UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





ANNUAL
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934





FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





Commission
File Number 1-10446





LITHIUM
TECHNOLOGY CORPORATION


(Name
of Registrant as Specified in Its Charter)





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





5115
CAMPUS DRIVE, PLYMOUTH MEETING, PENNSYLVANIA 19462


(Address
of Principal Executive Offices) (Zip Code)





(610)
940-6090


(Registrant’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





Indicate
by checkmark if registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.  o Yes  x No





Indicate
by checkmark if registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. o Yes  x No





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





Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. x
Yes  o
No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company.  See definition of “large accelerated filer”, “accelerated
filer”, and “smaller reporting company” in Rule 12B-2 of the Exchange
Act.





Larger
      Accelerated Filer o
            
            Accelerated
      Filer oNon-Accelerated
      Filer o
            
            Small
      Reporting Company x





Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12B-2
of the Securities Act). o Yes  x No





The
aggregate market value of the voting common stock held by non-affiliates on June
30, 2008 (the last business day of our most recently completed second fiscal
quarter) was $46,282,747 using the closing price of $ 0.10 on June 30,
2008.





As of May
29, 2009, the registrant had issued and outstanding 745,924,782 shares of common
stock.





Documents
Incorporated by Reference:  None.














TABLE
OF CONTENTS







PART
      I.
              PageItem
      1.
              Description of
      Business
              2Item
      1A.
              Risk
      Factors
              9Item
      2.
              Description of
      Property
              9Item
      3.
              Legal
      Proceedings
              10Item
      4.
              Submission of Matters to a Vote
      of Security Holders
              10PART
      II.Item
      5.
              Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
              11Item
      6.
              Selected Financial
      Data
              13Item
      7.
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
              14Item
      7A.
              Quantitative and Qualitative
      Disclosures About Market Risk
              31Item
      8.
              Financial
      Statements
              31Item
      9.
              Changes in and Disagreements
      with Accountants on Accounting and Financial
      Disclosure
              31Item
      9A(T).
              Controls and
      Procedures
              31PART
      III.Item
      10.
              Directors,
      Executive Officers and Corporate Governance
              33Item
      11.
              Executive
      Compensation
              35Item
      12.
              Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters
              39Item
      13.
              Certain Relationships and
      Related Transactions, and Director Independence
              42Item
      14.
              Principal Accounting Fees and
      Services
              43PART
      IV.Item
      15.
              Exhibits, Financial Statement
      Schedules
              44














CURRENCY
AND EXCHANGE RATES





All
monetary amounts contained in this Report are, unless otherwise indicated,
expressed in U.S. Dollars. On December 31, 2008, the noon buying rate for Euros
as reported by the Federal Reserve Bank of New York was €0.817 to $1.00
U.S.





PART I





ITEM 1.
            DESCRIPTION
      OF BUSINESS





BUSINESS
OVERVIEW





Lithium
Technology Corporation (“LTC” or the “Company”) is a global manufacturer and
provider of rechargeable energy storage solutions for diverse applications. The
Company designs and builds a limited amount of large format, cylindrical
lithium-ion (Li-ion) rechargeable cells and engineers and builds lithium-ion
(Li-ion) rechargeable batteries complete with battery management systems for use
in transportation, military/national security and stationary power markets. LTC
also manufactures its own unique large format, cylindrical cells. The Company
believes that it offers cells with the highest power density of any standard
commercial Li-ion cell in the western hemisphere (most amperes or watts per
kilogram). LTC cells are also the largest Li-ion cells produced in the western
hemisphere (most energy capacity - watt-hours or amp hours). The Company’s
leading technology capabilities, manufacturing infrastructure and management
strengths enable it to provide a unique breadth of solutions in battery design,
manufacturing, marketing, and delivery. Industrial, retail and government
customers include DesignLine International, Volkswagen, Frazer Nash, Duracar,
RUF/Siemens, US Hybrid, Enersys, ArvinMeritor, ZF, NASA, Lockheed Martin,
ThyssenKrupp, scientific research facilities and the national defense agencies
of the United States, United Kingdom and Germany, among others.





The
transportation, military, and stationary power markets continue to demonstrate
that lithium-ion is the technology of choice for advanced battery applications
placing us at the threshold of a period of significant growth.





The
Company’s rechargeable lithium battery technology basis dates back to 1983.
Since 1983, LTC has evaluated a wide range of lithium battery technologies.
These evaluations have involved coating a wide variety of electrode materials,
including those for Li-ion liquid, lithium metal and lithium polymer
chemistries, onto a variety of substrates, including solid foils, expanded metal
grids and fiber webs. The Company has engaged in high-yield pilot line
operations since 1996. Over the last seven years, various manufacturing steps
were adapted to our pilot line to accommodate new techniques. These factors have
allowed us the flexibility to match the battery design to the application. In
1997, we began focusing on unique large footprint cells and large battery
assemblies comprised of large number of cells and control circuitry. LTC’s
manufacturing practices and know how combined with advanced in-house R&D
efforts and collaborative relationship with material developers (i.e.:
Süd-Chemie/Phostech, BASF, ConocoPhillips, etc.) and research institutions have
positioned the Company ahead of its competitors. LTC is not dependent on one
type of chemistry, but can adapt to new developments in any of its target
markets. As an example, when management of the Company identified the movement
of the transportation industry toward the cathode materials of iron-phosphate
toward the end of 2006, the Company geared efforts to manufacture large format
high power cells (6AH, 35AH), which are the biggest of its kind today in the
market. In February of 2008 the Company launched its product line of High Energy
iron-phosphate, which completes the Company’s product offering with regards to
iron-phosphate chemistry. In 2008 the Company sold its pilot flat cell
production activity in Plymouth Meeting and reduced its cylindrical cell
portfolio, which are manufactured at the Company’s manufacturing plant in
Nordhausen Germany. Batteries which are designed and assembled on customer
requirements are assembled both in Plymouth Meeting or the customer’s premises
for the US market or in Nordhausen for the European market. We are working to
introduce other chemistries that will add benefit to the end customers, but all
within the Li-ion field. In recent years, we have extended our experience to the
assembly of fully engineered batteries complete with battery management
systems.





GAIA
Akkumulatorenwerke GmbH (“GAIA”), our wholly owned subsidiary, began as a
venture business to commercialize proprietary, novel manufacturing technology in
1996. GAIA had developed technology to continuously extrude Li-ion polymer
electrodes and a separator containing the final electrolyte solution. This
simplifies the manufacturing process by eliminating process steps such as drying
coatings, extraction of plasticizer, and cell activation with electrolyte
solution. The result is a liquid-free process that operates at lower cost and
with minimal emission of organic solvents. GAIA’s plant is a modern facility
with state-of-the-art automated equipment for extrusion/coating, lamination,
winding, packaging and formation/testing.








2








In 2000,
after four years of development, the GAIA team of experienced industrial
managers, battery development engineers and production engineers succeeded in
advancing GAIA’s lithium polymer technology to the pilot production
stage.





LTC
merged with GAIA in 2002, where the surviving entity is LTC, and GAIA is the
wholly owned subsidiary. By the end of 2003, LTC and GAIA cooperation resulted
in the development of several new cylindrical cell designs for use in HEV
batteries and in national security applications. Additionally, LTC continued to
manufacture flat cells of the same chemistry for unique
applications.





We have
two principal centers of operation – in Plymouth Meeting, Pennsylvania and in
Nordhausen, Germany. The Plymouth Meeting office is also our corporate
headquarters. Sales into the U. S. and European markets are managed out of each
of the offices. Our strategic business plan incorporates a unified approach by
our two locations to overall business strategy, procurement, production, market
and competitive analysis, customer contact plans, marketing, public
relations/investor relations, sales, distribution, securing future joint venture
relationships for manufacturing and distribution, future resource needs, and
financial matters.  We have spent nearly $135 millionadvancing our
technologies, and we are now in a position to manufacture and sell highly
reliable, cost-effective advanced lithium-ion rechargeable batteries to our
target market segments, to further develop our technology, and to license out
our technology. All technology, research and development and all cell product
development is concentrated in Nordhausen, Germany, because the cell
manufacturing is concentrated in Nordhausen, Germany as well.





We have
financed our operations since inception primarily through equity and debt
financings, loans from shareholders, including loans from Arch Hill Capital N.V.
and related parties, loans from silent partners and bank borrowings secured by
assets. The Company’s operating plan seeks to minimize its capital requirements,
but the expansion of its production capacity to meet increasing sales and
refinement of its manufacturing process and equipment will require additional
capital. The Company expects that operating and production expenses will
increase significantly to meet increasing sales. For this reason the Company
restructured its business starting in the third quarter of 2008, by abandoning
its flat cell production activity and streamlining its cylindrical cell
production in Nordhausen Germany. Going forward the US operation will assemble
batteries to customer needs for the US market. Batteries for the EU market will
initially be assembled in Nordhausen Germany. The Company has recently entered
into a number of financing transactions and raised approximately $7 million in
net proceeds in debt and equity financing transactions from January to December
2008 (see Notes 8 and 10).  The Company is continuing to seek other
financing initiatives and needs to raise additional capital to meet its working
capital needs, for the repayment of debt and for capital expenditures. Such
capital is expected to come from the sale of securities. The Company believes
that if it raises approximately $7 million in debt and equity financings it
would have sufficient funds to meet its needs for working capital, repayment of
debt and for capital expenditures over the next twelve months and to meet
expansion plans.  See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”





No
assurance can be given that we will be successful in completing these or any
other financings at the minimum level necessary to fund our working capital or
to complete our product commercialization or at all. If we are unsuccessful in
completing these financings, we will not be able to fund our working capital
requirements, products, commercialization or execute our business plan. These
conditions raise substantial doubt about our ability to continue as a going
concern.





CORPORATE
INFORMATION





We
combined the operations of LTC with GAIA, a private lithium polymer battery
company headquartered in Nordhausen, Germany, in a share exchange in 2002. In
the share exchange Lithium Technology Corporation acquired a 100% interest in
GAIA through the acquisition of 100% of the outstanding shares of GAIA Holding
B.V., a Netherlands holding company. Subsequent to the share exchange, Arch Hill
Capital, NV controls us. Lithium Technology Corporation, GAIA Akkumulatorenwerke
GmbH, GAIA Holding B.V. and all of the subsidiaries of Lithium Technology
Corporation, GAIA Akkumulatorenwerke GmbH, GAIA Holding B.V are collectively
referred to herein as the “Company”, “we” or “us”.





Arch Hill
Capital N.V., a private company limited by shares incorporated under the laws of
the Netherlands, controls Arch Hill Ventures. In November 2004, Arch Hill
Capital and Arch Hill Ventures transferred all LTC securities owned by such
entities to Stichting Gemeenschappelijk Bezit GAIA (“Stichting GAIA”) and
Stichting Gemeenschappelijk Bezit LTC (“Stichting LTC”). Stichting LTC is
controlled by Arch Hill Capital.





LTC is a
Delaware corporation that was incorporated on December 28, 1995. LTC’s
predecessor - Lithium Technology Corporation (a Nevada corporation previously
named Hope Technologies, Inc.) - merged with and into LTC in a reincorporation
merger that became effective on February 8, 1996. The executive office of
LTC is located at 5115 Campus Drive, Plymouth Meeting,
Pennsylvania 19462, telephone number: (610) 940-6090.








3








LTC holds
100% of the outstanding shares of GAIA Holding B.V., a Netherlands holding
company. GAIA Holding is a private limited liability company incorporated under
the laws of the Netherlands on February 2, 1990, with a statutory seat at
The Hague (the Netherlands) and office address at Parkweg 2, 2585 JJ, The Hague,
the Netherlands. GAIA Holding is the legal and beneficial owner of all of the
issued and outstanding shares of Lithiontech B.V., a Netherlands company limited
by shares that was formed on February 8, 1999. Lithiontech has the legal
and beneficial ownership of all the issued and outstanding shares of DILO
Trading AG, a Switzerland company limited by shares that was formed on
September 11, 1975 and Lithiontech Licensing B.V., a Netherlands company
limited by shares that was formed on February 8, 1999. DILO Trading holds
patents for which the intellectual property was developed by DILO Trading in
collaboration with GAIA. Until 2008 GAIA held a worldwide, exclusive license for
all these patents. In 2009 GAIA will start paying for those licenses that GAIA
is using from DILO Trading. License fee structure will depend on the exclusivity
level and regional coverage that GAIA wants to obtain from DILO Trading. For
those patents that GAIA will not retain global exclusivity, DILO Trading will
look for other license partners.





GAIA
Holding is the beneficial owner of all of the issued and outstanding shares of
GAIA. Legal ownership of the outstanding shares of GAIA are held pursuant to
certain Dutch and German trust agreements by two Netherlands entities (“Nominal
Stockholder”) for the risk and account of GAIA Holding. Based on the Dutch and
the German trust agreements, the Nominal Stockholders are obliged to transfer
the legal ownership of the shares in GAIA without any further payments to GAIA
Holding to a third party designated by GAIA Holding on the demand of GAIA
Holding. Pursuant to the trust agreements, GAIA Holding has the right to vote
the shares of GAIA held by the Nominal Stockholders.





LTC and
GAIA Holding, Arch Hill Ventures and the Nominal Stockholders are parties to an
agreement which provides that without LTC’s prior written consent, GAIA Holding
may not directly or indirectly transfer or instruct any party to transfer the
legal ownership of the shares of GAIA held by the Nominal Stockholders to any
party other than to GAIA Holding and that upon LTC’s written direction, GAIA
Holding will instruct the Nominal Stockholders to transfer the legal ownership
of the shares of GAIA held by the Nominal Stockholders to GAIA Holding for no
payment. The agreement further provides that at such time as the parties
determine that there would no longer be any possible adverse tax effect as a
result of the transfer of the GAIA shares to GAIA Holding, then the legal
ownership of the GAIA shares held by the Nominal Stockholders shall be
transferred to GAIA Holding without any payment.





GAIA is a
private limited liability company organized under German law on April 4,
1996. GAIA is located at Montaniastrasse 17, D-99734 Nordhausen/Thuringia,
Germany, telephone number: 011 49 3631 616 70.





For
consolidation of the financial reports, LTC has only one direct subsidiary in
Europe, which is GAIA Holding B.V.





LTC holds
100% of the outstanding shares of Lithion Corporation, a Pennsylvania
corporation that was incorporated on June 3, 1988.





Since the
Company was not current in its SEC filings the Company’s shares ceased trading
on the OTCBB on May 31, 2006. The Company’s common stock is traded in the
over-the-counter market, and “bid” and “asked” prices in the common stock are
quoted on the OTC Pink Sheets under the symbol “LTHU”.





Information
contained on the LTC web site or GAIA web site (www.lithiumtech.com and
www.gaia-akku.com) does not constitute part of this Report.





DEVELOPMENT
AND COMMERCIALIZATION PLAN





General





We are
engaged in continuing development contract and small volume production, in both
the United States and Germany, of large format lithium-ion rechargeable
batteries used as power sources in advanced applications in the national
security, transportation and stationary power markets. We have moved from a
development and pilot-line production company to a small production business
with our lithium-ion rechargeable batteries. Lithium-ion battery acceptance and
usage continues to grow in emerging advanced applications in our target markets.
With the continuing interest in higher energy density, lighter weight, smaller
volume, longer operational life and greater cost effectiveness, lithium
batteries are the technology of choice with emerging applications in these
markets.





Our
mission is to become a leading manufacturer of large format rechargeable lithium
power solutions for advanced national security, transportation and stationary
power applications. Our business model also includes the licensing of our
technology and other collaborative efforts with third parties.








4








We
believe that our large format cylindrical cell designs provide a special
advantage for transportation, military/national security and stationary power
applications. The target markets continue to demonstrate that lithium-ion is the
technology of choice for advanced battery applications placing us at the
threshold of a period of significant growth.





Over the
past years, we have successfully focused on producing larger, more consistent
runs of standardized cylindrical cells. In the last two years, we have been
successful in increasing production, improving quality and yields and reducing
production costs. As part of the further improvements of our operational
performance we discontinued in 2008 the production of flat cells and limited the
amount of cylindrical cells to be produced going forward. We have established
several standardized modular battery assembly designs which facilitate the
construction of custom batteries. We have expanded our custom battery design
activities and we continue to receive favorable feedback from field use and
testing by our customers. During 2007 the Company started producing standard
batteries for wind generators and robots. In 2008 the Company did offer standard
batteries for large transportation applications. In 2009 the Company will focus
to grow the manufacturing volume of cells and of batteries, to improve gross
margin and yields. The biggest challenge for the Company will remain its ability
to find sufficient (working) capital to increase its manufacturing
volume.





In the
transportation market, sales of hybrid-electric vehicles (known as HEVs)
continue to increase. While sales to U.S. automakers have been slow, we have
sold several HEV prototype batteries and modules for evaluation in Europe. GAIA
is working with several European automakers and integrators to evaluate lithium
technology for hybrid electrical vehicles. In addition, we have been negotiating
with small electric vehicle (EV)/HEV manufacturers in England, Israel, the
Netherlands and Switzerland for supplying them with large volumes. For some of
them we delivered prototype batteries. Building on the success of our battery
technology and application at Penn State University, we have generated
additional orders and supplied batteries to Penn State and the University
of California - Davis for the Chevrolet Equinox competition in
2006.





During
the first quarter of 2006, GAIA delivered a lithium-ion battery for a hybrid
vehicle that is being developed by UK based automotive technology specialists
Zytek Systems as part of the Energy Saving Trust’s Ultra-Low Carbon Car
Challenge (known as ULCCC). In March 2005, Zytek was awarded grant funding from
the Energy Saving Trust for the second phase of their ULCCC project to develop a
new high efficiency, dual mode hybrid vehicle. The vehicle is based on the new
Smart forfour and will utilize a hybrid power train based on 1500cc, 3-cylinder
turbo charged diesel engine coupled to two high-efficiency, permanent-magnet
electric motors. Zytek has taken delivery of three lithium-ion batteries each
with output of 288 volts, a capacity of 7.5 amp hours (or about 2.2 kWh of
energy) and with a capability to deliver 25 kWh of power. These batteries
can be charged by either the internal combustible engine, by regenerative
breaking, or by household mains (plug-in hybrid), and will have a modest
all-electric range. LTC, together with Zytek and I+ME, have jointly developed an
improved version of the Battery Management System to include additional safety
features and to control the charging of the battery from the mains. The Battery
Management System will also communicate with the vehicles energy management
system for better efficiency and control. Additionally, GAIA delivered several
batteries to undisclosed car manufacturers.





The
Company has been awarded several contracts in the space of Hybrid Electric
Vehicles, Plug-in Hybrid Electric Vehicles and Full Electric Vehicles. These
projects vary from the delivery of prototype batteries, to small volume delivery
of the same battery to a regular delivery of batteries as part of a fixed
delivery schedule to end customers. The Company’s focus for 2009 is to increase
the programs in which the Company delivers batteries on a regular basis. The
list of customers include names like Design Line International, Frazer Nash
Research, Volkswagen, Duracar/Quicc, US Hybrid, ArvinMeritor, ZF, RUF/Siemens
and others.





As a
result of our involvement with the military market over the last three years, we
have received orders for various prototype batteries and small production runs
of both customized cells and batteries from customers. As a result of our
continuing involvement with the military market, we have interacted with
customers that are actively pursuing new battery technologies. We have been able
to apply our battery technology for use with new high tech systems including
robots, advanced weapons, launch vehicles and unmanned underwater vehicles
(known as UUVs). We have been working with some clients since 2004 for these
military applications. In 2008 the Company signed a Memorandum of Understanding
with Enersys, in which Enersys would become the exclusive global distributor of
the Company’s product for the military/national security market. For stationary
applications Enersys received a non-exclusive distributorship. Both partners are
working the details of the final agreement.





We
continue our collaborative relationships for the development of the next
generation cathode materials with Süd-Chemie/Phostech. We are a subcontractor to
a builder of unmanned underwater vehicles on a contract for Advanced Pressure
Tolerant Batteries. We plan to continue to bid on new development contracts and
commercial contracts going forward.








5








Outside
the U.S., in 2005 we entered into a development contract for large submarine
batteries from Thyssen-Krupp, the world’s largest builder of diesel-electric
submarines. In 2007 we announced jointly with ThyssenKrupp the successful
development of a 500Ah cell and a 40kWh battery module in a technical journal.
During 2007, within our operation in Germany, we delivered several large
batteries to be used in military applications, and secured additional
orders.





In the
stationary power market we supplied prototype batteries for backup control
systems for wind generators in Europe.





Products





We
manufacture and sell the GAIA®product
line of large, high power hermetically sealed rechargeable lithium-ion cells and
batteries. Our product portfolio includes large format, high power cells ranging
from 7.5 to 45 Ah, with very high discharge capabilities designed for HEV and
military applications, and high energy cells from 10 to 500 Amp-hours for
various applications. Our products include large batteries up to 600Vand
capacity of more than 40 kWh.





We
produce high power cells designed for HEVs and military applications that can
discharge hundreds of amps in times as short as a few minutes, and high capacity
cells for applications such as back-up power and remote standby installations.
Cells are manufactured in cylindrical form and employ proprietary extrusion,
design and assembly technology. We manufacture a variety of standard cells that
are assembled into custom large batteries complete with electronics (battery
management systems) and electronics to communicate with other components of the
system for performance monitoring.





We
specialize in working with the customer to engineer solutions using standardized
cells in customized configurations. Over the past year, production has increased
in Nordhausen, and we have succeeded in producing long, consistent runs of
standardized cells. We have also established a number of standardized modular
battery assembly designs which facilitate the customized construction of
batteries.





Lithium-ion
Battery Market





The
lithium-ion battery market is rapidly expanding and maturing. Large format
lithium-ion batteries are becoming widely known and accepted, resulting in
accelerating market growth. We are benefiting from this expansion of new product
applications by being able to be involved in the initial design of these
applications. This market expansion is also driving material suppliers to
develop higher energy, lower cost and safer raw materials. Increasing volumes of
production are being shifted to China and this continues to put downward
pressure on pricing. Some of our Asian competitors have introduced high power
cells and large formats which emphasizes our need to ramp up quickly and provide
custom solutions to capture market share. The Company believes that Lithium-ion
is the chemistry of choice for the growing demand for portable devices. Other
technologies, like nickel-cadmium is shrinking. Nickel-cadmium still holds a
major share for power tools, two-way radios and medical devices. This chemistry
is preferred over nickel-metal-hydride for its high durability and reliable
service but some countries will ban its use for environmental reasons. Without a
major breakthrough, the fuel cell will play an insignificant role in providing
power for future applications. Cost, size and performance are the main
obstacles. Although continuous in operation by replacing fuel capsules, the fuel
cell, as we know it today, still needs a backup battery to satisfy the power
requirements of modern portable equipment. It is believed that the
electro-chemical battery will keep its present position for some time to come as
it has it did has for the last century.





Our
Target Markets





We are
leveraging our expertise in high power and large battery assemblies to
commercialize advanced lithium batteries as a new power source in the
transportation, military/national security systems and stationary power markets
with a particular focus on the U.S. and European geographic market segments
where the customers prefer a domestic supplier. Our sales and marketing efforts
are focused on markets where we can obtain a premium by being a western
hemisphere, domestic supplier, providing a better product and better service and
co-developing custom solutions for new emerging high tech products. Our business
plan does not incorporate mass commercial markets in the immediate future from
our existing facilities. Entry into these large volume markets is projected
though the licensing of our technology and collaborative efforts with third
parties.





·
            Transportation Market.
      Transportation applications require rapid charge/discharge rates and long
      life in safe, durable high power storage for HEV and fuel cell powered
      vehicles. Military and heavy duty vehicle original equipment manufacturers
      have been early adopters of new technology and have taken the lead in the
      use of large-format lithium-ion batteries. In the past year we have seen
      growth in small niches such as all-terrain vehicles, e-bikes and other
      areas. We also see certain European cities moving towards banning gasoline
      powered vehicles in the city centers as prototype dual mode hybrid
      vehicles appear.








6











·
            National Security
      Market. National Security/Military applications require flexibility
      in design as the applications encompass a wide range of power output,
      broad operating temperatures, lower weight and thousands of recharge
      cycles. Performance is more important than price in this market. We have
      found our lithium-ion batteries displacing silver-zinc batteries. Over the
      past years, as we have provided the market with high power batteries, we
      have also seen new applications emerge in areas such as pulsed defensive
      weapons. In 2008 the Company sign a Memorandum of Understanding with
      Enersys in which they will become the exclusive global distributor of our
      large format, cylindrical cells for the national security/military
      market.





·
            Stationary Power Market.
      Stationary Power applications require high-reliability power for
      telecommunications, computers and other mission critical applications. We
      believe this presents a very large potential market. Growing dependence on
      electrical power worldwide drives the demand for high quality and readily
      available back-up power. We have also found niches developing in the
      alternative energy markets.





Strategy
for Growth





We
envision a four phase evolution to achieving our mission of being a leader in
rechargeable lithium-ion battery solutions for high power
applications:





PHASE I (from 2005),
Standard cells and Custom Engineered Batteries: Innovators and early
adopters; customers with applications where performance is more important than
cost. Such customers are willing to pay a premium for advanced high power and
high energy Li-ion rechargeable batteries, and generally require relatively
small quantities.  Sales increase through funded development contracts
and through sales to military/national security and to select automotive and
stationary power/alternative energy.





PHASE II (from 2007),
Standard cells and High-Tech Specialty Batteries: Early followers; users
requiring modest to high volumes with low to moderate price sensitivity.
Expansion of business via strategic partnerships to deepen presence in existing
markets and to gain entry into new markets.





PHASE III (from 2008),
Initial Commodity Products: OEM beta testing and engineering development
in partnership with major industry players in need for qualifying new battery
technology for large scale commercial applications; penetrate additional markets
through joint-ventures per market segment.





PHASE IV (beyond 2010), Mass
market production: The Company anticipates that the cost of large format
Li-ion batteries after 2010 will decrease such that volume scale-up to address
large volume, price-sensitive mass market applications will be viable. For these
applications, The Company anticipates to increase its production capacity
further through several joint-ventures in several countries with
industry-specific local partners and to enter into technology licensing
relationships with one or several major battery manufacturers. Revenues of phase
IV expected to be very large based expected market share.





COMPETITION





Competition
in the battery industry is, and is expected to remain, intense. The lithium-ion
battery market is rapidly expanding and maturing. Large format Lithium-ion
batteries are becoming more widely known and accepted resulting in accelerating
market growth. We are benefiting from this expansion of new product applications
by being able to be involved in the initial design of these applications rather
than competing directly with low cost mass-market 18650 cells from Asia. This
market expansion is also driving material suppliers to develop higher energy,
lower cost and safer products. Increasing volumes of production are being
shifted to China and this continues to put downward pressure on pricing. Some of
our Asian competitors have introduced high power cells and large formats which
emphasizes our need to ramp up quickly and provide custom solutions to capture
market share. Our sales and marketing efforts are focused on markets where we
can obtain a premium by providing superior, robust and reliable products and as
being a domestic supplier. Additionally, we strive to provide better service and
co-developing custom solutions for new emerging high tech products with our
clients, this has helped us to establish good reputation in the market place.
Our business plan does not incorporate mass commercial markets in the immediate
future from our existing facilities. Entry into these large volume markets is
projected though building additional manufacturing facilities and collaborative
efforts with third parties.





In our
target markets of transportation and stationary power systems, the principal
competitive technologies are currently lead acid and nickel-metal hydride. We
believe that lithium-ion batteries entered specific niches of this segment of
the rechargeable battery market, which is important to the general wide
acceptance of our products. We believe that lithium-ion batteries will dominate
in the HEV market which requires constant fast cycle charge and discharge, high
rate regenerative braking and operation over a wide range of temperatures. We
also believe that there will be certain limited niches in the stationary power
market where new products will be able to compete based upon superior
performance and better energy density, hence, less weight.








7








The
rechargeable battery industry consists of major domestic and international
companies, many of which have financial, technical, marketing, sales,
manufacturing, distribution and other resources substantially greater than ours.
We compete against companies producing lithium batteries as well as other
primary and rechargeable battery technologies. Our primary competitors in the
national security market are: Saft, Eagle-Pitcher, The Yardney Technical
Products, Inc. and Ultralife Batteries, Inc. Our primary competitors in the
Transportation Market are: Johnson Controls, Inc./Saft,  Panasonic EV
Energy Co.(Majority owned by Toyota), The Sanyo Group of Companies, Delphi
Automotive Systems,  A123 Systems, and Ener1 Group. Our primary
partner in the military/national security and stationary power market is
Enersys.





INTELLECTUAL
PROPERTY





As of
December 31, 2008, LTC and its subsidiaries hold 29 issued patents in
Europe and 15 in the United States and have 30 pending patent applications. DILO
Trading holds patents for which the intellectual property was developed by DILO
Trading in collaboration with GAIA. DILO Trading has granted GAIA the right to
use these patents exclusively. This exclusivity will be reconsidered in
2009. Although we believe that the pending patent applications will be granted,
no assurance to this effect can be given.





We also
have proprietary knowledge that is in the patent disclosure stage or that we
protect as trade secrets. Our early patents relate to materials and construction
for lightweight solid-state rechargeable batteries. Our later patents and
applications relate to improvements to the technology contained in the first
patents or to other key aspects of rechargeable lithium battery technology.
There is no current or, to our knowledge, threatened litigation regarding our
patents.





We also
rely on unpatented proprietary information to maintain and develop our
commercial position. Although we seek to protect our proprietary information,
there can be no assurance that others will not either develop independently the
same or similar information or obtain access to our proprietary information. In
addition, there can be no assurance that we would prevail if we were to
challenge intellectual property rights claimed by third parties that we believed
infringed upon our rights or that third parties will not successfully assert
infringement claims against us in the future.





Our
employees are required to enter into agreements providing for confidentiality
and assignment of rights to inventions made by them while employed by us. There
can be no assurance that these agreements will be enforceable by
us.





RAW
MATERIALS





We
purchase various raw materials for use in our batteries. Certain materials used
in our products are available only from a limited number of sources. The
industry currently has sufficient capacity to meet our needs. There is no
assurance, however, that our sources will remain available or the currently
adequate supply of raw materials will continue.





RESEARCH
AND DEVELOPMENT





We devote
substantial resources to technology development activities related to the
development of our cells. Our research has focused upon bringing existing
available technology to viable commercial production for specific applications.
The majority of our effort is directed towards product quality, process yield
improvement, identifying alternative raw materials and supplies for use in our
batteries, and cost reduction. We seek evolutionary improvements for cell and
battery design, including controls. We evaluate new materials, which are not
direct substitutes, for use in our batteries, but offer advantages such as cost,
safety and performance. One such material which results in cells that are
intrinsically safe from overcharge or short circuit is now in beta test. Such a
development is critical to the development of the automotive and consumer
markets.





EMPLOYEES





As of
December 31, 2008, we employed a total of 9 full-time employees at LTC, and 65
full-time employees at GAIA. None of our employees at LTC or GAIA are
represented by a labor union. We consider our employee relations to be
good.








