 shares were awarded each to Messrs. Hope, Ketchum,
Labush and McKey, Jr. recognizing consummation of the sale of $5.5 million of
the Company's Senior Secured Convertible Notes. Notwithstanding the foregoing,
no stock option shall be granted to any person whose service as a director of
the Company has ceased. Mr. Thomsen received 13,334 stock options under the
Directors Plan, prior to his employment with the Company. Mr. Thomsen, as Chief
Executive Officer, will no longer receive options under the Directors Plan.

         During the fiscal year ended December 31, 1996, Harry Edelson and L.
Wayne Harber, upon their election to the Company's Board of Directors, each were
granted 13,334 stock options, which vest in equal increments over four years. In
addition, the 13,334 options held by Paul Bagley, David H. Hughes, Ralph D.
Ketchum, Gerald M. Labush, John D. McKey and Thomas R. Thomsen under the
Directors Plan were repriced on February 8, 1996 to $.90. Messrs. Edelson,
Harber, Bagley, and Hughes no longer give as members of the Company's Board of
Directors. See "Stock Option Repricing" for details.

         During the fiscal year ended December 31, 1997, Dr. William H. Chu,
upon his election to the Company's Board of Directors on December 1, 1997, was
granted 13,334 stock options, which vest in equal increments over four years.

         The exercise price of any stock option granted pursuant to the
Directors Plan is the fair market value of the Common Stock on the date of
grant. As of December 31, 1997, there were outstanding options under the
Directors Plan which respect to 146,670 shares of Common Stock, which have
exercise prices ranging from $0.58 per share to $1.00 per share and options with
respect to 30,001 shares of Common Stock are fully vested as of December 31,
1997.

STOCK OPTION REPRICING

         In February 1996, stock options which had previously been granted to
then directors of the Company were cancelled and new options were reissued at
$.90 per option, the fair market value of the Common Stock as of the effective
date pursuant to the terms and conditions of the Directors Plan. The stock
options were repriced in order to sustain the incentivization of the directors
since the stock options held by the directors had exercise prices well in excess
of the then market price of the Company's common stock (ranging from $2.40 to
$9.30). As a result of this stock option repricing, the Company cancelled a
total of 106,672 stock options and granted the same number of new stock options
at the aforementioned exercise price of $.90 per share.

EMPLOYMENT AGREEMENTS AND CERTAIN EMPLOYEE MATTERS

         On May 9, 1996, the Company entered into a one-year employment
agreement with Thomas R. Thomsen pursuant to which Mr. Thomsen is employed as
the Company's Chief Executive Officer at an annual salary of $185,000. The
agreement has been extended through May 8, 1998. Mr. Thomsen has voluntarily
elected to defer his compensation in the best interests of the Company until
October 1997. In 1997, the Board of Directors approved the issuance of 246,623
shares of the Company's Common Stock to Mr. Thomsen in satisfaction of $100,000
of accrued but unpaid salary. Mr. Thomsen shall be eligible to receive a target
bonus of up to 40% of his annual salary, the exact amount of such bonus to be
determined by the Board of Directors in accordance with performance thresholds
to be agreed upon by the Board of Directors and Mr. Thomsen. Mr. Thomsen's
employment also provides for the issuance of a ten (10) year non-qualified
option to purchase 400,000 shares of the Company's common stock at an exercise
price of $2.5625 per share. In June 1997, the Board of Directors approved the
exchange of options held by each employee (including executive officers) under
the Company's Stock Plan for new


                                       26
<PAGE>   30
options. The new options provide for an exercise price of $0.58 per share and
became exercisable on November 1, 1997. If Mr. Thomsen's employment is
terminated without cause and other than due to disability or death, the Company
will be obligated to (i) continue Mr. Thomsen's salary for an additional six (6)
months or the remainder of the term on the contract, whichever is longer
("severance period"), (ii) continue for such "severance period" all of Mr.
Thomsen's benefits under the Company's medical insurance, disability insurance,
life insurance and other benefit plans as are then in effect for executives of
the Company, and (iii) accelerate the vesting of all unexercisable options such
that upon termination all then exercisable and unexercisable options immediately
become exercisable on the date of termination, and all the same shall remain
exercisable for a period of three (3) years commencing on the date of
termination.

         On July 24, 1996, the Company entered into a one-year employment
agreement with David J. Cade pursuant to which Mr. Cade is employed as the
Company's President and Chief Operating Officer at an annual salary of $140,000.
In May 1997, this agreement was extended for one year on the same terms and
conditions except that no new options were granted. Mr. Cade shall also be
eligible to receive a target bonus of up to 20% of his annual salary, the exact
amount of such bonus to be determined by the Board of Directors in accordance
with performance thresholds to be agreed upon by the Board of Directors and Mr.
Cade. Mr. Cade's employment agreement also provides for the issuance of a ten
(10) year incentive option to purchase 133,333 shares of the Company's common
stock at an exercise price of $1.33 per share. In June 1997, the Board of
Directors approved the exchange of options held by each employee (including
executive officers) under the Company's Stock Plan for new options. The new
options provide for an exercise price of $0.58 per share and became exercisable
on November 1, 1997. In addition, Mr. Cade was granted 316,001 stock options on
December 2, 1997 at an exercise price of $1.00. If Mr. Cade's employment is
terminated without cause and other than due to disability or death, the Company
will be obligated to (i) continue Mr. Cade's salary for an additional six (6)
months or the remainder of the term on the contract, whichever is longer
("severance period"), (ii) continue for such "severance period" all of Mr.
Cade's benefits under the Company's medical insurance, disability insurance,
life insurance and other benefit plans as are then in effect for executives of
the Company, and (iii) in the case of death or disability, the option shall be
exercisable to the extent then vested for a period of three years.

         On July 24, 1996, the Company entered into a one-year employment
agreement with George R. Ferment pursuant to which Mr. Ferment is employed as
the Company's Executive Vice President of Operations and Chief Technical Officer
at an annual salary of $130,000. In May 1997, this agreement was extended for
one year on the same terms and conditions except that no new options were
granted. Dr. Ferment shall also be eligible to receive a target bonus of up to
20% of his annual salary, the exact amount of such bonus to be determined by the
Board of Directors and Dr. Ferment. Dr. Ferment's employment agreement also
provides for the issuance of a ten (10) year incentive option to purchase
133,333 shares of the Company's common stock at an exercise price of $1.33 per
share. In June 1997, the Board of Directors approved the exchange of options
held by each employee (including executive officers) under the Company's Stock
Plan for new options. The new options provide for an exercise price of $0.58 per
share and became exercisable on November 1, 1997. In addition, Dr. Ferment was
granted 316,000 stock options on December 2, 1997 at an exercise price of $1.00.
If Dr. Ferment's employment is terminated without cause and other than due to
disability or death, the Company will be obligated to (i) continue Dr. Ferment"s
salary for an additional six (6) months or the remainder of the term on the
contract, whichever is longer ("severance period"), (ii) continue for such
"severance period" all of Dr. Ferment's benefits under the Company's medical
insurance, disability insurance, life insurance and other benefit plans as are
then in effect for executives of the Company, and (iii) in the case of death or
disability, the option shall be exercisable to the extent then vested for a
period of three years.

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                           AND MANAGEMENT

         The following table sets forth information as of February 28, 1998 with
respect to the equity securities of the Company known by the Company to be
beneficially owned by each beneficial owner of more than five percent of the
Company's Common Stock, by each current director and Named Executive Officer (as
defined in applicable SEC regulations), and by all current directors and
executive officers as a group.


                                       27
<PAGE>   31
<TABLE>
<CAPTION>
Name and Address                        Number of Shares
of Beneficial Owner(1)                  Beneficially Owned(2)                   Percent of Class(2)
-------------------                     ------------------                      ----------------   
<S>                                     <C>                                     <C>  
Thomas R. Thomsen                       1,015,850(3)                            4.74%
Stephen F. Hope                         1,576,829(4)                            7.50%
Ralph D. Ketchum                          472,596(5)                            2.21%
Gerald M. Labush                          276,653(6)                            1.32%
John D. McKey, Jr.                        570,868(7)                            2.71%
David J. Cade                             345,882(8)                            1.62%
George R. Ferment                         361,910(9)                            1.69%
William D. Walker                         587,859(10)                           2.76%
William H. Chu                                  0(11)                            *
Edelson Technology Partners III         1,299,518(12)                           6.18%
Donald C. Taylor                        2,032,500(13)                           8.95%
Group III Capital, Inc.                 1,892,500(14)                           8.33%
Lithium Link, LLC                       11,857,143(15)                          36.07%
Interlink Management Corporation        11,857,143(16)                          36.07%
All Directors and Officers as a          5,208,447                              24.55%
Group (9 persons)+
</TABLE>

  *   Less than 1%.
  +   Includes the Company's directors and officers as of March 31, 1998.

(1)      The address of each beneficial owner is c/o Lithium Technology
         Corporation, 5115 Campus Drive, Plymouth Meeting, PA 19462 except for
         Edelson Technology Partners III: Whiteweld Centre, 300 Tice Boulevard,
         Woodcliff Lake, NJ 07065; Group III Capital Ventures, Inc. and Donald
         C. Taylor: 475 Park Avenue South, Suite 330, New York, NY 10016; and
         Lithium Link, LLC and Interlink Management Corporation: 10,000 Memorial
         Drive, Suite 920, Houston, Texas 77024.

(2)      Includes shares of Common Stock underlying outstanding warrants,
         options and convertible securities which are exercisable by the
         beneficial owner with respect to whom the calculation is made, but does
         not include shares of common stock that may not be acquired within 60
         days after February 28, 1998 upon the exercise or conversion of
         warrants, options or convertible securities.

(3)      Includes 359,227 shares of Common Stock which are covered by a voting
         proxy granted by a shareholder to Mr. Thomsen and options to acquire
         410,000 shares of common stock.

(4)      Includes 422,550 shares of Common Stock held by Hazel Hope, the
         Executrix of the Estate of Henry Hope, and options to acquire 5,000
         shares of Common Stock.


                                       28
<PAGE>   32
(5)      Includes options to acquire 15,000 shares of Common Stock, 7,999 shares
         held by Mr. Ketchum's spouse, a convertible note giving Mr. Ketchum, as
         a member of Lithium Link, LLC, the right to acquire 178,571 shares of
         the Company's Common Stock and a convertible note giving Mrs. Ketchum,
         as a member of Lithium Link, LLC, the right to acquire 178,571 shares
         of the Company's Common Stock.

(6)      Includes options to acquire 11,667 shares of Common Stock.

(7)      Includes options to acquire 11,667 shares of Common Stock.

(8)      Consists of options to acquire 345,882 shares of Common Stock.

(9)      Consists of options to acquire 361,910 shares of Common Stock.

(10)     Includes 148,227 shares of Common Stock which are covered by a voting
         proxy granted by a shareholder to Mr. Walker, options to acquire 66,669
         shares of Common Stock and a convertible note giving Mr. Walker, as a
         member of Lithium Link, LLC, the right to acquire 178,571 shares of the
         Company's Common Stock.

(11)     Options held by Mr. Chu will not vest within 60 days of February 28,
         1998. Mr. Chu is the Chairman, Chief Executive Officer, and a
         shareholder of Elite Material Co., Ltd. ("Elite Material"). Elite
         Material is a member of Lithium Link LLC ("Lithium Link"). Lithium Link
         may be deemed a beneficial owner of more than ten percent of the shares
         of Common Stock of the Company. Elite Material has advised that it is
         neither a controlling member nor has or shares investment control over
         Lithium Link's portfolio securities. Mr. Chu disclaims beneficial
         ownership of any of the derivative securities beneficially owned by
         Lithium Link except to the extent (if any) of his indirect pecuniary
         interest arising out of his shareholdings in Elite Material.

(12)     Consists of 1,299,518 shares of Common Stock.

(13)     Includes approximately 47,500 shares of Common Stock held by Mr. Taylor
         directly, 192,500 shares of Common Stock held directly by, and
         1,700,000 shares of Common Stock underlying a warrant beneficially
         owned by, Group III Capital, Inc., an entity controlled by Mr. Taylor,
         and 92,500 shares of Common Stock held by a limited partnership
         controlled by Mr. Taylor. Excludes 1,100,000 warrants owned by Group
         III Capital, Inc. which have not vested pursuant to the terms thereof
         and are not expected to vest within 60 days of February 28, 1998.

(14)     Includes 195,000 shares of Common Stock and 1,700,000 shares of Common
         Stock underlying a warrant. Excludes 1,100,000 warrants which have not
         vested pursuant to the terms thereof and are not expected to vest
         within 60 days of February 28, 1998.

(15)     Consists of $3,320,000 principal amount of Notes, convertible into
         11,857,143 shares of the Company's Common Stock.

