For the fiscal year ended: December 31, 2001

OR

Commission File Number:  001-14919

(Exact Name of Registrant as Specified in Its Charter)

5 POND PARK ROAD
HINGHAM, MASSACHUSETTS 02043
(781) 741-8800
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)

GARRY PRIME, PRESIDENT AND CHIEF EXECUTIVE OFFICER
EVERCEL, INC.
5 POND PARK ROAD
HINGHAM, MASSACHUSETTS 02043
(781) 741-8800

(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of 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.

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.

þ

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $18,551,874, which is based on the closing price of $2.05 on March 21, 2001. On March 21, 2002 there were 10,390,708 shares of Common Stock of the registrant issued and outstanding.

Forward-looking Statement Disclaimer

When used in this report, the words "expects", "anticipates", "estimates", "should", "will", "could", "would", "may", and similar expressions are intended to identify forward-looking statements. Such statements include statements relating to Evercel's continued development and commercialization schedule for its patented nickel-zinc ("Ni-Zn") rechargeable battery technology and its joint venture partner, expansion plans, licensing opportunities and the expected cost competitiveness of its technology as well as its lack of a definitive business plan. These and other forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results to differ materially from those forward-looking statements, including, without limitation, general risks associated with product development and introduction, changes in worldwide environmental laws and policies, potential volatility of material costs, government appropriations, rapid technol ogical change, and competition, as well as other risks. The forward-looking statements contained herein speak only as of the date of this Report. Evercel Inc. (the "Company") expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which any such statement is based.

Overview

          We have developed and, through our joint venture in the Peoples Republic of China are manufacturing rechargeable nickel-zinc batteries (See "Our Joint Venture in the PRC"). The nickel-zinc battery technology is suited for applications requiring long cycle life, light weight and relative cost efficiency. We believe that we will be able to develop markets that utilize nickel-zinc technology both in the U.S. and internationally. However, to date there has not been wide spread acceptance of our technology.

          We are focusing our marketing efforts on specialty applications of our rechargeable nickel-zinc batteries where our technology has competitive advantages and where the channels of distribution are relatively narrow. At the present time, we are principally addressing applications in transportation, including:

• the small electric vehicle market, principally scooters, bicycles, wheelchairs and neighborhood electric vehicles

• the electric trolling motor market, primarily focused on bass fishing boats,

          We believe our rechargeable nickel-zinc batteries have a variety of other applications. We are continuing to look at additional applications such medical devices, portable power tools and lawn equipment.

          Our proprietary nickel-zinc rechargeable battery is the result of a substantial investment by our former parent company in the development of advanced battery technologies. Our patented technology allow us to produce batteries with the following combination of characteristics:

• extended run time;

• light weight;

• maintenance free construction;

• favorable environmental profile; and

• attractive lifetime cost.

          In many deep discharge applications where the battery functions as the primary power source, we believe our nickel-zinc batteries offer superior performance and lower lifetime cost than many other battery chemistries currently available on a commercial basis. However, the cost of materials used in our batteries results in a higher initial cost to the user compared to some alternative technologies. This factor has hindered our efforts to achieve significant market penetration. We are continuing to improve our technology to reduce the cost per kilowatt hour.

          Electric Vehicles

          The electric scooter, electric bike and neighborhood electric vehicle markets are a good fit for our technology because of the particular characteristics of our batteries. Our technology enables manufacturers to incorporate in their vehicles a high-energy power source relative to the weight of the battery. The deep cycle capability of our technology provides longer total range than lower cost technologies. We believe the cost of ownership of our battery over its entire life is less than other available technologies. Certain states, including California, Arizona and Colorado, are strengthening environmental laws and granting consumer rebates for purchasing electric vehicles. We expect this trend to continue. As the market for mass-produced electric vehicles grows in the United States, we believe that we are well positioned to be a major participant in this market

          The electric vehicle market primarily exists in Europe and Asia. Growing concern about air pollution in Europe is resulting in increased government restrictions on internal combustion engines and government incentives to induce consumer purchases of non-combusting vehicles. Our technology is a logical alternative that offers greater power and range than many competing technologies. Within the electric vehicle market, we expect that the majority of our sales will be direct sales to manufacturers, with a small aftermarket for battery sales directly to consumers.

          Electric Trolling Motors

          The electric trolling motor market exists almost exclusively in the United States bass fishing industry. While the retail price of the Evertroll battery is significantly higher than that of a lead-acid battery, we believe that the durability and extended life of the Evertroll battery will result in a cost per hour of operation over the life of the battery that is less than that of a lead-acid battery. However, the initial high cost of our battery has been a barrier to greater market penetration. While we have seen increased demand at a lower retail price, we are not certain we can lower manufacturing costs to a level that will allow us to maintain the lower retail price.

          Other Markets

          Our technology lends itself to other applications where a mobile energy source is required. We believe that the motorized wheelchair may be a potentially large market for our technology. We have developed a battery that matches the dimensions of the standard for motorized wheelchairs. Our battery is significantly lighter and offers the other advantages of nickel-zinc technology. We have not yet begun to market this battery and cannot predict the level of market acceptance.

          We are exploring the potential of our technology for use in medical devices and tools. While we do not currently have products suitable for these markets, we believe that the nickel-zinc batteries may be a viable power source for these applications.

Technology

          We believe we have created products that are well suited for our target markets and we have developed and patented technologies that will permit high volume manufacture of our rechargeable batteries. We believe our batteries have a longer cycle life, are lighter in weight and lower in total life cycle cost than comparable batteries currently available in our target markets. Although the basic characteristics of nickel-zinc battery technology have been known for many years, our patents and proprietary production process create a barrier of entry for potential competition in our chosen market. We have nine U.S. patents which, combined, have an average of eight years remaining before expiration. Our batteries also have the additional advantage of lower environmental impact compared to lead-acid or nickel-cadmium batteries.

          In July 2001, the Company elected a new Chairman of the Board of Directors and hired a new President and CEO. The new management has reduced expenses while focusing on improving sales and reducing costs. (See Directors and Officers of Registrant)

          Our products are the culmination of decades of research in rechargeable nickel-zinc battery technology. The rechargeable nickel-zinc battery was first patented in 1923. During the early 1980's, extensive research and development efforts by other researchers to develop a rechargeable nickel-zinc battery were not successful due to unacceptably short battery cycle life.

