AER ENERGY RESOURCES INC /GA, 10-K405, 1997-03-27

AER ENERGY RESOURCES INC /GA
10-K405, 1997-03-27
MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------

Commission File Number 0-21926

AER ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
GEORGIA 34-1621925
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>

4600 HIGHLANDS PARKWAY, SUITE G, SMYRNA, GEORGIA
(Address of principal executive offices)
30082
(Zip Code)
Registrant's telephone number, including area code: (770) 433-2127

---------------
Securities registered pursuant to Section 12(b) of the Act:

None

---------------
Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE

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

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

The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on the
Nasdaq Stock Market's National Market on March 21, 1997, was approximately
$34,907,854.

As of March 21, 1997, the registrant had outstanding 24,364,570 shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the registrant's Annual Report to Shareholders for
the fiscal year ended December 31, 1996 are incorporated by reference to the
extent indicated in Part II of this Form 10-K. In addition, certain portions
of the Proxy Statement for the registrant's 1997 Annual Meeting of Shareholders
are incorporated by reference to the extent indicated in Part III of this Form
10-K.
===============================================================================
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TABLE OF CONTENTS

PART I

<TABLE>
<S> <C> <C> <C>
Item 1. Business ................................................................ 3
2. Properties .............................................................. 11
3. Legal Proceedings ....................................................... 12
4. Submission of Matters to a Vote of Security Holders ..................... 12
Executive Officers of the Registrant .................................... 13

PART II
----------

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ................................................................. 15
6. Selected Financial Data .................................................. 15

7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 15
8. Financial Statements and Supplementary Data .............................. 15
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................................ 15

PART III
- ----------

Item 10. Directors and Executive Officers of the Registrant ........................ 16
11. Executive Compensation .................................................... 16
12. Security Ownership of Certain Beneficial Owners and Management ............ 16
13. Certain Relationships and Related Transactions ............................ 16

PART IV
- ----------

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 17

</TABLE>

2
<PAGE> 3

PART I
ITEM 1. BUSINESS.

GENERAL

AER Energy Resources, Inc. (the "Company" or "AER Energy") is engaged in
the development and commercialization of high energy density, rechargeable
zinc-air batteries that provide long, continuous run-time to users of portable
computers and other portable electronic products. The Company believes the
limited run-time between recharges (generally two to four hours) offered by
other manufacturers' rechargeable batteries is a major source of
dissatisfaction to some users of portable computers. The Company's
rechargeable zinc-air technology, which provides high energy density by weight
and high energy storage capacity, is being used to develop batteries capable of
operating most portable computers and certain other portable electronic
products at maximum power continuously for a full workday on a single charge.

Since its inception, the Company has been a development stage company and
has generated only minimal revenues from battery product sales. The Company
has focused its efforts on developing and improving its rechargeable zinc-air
technology, establishing the manufacturing process, developing relationships
with portable computer manufacturers (OEMs), defining and developing market
opportunities and testing and selling rechargeable zinc-air batteries. During
1994, the Company converted its pilot manufacturing line to a production
facility and began shipping its first battery product.

The Company has initially produced and marketed two types of rechargeable
batteries: stand-alone accessory batteries designed to power certain models of
the installed base of portable computers; and customized optional batteries
designed to power specific computer models of certain OEMs. The Company's
stand-alone accessory batteries and customized optional batteries have been
marketed to end-users through specialty computer catalogs, value-added
resellers (VARs) and direct sales. The Company's customized optional batteries
have also been marketed through OEM accessory catalogs.

During 1995, the Company introduced two customized optional batteries for
portable computer OEMs, the AER Energy PowerProTM and the AER Energy PowerSlice
LXTM. The AER Energy PowerPro was designed to power several 1995 models of
Toshiba portable computers which were discontinued by Toshiba in late 1995. As
a result, the Company phased out the AER Energy PowerPro in 1996. The AER
Energy PowerSlice LX was designed for the Hewlett-Packard (HP) OmniBook 600 PC
portable computer that was upgraded to the more powerful Pentium-based OmniBook
800 in September 1996. The increased power requirements of the OmniBook 800
necessitated an upgrade of the AER Energy PowerSlice LX, and the Company began
shipping limited quantities of the upgraded version in the first quarter of
1997. The Company recognized $23,000 in net revenues from the sales of AER
Energy PowerPro and AER Energy PowerSlice LX batteries during the year ended
December 31, 1996.

Although net revenues generated from battery product sales have been
minimal, the Company has used information gained from the field use of its
batteries to further improve its zinc-air technology and battery product
marketing. During 1996, the Company made significant

<PAGE> 4

improvements to its rechargeable zinc-air technology, enabling it to build a
3.2 pound prototype battery with sufficient power to operate a 30 plus watt
portable computer for a full workday on a single charge. As a result of
eliminating the need to add mercury to its zinc-air batteries during 1996, AER
Energy's rechargeable zinc-air batteries are no longer considered hazardous
waste under federal regulations and can be disposed of as household waste.
Also in 1996, the Company developed a low-cost design process that enables it
to more quickly adapt its battery product designs to serve different
applications.

