MILLENNIUM CELL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

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000-31083
(COMMISSION FILE NUMBER)

MILLENNIUM CELL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 22-3726792
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

1 INDUSTRIAL WAY WEST, EATONTOWN, NEW JERSEY 07724
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(732) 542-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE PER SHARE

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

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

The aggregate market value of the registrant's common stock held by
non-affiliates as of March 1, 2001 was $55,627,617.

The number of shares outstanding of the registrant's common stock as of
March 1, 2001 was 27,167,981.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement dated March 21,
2001 to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held April 26, 2001 is incorporated by reference into Part
III.

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TABLE OF CONTENTS

ITEM DESCRIPTION PAGE
---- ----------- ----

PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9

PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 11
Item 8. Financial Statements and Supplementary Data................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 14

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 15
Item 11. Executive Compensation...................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 17
Item 13. Certain Relationships and Related Party Transactions........ 17

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 18

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PART I

ITEM 1. BUSINESS.

GENERAL

We have invented, patented and developed a proprietary process called
Hydrogen on Demand(TM) that safely generates pure hydrogen or electricity from
environmentally friendly raw materials. In the process, the energy potential of
hydrogen is carried in the chemical bonds of sodium borohydride, which in the
presence of a catalyst releases hydrogen or produces electricity. The primary
input components of the reaction are water and sodium borohydride, a derivative
of borax, which is found in substantial natural reserves globally. Hydrogen from
this system can be used to power fuel cells, as well as fed directly to internal
combustion engines. We also have a patented design for boron-based longer-life
batteries.

Our process can be used to:

- generate hydrogen for use by fuel cells in the production of electricity,

- generate hydrogen for use by modified internal combustion engines, and

- power longer-life batteries.

In its simplest form, our sodium borohydride technology provides the
ability to store and transport hydrogen as a solid. Since hydrogen provides the
energy used by fuel cells to create electricity, this is the equivalent of
transporting clean electricity as a solid. To put this in another perspective,
an aqueous solution containing 35% by weight sodium borohydride has an energy
density that is equal to or greater than that of gasoline. The table below shows
the approximate energy density of various fuels compared to hydrogen.

ENERGY CONTENT

FUEL BTU/LB.
---- -------

Coal........................................................ 10,000
Oil......................................................... 18,000
Gasoline.................................................... 19,000
Diesel...................................................... 19,000
Natural Gas................................................. 21,000
Hydrogen.................................................... 52,000

We believe that the our proprietary Hydrogen on Demand(TM) hydrogen
generation system offers significant advantages over other methods of generating
hydrogen fuel, which often require the storage of hydrogen in bulky and
potentially explosive tanks or consume polluting hydrocarbon fuels. Advantages
of our system are both environmental and economic. We have used our hydrogen
generation system to power an operating series-hybrid sports utility vehicle and
two other vehicles, including a fuel cell vehicle and a former New York City
taxicab that burns hydrogen in its internal combustion engine. We believe that
sodium borohydride fuel could be distributed through fleet refueling centers,
and eventually through the existing network of neighborhood gasoline stations.
We have also designed and produced single use power cells that use our
proprietary system to provide electricity for the portable power markets,
including laptop computers, cellular telephones, hearing aids, personal
organizers and other portable devices.

OUR HYDROGEN STORAGE AND DELIVERY TECHNOLOGY

We believe that our system minimizes the storage, handling and economic
issues that are associated with other hydrogen delivery systems. The chemical
reactions used in our process eliminate the pollutants and undesirable emissions
of typical hydrocarbon-based energy production systems, which use fossil fuels
such as gasoline, natural gas and diesel. The byproducts of our process are
primarily heat and borax, a type of sodium borate, which can be recycled to form
sodium borohydride. Sodium borohydride-based energy systems have favorable
energy density, power-to-weight and volume characteristics when compared to
mobile power sources

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now in use. Based on our laboratory tests, we believe that batteries using our
patented sodium borohydride process can deliver substantially more potential
energy per unit of both weight and volume compared to the batteries on the
market today.

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

In addition to safety and environmental advantages, we believe that our
system also has operating and manufacturing efficiencies superior to those of
competitive technologies. In internal combustion engines, well-to-wheel
efficiency is a common measure of how much energy is lost in the process of
producing, refining, formulating and consuming a fuel. Our testing to date
indicates that an internal combustion engine consuming hydrogen generated from
sodium borohydride will provide a vehicle with significantly higher
well-to-wheel efficiency than that of gasoline in an internal combustion engine,
while reducing greenhouse gas emissions. Our Hydrogen on Demand(TM) system, when
used as a hydrogen source to power a fuel cell, is even more efficient, up to
three times as efficient as gasoline.

The recycling process to regenerate the spent fuel into sodium borohydride
is feed stock neutral -- meaning that the least expensive locally available
source of energy can be used, including natural gas, waste oil, coal,
hydroelectric or solar energy. If carbon fuels are used in the regeneration
process, the emissions associated with these fuels are concentrated locally and
can be controlled as a single point source, unlike conventional gasoline burning
automobiles which scatter emissions throughout an area with no real method of
control.

FUEL CELL TECHNOLOGY AND FUEL CELL SYSTEMS

A fuel cell is a device that combines hydrogen, derived from a fuel such as
natural gas, propane, methanol or gasoline, and oxygen from the air, to produce
electric power without combustion. The following table sets forth information
relating to the principal types of fuel cells.

FUEL CELL TYPE PRINCIPAL APPLICATIONS INPUT FUEL OPERATING TEMPERATURE
-------------- ---------------------- --------------------- ---------------------

Alkaline Small-size aerospace Hydrogen (pure) 20(LOGO)C to
and defense 100(LOGO)C
applications
Phosphoric acid Mid- to large-size Hydrogen up to 200(LOGO)C
stationary power
generation
applications
Molten carbonate Large-size power Hydrogen or natural at least 650(LOGO)C
generation gas
applications
Solid oxide Large- to very Hydrogen, natural gas at least 1000(LOGO)C
large-size stationary or fossil fuels
power generation
applications
Proton exchange Transportation, small- Hydrogen (pure) up to 80(LOGO)C
membrane, or PEM to mid-size stationary
power and portable
power generation
applications

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FUEL CELL TYPE PRINCIPAL APPLICATIONS INPUT FUEL OPERATING TEMPERATURE
-------------- ---------------------- --------------------- ---------------------

Sodium borohydride Transportation, small- Sodium borohydride up to 80(LOGO)C
to very large-size solution
stationary power and
portable power
generation
applications

In the small-scale commercial market, where sizes of fuel cells range from
25 watts to 250 kilowatts, the PEM fuel cell has been the type most tested and
used in laboratories and in prototypes. The smaller size and lower temperature
characteristics make PEM fuel cells ideal for use in vehicles, and therefore,
much of the current testing to date in transportation markets has involved this
type of fuel cell.

The PEM fuel cell, as any fuel cell, requires hydrogen. Current methods of
storing significant amounts of hydrogen in vehicles require use of large tanks
of liquid (cryogenic) or compressed gaseous hydrogen. For a 3,000 pound
automobile to achieve a range of 300 miles using a PEM fuel cell system, the
equivalent of 32 twenty-five pound tanks (weighing 800 lbs.) of compressed
gaseous hydrogen would be required. For cryogenically stored hydrogen, the
weight drops significantly. However, even though the weight of the overall
system decreases, the overall energy efficiency does too, as approximately
two-thirds of the total energy of the cryogenically stored hydrogen is required
to liquefy the hydrogen. Both of these systems are cumbersome, voluminous and
potentially hazardous, as an accident that damages a full tank of either liquid
or gaseous hydrogen might result in an extremely powerful explosion. To date, we
are unaware of any other methods for storing significant amounts of hydrogen in
a compact, lightweight and safe manner.

MARKET OPPORTUNITY FOR OUR TECHNOLOGY

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

In addition to the transportation markets, there is a growing worldwide
consumer demand for quiet, clean and environmentally friendly products in the
portable power markets. Promising applications include portable power products
for use in densely populated areas where noise pollution is a significant
concern and for use indoors or in other areas where high noise and high
emissions of internal combustion engine generators pose significant problems. We
believe that public concern over pollution is focusing attention on the use of
environmentally cleaner methods of power generation that can use non-renewable
natural resources more efficiently. We also believe that the battery market,
fueled by technological innovations, will continue to present a considerable
market opportunity for more durable and lighter power sources.