(16)     Consists of $3,320,000 principal amount of Notes, convertible into
         11,857,143 shares of the Company's Common Stock. Interlink Management
         Corporation is the managing member of Lithium Link, LLC and, therefore,
         may be deemed to have indirect beneficial ownership of, and shared
         voting and dispositive power with respect to, such shares. Does not
         include shares of Common Stock that may be acquired by the two
         controlling persons of Interlink Management Corporation pursuant to the
         exercise of 450,000 warrants.


                                       29
<PAGE>   33
CHANGES IN CONTROL

         On September 22, 1997, the Company entered into a Senior Secured
Convertible Note Purchase Agreement (the "1997 Note Purchase Agreement") with
Lithium Link LLC (the "Lender") for the sale of $5.5 million of the Company's
Senior Secured Convertible Notes (the "1997 Notes"). The Company is obligated to
borrow, and the Lender is obligated to loan, the entire $5.5 million principal
amount. The Company has received $2.17 million of the $5.5 million funding as of
December 31, 1997 and $3,320,000 of the $5.5 million as of March 31, 1998. The
1997 Notes are convertible into the Company's Common Stock at a conversion price
of $.28 per share. The number of shares which may be issued to the holders of
the 1997 Notes would be approximately 19.64 million shares of common stock,
assuming conversion in full of the 1997 Notes without giving effect to any
antidilution provisions. As of February 28, 1998, the Company had 21,016,361
shares of common stock outstanding. Accordingly, the issuance of such a
significant number of additional shares to the holder of the 1997 Notes could
result in a change in control of the Company. In addition, the 1997 Notes are
secured by a first priority security interest in favor of the 1997 Noteholder as
to substantially all of the Company's assets other than the Company's
intellectual property.

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Between August 1994 and April 1995, the Company issued and sold 7%
convertible promissory notes in the aggregate principal amount of $1,467,750. As
of December 1995, $1,167,750 principal amount of notes were converted into
577,961 shares of Common Stock, after giving effect to the reverse split,
leaving $300,000 principal amount of notes outstanding. These remaining notes
and accrued interest thereon were converted into 152,038 shares of Common Stock,
after giving effect to the reverse stock split, during January 1996. Gerald
Labush, a director of the Company, and Mr. Hughes, a former director, purchased
a portion of the promissory notes.

         In August 1995 and October 1995, the Company issued and sold to certain
private investors an aggregate principal amount of $1,000,000 12% convertible
promissory notes. On March 29, 1996, the Company entered into the Technology
Development Agreement and Stock Purchase Agreement with the Consortium, and such
notes, and accrued interest thereon, were converted into 5,617,492 shares of
Common Stock of the Company. Mr. McKey, a director of the Company, Mr. Hughes, a
former director, and Mr. Walker, the Treasurer and Chief Financial Officer of
the Company, purchased a portion of such convertible notes offering. See
"Security Ownership of Certain Beneficial Owners and Management".

         In December 1995, the Company issued and sold to a group of private
investors an aggregate principal amount of $800,000 12% convertible promissory
notes. On March 29, 1996, the Company entered into the Technology Development
Agreement and Stock Purchase Agreement with the Consortium, as discussed above,
and such notes, and accrued interest thereon, were converted into 1,385,954
shares of Common Stock of the Company. Messrs. Ketchum and Labush, directors of
the Company, and Mr. Walker, the Treasurer and Chief Financial Officer of the
Company, purchased a portion of such convertible notes offering. See "Security
Ownership of Certain Beneficial Owners and Management".

         In September 1997, the Company issued and sold to certain private
investors an aggregate principal amount of $5,500,000 8.5% Senior Secured
Convertible Promissory Notes (the "1997 Notes"). Mr. Ketchum, a director of the
Company, and Mr. Walker, the Treasurer and Chief Financial Officer of the
Company, purchased a portion of such convertible notes offering. See "Security
Ownership of Directors and Officers". In July and August 1997, the Company
obtained a bridge loan of $500,000 from certain private investors, including Mr.
Ketchum and his wife, who each loaned the Company $50,000, for an aggregate of
$100,000. In connection with the $500,000 loan, the Company issued an aggregate
of 100,000 warrants to the bridge lenders of which 5,000 warrants were granted
to each of Mr. and Mrs. Ketchum. Subsequently Mr. and Mrs. Ketchum exercised
such warrants in full and Mr. and Mrs. Ketchum were each issued 5,000 shares.

         In exchange for assistance in placing the 1997 Notes, the Company paid
$150,000 and issued warrants to Interlink Management Corporation ("IMC"). IMC is
the managing member of Lithium Link, LLC, the purchaser of


                                       30
<PAGE>   34
the 1997 Notes. 

         IMC's warrants allow it to purchase 500,000 shares of the Company's
Common Stock at an exercise price of $.40 share. In addition, the Company
entered into a Consulting Agreement with IMC whereby IMC will be paid $5,000 per
month for one year, with the Company having an option to renew the Consulting
Agreement for another one year term.

         As of December 31, 1997, the Company has issued and outstanding stock
options to purchase 2,915,268 shares of the Company's Common Stock, comprised of
(a) options to acquire 146,670 shares pursuant to the Directors Stock Option
Plan (the "Directors Plan") (See "Executive Compensation -- Directors Stock
Option Plan" for details), (b) options to acquire 2,761,514 shares pursuant to
the 1994 Stock Incentive Plan" (See "Executive Compensation - Stock Incentive
Plan" for details), and (c) 7,084 options granted to consultants.

         Pursuant to the Majority Consent of Stockholders dated February 8,
1996, the following directors each exchanged options to purchase 13,334 shares
of Common Stock, previously granted to each of them by the Company, for the same
number of options to be granted under the Directors Plan at a purchase price of
$0.90 per share, with vesting schedules substantially similar to the vesting
schedules of the surrendered options: Messrs. Paul Bagley; Anthony B. Fisher;
David H. Hughes; Ralph D. Ketchum; John D. McKey, Jr.; Donald C. Taylor and
Thomas R. Thomsen. Mr. Taylor has since waived his rights to such options.

         In 1997, the Board of Directors approved the exchange by each employee,
including executive officers holding options under the Company's 1994 Stock
Incentive Plan of such outstanding options for new options with an exercise
price of $0.58 per share. The Board of Directors determined such exchange to be
appropriate in order to sustain the incentivization of all of its employees
since the outstanding options has exercise prices well in excess of the then
market price of the Company's Common Stock. As a condition for such repricing,
such new options (including such options which has been exchanged for vested
options) do not become exercisable until the later of November 1, 1997 (with
respect to options which had been vested previously) or the original vesting
schedule of such options. As a result of this stock option repricing, the
Company cancelled a total of 1,529,357 stock options having exercise prices in
excess of the then market price of the Company's Common Stock and granted the
same number of new stock options at the aforementioned $0.58 exercise price per
share. Also in 1997, the Board of Directors approved the issuance of 246,623
shares of the Company's Common Stock to Mr. Thomsen in satisfaction of $100,000
of accrued but unpaid salary and in December 1997, options to purchase an
additional 20,000 shares were awarded each to Messrs. Hope, Ketchum, Labush and
McKey, Jr. recognizing consummation of the sale of $5.5 million of the
Company's Senior Secured Convertible Notes.

         Dr. William Chu, upon his election to the Company's Board of Directors
on December 1, 1997, was granted 13,334 stock options. Dr. Chu is the chairman,
chief executive officer, and a shareholder of Elite Material Co., Ltd. ("Elite
Material"). Elite Material is a member of Lithium Link, LLC. In a December 3,
1997 press release, the Company announced that Elite Material had signed a
Letter of Intent to partner in manufacturing the Company's proprietary
lithium-ion polymer batteries. 

         On December 2, 1997, Mr. Cade was granted 316,001 stock options at an
exercise price of $1.00 per share, Dr. Ferment was granted 316,000 stock options
at an exercise price of $1.00 per share and Mr. Walker was granted 100,000 stock
options at an exercise price of $1.00 per share.

         


                                       31
<PAGE>   35
         During 1996 and 1997, the Company issued options to purchase its Common
Stock to the following executive officers in the amounts listed in parenthesis
next to each executive officer's name: Thomas R. Thomsen (413,334); David J.
Cade (671,982); Dr. George R. Ferment (704,038); and William D. Walker
(166,668).

         During 1997, the Company granted an aggregate of 93,334 Common Stock
options pursuant to the Director's Stock Option Plan and an aggregate of
1,017,500 Common Stock options pursuant to the 1994 Stock Incentive Plan.

CONSULTING AGREEMENTS

         From December 1993 through April 1995, Matthew Stuart & Co., Inc.
("Matthew Stuart") provided certain consulting and advisory services to the
Company. For these services, Matthew Stuart has been paid approximately $112,000
exclusive of commissions and accrued amounts in connection with various private
placements. Matthew Stuart, Robert Pfeffer (a former principal in Matthew
Stuart) and Richard Perlman (a former principal in Matthew Stuart) commenced
litigation against the Company claiming they were also entitled to further fees
and certain warrants. The Company has disputed the issuance of these warrants to
Matthew Stuart, Mr. Pfeffer, and Mr. Perlman, and the Company has declared the
1993 warrant agreement and related warrant documents void. The Company has
settled the litigation with Matthew Stuart and Mr. Pfeffer. The litigation
between the Company and Mr. Perlman was continuing at December 31, 1997. See
"Legal Proceedings" for details. Mr. Perlman served as a director of the
Company from July 1994 until his resignation in September 1995. Effective April
1995, the Company terminated any continuing relationship with Matthew Stuart.
On June 20, 1996, the Company entered into a Settlement Agreement with Matthew
Stuart and Mr. Pfeffer thereby terminating that litigation and pursuant to
which the Company issued a warrant entitling Mr. Pfeffer to purchase up to
600,000 shares of the Company's Common Stock. 

         On May 9, 1996, the Company entered into a Consulting Agreement with
former director Donald C. Taylor providing for investment advisory services,
shareholder relations and related consulting services to the Company. Mr. Taylor
served as a director of the Company from August 1995 to May 1996. Pursuant to
the Consulting Agreement the Company paid consulting fees to Mr. Taylor in the
amount of $56,000 in 1996 and $77,000 in 1997. The Company and Mr. Taylor agreed
in December 1997 to terminate the Consulting Agreement except for Mr. Taylor's
non-competition and confidentiality covenants. In consideration for past and
prospective services provided to the Company by Group III Capital, Inc., of
which Mr. Taylor is the President and a director, the Company had issued in 1996
to Group III Capital, Inc. a warrant to purchase 1,500,000 shares of the
Company's Common Stock at an exercise price of $1.54 per share. The warrant also
included certain anti-dilution provisions which as of September 22, 1997
entitled the warrant holder to purchase approximately 2,400,000 shares of the
Company's Common Stock at an exercise price of $0.96 per share. In December
1997, in consideration for removing all anti-dilution provisions from the
warrant, except for those activated by a stock split, reverse stock split or a
stock dividend and for other consideration, the Company and Group III amended
the warrant to entitle the warrant holder to purchase 2,800,000 shares of the
Company's Common Stock at an exercise price of $0.85 per share and to reduce the
warrant's exercise period from ten years to five years. In connection with the
termination of the Consulting Agreement the Company agreed in 1997 to pay an
additional $126,000 to Mr. Taylor, which payment was completed in 1998.

         In 1997 and 1996, the Company paid $70,000 and $75,000, respectively to
William D. Walker for services rendered to the Company as Treasurer and Chief
Financial Officer. Mr. Walker does not receive a salary from the Company.

OTHER COMPENSATION

         In connection with the Company's $1.75 million bridge loan in October
1996, the Company paid a placement fee of $122,500 to Stone Pine Atlantic,
L.L.C., Paul Bagley and L. Wayne Harber, each a former director of the Company,
and John D. McKey, Jr., a current director have a financial interest in Stone
Pine, L.L.C.


