SEC Filing | Ultralife Corporation

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998

REGISTRATION NO. 333-47087
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549

AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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ULTRALIFE BATTERIES, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 16-1387013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1350 ROUTE 88 SOUTH MR. BRUCE JAGID
NEWARK, NEW YORK 14513 ULTRALIFE BATTERIES, INC.
TEL: (315) 332-7100 1350 ROUTE 88 SOUTH
NEWARK, NEW YORK 14513
TEL: (315) 332-7100

(Address, including zip code and telephone number (Name, address, including zip code and telephone
including area code, of registrant's principal number, including area code, of agent for service)
executive offices)

COPIES TO:

HENRY I. ROTHMAN, ESQ. BARBARA L. BECKER, ESQ.
JORDAN A. HORVATH, ESQ. CHADBOURNE & PARKE LLP
PARKER CHAPIN FLATTAU & KLIMPL, LLP 30 ROCKEFELLER PLAZA
1211 AVENUE OF THE AMERICAS NEW YORK, N.Y. 10112
NEW YORK, NEW YORK 10036 TEL: (212) 408-5100
TEL: (212) 704-6000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION, DATED APRIL 30, 1998

PROSPECTUS

2,500,000 SHARES

[LOGO]

COMMON STOCK
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All of the 2,500,000 shares of Common Stock offered hereby are being sold by
Ultralife Batteries, Inc. (the "Company").

The Common Stock is quoted on Nasdaq National Market under the symbol
"ULBI." On April 29, 1998, the last reported sale price for the Common Stock as
reported by the Nasdaq National Market was $13.375 per share. See "Price Range
of Common Stock."

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THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)

Per Share....................................... $ $ $
Total(3)........................................ $ $ $

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting estimated expenses of $475,000 payable by the Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."

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The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, delivery to and acceptance by the Underwriters and
certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1998.

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LEHMAN BROTHERS
A.G. EDWARDS & SONS, INC.
PENNSYLVANIA MERCHANT GROUP

, 1998

[PICTURES: TO BE INSERTED]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, NO EFFECT IS
GIVEN IN THIS PROSPECTUS TO THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION. AS USED IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED, THE TERMS
"COMPANY" AND "ULTRALIFE" INCLUDE THE COMPANY'S WHOLLY-OWNED SUBSIDIARY,
ULTRALIFE BATTERIES (UK) LTD. ("ULTRALIFE UK"). CERTAIN TERMS USED IN THIS
PROSPECTUS ARE DEFINED UNDER "GLOSSARY OF TECHNICAL TERMS." FOR PURPOSES OF
PRESENTATION IN THIS PROSPECTUS, EXCEPT FOR THE CONSOLIDATED FINANCIAL
STATEMENTS HEREIN OR DATA DERIVED THEREFROM, CONTRACT TERMS OR OTHER AMOUNTS
EXPRESSED ORIGINALLY IN BRITISH POUNDS STERLING ARE SET FORTH HEREIN IN U.S.
DOLLARS AT THE RATE OF LL.00 TO $1.65, THE NOON BUYING RATE IN NEW YORK CITY FOR
CABLE TRANSFERS IN FOREIGN CURRENCIES AS ANNOUNCED BY THE FEDERAL RESERVE BANK
OF NEW YORK FOR CUSTOMS PURPOSES ON DECEMBER 31, 1997.

THE COMPANY

Ultralife Batteries, Inc. ("Ultralife" or the "Company") develops,
manufactures and markets primary and rechargeable lithium batteries for use in a
wide array of applications. The Company believes that its proprietary
technologies allow the Company to offer batteries that are ultra-thin,
lightweight and generally achieve longer operating time than competing batteries
currently available. To date, the Company has focused on manufacturing a family
of lithium primary batteries for consumer and industrial applications which it
believes is one of the most comprehensive lines of lithium primary batteries
commercially available. Recently, the Company has been focusing on the
commercialization of its advanced rechargeable batteries which are based on its
proprietary lithium-ion solid-polymer technology and are integrated into
consumer electronic applications such as portable computers and cellular
telephones. The Company believes that its advanced rechargeable batteries are
the only solid-polymer lithium batteries currently being manufactured and sold
for commercial use. The Company intends to increase its production capacity of
advanced rechargeable batteries in order to supply Original Equipment
Manufacturers (OEMs) and the after-market for consumer replacement of batteries
in electronic devices. The Company has obtained initial production orders from
Mitsubishi Electronics America, Inc. ("Mitsubishi") to supply its advanced
rechargeable batteries for use in its new ultra-thin lightweight notebook
computer, the Pedion, and is also in discussions with other major OEMs to
develop its advanced rechargeable batteries for use in such products as cellular
telephones.

The global small cell rechargeable batteries market was approximately $3.7
billion in 1997 and is expected to grow to $6.1 billion by 2001. The widespread
use of a variety of portable consumer electronics such as notebook computers and
cellular telephones has resulted in large and growing markets for rechargeable
batteries. These electronic products are placing increasing demands on existing
battery technologies to deliver greater amounts of energy through efficiently
designed, smaller and lighter batteries. In some cases, current battery
capabilities are a major limitation in the development of next generation
electronic products. The Company believes that its proprietary lithium-ion
solid-polymer technology provides substantial benefits, including design
flexibility, reduced size and weight, and longer cycle life, over other
available rechargeable battery technologies. In addition, the Company's
proprietary technology, which does not utilize lithium metal or a liquid
electrolyte, provides performance and safety characteristics superior to other
lithium rechargeable batteries currently available.

The Company has been manufacturing its advanced rechargeable batteries on a
low volume production line since March 1997. A custom-designed automated
assembly machine and a custom-designed automated packaging and sealing machine
have been installed and are currently being tested at the Company's facility in
Newark, New York. The Company intends to ramp up production while integrating
this new equipment to achieve full operation by June 1998. This equipment will
enable the Company to complete its automated assembly line in Newark, New York,
greatly increase the Company's production capacity of advanced rechargeable
batteries and service anticipated demand. The Company intends to further expand
its production capacity by installing additional automated equipment at its
Newark, New

York facility, adding automated assembly equipment at its Abingdon, England
facility and by establishing a third production facility which is likely to be
located in Asia.

The Company also manufactures and markets a family of lithium-manganese
dioxide primary batteries in 9-volt and 3-volt sizes to OEM and consumer
markets, high rate lithium batteries in C, 1 1/4C and D sizes to specialized
industrial markets, custom Thin Cell-TM- batteries and silver-chloride sea water
batteries. The Company also provides research and development services to
government agencies and other third parties pursuant to technology contracts.
The Company's 9-volt battery is marketed to the consumer retail, security and
safety equipment, medical device and specialty instrument markets, and is
currently used in devices such as smoke detectors, home security devices and
medical infusion pumps. The Company currently sells its 9-volt battery under its
label to Coleman Safety & Security Products, Inc., Fyrnetics, Inc., and First
Alert-Registered Trademark- for long-life smoke alarms, to Siemens Medical
Systems, Inc. and i-STAT Corp. for medical devices and to ADEMCO and Interactive
Technologies, Inc. for security devices. The Company produces private label
9-volt batteries for Eveready Battery Company ("Eveready") in the United States,
Sonnenschein Lithium GmbH in Germany and Uniline in Sweden. Additionally, the
Company has introduced its 9-volt battery to the broader consumer market by
establishing relationships with national and regional retail chains such as
Radio Shack, Fred Meyer, Inc., TruServ Ace Hardware and a number of catalogues.
The Company believes that the market for its 9-volt lithium battery will
continue to grow as legislation is enacted which requires use of a long-life
battery in smoke detector devices. A state law was recently enacted in Oregon
and legislation was recently proposed in New York which provides that all
battery operated smoke detectors sold or in use in such states must include a
10-year battery. The Company believes that it currently manufactures the only
standard size 9-volt battery warranted to last 10 years.

STRATEGY

The Company's strategic objective is to become a leading provider of
advanced technology primary and rechargeable lithium batteries. In order to
achieve this goal, the Company intends to supply OEMs of portable consumer
electronic devices with custom-designed rechargeable batteries for products such
as notebook computers and cellular telephones. Additionally, the Company will
continue to provide primary batteries to OEMs and the consumer after-market. The
Company is establishing a distribution network to market the Company's advanced
rechargeable batteries to the consumer after-market and is continuing to market
its primary battery products to the broader consumer market by establishing
relationships with selected national and regional retailers and establishing
strategic relationships with OEMs. The Company intends to increase production
capacity by installing and integrating additional production lines and automated
equipment. While increasing its production and marketing efforts, the Company
will continue its research and development efforts to identify and develop new
applications for its advanced rechargeable batteries which is in part funded by
technology contracts with OEMs and the U.S. government. In addition, the Company
plans to continue to seek strategic relationships and joint ventures with other
battery manufacturers, suppliers and customers to accelerate commercialization
of its technology and products.

BENEFITS OF ULTRALIFE'S ADVANCED RECHARGEABLE BATTERY

The Company's advanced rechargeable batteries are based on its proprietary
lithium-ion solid-polymer technology which utilize a prismatic design and
provide significant advantages over currently available rechargeable batteries,
including:

ULTRA-THIN PROFILE AND DESIGN FLEXIBILITY. The Company is addressing the
demands of the portable electronics market which require thin and lightweight
power sources. The ultra-thin characteristics associated with the Company's
advanced rechargeable batteries provide manufacturers of portable electronic
devices the flexibility to meet the increasing demand for thinner and lighter
products.

SMALLER SIZE AND LIGHTWEIGHT. Reduced size and weight are critically
important for applications such as notebook computers and cellular telephones.
The Company's advanced rechargeable batteries deliver two times as much energy
as nickel-metal hydride batteries of comparable weight and approximately 20%
more energy than prismatic lithium-ion liquid batteries of comparable weight,
enabling electronic portable device manufacturers to provide an equivalent power
source in a smaller and lighter-weight package.

LONGER OPERATING TIME. Length of operating time is a critical performance
characteristic for many applications, particularly portable computers and
cellular telephones. Because the Company's advanced rechargeable batteries
provide greater energy density, manufacturers of portable electronic devices
have the ability to optimize weight and operating time in their products to meet
the preferences of their customers.

SUPERIOR RECHARGE CHARACTERISTICS. Certain of the Company's advanced
rechargeable batteries are able to deliver more than 500 discharge cycles
without appreciable performance degradation and are not subject to the memory
effect which is commonly experienced in certain other rechargeable batteries.
The Company's advanced rechargeable battery does not incorporate lithium metal,
which is subject to growth of dendritic structures which can significantly limit
the number of achievable cycles and become a safety hazard.

SUPERIOR SAFETY AND ENVIRONMENTAL CHARACTERISTICS. Unlike competing
lithium-ion liquid batteries, the Company's advanced rechargeable batteries do
not contain liquid and are fundamentally safer to use. Lithium-ion liquid
electrolyte batteries used in notebook computers and cellular phones have been
reported to have had incidences causing user safety concerns since they contain
a flammable liquid electrolyte that is contained in a metal case. The Company's
advanced rechargeable batteries are better for the environment than other
competing batteries since they do not contain metallic lithium, a flammable
liquid electrolyte or any toxic or heavy metals.

COST COMPETITIVE. The Company's batteries are comprised of relatively low
cost materials. Therefore, the Company believes that its advanced rechargeable
batteries will become cost competitive when the Company's production process is
successfully automated and its advanced rechargeable batteries are produced in
greater volume.

BENEFITS OF ULTRALIFE'S PRIMARY LITHIUM TECHNOLOGY

The Company's primary battery products are based on its proprietary
lithium-manganese dioxide technology. The materials used in, and the chemical
reactions inherent to, the Company's lithium batteries provide significant
advantages over currently available primary battery technologies, including
lighter weight, longer operating time, longer shelf life, and a wider operating
temperature range. The Company's primary batteries also have relatively flat
voltage profiles which provide stable power. Conventional primary batteries,
such as alkaline batteries, have sloping voltage profiles, which result in
decreased power during discharge. While the price for the Company's lithium
batteries is generally higher than commercially available alkaline batteries,
the Company believes that the increased energy per unit of weight and volume of
its batteries allows longer operating time and less frequent battery
replacements for the Company's targeted applications. Therefore, the Company
believes that its primary batteries are price competitive with other battery
technologies on a price per watt hour basis.

The Company was incorporated in Delaware on December 14, 1990, under the
name Ultralife Technologies, Inc. The Company changed its name to Ultralife
Batteries, Inc. on April 3, 1991. The Company's headquarters is located at 1350
Route 88 South, Newark, New York 14513, and its telephone number is (315)
332-7100.

THE OFFERING

Common Stock offered......................... 2,500,000 shares

Common Stock to be outstanding after this
offering (1)............................... 10,483,286 shares

Use of proceeds.............................. The Company intends to use the net proceeds
of this offering to purchase additional
production equipment to further increase
production capacity of its advanced
rechargeable batteries in its Newark, New
York facility and to purchase automated
assembly equipment and other equipment
necessary to produce advanced rechargeable
batteries at its Abingdon, England facility.
In addition, the Company plans to use a
portion of the net proceeds to establish a
third production facility, which is likely to
be located in Asia. Pending such uses, the
Company intends to invest the net proceeds in
the United States primarily in short and
intermediate term interest-bearing debt
obligations of investment grade. See "Use of
Proceeds."

Nasdaq National Market symbol................ ULBI

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(1) Does not include (i) 375,000 shares of Common Stock issuable upon exercise
in full of the Underwriters' over-allotment option; (ii) 1,142,350 shares of
Common Stock issuable upon exercise of options granted to the Company's
employees pursuant to the Company's 1992 Stock Option Plan ("1992 Plan") and
1995 Stock Option Plan ("1995 Plan"); (iii) 375,000 shares of Common Stock
issuable upon exercise of options granted to the Chairman and Chief
Executive Officer not pursuant to a plan; and (iv) 112,500 shares of Common
Stock reserved for issuance upon exercise of outstanding warrants (the
"Warrants").

SUMMARY CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
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STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996 1997 1996 1997
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(UNAUDITED)
Revenue:
Battery sales................................... $ 1,817 $ 2,890 $ 11,213 $ 12,624 $ 14,765 $ 7,444 $ 7,573
Technology contracts............................ 2,073 2,424 3,430 2,478 1,176 594 1,426
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Total revenue................................... 3,890 5,314 14,643 15,102 15,941 8,038 8,999
Cost of products sold:
Battery costs................................... 2,512 3,168 10,900 12,317 13,880 7,126 6,790
Technology contracts............................ 594 1,781 3,017 1,954 1,238 594 1,261
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Total cost of products sold..................... 3,106 4,949 13,917 14,271 15,118 7,720 8,051
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Gross profit.................................... 784 365 726 831 823 318 948
Selling, general and administrative expenses.... 1,527 2,879 4,263 4,994 5,217 2,787 2,613
Research and development expenses............... 658 1,481 1,542 2,671 3,413 1,687 2,764
Loss from operations(1)......................... (1,401) (3,995) (5,079) (7,186) (8,557) (4,156) (3,233)
Net loss........................................ $ (814) $ (3,137) $ (3,392) $ (3,239) $ (7,246) $ (3,356) $ (2,828)
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Net loss per common share....................... $ (0.20) $ (0.57) $ (0.50) $ (0.41) $ (0.91) $ (0.42) $ (0.36)
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Weighted average number of shares outstanding... 4,032 5,499 6,747 7,814 7,923 7,933 7,942

DECEMBER 31, 1997
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AS
BALANCE SHEET DATA: ACTUAL ADJUSTED(2)
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(UNAUDITED)

Cash and available-for-sale securities.................................................... $ 15,922 $ 46,878
Working capital........................................................................... 18,724 49,680
Total assets.............................................................................. 49,882 80,838
Stockholders' equity...................................................................... 43,454 74,410

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(1) Loss from operations includes items in 1996 and 1997 related to fires and
the China Battery development program.

(2) As adjusted to give effect to the sale by the Company of 2,500,000 shares
of Common Stock offered hereby at an assumed public offering price of
$13.375 per share, after deducting underwriting discounts and commissions
and estimated offering expenses.

RISK FACTORS

AN INVESTMENT IN SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE
COMMON STOCK OFFERED BY THIS PROSPECTUS.

HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY

The Company commenced operations in March 1991 and has incurred net
operating losses since its inception. Losses have resulted principally from
research and development, manufacturing and general and administrative costs. No
assurance can be given that the Company will generate an operating profit or
achieve profitability in the future. For the fiscal years ended June 30, 1996
and June 30, 1997 and the six months ended December 31, 1997, the Company's net
loss was approximately $3.2 million, $7.2 million and $2.8 million,
respectively. At December 31, 1997, the accumulated deficit was $22.9 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

UNCERTAINTY OF MARKET ACCEPTANCE OF ADVANCED RECHARGEABLE BATTERIES

Since the Company intends to focus its manufacturing, research and
development and marketing efforts on the success of its advanced rechargeable
batteries, it will be dependent upon the market acceptance of its advanced
rechargeable batteries which are based on its lithium-ion solid-polymer
technology. Although the Company has received initial purchase orders for its
rechargeable batteries from Mitsubishi, the Company's advanced rechargeable
batteries have not yet achieved wide market acceptance. There can be no
assurance that market acceptance of its technology or advanced rechargeable
batteries will ever be achieved. The introduction of new products is subject to
the inherent risks of unforeseen delays and the time necessary to achieve market
success for any individual product is uncertain. If volume production of the
Company's advanced rechargeable batteries is delayed for any reason, the
Company's competitors may introduce emerging technologies or refine existing
technologies which could have a material adverse effect on the Company's
business, financial condition and results of operations.

DEPENDENCE ON OEM RELATIONSHIPS AND THEIR PRODUCTS FOR SALE OF ADVANCED
RECHARGEABLE BATTERIES

The Company intends to continue to promote demand for, and awareness of, its
advanced rechargeable batteries, in part, through the development of
relationships with OEMs that manufacture products which require the performance
characteristics of the Company's advanced rechargeable batteries. The success of
any such relationship is dependent upon the general business condition of the
OEM and the ability of the Company to produce its advanced rechargeable
batteries at the quality and cost and within the time frame required by such
OEMs. To date, the Company has entered into a relationship with Mitsubishi,
which has agreed to purchase limited quantities of production units of advanced
rechargeable batteries through April 1998. Since the Company has not been able
to produce its advanced rechargeable batteries in the volumes required by
Mitsubishi, Mitsubishi is utilizing lithium-ion liquid electrolyte batteries
produced by another manufacturer in some of its Pedion computers. Although the
Company is pursuing relationships with other OEMs, the Company currently depends
upon one OEM customer, Mitsubishi, for all current orders of advanced
rechargeable batteries. Failure to develop relationships with other OEMs or the
non-renewal or termination of its contractual arrangement with Mitsubishi could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products -- Key OEM Relationships."

A substantial portion of the Company's business will depend upon the success
of products sold by OEMs that use the Company's batteries. For example, one
factor determining the quantity of purchase orders the Company may receive from
Mitsubishi in the future is the success of the Pedion, its new generation
notebook computer. Therefore, the Company's success is substantially dependent
upon the acceptance of the OEMs' products in the marketplace. The Company is
subject to many risks beyond its

control that influence the success or failure of a particular product
manufactured by an OEM, including among others, competition faced by the OEM in
its particular industry; market acceptance of the OEM's product; the
engineering, sales and marketing and management capabilities of the OEM;
technical challenges unrelated to the Company's technology or products faced by
the OEM in developing its products and the financial and other resources of the
OEM. See "Business -- Business Strategy."

ADVANCED RECHARGEABLE BATTERIES: MANUFACTURING; LIMITED EXPERIENCE; FACTORS
RELATED TO MANUFACTURING EXPANSION

To be successful with respect to its advanced rechargeable battery efforts,
the Company must manufacture its batteries in large commercial quantities with
appropriate performance characteristics at competitive costs. At present, the
Company operates an automated coating machine and a manual assembly and
packaging production line that produces limited quantities of advanced
rechargeable batteries for customer sampling and initial product runs. The
Company is in the process of testing a high volume automated assembly machine
and an automated packaging machine. The Company will not have a fully automated
production line of its advanced rechargeable batteries until these machines
become fully operational, which the Company expects to occur by June 1998. The
Company must successfully integrate its automated assembly and packaging
production line and be able to ramp up production of its advanced rechargeable
batteries. Failure of such machines to become fully operational may result in
the Company not being able to obtain additional orders from Mitsubishi and may
adversely impact the Company's ability to attract additional customers which
will have a material adverse effect on the Company's business, financial
condition and results of operations. The Company currently has no high volume
manufacturing capability or experience in large scale manufacturing of its
advanced rechargeable batteries and has limited experience in automated assembly
and packaging technology. Custom design, manufacturing and integration of large
scale manufacturing equipment frequently result in delays and cost overruns, as
the equipment is repeatedly tested and modified to achieve optimum performance.
There can be no assurance that the Company will be successful in integrating and
operating such additional equipment or that the Company will be able to develop
its manufacturing capabilities to produce the necessary production quality on
acceptable terms. The Company currently plans to install additional automated
production equipment for advanced rechargeable batteries in its Newark, New York
and Abingdon, England facilities and to establish a third facility, which is
likely to be located in Asia. In the past, the Company has experienced
significant delays in the delivery of its custom-designed equipment. Such delays
have resulted in the Company not being able to fulfill certain production
purchase orders of Mitsubishi and another OEM causing the Company to have to
renegotiate its contracts with Mitsubishi and another OEM. Any delays or
difficulties in developing or operating its manufacturing facilities will have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, further delays in the production and delivery
of the Company's advanced rechargeable batteries could adversely affect the
Company's prospects for sales of rechargeable batteries to its current or
prospective customers. See "Business -- Products -- Key OEM Relationships" and
"-- Manufacturing and Raw Materials."

RISKS RELATING TO GROWTH AND EXPANSION

Rapid growth of the Company's advanced rechargeable battery business or
other segments of its business may significantly strain the Company's
management, operations and technical resources. If the Company is successful in
obtaining rapid market penetration of its advanced rechargeable batteries, the
Company will be required to deliver large volumes of quality products to its
customers on a timely basis at a reasonable cost to those customers. There can
be no assurance, however, that the Company's business will achieve rapid growth
or that its efforts to expand its manufacturing and quality control activities
will be successful or that it will be able to satisfy commercial scale
production requirements on a timely and cost-effective basis. The Company will
also be required to continue to improve its operations, management and financial
systems and controls. Failure by the Company to manage its growth effectively
could have an

adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Manufacturing and Raw Materials" and "--
Facilities."

COMPETITION; TECHNOLOGICAL OBSOLESCENCE

The primary and rechargeable battery industry is characterized by intense
competition with a large number of companies offering or seeking to develop
technology and products similar to those of the Company. The Company is subject
to competition from manufacturers of traditional rechargeable batteries, such as
nickel- cadmium batteries, from manufacturers of rechargeable batteries of more
recent technologies, such as nickel-metal hydride, lithium-ion liquid
electrolyte and lithium-metal solid-polymer batteries, as well as from companies
engaged in the development of batteries incorporating new technologies.
Manufacturers of nickel-cadmium and nickel-metal hydride batteries include
Eveready, Sanyo Electric Co. Ltd., Sony Corp., Toshiba Corp., Matsushita
Electric Industrial Co., Ltd. and Duracell International, Inc. Manufacturers of
lithium-ion liquid electrolyte batteries currently include Saft-Soc des ACC,
Sony Corp., Toshiba Corp., Matsushita Electric Industrial Co., Ltd., Sanyo
Electric Co. Ltd. and Duracell International, Inc. Valence Technology, Inc.,
Lithium Technology Corporation, Battery Engineering, Inc. and Yuasa-Exide, Inc.
have developed prototype solid-polymer batteries and are constructing
commercial-scale manufacturing facilities. The Company also competes with large
and small manufacturers of alkaline, carbon-zinc, sea water, high rate and
primary batteries as well as other manufacturers of lithium batteries. There can
be no assurance that the Company will be successful in competing with these
manufacturers, many of which have substantially greater financial, technical,
manufacturing, distribution, marketing, sales and other resources. A number of
companies with substantially greater resources than the Company are pursuing the
development of a wide variety of battery technologies, including both liquid
electrolyte lithium and solid electrolyte lithium batteries, which are expected
to compete with the Company's technology. Other companies undertaking research
and development activities of solid-polymer batteries have already developed
prototypes and are constructing commercial scale production facilities. If such
other companies successfully market their batteries prior to the introduction of
the Company's products, there will be a material adverse effect on the Company's
business, financial condition and results of operations. The market for the
Company's products is characterized by changing technology and evolving industry
standards, often resulting in product obsolescence or short product lifecycles.
Although the Company believes that its batteries, particularly its 9-volt and
advanced rechargeable batteries, are comprised of state-of-the-art technology,
there can be no assurance that competitors will not develop technologies or
products that would render the Company's technology and products obsolete or
less marketable. See "Business -- Competition."

DEPENDENCE ON KEY PERSONNEL

Because of the specialized, technical nature of the Company's business, the
Company is highly dependent on certain members of its management, marketing,
engineering and technical staff, the loss of whose services could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition to developing manufacturing capacity that
meets the rigorous tolerances necessary for the high volume production of the
Company's advanced rechargeable batteries, the Company must attract, recruit and
retain a sizeable workforce of technically competent employees. The ability of
the Company to pursue effectively its business strategy will depend upon, among
other factors, the successful recruitment and retention of additional highly
skilled and experienced managerial, marketing, engineering and technical
personnel. There can be no assurance that the Company will be able to retain or
recruit such personnel. See "Business -- Employees" and "Management -- Executive
Officers and Directors."

INTERRUPTION IN OPERATIONS OF ULTRALIFE UK

The operations of the Company's Abingdon, England facility remain suspended
as a result of a December 1996 fire believed to be caused by arson. This fire
has caused the Company to cease sales of its

high rate lithium batteries and sea water batteries. The Company has only
recently resumed production of its sea water batteries. The Company has
subcontracted manufacturing to third parties and manufactured products from an
off-site facility to satisfy some customers, however, many of the Company's
customers have obtained products previously supplied by Ultralife UK from other
manufacturers while operations have been interrupted. Since the fire, the
Company has been receiving insurance proceeds compensating for the loss of plant
and machinery, leasehold improvements, inventory and business interruption. The
Company's insurance policies will cover losses associated with business
interruption until May 1998. Although the Company believes that its remaining
operations in Abingdon, England will begin by March 1998 and become fully
operational by June 1998 and that many of its customers will return to the
Company, there can be no assurance that customers which have purchased batteries
elsewhere will resume their relationship with the Company. Such an event would
have a material adverse effect on the Company's business, financial condition
and results of operations.