8





GOVERNMENT
REGULATION, SAFETY, ENVIRONMENTAL COMPLIANCE





We are
subject to the requirements of U.S. federal, state, local and non-U.S.
environmental and occupational safety and health laws and regulations. These
include laws regulating air emissions, water discharge and waste management.
Although it is our intent to comply with all such requirements and regulations,
there can be no assurance that we are at all times in compliance. Environmental
requirements are complex, change frequently and have tended to become more
stringent over time. Accordingly, there can be no assurance that these
requirements will not change or become more stringent in the
future.





As with
any battery, our lithium-ion batteries can short when not handled properly. Due
to the high energy and power density of lithium-ion batteries, a short can cause
rapid heat buildup. Under extreme circumstances, this could conceivably cause a
fire. This is most likely to occur during the formation and/or testing phase of
our process. We incorporate safety procedures in our battery testing lab to
minimize safety risks, although there can be no assurance that an accident in
any part of our facilities where charged batteries are handled will not occur.
Any such accident could require an internal investigation by our technical
staff, causing delays in further development and manufacturing of our products,
which could adversely affect our operations and financial condition. Likewise
any battery that is abused by a customer, could, under extreme circumstances
conceivably cause a fire. We employ all appropriate design and electronic
protections. We also carry product liability insurance.





Our
manufacturing process incorporates pulverized solids, which can be toxic to
employees when allowed to become airborne in high concentrations. We have
incorporated safety controls and procedures into our pilot line manufacturing
processes designed to maximize the safety of our employees and neighbors. Any
related incident, including fire or personnel exposure to toxic substances,
could result in significant production delays or claims for damages resulting
from injuries, which could adversely affect our operations and financial
condition.





The U.S.
Department of Transportation and the International Air Transport Association
regulate the shipment of lithium-ion batteries. A permit is required to
transport both our lithium cells and custom engineered batteries from our
manufacturing facilities. No assurance can be given that we will not encounter
any difficulties in complying with future or amended U.S. Department of
Transportation or International Air Transport Association regulations or
regulations developed by other agencies such as the International Civil Aviation
Organization or International Maritime Dangerous Goods.





ITEM 1A.
            RISK
      FACTORS





Not
applicable because we are a smaller reporting company.





ITEM 2.
            DESCRIPTION
      OF PROPERTY





LTC was
leasing a 12,400 square foot facility at 5115 Campus Drive in Plymouth Meeting,
Pennsylvania pursuant to a Lease Agreement with PMP Whitemarsh Associates dated
July 22, 1994, as amended. The facility was being leased under a one-year
lease extension that commenced on April 1, 2008 and ended on March 31,
2009. The base annual rent under this lease agreement was $160,000. LTC did
not extend the lease after March 31, 2009. In August 2008 the Company signed an
Asset Purchase Agreement with Porous Power Technologies and a Sublease
Agreement with Porous Power Technologies. At the facility, we sold some of
our assets to Porous Power Technologies, the others which could be of use to the
Company at its manufacturing facility in Nordhausen, Germany were shipped from
Plymouth Meeting to Nordhausen, Germany. Porous Power Technologies was a
sub-tenant to the Company at the Company’s facility from August 2008 to March
31, 2009. Porous Power Technologies signed a lease agreement for the Plymouth
Meeting facility on April 1, 2009. The Company signed a six month sub-lease
agreement with Porous Power Technologies for total rent of $42,000 ($7,000 per
month), with the possibility to extend the sub-lease for 3 month periods. This
facility has sufficient space to meet our near-term needs in the United States.
Our corporate headquarters are located at the Plymouth Meeting, Pennsylvania
facility.





GAIA owns
approximately 150,000 square foot renovated facility in the city of Nordhausen,
Thuringia Germany. This facility has sufficient space to meet our near-term
needs in Europe and can be upgraded to increase production capacity
significantly. The facility also includes laboratory, quality control and
offices for the European sales and management teams. At this facility we have
sufficient equipment to be able to produce up to 40,000 cells per annum. By
investing limited amounts the Company will be able to increase the production
capacity. However for large volume production the facility in Nordhausen and the
chosen production concept will not be reviewed. The facility has sufficient
space to meet our near-term needs in Europe.








9








ITEM 3.
            LEGAL
      PROCEEDINGS





The
Company entered into a Financial Advisory and Investment Banking Agreement with
North Coast Securities Corporation (“North Coast”) dated February 1,
2006. Subsequent to the date of the Agreement North Coast asserted
claims for unpaid compensation under the Agreement. Counsel for North Coast have
asserted a breach of contract claim against the Company seeking warrants to
purchase 500,000 shares of Company common stock with an exercise price of $0.04
per share and $10,000 per month for the term of the Agreement for a total of
$120,000.  On December 31, 2007 a lawsuit was filed in
Montgomery County against the Company in this matter. Management asserts
that no services were rendered to satisfy any compensation. This matter has not
been resolved as of December 31, 2008. Montgomery County court has
dismissed the case with prejudice on March 30, 2009. The Company was responsible
for its own legal fees in this matter.





Andrew J.
Manning, a former employee of the Company, filed a complaint in October 2008, in
the Superior Court of New Jersey, Morris County, Law Division, against the
Company and other parties, alleging breach of contract, breach of covenant of
good faith and fair dealing, negligent misrepresentation, tortious interference
with Mr. Manning’s economic gain, retaliation, unjust enrichment, and
intentional infliction of emotional distress. The Company and management believe
that the allegations in the Complaint have no merit and the Company intends to
vigorously defend the suit. This matter has not been resolved as of the date
hereof.





From time
to time, the Company is a defendant or plaintiff in various legal actions which
arise in the normal course of business. As such the Company is required to
assess the likelihood of any adverse outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of the
provision required for these commitments and contingencies, if any, which would
be charged to earnings, is made after careful analysis of each matter. The
provision may change in the future due to new developments or changes in
circumstances. Changes in the provision could increase or decrease the Company’s
earnings in the period the changes are made. In the opinion of management, after
consultation with legal counsel, the ultimate resolution of these matters will
not have a material adverse effect on the Company’s financial condition, results
of operations or cash flows.





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





On March
25, 2009, the Company filed an Amendment to its Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, to increase
the number of authorized shares of the Company’s common stock to 3,000,000,000
shares.  The amendment of the Company’s Restated Certificate of
Incorporation to reflect the increase was approved by the Company’s Board of
Directors and the holders of a majority of the Company’s common stock in October
2008.  An information statement describing the amendment was mailed to
stockholders on February 10, 2009 and became effective on March 2,
2009.  The increase in the number of authorized shares of common stock
is needed in order for the Company to have an adequate reserve of common stock
available for issuance upon conversion of existing convertible securities and
exercise of outstanding options and warrants and to satisfy certain commitments
to issue common stock.








10





PART II





ITEM 5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





MARKET
INFORMATION





The
Company’s common stock is traded in the over-the-counter market, and “bid” and
“asked” prices in the common stock are quoted on the OTC Pink Sheets under the
symbol “LTHU”. The following table sets forth certain information with respect
to the high and low bid prices for our common stock as of the close of each of
the four calendar quarters of 2008 and 2007. Such quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may
not represent actual transactions.





Bid Prices for Common
  StockHigh
                
                Low2008Fourth
      Quarter
                
                0.107
                
                0.050Third
      Quarter
                
                0.100
                
                0.060Second
      Quarter
                
                0.090
                
                0.050First
      Quarter
                
                0.120
                
                0.0402007Fourth
      Quarter
                
                0.150
                
                0.087Third
      Quarter
                
                0.155
                
                0.085Second
      Quarter
                
                0.165
                
                0.025First
      Quarter
                
                0.050
                
                0.025





On
December 31, 2008, the last sale price quoted on the OTC Pink Sheets was $0.04.
As of December 31, 2008, there were approximately 1,040 holders of record of our
common stock.





DIVIDENDS





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








11





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER





EQUITY
COMPENSATION PLANS





The
following table sets forth information as to securities issuable upon exercise
of outstanding options and warrants and available for issuance under equity
compensations plans as of December 31, 2008.





Plan
      category
                                    Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights (a)
                                    
                                    Weighted-average
      exercise price of outstandingoptions, warrantsand rights
      (b)
                                    
                                    Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column (a)
      (c)Equity
      compensation plans approved by security holders
                                    
                                    
                                    0
                                    
                                    N/A
                                    
                                    N/AEquity
      compensation plans notapproved by security holders
                                    Options
      :1994
      Plan-
                                    
                                    29,309
                                    
                                    $5.2000
                                    
                                    0
                                    (1)Directors
      Plan-
                                    
                                    5,501
                                    
                                    $5.6000
                                    
                                    0
                                    (1)1998
      Plan-
                                    
                                    18,842
                                    
                                    $5.5600
                                    
                                    0
                                    (1)2002
      Plan
                                    
                                    35,500
                                    
                                    $3.8600
                                    
                                    308,750Warrants
      :
                                    
                                    4,532,836
                                    
                                    $0.0500
                                    
                                    0100,000
                                    
                                    $1.9100
                                    
                                    0200,000
                                    
                                    $0.0600
                                    
                                    0Total
                                    
                                    
                                    4,921,988
                                    
                                    $0.1736
                                    
                                    308,750





(1)
            Option
      Plan terminated as of December 31,
2002.





The
following stock option and incentive plans are the plans of LTC and not of GAIA.
GAIA does not have any stock option or incentive plans.





1994
STOCK INCENTIVE PLAN





LTC’s
Board of Directors adopted the 1994 Stock Incentive Plan in February 1994. The
1994 Stock Plan was terminated as of December 31, 2002. All options
outstanding under the 1994 Stock Plan were 100% vested in February 2000. Vested
options are exercisable for up to sixty months after the date of termination of
the grantees employment or association with LTC.





DIRECTORS
STOCK OPTION PLAN





In August
1995, the Board of Directors of LTC adopted the Directors Stock Option Plan. The
Directors Plan was terminated as of December 31, 2002. All options
outstanding under the Directors Plan were 100% vested in February 2000. Upon the
termination of a participants association with LTC, options granted will remain
exercisable for a period of three months or until the stated expiration of the
stock option, if earlier.








12





1998
STOCK INCENTIVE PLAN





LTC’s
Board of Directors adopted the 1998 Stock Incentive Plan in December 1998. The
1998 Plan was terminated as of December 31, 2002. All options outstanding
under the 1998 Plan were 100% vested in February 2000. Vested options are
exercisable for up to sixty months after the date of termination of the
grantee’s employment or association with LTC.





2002
STOCK INCENTIVE PLAN





LTC’s
Board of Directors adopted the 2002 Stock Incentive Plan in January 2002. The
2002 Plan terminates in 2012. A total of 350,000 shares of common stock are
reserved and available for grant. The exercise price of an option granted under
the 2002 Plan will not be less than the fair market value of LTC’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 the grant. Options granted that are
not vested will be cancelled immediately upon termination of the grantee’s
employment or association with LTC, except in certain situations such as
retirement, death or disability. Vested options are exercisable for up to sixty
months upon termination of the grantee’s employment or association with
LTC.





WARRANTS





Warrants
issued under equity compensation plans, which were outstanding as of December
31, 2008, include the following:





The
Company issued to the finder and affiliated persons in the January 2004
debenture financing warrants to purchase 4,532,836 shares of Company common
stock at exercise prices ranging from $0.034 to $0.660 per share. The warrants
expire on January 20, 2009.





The
Company issued to a consultant warrants to purchase 100,000 shares of Company
common stock with an exercise price of $1.91. The warrants expire on
June 1, 2009.





The
Company issued to a consultant 200,000 warrants to purchase shares of common
stock with an exercise price of $0.064. The warrants expired on May 6,
2009.





The
Company issued 264,739 finder warrants to purchase shares of common stock
with an exercise price of $0.187. The warrants expire on May 31,
2009.





The
Company issued 684,099 finder warrants to purchase shares of common stock
with an exercise price of $0.257. The warrants expire on August 30,
2009.





The
Company issued 20,000 placement warrants to purchase shares of common stock with
an exercise price of $0.055. The warrants expire on May 17,
2009.





SALE
OF SECURITIES DURING QUARTER ENDED DECEMBER 31, 2008





On
October 14, 2008 the Company signed a separation agreement with its Chief
Financial Officer, Amir Elbaz, and as part of this separation agreement the
Company approved the issuance of 1,500,000 shares of its Common Stock to Mr.
Elbaz. The shares have not yet been issued.





The
Company closed on debt financings under the June 2008 Financing described herein
with seven institutional investors from October 6, 2008 to December 23, 2008 for
a total of Euros 2,213,100 (approximately U.S. $2,934,307).  The
Company did not pay any underwriting discounts or commissions in connection with
the issuance of the Convertible Notes in this transaction. Issuance of the
Convertible Note was exempt from registration under Section 4(2) of the
Securities Act. The Convertible Notes were issued to accredited investors in a
private transaction without the use of any form of general solicitation or
advertising. The underlying securities are “restricted securities” subject to
applicable limitations on resale.





ITEM 6.
            SELECTED
      FINANCIAL DATA





Not
applicable because we are a smaller reporting company.








13








ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following discussion and analysis should be read together with the Consolidated
Financial Statements and the accompanying notes to the Consolidated Financial
Statements included elsewhere in this Report.





The
following discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 relating to future events or our future
performance.  The statements contained in this Report relating to
matters that are not historical facts are forward-looking statements that
involve risks and uncertainties, including, but not limited to, the successful
commercialization of our batteries, future demand for our products, general
economic conditions, government and environmental regulation, competition and
customer strategies, technological innovations in the battery industries,
changes in our business strategy or development plans, capital deployment,
business disruptions, our ability to consummate future financings and other
risks and uncertainties, certain of which are beyond our control. Additional
factors that could affect the Company’s forward-looking statements include,
among other things: the restatement of the Company’s financial statements for
the fiscal year ended December 31, 2004, and the delay in filing financial
statements and periodic reports with the Securities and Exchange Commission for
the fiscal years ended December 31, 2005 to date; negative reactions from
the Company’s stockholders, creditors, customer or employees to the results of
the review and restatement or delay in providing financial information and
periodic reports; the impact and result of any litigation (including private
litigation), or of any investigation by the Securities and Exchange Commission
or any investigation by any other governmental agency related to the Company;
the Company’s ability to manage its operations during and after the financial
statement restatement process; and the Company’s ability to successfully
implement internal controls and procedures that remediate any material weakness
in controls and ensure timely, effective and accurate financial reporting.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ materially
from those described herein as anticipated, believed, estimated or
expected.





Forward-looking
statements are based on management’s current views and assumptions and involve
known and unknown risks that could cause actual results, performance or events
to differ materially from those expressed or implied in those
statements.





GENERAL





We are
engaged in limited volume production and development contracts, in both the
United States and Germany, of large format cylindrical lithium-ion rechargeable
cells and batteries used as power sources in advanced applications in the
transportation, military/national security and stationary power markets. We have
moved from a development and pilot-line production company to a small production
business with our lithium-ion rechargeable cells and batteries. The Company will
be increasing production capacity by engaging into large volume cell delivery
and battery assembly programs.








14





LIQUIDITY
AND FINANCIAL CONDITION





GENERAL





At
December 31, 2008, cash and cash equivalents were $792,000. Total liabilities as
of December 31, 2008 were $21,897,000 consisting of current liabilities in the
aggregate amount of $15,112,000. At December 31, 2008, assets included
$2,623,000 in inventories, property and equipment, net of accumulated
depreciation, of $6,933,000, prepaid expenses and other current assets of
$173,000. As of December 31, 2008, our working capital deficit was $11,360,000
as compared to $25,444,000 at December 31, 2007. We expect to incur
substantial operating losses as we continue our commercialization efforts (For
disclosure purposes, all numbers related to the Company’s financials were
rounded to the nearest thousand).




December 31,
      2008
                                  
                                  
                                  December 31,
      2007Current debt is summarized as
      follows:Loans From Financial
      Institutions
                                  
                                  $
                                  82,000
                                  
                                  
                                  $
                                  104,000Silent Partner
      loans-TBG
                                  
                                  
                                  2,162,000
                                  
                                  
                                  
                                  2,259,000July 2007 10% Convertible
      Debenture
                                  
                                  
                                  3,247,000
                                  
                                  
                                  
                                  3,048,000Sub total
      current debt
                                  
                                  $
                                  5,491,000
                                  
                                  
                                  $
                                  5,411,000Related party
      debt:Subordinated Loans from
      Archhill
                                  
                                  
                                  3,627,000
                                  
                                  
                                  
                                  6,272,000Promissory Note to
      Archhill
                                  
                                  
                                  1,777,000
                                  
                                  
                                  
                                  60,000Sub
      total Related party debt
                                  
                                  
                                  5,404,000
                                  
                                  
                                  
                                  6,332,000Long term
      debtJune 2008, 9% Convertible
      Note,
                                  
                                  
                                  6,785,000
                                  
                                  
                                  
                                  --Warrant
      liability
                                  
                                  
                                  292,000
                                  
                                  
                                  
                                  15,550,000Total current
      debt
                                  
                                  $
                                  17,972,000
                                  
                                  
                                  $
                                  27,293,000







For more
detailed information on our debt, see Note 4 to our financial statements
contained herein.





FINANCING
TRANSACTIONS





We have
financed our operations since inception primarily through equity and debt
financings, loans from shareholders and other related parties, loans from silent
partners and bank borrowings secured by assets.  We have recently
entered into a number of financing transactions and are continuing to seek other
financing initiatives.  From
January to December 2008, we raised approximately $6.8 million in debt financing
transactions and approximately $500,000 through the exercise by a holder of 40
million outstanding warrants. We will need to raise
additional capital to meet our working capital needs and to complete our
product commercialization process. Such capital is expected to come from
the sale of securities. No assurances can be given that such financing will be
available in sufficient amounts or at all. If such financing is not available
there can be no assurance that Arch Hill Capital or any other major shareholder
will provide any further funding.





The
following is a general description of our existing debt and equity financing
transactions. See also the Notes to Consolidated Financial Statements included
with this Report.





SILENT
PARTNERSHIP LOANS-





Technology-Beteiligungs-Gesellschaft
GmbH der Deutschen Ausgleichsbank (“TBG”) has provided a partnership loan, which
bears interest at 6% per annum. The total amount payable to TBG under the
Partnership Agreements at December 31, 2008 and December 31, 2007 was
$2,162,000 and $2,259,000, respectively.  TBG is entitled to receive
an annual 12% share in profits related to its contributions under the TBG
Partnership Agreement.  The TBG Partnership Agreement provides that
should GAIA receive additional injections of capital in the course of further
financing rounds, TBG shall adjust its profit sharing to the capital ration
applicable at such time. Management believes that based upon subsequent equity
received by GAIA that the present profit sharing that TBG is entitled to under
the Agreement is approximately 4.4%. Management further believes that it is
unlikely that TBG will receive any profit sharing under the Partnership
Agreement at any time in the near future.








15








From
March 8, 2005 under the TBG Partnership Agreement, TBG is entitled to
demand a non-recurrent remuneration of 30% of the amount invested plus 6% of the
amount invested at the end of the period of participation for each year after
the expiration of the fifth full year of participation under certain
circumstances relating to the economic condition of GAIA. The TBG Partnership
Agreement terminated in December 2008.





TBG has
contacted the Company and has claimed under the terms of the agreement the
remuneration in the amount of $1,297,000 (920,000 Euros).  Management
asserts that TBG has not met the terms of the agreement and is not entitled to
the above amount.





GAIA is
negotiating with TBG to convert the TBG Partnership Agreement into a long term
loan bearing an interest rate of 6% per annum, including a repayment
schedule.





In March
2009 LTC received a request from Frankendael Participatiemaatschappij NV
(“Frankendael”) to confirm to Frankendael the outstanding amount as part of the
“Stille Beteiligung” loan agreement of March 1999 (the “Frankendael Debt”),
which would mature after 10 years. Management is of the opinion that there is no
outstanding amount due from either LTC or GAIA to Frankendael due to the
transfer of the Frankendael Debt from Frankendael to Arch Hill Ventures and the
October 2005 debt exchange between Arch Hill Ventures and the Company, as
reported in the Company’s Form 8-K dated October 21, 2005.





JULY
2007 10% CONVERTIBLE NOTE





On
July 11, 2007, debt of European subsidiaries of the Company and accrued
interest was satisfied with the payment of €6 million and the issuance of a
Company convertible note in the principal amount of U.S. $3,247,000 (the
“Convertible Note”). The Convertible Note is convertible into shares of Company
common stock at $0.10 per share. The Convertible Note accrues interest at
10% per annum and was due and payable on September 1, 2008. The
Company has the right to repay the Convertible Note at any time prior to
maturity without penalty. The Convertible Note will be secured by
90 million shares of Company common stock. As of December 31, 2008,
$3,247,000 plus accrued interest of $154,242 was outstanding under the
Convertible Note. Upon issuance the Company recorded a beneficial conversion
feature of $324,721 that is amortized over the life of the note using the
effective interest method.





As of
September 1, 2008 the Convertible Note was extended for an additional six
months, under the same conditions. The interest rate on the unpaid accrued
interest as of September 1, 2008 was increased from 10% to 12% per annum. On
March 1, 2009 the Convertible Note was extended a second time until January 1,
2010.





SUBORDINATED
LOANS FROM RELATED PARTY





GAIA has
received subordinated loans from Arch Hill, a related party, which totaled
$3,627,000 and $6,272,000 as of December 31, 2008 and December 31,
2007.  The outstanding amount as of December 31, 2008 consists out of
unpaid management fees invoiced from Arch Hill to GAIA Holding BV over the
period 2004 till 2008 and accrued interest.





The
loans bear cumulative interest at 6% per annum. Under the subordinated loan
agreement (the “Subordinated Loan Agreement”) terms, the loans can be called
when GAIA does not have negative stockholders’ equity. The loans are
subordinated to all other creditors of GAIA.





On
February 28, 2008, the Company and GAIA executed a Debt Settlement
Agreement with Arch Hill Ventures N.V., Arch Hill Real Estate N.V. and Arch Hill
Capital N.V. (collectively, the “Debtholders”). Pursuant to the Agreement
$5,773,707 of debt owed by LTC and GAIA to the Debtholders was settled. LTC
agreed to issue to Arch Hill Capital N.V. 302,714,400 shares of LTC common stock
in full and complete settlement of the Debt (the “Debt Settlement”). In the
Agreement, Arch Hill Capital agreed that for a two year period it will not,
directly or indirectly, without the prior written consent of LTC issue, offer,
agree or offer to sell, sell, grant an option for the purchase or sale of,
transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of the Shares.





As
described above, the Company agreed to issue 302,714,400 common stock shares,
but because the Company did not have enough shares of common stock authorized,
the Company issued 45,016.84 Series C Preferred Stock in lieu of issuing
112,542,100 for partial debt settlement.








16








The
Company and Arch Hill, which is approximately 64% beneficial owner of the
Company, settled $2,146,529 of Arch Hill’s outstanding debt by issuing 45,016.84
shares of Series C Preferred Stock. Because this is a related party transaction,
any losses on settlement would be recorded as an adjustment to equity with no
financial statement impact. The Company recorded the Series C Preferred Stock
issued at par value with the difference affecting additional paid in capital for
a total impact on equity of $2,146,529.





As Arch
Hill received a beneficial conversion price on the Series C Preferred Stock, a
beneficial conversion feature was recorded on the Series C. Per paragraph 5 of
EITF 98-5, the embedded beneficial conversion feature was recognized by
allocating a portion of the proceeds equal to intrinsic value of the feature to
additional paid in capital.





Per
paragraph 6 of EITF 98-5 the amount allocated to the beneficial conversion
feature is limited to the amount of the proceeds allocated to the convertible
instrument. As such, in this case, the amount of the beneficial conversion
feature was limited to $2,146,529.





Series C
Preferred Stock is convertible upon the Company’s authorization and upon the
Company having a sufficient number of shares of common stock available for
issuance. Although the Company has to approve any notice of conversion, the
holder can submit a conversion option at time of issuance of the stock. As such,
management believes it is appropriate to record the beneficial conversion
discount at time of issuance of the Series C Preferred Stock.





As the
Company has accumulated deficit and no retained earnings, the beneficial
conversion will be recorded as follows: debit and credit to additional paid in
capital for $2,146,529. The transaction will be shown as separate line item in
the statement of stockholders’ deficit and is reflected on the income statement
as a decrease of income applicable to common shareholders. The above accounting
is consistent with the Minutes of joint session with SEC of AICPA SEC regulation
Committee which took place on March 20, 2001.





A balance
of $3,627,000 remains payable to Arch Hill after the issuance of the Series C
Preferred Stock discussed above.   As the conversion price is
beneficial to Arch Hill at the time of the settlement agreement because the
conversion price was below market on that date, a beneficial conversion discount
was recorded on the remaining debt.





Based on
management’s calculations, the beneficial conversion discount was higher than
the value of the remaining note payable. As the beneficial conversion discount
cannot exceed the face value of the note, it was capped at $3,627,000. Since the
debt has no redemption date subsequent to the settlement agreement, the
beneficial conversion discount was expensed immediately at the time of the debt
settlement transaction.





On March
25, 2009 the Company filed an Amendment to its Restated Certificate of
Incorporation in which it increased the amount of authorized shares of common
stock to 3 billion. As part of this increase the Company will be able to convert
the balance of the above described debt of  $3,627,000 to Arch Hill
into 190,172,300 shares of common stock.





PROMISSORY
NOTES – RELATED PARTY





Arch Hill
Real Estate N.V. had over the period 2004 and 2005 billed an amount of $70,000
per month  as management fees to Gaia Holding BV. The amount was
unpaid as per December 31, 2008 and is included in the  promissory
notes  of $1,777,000 from Arch Hill, in which balance unpaid
management fees and unpaid interest for the years 2004-2008 are included. The
accrued interest related to the notes in 2008 was approximately
$124,000.





JUNE
2008 9% CONVERTIBLE NOTES





The
Company closed on a convertible debt financing (the “June 2008 Financing”) with
several institutional investors from June 12, 2008 to December 23, 2008 for
a total of Euros 4.80 million (approximately U.S. $6,785,000). The accrued
interest on this amount is €139,000 (approximately U.S. $204,000).The Company
issued its convertible notes (the “Convertible Notes”) to the institutional
investors (the “Lenders”) in connection with the June 2008 Financing. The
Convertible Notes are convertible at $0.10 per share into Company common stock
or any equity securities issued by the Company after the date of issuance of the
Convertible Notes. The Convertible Notes accrue interest at 9% per annum
and are due and payable on September 30, 2011 (the “Maturity Date”). All
obligations of the Company under the Convertible Notes will be secured by
security interests in all of the tangible and intangible fixed assets, including
real estate, of the Company.





In March
2009 the Board of Directors of the Company approved a reduction of the
conversion price of the Convertible Notes from $0.10 per share to
$0.07.  This reduction will apply to all holders of Convertible
Notes.





In April
2009 the Company received confirmation from one of the investors that the terms
and conditions of the June 2008 9% convertible loan will apply to the loan of
EUR 100,000 which was originally granted as a bridge loan in 2008. The amount of
EUR 100,000 is included in the balance of the June 2008 9% convertible
note.








17








Based
upon the decreased conversion price and under assumption that all note holders
would voluntary choose a conversion into shares, the principal and accrued
interest under the Convertible Notes, would convert into 102,495,482 shares of
common stock as of December 31, 2008.





Prior to
the Maturity Date, the Convertible Notes are due and payable within three months
of a “Change in Control” of the Company or a “Financing”. “Change in Control” of
the Company is defined to have occurred if, at any time following the date of
the Convertible Notes: (A) any “person” or “group” (as such terms are used
in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) (other than the shareholders of the Company
identified in (1) Amendment No. 16/6 to Schedule 13D filed with
respect to the Company on April 29, 2008 and (2) Schedule 13D
filed with respect to the Company on June 2, 2008) becomes a “beneficial
owner” (as such term is used in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company’s then outstanding securities;
(B) a change in “control” of the Company (as the term “control” is defined
in Rule 12b-2 or any successor rule promulgated under the Exchange Act) shall
have occurred; (C) the shareholders or the Board of Directors of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company’s assets; or (D) the shareholders or the Board of Directors of the
Company approve a merger or consolidation of the Company with any other company,
other than a merger or consolidation which would result in the combined voting
power of the Company’s voting securities outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation. “Financing” is
defined as the consummation by the Company or any of its subsidiaries of any
debt or equity financing in excess of $20,000,000.





The
Convertible Notes provide that in the event of the receipt by the Company or any
of its subsidiaries of any proceeds from any “Asset Sale” or
“Insurance/Condemnation Award”, the Company shall apply within thirty
(30) Business Day after the receipt thereof the net after-tax proceeds
there from to pay in cash the principal and all accrued but unpaid interest
hereunder. “Asset Sale” means any sale, transfer, conveyance or other
disposition by the Company or any of its subsidiaries of any of its property or
assets, other than the sale of inventory in the ordinary course of
business.





“Insurance/Condemnation
Award” means the receipt by the Company or any of its subsidiaries of any
proceeds received under any casualty insurance polity maintained by or for the
benefit of the Company or any of its subsidiaries or as a result of the taking
of any assets of the Company or any of its subsidiaries pursuant to the power of
eminent domain or condemnation.





OCTOBER
2005 8% DEBENTURE (CORNELL CAPITAL)





On
October 7, 2005, the Company entered into a Securities Purchase Agreement
with Cornell Capital pursuant to which the Company issued convertible debentures
in the principal amount for $3,000,000, with an original maturity date of
October 1, 2006. The debentures were convertible at the option of Cornell
Capital any time up to maturity at a conversion price equal to $0.06 per share.
The debentures had a one-year term and accrued interest at 8% per year.
Interest and principal payments on the debenture were to commence on
January 1, 2006 and end on October 1, 2006. The debenture was issued
with five-year warrants to Cornell Capital to purchase 20,000,000 shares of
common stock at the following exercise prices: 10,000,000 at $0.06 per share
5,000,000 at $0.07 per share and 5,000,000 at $0.10 per share. The terms of the
Cornell Capital debenture were subsequently amended three times as described in
our financial reports for the year 2007.





The
Company determined that the warrants issued to the debenture holder qualified
for classification as a liability under EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.” The Company measured the fair value of the warrants at issuance and
subsequently at each year end using the Black-Scholes option-pricing model with
changes in fair value recognized in earnings. The value of the warrants is
recorded as a liability with the offset in warrant expense.





On
November 9, 2006, the Board of Directors of the Company approved a third
letter of amendment with Cornell Capital effective as of October 31, 2006
(the “Third Amendment”) whereby the Company amended the following provisions of
the Secured Debenture and the Warrants. All payments of principal and accrued
interest on the Secured Debenture otherwise due on or before March 15, 2006
are due on or before March 1, 2007. The conversion price at which Cornell
Capital may convert the outstanding principal and interest due to Cornell
Capital under the Secured Debenture into shares of the Company’s common stock is
reduced to $0.0128. The Warrants are amended to provide that the exercise price
is reduced to $0.0128 per share. The balance due and owing under the Secured
Debenture as of October 31, 2006 was $3,257,096. In the Third Amendment the
Company also agreed to pay Cornell Capital a forbearance fee of
$375,000.