                                       32
<PAGE>   36
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      The following Exhibits are filed as part of this Report:

         3.1      Certificate of Incorporation.(3)

         3.2      By-Laws, as amended.(3)

         4.1      Specimen Common Stock Certificate.(3)

         4.2      Credit Agreement dated August 3, 1995 between the Company and
                  various Note Holders specified therein.(6)

         4.3      Credit Agreement dated December 1, 1995 between the Company
                  and various Note Holders specified therein.(6)

         10.1     Memorandum of Agreement dated February 9, 1989, among Trinity
                  American Corporation, Lithion, Industries, Coastal Leasing and
                  Investments, Inc., Hope Lithographic Enterprises, Inc., Henry
                  F. Hope and Stephen F. Hope, with Amendment dated May 24,
                  1989.(3)

         10.2     Stock for Debt Exchange Agreement dated as of October 10, 1991
                  among the Company, Stephen F. Hope and Hazel Hope as Executrix
                  of the Estate of Henry Hope.(4)

         10.3     Exchange Agreement and Patent Assignment among Industries,
                  Henry Hope and Stephen F. Hope.(3)

         10.4     Exchange Agreement and Patent Assignment among Lithion,
                  Stephen F. Hope and Henry Hope, dated July 20, 1989.(3)

         10.5     Stock Purchase Agreement, dated as of November 17, 1993, by
                  and among Stephen F. Hope, the Estate of Henry Hope, and
                  Majestic Hopes, L.L.C., as amended on December 10, 1993.(3)

         10.6     Stockholders Agreement, dated as of December 10, 1993, among
                  Stephen F. Hope, Hope Technologies, Inc., and Majestic Hopes,
                  L.L.C.(3)

         10.7     Reserved.

         10.8     1994 Stock Incentive Plan, as amended.(1)

         10.9     Directors Stock Option Plan.(1)

         10.10    Agreement, dated as of May 31, 1994, by and among Stephen F.
                  Hope, Hope Industries, Inc., Hope Technologies, Inc., and
                  Majestic Hopes, L.L.C.(3)

         10.11    Consulting Letter Agreement, dated December 10, 1993, between
                  Majestic Hopes, L.L.C. and Stephen F. Hope.(3)

         10.12    Employment Agreement, dated July 24, 1996, between David Cade 
                  and the Company.(8)

         10.13    Employment Agreement, dated July 24, 1996, between George 
                  Ferment and the Company.(8)


                                       33
<PAGE>   37
         10.14*   Technology Development Agreement, dated March 29, 1996,
                  between Mitsubishi Materials Corporation, Mitsui & Co., Ltd.
                  and the Company.(6)

         10.15    Stock Purchase Agreement, dated March 29, 1996, between
                  Mitsubishi Materials Corporation, Mitsui & Co., Ltd. and the
                  Company.(6) (without exhibits)

         10.16    Form of Stock Option Agreement relating to the Company's 1994
                  Stock Incentive Plan, as amended.(6)

         10.17    Form of Stock Option Agreement relating to the Company's
                  Directors Stock Option Plan.(6)

         10.18    Lease Agreement, dated July 22, 1994, between PMP Whitemarsh
                  Associates and the Company and Addendum thereto dated July 22,
                  1994.(6)

         10.19    Consulting Agreement, dated January 18, 1995, between
                  Mitsubishi Trust and Banking Corporation and the Company.(6)

         10.20    Agreement between the Company and Coastal Leasing &
                  Investment, Inc. dated November 1, 1994.(6)

         10.21    Agreement dated June 6, 1994, by and among Stephen F. Hope,
                  Hope Industries, Inc., Lithion Corporation, Hope Technologies,
                  Inc., Trinity American Corporation, with amendments dated
                  November 1, 1994.(6)

         10.22    Separation Agreement, dated August 7, 1995 between James A.
                  Elsner and the Company.(6)

         10.23    Agreement and Plan of Merger of Lithium Technology Corporation
                  (a Nevada corporation) and Lithium Technology Corporation (a
                  Delaware corporation) dated February 28, 1996.(1)

         10.24    Warrant to Purchase Common Stock issued to Robert Pfeffer
                  dated June 20, 1996.(6)

         10.25    Agreement of Settlement and Release, dated June 20, 1996, by
                  and between Matthew Stuart & Co., Inc., Robert Pfeffer and the
                  Company.(7)

         10.26    Employment Agreement, dated May 9, 1996, between Thomas R.
                  Thomsen and the Company.(7)

         10.27    Stock Option Agreement, dated May 9, 1996, between Thomas R.
                  Thomsen and the Company.(7)

         10.28    Consulting Agreement, dated May 9, 1996, between Donald Taylor
                  and the Company.(7)

         10.29    Warrant to Purchase Common Stock issued to Group III Capital,
                  Inc. dated May 9, 1996.(7)

         10.30    Warrant to Purchase Common Stock issued to Nanele Services,
                  Inc., dated May 9, 1996.(7)

         10.31    Stock Option Agreement, dated July 24, 1996, between David
                  Cade and the Company.(8)

         10.32    Stock Option Agreement, dated July 24, 1996, between George
                  Ferment and the Company.(8)

         10.33    Form of Restricted Stock Agreement relating to the Company's
                  1994 Stock Incentive Plan.(7)

         10.34    Form of Convertible Note Purchase Agreement dated October 23,
                  1996 between the Company and the Purchasers.(9)


                                       34
<PAGE>   38
         10.35    Form of Convertible Note dated October 23, 1996 issued by the
                  Company.(10)

         10.36    Form of Stock Purchase Agreement dated October 23, 1996
                  between the Company and the Purchasers.(11)

         10.37    Form of Stock Purchase Agreement dated October 23, 1996
                  between the Company and the Placement Agent.(12)

         10.38    Form of Warrant Agreement dated October 23, 1996 between the
                  Company and the Placement Agent.(13)

         10.39    Form of Registration Rights Agreement dated October 23, 1996
                  between the Company and the Placement Agent.(14)

         10.40    Letter Agreement dated February 5, 1997 between the Company
                  and Chase Manhattan Bank.(15)

         10.41    Form of Senior Secured Convertible Note Purchase Agreement
                  dated September 22, 1997, between the Company and Lithium Link
                  LLC.(16)

         10.42    Form of Convertible Promissory Note dated September 22, 1997
                  issued by the Company.(17)

         10.43    Form of Consulting Agreement dated September 22, 1997 between
                  the Company in favor of Interlink Management Corporation.(18)

         10.44    Form of Common Stock Warrant dated September 22, 1997 issued
                  by the Company in favor of Interlink Management
                  Corporation.(19)

         10.45    Form of License Agreement dated September 22, 1997 between the
                  Company and Lithium Link LLC.(20)

         16.1     Letter from Wiss & Company, LLP.(21)

         21.1     List of Subsidiaries.(2)

         27.1+    Financial Data Schedule

(1)      Incorporated herein by reference to the exhibits contained in the
         Company's Information Statement Pursuant to Section 14(c) of the
         Securities Exchange Act of 1934, dated January 19, 1996.

(2)      Incorporated herein by reference to the exhibits contained in the
         Company's Post-Effective Amendment No. 9 to the Registration Statement
         on Form SB-2, File No. 33-9323 N.Y., which was filed with the
         Securities and Exchange Commission on January 6, 1995.

(3)      Incorporated herein by reference to the exhibits contained in the
         Company's Annual Report on Form 10-K for the fiscal year ended October
         31, 1989.

(4)      Incorporated herein by reference to the exhibits contained in the
         Company's Annual Report on Form 10-K for the fiscal year ended October
         31, 1991.

(5)      Incorporated herein by reference to the exhibits contained in the
         Company's Report on Form 8-K, dated November 23, 1994.

(6)      Incorporated herein by reference to the exhibits contained in the
         Company's Form 10-KSB for the fiscal year ended December 31, 1995.


                                       35
<PAGE>   39
(7)      Incorporated herein by reference to the exhibits contained in the
         Company's Registration Statement on Form SB-2, File No. 333-08143,
         which was filed with the Securities and Exchange Commission on July 15,
         1996.

(8)      Incorporated herein by reference to the exhibits contained in the
         Company's Quarterly Report on Form 10- QSB for the quarter ended June
         30, 1996.

(9)      Incorporated herein by reference to Exhibit 10.29 contained in the
         Company's Report on Form 8-K, dated October 25, 1996.

(10)     Incorporated herein by reference to Exhibit 10.30 contained in the
         Company's Report on Form 8-K, dated October 25, 1996.

(11)     Incorporated herein by reference to Exhibit 10.31 contained in the
         Company's Report on Form 8-K, dated October 25, 1996.

(12)     Incorporated herein by reference to Exhibit 10.32 contained in the
         Company's Report on Form 8-K, dated October 25, 1996.

(13)     Incorporated herein by reference to Exhibit 10.33 contained in the
         Company's Report on Form 8-K, dated October 25, 1996.

(14)     Incorporated herein by reference to Exhibit 10.34 contained in the
         Company's Report on Form 8-K, dated October 25, 1996.

(15)     Incorporated herein by reference to exhibits contained in the Company's
         Annual Report on Form 10-KSB, for the year ended December 31, 1996.

(16)     Incorporated herein by reference to Exhibit 10.36 contained in the
         Company's Report on Form 8-K, dated September 22, 1997.

(17)     Incorporated herein by reference to Exhibit 10.37 contained in the
         Company's Report on Form 8-K, dated September 22, 1997.

(18)     Incorporated herein by reference to Exhibit 10.38 contained in the
         Company's Report on Form 8-K, dated September 22, 1997.

(19)     Incorporated herein by reference to Exhibit 10.39 contained in the
         Company's Report on Form 8-K, dated September 22, 1997.

(20)     Incorporated herein by reference to Exhibit 10.40 contained in the
         Company's Report on Form 8-K, dated September 22, 1997.

(21)     Incorporated herein by reference to Exhibit 16.1 contained in the
         Company's Report on Form 8-K, dated December 18, 1997.

(b) Reports on Form 8-K during the quarter ended December 31, 1997:

         1.       Form 8-K Report, dated December 18, 1997 with respect to Item
                  4 of such Report.

         2.       Form 8-K Report, dated December 23, 1997 with respect to Item
                  4 of such Report.

*        Subject to order for confidential treatment as to certain portions
         thereof.

+        Exhibit filed herewith in this Report.

 
                                       36
<PAGE>   40
                                   SIGNATURES

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

                                          LITHIUM TECHNOLOGY CORPORATION


Date: April 15, 1998                      By:   /s/ THOMAS R. THOMSEN
                                             ------------------------------
                                                Thomas R. Thomsen
                                                Principal Executive Officer
                                                and Chairman of the Board

                                          By:   /s/ WILLIAM D. WALKER
                                             ------------------------------
                                                William D. Walker
                                                Principal Financial Officer
                                                and Treasurer


                  In accordance with the Securities Exchange Act of 1934, this
report has been signed by the following persons and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
Signature                                            Title                              Date
---------                                            -----                              ----
<S>                                         <C>                                         <C>
/s/ Thomas R. Thomsen                       Chairman of the                        April 15, 1998
--------------------------------            Board, Director
Thomas R. Thomsen                           

/s/ David J. Cade                           Director                               April 15, 1998
--------------------------------
David J. Cade

/s/ William H. Chu                          Director                               April 15, 1998
--------------------------------
William H. Chu

/s/ George R. Ferment                       Director                               April 15, 1998
--------------------------------
George R. Ferment 

/s/ Stephen F. Hope                         Director                               April 15, 1998
--------------------------------
Stephen F. Hope

/s/ Ralph D. Ketchum                        Director                               April 15, 1998
--------------------------------
Ralph D. Ketchum

/s/ Gerald M. Labush                        Director                               April 15, 1998
--------------------------------
Gerald M. Labush

/s/ John D. McKey, Jr.                      Director                               April 15, 1998
--------------------------------
John D. McKey, Jr.
</TABLE>


                                       37
<PAGE>   41
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                                DECEMBER 31, 1997

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                                               PAGE

<S>                                                                                                     <C>
Independent Auditors' Reports                                                                            F-2 to F-3

Consolidated Financial Statements:

         Consolidated Balance Sheet at December 31, 1997                                                        F-4

         Consolidated Statements of Operations for the Years
           Ended December 31, 1997 and 1996 and the Period from
           July 21, 1989 (Date of Inception) to December 31, 1997 (As Restated)                                 F-5

         Consolidated Statements of Changes in Stockholders' Deficiency
           for the Period from July 21, 1989 (Date of Inception) to December 31, 1997 (As Restated)      F-6 to F-8

         Consolidated Statements of Cash Flows for the Years Ended December 31,
           1997 and 1996, and the Period from July 21,
           1989 (Date of Inception) to December 31, 1997 (As Restated)                                  F-9 to F-10

         Notes to Consolidated Financial Statements                                                    F-11 to F-22
</TABLE>


                                       F-1
<PAGE>   42
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
         Lithium Technology Corporation and Subsidiary
         (Development Stage Companies)


We have audited the accompanying consolidated balance sheet of Lithium
Technology Corporation and subsidiary (development stage companies) as of
December 31, 1997, and the related consolidated statements of operations,
changes in stockholders' deficiency and cash flows for the year then ended, and
for the period from July 21, 1989 (date of inception) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The Company's financial statements as of and for the year ended
December 31, 1996, and for the period July 21, 1989 (date of inception) through
December 31, 1996 (as restated, see Note 8), were audited by other auditors
whose report, dated January 22, 1997 and February 6, 1998 (as to Note 8),
expressed an unqualified opinion on those statements and included explanatory
paragraphs that described the uncertainty concerning the Company's ability to
continue as a going concern and the restatement of the 1996 financial
statements. The financial statements for the period July 21, 1989 (date of
inception) through December 31, 1996 reflect a cumulative net loss of
$18,877,000, of the total net loss of $33,041,000. The other auditors' report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for such prior periods, is based solely on the report of such other
auditors. 