Transportation Markets

In the transportation market, the United States federal government,
California and several northeastern states, principally New York, Massachusetts
and Maine, have adopted laws and regulations establishing vehicle emission
standards and requirements for the sale, beginning in 2003, of low, ultra-low,
super ultra-low and zero emission vehicles, or ZEVs. Regulations adopted by
these states provide that 10% of the new vehicles sold in these states must meet
zero emission guidelines by 2003. Furthermore, recent amendments to California
regulations allow automobile manufacturers to meet ZEV requirements using
hydrogen fuel cell powered vehicles. We believe that our proprietary sodium
borohydride based hydrogen generation system would allow these vehicles to
achieve full ZEV credit. In May 2000, we entered into a proprietary rights
agreement with DaimlerChrysler Corporation to participate in a program to test
the Company's sodium borohydride generating systems for vehicle applications. As
part of that agreement, we have granted a non-

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exclusive perpetual worldwide license to DaimlerChrysler to use in its
automotive business the technological benefits that we jointly develop. In
addition, we have agreed to license to DaimlerChrysler, any of our technology
that we developed prior to the proprietary rights agreement, provided that our
obligation to license this technology will expire one year after the date we
deliver our first hydrogen generator to DaimlerChrysler. Under the agreement,
DaimlerChrysler will gain intellectual property rights to technology that it
will fund in the program.

In our hybrid design, an automobile is powered by an electric motor which,
in turn, gets its energy from conventional batteries. Our technology is used to
generate the hydrogen that runs an internal combustion engine, driving an
alternator that will keep the batteries charged. Additionally, our technology
eliminates the need for costly catalytic converters.

We have installed our hydrogen generation systems in three prototype
vehicles: a Ford Explorer SUV, a Ford Crown Victoria sedan and the "Genesis"
vehicle which was part of a project operated by the New Jersey Department of
Transportation. Our program to develop these prototype vehicles is not
affiliated with the vehicles' manufacturers. The SUV will accommodate all of the
requisites for an emission-free electric vehicle with virtually no loss of cabin
space and no material change in fully-fueled weight. To modify the SUV, we
installed reservoirs of sodium borohydride and water, a receiving tank for the
resulting sodium borate, as well as a chamber in which the hydrogen-producing
reaction takes place. The space required for our system is approximately the
same size that is required for a conventional internal combustion engine. A
sodium borohydride storage/borax collecting tank replaces the standard gasoline
tank. The conventional internal combustion gasoline engine is replaced with a
smaller hydrogen engine/alternator combination, and the transmission is
completely removed, because the electric motor that propels the car in our
hybrid system are linked directly to the drive train. The Crown Victoria, which
has a conventional drive train, has been modified to run on hydrogen. We have
run the car's engine on hydrogen from our system and are now enhancing the
design. We have already installed the Hydrogen on Demand(TM) system in the
"Genesis" vehicle, which powers a proton exchange membrane fuel cell. The
completion and testing of the "Genesis" vehicle, which is contingent on the
installation of a battery pack by another contractor, is scheduled for
completion in cooperation with Rutgers University.

In the longer-term, we believe that fuel cell powered vehicles using our
sodium borohydride technology will meet the performance requirements of
consumers and the regulatory requirements for ZEVs. ZEV criteria can also be
satisfied by vehicles powered by other means, but we believe that our technology
will provide the best overall performance to meet consumer demands, and maintain
more favorable environmental characteristics. As an interim step, Hydrogen on
Demand(TM) can be used in internal combustion engines that have been modified to
burn hydrogen. This system provides enough fuel from a single filling to provide
distance ranges comparable to conventional internal combustion engines, while
providing for much cleaner transportation in the near term. When fuel cells
become fully developed for automotive use, our system can be used aboard
vehicles to provide hydrogen for fuel cells.

Portable Power Markets

There is a growing worldwide consumer demand for quiet, clean portable
generators. Promising applications include their use in densely populated areas
where noise pollution is a significant concern and indoors or in other areas
where the high noise and high emissions of internal combustion engine generators
pose significant problems. We believe that portable power generators powered by
sodium borohydride fuel cells enjoy substantial advantages over existing
portable generators and can provide consumers with the power they need in a
package that is small and durable with low noise and emissions, particularly in
comparison to diesel fueled generators.

We believe that portable sodium borohydride fuel cell power products could
provide clean, quiet, vibration-free electric power on demand for a variety of
applications. We believe that markets could develop where the attributes of
sodium borohydride fuel cell systems would provide a significant competitive
advantage over existing technologies. These markets would include recreational
vehicles, auxiliary power for boats and generators for densely populated areas
and other locations where noise pollution is a concern.

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In October 2000, we entered into a product development agreement with
Ballard Power Systems to further develop our proprietary hydrogen generation
system for use with Ballard's portable power fuel cell products. As part of that
agreement, we will grant a license upon the successful commercial development
effort to Ballard to use our hydrogen generation technology in its portable
products. Ballard has paid us $2.4 million as an advance for prospective
royalties under the license. Under the agreement, we have granted Ballard a
warrant to purchase up to 400,000 shares of our common stock.

Battery Markets

Our sodium borohydride based technology may be adapted for production of
batteries. We believe that batteries based on our technology would have a higher
energy density by volume than batteries currently in use, and be more efficient.
As a result, we believe these batteries could be lighter and smaller, embracing
and advancing the trend towards smaller and lighter products in consumer
electronics.

The highest growth battery segment is that which includes advanced
commercial rechargeable and disposable battery technologies. These batteries
power the latest communications, imaging and portable computing devices that are
projected to demand continually higher energy density power sources. Our new
chemistries can enable smaller and lighter electronic devices, longer runtimes
and new power hungry features that will increase the use of future wireless
devices. We believe there is substantial opportunity for our technology in this
segment.

Supply Chain

Our supply chain plan is focused primarily on licensing our internally
developed process for the manufacture and regeneration of sodium borohydride
with large, industrial partners including borate producers, industrial hydrogen
providers, chemical providers, and major energy producers (including oil, gas,
and electricity companies) on a global basis. If market acceptance of our
technology increases as planned in the transportation, portable power and
battery markets, we believe that demand for sodium borohydride will result in
the need for additional global manufacturing capacity. By licensing our process
of producing sodium borohydride, we believe a significant revenue stream could
be generated. The goal of our research and development efforts in the area of
sodium borohydride production is to lower raw material costs by significantly
reducing the amount of sodium that is required in the current manufacturing
process. The current market price for sodium is approximately $1 per pound.

One of our objectives is to ensure the short-term and long-term supply of
sodium borohydride for energy applications. This will involve collaboration with
present and future producers of this chemical. In addition, we will continue to
evaluate ways to ensure an affordable supply of sodium borohydride to our
potential partners and customers. In December 2000, we signed a letter of intent
with the world's largest producer of sodium borohydride, Rohm and Haas Company,
to jointly develop a lower cost process to manufacture and recycle sodium
borohydryde. We believe partnerships like this one may lead to an affordable,
adequate supply of sodium borohydride to support commercialization of products
that utilize our technology.

OUR STRATEGY

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

- Pursue Ventures with Fuel Cell Companies. We are pursuing ventures with
manufacturers of fuel cells. We believe that our Hydrogen on Demand(TM)
system will provide a solution for existing fuel cell companies that
cannot produce hydrogen as safely or as efficiently. We will seek to
leverage these relationships to further our brand awareness and decrease
the time to commercialization.

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

- Build Relationships with Truck Manufacturers. We plan to pursue
relationships with manufacturers of heavy duty, over-the-road trucks. We
believe our technology can be used to deliver hydrogen as a fuel for
modified internal combustion truck engines, which could significantly
reduce emissions currently generated by diesel fuel. We also believe that
our Hydrogen on Demand(TM) system, when used in conjunction with a small
fuel cell can provide sufficient power to operate all on-board electrical
devices, thereby allowing the engine to be shut down when the truck is
parked. The reduction in emissions would result in a significantly
cleaner environment.

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

- Develop Strategic Relationships with Key Battery Manufacturers. We are
pursuing relationships with key battery manufacturers. We believe such
relationships will facilitate the commercialization, distribution and
consumer acceptance of batteries based on our sodium borohydride process
which may be developed in the future.

- Lower the Costs of Sodium Borohydride. Sodium borohydride is currently a
specialty chemical that is produced by a few manufacturers located in the
United States and Europe. We believe that we can successfully compete in
the battery markets at the current price of sodium borohydride, but it
will be necessary to scale-up production of the chemical to be cost
competitive in the transportation markets. In 2001, we plan to begin
construction of a process demonstration unit that we believe will cost
approximately $1.0 to $2.0 million to build and will take approximately
six months to complete. Our goal is to demonstrate the viability of
cost-effective mass production of sodium borohydride through economies of
scale and improved manufacturing efficiencies exhibited in our process
demonstration unit.

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

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

INTELLECTUAL PROPERTY RIGHTS

Our intellectual property strategy is to identify key intellectual property
developed by us in order to protect it in a timely and effective manner. In
addition, we seek to use and assert such intellectual property to our
competitive advantage. Our goal is to be first to market with superior
technology and to sustain a long-term competitive edge in the market. We rely on
a combination of patents, trade secrets, trademarks, copyrights and contracts to
protect our proprietary technology.