18








On
May 30, 2007 the Company entered into a further letter agreement with
Cornell (the “Letter Agreement”). The Letter Agreement provided for the
conversion by Cornell of $288,722 of the principal of the Debenture into
22,556,385 restricted shares of the Company and the repayment by the Company of
the balance due of principal and interest owing to Cornell under the Debenture
(after taking into account the Conversion). Upon the Conversion by Cornell and
the Repayment by the Company, no amounts were outstanding under the Debenture
and Cornell agreed to release its security interest and return 250,000,000
shares of the Company’s common stock that were pledged as security for the
Debenture. In the Letter Agreement Section 3(a)(ii)(A) of the Debenture,
which limited Cornell’s ownership of the Company’s common stock to 4.9% of the
Company’s outstanding shares, was deleted in its entirety.





The
October 2005 Debenture was settled in five tranches in May and June of 2007.
Settlement of the debenture consisted of issuance of a total of 77,228,495
shares of common stock and payment of $2,011,475 plus approximately $770,000
cash payment of accrued interest. As of December 31, 2007 the Company
reported a warrant liability for the Cornell warrants of
$5,123,000.





On
March 6, 2008 Yorkville Advisors (f/k/a Cornell Capital) exercised all
their warrants (40,000,000) into common shares of the Company at an
exercise price of $0.0128 for a total cash consideration of $512,000. The
Company revalued the Cornell warrant liability immediately prior to the exercise
and recognized a gain on the change in the fair value of the warrants in the
Statement of Operations of $2,635,000. Warrant liability immediately prior
to exercise was $2,488,000. This warrant liability was then reclassified to
common stock at par value of $400,000 for 40,000,000 newly issued common shares
and the balance of $2,600,000 to additional paid in capital.





SALE
OF SERIES C CONVERTIBLE PREFERRED STOCK





During
2007 the Company closed on the sale of Series C Preferred Stock in several
private placement transactions. The Company sold 119,481 shares of Series C
Preferred Stock at a purchase price of $150 per share for an aggregate purchase
price of $17,922,117. Each share of Series C Preferred Stock is convertible into
2,500 shares of Company common stock. The effective purchase price for each
underlying share of Company common stock in these transactions was $0.06 per
share. Additionally, the Company sold 35,868 shares of Series C Preferred Stock
for an aggregate purchase price of $9,466,875 at a purchase price of $250 per
share of Series C Preferred Stock, with an effective purchase price for each
underlying share of Company common stock of $0.10 per share in these
transactions. No additional shares of Series C Preferred stock were sold or
issued during 2008 other than shares issued in the Debt Settlement described
above.  See “Subordinated Loans From Related Party”.





Each
share of the Series C Preferred Stock is convertible at the option of the holder
thereof into 2,500 shares of Company common stock at any time following the
authorization and reservation of a sufficient number of shares of Company common
stock by all requisite action, including action by the Company’s Board of
Directors and by Company stockholders, to provide for the conversion of all
outstanding shares of Series C Preferred Stock into shares of Company common
stock. On March 25, 2009 the Company filed an Amended Certificate of
Incorporation, in which the authorized amount of common stock has been increased
from 750,000,000 to 3,000,000,000 shares of common stock.





Each
share of the Series C Preferred Stock will automatically be converted into 2,500
shares of Company common stock on June 22, 2009, which is 90 days following the
authorization and reservation of a sufficient number of shares of Company common
stock to provide for the conversion of all outstanding shares of Series C
Preferred Stock into shares of Company common stock.





The
shares of Series C Preferred Stock are entitled to vote together with the common
stock on all matters submitted to a vote of the holders of the common stock. On
all matters as to which shares of common stock or shares of Series C Preferred
Stock are entitled to vote or consent, each share of Series C Preferred Stock is
entitled to the number of votes (rounded up to the nearest whole number) that
the common stock into which it is convertible would have if such Series C
Preferred Stock had been so converted into common stock as of the record date
established for determining holders entitled to vote, or if no such record date
is established, as of the time of any vote on such matters.





In
addition to the voting rights provided above, as long as any shares of Series C
Preferred Stock are outstanding, the affirmative vote or consent of the holders
of two-thirds of the then-outstanding shares of Series C Preferred Stock, voting
as a separate class, will be required in order for the Company to:





(i)
            amend,
      alter or repeal, whether by merger, consolidation or otherwise, the terms
      of the Series C Preferred Stock or any other provision of Company Charter
      or Bylaws, in any way that adversely affects any of the powers,
      designations, preferences and relative, participating, optional and other
      special rights of the Series C Preferred
Stock;








19











(ii)
            issue
      any shares of capital stock ranking prior or superior to, or on parity
      with, the Series C Preferred Stock;
or





(iii)
            subdivide
      or otherwise change shares of Series C Preferred Stock into a different
      number of shares whether in a merger, consolidation, combination,
      recapitalization, reorganization or
otherwise.





The
Series C Preferred Stock ranks on a parity with the common stock as to any
dividends, distributions or upon liquidation, dissolution or winding up, in an
amount per share equal to the amount per share that the shares of common stock
into which such Series C Preferred Stock are convertible would have been
entitled to receive if such Series C Preferred Stock had been so converted into
common stock prior to such distribution. For issuances of Series C Preferred
Stock with beneficial conversion feature the discount is recognized upon
issuance. During 2007 $11,774,000 was recorded, and the amount is reflected as
an increase to the Net Loss to common shareholders in the Company’s statement of
operation.





The
Series C Preferred Stock has no mandatory or optional redemption rights, thus,
cannot be redeemed for cash. The Series C Preferred Stock is only convertible
into the Company’s common stock upon the Company having enough shares of common
stock authorized to issue. As the control of the conversion lies with the
Company in authorizing an increase in the number of shares of Company common
stock, the holder cannot force conversion without such increase in authorized
shares, and the stock has no redemption rights, the Series C Preferred Stock is
classified in permanent equity on the Company’s consolidated balance sheet. Upon
issuance of the Series C Convertible Preferred stock the par value ($0.01) is
credited toward the Series C Preferred Stock, and the balance is credited toward
additional paid-in capital. For issuances of convertible Preferred Stock with
beneficial conversion feature the discount is recognized upon issuance as a
debit and a credit to additional paid in capital. The beneficial conversion
discount on the Series C Preferred Stock is shown as separate line item in the
statement of stockholders’ deficit and is reflected on the income statement as a
decrease/ increase of income/loss applicable to common
shareholders.





MANAGEMENT’S
PLANS TO OVERCOME OPERATING AND


LIQUIDITY
DIFFICULTIES





Over the
past nine years, we have refocused our unique extrusion-based manufacturing
process, cell technology, large battery assembly expertise, and market
activities to concentrate on large-format, high rate battery applications. Our
commercialization efforts are focused on applying our lithium-ion rechargeable
batteries in the transportation, stationary power and national
security markets.





Our
operating plan seeks to minimize our capital requirements, but expansion of our
production capacity to meet increasing sales and refinement of our manufacturing
process and equipment will require additional capital. We expect that operating
and production expenses will increase significantly as we continue to ramp up
our production and continue our battery technology and develop, produce, sell
and license products for commercial applications. For this reason the Company
restructured its business starting in the third quarter of 2008, by abandoning
its flat cell production activity and streamlining its cylindrical cell
production in Nordhausen Germany. Going forward the US operation will assemble
batteries to customer needs for the US market. Batteries for the EU market will
initially be assembled in Nordhausen Germany.





Management
plans to use a more aggressive pricing structure through price reductions to be
able to address the market more aggressively in order to obtain larger volume
contracts. This price reduction will have an impact on the valuation of the
finished goods inventory which has been accounted for in the quarter ended
September 30, 2008. All proposals sent out prior to the third quarter were
based on the Company’s pricing structure prior to any price
reductions.





We have
recently entered into a number of financing transactions (see Notes 4 and 7 to
our financial statements). From
January to December 2008, we raised approximately $6.8 million in debt financing
transactions and approximately $500,000 through the exercise by a holder of 40
million outstanding warrants. We are continuing to seek other
financing initiatives. We need to raise additional capital to meet our working
capital needs, for the repayment of debt and for capital expenditures. Such
capital is expected to come from the sale of securities and debt financing. We
believe that if we raise approximately $7 million in debt and equity financings,
we would have sufficient funds to meet our needs for working capital, repayment
of debt and for capital expenditures over the next twelve months and to meet
expansion plans.  With these funds the Company will be able to expand
the production capacity to approximately 20MWh per annum and to expand battery
assembly activities in both the US and in Europe. After these investments the
existing production facility in Nordhausen will not be able to expand even
further. If after that the Company would like to extend the production capacity
substantially it will need substantially more new capital to build this new
facility. The ultimate location will  depend on the regional market
needs.











20





No
assurance can be given that we will be successful in completing any financings
at the minimum level necessary to fund our capital equipment, debt repayment or
working capital requirements, or at all. If we are unsuccessful in completing
these financings, we will not be able to meet our working capital, debt
repayment or capital equipment needs or execute our business plan. In such case
we will assess all available alternatives including a sale of our assets or
merger, the suspension of operations and possibly liquidation, auction,
bankruptcy, or other measures.





GOING
CONCERN MATTERS





Our
accompanying consolidated financial statements 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
inception, we have incurred substantial operating losses and expect to incur
additional operating losses over the next few years. As of December 31, 2008, we
had an accumulated deficit of approximately $137,000,000. We have financed our
operations since inception primarily through equity financings, loans from
shareholders and other related parties, loans from silent partners and bank
borrowings secured by assets. We have recently entered into a number of
financing transactions and are continuing to seek other financing initiatives.
We will need to raise additional capital to meet our working capital needs and
to complete our product commercialization process. Such capital is expected to
come from the sale of securities and debt financing. No assurances can be given
that such financing will be available in sufficient amounts or at all.
Continuation of our operations in 2009 is dependent upon obtaining such further
financing. These conditions raise substantial doubt about our 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.





RESULTS
OF OPERATIONS





YEAR
ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007





Revenues
from Product Sales





Revenues
from product sales increased to $4,167,000 or 59% in the year ended December 31,
2008 from $2,609,000 in the same period in 2007. The increase in sales revenues
is a result of our focused sales and operational performance.





As we are
still in early manufacturing stage, but by limiting the amount of different
large format cylindrical cells we are producing and selling, and by streamlining
our production facility logistically, the Company has been able to improve yield
substantially. Our mission continues to be to become a leading manufacturer of
large format cylindrical rechargeable lithium power solutions for advanced
transportation, stationary power and national security applications. We can also
license our technology and have the capability to enter into other collaborative
efforts with third parties.





In the
transportation market, the rapidly increasing cost of petroleum-based fuels
continues to accelerate the move to full electric and plug-in electric hybrid
vehicles. While we believe that other automobile manufacturers will take several
years to adopt the technology, we are continuing our development efforts through
smaller, but more focused market opportunities. Political pressure to innovate
drive train technologies towards electric and plug-in hybrid solutions has put
strong emphasis and interest in battery technology over the past several
months.





Outside
the U.S., we continue to further our agreement with ThyssenKrupp, the largest
manufacturer of non-nuclear, manned submarines to develop and manufacture
special, very large lithium-ion cells for propulsion.





Cost
of Goods Sold





Cost of
goods sold was $7,459,000 in the year ended December 31, 2008 compared to
$3,729,000 in the same period in 2007, an increase of 100%.  The
increase was due to reclassification of other costs to Cost of Goods Sold. We
continue to look for cheaper sources of raw materials and more efficient
production processes. We anticipate costs to decline substantially as we achieve
larger economies of scale.  We continue to look for cheaper sources of raw
materials and more efficient production processes. We anticipate costs to
decline substantially as we achieve larger economies of scale. Costs allocated
towards indirect costs in the past have been reclassified as direct costs
resulting in both an absolute increase of the Costs of Goods Sold, as well as a
percentage increase of these costs.








21





Engineering,
Research and Development Expenses





Engineering,
research and development expenses during the year ended December 31, 2008
decreased by 53% to $1,437,000 from $3,088,000 in the same period in 2007. This
decrease was due to completion of some R&D projects in 2008, and the
discontinuation of flat cell manufacturing and research in Plymouth
Meeting.





General
and Administrative Expenses





General
and administrative expenses during the year ended December 31, 2008
increased by $701,000 or approximately 13% to $6,188,000 from $5,487,000 in the
same period in 2007. This increase reflects our efforts to move to larger scale
manufacturing and increase financing related efforts and costs. Due to the
increased efforts we have paid consultants fees of approximately $1,500,000
during 2008. Partly this has been costs resulted out of the in April 2008 signed
Governance Agreement in which the Company agreed to hire two fulltime
consultants and $150,000 of the legal fees of the shareholder parties to the
Governance Agreement have been paid by the Company.





Sales
and Marketing Expenses





Sales and
marketing expenses were $397,000 in the year ended December 31, 2008 compared to
$444,000 in the same period in 2007. Sales and Marketing expenses represent
costs incurred from sales associates and participation in trade shows relating
to the sale of cells and or batteries.  The  amount spent on
sales and marketing costs reflects our strategic focus to increase market
recognition and the continuous of our efforts to sell products to bigger
corporations, which require more travel and sales efforts. The decrease in our
sales and marketing expense is because a higher amount of our marketing and
sales costs have been contributed towards Cost of Goods Sold, since most efforts
could be contributed to awarded sales contracts, which resulted in a decrease of
the Sales and Marketing Costs.





Depreciation
and Amortization





Depreciation
and amortization during the year ended December 31, 2008 decreased by $21,000 to
$330,000 from $351,000 in the same period in 2007 due to the fact that due to
increased revenue a larger portion of depreciation has been contributed to Cost
of Goods sold.





Interest
Expense





Interest
expense, net of interest income for the year ended December 31, 2008 decreased
by $1,124,000 or 60% to $744,000 from $1,868,000 in the same period in 2007.
Interest expense mainly represents interest accrued on the loans from the
European subsidiary debt financing, which was paid in July 2008.





Warrants
Expense (Income)





Charges
for warrants were $(9,946,000) and $10,009,000, respectively, in the years ended
December 31, 2008 and 2007. The decrease in the charge for the warrant expense
is attributed as a result of the decrease of the Company’s stock price, and the
fact that we mark the warrants to market every quarter.





Per EITF
00-19 Accounting for Derivatives Financial Instrument Indexed to, and
Potentially Settled Into, a Company’s Own Stock, warrants issued with debt are
classified as liabilities and marked to market at each reporting
period.





Charge
for Beneficial Conversion Feature





Charge
for beneficial conversion feature was $3,827,000 and $1,700,000, respectively,
in the year ended December 31, 2008 and 2007. For more information concerning
this please refer to the Notes to Financial Statement contained
herein.





Net
Loss to Common Shareholders





Net loss
to common shareholders was approximately $6,414,000 or $(0.00) per share for the
year ended December 31, 2008 as compared to a net loss to common shareholders of
$36,233,000 or $(0.03) for the year ended December 31, 2007.





Accumulated
Deficit





We have
incurred substantial operating losses and expect to incur additional operating
losses over the next several years. As of December 31, 2008, our accumulated
deficit was $137,473,000.








22








CRITICAL
ACCOUNTING POLICIES





The
Securities and Exchange Commission (“SEC”) defines “critical accounting
policies” as those that require application of management’s most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. Our significant accounting policies are described in Note 2
in the Notes to the Consolidated Financial Statements. Not all of these
significant accounting policies require management to make difficult, subjective
or complex judgments or estimates. However, the following policies could be
deemed to be critical within the SEC definition.





Revenues





We sell
large complete batteries and battery cells to various customers, mostly in the
US and Europe. Revenue is recognized as services are rendered or products are
delivered, the price to the buyer is fixed and determinable, and collectability
is reasonably assured. In 2008 revenues were concentrated for 29% with two
customers. Purchases were concentrated for 15% with one vendor.





Useful
Lives of Tangible and Intangible Assets





Depreciation
and amortization of tangible and intangible assets are based on estimates of the
useful lives of the assets. We regularly review the useful life estimates
established to determine their propriety. Changes in estimated useful lives
could result in increased depreciation or amortization expense in the period of
the change in estimate and in future periods that could materially impact our
financial condition and results of operations.





Impairment
of Long-Lived Assets





We follow
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),
 which requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. An impairment charge could materially impact our
financial condition and results of operations.





Income
Taxes





In
preparing our consolidated financial statements, we make estimates of our
current tax exposure and temporary differences resulting from timing differences
for reporting items for book and tax purposes. We recognize deferred taxes by
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for differences
between the financial statement and tax bases of assets and liabilities at
enacted statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. In consideration of our
accumulated losses and lack of historical ability to generate taxable income to
utilize our deferred tax assets, we have estimated that we will not be able to
realize any benefit from our temporary differences and have recorded a full
valuation allowance. If we become profitable in the future at levels which cause
management to conclude that it is more likely than not that we will realize all
or a portion of the net operating loss carry-forward, we would immediately
record the estimated net realized value of the deferred tax asset at that time
and would then provide for income taxes at a rate equal to our combined federal
and state effective rates, which would be approximately 40% under current tax
laws. Subsequent revisions to the estimated net realizable value of the deferred
tax asset could cause our provision for income taxes to vary significantly from
period to period.





Fair
Value of Financial Instruments





Fair
value estimates, assumptions and methods used to estimate fair value of our
financial instruments are made in accordance with the requirements of SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments”. We have
used available information to derive our estimates. However, because these
estimates are made as of a specific point in time, they are not necessarily
indicative of amounts we could realize currently. The use of different
assumptions or estimating methods may have a material effect on the estimated
fair value amounts.








23








Convertible
Securities With Beneficial Conversion Features





The
Company accounts for securities with embedded conversion features and warrant
issuances in accordance with EITF 98-5: Accounting for convertible securities
with beneficial conversion features or contingency adjustable conversion and
EITF No. 00-27: Application of issue No. 98-5 to certain convertible
instruments. The Company determines the fair values to be ascribed to detachable
warrants issued with the convertible debentures utilizing the Black-Scholes
method. Any discount derived from determining the fair value of the beneficial
conversion features is amortized using the effective interest method to
financing costs over the remaining life of the debenture. Warrants issued with
debt are classified as liabilities and marked to market at each reporting
period. For issuances of convertible Preferred Stock with beneficial conversion
feature the discount is recognized upon issuance.





RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS





In
October 2008, the FASB issued FSP No. 157-3.  “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” ("FSP
157-3”).  FSP 157-3 clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active.  FSP 157-3 was effective for the
Company on September 30, 2008 for all financial assets and liabilities
recognized or disclosed at fair value in our Consolidated Financial Statements
on a recurring basis (or at least annually).





In June
2008, the FASB issued EITF 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock.” EITF 07-5 provides
guidance in assessing whether an equity-linked financial instrument (or embedded
feature) is indexed to an entity’s own stock for purposes of determining whether
the appropriate accounting treatment falls under the scope of SFAS 133,
Accounting For Derivative Instruments and Hedging Activities” and/or
EITF 00-19, Accounting For Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock.” EITF 07-05 is effective as
of the beginning of our 2009 fiscal year. The Company is currently evaluating
the provisions of EITF 07-5 to determine the impact on the Company’s
consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162,  The Hierarchy of Generally
Accepted Accounting Principles.  The statement is intended to improve
financial reporting by identifying a consistent hierarchy for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP.  Prior to the issuance of SFAS No.
162, GAAP hierarchy was defined in the American Institute of Certified Public
Accountants (“AICPA”) Statement on Auditing Standards (SAS) No. 69, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.”  Unlike SAS No. 69, SFAS No. 162 is directed to the
entity rather than the auditor.  Statement No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board Auditing amendments to AU Section 411.  The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles, SFAS No. 162
is not expected to have any material impact on the Company’s results of
operations, financial condition or liquidity.





In May
2008, the FASB issued FASB Staff Position (FSP”) APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).” FSP APB14-1 will require us to account
separately for the liability and equity components of our convertible debt. The
debt would be recognized at the present value of its cash flows discounted using
our nonconvertible debt borrowing rate at the time of issuance. The equity
component would be recognized as the difference between the proceeds from the
issuance of the note and the fair value of the liability. The FSP also requires
accretion of the resultant debt discount over the expected life of the debt. The
FSP is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years. Entities are required to apply the FSP
retrospectively for all periods presented. The Company is currently
evaluating  the provisions of this FSP to determine the impact on the
Company’s consolidated financial statements.





Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements”.  In February 2008, the Financial Accounting Standards
Board (“FASB”) issued FASB Staff Position No. FAS 157-2.  “Effective
Date of FASB Statement No. 157”, which provides a one year deferral of the
effective date of SFAS No. 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually.  Therefore, the Company
has adopted the provisions of SFAS No. 157 with respect to its financial assets
and liabilities only.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles and enhances disclosures about fair value
measurements.  Fair value is defined under SFAS No. 157 as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date.  Valuation techniques used to measure fair value
under SFAS No. 157 must maximize the use of observable inputs and minimize the
use of unobservable inputs.  The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value.
The adoption of this Statement did not have a material impact on the Company’s
consolidated results of operations and financial condition.








24








Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings.
FAS 159 does not affect any existing accounting literature that requires certain
assets and liabilities to be carried at fair value. The adoption of this
Statement did not have a material impact on the Company’s consolidated results
of operations and financial condition.





In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 160,“Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51”  (“FAS 160”). FAS 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the retained interest and gain or loss when a subsidiary is deconsolidated. This
statement is effective for financial statements issued for fiscal years
beginning on or after December 15, 2008 with earlier adoption prohibited.
The Company is currently evaluating the impact, if any, of FAS 160 on its
operating results and financial position.





In
December 2007, the FASB issued SFAS No. 141R,“Business Combinations,”
(“SFAS 141R”) which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree. SFAS 141R also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact, if any, of SFAS 141R on
its operating results and financial position.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 ” (“FAS 161”). FAS 161 changes the disclosure requirements
for derivative instruments and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The guidance in FAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The company is currently
evaluating the provisions of FASB 161 to determine the impact on the company’s
consolidated financial statements.





RISK
FACTORS





WE ARE
SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. IF ANY OF THESE RISKS OR UNCERTAINTIES
ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.





RISKS
RELATED TO OUR BUSINESS





WE HAVE A
WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS ON DECEMBER 31,
2008 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES. We had a working
capital deficit of approximately $11,360,000 at December 31, 2008, which means
that our current liabilities exceeded our current assets on December 31, 2008.
Current assets are assets that are expected to be converted to cash within one
year and, therefore, may be used to pay current liabilities as they become
due.





WE HAVE
SUBSTANTIAL INDEBTEDNESS AND ARE HIGHLY LEVERAGED. At December 31, 2008, we had
total consolidated indebtedness of approximately $21,897,000. The level of our
indebtedness and related debt service requirements could negatively impact our
ability to obtain any necessary financing in the future for working capital,
capital expenditures or other purposes. A substantial portion of our future cash
flow from operations, if any, may be dedicated to the payment of principal and
interest on our indebtedness. Our high leverage may also limit our flexibility
to react to changes in business and may place us at a competitive disadvantage
to less highly leveraged competitors. In addition, creditors who remain unpaid
may initiate collection proceedings, which could hamper our operations due to
our short term cash needs or the effect on our assets subject to
debt.








25








WE HAVE A
HISTORY OF OPERATING LOSSES AND HAVE BEEN UNPROFITABLE SINCE INCEPTION. We
incurred net losses from inception to December 31, 2008, including approximately
$6,414,000 of net loss to common shareholders in the year ended December 31,
2008. We expect to incur substantial additional operating losses in the future.
During the year ended December 31, 2008 and 2007, we generated revenues from
batteries sales and development contracts in the amounts of $4,167,000 and
$2,609,000, respectively. We cannot assure you that we will continue to generate
revenues from operations or achieve profitability in the near future or at all.
These conditions raise substantial doubt about our ability to continue as a
going concern.





WE NEED
SIGNIFICANT FINANCING FOR WORKING CAPITAL AND TO COMPLETE OUR PRODUCT
COMMERCIALIZATION. We have recently entered into a number of financing
transactions and are continuing to seek other financing initiatives. We will
need to raise additional capital to meet our working capital needs and to
complete our product commercialization process. Such capital is expected to come
from the sale of securities and debt financing. We believe that if we raise
approximately $7 million in debt and equity financings, we would have sufficient
funds to meet our needs for working capital, repayment of debt and for capital
expenditures over the next twelve months and to meet expansion plans. If we do
not raise such additional capital, we will assess all available alternatives
including a sale of our assets or merger, the suspension of operations and
possibly liquidation, auction, bankruptcy, or other measures.





We have
not entered into any definitive agreements related to a new financing. No
assurance can be given that we will be successful in completing these or any
other financings at the minimum level necessary to fund our working capital or
to complete our product commercialization or at all. If we are unsuccessful in
completing these financings, we will not be able to fund our working capital
requirements, products, commercialization or execute our business plan. These
conditions raise substantial doubt about our ability to continue as a going
concern.





WE FACE
RISKS RELATED TO OUR ACCOUNTING RESTATEMENTS AND LATE SEC FILINGS. As previously
disclosed, the Company’s prior auditors, BDO Seidman, LLP (“BDO Seidman”),
notified the Company in connection with the preparation of the Company’s audited
financial statements for the year ended December 31, 2005 that BDO Seidman
was evaluating all of the debt financings conducted by the Company during 2004,
2005 and 2006 as a result of evolving interpretations of the accounting rules
relating to various convertible debt instruments, which include embedded
derivatives. On October 17, 2006, BDO Seidman had not yet finished such
evaluation and the Company terminated BDO Seidman. BDO Seidman notified the
Company that as a result of the October 17, 2006 termination of BDO
Seidman, the above described debt financing evaluation could not be completed by
BDO Seidman and therefore the Company’s previously issued audited financial
statements and independent auditors report of BDO Seidman for the year ended
December 31, 2004, and all quarterly financial statements for periods after
December 31, 2004, should not be relied upon. Further, BDO Seidman notified
the Company after their dismissal on October 17, 2006 that BDO Seidman
would not be reissuing their auditor’s opinion on the Company’s financial
statements for the year ended December 31, 2004.





Effective
February 23, 2007 Amper, Politziner & Mattia LLP (“AP&M”) was
appointed by the Board of Directors of the Company to serve as the Company’s
independent registered public accounting firm to audit the Company’s financial
statements for the years ended December 31, 2006, 2005 and
2004.





On
November 21, 2007, the Company filed a Form 10KSB/A which included audited
financial statements for the years ended December 31, 2004 and 2005 audited
by AP&M. On November 21, 2007 we publicly announced that we had
re-evaluated our accounting for our convertible instruments and our intangible
assets in previously reported financial statements. Following consultation with
our independent accountants, AP&M, we restated our financial statements for
the year ended December 31, 2004. On February 8, 2008, the Company
filed a Form 10KSB which included audited financial statements for the year
ended December 31, 2006. On May 15, 2008, the Company filed a Form
10KSB which included audited financial statements for the year ended
December 31, 2007.





The
restatement of these financial statements and delay in filing financial
statements and periodic reports with the SEC for the fiscal years ending
December 31, 2005 to date may lead to litigation claims and/or regulatory
proceedings against us. The defense of any such claims or proceedings may cause
the diversion of management’s attention and resources, and we may be required to
pay damages if any such claims or proceedings are not resolved in our favor. Any
litigation or regulatory proceeding, even if resolved in our favor, could cause
us to incur significant legal and other expenses. We also may have difficulty
raising equity capital or obtaining other financing as a result of the
restatements and delay in filing financial statements and periodic reports with
the SEC and we may not be able to effectuate our current business strategy.
Moreover, we may be the subject of negative publicity focusing on the financial
statement errors and resulting restatement and delay in filing financial
statements and periodic reports with the SEC and negative reactions from our
stockholders, creditors or others with whom we do business. The occurrence of
any of the foregoing could harm our business and reputation and cause the price
of our securities to decline.








26








IF WE
FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL AND DISCLOSURE CONTROLS, WE MAY
NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD. AS A
RESULT, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR
FINANCIAL REPORTING WHICH WOULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR
SECURITIES. Effective internal and disclosure controls are necessary for us to
provide reliable financial reports and effectively prevent fraud and to operate
successfully as a public company. If we cannot provide reliable financial
reports or prevent fraud, our reputation and operating results would be harmed.
We have in the past discovered, and may in the future discover, areas of our
disclosure and internal controls that need improvement. As a result after a
review of our December 31, 2004 through 2008 operating results, we
identified certain deficiencies in some of our disclosure controls and
procedures.





We have
undertaken improvements to our internal controls in an effort to remediate these
deficiencies. We cannot be certain that our efforts to improve our internal and
disclosure controls will be successful or that we will be able to maintain
adequate controls over our financial processes and reporting in the future. Any
failure to develop or maintain effective controls or difficulties encountered in
their implementation or other effective improvement of our internal and
disclosure controls could harm our operating results or cause us to fail to meet
our reporting obligations. If we are unable to adequately establish or improve
our internal controls over financial reporting, our external auditors may not be
able to issue an unqualified opinion on the effectiveness of our controls.
Ineffective internal and disclosure controls could also cause investors to lose
confidence in our reported financial information, which would likely have a
negative effect on the trading price of our securities.





WE FACE
RISKS RELATED TO LATE TAX FILINGS. The Company filed its mandatory tax filings
for the 2005 to 2007 fiscal years with the US Internal Revenue Service
and  the Commonwealth of Pennsylvania Tax Department beyond their
extended due dates.  Management believes that the potential liability
to the Company is not significant since the Company reported significant losses
for the respective years. Moreover, to the best of management’s knowledge, the
Company does not believe that not filing tax returns late is a violation of any
of its contractual covenants.





THERE MAY
BE NO REMAINING PROCEEDS FOR STOCKHOLDERS IN THE EVENT OF OUR DISSOLUTION. In
the event of our dissolution, the proceeds from the liquidation of our assets,
if any, will be first used to satisfy the claims of creditors.  All
obligations of the Company under the June 2008 9% Convertible Notes will be
secured by security interests in all of the tangible and intangible fixed
assets, including real estate, of the Company.  Only after all
outstanding debts are satisfied will the remaining proceeds, if any, be
distributed to our stockholders. Accordingly, the ability of any investor to
recover all or any portion of an investment in our securities under such
circumstances will depend on the amount of funds so realized and claims to be
satisfied there from.





