<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, 1998

                                       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, 1998.

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 $10,340,683.24 as of January 31, 1999. 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 January 31, 1999, 43,257,689
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]


                                       ii
<PAGE>   3
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                     PAGE
<S>         <C>                                                                                     <C>
PART I

            Item  1.  Description of Business ........................................................  1 
            Item  2.  Description of Property ........................................................  10
            Item  3.  Legal Proceedings ..............................................................  10 
            Item  4.  Submission of Matters to a Vote of Security Holders ............................  10 

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 ......................  12
            Item  7.  Financial Statements ...........................................................  17
            Item  8.  Changes in and Disagreements with Accountants on Accounting  
                      and Financial Disclosure .......................................................  17

PART III

            Item  9.  Directors, Executive Officers, Promoters and Control Persons;                     
                      Compliance with Section 16(a) of the Exchange Act ..............................  17
            Item 10.  Executive Compensation .........................................................  19
            Item 11.  Security Ownership of Certain Beneficial Owners and Management .................  27
            Item 12.  Certain Relationships and Related Transactions .................................  28
            Item 13.  Exhibits and Reports on Form 8K ................................................  30


FINANCIAL STATEMENTS

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

         Consolidated Financial Statements:                                                             

         Consolidated Balance Sheet at December 31, 1998 and December 31, 1998 
            (Pro Forma) .............................................................................  F-4

         Consolidated Statements of Operations for the Years Ended December 31,
            1998 and 1997, and the Period from July 21, 1989 (Date of Inception)
            to December 31, 1998 ..................................................................... F-5

         Consolidated Statements of Changes in Stockholders' Deficiency for the
             Period from July 21, 1989 (Date of Inception) to December 31, 1998 .............. F-6 to F-10

         Consolidated Statements of Cash Flows for the Years Ended December 31, 
             1998 and 1997 .................................................................. F-11 to F-12

         Notes to Consolidated Financial Statements ......................................... F-13 to F-23
</TABLE>

                                       iii
<PAGE>   4
                                     PART I
ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS

Lithium Technology Corporation (the "Company" or "LTC") is in the late stages 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 handset 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 and has no commercial operations to date.

The Company had cash of $1,073,000 at December 31, 1998. In the absence of new
capital, such cash is only sufficient to meet the Company's operating needs
through approximately May, 1999 other than financing for the development of
manufacturing capacity. The Company has developed and is implementing
appropriate strategies to minimize expenses and conserve cash. Although
management'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. The Company expects that research and
development expenses will increase 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, the ability of the Company to obtain equity and/or
debt financing in the public or private markets, and the ability of the Company
to establish collaborative agreements with other companies to provide research
and development funding to the Company and to manufacture and market the
Company's products. 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."

During the last five years, the Company has recruited a 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. 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.

In December, 1998, the Company elected two new members to its Board - Barry
Huret and Dr. John McFeeley. Mr. Huret is the President and CEO of Huret
Associates, Inc., Yardley, PA, a management and battery consulting company. Dr.
McFeeley is a Distinguished Engineer with the Polaroid Corporation. Effective
December 1, 1998, Dr. William Chu resigned from the Company's Board to focus on
the establishment of the TMP (See below). See "Directors, Executive Officers,
Promoters and Control Persons, Compliance with Section 16(a) of the Exchange
Act". Also, in December, 1998, the Board of Directors established the 1998 Stock
Incentive Plan (the "1998 Plan") See "Executive Compensation - 1998 Plan" for a
detailed description of the 1998 Plan.

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, a patent portfolio covering both the battery
construction and manufacturing process unique to the battery industry, and the
establishment of 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.
To advance this strategy (i) in May, 1998, the Company entered into a technology
development agreement (the "1998 TDA") with a global notebook computer
manufacturer (the "PC OEM") for the Company to provide its proprietary
rechargeable lithium-ion polymer 


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<PAGE>   5
batteries for an advanced notebook application. The PC OEM subsequently decided
to cancel the advanced high-end notebook product for which the Company's battery
was intended. Accordingly, the Company will not receive from the PC OEM the
latter two of three milestone equity investments contemplated by the 1998 TDA,
although the PC OEM intends to continue to work with the Company to develop the
Company's technology into a next generation of notebook products; (ii) in June,
1998, the Company entered into an agreement with the Ben Franklin Technology
Center of Southeastern Pennsylvania to undertake an advanced battery research
and development project with Temple University. The agreement provides funding
for a collaborative effort on the part of the Company and Temple to develop an
advanced solid polymer electrolyte for use in the Company's next generation of
rechargeable lithium-ion polymer batteries; (iii) in January, 1999, the Company
signed a letter of intent with the Hengdian Group, of mainland China, to enter
into a joint venture to manufacture rechargeable lithium-ion polymer batteries
in China using the Company's patented and proprietary technology, with the year
2000 as a target for initial commercial production; and (iv) in February, 1999,
the Company received a small purchase order from the NASA Lewis Research Center
for twenty large prototype lithium-ion polymer cells. Previously, in 1997, the
Company had entered into a letter of intent to establish a strategic
manufacturing joint venture with Elite Material Co., Ltd. (EMC) of Taiwan
contemplating a 194,000 square foot joint venture manufacturing facility in
Taiwan (Taiwan Manufacturing Plant - TMP) to produce lithium-ion polymer
batteries. The Company and EMC have mutually agreed to reassess the TMP
financing as originally contemplated by the letter of intent. This reassessment
is on-going at the time of this report. There can be no assurance as to the
completion of definitive agreements with respect to the implementation of the
TMP and the Hengdian joint venture or the other strategies referred to herein.

In September, 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"). In January 1999, all of the principal
amount of the 1997 Notes were converted into 19,642,857 shares of the Company's
common stock and 562,647 shares of the Company's common stock were issued to pay
accrued interest through the conversion date. See "Management's Discussion and
Analysis--Liquidity, Capital Resources, and Financial Condition" for details.

In early 1996 the Company installed a continuous flow coating and laminating
pilot line. The pilot line has been undergoing trial runs and
modifications/upgrades over the past three years and is being used to fabricate
the Company's lithium-ion polymer cell and battery pack samples for distribution
to selected Original Equipment Manufacturers (OEMs) which has been on-going
since the second quarter of 1997. The pilot line is currently evolving into the
Plymouth Meeting Manufacturing Plant (PMMP), subject to the uncertainties
discussed in this report and the availability of capital. It is anticipated that
an additional expenditure of approximately $4.0 million in equipment and
engineering services will be required in the 1999-2000 time frame, including
manufacturing equipment meeting applicable environmental regulatory standards to
achieve initial production levels for specific OEM battery pack applications.
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.

As of the date of this report, the Company is evaluating, and taking measures
with respect to, several alternative strategies to address the Company's needs
for (a) manufacturing capacity and (b) working capital for short-term
applications and longer-term applications, inclusive of bridge financing. No
commitments relative to these strategies have been received by the Company as of
the date of this report and there can be no assurance that these strategies and
measures will result in capital and/or manufacturing capacity on terms favorable
and acceptable to the Company.

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
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.


                                       2
<PAGE>   6
MARKET SUMMARY; CAPITAL REQUIREMENTS

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 $4.0 million for equipment expenditures
that is currently estimated to be required to achieve sustained production
levels, discussed herein and other manufacturing-related facilities.

There can also be no assurance that the incremental capital needed for attaining
commercial viability of the Company's battery technology through the year 2000
will be obtained, which the Company currently estimates at $18,000,000 (without
regard to the capital requirements for the development of any manufacturing
capacity). See "Management's Discussion and Analysis--Liquidity, Capital
Resources and Financial Condition."

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" 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
gravimetric energy density than metal grids; (2) better pulse discharge rate;
and (3) equivalent cycle life.


                                       3
<PAGE>   7
INTELLECTUAL PROPERTY

The Company holds twenty-five issued U.S. patents and twelve 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. In 1998, two patents were issued
which gave the Company patent protection on the use of metalized fiber webs for
building electrodes and separators. These metalized webs, which are now being
incorporated into the Company's composite cell structures, provide superior
conductivity and further simplify the manufacturing process.

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 the manufacturing process for a 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
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 Powdered, Granular, or Flaked Material
5,705,084                      Polymer Alloy Electrolytes for Electrochemical Devices                  2015

5,747,195                      Current collectors for high energy density cells                        2018

5,750,289                      Lightweight current collectors and carriers                             2018
</TABLE>

With respect to licensing relationships, the Company has: (i) 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


                                       4
<PAGE>   8
technology; and (ii) 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 pilot line was installed. Since
then, the pilot line has been undergoing continuing upgrade and trial runs. In
1997, the pilot line was upgraded and distribution of pilot line made
lithium-ion polymer cells samples processed on the pilot line commenced to
selected Original Equipment Manufacturers (OEMs).