          We solved the short cycle life problem with our proprietary cell consisting of layers of positive (nickel) electrodes and negative (zinc) electrodes separated by both electrolyte absorptive layers and microporous separator layers. By sealing the battery cell and reducing the solubility of the zinc electrode, we have increased the cycle life of our batteries. Currently, our research and development efforts are focused on designing batteries for specific applications, improving performance characteristics and reducing costs. (See Research and Development)

          Evercel operated as the battery business group of FuelCell Energy, Inc. (FuelCell) between 1970 and 1999. FuelCell's main business is the development of carbonate fuel cells, which are designed for stationary power systems. In February 1999, FuelCell made a tax-free distribution of our stock to its stockholders, which resulted in our current structure as an independent, publicly held company. While we were part of FuelCell, we focused primarily on the development and engineering of electricity production and storage by electrochemical means. Prior to becoming independent, our product sales emphasized high performance battery cells for the submarine, aerospace and military markets where application needs and engineering excellence outweighed the concerns of cost. We pursued several battery technologies, including silver-zinc, nickel-cadmium, and nickel-zinc. During the mid-1970's to early 1980's, we manufactured high energy density silver-zinc bat teries for submarines and submersibles for both main propulsion and auxiliary power. During the 1980's, we were contracted by the United States Navy to develop nickel-cadmium batteries for nuclear submarines as well as the U.S. Department of Energy to develop nickel-zinc batteries for electric vehicles. Historically, we relied on corporate and government contracts for our revenue and as the source of internal research and development funds.

          There are two types of batteries, disposable and rechargeable batteries. Our nickel-zinc batteries are rechargeable. Rechargeable batteries can often be used in battery applications where disposable batteries are most commonly employed. Disposable batteries are, in most cases, too costly or inconvenient for widespread use in applications currently utilizing rechargeable batteries.

          No one rechargeable battery system is ideal for all applications. There are numerous performance variables that vary in importance by application. Important variables in our markets include:

• specific energy (energy capacity per unit weight);

• specific power (how rapidly energy can be drawn from the battery relative to its weight);

• cycle life (which varies with discharge rate and depth of discharge, response to ambient temperatures, rate of self-discharge, charged and discharged shelf life, size, shape and design);

• energy density (energy capacity per unit volume); and

• cost of materials per kilowatt hour.

          We believe nickel-zinc technology is suitable for our target markets because of its potential to compete well in several rechargeable battery applications. The following chart illustrates the primary performance characteristics by which batteries are judged in our target markets and compares nickel-zinc to certain other competitive battery technologies:

_______________________

Risk Factors

          You should carefully consider the risks described below as well as the other information included in or incorporated by reference in this annual report on Form 10-K. If any of these risks occur our business prospects, results of operations or financial condition could be harmed.

          Until February 1999, we operated as the battery business group of FuelCell. Since our establishment as an independent entity, we have had limited success in the commercialization of our initial products. Revenue to date from sales of our battery products has been minimal. All manufacturing is done at our joint venture in the PRC; we do not have manufacturing capability in the United States. Our limited operating history makes predicting the future results of our operations or the risks we will face difficult. To date we have been unable to achieve the objectives of our business model, accordingly, we cannot be certain that our business strategy will be successful. As we seek to exploit other opportunities, there is no guarantee that we will:

          We are not profitable and have had limited revenues. We cannot assure you that we will become profitable in the foreseeable future, if ever. For the twelve months ended December 31, 2001, 2000 and 1999 we had losses attributable to common stockholders of $28.5 million, $12.0 million and $5.9 million, respectively. We expect that we will continue to incur losses at least through 2002. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

          If we determine that future net cash flows from the licensing of our technology and the sale of our battery products is less than the carrying amount of our intellectual properties, we will be required under current accounting principles to revalue those properties.

          We believe that we will depend on sales of our nickel-zinc batteries for substantially all of our revenues for the foreseeable future. Our success will depend upon the market acceptance of our nickel-zinc battery technology. Our nickel-zinc batteries have not achieved, and may never achieve, market acceptance. Our introduction of new products may be delayed or unsuccessful. Our batteries will be a more expensive initial purchase than competing batteries and other technologies. We cannot assure you that we will be successful in convincing customers of the value of our batteries over their life cycles and their other performance advantages. Our success will depend, in large part, on our ability to meet customer requirements by developing and introducing, on a timely basis, new products and enhanced and modified versions of our current products. We cannot assure you that we will be able to do so. Our competitors may introduce new technologies or refine existing technologies that will be more appealing to customers than our products.

          Patents, trade secrets and other proprietary rights are important to our success and competitive position. Our efforts to protect our proprietary rights, including our patents, may be inadequate and may not prevent others from claiming violations by us of their property rights. In addition, because of the intense competition in battery technology and the large number of patents filed, or being filed, we may need to use other companies' patents under license agreements. We are uncertain if we could reach an agreement to use those patents and whether the terms of such an agreement would be acceptable to us. If any court or competent authority concludes that our products or manufacturing processes have infringed upon the product or process rights held by others, our business, financial condition and results of operations could be harmed. Additionally, a determination that we have infringed upon the product or process rights held by others could result in the loss of our proprietary rights, subject us to liability to third parties or prevent us from manufacturing or selling our products, any of which could have a material negative effect on our business and hinder our intentions to sell our nickel-zinc battery technology. We cannot assure you that patents will be issued from any pending applications, that the claims allowed under any patents will be sufficiently broad to protect our technology, that any patents issued to us will not be challenged, invalidated or circumvented, or as to the degree or adequacy of protection any patents or patent applications may afford. We could incur substantial costs in prosecuting and defending patent and other proprietary rights suits.

          Our policy is to also protect our proprietary rights in our products and operations through contractual obligations including nondisclosure agreements with certain employees, customers, consultants, licensees and strategic partners. We also cannot assure you as to the degree of protection these contractual measures may afford.

          We have not filed for patent protection in certain potential major markets such as Southeast Asia. Any agreements that we reach with partners in these areas would have to be based on trade secrets and know-how. In the future, we may seek patent protection in those areas. In addition, some foreign countries in which we may do business provide significantly less patent and proprietary rights protection than the United States.

          We also rely on know-how and trade secrets to establish our battery technologies for commercial applications and we cannot assure you that we can adequately protect this information in our dealings with other companies. If other competitors or organizations develop similar or better battery technologies through their own efforts, these developments could have an adverse effect on our business.

          Rapid growth of our advanced rechargeable nickel-zinc battery business may significantly strain our management, operations and technical resources. We currently have limited manufacturing capability and no experience in large-scale manufacturing of our rechargeable nickel-zinc batteries or in automated assembly and packaging technology.