SAFETY RISKS; DEMANDS OF ENVIRONMENTAL AND OTHER REGULATORY COMPLIANCE

Components of the Company's batteries contain certain elements which are
known to pose safety risks. The Company's primary battery products incorporate
lithium metal, which is known to react with water and may cause fires if not
handled properly. In addition to the December 1996 fire at the Company's
Abingdon, England facility described above, fires occurred in August 1991 and
August 1997 at the Company's Newark, New York facility and fires occurred in
July 1994 and September 1995 at the Company's Abingdon, England facility, each
of which temporarily interrupted certain manufacturing operations in a specific
area of the facility. Although the Company incorporates safety procedures in its
research, development and manufacturing processes that are designed to minimize
safety risks, there can be no assurance that an accident in its facilities or
one involving its products will not occur. Although the Company currently has in
force insurance policies which cover loss of its plant and machinery, leasehold
improvements, inventory and business interruption, any accident, whether at the
Company's manufacturing facilities or from the use of its products, may result
in significant production delays or claims for damages resulting from injuries,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations.

National, state and local regulations impose various environmental controls
on the manufacture, storage, use and disposal of lithium batteries and/or of
certain chemicals used in the manufacture of lithium batteries. Although the
Company believes that its operations are in substantial compliance with current
environmental regulations and that there are no environmental conditions that
will require material expenditures for clean-up at its present or former
facilities or at facilities to which it has sent waste for disposal, there can
be no assurance that changes in such laws and regulations will not impose costly
compliance requirements on the Company or otherwise subject it to future
liabilities. Moreover, state and local governments may enact additional
restrictions relating to the disposal of lithium batteries used by customers of
the Company which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
transportation of batteries which contain lithium metal is regulated by the U.S.
Department of Transportation and by certain foreign regulatory agencies that
consider lithium to be a hazardous material. The Company currently ships its
lithium batteries in accordance with regulations established by the U.S.
Department of Transportation. There can be no assurance that additional or
modified regulations relating to the manufacture, transportation, storage, use
and disposal of materials used to manufacture the Company's batteries or
restricting disposal of batteries will not be imposed or as to the effect such
regulations may have on the Company or its customers. See "Business -- Battery
Safety; Regulatory Matters; Environmental Considerations."

assurance that this will be the case. In February 1998, the Company entered into
an agreement with a third party which provides that the Company and this third
party will retain an environmental consulting firm to conduct a supplemental
Phase II investigation to verify the existence of the contaminants and further
delineate the nature of the environmental concern. The third party agreed to
reimburse the Company for fifty percent of the cost associated with remediating
the environmental concern. There can be no assurance that the Company will not
face claims resulting in substantial liability which would have a material
adverse effect on the Company's business, financial condition and results of
operations in the period in which such claims are resolved. See "Business --
Battery Safety; Regulatory Matters; Environmental Considerations."

LIMITED SOURCES OF SUPPLY

Certain materials used in the Company's products are available only from a
single or a limited number of suppliers. Additionally, the Company may elect to
develop relationships with a single or limited number of suppliers for materials
that are otherwise generally available. Although the Company believes that
alternative suppliers are available to supply materials that could replace
materials currently used by the Company and that, if necessary, the Company
would be able to redesign its products to make use of such alternatives, any
interruption in its supply from any supplier that serves as the Company's sole
source could delay product shipments and have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
Company has experienced interruptions of product deliveries by sole source
suppliers, none of such interruptions has had a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not experience a material interruption of
product deliveries from sole source suppliers which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Manufacturing and Raw Materials."

DEPENDENCE ON PROPRIETARY TECHNOLOGIES

The Company believes that its success is less dependent on the legal
protection that its patents and other proprietary rights may or will afford than
on the knowledge, ability, experience and technological expertise of its
employees. The Company claims proprietary rights in various unpatented
technologies, know how, trade secrets and trademarks relating to its products
and manufacturing processes. There can be no assurance as to the degree of
protection these various claims may or will afford, or that the Company's
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to the Company's technology. It is the
policy of the Company to protect its proprietary rights in its products and
operations through contractual obligations, including nondisclosure agreements
with certain employees, customers, consultants and strategic partners. There can
be no assurance as to the degree of protection these contractual measures may or
will afford. The Company, however, has had patents issued and patent
applications pending in the U.S. and elsewhere. There can be no assurance (i)
that patents will be issued from any pending applications, or that the claims
allowed under any patents will be sufficiently broad to protect the Company's
technology, (ii) that any patents issued to the Company will not be challenged,
invalidated or circumvented, or (iii) as to the degree or adequacy of protection
any patents or patent applications may or will afford. In addition, although the
Company does not believe that it is materially infringing the intellectual
property rights of others, a legal action was commenced by Eveready alleging
infringements of two patents. The Company has cross-claimed against the
corporation that licensed the technology at issue to the Company. Although the
Company believes the damages, if any, are minimal and the possibility of an
injunction, in the opinion of Lieberman & Nowak, LLP, the Company's patent
counsel, is remote, there can be no assurance that any consequences arising from
this infringement claim will not have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, there can be
no assurance that other claims will not be asserted against the Company in the
future. If the Company is found to be infringing third party patents, there can
be no assurance that it will be able to obtain licenses with respect to such
patents on acceptable terms, if at all. Failure of the Company to obtain
necessary licenses could result in delays in product

shipment or the introduction of new products, and costly attempts to design
around such patents could foreclose the development, manufacture or sale of the
Company's products. See "Business -- Legal Proceedings" and "-- Patents, Trade
Secrets and Trademarks."

DEPENDENCE ON TECHNOLOGY TRANSFER AGREEMENTS

The Company's research and development of advanced rechargeable battery
technology and products utilizes internally-developed technology, acquired
technology and certain patents and related technology licensed by the Company
pursuant to non-exclusive, technology transfer agreements. The Company is
currently aware of ten to twelve companies who have acquired the technologies
under such non-exclusive technology transfer agreements, although the Company
believes only one of these companies is in a directly competitive field. There
can be no assurance that the Company's competitors will not develop,
independently or through the use of similar technology transfer agreements,
rechargeable battery technology or products that are substantially equivalent or
superior to the technologies and products currently under research and
development by the Company. Termination of the technology transfer agreements
could result in significant delays in the research and development of the
Company's advanced rechargeable battery technology and the introduction of new
products based thereon, and there can be no assurance that the Company will be
able to develop its own technology or obtain similar or alternative licenses on
acceptable terms, if at all. The Company does not believe that it will have any
difficulty complying with all material terms of the technology transfer
agreements; however, termination of such agreements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Business Strategy," "-- Ultralife's Advanced
Rechargeable Batteries" and "-- Patents, Trade Secrets and Trademarks."

RISKS RELATED TO CHINA JOINT VENTURE PROGRAM

In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in Changzhou, China, for the
production and distribution in and from China of 2/3A lithium primary batteries.
Changzhou Ultra Power Battery Co., Ltd, a company organized in China ("China
Battery"), purchased from the Company certain technology, equipment, training
and consulting services relating to the design and operation of a lithium
battery manufacturing plant. China Battery is required to pay approximately $6.0
million to the Company over the first two years of the agreement, of which
approximately $5.6 million had been paid as of the date of this Prospectus. The
Company has been attempting to collect the balance due under this contract.
China Battery has indicated that these payments will not be made until certain
contractual issues have been resolved. Due to China Battery's questionable
willingness to pay, the Company wrote off in fiscal 1997 the entire balance owed
to the Company as well as the Company's investment aggregating $805,000. Since
China Battery has not purchased technology, equipment, training or consulting
services from the Company to produce batteries other than 2/3 A lithium
batteries, the Company does not believe that China Battery has the capacity to
become a competitor of the Company. The Company does not anticipate that the
manufacturing or marketing of 2/3 A lithium batteries will be a substantial
portion of its product line in the future. However, in December 1997, China
Battery sent to the Company a letter demanding reimbursement of an unspecified
amount of losses they have incurred plus a refund for certain equipment that the
Company sold to China Battery. The Company has attempted to initiate
negotiations to resolve the dispute. However, an agreement has not yet
materialized. Although China Battery has not taken any additional steps, there
can be no assurance that China Battery will not further pursue such a claim
which, if successful, would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that such a claim is without merit.

ABILITY TO INSURE AGAINST LOSSES

Because certain of the Company's primary batteries are used in a variety of
security and safety products (such as smoke and fire detectors) and medical
devices (such as infusion pumps), the Company may be exposed to liability claims
if such a battery fails to function properly. The Company currently has in force
an insurance policy which covers product liability claims with coverage limits
of $11,000,000 per occurrence and $11,000,000 in the aggregate annually.
However, there can be no assurance that the liability insurance will continue to
be available, or that any such liability insurance would be sufficient to cover
any claim or claims.

POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK

The Company's Restated Certificate of Incorporation authorizes the Company's
Board of Directors to issue up to 1,000,000 shares of preferred stock (the
"Preferred Stock") in one or more series and to fix the rights, preferences,
privileges and restrictions as may be determined from time to time by the Board
of Directors. Accordingly, the Board of Directors will be authorized without
stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting, redemption (including sinking fund provisions) or other
rights, which could adversely affect the voting power of the holders of Common
Stock and, under certain circumstances, could make it difficult for a third
party to gain control of the Company, prevent or substantially delay a change in
control, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock. Although the Company has
no current plans to issue any shares of Preferred Stock, there can be no
assurance that the Board will not decide to do so in the future. See
"Description of Capital Stock--Preferred Stock."

POSSIBLE VOLATILITY OF STOCK PRICE

Future announcements concerning the Company or its competitors, including
technological innovations or commercial products, litigation or public concerns
as to the safety or commercial value of one or more of the Company's products,
may cause the market price of the Common Stock to fluctuate substantially for
reasons which may be unrelated to operating results. These fluctuations, as well
as general economic, political and market conditions, may have a material
adverse effect on the market price of the Common Stock. See "Underwriting" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock by existing stockholders pursuant to Rule 144
("Rule 144") promulgated under the Securities Act, pursuant to registration
rights granted to certain holders of warrants to purchase the Common Stock, or
pursuant to other registration or exemptions from registration under the
Securities Act, could have an adverse effect on the price of the shares of
Common Stock. The Company has approximately 7,983,286 shares of Common Stock
outstanding (10,858,286 upon consummation of this offering and assuming the
Underwriter's over-allotment option is exercised in full). In addition, as of
March 30, 1998, the Company has reserved for issuance (i) 1,042,350 shares of
Common Stock upon the exercise of options available for grant under the 1992
Plan, (ii) 100,000 shares of Common Stock upon the exercise of options available
for grant under the 1995 Plan, (iii) 375,000 shares of Common Stock upon the
exercise of options granted to the Company's Chairman and Chief Executive
Officer not pursuant to a plan and (iv) 112,500 shares of Common Stock reserved
for issuance upon the exercise of the outstanding Warrants. The Company has
agreed to include 12,500 of the shares underlying the foregoing Warrants in a
future registration statement which the Company will prepare and file with, and
use its best efforts to have declared effective by, the Securities and Exchange
Commission ("Commission") so as to permit the public trading of the shares
underlying the foregoing Warrants.

Of the 7,983,286 shares of Common Stock issued and outstanding, 2,012,500
were sold publicly in the Company's initial public offering in December 1992 and
approximately 2,000,000 shares were sold publicly pursuant to the Company's
follow-on public offering in December 1994. Of the remaining shares of Common
Stock, all are freely tradeable without restriction or further registration
under the Securities Act except for approximately 1.8 million shares of Common
Stock which may not be resold except pursuant to an effective registration
statement filed by the Company or an applicable exemption from registration,
including an exemption under Rule 144. The Company, each of its executive
officers and directors and Intermagnetics General Corporation ("IGC") have
agreed that, for a period of 90 days after the date of this Prospectus, they
will not offer, sell or otherwise dispose of any shares of Common Stock without
the prior written consent of Lehman Brothers Inc. No predictions can be made as
to the effect that future sales of Common Stock, or the availability of shares
of Common Stock for future sales, will have on the market prices for the Common
Stock prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely effect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the future sales of its equity securities. See
"Principal Stockholders."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby (at an assumed public offering price of $14.75 per
share and after deducting the underwriting discounts and commissions and
estimated offering expenses) are estimated to be $34,187,500 ($39,386,875
million if the Underwriters' over-allotment option is exercised in full). The
Company anticipates that from the net proceeds of this offering and the current
cash position of the Company, approximately $9 million will be used to purchase
additional automated coating, conditioning and formation equipment necessary to
further increase production capacity of its advanced rechargeable batteries at
its Newark, New York facility, approximately $13 million will be used to
purchase automated assembly and packaging equipment to produce advanced
rechargeable batteries at its Abingdon, England production facility and
approximately $20 million will be used to establish a third production facility,
which is likely to be located in Asia, and to purchase automated production
equipment to produce advanced rechargeable batteries at that facility. Pending
such uses, the Company intends to invest the net proceeds in the United States,
primarily in short and intermediate term interest-bearing debt obligations of
investment grade.

Since the net proceeds of this offering will be applied over time, the
actual expenditure of funds for any purpose could vary significantly from the
anticipated expenditures described above. The Company may, from time to time,
seek to acquire businesses, products, services or technologies complementary to
the Company's business, although no acquisitions are currently being negotiated
or planned. The Company reserves the right, therefore, to reallocate proceeds
among the uses described above, depending upon factors such as the results of
the Company's marketing activities and technological advances in the industry.

PRICE RANGE OF COMMON STOCK

The Common Stock is included for quotation on the Nasdaq National Market
System under the symbol "ULBI." The following table sets forth the quarterly
high and low sales prices of the Common Stock during the period set forth below:

SALES PRICES
--------------------

HIGH LOW
--------- ---------
FISCAL YEAR 1996
Quarter ended September 30, 1995............................................................... $ 24.75 $ 14.75
Quarter ended December 31, 1995................................................................ 24.50 16.75
Quarter ended March 31, 1996................................................................... 24.00 10.50
Quarter ended June 30, 1996.................................................................... 16.25 12.38

FISCAL YEAR 1997
Quarter ended September 30, 1996............................................................... 15.25 10.75
Quarter ended December 31, 1996................................................................ 13.75 7.50
Quarter ended March 31, 1997................................................................... 12.25 7.88
Quarter ended June 30, 1997.................................................................... 13.00 7.38

FISCAL YEAR 1998
Quarter ended September 30, 1997............................................................... 20.38 10.38
Quarter ended December 31, 1997................................................................ 20.38 13.13
Quarter ended March 31, 1998................................................................... 16.88 14.00

On April 29, 1998, the last reported sales price for the Common Stock as
reported on the Nasdaq National Market was $13.375 per share. As of April 2,
1998, there were approximately 149 holders of record of the Common Stock, and
the Company believes there are in excess of 3,650 beneficial holders of the
Common Stock.

DIVIDEND POLICY

The Company has never declared or paid a cash dividend on the Common Stock
and does not intend to do so in the foreseeable future. The Company's current
policy is to reinvest earnings, if any, to finance internal growth and product
development. Payment of dividends in the future will depend upon the earnings
and financial condition of the Company and such other factors as the directors
may consider or deem appropriate at the time.

CAPITALIZATION

The following table set forth the capitalization of the Company as of
December 31, 1997 and as adjusted to give effect to the sale of 2,500,000 shares
of Common Stock offered hereby at an assumed public offering price of $13.375
per share and after deducting the underwriting discounts and commissions and
estimated offering expenses. This table should be read in conjunction with the
Company's Financial Statements and Notes thereto included elsewhere in this
Prospectus.

DECEMBER 31, 1997
----------------------

ACTUAL AS ADJUSTED
--------- -----------

(IN THOUSANDS)

Stockholders' equity:
Preferred Stock, $0.10 par value per share: authorized -- 1,000,000 shares; no shares
outstanding........................................................................... -- --

Common Stock, $0.10 par value per share: authorized -- 12,000,000 shares; outstanding --
actual: 7,975,286 shares; as adjusted: 10,475,286 shares (1).......................... $ 800 $ 1,050
Capital in excess of par value.......................................................... 65,245 95,951
Unrealized net gain on securities....................................................... 634 634
Foreign currency translation adjustment................................................. 20 20
Accumulated deficit..................................................................... (22,943) (22,943)
Treasury stock, 27,250 shares of Common Stock, actual and as adjusted................... (302) (302)
--------- -----------

Total stockholders' equity.............................................................. 43,454 74,410
--------- -----------
Total capitalization.................................................................. $ 43,454 $ 74,410
--------- -----------
--------- -----------

- ------------------------

(1) Does not include (i) 375,000 shares of Common Stock issuable upon exercise
in full of the Underwriters' over-allotment option; (ii) 1,142,350 shares of
Common Stock issuable upon exercise of options granted to the Company's
employees pursuant to the 1992 Plan and the 1995 Plan; (iii) 375,000 shares
of Common Stock issuable upon exercise of options granted to the Chairman
and Chief Executive Officer not pursuant to a plan; (iv) 100,000 shares of
Common Stock reserved for issuance upon exercise of the Warrants and (v)
12,500 shares of Common Stock reserved for issuance upon exercise of the
Warrants issued subsequent to December 31, 1997. Certain holders of the
options exercisable to purchase shares of Common Stock have agreed not to
exercise their options until the Company increases its authorized number of
shares of Common Stock. See "Underwriting" and "Principal Stockholders."

DILUTION

The net tangible book value of the Company at December 31, 1997, was
$42,820,337, or $5.37 per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets less total liabilities of
the Company, divided by the number of shares of Common Stock outstanding. After
giving effect to the receipt of the net proceeds from the sale of the 2,500,000
shares of Common Stock offered hereby, at the estimated offering price of
$13.375 per share, after deducting underwriting discounts and commissions and
estimated offering expenses, the pro forma net tangible book value of the
Company at December 31, 1997, would have been $73,776.587, or $7.04 share. This
represents an immediate increase in net tangible book value of $1.67 per share
to existing stockholders and an immediate dilution of $7.40 per share to the new
investors purchasing Common Stock at the assumed public offering price. The
following illustrates this per share dilution:

Public offering price per share.............................................. $ 13.38
Net tangible book value per share as of December 31, 1997 before this
offering................................................................... $ 5.37
Increase per share attributable to new investors............................. 1.67
---------
Pro forma net tangible book value per share at December 31, 1997 after this
offering................................................................... 7.04
---------
Dilution per share to new investors (1)...................................... $ 6.34
---------
---------

- ------------------------

(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after this offering and dilution per
share to new investors would be $7.23 and $6.15, respectively.

The foregoing table excludes 1,617,350 shares of Common Stock issuable
pursuant to outstanding options and warrants as of December 31, 1997 which are
expected to be outstanding after the consummation of this offering and 12,500
shares of common stock reserved for issuance upon the exercise of the Warrants
issued subsequent to December 31, 1997. If all options and warrants outstanding
as of December 31, 1997, were included above, the pro forma net tangible book
value per share at December 31, 1997, after giving effect to this offering,
would have been $7.57 and the dilution per share to new investors would have
been $5.81.

SELECTED CONSOLIDATED FINANCIAL DATA

Set forth below is selected consolidated financial data with respect to the
statements of operations of the Company for the years ended June 30, 1993, 1994,
1995, 1996, 1997, the six months ended December 31, 1996 and 1997, and the
balance sheets of the Company at June 30, 1993, 1994, 1995, 1996 and 1997 and
December 31, 1997. Year-end data for the years ended June 30, 1996 and 1997 were
derived from the Company's Consolidated Financial Statements audited by Arthur
Andersen LLP, independent public accountants, whose report thereon is included
elsewhere in this Prospectus. Year-end data for the years ended June 30, 1993,
1994 and 1995 were derived from the Company's Consolidated Financial Statements
audited by Ernst & Young LLP, independent auditors, whose report for the year
ended June 30, 1995 is included elsewhere in this Prospectus. The selected
financial data for the six-month periods ended December 31, 1996 and 1997 are
derived from unaudited interim financial statements of the Company which, in the
opinion of management of the Company, include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
of operations and financial position for this period. Operating results for the
six-month period ended December 31, 1997 are not necessarily indicative of the
results which may be expected for the full year. The data should be read in
conjunction with the Financial Statements and Notes thereto and the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Prospectus.

SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------

STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------

(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

Revenue:
Battery sales.................................. $ 1,817 $ 2,890 $ 11,213 $ 12,624 $ 14,765 $ 7,444 $ 7,573
Technology contracts........................... 2,073 2,424 3,430 2,478 1,176 594 1,426
--------- --------- --------- --------- --------- --------- ---------
Total revenue.................................. 3,890 5,314 14,643 15,102 15,941 8,038 8,999
Cost of products sold:
Battery costs.................................. 2,512 3,168 10,900 12,317 13,880 7,126 6,790
Technology contracts........................... 594 1,781 3,017 1,954 1,238 594 1,261
--------- --------- --------- --------- --------- --------- ---------
Total cost of products sold.................... 3,106 4,949 13,917 14,271 15,118 7,720 8,051
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 784 365 726 831 823 318 948
Selling, general and administrative expenses..... 1,527 2,879 4,263 4,994 5,217 2,787 2,613
Research and development expenses................ 658 1,481 1,542 2,671 3,413 1,687 2,764
Loss (gain) on fires - insurance................. -- -- -- 352 (55) -- (1,196)
Loss on China Battery development program........ -- -- -- -- 805 -- --
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses......................... 2,185 4,360 5,805 8,017 9,380 4,474 4,181
Loss from operations............................. (1,401) (3,995) (5,079) (7,186) (8,557) (4,156) (3,233)
Interest income.................................. 350 836 1,722 2,017 1,352 801 427
Gain on sale of securities....................... -- -- -- 1,930 -- -- --
Other income (expense), net...................... 237 22 (35) -- (41) -- (22)
Loss before income taxes......................... (814) (3,137) (3,392) (3,239) (7,246) (3,356) (2,828)
--------- --------- --------- --------- --------- --------- ---------
Income taxes..................................... -- -- -- -- -- -- --
Net loss......................................... $ (814) $ (3,137) $ (3,392) $ (3,239) $ (7,246) $ (3,356) $ (2,828)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share........................ $ (0.20) $ (0.57) $ (0.50) $ (0.41) $ (0.91) $ (0.42) $ (0.36)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of shares outstanding.... 4,032 5,499 6,747 7,814 7,923 7,933 7,942

JUNE 30, DECEMBER 31, 1997
----------------------------------------------------- ----------------------
CONSOLIDATED BALANCE SHEET DATA: 1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED
--------- --------- --------- --------- --------- --------- -----------

(IN THOUSANDS) (UNAUDITED)
Cash and available-for-sale securities....... $ 23,097 $ 21,928 $ 27,398 $ 35,069 $ 22,158 $ 15,922 $ 46,878
Working capital.............................. 24,354 23,020 32,705 44,666 27,206 18,724 49,680
Total assets................................. 30,202 30,078 62,593 60,633 51,395 49,882 80,838
Total long-term debt......................... 1,800 -- -- -- -- -- --
Stockholders' equity......................... 27,138 27,554 57,957 56,435 46,763 43,454 74,410

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis below, and throughout this report, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual
results could differ materially from those projected or suggested in the
forward-looking statements. Factors that could cause or contribute to such
difference include, but are not limited to, those discussed in this section, as
well as in the sections entitled "Risk Factors" and "Business."

The following discussions and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.

GENERAL

The Company develops, manufactures and markets primary and rechargeable
lithium batteries for use in a wide array of applications. The Company believes
that its proprietary technologies allow the Company to offer batteries that are
ultra-thin, lightweight and generally achieve longer operating time than
competing batteries currently available. To date, the Company has focused on
manufacturing a family of lithium primary batteries in 9-volt, 3-volt, C, 1 1/4C
and D configurations and custom Thin Cell batteries at its Newark, New York
facility as well as high rate lithium batteries and sea water batteries at
Ultralife UK in Abingdon, England. The Company believes this is one of the most
comprehensive lines of lithium primary batteries commercially available.
Recently, the Company has been focusing on the commercialization of its advanced
rechargeable batteries which are based on its proprietary lithium-ion
solid-polymer technology and are integrated into consumer electronic
applications such as portable computers and cellular telephones. The Company
believes that its advanced rechargeable batteries are the only solid-polymer
lithium batteries currently being manufactured and sold for commercial use. The
Company intends to increase its production capacity of advanced rechargeable
batteries in order to supply OEMs and the after-market for consumer replacement
of batteries in electronic devices. The Company has obtained initial production
orders from Mitsubishi to supply its advanced rechargeable batteries for use in
its new ultra-thin lightweight notebook computer, the Pedion, and is also in
discussions with other major OEMs to develop its advanced rechargeable batteries
for use in such products as cellular telephones.

The Company was formed in December 1990. In March 1991, the Company acquired
certain technology and assets from the Eastman Kodak Company ("Kodak") relating
to the 9-volt lithium-manganese dioxide battery. The Company then expanded its
operation by its acquisition in June 1994 of the assets of Dowty Group PLC in
Abingdon, England ("Dowty") which became a subsidiary of the Company and was
renamed Ultralife Batteries (UK) Ltd. The customer base of Ultralife UK was
further expanded by the acquisition of assets of Accuumulatorenwerke Hoppecke
Carl Zoellner & Sohn GmbH & Co. ("Hoppecke") in July 1994. Since revenues and
expenses of Ultralife UK are paid in British pounds sterling, the Company's
results of operations are not materially affected by changes in currency
fluctuations.

In September 1997, the Company commenced production of its advanced
rechargeable batteries in limited quantities to Mitsubishi on a low volume
production line. The Company has agreed to deliver and Mitsubishi has agreed to
accept between 800 and 1,000 rechargeable batteries per month through April
1998. A custom-designed automated assembly machine was delivered in December
1997 and is currently being tested. A custom-designed packaging and sealing
machine was delivered in February 1998 and is currently being tested. The
Company intends to ramp up production while integrating the new equipment to
reach full operation by June 1998. This equipment will enable the Company to
complete its automated assembly line in Newark, New York, greatly increase
production capacity of advanced rechargeable batteries and service anticipated
demand. The Company intends to further expand its production capacity subsequent
to June 1998 by installing additional automated equipment at its Newark, New
York facility and adding automated equipment at its Abingdon, England facility
as well as establishing a third

production facility, which is likely to be located in Asia. The Company
anticipates that profit margins from sales of rechargeable batteries will
increase as production is automated and that profit margins from sales of 9-volt
batteries will increase as production volumes increase. See "Use of Proceeds."