WE HAVE
NOT PRODUCED SIGNIFICANT COMMERCIAL QUANTITIES OF LITHIUM-ION BATTERIES. Our
construction of large batteries for military, transportation and stationary
power applications requires customized, tailored solutions for each application.
At present, we operate a small production line that produces limited quantities
of standardized cells. We have taken these cells and assembled them into various
prototype batteries. We have had repeat orders for the same batteries, but to be
successful, we must ultimately produce our lithium-ion batteries (i) in
reasonable commercial quantities; (ii) at competitive costs;
(iii) with appropriate performance characteristics; and (iv) with low
failure rates. We currently have no high volume manufacturing capability or
experience in large scale manufacturing of either our standard cells or our
customized batteries. We have limited experience in automated cell assembly and
packaging technology. We cannot give any assurance that we will be able to
produce commercial lithium-ion batteries on a timely basis, at an acceptable
cost or in the necessary commercial specifications or quantities.





COMPETITION
IN THE RECHARGEABLE BATTERY INDUSTRY IS INTENSE. The rechargeable battery
industry consists of major domestic and international companies, many of which
have financial, technical, manufacturing, distribution, marketing, sales and
other resources substantially greater than ours. We compete against companies
producing lithium batteries as well as other primary and rechargeable battery
technologies. Further, our competitors may introduce emerging technologies or
refine existing technologies which could compete with our products and have a
significant negative impact on our business and financial
condition.








27








EXPANDING
MARKET ACCEPTANCE OF OUR BATTERIES IS UNCERTAIN. While initial market acceptance
of our cells and our custom engineered batteries has been good, we cannot
guarantee going forward that we will be able to achieve market acceptance in
larger more standardized markets. Market acceptance will depend on a number of
factors, including:





·
            our
      ability to keep production costs low. Other advanced battery chemistries
      may be produced at a reduced cost. As we work to reduce the cost of our
      batteries, we expect that manufacturers of other advanced battery
      chemistries will do the same.





·
            lithium-ion
      battery life in various commercial applications. While initial testing is
      promising, it is difficult to predict the life of lithium-ion batteries in
      high rate applications. If our batteries do not last long enough when used
      for high rate applications, it is unlikely that there will be market
      acceptance of our battery products.





·
            timely
      introductions of new products. Our introduction of new products will be
      subject to the inherent risks of unforeseen problems and delays. Delays in
      product availability may negatively affect their market
      acceptance.





OUR
BATTERY TECHNOLOGY MAY BECOME OBSOLETE. The market for our rechargeable
batteries is characterized by changing technology and evolving industry
standards, often resulting in product obsolescence or short product lifecycles.
Changes in end-user requirements and new products introductions and enhancements
by our competitors may also render our technology obsolete. Our success will
depend upon our ability to introduce in a timely manner products whose
performance will match or better our competitors’ products. There can be no
assurance that our competitors will not develop technologies or products that
would render our technology and products obsolete or less
marketable.





OUR
BUSINESS STRATEGY DEPENDS ON THE CONTINUED GROWTH OF THE LITHIUM BATTERY
INDUSTRY. We would be adversely affected if sales of rechargeable lithium
batteries do not continue to grow. The growth in sales of rechargeable lithium
batteries may be inhibited for any number of reasons, including:





·
            competition
      from other battery chemistries;





·
            the
      failure of large-scale commercial production of lithium battery powered
      hybrid electric vehicles;





·
            a
      significant downturn in military activities requiring rechargeable power
      sources; or





·
            the
      failure of the markets to accept the use of lithium batteries in
      large-scale applications, such as energy
  storage.





WE MAY
NOT BE ABLE TO ACCOMMODATE INCREASED DEMAND FOR OUR BATTERIES. Rapid growth of
our business may significantly strain our management, operations and technical
resources. If we are successful in obtaining orders for commercial production of
our batteries, we will be required to deliver large volumes of quality products
to our customers on a timely basis and at a reasonable cost. We cannot assure
you that we will obtain commercial scale orders for our batteries or that we
will be able to satisfy commercial scale production requirements on a timely and
cost-effective basis. As our business grows, we will also be required to
continue to improve our operations, management and financial systems and
controls. Our failure to manage our growth effectively could have an adverse
effect on our ability to produce products and meet the demands of our
customers.





CERTAIN
COMPONENTS OF OUR BATTERIES POSE SAFETY RISKS THAT MAY CAUSE ACCIDENTS IN OUR
FACILITIES AND IN THE USE OF OUR PRODUCTS. As with any battery, our lithium-ion
batteries can short circuit when not handled properly. Due to the high energy
and power density of lithium-ion batteries, a short circuit can cause rapid heat
buildup. Under extreme circumstances, this could cause a fire. This is most
likely to occur during the formation or testing phase of our process. While we
incorporate safety procedures and specific safety testing in our battery testing
lab to minimize safety risks, we cannot assure you that an accident in any part
of our facilities where charged batteries are handled will not occur. Any such
accident could result in injury to our employees or damage to our facility and
would require an internal investigation by our technical staff. Likewise any
battery that is abused by a customer, could, under extreme circumstances
conceivably cause a fire. We employ all appropriate design and electronic
protections. We also carry the appropriate liability insurance. Any such
injuries, damages or investigations could lead to liability to our company,
cause delays in manufacturing of our product and/or adversely affect market
acceptance which could adversely affect our operations and financial
condition.





Our
manufacturing process incorporates pulverized solids, which can be toxic to
employees when allowed to become airborne in high concentrations. We have
incorporated safety controls and procedures into our pilot line manufacturing
processes designed to maximize the safety of our employees and neighbors. Any
related incident, including fire or personnel exposure to toxic substances,
could result in significant production delays or claims for damages resulting
from injuries, which could adversely affect our operations and financial
condition.








28








WE MUST
COMPLY WITH EXTENSIVE REGULATIONS GOVERNING SHIPMENT OF OUR BATTERIES AND
OPERATION OF OUR FACILITY. We are subject to the U.S. Department of
Transportation (USDOT) and the International Transport Association (IATA)
regulations regarding shipment of lithium-ion batteries. Due to the size of our
batteries, a permit is required to transport our lithium batteries from our
manufacturing facility. Although similar batteries with other chemistries are
routinely shipped from manufacturing facilities to all parts of the world, we
cannot assure you that we will not encounter any difficulties in obtaining
shipment permits or in complying with new or amended regulations regarding
shipment of our products.





WE COULD
INCUR SIGNIFICANT COSTS FOR VIOLATIONS OF OR TO COMPLY WITH APPLICABLE
ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY LAWS AND REGULATIONS. National,
state, local and foreign laws impose various environmental controls on the
manufacture, storage, use and disposal of lithium batteries and of certain
chemicals used in the manufacture of lithium batteries. Although we believe that
our operations are in substantial compliance with current environmental
regulations and that there are no environmental conditions that will require
material expenditures for clean-up at our facility or at facilities to which we
have sent waste for disposal, we cannot assure you that new laws or regulations
or changes in existing laws or regulations will not impose costly compliance
requirements on us or otherwise subject us to future liabilities. Moreover,
foreign, state and local governments may enact additional restrictions relating
to the disposal of lithium batteries used by our customers which could require
us to respond to those restrictions or could negatively affect the demand for
those batteries.





As with
all employers in the U.S., we must comply with U.S. Occupational and Safety
Administration (OSHA) regulations designed for the protection of employees while
at the workplace. We are also subject to U.S. Environmental Protection Agency
(USEPA) and Pennsylvania Department of Environmental Protection Agency (PADEP)
regulations designed to protect the environment from contaminants that can be
discharged from manufacturing facilities. We cannot assure you that we will not
incur significant expenses or encounter any difficulties in complying with OSHA,
USEPA, and PADEP regulations.





OUR
BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL. Our
success depends in large part upon the services of a number of key employees and
senior management. If we lose the services of one or more of our key employees
or senior management, it could have a significant negative impact on our
business.





WE CANNOT
GUARANTEE THE PROTECTION OF OUR TECHNOLOGY OR PREVENT THE DEVELOPMENT OF SIMILAR
TECHNOLOGY BY OUR COMPETITORS. Our success depends largely on the knowledge,
ability, experience and technological expertise of our employees rather than on
the legal protection of our patents and other proprietary rights. We claim
proprietary rights in various unpatented technologies, know-how, trade secrets
and trademarks relating to our products and manufacturing processes. We cannot
guarantee the adequacy of protection these claims afford, or that our
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to our technology. We protect our
proprietary rights in our products and operations through contractual
obligations, including nondisclosure agreements, with our employees and
consultants. We cannot guarantee the adequacy of protection these contractual
measures afford.





We have
patents issued and patent applications pending in the U.S., Europe and
elsewhere. We cannot assure you (i) that patents will be issued from any
pending applications, (ii) that the claims allowed under any patents will
be sufficiently broad to protect our technology, (iii) that any patents
issued to us will not be challenged, invalidated or circumvented, or
(iv) as to the adequacy of protection any patents or patent applications
afford.





If we are
found to be infringing upon third party patents, we cannot assure you that we
will be able to obtain licenses with respect to such patents on acceptable
terms, if at all. Our failure to obtain necessary licenses could lead to costly
attempts to design around such patents or delay or even foreclose the
development, manufacture or sale of our products.





WE MAY
FACE LIABILITY IF OUR BATTERIES FAIL TO FUNCTION PROPERLY. We maintain liability
insurance coverage that we believe is sufficient to protect us against potential
claims. We cannot assure you that our liability insurance will continue to be
available to us on its current terms or at all, or that such liability insurance
will be sufficient to cover any claim or claims.








29





RISKS
RELATED TO OUR SHARES





FUTURE
SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY
TO RAISE FUNDS IN NEW STOCK OFFERINGS. Sales of our common stock in the public
market could lower the market price of our common stock. Sales may also make it
more difficult for us to sell equity securities or equity-related securities in
the future at a time and price that our management deems acceptable or at all.
As of December 31, 2008, we had 745,924,782 shares of common stock outstanding,
without taking into account shares issuable upon exercise of outstanding Series
B Convertible Preferred Stock, Series C Convertible Preferred Stock, convertible
debentures, warrants or options.





THE
MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE, WHICH COULD CAUSE THE VALUE OF
AN INVESTMENT IN OUR STOCK TO DECLINE. The market price of shares of our common
stock has been and is likely to continue to be highly volatile. Factors that may
have a significant effect on the market price of our common stock include the
following:





·
            sales
      of large numbers of shares of our common stocks in the open market,
      including shares issuable at fluctuating conversion price at a discount to
      the market price of our common
stock;





·
            our
      operating results;





·
            our
      need for additional financing;





·
            announcements
      of technological innovations or new commercial products by us or our
      competitors;





·
            developments
      in our patent or other proprietary rights or our competitors’
      developments;





·
            our
      relationships with current or future collaborative
    partners;





·
            governmental
      regulation;





·
            and
      factors and events beyond our
control.





In
addition, our common stock has been relatively thinly traded. Thinly traded
common stock can be more volatile than common stock trading in an active public
market. We cannot predict the extent to which an active public market for the
common stock will develop.





In
addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating
performance.





As a
result of potential stock price volatility, investors may be unable to resell
their shares of our common stock at or above the cost of their purchase prices.
In addition, companies that have experienced volatility in the market price of
their stock have been the subject of securities class action litigation. If we
were to become the subject of securities class action litigation, this could
result in substantial costs, a diversion of our management’s attention and
resources and harm to our business and financial condition.





OUR
COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY. There has been a limited public market for our common stock and
there can be no assurance that an active trading market for our common stock
will develop. An absence of an active trading market could adversely affect our
shareholders” ability to sell our common stock in short time periods, or
possibly at all. Our common stock has experienced, and is likely to experience
in the future, significant price and volume fluctuations that could adversely
affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to fluctuate
substantially.








30








OUR
COMMON STOCK IS DEEMED TO BE “PENNY STOCK,” WHICH MAY MAKE IT MORE DIFFICULT FOR
INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS. Our common stock
is deemed to be “penny stock” as that term is defined in Rule 3a51-11
promulgated under the Securities Exchange Act of 1934. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline. Penny stocks are stocks:





·
            with
      a price of less than $5.00 per
share;





·
            that
      are not traded on a “recognized” national
  exchange;





·
            whose
      prices are not quoted on the Nasdaq automated quotation system
      (Nasdaq-listed stocks must still have a price of not less than $5.00 per
      share); or





·
            in
      issuers with net tangible assets less than $2.0 million (if the issuer has
      been in continuous operation for at least three years) or $5.0 million (if
      in continuous operation for less than three years), or with average
      revenues of less than $6.0 million for the last three
    years.





Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks, Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor.








ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable because we are a smaller reporting company.




ITEM 8.
            FINANCIAL
      STATEMENTS





The
consolidated balance sheets as of December 31, 2008 and 2007, and our
consolidated statements of operations, changes in stockholders’ deficit and
comprehensive loss and cash flows for each of the years in the two year period
ended December 31, 2008 and 2007, together with the report of Amper,
Politziner & Mattia LLP, independent registered public accountants, are
included at the end of this report. Reference is made to the “Index to
Consolidated Financial Statements” on page F-l.





ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





Not
Applicable.





ITEM 9A.
            CONTROLS
      AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We have
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and acting Chief Financial
Officer of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, our Chief Executive Officer and acting Chief Financial Officer
concluded that our disclosure controls and procedures were not effective in
timely alerting them to material information relating to the Company (including
our subsidiary) required to be included in our periodic Securities and Exchange
Commission filings.  Additionally we do not have the ability to
summarize and report information which we are required to file in periodic
reports under the Securities Exchange Act of 1934 within the time periods
specified in the Commission’s rules. Changes are being made in our internal
controls and other factors that will improve our controls subsequent to the date
of their evaluation.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a
process designated by, or under the supervision of, our principal executive and
principal financial officers and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:





·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and disposition of our
    assets;








31











·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and





·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control – Integrated
Framework.





Based on
our assessment, management believes that, as of December 31, 2008, our internal
control over financial reporting was not effective due to the
following:





(1)
            certain
      audit adjustments were made to such financial statements after being
      identified by Amper, Politziner and Mattia LLP(2)
            certain
      disclosures required by GAAP were incorporated in such financial
      statements and the notes thereto after being identified by Amper,
      Politziner and Mattia LLP(3)
            certain
      account analyses were either not accurately completed and /or not
      completed in a timely manner.(4)
            inability
      to summarize and report financial information on a timely
      basis(5)
            the
      Company’s Form 10Q report for the period ended September 30, 2008 was
      filed with the Securities and Exchange Commission prior to the review and
      approval of the document by the Company’s Audit Committee and Independent
      Registered Accounting Firm.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.





Changes
in Internal Control Over Financial Reporting





As
described above, the Company’s management assessed the effectiveness of the
Company’s internal control over financial reporting and identified material
weaknesses in internal control over financial reporting as of December 31,
2008.





As for
the material weakness identified at December 31, 2008, management has
implemented the following remedial actions:





·
            Continues
      to change internal guidance and procedures, as
  needed.





·
            Hired
      and continues to search for additional personnel with the requisite
      knowledge and/or adequate training to control and monitor the effects of
      accounting principles and disclosures on the financial reporting of the
      Company.





Other
than the remedial actions described above, management believes that no change in
internal control over financial reporting occurred during 2008 that materially
affected, or is reasonably likely to materially affect, such internal control
over financial reporting.





We are
continuing to actively assess and evaluate our most critical business and
accounting processes to identify further enhancements and improvement
opportunities.








32





PART III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
following table sets forth information concerning LTC’s directors and executive
officers and the directors and executive officers of GAIA Holding and GAIA as of
December 31, 2008:





Name
                    
                    Age
                    
                    PositionFred
      A. Mulder
                    
                    67
                    
                    Co-Chairman
      of the Board of LTCChristiaan
      A. van den Berg
                    
                    59
                    
                    Co-Chairman
      of the Board of LTCChief Executive Officer and Executive Director of GAIA
      Holding Supervisory Director of GAIATheo
      M. Kremers
                    
                    55
                    
                    Chief
      Executive Officer of LTCManaging Director of GAIA Director of
      LTCDr.
      Klaus Brandt
                    
                    60
                    
                    Chief
      Technology Officer of LTCManaging Director of GAIA Director of
      LTCDr.
      Andrew J. Manning
                    
                    61
                    
                    Director
      of LTCFrits
      Obers
                    
                    52
                    
                    Managing
      Director of GAIAKenneth
      Rudisuela
                    
                    55
                    
                    Chief
      Operating Officer





Fred A.
Mulder was appointed as a Director and co-Chairman of LTC on April
28, 2008. Mr Mulder has extensive experience in the investment market and
in managing companies. He currently is Chairman of the Board of LBI
International AB, Chairman of the Investment Advisory Committee of Greenfield
Capital Partners N.V. (private equity) and a Member of the Supervisory Board of
W.P. Stewart & Co., Ltd, Aleri Lab, Inc. (Chicago/London), WAYSIS B.V., Duos
Technology, Inc. (USA) and Force India (Formula 1 Team).





Christiaan
A. van den Berg was appointed as a Director and co-Chairman of LTC on April 28,
2008. He has been the Chairman of LTC since May 18, 2007 and the Chief Executive
Officer of Arch Hill Capital since May 2007. Mr. van den Berg is the Chief
Executive Officer and Executive Director of GAIA Holding and a member of the
supervisory Board of Directors of GAIA. Mr. van den Berg holds
directorships in a number of Dutch and American private companies.





Theo M.
Kremers was appointed as a Director of LTC on April 28, 2008  and
appointed the Chief Executive Officer of LTC on June 26, 2008 and appointed
Managing Director of GAIA in November 3, 2008. Mr. Kremers has been the founder
and Chief Executive Officer and President of MARC Global Holdings Inc.,
headquartered in Dulles, VA. MARC Global Holdings has been acquired from TRW,
Reston VA in 2000 as part of a buy-out. MARC Global Holdings Inc. has been
one of the premier global suppliers of Supply Chain Execution Software
solutions, with operating locations in the United States, the Netherlands,
Germany and Australia. After his resignation in 2004, he became Managing Partner
of a Dutch Private Equity fund, with as major focus area intelligent solutions
and applications for the (deregulated) utility market. Mr. Kremers holds a
masters degree in Electrical Engineering of the Technical University Eindhoven.
Mr. Kremers holds directorship in a number of Dutch and American private
companies.





Dr. Klaus
Brandt, Ph.D. has been serving as the Chief Technology Officer of LTC since June
26, 2008 and acted as Chief Executive Officer of LTC from May 18, 2007
until June 26, 2008. Previously, Dr. Brandt served as the Executive Vice
President of LTC from June 20, 2005. Dr. Brandt was appointed the
Managing Director of GAIA on April 1, 2005 and has served as a director of
LTC since September 27, 2006. Prior to joining GAIA and LTC Dr. Brandt
served as a member of the Executive Board (Vorstand) that was responsible for
Technology and Manufacturing at the German based company








33








Ionity AG
(January 2, 2003 to March 15, 2005). From January 2, 1997 to
December 31, 2002 Dr. Brandt was employed by The Gillette Company
(U.S.A.) which is the parent company of Duracell, the world’s largest
manufacturer of alkaline batteries and other primary batteries for the consumer
market. His tenure with Gillette entailed serving as Director of Advanced
Materials and Processes of Duracell Worldwide Technology Center (January 2, 1997
to June 30, 2000) as well as Director of Portable Power, Gillette Advanced
Technologies (July 1, 2000 to December 31, 2002). In 1992 Dr. Brandt
joined Varta Battery AG (Germany), the leading battery manufacturer in Europe,
where he served as Manager of Lithium Batteries at the Varta Research and
Development center until 1996. While at Varta he was responsible for research
and development of lithium-ion batteries for both portable and electric vehicle
applications. From 1978 to 1992 Dr. Brandt worked for Moli Energy Limited
(Canada) which was a start-up company that grew out of the research efforts at
the University of British Columbia and was the first company to commercialize
rechargeable Lithium batteries in 1986. From 1977 to 1978 he served as a
Doctoral Fellow in the Physics department at the University of British Columbia
(Vancouver, Canada). Prior to this Dr. Brandt received his Doctorate of
Natural Science from the Technical University of Munich in 1977 where he wrote
his thesis on solid state physics. He received a physics diploma from the
University of Goettingen in 1973 where he wrote his thesis on theoretical
physics.





Dr.
Andrew J. Manning, Ph.D. served as the President and Chief Operating Officer of
LTC from June 20, 2005 until October 1, 2007. Dr. Manning has
served as a director of LTC since November 23, 2004. Previously
Dr. Manning served as the Executive Vice President of Operations of LTC
from January 2001 to January 2002, Chief Operating Officer of LTC from January
2002 to November 26, 2002 and Chief Technical Officer of LTC from January
2003. Dr. Manning joined LTC in 1994 as Director of Process Development,
and was Vice President of Manufacturing from October 1999 to January
2001.  Dr. Manning left the employ of the Company effective May 15,
2008.





Frits
Obers has been serving as a consultant to LTC since April 28, 2009 and serves as
Managing Director of GAIA since November 3, 2008. Mr. Obers has extensive
experience in managing turn arounds of distressed venture
companies.  Mr. Obers worked for the Ministry of transport and headed
the Department of vehicle registration. Thereafter Mr. Obers (co)founded two
consultancy companies and was for 15 years a strategic advisor for environmental
issues. Also Mr. Obers was the CEO of a Telecom Company.





Kenneth
Rudisuela was appointed Chief Operating Officer of the Company on
October 1, 2007. Mr. Ken Rudisuela has worked in the advanced battery
and ultracapacitor industry for the last 24 years involved in the areas of
development, manufacturing and commercialization. He is an early member and
eventual General Manager of Moli Energy; a pioneer in the development of
rechargeable lithium technology. Subsequently, he became a founding member of
Ashurst Technologies responsible for all energy storage development efforts of
three Institutes of Science in Kiev and the parent operations in Canada. In 1995
Mr. Rudisuela went on to establish Arcotronics Technology Services, a
global company in developing and marketing of advanced battery manufacturing
processes and machinery. Since 2005 Mr. Rudisuela also served the
co-founder and CEO of UNCAP LLC, a developer of ultracapacitor technology. Mr.
Rudisuela has a Bachelor of Applied Science Degree from the University of
Waterloo. The Company concluded in January 2009 to cancel Mr. Rudisuela’s
employment agreement without cause and therefore Mr. Rudisuela will leave the
Company on July 31, 2009.





Our
directors hold office until the next annual meeting of our stockholders and
until their successors have been duly elected and qualified.





ADVISOR
TO BOARD





Mr. Ben
van Schaik has been appointed as an Advisor to the Board of Directors of the
Company as of December 1, 2008. Mr. van Schaik has been asked to serve as
an Advisor on account of his long standing experience in the automotive sector,
as well as his extensive network within the industry. As the former Chief
Executive Officer of DaimlerChrysler in Brazil, Mr. van Schaik gained a
stellar reputation for his vision and managerial qualities. Currently,
Mr. van Schaik is a Member of the Supervisory Board of Groeneveled Groep
and Member of the Supervisory Board of Heineken Nederland.





AUDIT
AND EXECUTIVE COMMITTEES





Effective
April 28, 2008, the Board of Directors appointed Theo M.M. Kremers, Fred J.
Mulder and Christiaan A. van den Berg as members of the Audit Committee. On June
26, 2008, Theo M.M. Kremers was appointed as Chief Executive Officer and
resigned as a member of the Audit Committee.   Effective April
28, 2009, the Board of Directors appointed Klaus Brandt, Theo M.M. Kremers, Fred
J. Mulder and Christiaan A. van den Berg as members of the Executive
Committee.





No member
of the audit committee is a “financial expert”.








34








SECTION
16(a) BENEFICIAL OWNERSHIP COMPLIANCE





Section 16(a)
of the Securities Exchange Act of 1934 requires our officers and directors, and
persons who beneficially own, directly or indirectly, more than ten percent
(10%) of the registered class of our equity securities to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Officers,
directors and greater than ten percent (10%) beneficial owners are required
by SEC regulation to furnish us with copies of all Forms 3, 4 and 5 they file.
No Forms 3, 4 and 5 relating to our common stock were filed late during
2008.





CODE
OF ETHICS





We have
adopted a Code of Ethics that applies to our Chief Executive Officer and Chief
Financial and Accounting Officers.





ITEM 11.
            EXECUTIVE
      COMPENSATION





SUMMARY
COMPENSATION TABLE





The
following summary compensation table sets forth all compensation awarded to,
earned by, or paid to the named executive officers paid by us during the fiscal
years ended December 31, 2008, 2007 and 2006 in all capacities for the accounts
of our Chief Executive Officer (CEO), Chief Financial Officer (CFO) and the
three highest paid executive officers during the fiscal year ended December 31,
2008:





Name
      and Principal Position
                          Year
                          Salary
                          
                          Bonus
      $
                          Stock
      Awards($) (a)
                          
                          Option
      Awards($) (b)
                          Non-Equity
      Incentive Plan Compen-sation ($)
                          Nonqualified
      Deferred Compen-sation Earnings  ($)
                          All
      other Compen-sation
                            ($)
      (c)
                          
                          Total
      ($)Theo
      Kremers Chief Executive Officer of LTC, Managing Director of GAIA (1)
      (2)
                          2008
                          $245,066
                          (7)Klaus
      Brandt Chief Technology Officer of LTC, Managing Director of GAIA
      (3)
                          2008
                          $309,796
                          (8)
                          
                          
                          
                          
                          
                          
                          
                          
                          $309,7962007
                          $249,024
                          (9)
                          
                          $100,000
                          (10)
                          
                          
                          
                          
                          
                          $349,0242006
                          $240,185
                          (11)
                          
                          
                          
                          
                          
                          
                          
                          
                          $240,185Frits
      Obers Managing Director of GAIA(1)
                          2008
                          $245,066
                          (7)
                          
                          
                          
                          
                          
                          
                          
                          
                          $245,066Ken
      Rudisuela, Chief Operating Officer (4)
                          2008
                          $200,000
                          (12)
                          
                          
                          
                          
                          
                          
                          
                          
                          $200,0002007
                          $
      50,000
                          (13)
                          
                          
                          
                          
                          
                          
                          
                          
                          $
      50,000Amir
      Elbaz Chief Financial Officer, Executive Vice President and Treasurer of
      LTC (5)
                          2008
                          $206,250
                          (14)
                          
                          $83,000
                          (15)
                          
                          
                          
                          $225,000
                          (16)
                          $514,2502007
                          $225,000
                          (17)
                          
                          $100,000
                          (18)
                          
                          
                          
                          
                          
                          $325,0002006
                          $181,875
                          (19)
                          
                          
                          
                          
                          
                          
                          
                          
                          $181,875Andrew
      J. Manning (6)
                          2008
                          $126,041
                          (20)
                          
                          
                          
                          
                          
                          
                          
                          
                          $126,0412007
                          $275,000
                          (21)
                          
                          
                          
                          
                          
                          
                          
                          
                          $275,0002006
                          $349,902
                          (22)
                          
                          
                          
                          
                          
                          
                          
                          
                          $349,902





(a)
            Reflects
      dollar amount expensed by the Company during applicable fiscal year for
      financial statement reporting purposes pursuant to FAS 123R. FAS 123R
      requires the Company to determine the overall value of the shares as of
      the date of grant based upon the Black-Scholes method of valuation, and to
      then expense that value over the service period over which the shares
      become exercisable (vest). As a general rule, for time-in-service-based
      shares, the Company will immediately expense any share or portion thereof
      which is vested upon grant, while expensing the balance on a pro rata
      basis over the remaining vesting term of the share. For a description FAS
      123 R and the assumptions used in determining the value of the shares
      under the Black-Scholes model of valuation, see the notes to the financial
      statements included with this Form
10-K.








35








(b)
            Reflects
      dollar amount expensed by the Company during applicable fiscal year for
      financial statement reporting purposes pursuant to FAS 123R. FAS 123R
      requires the Company to determine the overall value of the stock awards as
      of the date of grant based upon the Black-Scholes method of valuation, and
      to then expense that value over the service period over which the stock
      awards become exercisable (vest). As a general rule, for
      time-in-service-based stock awards, the Company will immediately expense
      any stock awards or portion thereof which is vested upon grant, while
      expensing the balance on a pro rata basis over the remaining vesting term
      of the stock awards. For a description FAS 123 R and the assumptions used
      in determining the value of the stock awards under the Black-Scholes model
      of valuation, see the notes to the financial statements included with this
      Form 10-K.





(c)
            Includes
      all other compensation not reported in the preceding columns, including
      (i) perquisites and other personal benefits, or property, unless the
      aggregate amount of such compensation is less than $10,000; (ii) any
      “gross-ups” or other amounts reimbursed during the fiscal year for the
      payment of taxes; (iii) discounts from market price with respect to
      securities purchased from the Company except to the extent available
      generally to all security holders or to all salaried employees;
      (iv) any amounts paid or accrued in connection with any termination
      (including without limitation through retirement, resignation, severance
      or constructive termination, including change of responsibilities) or
      change in control; (v) contributions to vested and unvested defined
      contribution plans; (vi) any insurance premiums paid by, or on behalf
      of, the Company relating to life insurance for the benefit of the named
      executive officer; and (vii) any dividends or other earnings paid on
      stock or option awards that are not factored into the grant date fair
      value required to be reported in a preceding
  column.








(1)
            Theo
      Kremers and Frits Obers signed a consulting agreement with the Company on
      April 28, 2008 as part of the Governance Agreement between the Company,
      Arch Hill and a group of individual
investors





(2)
            Theo
      Kremers has been serving as the Chief Executive Officer of LTC since June
      26, 2008.





(3)
            Klaus
      Brandt has been serving as the Chief Technology Officer of LTC since June
      26, 2008 and prior thereto as Chief Executive Officer of LTC from
      May 18, 2007 to June 26, 2008, Executive Vice President of LTC from
      June 20, 2005 to May 18, 2007 and Managing Director of GAIA
      since April 1, 2005.





(4)
            Ken
      Rudisuela has been serving as Chief Operating Officer of LTC since October
      1, 2007 and will be leaving LTC on July 31,
  2009.





(5)
            Amir
      Elbaz left the Company on October 15, 2008 as part of a jointly
      agreed severance agreement.  Prior thereto he had been serving
      as Chief Financial Officer of LTC since October 11, 2006 and prior
      thereto as Executive Vice President of Corporate Communications and
      Business Development since August 2006. Amir Elbaz served as a
      consultant to the Company overseeing external and internal communications,
      public relations and marketing, as well as business ventures pursuant to a
      consulting agreement with the Company from October 2005 until
      October 10, 2006.





(6)
            Dr.
      Andrew J. Manning, Ph.D. served as the President and Chief Operating
      Officer of LTC from June 20, 2005 until October 1, 2007. Dr.
      Manning left the employ of the Company effective May 15,
    2008.





(7)
            Consists
      of a consulting fee paid by LTC in Euros (166,560) and converted to
      dollar value based on the average conversion rate for
  2008.





(8)
            Consists
      of salary paid by GAIA in Euros (210,553) and converted to dollar
      value based on the average conversion rate for
  2008.





(9)
            Consists
      of salary paid by GAIA in Euros (181,992) and converted to dollar
      value based on the average conversion rate for
  2007.





(10)
              On
      November 27, 2007 the Executive Committee of the Board of Directors
      approved of the issuance of 1,000,000 shares to Klaus Brandt. This grant
      was given to the executive of the Company as a performance bonus for the
      development of the Company during
2007.