During 1998, development and distribution of prototype battery packs commenced
to certain OEMs and is on-going. The Company is in the late stages of developing
and seeking to commercialize innovative solid-state lithium polymer batteries.
As of December 31, 1998, the Company had not generated any product revenues and
had no commercial operations. To date, the Company has delivered limited
quantities of its battery cells to selected OEMs for evaluation. In early 1999,
the Company successfully produced on its pilot manufacturing line a 90 watt hour
battery prototype for notebook computers and other portable electronics
applications. In January, 1999, the Company delivered to the PC OEM the first
battery prototype, which is approximately 8 x 12 inches, -1/4 inch thick and
provides run times for up to 10 hours. Based on continuing price declines in the
global notebook PC market, the PC OEM has decided to cancel the advanced
high-notebook product for which this 90 watt hour battery was intended. However,
the OEM has indicated its intention to work with the Company to infuse the
technology into a next generation of notebook products.

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, $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) and
$3,261,000 was incurred during 1998 (including interest expense of approximately
$341,000). Therefore, the Company's aggregate accumulated losses for the battery
technology through December 1998 are $36,302,000 (including interest expense of
approximately $17,841,000 relating to the beneficial conversion features of
certain debt issued by the Company and including $1,816,000 of other interest
expenses). The Company spent approximately $1,399,000 and $1,899,000 on research
and development activities during 1997 and 1998, 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, a strong patent portfolio covering both the
battery construction and manufacturing process unique to the battery industry
the establishment of 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.. 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 


                                       5
<PAGE>   9
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 pilot line and its equipment augmentation,
discussed herein, and other manufacturing-related facilities including
commercial production at the PMMP and commercial production at the TMP. The TMP,
as noted herein, is currently being reassessed by the Company and EMC.

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. In March 1996, the Company entered into a
two-year technology development agreement (the "1996 Agreement") with a Japanese
consortium headed by Mitsubishi Materials Corporation. The LTC-Mitsubishi
Materials alliance was successful for both parties. 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 1996 Agreement.

As the Company has reported in its September 30, 1998 report on Form 10-QSB, no
commitments were received, or have since been received, by the Company for the
purchase of $22,000,000 of redeemable convertible preferred stock the Company
sought to issue in order to raise capital. The Company, with the advice of its
investment banking firm determined not to proceed with the 1998 offering and the
Company is currently evaluating and reformulating its financial objectives and
strategies in conjunction with its technology development and manufacturing
strategies. The decision not to proceed with the 1998 offering was based on
several factors including the global economic down cycle as well as unfavorable
conditions in the domestic and international securities markets during the third
fiscal quarter for 1998 (particularly in the Far East where significant
investment interest in the Company is potentially located), and a significant
decrease in the market price for the Company's common stock with the potential
adverse consequence on the pricing of the 1998 offering and resulting dilutive
effect to the Company's existing shareholders. In connection with this
re-evaluation the Company is currently developing several strategies to address
the Company's needs for manufacturing capacity and working capital for
short-term applications and longer-term applications, inclusive of bridge
financing. No commitments relative to these strategies have been received by the
Company as of the date of this report and there can be no assurance that
commitments will be obtained on terms favorable and acceptable to the Company.

There can be no assurance that the incremental capital needed to attain
commercial viability of the Company's battery technology through the year 2000
will be obtained, which the Company currently estimates at approximately
$18,000,000 (without regard to the capital requirements for the development of
any manufacturing capacity). 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.

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 regard, although there can
be no assurance as to the consummation of any such strategic alliances. As noted
above, in December 1997, the Company had entered into a letter of intent to
establish a strategic manufacturing joint venture with EMC contemplating a
194,000 square foot joint venture manufacturing facility in Taiwan. During 1998,
the Company and EMC mutually agreed to reassess the manufacturing facility in
Taiwan as originally contemplated by the letter of intent and the level of
potential financial involvement by the Company in the joint venture in light of
the Company's decision, as discussed above, not to proceed with the Company's
1998 securities offering. In May 1998, the Company entered into the 1998 TDA (as
defined above) with the PC OEM (as defined above) contemplating the development
of a specific battery for the PC OEM's notebook computers. The PC OEM
subsequently decided to cancel the advanced high-end notebook product for which
the Company's battery was intended. Accordingly, the Company will not receive
from the PC OEM the latter two of three milestone equity investments
contemplated by the 1998 TDA, although the PC OEM intends to continue to work
with the Company to develop the company's technology into a next generation of
notebook products. In June, 1998, the Company entered into an agreement with the
Ben Franklin Technology Center of Southeastern Pennsylvania to undertake an
advanced battery research and development project with Temple University. The
agreement provides funding for a collaborative effort on the part of the Company
and Temple to develop an advanced solid polymer electrolyte for the Company's
next generation of rechargeable lithium-ion polymer batteries. In January, 1999,
the Company 


                                       6
<PAGE>   10
signed a letter of intent with the Hengdian Group, of mainland China, to enter
into a joint venture to manufacture rechargeable lithium-ion polymer batteries
in China using the Company's patented and proprietary technology with the year
2000 as a target for initial commercial production. In February, 1999, the
Company received a small purchase order from the NASA Lewis Research Center for
twenty large prototype lithium-ion polymer cells.

During March 1996, a benchtop continuous flow coating/laminating pilot line 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 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 pilot line, the
Company must successfully augment the pilot line 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 $4.0 million to construct in the 1999-2000 time frame.

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 pilot line continuous flow coating and
                  laminating unit in first quarter of 1996 (accomplished);

         (iii)    upgrade of the pilot line and distribution of lithium-ion
                  polymer cell samples made on the pilot line 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 packaging equipment at PMMP, with initial
                  commercial production at PMMP in late 1999 or early 2000;

         (vi)     initial production at the Taiwan Factory subject to the 
                  reassessment of the TMP as noted above; and

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

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 estimated $18 million total required for capital
equipment, plant augmentation and operating expenses at Plymouth Meeting in
order to bring the Company to the initial commercial production stage in late
1999 or early 2000. The Company has thus far successfully raised approximately
$14.8 million through the private sale of its securities including the sale of
$5.5 million of the 1997 Notes described above. There can be no assurances that
the approximately $18 million in incremental capital still needed for attaining
commercial viability of the Company's battery technology through the year 2000
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. 


                                       7
<PAGE>   11
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.

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.

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-alloy
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. In 1998, the Company received a
Semi-Automatic Cell Packaging and Filling machine. This new piece of equipment
is one of the central elements of the Company's capital investment program to
expand and upgrade its continuous flow production line.

EMPLOYEES

During the last five 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, electrochemistry
international marketing, fund-raising and strategic alliance development. In
May, 1998, the Company hired three technical employees. As of December 31, 1998,
the Company had a total of 17 employees, of whom 14 were employed full-time by
the Company. The Company anticipates that it will need to hire approximately 11
additional employees in order to advance the Company's manufacturing scale-up in
1999. The Company believes that 


                                       8
<PAGE>   12
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>

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 and the pilot manufacturing line. 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

None.

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, 1998.


                                       10
<PAGE>   14
                                     PART II

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

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 1998 and 1997 and
as of the last practical date prior to the date of this Report. Such 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>
1998
Fourth Quarter                                          $.45          $.23
Third Quarter                                           $.90          $.35
Second Quarter                                          $1.04         $.83
First Quarter                                           $1.20         $.84375

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
</TABLE>

As of December 31, 1998, there were approximately 692 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 (i) removing all
anti-dilution provisions (except for those activated by a stock split, reverse
stock split or a stock dividend) and (ii) 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.


                                       11
<PAGE>   15
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.

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.

During 1998, the Company granted an aggregate of 26,668 common stock options
pursuant to the Directors Stock Option Plan and an aggregate of 112,000 common
stock options pursuant to the 1994 Stock Incentive Plan.

Additionally, during 1998, the Company granted an aggregate of 1,964,059 common
stock options pursuant to the Company's 1998 Stock Incentive Plan.

In May 1998, the Company reached agreements to settle lawsuits with a former
director of the Company and the Company's former legal counsel. As a result of
the agreements, the Company issued 125,000 shares of its Common Stock, received
a cash settlement payment and eliminated an accrued liability.

Also during 1998, pursuant to the terms of the Company's technology development
agreement with a global notebook computer manufacturer (See "Liquidity, Capital
Resources and Financial Condition"), the Company issued 142,857 shares of Common
Stock to the computer manufacturer as payment for $100,000 advanced to the
Company.

In 1998, the Company issued 1,669,634 shares of its common stock in payment of
interest due for the first year on the $5.5 million principal amount of the 1997
Notes. In January 1999, the principal of these $5.5 million 1997 Notes was
converted into 19,642,857 shares of the Company's common stock, and 562,647
shares of the Company's common stock were issued to pay accrued interest through
the conversion date.

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.

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 from operations 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,
1999. 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, 


                                       12
<PAGE>   16
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").

The Company believes that as of December 31, 1998, it has sufficient capital
resources to meet the Company's needs and satisfy the Company's obligations
through approximately May 1999 other than financing for the development of
manufacturing capacity, 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 1999 installation of the pilot manufacturing line. 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, the
Company will be required to sell additional debt or equity securities.

At December 31, 1998, the Company had cash and cash equivalent of $1,073,000,
fixed assets of $463,000 and other assets of $591,000. The Company's total
liabilities were $6,154,000 consisting of accounts payable, accrued salaries,
and accrued expenses in the amount of $654,000 and the 1997 Notes due July 1,
2002 in the amount of $5,500,000 (which $5,500,000 1997 Notes were converted 
into common stock subsequent to December 31, 1998 as discussed below). The 
Company had net working capital of $513,000 on December 31, 1998.