Fires occurred in July 1994, September 1995 and December 1996 at the
Company's Abingdon, England facility. Based upon information received from the
police, the December 1996 fire has been attributed to arson. With the exception
of the December 1996 fire, each of these fires temporarily interrupted certain
manufacturing operations in a specific area of the facility. The December 1996
fire, however, caused extensive damage to the facility. Since the December 1996
fire, the Company has been receiving insurance proceeds compensating the Company
for loss of its plant and machinery, leasehold improvements, inventory and
business interruption. Sales of high rate and sea water batteries have been
significantly reduced over the past 12 months, however, the Company's insurance
policy covers losses associated with business interruption until May 1998. If
insurance proceeds relate to reimbursement for destroyed assets, the proceeds
are reflected as "gain on fire" on the statement of operations. If the insurance
proceeds relate to reimbursement of excess costs of working (such as rental of
temporary space, telephones, vehicles/transportation to move to the temporary
site, et cetera), such proceeds are recorded as a reduction to selling, general
and administrative expenses. If the insurance proceeds relate to reimbursement
for normal overhead costs related to lower production volumes resulting from the
fires, such proceeds are recorded as an offset to cost of sales. Insurance
proceeds received by the Company may exceed recorded losses.

Since inception, the Company has incurred net operating losses primarily as
a result of funding research and development activities. In addition, net
operating losses have been attributed to manufacturing and general and
administrative costs. To date, the Company has devoted a substantial portion of
its resources to the research and development of its products and technology,
particularly its proprietary lithium-ion solid-polymer technology. The Company
expects its operating expenses to increase as it expands production activities.
The Company's results of operations may vary significantly from quarter to
quarter depending upon the number of orders received, technology contracts
entered into and the pace of the Company's research and development activities.

SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
(IN THOUSANDS) (UNAUDITED)
------------------------------- --------------------

NET SALES BY BUSINESS SEGMENT: 1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
Battery sales.............................................. $ 11,213 $ 12,624 $ 14,765 $ 7,444 $ 7,573
Technology contracts....................................... 3,430 2,478 1,176 594 1,426
--------- --------- --------- --------- ---------
Total revenue.............................................. $ 14,643 $ 15,102 $ 15,941 $ 8,038 $ 8,999

NET INCOME (LOSS) BY BUSINESS SEGMENT:
Batteries.................................................. ($ 3,347) ($ 5,010) ($ 5,261) ($ 2,347) ($ 1,765)
Technology contracts....................................... 413 524 (62) (51) (7)
All Other.................................................. (458) 1,247 (1,923) (958) (1,056)
--------- --------- --------- --------- ---------
Net loss................................................... ($ 3,392) ($ 3,239) ($ 7,246) ($ 3,356) ($ 2,828)

RESULTS OF OPERATIONS

SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE SIX MONTHS ENDED DECEMBER
31, 1996

REVENUES. Total revenues of the Company increased $961,000, or approximately
12%, from $8,038,000 in the six months ended December 31, 1996 to $8,999,000 in
the six months ended December 31, 1997. This increase reflects an increase in
sales of batteries and technology contracts. Sales of 9-volt and BA-5372 primary
batteries increased $973,000, or approximately 21%, from $4,532,000 in the six
months ended December 31, 1996 to $5,505,000 in the six months ended December
31, 1997. This increase was reduced by lower sales of high rate batteries by
Ultralife UK as a result of suspended operations of the Company's

Abingdon, England facility due to a fire which occurred in December 1996.
Technology contracts revenue increased $832,000, or approximately 140%, from
$594,000 in the six months ended December 31, 1996 to $1,426,000 in the six
months ended December 31, 1997. The increase in revenues from technology
contracts was attributed to development funds arising from the Company's
agreement with Mitsubishi. The Company's development contracts with Mitsubishi
provided total funding of $1,135,000 for the development of rechargeable
batteries for a new generation notebook computer. Payments were made in three
installments during the fourth quarter of fiscal 1997 and the first quarter of
fiscal 1998. The agreement provides for the design and production of evaluation
cells and sample batteries, development of a battery management system and
design of high volume tooling. All of the obligations of the Company under this
contract have been fulfilled.

COST OF PRODUCTS SOLD. Cost of products sold increased $331,000 from
$7,720,000 in the six months ended December 31, 1996 to $8,051,000 in the six
months ended December 31, 1997. Cost of products sold as a percentage of revenue
decreased from approximately 96% to approximately 89% in the six months ended
December 31, 1997. Cost of batteries sold decreased $336,000 from $7,126,000 in
the six months ended December 31, 1996 to $6,790,000 in the six months ended
December 31, 1997. Cost of batteries sold as a percentage of revenue decreased
from approximately 96% to approximately 90% in the six months ended December 31,
1997. The decrease in cost of batteries sold as a percentage of revenue was
principally the result of increased production volumes of 9-volt and BA-5372
batteries and the Company's implementation of cost reduction programs related to
the improvement of manufacturing efficiencies. Cost of products sold includes
$637,000 of insurance proceeds received by Ultralife UK partially offsetting
overhead expenses resulting from lower production associated with suspended
manufacturing operations due to the December 1996 fire. Technology contracts
cost of sales increased $667,000 from $594,000 for the six months ended December
31, 1996 to $1,261,000 in the six months ended December 31, 1997. Technology
contracts cost of sales as a percentage of revenue decreased from approximately
100% to approximately 88% in the six months ended December 31, 1997. The
decrease in technology contract cost of sales as a percentage of revenue
reflects a greater number of contracts to absorb overhead expenses.

OPERATING EXPENSES. Operating expenses decreased $293,000 from $4,474,000
in the six months ended December 31, 1996 to $4,181,000 in the six months ended
December 31, 1997. Of the Company's operating expenses, research and development
expenses increased $1,077,000, from $1,687,000 in the six months ended December
31, 1996 to $2,764,000 in the six months ended December 31, 1997. Research and
development expenses increased as a result of the Company's efforts to improve
its production process and performance of its advanced rechargeable batteries.
Selling, general and administrative expenses decreased $174,000 from $2,787,000
in the six months ended December 31, 1996 to $2,613,000 in the six months ended
December 31, 1997. The decrease in selling, general and administrative expenses
are attributable to the impact of expense control efforts. Selling, general and
administrative expenses also include $456,000 offsetting incremental costs of
operations corresponding to replacement facility rental, transportation costs
and other such costs relating to the December 1996 fire at Ultralife UK. Total
operating expenses also decreased by $1,195,000 as a result of the receipt of
insurance proceeds to replace assets previously written off due to the December
1996 fire at Ultralife UK.

INTEREST INCOME. Interest income decreased $374,000 from $801,000 in the
six months ended December 31, 1996 to $427,000 in the six months ended September
30, 1997. The decrease of interest income is the result of lower average balance
invested since the Company used cash and investments to fund operations and
capital equipment additions for high volume production of rechargeable
batteries.

NET LOSSES. Net loss decreased $528,000 from a loss of $3,356,000, or $0.42
per share, in the six month period ended December 31, 1996 to a net loss of
$2,828,000, or $0.36 per share, for the six months ended December 31, 1997,
primarily as a result of the reasons described above.

YEAR ENDED JUNE 30, 1997 COMPARED WITH THE YEAR ENDED JUNE 30, 1996

REVENUES. Total revenues increased by $839,000, or approximately 6%, from
$15,102,000 for the year ended June 30, 1996 to $15,941,000 for the year ended
June 30, 1997. This was principally due to an increase of battery sales in the
amount of $2,141,000, or approximately 17%, from $12,624,000 for the year ended
June 30, 1996 to $14,765,000 for the year ended June 30, 1997. This increase in
battery revenues was generated by both the U.S. and the U.K. operations. In the
U.S., revenues from the Company's BA-5372 battery increased $2,061,000 as
contract extensions were received from the U.S. Army which supported increasing
production rates throughout the year. This was partially offset by reduced
levels of 9-volt battery sales which declined $1,351,000 primarily in the smoke
detector market. In the U.K., sales to the Ministry of Defense increased
$1,431,000 reflecting increased orders for high energy batteries. This increase
was partially offset by decreased revenues from high rate lithium and seawater
batteries in the second half of the year due to a fire in December 1996 at the
Abingdon, England facility. Revenues generated from technology contracts
decreased $1,302,000 from $2,478,000 for the year ended June 30, 1996 to
$1,176,000 for the year ended June 30, 1997. The decrease in revenues from
technology contracts is primarily attributable to the completion of certain
contracts and delays in receipt of new development programs as the Company
focused its efforts on the implementation of the Company's production line of
advanced rechargeable batteries.

COST OF PRODUCTS SOLD. Cost of products sold increased $847,000, from
$14,271,000 for the year ended June 30, 1996 to $15,118,000 for the year ended
June 30, 1997. Cost of products sold as a percentage of revenues remained at
approximately 95% during the fiscal year ended June 30, 1996 and June 30, 1997.
Cost of batteries sold increased $1,563,000 from $12,317,000 for the year ended
June 30, 1996 to $13,880,000 for the year ended June 30, 1997. Cost of batteries
sold as a percentage of revenues decreased from approximately 98% for the year
ended June 30, 1996 to approximately 94% for the year ended June 30, 1997. The
decrease in cost of batteries sold as a percentage of revenues reflects the
receipt of $906,000 from insurance proceeds as a result of fires in September
1995 and December 1996 at the Company's Abingdon, England facility. Partially
offsetting this recovery of costs associated with fires were increased costs of
batteries attributable to the Company's decision to temporarily reduce
manufacturing levels of 9-volt batteries to align inventory with sales volume.
Technology cost of sales decreased $716,000 from $1,954,000 for the year ended
June 30, 1996 to $1,238,000 for the year ended June 30, 1997 reflecting lower
contract volumes. Cost of technology contracts as a percentage of revenues
increased from approximately 79% for the year ended June 30, 1996 to
approximately 105% for the year ended June 30, 1997. This increase reflects
greater direct costs of fulfilling contracts performed during the year ended
June 30, 1997 than for the prior year.

OPERATING EXPENSES. Operating expenses increased $1,363,000, from
$8,017,000 for the year ended June 30, 1996 to $9,380,000 for the year ended
June 30, 1997. Selling, general and administrative expenses increased $223,000,
from $4,994,000 in the year ended June 30, 1996 to $5,217,000 in the year ended
June 30, 1997 attributable to increased support provided for new products
planned to be introduced. The year ended June 30, 1997 included the receipt of
insurance proceeds amounting to $138,000 to offset costs relating to the
September 1995 and December 1996 fires. Research and development expenses
increased $742,000, from $2,671,000 for the year ended June 30, 1996 to
$3,413,000 for the year ended June 30, 1997. This increase is due primarily to
increased expenditures related to the development of the rechargeable battery
program. Also included in total operating expenses was $56,000 received in
excess of the loss provision related to the fires which occurred in the
Abingdon, England factory. During the three months ended March 31, 1997, a
reserve of $137,000 was established for the December 1996 fire and during the
year ended June 30, 1996 the Company provided a reserve of $352,000 for losses
related to the September 1995 fire. Generally, the Company records expenses
related to the fires as they are incurred and records the offsetting insurance
proceeds only when received. Operating expenses also increased as a result of a
write-off of a China development project and related receivables due under
provisions of various agreements during the year ended June 30, 1997. The total
cost of these write-offs was $805,000. The

original purpose of the Company's participation in a China development program
was to make available a 2/3A size lithium battery at a competitive cost. Other
sources for this battery have since been identified. See "Risk Factors -- Risks
Related to China Joint Venture Programs."

INTEREST INCOME. Interest income decreased $665,000, from $2,017,000 for
the year ended June 30, 1996 to $1,352,000 the year ended June 30, 1997, due to
a lower average balance invested as the Company used cash and investments to
fund capital equipment improvements and operations during the year ended June
30, 1997.

NET LOSS. Net loss increased $4,007,000, or $0.50 per share, from a net
loss of $3,239,000, or $0.41 per share, in the year ended June 30, 1996 to
$7,246,000, or $0.91 per share, in the year ended June 30, 1997, primarily as a
result of the reasons described above. During the year ended June 30, 1996, the
Company realized a gain of $1,930,000, or $0.25 per share, as the result of a
sale of 123,200 shares of common stock of Intermagnetics General Corporation
("IGC"). If the Company would not have realized a gain from the sale of shares
of IGC, net loss would have increased $2,077,000, or $0.25 per share, from
$5,169,000 for the year ended June 30, 1996 to $7,246,000 for the year ended
June 30, 1997.

YEAR ENDED JUNE 30, 1996 COMPARED WITH THE YEAR ENDED JUNE 30, 1995

REVENUES. Total revenues increased $459,000, or approximately 3%, from
$14,643,000 for the year ended June 30, 1995 to $15,102,000 for the year ended
June 30, 1996. Battery sales increased $1,411,000, from $11,213,000 for the year
ended June 30, 1995 to $12,624,000 for the year ended June 30, 1996. Revenues
from technology contracts decreased $952,000, from $3,430,000 for the year ended
June 30, 1995 to $2,478,000 for the year ended June 30, 1996. Sales of primary
batteries increased 67% in the United States during the year ended June 30,
1996. However, these increases were nearly completely offset by a decrease in
battery sales by Ultralife UK of 36% as a result of the fire which occurred at
the Company's Abingdon, England facility. Revenues from technology contracts
decreased as the Company's contract relating to the establishment of a battery
manufacturing facility in China was in the final stage of completion.

COST OF PRODUCTS SOLD. Cost of products sold increased $354,000, from
$13,917,000 in the year ended June 30, 1995 to $14,271,000 in the year ended
June 30, 1996. Cost of products sold as a percentage of revenues remained at
approximately 95% during the fiscal years ended June 30, 1995 and June 30, 1996.
Cost of batteries sold increased $1,417,000 from $10,900,000 for the year ended
June 30, 1995 to $12,317,000 for the year ended June 30, 1996. Cost of batteries
sold as a percentage of revenues increased from approximately 97% for the year
ended June 30, 1995 to approximately 98% for the year ended June 30, 1996. The
increase in cost of battery sales primarily reflects increasing sales volumes
coupled with initial start-up costs for the production of BA-5372 batteries.
Cost of products sold related to technology contracts decreased during the year
ended June 30, 1996 primarily as a result of development funding received from a
leading cellular telephone manufacturer.

OPERATING EXPENSES. Operating expenses increased $2,212,000 from $5,805,000
for the year ended June 30, 1995 to $8,017,000 for the year ended June 30, 1996.
Of this amount, selling, general and administrative expenses increased $731,000,
primarily due to additional costs relating to promoting battery sales. Research
and development expenses increased $1,129,000, from $1,542,000 for the year
ended June 30, 1995 to $2,671,000 for the year ended June 30, 1996 as a result
of the Company's continuing support of its advanced rechargeable battery
programs. Losses incurred at Ultralife UK resulting from the September 1995 fire
amounted to approximately $352,000.

INTEREST INCOME. Interest income increased $295,000, from $1,722,000 for
the year ended June 30, 1995 to $2,017,000 for the year ended June 30, 1996
primarily as a result of increased interest rates during the twelve month
period. In addition, the Company realized higher average balance invested as a
result of the sale of 123,200 shares of common stock of IGC sold during the
year.

NET LOSS. Net loss decreased $153,000, or $0.09 per share, from $3,392,000,
or $0.50 per share, for the year ended June 30, 1995 to $3,239,000, or $0.41 per
share, for the year ended June 30, 1996 primarily due to the gain received as a
result of the Company's sale of 123,200 shares of common stock of IGC described
above. If the Company would not have realized a gain from the sale of shares of
IGC described above, net loss would have increased $1,777,000, or $0.16 per
share from $3,392,000 for the year ended June 30,1995, to $5,169,000 for the
year ended June 30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations principally through cash generated
from public offerings of its Common Stock and from certain transactions with
IGC. In December 1992 the Company received net proceeds of approximately $17.3
million in its initial public offering of 2,012,500 shares of common stock and
net proceeds of approximately $3 million from the exercise of an option to
purchase 507,958 shares previously granted to IGC. In December 1994 the Company
consummated a follow-on public offering of common stock raising net proceeds of
approximately $32.6 million. In addition, the Company has realized gains on the
sale of shares of IGC amounting to $1.9 million. The Company continues to hold
345,591 shares of common stock of IGC available for future sale. Principal uses
of funds since the initial public offering have been to purchase production
equipment, primarily for automated equipment to produce rechargeable batteries,
($23.6 million), increase working capital to support sales growth ($6.3
million), repayment of long-term debt ($1.8 million), acquisitions ($1.3
million), purchase of technology ($1.1 million) and to fund research and
development ($15.8 million). In June 1997, the Empire State Development
Corporation approved a $500,000 grant to the Company, provided that the Company
employs an additional number of employees at its Newark, New York facility in
connection with its efforts to expand its advanced rechargeable battery program.

As of December 31, 1997 cash, cash equivalents and available for sale
securities totaled $15,922,000. The Company used $56,600 of cash from operations
during the six months ended December 31, 1997. This is the net result of net
losses for the period and increases in earned contract revenues receivable and
prepaid and other current assets offset by reductions in accounts receivable and
inventories. The decrease in accounts receivable reflects continued improvement
in collections as days sales in trade receivables decreased from 69 days at June
30, 1997 to 52 days at December 31, 1997. The decrease in inventories during the
six months ended December 31, 1997 is the result of continued improvement in the
turnover of 9-volt battery inventories and the completion of the Company's
contract to produce BA-5372 batteries for the U.S. Army. Months cost of sales in
inventory at December 31, 1997 was 2.9 months as compared to 4.6 months at June
30, 1997.

During the year ended June 30, 1997, the Company used $1,572,000 of cash in
operating activities as compared to $6,723,000 for the year ended June 30, 1996.
The substantial decrease in the cash used in operations was primarily the result
of decreases in inventories, accounts receivable and earned contract revenues
receivable offset by increased net loss for the year ended June 30, 1997 and
decreased accounts payable and accrued liabilities. The decrease in accounts
receivable primarily reflects improved collections as days sales outstanding in
trade receivables dropped from 109 days at June 30, 1996 to 69 days at June 30,
1997. The decrease in inventories during the year ended June 30, 1997 amounted
to $3,042,000 as a result of management's decision to temporarily reduce
production levels of 9-volt batteries to align inventory with sales volume.
Months cost of sales in inventory at June 30, 1997 was 4.6 months as compared to
8.2 months at June 30, 1996. In the year ended June 30, 1997, the Company used
$8,913,000 to purchase equipment, primarily for the Company's rechargeable
battery production line.

During the year ended June 30, 1996, the Company used $6,723,000 of cash in
operating activities as compared to $6,986,000 in the year ended June 30, 1995.
The decrease in the cash used in operations was primarily the result of
additional inventories, accounts receivable, prepaid expenses and other current
assets, partially offset by a decrease in earned contract revenues receivable
and an increase in depreciation and amortization expenses. The increase in
accounts receivable reflects increased sales during the year

ended June 30, 1996 and slower collections, primarily related to monies due from
China Battery. At June 30, 1996, the days sales outstanding in trade receivables
was 109 days compared to 58 days at June 30, 1995. In the year ended June 30,
1996, the Company used $6,662,000 to purchase equipment, primarily for the
Company's rechargeable battery production line.

The Company does not currently have any long-term debt. A limited line of
credit in the amount of $330,000 is maintained by Ultralife UK for short term
working capital requirements. However, with continued sales, growth and
expansion, the Company will explore normal working capital lines of credit. The
Company has obtained a $3,000,000 bank facility to secure letters of credit
required from time to time in the regular course of business. Deposits
maintained at the bank secure this facility. The Company believes that its
present cash position and cash flows from operations will be sufficient to
satisfy the Company's estimated cash requirements for at least 12 months
following the consummation of this offering.

The Company has conducted an initial review regarding the effect the
upcoming year 2000 will have on its computer applications. The Company has
determined that there will be minimal impact on the Company and that the
financial and human resources utilized to address this issue will not be
material. However, there can be no assurance that unforeseen problems will not
arise in connection with this issue.

BUSINESS

GENERAL

Ultralife Batteries, Inc. develops, manufactures and markets primary and
rechargeable lithium batteries for use in a wide array of applications. The
Company believes that its proprietary technologies allow the Company to offer
batteries that are ultra-thin, lightweight and generally achieve longer
operating time than competing batteries currently available. To date, the
Company has focused on manufacturing a family of lithium primary batteries for
consumer and industrial applications which it believes is one of the most
comprehensive lines of lithium primary batteries commercially available.
Recently, the Company has been focusing on the commercialization of its advanced
rechargeable batteries which are based on its proprietary lithium-ion
solid-polymer technology and are integrated into consumer electronic
applications such as portable computers and cellular telephones. The Company
believes that its advanced rechargeable batteries are the only solid-polymer
lithium batteries currently being manufactured and sold for commercial use. The
Company intends to increase its production capacity of advanced rechargeable
batteries in order to supply OEMs and the after-market for consumer replacement
of batteries in electronic devices. The Company has obtained initial production
orders from Mitsubishi to supply its advanced rechargeable batteries for use in
its ultra-thin lightweight notebook computer, the Pedion, and is also in
discussions with other major OEMs to develop advanced rechargeable batteries for
use in such products as cellular telephones.

The global small cell rechargeable batteries market was approximately $3.7
billion in 1997 and is expected to grow to $6.1 billion by 2001. The widespread
use of a variety of portable consumer electronics such as notebook computers and
cellular telephones has resulted in large and growing markets for rechargeable
batteries. These electronic products are placing increasing demands on existing
battery technologies to deliver greater amounts of energy through efficiently
designed, smaller and lighter batteries. In some cases, current battery
capabilities are a major limitation in the development of next generation
electronic products. The Company believes that its proprietary lithium-ion
solid-polymer technology provides substantial benefits, including design
flexibility, reduced size and weight and longer cycle life, over other available
rechargeable battery technologies. In addition, the Company's proprietary
technology, which does not utilize lithium metal or a liquid electrolyte,
provides performance and safety characteristics superior to other lithium
rechargeable batteries currently available.

and Interactive Technologies, Inc. for security devices. The Company produces
private label 9-volt batteries for Eveready in the United States, Sonnenschein
Lithium GmbH in Germany and Uniline in Sweden. Additionally, the Company has
introduced its 9-volt battery to the broader consumer market by establishing
relationships with national and regional retail chains such as Radio Shack, Fred
Meyer, Inc., TruServ Ace Hardware and a number of catalogues. The Company
believes that the market for its 9-volt lithium battery will continue to grow as
legislation is enacted which requires use of a long-life battery in smoke
detector devices. A state law was recently enacted in Oregon and legislation was
recently proposed in New York which provides that all battery operated smoke
detectors sold in such states must include a 10-year battery. The Company
believes that it currently manufactures the only standard size 9-volt battery
warranted to last 10 years.

HISTORY

The Company was formed in December 1990. In March 1991, the Company
acquired, on favorable terms, certain technology and assets from Kodak relating
to the 9-volt lithium-manganese dioxide battery that was developed and
manufactured by Kodak. During the initial 12 months of operation, the Company
directed its efforts towards reactivating the Kodak manufacturing facility and
performing extensive tests on the Kodak 9-volt battery. These tests demonstrated
a need for design modifications which were incorporated into the Company's
9-volt battery, resulting in a battery with improved performance and shelf life.
The Company then expanded its operations by its acquisition in June 1994 of the
assets of Dowty Ultralife UK which has became a subsidiary of the Company and
was renamed Ultralife UK. The Dowty acquisition provided the Company with a
presence in Europe, manufacturing facilities for high rate lithium and sea water
batteries and highly skilled scientists with significant expertise in lithium
battery technology. The customer base of Ultralife UK was further expanded by
the acquisition of assets of Hoppecke in July 1994. The Company has developed a
wide array of products based on combining technology developed by the Company's
research and development personnel and assets acquired from Kodak, Dowty and
Hoppecke as well as various technology licenses.

Since its inception, the Company has concentrated significant resources on
research and development activities primarily related to its lithium-ion
solid-polymer rechargeable battery. The Company commenced production of its
advanced rechargeable batteries in limited quantities for an OEM using a low
volume production line which includes manual operation. High volume
custom-designed equipment is in the process of being installed and tested to
ramp up production of rechargeable batteries to full operation by June 1998.

TECHNOLOGY

A battery is an electrochemical apparatus used to store energy and release
it in the form of electricity. The main components of a conventional battery are
the anode, the cathode, the separator and an electrolyte, which can be either a
liquid or a solid. The separator acts as an electrical insulator, preventing
electrical contact between the anode and cathode inside the battery. Upon
discharge of the battery, the anode supplies a flow of electrons, known as
current, to a load or device outside of the battery. After powering the load,
the electron flow reenters the battery at the cathode. As electrons flow from
the anode to the device being powered by the battery, ions are released from the
cathode, cross through the electrolyte and react at the anode.

There are two types of batteries, primary and rechargeable. A primary
battery is used until discharged and then discarded. The principal competing
primary battery technologies are carbon-zinc, alkaline and lithium. In contrast,
after a rechargeable battery is discharged, it can be recharged close to full
capacity and used again (subject to the memory effect, if any). Generally,
discharge and recharge cycles can be repeated a number of times in rechargeable
batteries, but the achievable number of cycles (cycle life) varies among
technologies and is an important competitive factor. All rechargeable batteries
experience a small, but measurable, loss in energy with each cycle. The industry
commonly reports cycle life in number of cycles a

battery can achieve until 80% of the battery's initial energy capacity remains.
In the rechargeable battery market, the principal competing technologies are
nickel-cadmium, nickel-metal hydride and lithium-based batteries. Rechargeable
batteries generally can be used in all primary battery applications, as well as
in additional applications, such as portable computers, cellular telephones and
other consumer products.