          Our joint venture in the PRC intends to expand its manufacturing capability. Manufacturing capability is dependent upon a number of factors, including manufacturing concerns and process control issues. We cannot assure you that the Joint Venture will not have difficulties meeting necessary quality control standards if we expand our manufacturing capabilities. Our business, financial condition and results of operations may be severely harmed if we encounter difficulties in effectively managing either the current production process or the budgeting, forecasting, quality control and other manufacturing issues encountered. Additionally, we cannot assure you that our licensees or our Joint Venture will be able to satisfy commercial-scale production requirements on a timely and cost-effective basis. Our failure to manufacture our nickel-zinc battery products in the volume necessary to exceed our fixed overhead expenses would have a significant adverse impact on our results of operations. To date, our manufacturing process has been unable to yield sufficient quantities of good batteries to be cost effective.

          The Joint Venture in the PRC is currently the exclusive manufacturer of our batteries. If the Joint Venture is unable or unwilling to continue to manufacture our batteries, we have no alternative means of producing batteries. In addition, we have no experience with the capabilities of our shipping contractors and cannot assure you that our shipping contractors will be able to ship our products in a timely manner. Delays in receiving product from China may hinder our ability to establish and maintain relationships with original equipment manufacturers and distributors.

          We conduct business in the People's Republic of China (the PRC) mainly through:

• our 50.5% ownership interest in a joint venture with Xiamen Three Circles Co., Ltd. that manufactures rechargeable nickel-zinc batteries from a plant in Xiamen; and

• the licensing of our technology to that joint venture pursuant to the Three Circles License Agreement.

The following risk factors relate to our business in the PRC.

          The value of our interest in our joint venture in the PRC and the profitability of that joint venture may be adversely affected by changes in the political environment in the PRC. The PRC is a socialist state, which, since 1949, has been, and is expected to continue to be, controlled by the Communist Party of China. Changes in the political leadership in the PRC could lead to changes in legal and business regulations and the general political, economic and social environment in that country. Those changes could adversely affect our business, financial condition and results of operations if they prohibit or restrict foreign investment in the PRC or result in increased costs for our joint venture.

          One of the target markets for nickel-zinc batteries manufactured from the Xiamen plant is Taiwan. The relationship between the PRC and Taiwan has been marked with political and economic tension. Our joint venture in the PRC could be adversely affected if bans or restrictions were imposed on trade between those two countries.

          In addition, we have relationships with individuals in the PRC whose status and political influence could be adversely affected as a result of political changes in that country. Any such changes in the political leadership or current economic reform policies or the imposition of additional restrictions on foreign-owned enterprises could have a material adverse effect on the business of our joint venture in the PRC and, as a result, our interest in that joint venture. Any such changes could also adversely affect our rights and revenues under the Three Circles License Agreement.

          We have licensed our technology for use by our joint venture in the PRC pursuant to the Technology Transfer and the Three Circles License Agreement. This agreement provides for the use of our nickel-zinc batteries for miners' lamps, two- and three-wheel vehicles, industrial traction equipment, off-road golf carts, boats and all terrain vehicles in the PRC on an exclusive basis and in Southeast Asia on a non-exclusive basis. We protect our technology in the PRC through a combination of patent applications, contractual arrangements and trade secrets. Patent and other intellectual property rights receive substantially less protection in the PRC than is available in the United States. We cannot assure you that we will be able to protect our proprietary rights in the PRC or elsewhere. The unauthorized use of our technology by others, particularly in the PRC where labor costs are low, could have a material adverse effect on our business, financial condition and results of operation.

          The PRC regulates the repatriation of foreign currencies as payments to foreigners, including investors and licensors, and the conversion of renminbi (the official currency of the PRC) into foreign currencies, such as the U.S. dollar. As a result, we may be restricted or prevented from receiving distributions, license payments or royalties from our joint venture in the PRC even if they are needed to meet obligations of our business or would be better employed in our business outside of the PRC. In addition, distributions from our joint venture in the PRC, license payments and royalties may be subject to taxation by the PRC as well as tax authorities in the United States.

          We expect that our joint venture in the PRC will receive a substantial portion of its revenues in renminbi. A portion of those revenues will have to be converted to other currencies to meet contractual obligations (such as payment obligations to suppliers) or for purposes of remitting these funds to us as return of capital, dividends or license payments. Under our joint venture agreement, we are entitled to receive royalties based on sales using our technology and other distributions from our joint venture. Our joint venture may be unable to convert sufficient renminbi into foreign currency to enable it to comply with its foreign currency payment obligations, including royalty payments and distributions to us. In the event of a depressed market in renminbi, the cost of foreign currency could prevent our joint venture in the PRC from paying distributions and license fees to us. In addition, fluctuations in the exchange rate of the renminbi into U. S. dollars could have an adverse effect on the license fees owed to us.

          The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation. As the legal system in the PRC develops, new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local laws by national laws may adversely affect our investment in our joint venture. In circumstances where adequate laws exist, we may not be able to obtain timely and equitable enforcement of those laws.

          Following the formation of the PRC in 1949, the PRC government renounced various debt obligations incurred by predecessor governments, which obligations remain in default, and expropriated assets without compensation. We cannot assure you that, in the future, expropriation or nationalization of the assets of the joint venture in the PRC or any of our other assets in the PRC will not occur. Such an expropriation or nationalization could result in a total loss of our investment in the joint venture in the PRC.

          A substantial portion of our business will depend upon the success of products sold by manufacturers that may use our batteries or license our technology. For example, one factor determining the quantity of purchase orders we may receive from electric vehicle manufacturers in the future is the success of that company's vehicles. We are subject to many risks beyond our control that influence the success or failure of manufacturers' particular products including, among others factors:

• competition faced by those manufacturers in their particular industry;

• market acceptance of the manufacturers' products;

• engineering, sales and marketing and management capabilities of those manufacturers;

• technical challenges unrelated to our technology or problems faced by any of those manufacturers in developing their products; and

• financial and other resources of those other manufacturers.

          The battery industry has experienced, and is expected to continue to experience, rapid technological change. Our growth and future success will depend, in part, on our ability to enhance and modify existing products and to introduce new products in new markets. Our product development efforts require and are expected to continue to require, substantial investments by us for research, refinement and testing. We cannot assure you that we will have the resources to do this.

          The rechargeable battery industry is characterized by intense competition with a large number of companies offering or seeking to develop technology and products similar to ours. We are subject to competition from manufacturers of traditional rechargeable batteries, from manufacturers of rechargeable batteries with advanced technologies, as well as from companies engaged in the development of batteries incorporating new technologies. We cannot assure you that we will be successful in competing with these manufacturers, many of which have substantially greater financial, technical, manufacturing, distribution, marketing, sales and other resources than we have. A number of companies with substantially greater resources than ours are pursuing the development of a wide variety of battery technologies that are expected to compete with our technology.