36








(11)
            Consists
      of salary paid by GAIA in Euros (182,000) and converted to dollar
      value based on a conversion rate prevailing on December 29,
      2006.





(12)
            Consists
      of salary paid by LTC of $200,000 in
2008.





(13)
            Consists
      of salary paid by LTC of $50,000 in
2007.





(14)
            Consists
      of monthly salary paid by LTC till Nov 30, 2008 of $18,750, and thus a
      salary paid in 2008 of $206,250.





(15)
            On
      October 14, 2008 the Board of Directors approved a severance agreement
      with Mr. Amir Elbaz and part of the agreement the issuance of 1,500,000
      shares to Amir Elbaz.





(16)
            On
      October 14, 2008 the Board of Directors approved a severance agreement
      with Mr. Amir Elbaz and part of the agreement a severance payment of one
      year’s salary of $225,000.





(17)
            Consists
      of salary paid by LTC of $225,000 in
2007





(18)
            On
      November 27, 2007 the Executive Committee of the Board of Directors
      approved of the issuance of 1,000,000 shares to Amir Elbaz. This grant was
      given to the executive of the Company as a performance bonus for the
      development of the Company during
2007.





(19)
            Consists
      of consulting payments from January 1, 2006-October 10, 2006,
      and salary from October 11, 2006 to December 31,
      2006.





(20)
            Base
      salary for 2008 was $275,000.





(21)
            Base
      salary for 2007 was $275,000.





(22)
            This
      amount includes payment for deferred salary from 2004 and 2005 in the
      amount of $74,902.  Base salary for the year was
      $275,000.





STOCK
GRANT TO EXECUTIVES





In 2008
no stock grants were given to management.  As part of the separation
agreement between Mr. Amir and the Company, Mr. Elbaz is entitled to 1,500,000
of common shares of the Company. The Company recognized a compensation expense
of $83,000 for the year ended December 31, 2008.





COMPENSATION
OF DIRECTORS





Directors
receive no cash compensation for serving on our Board of Directors. Certain
directors who serve as consultants to the Company did receive consulting fees as
described below.





EMPLOYMENT
AND CONSULTING AGREEMENTS





On
December 5, 2006, the Company entered into an employment agreement with
Amir Elbaz who served as the Chief Financial Officer and Treasurer of the
Company from October 11, 2006 until October 14, 2008. The employment
agreement provided for a three year term commencing on December 5, 2006,
under which Mr. Elbaz received a base annual salary of
$225,000.  The employment agreement provides that if Mr. Elbaz is
terminated by the Company other than for cause, Mr. Elbaz will be entitled
to receive his base salary for a period equal to the lesser of 12 months from
the date of termination or the remaining term of the employment
agreement.  On October 14, 2008 the Board of Directors approved a
severance agreement with Mr. Amir Elbaz and part of the agreement the issuance
of 1,500,000 shares to Amir Elbaz and the payment of one year’s salary of
$225,000.





On June
26, 2008, Dr. Klaus Brandt was appointed as the Chief Technology Officer of
Lithium Technology Corporation by the Company’s Board of Directors. Prior to
this Dr. Klaus Brandt had been serving as Chief Executive Officer since May 18,
2007. Prior to this Dr. Klaus Brandt had been serving as a Director of the
Company since September 27, 2006 and as an Executive Vice President since
June 2005. Additionally, Dr. Brandt has been serving as the Managing
Director of the Company’s subsidiary, GAIA, since April 2005. Pursuant to
the employment agreement with Dr. Brandt, which expired on December 31,
2007 he served as the Managing Director of GAIA. On January 1, 2008,
Dr. Klaus Brandt entered into a new employment contract with GAIA for a
three year term. Under this employment agreement, Dr. Brandt will receive a
base annual salary of €200,000 and such additional compensation that is approved
by the Board of Directors of the Company. As Chief Technology Officer his base
annual salary has not been changed.








37








On
October 1, 2007, the Company entered into an employment agreement with
Kenneth Rudisuela to serve as the Chief Operating Officer of the Company. The
employment agreement provides for a three year term commencing on
October 1, 2007 and a base annual salary of $200,000. If Mr. Rudisuela
is terminated by the Company other than for cause, Mr. Rudisuela will be
entitled to receive his base salary for a period equal to the lesser of 6 months
from the date of termination or the remaining term of the employment
agreement. The Company concluded in January 2009 to cancel Mr. Rudisuela’s
employment agreement without cause and therefore Mr. Rudisuela will leave the
Company on July 31, 2009.





On
April 28, 2008 the Company entered into a consulting agreement with each of
Christiaan A. van den Berg (the “Van Den Berg Consulting Agreement”), Fred J.
Mulder (the “Mulder Consulting Agreement”), OUIDA Management Consultancy B.V.
(the “OUIDA Consulting Agreement”), and Romule B.V. (the “Romule Consulting
Agreement”) (collectively, the “Consulting Agreements”).





Each of
the Consulting Agreements has a term of one year and may be terminated on 60
days written notice. Each Consulting Agreement provides that the Consultant will
consult with the directors, officers and employees of the Company concerning
matters relating to the management and organization of the Company, its
financial policies, the terms and conditions of employment of the Company’s
employees, and generally any matter arising out of the business affairs of the
Company.





The
Mulder Consulting Agreement with Fred J. Mulder, a director of the Company,
provides for Mr. Mulder to spend approximately 32 hours per month in
fulfilling his obligations under the Consulting Agreement and the payment by the
Company of a monthly fee of U.S. $4,167.





The Van
Den Berg Consulting Agreement with Christiaan A. van den Berg, the Chief
Executive of Arch Hill Capital and the Foundation and the co-chairman of the
Board of the Company, provides for Mr. van den Berg to spend approximately
32 hours per month in fulfilling his obligations under the Consulting Agreement
and the payment by the Company of a monthly fee of US $4,167.





The
Romule Consulting Agreement provides for Frits Obers, an employee of Romule
B.V., to spend approximately 160 hours per month in fulfilling his obligations
under the Consulting Agreement and the payment by the Company of a monthly fee
of Euros 20,820.





The OUIDA
Consulting Agreement provides for Theo Kremers, an employee of OUIDA Management
Consultancy B.V. and a director and Chief Executive Officer of the Company,
to spend approximately 160 hours per month in fulfilling his obligations under
the Consulting Agreement and the payment by the Company of a monthly fee of
Euros 20,820.





In 2009 a
consulting fee of $705,000 was claimed by Fidessa Asset Management for services
rendered over the period April 1, 2008 until December 31, 2008. There is no
signed agreement between LTC and Fidessa Asset Management S.A. regarding these
consulting services and the Company is disputing the amount.





For the
period October 1, 2006 until April 1, 2008 an agreement for advisory services by
Fidessa Asset Management S.A. was signed by LTC. For these services Fidessa
Asset Management S.A. received fees of $450,000 in 2007 and $300,000 in 2008.
Additionally Fidessa Asset Management S.A. is entitled to receive an equity
compensation of 16,666,667 of common shares. As of December 31, 2008, these
shares have not been delivered.





Arch Hill
Real Estate N.V. had over the period 2004 and 2005 billed an amount of $70,000
per month  as management fees to Gaia Holding BV. The amount was
unpaid as per December 31, 2008 and is included in the  promissory
notes  of $1,777,000 from Arch Hill, in which balance unpaid
management fees and unpaid interest for the years 2004-2008 are included. The
accrued interest related to the notes in 2008 was approximately
$124,000.








38








ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





The
following table sets forth as of December 31, 2008, the number and percentage of
outstanding shares of our common stock beneficially owned by (i) any person or
group owning more than 5% of each class of voting securities, (ii) each
director, (iii) each executive officer named in the Summary Compensation Table
in the section entitled “Executive Compensation” and (iv) all such executive
officers and directors as a group.





Beneficial
      OwnershipName of Owner
            Number of Shares
            Percentage of Total (1)5% or Greater StockholdersArch
      Hill Capital, NV (2)
            868,799,711
            (19)
            60.95
            %Stichting
      Gemeenschappelijk Bezit LTC (2)
            525,366,785
            (20)
            46.79
            %Eduard
      Hagens (3)
            100,000,000
            (21)
            12.56
            %Bauke
      Bakhuizen (4) **
            36,214,000
            (22)
            4.63
            %Cornelis
      J.M. Borst (5) **
            47,500,000
            (23)
            6.15
            %Bover
      B.V. (5) **
            14,000,000
            (24)
            1.84
            %Benno
      J.G. de Leeuw (6) **
            5,329,700
            (25)
            0.71
            %Benno
      de Leeuw Holding B.V. (6) **
            105,000
            (26)
            0.01
            %Robert
      L.O. du Chatenier (7) **
            34,193,350
            (27)
            4.39
            %Chadmin
      B.V. (7) **
            16,916,675
            (28)
            2.22
            %J.F.G.M.
      Heerschap (8) **
            61,250,000
            (29)
            7.59
            %Cornelis
      L.M. Meeuwis (9) **
            36,306,675
            (30)
            4.66
            %Dreamweaver
      B.V. (9) **
            33,916,675
            (31)
            4.35
            %Johannes
      C.L. Mol (10) **
            50,591,675
            (32)
            6.42
            %Green
      Desert NV (10) **
            50,591,675
            (33)
            6.42
            %Walter
      J.M. van der Mee (11) **
            4,875,000
            (34)
            0.65
            %Directors and Named Executive
      OfficersChristiaan
      A. van den Berg (2)(14)
            0
            
            0Klaus
      Brandt (12)(15)
            1,000,000
            (35)
            *Kenneth
      Rudisuela (13)(16)
            0
            
            0Amir
      Elbaz
            2,694,805
            (36)
            *Andrew
      J. Manning (15)
            0
            
            *Theo
      M.M. Kremers (13)(15)(17)
            0
            
            0Fred
      Mulder (13)(14)
            0
            
            0Frits
      Obers (12) (18)
            0
            
            0All
      Named Executive Officers and Directors as a Group (8
    persons)
            3,694,805
            (37)
            *




*
              Less
      than 1%




**
            Based
      on Schedule 13 D dated April 28, 2008 reporting that the stockholders may
      be deemed a group as defined in Rule 13d-5(b) under the Exchange
      Act.





(1)
            The
      percentage of class calculation for each person or entity is based on the
      number of shares of Common Stock outstanding as of December 31, 2008
      (745,924,782) plus the number of shares of Common Stock issuable to
      the person or entity upon exercise of convertible securities held by such
      person or entity.





(2)
            Address:
      Parkweg 2, NL - Beech Avenue 129A, 1119 RB Schiphol-Rijk,
      Netherlands





(3)
            Address:
      Narcissenlaan 13, 2970 Schilde,
Belgium.





(4)
            Address:  Torenlaan
      19, 3742 CR Baarn, The Netherlands





(5)
            Address:  Boksheide
      20, 5521 PM Eersel, The Netherlands





(6)
            Address:  Leunweg
      13, 5221 BC Engelen, The
Netherlands





(7)
            Address:  Valkeveenselaan
      60, 1411 GT Naarden, The
Netherlands





(8)
            Address:  Heverstraat
      8, 6088 BH Roggel, The Netherlands





(9)
            Address:  Ulvenhoutselaan
      2, 4835 MC Breda, The Netherlands





(10)
            Address:  Kaya
      WFG Mensing 14, P.O. Box 3192, Willemstad, Curacao, Netherlands
      Antilles








39








(11)
            Address:  Oude
      Huizerweg 17, 1261 BD Blaricum, The
Netherlands





(12)
            Address:  c/o
      GAIA, MontaniastraBe 17, D-99734 Nordhausen,
  Germany





(13)
            Address:  c/o
      Lithium Technology Corporation, 5115 Campus Drive, Plymouth Meeting,
      PA





(14)
            Co-Chairman
      of the Company.





(15)
            Director
      of Company.





(16)
            Chief
      Operating Officer.





(17)
            Chief
      Executive Officer.





(18)
            Managing
      Director of GAIA.





(19)
            Consists
      of (i) 40,718,526 shares of Common Stock held by Arch Hill Capital, (ii)
      112,542,100 shares of Common Stock issuable upon conversion of 45,016.84
      shares of Series C Preferred Stock held by Arch Hill Capital; (iii)
      190,172,300 shares of Common Stock to be delivered by the Company in
      connection with the February 2008 Debt Settlement, and (iv) all of the
      securities (the “Stichting LTC Shares”) owned by Stichting
      Gemeenschappelijk Bezit LTC (“Stichting LTC”). See Note (20). The
      Stichting LTC Shares are owned directly by Stichting LTC, with Stichting
      LTC having the power to vote and dispose of the Stichting LTC Shares. Arch
      Hill Capital controls Stichting LTC and also has the power to vote and
      dispose of the Stichting LTC Shares. Accordingly, Arch Hill Capital is the
      beneficial owner of the Stichting LTC Shares.  Cees Borst has
      the right to receive 1,500,000 shares of Common Stock from Stichting
      LTC.  These shares are included in the number of shares
      beneficially owned by Stichting
LTC.





(20)
            Consists
      of 148,568,784 shares of Common Stock, 264,103,114 shares issuable upon
      conversion of Series B Preferred Stock, 28,200,000 shares issuable upon
      conversion of Series C Preferred Stock, 1,500,000 shares issuable upon
      exercise of $2.00 warrants, 9,889,625 shares issuable upon conversion of
      $2.40 warrants, 17,050,000 shares issuable upon conversion of 125% A
      Warrants, 17,050,000 shares issuable upon conversion of 150% A Warrants,
      18,400,000 shares issuable upon conversion of 125% B Warrants, 18,400,000
      shares issuable upon conversion of 150% B Warrants, and 2,205,262 shares
      issuable upon exercise of $.38
warrants.





(21)
            Consists
      of 50,000,000 shares of Common Stock and 50,000,000 shares of Common Stock
      issuable upon conversion of Series C Preferred
  Stock.





(22)
            Mr.
      Bakhuizen beneficially owns 36,214,000 shares of Common Stock issuable
      upon conversion of 14,485.6 shares of Series C Preferred
      Stock.





(23)
            Mr.
      Borst beneficially owned 47,500,000 shares of Common Stock, consisting of
      (i) 20,750,000 shares of Common Stock, (ii) 11,250,000 shares of
      Common Stock issuable upon conversion of 4,500 shares of Series C
      Preferred Stock, (iii) 14,000,000 shares of Common Stock issuable
      upon conversion of 5,600 shares of Series C Preferred Stock (these
      shares are held by Bover -- see Note 24) and (iv) the right to receive
      1,500,000 shares of Common Stock from Arch Hill Capital.  See
      Note 19.





(24)
            Bover
      B.V. beneficially owned 14,000,000 shares of Common Stock issuable upon
      conversion of 5,600 shares of Series C Preferred
  Stock.





(25)
            Benno
      De Leeuw beneficially owns 5,329,700 shares of Common Stock, consisting of
      (i) 105,000 shares of Common Stock (these shares are held by De Leeuw
      Holding -- see Note 26) and (ii) 5,224,700 shares of Common Stock issuable
      upon conversion of 2089.88 shares of Series C Preferred
    Stock.





(26)
            De
      Leeuw Holding beneficially owns 105,000 shares of Common
      Stock.





(27)
            Mr.
      Du Chatenier beneficially owns 34,193,350 shares of Common Stock,
      consisting of (i) 610,000 shares of Common Stock, (ii) 250,000
      shares of Common Stock (these shares are held by Chadmin), (iii)
      11,983,525 shares of Common Stock issuable upon conversion of 4,793.41
      shares of Series C Preferred Stock, (iv) 4,683,150 shares of Common Stock
      issuable upon conversion of 1,873.26 shares of Series C Preferred Stock
      (these shares are registered in the name of Du Chatenier and beneficially
      owned by the minor children of Du Chatenier) and (v) 16,666,675 shares of
      Common Stock issuable upon conversion of 6,666.67 shares of Series C
      Preferred Stock (these shares are held by Chadmin -- see Note
      28).





(28)
            Chadmin
      B.V. beneficially owns 16,916,675 shares of Common Stock, consisting of
      (i) 250,000 shares of Common Stock and (ii) 16,666,675 shares of Common
      Stock issuable upon conversion of 6,666.67 shares of Series C Preferred
      Stock.








40





(29)
            Mr.
      Heerschap beneficially owns 61,250,000 shares of Common Stock issuable
      upon conversion of 11,068.99 shares of Series C Preferred
      Stock.





(30)
            Mr.
      Meeuwis beneficially owns 36,306,675 shares of Common Stock, consisting of
      (i) 2,390,000 shares of Common Stock, (ii) 27,672,475 shares of Common
      Stock issuable upon conversion of 11,068.99 shares of Series C Preferred
      Stock (these shares are held by Dreamweaver) and (iii) 6,244,200 shares of
      Common Stock issuable upon conversion of 2,497.68 shares of Series C
      Preferred Stock (these shares are registered in the name of Dreamweaver
      and beneficially owned by the minor children of Meeuwis -- see Note
      31.





(31)
            Dreamweaver
      B.V. beneficially owns 33,916,675 shares of Common Stock, consisting of
      (i) 27,672,475 shares of Common Stock issuable upon conversion of
      11,068.99 shares of Series C Preferred Stock and (ii) 6,244,200 shares of
      Common Stock issuable upon conversion of 2497.68 shares of Series C
      Preferred Stock.





(32)
            Mr.
      Mol beneficially owns 50,591,675 shares of Common Stock, consisting of (i)
      8,925,000 shares of Common Stock (these shares are held by Green Desert --
      see Note 33) and (ii) 41,666,675 shares of Common Stock issuable upon
      conversion of 16,666.67 shares of Series C Preferred Stock (these shares
      are held by Green Desert -- see Note
33).





(33)
            Green
      Desert NV beneficially owned 50,591,675 shares of Common Stock, consisting
      of (i) 8,925,000 shares of Common Stock and (ii) 41,666,675 shares of
      Common Stock issuable upon conversion of 16,666.67 shares of Series C
      Preferred Stock.





(34)
            Mr.
      Van der Mee beneficially owns 4,875,000 shares of Common Stock, consisting
      of (i) 1,500,000 shares of Common Stock and (ii) 3,375,000 shares of
      Common Stock issuable upon conversion of 1,350 shares of Series C
      Preferred Stock.





(35)
            Consists
      of 1,000,000 shares of Common Stock approved by the Company on
      December 27, 2007.





(36)
            Consists
      of 194,805 outstanding shares of Common Stock, 1,000,000 shares of Common
      Stock approved by the Company on December 27, 2007 and 1,500,000
      shares of Common Stock approved by the Company on October 14,
      2008.





(37)
            Includes
      194,805 outstanding shares of Common Stock, 2,000,000 shares of Common
      Stock approved by the Company on December 27, 2007 and 1,500,000
      shares of Common Stock approved by the Company on October 14,
      2008.





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





See
Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.”





CHANGES
IN CONTROL





On
April 28, 2008 (the “Effective Time”) the Company entered into a Governance
Agreement (the “Governance Agreement”) with certain shareholders of the Company
(the “Investors”), Stichting Gemeenschappelijk Bezit LTC, (the “Foundation”),
and Arch Hill Capital NV (“Arch Hill Capital” and together with the Foundation,
the “Arch Hill Parties”). The Investors include eight persons or entities that
are the beneficial owners of shares of the Company’s Series C Preferred Stock
and/or Common Stock. The Investors beneficially own approximately 29% of the
Company’s Common Stock in the aggregate.





The
Company, the Foundation, Arch Hill Capital and the Investors have determined
that it is the best interest of the Company and its shareholders to enter into
certain governance and other arrangements with respect to the Company on the
terms set forth in the Governance Agreement. The Governance Agreement provides
that as of the Effective Time Ralph D. Ketchum, Marnix Snijder and Clemens E.M.
van Nispen tot Sevenaer, directors of the Company, resign as directors of the
Company (the “Resigning Directors”) and that the number of directors of the
Company be set at six. The Governance Agreement further provides that Fred J.
Mulder and Theo M.M. Kremers be appointed directors of the Company as of the
Effective Time to fill the vacancies on the Board of Directors resulting from
the resignation of the Resigning Directors.





The Arch
Hill Parties, acting jointly, have the right to terminate the Governance
Agreement upon ten days’ prior written notice if at any time the Investors
collectively cease to beneficially own less than 50% of the aggregate number of
the shares of Common Stock listed on Schedule A to the Governance Agreement as
being beneficially owned by the Investors (disregarding any double
counting).








41








The
Investors, acting jointly, have the right to terminate the Governance Agreement
upon ten days’ prior written notice if at any time the Arch Hill Parties
collectively cease to beneficially own less than 50% of the aggregate number of
the shares of Common Stock listed on Schedule B to the Governance Agreement as
being beneficially owned by Arch Hill (disregarding any double
counting).





As
described above, on April 28, 2008 the Company entered into a Governance
Agreement relating to the composition of the Board and other matters. Pursuant
to the Governance Agreement the following actions were taken:





Effective
April 28, 2008, Ralph D. Ketchum, Marnix Snijder and Clemens E.M. van
Nispen tot Sevenaer resigned as directors of the Company.





Effective
April 28, 2008, the Board of Directors appointed Fred J. Mulder and Theo
M.M. Kremers as directors of the Company. Pursuant to the foregoing actions, as
of April 28, 2008, the Company’s Board of Directors consisted of the
following persons: Klaus Brandt, Amir Elbaz, Theo M.M. Kremers, Andrew J.
Manning, Fred J. Mulder and Christiaan A. van den Berg.





Effective
April 28, 2008, Fred J. Mulder and Christiaan A. van den Berg were
appointed Co-Chairman of the Board of Directors. Mr. van den Berg has been
serving as the Chairman of the Board of Directors of the Company since May
2007.





Certain
of the provisions of the Governance Agreement may result in a change in control
of the Company.





ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE





As of
December 31, 2008, Arch Hill Capital beneficially owned 868,799,711 shares of
our common stock which constitutes approximately 61% of our common stock on an
as-converted basis, including shares beneficially owned by Arch Hill Capital and
shares issuable upon conversion of convertible securities held by Arch Hill
Capital but not including any shares issuable upon conversion of outstanding
convertible securities held by any other person. Accordingly, Arch Hill Capital
is a controlling entity. In addition, Arch Hill Capital controls a majority of
the voting power of GAIA Holding and GAIA by virtue of its ownership of a
controlling interest in us. The calculation of percentage of our common stock
beneficially owned by Arch Hill Capital is based on the number of shares of our
common stock outstanding as of December 31, 2008 (745,924,782) plus the
number of shares of our common stock issuable to Arch Hill Capital upon
conversion of convertible securities held by such entity. See “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholders
Matters.”





On
February 28, 2008, the Company, GAIA Akkumulatorenwerke GmbH (“GAIA”), Arch
Hill Ventures N.V., Arch Hill Real Estate N.V. and Arch Hill Capital N.V.
(collectively, the “Debt holders”) executed a Debt Settlement Agreement.
Pursuant to the Agreement $5,773,707 of debt owed by LTC and GAIA to the
Debt holders was settled. LTC agreed to issue to Arch Hill Capital N.V.
302,714,400 shares of LTC common stock in full and complete settlement of the
Debt (the “Debt Settlement”). In the Agreement, Arch Hill Capital agreed that
for a two year period it will not, directly or indirectly, without the prior
written consent of LTC issue, offer, agree or offer to sell, sell, grant an
option for the purchase or sale of, transfer, pledge, assign, hypothecate,
distribute or otherwise encumber or dispose of the Shares. On March 6,
2008, the Company issued to Arch Hill 45,016.84 shares of Series C Preferred
Stock convertible into 112,542,100 shares of Company common stock in lieu of
common stock in partial satisfaction of its obligations under the Debt
Settlement.





On
April 28, 2008 (the “Effective Time”) the Company entered into a Governance
Agreement (the “Governance Agreement”) with certain shareholders of the Company
(the “Investors”), Stichting Gemeenschappelijk Bezit LTC, (the “Foundation”),
and Arch Hill Capital NV (“Arch Hill Capital” and together with the Foundation,
the “Arch Hill Parties”). The Investors include eight persons or entities that
are the beneficial owners of shares of the Company’s Series C Preferred Stock
and/or Common Stock. The Investors beneficially own approximately 29% of the
Company’s Common Stock in the aggregate. See Item 12 “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.”





We have
entered into agreements with certain of our executive officers and directors as
described above in Item 10 “Executive Compensation”.








42








As per
December 31, 2008 an amount of $400,000 of fees to these directors and executive
officers is included in the Accounts Payable.





In 2009 a
consulting fee of $705,000 was billed by Fidessa Asset Management for services
rendered over the Period April 1, 2008 until December 31, 2008. The fee was
unpaid and recorded under Accounts Payable. There is no signed agreement between
LTC and Fidessa Asset Management S.A. regarding consulting
services.





For the
period October 1, 2006 until April 1, 2008 an agreement for advisory services by
Fidessa Asset Management S.A. was signed by LTC. For these services Fidessa
Asset Management S.A. received fees of $450,000 in 2007 and $300,000 in 2008.
Additionally Fidessa Asset Management S.A. is entitled to receive an equity
compensation of 16,666,667 of common shares. As of December 31, 2008, these
shares have not been delivered.





In 2008
Arch Hill Real Estate N.V. billed an amount of $70,000 as management fees to
Gaia Holding BV. The amount was unpaid as per December 31, 2008 and is included
in the subordinated loan of $1,776,000 from Arch Hill, in which balance unpaid
management fees and unpaid interest for the years 2004-2008 are included. There
is no signed agreement between Arch Hill Real Estate NV and GAIA Holding BV
regarding the fees and the rendering of management services.





We
believe that the transactions as described above were fair to us and were as
favorable to us as those that we might have obtained from non-affiliated third
parties, given the circumstances under which such transactions were proposed and
effectuated.





ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES





AUDIT
FEES





The
aggregate fees billed for fiscal 2008 for professional services rendered by
Amper, Politziner & Mattia LLP (AP&M) as our principal accountant
for the audit of our annual financial statements and review of financial
statements included in our Form 10-Qs and services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements for fiscal year 2008 was $250,000.





The
aggregate fees billed for fiscal year 2007 for professional services rendered by
AP&M as our principal accountant for the audit of our annual financial
statements and services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for fiscal year
2007 was $210,000.





AUDIT-RELATED
FEES





The
aggregate fees billed in each of fiscal 2008 and 2007 for assurance and related
services by our principal accountant that are reasonably related to the
performance of the audit or review of our financial statements (and are not
reported under Item 9(e)(1) of Schedule 14A) was $27,000 and $0,
respectively.





TAX
FEES





The
aggregate fees billed in each of fiscal 2008 and 2007 for professional services
rendered by our principal accountant tax compliance, tax advice and tax planning
was $0 and $0, respectively.





ALL
OTHER FEES





The
aggregate fees billed in each of fiscal 2008 and 2007 for products and services
provided by our principal accountant (other than the services reported in Items
9(e)(1) through 9(e)(3) of Schedule 14A) was $0 and $0,
respectively.





PRE-APPROVAL
POLICIES AND PROCEDURES





The
decision to retain Amper, Politziner & Mattia LLP as our principal
accountant for the audit of our financial statements for the year ended December
31, 2008 was approved by our Audit Committee on January 29, 2009.





We
established an audit committee on November 16, 2007. Our audit committee’s
policy is to pre-approve all audit and permissible non-audit services performed
by the independent accountant. The independent auditors and management are
required to periodically report to the Company’s Board of Directors regarding
the extent of services provided by the independent auditors in accordance with
this pre-approval, and the fees for the services performed to date. The Board of
Directors may also pre-approve particular services on a case-by-case
basis.








43





PART IV.





ITEM 15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





(a) The
following documents are filed as part of this Report for Form 10-K:





(1)  Financial
Statements.   Please see the accompanying Index to
Consolidated Financial Statements, which appears on page F-1 of this Report on
Form 10-K.





(2)  Financial Statement
Schedules.  Financial Statement Schedules have been omitted
because the information required to be set forth therein is either not
applicable or is included in the Consolidated Financial Statements or the notes
thereto.





(3)  Exhibits.  See Item
15(b) below.





(b)  Exhibits.