Three important parameters for describing the performance characteristics of
a rechargeable battery suited for today's portable electronic devices are design
flexibility, energy density and cycle life. Design flexibility refers to the
ability of rechargeable batteries to be designed to fit a variety of shapes and
sizes of battery compartments. Thin profile batteries with prismatic geometry
provide the design flexibility to fit the battery compartments of today's
electronic devices. Energy density refers to the total electrical energy per
unit volume stored in a battery. High energy density batteries generally are
longer-lasting power sources providing longer operating time and necessitating
fewer battery recharges. Lithium batteries, by the nature of their
electrochemical properties, are capable of providing higher energy density than
comparably-sized batteries that utilize other chemistries and, therefore, tend
to consume less volume and weight. Long cycle life is a preferred feature of a
rechargeable battery because it allows the user to charge and recharge power
many times before noticing a difference in performance.

INDUSTRY

RECHARGEABLE

Worldwide small cell rechargeable battery sales were estimated to be $3.7
billion and 1.9 billion units in 1997, at the manufacturer's level, representing
the fastest-growing sector of the overall battery industry. This market is
expected to grow at an annual rate of 13%, measured in dollars over the next
five years to an estimated level of $6.1 billion in the year 2001, resulting
primarily from the continued development and proliferation of new portable
electronic products.

The market for portable rechargeable batteries, consists of three major
technologies, and is measured on a per unit basis as follows: (i) Nickel-cadmium
(NiCd), presently 62% of the market, (ii) Nickel-metal hydride (NiMH), 31% of
the market and (iii) Lithium- ion liquid electrolyte (Li Ion Liquid), 7% of the
market.

Approximately 75% of all cells are assembled into battery packs for use in a
variety of portable devices. Increasingly, these packs contain sophisticated
electronics for power management and safety. Efficient battery assembly
operations and capabilities in associated electronics are important success
factors in the rechargeable business and can lead to higher-margin sales due to
the value-added content of the battery packs.

NiCd is the oldest commercialized rechargeable system in the market. NiCd
cells can be employed in battery packs without high-cost electronics and safety
devices and enjoy a substantial price advantage over NiMH and Li Ion Liquid
cells. In the last decade, NiCd has increasingly been the subject of tightening
environmental and workplace regulations and related pressures for recycling and
mandatory collection. However, pressures to enforce mandatory collection schemes
or even to ban NiCd have largely abated due to industry-wide recycling efforts.
Although NiCd will remain attractive in certain applications which do not
experience a significant performance benefit from other technologies and are
sensitive to their higher cost, growth in this segment is expected to remain
relatively flat.

NiMH technology, which typically offers a 25% to 40% advantage in energy
density relative to NiCd, was commercialized at the beginning of this decade.
Because it employs a metal hydride electrode rather than a cadmium electrode,
NiMH is considered an environmentally preferred technology and is enjoying
market penetration in several applications and geographic regions as a result of
this attribute. However, NiMH cells and batteries typically carry a cost premium
relative to NiCd.

Li Ion Liquid battery technology was commercialized in the early 1990s.
Production of Li Ion Liquid cells has jumped from just 15 million cells in 1994
to about 33 million cells in 1995 and about 125 million cells in 1996.
Production for 1997 is estimated at 200 million cells. Li Ion Liquid technology,
in a cylindrical form, offers the highest energy density of all commercial
rechargeable technologies on the market today. On a weight basis, the technology
offers 2 to 3 times the energy content of NiCd. Li Ion Liquid technology
combines higher voltage (3.6 volts per cell) with better tolerance to the
elevated temperatures found in today's portable computers than NiMH. The higher
voltage typically allows the design of battery packs with about one-third the
cell count associated with nickel-based (1.2 volt) technologies. Lithium based
technologies are expected to experience significantly higher growth rates than
either of the nickel based technologies.

Rechargeable battery technology that employs a polymer electrolyte rather
than a liquid electrolyte has been under development since the late 1970s. The
attraction of this technology is its ability to produce flat prismatic batteries
which can be more efficiently packaged than liquid electrolyte cells. From a
space-filling perspective, these packages result in higher energy density than
found in cylindrical cell battery packs. The trend to thinner and lighter
portable electronic products may provide a significant level of demand for this
technology.

Powerful market forces in several key product categories have played a
critical role in driving the development of new rechargeable battery technology.
Specifically, battery technology has been racing to meet the need for higher
energy density battery technologies that allow portable devices to be smaller
and lighter, to have increased run-times and to incorporate an increasing number
of features which need significantly more power. Typical devices in this
category include portable computers, cellular telephones, and camcorders.
Improvements in battery technology are typically consumed rapidly in new device
designs, and create a continuing need for rechargeable batteries with even
higher energy density. Advanced rechargeable battery technology has been
regarded as a strategically important technology for manufacturers of advanced
portable electronic products.

Portable computers and cellular telephones represent the largest and fastest
growing segments of the portable electronic device market. Worldwide sales for
cellular handsets were approximately 100 million units in 1997, and are
projected to reach 200 million units by the year 2000, a compounded annual
growth rate of 26%. Worldwide sales for portable computers were approximately 15
million units in 1977, and are projected to reach 24 million units by the year
2000, a compounded annual growth rate of 17%.

PRIMARY

Primary battery sales were estimated to be $6.7 billion in 1997. This market
is estimated to be growing at an annual rate of 8% to a level of $8.7 billion by
the year 2001, resulting primarily from continuing sales of both alkaline and
lithium batteries.

The portable primary battery industry consists primarily of three major
technologies and is measured on a per unit basis as follows: (i) Alkaline, 69%
of the market, (ii) Carbon-Zinc or Chloride-Zinc (C-Zn; Chl-Zn), 17% of the
market and (iii) Lithium (Li) 7% of the market. An additional 7% of the market
is comprised of other primary chemistries including Silver-Oxide, Zinc-Air and
Mercury batteries.

Alkaline batteries, with a growth rate of approximately 9% annually, are
expected to continue to dominate the consumer market. Consumer applications
range widely, from flashlights to products such as motorized toys, electronic
games, tape players, compact disk players, radios and other portable electronics
products. Industrial applications include battery powered equipment used in the
workplace and for OEM applications including computer clock power supplies and
various portable products packaged with batteries.

C-Zn or Chl-Zn battery demand is expected to expand only modestly at
approximately 2% per year due to the continuing popularity of alkaline batteries
which compete for the same applications. Designated

as "regular" or "heavy duty" types, these batteries sell for about half the
price of alkalines while providing only one-third or less the capacity depending
on the type of device in which they are used. Zinc type batteries are used
primarily in applications where current drain is relatively low, constant
voltage is not required or where long shelf life or usage life is not needed.

The Li primary battery market continues to have the highest growth rate of
primary batteries and is expected to expand 10.5% annually to $685 million by
2001. The increasing demand for Li batteries is due to their use in a growing
array of portable devices which cannot be adequately powered with alkaline or
other primary batteries. Li batteries are light in weight, have high energy
density, long shelf life, long life in use, a stable voltage, a wide operating
temperature range and can provide a cost advantage over alkaline and C-Zn
batteries on a cost per unit of energy basis. These characteristics make Li
batteries ideal for a broad range of consumer, industrial and military
applications.

Li primary batteries are widely used in advanced cameras and other portable
or wireless devices such as security system transmitters. A long shelf of up to
10 years, combined with long usage life, makes Li batteries particularly well
suited for critical life saving applications such as smoke and carbon monoxide
detectors, and wireless security systems.

Thin profile lithium primary batteries are beginning to emerge in
applications such as identification tags used for package tracking, smart cards
and identification badges for use in computer terminal access and high security
areas. Other emerging markets include long-life 2-way pagers.

Li batteries are expected to continue leading the growth of the primary
battery industry due to the continued proliferation of portable consumer,
industrial and military applications requiring high energy, light weight and
long-lasting power sources.

BUSINESS STRATEGY

To achieve the Company's strategic objective of becoming a leading provider
of advanced technology primary and rechargeable lithium batteries, the Company
has implemented a business strategy which includes the following key elements:

SUPPLY ADVANCED RECHARGEABLE AND PRIMARY BATTERIES TO OEMS. The Company
intends to supply OEMs of portable consumer electronic devices with
custom-designed rechargeable batteries for products such as notebook computers
and cellular telephones. The Company also intends to continue to provide primary
batteries to OEMs by further developing relationships.

EXPAND PRESENCE IN THE CONSUMER MARKET. The Company intends to expand the
presence of its 9-volt battery to the consumer market. It has established
relationships with Radio Shack and Fred Meyer, Inc., and is currently shipping
the 9-volt battery to these and other retailers. The Company also produces
private label batteries for Eveready in the U.S., Sonnenschein Batteries, Inc.
in Germany and Uniline in Sweden. The Company intends to enter into contractual
arrangements with distributors in the U.S. and abroad to purchase rechargeable
batteries from the Company for resale to the after-market using distributor
channels established with the Company's primary batteries.

IDENTIFY NEW APPLICATIONS AND FURTHER DEVELOP TECHNOLOGY. The Company seeks
to identify and develop new applications for its products and technology in the
industrial and consumer markets. The Company believes that its lithium primary
and advanced rechargeable batteries offer both the performance characteristics
and design flexibility that satisfy the increasing requirements of industrial
and consumer markets for high energy, reliable and long-lasting power sources.
The Company's technological development activities will continue to be directed
toward improving the benefits of its advanced rechargeable battery; developing
new lithium-manganese dioxide primary batteries in different size and voltage
configurations; and continuing research and development to increase battery
performance and decrease battery

cost. The Company will continue to work with OEMs and the U.S. and British
governments to further this development.

INCREASE PRODUCTION AND FOCUS ON QUALITY. The Company intends to increase
its production capacity of rechargeable batteries by purchasing, installing and
integrating additional production lines and automated equipment at its ISO 9001
certified Newark, New York and Abingdon, England facilities and by establishing
a third production facility, which is likely to be located in Asia. A large
production capacity is necessary to supply products that are configured to
utilize the Company's batteries. As the quality of the Company's products is
vital to developing and maintaining the Company's relationship with its
customers, the Company is committed to an extensive quality control program. The
Company's quality control procedures are an integral part of the production
process of each of its batteries.

ENTER INTO STRATEGIC ALLIANCES AND IDENTIFY ACQUISITIONS. The Company
intends to continue to enter into alliances with OEMs, suppliers, customers,
distributors and other battery manufacturers to provide the additional funding,
research and development, marketing and other resources required to develop and
commercialize further the Company's products and technology. For example, the
Company has entered into a relationship with Mitsubishi to install the Company's
advanced rechargeable batteries in a new line of notebook computers and with
Eveready, which markets the Company's primary batteries under private label. The
Company intends to continue to expand its presence in the lithium battery market
by identifying strategic acquisitions of assets or businesses that offer
complementary product lines, access to new distribution channels, or access to
new technologies or manufacturing expertise. For example, in June 1994, the
Company acquired the assets and related business of Dowty which added a number
of complementary lithium battery technologies and products to the Company's
product portfolio and a distribution channel in Europe.

PRODUCTS

ULTRALIFE'S ADVANCED RECHARGEABLE BATTERY

The Company's advanced rechargeable battery is based on its proprietary
lithium-ion solid-polymer technology. The battery is composed of ultra-thin and
flexible components including a lithiated manganese dioxide cathode, a carbon
anode and a solid-polymer electrolyte. The Company believes that users of
portable consumer electronic products such as notebook computers and cellular
telephones are seeking smaller and lighter products that require less frequent
recharges while providing the same energy. The Company believes that its
technology is attractive to OEMs of such products since the use of a flexible
solid-polymer electrolyte, rather than a liquid electrolyte, reduces the
battery's overall weight and volume, and allows for increased design flexibility
in conforming batteries to the variety of shapes and sizes required for portable
consumer products. In addition to its high energy density and long cycle life,
the Company's lithium-ion solid-polymer battery is not subject to the memory
effect common in certain other rechargeable batteries. The following table sets
forth the performance characteristics of the three rechargeable battery
technologies that the Company believes represents its most significant current
competition.

COMPARISON OF PRISMATIC RECHARGEABLE BATTERY TECHNOLOGIES

ENERGY DENSITY
-------------------- MINIMUM CELL
TECHNOLOGY WH/KG WH/L CYCLE LIFE(1) SAFETY THICKNESS(MM)
- ------------------------------------------------- --------- --------- ------------- ---------- ---------------------

Nickel-cadmium (2)............................... 40-55 100-150 500 Safe 8
Nickel-metal hydride (2)......................... 50-60 155-185 500 Safe 6
Lithium-ion liquid electrolyte(2)(3)............. 68-110 200-250 >500 Concern 6
Ultralife lithium-ion solid-polymer (4).......... 100-120 200-250 >500 Safe 1

- ------------------------

(1) Cycle life to 80% of rated capacity and 100% depth of discharge, at
approximately the C rate (1 hour discharge cycle). Certain batteries may
achieve significantly higher cycle life at longer discharge rates.

(2) Data compiled from industry sources and sales literature of other battery
manufacturers or derived therefrom by the Company.

(3) Cycle life data based on C/5 rate (5 hour discharge cycle).

(4) Based on the Company's tests.

Energy density refers to total amount of electrical energy stored in a
battery divided by the battery's weight and volume as measured in watt-hours per
kilogram and watt-hours per liter, respectively. High energy density and long
achievable cycle life are important characteristics for comparing rechargeable
battery technologies. Greater energy density will permit the use of batteries of
a given weight or volume for a longer time period. Accordingly, greater energy
density will enable the use of smaller and lighter batteries with energy
comparable to those currently marketed. Long achievable cycle life, particularly
in combination with high energy density, is suitable for applications requiring
frequent battery rechargings, such as cellular telephones and portable
computers.

In addition to the performance advantages described above, there is a
significant difference between the rechargeable batteries which are based on the
lithium-ion liquid electrolyte technology and the technology used in the
Company's advanced rechargeable batteries. Liquid lithium-ion cells use a
flammable liquid electrolyte that is contained within a cylindrical or prismatic
metal housing. Under abusive conditions, where external temperatures are
extremely high, significant pressure may build within these cells which can
cause these cells to vent and release liquid electrolyte into the
high-temperature environment. If temperatures are high enough, flames can
result. The Company's advanced rechargeable batteries utilize a solid polymer
electrolyte that has no liquid and thus cannot leak. Moreover, because the
electrolyte is solid, the Company cells do not require a metal housing. Rather,
they are packaged within a thin foil laminate. The Company further believes that
its cells will perform safely under the same abusive conditions that could cause
a flame from liquid lithium-ion cells. The Company's rechargeable cells have
passed each of the following safety tests: UL 1950, IEC 950, CSA 950 and the
Japan Storage Batteries Association Guideline for Safety Evaluation of Lithium
Cells.

BENEFITS OF ULTRALIFE'S ADVANCED RECHARGEABLE BATTERY

KEY OEM RELATIONSHIPS

The Company is in various stages of discussion with OEMs regarding the use
of the Company's advanced rechargeable batteries in their products. The Company
has, to date, formalized its relationship with two OEMs as described below. In
April 1997, the Company entered into an agreement with Mitsubishi to develop and
deliver 1,800 prototype cells of its lithium-ion solid-polymer rechargeable
batteries for use in a new ultra-thin and lightweight notebook computer. The
Company has delivered approximately 1,600 battery cells under this agreement and
has received additional purchase orders for production units from Mitsubishi.
However, since the Company lacked the production capacity to deliver the
quantity of rechargeable batteries in the time frame desired by Mitsubishi,
Mitsubishi is utilizing lithium-ion liquid electrolyte batteries produced by
another manufacturer in some of its Pedion computers. Mitsubishi and the Company
have also agreed to modify the purchase orders previously placed with the
Company. Under this modified arrangement, the Company agreed to deliver and
Mitsubishi has agreed to accept between 800 to 1,000 rechargeable batteries per
month through April 1998. Although the Company is not under any obligation to
produce additional rechargeable batteries for Mitsubishi, the Company believes
that an increase in production capacity will allow the Company to meet the
requirements of Mitsubishi as it commences a full rollout of the Pedion. There
can be no assurance, however, that the Company will receive additional purchase
orders for its rechargeable batteries from Mitsubishi subsequent to April 1998.

In November 1994, the Company signed a development and supply agreement that
is exclusive for the wireless telecommunications market with a major
communications company for its advanced rechargeable battery. Under the terms of
this agreement, the communications company provided a portion of the funds to
finalize the development of the battery to meet its particular specifications.
The agreement was amended in March 1996, pursuant to which the communications
company advanced $334,000 towards the shipment of mass-produced batteries, which
advance is secured by a letter of credit. Since the Company lacked the
production capacity to deliver the quantity of rechargeable batteries in the
time frame desired by this customer this communications company may, until
December 31, 1998, draw on the letter of credit, however, negotiations are
ongoing. In January 1998, the Company's agreement with this communication
company was amended to a non-exclusive arrangement. The Company is currently
under no obligation to produce, and the communications company is under no
obligation to purchase, batteries under this agreement. See "Risk Factors --
Advanced Rechargeable Batteries; Manufacturing; Limited Experience; Factors
Related to Manufacturing Expansion."

ULTRALIFE'S PRIMARY BATTERIES

The Company's primary battery products, exclusive of its sea water
batteries, are based on lithium-manganese dioxide technology. The following
table sets forth the performance characteristics of the battery technologies
that the Company believes represent its most significant current or potential
competition for its 9-volt battery and its high-rate lithium battery.

COMPARISON OF PRIMARY BATTERY TECHNOLOGIES

OPERATING
TEMPERATURE
DISCHARGE SHELF LIFE RANGE
TECHNOLOGY ENERGY DENSITY PROFILE (YEARS) ( DEG.F)
- ------------------------------------------------------ -------------------- ----------- ---------- ------------

WH/KG WH/L
--------- ---------
9-VOLT CONFIGURATIONS:
Carbon-zinc (1)....................................... 22 40 Sloping 1 to 2 23 to 113
Alkaline (1).......................................... 65 143 Sloping 4 to 5 -4 to 130
Ultralife lithium-manganese dioxide (2)............... 262 406 Flat up to 10 -40 to 160

HIGH RATE CYLINDRICAL: (3)
Alkaline (1).......................................... 59 160 Sloping 4 to 5 -4 to 130
Lithium-sulfur dioxide (1)(4)......................... 260 430 Flat 10 -40 to 160
Lithium thionyl-chloride (2)(4)....................... 250-300 650-700 Flat 10 -40 to 160
Ultralife lithium-manganese dioxide (2)............... 228 510 Flat 10 -40 to 160

- ------------------------

(1) Data compiled from industry sources and sales literature of other battery
manufacturers or derived therefrom by the Company.

(2) Results of tests conducted by the Company.

(3) Data for equivalent D-size cells.

(4) The Company believes that these batteries are limited in application due to
health, safety and environmental risks associated therewith.

Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume, as measured in watt-hours
per kilogram and watt-hours per liter, respectively. Higher energy density
translates into longer operating times for a battery of a given weight or volume
and, therefore, fewer replacement batteries. Discharge profile refers to the
profile of the voltage of the battery during discharge. A flat discharge profile
results in a more stable voltage during discharge of the battery. High
temperatures generally reduce the storage life of batteries, and low
temperatures reduce the battery's ability to operate efficiently. The inherent
electrochemical properties of lithium batteries result in improved low
temperature performance and an ability to withstand relatively high temperature
storage.

BENEFITS OF ULTRALIFE'S PRIMARY LITHIUM TECHNOLOGY

The Company's primary battery products are based on lithium-manganese
dioxide technology. The materials used in, and the chemical reactions inherent
to, the Company's lithium batteries provide significant advantages over
currently available primary battery technologies which include lighter weight,
longer operating time, longer shelf life, and a wider operating temperature
range. The Company's primary batteries also have relatively flat voltage
profiles which provide stable power. Conventional primary batteries, such as
alkaline batteries, have sloping voltage profiles, which result in decreasing
power outage during discharge. While the price for the Company's lithium
batteries is generally higher than commercially available alkaline batteries
produced by others, the Company believes that the increased energy per unit of
weight and volume of its batteries will allow longer operating time and less
frequent battery replacements for the Company's targeted applications.
Therefore, the Company believes that its primary batteries are price competitive
with other battery technologies on a price per watt hour basis.

9-VOLT LITHIUM BATTERY. The Company's 9-volt lithium battery delivers a
unique combination of high energy density and stable voltage which results in a
longer operating life for the battery and, accordingly, fewer battery
replacements. While the Company's 9-volt battery's price is generally higher
than conventional 9-volt carbon-zinc and alkaline batteries, the Company
believes the enhanced operating performance and decreased costs associated with
battery replacement make the Ultralife 9-volt battery more cost effective than
conventional batteries on a cost per watt-hour basis.

The Company currently markets its 9-volt lithium battery to consumer retail
and OEM markets, including manufacturers of safety and security systems such as
smoke alarms, medical devices and other electronic instrumentation. The Company
believes that approximately 10% of the 220 million 9-volt batteries sold in the
U.S. in 1997 were sold to OEMs. Applications for which the Company's 9-volt
lithium battery are currently sold include:

SAFETY AND SECURITY EQUIPMENT MEDICAL DEVICES SPECIALTY INSTRUMENTS

Smoke alarms Bone growth stimulators Garage door openers
Wireless alarm systems Telemetry equipment Electronic meters
Tracking devices Portable blood analyzers Hand-held scanners
Transmitters/receivers TENS units Wireless electronics

The Company currently sells its 9-volt battery to Coleman Safety & Security
Products, Inc., Fyrnetics, Inc., and First Alert-Registered Trademark- for long
life smoke alarms, to Siemens Medical Systems, Inc. and i-STAT Corp. for medical
devices and to ADEMCO and Interactive Technologies, Inc. for security devices.
Coleman Safety & Security Products, Inc. and Fyrnetics, Inc. have recently
introduced long life smoke detectors powered by the Company's 9-volt lithium
battery, offered with a limited 10 year warranty. The Company also manufactures
its 9-volt lithium battery under private label for Eveready, Sonnenschein
Lithium GmbH in Germany and Uniline in Sweden. Additionally, the Company has
introduced its 9-volt battery to the broader consumer market by establishing
relationships with national and regional retail chains such as Radio Shack, Fred
Meyer, Inc., TruServ Ace Hardware and a number of catalogues.

The Company expects that its 9-volt lithium battery market has expanded as a
result of a state law recently enacted in Oregon. The Oregon statute requires
that, as of January 1, 1998, all battery-operated smoke detectors sold in that
state must include a 10-year battery. Similar legislation has been recently
proposed in New York State that would also require all smoke alarms operated
solely by a battery to include a battery warranted to last 10 years. The Company
manufactures the only standard size 9-volt battery warranted to last 10 years.

The Company believes that its 9-volt lithium battery production facility
based in Newark, New York, is one of the most automated and efficient lithium
battery production facilities of its kind currently operating. The Company's
production facility currently has the capacity to produce nine million 9-volt
lithium batteries per year with its existing equipment.

HIGH RATE LITHIUM BATTERIES. Ultralife UK, the Company's wholly-owned
subsidiary based in Abingdon, England, markets a wide range of high rate primary
lithium batteries in various sizes and voltage configurations. The Company
currently manufactures C, 1 1/4C and D size high rate lithium batteries which
are sold and packaged into multi-cell battery packs. The Company believes that
its high rate lithium C, 1 1/4C and D primary batteries, based on its
proprietary lithium-manganese dioxide technology, are the most advanced high
rate lithium batteries currently available. The Company also markets high rate
lithium batteries under private label in other sizes and voltage configurations
in order to offer a more comprehensive line of batteries to its customers.

The Company currently markets its line of high rate lithium batteries to the
OEM market for industrial applications, including military use. The main OEM
applications are SAR (Search & Rescue), oil industry, pipeline monitoring
equipment, utility meters, oceanographic, remote switching and portable
equipment. The main military applications are manpack radios, night vision
equipment, chemical agent monitors and missile power supplies.

The Company estimates the market for high rate lithium batteries was $75
million in 1996. Although this market has been dominated by lithium
thionyl-chloride, lithium-sulfur dioxide and liquid cathode batteries, there is
an increasing market share taken by the lithium-manganese dioxide and solid
cathode due to their improved performance and safety. The Company increased its
sales of the high rate lithium-manganese dioxide batteries from $2.3 million in
1995 to $3.1 million in 1996 and expected a similar increase in 1997 prior to a
fire in December 1996 that severely damaged its UK manufacturing facility and
caused the temporary interruption of the production of these batteries. Repairs
of the facility are near completion and production facilities, capable of
producing more than 2,000 cells per shift (one million per year), are expected
to be completed in March 1998. The Company believes that its high rate lithium-
manganese dioxide batteries offer a combination of performance, safety and
environmental benefits which will enable it to effectively penetrate this
market.

SEA WATER BATTERIES. The Company produces a variety of sea water batteries
based on magnesium-silver chloride technology. Sea water batteries are custom
designed and manufactured to end user specifications. The batteries are
activated when placed in salt water, which acts as the electrolyte allowing
current to flow. The Company manufactures sea water batteries at the Abingdon,
England facility and markets them to naval and other specialty OEMs. However,
due to the fire which damaged this manufacturing facility, the Company has
temporarily interrupted its production of sea water batteries since December
1996 and has only recently resumed production of sea water batteries.

BA-5372 BATTERY. The Company's BA-5372 battery is a cylindrical 6-volt
lithium-manganese dioxide battery which is used for memory back-up in
specialized mobile communication equipment. The Company's BA-5372 battery offers
a combination of performance features suitable for military applications
including high energy density, light weight, long shelf life and ability to
operate in a wide temperature range.

The Company was awarded a $1.5 million contract by the U.S. Department of
Defense to produce the BA-5372 lithium battery in 1995. Pursuant to the
production contract, the U.S. Government exercised options to purchase
additional BA-5372 batteries aggregating $2.5 million. The Company has completed
production under this contract in December 1997.

THIN CELL BATTERY. The Company has developed a line of lithium-manganese
dioxide primary batteries which the Company calls its Thin Cell batteries. The
Thin Cell batteries are flat, light weight, flexible and can be manufactured to
conform to the shape of the particular application. The Company is currently
offering three configurations of the Thin Cell battery which range in capacity
from 120 milliampere-hours to 1,000 milliampere-hours.

The Company is currently marketing these batteries to OEMs for applications
such as identification tags, computer access cards and personal communication
devices. The Company believes that its Thin Cell batteries offer a number of
performance characteristics which makes them attractive to OEMs for

introduction in current and future applications including high energy density,
light weight and flexibility in the shape and size of the battery. The Company
believes that acceptance by OEMs is necessary to create a significant commercial
market for its Thin Cell batteries.