The Company's net working capital was decreased by approximately $2,459,000 from
December 31, 1997 to December 31, 1998. The Company's cash and cash equivalents
(including cash held in escrow at December 31, 1997) decreased by approximately
$2,763,000 from December 31, 1997 to December 31, 1998. The decrease in net
working capital and in cash and cash equivalents is attributable primarily to
normal on-going activities of the business.

The Company's stockholders deficiency was $3,933,000 at December 31, 1998, after
giving effect to an accumulated deficit of $43,167,000 which consisted of
$36,302,000 accumulated deficit during the development stage from July 21, 1989
through December 31, 1998 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"). In January 1999, the 1997 Notes were
converted into 19,642,857 shares of the Company's Common Stock and 562,647
shares of the Company's Common Stock were issued to pay accrued interest to the
conversion date. Interest accrued at 8.5% and was payable annually, at the
Company's election in cash or the Company's Common Stock. The principal of the
1997 Notes was payable on or before July 1, 2002. The 1997 Notes were
convertible into the Company's Common Stock at a conversion price of $.28 per
share. In 1997, the Company recorded the intrinsic value of the beneficial
conversion feature of the 1997 Notes as a charge to interest expense 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. 

In May 1998, the Company entered into a technology development agreement with a
global notebook computer 


                                       13
<PAGE>   17
manufacturer for the Company to provide its proprietary rechargeable lithium-ion
polymer batteries for an advanced notebook application. Under the terms of the
agreement, the manufacturer was to invest up to $1,000,000 in the Company for
1,428,571 shares of Common Stock. Of this amount, $100,000 was advanced to the
Company and 142,857 shares of Common Stock were issued to the computer
manufacturer. In December 1998, development activities were curtailed based upon
adverse market conditions which the computer manufacturer was experiencing with
certain of its notebook products. As a result, the Company will not receive the
remaining $900,000 equity investment contemplated under the agreement, although
the computer manufacturer intends to continue to work with the Company to
develop the Company's technology into a next generation of notebook products.

In May 1998, the Company reached agreements to settle lawsuits pursuant to which
the Company issued 125,000 shares of its Common Stock, received a cash
settlement payment and eliminated an accrued liability, the net effect of which
was the receipt of approximately $505,000.

Although 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. 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 capability, technological
advances, the status of competitors, the ability of the Company to obtain equity
and/or debt financing in the public or private markets, 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.

There can be no assurances that the incremental capital needed for attaining
commercial viability of the Company's battery technology, will be obtained,
which the Company estimates at approximately $18,000,000 (without regard to the
capital requirements for the development of any manufacturing capacity).

The $18,000,000 is comprised as follows (i) $10,000,000 for working capital
through the fourth quarter of 2000; (ii) $4,000,000 for capital and equipment
(iii) $2,500,000 for technology licensing; and (iv) $1,500,000 for fees and
legal expenses. 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
the Hengdian Group in Mainland China. 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 capital requirements and expected sources of funds
are included in the discussion above relating to the Company's $18 million
estimate of the incremental capital needed for attaining commercial viability of
its battery technology.

RESULTS OF OPERATIONS

The Company had no revenues from commercial operations for the years ended
December 31, 1998 and 1997. Engineering, research and development expenses were
$1,899,000 for the year ended December 31, 1998 compared to $1,399,000 in 1997.
The increase of $500,000 results from increased contract research activities and
increased lab supplies and salaries as the Company continues to accelerate its
commercialization efforts.

General and administrative expenses were $1,770,000 for the year ended December
31, 1998 compared to $1,654,000 in 1997. The increase of $116,000 was due to
increased legal costs offset by decreased consulting expenses.

Interest expense decreased to $341,000 (net of interest income of $126,000) for
the year ended December 31, 1998 compared to $1,290,000 (net of interest income
of $86,000) in 1997. The decrease 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 of its right
to extend the maturity date for repayment of the Convertible Notes. The Company
also recorded in 1997 the intrinsic value of the beneficial conversion feature
of the Senior Secured Convertible Notes as a charge to interest expense of
$9,821,000.


                                       14
<PAGE>   18
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 (product development
completed in 1998) and lithium alloy polymer batteries (product development
completed 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 complete the construction of the commercial
production capability at the Plymouth Meeting Manufacturing Plant (PMMP) and
commercial production at the Taiwan Manufacturing Plant (TMP) (subject to the 
reassessment of the TMP as noted above) or the Hengdian joint venture plant.

During the last five years, 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 December 31, 1998, the management team and
technical staff consisted of fourteen 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. In June 1998, the Company
extended Mr. Thomsen's agreements as of May 1, 1998, through December 31, 1998.
Also, in June 1998, the Company extended Messrs. Cade and Ferment's employment
agreements for one year on the same terms and conditions except that no new
options were granted.

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 pilot line continuous flow coating and
                  laminating unit in first quarter of 1996 (accomplished);

         (iii)    upgrade of the pilot line and distribution of lithium-ion
                  polymer cell samples made on the pilot line 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 packaging equipment at PMMP, with initial
                  commercial production at PMMP in late 1999 or early 2000;

         (vi)     initial production at the Taiwan Factory subject to the 
                  reassessment of the TMP as noted above; and

         (vii)    construction of additional manufacturing facilities in Asia,
                  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) and (v) through the end of
1999 will cost the Company approximately $18 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 pilot line -- 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 pilot line, the Company must
successfully augment the pilot line equipment to construct a manufacturing line
(Plymouth Meeting Manufacturing Plant -- 


                                       15
<PAGE>   19
PMMP) reflecting the cost, quality, reliability, and performance required for
the various target market applications. It is anticipated that the PMMP will
cost approximately $4.0 million to construct in the 1999-2000 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 $4.0 million 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 $18 million
total capital equipment and operating expense required to bring the Company to
the initial commercial production stage at late 1999 or early 2000 by means of
private and/or public equity or debt financings.

The Company does not currently have sufficient cash to achieve all its
development and production objectives, including the 1999-2000 completion of the
PMMP. As noted above (See "Liquidity, Capital Resources, and Financial
Condition") the Company believes that as of December 31, 1998 it has sufficient
capital resources to meet the Company's needs and satisfy the Company's
obligations through approximately May 1999 based on the Company's current
strategies and subject to the uncertainties discussed in this report. In order
to raise sufficient capital to fund its operations, 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 1999, 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.

YEAR 2000

The Company is in the process of conducting a review of its computer and
business systems to identify and address any problems that the systems may have
with correctly interpreting and processing date information as the year 2000
approaches. The Company's review includes a series of initiatives to ensure that
the Company's computer equipment and software will function properly into the
next millennium. Computer hardware and software includes systems generally
thought of as information-technology dependent, such as accounting, data
processing, and telephone equipment ("IT systems"), as well as systems not
obviously information-technology dependent, such as battery manufacturing and
testing equipment, telecopier machines and securities systems ("non-IT
systems"). These systems may contain embedded technology, which requires that
the Company's review include broad identification, assessment, remediation and
testing efforts.

Based upon its identification and assessment efforts to date, the Company
believes that certain of its IT systems will require replacement or
modification. In addition, in the ordinary course of business, the Company
periodically replaces computer equipment and software, and in so doing, seeks to
acquire only year 2000 compliant software and hardware. The Company plans to
complete its assessment of its non-IT systems by mid 1999. The Company presently
believes that its planned modifications or replacements of existing IT systems
and non-IT systems will be completed on a timely basis so as to avoid any of the
potential year 2000-related disruptions or malfunctions of the computer
equipment and software it has identified.

As a development stage enterprise, the Company has not yet established any
significant customer relationships, whereby year 2000 compliance or
non-compliance might materially affect the Company's operations. At this point
in the review process, the Company cannot reasonably estimate the cost of
achieving year 2000 compliance; however, the Company does not anticipate the
cost of implementing its year 2000 efforts to be material. As and when the
Company transitions from the development stage to significant commercial
manufacturing operations, the Company plans to determine the year 2000 readiness
of its then key suppliers, identify alternative sources for materials and
services in the event that lack of year 2000 compliance is indicated, and make
inquiries regarding the year 2000 readiness of any potential strategic partners.
Management is continuing to examine the year 2000 issues as they potentially
impact the Company, and will be developing contingency plans as necessary.

SAFE HARBOR STATEMENT

The Private Securities Litigation Reform Act of 1995 provides a "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.