We use patents as the primary means of protecting our technological
advances and innovations, such as our proprietary hydrogen generators, fuel cell
designs, components, materials, operating techniques and systems and, therefore,
the protection of our patents is critical to our business. We have adopted a
proactive approach to identifying patentable inventions and securing patent
protection through the timely filing and aggressive prosecution of patent
applications. Patent applications are filed in various jurisdictions
internation-

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ally, which are carefully chosen based on the likely value and enforceability of
intellectual property rights in those jurisdictions.

We own two U.S. and two non-U.S. patents, which cover a wide variety of
devices, systems, uses and applications for various boron chemistries. We have
filed an additional six U.S. and 21 non-U.S. patent applications. We have also
filed one U.S. trademark application. Our earliest patent expires in 2015 and
the most recently filed applications, if issued, will not expire until 2020.

Our intellectual property program includes a strong competitor-monitoring
element. We actively monitor the patent position, technical developments and
market activities of our competitors. We expect activities relating to assertion
and enforcement of our intellectual property rights to increase as the market
develops.

RESEARCH AND DEVELOPMENT

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

We have developed relationships with governmental agencies, including the
State of New Jersey Commission on Science and Technology. Between January 1999
and April 2000, we received an aggregate of $227,522 from a recoverable grant
award from that agency. These funds were used to partially fund costs directly
related to development of our fuel cell technology. In addition, we have worked
together with the New Jersey Department of Transportation to develop prototype
highway signs, which are powered by third party fuel cells. Our Hydrogen on
Demand(TM) system provided the hydrogen for these fuel cells.

HYDROGEN GENERATION

As a generator of hydrogen, an aqueous solution of sodium borohydride is
passed over a catalyst via a pump. The catalyst is typically a non-volatile,
metallic chemical element such as ruthenium and/or cobalt. Once in contact with
the catalyst, the sodium borohydride reacts to form hydrogen gas, which can be
used immediately or stored in a tank. The byproduct formed in this process is
borax.

We have filed a patent application for the primary production and
regeneration of sodium borohydride. We believe that this new process will lower
the cost of sodium borohydride by reducing or eliminating some of the costly raw
materials that are required today. We are currently performing laboratory work
and will be constructing a process demonstration unit in 2001 to validate our
process technology.

COMMERCIALIZATION PROCESS

In the near-term, we do not anticipate manufacturing on a large-scale. Our
initial focus is in the portable power and automotive areas, and is based on our
belief that we can validate our technology. Once this is accomplished, we will
seek partnerships with fuel cell companies and others in the portable power
market and with automotive OEMs. Our business focus will be on licensing our
hydrogen generation technology with vehicle manufacturers, utilities and other
companies requiring fuel cell technologies. Over the next several years, our
current plans for commercialization are as follows:

- Commercial Testing and Licensing for Hydrogen Generation Systems. We
intend to seek additional relationships, such as our agreements with
DaimlerChrysler and Ballard, to test our system in vehicle and other fuel
cell applications. We believe that the successful completion of
demonstration units will provide us with the opportunity to develop
stronger relationships with OEMs and enter into licensing arrangements.

- Regeneration of Sodium Borohydride from Sodium Borate. We believe we can
develop a small-scale demonstration unit for regenerating sodium
borohydride. This feature is significant in that the overall cost of the
sodium borohydride system, whether for vehicles or portable power, will
be significantly

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decreased. Development of the infrastructure for large-scale production
of sodium borohydride would follow.

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

COMPETITION

Our core competitive advantage is that our technology solves two critical
problems related to the use of hydrogen as a fuel: generation and storage. Our
Hydrogen on Demand(TM) system stores the energy of hydrogen in the chemical, as
a dry powder or an inert, non-flammable liquid. Hydrogen is released only when
it is needed, and because it is consumed on demand, no storage technology is
required. We believe that this is a considerable advantage when compared to
other means of generating and storing hydrogen.

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

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

The application of boron chemistry to the production of batteries is
another area of competitive advantage. Based on our internal laboratory tests,
we believe that batteries designed using our technology will last far longer
than any commercially existing battery technology -- opening the door for
manufacturers of electronic devices to design greater functionality, without the
constraints of today's battery life.

RAW MATERIALS

Sodium borohydride is manufactured from a base material called borax. There
is a significant global supply of borax, and the United States is among the
largest holders of borax reserves in the world. Borax is most commonly found in
dried lake or sea beds, and it is mined at the surface using drag lines, whereby
buckets are continuously dragged across the ground scraping borax from the
surface. Currently, a few manufacturers make sodium borohydride as a specialty
chemical. We signed a letter of intent in December 2000 with the world's largest
specialty manufacturer, Rohm and Haas Company, to explore the joint development
of a lower cost process to manufacture and recycle sodium borohydride. Despite
the great quantities of reserves and current annual production of borax, there
are few commercial applications that require sodium borohydride today. The most
common application for sodium borohydride is for use as a bleaching agent in the
paper industry. Up until now, the relatively limited commercial uses of sodium
borohydride have allowed manufacturing to continue using technology from the
early 1900's.

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

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11

HUMAN RESOURCES

As of March 1, 2001, we had a total staff of 38 employees, including 36
full-time employees, of which 28 are scientists, engineers and other
professionals. We plan to increase our staff to over 90 employees by the end of
the fiscal year.

ITEM 2. PROPERTIES.

Our principal offices are located at 1 Industrial Way West, Eatontown, New
Jersey 07724, currently occupying 9,700 square feet. We are currently
negotiating to amend our lease agreement to provide for the expansion of our
principal offices to 32,500 square feet in adjacent facilities comprised of
additional laboratories and offices. We expect to finalize negotiations and
enter into an amended lease agreement by April 2001 and plan to occupy the
additional area beginning September 2001. We will need to purchase equipment and
furnishings for the additional space and to construct a process demonstration
unit to produce sodium borohydride.

We expect that our amended lease will expire in 2008, with five and three
year options to renew through 2016 and will contain an option expiring in
December 2001 for an additional 10,000 square feet. We believe that the current
and expanded facilities will be sufficient for our operations in the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS.

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

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

During the fourth quarter of the fiscal year ended December 31, 2000, no
matter was submitted to a vote of our stockholders.

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12

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.

MARKET PRICE AND DIVIDEND INFORMATION

Price Range of Common Stock

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

COMMON STOCK PRICE
-------------------
HIGH LOW
------- ------

FISCAL YEAR ENDING DECEMBER 31, 2000
Third quarter (from August 9, 2000)......................... $24.00 $7.56
Fourth quarter.............................................. $23.19 $7.75

As of December 31, 2000, there were approximately 74 holders of record of
our common stock. The closing sale price of our common stock on March 1, 2001
was $8.41 per share.

Dividend Policy

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

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

ITEM 6. SELECTED FINANCIAL DATA.

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

PERIOD FROM
TWELVE MONTHS JANUARY 1, 1999 CUMULATIVE
ENDED (INCEPTION) TO AMOUNTS FROM
DECEMBER 31, 2000 DECEMBER 31, 1999 INCEPTION
----------------- ----------------- ------------

STATEMENT OF OPERATIONS DATA
General and administrative (includes
non-cash charges of $10,785,381 for the
year ended December 31, 2000)............. $ 13,958,774 $ 164,953 $ 14,123,727
Depreciation and amortization............... 256,820 57,007 313,827
Research and development.................... 2,131,684 820,128 2,951,812
------------ ----------- ------------
Total operating expenses.................... 16,347,278 1,042,088 17,389,366
------------ ----------- ------------
Loss from operations........................ (16,347,278) (1,042,088) (17,389,366)
Interest income, net........................ 678,194 10,811 689,005
------------ ----------- ------------
Net loss.................................... (15,669,084) (1,031,277) (16,700,361)
Preferred stock amortization................ 2,150,881 -- 2,150,881
------------ ----------- ------------
Net loss applicable to common
stockholders.............................. $(17,819,965) $(1,031,277) $(18,851,242)
============ =========== ============
Loss per share -- basic and diluted......... $ (.69) $ (.04) $ (.71)
============ =========== ============

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DECEMBER 31, DECEMBER 31,
2000 1999
----------------- -----------------

BALANCE SHEET DATA
Total assets................................ $ 31,396,245 $ 746,477

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

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

GENERAL

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

OVERVIEW

In December 1998, we acquired rights to exploit the sodium borohydride
technology patented by Steven Amendola, our chief scientific advisor. Our
initial business plan was to conduct research and development on sodium
borohydride with the purpose of developing an alternative energy system to
gasoline for use in automobile engines. In the course of investigating the use
of our energy system, we focused initially on the development of a sodium
borohydride fuel cell for potential commercial application. As our research
progressed, we realized that sodium borohydride not only had the potential to
produce a better fuel cell than currently exists, but that sodium borohydride
can also be used to generate hydrogen. Further research indicated that our
proprietary system could also be used to make longer lasting disposable
batteries. In May 2000, we and Mr. Amendola terminated our licensing agreement
and we acquired ownership of the existing and future patent rights relating to
the sodium borohydride technology.