3.1
                                                                  Restated
      Certificate of Incorporation, effective as of July 29, 2005(1)3.2
                                                                  Certificate
      of Designation for Series B Preferred(2)3.3
                                                                  By-Laws,
      as amended(3)3.4
                                                                  Certificate
      of Designation of Series C Preferred Stock(4)3.5
                                                                  Amendment
      to Restated Certificate of Incorporation, effective as of March 25,
      2009(5)4.1
                                                                  10%
      Convertible Note dated July 11, 2007(6)4.2
                                                                  Form
      of 9% Convertible Note issued June to December 2008(7)10.1
                                                                  1994
      Stock Incentive Plan, as amended(8)10.2
                                                                  Directors
      Stock Option Plan(8)10.3
                                                                  1998
      Stock Incentive Plan(9)10.4
                                                                  2002
      Stock Incentive Plan(10)10.5
                                                                  Form
      of Stock Option Agreement relating to LTC’s 1994 Stock Incentive Plan, as
      amended(11)10.6
                                                                  Form
      of Stock Option Agreement relating to LTC’s Directors Stock Option
      Plan(11)10.7
                                                                  Form
      of Stock Option Agreement relating to LTC’s 1998 Stock Incentive Plan(9)10.8
                                                                  Form
      of Incentive Stock Option Agreement relating to LTC’s 2002 Stock Incentive
      Plan(10)10.9
                                                                  Form
      of Non-Qualified Incentive Stock Option Agreement relating to LTC’s 2002
      Stock Incentive Plan [For Employees](10)10.10
                                                                  Form
      of Non-Qualified Incentive Stock Option Agreement relating to LTC’s 2002
      Stock Incentive Plan [For Consultants and Non-Employee Directors](10)10.11
                                                                  Lease
      Agreement, dated July 22, 1994, between PMP Whitemarsh Associates and
      LTC and Addendum dated July 22, 1994(11)10.12
                                                                  Bridge
      Financing Agreement, dated as of December 31, 2001, between LTC and Arch
      Hill Capital(12)10.13
                                                                  Bridge
      Financing Amendment Agreement No. 5, dated as of April 14, 2003 between
      LTC and Arch Hill Capital(3)








44





10.14
                                                                    Loan
      Contract and Agreement on Subordination between GAIA and Arch Hill
      Ventures NV(3)10.15
                                                                    Partnership
      Agreement between GAIA and Frankendael Participatiemaatschappij NV(3)10.16
                                                                    Partnership
      Agreement, dated March 4, 1999, between GAIA and Tamarchco GmbH(3)10.17
                                                                    Partnership
      Agreement between GAIA and Tamarchco GmbH(3)10.18
                                                                    Partnership
      Agreement between GAIA and Tamarchco GmbH(3)10.19
                                                                    Partnership
      Agreement dated August 21, 1998 between GAIA Akkumulatorenwerke GmbH and
      Technologie-Beteiligungs-Gesellschaft GmbH der Deutschen
      Ausgleichsbank(13)10.20
                                                                    Form
      of Stock Purchase Warrant dated as of January 20, 2004 between Lithium
      Technology Corporation and the Investors(14)10.21
                                                                    Form
      of $2.00 Stock Purchase Warrant dated as of April 13, 2004, issued to Arch
      Hill Capital NV(15)10.22
                                                                    Form
      of $2.40 Stock Purchase Warrant dated as of April 13, 2004, issued to
      Arch Hill Capital NV(15)10.23
                                                                    Form
      of 125% A Warrant(16)10.24
                                                                    Form
      of 150% A Warrant(16)10.25
                                                                    Form
      of 125% B Warrant(16)10.26
                                                                    Form
      of 150% B Warrant(16)10.27
                                                                    Form
      of 135% Warrants(17)10.28
                                                                    Form
      of Warrant dated May 6, 2005 issued to Bridgehead Partners, LLC(18)10.29
                                                                    Form
      of Warrant dated May 31, 2005 issued to North Coast Securities Corporation
      in connection with A Unit and B Unit Offering(18)10.30
                                                                    Form
      of Stock Purchase Warrant dated October 21, 2005 issued to Stichting
      Gemeenschappelijk Bezit LTC(2)10.31
                                                                    Fifth
      Amendment to Lease, dated March 31, 2006, between PMP Whitemarsh and
      LTC(19)10.32
                                                                    Agreement
      of Sublease dated June 16, 2007 between the Company and Arch Hill(20)10.33
                                                                    Agreement
      for Administration Services between the Company and Arch Hill dated July
      16, 2007(20)10.34
                                                                    Contract
      Services Agreement for Investor Relations Services between the Company and
      Arch Hill dated July 16, 2007(20)10.35
                                                                    Employment
      Agreement between Lithium Technology Corporation and Ken Rudisuela
      effective October 1, 2007(21)10.36
                                                                    Debt
      Settlement Agreement dated February 27, 2008, by and among Lithium
      Technology Corporation, GAIA Akkumulatorenwerke GmbH, Arch Hill Ventures
      N.V., Arch Hill Real Estate N.V. and Arch Hill Capital N.V.(22)10.37
                                                                    Share
      Issuance Agreement dated March 6, 2008 between the Company and Arch
      Hill Capital N.V.(23)10.38
                                                                    Governance
      Agreement dated April 28, 2008, among the Company, the Investors listed on
      Schedule A thereto, Stichting Gemeenschappelijk Bezit LTC and Arch
      Hill Capital N.V.(24)10.39
                                                                    Business
      Consultant Agreement dated April 28, 2008 between the Company and
      Christiaan A. van den Berg(24)








45











10.40
                                    Business
      Consultant Agreement dated April 28, 2008 between the Company and Fred J.
      Mulder(24)10.41
                                    Business
      Consultant Agreement dated April 28, 2008 between the Company and Ouida
      Management Consulting B.V.(24)10.42
                                    Business
      Consultant Agreement dated April 28, 2008 between the Company and Romule
      B.V.(24)10.43
                                    Asset
      Purchase Agreement dated August 23, 2008 between the Company and Porous
      Power Technologies, LLC(25)10.44
                                    Sublease
      Agreement dated August 23, 2008 between the Company and Porous Power
      Technologies, LLC(25)10.45
                                    Amendment
      dated September 11, 2008 to July 2007 Note +10.46
                                    Revised
      June 2008 Convertible Note +10.47
                                    Amendment
      dated March 1, 2009 to July 2007 Note +21.1
                                    List
      of Subsidiaries (18)31.1
                                    Certification
      of Chief Executive Officer and Acting Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002 +32.1
                                    Certification
      of Chief Executive Officer and Acting Chief Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002+





________________________





(1)
            Incorporated
      herein by reference to LTC’s Quarterly Report on Form 10-QSB for the
      quarter ended June 30, 2005.





(2)
            Incorporated
      herein by reference to LTC’s Quarterly Report on Form 10-QSB for the
      quarter ended September 30,
2005.





(3)
            Incorporated
      herein by reference to LTC’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2002.





(4)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K dated
      November 28, 2006.





(5)
            Incorporated
      herein by reference to LCT’s Current Report on Form 8-K dated March 25,
      2009.





(6)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K dated
      July 11, 2007.





(7)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K/A dated June 30,
      2008.





(8)
            Incorporated
      herein by reference to the exhibits contained in LTC’s Information
      Statement Pursuant to Section 14(c) of the Securities Exchange Act of
      1934, dated January 19, 1996.





(9)
            Incorporated
      herein by reference to LTC’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 1998.





(10)
            Incorporated
      herein by reference to LTC’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2001.





(11)
            Incorporated
      herein by reference to LTC’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 1995.





(12)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K, dated
      January 23, 2002.





(13)
            Incorporated
      herein by reference to LTC’s Quarterly Report on Form 10-QSB for the
      quarter March 31, 2003.





(14)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K, dated
      January 26, 2004.





(15)
            Incorporated
      herein by reference to LTC’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2003.








46








(16)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K, dated
      August 30, 2004.





(17)
            Incorporated
      herein by reference to LTC’s Quarterly Report on Form 10-QSB for the
      quarter ended March 31, 2005.





(18)
            Incorporated
      herein by reference to LTC’s Registration Statement on Form SB-2 (No
      333-114998) filed on August 2,
2005.





(19)
            Incorporated
      herein by reference to LTC’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2005.





(20)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K dated
      July 16, 2007.





(21)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K dated
      October 1, 2007.





(22)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K dated February 28,
      2008.





(23)
            Incorporated
      herein by reference to LTC’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2007.





(24)
            Incorporated
      herein by reference to LTC’s Current Report on Form 8-K dated
      April 28, 2008.





(25)
            Incorporated
      herein by reference to LTC’s Report on Form 10-Q dated September 30,
      2008.





+
            Exhibit
      filed herewith.





Financial Statement
Schedules.  Reference is made to Item 15(a)(2)
above.








47





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 CORPORATIONDate:
      June 13, 2009
            BY:
            
            /s/
      Theo M.M. KremersTheo
      M.M. Kremers, Chief Executive Officer
              (Principal
      Executive Officer & Principal Financial and Accounting
      Officer)





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





Signature
            
            Title
            
            Date/s/
      Theo M.M. KremersTheo
      M.M. Kremers
            
            Chief
      Executive Officer & Director (Principal Executive Officer &
      Principal Financial and Accounting Officer)
            
            June
      13, 2009/s/
      Christiaan A. van den BergChristiaan
      A. van den Berg
            
            Director
            
            June
      12, 2009/s/
      Fred J. MulderFred
      J. Mulder
            
            Director
            
            June
      12, 2009/s/
      Klaus BrandtKlaus
      Brandt
            
            Director
            
            June
      12, 2009/s/
      Andrew J. ManningAndrew
      J. Manning
            
            Director
            
            June
      12, 2009











48





LITHIUM
TECHNOLOGY CORPORATION


AND
SUBSIDIARIES





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS







PageReport of
      Independent Registered Public Accounting Firm
            
            F-2Consolidated Balance
      Sheets at December 31, 2008 and 2007
            
            F-3Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2008 and 2007
            
            F-4Consolidated Statements of Changes in
      Stockholders’ Deficit for the years ended December 31, 2008 and
      December 31, 2007
            
            F-5Consolidated Statements
      of Cash Flows for the years ended December 31, 2008 and
      2007
            
            F-6Notes to Consolidated
      Financial Statements
            
            F-7











F-1











Report of Independent Registered Public
Accounting Firm





To the
Stockholders of





Lithium
Technology Corporation and Subsidiaries





We have
audited the accompanying consolidated balance sheets of Lithium Technology
Corporation and Subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive loss, stockholders’
deficit, and cash flows for the years ended December 31, 2008 and 2007. 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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2008 and 2007, and the results of their operations and their cash
flows for the for the years ended December 31, 2008 and 2007 in conformity with
accounting principles generally accepted in the United States.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1, the Company has
recurring losses from operations since inception and has a working capital
deficiency that 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 1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.





/s/
Amper, Politziner & Mattia LLP


June 11,
2009


Edison,
New Jersey








F-2








LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS








December
      31, 2008
                
                
                December
      31, 2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                
                $
                792,000
                
                
                $
                4,458,000Accounts
      receivable
                
                
                164,000
                
                
                
                527,000Inventories
                
                
                2,623,000
                
                
                
                3,320,000Prepaid
      expenses and other current assets
                
                
                173,000
                
                
                
                703,000Total
      current assets
                
                
                3,752,000
                
                
                
                9,008,000Property
      and equipment, net
                
                
                6,933,000
                
                
                
                7,789,000Related
      party receivables
                
                
                274,000
                
                
                
                579,000Other
      assets
                
                
                148,000
                
                
                
                155,000Total
      assets
                
                $
                11,107,000
                
                
                $
                17,531,000LIABILITIES
      AND STOCKHOLDERS DEFICITCURRENT
      LIABILITIES:Accounts
      payable
                
                
                1,318,000
                
                
                
                2,704,000Accounts
      payable - related party
                
                
                -
                
                
                
                1,623,000Accrued
      salaries
                
                
                517,000
                
                
                
                83,000Accrued
      interest
                
                
                954,000
                
                
                
                504,000Related
      parties debt
                
                
                5,404,000
                
                
                
                6,332,000Current
      portion of long term debt
                
                
                5,491,000
                
                
                
                5,411,000Other
      current liabilities and accrued expenses
                
                
                1,136,000
                
                
                
                2,245,000Warrant
      liability
                
                
                292,000
                
                
                
                15,550,000Total
      current liabilities
                
                
                15,112,000
                
                
                
                34,452,000Long
      term debt
                
                
                6,785,000
                
                
                
                -Total
      liabilities
                
                $
                21,897,000
                
                
                $
                34,452,000COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS
      DEFICITTotal
      Preferred Stock Authorized 100,000,000Convertible
      Preferred stock B, par value $.01 per share, authorized, issued and
      outstanding: 100,000 at December 31, 2008 and December 31,
      2007
                
                
                1,000
                
                
                
                1,000Convertible
      Preferred stock C, par value $.01 per share, authorized 300,000, issued
      and outstanding: 233,200 at December 31, 2008 and 218,183 at December 31,
      2007
                
                
                2,000
                
                
                
                2,000Common
      stock, par value $.01 per share, authorized - 750,000,000 at December 31,
      2008 and December 31, 2007 respectively; issued and outstanding -
      745,924,782 and 630,924,782
                
                
                7,459,000
                
                
                
                6,309,000Additional
      paid-in capital
                
                
                122,528,000
                
                
                
                111,998,000Cumulative
      translation adjustments
                
                
                (3,307,000
                )
                
                
                (4,172,000
                )Accumulated
      deficit
                
                
                (137,473,000
                )
                
                
                (131,059,000
                )Total
      stockholders deficit
                
                
                (10,790,000
                )
                
                
                (16,921,000
                )Total
      liabilities and stockholders deficit
                
                $
                11,107,000
                
                
                $
                17,531,000





See
accompanying notes to consolidated financial statements.








F-3











LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS




YEARS ENDEDDECEMBER
      31,2008
                
                
                2007REVENUESProducts
      and services sales
                
                $
                4,167,000
                
                
                $
                2,609,000COSTS
      AND EXPENSESCost
      of goods sold
                
                
                7,459,000
                
                
                
                3,729,000Engineering,
      research and development
                
                
                1,437,000
                
                
                
                3,088,000General
      and administrative
                
                
                6,188,000
                
                
                
                5,487,000Stock
      based compensation expense
                
                
                83,000
                
                
                
                200,000Sales
      and marketing
                
                
                397,000
                
                
                
                444,000Depreciation
                
                
                330,000
                
                
                
                351,000Loss
      on sale of tangible assets
                
                
                62,000
                
                
                
                0Total
      costs and expenses
                
                
                15,956,000
                
                
                
                13,299,000Loss
      from operations
                
                
                (11,789,000
                )
                
                
                (10,690,000
                )OTHER
      INCOME (EXPENSE)Interest
      expense
                
                
                (744,000
                )
                
                
                (1,868,000
                )Interest
      expense related to amortization of discount on convertible
      debt
                
                
                (3,827,000
                )
                
                
                (1,700,000
                )Change
      in fair value of warrants
                
                
                9,946,000
                
                
                
                (10,009,000
                )Other
                
                
                -
                
                
                
                (124,000
                )Total
      other income (expense)
                
                
                5,375,000
                
                
                
                (13,701,000
                )NET
      LOSS
                
                
                (6,414,000
                )
                
                
                (24,391,000
                )Dividends
      on preferred shares
                
                
                -
                
                
                
                (68,000
                )Discount
      related to beneficial conversion feature of Preferred
Stock
                
                
                -
                
                
                
                (11,774,000
                )NET
      LOSS TO COMMON SHAREHOLDERS
                
                $
                (6,414,000
                )
                
                $
                (36,233,000
                )OTHER
      COMPREHENSIVE LOSSCurrency
      translation adjustments
                
                
                865,000
                
                
                
                (1,018,000
                )COMPREHENSIVE
      INCOME (LOSS)
                
                $
                (5,549,000
                )
                
                $
                (37,251,000
                )Weighted
      average number of common shares outstanding:
                
                
                1,593,027,896
                
                
                
                1,186,029,767Basic
      and diluted loss per share
                
                $
                (0.00
                )
                
                $
                (0.03
                )





See
accompanying notes to consolidated financial statements.





F-4





LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ DEFICIT








Convertible
      PreferredClass A Stock
                    
                    
                    Convertible
      PreferredClass B Stock
                    
                    
                    Convertible
      PreferredClass C Stock
                    
                    
                    Common
      Stock
                    
                    
                    AdditionalPaid
      in
                    
                    
                    Dividends
                    
                    
                    CumulativeTransalation
                    
                    
                    AccumulatedShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    in
    Arrears
                    
                    
                    Adjustments
                    
                    
                    Deficit
                    
                    
                    TotalBeginning
      Balance as of January 1, 2007
                    
                    
                    1,000
                    
                    
                    $
                    1,000,000
                    
                    
                    
                    100,000
                    
                    
                    $
                    1,000
                    
                    
                    
                    97,635
                    
                    
                    $
                    1,000
                    
                    
                    
                    422,994,852
                    
                    
                    $
                    4,230,000
                    
                    
                    $
                    83,469,000
                    
                    
                    $
                    113,000
                    
                    
                    $
                    (3,154,000
                    )
                    
                    $
                    (106,668,000
                    )
                    
                    $
                    (21,008,000
                    )Issuance
      of Series C Convertible Preferred Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    157,348
                    
                    
                    
                    2,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    27,387,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    27,389,000Partial
      Conversion of October 2005 8% Convertible Notes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    81,967,880
                    
                    
                    
                    820,000
                    
                    
                    
                    230,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,050,000Conversion
      of May 2006 12% Convertible Note
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    20,576,132
                    
                    
                    
                    206,000
                    
                    
                    
                    294,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    500,000Exercise
      of Warrants
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    315,760
                    
                    
                    
                    3,000
                    
                    
                    
                    31,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    34,000Discount
      of Beneficial Conversion Feature for July 2007 10% Convertible
      Debenture
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    325,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    325,000Aggregated
      Discount of Beneficial Conversion Feature for 2007 Issuance of Series C
      Convertible Preferred Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (11,774,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (11,774,000
                    )Recognition
      of Discount of Beneficial Conversion Feature for 2007 Issuance of Series C
      Convertible Preferred Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,774,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,774,000Conversion
      of Series C Convertible Preferred into Common Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (36,800
                    )
                    
                    
                    (1,000
                    )
                    
                    
                    92,000,000
                    
                    
                    
                    920,000
                    
                    
                    
                    (920,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,000
                    )Conversion
      of Series A Convertible Preferred into Common Stock
                    
                    
                    (1,000
                    )
                    
                    
                    (1,000,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,065,664
                    
                    
                    
                    110,000
                    
                    
                    
                    889,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,000
                    )Dividends
      on series A Preferred Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (68,000
                    )
                    
                    
                    68,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Dividends
      on series A Preferred Stock Paid in Common Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,004,494
                    
                    
                    
                    20,000
                    
                    
                    
                    161,000
                    
                    
                    
                    (181,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Executive
      Compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    200,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    200,000Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,018,000
                    )
                    
                    
                    
                    
                    
                    
                    (1,018,000
                    )Net
      Loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (24,391,000
                    )
                    
                    
                    (24,391,000
                    )Balance
      as of December 31, 2007
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    100,000
                    
                    
                    $
                    1,000
                    
                    
                    
                    218,183
                    
                    
                    $
                    2,000
                    
                    
                    
                    630,924,782
                    
                    
                    $
                    6,309,000
                    
                    
                    $
                    111,998,000
                    
                    
                    $
                    -
                    
                    
                    $
                    (4,172,000
                    )
                    
                    $
                    (131,059,000
                    )
                    
                    $
                    (16,921,000
                    )Exercise
      of Warrants by Cornell & Partners
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    40,000,000
                    
                    
                    
                    400,000
                    
                    
                    
                    2,600,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,000,000Issuance
      of Series C Convertible Preferred Stock in debt settlement agreement with
      Arch Hill (February 28, 2008)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    45,017
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,773,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,773,000Conversion
      of 30,000 Series C Convertible Preferred into Common Stock by Arch Hill on
      September 3, 2008
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (30,000
                    )
                    
                    
                    
                    
                    
                    
                    75,000,000
                    
                    
                    
                    750,000
                    
                    
                    
                    (750,000
                    )Discount
      of Beneficial Conversion Feature for Issuance of Serices C Convertible
      Preferred Stock to Arch Hill due to debt settlement on Feburary 28th,
      2008
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,147,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,147,000Discount
      of Beneficial Conversion Feature for Issuance of Series C Convertible
      Preferred Stock to Arch Hill due to debt settlement on February 28,
      2009
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,147,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,147,000
                    )Warrants
      expired during 2008
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,824,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,824,000Executive
      Compensation - Stock Options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    83,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    83,000Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    865,000
                    
                    
                    
                    
                    
                    
                    
                    865,000Net
      Loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (6,414,000
                    )
                    
                    
                    (6,414,000
                    )Ending
      balance as of December 31, 2008
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    100,000
                    
                    
                    $
                    1,000
                    
                    
                    
                    233,200
                    
                    
                    $
                    2,000
                    
                    
                    
                    745,924,782
                    
                    
                    $
                    7,459,000
                    
                    
                    $
                    122,528,000
                    
                    
                    $
                    -
                    
                    
                    $
                    (3,307,000
                    )
                    
                    $
                    (137,473,000
                    )
                    
                    $
                    (10,790,000
                    )








See
accompanying notes to consolidated financial statements





F-5





LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS







YEAR
      ENDEDDECEMBER
      31,2008
                  
                  
                  2007CASH
      FLOW FROM OPERATING ACTIVITIESNet
      Income / (Net loss)
                  $
                  (6,414,000
                  )
                  
                  $
                  (24,391,000
                  )AdjustmentsDepreciation
      expense
                  
                  1,046,000
                  
                  
                  
                  959,000Impairment
      charge for fixed assets
                  
                  230,000
                  
                  
                  
                  -Bad
      debt expense
                  
                  163,000
                  
                  
                  
                  -Stock-based
      compensation expense
                  
                  83,000
                  
                  
                  
                  200,000Loss
      on sale of property and equipment
                  
                  62,000
                  
                  
                  
                  15,000Warrant
      income/change in fair value
                  
                  (9,946,000
                  )
                  
                  
                  10,009,000Interest
      expense beneficial conversion feature
                  
                  3,826,000
                  
                  
                  
                  1,700,000(Increase)/decrease
      in assetsInventories
                  
                  697,000
                  
                  
                  
                  (1,158,000
                  )Accounts
      receivable
                  
                  512,000
                  
                  
                  
                  (325,000
                  )Prepaid
      expenses and other assets
                  
                  529,000
                  
                  
                  
                  (607,000
                  )Increase/(Decrease)
      in liabilitiesAccounts
      payable & accrued expenses
                  
                  (1,334,000
                  )
                  
                  
                  565,000Other
      current liabilities
                  
                  -
                  
                  
                  
                  (152,000
                  )Net
      cash used in operating activities
                  $
                  (10,546,000
                  )
                  
                  $
                  (13,185,000
                  )CASH
      FLOW FROM INVESTING ACTIVITIESCapital
      Expenditures
                  $
                  (705,000
                  )
                  
                  $
                  (1,931,000
                  )Net
      cash used in investing activities
                  $
                  (705,000
                  )
                  
                  $
                  -1,931,000CASH
      FLOW FROM FINANCING ACTIVITIESRepayment
      of debt
                  $
                  (122,000
                  )
                  
                  $
                  (9,924,000
                  )Proceeds
      from loans from related parties
                  
                  100,000
                  
                  
                  
                  -Proceeds
      from issuance of convertible debt
                  
                  6,785,000
                  
                  
                  
                  -Proceeds
      from exercise of warrants
                  
                  512,000
                  
                  
                  
                  -Proceeds
      from equity issuance
                  
                  -
                  
                  
                  
                  27,389,000Net
      cash provided by financing activities
                  $
                  7,275,000
                  
                  
                  $
                  17,465,000NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                  $
                  (3,976,000
                  )
                  
                  $
                  2,349,000CURRENCY
      EFFECTS ON CASH AND CASH EQUIVALENTS
                  
                  310,000
                  
                  
                  
                  133,000CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                  
                  4,458,000
                  
                  
                  
                  1,976,000CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                  $
                  792,000
                  
                  
                  $
                  4,458,000





See
accompanying notes to consolidated financial statements.








F-6













NOTE
1—ORGANIZATION, BUSINESS OF THE COMPANY AND LIQUIDITY





In 2002,
Lithium Technology Corporation (“LTC”) closed share exchanges in which LTC
acquired ownership of 100% of GAIA Holding B.V. (“GAIA Holding”) from Arch Hill
Ventures, N.V., a private company limited by shares, incorporated under the laws
of the Netherlands (“Arch Hill Ventures”), which is controlled by Arch Hill
Capital N.V. (“Arch Hill Capital”), a private company limited by shares,
incorporated under the laws of the Netherlands (the “Share Exchanges”). In
November 2004, Arch Hill Capital and Arch Hill Ventures transferred all LTC
securities owned by such entities to Stichting Gemeenschappelijk Bezit GAIA
(“Stichting GAIA”) and Stichting Gemeenschappelijk Bezit LTC (“Stichting LTC”),
entities controlled by Arch Hill Capital.





Subsequent
to the Share Exchanges, Arch Hill Capital effectively controls LTC. As a result,
the Share Exchanges were accounted for as a reverse acquisition, whereby for
financial reporting purposes, GAIA Holding is considered the acquiring company.
Hence, the historical financial statements of GAIA Holding became the historical
financial statements of the Company and include the results of operations of LTC
only from the acquisition date of October 4, 2002.





GAIA
Holding, a private limited liability company incorporated under the laws of the
Netherlands, is the 100% beneficial owner of GAIA Akkumulatorenwerke GmbH
(“GAIA”). GAIA Holding (formerly known as Hill Gate Investments B.V.) was
incorporated in 1990 and only had limited operations until the acquisition of
GAIA on February 12, 1999. GAIA is a private limited liability company
incorporated under the laws of Germany. GAIA Holding’s ownership interest in
GAIA is held through certain trust arrangements (see Note 2).





The
Company was in the development stage from February 12, 1999 through
December 31, 2005. The year 2006 was the first year for which the Company
was considered an operating company and was no longer in a development
stage.





The
Company considers itself to have one operating segment in two geographical
areas. The Company is an early pilot-line production stage company that develops
large format lithium-ion rechargeable batteries to be used as a new power source
for emerging applications in the automotive, stationary power, and national
security markets.





Over the
past several years, the Company has refocused its unique extrusion-based
manufacturing process, cell technology, large battery assembly expertise, and
market activities to concentrate on large-format, high rate battery
applications. The Company’s commercialization efforts are focused on applying
its lithium-ion rechargeable batteries in the national security, transportation
and stationary power markets.





The
Company’s operating plan seeks to minimize its capital requirements, but the
expansion of its production capacity to meet increasing sales and refinement of
its manufacturing process and equipment will require additional capital. The
Company expects that operating and production expenses will increase
significantly. The Company has recently entered into a number of financing
transactions (see Notes 4 and 7) and is continuing to seek other financing
initiatives. The Company needs to raise additional capital to meet its working
capital needs, for the repayment of debt and for capital expenditures. Such
capital is expected to come from the sale of securities and debt financing. The
Company believes that if it raises approximately $7 million in debt and equity
financings it would have sufficient funds to meet its needs for working capital,
repayment of debt and for capital expenditures over the next twelve months to
meet expansion plans.





No
assurance can be given that the Company will be successful in completing any
financings at the minimum level necessary to fund its capital equipment, debt
repayment or working capital requirements, or at all. If the Company is
unsuccessful in completing these financings, it will not be able to meet its
working capital, debt repayment or capital equipment needs or execute its
business plan. In such case the Company will assess all available alternatives
including a sale of its assets or merger, the suspension of operations and
possibly liquidation, auction, bankruptcy, or other measures. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability of the carrying amount of recorded assets or the
amount of liabilities that might result should the Company be unable to continue
as a going concern.








F-7





NOTE
2—SIGNIFICANT ACCOUNTING POLICIES





BASIS
OF CONSOLIDATION





The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.





The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or classification of
liabilities that might be necessary should the Company be unable to operate in
the normal course of business.





Certain
prior period amounts have been reclassified to confirm to the current period
presentation.





GAIA
Holding is the beneficial owner of all of the issued and outstanding shares of
GAIA. Legal ownership of the outstanding shares of GAIA are held pursuant to
certain Dutch and German trust agreements by two Netherlands entities (the
“Nominal Stockholders”) for the risk and account of Gaia Holding. Based on the
Dutch and German trust agreements, the Nominal Stockholders are obligated to
transfer the legal ownership of the shares in GAIA without any further payments
to GAIA Holding. Pursuant to the trust agreements, GAIA Holding has the right to
vote the shares of GAIA held by the Nominal Stockholders. The results of GAIA
are included in the results of GAIA Holding as of the date of
acquisition.





ESTIMATES
AND UNCERTAINTIES





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“Generally Accepted
Accounting Principles”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period and related disclosures of contingent assets and
liabilities. Actual results, as determined at a later date, could differ from
these estimates.





FAIR
VALUE OF FINANCIAL INSTRUMENTS





Fair
value estimates, assumptions and methods used to estimate fair value of the
Company’s financial instruments are made in accordance with the requirements of
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” The
Company has used available information to derive its estimates. However, because
these estimates are made as of a specific point in time, they are not
necessarily indicative of amounts the Company could realize currently. The use
of different assumptions or estimating methods may have a material effect on the
estimated fair value amounts. The carrying amounts of cash and cash equivalents,
accounts receivable, net, accounts payable and accrued expenses approximate fair
value due to the short-term nature of the instruments.





CASH
AND CASH EQUIVALENTS





The
Company considers all highly liquid investment instruments purchased with an
initial remaining maturity of three months or less to be cash equivalents. The
Company maintains cash balances with financial institutions. Cash and cash
equivalents include a restricted cash position of $363,000 as of December 31,
2008 and $307,000 as of December 31,2007.





ALLOWANCE
FOR DOUBTFUL DEBTS





Accounts
receivable are recorded net of allowance for doubtful accounts of $ 156,000 as
of December 31, 2008 and of $1,000 as of December 31, 2007.





INVENTORIES





Inventories
primarily include raw materials and auxiliary materials required for the
production process as well as direct labor and overhead. Inventories are valued
at the lower of cost or net realizable value. The cost of inventories is
determined by using the weighted average method. Cost elements included in
inventories comprise all costs of purchase and other costs incurred to bring the
inventories to their present location and condition.





Write-down
to market of inventories incurred an extra charge to cost of goods sold in
2008 of $ 1,120,000.








F-8





Inventories
are as follows:





2008
                            
                            
                            2007Finished
      Goods
                            
                            $
                            1,014,000
                            
                            
                            $
                            1,814,000Work In
      Process
                            
                            
                            808,000
                            
                            
                            
                            757,000Raw
      Materials
                            
                            
                            801,000
                            
                            
                            
                            749,000$
                            2,623,000
                            
                            
                            $
                            3,320,000


PROPERTY
AND EQUIPMENT





Property
and equipment are recorded at cost and primarily consist of buildings, technical
and lab equipment, furniture and office equipment and leasehold improvements. In
the period assets are retired or otherwise disposed of, the costs and
accumulated depreciation are removed from the accounts, and any gain or loss on
disposal is included in results of operations. Property and equipment are
depreciated using the straight-line method over their estimated useful lives as
follows:





Buildings
                    
                    25 yearsTechnical
      and laboratory equipment
                    
                    7 - 14 yearsOffice
      equipment and other
                    
                    1 -
      5 years





CONVERTIBLE
SECURITIES WITH BENEFICIAL CONVERSION FEATURES





The
Company accounts for securities with embedded conversion features and warrant
issuances in accordance with EITF 98-5: Accounting for convertible securities
with beneficial conversion features or contingency adjustable conversion and
EITF No. 00-27: Application of issue No. 98-5 to certain convertible
instruments. The Company determines the fair values to be ascribed to detachable
warrants issued with the convertible debentures utilizing the Black-Scholes
method. Any discount derived from determining the fair value of the beneficial
conversion features is amortized using the effective interest method to
financing costs over the remaining life of the debenture. Per EITF 00-19
Accounting for Derivatives Financial Instrument Indexed to, and Potentially
Settled Into, a Company’s Own Stock, warrants issued with debt are classified as
liabilities and marked to market at each reporting period. For issuances of
convertible Preferred Stock with beneficial conversion feature the discount is
recognized upon issuance.





LONG-LIVED
ASSETS





The
Company periodically evaluates the carrying value of long-lived assets when
events and circumstances indicate the carrying amounts may not be recoverable.
The carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flows expected to result from the use and eventual
disposition from such assets are less than the carrying value. If the sum of the
expected cash flows (undiscounted and without finance charges) is less than the
carrying amount of the asset, the Company recognizes an impairment loss on the
asset by which the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined by quoted market prices in active markets, if
available, or by using the anticipated cash flows discounted at a rate
commensurate with the risks involved. The Company conducted an evaluation of the
carrying values of its long-lived assets at the end of 2008 and
no  impairment charge was recorded except for equipment in Germany of
$220,000 to General and Administrative expense.





INCOME
TAXES





In
preparing our consolidated financial statements, we make estimates of our
current tax exposure and temporary differences resulting from timing differences
for reporting items for book and tax purposes. We recognize deferred taxes by
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for differences
between the financial statement and tax bases of assets and liabilities at
enacted statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. In consideration of our
accumulated losses and lack of historical ability to generate taxable income to
utilize our deferred tax assets, we have estimated that we will not be able to
realize any benefit from our temporary differences and have recorded a full
valuation allowance. If we become profitable in the future at levels which cause
management to conclude that it is more likely than not that we will realize all
or a portion of the net operating loss carry-forward, we would immediately
record the estimated net realized value of the deferred tax asset at that time
and would then provide for income taxes at a rate equal to our combined federal
and state effective rates, which would be approximately 40% under current tax
laws. Subsequent revisions to the estimated net realizable value of the deferred
tax asset could cause our provision for income taxes to vary significantly from
period to period.