                                       16
<PAGE>   20
ITEM 7.    FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

<S>                                            <C>        <C>

   The Company's financial statements, as itemized below, appear in a
   separate section of this report following Item 13 

   Independent Auditors' Reports  

   Consolidated Financial Statements:....................................... F-2 to F-3

   Consolidated Balance Sheet at December 31, 1998 and December 31, 1998
   (Pro Forma).............................................................. F-4

   Consolidated Statements of Operations for the Years Ended December 31,
   1998 and 1997 and the Period from July 21, 1989 (Date of Inception) to
   December 31, 1998........................................................ F-5

   Consolidated Statements of Changes in Stockholders' Deficiency for the
   Period from July 21, 1989 (Date of Inception) to December 31, 1998....... F-6 to F-10

   Consolidated Statements of Cash Flows for the Years Ended December 31,
   1998 and 1997............................................................ F-11 to F-12

   Notes to Consolidated Financial Statements............................... F-13 to F-23
</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                    63         Chairman of the Board and Chief Executive Officer
          David J. Cade                        61         Director, President and Chief Operating Officer
          George R. Ferment                    59         Director, Executive Vice President of Operations and
                                                          Chief Technical Officer
          Stephen F. Hope                      56         Director
          Barry Huret                          61         Director
          Ralph D. Ketchum                     72         Director
          Arif Maskatia                        49         Director
          John McFeeley                        53         Director
          John D. McKey, Jr.                   55         Director
          William D. Walker                    57         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 Transcypt International Corporation and the TPA 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 Senior Vice President of Marketing and Business Development for
COMSAT Systems Division and from 


                                       17
<PAGE>   21
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.

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 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.

Barry Huret was elected a Director of the Company on December 21, 1998. Mr.
Huret is the President and CEO of Huret Associates, Inc., Yardley, PA, a
management and battery consulting company. Previously, from 1982-1997, he served
as the Assistant General Manager, Division Head - OEM Battery Sales Group for
the Panasonic Industrial Company, Secaucus, New Jersey. He holds an MBA with
Distinction from the New York University, Graduate School of Business and a B.A.
with Honors in Economics from Cornell University, Ithaca, New York.

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.

Arif Maskatia was elected a director of the Company, effective February 23,
1999. Mr. Maskatia has over 26 years of experience in the computer industry. He
presently is Vice President of the Advanced Technology & Portable Development
Group for Acer Advanced Labs in San Jose, California, responsible for
development of new notebook computer platforms. Prior to joining Acer, he held
senior technology development positions with Zenith Data Systems and Alcatel/ITT
Information Systems. Mr. Maskatia holds Bachelors and Masters degrees in
electrical engineering from Cornell University.

Dr. John McFeeley was elected a Director of the Company on December 21, 1998.
Dr. McFeeley has been with the Polaroid Corporation, Cambridge, Massachusetts
from 1971 to the present, where he served as Senior Program Manager from 1989 -
1997 and became Distinguished Engineer in 1997. Dr. McFeeley holds a B.S., M.S.
and Ph. D. in Chemical Engineering from the Polytechnic Institute of Brooklyn.

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


                                       18
<PAGE>   22
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.

William H. Chu, formerly a director of the Company, resigned from the Board
effective December 1, 1998.

Gerald Labush, formerly a director of the Company, resigned from the Board
effective February 23, 1999.

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, 1998, except as follows:
each of Thomas R. Thomsen, the Company's Chairman and Chief Executive Officer,
David J. Cade, the Company's President and Chief Operating Officer, George R.
Ferment, the Company's Executive Vice President of Operations and Chief
Technical Officer, Stephen F. Hope, Ralph D. Ketchum, Gerald M. Labush and John
D. McKey, Jr., each a Director of the Company, and William D. Walker, the
Company's Chief Financial Officer, and Gretchen N. Deming, the Company's
Secretary, filed, in February, 1999, a Form 5 disclosing one late Form 4 with
respect to one transaction. William H. Chu, a former Director, filed one late
Form 5.

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, 1998 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, 1998 and received total salary and bonus in excess of $100,000
during fiscal year 1998 (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.


                                       19
<PAGE>   23
                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                           LONG-TERM
                                                                                         COMPENSATION
                                                                                       AWARDS SECURITIES
                                                 ANNUAL                                    UNDERLYING
NAME AND PRINCIPAL                            COMPENSATION                               OPTIONS/SARS (#)
             POSITION            YEAR            SALARY           BONUS
<S>                              <C>          <C>                 <C>                  <C>
Thomas R. Thomsen,               1998          $185,000 (2)       $  0                      310,000 (4)
    Chairman of the Board of     1997          $185,000 (2)       $  0                      413,334 (3)
    Directors and Chief          1996          $118,708 (2)       $  0                       13,334
    Executive Officer (1)
David J. Cade, President and     1998          $148,750           $  0                      528,029 (8)
    Chief Operating Officer (5)  1997          $140,000           $15,000                   189,314 (6)(7)
                                 1996          $134,711           $  0                      266,667
George R. Ferment,               1998          $138,750           $  0                      528,029 (12)
    Executive Vice President of  1997          $130,000           $15,000                   221,370 (10)(11)
    Operations and Chief         1996          $126,474           $  0                      200,001
    Technical Officer (9)
</TABLE>

(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 and again in October 1998. 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)    Mr. Thomsen was granted 310,000 stock options on December 18, 1998 at an
       exercise price of $0.28 per share.

(5)    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.

(6)    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).

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

(8)    Mr. Cade was granted 528,029 stock options on December 18, 1998 at an
       exercise price of $0.28 per share.

(9)    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.

(10)   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).


                                       20
<PAGE>   24
(11)   Dr. Ferment was granted 316,000 stock options on December 2, 1997 at an
       exercise price of $1.00.

(12)   Dr. Ferment was granted 528,029 stock options on December 18, 1998 at an
       exercise price of $0.28 per share.

OPTION GRANTS IN FISCAL YEAR 1998

The following table sets forth stock options granted to each of the Named
Executive Officers during fiscal year 1998 to purchase shares of Common Stock.

<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          310,000 (3)               15.6%                       $0.28            12/18/09
David J. Cade (4)          528,029(4)                26.6%                       $0.28            12/18/09
George R. Ferment (5)      528,029(5)                26.6%                       $0.28            12/18/09
</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)    Mr. Thomsen was granted 310,000 stock options on December 18, 1998 at an
       exercise price of $0.28 (exercisable in equal amounts on December 18,
       1998, December 18, 1999 and December 18, 2000).

(4)    Mr. Cade was granted 528,029 stock options on December 18, 1998 at an
       exercise price of $0.28 (exercisable in equal amounts on December 18,
       1998, December 18, 1999, and December 18, 2000).

(5)    Dr. Ferment was granted 528,029 stock options on December 18, 1998 at an
       exercise price of $0.28 (exercisable in equal amounts on December 18,
       1998, December 18, 1999, and December 18, 2000).

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 1998 (none) and (ii) the
number and value of options held by each of the Named Executive Officers at the
end of fiscal year 1998. The calculations to determine the unexercised value of
options held at December 31, 1998 are based on the closing "bid" price of $.37
per share of Common Stock on December 31, 1998.

             AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1998 AND
                       DECEMBER 31, 1998 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                     513,333/210,001       $189,933/ 77,700
David J. Cade                  0                  0                     689,992/510,019       $255,297/188,707
George R. Ferment              0                  0                     722,048/510,019       $267,158/188,707
</TABLE>

1994 STOCK INCENTIVE PLAN

In February 1994 the Board of Directors of the Company established the 1994
Stock Incentive Plan (the "1994 


                                       21
<PAGE>   25
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 1994 Stock Plan and on
February 8, 1996 ratified an amendment to the 1994 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 1994 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 1994 Stock Plan to 5,333,334 subject to approval by the
Company's shareholders. The 1994 Stock Plan terminates in February 2004.

Set forth below is a brief description of the principal features of the 1994
Stock Plan.

The 1994 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 1994 Stock Plan or any other stock plan of the Company. In addition, the
1994 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 1994 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 1994 Stock Plan.

The 1994 Stock Plan makes available a maximum of 5,333,334 shares of the
Company's Common Stock for issuance for awards granted under the 1994 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 1994 Stock Plan. As of December 31, 1998, there were outstanding options
with respect to 2,470,023 shares of Common Stock under the 1994 Stock Plan. As
of December 31, 1998, options with respect to 1,893,690 shares of Common Stock
were fully vested.

The 1994 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 1994 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 1994 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 the 1994 Stock Plan (the "1994 Stock Plan Committee")
currently consists of Ralph Ketchum and Gerald Labush. The 1994 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 1994 Stock Plan generally and to
interpret the 1994 Stock Plan and award agreements entered into pursuant to the
1994 Stock Plan. The 1994 Stock Plan Committee may also effect the continuation,
acceleration or modification of awards under the 1994 Stock Plan in certain
circumstances including events that might constitute a change in control of the
Company.

Generally, a 1994 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 1994 Stock Plan Committee, the 1994 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 1994 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 1994 Stock Plan are not assignable or
transferable by a participant, except under the limited circumstances
contemplated by the 1994 Stock Plan.


                                       22
<PAGE>   26
The exercise price of an option granted under the 1994 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 1994 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 1994 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 1994 Stock Plan
Committee or (c) any other means acceptable to the 1994 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 1994 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 1994 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 1994 Stock Plan
(except for adjustment pursuant to Section 14 of the 1994 Stock Plan, as
described above) (ii) materially increase the benefits accruing to participants
or (iii) materially modify the eligibility requirements of the 1994 Stock Plan.
The 1994 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 1994 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 1994
Stock Plan, the 1994 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 1994 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 1998 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 


                                       23
<PAGE>   27
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 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 serve 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.