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audit and the report of other auditors, such
consolidated financial statements present fairly in all material respects, the
financial position of Lithium Technology Corporation and subsidiary (development
stage companies) as of December 31, 1997, and the results of their operations
and their cash flows for the year then ended, and for the period from July 21,
1989 (date of inception) through December 31, 1997, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing and marketing lithium-polymer rechargeable
batteries. As discussed in Note 2 to the financial statements, the Company's
operating losses since inception raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

DELOITTE & TOUCHE, LLP
Philadelphia, PA

 
February 6, 1998 


                                       F-2
<PAGE>   43

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
   Lithium Technology Corporation and Subsidiary
   (Development Stage Companies)

We have audited the consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows of Lithium Technology Corporation
and subsidiary (Development Stage Companies) for the year ended December 31,
1996 and for the period July 1, 1989 (date of inception) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lithium
Technology Corporation and subsidiary (Development Stage Companies) for the
year ended December 31, 1996 and for the period July 1, 1989 (date of
inception) to December 31, 1996, in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 of the
financial statements, the Company is a development stage company, has suffered
recurring losses from operations and needs significant additional financing to
repay existing indebtedness and to continue the development of its technology.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

In 1997, the SEC Staff announced a new position on the accounting for
convertible securities with a nondetachable conversion feature that is "in the
money" at the date of issuance. The SEC staff believes that the "in the money"
amount for convertible debt securities should be considered debt discount and
amortized over the period from the date of issuance to the date it first
becomes convertible. The SEC Staff requires that all public companies restate
their financial statements to comply with this position. As indicated in Note
8, the Company has, accordingly, restated its financial statements for 1994 and
1995.


                                   WISS & COMPANY, LLP

Woodbridge, New Jersey
January 22, 1997, except as to Note 8
for which the date is February 6, 1998



                                      F-3

<PAGE>   44
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                     ASSETS
<S>                                                                                      <C>                <C>
CURRENT ASSETS:
         Cash and cash equivalents                                                       $  506,000
         Cash held in escrow (see Note 7)                                                 3,330,000
         Other current assets                                                                15,000
                                                                                         ----------
                  Total Current Assets                                                                      $3,851,000
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
         DEPRECIATION OF $567,000                                                                              422,000
OTHER ASSETS:
         Debt issue costs, less accumulated amortization of $39,000                         638,000
         Security and equipment deposits                                                     49,000
                                                                                        -----------
                                                                                                               687,000
                                                                                                           -----------
                                                                                                            $4,960,000
                                                                                                           ===========
                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
         Accounts payable                                                                 $ 390,000
         Accrued salaries                                                                   181,000
         Other accrued expenses                                                             308,000
                                                                                          ---------
                  Total Current liabilities                                                                 $  879,000
LONG-TERM LIABILITIES:
         Senior Secured Convertible Notes, due July 1, 2002                               5,500,000
                                                                                         ----------

                  Total Long-Term liabilities                                                               $5,500,000
                                                                                                           -----------
                  Total Liabilities                                                                         $6,379,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
         Common stock, par value $.01 per share:
                  Authorized - 50,000,000 shares
                  Issued and outstanding - 21,016,361 shares                                210,000
         Additional paid-in capital                                                      38,277,000
         Accumulated deficit                                                             (6,865,000)           
         Deficit accumulated during development stage                                   (33,041,000)
                                                                                       ------------

                  Total Stockholders' Deficiency

                                                                                                            (1,419,000)
                                                                                                           ----------- 
                                                                                                            $4,960,000
                                                                                                           ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>   45
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                                            Period From
                                                                                                          July 21, 1989
                                                                                                               (Date of
                                                                      Year Ended                           Inception) to
                                                                      December 31,                           December 31,
                                                                 1997                 1996                        1997
                                                              ----------           ----------          ---------------
                                                                                                        (As Restated -  
                                                                                                          see Note 8)
<S>                                                       <C>                   <C>                     <C>
COSTS AND EXPENSES:
         Engineering, research and development               $   1,399,000         $ 1,079,000            $   5,112,000
         General and administrative                              1,654,000           3,216,000                8,613,000
         Interest expense, net of interest income
           of $86,000 (1997) and $58,000 (1996)                  1,290,000              89,000                1,475,000
         Interest expense related to beneficial                                                                        
           conversion feature                                    9,821,000                                   17,841,000
                                                             -------------         -----------            -------------
                                                                14,164,000           4,384,000               33,041,000
                                                             -------------         -----------            -------------
NET LOSS                                                      $(14,164,000)        $(4,384,000)            $(33,041,000)
                                                             -------------         -----------            -------------
WEIGHTED AVERAGE NUMBER OF
         COMMON SHARES OUTSTANDING                              18,005,000          14,029,000
                                                             =============         ===========
BASIC AND DILUTED NET LOSS PER SHARE                         $        (.79)        $      (.31)
                                                             =============         ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-5
<PAGE>   46
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

         CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
                                               Series A                         Series B                        Series C       
                                            Preferred Stock              Convertible Preferred Stock     Convertible Preferred Stock
                                         -----------------------         ---------------------------     ---------------------------
                                           Shares        Amount              Shares         Amount        Shares            Amount
                                         ----------   ------------       ------------    ------------   ------------     -----------
<S>                                      <C>          <C>                <C>             <C>            <C>              <C>    
BALANCES AT JULY 21, 1989
PERIOD ENDED OCTOBER 31, 1989:
  Net assets received in reverse
     acquisition (Note 1)                    --            --                                                                   
  Change in par value                        --            --                                                                   
  Exchange for debt owed to officer          23,000      2,300,000           --              --             --              --
  Shares sold to financial consultant       
     in conjunction with financing           --            --                --              --             --              --
  Expenses paid by principal shareholder
     on behalf of Lithium Corporation        --            --                --              --             --              --
  Net income (loss) for the year             --            --                --              --             --              --
                                         ----------   ------------       ------------    ------------   ------------     -----------
BALANCES AT OCTOBER 31, 1989                 23,000      2,300,000

YEAR ENDED OCTOBER 31, 1990
  Issuance of Class B common stock for
     cash to Investors                       --            --                --              --             --              --
  Exercise of Class B common stock
     warrants, net of offering costs         --            --                --              --             --              --

NET INCOME (LOSS) FOR THE YEAR               --            --                --              --             --              --
                                         ----------   ------------
BALANCE AT OCTOBER 31, 1990                  23,000     $2,300,000           --              --             --              --

YEAR ENDED OCTOBER 31, 1991:
  Conversion of debt due stockholder         10,000      1,000,000           --              --             --              --
  Exercise of Class B common stock
     warrants, net of offering costs
     of $520,000                             --            --                --              --             --              --
  Fair value of warrants issued in 
     connection with financial 
     consulting services                     --            --                --              --             --              --
  Net loss                                   --            --                --              --             --              --
                                         ----------   ------------       ------------    ------------   ------------     -----------
BALANCES AT OCTOBER 31, 1991                 33,000      3,300,000

YEAR ENDED OCTOBER 31, 1992:
  Issuance of common stock to certain
     employees for services rendered         --            --               
  Net loss                                   --            --
                                         ----------   ------------     
BALANCES AT OCTOBER 31, 1992                 33,000      3,300,000           --              --             --              --     

YEAR ENDED OCTOBER 31, 1993:
  Net loss                                   --            --                --              --             --              --
                                         ----------   ------------      
BALANCES AT OCTOBER 31, 1993                 33,000     $3,300,000           --              --             --              --
                                         ==========   ============
<CAPTION>
                                                                                                                         Deficit
                                                 Class A         Class B                                               Accumulated
                                              Common Stock     Common Stock    Common Stock    Additional                 During
                                            ---------------    -------------   --------------    Paid-in  Accumulated   Development
                                            Shares  Amount    Shares Amount   Shares Amount      Capital     Deficit      Stage
                                          --------- -------  --------- ------- ------ ------     ---------   ---------    ---------
<S>                                      <C>        <C>     <C>        <C>     <C>    <C>        <C>       <C>          <C>
BALANCES AT JULY 21, 1989                2,333,000   1,000      --       --                          --    (6,465,000)      --
PERIOD YEAR ENDED OCTOBER 31, 1989:                                                                                           
  Net assets received in reverse
     acquisition (Note 1)                    --        --     210,000  1,000                     36,000        --
  Change in par value                        --      6,000                                       (6,000)       --
  Exchange for debt owed to officer          --                 --       --                                    --                 
  Shares sold to financial consultant                                                                                             
     in conjunction with financing           --        --     697,000  1,000                      7,000        --                 
  Expenses paid by principal shareholder                                                                                          
     on behalf of Lithium Corporation        --        --       --       --                      79,000        --                 
  Net income (loss) for the year             --        --       --       --                          --       844,000     (502,000)
                                         --------- -------  --------- -------                   ---------   ---------    --------- 
BALANCES AT OCTOBER 31, 1989             2,333,000   7,000    907,000  2,000                    116,000    (5,621,000)    (502,000)
 
YEAR ENDED OCTOBER 31, 1990                 
  Issuance of Class B common stock for
     cash to Investors                       --        --      57,000    --                      50,000        --           --
  Exercise of Class B common stock
     warrants, net of offering costs         --        --      15,000    --                          --        --           --

NET INCOME (LOSS) FOR THE YEAR               --        --       --       --                          --       569,000     (498,000)
                                         --------- -------  --------- -------                   ---------   ---------    --------- 
BALANCE AT OCTOBER 31, 1990              2,333,333  $7,000    979,000 $ 2,000                   $166,000  $(5,052,000)  (1,000,000)

YEAR ENDED OCTOBER 31, 1991:                 
  Conversion of debt due stockholder         --        --       --       --                          --        --           --
  Exercise of Class B common stock
     warrants, net of offering costs
     of $520,000                             --        --     145,000    --                       121,000      --           --
  Fair value of warrants issued in 
     connection with financial 
     consulting services                     --        --       --       --                        30,000      --           --
  Net loss                                   --        --       --       --                          --       (84,000)    (560,000)
                                         --------- -------  --------- -------                   ---------   ---------    --------- 
BALANCES AT OCTOBER 31, 1991             2,333,000   7,000  1,124,000  2,000                      317,000  (5,136,000)  (1,560,000)
                                                                                               
YEAR ENDED OCTOBER 31, 1992:                                                                   
  Issuance of common stock to certain                                                         
     employees for services rendered         --        --      96,000    --                       106,000                          
  Net loss                                   --        --       --       --                          --       (23,000)    (175,000)
                                         --------- -------  --------- -------                   ---------   ---------    --------- 
BALANCES AT OCTOBER 31, 1992             2,333,000   7,000  1,220,000  2,000                      423,000  (5,159,000)  (1,735,000)

YEAR ENDED OCTOBER 31, 1993:                                                                   
  Net loss                                   --        --       --       --                          --    (1,706,000)     (66,000)
                                         --------- -------  --------- -------                   ---------   ---------    --------- 
BALANCES AT OCTOBER 31, 1993             2,333,000 $ 7,000  1,220,000 $2,000                    $ 423,000 $(6,865,000)  (1,801,000)
                                         ========= =======  ========= =======                   ========= ===========   ========== 
</TABLE>
                                      F-6
<PAGE>   47
<TABLE>
<CAPTION>
                                               Series A                         Series B                        Series C       
                                            Preferred Stock              Convertible Preferred Stock     Convertible Preferred Stock
                                         -----------------------         ---------------------------     ---------------------------
                                           Shares        Amount              Shares         Amount        Shares            Amount
                                         ----------   ------------       ------------    ------------   ------------     -----------
<S>                                      <C>          <C>                <C>             <C>            <C>              <C>    
BALANCES AT OCTOBER 31, 1993                 33,000      3,300,000           --              --             --              --
                                                                         ------------    ------------   ------------     -----------
TWO MONTHS ENDED
  DECEMBER 31, 1993.
     Contribution to capital of Industries
       accumulated losses in excess of
       Company's Investment                  --            --                --              --             --              --
     Conversion of preferred stock to 
       common stock                         (33,000)    (3,300,000)          --              --             --              --
     Fair value of option issued in 
       exchange for certain legal services   --            --                --              --             --              -- 
  Net loss                                   --            --                --              --             --              --
                                         ----------   ------------       ------------    ------------   ------------     -----------

BALANCE AT DECEMBER 31, 1993                 --            --                --              --             --              --