Our goal is to convert our technology from the research and development
stage to commercialization. Such potential revenue for the next several years is
likely to include upfront license fees, research contracts with various federal,
state and local agencies or through collaborations with other companies, and
royalty payments or joint venture revenue from licensees or strategic
partnerships. We have not generated any commercial revenue to date.

We incurred operating losses in 2000 and 1999 of $16,347,278 and
$1,042,088, respectively, and we had a net loss applicable to common
stockholders of $17,819,965 and $1,031,277, respectively. As of December 31,
2000 and 1999, we had an accumulated deficit of $18,851,242 and $1,031,277,
respectively. The following table disaggregates the Company's net operating
losses from incurred non-cash charges and preferred dividends:

NET LOSS NON-CASH
EXCLUDING CHARGES AND ACCUMULATED
NON-CASH CHARGES PREFERRED DIVIDENDS DEFICIT
---------------- ------------------- ------------

Period from January 1, 1999 (Inception)
to June 30, 2000............................ $(2,237,759) $ (1,424,757) $ (3,662,516)
Period from July 1, 2000 to December 31,
2000*....................................... (3,677,221) (11,511,505) (15,188,726)
----------- ------------ ------------
Cumulative amount from inception.............. $(5,914,980) $(12,936,262) $(18,851,242)
=========== ============ ============

- ---------------
* Our initial public offering was completed on August 9, 2000.

Of the $5.9 million net loss excluding non-cash charges presented above,
$2.1 million was attributable to the fourth quarter of 2000. Our losses have
resulted primarily from costs associated with research and

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14

development activities as well as non-cash amortization related to preferred
stock and non-cash charges related to employees and third parties. As a result
of planned expenditures in the areas of research, product development and
marketing we expect to incur additional operating losses for the foreseeable
future.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 VERSUS 1999

Total Revenues. To date, we have not recognized any revenues related to
the sale or license of our technology.

General and Administrative Expenses. General and administrative expenses
were $13,958,774 for the year ended December 31, 2000 compared to $164,953 in
1999, an increase of $13,793,821. The increase in general and administrative
expenses includes a non-cash compensation charge of $5,840,780 for the grant of
company stock options to employees and board members below market, the fair
value of options issued to non-employees of $2,875,631 and $2,068,970 for the
issuance of common stock in connection with the termination of the royalty
agreement.

Depreciation and Amortization. Depreciation and amortization was $256,820
for the year ended December 31, 2000 compared to $57,007 in 1999, an increase of
$199,813. This increase in depreciation and amortization is related to the
addition of certain laboratory equipment. We expect depreciation and
amortization to continue to increase as we purchase additional property and
equipment to support our expansion plans.

Research and Development Expenses. Research and development expenses were
$2,131,684 for the year ended December 31, 2000 compared to $820,128 in 1999, an
increase of $1,311,556. The increase is primarily attributable to increased
staffing required to further the development of our technology.

Interest Income/(Expense). Net interest income was $678,194 for the year
ended December 31, 2000 compared to $10,811 in 1999, an increase of $667,383.
The change in net interest income is primarily the result of higher interest
income related to a larger average cash balance resulting from the proceeds of
the initial public offering in August 2000.

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

PERIOD FROM JANUARY 1, 1999 TO DECEMBER 31, 1999

Total Revenues. There were no revenues related to the sale or license of
our technology.

General and Administrative Expenses. General and administrative expenses
were $164,953 in 1999 and reflect increased lease costs in our current office
location that we moved into in January 1999. In addition, there were increases
in staffing necessary to manage and support our growth.

Depreciation and Amortization. Depreciation and amortization was $57,007
in 1999 and related to depreciation of certain laboratory equipment and the
amortization of intangible assets.

Research and Development Expenses. Research and development expenses were
$820,128 in 1999 and were primarily attributable to increased staffing required
to further the development of our technology.

Interest Income. Interest income was $10,811 in 1999 relating to interest
earned on the capital we received in January 1999.

LIQUIDITY AND CAPITAL RESOURCES

Since our organization effective January 1, 1999, we have primarily
financed our operations through our initial public offering in August 2000 and
private placements of equity securities. In 1999, we issued

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15

$1,250,000 of membership interests in Millennium Cell LLC for cash, which
subsequently were converted into our common stock as of April 25, 2000. We also
received a capital contribution of $500,000 in the first quarter of 2000, and in
May 2000, we sold 759,368 shares of Series A preferred stock, which
automatically converted into 759,368 shares of common stock upon the completion
of our initial public offering. The net proceeds from our initial public
offering totaled approximately $29.9 million.

In October 2000, we received $2.4 million in cash from Ballard Power
Systems Inc. as an advance for prospective royalties pursuant to a product
development agreement between us and Ballard. Under certain circumstances, a
portion of this advance may be refundable to Ballard. In addition, we have
granted Ballard a warrant to purchase up to 400,000 shares of our common stock.
Upon completion of product development, these warrants will be recorded at fair
value with the related charge to research and development expense over the
estimated life of the royalty agreement.

As of December 31, 2000, we had $30.1 million in cash and cash equivalents.
Cash used in operations totaled $1,525,538 and $953,363 in 2000 and 1999,
respectively, and related to funding our net operating losses, partially offset
by the advance for prospective royalties discussed above.

Investing activities used cash of $701,659 and $448,094 in 2000 and 1999,
respectively. Investing activities consisted primarily of purchases of
laboratory equipment and accessories necessary for the continuation of our
research and development activities and additional patent registration costs. We
expect to continue to make significant investments in research and development
and our administrative infrastructure, including the purchase of property, plant
and equipment to support our expansion plans. We continue to register and pursue
patents on our technology.

Between January 1999 and April 2000, we received an aggregate of $227,522
from a recoverable grant award from the State of New Jersey Commission on
Science and Technology. The funds were used to partially fund costs directly
related to development of our fuel cell technology. The recoverable grant is
required to be repaid when we generate net income in a fiscal year. The
repayment obligation, which begins in June 2001, ranges from 1% to 5% of net
income over a ten-year period and shall not exceed 200% of the original grant.
We are obligated to repay the unpaid amount of the original grant at the end of
the ten-year period.

In December 2000, we were granted a tax abatement rebate by the State of
New Jersey as a business incentive. Under the abatement, the State of New Jersey
will reimburse us for a portion of the state income taxes paid by up to a
maximum of 50 new employees hired after December 2000. This incentive may
provide rebates of up to $200,000 per year for ten years.

We believe that the net proceeds from our initial public offering, together
with our current cash and cash equivalents, will be sufficient to satisfy
anticipated cash needs of our operations into 2003. It is possible, however,
that we may seek additional financing within this timeframe. We may raise
additional funds through public or private financings, collaborative
relationships or other arrangements. We cannot assure you that additional
funding, if sought, will be available or, even if available, will be on terms
favorable to us. Further, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. Our failure to raise capital when needed may harm our business and
operating results.

DISCLOSURE ABOUT MARKET RISK

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

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

FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this document that are subject
to risks and uncertainties. Without limitation, these forward-looking statements
include statements:

- regarding new products we may introduce in the future;

- about our business strategy and plans;

- about the adequacy of our working capital and other financial resources;
and

- that are not of an historical nature.

When we use words such as "plan," "believe," "expect," "anticipate,"
"intend" or similar expressions, we are making forward-looking statements. You
should note that forward-looking statements rely on a number of assumptions
concerning future events, and are subject to a number of uncertainties and other
factors, many of which are outside of our control, that could cause actual
results to differ materially from the statements made. Please note that we
disclaim any intention or obligation to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
Other discussions regarding forward-looking statements and risk factors can be
found in our registration statement on Form S-1 declared effective by the
Securities and Exchange Commission on January 12, 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Index to Financial Statements and Financial Statement Schedule in Item
14.

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

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors are listed below.