During the fiscal year ended December 31, 1998, Dr. John McFeeley, upon his
election to the Company's Board of Directors on December 21, 1998, was granted
13,334 stock options, which vest in equal increments over four years and Barry
Huret, upon his election to the Company's Board of Directors on December 21,
1998, 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, 1998, there were outstanding options under the Directors Plan with respect
to 163,338 shares of Common Stock, which have exercise prices ranging from $0.25
per share to $1.00 per share and options with respect to 66,667 shares of Common
Stock are fully vested as of December 31, 1998.

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.

1998 PLAN

In December, 1998 the Board of Directors of the Company established the 1998
Stock Incentive Plan (the "1998 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. The Board has recommended that the Plan
be submitted for shareholder approval at the next shareholder meeting. The 1998
Plan terminates in December 2008.

Set forth below is a brief description of the principal features of the 1998
Plan.

The 1998 Stock Plan makes available a maximum of 3,000,000 shares of the
Company's Common Stock for issuance for awards granted under the 1998 Plan.
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 


                                       24
<PAGE>   28
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 1998 Plan. As of December 31,
1998 there were outstanding options with respect to 1,964,059 shares of Common
Stock under the 1998 Plan. As of December 31, 1998, options with respect to
654,686 shares of Common Stock were fully vested.

The 1998 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 1998 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 1998 Plan provides that it shall be administered by a Committee of the Board
of Directors or in the absence of a Committee by the entire Board. For purposes
of any Awards made pursuant to the 1998 Plan to any non-employee directors, the
term Committee shall mean the "Non-Employee Directors Compensation Committee"
which shall initially as of December 18, 1998 be comprised of the then current
members of the Company's Directors' Stock Option Plan Committee and for purposes
of any other Award made pursuant to the 1998 Plan, the term Committee shall mean
the "1998 Plan Compensation Committee" which shall initially as of December 18,
1998 be comprised of the then current members of the Company's Compensation
Committee of the 1994 Stock Incentive Plan.

Generally, a 1998 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 Committee, the 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
Committee, exercise or receive payment in respect to awards held by the
participant at the time of death. In general, awards granted under the 1998 Plan
are not assignable or transferable by a participant, except that non-qualified
stock options are freely transferable, subject, however to compliance with
applicable federal and state securities laws and regulations.

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;
however, for any non-qualified Stock Option the option price per share of Common
Stock, may alternatively, be fixed at any price deemed to be fair and
reasonable, as of the date of grant, by the Committee. The exercise price of an
option must be paid in full in cash at the time of exercise, or, if permitted by
the Committee, may be paid in whole or in part by tendering shares of Common
Stock or surrendering another award granted under the 1998 Plan or another
benefit stock plan of the Company or any other means acceptable to the 1998 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 1998
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
Board may amend, alter or discontinue the 1998 Plan to the extent it deems
appropriate in the best interest of the Company, but no amendment may be made
which would impair the rights of a participant without the participant's
consent, except in limited circumstances set forth in the 1998 Plan, and no
amendment may be made which would disqualify any award or transaction under the
1998 Plan from the exemption provided by Rule 16b-3.

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 was
extended through May 8, 1998 and in June 1998, the Company extended his
employment agreement, as of May 1, 1998, through December 31, 1998. Mr. Thomsen
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 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 


                                       25
<PAGE>   29
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. Mr. Thomsen was granted 310,000 options
on December 18, 1998 at an exercise price of $.28.

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. In June, 1998, the Company extended this employment
agreement for two years on the same terms and conditions except that no new
options were granted, and Mr. Cade's salary was increased to $155,000 per year.
Mr. Cade is also eligible to receive a target bonus of up to 20% of his annual
salary in the event certain specified milestones are achieved. 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 and was granted 528,029 options on December 18, 1998 at
an exercise price of $.28. Mr. Cade's employment agreement also provides for
certain severance payment benefits in the event of a change in control (as
defined in the employment extension agreement) combined with his employment
termination resulting from his resignation or the Company's termination of his
employment without cause, and the vesting provisions relating to certain of his
stock options were modified in the event of specified employment termination
events, disability or death.

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. In June,
1998, the Company extended this employment agreement for two years on the same
terms and conditions except that no new options were granted and Dr. Ferment's
salary was increased to $145,000 per year. Dr. Ferment shall also be eligible to
receive a target bonus of up to 20% of his annual salary, in the event certain
specified milestones are achieved. 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
and was granted 528,029 options on December 18, 1998 at an exercise price of
$.28. Dr. Ferment's employment agreement also provides for certain severance
payment benefits in the event of a change in control (as defined in the
employment extension agreement) combined with his employment termination
resulting from his resignation or the Company's termination of his employment
without cause, and the vesting provisions relating to his stock options were
modified in the event of specified employment termination events disability or
death.


                                       26
<PAGE>   30
ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
           AND MANAGEMENT

The following table sets forth information as of December 31, 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.

<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                                      1,020,744 (3)                           4.33%
Stephen F. Hope                                        1,254,607 (4)                           5.44%
Ralph D. Ketchum                                         489,263 (5)                           2.09%
Gerald M. Labush                                         218,319 (6)                           1.05%
John D. McKey, Jr.                                       587,534 (7)                           2.55%
David J. Cade                                            689,992 (8)                           2.91%
George R. Ferment                                        722,048 (9)                           3.04%
William D. Walker                                        449,571 (10)                          1.92%
William H. Chu                                             3,334 (11)                            *
Barry Huret                                                    0 (12)                            *
John J. McFeeley                                               0 (13)                            *
Donald C. Taylor                                       1,732,500 (14)                          7.09%
Group III Capital, Inc.                                1,492,500 (15)                          6.10%
Lithium Link, LLC                                     21,875,138 (16)                         50.57%
Interlink Management Corporation                      21,875,138 (17)                         50.57%
All Directors and Officers as a                        5,435,412                              22.28%
Group (11 persons)+
</TABLE>

*      Less than 1%.

+      Includes the Company's directors and officers as of December 31, 1998
(also includes William H. Chu, who resigned on December 1, 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 December
       31, 1998 upon the exercise or conversion of warrants, options or
       convertible securities.

(3)    Includes 257,454 shares of Common Stock which are covered by a voting
       proxy granted by a shareholder to Mr. Thomsen and options to acquire
       510,334 shares of common stock.

(4)    Includes 90,328 shares of Common Stock held by Hazel Hope, the Executrix
       of the Estate of Henry Hope, and options to acquire shares of Common
       Stock.

(5)    Includes options to acquire 31,667 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 28,333 shares of Common Stock. Mr. Labush 
       resigned from the Board effective February 23, 1999.

(7)    Includes options to acquire 28,333 shares of Common Stock.

(8)    Consists of options to acquire 689,992 shares of Common Stock.


                                       27
<PAGE>   31
(9)    Consists of options to acquire 722,048 shares of Common Stock.

(10)   Includes options to acquire 158,335 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)   Mr. Chu resigned from the Board effective December 1, 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)   Options held by Mr. Huret will not vest within 60 days of January 31,
       1999.

(13)   Options held by Dr. McFeeley will not vest within 60 days of January 31,
       1999.

(14)   Includes approximately 47,500 shares of Common Stock held by Mr. Taylor
       directly, 192,500 shares of Common Stock held directly by, and 1,400,000
       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 March 31, 1999.

(15)   Includes 92,500 shares of Common Stock and 1,400,000 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 March 31, 1999.

(16)   Consists of 19,642,857 shares issuable to Lithium Link, LLC within 60
       days of December 31, 1998 upon conversion of the $5.5 million Notes,
       1,669,634 shares issued in December, 1998 upon the conversion of $467,500
       interest, and 562,647 shares which were issued in January 1999 upon
       conversion of interest that accrued from September 23, 1998 through
       January 22, 1999 and which were issuable as of December 31, 1998. The
       managing member of Lithium Link, LLC is Interlink Management Corporation.
       The shares referred to in this note are the same shares referred to in
       note 17 to this table.

(17)   Consists of 19,642,857 shares issuable to Lithium Link, LLC within 60
       days of December 31, 1998 upon conversion of the $5.5 million Notes, 
       1,669,634 shares issued in December, 1998 upon the conversion of 
       $467,500 interest, and 562,647 shares which were issued in January 1999
       upon conversion of interest that accrued from September 23, 1998 through
       January 22, 1999 and which were issuable as of December 31, 1998. 
       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. The shares referred to in this note are the same shares referred
       to in note 16 to this table. 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.

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 1997 Notes were convertible into the
Company's Common Stock at a conversion price of $.28 per share. As of December
31, 1998, the Company had 23,052,185 shares of common stock outstanding. In
January 1999, the Notes were converted into 19,642,857 shares of the Company's
Common Stock and 562,647 shares of the Company's Common Stock were issued to pay
accrued interest to the conversion date. In addition, as a result of the Note
conversion, the Consulting Agreement with Interlink Management Corporation
("IMC") and all security interests and licenses held by IMC were cancelled and
terminated.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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.