F-9





REVENUES





The
Company sells battery cells and complete batteries to various clients. Revenue
is recognized as services are rendered or products are delivered, the price to
the buyer is fixed and determinable, and collectability is reasonably assured.
Sales terms are Free on Board (FOB) origin. Trade accounts receivable
potentially subject the Company to credit risk. The Company extends credit
to its customers based upon an evaluation of the customer’s financial condition
and credit history and generally does not require collateral. Two of the
Company’s customers represented 28% of the Company’s sales volume for the year
ended December 31, 2008.  As of December 31, 2008, no amounts were due
from these customers.  One of the Company’s customers represented 24%
of the Company’s sales volume for the year ended December 31,
2007. Customers comprising the largest accounts receivable balances
represented approximately 45% of total trade receivable balances at December 31,
2007.





OTHER
INCOME





From time
to time the Company receives subsidies from foreign governmental agencies to
reimburse the Company for certain research and development expenditures.
Subsidies are recorded as other income. In 2008 and 2007 there was no other
income recorded.





FOREIGN
CURRENCY TRANSLATION





The
functional currency for foreign operations is the local currency. For these
foreign entities, the Company translates assets and liabilities at end-of-period
exchange rates. For revenues, expenses, gains and losses, the weighted average
exchange rate for the period is used to translate those elements. The Company
records these translation adjustments in cumulative other comprehensive income
(loss), a separate component of equity in the consolidated balance
sheet.





NET
LOSS PER COMMON SHARE





The
Company has presented net loss per common share pursuant to SFAS No. 128,
“Earnings Per Share”. Net loss per common share is based upon the weighted
average number of outstanding common shares. The Company has determined that the
as-if converted common shares related to the preferred shares should be included
in the weighted average shares outstanding for purposes of calculating basic
earnings per share. The Company made such determination because: 1) Arch Hill
Capital, which controls the Company, has the ability to authorize the necessary
shares for conversion; 2) the preferred shares have no significant preferential
rights above the common shares; and 3) the preferred shares will automatically
convert at a later date upon proper share authorization. As a result, weighted
average shares outstanding included in the calculation of basic and diluted net
loss per common share for the years ended December 31, 2008 and 2007 were as
follows:





2008
                
                
                2007Series
      B Preferred Stock
                
                
                264,103,114
                
                
                
                264,103,114Series
      C Preferred Stock
                
                
                583,000,000
                
                
                
                448,731,198Common
      Stock
                
                
                745,924,782
                
                
                
                473,195,455Total
                
                
                1,593,027,896
                
                
                
                1,186,029,767








F-10





Due to
net losses in the years ended December 31, 2008 and 2007, the effect of the
potential common shares resulting from convertible promissory notes payable,
stock options and warrants in those years were excluded, as the effect would
have been anti-dilutive.




2008
                        
                        
                        2007Shares issuable under May 2006
      12% Convertible Debentures
                        
                        
                        -
                        
                        
                        
                        1,244,733Shares issuable under July 2007
      10% Convertible Notes
                        
                        
                        37,420,773
                        
                        
                        
                        34,014,480Shares issuable under June 2005
      12% Convertible Debentures
                        
                        
                        -
                        
                        
                        
                        3,922,660Shares issuable under Outstanding
      Warrants
                        
                        
                        15,896,233
                        
                        
                        
                        67,501,373Shares issuable under Warrants
      issued upon conversion of SeriesA and B
      Units*
                        
                        
                        17,444,798
                        
                        
                        
                        118,413,815Executive
      Compensation
                        
                        
                        3,500,000
                        
                        
                        
                        2,000,000Fidessa Consulting
      Agreement
                        
                        
                        16,666,667
                        
                        
                        
                        -2008 Debt Settlement
      Agreement
                        
                        
                        190,172,300
                        
                        
                        
                        -June 2008, Convertible
      Loan
                        
                        
                        71,746,833
                        
                        
                        
                        -Shares issuable under exercise of
      options
                        
                        
                        89,152
                        
                        
                        
                        89,902352,936,756
                        
                        
                        
                        227,186,963




As of
December 31, 2008 and 2007 the Company does not have enough shares of common
stock authorized to issue shares of common stock to all holders of its
convertible securities upon conversion of such securities. In November 2008 the
majority of the shareholders approved the increase of common stock by written
consent. All appropriate filings have been filed with the SEC. The company filed
on March 2, 2009 an amended Certificate of Corporation in which the amount of
available common stock has been increased to 3 Billion.





RECENT
ACCOUNTING PRONOUNCEMENTS





In
October 2008, the FASB issued FSP No. 157-3.  “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” ("FSP
157-3”).  FSP 157-3 clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active.  FSP 157-3 was effective for the
Company on September 30, 2008 for all financial assets and liabilities
recognized or disclosed at fair value in our Consolidated Financial Statements
on a recurring basis (or at least annually).





In June
2008, the FASB issued EITF 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock.” EITF 07-5 provides
guidance in assessing whether an equity-linked financial instrument (or embedded
feature) is indexed to an entity’s own stock for purposes of determining whether
the appropriate accounting treatment falls under the scope of SFAS 133,
Accounting For Derivative Instruments and Hedging Activities” and/or
EITF 00-19, Accounting For Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock.” EITF 07-05 is effective as
of the beginning of our 2009 fiscal year. The Company is currently evaluating
the provisions of EITF 07-5 to determine the impact on the Company’s
consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162; The Hierarchy of Generally Accepted
Accounting Principles.  The statement is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with GAAP.  Prior to the issuance of SFAS No. 162, GAAP
hierarchy was defined in the American Institute of Certified Public Accountants
(“AICPA”) Statement on Auditing Standards (SAS) No. 69;  “The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles.”  Unlike SAS No. 69, SFAS No. 162 is directed to the
entity rather than the auditor.  Statement No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board Auditing amendments to AU Section 411.  The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles, SFAS No. 162
is not expected to have any material impact on the Company’s results of
operations, financial condition or liquidity.





In May
2008, the FASB issued FASB Staff Position (FSP”) APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).” FSP APB14-1 will require us to account
separately for the liability and equity components of our convertible debt. The
debt would be recognized at the present value of its cash flows discounted using
our nonconvertible debt borrowing rate at the time of issuance. The equity
component would be recognized as the difference between the proceeds from the
issuance of the note and the fair value of the liability. The FSP also requires
accretion of the resultant debt discount over the expected life of the debt. The
FSP is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years. Entities are required to apply the FSP
retrospectively for all periods presented. The Company is currently
evaluating  the provisions of this FSP to determine the impact on the
Company’s consolidated financial statements.








F-11








Effective
January 1, 2008, the Company adopted SFAS No. 157; “Fair Value
Measurements”.  In February 2008, the Financial Accounting Standards
Board (“FASB”) issued FASB Staff Position No. FAS 157-2.  “Effective
Date of FASB Statement No. 157”, which provides a one year deferral of the
effective date of SFAS No. 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually.  Therefore, the Company
has adopted the provisions of SFAS No. 157 with respect to its financial assets
and liabilities only.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles and enhances disclosures about fair value
measurements.  Fair value is defined under SFAS No. 157 as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date.  Valuation techniques used to measure fair value
under SFAS No. 157 must maximize the use of observable inputs and minimize the
use of unobservable inputs.  The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value.
The adoption of this Statement did not have a material impact on the Company’s
consolidated results of operations and financial condition.





Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings.
FAS 159 does not affect any existing accounting literature that requires certain
assets and liabilities to be carried at fair value. The adoption of this
Statement did not have a material impact on the Company’s consolidated results
of operations and financial condition.





In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 160,“Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51”  (“FAS 160”). FAS 160 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the retained interest and gain or loss when a subsidiary is deconsolidated. This
statement is effective for financial statements issued for fiscal years
beginning on or after December 15, 2008 with earlier adoption prohibited.
The Company is currently evaluating the impact, if any, of FAS 160 on its
operating results and financial position.





In
December 2007, the FASB issued SFAS No. 141R,“Business Combinations,”
(“SFAS 141R”) which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree. SFAS 141R also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact, if any, of SFAS 141R on
its operating results and financial position.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(“FAS 161”). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
under Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption. The company is currently evaluating the provisions of FASB 161
to determine the impact on the company’s consolidated financial
statements.








F-12





NOTE
3—PROPERTY AND EQUIPMENT





Property
and equipment at December 31, 2008 and 2007 are summarized as
follows:




2008
                        
                        
                        2007Land and
      buildings
                        
                        $
                        3,910,000
                        
                        
                        $
                        3,756,000Technical and laboratory
      equipment
                        
                        
                        8,352,000
                        
                        
                        
                        8,864,000Asset under construction and
      equipment deposit
                        
                        
                        285,000
                        
                        
                        
                        285,000Office equipment and
      other
                        
                        
                        1,244,000
                        
                        
                        
                        987,000Sub
      Total
                        
                        
                        13,791,000
                        
                        
                        
                        13,892,000Less: Accumulated depreciation
      and amortization
                        
                        
                        (6,858,000
                        )
                        
                        
                        (6,103,000
                        )$
                        6,933,000
                        
                        
                        $
                        7,789,000





Depreciation
expense for the years ended December 31, 2008 and December 31, 2007 was
$1,046,000 and $959,000, respectively. Assets under construction at December 31,
2008 and 2007 included equipment being constructed that was not yet placed into
service.





NOTE
4—DEBT





December
      31, 2008
                
                
                December
      31,2007Current
      debt is summarized as follows:Loans
      From Financial Institutions
                
                $
                82,000
                
                
                $
                104,000Silent
      Partner loans-TBG
                
                
                2,162,000
                
                
                
                2,259,000July
      2007 10% Convertible Note
                
                
                3,247,000
                
                
                
                3,048,000Sub
      total current debt
                
                $
                5,491,000
                
                
                $
                5,411,000Related
      party debt:Subordinated
      Loans from Arch Hill
                
                
                3,627,000
                
                
                
                6,272,000Promissory
      Note to Arch Hill
                
                
                1,777,000
                
                
                
                60,000Sub
      total Related party debt
                
                
                5,404,000
                
                
                
                6,332,000Long
      term debtJune
      2008, 9% Convertible Note,
                
                
                6,785,000
                
                
                
                -Warrant
      liability
                
                
                292,000
                
                
                
                15,550,000Total
      debt
                
                $
                17,972,000
                
                
                $
                27,293,000





LOANS
FROM FINANCIAL INSTITUTIONS





GAIA has
two loans from financial institutions, which totaled $82,000 and $104,000 as of
December 31, 2008 and December 31, 2007 respectively, that are
collateralized by specific assets of the Company and bear European commercial
standard rates, which were 7% and 7% as of December 31, 2008 and 2007,
respectively





2006
GAIA AND DILO DEBT FINANCING





On
July 14, 2006, GAIA and Dilo Trading AG (“Dilo Trading”), subsidiaries of
the Company, closed bridge financings with a European lender for a total of
Euros 7.5 million (approximately $9.5 million upon issuance). The loan
principal and accrued interest is due and payable on December 31, 2006. The
loans are secured by a pledge of all of the assets of GAIA and Dilo Trading. The
nonconvertible note bears an annual interest of 20%.








F-13








A portion
of the proceeds was used to repay the mortgage on the GAIA facility in
Nordhausen, Germany and to repay existing loans on GAIA equipment. The remaining
proceeds were used for the purchase of machinery and equipment to increase the
production of lithium-ion cells and batteries in Germany, for working capital
and partial repayment of debt.





JULY
2007 10% CONVERTIBLE NOTE





On
July 11, 2007, the European Subsidiaries Debt and accrued interest was
satisfied with the payment of Euros 6 million and the issuance of a Company
convertible note in the principal amount of U.S. $3,247,000 (the “Convertible
Note”). The Convertible Note is convertible into shares of Company common stock
at $0.10 per share. The Convertible Note accrues interest at 10% per annum
and was due and payable on September 1, 2008. The Company has the right to
repay the Convertible Note at any time prior to maturity without penalty. The
Convertible Note will be secured by 90 million shares of Company common
stock. The Company did not pay any underwriting discounts or commissions in
connection with the issuance of the Convertible Note in this transaction.
Issuance of the Convertible Note was exempt from registration under
Section 4(2) of the Securities Act. The Convertible Note was issued to an
accredited investor in a private transaction without the use of any form of
general solicitation or advertising. The underlying securities are “restricted
securities” subject to applicable limitations on resale. As of December 31,
2008, $3,247,000 plus accrued interest of $154,242 was outstanding under the
Convertible Note. Upon issuance the Company recorded a beneficial conversion
feature of $324,721 that is amortized over the life of the note using the
effective interest method.





As of
September 1, 2008 the debenture has been extended for an additional six months,
under the same conditions. The interest rate on the unpaid accrued interest as
of September 1, 2008 was increased from 10% to 12%.   On March 1,
2009 the note has been extended a second time until January 1,
2010.





MAY
2006 12% CONVERTIBLE DEBENTURE





On
May 4, 2006, the Company sold $500,000 of equity units (the “2006 Units”)
in a private placement. The 2006 Units consist of (i) a 12% convertible
debenture in the principal amount of $500,000 (the “12% Debentures”),
(ii) 500,000 warrants to purchase Company common stock at an exercise price
of $0.20 per share (the “0.20 Warrants”), (iii) 500,000 warrants to
purchase Company common stock at an exercise price of $0.25 per share (the “0.25
Warrants”), (iv) 1,000,000 warrants to purchase $0.10 per share (the “0.10
warrants”), and (v) 250,000 warrants to purchase Company common stock at an
exercise price equal to the Conversion Price (as defined below) of the 12%
Debentures (the “Conversion Price Warrants”). The 12% Debentures are entitled to
receive a 12% annual interest payment payable semi-annually at the option of the
Company in cash or shares of Company common stock valued at the then applicable
conversion price of the 12% Debentures on June 30 and December 31 of
each year beginning on December 31, 2006 or at the time of conversion of
the principal to which such interest relates.On November 30, 2007 the
Company issued 20,567,132 shares of common stock for the conversion of the
Debenture at an exercise price of $0.0243 per share. Upon the conversion notice
in November 4, 2006 of the conversion price warrants was set at $0.0243 per
share.





The $0.20
Warrants, $0.25 Warrants and $0.10 Warrants are exercisable for a period of five
years commencing on November 4, 2007. The Conversion Price Warrants are
exercisable by the Debentureholder for a period of five years commencing on or
after the date subsequent to November 4, 2007 on which all of the
Debentures have been converted. On the date of issuance, the Company recorded a
warrant liability of $59,991. As of December 31, 2008, the Company has warrant
liability for the above warrants of $87,672.





The 2006
Unitholder has the following registration rights with respect to the shares of
common stock into which the Debentures are convertible and warrants are
exercisable. The Company has agreed to file with the SEC a registration
statement covering the underlying shares of common stock on or before the
90th day after the last closing of the sale of 2006 Units and to use its
best efforts to have the registration statement declared effective within 60
days of filing. No registration statement has been filed to date.





SILENT
PARTNERSHIP LOANS-TBG





Technology-Beteiligungs-Gesellschaft
GmbH der Deutschen Ausgleichsbank (“TBG”) has provided a partnership loan, which
bears interest at 6% per annum. GAIA The total amount payable to TBG under
the Partnership Agreements at December 31, 2008 and December 31, 2007 was
$2,162,000 and $2,259,000 respectively.TBG is entitled to receive an annual 12%
share in profits related to its contributions under the TBG Partnership
Agreement. The TBG Partnership Agreement provides that should GAIA receive
additional injections of capital in the course of further financing rounds, TBG
shall adjust its profit sharing to the capital ration applicable at such time.
Management believes that based upon subsequent equity received by GAIA that the
present profit sharing that TBG is entitled to under the Agreement is
approximately 4.4 %. Management further believes that it is unlikely that TBG
will receive any profit sharing under the Partnership Agreement at any time in
the near future.





F-14
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





From
March 8, 2005 under the TBG Partnership Agreement, TBG is entitled to
demand a non-recurrent remuneration of 30% of the amount invested plus 6% of the
amount invested at the end of the period of participation for each year after
the expiration of the fifth full year of participation under certain
circumstances relating to the economic condition of GAIA. The Frankendael
Partnership Agreement and the TBG Partnership Agreement each terminated in
December 2008,





TBG has
contacted the Company and has claimed under the terms of the agreement the
remuneration in the amount of $1,297,000 (920,000 Euros).  Management
asserts that TBG has not met the terms of the agreement and is not entitled to
the above amount.





GAIA is
negotiating with TBG to convert the TBG Partner Agreement into a long-term loan
bearing interest rate of 6% per annum, including a repayment
schedule.





SUBORDINATED
LOANS FROM RELATED PARTY





GAIA has
received subordinated loans from Arch Hill, a related party, which totaled
$3,627,000and $6,272,000 as of December 31, 2008 and December 31,
2007.  The outstanding amount as of December 31, 2008 consists out of
unpaid management fees invoiced from Arch Hill to GAIA Holding BV over the
period 2004 till 2008 and accrued interest.





The
loans bear cumulative interest at 6% per annum. Under the subordinated loan
agreement (the “Subordinated Loan Agreement”) terms, the loans can be called
when GAIA does not have negative stockholders’ equity. The loans are
subordinated to all other creditors of GAIA.





On
February 28, 2008, the Company and GAIA executed a Debt Settlement
Agreement with Arch Hill Ventures N.V., Arch Hill Real Estate N.V. and Arch Hill
Capital N.V. (collectively, the “Debtholders”). Pursuant to the Agreement
$5,773,707 of debt owed by LTC and GAIA to the Debtholders was settled. LTC
agreed to issue to Arch Hill Capital N.V. 302,714,400 shares of LTC common stock
in full and complete settlement of the Debt (the “Debt Settlement”). In the
Agreement, Arch Hill Capital agreed that for a two year period it will not,
directly or indirectly, without the prior written consent of LTC issue, offer,
agree or offer to sell, sell, grant an option for the purchase or sale of,
transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of the Shares.





As
described above, the Company agreed to issue 302,714,400 common stock shares,
but because the Company did not have enough shares of common stock authorized,
the Company issued 45,016.84 Series C Preferred Stock in lieu of issuing
112,542,100 for partial debt settlement.





The
Company and Arch Hill, which is approximately 64% beneficial owner of the
Company, settled $2,146,529 of Arch Hill’s outstanding debt by issuing 45,016.84
shares of Series C Preferred Stock. Because this is a related party transaction,
any losses on settlement would be recorded as an adjustment to equity with no
financial statement impact. The Company recorded the Series C Preferred Stock
issued at par value with the difference affecting additional paid in capital for
a total impact on equity of $2,146,529.





As Arch
Hill received a beneficial conversion price on the Series C Preferred Stock, a
beneficial conversion feature was recorded on the Series C. Per paragraph 5 of
EITF 98-5, the embedded beneficial conversion feature was recognized by
allocating a portion of the proceeds equal to intrinsic value of the feature to
additional paid in capital.





Per
paragraph 6 of EITF 98-5 the amount allocated to the beneficial conversion
feature is limited to the amount of the proceeds allocated to the convertible
instrument. As such, in this case, the amount of the beneficial conversion
feature was limited to $2,146,529.





Series C
Preferred Stock is convertible upon the Company’s authorization and upon the
Company having a sufficient number of shares of common stock available for
issuance. Although the Company has to approve any notice of conversion, the
holder can submit a conversion option at time of issuance of the stock. As such,
management believes it is appropriate to record the beneficial conversion
discount at time of issuance of the Series C Preferred Stock.





As the
Company has accumulated deficit and no retained earnings, the beneficial
conversion will be recorded as follows: debit and credit to additional paid in
capital for $2,146,529. The transaction will be shown as separate line item in
the statement of stockholders’ deficit and is reflected on the income statement
as a decrease of income applicable to common shareholders. The above accounting
is consistent with the Minutes of joint session with SEC of AICPA SEC regulation
Committee which took place on March 20, 2001.








F-15
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








A balance
of $3,627,000 remains payable to Arch Hill after the issuance of the Series C
Preferred Stock discussed above.  . As the conversion price is
beneficial to Arch Hill at the time of the settlement agreement because the
conversion price was below market on that date, a beneficial conversion discount
was recorded on the remaining debt.





Based on
management’s calculations, the beneficial conversion discount was higher than
the value of the remaining note payable. As the beneficial conversion discount
cannot exceed the face value of the note, it was capped at $3,627,000. Since the
debt has no redemption date subsequent to the settlement agreement, the
beneficial conversion discount was expensed immediately at the time of the debt
settlement transaction.





On March
25, 2009 the Company filed an Amendment to its Restated Certificate of
Incorporation in which it increased the amount of authorized shares of common
stock to 3 billion. As part of this increase the Company will be able to convert
the balance of the above described debt of $3,627,000 to Arch Hill into
190,172,300 shares of common stock.





PROMISSORY  NOTES
– RELATED PARTY





Arch Hill
Real Estate N.V. had over the period 2004 and 2005 billed an amount of $70,000
per month  as management fees to Gaia Holding BV. The amount was
unpaid as per December 31, 2008 and is included in the  promissory
notes  of $1,777,000 from Arch Hill, in which balance unpaid
management fees and unpaid interest for the years 2004-2008 are included. The
accrued interest related to the notes in 2008 was approximately
$124,000.





JUNE
2008  9% CONVERTIBLE NOTES





The
Company closed on a convertible debt financing (the “June 2008 Financing”) with
several institutional investors from June 12, 2008 to December 23, 2008 for
a total of Euros 4.80 million (approximately U.S. $6,785,000). The accrued
interest on this amount is 139,000€ (approximately U.S. $204,000). The Company
issued its convertible notes (the “Convertible Notes”) to the Lenders in
connection with the June 2008 Financing. The Convertible Notes are convertible
at $0.10 per share into Company common stock or any equity securities issued by
the Company after the date of issuance of the Convertible Notes. The Convertible
Notes accrue interest at 9% per annum and are due and payable on
September 30, 2011 (the “Maturity Date”). All obligations of the Company
under the Convertible Notes will be secured by security interests in all of the
tangible and intangible fixed assets, including real estate, of the
Company.





In March
2009 the Board of Directors of the Company approved a reduction of the
conversion price of the Convertible Notes from $0.10 per share to
$0.07.  This reduction will apply to all holders of Convertible
Notes.





In April
2009 the Company received confirmation from one of the investors that the terms
and conditions of the June 2008 9% convertible loan will apply to the loan of
EUR 100,000 which was originally granted as a bridge loan in 2008. The amount of
EUR 100,000 is included in the balance of the June 2008 9% convertible
note.





Based
upon the decreased conversion price and under assumption that all note holders
would voluntary choose for a conversion into shares, the principal and accrued
interest under the Convertible Notes, would convert into 102,495,482 shares of
Common Stock as of December 31, 2008.





Prior to
the Maturity Date, the Convertible Notes are due and payable within three months
of a “Change in Control” of the Company or a “Financing”. “Change in Control” of
the Company is defined to have occurred if, at any time following the date of
the Convertible Notes: (A) any “person” or “group” (as such terms are used
in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) (other than the shareholders of the Company
identified in (1) Amendment No. 16/6 to Schedule 13D filed with
respect to the Company on April 29, 2008 and (2) Schedule 13D
filed with respect to the Company on June 2, 2008) becomes a “beneficial
owner” (as such term is used in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company’s then outstanding securities;
(B) a change in “control” of the Company (as the term “control” is defined
in Rule 12b-2 or any successor rule promulgated under the Exchange Act) shall
have occurred; (C) the shareholders or the Board of Directors of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company’s assets; or (D) the shareholders or the Board of Directors of the
Company approve a merger or consolidation of the Company with any other company,
other than a merger or consolidation which would result in the combined voting
power of the Company’s voting securities outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation. “Financing” is
defined as the consummation by the Company or any of its subsidiaries of any
debt or equity financing in excess of $20,000,000.








F-16
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








The
Convertible Notes provide that in the event of the receipt by the Company or any
of its subsidiaries of any proceeds from any “Asset Sale” or
“Insurance/Condemnation Award”, the Company shall apply within thirty
(30) Business Day after the receipt thereof the net after-tax proceeds
there from to pay in cash the principal and all accrued but unpaid interest
hereunder. “Asset Sale” means any sale, transfer, conveyance or other
disposition by the Company or any of its subsidiaries of any of its property or
assets, other than the sale of inventory in the ordinary course of business.
“Insurance/Condemnation Award” means the receipt by the Company or any of its
subsidiaries of any proceeds received under any casualty insurance polity
maintained by or for the benefit of the Company or any of its subsidiaries or as
a result of the taking of any assets of the Company or any of its subsidiaries
pursuant to the power of eminent domain or condemnation.





OCTOBER
2005 8% DEBENTURE (CORNELL CAPITAL)





On
October 7, 2005, the Company entered into a Securities Purchase Agreement
with Cornell Capital pursuant to which the Company issued convertible debentures
in the principal amount for $3,000,000, with an original maturity date of
October 1, 2006. The debentures were convertible at the option of Cornell
Capital any time up to maturity at a conversion price equal to $0.06 per share.
The debentures had a one-year term and accrued interest at 8% per year.
Interest and principal payments on the debenture were to commence on
January 1, 2006 and end on October 1, 2006. The debenture was issued
with five-year warrants to Cornell Capital to purchase 20,000,000 shares of
common stock at the following exercise prices: 10,000,000 at $0.06 per share
5,000,000 at $0.07 per share and 5,000,000 at $0.10 per share. The terms of the
Cornell Capital debenture were subsequently amended three times as described in
our financial reports for the year 2007.





The
Company determined that the warrants issued to the debenture holder qualified
for classification as a liability under EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.” The Company measured the fair value of the warrants at issuance and
subsequently at each year end using the Black-Scholes option-pricing model with
changes in fair value recognized in earnings. The value of the warrants is
recorded as a liability with the offset in warrant expense.





On
November 9, 2006, the Board of Directors of the Company approved a third
letter of amendment with Cornell Capital effective as of October 31, 2006
(the “Third Amendment”) whereby the Company amended the following provisions of
the Secured Debenture and the Warrants. All payments of principal and accrued
interest on the Secured Debenture otherwise due on or before March 15, 2006
are due on or before March 1, 2007. The conversion price at which Cornell
Capital may convert the outstanding principal and interest due to Cornell
Capital under the Secured Debenture into shares of the Company’s common stock is
reduced to $0.0128. The Warrants are amended to provide that the exercise price
is reduced to $0.0128 per share. The balance due and owing under the Secured
Debenture as of October 31, 2006 was $3,257,096. In the Third Amendment the
Company also agreed to pay Cornell Capital a forbearance fee of
$375,000.





On
May 30, 2007 the Company entered into a further letter agreement with
Cornell (the “Letter Agreement”). The Letter Agreement provided for the
conversion by Cornell of $288,722 of the principal of the Debenture into
22,556,385 restricted shares of the Company and the repayment by the Company of
the balance due of principal and interest owing to Cornell under the Debenture
(after taking into account the Conversion). Upon the Conversion by Cornell and
the Repayment by the Company, no amounts were outstanding under the Debenture
and Cornell agreed to release its security interest and return 250,000,000
shares of the Company’s common stock that were pledged as security for the
Debenture. In the Letter Agreement Section 3(a)(ii)(A) of the Debenture,
which limited Cornell’s ownership of the Company’s common stock to 4.9% of the
Company’s outstanding shares, was deleted in its entirety.





The
October 2005 Debenture was settled in five tranches in May and June of 2007.
Settlement of the debenture consisted of issuance of a total of 77,228,495
shares of common stock and payment of $2,011,475 plus approximately $770,000
cash payment of accrued interest. As of December 31, 2007 the Company
reported a warrant liability for the Cornell warrants of
$5,123,000.





On
March 6, 2008 Yorkville Advisors (f/k/a Cornell Capital) exercised all
their warrants (40,000,000) into common shares of the Company at an
exercise price of $0.0128 for a total cash consideration of $512,000. The
Company revalued the Cornell warrant liability immediately prior to the exercise
and recognized a gain on the change in the fair value of the warrants in the
Statement of Operations of $2,635,000. The fair value of the warrant
liability immediately prior to exercise was $2,488,000. This warrant
liability was then reclassified to common stock at par value of $400,000 for
40,000,000 newly issued common shares and the balance of $2,600,000
to additional paid in capital.








F-17
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








NOTE
5—INCOME TAXES





Dutch tax
legislation does not permit a Dutch parent company and its foreign subsidiaries
to file a consolidated Dutch tax return. Dutch resident companies are taxed on
their worldwide income for corporate income tax purposes at a statutory rate of
35%. No further taxes are payable on this profit unless that profit is
distributed. If certain conditions are met, income derived from foreign
subsidiaries is tax exempt in the Netherlands under the rules of the Dutch
“participation exemption”. However, certain costs such as acquisition costs and
interest on loans related to foreign qualifying participation’s are not
deductible for Dutch corporate income tax purposes, unless those cost are
attributable to Dutch taxable income. When income derived by a Dutch company is
subject to taxation in the Netherlands as well as in other countries, generally
avoidance of double taxation can be obtained under the extensive Dutch tax
treaty network or Dutch domestic law.





For
subsidiaries, local commercial and tax legislation contains provisions that may
imply more than one treatment for a transaction. Thus, management’s judgment of
the companies’ business activities and transactions may not coincide with the
interpretation of the tax authorities. In the event that a particular
transaction is challenged by the tax authorities the subsidiaries may incur
penalties and taxes on present and past transactions. Management believes that
the financial statements adequately reflect the activities of the
subsidiaries.See





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 breakdown of the deferred tax asset as
of December 31, 2008 is as follows:




Foreign
                  
                  
                  Domestic
                  
                  
                  TotalTax
      loss carry forwards
                  
                  $
                  24,358,000
                  
                  
                  $
                  21,871,000
                  
                  
                  $
                  46,229,000Less
      valuation allowance
                  
                  
                  (2,358,000
                  )
                  
                  
                  (21,871,000
                  )
                  
                  
                  (46,229,000
                  )$
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -






A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. Management has
determined, based on its recurring net losses, lack of a commercially viable
product and limitations under current tax rules, that a full valuation allowance
is appropriate.