NAME AGE POSITION
- ---- --- --------

G. Chris Andersen................. 62 Chairman of the Board of Directors
Stephen S. Tang................... 40 President, Chief Executive Officer and Director
Steven C. Amendola................ 46 Vice President -- Chief Scientific Advisor and Director
Adam P. Briggs.................... 39 Vice President -- Business Development and Portable Power
Terry M. Copeland................. 49 Vice President -- Product Development
Curtis C. Cornell................. 54 Vice President -- Business Development and Supply Chain
Norman R. Harpster, Jr............ 49 Vice President -- Finance and Administration; Chief
Financial Officer; Corporate Secretary
Rex E. Luzader.................... 52 Vice President -- Business Development and Transportation
Katherine M. McHale............... 45 Vice President -- Marketing and Communications
Kenneth R. Baker.................. 53 Director
William H. Fike................... 64 Director
Alexander MacLachlan.............. 68 Director
Zoltan Merszei.................... 78 Director
H. David Ramm..................... 49 Director
James L. Rawlings................. 56 Director

G. CHRIS ANDERSEN has served as the chairman of our board of directors
since April 2000. Mr. Andersen is currently a general partner of Andersen,
Weinroth & Co., a merchant banking firm. From 1990 to 1995, Mr. Andersen was
vice chairman and head of international investment banking at PaineWebber
Incorporated. Previously, Mr. Andersen was a managing director for 15 years at
Drexel Burnham Lambert, Incorporated and a member of its board of directors. He
is currently a director of Terex Corporation, Headway Corporate Resources Inc.,
and GP Strategies Corporation.

STEPHEN S. TANG, PH.D. has served as our president and chief executive
officer and a member of our board of directors since May 2000. From January 1996
to June 2000, Dr. Tang was vice president and global leader of the
pharmaceutical and health care industry practice for the management consultancy
A.T. Kearney, Inc., a wholly owned subsidiary of Electronic Data Systems, Inc.,
where he directed global business development and marketing. Dr. Tang previously
served as co-leader of the global chemical and environmental practice for the
management consulting firm, Gemini Consulting, Inc., a wholly owned subsidiary
of Cap Gemini. Prior to that, he was the president and founder of Tangent
Technologies, a technical consulting firm to chemical, pharmaceutical and
biotechnology companies, and senior research engineer and assistant director of
Lehigh University's Center of Molecular Bioscience and Biotechnology. Dr. Tang
received his B.S. in chemistry from the College of William and Mary, an M.S. and
Ph.D. in chemical engineering from Lehigh University and an M.B.A. from the
Wharton School of Business at the University of Pennsylvania.

STEVEN C. AMENDOLA has served in various technical positions with the
company since its inception in December 1998, and currently serves as the
company's vice president and chief scientific advisor. Mr. Amendola has been
issued more than 20 patents in the petroleum processing, pollution control and
energy recovery areas, including our patent to produce hydrogen and electricity.
From May 1997 to December 1998, Mr. Amendola served as vice president of
National Patent Development Corporation (now known as GP Strategies
Corporation), where he headed their research and development effort of sodium
borohydride. From September 1996 to April 1997, Mr. Amendola served as vice
president of research and development for Nextcell Inc., where he supervised and
researched new battery chemistry. From February 1995 to September 1996, he was
involved in process development chemistry at RFE Industries Inc. Mr. Amendola
completed

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graduate courses in chemistry at Ohio State University, where he developed new,
high-energy explosives under a grant from the U.S. Army. Mr. Amendola holds a
B.S. in chemistry from The Kings College in New York.

ADAM P. BRIGGS has served as our vice president of business development and
portable power since February 2001. Mr. Briggs was employed at Duracell from
1984 to 2001, where he was most recently Vice President -- Strategic OEM
(Original Equipment Manufacturer) Sales and Consulting Group in the Global
Business Management Group. Prior positions include Director of Global Strategic
Account Management; Program Director -- Alkaline; Director of OEM Sales and
Marketing -- Asia; Leader, Design Win Management Team -- Far East and OEM
Marketing Director -- Far East. Mr. Briggs received his B.A. in physics from
Bowdoin College.

TERRY M. COPELAND, PH.D. has served as our vice president of product
development since November 2000. From 1998 to 2000, Dr. Copeland was Director of
Product Development at Duracell, and from 1995 to 1998 Plant Manager at two of
Duracell's largest major manufacturing facilities. Dr. Copeland also served as
Director of Engineering at Duracell from 1992 to 1995. Prior to working at
Duracell, Dr. Copeland was with E.I. DuPont de Nemours & Co. for 14 years, were
he worked in a wide variety of management positions. Dr. Copeland received his
B.S. in chemical engineering from the University of Delaware and a Ph.D. in
chemical engineering from the Massachusetts Institute of Technology.

CURTIS C. CORNELL has served as our vice president of business development
and supply chain since October 2000. From 1976 to 2000, Mr. Cornell was employed
by Air Products and Chemicals, Inc. where he held numerous management positions,
including Director, Corporate Real Estate and Property Management, Director,
Corporate Purchasing, and General Manager of Gardner Cryogenics. Mr. Cornell
received his B.S. in electrical engineering from Grove City College and his
M.B.A. from Lehigh University.

NORMAN R. HARPSTER, JR. has served as our and vice president of
administration and finance, chief financial officer and corporate secretary
since October 2000. From 1975 to 2000, Mr. Harpster held numerous financial
positions at Air Products and Chemicals, Inc., including from 1999 to 2000 Vice
President, Global Business Services; from 1994 to 1999 Vice President,
Controller -- Gases & Equipment Group; from 1991 to 1994 Controller, Europe and
1986 to 1991 Controller -- Energy Systems and Environmental Group. Mr. Harpster
received his B.A. in economics from Lafayette College and an M.B.A. from the
Darden School of Business at the University of Virginia.

REX E. LUZADER has served as our vice president of business development and
transportation since November 2000. Mr. Luzader was the Vice President Original
Equipment Sales and Engineering and Corporate Strategy for Exide Corporation
from 1998 to 1999. From 1988 to 1998, Mr. Luzader also held a number of Vice
Presidential positions at Exide Corporation including sales to the
transportation industry, product engineering, process and equipment engineering,
research and development and quality control. Mr. Luzader received his B.S. in
mechanical engineering from Kettering University. From 1988 to 1999 he also
served as a member of the broad of directors of Great Valley Bank in Reading.

KATHERINE M. MCHALE has served as our vice president of marketing and
communications since January 2001. From 1985 to 2000, Ms. McHale was an
independent marketing and public affairs consultant for a wide range of clients
in corporate, industrial, non-profit and institutional settings. Prior to 1985,
Ms. McHale was Senior Producer, then Manager, of the Audio Visual Department of
Air Products and Chemicals, Inc., and an instructor at Kutztown University. In
1991, she was elected to the Pennsylvania House of Representatives. Ms. McHale
received her B.A. in communicative arts from Whitworth College and an M.S. in
telecommunications from Kutztown University.

KENNETH R. BAKER has served on our board of directors since July 2000. Mr.
Baker has served as president, chief executive officer and a member of the board
of trustees of the Environmental Research Institute of Michigan since November
1999. From 1969 to 1999, Mr. Baker served in various executive positions with
General Motors Corporation, including vice president and general manager of the
GM Distributed Energy Business Unit, vice president and general manager of GM
Research and Development and

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program manager of GM Electric Vehicles. Following his retirement in February
1999, Mr. Baker served as vice chairman and chief operating officer of Energy
Conversion Devices, Inc. Mr. Baker currently serves as director of
AeroVironment, Inc.

WILLIAM H. FIKE has served on our board of directors since May 2000. Mr.
Fike retired as the vice-chairman and executive vice president of Magna
International, Inc., an automotive parts manufacturer based in Ontario, Canada,
in February 1999. Prior to joining Magna in 1994, Mr. Fike was employed by Ford
Motor Company from 1966 to 1994, where he served most recently as President of
Ford Europe. Mr. Fike currently serves as a director of Magna and AGCO
Corporation, a manufacturer of farm equipment.

ALEXANDER MACLACHLAN, PH.D. has served on our board of directors since May
2000. He is currently chairman of the National Research Council's project to
evaluate the U.S. Department of Transportation's Intelligent Vehicle Initiative.
Prior to his retirement in March 1996, Dr. MacLachlan was the Deputy Under
Secretary for R&D Management at the U.S. Department of Energy and held various
other positions in the Department of Energy. Prior to his employment at the
Department of Energy, Dr. MacLachlan was employed by DuPont for 36 years, where
he was Senior Vice President for Research and Development and Chief Technical
Officer from 1986 to 1993, and a member of DuPont's Operating Group from 1990 to
1993.

ZOLTAN MERSZEI has served on our board of directors since May 2000. Mr.
Merszei retired as the president, chairman and chief executive officer of The
Dow Chemical Company in March 1980. From August 1974 to March 1980, he served as
president and chief executive officer of Dow Chemical Europe. From May 1980 to
May 1988, Mr. Merszei served in various executive positions with Occidental
Petroleum Corporation, including chairman and chief executive officer of
Occidental Chemical, chairman of Occidental Research and president and chief
executive officer, and subsequently, vice chairman of the board of directors of
Occidental Petroleum. Mr. Merszei currently serves as a director of The Budd
Company, Dole Food Company Inc., Thyssen Industrie AG (Germany) and Thyssen
Henschel America.