                                       28
<PAGE>   32
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 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, 1998, the Company has issued and outstanding stock options to
purchase 4,597,420 shares of the Company's Common Stock, comprised of (a)
options to acquire 163,338 shares pursuant to the Directors Stock Option Plan
(the "Directors Plan") (See "Executive Compensation -- Directors Stock Option
Plan" for details), (b) options to acquire 2,470,023 shares pursuant to the 1994
Stock Incentive Plan" (See "Executive Compensation Stock Incentive Plan" for
details), (c) options to acquire 1,964,059 shares pursuant to the 1998 Stock
Incentive Plan" (See "Executive Compensation - 1998 Plan" for details) and (d)
3,750 options granted to consultants.

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. In 1998, the Board of Directors approved the
implementation of the 1998 Stock Incentive Plan, the terms of such plan being
summarized in "Executive Compensation - 1998 Plan". All employees and directors
of the Company as of December 18, 1998 were awarded common stock options
pursuant to the Plan, such options totaling 1,954,059.

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. Dr. Chu has
resigned from the Board effective December 1, 1998.

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.

On December 18, 1998, Mr. Cade was granted 528,029 stock options at an exercise
price of $.28 per share, Dr. Ferment was granted 528,029 stock options at an
exercise price of $.28 per share, Mr. Hope was granted 15,000 stock options at
an exercise price of $.28 per share, Mr. Ketchum was granted 25,000 stock
options at an exercise price of $.28 per share, Mr. Labush was granted 25,000
stock options at an exercise price of $.28 per share, Mr. McKey was granted
25,000 stock options at an exercise price of $.28 per share, Mr. Thomsen was
granted 300,000 stock options at an exercise price of $.28 per share, and Mr.
Walker was granted 125,001 stock options at an exercise price of $.28 per share.

Barry Huret, upon his election to the Company's Board of Directors on December
21, 1998, was granted 13,334 stock options. Dr. John J. McFeeley, upon his
election to the Company's Board of Directors on December 21, 1998, was granted
13,334 stock options. Arif Maskatia, upon his election to the Company's Board of
Directors on February 23, 1999, was granted 13,334 stock options.

During 1997 and 1998, 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 (310,000); David J. Cade
(844,030); Dr. George R. Ferment (844,029); and William D. Walker (225,001).

During 1997, the Company granted an aggregate of 93,334 Common Stock options
pursuant to the Director's Stock 


                                       29
<PAGE>   33
Option Plan and an aggregate of 1,017,500 Common Stock options pursuant to the
1994 Stock Incentive Plan.

During 1998, the Company granted an aggregate of 26,668 Common Stock options
pursuant to the Director's Stock Option Plan, an aggregate of 112,000 Common
Stock options pursuant to the 1994 Stock Incentive Plan, and an aggregate of
1,964,059 Common Stock options pursuant to the 1998 Stock Incentive Plan.

CONSULTING AGREEMENTS

In December 1997, the Company and Donald C. Taylor, a former director of the
Company, agreed to terminate the Consulting Agreement which the Company and Mr.
Taylor had entered into in May 1996 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 Consulting Agreement was
terminated 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 1998 and 1997, the Company paid $73,781 and $70,237, 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.


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)


                                       30
<PAGE>   34
              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)

              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)


                                       31
<PAGE>   35
              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)

              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)


                                       32
<PAGE>   36
              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)

              10.46  Employment Agreement Extension, dated June 1, 1998,
                     between David Cade and the Company.+

              10.47  Employment Agreement Extension, dated June 1, 1998,
                     between George Ferment and the Company.+

              10.48  1998 Stock Incentive Plan.+

              10.49  Form of Stock Option Agreements relating to the Company's
                     1998 Stock Incentive Plan.+

              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.

(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.


                                       33
<PAGE>   37
(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, 1998:

         None

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

+        Exhibit filed herewith in this Report.


                                       34
<PAGE>   38
                                   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: March 12, 1999                        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 Board, Director                    March 12, 1999
---------------------------
Thomas R. Thomsen

/s/ David J. Cade                                       Director                                    March 12, 1999
---------------------------
David J. Cade

/s/ George R. Ferment                                   Director                                    March 12, 1999
---------------------------
George R. Ferment

/s/ Stephen F. Hope                                     Director                                    March 12, 1999
---------------------------
Stephen F. Hope

/s/ Barry Huret                                         Director                                    March 12, 1999
---------------------------
Barry Huret

                                                        Director                                    
---------------------------
Ralph D. Ketchum

                                                        Director                                    
---------------------------
Arif Mastakia

/s/John J. McFeeley                                     Director                                    March 12, 1999
---------------------------
John J. McFeeley

/s/ John D. McKey, Jr.                                  Director                                    March 12, 1999
---------------------------
John D. McKey, Jr.
</TABLE>


                                       35
<PAGE>   39
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                                DECEMBER 31, 1998

                   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, 1998 and December 31, 1998 (Pro Forma)                 F-4

          Consolidated Statements of Operations for the Years Ended December 31,
            1998 and 1997 and the Period from July 21, 1989 (Date of Inception)
            to December 31, 1998                                                                            F-5

          Consolidated Statements of Changes in Stockholders' Deficiency for the
            Period from July 31, 1989 (Date of Inception) to December 31, 1998                              F-6 to F-10


          Consolidated Statements of Cash Flows for the Years Ended December 31,
            1998 and 1997                                                                                   F-11 to F-12

          Notes to Consolidated Financial Statements                                                        F-13 to F-23
</TABLE>


                                       F-1
<PAGE>   40
                          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, 1998, and the related consolidated statements of operations,
changes in stockholders' deficiency and cash flows for each of the two years in
the period ended December 31, 1998, and for the period from July 21, 1989 (date
of inception) to December 31, 1998. 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 audits. The Company's
financial statements for the period July 21, 1989 (date of inception) through
December 31, 1996, were audited by other auditors whose report, dated January
27, 1997, 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. 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 $36,302,000. 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 audits 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 audits 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, 1998, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1998, and for the period from July 21, 1989 (date of inception) through December
31, 1998, 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 and lack of adequate financing to fund its
operations beyond May 1999 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 5, 1999


                                       F-2
<PAGE>   41
                          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 period July 21, 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 audits.

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
period July 21, 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.



                                   /s/ Wiss & Company, LLP

                                   WISS & COMPANY, LLP

Woodbridge, New Jersey
January 22, 1997


                                      F-3
<PAGE>   42
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                       ASSETS


                                                                                                              Pro Forma
                                                                                                             (Unaudited
CURRENT ASSETS:                                                                                                Note 8)
                                                                                                               ------
<S>                                                                                         <C>            <C>        
          Cash and cash equivalents                                                          $1,073,000     $ 1,073,000
          Accounts receivable                                                                    77,000          77,000
          Other current assets                                                                   17,000          17,000
                                                                                             ----------     -----------
                   Total Current Assets                                                       1,167,000       1,167,000
                                                                                             ----------     -----------

PROPERTY AND EQUIPMENT, LESS ACCUMULATED                                                        463,000         463,000
          DEPRECIATION OF $799,000

OTHER ASSETS:
          Debt issue costs, less accumulated amortization of $187,000                           496,000            ---
          Security and equipment deposits                                                        95,000          95,000
                                                                                             ----------     -----------
                                                                                                591,000          95,000
                                                                                             ----------     -----------
                     Total assets                                                            $2,221,000     $ 1,725,000
                                                                                             ==========     ===========

                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES:
          Accounts payable                                                                  $   213,000     $   213,000
          Accrued salaries                                                                      212,000         212,000
          Other accrued expenses                                                                229,000         100,000
                                                                                             ----------     -----------
                   Total current liabilities                                                    654,000         525,000
                                                                                             ----------     -----------

LONG-TERM LIABILITIES:
          Senior Secured Convertible Notes, due July 1, 2002                                  5,500,000           ---
                                                                                             ----------     -----------
                   Total liabilities                                                          6,154,000         525,000
                                                                                             ----------     -----------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
          Common stock, par value $.01 per share:
                   Authorized - 50,000,000 shares
                   Issued and outstanding - 23,052,185 and 42,695,042 shares                    231,000         432,000
          Additional paid-in capital                                                         39,003,000      43,935,000
          Accumulated deficit                                                                (6,865,000)     (6,865,000)
          Deficit accumulated during development stage                                      (36,302,000)    (36,302,000)
                                                                                             ----------     -----------

                   Total stockholders' equity (deficiency)                                   (3,933,000)      1,200,000
                                                                                             ----------     -----------

                                                                                             $2,221,000     $ 1,725,000
                                                                                             ==========     ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-4
<PAGE>   43
                         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,
                                                     --------------------------     -------------  
                                                         1998            1997             1998
                                                         
<S>                                                  <C>             <C>             <C>             
REVENUES:
         Development contracts                       $     99,000    $       --      $     99,000
                                                     ------------    ----------      ------------

COSTS AND EXPENSES:
          Engineering, research and development         1,899,000       1,399,000       7,011,000
          General and administrative                    1,770,000       1,654,000      10,383,000
                                                     ------------    ------------    ------------
                                                        3,669,000       3,053,000      17,394,000
                                                     ------------    ------------    ------------