YEAR ENDED DECEMBER 13, 1994:
     Change in par value of Class B
       common stock to $.0001                --            --                --              --             --              --
     Issuance of common stock:
       For services relating to warrants
        exercised in 1995                    --            --                --              --             --              --
       Upon cancellation of Indebtedness     --            --                --              --             --              --
       In exchange for advances repayable
          only out or proceeds of public
          offering                           --            --                --              --             --              --
       Upon exercise of option               --            --                --              --             --              --
       For cash, less related costs of
          $152,000                           --            --                --              --             --              --
       Upon conversion of $162,000 of 7%
          convertible promissory notes and 
          accrued interest thereon           --            --                --              --             --              --
       Upon exercise of option to acquire
          laboratory equipment and 
          forgiveness of related accrued     
          rent                               --            --                --              --             --              -- 
       Upon conversion of preferred stock    --            --                    (815)       --             --              -- 
     Issuance of convertible preferred stock
       in exchange for convertible
          promissory notes                   --            --                  14,151        --             --              -- 
       For cash                              --            --                --              --               10,000        -- 
     Issuance of 7% convertible
       promissory notes                      --            --                --              --             --              -- 
     Net loss (As Restated)                --            --                --              --             --              --   
                                         ----------   ------------       ------------    ------------   ------------     -----------
BALANCES AT DECEMBER 31, 1994                                                                                                 
   (As Restated, See Note 8)                 --       $    --                  13,336        --               10,000        --
                                         ==========   ============                                                            
YEAR ENDED DECEMBER 31, 1995
     Issuance of common stock
       Upon conversion of convertible
          preferred stock                                                      (6,394)       --             --              --
       Upon conversion of 7% convertible
          promissory notes and accrued
          interest thereon                                                   --              --             --              --
       Upon exercise of warrants                                             --              --             --              --
       Recapitalization of common stock 
          (Note 7)                                                           --              --             --              --
       Issuance of 12% convertible
          promissory notes                                                   --              --             --              --
     Net loss (As Restated)                                                  --              --             --              --
                                                                         ------------    ------------   ------------     -----------
BALANCES AT DECEMBER 31, 1995                                                                                                       
   (As Restated, See Note 8)                                                    6,942    $   --               10,000     $  --      
                                                                         ------------    ------------   ------------     -----------
<CAPTION>
                                                                                                                         Deficit
                                                 Class A         Class B                                               Accumulated
                                              Common Stock     Common Stock    Common Stock    Additional                 During
                                            ---------------    -------------   --------------    Paid-in  Accumulated   Development
                                            Shares   Amount   Shares    Amount Shares Amount      Capital     Deficit      Stage
                                          --------- -------  --------- ------- ------ ------     ---------   ---------    ---------
<S>                                      <C>        <C>     <C>        <C>     <C>    <C>      <C>         <C>          <C>
BALANCES AT OCTOBER 31, 1993             2,333,000   7,000  1,220,000  2,000                      423,000  (6,865,000)  (1,801,000)

TWO MONTHS ENDED
  DECEMBER 31, 1993.
     Contribution to capital of Industries
       accumulated losses in excess of                                         
       Company's Investment                  --        --       --       --
     Conversion of preferred stock to                                                           3,659,000      --           --
       common stock                      1,000,000   3,000    667,000  1,000                    3,296,000      --           --
     Fair value of option issued in                                                                                               
       exchange for certain legal services   --        --       --       --                         8,000      --           --
  Net loss                                   --        --       --       --                          --        --          (67,000)
                                         --------- -------  --------- -------                   ---------   ---------    --------- 

BALANCE AT DECEMBER 31, 1993             3,533,000  10,000  1,887,000  3,000                    7,386,000  (6,865,000)  (1,868,000)

YEAR ENDED DECEMBER 13, 1994:            
     Change in par value of Class B
       common stock to $.0001                --        --       --     3,000                       (3,000)     --           --
     Issuance of common stock:
       For services relating to warrants
        exercised in 1995                    --        --       22,000   --                        88,000      --           --
       Upon cancellation of Indebtedness     --        --       78,000   --                       445,000      --           --
       In exchange for advances repayable
          only out or proceeds of public
          offering                           --        --      133,000   --                       471,000      --           --
       Upon exercise of option               --        --       17,000   --                         8,000      --           --
       For cash, less related costs of
          $152,000                           --        --      909,000 3,000                      933,000      --           --
       Upon conversion of $162,000 of 7%
          convertible promissory notes and
          accrued interest thereon           --        --       79,000   --                       165,000      --           --
       Upon exercise of option to acquire
          laboratory equipment and
          forgiveness of related accrued
          rent                               --        --       83,000 1,000                      271,000      --           --
       Upon conversion of preferred stock    --        --       43,000   --                          --        --           --
     Issuance of convertible preferred stock
       in exchange for convertible
          promissory notes                   --        --       --       --                       356,000      --           --
       For cash                              --        --       --       --                       100,000      --           --
     Issuance of 7% convertible
       promissory notes                      --        --       --       --                     1,643,000      --           --
     Net loss (As Restated)                  --        --       --       --                          --        --       (3,776,000)
                                         --------- -------  --------- -------                   ---------   ---------    --------- 
                                         3,333,000  10,000  3,249,000 10,000    --         --  11,863,000  (6,865,000)  (5,644,000)
BALANCES AT DECEMBER 31, 1994
  (As Restated, see Note 8)

YEAR ENDED DECEMBER 31, 1995
     Issuance of common stock
       Upon conversion of convertible
          preferred stock                    --        --     341,000  1,000    --         --      (1,000)     --           --
       Upon conversion of 7% convertible
          promissory notes and accrued
          interest thereon                   --        --     500,000  1,000    --         --   1,050,000      --           --
       Upon exercise of warrants             --        --     120,000  1,000    --         --     254,000      --           --
       Recapitalization of common stock
          (Note 7)                     (3,333,000)(10,000)(4,210,000)(13,000) 7,543,000   75,000  (52,000)     --       
       Issuance of 12% convertible
          promissory notes                   --        --       --       --                     6,377,000      --           --
     Net loss (As Restated)                  --        --       --       --                          --        --        (8,849,000)
                                         --------- -------  --------- ------- ---------  ------ ---------   ---------    --------- 

BALANCES AT DECEMBER 31, 1995                                                                                                       
  (As Restated, see Note 8)                  --    $   --       --    $  --   7,543,000 $75,000 19,491,000 $(6,865,000)$(14,493,000)
                                         --------- -------  --------- ------- ---------  ------ ---------   ---------    ---------  
</TABLE>

                                      F-7

<PAGE>   48
<TABLE>
<CAPTION>
                                                                          Common Stock
                                                                          ------------
                                                                       Shares       Amount
                                                                       ------       ------
<S>                                                                  <C>            <C>   
BALANCES AT DECEMBER 31, 1995 (As Restated, see Note 8)              7,543,000      75,000
YEAR ENDED DECEMBER 31, 1996:
  Issuance of Common stock:
    Upon conversion of convertible preferred stock                     454,000       4,000
    Upon conversion of 7% convertible promissory notes and
      accrued interest ($20,000) and related costs of $41,000          152,000       2,000
    Upon conversion of 12% convertible promissory notes and
      accrued interest thereon of $100,000 net of related costs
      of $218,000                                                    7,004,000      70,000
    For cash -
      From consortium, net of placement costs of $212,000              632,000       7,000
      Upon exercise of stock options                                   193,000       2,000
      Other                                                             38,000        --
    In payment of accrued salaries and accounts payable                434,000       4,000
    Upon exercise of warrants                                          196,000       2,000
    In connection with costs relating to the issuance of 10%
      convertible notes                                                462,000       5,000
  Issuance of warrants for services rendered                              --          --
  Issuance of warrants in settlement of litigation                        --          --
  Net loss                                                                --          --
                                                                    ----------    --------
BALANCES AT DECEMBER 31, 1996 (As Restated, see Note 8)             17,108,000    $171,000
YEAR ENDED DECEMBER 31, 1997:
  Issuance of common stock:
    In connection with costs relating to the issuance of 10%
      convertible notes                                                493,000       5,000
    In connection with the sale of Escrowed Shares by the
      Convertible Note Purchasers                                    2,669,000      27,000
    Upon exercise of warrant                                           100,000       1,000
    In payment of accrued salaries and accounts payable                646,000       6,000
  Issuance of warrants:
    For services rendered in connection with the sale of the
    8.5% senior secured convertible notes
  Issuance of the 8.5% senior secured convertible notes                   --          --
Net Loss:                                                                 --          --
                                                                    ----------    --------
BALANCES AT DECEMBER 31, 1997                                       21,016,000     210,000
                                                                    ==========    ========
</TABLE>



<TABLE>
<CAPTION>
                                                                                                Deficit
                                                                                              Accumulated
                                                          Additional                            During
                                                            Paid-In       Accumulated         Development
                                                            Capital         Deficit             Stage
                                                            -------         -------             -----
<S>                                                     <C>                <C>                <C>
     Issuance of warrants:                                                        --                --
       For services rendered                                  88,000
       In connection with the sale of the 8.5%
         senior secured convertible notes                    400,000

       Issuance of the 8.5% senior secured 
         convertible notes                                 9,821,000
Net Loss:                                                       --                --           (14,164,000)
                                                         -----------       -----------        ------------
BALANCES AT DECEMBER 31, 1997                            $38,277,000       $(6,865,000)       $(33,041,000)
                                                         ===========       ===========        ============
</TABLE>


See accompanying notes to consolidated financial statements.



                                      F-8
<PAGE>   49
<TABLE>
<CAPTION>
                                                                                                       Deficit
                                                                                                     Accumulated
                                                              Additional                               During
                                                               Paid-In           Accumulated         Development
                                                               Capital             Deficit             Stage
                                                               -------             -------             -----
<S>                                                         <C>                 <C>                <C>          
BALANCES AT DECEMBER 31, 1995                                                                                   
   (As Restated, see Note 8)                                $ 19,491,000        $(6,865,000)       $(14,493,000)

YEAR ENDED DECEMBER 31, 1996:
         Issuance of common stock:
           Upon conversion of convertible
             preferred stock                                      (4,000)              --                  --
           Upon conversion of 7% convertible
             promissory notes and accrued interest
             ($20,000) and related costs of $41,000              277,000               --                  --
           Upon conversion of 12% convertible
             promissory notes and accrued interest
             thereon of $100,000 net of related costs
             of $218,000                                       1,612,000               --                  --
         For cash:
           From consortium, net of placement costs
             of $212,000                                       2,181,000               --                  --
           Upon exercise of stock options                         95,000               --                  --
           Other                                                  19,000               --                  --
         In payment of accrued salaries and accounts
           payable                                               260,000               --                  --
         Upon exercise of warrants                                98,000               --                  --
         In connection with costs relating to the
           issuance of 10% convertible notes                     520,000               --                  --
         Issuance of warrants for services rendered              175,000               --                  --
         Issuance of warrants in settlement of
           litigation                                             68,000               --                  --
         Net loss                                                   --                 --            (4,384,000)
                                                            ------------        -----------        ------------
BALANCES AT DECEMBER 31, 1996                                                                                   
   (As Restated, see Note 8)                                $ 24,792,000        $(6,865,000)       $(18,877,000)

YEAR ENDED DECEMBER 31, 1997:
         Issuance of common stock:
           In connection with costs relating to the
             issuance of 10% convertible notes                   575,000               --                  --
           In connection with the sale of Escrowed
             Shares by the Convertible Note
             Purchasers                                        2,219,000               --                  --
           Upon exercise of warrants                              13,000               --                  --
           In payment of accrued salaries and
             accounts payable                                    369,000               --                  --
</TABLE>


                                       F-8
<PAGE>   50
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                     
                                                                                                      Period From 
                                                                           Year Ended               July 21, 1989 
                                                                          December 31,                   (Date of
                                                                          ------------              Inception) to
                                                                   1997                1996           Dec.31,1997
                                                                ----------          -----------       -----------
                                                                                                     (As Restated,
                                                                                                      see Note 8)

<S>                                                           <C>                 <C>                <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
         Net Loss                                             $(14,164,000)       $(4,384,000)       $(33,041,000)
         Adjustments to reconcile net loss to net
         cash flows from operating activities:
           Interest expense relating to the beneficial
             conversion feature of the Senior
             Secured Convertible Note                            9,821,000               --            17,841,000
           Depreciation                                            205,000            185,000             567,000
           Amortization of debt issue costs                        181,000            494,000             920,000
           Common stock issued in lieu of interest               1,176,000             87,000           1,288,000
           Fair value of warrants and option granted
             for services rendered                                  88,000             83,000             209,000
           Common stock issued for services
               provided                                               --              100,000             206,000
           Expenses paid by shareholder of behalf
             of Company                                               --                 --                79,000
           Changes in operating assets and liabilities:
             Prepaid expenses and other current assets              (5,000)            44,000             (10,000)
             Security deposits                                     (29,000)              --               (49,000)
             Accounts payable and accrued expenses                 (24,000)           684,000           1,988,000
             Dues to related parties                                  --             (327,000)           (118,000)
                                                              ------------        -----------        ------------
                  Net cash used in
                    operating activities                        (2,751,000)        (3,034,000)        (10,120,000)
                                                              ------------        -----------        ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchases of property and equipment                        (3,000)          (156,000)           (739,000)
         Restricted cash                                            65,000            (18,000)               --
         Other                                                        --                 --                94,000
                                                              ------------        -----------        ------------
                  Net cash provided by (used in)
                    investing activities                            62,000           (174,000)           (645,000)
                                                              ------------        -----------        ------------
</TABLE>