H. DAVID RAMM has served on our board of directors since June 2000. Mr.
Ramm has served as president, chief executive officer and a director of
Integrated Electrical Services since April 2000. From 1997 to March 2000, he was
employed by Enron, most recently as the president of Enron Wind Corp., which is
engaged in environmentally benign power generation. Prior to his employment at
Enron, Mr. Ramm worked for 14 years at United Technologies Corporation, where he
held several senior management positions, including chairman and chief executive
officer of International Fuel Cells Corporation.

JAMES L. RAWLINGS has served on our board of directors since April 2000.
Mr. Rawlings is a partner at Andersen, Weinroth & Co. Prior to joining Andersen,
Weinroth, he was a managing director, principal and member of the board of
directors of Schooner Asset Management Co. LLC, an asset management firm. Before
joining Schooner, he was a managing director of Robert Fleming & Co., a London
based investment bank, where he was responsible for investment banking
activities in North and South America. Mr. Rawlings was a managing director in
the corporate finance department with Drexel Burnham Lambert, Incorporated from
1979 to 1988.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated herein by reference is the information appearing under the
caption "Executive Compensation" in the Company's definitive proxy statement for
its 2001 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated herein by reference is the information appearing under the
caption "Common Stock Ownership of Principal Stockholders and Management" in the
Company's definitive proxy statement for its 2001 Annual Meeting of
Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Incorporated herein by reference is the information appearing under the
caption "Certain Transactions" in the Company's definitive proxy statement for
its 2001 Annual Meeting of Stockholders.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Documents filed as part of this report

Financial Statements

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

Financial Statement Schedules

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

14(a)(3) Exhibits

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

EXHIBIT
NO. DESCRIPTION
- ------- -----------

2.1+ -- Certificate of Conversion of Millennium Cell LLC to
Millennium Cell Inc. (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No.
333-37896)
3.1+ -- Certificate of Incorporation of Millennium Cell Inc.
(incorporated by reference to the Registration Statement
filed on Form S-1, Registration No. 333-37896)
3.2+ -- By-Laws of Millennium Cell Inc. (incorporated by reference
to the Registration Statement filed on Form S-1,
Registration No. 333-37896)
3.3+ -- Certificate of Amendment to Certificate of Incorporation of
Millennium Cell Inc. (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No.
333-37896)
4.1+ -- Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions of Series A Convertible Preferred Stock of
Millennium Cell Inc. (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No.
333-37896)
4.2+ -- Specimen stock certificate representing the Registrant's
Common Stock (incorporated by reference to the Registration
Statement filed on Form S-1, Registration No. 333-37896)
10.1+ -- Agreement for Recoverable Grant Award, dated as of April
1999, by and between State of New Jersey Commission on
Science and Technology and Millennium Cell LLC (incorporated
by reference to the Registration Statement filed on Form
S-1, Registration No. 333-37896)
10.2+ -- Amended and Restated Agreement, dated as of August 1, 2000,
by and among Millennium Cell Inc., GP Strategies Corporation
and Steven Amendola (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No.
333-37896)
10.3+ -- Assignment, dated as of May 24, 2000, by Steven Amendola in
favor of Millennium Cell Inc. (incorporated by reference to
the Registration Statement filed on Form S-1, Registration
No. 333-37896)
10.4+ -- Employment Agreement, dated as of May 16, 2000, by and
between Stephen S. Tang and Millennium Cell
Inc.(incorporated by reference to the Registration Statement
filed on Form S-1, Registration No. 333-37896)
10.5+ -- Employment Agreement, dated as of August 2, 2000, by and
between Steven C. Amendola and Millennium Cell Inc.
(incorporated by reference to the Registration Statement
filed on Form S-1, Registration No. 333-37896)

18
21

EXHIBIT
NO. DESCRIPTION
- ------- -----------

10.6+ -- Amended and Restated Millennium Cell Inc. 2000 Stock Option
Plan (incorporated by reference to the Registration
Statement filed on Form S-1, Registration No. 333-37896)
10.7+ -- Proprietary Rights Agreement, effective as of May 1, 2000,
between DaimlerChrysler Corporation and Millennium Cell Inc.
(incorporated by reference to the Registration Statement
filed on Form S-1, Registration No. 333-37896)
10.8+ -- Assignment and Assumption of License Agreement, dated as of
December 17, 1998, by and between GP Strategies Corporation
and Millennium Cell LLC (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No.
333-37896)
10.9+ -- Employment Agreement, dated as of September 6, 2000, by and
between Millennium Cell Inc. and Norman R. Harpster, Jr.
(incorporated by reference to the Quarterly Report filed on
November 1, 2000 on Form 10-Q)
23.1 -- Consent of Ernst & Young
99.1+ -- License Agreement, dated July 31, 1997, by and between
Steven C. Amendola and National Patent Development
Corporation (incorporated by reference to the Registration
Statement filed on Form S-1, Registration No. 333-37896)

- ---------------
+ Previously filed.

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

(b) Reports on Form 8-K

There have been no reports filed under Form 8-K during the last quarter
of the period covered by this report.

19
22

SIGNATURES

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

MILLENNIUM CELL INC.

By: /s/ NORMAN R. HARPSTER, JR.
------------------------------------
Norman R. Harpster, Jr.
Vice President -- Finance and
Administration
and Chief Financial Officer

Date: March 21, 2001

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

SIGNATURE TITLE DATE
--------- ----- ----

/s/ STEPHEN S. TANG Chief Executive Officer, March 21, 2001
- --------------------------------------------------- President
Stephen S. Tang and Director

/s/ NORMAN R. HARPSTER, JR. Chief Financial Officer March 21, 2001
- ---------------------------------------------------
Norman R. Harpster, Jr.

/s/ JOHN D. GIOLLI Controller March 21, 2001
- ---------------------------------------------------
John D. Giolli

/s/ STEVEN C. AMENDOLA Director March 21, 2001
- ---------------------------------------------------
Steven C. Amendola

/s/ G. CHRIS ANDERSEN Director March 21, 2001
- ---------------------------------------------------
G. Chris Andersen

/s/ KENNETH R. BAKER Director March 21, 2001
- ---------------------------------------------------
Kenneth R. Baker

/s/ WILLIAM H. FIKE Director March 21, 2001
- ---------------------------------------------------
William H. Fike

/s/ ALEXANDER MACLACHLAN Director March 21, 2001
- ---------------------------------------------------
Alexander MacLachlan

/s/ ZOLTAN MERSZEI Director March 21, 2001
- ---------------------------------------------------
Zoltan Merszei

/s/ H. DAVID RAMM Director March 21, 2001
- ---------------------------------------------------
H. David Ramm

/s/ JAMES L. RAWLINGS Director March 21, 2001
- ---------------------------------------------------
James L. Rawlings

20
23

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Report of Independent Auditors.............................. F-2
Balance Sheet as of December 31, 2000 and 1999.............. F-3
Statement of Operations for the twelve months ended December
31, 2000 and 1999......................................... F-4
Statement of Stockholders' Equity for the period from
January 1, 1999 to December 31, 2000...................... F-5
Statement of Cash Flows for the twelve months ended December
31, 2000 and 1999......................................... F-6
Notes to Financial Statements............................... F-7

F-1
24

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Millennium Cell Inc.

We have audited the accompanying balance sheets of Millennium Cell Inc. (a
development stage company) as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity and cash flows for the period
from January 1, 1999 (inception) to December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Millennium Cell Inc. as of
December 31, 2000 and 1999 and the results of its operations and its cash flows
for the period from January 1, 1999 (inception) to December 31, 2000, in
conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

New York, New York
February 20, 2001

F-2
25

MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEET

DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,098,701 $ 42,165
Prepaid expenses.......................................... 188,874 --
------------ -----------
Total current assets........................................ 30,287,575 42,165
Property and equipment, net................................. 645,852 386,587
Patents and licenses, net................................... 440,074 254,500
Other assets................................................ 22,744 63,225
------------ -----------
$ 31,396,245 $ 746,477
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,435 $ 41,700
Accrued bonuses........................................... 248,010 --
Accrued expenses.......................................... 674,437 12,432
Due to affiliate.......................................... -- 30,000
Note payable to affiliate................................. -- 250,000
Deferred royalty income................................... 2,399,988 --
------------ -----------
Total current liabilities................................... 3,333,870 334,132

Refundable grant obligation................................. 227,522 193,622

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 authorized
shares, none issued and outstanding.................... -- --
Common stock, $.001 par value; authorized 40,000,000
shares and 27,167,981 and 23,679,714 shares issued and
outstanding as of December 31, 2000 and 1999,
respectively........................................... 27,168 23,680
Additional paid-in capital................................ 46,658,927 1,226,320
Deficit accumulated during development stage.............. (18,851,242) (1,031,277)
------------ -----------
Total stockholders' equity.................................. 27,834,853 218,723
------------ -----------
$ 31,396,245 $ 746,477
============ ===========