OTHER INCOME (EXPENSE):
          Interest expense, net of interest income       (341,000)     (1,290,000)     (1,816,000)
          Interest expense related to beneficial
            conversion feature                               --        (9,821,000)    (17,841,000)
         Other non-operating income - Note 6              650,000            --           650,000
                                                     ------------    ------------    ------------
                                                          309,000     (11,111,000)    (19,007,000)
                                                     ------------    ------------    ------------

NET LOSS                                             ($ 3,261,000)   ($14,164,000)   ($36,302,000)
                                                     ============    ============    ============ 
WEIGHTED AVERAGE NUMBER OF
          COMMON SHARES OUTSTANDING:                   21,697,000      18,005,000
                                                      ===========    ============
BASIC AND DILUTED NET LOSS PER SHARE:                 $      (.15)   $       (.79)
                                                      ===========    ============ 
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-5
<PAGE>   44

                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  (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>   45
<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                                --            --                --              --             --              --   
                                         ----------   ------------       ------------    ------------   ------------     -----------
BALANCES AT DECEMBER 31, 1994                                                                                                 
                                             --       $    --                  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                                      --              --             --              --
       Issuance of 12% convertible
          promissory notes                                                   --              --             --              --
     Net loss                                                                --              --             --              --
                                                                         ------------    ------------   ------------     -----------
BALANCES AT DECEMBER 31, 1995                                                                                                       
                                                                                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                           --        --      907,000 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                                --        --       --       --                          --        --       (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

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
                                       (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                                --        --       --       --                          --        --        (8,849,000)
                                         --------- -------  --------- ------- ---------  ------ ---------   ---------    --------- 

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

                                      F-7

<PAGE>   46
<TABLE>
<CAPTION>
                                                                          Common Stock
                                                                          ------------
                                                                       Shares       Amount
                                                                       ------       ------
<S>                                                                  <C>            <C>   
BALANCES AT DECEMBER 31, 1995                                        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                                       17,108,000    $171,000
</TABLE>


See accompanying notes to consolidated financial statements.



                                      F-8
<PAGE>   47
<TABLE>
<CAPTION>
                                                                                                       Deficit
                                                                                                     Accumulated
                                                              Additional                               During
                                                               Paid-In           Accumulated         Development
                                                               Capital             Deficit             Stage
                                                               -------             -------             -----
<S>                                                         <C>                 <C>                <C>          
BALANCES AT DECEMBER 31, 1995                               $ 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                               $ 24,792,000        $(6,865,000)       $(18,877,000)
</TABLE>


                                       F-9
<PAGE>   48

<TABLE>
<CAPTION>
                                                                                                                        Deficit
                                                                                                                      Accumulated
                                                                                        Additional                      During
                                                                      Common Stock        Paid-In      Accumulated    Development
                                                                 Shares       Amount      Capital      Deficit           Stages
                                                                 ------       ------      -------      -------           ------

<S>                                                            <C>          <C>         <C>           <C>             <C>          
 Balances At December 31, 1996                                 17,108,000   $171,000    $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          493,000      5,000        575,000
       of 10%  convertible notes
       In connection with the sale of Escrowed Shares by        2,669,000     27,000      2,219,000
       the Convertible Note Purchasers
       Upon exercise of warrant                                   100,000      1,000         13,000
       In payment of accrued salaries and accounts                646,000      6,000        369,000
       payable
  Issuance of warrants:
         For services rendered                                                               88,000
         In connection with the sale of the 8.5% senior                                     400,000
       secured convertible notes
         Issuance of the 8.5% senior secured convertible                                  9,821,000
       notes

Net loss:                                                                                                              (14,164,000)
                                                               ----------   --------    -----------   -----------     ------------ 
BALANCES AT DECEMBER 31, 1997                                  21,016,000    210,000     38,277,000    (6,865,000)     (33,041,000)

YEAR ENDED DECEMBER 31, 1998:
  Issuance of common stock:
       In connection with settlement of litigation                125,000      1,000        124,000
       Upon exercise of stock options                              98,000      1,000         53,000
       For cash                                                   143,000      2,000         98,000
       In lieu of interest                                      1,670,000     17,000        451,000

Net loss:                                                                                                               (3,261,000)
                                                               ----------   --------    -----------   -----------     ------------ 
BALANCES AT DECEMBER 31, 1998                                  23,052,000   $231,000    $39,003,000   $(6,865,000)    $(36,302,000)
                                                               ==========   ========    ===========   ===========     ============ 
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-10
<PAGE>   49
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                          Year Ended               Period From
                                                                                          December 31,            July 21, 1989
                                                                                  ---------------------------   (Date of Inception)
                                                                                                                  Dec. 31, 1998
                                                                                       1998            1997
<S>                                                                               <C>             <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                          $ (3,261,000)   $(14,164,000)   $(36,302,000)
     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                                                                    232,000         205,000         799,000
       Amortization of debt issue costs                                                142,000         181,000       1,062,000
       Reduction of accrued expenses                                                  (270,000)           --          (270,000)
       Common stock issued in lieu of interest                                         468,000       1,176,000       1,756,000
       Fair value of warrants and option granted for services rendered                    --            88,000         209,000
       Common stock issued for services provided                                          --              --           206,000
       Common stock issued upon settlement of litigation                               125,000            --           125,000
       Expenses paid by shareholder on behalf of Company                                  --              --            79,000
     Changes in operating assets and liabilities:
       Accounts receivable                                                             (77,000)           --           (77,000)
       Other current assets                                                             (2,000)         (5,000)         (1,000)
       Security and equipment deposits                                                 (46,000)        (29,000)        (95,000)
       Accounts payable, accrued expenses and customer deposits                         45,000         (24,000)      2,033,000
       Due to related parties                                                             --              --          (118,000)
                                                                                  ------------    ------------    ------------
              Net cash used in operating activities                                 (2,644,000)     (2,751,000)    (12,764,000)
                                                                                  ------------    ------------    ------------

     CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchases of property and equipment                                            (273,000)         (3,000)     (1,012,000)
       Restricted cash                                                                    --            65,000            --
       Other                                                                              --              --            94,000
                                                                                                                  ------------
              Net cash provided by (used in) investing activities                     (273,000)         62,000        (918,000)
                                                                                  ------------    ------------    ------------
     CASH FLOW FROM FINANCING ACTIVITIES:
       Net advance repayable only out of proceeds of public offering                      --              --           471,000
       Proceeds received upon issuance of common stock                                 100,000            --         3,339,000
       Proceeds received from issuance of preferred stock, net of related costs           --              --           100,000
       Proceeds received upon exercise of options and warrants, net of costs            54,000          14,000         637,000
       Net advances by former principal stockholder                                       --              --           321,000
       Proceeds from sale of convertible debt                                        3,330,000       2,170,000      10,874,000
       Debt issue costs                                                                   --          (277,000)       (887,000)
       Repayment of convertible debt                                                      --          (100,000)       (100,000)
                                                                                  ------------    ------------    ------------

              Net cash provided by financing activities                              3,484,000       1,807,000      14,755,000
                                                                                  ------------    ------------    ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                                567,000        (882,000)      1,073,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                         506,000       1,388,000        
                                                                                  ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                          $  1,073,000    $    506,000    $  1,073,000
                                                                                  ============    ============    ============
</TABLE>


                                       F-11
<PAGE>   50
<TABLE>
<CAPTION>
                                                                                                 Period From
                                                                            Year Ended        July 21, 1989 (Date
                                                                            December 31        of Inception) to
                                                                        1998           1997     Dec. 31, 1998
                                                                        ----           ----     -------------
<S>                                                                     <C>       <C>             <C>       
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                    $---      $---            $  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

   Conversion of convertible debt and accrued interest into common      $---      $1,508,000      $4,776,000
       stock, net of unamortized debt discount
   Exchange of advances repayable only out of proceeds of               $---      $---            $  471,000
       public offering for common stock
   Deferred offering costs on warrants exercised                        $---      $---            $   88,000
   Issuance of warrants in settlement of litigation for debt issue      $---        $488,000      $  364,000
       costs and for services rendered
   Common stock issued for costs related to 10% promissory notes        $---      $---            $  525,000
</TABLE>


See accompanying notes to consolidated financial statements


                                       F-12
<PAGE>   51
                         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.

       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, 1998
       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 during 1997, 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. In January 1999, these
       promissory notes were converted into 19,642,857 shares of the Company's
       Common Stock and 562,647 shares of the Company's Common Stock were issued
       to pay accrued interest to the conversion date (see Note 8).

       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-13
<PAGE>   52
                         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 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
       1998 and 1997.

       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. For the years ended
       December 31, 1998 and 1997, the Company's potential common shares have an
       anti-dilutive effect on earnings per share and, therefore, have not been
       used in determining the total weighted average number of common shares
       outstanding. Potential common shares resulting from convertible notes
       payable, stock options and warrants that would be used to determine
       diluted earnings per share for the years ended December 31, 1998 and 
       1997 were as follows:

<TABLE>
<CAPTION>

                                      POTENTIAL COMMON SHARES
                                      -----------------------

                                                1998                1997
                                                ----                ----
<S>                                       <C>                 <C>
                 Stock options             4,598,000           2,909,000

                 Warrants                  4,590,000           4,590,000

                 Convertible debt         19,643,000          19,643,000

                 Accrued interest on
                    Convertible debt         462,000             462,000
                                          ----------          ----------
                   Total                  29,293,000          27,604,000   
                                          ==========          ==========
</TABLE>

       RECENT ACCOUNTING PRONOUNCEMENTS - Effective January 1, 1998, the Company
       adopted Financial Accounting Standards Board Statement No. 130,
       "Reporting Comprehensive Income" ("SFAS No. 130"). During the periods
       presented, the Company had no changes in equity from transactions or
       other events and circumstances from non-owner sources. Accordingly, a
       statement of comprehensive income has not been provided as comprehensive
       loss equals net loss for all periods presented.