                                      F-9
<PAGE>   51
<TABLE>
<CAPTION>
                                                                                                 Period From
                                                                     Year Ended                July 21, 1989
                                                                     December 31,                   (Date of
                                                            ----------------------------       Inception) to
                                                               1997             1996           Dec. 31, 1997
                                                            ----------       -----------       -------------
                                                                                               (As Restated, 
                                                                                               see Note 8)
<S>                                                       <C>                <C>                <C>         
CASH FLOWS FROM FINANCING ACTIVITIES:
         Net advance repayable only out of                       --                 --               471,000
           proceeds of public offering
         Proceeds received upon issuance of                      --            2,207,000           3,239,000
           common stock
         Proceeds received from issuance of                      --                 --               100,000
           preferred stock, net of related costs
         Proceeds received upon exercise of options            14,000             97,000             583,000
           and warrants, net of costs
         Net advances by former principal                   
           stockholder                                           --                 --               321,000
         Proceeds from sale of convertible debt             2,170,000          2,266,000           7,544,000
         Debt issue costs                                    (277,000)          (191,000)           (887,000)
         Repayment of convertible debt                       (100,000)              --              (100,000)
                                                          -----------        -----------        ------------
               Net cash provided by                                                                        
               financing activities                         1,807,000          4,379,000          11,271,000
                                                          -----------        -----------        ------------

NET CHANGE IN CASH AND CASH                                  (882,000)         1,171,000             506,000
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING  
OF YEAR                                                     1,388,000            217,000               - - -
                                                          -----------        -----------        ------------

CASH AND CASH EQUIVALENTS, END OF
YEAR                                                      $   506,000        $ 1,388,000        $    506,000
                                                          ===========        ===========        ============

SUPPLEMENTAL CASH FLOW INFORMATION:
  Contribution to capital by former principal             $      --          $      --          $  3,659,000
    stockholder
  Related party debt exchanged for convertible debt       $      --          $      --          $    321,000
  Exchange of indebtedness to former principal            $      --          $      --          $    445,000
    stockholder for common stock
  Issuance of common stock for services and accrued       $      --          $   264,000        $    352,000
    salaries
  Exchange of equipment and accrued rent for              $      --          $      --          $    271,000
    common stock
  Subordinated notes and related accrued interest         $      --          $      --          $  3,300,000
    exchanged for Series A preferred stock
  Exchange of convertible debt for convertible            $      --          $      --          $    356,000
    preferred stock
</TABLE>


                                      F-10
<PAGE>   52
<TABLE>
<CAPTION>
                                                                                              Period From
                                                                   Year Ended               July 21, 1989
                                                                   December 31,                  (Date of
                                                           ----------------------------     Inception) to
                                                               1997            1996           Dec.31,1997
                                                           ----------       -----------       -----------
                                                                                              (As Restated,
                                                                                               see Note 8)
                                                                                             
<S>                                                        <C>              <C>              <C>        
Conversion of convertible debt and accrued interest        $1,508,000       $2,053,000       $ 4,776,000
  into common stock, net of unamortized debt
  discount
Exchange of advances repayable only out of                 $     --         $     --         $   471,000
  proceeds of public offering for common stock
Deferred offering costs on warrants exercised              $     --         $     --         $    88,000
Issuance of warrants in settlement of litigation for
  debt issue costs and for services rendered               $  488,000       $  160,000       $   364,000
Common stock issued for costs related to 10%               $     --         $  525,000       $   525,000
  promissory notes
</TABLE>


See accompanying notes to consolidated financial statements


                                       F-10
<PAGE>   53
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -          HISTORY OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
                  POLICIES:

                  Lithium Technology Corporation ("LTC") and its wholly-owned
                  subsidiary, Lithion Corporation ("Lithion"), collectively
                  referred to as the "Company", are development stage companies
                  in the process of commercializing a unique, solid-state,
                  lithium-polymer rechargeable battery. The Company is engaged
                  in research and development activities to further develop and
                  exploit this battery technology and also holds various patents
                  relating to such batteries. The Company's commercialization
                  focus is on the rapidly growing portable electronics market
                  segment (notebook and palmtop computers and wireless
                  communications devices).

                  The date of inception of the Company's development stage is
                  July 21, 1989. At that time, the Company exchanged its capital
                  stock for all of the capital stock of Lithion and an operating
                  company in a reverse acquisition. The operating company was
                  divested in November 1993. The accumulated deficit associated
                  with the operating company of $6,865,000 has been segregated
                  from the Company's deficit accumulated during the development
                  stage in the accompanying consolidated financial statements.

                  Effective January 1, 1994, the Company changed its fiscal year
                  end from October 31 to December 31.

                  ESTIMATES AND UNCERTAINTIES - The preparation of financial
                  statements in conformity with generally accepted accounting
                  principles requires management to make estimates and
                  assumptions that affect the reported amounts of assets and
                  liabilities and disclosure of contingent assets and
                  liabilities at the date of the financial statements and the
                  reported amounts of revenues and expenses during the reporting
                  period. Actual results, as determined at a later date, could
                  differ from those estimates.

                  FINANCIAL INSTRUMENTS - Financial instruments include cash and
                  cash equivalents, other assets, accounts payable and
                  convertible promissory notes payable. With the exception of
                  convertible promissory notes payable, management believes that
                  the amounts reported for financial instruments are reasonable
                  approximations of their fair values due to their short term
                  nature.

                  The convertible promissory notes payable outstanding at
                  December 31, 1997 are payable July 1, 2002, bear interest at
                  8.5% and are convertible into the Company's Common Stock at a
                  conversion price of $.28 per share. The conversion price
                  represented a discount from the quoted market price of the
                  Company's Common Stock and as a result, the Company recorded
                  interest expense of $9,821,000 for the intrinsic value of this
                  "beneficial conversion feature" (see Note 7). It is not
                  practicable to estimate the fair value of this financial
                  instrument due to a lack of existing comparable financial
                  instruments.

                  CONSOLIDATION - As indicated above, the consolidated financial
                  statements include the accounts of LTC and Lithion. All
                  significant intercompany accounts and transactions have been
                  eliminated.


                                       F-11
<PAGE>   54
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  CASH AND CASH EQUIVALENTS - The Company considers all highly
                  liquid debt instruments purchased with a maturity of three
                  months or less to be cash equivalents.

                  PROPERTY AND EQUIPMENT - Property and equipment are recorded
                  at cost. Furniture and fixtures, computer equipment and
                  software and laboratory equipment are depreciated primarily
                  using the straight-line method over their estimated useful
                  lives of 3 to 7 years. Leasehold improvements are amortized
                  over the period of the respective lease using the
                  straight-line method.

                  DEBT ISSUE COSTS - Costs related to the issuance of
                  convertible promissory notes are capitalized. Such costs are
                  amortized over the term of the related debt using the
                  straight-line method.

                  INCOME TAXES - Deferred tax assets and liabilities are
                  computed annually for temporary differences between the
                  financial statement and tax bases of assets and liabilities
                  that will result in taxable or deductible amounts in the
                  future based on enacted tax laws and rates applicable to the
                  periods in which the temporary differences are expected to
                  affect taxable income. Valuation allowances are established
                  when necessary to reduce deferred tax assets to the amount
                  expected to be realized.

                  STOCK OPTIONS - Effective January 1, 1996, the Company adopted
                  Statement of Financial Accounting Standard No. 123,
                  "Accounting for Stock-Based Compensation" (SFAS No. 123). In
                  accordance with SFAS No. 123, the Company has elected to
                  account for stock option grants using the intrinsic value
                  based method prescribed by APB Opinion No. 25. Since the
                  exercise price equaled or exceeded the estimated fair value of
                  the underlying shares at the date of grant, no compensation
                  was recognized in 1997 and 1996.

                  NET LOSS PER COMMON SHARE - The Company has presented net
                  loss per common share pursuant to Statement of Financial
                  Accounting Standards No. 128, "Earnings Per Share". Net loss
                  per common share is based upon the weighted average number of
                  outstanding common shares. The shares issuable upon the
                  exercise of outstanding warrants and options have been
                  excluded since the assumed conversion would be antidilutive
                  due to net losses for all periods presented.

NOTE 2 -          OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO
                  OVERCOME:

                  The accompanying consolidated financial statements of the
                  Company have been prepared on a going concern basis, which
                  contemplates the continuation of operations, realization of
                  assets and liquidation of liabilities in the ordinary course
                  of business. Since its inception, the Company has incurred
                  substantial operating losses and expects to incur additional
                  operating losses over the next several years. The Company does
                  not expect to generate any revenues from operations prior to
                  late 1998 or the first half of 1999. Since December 1993,
                  operations have been financed primarily through the use of
                  proceeds from the sale of convertible debt and private
                  placements of common and preferred stock. Continuation of the
                  Company's operations is dependent upon its ability to raise
                  additional financing. These conditions raise substantial doubt
                  about the Company's ability to continue as a going concern.
                  The accompanying consolidated financial statements do not
                  include any adjustments that might result from the outcome of
                  this uncertainty.


                                       F-12
<PAGE>   55
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  MANAGEMENT'S PLANS - During the last four years, the Company
                  has recruited a new management team and a core technical staff
                  with commercialization and battery technology expertise.
                  The staff has expertise in technology, commercialization,
                  process development, battery engineering and strategic
                  alliance development. A modern research facility was leased
                  and product development commenced. The Company's operating
                  results to date are solely attributable to research
                  and development activities and general and administrative
                  expenses.

                  Management's operating plan seeks to minimize the Company's
                  capital requirements, but commercialization of the Company's
                  battery technology will require substantial amounts of
                  additional capital. The Company expects that research and
                  development expenses will increase significantly as it
                  continues to advance its battery technology and develop
                  products for commercial applications. The Company's working
                  capital and capital requirements will depend upon numerous
                  factors, including, without limitation, the progress of the
                  Company's research and development program, the levels and
                  resources that the Company devotes to the development of
                  manufacturing and marketing capabilities, technological
                  advances, the status of competitors and the ability of the
                  Company to establish collaborative arrangements with other
                  companies to provide research and development funding to the
                  Company and to manufacture and market the Company's products.

                  The Company has raised approximately $14,800,000 since
                  inception through various sales of convertible debt and common
                  and preferred stock. During 1996, the Company sold a then 4%
                  equity position to a Japanese Consortium for approximately
                  $2,400,000 and also sold 10% convertible promissory notes for
                  $1,750,000. On September 22, 1997, the Company issued 8.5%
                  Senior Secured Convertible Notes for $5,500,000 (see Note 7).
                  Management's plans include expansion of its strategic
                  alliances, which would provide capital from joint development
                  programs, license fees or an additional equity investment. The
                  Company also plans to raise additional capital by means of
                  private and/or public equity or debt financings.

                  In January 1998, the Company signed a Letter of Intent to
                  enter into an agreement with a major global notebook computer
                  manufacturer to complete the development of a specific battery
                  for its notebook computers. Among other things, the Company
                  was paid $100,000 upon executing the Letter of Intent and will
                  receive an additional $900,000 upon achieving certain
                  milestones under the contemplated agreement.

                  There can be no assurance that the incremental capital needed
                  to attain commercial viability of the Company's battery
                  technology will be obtained, which the Company currently
                  estimates at approximately $20 million (without regard to 
                  repayment of the $5,500,000 Senior Secured Convertible 
                  Notes). If the Company is unable to raise sufficient capital,
                  it will be forced to curtail research and development 
                  expenditures which, in turn, will delay, and could prevent, 
                  the completion of the commercialization process.

NOTE 3 -          PROPERTY AND EQUIPMENT:

                  Property and equipment at December 31, 1997 is summarized as
                  follows:

<TABLE>
<S>                                                                             <C>     
                           Laboratory equipment                                 $855,000
                           Furniture and office equipment                         93,000
                           Leasehold improvements                                 41,000
                                                                                ---------
                                                                                $989,000
                                                                                --------
                           Less:  Accumulated depreciation and amortization      567,000
                                                                                --------
                                                                                $422,000
                                                                                ========
</TABLE>


                                       F-13
<PAGE>   56
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 -          RELATED PARTY TRANSACTIONS:

                  CONSULTING AGREEMENTS - In May 1996, the Company entered into
                  a consulting agreement with a former director to provide
                  investment advisory services, shareholder relations and
                  related consulting services to the Company. The agreement was
                  for a period of one year and was automatically renewable for
                  not more than two additional years. In addition, in
                  consideration for past and prospective services provided to
                  the Company by this former director's corporation, the Company
                  issued to such corporation a warrant to purchase 1,500,000
                  shares of the Company's Common Stock at an exercise price of
                  $1.54 per share. The warrant also included certain
                  anti-dilutive provisions which as of September 22, 1997 had
                  entitled the warrant holder to purchase approximately
                  2,400,000 shares of the Company's Common Stock at an exercise
                  price of $0.96 per share.