During 1997, the Company hopes to obtain a commitment from one or more
OEMs to design a portable computer that is mechanically and electrically
compatible with an AER Energy zinc-air battery.

The Company was originally incorporated in Ohio in July 1989 under the
name Aerobic Power Systems, Inc. It subsequently changed its state of
incorporation to Georgia and its name to AER Energy Resources, Inc.

TECHNOLOGY OVERVIEW

The market for batteries is currently being served by a variety of
different battery technologies, some of which were first commercialized
approximately 100 years ago. Each of these battery technologies offers certain
attributes such as energy density, energy storage capacity, cost, configuration
and service life which make it best suited for particular product applications.
Choosing the appropriate battery to serve a given application involves
matching the battery's characteristics to the user's application requirements.
The Company is not aware of any single battery technology that can ideally
serve all applications.

The battery industry is broadly segmented into two types of batteries:
disposable and rechargeable. Disposable batteries, which include carbon-zinc
and alkaline technologies, are used until discharged and then discarded and
typically are priced below rechargeable batteries. Applications suited to
disposable batteries include products such as flashlights that operate at low
power and require infrequent use. In contrast, rechargeable batteries can be
discharged and then recharged to almost full capacity and discharged again.
Rechargeable batteries are best suited for applications that would require the
frequent replacement of a disposable battery. Commercially available
rechargeable batteries include nickel-cadmium, nickel-metal hydride,
lithium-ion, lead acid batteries and AER Energy's zinc-air batteries.

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The Company believes important rechargeable battery characteristics
include energy density, energy storage capacity, cell voltage and discharge
voltage profile. Energy density can be calculated based on either the weight or
volume of the battery. For a given amount of energy, higher energy density by
weight yields lighter batteries and higher energy density by volume yields
smaller batteries. Energy storage capacity refers to the limits on a battery's
ability to store energy safely and practically. Batteries with high energy
storage capacity may more easily be configured to deliver increased operating
time. Cell voltage determines the number of individual cells that must be
connected in series to provide the overall voltage required to operate a
specific product. Generally, batteries requiring fewer cells to achieve a given
battery voltage are more reliable and facilitate OEM product design. The shape
of a battery's discharge voltage profile defines the range of voltage over which
a product must operate to utilize all of the energy stored in the battery. A
battery with a flat discharge profile delivers a more consistent level of
voltage throughout the battery's discharge cycle and may simplify OEM product
design and contribute to better operating efficiency.

The Company believes its zinc-air rechargeable batteries offer a unique
combination of high energy density by weight and high energy storage capacity.
In addition, the Company's zinc-air battery cell has a flat discharge voltage
profile that can be an advantage in OEM product design and contribute to better
operating efficiency.

BUSINESS STRATEGY

The Company's strategy is to capitalize on the demand for long run-time
batteries by mobile workers dissatisfied with the run-time of portable
computers powered by other manufacturers' rechargeable batteries. The
Company's objective is to become a leading producer of long run-time
rechargeable zinc-air batteries. The following are key elements of the
Company's strategy:

Technology Development. The Company believes that, although it has
made very substantial technical progress, there is still a significant
opportunity to further improve its rechargeable zinc-air battery technology.
The Company's principal product research and development objectives to date
have been to improve energy storage capacity and energy density, reduce battery
size, increase power output, increase the number of recharges, reduce recharge
time, extend overall field service life, eliminate added mercury and lower
product costs. The Company intends to incorporate any such improvements into
existing and future products as appropriate.

Marketing. The Company has pursued parallel marketing strategies aimed at
selling rechargeable zinc-air batteries to both end-users and OEMs of portable
computers and other portable electronic products. The Company has learned that
selling directly to end-users is a difficult and expensive process due to the
lack of standard interfaces to power portable computers and the rapid
obsolescence of computer products. Therefore, the Company believes the key to
generating significant revenues depends largely on one or more computer OEMs
developing portable computers that are designed to be mechanically and
electrically compatible with AER Energy zinc-air batteries. This is the
Company's primary marketing focus in 1997.

<PAGE> 6

In past relationships with OEMs, the Company designed customized
optional zinc-air batteries to operate specific portable computers that were
already being marketed by the OEMs, such as the AER Energy PowerPro and AER
Energy PowerSlice LX batteries. In these relationships, the Company was
responsible for the design and distribution of the batteries. The Company is
currently working to obtain a commitment from one or more OEMs to design a
portable computer that is mechanically and electrically compatible with an AER
Energy zinc-air battery. In the future, the Company plans to pursue OEMs of
portable computers and other portable electronic products to develop products
with an AER Energy rechargeable zinc-air battery fitting inside the product,
thereby eliminating the need for a separate battery case and reducing the size
and weight of the product and battery combination.