       Effective January 1, 1998, the Company was required to adopt SFAS 131,
       "Disclosures about Segments of an Enterprise and Related Information".
       This statement establishes standards for the reporting of information
       about operating segments and requires the reporting of selected
       information about operating segments in interim financial statements. It
       also establishes standards for related disclosures about products,
       services, geographic areas and major customers. As a development stage
       enterprise, adoption of this standard had no impact on the Company's
       financial statement disclosures.

       In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
       Instruments and Hedging Activities". This statement establishes
       accounting and reporting standards for derivative instruments, including
       certain derivative instruments embedded in other contracts collectively
       referred to as derivatives, and for hedging activities. It requires that
       an entity recognize all derivatives as either assets or liabilities in
       the statement of financial position and measure those statements at fair
       value. This statement is effective for fiscal years beginning after June
       15, 1999, although early adoption is encouraged. The Company is
       evaluating the effect that the adoption of SFAS No. 133 will have on its
       consolidated financial position and results of operations but does not
       expect the effect to be material.

                                      F-14
<PAGE>   53
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 1999 or
       the first quarter of 2000. 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.

       MANAGEMENT'S PLANS - During the last five 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, general and administrative expenses and interest
       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.
       Management believes that, as of December 31, 1998, the Company only has
       capital resources sufficient to meet the Company's obligations through
       May 1999, other than financing for the development of manufacturing
       capacity. 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.

       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 $18
       million without regard to the capital requirements for the development of
       any manufacturing capacity. 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, 1998 is summarized as follows:

<TABLE>
<S>                                                                            <C>       
                        Laboratory equipment                                   $1,122,000
                        Furniture and office equipment                             95,000
                        Leasehold improvements                                     45,000
                                                                              -----------
                                                                               $1,262,000

                        Less:     Accumulated depreciation and amortization       799,000
                                                                              -----------
                                                                              $   463,000
                                                                              ===========
</TABLE>


                                      F-15
<PAGE>   54
                         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 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 $203,000 in 1997.

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 $6,900,000 at December
       31, 1998.

       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 limitations under current tax law, that a full
       valuation allowance is appropriate at December 31, 1998.

       At December 31, 1998, the Company had net operating loss carryforwards
       for federal income tax purposes of approximately $16,900,000 expiring in
       the years 2004 through 2013 and net operating loss carryforwards of
       approximately $11,700,000 for state income tax purposes, expiring in the
       years 1999 through 2001.

       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, and
       the conversion of the Senior Secured Convertible Notes in January 1999
       (see Note 8), there exists substantial risk that the Company's use of net
       operating losses may be severely limited under the Internal Revenue Code.


                                      F-16
<PAGE>   55
                         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 February, 1999.

       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 December 31, 1998. The officer
       voluntarily elected to defer his compensation until October 1997 and
       again in October 1998. At December 31, 1998 such deferral ($211,416) 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 June 1998, the Company extended for two years the employment
       agreements with its President/Chief Operating Officer and its Executive
       Vice President of Operations/Chief Technical Officer at annual salaries
       of $155,000 and $145,000, respectively, plus other incentives, including
       performance bonuses and stock options. These employment agreements were
       extended on the same terms and conditions except that no new options were
       granted.

       LEGAL PROCEEDINGS - In May 1998, the Company reached agreements to
       settle law suits with a former director of the Company and the Company's
       former legal counsel. As a result of the agreements, the Company issued
       125,000 shares of its Common Stock, received a cash settlement payment
       and eliminated an accrued liability. The net effect of the settlement was
       cash proceeds to the Company of $505,000.


                                      F-17
<PAGE>   56
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 -   STOCKHOLDERS' EQUITY:

       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, 1998.

       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.

       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 in 1997.

       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 in 1997.

       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"). Interest accrues at 8.5% and is payable
       annually, at the Company's election in cash or the Company's Common
       Stock. The Company issued 1,669,634 shares of Common Stock to the
       noteholders in payment of interest from September 22, 1997 to September
       21, 1998. 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. In 1997, the Company recorded the
       intrinsic value of the beneficial conversion feature of the Senior
       Secured Convertible Notes as a charge to interest expense 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-18
<PAGE>   57
                         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 provides 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.

       In January 1999, the Notes were converted into shares of the Company's
       Common Stock (see Note 8).

       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. 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-19
<PAGE>   58
       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.

       1998 Stock Incentive Plan - The Company's Board of Directors adopted the
       1998 Stock Incentive Plan (the "1998 Plan") in December 1998. The 1998
       Plan terminates in December 2008. A total of 3,000,000 shares of common
       stock shall be reserved and available for grants. The exercise price of
       an option granted under the 1998 Plan will not be less than the fair
       market value of the Company's Common Stock on the date of grant; however,
       for any non-qualified Stock Option the option price per share of Common
       Stock, may alternatively, be fixed at any price deemed to be fair and
       reasonable, as of the date of grant. Options granted under the 1998 Plan
       generally vest one-third at the date of grant and one-third at each of
       the first two anniversary dates following the date of grant.

       Options under the 1994 Stock Plan, the Directors Plan and the 1998 Plan
       as of December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                                 1998                           1997
                                                 ----                           ----

                                                      Weighted                          Weighted
                                                       Average                           Average
                                        Options    Exercise Price       Options       Exercise Price
<S>                                    <C>             <C>             <C>             <C>     
Outstanding, beginning of year         2,909,000       $   .73         1,851,000       $   1.35
Granted                                2,103,000       $   .32         2,640,000       $   0.74
Exercised                                (98,000)      $   .55
Cancelled                               (316,000)      $   .65        (1,582,000)      $   1.50
                                       ---------       -------         ---------       --------
Outstanding, end of year               4,598,000       $   .55         2,909,000       $   0.73
                                       ---------       -------         ---------       --------
Options exercisable, end of year       2,615,000       $   .52         1,695,000       $   0.64
                                       ---------       -------         ---------       --------
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1998:

<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> 
$.28                             1,991,000               $.28               10 years         655,000                   $.28
$.58                             1,509,000               $.58                7 years       1,449,000                   $.58
$.79-$1.09                       !,098,000               $.99                9 years         511,000                   $.99
                                 ---------                                                 ---------
                                 4,598,000                                                 2,615,000
</TABLE>


                                      F-20
<PAGE>   59
                         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
       1998 and 1997 was $.25 and $.62 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, 1998 and 1997 would have been $3,726,000 ($.17
       per share) and $14,550,000 ($.81 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: 1998 - no
       dividend yield, expected volatility of 103%, risk-free interest rate of
       4.8% and expected life of 5 years; 1997 - no dividend yield, expected
       volatility of 114%, risk-free interest rate of 5.5% and expected life of
       5 years.


                                      F-21
<PAGE>   60
                         LITHIUM TECHNOLOGY CORPORATION
                                 AND SUBSIDIARY
                          (DEVELOPMENT STAGE COMPANIES)

WARRANTS -

Warrants are summarized as follows:


<TABLE>
<CAPTION>
                                                                Weighted
                                                            Average Exercise
                                        Warrants                  Price
                                        --------                  -----
<S>                                    <C>                  <C>
Outstanding, January 1, 1997           2,360,000                 $1.52
Granted in 1997                        2,330,000                 $0.85

Exercised in 1997                       (100,000)                $0.14
                                       ---------                 -----
Outstanding, December 31, 1997         4,590,000                 $0.93
                                       ---------                 -----

Exercisable, December 31, 1997         3,233,000                 $0.86
                                       ---------                 -----
</TABLE>

There was no activity with respect to warrants during 1998. The following table
summarizes information about warrants outstanding at December 31, 1998:

<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 1997, the Company issued warrants in exchange for consulting
       services 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. 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-22
<PAGE>   61
                         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 - SUBSEQUENT EVENTS AND PRO FORMA INFORMATION - In January 1999,
       the Company's Notes were converted to equity by the Lender in accordance
       with the original terms of the Note Purchase Agreement (see Note 7). As a
       result of the conversion, the Company issued 19,642,857 shares of its
       Common Stock to convert the Notes and 562,647 shares of its Common Stock
       to pay accrued interest to the conversion date. In addition, the
       Consulting Agreement with IMC expired according to its terms and all
       security interests and licenses held by IMC and the Lender were cancelled
       and terminated.

       The unaudited pro forma balance sheet presented herein reflects the
       conversion of the $5,500,000 Notes and accrued interest of $129,000 into
       $201,000 of common stock and $5,428,000 of additional paid-in-capital,
       and the write-off of related debt issue costs of $496,000 to additional
       paid-in capital.


                                      F-23