Valuation
      Allowance, December 31, 2006
                  
                  $
                  37,262,000Increase
                  
                  
                  4,439,000Valuation
      Allowance, December 31, 2007
                  
                  $
                  41,701,000Increase
                  
                  
                  4,528,000Valuation
      Allowance, December 31, 2008
                  
                  $
                  46,229,000







At
December 31, 2008, the company had net operating loss carry forwards for United
States Federal income tax purposes of approximately $63,799,000 expiring in the
years 2009 through 2025 and net operating loss carry forwards of approximately
$55,498,000 for Pennsylvania state income tax purposes. Current United States
Federal tax law limits the use of net operating loss carry forwards after there
has been a substantial change in ownership, as defined in Internal Revenue code
Section 382, during a three year period. Due to changes in ownership
between 1993 and 1997, and the conversion of Senior Secured Convertible Notes in
January 1999, and the Share Exchanges, there exists substantial risk that the
Company’s use of net operating losses for United States and Pennsylvania tax
purposes may be severely limited under the Internal Revenue Code. The Company
and its subsidiaries are subject to audits for the past nine years as a result
of not filing the respective tax returns for certain of those
years.





In June
2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”) which
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement criteria for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
No. 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition and
defines the criteria that must be met for the benefits of a tax position to be
recognized. The cumulative effect of the change in accounting principle must be
recorded as an adjustment to opening retained earnings. Effective
January 1, 2007, the Company adopted FIN No. 48 and determined that
such adoption did not have a material impact on its consolidated financial
statements.








F-18
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








NOTE
6—COMMITMENTS AND CONTINGENCIES





BUILDING
LEASE





The
Company was leasing a 12,400 square foot facility at 5115 Campus Drive in
Plymouth Meeting, Pennsylvania pursuant to a Lease Agreement with PMP Whitemarsh
Associates dated July 22, 1994, as amended. The facility was being leased
under a one-year lease extension that commenced on April 1, 2008 and ended
on March 31, 2009. The base annual rent under this lease agreement was
$160,000. LTC did not extend the lease after March 31, 2009. In August 2008 the
Company signed an Asset Purchase Agreement with Porous Power Technologies and a
Sublease Agreement with Porous Power Technologies. At the facility, the Company
sold some of the assets to Porous Power Technologies, the others which could be
of use to the Company at its manufacturing facility in Nordhausen, Germany were
shipped from Plymouth Meeting to Nordhausen, Germany. Porous Power Technologies
has been sub-tenant to the Company at the Company’s Plymouth Meeting facility
from August 2008 until March 31, 2009. Porous Power Technologies signed a lease
agreement for the Plymouth Meeting facility on April 1, 2009. The Company signed
a six month sublease agreement on April 1, 2009 with Porous Power Technologies
of a total rent of $42,000 ($7,000 per month), with the possibility to extend
the sublease for 3 month periods. This facility has sufficient space to meet the
Company’s near-term needs in the United States.  The Company’s
corporate headquarters are located at the Plymouth Meeting, Pennsylvania
facility.





On
July 16, 2007 the Company entered into an Agreement of Sublease with Arch
Hill N.V. (“Arch Hill”) for the sublease by the Company of office space in the
Netherlands. The Sublease commenced July 16, 2007 and
terminated January 1, 2008. The office space will be used by the
coordinators of the project and the management of the Company. The monthly
payment is $15,500.





LITIGATION





The
Company entered into a Financial Advisory and Investment Banking Agreement with
North Coast Securities Corporation (“North Coast”) dated February 1,
2006. Subsequent to the date of the Agreement North Coast asserted
claims for unpaid compensation under the Agreement. Counsel for North Coast have
asserted a breach of contract claim against the Company seeking warrants to
purchase 500,000 shares of Company common stock with an exercise price of $0.04
per share and $10,000 per month for the term of the Agreement for a total of
$120,000. This matter has not been resolved as of December 31, 2008 or as of the
date of this report and on December 31, 2008 a lawsuit was filed in
Montgomery County against the Company in this matter. Management
asserts that no services were rendered to satisfy any compensation.
Montgomery County court has dismissed the case with prejudice on March 30,
2009. The Company was responsible for its own legal fees in this
matter.





Andrew J.
Manning, a former employee of the Company, filed a complaint in October 2008, in
the Superior Court of New Jersey, Morris County, Law Division, against the
Company and other parties, alleging breach of contract, breach of covenant of
good faith and fair dealing, negligent misrepresentation, tortious interference
with Mr. Manning’s economic gain, retaliation, unjust enrichment, and
intentional infliction of emotional distress. The Company and management believe
that the allegations in the Complaint have no merit and the Company intends to
vigorously defend the suit. This matter has not been resolved as of the date
hereof.





From time
to time the Company is a defendant or plaintiff in various legal actions which
arise in the normal course of business. As such the Company is required to
assess the likelihood of any adverse outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of the
provision required for these commitments and contingencies, if any, which would
be charged to earnings, is made after careful analysis of each matter. The
provision may change in the future due to new developments or changes in
circumstances. Changes in the provision could increase or decrease the Company’s
earnings in the period the changes are made. In the opinion of management, after
consultation with legal counsel, the ultimate resolution of these matters will
not have a material adverse effect on the Company’s financial condition, results
of operations or cash flows.





GOVERNANCE
AGREEMENT





On
April 28, 2008 the Company entered into a Governance Agreement (the
“Governance Agreement”) with certain shareholders of the Company (the
“Investors”), Stichting Gemeenschappelijk Bezit LTC, (the “Foundation”), and
Arch Hill Capital NV (“Arch Hill Capital” and together with the Foundation, the
“Arch Hill Parties”). The Investors include eight persons or entities that are
the beneficial owners of shares of the Company’s Series C Preferred Stock and/or
Common Stock. The Investors beneficially own approximately 29% of the Company’s
Common Stock in the aggregate. Arch Hill Capital beneficially owns approximately
64% of the Company’s Common Stock including the shares beneficially owned by its
affiliate the Foundation.








F-19
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








The
Company, the Foundation, Arch Hill Capital and the Investors have determined
that it is the best interest of the Company and its shareholders to enter into
certain governance and other arrangements with respect to the Company on the
terms set forth in the Governance Agreement. The Governance Agreement provides
that as of the Effective Time Ralph D. Ketchum, Marnix Snijder and Clemens E.M.
van Nispen tot Sevenaer, directors of the Company, resign as directors of the
Company (the “Resigning Directors”) and that the number of directors of the
Company be set at six. The Governance Agreement further provides that Fred J.
Mulder and Theo M.M. Kremers be appointed directors of the Company as of the
Effective Time to fill the vacancies on the Board of Directors resulting from
the resignation of the Resigning Directors.





EMPLOYMENT
AND CONSULTING AGREEMENTS





On
October 1, 2007, the Company entered into an employment agreement with Ken
Rudisuela to serve as the Chief Operating Officer of the Company. The employment
agreement provides for a three year term commencing on October 1, 2007.
Under the employment agreement, Mr. Rudisuela will receive a base annual
salary of $200,000 and such additional compensation that is approved by the
Board of Directors of the Company. If Mr. Rudisuela is terminated by the
Company other than for cause, Mr. Rudisuela will be entitled to receive his
base salary for a period equal to the lesser of 6 months from the date of
termination or the remaining term of the employment agreement.





On
January 1, 2008, Dr. Klaus Brandt entered into a new employment
contract with GAIA for a three year term. Under this employment agreement,
Dr. Brandt will receive a base annual salary of €200,000 and such
additional compensation that is approved by the Board of Directors of the
Company.





On June
26, 2008 Dr. Klaus Brandt was appointed as the Chief Technology Officer of
Lithium Technology Corporation. Prior to this  Dr. Klaus Brandt
was the Chief Executive Officer of Lithium Technology Corporation by the
Company’s Board of Directors. Prior to this Dr. Klaus Brandt has been
serving as a Director of the Company since September 27, 2006 and as an
Executive Vice President since June 2005. Additionally, Dr. Brandt has been
serving as the Managing Director of the Company’s subsidiary, GAIA, since April
2005. Pursuant to the employment agreement with Dr. Brandt, which
expired on December 31, 2008, he served as the Managing Director of
GAIA.





In
connection with the Governance Agreement, on April 28, 2008 the Company
entered into a consulting agreements with each of Christiaan A. van den Berg
(the “Van Den Berg Consulting Agreement”), Fred J. Mulder (the “Mulder
Consulting Agreement”), OUIDA Management Consultancy B.V. (the “OUIDA Consulting
Agreement”), and Romule B.V. (the “Romule Consulting Agreement”) (collectively,
the “Consulting Agreements”).





Each of
the Consulting Agreements has a term of one year and may be terminated on 60
days written notice. Each Consulting Agreement provides that the Consultant will
consult with the directors, officers and employees of the Company concerning
matters relating to the management and organization of the Company, its
financial policies, the terms and conditions of employment of the Company’s
employees, and generally any matter arising out of the business affairs of the
Company.





The
Mulder Consulting Agreement with Fred J. Mulder, a director of the Company,
provides for Mr. Mulder to spend approximately 32 hours per month in
fulfilling his obligations under the Consulting Agreement and the payment by the
Company of a monthly fee of US $4,167.





The Van
Den Berg Consulting Agreement with Christiaan A. van den Berg, the Chief
Executive of Arch Hill Capital and the Foundation and the co-chairman of the
Board of the Company, provides for Mr. van den Berg to spend approximately
32 hours per month in fulfilling his obligations under the Consulting Agreement
and the payment by the Company of a monthly fee of US $4,167.





The
Romule Consulting Agreement provides for Frits Obers, an employee of Romule
B.V., to spend approximately 160 hours per month in fulfilling his obligations
under the Consulting Agreement and the payment by the Company of a monthly fee
of Euros 20,820 (approximately US $30,000 as of the date of the
agreement).








F-20
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








The OUIDA
Consulting Agreement provides for Theo Kremers, an employee of OUIDA Management
Consultancy B.V. and a director and Chief Executive Officer of the Company,
to spend approximately 160 hours per month in fulfilling his obligations under
the Consulting Agreement and the payment by the Company of a monthly fee of
Euros 20,820 (approximately US $30,000 as of the date of the
agreement).





On
October 14, 2008, the Company entered into a Transition and Termination
Agreement (the “Agreement”) with the Company’s Former Chief Financial
Officer.  The Agreement calls for a lump sum termination payment of
$225,000 plus accrued but unpaid vacation.  In addition, the Company
agreed to issue 1,500,000 shares of the Company ‘s common stock to the former
CFO as additional consideration.  The Company recorded compensation
expense of $83,000 related to the stock grant based on the fair value of the
Company’s stock on the date of the agreement, calculated using the Black-Scholes
method.





In 2009 a
consulting fee of $705,000 was claimed by Fidessa Asset Management for services
rendered over the period April 1, 2008 until December 31, 2008. There is no
signed agreement between LTC and Fidessa Asset Management S.A. regarding these
consulting services and the Company is disputing the amount.





For the
period October 1, 2006 until April 1,2008 an advisory services agreement by
Fidessa Asset Management S.A. was signed by LTC. For these services Fidessa
Asset Management S.A. received fees of $450,000 in 2007 and $300,000 in 2008.
Additionally Fidessa Asset Management S.A. is entitled to receive an equity
compensation of 16,666,667 of common shares. As of December 31, 2008 these
shares have not been delivered by the Company





NOTE
7—STOCKHOLDERS’ EQUITY





SERIES
A PREFERRED STOCK





On
August 1, 2005 the Company issued to an independent foreign investor 1,000
shares of the Company’s Series A Preferred Stock. The shares of Series A
Preferred Stock were entitled to receive an 8% annual cumulative dividend
payable in shares of company common stock at the conversion price of the stock.
The conversion price for the Series A Preferred Stock is 80% of the average
closing trading prices for the common stock during the 20 trading day period
prior to the date of the conversion notice. For each share of the Company’s
common stock issued upon conversion of the Series A Preferred Stock, a four year
warrant to purchaseone-half
of a share of Company common stock was issued at an exercise price per share
equal to 125% of the conversion price of the Series A Preferred Stock upon
conversion of the shares of Series A Preferred Stock by the stockholder; and for
each share of Company common stock Issued upon conversion of the Series A
Preferred Stock, a four year warrant to purchaseone-half
of a share of Company common stock at an exercise price per share equal to 150%
of the conversion price of the Series A Preferred Stock upon conversion of the
shares of Series A Preferred Stock by the stockholder.





On
July 10, 2007 the stockholder of Series A Preferred Stock sent a notice of
conversion for 100 shares of Series A Preferred in exchange for 1,197,243 common
shares of the Company. The balance of the Series A Preferred Stock
(900) was convertible at the election of the holder at any time until
November 19, 2007 at a conversion price then in effect as in accordance
with the Series A Preferred Stock agreement. The Series A Preferred Stock was
automatically converted into Company common stock on November 19, 2007 into
9,868,421 common shares of the Company plus 2,004,494 shares, which were issued
as cumulative dividend in accordance with the Series A Preferred Stock
agreement. Additionally, the Company issued to the stockholder of Series A
Preferred 11,065,665 warrants with exercise prices ranging from $0.1044 to
$0.1368.





SERIES
B PREFERRED STOCK





The
Company has authorized and outstanding 100,000 shares of Series B Convertible
Preferred Stock. The Company issued 100,000 preferred B shares in connection
with the Debt Exchange in October 2005. The shares of Series B Convertible
Preferred Stock have the same dividend rights as the Company’s common stock
shares. The 100,000 shares of convertible preferred stock are convertible into
an aggregate of 264,103,114 shares of common stock and have voting rights equal
to 264,103,114 shares of common stock.





The
Series B Convertible Preferred Stock has no mandatory or optional redemption
rights, thus, cannot be redeemed for cash. The Series B Convertible Preferred
Stock is only convertible into the Company’s common stock upon the Company
having enough shares of common stock authorized to issue. As the control of the
conversion lies with the Company in authorizing an increase in the number of
shares of Company common stock, the holder cannot force conversion without such
increase in authorized shares, and the stock has no redemption rights, the
Series B Preferred Stock is classified in permanent equity on the Company’s
consolidated balance sheet.








F-21
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








SERIES
C PREFERRED





During
2007 the Company closed on the sale of Series C Preferred Stock in several
private placement transactions. The Company sold 119,481 shares of Series C
Preferred Stock for an aggregate purchase price of $17,922,117. Each share of
Series C Preferred Stock is convertible into 2,500 shares of Company common
stock. At a purchase price of $150 per share of Series C Preferred Stock, the
effective purchase price for each underlying share of Company common stock is
$0.06 per share. Additionally, the Company sold 35,868 shares of Series C
Preferred Stock for an aggregate purchase price of $9,466,875. Each share of
Series C Preferred Stock is convertible into 2,500 shares of Company common
stock. At a purchase price of $250 per share of Series C Preferred Stock, the
effective purchase price for each underlying share of Company common stock is
$0.10 per share. The Company did not pay any underwriting discounts or
commissions in connection with the sale of the Series C Preferred Stock in this
transaction. For issuances of convertible Preferred Stock with beneficial
conversion feature the discount is recognized upon issuance. In 2007 $11,773,723
was recorded, and the amount is reflected as an increase to the Net Loss to
common shareholders in the Company’s statement of operation.





On
November 28, 2006, the Company filed with the Secretary of State of the
State of Delaware a Certificate of Designation of Series C Preferred Stock (the
“Certificate of Designation”) designating 300,000 of the Company’s authorized
preferred stock as Series C Preferred Stock. The Certificate of Designation was
approved by the Company’s Board of Directors.





Each
share of the Series C Preferred Stock is convertible at the option of the holder
thereof into 2,500 shares of Company common stock at any time following the
authorization and reservation of a sufficient number of shares of Company common
stock by all requisite action, including action by the Company’s Board of
Directors and by Company stockholders, to provide for the conversion of all
outstanding shares of Series C Preferred Stock into shares of Company common
stock.





Each
share of the Series C Preferred Stock will automatically be converted into 2,500
shares of Company common stock 90 days following the authorization and
reservation of a sufficient number of shares of Company common stock to provide
for the conversion of all outstanding shares of Series C Preferred Stock into
shares of Company common stock. The shares of Series C Preferred Stock are
entitled to vote together with the common stock on all matters submitted to a
vote of the holders of the common stock. On all matters as to which shares of
common stock or shares of Series C Preferred Stock are entitled to vote or
consent, each share of Series C Preferred Stock is entitled to the number of
votes (rounded up to the nearest whole number) that the common stock into which
it is convertible would have if such Series C Preferred Stock had been so
converted into common stock as of the record date established for determining
holders entitled to vote, or if no such record date is established, as of the
time of any vote on such matters. Each share of Series C Preferred Stock is
entitled to the number of votes that 2,500 shares of common stock would
have.





In
addition to the voting rights provided above, as long as any shares of Series C
Preferred Stock are outstanding, the affirmative vote or consent of the holders
of two-thirds of the then-outstanding shares of Series C Preferred Stock, voting
as a separate class, will be required in order for the Company to:





(i)
            amend,
      alter or repeal, whether by merger, consolidation or otherwise, the terms
      of the Series C Preferred Stock or any other provision of Company Charter
      or Bylaws, in any way that adversely affects any of the powers,
      designations, preferences and relative, participating, optional and other
      special rights of the Series C Preferred Stock;(ii)
            issue
      any shares of capital stock ranking prior or superior to, or on parity
      with, the Series C Preferred Stock; or(iii)
            Sub
      divide or otherwise change shares of Series C Preferred Stock into a
      different number of shares whether in a merger, consolidation,
      combination, recapitalization, reorganization or
otherwise.





The
Series C Preferred Stock ranks on a parity with the common stock as to any
dividends, distributions or upon liquidation, dissolution or winding up, in an
amount per share equal to the amount per share that the shares of common stock
into which such Series C Preferred Stock are convertible would have been
entitled to receive if such Series C Preferred Stock had been so converted into
common stock prior to such distribution.








F-22
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








On
September 3, 2008 30,000 shares of Series C Preferred Stock held by investors
were converted into 75,000,000 shares of Company common stock.





2002
STOCK INCENTIVE PLAN





LTC’s
Board of Directors adopted the 2002 Stock Incentive Plan (the “2002 Plan”) in
January 2002. The 2002 Plan terminates in 2012. A total of 350,000 shares of
common stock are reserved and available for grant. No options were granted for
the years ended December 31, 2008 and 2007. The exercise price of an option
granted under the 2002 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 the
grant. Options granted that are not vested will be cancelled immediately upon
termination of the grantee’s employment or association with LTC, except in
certain situations such as retirement, death or disability. Vested options are
exercisable for up to sixty months upon termination of the Grantee’s employment
or association with LTC.





All
outstanding employees and directors options are summarized as
follows:





Options
                
                
                Weighted
      Average Exercise PriceOutstanding
      and Exercisable, January 1, 2007
                
                
                118,355
                
                
                $
                4.85Expired
                
                
                (28,453
                )
                
                
                5Outstanding
      and Exercisable December 31, 2007
                
                
                89,902
                
                
                $
                4.78Expired
                
                
                (750
                )
                
                
                2Outstanding
      and Exercisable December 31, 2008
                
                
                89,152
                
                
                $
                4.80





The
following table summarizes information about stock options outstanding at
December 31, 2008:





Range
      of Exercise Prices
                        
                        
                        Options
      Outstanding
                        
                        Weighted
      AverageRemainingContractual Life$
                        2.30
                        
                        
                        
                        2,000
                        
                        0.1  years$
                        2.80
                        
                        
                        
                        1,000
                        
                        4
      years$
                        4.00
                        
                        
                        
                        32,500
                        
                        2.5
      years$
                        4.40
                        
                        
                        
                        730
                        
                        2
      years$
                        5.20
                        
                        
                        
                        41,695
                        
                        1.5
      years$
                        5.60
                        
                        
                        
                        9,227
                        
                        2
      years$
                        9.60
                        
                        
                        
                        2,000
                        
                        1.5
      yearsBalance
      outstanding as of December 31, 2008
                        
                        
                        
                        89,152








F-24
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





WARRANTS





Warrants
as of December 31, 2007 and 2008 are summarized as follows:





Warrants
                
                
                Weighted
      Average Exercise PriceOutstanding
      and Exercisable, December 31, 2006
                
                
                175,585,524
                
                
                $
                0.2507Issued
                
                
                11,065,665
                
                
                
                0.1243Exercised
                
                
                (576,000
                )
                
                
                0.0550Expired
                
                
                (160,000
                )
                
                
                3.6063Outstanding
      and Exercisable, December 31, 2007
                
                
                185,915,189
                
                
                $
                0.2335Exercised
                
                
                (40,000,000
                )
                
                
                0.0128Expired
                
                
                (112,574,158
                )
                
                
                0.0836Outstanding
      and Exercisable, December 31, 2008
                
                
                33,341,031
                
                
                $
                1.1327





The
following table summarizes information about warrants outstanding as of December
31, 2008:




Exercise
      Price
                    
                    
                    Number
      of Warrants Outstanding
                    
                    
                    Time
      to Expiration in Years$
                    0.2250
                    
                    
                    
                    277,779
                    
                    
                    
                    0.1
                    
                    Years0.2750
                    
                    
                    
                    277,779
                    
                    
                    
                    0.1
                    
                    Years2.0000
                    
                    
                    
                    1,000,000
                    
                    
                    
                    0.1
                    
                    Years0.0240
                    
                    
                    
                    1,570,000
                    
                    
                    
                    0.1
                    
                    Years0.0270
                    
                    
                    
                    300,000
                    
                    
                    
                    0.1
                    
                    Years0.0280
                    
                    
                    
                    130,000
                    
                    
                    
                    0.1
                    
                    Years0.0290
                    
                    
                    
                    262,836
                    
                    
                    
                    0.1
                    
                    Years0.0310
                    
                    
                    
                    130,000
                    
                    
                    
                    0.1
                    
                    Years0.0340
                    
                    
                    
                    150,000
                    
                    
                    
                    0.1
                    
                    Years0.0390
                    
                    
                    
                    280,000
                    
                    
                    
                    0,1
                    
                    Years0.0440
                    
                    
                    
                    250,000
                    
                    
                    
                    0.1
                    
                    Years0.0490
                    
                    
                    
                    250,000
                    
                    
                    
                    0.1
                    
                    Years0.0520
                    
                    
                    
                    180,000
                    
                    
                    
                    0.1
                    
                    Years0.0570
                    
                    
                    
                    230,000
                    
                    
                    
                    0.1
                    
                    Years0.0620
                    
                    
                    
                    50,000
                    
                    
                    
                    0.1
                    
                    Years0.0820
                    
                    
                    
                    250,000
                    
                    
                    
                    0.1
                    
                    Years0.0840
                    
                    
                    
                    50,000
                    
                    
                    
                    0.1
                    
                    Years0.0860
                    
                    
                    
                    100,000
                    
                    
                    
                    0.1
                    
                    Years0.0880
                    
                    
                    
                    25,000
                    
                    
                    
                    0.1
                    
                    Years0.0890
                    
                    
                    
                    50,000
                    
                    
                    
                    0.1
                    
                    Years0.0940
                    
                    
                    
                    75,000
                    
                    
                    
                    0.1
                    
                    Years0.0970
                    
                    
                    
                    50,000
                    
                    
                    
                    0.1
                    
                    Years0.0990
                    
                    
                    
                    25,000
                    
                    
                    
                    0.1
                    
                    Years0.1000
                    
                    
                    
                    25,000
                    
                    
                    
                    0.1
                    
                    Years0.1760
                    
                    
                    
                    25,000
                    
                    
                    
                    0.1
                    
                    Years0.2200
                    
                    
                    
                    25,000
                    
                    
                    
                    0.1
                    
                    Years0.3520
                    
                    
                    
                    25,000
                    
                    
                    
                    0.1
                    
                    Years0.6600
                    
                    
                    
                    25,000
                    
                    
                    
                    0.1
                    
                    Years0.1500
                    
                    
                    
                    662,503
                    
                    
                    
                    0.1
                    
                    Years0.1800
                    
                    
                    
                    662503
                    
                    
                    
                    0.1
                    
                    Years0.1445
                    
                    
                    
                    1,307,698
                    
                    
                    
                    0.1
                    
                    Years








F-25
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS











0.1736
                      
                      
                      
                      1,307,698
                      
                      
                      
                      0.1
                      
                      Years2.0000
                      
                      
                      
                      1,500,000
                      
                      
                      
                      0.3
                      
                      Years2.4000
                      
                      
                      
                      10,500,000
                      
                      
                      
                      0.3
                      
                      Years0.0257
                      
                      
                      
                      131,578
                      
                      
                      
                      0.4
                      
                      Years0.0675
                      
                      
                      
                      2,510,000
                      
                      
                      
                      0.4
                      
                      Years0.0201
                      
                      
                      
                      500,000
                      
                      
                      
                      0.4
                      
                      Years0.0245
                      
                      
                      
                      746,557
                      
                      
                      
                      0.4
                      
                      Years0.0550
                      
                      
                      
                      20,000
                      
                      
                      
                      0.4
                      
                      Years0.1870
                      
                      
                      
                      264,739
                      
                      
                      
                      0.4
                      
                      Years0.2570
                      
                      
                      
                      684,099
                      
                      
                      
                      0.7
                      
                      Years0.3800
                      
                      
                      
                      2,205,262
                      
                      
                      
                      1.8
                      
                      Years0.0300
                      
                      
                      
                      2,000,000
                      
                      
                      
                      1.9
                      
                      Years0.2500
                      
                      
                      
                      500,000
                      
                      
                      
                      2.3
                      
                      Years0.2000
                      
                      
                      
                      500,000
                      
                      
                      
                      2.3
                      
                      Years0.1000
                      
                      
                      
                      1,000,000
                      
                      
                      
                      2.3
                      
                      Years0.0243
                      
                      
                      
                      250,000
                      
                      
                      
                      2.3
                      
                      YearsTotal
      warrants outstanding as of December 31, 2008
                      
                      
                      
                      33,341,030





NOTE
8—SEGMENTS





Segment
Information





SFAS
No. 131, “Disclosure about Segments of an Enterprise and Related
Information” (SFAS 131), defines operating segments as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Based on the way it organizes
its business for making operating decisions and assessing performance, the
Company has determined that it has one reportable operating segment with two
geographical locations.





Management
reviews its Domestic Operations and its European Operations to evaluate
performance and resources. Management has aggregated its operations into one
industry segment since its Domestic and European Operations are similar and meet
the aggregation criteria of SFAS 131, “Disclosures about segments of an
enterprise and related information”.





Geographic
information is as follows:








Year
      Ended
                      
                      
                      Year
      EndedDecember
      31, 2008
                      
                      
                      December
      31, 2008RevenuesDomestic
      Operations
                      
                      $
                      1,301,000
                      
                      
                      $
                      1,504,000European
      Operations
                      
                      
                      2,866,000
                      
                      
                      
                      1,105,000$
                      4,167,000
                      
                      
                      $
                      2,609,000Long-lived
      assets, netDomestic
      Operations
                      
                      $
                      3,000
                      
                      
                      $
                      101,000European
      Operations
                      
                      
                      6,930,000
                      
                      
                      
                      7,688,000$
                      6,933,000
                      
                      
                      $
                      7,789,000





In 2008
revenues were concentrated for 29% with 2 customers and purchases were
concentrated for 15% with 1 vendor. In 2007, 24% of revenue was derived from one
customer.








F-26
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
9—SUPPLEMENTAL CASH FLOW INFORMATION





SUPPLEMENTAL
CASH FLOW INFORMATION





For the
Years Ended December 31,





2008
                  
                  2007Convertible
      Preferred Series C Shares  with $300 par value were converted
      into common stock with a par value of $750,000.
                  
                  Convertible
      debentures and accrued interest of $989,000 were converted into common
      stock with par value of $820,000.112,574,159
      outstanding warrants with a related warrant liability of $2,824,000
      expired
                  
                  Convertible
      debenture of $500,000 was converted into common stock with par value of
      $206,000.45,017
      shares of Convertible Preferred Series C stock with $450 par value was
      issued in a debt settlement agreement with Arch Hill.
                  
                  Convertible
      Preferred Series A of $1,000,000 was converted into common stock with par
      value of $111,000.1,500,000
      shares of common stock with $15,000 par value were issued to a former
      officer of the Company
                  
                  Accrued
      dividends of $181,000 were paid through the issuance of common stock with
      a par value of $20,000.Convertible
      Preferred Series C shares with $380 par value were converted into common
      stock with par value of $920,000.Discount
      of $325,000 was recorded on July 2007 10% Convertible
      Debentures.576,000
      Warrants with a cashless exercise feature were converted into common stock
      with a total par value of
$3,200.





NOTE
10—SUBSEQUENT EVENTS





2009
Amendment of Certificate of Incorporation





On March
25, 2009, the Company filed an Amendment to its Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, to increase
the number of authorized shares of the Company’s common stock to 3,000,000,000
shares (the “Authorization Date”).  The amendment of the Company’s
Restated Certificate of Incorporation to reflect the increase was approved by
the Company’s Board of Directors and the holders of a majority of the Company’s
common stock in October 2008.  An information statement describing the
amendment was mailed to stockholders on February 10, 2009 and became effective
on March 2, 2009.  The increase in the number of authorized shares of
common stock is needed in order for the Company to have an adequate reserve of
common stock available for issuance upon conversion of existing convertible
securities and exercise of outstanding options and warrants and to satisfy
certain commitments to issue common stock.





2007
Convertible Debenture Extension





On March
1, 2009 the July 2007 10% Convertible Note was extended a second time until
January 1, 2010.





Reduction
of Exercise Price of June 2008 Converible Note





In March
2009 the Board of Directors of the Company approved a reduction of the
conversion price of the Convertible Notes from $0.10 per share to
$0.07.  This reduction will apply to all holders of Convertible
Notes.





In April,
2009 the Company received confirmation from one of the investors that the terms
and conditions of the June 2008 9% convertible loan will apply to the loan of
EUR 100,000 which was originally granted as a bridge loan in 2008. The amount of
EUR 100,000 is included in the balance of the June 2008 9% convertible
note.








F-27
 LITHIUM
TECHNOLOGY CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








Other





In March
2009 LTC received a request from Frankendael Participatiemaatschappij NV
(“Frankendael”) to confirm to Frankendael the outstanding amount as part of the
“Stille Beteiligung” loan agreement of March 1999 (the “Frankendael Debt”),
which would mature after 10 years. Management is of the opinion that there is no
outstanding amount due from either LTC or GAIA to Frankendael due to the
transfer of the Frankendael Debt from Frankendael to Arch Hill Ventures and the
October 2005 debt exchange between Arch Hill Ventures and the Company, as
reported in the Company’s Form 8-K dated October 21, 2005.





In June
2009 GAIA received the initial assessment of an investigation of the German tax
authorities regarding the transfer of Intellectual Property Rights and patents
to Dilo AG in Switzerland, a wholly owned subsidiary, over the period 2001-2004.
In the past years, former management has been of the opinion that these
investigations would not result in a material claim against GAIA or its former
management from the German tax authorities. The claim is that on the value of
the transfer both Value Added Tax and Corporate tax had to be filed and paid.
The amounts which in the view of the German Tax authorities should have been
paid over the above mentioned period is substantial and could have substantial
impact on the continuity of GAIA. Management is preparing a response to the
German Tax authorities claim but disagrees with their claim and believes that
the ultimate resolution of this matter will not have a material adverse effect
on the Company’s financial statements.







F-28