          Other companies undertaking research and development activities of solid-polymer batteries have already developed prototypes and are constructing commercial scale production facilities. If other companies successfully market their batteries prior to the introduction of our products, there may be a material adverse effect on our business, financial condition and results of operations. The market for our products, as well as the products that use our batteries and technology, is characterized by changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. We cannot assure you that competitors will not develop technologies or products that would render our technology and products obsolete or less marketable.

          Our growth and success will be dependent to a substantial extent on our reputation. Since we anticipate licensing our technology to others, our reputation may be affected by the performance of the companies to which we license our technology. Our licenses may grant exclusivity with respect to certain uses or geographic areas. As a result, we will be wholly dependent on the success of the licensee for success with respect to any exclusive use or geographical area. We cannot assure you that we will be successful in granting our licenses to those who are likely to succeed. In addition, license agreements with foreign companies may be subject to additional risks, such as exchange rate fluctuations, political instability or weaknesses in the local economy. Certain provisions of the license agreements that benefit us may be subject to restrictions in foreign laws that limit our ability to enforce those contractual provisions. In addition, it may be more difficult to register and protect our proprietary rights in certain foreign countries. Our failure to obtain suitable licensees of our technology or the failure of our licensees to achieve our manufacturing or quality control standards or otherwise meet our expectations could have a material adverse effect on our business, financial condition and results of operations.

          We intend to enter into additional joint venture arrangements in the future to sell or license our battery technology. Our joint venture in the PRC is with a foreign partner and we anticipate that future joint ventures may be with foreign partners or entities. As a result, such future joint ventures may be subject to the political climate and economies of the foreign countries where such partners reside. We cannot assure you that our joint venture partners or other partners will provide us with the support we anticipate, or that any of the joint ventures or other relationships will be successful in developing batteries for use with their intended products, or that any of the joint ventures or other relationships will be successful in manufacturing and marketing their batteries for such products once developed. Any of our international operations will also be subject to certain external business risks such as exchange rate fluctuations, politi cal instability and a significant weakening of a local economy in which a foreign joint venture operates or is located. Certain provisions of the joint venture agreements that are for our benefit may be subject to restrictions in foreign laws that limit our ability to enforce those contractual provisions. Failure of these joint ventures to be successful could have a material adverse effect on our business and prospects.

          Foreign, federal, state and local regulations impose various environmental controls on the manufacture, transportation, storage, use and disposal of batteries and certain chemicals used in the manufacture of batteries. We cannot assure you that conditions relating to our historical operations which require expenditures for clean-up will not be discovered in the future or that changes in environmental laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. Our batteries contain a limited amount of lead in the negative electrodes. We cannot assure you that the United States Environmental Protection Agency or other governmental agencies in the U.S. or abroad will not determine that the lead content or the nickel in our batteries makes them unsuitable for landfill disposal. Although we believe we are presently in compliance with all foreign, federal, state and local governmental reg ulations, we cannot assure you that additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our batteries or restricting disposal of batteries will not be imposed or as to the effect such regulations may have on us or our customers.

          The principal raw materials used in the production of our battery products are nickel and zinc. Prices for both nickel and zinc are subject to market forces beyond our control. Our future profitability may be materially adversely affected by increased nickel or zinc prices to the extent we are unable to pass on higher raw material costs to our customers. To attempt to reduce such risks, we may engage in forward purchases and hedging transactions to manage raw material costs and inventory relative to anticipated production requirements. We cannot assure you that such activities will be successful or will not result in increased losses.

          Certain separator materials used in the production of our batteries are only available from one supplier. We cannot assure you that alternate materials would be available to us at an acceptable price, or quickly enough so as not to disrupt production.

          We offer an extended warranty for our batteries. Our warranty is greater than the existing warranties of most of our competitors. If we are unable to manufacture batteries that achieve our stated performance levels or meet our customers' expectations for quality, the resulting claims may exceed expected levels against which we have reserved. Excessive claims will adversely affect our results of operations and financial condition.

          The sale of our products may expose us to product liability claims from consumers. Certain materials we use in our batteries could, if used improperly, cause injuries to others. In addition, improperly charging or discharging our batteries could possibly cause fires. Any accident involving our batteries or other battery products could impede demand for our products.

          We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-related or debt securities, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience additional dilution. In the past, we have experienced negative cash flow from operations. We completed a public offering in February 2001. This offering raised net proceeds of $25.1 million through the sale of 3,000,000 shares of our common stock at $9.00 per share and we currently anticipate that our available funds will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least 2002. We may need to raise additional funds prior to the expiration of this period if, for example, we pursue business acquisitions or experience operational losses tha t exceed our current expectations. We also cannot assure you that we will be able to put in place any future credit facilities that will address our future capital needs, in whole or in part.

          We expect that our quarterly operating results will fluctuate significantly. As a result, the market price for our common stock is likely to be highly volatile and subject to wide fluctuations. Factors, many of which are beyond our control, that may affect our quarterly results include:

• announcements of technological innovations or new products or services or pricing changes by us or our competitors;

• inability to commercialize the nickel-zinc technology

• conditions or trends in the battery or electric vehicle industries;

• changes in the economic performance and/or market valuations of other battery or electric power companies;

• announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

• additions or departures of key personnel;

• currency fluctuations;

• release of lock-up or other transfer restrictions on our outstanding shares of common stock or sales of additional shares of common stock; or

• potential litigation.

          Many companies that have experienced volatility in the market price of their stocks have been the subjects of securities class action litigation. We may be involved in a securities class action lawsuit in the future. Litigation often results in substantial costs and the diversion of management's attention and resources and could harm our business, financial condition and results of operations.

          If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants or the conversion of our Series A preferred stock, in the public market, the market price of our common stock could fall. These sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. At December 31, 2001 we had outstanding 10,377,375 shares of common stock, assuming no conversion of our Series A preferred stock and no exercise of our outstanding options or warrants. As of December 31, 2001, an additional 1,434,592 shares of common stock may be issued upon conversion of the Series A preferred stock and exercise of outstanding options and warrants.

          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 cash dividends on our common stock in the foreseeable future.

          We have never declared or paid any cash dividends on our common stock and we do not intend to pay any cash dividends in the near future on our common stock. At this time, we intend to retain our future earnings to fund the expansion of our business. Our board of directors may review our dividend policy from time to time, based on our performance and our financial condition.

          Effective March 1, 2002 we leased 4,000 square feet of space in Hingham, Massachusetts for our corporate headquarters. The lease term is for three years. The annual rent is $30,000.