See accompanying notes.
F-3
26

MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF OPERATIONS

PERIOD FROM
TWELVE MONTHS JANUARY 1, 1999
ENDED (INCEPTION) TO CUMULATIVE
DECEMBER 31, DECEMBER 31, AMOUNTS FROM
2000 1999 INCEPTION
------------- --------------- ------------

General and administrative (includes non-cash
charges of $10,785,381 for the year ended
December 31, 2000)............................. $ 13,958,774 $ 164,953 $ 14,123,727
Depreciation and amortization.................... 256,820 57,007 313,827
Research and development......................... 2,131,684 820,128 2,951,812
------------ ----------- ------------
Total operating expenses......................... 16,347,278 1,042,088 17,389,366
------------ ----------- ------------
Loss from operations............................. (16,347,278) (1,042,088) (17,389,366)
Interest income, net............................. 678,194 10,811 689,005
------------ ----------- ------------
Net loss......................................... (15,669,084) (1,031,277) (16,700,361)
Preferred stock amortization..................... 2,150,881 -- 2,150,881
------------ ----------- ------------
Net loss applicable to common stockholders....... $(17,819,965) $(1,031,277) $(18,851,242)
============ =========== ============
Loss per share -- basic and diluted.............. $ (.69) $ (.04) $ (.77)
------------ ----------- ------------
Weighted -- average number of shares
outstanding.................................... 25,787,672 23,679,714 24,382,174
============ =========== ============

See accompanying notes.
F-4
27

MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY

COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
-------------------- ----------------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------- ---------- ---------- ----------- ------------ -------------

January 1, 1999
(inception)................ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock... 17,494,392 17,494 -- -- 1,232,506 -- 1,250,000
Issuance of common stock to
GPS in exchange for
assets................... 6,185,322 6,186 -- -- (6,186) -- --
Net loss................... -- -- -- -- -- (1,031,277) (1,031,277)
---------- ------- ---------- ---------- ----------- ------------ ------------
Balance at December 31,
1999....................... 23,679,714 23,680 -- -- 1,226,320 (1,031,277) 218,723
Capital contribution....... -- -- -- -- 500,000 -- 500,000
Redemption of common stock
held by GPS and
termination of royalty
agreement................ (623,401) (623) -- -- 2,068,763 -- 2,068,140
Issuance of preferred
stock.................... -- -- 759,368 2,146,446 -- -- 2,146,446
Conversion of preferred
stock to common stock.... 759,368 759 (759,368) (2,146,446) 2,145,687 -- --
Amortization of preferred
stock.................... -- -- -- -- 2,150,881 (2,150,881) --
Issuance of common stock
from initial public
offering................. 3,352,300 3,352 -- -- 29,850,865 -- 29,854,217
Non-cash compensation
charges for issuance of
stock options............ -- -- -- -- 8,716,411 -- 8,716,411
Net loss................... -- -- -- -- -- (15,669,084) (15,669,084)
---------- ------- ---------- ---------- ----------- ------------ ------------
Balance at December 31,
2000....................... 27,167,981 $27,168 $ -- $ -- $46,658,927 $(18,851,242) $ 27,834,853
========== ======= ========== ========== =========== ============ ============

See accompanying notes.
F-5
28

MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF CASH FLOWS

PERIOD FROM
TWELVE MONTHS JANUARY 1, 1999
ENDED (INCEPTION) TO CUMULATIVE
DECEMBER 31, DECEMBER 31, AMOUNTS FROM
2000 1999 INCEPTION
------------- --------------- ------------

OPERATING ACTIVITIES
Net loss......................................... $(15,669,084) $(1,031,277) $(16,700,361)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 256,820 57,007 313,827
Non-cash charges................................. 10,785,381 -- 10,785,381
Changes in operating assets and liabilities:
Prepaid expenses and other assets................ (148,393) (63,225) (211,618)
Accounts payable and accrued expenses............ 879,750 54,132 933,882
Due to affiliate................................. (30,000) 30,000 --
Deferred royalty income.......................... 2,399,988 -- 2,399,988
------------ ----------- ------------
Net cash used in operating activities............ (1,525,538) (953,363) (2,478,901)
INVESTING ACTIVITIES
Purchase of property and equipment............... (493,568) (330,091) (823,659)
Patent registration costs........................ (208,091) (118,003) (326,094)
------------ ----------- ------------
Net cash used in investing activities............ (701,659) (448,094) (1,149,753)
FINANCING ACTIVITIES
Proceeds from sale of common stock............... 33,523,000 1,250,000 34,773,000
Underwriting and other expenses of initial public
offering....................................... (3,669,613) -- (3,669,613)
Proceeds from capital contribution............... 500,000 -- 500,000
Payment of note payable.......................... (250,000) -- (250,000)
Proceeds from grant.............................. 33,900 193,622 227,522
Proceeds from sale of preferred stock............ 2,146,446 -- 2,146,446
------------ ----------- ------------
Net cash provided by financing activities........ 32,283,733 1,443,622 33,727,355
------------ ----------- ------------
Net increase in cash and cash equivalents........ 30,056,536 42,165 30,098,701
Cash and cash equivalents, at inception.......... 42,165 -- --
------------ ----------- ------------
Cash and cash equivalents, end of period......... $ 30,098,701 $ 42,165 $ 30,098,701
============ =========== ============

NON-CASH TRANSACTIONS

In January 1999, the Company received licenses and equipment from GP
Strategies ("GPS") in exchange for a note payable to GPS for $250,000.

See accompanying notes.
F-6
29

MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- BASIS OF PRESENTATION

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

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

On December 17, 1998, the Company entered into an agreement ("Agreement")
with GPS pursuant to which in January 1999 substantially all of the assets of
its Battery Technology Group (which consisted only of a license ("License") and
equipment) were exchanged for approximately 6.2 million shares of common stock
and a note payable to GPS for $250,000. The value allocated to the assets
acquired was limited to the $250,000 note payable. Approximately $100,000 has
been allocated to equipment (which is the basis at which it was recorded on the
books of GPS) and the remaining $150,000 to the License.

The License covers the use of the Invention to make, use and sell licensed
products within the licensed territory in perpetuity.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

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

Other Assets

Other assets primarily consist of deposits with certain vendors and
landlords.

Property and Equipment

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

ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -----------

Machinery and equipment..................................... 3 years
Furniture and fixtures...................................... 3 years
Leasehold improvements...................................... 3 years

Leasehold improvements are amortized over the estimated useful lives of the
assets or related lease terms, whichever is shorter.

Repairs and maintenance are charged to expense as incurred.

F-7
30
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Long-Lived Assets

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

Patents and Trademarks

Certain costs associated with obtaining and licensing patents and
trademarks are capitalized as incurred and are amortized on a straight-line
basis over their estimated useful lives of 10 to 17 years, unless the asset is
determined to be impaired. Amortization of such costs begins once the patent has
been issued. The Company evaluates the recoverability of its patent costs at
each balance sheet date based on estimated undiscounted future cash flows.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Based Compensation

The Company accounts for its stock options under the provisions of APB
Opinion No. 25 "Accounting for Stock Issued to Employees" and complies with the
disclosure requirements of FASB Statement No. 123 "Accounting for Stock Based
Compensation."

Earnings Per Share

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

Income Taxes

The Company is subject to state and federal income taxes and accounts for
income taxes under the liability method. Accordingly, net deferred tax assets
and an offsetting valuation allowance of $6,267,634 and $412,511 at December 31,
2000 and 1999, respectively have been recorded due to the uncertainty regarding
the realization of such deferred tax assets. The significant items giving rise
to the deferred income taxes were primarily tax loss and credit carryforwards
and depreciation.

Use of Accounting Estimates

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

F-8
31
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Reclassifications

Amounts previously reported as "Product Development and Engineering" have
been reclassified and shown as "Research and Development" for all periods
presented.

NOTE 3 -- PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

2000 1999
--------- --------

Machinery and equipment..................................... $ 757,721 $321,211
Furniture and fixtures...................................... 55,283 38,878
Leasehold improvements...................................... 110,655 70,002
--------- --------
923,659 430,091
Accumulated depreciation.................................... (277,807) (43,504)
--------- --------
Property and equipment, net................................. $ 645,852 $386,587
========= ========

NOTE 4 -- INTANGIBLE ASSETS

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

2000 1999
-------- --------

Patent and license costs.................................... $476,094 $268,003
Accumulated amortization.................................... (36,020) (13,503)
-------- --------
$440,074 $254,500
======== ========

NOTE 5 -- PRODUCT DEVELOPMENT AGREEMENT

In October 2000, the Company, in the ordinary course of business, entered
into agreements with Ballard Power Systems Inc. which provide for the following:

- The joint development of the Company's proprietary hydrogen generation
system for use with Ballard's portable power fuel cell products.