3-VOLT LITHIUM BATTERY. The Company has developed and is producing a 3-volt
lithium-manganese dioxide battery based on the technology and physical
configuration of the 9-volt lithium battery. By configuring the three 3-volt
cells in parallel, rather than in a series as in the 9-volt battery, the Company
is able to produce a 3-volt battery which it believes offers the highest energy
density for a commercially available 3-volt battery. The high energy density
makes it suitable for applications requiring high current pulses, such as radio
transmitters and receivers, and remote utility meter reading systems.

The Company currently sells its 3-volt lithium batteries to Dayton-Granger,
Inc. for emergency beacons for commercial aircraft, Schlumberger for residential
gas meters and Orthologic Corp. for bone growth stimulators. The Company
produces the 3-volt lithium battery on the same automated production equipment
as its 9-volt lithium battery.

SALES AND MARKETING

The Company sells its current products directly to OEMs in the U.S. and
abroad and has contractual arrangements with 11 sales representatives who market
the Company's products on a commission basis in particular areas. The Company
also distributes its products through 22 distributors in the U.S. and 29
distributors internationally that purchase batteries from the Company for
resale. The Company employs a staff of sales and marketing personnel in the
U.S., England and Germany including a vice president of sales, a director of
marketing, a marketing advertising manager, a European sales director, an Asian
sales director, an international sales director, an applications engineer, a
military marketing director, an industrial sales manager for after-market sales,
and a number of sales managers, who are responsible for particular product
lines, such as a smoke detector sales manager and an
audio/visual/security/medical sales manager. These managers are responsible for
direct sales, supervising the sales representatives and distributors, and other
sales and marketing and distribution activities. The Company operates on a
purchase order basis and has a number of long-term sales contracts with
customers.

The Company has initially targeted sales of its advanced rechargeable
batteries to manufacturers of portable consumer electronics products. The
Company employs a sales manager and intends to employ two additional marketing
personnel to concentrate on marketing its advanced rechargeable batteries to the
OEM market. The Company also intends to enter into contractual arrangements with
distributors in the U.S. and abroad to purchase rechargeable batteries from the
Company for resale to the after-market using distributor channels established
with the Company's primary batteries.

The Company plans to expand its marketing activities as part of its
strategic plan to increase sales of its rechargeable batteries to manufacturers
of cellular telephones, notebook computers and new electronic portable devices.

The Company has targeted sales of its primary batteries to manufacturers of
security and safety equipment, medical devices and specialty instruments. The
Company's primary strategy is to develop marketing alliances with OEMs that
utilize its batteries in their products, commit to cooperative research and
development or marketing programs and recommend the Company's products for
replacement use in their products. The Company is addressing these markets
through direct contact by its sales and technical personnel, use of sales
representatives and stocking distributors, manufacturing under private label and
promotional activities. The Company's warranty on its products is limited to
replacement of the product. The Company seeks to capture a significant market
share for its products within its initially targeted OEM markets, which the
Company believes, if successful, will result in increased product awareness and
sales at the end-user or consumer level. The Company is also selling the 9-volt
battery to the consumer market through limited retail distribution. Ultralife UK
targets the industrial markets through direct sales and the efforts of its
distributors.

In fiscal 1997, one customer, the U.S. Army, generated revenues of
approximately $2.4 million which amounted to in excess of 15% of total revenues
of the Company. The U.S. Army purchased BA-5372 batteries pursuant to a purchase
order and follow-on purchase options. The Company completed all production and
delivery pursuant to the purchase order and the exercised purchase options.
There are no other purchase orders outstanding with this customer. In fiscal
1996, one customer accounted for $1.9 million in revenues, or approximately 13%
of total revenues. The Company believes that sales of its 9-volt batteries for
smoke alarms typically increase in October because October is "Fire Prevention
Month" and at the end of its third quarter as consumers tend to replace their
batteries at the end of winter. The Company has not marketed its advanced
rechargeable batteries for a sufficient period to determine whether these OEM or
consumer sales are seasonal.

The Company's sales are executed primarily through purchase orders with
scheduled deliveries on a weekly or monthly basis. At the end of the fiscal year
ended June 30, 1997, the backlog was not material.

PATENTS, TRADE SECRETS AND TRADEMARKS

The Company relies on licenses of technology as well as its unpatented
proprietary information, know-how and trade secrets to maintain and develop its
commercial position. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not either develop
independently the same or similar information or obtain access to the Company's
proprietary information. In addition, there can be no assurance that the Company
would prevail if any challenges to intellectual property rights are asserted by
the Company against third parties or that third parties will not successfully
assert infringement claims against the Company in the future. The Company
believes, however, that its success is less dependent on the legal protection
that its patents and other proprietary rights may or will afford than on the
knowledge, ability, experience and technological expertise of its employees.

The Company holds patents covering 16 inventions in the U.S. and foreign
countries, and four applications pending including a number of patents acquired
with the purchase of Dowty, and has several patent applications pending. The
Company also pursues foreign patent protection in certain countries. The
Company's patents protect technology which makes automated production more
cost-effective and protect important competitive features of the Company's
products. However, the Company does not consider its business to be dependent on
patent protection.

The Company's research and development in support of its advanced
rechargeable battery technology and products are currently based, in part, on
non-exclusive technology transfer agreements. The Company made an initial
payment for such technology and is required to make royalty and other payments
for products which incorporate the licensed technology. The license continues
for the respective unexpired terms of the patent licenses, and continues in
perpetuity with respect to other licensed technical information.

All of Company's employees in the U.S. and all the Company's employees
involved with the Company's technology in England are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by the Company. These agreements also
contain certain noncompetition and nonsolicitation provisions effective during
the employment term and for a period of one year thereafter. There can be no
assurance that these agreements will be enforceable by the Company.

Ultralife-Registered Trademark- is a registered trademark of the Company.
The Company has recently settled an opposition in the Trademark Trial and Appeal
Board brought by a third party in which the third party claims to produce,
distribute and sell vehicle batteries, power supplies and related accessories,
products and services using the mark Ultralife. Under the settlement in
principle, the Company paid $17,500 to the third party. The papers dismissing
the opposition were filed with the U.S. Trademark Office and all rights under
the mark were assigned to the Company.

MANUFACTURING AND RAW MATERIALS

The Company manufactures its products from raw materials and component parts
that it purchases. The Company has obtained ISO 9001 certification for its
lithium battery manufacturing operations in both Newark, New York and Abingdon,
England. The Company believes that its Newark manufacturing facility is one of
the most automated and efficient lithium battery production facilities currently
operating. Based on the equipment currently at the Newark facility, the Company
has the capability to produce approximately nine million 9-volt batteries per
year.

The Company's production line of rechargeable batteries consists of an
automated coating machine and a manual assembly and packaging line. In December
1997 a custom-made automated assembly machine was delivered which has been
installed and is being tested. In February 1998, a custom-made automated
packaging and sealing machine was delivered which has been installed and is
being tested. Pursuant to the Company's agreement with the manufacturer of this
production line, the manufacturer is prohibited from manufacturing another
production line that replicates 20% or more of the components comprising the
production line delivered to the Company. The Company intends to ramp up
production of its advanced rechargeable batteries until June 1998 when it
believes its production line will become fully operational. The Company intends
to further expand its production capacity by installing additional automated
equipment at its Newark, New York facility and adding automated assembly
equipment at its Abingdon, England facility and by establishing a third
production facility which is likely to be located in Asia. See "Risk Factors --
Advanced Rechargeable Batteries: Manufacturing; Limited Experience; Factors
Related to Manufacturing Expansion."

A cellular telephone typically requires a battery that has two watt-hours of
energy and a notebook computer typically requires a rechargeable battery which
has 20 watt-hours of energy. The Company's current monthly production capacity
of advanced rechargeable batteries is 1,000 watt-hours per shift. The Company
anticipates that after equipment has been installed and is fully operational,
its monthly production capacity will increase to 13,500 watt-hours per shift,
which the Company expects to occur in June 1998. After additional automated
equipment is installed at its Newark, New York facility, the Company anticipates
that its monthly production capacity will increase to 46,000 watt-hours per
shift and, after additional automated equipment is installed in Abingdon,
England and a third production facility is established, the Company expects that
its monthly production capacity of advanced rechargeable batteries will increase
to 136,000 watt-hours per shift. The Company expects that production yields will
amount to approximately 50% of production capacity increasing over 18 to 24
months as the Company refines its automated manufacturing process. See "Risk
Factors -- Advanced Rechargeable Batteries: Manufacturing; Limited Experience;
Factors Related to Manufacturing Expansion."

The Company believes that increasing its production capacity is critical to
its success since OEMs in the portable consumer electronics market typically
require rechargeable batteries in high volume within short time frames. In
addition, the Company believes that by increasing production capacity it will
gain market share, establish its rechargeable battery as the leading technology
in its industry and provide the Company with more flexibility to price its
products competitively. See "Risk Factors -- Advanced Rechargeable Batteries:
Manufacturing; Limited Experience; Factors Related to Manufacturing Expansion."

The manufacturing facility in Abingdon, England is currently being repaired
following a fire in December 1996. When completed , the plant will be capable of
producing an average of one million high rate lithium batteries per year. The
facility also has research and development laboratories as well as areas for the
manufacture of sea water batteries and the packaging of multi-cell battery
packs. See "Risk Factors --Interruptions in Operations of Ultralife UK."

The Company utilizes lithium foil as well as other metals and chemicals to
manufacture its batteries. Although the Company knows of only three suppliers
that extrude lithium into foil and provide such foil in the form required by the
Company, it does not anticipate any shortage of lithium foil or any difficulty
in obtaining the quantities it requires. Certain materials used in the Company's
products are available only

from a single source or a limited number of sources. Additionally, the Company
may elect to develop relationships with a single or limited number of sources
for materials that are otherwise generally available. Although the Company
believes that alternative sources are available to supply materials that could
replace materials it uses and that, if necessary, the Company would be able to
redesign its products to make use of an alternative, any interruption in its
supply from any supplier that serves currently as the Company's sole source
could delay product shipments and adversely affect the Company's financial
performance and relationships with its customers. Although the Company has
experienced interruptions of product deliveries by sole source suppliers, none
of such interruptions has had a material effect on the Company. All other raw
materials utilized by the Company are readily available from many sources.

RESEARCH AND DEVELOPMENT

The Company conducts its research and development in both Newark, New York,
and Abingdon, England. The Company is directing its research and development
efforts toward design optimization of rechargeable batteries, Thin Cells and
3-volt batteries. Each of those batteries has a broad range of potential
applications in consumer, industrial and military markets including cellular
telephones, portable computers and cameras. No assurance can be given that such
efforts will be successful or that the products which result will be marketable.

During the years ended June 30, 1995, 1996, and 1997, the Company expended
approximately $1,542,000, $2,671,000, and $3,413,000, respectively, on research
and development. The Company currently expects that research and development
expenditures will continue at a high level as it continues to advance its
technology and develop new products. The Company will seek to fund part of its
research and development effort on a continuing basis from both government and
non-government sources.

The U.S. Government sponsors research and development programs designed to
improve the performance and safety of existing battery systems and to develop
new battery systems. The Company has successfully completed the initial and
second phase of a government-sponsored program to develop new configurations of
the Company's BA 5590 thin cell primary battery. The Company was also awarded an
additional cost sharing SBIR Phase III contract for the development of the BA
5590 thin cell primary battery. The contract provides that these batteries will
be developed and produced in small quantities. The BA 5590 is the most widely
used battery power source for the U.S. Army and NATO communications equipments.

BATTERY SAFETY; REGULATORY MATTERS; ENVIRONMENTAL CONSIDERATIONS

Certain of the materials utilized in the Company's batteries may pose safety
problems if improperly used. The Company has designed its batteries to minimize
safety hazards both in manufacturing and use. The Company's rechargeable cells
have passed each of the following safety tests: UL 1950, IEC 950, CSA 950 and
the Japan Storage Batteries Association Guideline for Safety Evaluation of
Lithium Cells. However, the Company's primary battery products incorporate
lithium metal, which reacts with water and may cause fires if not handled
properly. Fires occurred in August 1991, and August 1997, at the Company's
Newark, New York, facility. In July 1994, September 1995, and December 1996,
fires also occurred at the Company's Abingdon, England, facility. Based upon
information the Company received from the police, the December 1996 fire has
been attributed to arson. However, the Company is not aware of any convictions.
With the exception of the December 1996 fire, each of these fires temporarily
interrupted certain manufacturing operations in a specific area of the facility.
Since the December 1996 fire, the Company has been receiving insurance proceeds
compensating the Company for loss of its plant and machinery, leasehold
improvements, inventory and business interruption. The Company's insurance
policy covers the Company for losses associated with business interruption until
May 1998. The December 1996 fire caused an interruption in all manufacturing
operations of the Abingdon, England facility. The Company believes that it has
adequate fire insurance, including business interruption insurance, to protect
against fire hazards in its facilities.

Since lithium metal reacts with water and water vapor, certain of the
Company's manufacturing processes must be performed in a controlled environment
with low relative humidity. Each of the Company's facilities contains dry rooms
as well as specialized air drying equipment.

The Company's 9-volt battery is designed to conform to the dimensional and
electrical standards of the American National Standards Institute and the 9-volt
battery, 3-volt battery are recognized under the Underwriters Laboratories, Inc.
Component Recognition Program.

The transportation of batteries containing lithium metal is regulated by the
International Air Transportation Association ("IATA") and, in the U.S., by the
Department of Transportation, as well as by certain foreign regulatory agencies
that consider lithium metal a hazardous material. The Company currently ships
its products pursuant to IATA regulations and ships the 9-volt battery in
accordance with Department of Transportation regulations.

National, state and local regulations impose various environmental controls
on the storage, use and disposal of lithium batteries and of certain chemicals
used in the manufacture of lithium batteries. Although the Company believes that
its operations are in substantial compliance with current environmental
regulations, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on the Company or otherwise
subject it to future liabilities. Moreover, state and local governments may
enact additional restrictions relating to the disposal of lithium batteries used
by customers of the Company which could adversely affect the demand for the
Company's products. There can be no assurance that additional or modified
regulations relating to the storage, use and disposal of chemicals used to
manufacture batteries or restricting disposal of batteries will not be imposed.

In connection with the Company's purchase/lease of its Newark, New York
facility, a consulting firm performed a Phase I and II Environmental Site
Assessment which revealed the existence of contaminated soil around one of the
Company's buildings. The Company has retained an engineering firm which
estimated that the cost of remediation should be in the range of $230,000,
however, there can be no assurance that this will be the case. In February 1998,
the Company entered into an agreement with a third party which provides that the
Company and the third party will retain an environmental consulting firm to
conduct a supplemental Phase II investigation to verify the existence of the
contaminants and further delineate the nature of the environmental concern. The
third party agreed to reimburse the Company for fifty percent of the cost
associated with remediating the environmental concern. There can be no assurance
that the Company will not face claims resulting in substantial liability which
would have a material adverse effect on the Company's business, financial
condition and results of operations in the period in which such claims are
resolved. See "Risk Factors -- Safety Risks; Demands of Environmental and other
Regulatory Compliance."

COMPETITION

Competition in the battery industry is, and is expected to remain, intense.
The competition ranges from development stage companies to major domestic and
international companies, many of which have financial, technical, marketing,
sales, manufacturing, distribution and other resources significantly greater
than those of the Company. The Company competes against companies producing
lithium batteries as well as other primary and rechargeable battery
technologies. The Company competes on the basis of design flexibility,
performance and reliability. There can be no assurance that the Company's
technology and products will not be rendered obsolete by developments in
competing technologies which are currently under development or which may be
developed in the future or that the Company's competitors will not market
competing products which obtain market acceptance more rapidly than those of the
Company.

In the rechargeable battery market, the Company is currently the only
producer of a solid-polymer rechargeable battery which is commercially
available. The principal competitive technologies include nickel-cadmium,
nickel-metal hydride and lithium-ion liquid electrolyte technology. Major
manufacturers of nickel-cadmiun and nickel-metal hydride batteries include
Eveready, Sanyo Electric Co., Ltd., Sony Corp., Toshiba Corp. and Matsushita
Electric Industrial Co., Ltd. and Duracell International, Inc.

Manufacturers of lithium-ion liquid electrolyte batteries, primarily based on
lithium-ion cobalt oxide and lithium-ion nickel oxide technologies, include
Saft-Soc des ACC, Sony Corp., Toshiba Corp., Matsushita Electric Industrial Co.,
Ltd. and Sanyo Electric Co., Ltd., among others.

Lithium-ion liquid electrolyte batteries offer significant advantages over
nickel-cadmium and nickel-metal hydride batteries currently in use and the
Company expects that technology to be the most significant competition for its
advanced rechargeable battery. Sony Corp. and other manufacturers currently
offer lithium-ion liquid electrolyte batteries to consumers and to OEMs in
substantial volumes, and have publicly announced that they are substantially
increasing manufacturing capacity. As OEMs frequently require substantial lead
times to design new batteries for their products, the availability of
lithium-ion liquid electrolyte batteries could materially adversely affect the
demand for, and market acceptance of, the Company's advanced rechargeable
battery.

In addition to the currently marketed technologies, a number of companies
are currently undertaking research and development of rechargeable lithium
batteries, including lithium-ion solid-polymer batteries. Valence Technology,
Inc., Lithium Technology Corporation, Battery Engineering, Inc. and Yuasa-Exide,
Inc. have developed prototype solid-polymer batteries and are constructing
commercial-scale manufacturing facilities. The Company believes that other
research and development activities on solid-polymer batteries are underway at
other companies. No assurance can be given that such companies will not develop
batteries similar or superior to the Company's lithium-ion solid-polymer
rechargeable batteries.

In the 9-volt battery market, the principal competitive technologies
currently encountered are alkaline and carbon-zinc. Duracell International,
Inc., Eveready and Rayovac Corporation, among others, currently manufacture
alkaline and carbon-zinc batteries. None of these manufacturers, however,
produce a standard 9-volt battery warranted to last 10 years.

In the high rate lithium battery market, the principal competitive
technologies are lithium sulfur dioxide and lithium thionyl-chloride batteries.
Saft-Soc des ACC, BluStar Battery Systems Corporation, Frivo Silbercraft and
Power Conversion Products, Inc., among others, currently manufacture these high
rate type lithium batteries. The Company believes that its high rate
lithium-manganese dioxide technology in its high rate batteries offers greater
reliability over longer periods without the negative environmental effects of
sulfur dioxide and thionyl-chloride. The Company also manufactures sea water
batteries and believes that its competitors for those products are Saft-Soc des
ACC and Eagle-Picher Industries, Inc.

The Thin Cell batteries are expected to compete on the basis of their
performance characteristics. The Company will compete with major battery
producers, such as Gould Electronics, Inc. and Yuasa-Exide, Inc., which use
competing technologies such as low rate lithium thin cell batteries.

The 3-volt battery's primary competitors include Maxell Corp. of America,
Tadiran Ltd., Saft-Soc des ACC and Power Conversion Products, Inc., all of which
use lithium thionyl-chloride technology to produce 3-volt batteries.

Although other entities may attempt to take advantage of the growth of the
lithium battery market, the lithium battery industry has certain technological
and economic barriers to entry. The development of technology, equipment and
manufacturing techniques and the operation of a facility for the automated
production of lithium batteries require large capital expenditures, which may
deter new entrants from commencing production. Through its experience in battery
manufacturing, the Company has also developed expertise which it believes would
be difficult to reproduce without substantial time and expense.

EMPLOYEES

As of December 31, 1997, the Company employed 441 persons: 75 in research
and development, 324 in production and 42 in sales, administration and
management. Of the total, 384 are employed in the U.S. and 57 in England. None
of the Company's employees are represented by a labor union. The Company
considers its employee relations to be satisfactory.

FACILITIES

The Company leases approximately 110,000 square feet in a facility located
in Newark, New York. The Company leases approximately 30,000 square feet in a
facility based in Abingdon, England. At both locations, the Company maintains
administrative offices, manufacturing and production facilities, a research and
development laboratory, an engineering department and a machine shop. The
Company's corporate headquarters are located in the Newark facility. The Company
also maintains a sales office in Montvale, New Jersey. The Company believes that
its facilities are adequate and suitable for its current manufacturing needs.
The Company has entered into a lease/purchase with the local county authority
with respect to its 110,000 square foot factory in Newark, New York which
provides more favorable terms and would reduce the expense for the lease of the
facility. The lease also includes an adjacent building to the Company's current
facility estimated to encompass approximately 140,000 square feet and
approximately 65 acres of property. Pursuant to the lease, the Company has
delivered a down payment in the amount of $400,000 and is obligated to pay the
local governmental authority annual installments in the amount of $50,000 until
December 2001 decreasing to approximately $28,000 for the period commencing
December 2001 and ending December 2007. Upon expiration of the lease in 2007,
the Company is entitled to purchase its facility for the purchase price of $1.

In connection with the acquisition by the Company's subsidiary, Ultralife
UK, of certain assets and liabilities from Dowty in June 1994, it was provided
that Dowty would cause the lease for Dowty's UK facility, located in Abingdon,
England, to be assigned to the Company's subsidiary, Ultralife UK. This lease
(the "UK Lease") was originally entered into in May 1979 by Pension Funds
Securities Limited (the "Landlord") with a tenant which assigned the lease to an
affiliate of Dowty.

Initially, the Landlord refused consent to assign the UK Lease to Ultralife
UK and release Dowty's affiliate from liability. The building has recently been
sold to a new landlord. The new landlord has agreed, subject to a surety from
the Company, that he will allow an assignment of the UK Lease. The Company has
agreed to provide the surety. The term of the lease continues until May 2004. It
currently has an annual rent of $200,000 and is subject to review every five
years based on current real estate market conditions.

LEGAL PROCEEDINGS

In December 1996, Aerospace Energy System, Inc. ("Aerospace") commenced an
action in the Southern District of New York against the Company alleging that it
is owed commissions in excess of $50,000 for sales made on behalf of the Company
and $100,000 for the Company's alleged breach of its duty of good faith and fair
dealings. The Company believes that Aerospace is not the party that made such
sales for which it claims it is owed commissions. Although Aerospace has been
deposed it has not articulated any grounds for its claim of $100,000 for the
Company's alleged breach of its duty of good faith and fair dealing.

In May 1997, William Boyd, the principal of Aerospace, and Leland J. Coleman
commenced an action against the Company and Loeb Partners Corporation ("Loeb"),
an investment firm, in the Southern District Court of New York alleging that
they had entered into a contract with Loeb to arrange for the acquisition of
Dowty and that the Company tortiously interfered with their contract and
business opportunity. The Company believes the claim against it, for $25
million, is without merit.

In September 1997, a legal action was commenced by Eveready in the Northern
District Court of Ohio, Eastern Division, alleging infringement of two patents,
U.S. Patent No. 4,246,253 and U.S. Patent No. 4,312,930. The first of these
patents has six months before it expires and the second approximately ten
months. The Company cross-claimed against the corporation that licensed the
technology at issue to the Company. The license concerns certain technology
incorporated in the Company's rechargeable batteries. Damages, if any, are
believed to be minimal and the possibility of an injunction, in the opinion of
Lieberman & Nowak, LLP, the Company's patent counsel, is remote given the
substantial question of patent validity, infringement and double patenting.

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The Company's executive officers and directors are as follows:

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

Bruce Jagid.......................................... 57 Chairman and Chief Executive Officer

Martin G. Rosansky................................... 59 Vice Chairman

Joseph N. Barrella................................... 51 President, Chief Technology Officer and Director

Uri Soudak........................................... 53 Chief Operating Officer

Frederick F. Drulard................................. 57 Vice President of Finance, Chief Financial Officer

Stanley Lewin........................................ 65 Vice President of Technology

James Sullivan....................................... 60 Vice President of Sales

John R. Welsh........................................ 61 Vice President of European Operations

Daniel K. Schoenly................................... 61 Vice President of Manufacturing

Joseph C. Abeles..................................... 83 Treasurer and Director

Arthur M. Lieberman.................................. 63 Director

Richard A. Hansen.................................... 57 Director

Carl H. Rosner....................................... 69 Director

BRUCE JAGID, a founder of the Company, has been a director and the Company's
Chairman since March 1991 and its Chief Executive Officer since January 1992.
Mr. Jagid has over 25 years experience in the technical and business aspects of
the energy conversion field. Together with Mr. Rosansky, Mr. Jagid founded Power
Conversion, Inc. ("PCI") in 1970, where he was the President until January 1989.
PCI was sold to Hawker Siddely PLC in 1986. Mr. Jagid is a director of several
private companies and THQ, Inc. Mr. Jagid holds numerous patents in the area of
battery technology and has authored several publications on the subject.

MARTIN G. ROSANSKY, a founder of the Company, has been a director since
March 1991 and the Company's Vice Chairman since January 1992. Mr. Rosansky, a
co-founder of PCI in 1970, has 30 years experience in the engineering, design
and production of battery and fuel-cell systems. He was Chairman of the Board,
Secretary and Treasurer of PCI from 1970 to July 1986, and was Vice President
until January 1989 when he left PCI to pursue private investment activities. Mr.
Rosansky is a director of several private companies. Mr. Rosansky holds numerous
patents and has authored several publications in the field of battery
technology.

JOSEPH N. BARRELLA, a founder of the Company, has been a director and the
Company's President since March 1991 and the Company's Chief Operating Officer
from October 1992 through November 1996, and its Chief Technology Officer since
November 1996. From May 1984 to January 1991, Mr. Barrella spent seven years as
Director of Engineering at PCI. Mr. Barrella has been involved in the
development and manufacture of lithium batteries for more than 20 years. He
holds a number of patents relating to lithium battery designs and has authored
several publications relating to battery technology.

URI SOUDAK joined the Company in November 1996 as its Chief Operating
Officer. From January 1991 to November 1996, Mr. Soudak worked for Israel
Aircraft Industries, most recently serving as its Corporate Director of Research
and Development and Business Development. From 1988 until 1991 Mr. Soudak was
President of Microelectronics Company, an Israeli maker of electronics
equipment. From 1985 through 1987 Mr. Soudak was President of Elco Robotics
Company, an Israeli maker of vision guidance systems for robots.

FREDERICK F. DRULARD joined the Company in July 1996 as Director of
Corporate Planning and Administration. He became Vice President-Finance and
Chief Financial Officer in October 1997. From January 1994 through June 1996 he
was an independent consultant and a Senior Associate for Greenbush & Associates,
a financial consulting company. From 1986 to 1994 he worked for IGC, most
recently as Vice-President Corporate Planning and Administration.