          We lease approximately 28,500 square feet of space in Danbury, Connecticut, that has been used as our corporate headquarters. The lease term has two years remaining. The annual rent is $178,000 and $185,000 for the remaining years. We are attempting to sublease or negotiate a termination of this lease.

          Allen Charkey, the former Vice President and Chief Technical Officer, has sued the Company for wrongful discharge. Mr. Charkey has sued for actual damages of $165,000 and punitive damages. The suit was filed in the Superior Court of the State of Connecticut and is presently in the discovery stage.

          None.

          The following table sets forth the range of high and low sales prices of our common stock for the quarters indicated, as reported by the NASDAQ National Market and the NASDAQ Small Cap Market for the applicable periods.

          Our common stock has been traded on the NASDAQ National Market since May 4, 2000, and previously on the NASDAQ Small Cap Market from April 5, 1999.

          As of March 8, 2002, there were approximately 140 holders of record of our common stock.

          The selected financial data set forth below is for the fiscal years ended December 31, 2001 and 2000, October 31, 1999 and the two months ended December 31, 1999. You should read this information together with our financial statements and the notes to those statements beginning on page F-3 of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The statement of operations data for the fiscal years ended December 31, 2001 and 2000, October 31, 1999, the two months ended December 31, 1999 and the balance sheet data as of December 31, 2001, 2000 and 1999 are derived from our financial statements, which have been audited by KPMG LLP, independent accountants, and are included elsewhere in this report. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not n ecessarily indicative of results for the entire year.

          (a) Due to losses we have incurred, dilutive instruments, consisting of shares of Series A Preferred Stock, options and warrants, have been excluded from diluted shares. At December 31, 2001, 2000 and 1999 there were 194,035, 196,500 and 264,000 respectively, shares of Series A Preferred Stock convertible into 705,560, 714,523 and 960,000 respectively, shares of common stock, related warrants exercisable for 555,200, 555,200 and 595,268 shares of common stock and options exercisable for 173,833, 676,499 and 627,098 respectively, shares of common stock.

          We changed our fiscal year from October 31 to December 31 effective December 31, 1999. As a result, portions of the following discussion cover the two month period from November 1, 1999 to December 31, 1999.

          We have licensed the rights to manufacture and sell nickel-zinc batteries for certain specific applications in the PRC and other countries in Southeast Asia to our joint venture in the PRC, of which we own a 50.5% interest. Prior to December 1, 2000, we accounted for our involvement in that joint venture using the equity method of accounting, in which we recorded our share of earnings or losses from that joint venture in our income statement. Subsequent to December 1, 2000, as a result of the joint venture agreement being formally transferred to us, we have consolidated that joint venture in our financial statements.

          In a related transaction FuelCell transferred to us a 42.17% interest in Xiamen Three Circles ERC Technology Co., Ltd, (Tech JV). Subsequent to, but as part of the intent of, the original transfer, 17.67% of the Tech JV was transferred from us to Dr. Chao Ming Huang. The purpose of the Tech JV is to enhance cooperation between China and the United States in the field of energy and other new advanced technology fields. The Tech JV has had limited activity and is not significant to our financial statements. Subsequent to the 17.67% transfer, we have accounted for the Tech JV using the equity method of accounting.

          On February 16, 1999, FuelCell transferred to us the principal assets, intellectual property and liabilities related to its battery business group. On February 22, 1999, FuelCell distributed to its stockholders shares of our common stock in a tax-free distribution. In April 1999, we received $7.7 million from the sale of shares of our common stock at $3.00 per share pursuant to a rights offering. Results shown before the period of the spin-off reflect our activity as the battery business group of FuelCell.

          To continue to meet our operating and capital requirements, we completed a private placement of our equity in December 1999, raising $6.1 million, net of expenses. We also completed a public offering of our common stock in May 2000. The public offering raised net proceeds of $15.9 million through the sale of 1,391,080 shares of our common stock at $12.50 per share Additionally, we completed another public offering in February 2001. This offering raised net proceeds of $25.1 million through the sale of 3,000,000 shares of our common stock at $9.00 per share. We believe the net proceeds from these sales will be sufficient to support our planned operations at least through 2002.

Property, Plant and Equipment and Other Long-Lived Assets

          Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Company's business model or changes in the Company's capital strategy could result in the actual useful lives differing from the Company's estimates. In those cases where the Company determines that the useful life of property, plant and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value, over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could result in shortened useful lives.

          Long-lived assets to be held and used, including fixed assets and intangibles, are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, we estimate the undiscounted future cash flows to result from the use of the asset and its ultimate disposition. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Company's estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, and changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the Company recognizes an impairment loss, me asured as the amount by which the carrying value exceeds the fair value of the asset. Long-lived assets to be disposed of are evaluated in relation to the estimated fair value of such assets less costs to sell.

 Warranties and Sales Returns

          The Company allows customers to return their products when they meet certain Company-established criteria as outlined in the Company's warranty provision. The Company regularly reviews and revises when deemed necessary its estimates of sales returns based primarily upon actual returns or other events that would permit customers to return items based upon the Company's warranty provisions. The Company records estimated sales returns as a reduction to sales. Returned products are recorded as inventory only if they have an expected realizable value. The cost of refurbishment, if any, is charged to cost of sales. Actual returns, as well as realized values on returned products, may differ significantly, either favorably or unfavorably, from our estimates.

          We had revenue of $730,000 for the year ended December 31, 2001. This revenue resulted from sales of our scooter and marine batteries. Cost of sales of $6,472,000 for the year consisted of the material and labor costs of the product sold, scrap and manufacturing overhead.

          Administrative and selling expenses were $6,402,000, including $138,000 of related depreciation expense. These costs were primarily salaries, wages and benefits, selling and marketing activities and the costs of establishing our facility in Newport News, Virginia, including the relocation of personnel, professional services.

          Research and development expenses were $1,677,000 for the year, consisting primarily of salaries and benefits as well as travel related expenditures in an effort to assist in the start up of our Virginia manufacturing facility.

          In September 2001, we announced the closing of our Newport News, Virginia manufacturing facility as a result of our decision to discontinue production in the U.S. and to fully source our production from the Joint Venture in the PRC. As a result, we recorded a charge of $15,003,000. This charge was to cover the write-down of inventory and fixed assets as well as other costs associated with the shutdown of the facility and transfer of manufacturing to our joint venture. See note 15 to the consolidated financial statements.

          Net interest income of $819,000 for year ended December 31, 2001 was earned on investment of the proceeds from our stock sales.

          Minority interest expense of $123,000 represents the elimination of minority interest holders share of income generated by our Joint Venture in the PRC.