                  In December 1997, in consideration for removing the
                  anti-dilution provisions and reducing the term of the warrant,
                  the Company amended the warrant to entitle the warrant holder
                  to purchase 2,800,000 shares of the Company's Common Stock at
                  an exercise price of $0.85 per share. In addition, the
                  Consulting agreement was terminated upon payment of an
                  additional $84,000 to the Consultant. Total amounts charged to
                  operations under the agreement were $56,000 and $203,000 in
                  1996 and 1997.

                  COMMISSIONS - The Company paid $122,500 to a company, whose
                  managing director is a former director of the Company, for
                  services provided relating to the sale of $1,750,000
                  convertible promissory notes as described in Note 7.

NOTE 5 -          INCOME TAXES:

                  Deferred income taxes reflect the net effects of temporary
                  differences between the amounts of assets and liabilities for
                  financial reporting purposes and the amounts used for income
                  tax purposes. The principal temporary difference arises from
                  the net operating loss carryforwards and results in a deferred
                  tax asset of approximately $5,211,000 and $4,238,000 at
                  December 31, 1997 and 1996, respectively.

                  A valuation allowance is provided when it is more likely than
                  not that some portion of the deferred tax asset will not be
                  realized. The Company has determined, based on its recurring
                  net losses, lack of a commercially viable product and it being
                  a development stage company, that a full valuation allowance
                  is appropriate at December 31, 1997 and 1996.

                  At December 31, 1997, the Company had net operating loss
                  carryforwards of approximately $13,000,000 expiring in the
                  years 2004 through 2012.

                  Current tax law limits the use of net operating loss
                  carryforwards after there has been a substantial change in
                  ownership (as defined) during a three year period. Due to
                  changes in ownership between 1993 and 1997, there exists
                  substantial risk that the Company's use of net operating 
                  losses may be severely limited under the Internal Revenue 
                  Code.
                  


                                       F-14
<PAGE>   57
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 -          COMMITMENTS AND CONTINGENCIES:

                  LEASES - The Company leases its principal operating facility
                  from an unrelated party providing for annual rent of $122,400
                  through November 1999 and contains an option to renew for an
                  additional five years.

                  EMPLOYMENT AGREEMENTS - The Company has a four year employment
                  agreement with its Director of Research providing for annual
                  compensation of $125,000 through January 1998.

                  In May 1996, the Company entered into a one year employment
                  agreement with its Chief Executive Officer at an annual salary
                  of $185,000 and other incentives, including performance
                  bonuses and stock options. The agreement has been extended
                  through May 8, 1998. The officer voluntarily elected to defer
                  his compensation until October 1997 and at December 31, 1997
                  such deferral ($165,166) has been included in accrued salaries
                  in the accompanying financial statements. In 1997, the Board
                  of Directors approved the issuance of 246,623 shares of the
                  Company's Common Stock to the officer in satisfaction of
                  $100,000 of accrued but unpaid salary. The fair value of 
                  the shares was $125,000. Additional expense of $25,000 was
                  recognized as a result of the transaction.

                  In July 1996, the Company entered into one year employment
                  agreements with its President/Chief Technical Officer and its
                  Executive Vice President of Operations/Chief Technical Officer
                  at annual salaries of $140,000 and $130,000, respectively,
                  plus other incentives, including performance bonuses and stock
                  options. In May 1997, these employment agreements were
                  extended for one year on the same terms and conditions except
                  that no new options were granted.

                  LEGAL PROCEEDINGS - In August 1996, civil actions were
                  commenced against the Company by a former director of the
                  Company, and by the Company's former legal counsel. The former
                  director's complaint seeks monetary damages amounting to
                  approximately $4,500,000 and specific performance of
                  registration rights of certain warrants of the Company that
                  have not been registered and to which he claims entitlement.
                  The Company has declared such warrants and related documents
                  void. The complaint of the Company's former counsel alleges
                  non-payment of legal fees for services rendered. The Company
                  has included the unpaid legal fees in accounts payable,
                  however, it believes these actions to be without merit and
                  intends to vigorously defend both actions. Accordingly, the
                  Company has filed its own lawsuit against the former counsel
                  alleging fraud, legal malpractice and conflict of interest
                  flowing from the fraudulent issuance of the aforementioned
                  warrants. In addition, the complaint alleges violations of
                  federal securities laws, the Racketeering Influenced and
                  Corrupt Organization Act ("RICO") and fiduciary duties owed by
                  counsel to the Company. The complaint also includes similar
                  allegations against the former director, flowing from the
                  fraudulent issuance of warrants to him. Management cannot
                  predict the outcome of these actions at the present time. As
                  such, except for the amounts included in accounts payable, no 
                  adjustment to the accompanying financial statements has been
                  made.
                  
                  The Company is a defendant in one other pending litigation
                  matter, the outcome of which management does not believe will
                  have a materially adverse effect on the Company's financial
                  position or results of operations.




                                       F-15
<PAGE>   58
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 -          STOCKHOLDERS' EQUITY:

                  REVERSE STOCK SPLIT - In January 1996, the Company's existing
                  Class A and Class B common stock was combined into a single
                  new class of common stock. In addition, each outstanding
                  share of Series B and Series C Convertible Preferred Stock
                  was automatically converted into one share of newly issued
                  Series B Convertible Preferred Stock and Series C Convertible
                  Preferred Stock, respectively. Such conversions have been
                  reflected in the accompanying consolidated financial
                  statements as if they had occurred on December 31, 1995.

                  In connection with the share conversions noted in the
                  preceding paragraph, the Company's Board of Directors
                  and stockholders approved a one-for-thirty reverse stock
                  split of the Company's Common Stock. Common Stock share and
                  per share amounts have been retroactively restated for all
                  periods presented.

                  In January 1996, the Company revised its authorized shares of
                  common stock to 50,000,000 and its preferred stock to 100,000,
                  respectively, and changed the par value of its common stock
                  from $.0001 to $.01 per share.

                  PREFERRED STOCK - The Company is authorized to issue up to
                  100,000 shares of preferred stock, all of which is currently
                  undesignated and may be divided and issued from time to time
                  in one or more series as may be designated by the Board of
                  Directors. In the event of liquidation, dissolution or winding
                  up of the Company, the holders of the preferred stock will be
                  entitled to a liquidation preference over the Common Stock.

                  The preferred stock may be entitled to such dividends,
                  redemption rights, liquidation rights, conversion rights and
                  voting rights as the Board of Directors, in its discretion,
                  may determine, in a resolution or resolutions providing for
                  the issuance of any such stock. Rights granted by the Board of
                  Directors may be superior to those of existing shareholders,
                  (including the right to elect a controlling number of
                  directors as a class). Preferred stock can be issued without
                  the vote of the holders of Common Stock. No shares of
                  preferred stock are outstanding at December 31, 1997.

                  TECHNOLOGY DEVELOPMENT AGREEMENT - In March 1996, the Company
                  entered into a Technology Development Agreement and Stock
                  Purchase Agreement (the "Agreement") with a Consortium
                  consisting of two Japanese companies (the "Consortium"), based
                  on the Company's proprietary lithium-polymer rechargeable
                  battery technology. For 631,637 shares of the Company's Common
                  Stock (representing a then 4% equity position in the Company),
                  the Consortium paid $2,400,000. In addition, $1,800,000 of
                  convertible promissory notes and related accrued interest were
                  converted into approximately 7,000,000 shares of the Company's
                  common stock in connection with the Agreement.

                  CONVERTIBLE NOTES - In October 1996, the Company issued $1.75
                  million principal amount convertible notes (the "Convertible
                  Notes") to two purchasers (the "Convertible Note Purchasers").
                  The notes bore interest at 10% and were convertible into
                  Common Stock of the Company at the option of the Convertible
                  Note Purchasers in the event of default by the Company. In
                  connection with the issuance of the Convertible Notes, the
                  Company issued 267,176 shares of Common Stock to the
                  Convertible Note Purchasers. As fees to a placement agent, the
                  Company paid $122,500, issued 66,794 shares of Common Stock,
                  and issued warrants to purchase 87,500 shares of Common Stock
                  at an exercise price of $1.31. The total fair value of the
                  shares and warrants issued to the Convertible Note Purchasers
                  and the placement fee consideration was $560,000, which was
                  capitalized as debt issue costs.


                                       F-16

<PAGE>   59
                  Under the terms of the Convertible Note Agreements, additional
                  interest was payable by the Company in the form of shares of
                  common stock. Total shares issued for interest were 127,941 in
                  1996 and 492,843 from January to March 1997. The fair value of
                  the common stock charged to interest expense was $87,500 in 
                  1996 and $580,000 in 1997.

                  The Company did not repay the $1.75 million principal of the
                  Convertible Notes on the March 24, 1997 maturity date and,
                  accordingly, pursuant to the terms of the Convertible Note
                  Agreements, the Company placed in escrow an additional
                  6,201,550 shares of the Company's Common Stock (the "Escrowed
                  Shares"). Based on the terms of an amended agreement with
                  Convertible Note Purchasers, on September 22, 1997, the
                  Company paid $100,000 to the Convertible Note Purchasers to
                  reduce the principal amount of the Convertible Notes. During
                  September 1997 through November 1997, the Convertible Note
                  Purchasers sold 2,163,158 Escrowed Shares which further
                  reduced the principal amount of the Convertible Notes by
                  $1,650,000. In addition, 32,350 Escrowed Shares were issued to
                  the Convertible Note Purchasers to satisfy interest accrued
                  subsequent to March 1997. Of the remaining Escrowed Shares,
                  12.5% or 473,160 Escrowed Shares were issued to the
                  Convertible Note Purchasers and 87.5% or 3,532,882 Escrowed
                  Shares were returned to the Company and subsequently retired.
                  The fair value of the 473,160 additional shares issued of
                  $596,000 was charged to interest expense.

                  BRIDGE FINANCING - In July and August 1997, the Company
                  obtained bridge financing for an aggregate $500,000 by issuing
                  convertible notes to five lenders and an aggregate of 100,000
                  warrants to these lenders. The terms of this bridge financing,
                  as amended, included, among other things, interest of 8% on
                  the bridge notes, maturity of the bridge notes on September
                  30, 1997, the convertibility of the bridge notes into the
                  Company's Common Stock at $.28 per share, and an exercise
                  price of $.14 per share for the bridge lenders' warrants. On
                  September 22, 1997, these convertible notes were repaid from
                  proceeds of the sale of $5.5 million of the Company's Senior
                  Secured Convertible Notes. In November 1997, warrants to
                  purchase 100,000 shares of the Company's Common Stock were
                  exercised by the bridge lenders at an exercise price of $.14
                  per share. The fair value of the warrants of $66,000 was
                  recorded as debt issue costs and charged to interest expense.

                  SENIOR SECURED CONVERTIBLE NOTES DUE JULY 1, 2002 - On
                  September 22, 1997, the Company entered into a Senior Secured
                  Convertible Note Purchase Agreement (the "Note Purchase
                  Agreement") with Lithium Link LLC (the "Lender") for the sale
                  of $5.5 million of the Company's Senior Secured Convertible
                  Notes (the "Notes"). The proceeds of the sale of
                  the Notes will be disbursed to the Company from the escrow
                  account bi-monthly over a six month period in amounts varying
                  between $550,000 and $1,630,000 based on a pre-determined
                  disbursement schedule. The Company is entitled to the
                  interest earned on the escrowed funds. The bi-monthly
                  fundings are subject to the Company's satisfaction of
                  certain conditions subsequent set forth in the Note
                  Purchase Agreement, none of which relate to operating or
                  financial milestones. The Company has received from the
                  escrow account $2.17 million of the $5.5 million funding as
                  of December 31, 1997 in accordance with the terms of the
                  Note Purchase Agreement. Interest accrues at 8.5% and is
                  payable annually, at the Company's election in cash or the
                  Company's Common Stock. The principal of the Notes is
                  payable on or before July 1, 2002. The Notes are convertible
                  into the Company's Common Stock at a conversion price of
                  $.28 per share. The Company has recorded the intrinsic value
                  of the beneficial conversion feature of the Senior Secured
                  Convertible Notes as a charge to interest expense at its then
                  fair value of $9,821,000. The holders of the Notes will have
                  two demand registration rights and "piggyback" registration
                  rights, subject to conditions set forth in the Note Purchase
                  Agreement.