STANLEY LEWIN has been Vice President of Technology of the Company since
October 1991. Mr. Lewin has over 13 years experience in the lithium battery
business. Prior to joining the Company, Mr. Lewin served in various engineering
and managerial positions at PCI from 1977 to September 1991. At PCI he was
responsible for overall plant operations including manufacturing and production.
While at PCI, Mr. Lewin was directly responsible for the establishment of
battery manufacturing facilities in New Jersey, Puerto Rico and the People's
Republic of China.

JAMES SULLIVAN has been the Company's Vice President of Sales, since July
1996. From December 1995 through July 1996 he was President of C.C.
Communications, Inc., an advertising agency in New Jersey, in charge of market
development for Holt Lloyd International, a car care products company in the UK.
From November 1976 through November 1994, Mr. Sullivan was Vice President in
charge of sales with additional responsibilities for engineering and product
development, for PCI, a manufacturer of lithium batteries.

JOHN R. WELSH has been the Company's Vice President of European Operations
and Managing Director of Ultralife Batteries (UK) Ltd. since November 1995. Mr.
Welsh has over 20 years experience of managing companies in the UK, USA and
Germany. From August 1988 until January 1995 he was Marketing and then
Divisional Manager for Hoppecke Batteries in Germany which developed and
manufactured high rate lithium-manganese dioxide batteries, and from February
1995 to October 1995 he was Marketing Manager for industrial nickel-cadmium
batteries at FRIWO Silberkraft, also in Germany. Prior to joining Hoppecke Mr.
Welsh worked for 15 years for Semikron, a German manufacturer of power semi
conductors. He was Managing Director of Semikron UK from February 1972 until
December 1980 and President of Semikron Inc. Hudson, NH until July 1987.

DANIEL K. SCHOENLY has been the Company's Vice President of Manufacturing
since March 1997. Before then he held the position of Vice President of
Manufacturing Primary Batteries since May 1994. From January 1990 to May 1994,
Mr. Schoenly was the Vice President of Technical Materials, Inc., a subsidiary
of Brush Wellman Inc. Prior thereto, from 1982 to January 1990, Mr. Schoenly
held various positions at Brush Wellman Inc. Both Brush Wellman Inc. and
Technical Materials, Inc. manufacture engineered materials.

JOSEPH C. ABELES, a founder of the Company, has been a director and
Treasurer since March 1991. Mr. Abeles, formerly a director of PCI, is a private
investor and currently serves as a director of a number of companies, including
IGC and Bluegreen Corporation (formerly Patten Corporation). In 1951 he founded
Kawecki Chemical Co. and served as Chairman and CEO of Kawecki Berylco
Industries from 1969 to 1978.

ARTHUR M. LIEBERMAN has been a director since March 1991. Mr. Lieberman is a
founder, and since 1981 has been the senior partner of Lieberman & Nowak, LLP, a
legal firm specializing in intellectual property law which for many years has
represented clients in the battery industry and related fields. Lieberman &
Nowak, LLP has represented the Company in connection with certain intellectual
property matters.

RICHARD A. HANSEN has been a director since July 1993. Mr. Hansen has been
President and Chief Executive Officer of Pennsylvania Merchant Group Ltd., one
of the Underwriters, since 1987 and is a director of Computone Corporation.

CARL H. ROSNER, a director of the Company since January 1992, is the
Chairman of the Board and Chief Executive Officer of IGC. Mr. Rosner has been
Chairman of IGC since its formation and Chief Executive Officer since 1984.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 28, 1998 and after giving effect to
this offering by (i) each person or entity known by the Company to beneficially
own more than 5% of the outstanding shares of Common Stock, (ii) each director
and named executive officers of the Company, and (iii) all directors and
executive officers of the Company and officers of the Company as a group.

PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
- -------------------------------------------------------------------------- ----------------- ----------- -----------

Intermagnetics General Corporation........................................ 1,005,086 12.55% 9.56%
450 Old Niskayuna Rd.
Latham, NY 12210-0461 (1)
Mellon Bank Corporation................................................... 797,100 9.98% 7.59%
One Mellon Bank Center
Pittsburgh, PA 15258 (2)................................................
State of Wisconsin Investment Board....................................... 469,000 5.87% 4.47%
P.O. Box 7842
Madison, WI 53707 (3)...................................................
Joseph C. Abeles (4)(5)................................................... 268,000 3.34% 2.55%
Joseph N. Barrella (4)(6)................................................. 317,500 3.91% 2.99%
Bruce Jagid (4)(7)........................................................ 613,900 7.32% 5.64%
Richard A. Hansen (4)(8).................................................. 34,000 * *
Arthur M. Lieberman (4)(9)................................................ 130,000 1.63% 1.24%
Martin G. Rosansky (4)(10)................................................ 171,000 2.12% 1.61%
Stanley Lewin (4)(11)..................................................... 46,000 * *
Carl H. Rosner............................................................ 1,005,086 12.55% 9.57%
c/o Intermagnetics General Corporation
450 Old Niskayuna Rd.
Latham, NY 12210-0461(1)(12)
All directors and officers as a group
(13 persons) (13)....................................................... 2,628,086 29.90% 23.29%

- ------------------------

* Represents share ownership of less than one (1%) percent.

(1) Includes 833 shares and options to purchase 28,500 shares which may be
exercised within 60 days beneficially owned by Mr. Carl H. Rosner. Mr.
Rosner is the Chairman of the Board and Chief Executive Officer of IGC.
Therefore, IGC may be deemed to share voting and investment power with
respect to the shares and shares issuable upon the exercise of options held
by Mr. Rosner. IGC disclaims beneficial ownership of the shares and shares
issuable upon the exercise of options owned by Mr. Rosner.

(2) The information contained herein with respect to these shares has been
obtained from Schedule 13G, dated January 27, 1998, includes shares held as
trustee or investment advisor for affiliated entities.

(3) The information contained herein with respect to these shares has been
obtained from Schedule 13G, dated January 23, 1998.

(4) The address of this person is c/o Ultralife Batteries, Inc., 1350 Route 88
South, Newark, New York 14513.

(5) Includes 25,500 shares subject to options which may be exercised within 60
days, 12,000 shares owned by Abeles Associates Inc. and 25,000 shares held
by Mr. Abeles' spouse, as to which Mr. Abeles

disclaims beneficial ownership. Excludes 1,003,586 shares beneficially owned
by IGC. Mr. Abeles is a director of IGC and therefore may be deemed to share
voting and investment power with respect to the shares held by IGC. Mr.
Abeles disclaims beneficial ownership of the shares owned by IGC. Mr. Abeles
and the Company have entered into an agreement ("Waiver Agreement") pursuant
to which Mr. Abeles has agreed to not exercise options exercisable to
purchase 16,280 shares of Common Stock, until the Company effects an
increase to its authorized number of shares of Common Stock by no less than
500,000 shares, provided that this offering is consummated on or before June
30, 1998. In consideration, the Company has agreed to use its best efforts
to convene an annual or special meeting of stockholders as soon as
practicable in order for the stockholders to vote on a proposal to approve
an increase in the Company's authorized shares of Common Stock. In the event
that (i) an increase to its authorized shares of Common Stock is not
approved at the Company's next annual or special meeting of stockholders or
(ii) the Company is party to a merger, consolidation, sale of all or
substantially all of the Company's assets or a transaction in which
outstanding Common Stock shall be changed into or exchanged for different
securities of the Company (other than by combination or consolidation of its
outstanding shares of Common Stock) or common stock or other securities of
another corporation or interests in a noncorporate entity or other property
("Merger Event"), then the Company has agreed to compensate Mr. Abeles in an
amount equal to the market value of shares of Common Stock issuable upon
exercise of the vested portion of such options, as determined by the average
of the closing price ten trading days prior to the annual or special meeting
of stockholders or the closing date of the Merger Event, as the case may be,
less the aggregate exercise price of the vested options.

(6) Includes 128,500 shares subject to options which may be exercised within 60
days. Mr. Barrella has entered into a similar Waiver Agreement with respect
to options exerciseable to purchase 41,280 shares of Common Stock.

(7) Includes 403,500 shares subject to options which may be exercised within 60
days. Mr. Jagid has entered into a similar Waiver Agreement with respect to
options exerciseable to purchase 126,280 shares of Common Stock. Also
includes 2,000 shares held in trust for Mr. Jagid's children.

(8) Includes 27,000 shares subject to options which may be exercised within 60
days and includes 2,000 shares owned by minor children. Mr. Hansen has
entered into a similar Waiver Agreement with respect to options exerciseable
to purchase 16,280 shares of Common Stock. Does not include shares held by
Pennsylvania Merchant Group as a market-maker. Mr. Hansen is President and
Chief Executive Officer of Pennsylvania Merchant Group and therefore may be
deemed to share voting and investment power.

(9) Includes 48,500 shares subject to options which may be exercised within 60
days and 51,500 shares held by the Arthur M. Lieberman P.C. profit sharing
plan. Mr. Lieberman has entered into a similar Waiver Agreement with respect
to options exerciseable to purchase 16,280 shares of Common Stock.

(10) Includes 78,500 shares subject to options which may be exercised within 60
days. Mr. Rosansky has entered into a similar Waiver Agreement with respect
to options exercisable to purchase 41,280 shares of Common Stock.

(11) Includes 35,000 shares subject to options which may be exercised within 60
days. Mr. Lewin has entered into a similar Waiver Agreement with respect to
options exerciseable to purchase 25,000 shares of Common Stock.

(12) Includes 28,500 shares subject to options which may be exercised within 60
days and 975,753 shares owned by IGC. Mr. Rosner is the Chairman of the
Board and Chief Executive Officer of IGC and therefore may be deemed to
share voting and investment power with respect to the shares held by IGC.
Mr. Rosner disclaims beneficial ownership of the shares owned by IGC. Mr.
Rosner has entered into a similar Waiver Agreement with respect to options
exerciseable to purchase 16,280 shares of Common Stock.

(13) Includes 811,000 shares subject to options which may be exercised within 60
days. Certain directors and officers have entered into a similar Waiver
Agreement with respect to options exerciseable to purchase an aggregate of
494,956 shares of Common Stock.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 12,000,000 shares of
Common Stock, par value $0.10 per share, and 1,000,000 shares of Preferred
Stock, $0.10 par value per share.

As of January 31, 1998, there were 7,979,136 shares of Common Stock
outstanding and 1,623,650 shares of Common Stock issuable upon the exercise of
outstanding options and warrants. As of January 31, 1998, no shares of Preferred
Stock had been issued by the Company.

COMMON STOCK

Holders of shares of the Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders and are not entitled to
cumulate votes for the election of directors. Subject to preferences that may be
applicable to any outstanding Preferred Stock, holders of shares of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of shares
of Common Stock are entitled to share ratably, share for share, in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Preferred Stock, if any, then outstanding. Shares of Common Stock have no
preemptive, conversion or other subscription rights and there are no redemption
or sinking fund provisions applicable to the Common Stock.

PREFERRED STOCK

The Restated Certificate of Incorporation provides that the Company may
issue up to 1,000,000 shares of Preferred Stock. The Board of Directors has the
authority to issue Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including the dividend, conversion,
voting, redemption (including sinking fund provisions), and other rights,
liquidation preferences, and the number of shares constituting any series and
the designations of such series, without any further vote or action by the
stockholders of the Company. Because the terms of the Preferred Stock may be
fixed by the Board of Directors of the Company without stockholder action, the
Preferred Stock could be issued quickly with terms calculated to defeat a
proposed take-over of the Company, or to make the removal of management of the
Company more difficult. Under certain circumstances this could have the effect
of decreasing the market price of the Common Stock. Management of the Company is
not aware of any such threatened transaction to obtain control of the Company.

SECTION 203 OF THE DELAWARE CORPORATION LAW

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
combination" with certain Delaware corporations for 3 years following the date
such person became an interested stockholder unless (i) the corporation has
elected in its certificate of incorporation not to be governed by Section 203
(the Company has not made such an election); (ii) before such person became an
interested stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (iii) upon consummation of the transaction
that resulted in the interested stockholder becoming an interested stockholder,
the interested stockholder owns at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of the corporation and by employee stock
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be voted or tendered in a tender or
exchange offer); or (iv) following the transaction in which such person became
an interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting

of stockholders by the affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder. The restrictions in Section 203 also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of an extraordinary transaction involving the
corporation and a person who had not been an interested stockholder during the
previous 3 years or a person who became an interested stockholder with the
approval of a majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations and other
transactions between a Delaware corporation and an "interested stockholder"
resulting in a financial benefit to the stockholder.

LIMITATION OF LIABILITY

As permitted by the DGCL, the Company's Restated Certificate of
Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, relating to prohibited
dividends or distributions or the repurchase or redemption of stock, or (iv) for
any transaction from which the director derives an improper personal benefit.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the Company must indemnify him against
the expenses that such officer or director actually and reasonably incurred. The
indemnity does not affect the availability of equitable remedies such as an
injunction based upon a director's breach of his or her duty of care. However,
such equitable remedies may not provide effective protection due to factors such
as procedural limitations on obtaining such relief and the timeliness of any
such relief sought. The limitation on monetary liability also does not apply to
liabilities arising under the federal securities laws. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors of the Company pursuant to the foregoing provision, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Notwithstanding the foregoing, the Company has entered into indemnification
agreements with each of its directors and executive officers pursuant to which
the Company has agreed to indemnify its directors and executive officers against
certain liabilities which they may incur in connection with the performance of
their duties. Under the terms of such indemnification agreements, the Company
may, subject and to the extent permitted by law, advance funds for legal
expenses in connection with such indemnification.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock by existing stockholders pursuant to Rule 144
("Rule 144") promulgated under the Securities Act, pursuant to registration
rights granted to certain holders of warrants to purchase the Common Stock, or
pursuant to other registration or exemptions from registration under the
Securities Act, could have an adverse effect on the price of the shares of
Common Stock. The Company has approximately 7,983,286 shares of Common Stock
outstanding (10,858,286 upon consummation of this offering and assuming the
Underwriters' over-allotment option is exercised in full). In addition, as of
March 30, 1998, the Company has reserved for issuance (i) 1,042,350 shares of
Common Stock upon the exercise of options available for grant under the 1992
Plan, (ii) 100,000 shares of Common Stock upon the exercise of options available
for grant under the Company's 1995 Plan, (iii) 375,000 shares of Common Stock
upon the exercise of options granted to the Company's Chairman and Chief
Executive Officer not pursuant to a plan and (iv) 112,500 shares of Common Stock
reserved for issuance upon the exercise of the outstanding Warrants. The Company
has agreed to include 12,500 of the shares underlying the foregoing Warrants in
a future registration statement which the Company will prepare and file with,
and use its best efforts to have declared effective by, the Securities and
Exchange Commission ("Commission") so as to permit the public trading of the
shares underlying the foregoing Warrants.

Of the 7,983,286 shares of Common Stock issued and outstanding 2,012,500
were sold publicly in the Company's initial public offering in December 1992 and
approximately 2,000,000 shares were sold publicly pursuant to the Company's
follow-on public offering in December 1994. Of the remaining shares of Common
Stock, all are freely tradeable without restriction or further registration
under the Securities Act except for approximately 1.8 million shares of Common
Stock which may not be resold except pursuant to an effective registration
statement filed by the Company or an applicable exemption from registration,
including an exemption under Rule 144. The Company, each of its executive
officers and directors and IGC have agreed that, for a period of 90 days after
the date of this Prospectus, they will not offer, sell or otherwise dispose of
any shares of Common Stock without the prior written consent of Lehman Brothers
Inc. No predictions can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sales, will have
on the market prices for the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely effect prevailing market prices for the Common Stock and
could impair the Company's ability to raise capital through the future sales of
its equity securities. See "Principal Stockholders."

UNDERWRITING

Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement (the "Registration Statement") of which this Prospectus
forms a part, the underwriters named below (the "Underwriters"), for whom Lehman
Brothers Inc., A.G. Edwards & Sons, Inc. and Pennsylvania Merchant Group acting
as representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company, and the Company has agreed to sell to each Underwriter, the aggregate
number of shares of Common Stock set forth opposite the name of each such
Underwriter below:

NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------

Lehman Brothers Inc..................................................................................
A.G. Edwards & Sons, Inc.............................................................................
Pennsylvania Merchant Group..........................................................................

Total.............................................................................................. 2,500,000
----------
----------

The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to certain conditions, and that
if any of the foregoing shares of Common Stock are purchased by the Underwriters
pursuant to the Underwriting Agreement, then all the shares of Common Stock
agreed to be purchased by the Underwriters pursuant to the Underwriting
Agreement, must be so purchased.

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock directly to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
selected dealers (who may include the Underwriters) at such public offering
price less a selling concession not in excess of $ per share. The
Underwriters may allow, and the selected dealers may reallow, a concession not
in excess of $ per share to certain brokers and dealers. After this
offering, the offering price and other selling terms may be changed by the
Underwriters.

The Company has granted to the Underwriters an option to purchase up to an
aggregate of 375,000 additional shares of Common Stock, exercisable solely to
cover over-allotments, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of additional shares of Common Stock proportionate to such Underwriter's
initial commitment as indicated in the preceding table and the Company will be
obligated to such over-allotment option, to sell such shares of Common Stock to
the Underwriters.

The Company has agreed that, without the prior consent of Lehman Brothers
Inc., it will not, subject to certain limited exceptions, directly or
indirectly, offer, sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for any such
shares of Common Stock, for a period of 90 days from the date of this
Prospectus. All of the executive officers and directors of the Company and IGC
have agreed pursuant to lockup agreements that, without the prior written
consent of Lehman Brothers Inc., they will not, subject to certain limited
exceptions, directly or indirectly, offer, sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for any such shares for the period ending 90 days after the date of
this Prospectus. See "Shares Eligible for Future Sale."

The Company has agreed to indemnify, under certain circumstances, the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute, under certain circumstances, to payments that
the Underwriters may be required to make in respect thereof.

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with this offering (i.e., they sell more shares than are set forth on
the cover page of this Prospectus), the Representatives may reduce that short
position by purchasing Common Stock in the open market. The Representatives also
may elect to reduce any short position by exercising all or part of the
over-allotment option described herein.

The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of Common Stock, they may reclaim the amount
of the selling concession from the Underwriters and selling group members who
sold those shares as part of this offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such offer is made.

Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover hereof.

The Representatives have informed the Company that they do not intend to
confirm the sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.

Pennsylvania Merchant Group acted as an underwriter in connection with the
Company's initial public offering and subsequent follow-on offering. Richard A.
Hansen, a member of the Board of Directors of the Company, is President and
Chief Executive Officer of Pennsylvania Merchant Group, one of the
Representatives. Every member of the Board of Directors, including Mr. Hansen,
receives $750 per month for their services on the Board and $750 for each
meeting attended. In addition, every member, including Mr. Hansen, receives
options to purchase 1,500 shares of Common Stock under the Company's 1992 Stock
Option Plan at the end of every fiscal quarter. Mr. Hansen has received such
options since September 30, 1993. As of March 30, 1998 Mr. Hansen owns 7,000
shares of Common Stock and holds options exercisable to purchase 27,000 shares
of Common Stock.

LEGAL COUNSEL

The validity of the shares of Common Stock will be passed upon for the
Company by Parker Chapin Flattau & Klimpl, LLP, New York, New York. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Chadbourne & Parke LLP, New York, New York.

EXPERTS

The consolidated financial statements included in this Prospectus and
elsewhere in the Registration Statement, as of and for the years ended June 30,
1996 and 1997 have been audited by Arthur Andersen LLP, independent auditors, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firms as experts in giving said reports.

The consolidated financial statements of the Company and Ultralife UK for
the year ended June 30, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-3 including all amendments thereto (the "Registration Statement") under the
Securities Act with respect to the Common Stock offered by this Prospectus via
the Electronic Data Gathering Analysis and Retrieval system ("EDGAR") and may be
found on the Commission's web site at http://www.sec.gov. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and this
offering, reference is made to the Registration Statement, including the
exhibits filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and
where the contract or other document has been filed as an exhibit to the
Registration Statement, each such statement is qualified in all respects by such
reference to the applicable document filed with the Commission.

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith the Company files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Northeast Regional Office, 7 World Trade
Center 13th Floor, New York, New York 10048, upon payment of the fees prescribed
by the Commission. Copies of all or any part of the Registration Statement
(including exhibits thereto) also may be obtained from the Public Reference
Section of the Commission at the Commission's principal office in Washington,
D.C. at the Commission's prescribed rates. Electronic filings made via EDGAR are
publicly available through the Commission's web site referenced above.

The Company distributes to its stockholders annual reports containing
audited financial statements certified by its certified public accountants and
such other periodic reports as the Company determines to be appropriate or as
may be required by law.

INFORMATION INCORPORATED BY REFERENCE

The following documents filed by the Company with the Securities and
Exchange Commission are incorporated herein by reference:

(a) Annual Report on Form 10-K for the fiscal year ended June 30 1997;

(b) Quarterly Report on Form 10-Q for the three month period ended September
30, 1997 and the Quarterly Report on Form 10-Q for the six month period ended
December 31, 1997; and

(c) All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of this offering.

GLOSSARY OF TECHNICAL TERMS

ANODE The negative electrode in a battery which releases electrons to
an external circuit and accepts ions from the electrolyte.

BATTERY An electrochemical apparatus used to store energy and release
it in the form of electricity.

CATHODE The positive electrode in a battery which accepts electrons
from the external circuit and releases ions into the
electrolyte.

CELL The basic electrochemical unit of a battery, composed of an
anode, a cathode, an electrolyte and, in many cases, a
separator, which is capable of storing and generating
electrical energy.

CYCLE The discharge and subsequent recharge of a rechargeable
battery.

DISCHARGE PROFILE The variation in a battery's voltage as energy is removed over
time.

ELECTRODES The energy storing components of a battery, consisting of
anodes and cathodes.

ELECTROLYTE The ion transport medium between the anode and cathode in a
battery.

ENERGY DENSITY The total electrical energy stored in a battery, expressed as a
function of the battery's volume in watt-hours per liter, or as
a function of weight, in watt-hours per kilogram.

HIGH RATE BATTERY A battery capable of discharging substantially all of its
energy over a relatively short period of time (less than 10
hours).

LOW RATE BATTERY A battery capable of discharging substantially all of its
energy over a relatively long period of time (more than 100
hours).

MEMORY EFFECT The cumulative decline in the total energy capacity of a
rechargeable battery created by recharging a battery that has
not been fully discharged. The memory effect is prevalent in
nickel-cadmium rechargeable batteries.

POWER DENSITY The total electrical energy deliverable by a battery, expressed
as a function of the battery's volume in watts per liter, or as
a function of weight, in watts per kilogram.

SHELF LIFE The time a battery can be stored under specified conditions and
still perform at a specified level.

SOLID-POLYMER ELECTROLYTE An electrolyte based upon a solid-polymer material that
functions both as an ion transporting medium and separator in
thin films.

VOLTAGE The measure of the driving force (electromotive force) which
pushes electrons through an external circuit.

WATT (W) A unit of measurement for the power delivered by a battery.

WATT-HOUR (W/H) A unit of energy.

BATTERY TYPES

ALKALINE A primary battery with an alkaline anode, typically composed of
powdered zinc and a mixture of manganese dioxide and carbon
powder, packed around a carbon rod cathode with a potassium
hydroxide electrolyte.

CARBON-ZINC A primary battery with carbon and zinc electrodes, and an
organic electrolyte; prior to the introduction of alkaline
batteries, the most common form of primary battery.

CHLORIDE-ZINC A heavy duty use primary carbon-zinc cell which the cell
electrolyte is ammonium chloride and chloride zinc electrolyte.
This cell is generally used for heavy intermittent service or
medium rates continuous discharge.

LEAD-ACID BATTERY A popular, low-cost rechargeable battery with high-rate
performance. Typical lead-acid batteries utilize lead dioxide
as the active positive electrode material and metallic lead, in
a high-surface-area porous structure, as the negative active
material. The electrolyte is a sulfuric acid solution.

LITHIUM-ION (LIQUID) A rechargeable battery utilizing lithium compounds within
carbon electrodes. These compounds include lithium-manganese
oxide, lithium-cobalt oxide or lithium-nickel oxide within the
cathode and an organic liquid electrolyte.

LITHIUM-MANGANESE DIOXIDE Primary cell utilizing a lithium anode, a manganese dioxide
cathode and a non-aqueous organic solvent electrolyte
containing lithium salt.

LITHIUM-POLYMER A rechargeable battery with a lithium anode, a composite
cathode which stores lithium ions and a solid-polymer
electrolyte.

LITHIUM-SULFUR DIOXIDE Cells that utilize a lithium anode, a porous carbon cathode and
a sulfur dioxide cathode material. A nonaqueous electrolyte is
comprised of sulfur dioxide and an organic solvent typically
acetonitrile with a dissolved lithium bromide salt.

LITHIUM THIONYL-CHLORIDE Cells that consist of a lithium anode, a carbon cathode and a
nonaqueous electrolyte. Thionyl-chloride is both the
electrolyte solvent and the active cathode material.

MERCURY OXIDE-CELLS A primary cell utilizing an anode made from zinc powder or foil
amalgamated with mercury, a mercuric oxide cathode and an
electrolyte of sodium or potassium hydroxide.

NICKEL-CADMIUM A rechargeable battery with nickel and cadmium electrodes, and
a potassium hydroxide electrolyte.

NICKEL-METAL HYDRIDE A rechargeable battery with a hydrogen-absorbing alloy anode, a
nickel compound cathode and a potassium hydroxide electrolyte.

SILVER-OXIDE A rechargeable cell utilizing silver-oxide as the positive
material and zinc as the negative material with a potassium
hydroxide electrolyte.