- Ballard's right to license certain technology of the Company for use in
its portable power products on an exclusive basis for a defined period of
time.

- Ballard to pay the Company $2.4 million as an advance for prospective
royalty's payable under the license. Under certain circumstances, a
portion of this advance may be refundable to Ballard.

- Ballard, upon successful completion of the joint development effort, has
the right to purchase up to 400,000 shares of the Company's common stock,
which will be recorded at its fair value on such development date.

NOTE 6 -- GRANT OBLIGATION

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

F-9
32
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

tenth year the Company has not repaid at least 100% of the original grant, the
Company is obligated to repay the difference between that amount and the
cumulative repayments made to date. The original grant amount has been recorded
as a liability. Additional liability, if any, will be recorded upon the
attainment of net income in excess of the amount required to establish such
additional liability.

NOTE 7 -- PAYABLE TO AFFILIATE

In connection with the GPS Agreement, the Company entered into a 6% note
payable to GPS, which is payable with interest on September 25, 2001. The
Company repaid the note with proceeds of the private placement completed in the
second quarter of 2000.

NOTE 8 -- COMMITMENTS AND CONTINGENCIES

The Company is currently negotiating to amend certain operating leases to
provide for additional space for the Company's principal operating offices and
laboratories. The amended lease will expire in 2008 and will contain options to
renew for an additional 8 years and will require the Company to pay its
allocated share of taxes and operating cost in addition to the annual base rent
payment. We expect future minimum annual lease commitments including allocated
taxes and maintenance under existing and amended operating leases to be as
follows:

2001........................................................ $ 365,000
2002........................................................ 590,000
2003........................................................ 590,000
2004........................................................ 590,000
2005........................................................ 590,000
Thereafter.................................................. 1,426,000
----------
Total.................................................. $4,151,000
==========

Rent expense under the operating lease was approximately $128,435 and
$23,000 for the years ended December 31, 2000 and 1999, respectively.

NOTE 9 -- CAPITAL TRANSACTIONS

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

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

The Company issued 3,223,071 of options for shares of common stock
primarily to employees and directors in 2000 with exercise prices ranging from
$2.90-$10.00 per share. These issuances will result in non-cash charges of
approximately $25.5 million over the three-year vesting period of the options
(see note 10).

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

F-10
33
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

2000 Stock Option Plan

In July 2000, the Company adopted the Amended and Restated 2000 Stock
Option Plan. 5,500,000 shares of common stock have been reserved for issuance
under the plan. The plan provides for the granting of the following types of
awards: stock options, stock appreciation rights, restricted stock awards,
performance unit awards and stock bonus awards. Options issued under this plan
have a life of ten years and generally vest ratably over three years. The
specific terms and conditions of awards granted under the plan are specified in
a written agreement between the Company and the participant.

The following is additional information relating to options granted and
outstanding under the plan as of December 31, 2000:

REMAINING
WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE AVERAGE LIFE
EXERCISE PRICE RANGE OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE (YEARS)
- -------------------- ----------- -------------- ----------- -------------- ------------

$ 2.90 - $ 2.90.............. 3,227,321 $ 2.90 455,178 $ 2.90 9.5
9.50 - 10.00.............. 414,650 9.99 250,000 10.00 9.7
16.50 - 19.63.............. 42,500 17.87 -- -- 9.8
--------- ------ ------- ------ ---
3,684,471 $ 3.87 705,178 $ 5.42 9.5
========= ====== ======= ====== ===

All options were granted in 2000. There were no cancellations or exercises
of stock options for the year ended December 31, 2000.

Issuances to employees and board members resulted in a non-cash charge of
$5.1 million in 2000, which is included in general and administrative expense in
the statement of operations. The Company will incur additional non-cash charges
of approximately $16.2 million over the three-year vesting period of certain of
those options (assuming no employee turnover) as follows: 2001-$6.5 million,
2002-$6.5 million and 2003-$3.2 million.

In 2000, the Company issued approximately 542,000 options and warrants to
individuals and entities which were not employees of the Company. The fair value
of these options and warrants was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: volatility =
.92, contractual term = 10 years, expected option life = 0-3 years, expected
rate of return = 6.25%. This calculation resulted in a non-cash charge of $2.9
million in 2000, which is included in general and administrative expense in the
statement of operations. The Company will incur additional non-cash charges of
approximately $.6 million for those options which did not vest immediately over
the vesting period of such options as follows: 2001-$.3 million, 2002-$.2
million and 2003-$.1 million.

Accounting For Stock-Based Compensation

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as if
the Company had accounted for its employee stock options under the fair value
method of that statement. The fair value of options granted for the fiscal year
ended December 31, 2000 reported below has been estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
volatility = .92, contractual term = 10 yrs, expected option life = 0-3 yrs,
expected rate of return = 6.25%.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The Company's

F-11
34
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate. Based upon the above assumptions, the weighted average
fair value of employee stock options granted during fiscal 2000 was
$3.74 -- $16.88 per share.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had the Company's stock
option plan been accounted for under SFAS No. 123, net loss and loss per share
would have been increased to the following pro forma amounts:

NET LOSS -- NET LOSS -- LOSS PER SHARE -- LOSS PER SHARE --
YEAR ENDED DECEMBER 31, AS REPORTED PRO FORMA AS REPORTED PRO FORMA
- ----------------------- ------------ ------------ ----------------- -----------------

2000........................... $(17,819,965) $(18,458,948) $(0.69) $(0.72)
1999........................... $ (1,031,277) $ (1,031,277) $(0.04) $(0.04)

The effects of applying SFAS No. 123 on pro forma disclosures of net loss
and loss per share for fiscal 2000 are not likely to be representative of the
pro forma effects on net loss and loss per share in future years for the
following reasons: 1) the number of future shares to be issued under this plan
is not known, 2) the assumptions used to determine the fair value can vary
significantly.

Savings Plan

In December 2000, the Company enacted a savings plan that complies with
Section 401(k) of the Internal Revenue Code. The plan allows employees to
contribute a portion of their compensation on a pre-tax and/or after-tax basis
in accordance with specified guidelines. The Company matches in company stock,
on a one to one basis the employee contributions up to 6% of eligible
compensation. Contributions to this plan began in January 2001.

NOTE 11 -- QUARTERLY INFORMATION (UNAUDITED)

FISCAL YEAR QUARTERS
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- -------- ------- --------
(IN 000'S, EXCEPT PER SHARE AMOUNTS)

Fiscal Year Ended December 31, 2000
General and administrative (excluding
non cash charges).................... $ 114 $ 352 $ 1,017 $ 1,691 $ 3,173
Non-cash charges....................... -- -- 8,947 1,838 10,785
Depreciation and amortization.......... 25 36 99 97 257
Research and development............... 284 377 668 803 2,132
------- ------- -------- ------- --------
Total operating expenses............... 423 764 10,731 4,429 16,347
------- ------- -------- ------- --------
Loss from operations................... (423) (764) (10,731) (4,429) (16,347)
Interest income(expense), net.......... 1 (21) 230 467 678
------- ------- -------- ------- --------
Net loss............................... (422) (785) (10,501) (3,962) (15,669)
Preferred stock amortization........... -- 1,425 726 -- 2,151
------- ------- -------- ------- --------
Net loss applicable to common
stockholders......................... $ (422) $(2,209) $(11,227) $(3,962) $(17,820)
======= ======= ======== ======= ========
Loss per share -- basic and diluted.... $ (.02) $ (.09) $ (.45) $ (.15) $ (.69)
======= ======= ======== ======= ========
Weighted -- average number of shares
outstanding.......................... 23,680 23,680 25,221 27,168 25,788
======= ======= ======== ======= ========

F-12
35
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FISCAL YEAR QUARTERS
---------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
(IN 000'S, EXCEPT PER SHARE AMOUNTS)

Fiscal Year ended December 31, 1999
General and administrative............... $ 7 $ 17 $ 21 $ 120 $ 165
Depreciation and amortization............ 3 12 16 26 57
Research and development................. 152 197 231 241 820
------- ------- ------- ------- -------
Total operating expenses................. 162 226 268 387 1,042
------- ------- ------- ------- -------
Loss from operations..................... (162) (226) (268) (387) (1,042)
Interest income(expense), net............ -- 2 6 3 11
------- ------- ------- ------- -------
Net loss................................. (162) (225) (261) (383) (1,031)
======= ======= ======= ======= =======
Loss per share -- basic and diluted...... $ (.01) $ (.01) $ (.01) $ (.01) $ (.04)
======= ======= ======= ======= =======
Weighted -- average number of shares
outstanding............................ 23,680 23,680 23,680 23,680 23,680
======= ======= ======= ======= =======

F-13