          We had revenue of $200,000 for the year ended December 31, 2000. This revenue resulted from product samples sold in our efforts to commercialize our nickel-zinc batteries. Cost of sales of $627,000 for the year ending December 31, 2000 was due to the cost of the samples shipped and the revaluation of inventory items at December 31, 2000. The revaluation reflected the value of materials and their components at their market value in accordance with the lower of cost or market valuation method.

          Administrative and selling expenses were $7,361,000, including $129,000 of related depreciation expense for the year ended December 31, 2000. These costs were primarily salaries, wages and benefits, the costs of our new manufacturing facility in Newport News, Virginia, including the relocation of personnel, professional services and selling and marketing activities to position us for consumer acceptance and demand.

          Research and development expenses were $4,623,000 for year ended December 31, 2000 due to product development activities relating to the commercialization of our product and the increased research activity after the start up of our manufacturing facility.

          Net interest income of $609,000 for year ended December 31, 2000 was due to interest income on investment of the funds received from our 1999 and 2000 stock sales. License fee income of $572,000 was received during the year ended December 31, 2000 related to the Nan Ya license agreement. Our share of joint venture losses through November 30, 2000 was $165,000. Beginning in December 2000, as a result of obtaining formal approval from the Chinese government of the transfer of the Joint Venture from FuelCell to us, we began consolidating the Joint Venture in our financial statements. We recognized a tax expense of $88,000 on the license fee payment.

          We had revenue of $13,000 for the two months ended December 31, 1999. The revenue in 1999 was due to consumer samples sold in our efforts to commercialize our nickel-zinc batteries. Cost of sales of $220,000 for the two months ending December 31, 1999 was due to the cost of the samples shipped and the revaluation of inventory items at December 31, 1999. The revaluation reflects the value of materials and their components at what we believe to be their market value in accordance with the lower of cost or market valuation method.

          Administrative and selling expenses were $690,000, including $54,000 of related depreciation expense, for the two months ended December 31, 1999. These costs were for the full staffing of administrative functions during 1999, including the addition of a Chief Executive Officer, Controller and other administrative personnel, the costs of being an independent publicly traded company, and selling, marketing and administrative activities to ready us for commercialization of our nickel-zinc battery technology

          Research and development expenses were $451,000 for the two months ended December 31, 1999 due to product development activity relating to the commercialization of our battery technology.

          Interest income of $28,000 for the two months ended December 31, 1999 was due to interest income on investment of the funds received from the 1999 offerings.

          In the year ended October 31, 1999 we had revenue of $196,000 from the sale of material to the joint venture. We had cost of sales of $694,000 for the year ended October 31, 1999. These costs were due to the cost of the materials shipped and the revaluation of inventory items at December 31, 1999 to adjust their costs to market value. The revaluation reserve reflects the value of materials and their components to reflect what we believe will be their market value when we are in high volume production and are able to negotiate more favorable pricing.

          Administrative and selling expenses were $2,425,000, including related depreciation expense of $181,000 for the year ended October 31, 1999. These costs were the result of increased staffing to support the commercialization, production and distribution of sample batteries and costs associated with the Joint Venture and Three Circles License Agreement.

          Research and development expense of $2,449,000 for the year ended October 31, 1999 reflects product development activity relating to the commercialization of our battery technology.

          Net interest income of $90,000 in 1999 reflects interest of $108,000 earned on funds raised from 1999 offerings offset by $18,000 of interest expense due to borrowings from banks and FuelCell to finance operations prior to our 1999 offerings. Our share of the Joint Venture's losses amounted to $36,000 for the year ended October 31, 1999. We recognized a tax benefit of $360,000 in the quarter ended January 31, 1999 due to our inclusion in the consolidated tax return of FuelCell. We recorded no benefit for the losses incurred in the second, third and fourth quarters of the year ended October 31, 1999, pursuant to Financial Accounting Standard No. 109, "Accounting for Income Taxes."

          Working capital at December 31, 2001 was $13.6 million versus $10.9 million at December 31, 2000. Included in working capital was cash of $16.2 million, compared to cash of $12.2 million at December 31, 2000.

          Prior to being spun off from FuelCell, we obtained all of our funding from FuelCell. On February 5, 1999, we entered into a loan agreement pursuant to which we borrowed $1.6 million from a bank and $300,000 from FuelCell for working capital and proposed capital expenditures secured by all of our tangible and intangible personal property. FuelCell guaranteed repayment of the bank loan. In April 1999, we received $7.7 million of net proceeds from a rights offering, including funds received from the sale of unsubscribed shares pursuant to an agreement with standby underwriters. We used a portion of these net proceeds to repay in full the bank loan and the line of credit from FuelCell, and those agreements were terminated.

          To continue to meet our operating and capital requirements, we completed a private placement of our preferred equity in December 1999, raising $6.1 million, net of expenses. We also completed a public offering of our common stock in May 2000. This public offering raised net proceeds of $15.9 million through the sale of 1,391,080 shares of our common stock at $12.50 per share. Additionally, we completed another public offering in February 2001. This offering raised net proceeds of $25.1 million through the sale of 3,000,000 shares of our common stock at $9.00 per share.

          In December 2000, we borrowed approximately $1.0 million from the Virginia Small Business Financing Authority and $250,000 from the City of Newport News, Virginia, Redevelopment and Housing Authority, which have been fully repaid as of December 31, 2001.

          Our cash requirements will vary depending upon a number of factors, many of which are beyond our control. These factors include the demand for our products, the efforts and success of our licensees and joint venture partners in developing and marketing products incorporating our battery technology, the development of battery markets, the level of competition that we face, our ability to develop, market and license new products and our ability to effectively manage operating expenses (See Risk Factors). The Company believes that the cash on hand will be sufficient to enable the Company to meet its anticipated cash requirements at least through 2002. However, there can be no assurance that the cash on hand at December 31, 2001 will be sufficient to meet the Company's cash requirements.

          We had entered into a services agreement with FuelCell to provide us with certain management and administrative services and office, research and development and manufacturing support facilities and services. The net fees, which we paid to FuelCell pursuant to our services agreement, were $167,500 for the year ended December 31, 2000, $67,000 for the two months ended December 31, 1999 and $378,000 for the year ended October 31, 1999. These amounts exclude certain services billed on the basis of usage, such as purchasing, analytical lab, microscope analysis, machine shop and drafting. These amounts reflect FuelCell's additional costs related to providing these services. These services were provided by FuelCell through December 31, 2000 and are now provided by our employees.