ZINC-AIR A cell which utilizes zinc as the anode electrode and air as
the positive active material.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

PAGE
-----

Report of Independent Public Accountants................................................................... F-2
Report of Independent Auditors............................................................................. F-3
Consolidated Balance Sheets as of June 30, 1996 and 1997 and as of December 31, 1997 (unaudited)........... F-4
Consolidated Statements of Operations for the years ended June 30, 1995, 1996 and 1997 and for the six
months ended December 31, 1996 and 1997 (unaudited)...................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1995, 1996 and 1997
and for the six months ended December 31, 1997 (unaudited)............................................... F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997 and for the six
months ended December 31, 1996 and 1997 (unaudited)...................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Ultralife Batteries, Inc.:

We have audited the accompanying consolidated balance sheets of Ultralife
Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 1996 and
1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 Ultralife Batteries, Inc.
and subsidiary as of June 30, 1996 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

/s/ Arthur Andersen LLP

Rochester, New York,
September 5, 1997

F-2

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Ultralife Batteries, Inc. and Subsidiary

We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Ultralife Batteries, Inc. and Subsidiary for the year
ended June 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements of Ultralife
Batteries, Inc. and Subsidiary referred to above present fairly, in all material
respects, the consolidated results of their operations and their cash flows for
the year ended June 30, 1995, in conformity with generally accepted accounting
principles.

/s/ Ernst & Young LLP

Syracuse, New York
August 31, 1995

F-3

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

JUNE 30,
---------------------------- DECEMBER 31,
1996 1997 1997
------------- ------------- -------------

(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 1,212,743 $ 2,310,725 $ 2,773,768
Available-for-sale securities..................................... 33,856,285 19,847,201 13,148,403
Trade accounts receivable (less allowance for doubtful accounts of
$190,000, $278,000, and $290,000 at June 30, 1996 and 1997 and
December 31, 1997, respectively)................................ 3,485,044 2,715,728 2,360,907
Earned contract revenues receivable............................... 521,696 -- 519,223
Inventories, net.................................................. 8,437,791 5,302,752 3,490,510
Prepaid expenses and other current assets......................... 1,350,790 1,661,655 2,860,013
------------- ------------- -------------
Total current assets................................................ 48,864,349 31,838,061 25,152,824
------------- ------------- -------------
PROPERTY AND EQUIPMENT:
Machinery and equipment........................................... 12,419,928 21,267,756 26,005,998
Leasehold improvements............................................ 150,716 216,111 1,182,581
------------- ------------- -------------
12,570,644 21,483,867 27,188,579
Less--accumulated depreciation and amortization................... 1,882,106 2,610,172 3,092,409
------------- ------------- -------------
10,688,538 18,873,695 24,096,170
------------- ------------- -------------
OTHER ASSETS AND DEFERRED CHARGES:
Technology license agreements (net of accumulated amortization of
$303,458, $416,653, and $466,652 at June 30, 1996 and 1997 and
December 31, 1997, respectively)................................ 796,542 683,347 633,348
China battery development program................................. 283,500 -- --
------------- ------------- -------------
1,080,042 683,347 633,348
------------- ------------- -------------
Total Assets........................................................ $ 60,632,929 $ 51,395,103 $ 49,882,342
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 3,434,473 $ 2,659,547 $ 3,826,442
Accrued compensation.............................................. 276,668 234,501 407,223
Other accrued liabilities......................................... 153,022 101,741 924,326
Customer advances................................................. 334,000 1,636,433 1,270,666
------------- ------------- -------------
Total current liabilities........................................... 4,198,163 4,632,222 6,428,657
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY (NOTE 6):
Preferred stock, par value $0.10 per share, authorized 1,000,000
shares--none outstanding........................................ -- -- --
Common Stock, par value $0.10 per share, authorized 12,000,000
shares; outstanding--7,923,211 shares in 1996 7,926,086 in 1997
and 7,975,286 on December 31, 1997.............................. 792,322 795,360 800,255
Capital in excess of par value.................................... 64,630,638 64,785,814 65,245,016
Unrealized net gain on securities................................. 3,842,878 1,311,343 634,056
Accumulated deficit............................................... (12,868,821) (20,115,175) (22,942,968)
Foreign currency translation adjustment........................... 37,749 291,041 20,050
------------- ------------- -------------
56,434,766 47,068,383 43,756,409
Less--Treasury stock, at cost (27,500 shares at June 30, 1997 and
27,250 at December 31, 1997).................................... -- (305,502) (302,724)
------------- ------------- -------------
Total Stockholders' Equity.......................................... 56,434,766 46,762,881 43,453,685
------------- ------------- -------------
Total Liabilities and Stockholders' Equity.......................... $ 60,632,929 $ 51,395,103 $ 49,882,342
------------- ------------- -------------
------------- ------------- -------------

The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.

F-4

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------- ----------------------
1995 1996 1997 1996 1997
----------- ---------- ---------- ---------- ----------

(UNAUDITED)
REVENUES
Battery sales.................................. $11,212,643 $12,623,646 $14,765,364 $7,444,019 $7,572,849
Technology contracts........................... 3,430,640 2,477,887 1,175,754 593,747 1,425,976
----------- ---------- ---------- ---------- ----------
TOTAL REVENUES................................... 14,643,283 15,101,533 15,941,118 8,037,766 8,998,825

COST OF PRODUCTS SOLD:
Battery costs.................................. 10,900,049 12,317,486 13,880,321 7,125,878 6,790,072
Technology contracts........................... 3,017,117 1,953,707 1,238,049 594,487 1,260,547
----------- ---------- ---------- ---------- ----------
TOTAL COST OF PRODUCTS SOLD...................... 13,917,166 14,271,193 15,118,370 7,720,365 8,050,619
----------- ---------- ---------- ---------- ----------

GROSS PROFIT..................................... 726,117 830,340 822,748 317,401 948,206

OPERATING EXPENSES:
Selling, general and administrative............ 4,262,545 4,993,644 5,217,441 2,786,685 2,613,064
Research and development....................... 1,542,088 2,671,033 3,412,674 1,687,248 2,763,788
Loss (gain) on fires........................... -- 351,902 (55,835) -- (1,195,427)
Loss on China Battery development program...... -- -- 805,296 -- --
----------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES......................... 5,804,633 8,016,579 9,379,576 4,473,933 4,181,425
----------- ---------- ---------- ---------- ----------
LOSS FROM OPERATIONS............................. (5,078,516) (7,186,239) (8,556,828) (4,156,532) (3,233,219)
OTHER INCOME (EXPENSE):
Interest income................................ 1,721,682 2,016,831 1,351,646 800,878 427,202
Gain on sale of securities..................... -- 1,930,056 -- -- --
Miscellaneous expense.......................... (34,844) -- (41,172) -- (21,776)
----------- ---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES......................... (3,391,678) (3,239,352) (7,246,354) (3,355,654) (2,827,793)
INCOME TAXES..................................... -- -- -- -- --
----------- ---------- ---------- ---------- ----------
NET LOSS......................................... $(3,391,678) $(3,239,352) $(7,246,354) $(3,355,654) $(2,827,793)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
NET LOSS PER COMMON SHARE........................ $ (0.50) $ (0.41) $ (0.91) $ (0.42) $ (0.36)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.... 6,747,374 7,814,302 7,923,022 7,933,086 7,942,300
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------

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

F-5

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

COMMON STOCK UNREALIZED FOREIGN
---------------------- CAPITAL IN NET GAIN CURRENCY
NUMBER EXCESS OF ON ACCUMULATED TRANSLATION TREASURY
OF SHARES AMOUNT PAR VALUE SECURITIES DEFICIT ADJUSTMENT STOCK TOTAL
----------- --------- ---------- ------------ ------------ ------------ --------- ----------

BALANCE AT JUNE 30,
1994................... 5,543,586 $ 554,359 $30,259,237 $2,958,751 $(6,237,791) $ 19,857 $ -- $27,554,413

Shares issued under
public offering........ 2,000,000 200,000 35,300,000 35,500,000
Public offering
expenses............... (2,902,927) (2,902,927)
Shares issued under stock
option plans and other
stock options.......... 112,525 11,253 565,721 576,974
Foreign currency
translation
adjustment............. 62,634 62,634
Change in unrealized net
gain on securities..... 557,618 557,618
Net loss................. (3,391,678) (3,391,678)
----------- --------- ---------- ------------ ------------ ------------ --------- ----------

BALANCE AT JUNE 30,
1995................... 7,656,111 765,612 63,222,031 3,516,369 (9,629,469) 82,491 -- 57,957,034

Shares issued under stock
option plans and other
stock options.......... 267,100 26,710 1,408,607 1,435,317
Foreign currency
translation
adjustment............. (44,742) (44,742)
Change in unrealized net
gain on securities..... 326,509 326,509
Net loss................. (3,239,352) (3,239,352)
----------- --------- ---------- ------------ ------------ ------------ --------- ----------

BALANCE AT JUNE 30,
1996................... 7,923,211 792,322 64,630,638 3,842,878 (12,868,821) 37,749 -- 56,434,766

Shares issued under stock
option plans and other
stock options.......... 30,125 3,013 152,112 155,125
Purchase of treasury
stock.................. (27,500) (305,502) (305,502)
Other.................... 250 25 3,064 3,089
Foreign currency
translation
adjustment............. 253,292 253,292
Change in unrealized net
gain on securities..... (2,531,535) (2,531,535)
Net loss................. (7,246,354) (7,246,354)
----------- --------- ---------- ------------ ------------ ------------ --------- ----------

BALANCE AT JUNE 30,
1997................... 7,926,086 795,360 64,785,814 1,311,343 (20,115,175) 291,041 (305,502) 46,762,881

Shares issued under stock
option plans and other
stock options.......... 48,950 4,895 461,980 466,875
Foreign currency
translation
adjustment............. (270,991) (270,991)
Change in unrealized net
gain on securities..... (677,287) (677,287)
Issuance of common stock
from treasury.......... 250 -- (2,778) -- -- -- 2,778 --
Net loss................. (2,827,793) (2,827,793)
----------- --------- ---------- ------------ ------------ ------------ --------- ----------

BALANCE AT DECEMBER 31,
1997 (UNAUDITED)....... 7,975,286 $ 800,255 $65,245,016 $ 634,056 ($22,942,968) $ 20,050 $(302,724) $43,453,685
----------- --------- ---------- ------------ ------------ ------------ --------- ----------
----------- --------- ---------- ------------ ------------ ------------ --------- ----------

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

F-6

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------------------- ----------------------

1995 1996 1997 1996 1997
------------ ---------- ------------ ---------- ----------

(UNAUDITED)

OPERATING ACTIVITIES:
Net loss..................................... $ (3,391,678) $(3,239,352) $ (7,246,354) $(3,355,654) $(2,827,793)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 613,246 806,664 841,261 608,863 532,235
Loss on China battery development
program.................................. -- -- 283,500 -- --
Provision for loss on accounts
receivable............................... 64,311 102,153 88,000 -- 12,000
Provision for inventory obsolescence....... 474,050 (403,789) 93,178 -- (45,507)
Foreign currency loss...................... (24,274) -- -- (39,648) --
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable............................... (1,575,053) (727,615) 681,316 (1,317,509) 342,821
Decrease (increase) in earned contract
revenues receivable...................... (1,195,142) 790,246 521,696 -- (519,223)
Decrease (increase) in inventories......... (3,979,424) (2,797,373) 3,041,861 964,468 1,857,749
Decrease (increase) in prepaid expenses and
other current assets..................... (59,844) (815,742) (310,865) 87,716 (1,198,358)
Increase (decrease) in accounts payable and
accrued liabilities...................... 1,987,001 (319,951) (868,374) 1,428,603 1,789,446
Increase (decrease) in customer advances... 100,493 (118,000) 1,302,433 -- --
------------ ---------- ------------ ---------- ----------
Net cash used in operating activities........ (6,986,314) (6,722,759) (1,572,348) (1,623,161) (56,630)
------------ ---------- ------------ ---------- ----------

INVESTING ACTIVITIES:
Purchase of property and equipment........... (1,839,558) (6,661,725) (8,913,223) (5,021,686) (5,704,712)
China battery development program payments... (121,500) -- -- -- --
Purchases of available-for-sale securities... (122,875,062) (71,151,177) (139,484,737) (22,927,038) (40,582,647)
Sales of available-for-sale securities....... 24,969,843 19,260,164 64,969,005 9,239,983 39,208,989
Maturities of available-for-sale
securities................................. 74,398,379 63,363,519 85,993,281 19,488,735 7,402,159
------------ ---------- ------------ ---------- ----------
Net cash provided by (used in) investing
activities................................. (25,467,898) 4,810,781 2,564,326 779,994 323,789
------------ ---------- ------------ ---------- ----------

FINANCING ACTIVITIES:
Proceeds from issuance of common stock....... 33,174,047 1,435,317 158,214 119,119 466,875
Purchase of treasury stock................... -- -- (305,502) (305,502) --
------------ ---------- ------------ ---------- ----------
Net cash provided by (used in) financing
activities................................. 33,174,047 1,435,317 (147,288) (186,383) 466,875
------------ ---------- ------------ ---------- ----------
Effect of exchange rate changes on cash........ 24,179 (44,742) 253,292 -- (270,991)
------------ ---------- ------------ ---------- ----------
(Decrease) increase in cash and cash
equivalents.................................. 744,014 (521,403) 1,097,982 (1,029,550) 463,043
Cash and cash equivalents at beginning of
period....................................... 990,132 1,734,146 1,212,743 1,212,743 2,310,725
------------ ---------- ------------ ---------- ----------
Cash and cash equivalents at end of period..... $ 1,734,146 $1,212,743 $ 2,310,725 $ 183,193 $2,773,768
------------ ---------- ------------ ---------- ----------
------------ ---------- ------------ ---------- ----------

Supplemental disclosure of noncash investing
and financing activities:
Unrealized net gain (loss) in securities..... $ 557,618 $ 326,509 $ (2,531,535) $(1,949,648) $ (677,287)
------------ ---------- ------------ ---------- ----------
------------ ---------- ------------ ---------- ----------

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

F-7

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 1--SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

a. DESCRIPTION OF BUSINESS

Ultralife Batteries, Inc. (the "Company") develops, manufactures, and
markets primary and rechargeable lithium batteries for use in a wide array of
applications. The Company generally does not distribute its product to a
concentrated geographical area nor is there a significant concentration of
credit risks arising from individual or groups of customers engaged in similar
activities, or who have similar economic characteristics. To date, the Company
has depended upon one customer for all of its rechargeable batteries orders.
Termination of this relationship or the failure to obtain additional customers
may have a material adverse effect upon the Company. In fiscal 1996, battery
sales to one customer totaled approximately $1,920,000 (13% of total revenues).
By the end of the year, this customer had paid their trade account in full. In
fiscal 1997, battery sales to one customer totaled approximately $2,391,000 (15%
of total revenues) and account balances were current. In the six months ending
December 31, 1996 and 1997, sales to this same customer totaled approximately
$1,103,000 (14% of revenues) and $1,041,000 (12% of revenues) respectively and
account balances were current. The Company does not normally obtain collateral
on trade accounts receivable.

b. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Ultralife Batteries UK, Ltd. ("Ultralife UK").
All material intercompany accounts and transactions have been eliminated in
consolidation.

c. MANAGEMENT'S USE OF JUDGMENT AND 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.

d. CASH AND CASH EQUIVALENTS

The Company considers all demand deposits with financial institutions and
financial instruments with original maturities of three months or less to be
cash equivalents.

e. AVAILABLE-FOR-SALE SECURITIES

Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. These securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.

The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
Realized gains and losses, and declines in value judged to be
other-than-temporary on available-for-sale securities are included in
available-for-sale securities gains (losses).

f. INVENTORIES

F-8

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 1--SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first-out (FIFO) method.

g. PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of three
to ten years. Betterments, renewals and extraordinary repairs that extend the
life of the assets are capitalized. Other repairs and maintenance costs are
expensed. When sold, the cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in income.

During 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If such events or
changes in circumstances are present, a loss is recognized to the extent the
carrying value of the asset is in excess of the sum of the undiscounted cash
flows expected to result from the use of the asset and its eventual disposition.

h. STOCK-BASED COMPENSATION

In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits either recording the
estimated value of stock-based compensation over the applicable vesting period
or disclosing the unrecorded cost and the related effect on earnings per share
in the notes to the financial statements. The Company has elected to comply with
the disclosure provisions of the statement. The effect of SFAS No. 123 in the
pro forma disclosures is not indicative of future amounts. The statement does
not apply to awards prior to 1995, and additional awards are anticipated.

i. TECHNOLOGY LICENSE AGREEMENTS

Technology license agreements consist of the rights to patented technology
and related technical information. The Company acquired two technology license
agreements for an initial payment of $1 million and $100,000, respectively.
Royalties are payable at a rate of 8 percent and an initial rate of 4 percent,
respectively, of the fair market value of each battery using the technology if
the battery is sold or otherwise put into use by the Company for a 10-year
period. The royalties can be reduced under certain circumstances based on the
terms of these agreements. The agreements are amortized using the straight-line
method over three to ten years. Additionally, the Company will be required to
make royalty payments at stated rates based on the terms of each agreement. No
royalty expense has been recognized to date.

j. TRANSLATION OF FOREIGN CURRENCY

The financial statements of the Company's foreign subsidiary are translated
into U.S. dollar equivalent in accordance with SFAS No. 52. There was no
exchange gain or loss included in net loss for the years ended June 30, 1995,
1996 and 1997 and for the six months ended December 31, 1996 and 1997.

k. INCOME TAXES

The liability method, prescribed by SFAS No. 109, "Accounting for Income
Taxes", is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that may be in effect when the differences are
expected to reverse.

F-9

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 1--SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
l. RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to operations as incurred.

m. REVENUE RECOGNITION

Revenues from sales of batteries are recognized when products are shipped. A
provision is made at that time for warranty costs expected to be incurred.

n. REVENUE ON TECHNOLOGY CONTRACTS

For a majority of its technology contracts, the Company recognizes revenue
using the percentage of completion method based on the relationship of costs
incurred to date to the total estimated cost to complete the contract. Elements
of cost include direct material, labor and overhead. When a loss on a contract
is estimated, the full amount of the loss is recognized immediately. The Company
allocates costs to all technology contracts based upon actual costs incurred
including an allocation of certain research and development costs incurred.
Under certain research and development arrangements with the U.S. Government,
the Company may be required to transfer technology developed to the U.S.
Government.

The Company has accounted for the contracts in accordance with Statement of
Financial Accounting Standards No. 68. The Company, where appropriate, has
recognized a liability for amounts that may be repaid to third parties.

Costs totaling $1,143,225, $1,017,654, $527,112, $100,000 and $307,087
during the years ended June 30, 1995, June 30, 1996, June 30, 1997, and the six
months ended December 31, 1996 and December 31, 1997, respectively, previously
included in operating expenses as part of research and development have been
reclassified to cost of products sold-technology contracts as these costs were
directly related to revenues classified as technology contracts. This
reclassification had no impact on the loss from operations for the years and six
month periods presented.

o. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments", requires disclosure of any significant
derivative or other financial instruments. The Company does not have any
derivative financial instruments at June 30, 1996 and 1997 and at December 31,
1997.

SFAS No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosure of an estimate of the fair value of certain financial
instruments. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at June 30, 1996 and 1997 and at December 31,
1997. Fair values have been determined through information obtained from market
sources.

F-10

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 1--SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
p. EARNINGS PER SHARE

The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires the
reporting of basic and diluted earnings per share (EPS). Basic EPS is computed
by dividing reported earnings available to common stockholders by weighted
average shares outstanding for the period. No dilution for common share
equivalents is included. Diluted EPS includes the dilutive effect of securities
calculated using the treasury stock method. The Company is required to adopt
SFAS No. 128 retroactively for periods ending after December 15, 1997. The
accompanying financial statements have been restated for this adoption.

q. NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components. The standard
is applicable for fiscal years beginning after December 15, 1997. The Company
will adopt this standard in its 1999 financial statements. The Company has not
yet determined the impact of this standard on its financial statements.

SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in the financial statements. The standard is required to be adopted for
fiscal years beginning after December 15, 1997. The Company will adopt this
standard in its 1999 financial statements. The Company has not yet determined
the impact of this standard on its financial statements.

r. LEGAL MATTERS

The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to such
litigation cannot be determined, in the opinion of management, such liability
will not have a material adverse effect on the Company's financial condition or
results of operations.

s. RECLASSIFICATIONS

Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.

NOTE 2--LEASES

The Company leases its principal facility under the terms of an operating
lease with an initial term of seven years. In 1995, the Company entered into an
agreement to amend the initial lease to reflect rental of an additional 40,333
square feet, or a total of 110,000 square feet. The amendment extended the term
of the lease to March 12, 2003. The base rent is subject to a 4% annual
increase. Under the terms of the lease the Company had the right to lease
additional space and also has the right to first refusal of any offer made to
the lessor to purchase the facility. Additionally, the Company is liable for any
environmental contamination that it creates during the term of the lease.
Subsequent to December 31, 1997, the Company entered into an approximate 10-year
purchase/lease agreement to acquire the building it now occupies and an adjacent
building of approximately 140,000 square feet, together with approximately 65
acres of undeveloped land. Payments under the capital lease agreement total
$768,750 of the total payments, $400,000 is due upon execution and the remainder
is due over the term of the lease. The capital lease agreement also requires the
Company to establish a letter of credit in the amount of $200,000 which expires
in 2001. In connection with this agreement the Company entered into a
payment-in-lieu of tax agreement which

F-11

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 2--LEASES (CONTINUED)
provides the Company with certain real estate tax concessions upon certain
conditions. In connection with this agreement, the Company received an
environmental assessment which revealed contaminated soil. The assessment
indicated potential actions that the Company may be required to undertake upon
notification by the environmental authorities. The assessment also proposed that
a second assessment be completed and provided an estimate of total potential
costs to remediate the soil of $230,000. However, there can be no assurance that
this will be the maximum cost. The Company entered into an agreement whereby a
third party has agreed to reimburse the Company for fifty percent of the costs
associated with this matter. The matter is in its preliminary stages and the
total costs of remediation cannot be estimated at this time. The ultimate
resolution of this matter may have a significant adverse impact on the results
of operations in the period in which it is resolved. In addition, Ultralife UK
leases its principal facility under the terms of an operating lease with an
initial lease term of twenty-five years.

Rental expenses for all operating leases were approximately $760,000,
$773,000, $745,000, $423,000 and $451,000 for the years ended June 30, 1995,
1996, and 1997 and for the six months ended December 31, 1996 and 1997,
respectively. After taking effect of the purchase/lease agreement for the
Newark, NY property, future minimum lease payments under noncancelable operating
leases as of December 31 1997 are approximately as follows: 1998 (six months
remaining)--$249,000, 1999--$330,000, 2000-- $363,000, 2001--$439,000;
2002--$413,000, and thereafter--$822,000. The above amounts do not include
contingent or additional rent.

NOTE 3--INVESTMENTS

The following is a summary of available-for-sale securities:

UNREALIZED
----------------------- ESTIMATED
JUNE 30, 1996 COST GAINS LOSSES FAIR VALUE
- ---------------------------------------------------------- ------------- ------------ --------- -------------

U.S. Treasury securities and obligations of U.S.
Government agencies..................................... $ 8,508,124 $ 24,445 $ 14,671 $ 8,517,898
Mortgage backed securities................................ 1,008,153 2,007 -- 1,010,160
U.S. corporate securities................................. 18,343,214 14,585 12,214 18,345,585
------------- ------------ --------- -------------
Total debt securities..................................... 27,859,491 41,037 26,885 27,873,643
Intermagnetics General Corporation (equity securities).... 2,153,916 3,828,726 -- 5,982,642
------------- ------------ --------- -------------
$ 30,013,407 $ 3,869,763 $ 26,885 $ 33,856,285
------------- ------------ --------- -------------
------------- ------------ --------- -------------

UNREALIZED
------------------------ ESTIMATED
JUNE 30, 1997 COST GAINS LOSSES FAIR VALUE
- --------------------------------------------------------- ------------- ------------ ---------- -------------

U.S. Treasury securities and obligations of U.S.
Government agencies.................................... $ 2,352,880 $ 1,293 $ 4,186 $ 2,349,987
Mortgage backed securities............................... 2,829,058 11,288 261 2,840,085
U.S. corporate securities................................ 11,200,004 32,077 127,146 11,104,935
------------- ------------ ---------- -------------
Total debt securities.................................... 16,381,942 44,658 131,593 16,295,007
Intermagnetics General Corporation (equity securities)... 2,153,916 1,398,278 -- 3,552,194
------------- ------------ ---------- -------------
$ 18,535,858 $ 1,442,936 $ 131,593 $ 19,847,201
------------- ------------ ---------- -------------
------------- ------------ ---------- -------------

F-12

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 3--INVESTMENTS (CONTINUED)

UNREALIZED
---------------------- ESTIMATED
DECEMBER 31, 1997 COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------- ------------- ---------- ---------- -------------

U.S. Treasury securities and obligations of U.S. Government
agencies................................................. $ 7,300,668 $ 11,148 -- $ 7,311,816
Mortgage backed securities................................. 40,385 -- (100) 40,285
U.S. corporate securities.................................. 3,019,378 -- (11,048) 3,008,330
------------- ---------- ---------- -------------
Total debt securities...................................... 10,360,431 11,148 (11,148) 10,360,431
Intermagnetics General Corporation (equity securities)..... 2,153,916 634,056 -- 2,787,972
------------- ---------- ---------- -------------
$ 12,514,347 $ 645,204 $ (11,148) $ 13,148,403
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------

The Company has instructed its investment fund managers to invest in
conservative, investment grade securities with average maturities of less than
three years. In fiscal 1996, the Company realized gross gains on sales of
available-for-sale securities of $1,930,056, and in fiscal 1995, the Company
realized gross losses of $77,699.

The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties or the Company may sell the securities to meet their ongoing and
potential future cash needs.

ESTIMATED
AVAILABLE-FOR-SALE COST FAIR VALUE
- ----------------------------------------------------------------------------------- ------------- -------------

Due in one year or less............................................................ $ 10,360,431 $ 10,360,431
Due after one year through three years............................................. -- --
Equity securities.................................................................. 2,153,916 2,787,972
------------- -------------
$ 12,514,347 $ 13,148,403
------------- -------------
------------- -------------

NOTE 4--INCOME TAXES

Foreign and domestic loss carryforwards totaling approximately $22,020,000
are available to reduce future taxable income. Foreign loss carryforwards of
$2,834,000 can be carried forward indefinitely. The domestic net operating loss
carryforward of $19,186,000 expires in 2006 through 2012. Due to a change in
ownership defined under Internal Revenue Code Section 382, $2,738,000 of the net
operating loss carryforward will be subject to an annual limitation of
$1,507,000.

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The Company increased its
valuation allowance by approximately $496,000, $1,843,000 and $3,273,000 for the
years ended June 30, 1995, 1996 and 1997, respectively, to offset the deferred
tax assets due to uncertainty of realizations.