                                       F-17
<PAGE>   60
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  In connection with the sale of the Notes, the Company entered
                  into a Consulting Agreement with Interlink Management
                  Corporation ("IMC") whereby IMC will be paid $5,000 per month
                  for one year, with the Company having an option to renew the
                  Consulting Agreement for another one year term. IMC was also
                  paid $150,000 and granted a warrant to purchase 500,000 shares
                  of the Company's Common Stock at an exercise price of $.40 per
                  share. The estimated fair value of the warrants of $334,000
                  and the fee paid were capitalized as debt issue costs. IMC
                  will provide consulting services in connection with strategic
                  planning and the identification of prospective strategic
                  alliance partners with respect to the manufacture and
                  distribution of the Company's lithium-ion polymer rechargeable
                  battery products.

                  Total debt issue costs incurred in 1997 were $677,000,
                  including $277,000 paid in cash, $66,000 of warrants issued
                  to the bridge lenders (see Note 7) and $334,000 of warrants
                  issued to IMC.
                                    
                  The Notes are secured by a first priority security interest in
                  favor of the Lender as to substantially all of the Company's
                  assets other than the Company's intellectual property. The
                  Company's obligations under the Notes are guaranteed by the
                  Company's subsidiary, Lithion Corporation, and the Company
                  pledged its interest in the shares of Lithion Corporation as
                  security for repayment of the Notes.

                  The Company granted to the Lender a nonexclusive,
                  royalty-free, assignable, and sublicenseable license to use
                  the Company's lithium-ion-related patents and other
                  intellectual property for the manufacture and distribution of
                  lithium-ion polymer batteries in a defined territory
                  essentially comprised of designated countries in Asia and
                  Oceania, provided that the agreement expressly excludes the
                  use of the licensed subject matter for the manufacture of
                  lithium metal polymer battery products. The License Agreement
                  provides that the Lender may not exercise the license unless a
                  bankruptcy proceeding is filed by or against the Company or
                  other bankruptcy-related triggering events respecting the
                  Company occur.

                  ACCOUNTS PAYABLE - In December 1997, the Company issued
                  399,652 shares of its Common Stock in settlement of accounts
                  payable of $200,000. The fair value of the shares was
                  $250,000. Additional expense of $50,000 was recognized as a
                  result of the transaction.

                  STOCK INCENTIVE PLAN - The Company's Board of Directors
                  adopted the 1994 Stock Incentive Plan (the "1994 Stock Plan")
                  in February 1994. The 1994 Stock Plan shall terminate ten
                  years after its initial effective date, unless terminated
                  earlier by the Board of Directors. A total of 2,666,667 shares
                  of common stock shall be reserved and available for grants. On
                  December 2, 1997, shares of common stock available for grant
                  was increased to 5,333,334 subject to shareholder
                  ratification. Stock options permitting the holder to purchase
                  a specified number of shares of common stock will be granted
                  at an exercise price not less than 100% of the fair value of
                  such stock on the date of grant. The stock options may be in
                  the form of an incentive stock option or a non-qualified stock
                  option. Options granted generally vest 25% upon grant and 25%
                  upon each anniversary of the grant date. Options granted will
                  be cancelled immediately upon termination of the grantee's
                  employment or association with the Company, except in certain
                  situations such as retirement, death or disability.

                  In June, 1997, the Board of Directors approved the exchange of
                  options held by each employee (including executive officers)
                  under the Company's Stock Plan for new options. The new
                  options provide for an exercise price of $0.58 per share, the
                  then estimated fair market value of the common stock. The
                  Board of Directors determined such change to be appropriate in
                  order to sustain the incentivization of all of its employees.
                  Such new options vest according to the same schedule as the
                  original options. As a result of this stock options repricing,
                  the company cancelled a total of 1,529,357 stock options and
                  granted the same number of new stock options at the
                  aforementioned $0.58 exercise price per share.


                                       F-18

<PAGE>   61
                  DIRECTORS STOCK OPTION PLAN - In August 1995, the Board of
                  Directors adopted the Directors Stock Option Plan (the
                  "Directors Plan"). The Directors Plan shall terminate ten
                  years after its initial effective date, unless terminated
                  earlier by the Board of Directors. A total of 333,333 shares
                  of the Company's common stock shall be reserved and available
                  for grant. Stock options permitting the holder to purchase a
                  specified number of shares of common stock will be granted at
                  an exercise price equaling the then fair market value of the
                  common stock on the date of grant. Options granted generally
                  vest 25% upon each anniversary of the grant date. Upon the
                  termination of a participant's association with the Company,
                  options granted will remain exercisable for a period of three
                  months or until the stated expiration of the stock option, if
                  earlier.

                  In February 1996, stock options which had previously been
                  granted to then directors of the Company were cancelled and
                  new options were reissued at $.90 per option, the fair market
                  value of the Common Stock as of the effective date pursuant to
                  the terms and conditions of the Directors Plan. The stock
                  options were repriced in order to sustain the incentivization
                  of the directors since the stock options held by the directors
                  had exercise prices well in excess of the then market price of
                  the Company's common stock. As a result of this stock option
                  repricing, the Company cancelled a total of 106,672 stock
                  options and granted the same number of new stock options at
                  the aforementioned exercise price of $.90 per share.

                  Options under the 1994 Stock Plan and Directors Plan as of
                  December 31 are summarized as follows:


<TABLE>
<CAPTION>
                                                  1997                           1996
                                                  ----                           ----
                                                       Weighted                        Weighted
                                                        Average                        Average
                                         Options      Exercise Price   Options     Exercise Price
<S>                                     <C>              <C>          <C>              <C>  
Outstanding, beginning of year          1,851,000        $1.35        1,207,000        $0.83
Granted                                 2,640,000        $0.74          987,000        $1.77
Exercised                                                              (193,000)       $0.50
Cancelled                              (1,582,000)       $1.50         (150,000)       $0.90
                                       ----------        -----       ----------        -----
Outstanding, end of year                2,909,000        $0.73        1,851,000        $1.35
                                       ----------                    ----------        
Options exercisable, end of year        1,695,000        $0.64        1,185,000        $1.44
                                       ----------        -----       ----------        -----
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                    Weighted             Average                              Weighted
                                                     Average           Remaining                               Average
Range of                         Options            Exercise           Contractual          Options           Exercise
Exercise Prices               outstanding             Price               Life            Exercisable           Price
---------------               ------------           -------            --------          -----------           -----
<S>                           <C>                   <C>                <C>                <C>                 <C> 
$.50 - $.58                     1,836,000            $  0.57             8 years           1,414,000            $.57
$.90 - $1.00                    1,073,000            $  1.00            10 years             281,000            $.99
                                ---------                                                  ---------
                                2,909,000                                                  1,695,000
</TABLE>


                                       F-19
<PAGE>   62
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  The per share weighted-average fair value of stock options
                  granted during 1997 and 1996 was $.62 and $.84 on the date of
                  grant. The Company applies Accounting Principles Board Opinion
                  No. 25 and related Interpretations in accounting for its stock
                  option plans. Accordingly, no compensation cost has been
                  recognized for its stock option plans. Had the compensation
                  cost for the Company's stock option plans been determined
                  based on the fair value at the grant dates for awards under
                  those plans consistent with the method of FASB Statement 123,
                  the Company's pro forma net loss for the years ended December
                  31, 1997 and 1996 would have been $14,550,000 ($.81 per share)
                  and $6,041,000 ($.43 per share), respectively.

                  The fair value of options granted under the Company's stock
                  option plans was estimated on the date of grant using the
                  Black-Scholes option pricing model with the following weighted
                  average assumptions used: 1997 - no dividend yield, expected
                  volatility of 114%, risk-free interest rate of 5.5% and
                  expected life of 5 years; 1996 - no dividend yield, expected
                  volatility of 113%, risk-free interest rate of 6.0% and
                  expected life of 5 years.


                                       F-20
<PAGE>   63
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

WARRANTS -

Warrants are summarized as follows:


<TABLE>
<CAPTION>
                                                                      December 31
                                      -------------------------------------------------------------------------------
                                                   1997                                         1996
                                                   ----                                         ----
                                                            Weighted                                     Weighted
                                                        Average Exercise                             Average Exercise
                                      Warrants                Price                Warrants                Price
                                      --------                -----                --------                -----
<S>                                  <C>                <C>                        <C>               <C>
Outstanding, beginning               2,360,000                $1.52
of year
Granted                              2,330,000                $0.85                2,556,000               $1.44

Exercised                            (100,000)                $0.14                (196,000)               $0.51
Expired
                                     ---------                -----                ---------               -----
Outstanding, end of year             4,590,000                $0.93                2,360,000               $1.52
                                     ---------                -----                ---------               -----

Exercisable, end of year             3,233,000                $0.86                1,073,000               $1.26
                                     ---------                -----                ---------               -----
</TABLE>


The following table summarizes information about warrants outstanding at
December 31, 1997:


<TABLE>
<CAPTION>
                                              Weighted           Weighted Average                            Weighted
Range of                  Warrants             Average              Remaining             Warrants           Average
Exercise Prices          Outstanding       Exercise Price        Contractual Life       Exercisable       Exercise Price
---------------          -----------       --------------        ----------------       -----------       --------------
<S>                      <C>               <C>                   <C>                    <C>               <C>  
$ .40 - $ .85            3,984,000              $0.76                3 years             2,884,000            $0.72
$1.00 - $1.54              399,000              $1.19                4 years               249,000            $1.30
$3.20 - $4.50              207,000              $3.73                5 years               100,000            $3.60
                          --------                                                        --------
                          4,590,000                                                      3,233,000
</TABLE>

                  During 1996 and 1997, the Company issued warrants in exchange
                  for consulting services, in settlement of litigation and in
                  connection with the sale of convertible debt securities. The
                  Company accounts for warrants issued to nonemployees based on
                  the estimated fair market value of the services received or
                  the equity instruments issued, whichever is more reliably
                  measurable. The fair value of warrants related to the sale of
                  debt securities are capitalized as debt issue costs and
                  amortized over the term of the debt using the straight-line
                  method. The fair value of warrants related to services
                  received are expensed as the warrants become exercisable. For
                  warrants issued in 1996, the Company recorded $175,000 in
                  consulting expense and $68,000 as expense for the settlement
                  of litigation. For warrants issued in 1997, the Company
                  capitalized $400,000 in debt issue costs and recorded expense
                  of $88,000 for consulting services received.


                                       F-21
<PAGE>   64
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  In December 1997, in consideration for removing certain
                  anti-dilution provisions and decreasing the term of the
                  warrants from ten years to five years, two consultants who
                  held warrants to purchase an aggregate of 2,640,000 shares 
                  of the Company's Common Stock at a weighted average exercise 
                  price of $1.02 per share, received amended warrants to
                  purchase a total of 3,080,000 shares of the Company's common
                  stock at an exercise price of $.85 per share. Because the
                  estimated fair value of the existing warrants was in excess
                  of the estimated fair value of the amended warrants at the
                  transaction date, no additional compensation was recorded.


NOTE 8            RESTATEMENT

                  Subsequent to the issuance of the 1996 financial statements,
                  management determined that the accounting treatment of the
                  convertible notes issued in 1994 and 1995 did not reflect
                  the intrinsic value of the beneficial conversion feature of
                  those notes. As a result, the financial statements for
                  year ended December 31, 1996 and for the period from July 21,
                  1989 (date of inception) to December 31, 1996, and for the
                  years ended December 31, 1994 and 1995 (not presented herein)
                  have been restated from amounts previously reported
                  to reflect the appropriate accounting treatment for the
                  beneficial conversion features. The effect of the
                  restatement is to record the discount as interest expense
                  for each period with an offsetting credit to additional
                  paid-in capital. The restatement had no impact on total
                  stockholders' equity or total assets.  

                  The impact of the restatement on the Company's financial
                  statements is summarized as follows:

<TABLE>
<CAPTION>
                                                                   As Previously
                                                                     Reported           As Restated
<S>                                                                <C>                 <C> 
                  Net loss:

                     Year ended December 31, 1994                  $ (2,133,000)       $ (3,776,000)
                                                                   =============       =============
                     
                     Year ended December 31, 1995                  $ (2,472,000)       $ (8,849,000)
                                                                   =============       =============

                     For the period July 21, 1989 (date of
                        inception) through December 31, 1995       $ (6,473,000)       $(14,493,000)
                                                                   =============       =============
                  Net loss per share:

                     Year ended December 31, 1994                  $      (0.36)       $      (0.63)
                                                                   =============       =============

                     Year ended December 31, 1995                  $      (0.36)       $      (1.28)
                                                                   =============       =============

                  Additional paid-in capital:

                     As of December 31, 1994                       $ 10,220,000        $ 11,863,000
                                                                   ============        ============

                     As of December 31, 1995                       $ 11,471,000        $ 19,491,000
                                                                   ============        ============
</TABLE>


                                       F-22