          In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 revises the guidance for business combinations and eliminates the pooling method. SFAS No. 142 eliminates the amortization requirement for goodwill and certain other intangible assets and requires that such assets be reviewed annually for impairment. We adopted SFAS No. 141 upon its adoption with no impact on our financial condition or results of operations. We have adopted SFAS No. 142 effective January 1, 2002 and do not anticipate a significant impact on our financial condition or results from operations as a result of the adoption.

          In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires recording the fair market value of an asset retirement obligation as a liability in the period in which a legal obligation associated with the retirement of tangible long-lived assets is incurred. SFAS No. 143 also requires recording the contra asset to the initial obligation as an increase to the carrying amount of the related long-lived asset and depreciation of that cost over the life of the asset. The liability is then increased at the end of each period to reflect the passage of time and changes in the initial fair value measurement. The Company is required to adopt the provisions of SFAS No. 143 effective January 1, 2003 and has not yet determined the extent of its impact, if any.

          In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement also extends the reporting requirements to report separately, as discontinued operations, components of an entity that have either been disposed of or are classified as held-for-sale. We have adopted the provisions of SFAS No. 144 effective January 1, 2002 and do not anticipate a significant impact on our financial condition or results from operations as a result of the adoption.

Market Risk

          We held no derivative instruments as of December 31, 2001. We are exposed to market fluctuations in foreign currency exchange and repatriation, interest rates and commodity pricing. The nature of each is as follows:

          We currently have international operations in the PRC through our Joint Venture. The currency of exchange is U.S. dollars for all current international transactions, except for transactions of the Joint Venture in the PRC. Although the PRC controls the rate of exchange for the Renminbi, a devaluation or free market valuation could impair the Joint Ventures ability to make payments to us. Additionally, for the foreseeable future, we expect to continue to reinvest in the PRC all monies earned as net income of the Joint Venture. The PRC may restrict the payments under our joint venture agreement. As a result, we might not be able to receive distributions from the Joint Venture in the future even if they are needed to meet obligations of our business or would be better employed in uses of our business outside of the PRC.

          We have invested and expect to invest excess funds in money market accounts in U.S. and PRC financial institutions. Based upon the cash and cash equivalents balance at December 31, 2001, an increase or decrease of interest rates of 100 basis points would have an effect on the Company's results of operations and cash flows of approximately $162,000.

          We do not hedge against price fluctuation in the commodities used in the manufacturing of our products and as a result, we are exposed to market price fluctuations for these commodities. We will reevaluate this policy as needed commensurate with the risk inherent in the business.

The Financial Statements and Supplementary Data of the Company are listed under Part IV, Item 14, in this report.

None.

          The following table sets forth information with respect to our executive officers, directors and certain key employees:

Garry A. Prime has been our President, Chief Executive Officer and Director since July 2001. He also is a director of the Joint Venture. Mr. Prime is president of Sontek Industries, Inc., a private operating and investment company. He has led several successful turnarounds of both public and private companies over the past 25 years. Prime is also a director of Oxygen S.p.A. Oxygen is marketing light electric vehicles such as motor scooters and bicycles in Europe and the U.S.

James G. Bath has been Chief Technology Officer since joining the Company in December 2001. Mr. Bath was founder, President and CEO of Liberty Engineering Co, a turnkey electronics subcontractor from 1975 to 1992. In 1996, he co-founded New Med Corporation, a medical device company. He is president of LEI Corp., a technology investment holding company.

Anthony P. Kiernan has been our Chief Financial Officer, Treasurer and Secretary since December 2001. Prior to joining Evercel, he had been the Chief Financial Officer of Sunblush Technologies (USA) since 1998. Prior to joining Sunblush, he was Controller and Assistant Treasurer of Haemonetics Corporation from 1987-1998.

James D. Gerson has been our Chairman since July 2001. He has been a director of Evercel since September 1998. Mr. Gerson also serves as chairman of the Board of Directors of the Joint Venture. He has been a Vice President of Fahnestock & Co., Inc., a financial services company, since March 1993. Mr. Gerson also serves as a director of FuelCell, Ag Services of America, Inc., a company financing farm inputs, and American Power Conversion Corp., a company producing uninterruptible power supplies. Mr. Gerson is also a director of Oxygen S.p.A.

Warren D. Bagatelle has been a director since September 1998. He has been a Managing Director of Loeb Partners Corporation, a financial services company, and a general partner of Loeb Investors Co LXXV, an affiliate of Loeb Partners Corporation, an investment company, since 1988. Mr. Bagatelle is a director of FuelCell.

Dr. Chao Ming Huang has been a Director since August 2001 and a Vice President of Far East Operations since July 1999. He has served as a director of Xiamen Three Circles ERC Battery Corporation since its formation in August 1998 and General Manager since January 1999. He joined FuelCell in 1994 where he held various positions, including Director for Advanced Materials Research. He received a Ph. D. in Mechanical Engineering from the University of Wyoming.

Dr. Bernard S. Baker has been a director since December 2001, and was formerly a director of Evercel between February 1999 and March 2000. Dr. Baker joined FuelCell in 1970 and was President from 1973 to August 1997 when he became Chairman of the Board. He was Chief Executive Officer of FuelCell from March 1992 to August 1997. He received a Ph.D. from the Illinois Institute of Technology in 1969, and was a Fulbright Fellow at the Laboratory for Electrochemistry at the University of Amsterdam subsequent to receiving his Master of Science in Chemical Engineering from the University of Pennsylvania in 1959. In 1999, Dr. Baker received the Grove Medal in the United Kingdom for his contributions to fuel cell technology. Dr. Baker remains as Chairman of the Board of FuelCell.

John H. Gutfreund has been a director since January 2000. He is a principal of C. E. Unterberg Towbin. He is the former Chairman and Chief Executive Officer of Salomon Brothers Inc. and former Vice Chairman of the New York Stock Exchange. He is President of Gutfreund & Company, Inc., an investment banking and consulting firm. He is also a director of AMBI, Inc., a manufacturer of nutrition products; Ascent Assurance, Inc., an insurance holding company; Baldwin Piano & Organ Company, Inc., a musical instruments company; Maxicare Health Plans, Inc., a managed health care company; Arch Wireless, Inc., an Internet messaging and wireless information company; LCA-Vision, Inc., a provider of services to outpatient eye surgery facilities; and Universal Bond Fund.

William A. Lawson has been a director since September 1998. He has been President of W.A. Lawson Associates, an industrial and financial consulting firm, since 1987. Mr. Lawson is a director of FuelCell.

          The terms of Messrs. Bagatelle, Prime and Gerson will expire in 2004, Messrs. Huang and Lawson's terms will expire in 2003, and Messrs. Baker and Gutfreund's terms will expire in 2002.