F-13

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 4--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
as of June 30 are as follows:

1996 1997
------------ -----------

Deferred tax liabilities:
Unrealized gain on securities....................................................... $ 1,306,579 $ 514,737
Tax over book depreciation.......................................................... 497,797 666,016
------------ -----------
Total deferred tax liabilities........................................................ 1,804,376 1,180,753
Deferred tax assets:
Net operating loss carryforward..................................................... 4,925,559 7,486,716
Other............................................................................... 377,030 464,827
------------ -----------
Total deferred tax assets............................................................. 5,302,589 7,951,543
Valuation allowance for deferred assets............................................... (3,498,213) (6,770,790)
Net deferred tax assets............................................................... 1,804,376 1,180,753
------------ -----------
Net deferred income taxes............................................................. $ -- $ --
------------ -----------
------------ -----------

There were no income taxes paid for the years ended June 30, 1995, 1996 and
1997. For financial reporting purposes, loss from continuing operations before
income taxes included the following:

JUNE 30,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------

United States........................................................ $ (2,743,611) $ (1,605,015) $ (6,916,312)
Foreign.............................................................. (648,067) (1,634,337) (330,042)
------------- ------------- -------------
Total................................................................ $ (3,391,678) $ (3,239,352) $ (7,246,354)
------------- ------------- -------------
------------- ------------- -------------

There are no undistributed earnings of Ultralife UK, the Company's foreign
subsidiary, at June 30, 1997.

NOTE 5--COMMITMENTS AND CONTINGENCIES

a. CHINA PROGRAM

In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in China, for the production and
distribution of batteries. The Company made an investment of $283,500 of a total
anticipated investment of $405,000 which would represent a 15% interest in the
China Program and accounted for this investment using the cost method. Changzhou
Ultra Power Battery Co., Ltd., a company organized in China ("China Battery"),
purchased from the Company certain technology, equipment training and consulting
services relating to the design and operation of a lithium battery manufacturing
plant. China Battery was required to pay approximately $6.0 million to the
Company over the first two years of the agreement, of which approximately $5.6
million has been paid. The Company has been attempting to collect the balance
due under this contract. China Battery has indicated that these payments will
not be made until certain contractual issues have been resolved. Due to the
Chinese partner's questionable willingness to pay, the Company wrote off in
fiscal 1997 the entire balance

F-14

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
owed to the Company as well as the Company's investment. In December 1997, China
Battery sent to the Company a letter demanding reimbursement of losses they have
incurred plus a refund for certain equipment that the Company sold to China
Battery. Although China Battery has not taken any additional steps, there can be
no assurance that China Battery will not further pursue such a claim, which, if
successful, would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that such a
claim is without merit.

b. LETTER OF CREDIT

During 1996, the Company opened an irrevocable letter of credit up to a
maximum of $334,000 with an interest rate of 3.75% a year and an expiration date
of December 31, 1998. It is collateralized by $334,000 of the Company's
investments.

The Company has an agreement with a customer that provides an exclusive
right to that customer to purchase all such rechargeable batteries for
telecommunication applications produced by the Company until the earlier of the
shipment of 5 million batteries or December 31, 1998. If the Company fails to
fulfill its obligation under this agreement, the customer may draw up to the
maximum amount available under the letter of credit. As of December 31, 1997,
there has been no draw on the irrevocable letter of credit.

c. INDEMNITY AGREEMENT

The Company entered into an Indemnity Agreement with each member of its
Board of Directors and corporate officers in June 1993. The agreement provides
that the Company will reimburse directors or officers for all expenses, to the
fullest extent permitted by law and the Company by-laws, arising out of their
performance as agents or trustees of the Company.

d. PURCHASE COMMITMENTS

As of December 31, 1997 the Company is committed to purchase approximately
$2,900,000 of production machinery and equipment.

e. ROYALTY AGREEMENT

Technology underlying certain products of the Company are based in part as
non-exclusive transfer agreements. The Company made an original payment for such
technology and is required to make royalty and other payments in the future
which incorporate the licensed technology. The license expires through 2007.

f. LEGAL MATTERS

A company has filed a claim against the Company seeking amounts related to
commissions and breach of good faith and fair dealings. The Company's counsel
believes that an unfavorable outcome is unlikely in this matter.

An individual has filed suit claiming the Company interfered with his
opportunity to purchase Dowty Group, PLC (now the Company's U.K. subsidiary).
The claim amounts to $25 million. The Company believes that the claim is without
merit and the Company intends to vigorously defend its position. At this time,
the outcome of this suit is uncertain. An unfavorable outcome of this suit may
have a material adverse impact on the Company's financial position and results
of operations.

F-15

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)

A company has alleged infringement of two patents concerning technology
incorporated into the Company's rechargeable batteries. The Company's counsel
has stated, in its opinion, an unfavorable outcome is remote.

NOTE 6--STOCKHOLDERS' EQUITY

a. PREFERRED STOCK

During fiscal 1996, the shareholders of the Company ratified an amendment to
the Company's Certificate of Incorporation to change the authorized but unissued
preferred stock from no par to $0.10 par value per share. The Board of Directors
has the authority to fix by resolution the voting power, if any, designations,
preferences, privileges or other special rights of any series of preferred
stock. No shares of preferred stock have been issued.

b. STOCK OPTIONS

The Company sponsors several stock-based compensation plans, all of which
are accounted for under the provisions of Accounting Principles Board Opinion
No. 25. Had compensation expense for all of the Company's stock-based
compensation been determined consistent with SFAS No. 123, the Company's net
loss would have been $4,249,214, $8,294,904, $3,663,224 and $3,377,117 for the
years ended June 30, 1996 and 1997 and for the six months ended December 31,
1996 and 1997, compared with the reported losses of $3,239,352, $7,246,354,
$3,355,654 and $2,827,794. Loss per share would have been $0.54, $1.05, $0.46
and $0.43 in the years ended June 30, 1996 and 1997, and for the six months
ended December 31, 1996 and 1997, respectively, as compared to reported loss per
share of $0.41, $0.91, $0.42 and $0.36, respectively.

For purposes of this disclosure, the fair value of each fixed option grant
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in fiscal 1996
and 1997, and for the six months ended December 31, 1996 and 1997, respectively;
expected option terms of three years for all periods; expected stock volatility
of approximately 46.6% for all periods except approximately 56.0% for the six
months ended December 31, 1997; expected dividend yields of 0% for all periods
and risk free interest rates of 5.7%, 5.8%, 5.8% and 6.0%. The weighted average
fair value of options granted was $7.22 in fiscal 1996, $4.18 in fiscal 1997
$4.15 for the six months ended December 31, 1996 and $5.26 for the six months
ended December 31, 1997.

The stockholders of the Company have approved three stock option plans that
permit the grant of options. In addition, the stockholders of the Company have
approved the grant of options outside of these plans. Under the 1991 stock
option plan, 100,000 shares of common stock are reserved for grant to key
employees and consultants of the Company through September 13, 2001. There are
currently 11,250 shares remaining to be granted under the 1991 plan. The
exercise price per share shall be determined by the Board of Directors as
follows: (i) Incentive Stock Options (ISOs) shall not be less than 100% of the
fair market value at the date of grant; (ii) ISOs granted to holders of more
than 10% shall not be less than 110% of the fair market value at the date of
grant; and (iii) non-qualified stock options ("NQSOs") shall not be less than
85% of the fair market value of a share at the date of grant. The exercise
period is to be determined at the time of grant but cannot exceed ten years
(five years from the time of grant if issued to a holder of more than 10%). All
options granted under the 1991 plan are NQSOs.

F-16

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
The stockholders of the Company have also approved a 1992 stock option plan
that is substantially the same as the 1991 stock option plan. The shareholders
have approved reservation of 1,150,000 shares of common stock for grant under
the plan. During 1997, the board of directors approved an amendment to the plan
increasing the number of common shares reserved by 500,000 to 1,650,000. Options
granted under the 1992 plan are either ISO's or NQSO's; key employees are
eligible to receive ISO's and NQSO's; directors and consultants are eligible to
receive only NQSO's.

Effective March 1, 1995, the Company established the 1995 stock option plan
and granted the Chief Executive Officer ("CEO") options to purchase 100,000
shares at $14.25 per share under this plan. The options are exercisable in
annual increments of 20,000 shares over a five-year period commencing March 1,
1996 until March 1, 2001. There were no other grants under the 1995 stock option
plan. In October 1992, the Company granted, to the CEO, options to purchase
225,000 shares of common stock at $9.75 per share outside of any of the stock
option plans. The options vested through June 1997 and expire on October 2002.
In addition, on March 1, 1994, the Company granted options to the CEO to
purchase 150,000 shares at $11.00 per share under the terms of an employment
agreement and outside of any of the stock option plans. These options are
exercisable in annual increments of 30,000 shares over a five-year period
commencing March 1, 1995 until March 1, 2000.

F-17

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
b. STOCK OPTIONS (CONTINUED)

This table summarizes data for the stock options issued by the Company:

FISCAL
----------------------------------------------------------------------------
DECEMBER
1995 1996 1997 31, 1997
------------------------ ------------------------ ------------------------ -----------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE NUMBER
OF SHARES PER SHARE OF SHARES PER SHARE OF SHARES PER SHARE OF SHARES
----------- ----------- ----------- ----------- ----------- ----------- -----------

Shares under option at beginning of
year............................. 1,130,000 $ 8.76 1,259,975 $ 10.67 1,194,425 $ 12.67 1,337,300
Options granted.................... 314,500 $ 15.08 190,000 $ 19.33 503,150 $ 10.12 306,300
Options exercised.................. (112,525) $ 5.13 (218,800) $ 6.56 (30,125) $ 5.15 (48,950)
Options canceled................... (72,000) $ 8.49 (36,750) $ 14.98 (330,150) $ 14.30 (77,300)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Shares under option at end of
year............................. 1,259,975 $ 10.67 1,194,425 $ 12.67 1,337,300 $ 11.51 1,517,350
----------- ----------- ----------- ----------- ----------- ----------- -----------
Options exercisable at end of
year............................. 531,100 $ 12.26 570,125 $ 13.88 826,300 $ 11.43 850,150

WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
-----------

Shares under option at beginning of
year............................. $ 11.51
Options granted.................... $ 12.73
Options exercised.................. $ 9.35
Options canceled................... $ 10.89
-----------
Shares under option at end of
year............................. $ 10.89
-----------
Options exercisable at end of
year............................. $ 11.74

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

OPTIONS OUTSTANDING
- ------------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DEC. 31, CONTRACTUAL EXERCISE AT DEC. 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- --------------- --------------- ----------- ------------- --------------- -------------

$8.00--11.75.... 1,080,200 4.3 Years $ 9.95 594,250 $ 9.83
12.00--17.50... 357,650 3.4 Years 15.19 204,500 14.83
18.25--24.50... 79,500 3.4 Years 20.97 51,400 21.61
- --------------- --------------- ----------- ------ ------- ------
$8.00--24.50.... 1,517,350 4.1 Years $ 11.64 850,150 $ 11.74
- --------------- --------------- ----------- ------ ------- ------

c. WARRANTS

The Company had issued warrants to purchase 100,625 shares of its common
stock. Those warrants were exercised on September 21, 1995. The Company has
issued additional warrants to purchase 100,000 shares of its common stock. Those
warrants were issued on April 22, 1997 and expire on April 22, 1998. The
exercise price is $12.00 per share. The Company has committed to grant warrants
to purchase 12,500 shares of its common stock to the Empire State Development
Corporation in connection with a $500,000 grant to be finalized in March, 1998.
Proceeds of the grant are to be used to fund certain equipment purchases and are
contingent upon the Company achieving and maintaining minimum employment levels.
The warrants may be exercised through December 31, 2002 at an exercise price
equal to 60% of the average closing price for the 10 trading days preceding the
exercise date, but not less than the average closing price during the 20 trading
days prior to the grant.

F-18

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
d. RESERVED SHARES

The Company has reserved 1,409,125, 2,159,125, 2,159,125 and 2,225,000
shares of common stock under the various stock option plans and warrants as of
June 30, 1995, 1996, and 1997 and December 31, 1997, respectively.

NOTE 7--401(K) PLAN

The Company maintains a defined contribution 401(k) plan covering
substantially all employees. Employees can contribute a portion of their salary
or wages as prescribed under Section 401(k) of the Internal Revenue Code and,
subject to certain limitations, the Company may, at the Board of Directors
discretion, authorize an employer contribution based on a portion of the
employees' contributions. Effective January 1, 1997, the Board of Directors
approved Company matching of employee contributions up to a maximum of 3% of the
employee's income. For the year ended June 30, 1997 and the six months ended
December 31, 1997, the Company contributed $74,760 and $72,000 respectively.

NOTE 8--INVENTORIES

The composition of inventories were:

JUNE 30, DECEMBER 31,
-------------------------- ------------

1996 1997 1997
------------ ------------ ------------
Raw materials............................................................... $ 3,311,440 $ 2,993,858 $ 2,081,026
Work in process............................................................. 4,329,111 547,468 1,528,183
Finished products........................................................... 1,589,981 2,647,345 721,713
------------ ------------ ------------
9,230,532 6,188,671 4,330,922
Less: Reserve for obsolescence.............................................. 792,741 885,919 840,412
------------ ------------ ------------
$ 8,437,791 $ 5,302,752 $ 3,490,510
------------ ------------ ------------
------------ ------------ ------------

NOTE 9--RELATED PARTY TRANSACTIONS

The Company held approximately 332,369 shares (market value of $5,982,642),
339,016 shares (market value of $3,552,194) and 345,591 (market value of
$2,787,972) of Intermagnetics General Corporation ("IGC") at June 30, 1996 and
1997 and at December 31, 1997, respectively. IGC is considered to be a related
party since certain directors of the Company also serve as officers or directors
of IGC.

NOTE 10--BUSINESS SEGMENT INFORMATION

The Company's operations are classified into two business segments:
batteries and technology contracts. Operations within the battery segment
include the manufacture and sale of lithium batteries. The technology contract
segment includes revenue associated with the series of agreements with China

F-19

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 10--BUSINESS SEGMENT INFORMATION (CONTINUED)
Battery as well as various research and development contracts with other
companies and the U.S. Government. There are no inter-segment sales.

SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------

Business Segment Results
Net Sales:
Batteries................................. $ 11,212,643 $ 12,623,646 $ 14,765,364 $ 7,444,019 $ 7,572,849
Technology contracts...................... 3,430,640 2,477,887 1,175,754 593,747 1,425,976
------------- ------------- ------------- ------------- -------------
$ 14,643,283 $ 15,101,533 $ 15,941,118 $ 8,037,766 $ 8,998,825
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes:
Batteries................................. $ (3,346,856) $ (5,010,631) $ (5,261,013) $ (2,346,524) $ (1,764,811)
Technology contracts...................... 413,523 524,180 (62,295) (50,740) (7,376)
Corporate administration.................. (458,345) 1,247,099 (1,923,046) (958,390) (1,055,606)
------------- ------------- ------------- ------------- -------------
$ (3,391,678) $ (3,239,352) $ (7,246,354) $ (3,355,654) $ (2,827,793)
------------- ------------- ------------- ------------- -------------
Depreciation and amortization:
Batteries................................. $ 613,246 $ 806,664 $ 841,261 $ 608,863 $ 532,235
Technology contracts...................... -- -- -- -- --
Corporate administration.................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
$ 613,246 $ 806,664 $ 841,261 $ 608,863 $ 532,235
------------- ------------- ------------- ------------- -------------
Identifiable assets:
Batteries................................. $ 12,796,090 $ 21,808,067 $ 25,833,503 $ 24,877,228 $ 27,133,239
Technology contracts...................... 2,525,582 2,121,544 1,742,019 1,263,260 1,421,672
Corporate administration.................. 47,271,476 36,703,318 23,819,581 29,951,453 21,327,431
------------- ------------- ------------- ------------- -------------
$ 62,593,148 $ 60,632,929 $ 51,395,103 $ 56,091,941 $ 49,882,342
------------- ------------- ------------- ------------- -------------
Capital expenditures:
Batteries................................. $ 1,839,558 $ 6,661,725 $ 8,913,223 $ 5,021,686 $ 5,704,712
Technology contracts...................... -- -- -- -- --
Corporate administration.................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
$ 1,839,558 $ 6,661,725 $ 8,913,223 $ 5,021,686 $ 5,704,712
------------- ------------- ------------- ------------- -------------

F-20

ULTRALIFE BATTERIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

NOTE 10--BUSINESS SEGMENT INFORMATION (CONTINUED)
Information concerning geographic area is as follows:

Revenue:
United States............................. $ 8,202,047 $ 10,967,546 $ 10,611,602 $ 5,302,290 $ 7,140,359
United Kingdom............................ 6,441,236 4,133,987 5,329,516 2,735,476 1,858,467
------------- ------------- ------------- ------------- -------------
$ 14,643,283 $ 15,101,533 $ 15,941,118 $ 8,037,766 $ 8,998,826
------------- ------------- ------------- ------------- -------------
Loss before income taxes:
United States............................. $ (2,743,611) $ (1,605,015) $ (6,916,312) $ (3,079,383) $ (3,457,711)
United Kingdom............................ (648,067) (1,634,337) (330,042) (276,271) 629,918
------------- ------------- ------------- ------------- -------------
$ (3,391,678) $ (3,239,352) $ (7,246,354) $ (3,355,654) $ (2,827,793)
------------- ------------- ------------- ------------- -------------
Identifiable assets:
United States............................. $ 57,602,334 $ 56,367,177 $ 46,327,939 $ 50,776,275 $ 43,696,940
United Kingdom............................ 4,990,814 4,265,752 5,067,164 5,315,668 6,185,402
------------- ------------- ------------- ------------- -------------
$ 62,593,148 $ 60,632,929 $ 51,395,103 $ 56,091,943 $ 49,882,342
------------- ------------- ------------- ------------- -------------

United States revenues in fiscal 1995, 1996 and 1997 and for the six months
ended December 31, 1996 and 1997 include export sales to non-affiliated
customers of $1.0 million; $2.4 million of which $1.4 million was primarily in
Europe; $2.1 million of which $1.4 million was primarily in Europe; $.9 million;
and $.9 million, respectively.

United Kingdom revenues in fiscal 1995, 1996 and 1997 and for the six months
ended December 31, 1996 and 1997 include export sales to non-affiliated
customers of $2.1 million of which $.9 million was primarily in Europe and $.7
million was primarily in the United States; $2.4 million of which $1.6 million
was primarily in Europe; $1.7 million of which $.7 million was primarily in the
United States; $1.5 million of which $.3 million was primarily in the United
States and $1.1 million was primarily in Europe; and $.9 million of which $.5
million was primarily in the United States and $.3 million was primarily in
Europe, respectively.

F-21

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITY TO ANY PERSON IN ANY JURISDICTION WHERE AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

---------------------

TABLE OF CONTENTS

PAGE
---------

Prospectus Summary.............................. 3
Risk Factors.................................... 8
Use of Proceeds................................. 16
Price Range of Common Stock..................... 17
Dividend Policy................................. 17
Capitalization.................................. 18
Dilution........................................ 19
Selected Consolidated Financial Data............ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 21
Business........................................ 28
Management...................................... 46
Principal Stockholders.......................... 49
Description of Capital Stock.................... 51
Shares Eligible for Future Sale................. 53
Underwriting.................................... 54
Legal Counsel................................... 56
Experts......................................... 56
Additional Information.......................... 56
Information Incorporated by Reference........... 56
Glossary of Technical Terms..................... 57
Index to Consolidated Financial Statements...... F-1

2,500,000 SHARES

[LOGO]

COMMON STOCK

----------------

PROSPECTUS

, 1998
---------------------

LEHMAN BROTHERS

A.G. EDWARDS & SONS, INC.

PENNSYLVANIA MERCHANT GROUP

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the fees and expenses payable by the Company
in connection with the issuance and distribution of the securities being
registered hereunder, other than underwriting discounts and commissions. Except
for the Securities and Exchange Commission registration fee and the NASD filing
fee, all amounts are estimates.

SEC registration fee........................................................... $13,145.94
NASD filing fee................................................................ 4,956.25
Nasdaq National Market listing fee............................................. 17,500.00
Legal fees and expenses........................................................ 250,000.00
Printing and engraving expenses................................................ 50,000.00
Accounting fees and expenses................................................... 125,000.00
Miscellaneous expenses......................................................... 14,397.81
----------
Total.................................................................. $475,000.00
----------
----------

- ------------------------

* To be completed by amendment

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102(b)(7) of the General Corporation Law of the State of Delaware
(the "GCL") enables a corporation in its original certificate of incorporation
or an amendment thereto to eliminate or limit the personal liability of a
director to a corporation or its stockholders for violations of the director's
fiduciary duty, except (i) for any breach of a director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the GCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which a director derived an improper personal
benefit. The Restated Certificate of Incorporation of the Company provides in
effect for the elimination of the liability of directors to the extent permitted
by the GCL.

Section 145 of the GCL provides, in summary, that directors and officers of
Delaware corporations are entitled, under certain circumstances, to be
indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. Any such indemnification may be made by the corporation
only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct. The Company's By-laws
entitle officers and directors of the Company to indemnification to the fullest
extent permitted by the GCL.

II-1

The Company has entered into an agreement with each of its directors and
certain officers which provide for indemnification by the Company against
certain liabilities, including liabilities under the Securities Act.

The Company maintains a directors and officers liability insurance policy
with National Union Fire Insurance Company. The policy insures the directors and
officers of the Company against loss arising from certain claim or claims made
against such directors or officers by reason of certain wrongful acts. The
policy provides a combined limit of liability of $3,000,000 per policy year for
both directors' and officers' liability coverage at an annual premium of
$75,000.

ITEM 16. EXHIBITS.

EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------

1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Company (as amended through December 27, 1995)
(incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 filed
December 23, 1992 (File No. 33-54470)).
3.2* By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement
on Form S-1 filed December 23, 1992 (File No. 33-54470)).
4.1* Specimen copy of Stock Certificate for shares of Common Stock (incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-1 filed December 23, 1992 (File No. 33-54470)).
10.1* Lease agreement between Wayne County Industrial Development Agency and the Company, dated as of February
1, 1998.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP
23.1 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ernst & Young LLP
23.4* Consent of Lieberman & Nowak, LLP
24.1* Powers of Attorney of certain directors and officers of the Company (included as part of Signature
Pages)

- ------------------------

* Filed previously

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes:

(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13 (a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(2) To deliver or cause to be delivered with the prospectus to each
person to whom the prospectus is sent or given, the latest annual report, to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation
S-X is not set forth in the prospectus, to deliver, or cause to be

II-2

delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.

(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 15 above, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-3

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, State of New York, on April 30, 1998.

ULTRALIFE BATTERIES, INC.

BY: /S/ BRUCE JAGID
-----------------------------------------
Bruce Jagid
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ BRUCE JAGID Chairman of the Board,
- ------------------------------ Chief Executive Officer April 30, 1998
Bruce Jagid

* Vice Chairman of the Board
- ------------------------------ April 30, 1998
Martin G. Rosansky

President, Chief Technology
* Officer and Director
- ------------------------------ (Principal Executive April 30, 1998
Joseph N. Barrella Officer)

* Chief Financial Officer
- ------------------------------ (Principal Financial and April 30, 1998
Frederick F. Drulard Accounting Officer)

* Director
- ------------------------------ April 30, 1998
Joseph C. Abeles

* Director
- ------------------------------ April 30, 1998
Arthur M. Lieberman

* Director
- ------------------------------ April 30, 1998
Richard A. Hansen

* Director
- ------------------------------ April 30, 1998
Carl H. Rosner

*By: /s/ BRUCE JAGID
-------------------------
Bruce Jagid
ATTORNEY-IN-FACT

II-4


                                                                     EXHIBIT 5.1
 
                                   April 21, 1988
 
Utralife Batteries, Inc.
1350 Route 88 South
Newark, New York 14513
 
Gentlemen:
 
    We have acted as counsel to Ultralife Batteries, Inc., a Delaware
corporation (the "Company"), in connection with its filing of a registration
statement on Form S-3 (File No. 333-47087) (the "Registration Statement") filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, relating to the offering of 2,875,000 shares of Common stock, par value
$0.10 per share (including 375,000 shares subject to an over-allotment option)
(the "Shares"), which will be sold by the Company, all as more particularly
described in the Registration Statement.
 
    In our capacity as counsel to the Company, we have examined originals or
copies, satisfactory to us, of the Company's (i) Restated Certificate of
Incorporation, (ii) By-laws and (iii) resolutions of the Company's Board of
Directors. We have also reviewed such other matters of law and examined and
relied upon such corporate records, agreements, certificates and other documents
as we have deemed relevant and necessary as a basis for the opinion hereinafter
expressed. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the original documents of all documents submitted to us as
copies or fascimiles. As to any facts material to such opinion, we have, to the
extent that relevant facts were not independently established by us, relied on
certificates of public officials and certificates of officers or other
representatives of the Company.
 
    On the basis of the foregoing, we are of the opinion that the Shares have
been validly authorized and, when sold as contemplated in the Registration
Statement, will be legally issued, fully paid and non-assessable.
 
    We hereby consent to the use of our name under the caption "Legal Counsel"
in the Registration Statement and the filing of this opinion as an exhibit to
the Registration Statement.
 
                                          Very truly yours,
                                          /s/ Parker Chapin Flattau & Klimpl,
                                          LLP
                                          --------------------------------------
 
                                          PARKER CHAPIN FLATTAU & KLIMPL, LLP


                                                                    EXHIBIT 23.2
 
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
As independent public accountants, we hereby consent to the use of our report,
and to all references to our firm, included in or made a part of this
registration statement.
 
                                          /s/ ARTHUR ANDERSEN LLP
 
   
Rochester, New York
  April 29, 1998


                                                                    EXHIBIT 23.3
 
                        CONSENT OF INDEPENDENT AUDITORS
 
   
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated August
31, 1995, with respect to the 1995 Consolidated Financial Statements of
Ultralife Batteries, Inc. and Subsidiary included in Amendment No. 2 to the
Registration Statement (Form S-3 No. 333-47087) and related Prospectus of
Ultralife Batteries, Inc. and Subsidiary for the registration of 2,500,000
shares of its common stock.
    
 
                                          /s/ ERNST & YOUNG LLP
 
   
Syracuse, New York,
April 29, 1998