          Our Board has established an audit committee and a compensation committee

          Our audit committee consists of three independent Directors. Currently, our audit committee consists of Messrs. Bagatelle (Chairman), Lawson and Gerson. The audit committee selects the firm of independent accountants that will audit our financial statements, reviews the scope and result of the audit and other services provided by our independent auditors and reviews and evaluates our internal control functions.

          Our compensation committee consists of at least three disinterested Directors who are non-employee directors. Currently, our compensation committee consists of Messrs. Lawson (Chairman), Gutfreund and Gerson. The compensation committee reviews, approves and recommends to the Board of Directors the terms and conditions of incentive bonus plans applicable to corporate officers and key management personnel, reviews and approves the annual salary of our chief executive officer, and administers our 1998 Equity Incentive Plan.

          Prior to April 1, 2000, we paid an annual retainer of $12,000 to each director who was not an employee of the Company. As of April 1, 2000 annual compensation paid each non-employee director consists of a retainer of $10,000 and an option to buy 4,000 shares of our common stock at the fair market value on the day the option is granted. The options vest over four years. The Chairman and each committee chair are paid an extra $4,000 and $2,000, respectively. We reimburse each non-employee director for out-of-pocket expenses incurred in connection with attending board meetings.

          Messrs. Gutfreund, Baker and Huang were granted options to buy 20,000, 40,000 and 30,000 shares respectively, at the time they joined the Board of Directors. It is the Company's intention to grant future Board Members options to buy shares when they join the Board.

          The table below sets forth information concerning the compensation we paid to our former chief executive officer and the other former executive officer whose salary and bonus exceeded $100,000 in 2001.

__________________________

2001 Year-End Option Values

          The following table contains information about the aggregate value of the unexercised options for our common stock that were held at the end of 2001 by the executive officers named in the Summary Compensation Table above. These officers exercised no options in 2001 and 2000.

Stock Option Plan

          Our Board of Directors has adopted the 1998 Stock Option Plan. The Plan provides for the issuance of options to purchase up to 1,300,000 shares of common stock, of which 650,000 were added to the plan by the Board of Directors in July 2000. Grants of 1,192,764 options have been issued to our officers, key employees and directors, of which options to purchase 192,000 shares have been exercised. Grants totaling 416,266 options were added back to the plan as a result of grantee terminations. Under the terms of the Plan, the Board of Directors is authorized to grant incentive stock options and nonqualified options and stock appreciation rights to our officers and key employees and may grant nonqualified options and stock appreciation rights to members of the Board of Directors and consultants.

          The transferability of stock options granted under the Plan is restricted. The Plan states that the option exercise price shall be fixed by the Board of Directors but, in the case of incentive stock options, shall not be granted at an exercise price less than 100% of the fair market value of the shares subject to the option on the date the option is granted. The Board determines the vesting restrictions applicable to each grant under the Plan. Except for Messrs. Prime, Bath, Kiernan, and Huang all stock options that have been granted under the Plan to date are exercisable commencing one year after grant at the rate of 25% each year.

          The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2001, and as adjusted by:

• each stockholder known by us to beneficially own more than 5% of our outstanding common stock;

• each of our executive officers;

• each of our directors; and

• all directors and executive officers as a group.

          A person has beneficial ownership of shares if the individual has the power to vote or dispose of shares. This power can be exclusive or shared, direct or indirect. In addition, a person beneficially owns shares underlying options or warrants that are presently exercisable or will become exercisable within 60 days of December 31, 2001, and shares to be acquired upon conversion of our preferred stock. These shares are considered to be outstanding for the purpose of calculating the percentage of outstanding shares of our common stock owned by a particular stockholder but are not considered to be outstanding for the purpose of calculating the ownership percentage of any other person. Applicable percentage ownership in the following table is based on 10,377,375 shares of common stock outstanding as of December 31, 2001. Except as otherwise noted, to our knowledge, the stockholders named in the table have sole voting and investment power for all share s shown as beneficially owned by them.

_______________________

*   Less than one percent.

          Messrs. Warren Bagatelle, James Gerson, Bernard Baker and William Lawson are also directors of, and have a significant investment in, FuelCell. Accordingly, these directors may be deemed to have an indirect interest in certain transactions with us because of their relationship with FuelCell.

          We have invested $155,000 in the equity of Oxygen S.p.A. and we hold 18% of its issued capital. In December 2000, we entered into an agreement in which Oxygen agreed to promote and incorporate into its manufacturing process our rechargeable nickel-zinc batteries in exchange for the exclusive rights to our technology for light vehicle applications in Europe. The agreement is through 2002 with the possibility of a one year extension if Oxygen achieves certain volume levels. In 2001, we recorded sales to Oxygen of $161,000 for batteries and chargers. In addition, we reimbursed Oxygen $66,000 for marketing expenses incurred on our behalf. The agreement with Oxygen was negotiated prior to Mr. Prime joining Evercel. Unaffiliated members of the Board of Directors must approve any future agreements with Oxygen. James Gerson, our Chairman, and Garry Prime, our CEO and director, are directors and shareholders of Oxygen.

          We have a 24.5% equity interest valued at $168,000 in Xiamen Three Circles ERC Technology Co., Ltd. (the "Tech JV") a joint venture whose purpose is to enhance cooperation between China and the United States in the field of energy and other new advanced technology fields. Dr. Chao Ming Huang, an employee of the Company and a director of the Joint Venture, has a 50.5% equity interest in the Tech JV.

Supplement schedules are not provided because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
 

The Board of Directors
Evercel, Inc.:

We have audited the accompanying consolidated balance sheets of Evercel, Inc. and subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of income (loss), changes in shareholders' equity and cash flows for the years ended December 31, 2001, 2000, the two months ended December 31, 1999 and for the year ended October 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evercel, Inc. and subsidiary as of December 31, 2001 and 2000 and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000, the two months ended December 31, 1999 and for the year ended October 31, 1999, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP                        
KPMG LLP

March 14, 2002
Stamford, CT

The accompanying notes are an integral part of the consolidated financial statements

          (a) Due to losses we have incurred, dilutive instruments, consisting of shares of Series A Preferred Stock, options and warrants, have been excluded from diluted shares. At December 31, 2001, 2000 and 1999, there were 194,035, 196,500 and 264,000, respectively, shares of Series A Preferred Stock convertible into 705,560, 714,523 and 960,000, respectively, shares of common stock, related warrants exercisable for 555,200, 555,200 and 595,268, respectively, shares of common stock and options exercisable for 173,833, 676,499 and 627,098, respectively, shares of common stock.

The accompanying notes are an integral part of the consolidated financial statements.