The Company plans to continue its direct end-user sales effort by targeting
selected corporations which utilize large numbers of the same model of portable
computer in applications requiring long run-time. The sale of accessory
batteries to end-users is designed to provide actual field usage information
that can be used to further technology development and to validate battery
performance to support the Company's marketing effort with computer OEMs.

Manufacturing. In order to maintain control of its development and
manufacturing processes, the Company believes that, at least currently, it is
desirable to manufacture its batteries itself rather than contract with third
party manufacturers.

PRODUCTS

During 1996, the Company produced and marketed two customized optional
batteries designed to power specific computer models of two OEMs -- the AER
Energy PowerPro and the AER Energy PowerSlice LX. As discussed above, the AER
Energy PowerPro was phased out of production during 1996. Also discussed above,
the AER Energy PowerSlice LX was upgraded during 1996 in order to accommodate
the increased power requirements of the HP OmniBook 800 portable computer. The
Company began shipping limited quantities of the upgraded version of the
PowerSlice LX in the first quarter of 1997.

MARKETING AND SALES

The Company has conducted market research with certain individual users
and major corporate purchasers of portable computers and determined that many
mobile workers are dissatisfied with the run-time exhibited by portable
computers powered by other manufacturers' rechargeable batteries. The Company
believes an unserved market exists for long run-time batteries with mobile
workers who depend on portable computer operation in mobile environments and
carry multiple batteries. The Company is marketing computer batteries that
provide a full workday operation specifically to this segment of mobile
workers, both directly to portable computer end-users and through OEMs.

End-User Markets. The Company has a marketing communications program
primarily utilizing computer industry publications and trade shows. The
Company has distributed its stand-alone accessory batteries and customized
optional batteries through specialty computer

<PAGE> 7

catalogs, VARs and direct sales to end-users, targeting major corporations and
governmental agencies. The Company has agreements with three regional
distribution sales representative organizations to support end-user distribution
of accessory batteries.

OEM Markets. The Company's marketing efforts to OEMs are supplemented by
regional OEM sales representative organizations. The Company currently has
agreements with five such organizations.

The Company currently employs six people in its sales and marketing
department. Their responsibilities include the sales and marketing of the
Company's battery products and the development of relationships with OEMs.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts have been focused on
programs that lead to the commercialization of its rechargeable zinc-air
batteries. The Company has continued to work on improvements to its zinc-air
technology, materials and processing methods, with technical goals tied to
specific product application needs. The Company's principal product research
and development objectives to date have been to improve energy storage capacity
and energy density, reduce battery size, increase power delivery, increase the
number of recharges, reduce recharge time, eliminate added mercury, extend
overall field service life and lower product costs. The Company's research and
development activities during 1996 resulted in a smaller, thinner zinc-air cell
that enables the Company to make more powerful batteries, the elimination of
added mercury and a low-cost design process that allows the Company to quickly
adapt the size of its battery products to serve different applications.

A majority of the Company's expenses to date have been for
research and development. The Company's research and development expenses for
the years ended December 31, 1996, 1995 and 1994 were $4,208,000, $4,696,000
and $6,341,000, respectively.

MANUFACTURING

The Company currently manufactures its zinc-air batteries itself rather
than contracting with third party manufacturers. The Company believes that
control of the basic elements of the production process should assist the
Company in its efforts to improve the performance and quality of its zinc-air
batteries and maintain a proprietary position.

The Company commenced pilot production of prototype batteries in the
fourth quarter of 1992. In 1993, the Company purchased certain equipment for
the production of air cathodes used in its zinc-air batteries and licensed
certain related air cathode process technology pursuant to an agreement (the
"Westinghouse License") with Westinghouse Electric Corporation
("Westinghouse"). During 1994, the Company converted its pilot manufacturing
line to a production facility for volume assembly of rechargeable zinc-air
batteries, both prototype batteries and batteries for sale to customers. To
date, the Company has produced more than 74,000 cells at its manufacturing
facility for use in experimental testing and field trials and in the production
of more than 2,600 zinc-air batteries.

<PAGE> 8

The principal raw materials used in the production of the zinc-air
batteries are zinc, carbon, potassium hydroxide and metal and plastic parts.
These materials are available from multiple sources in North America and Asia.
The Company is seeking to build long term relationships with vendors to
generate reliable sources of supply.

ENVIRONMENTAL MATTERS

The Company is subject to various United States federal, state and local
standards that govern the storage, use and disposal of various chemicals used
in and waste materials produced in the manufacture of its zinc-air batteries,
including zinc, carbon, potassium hydroxide, solvents and adhesives. These
standards include the Environmental Protection Agency's regulations governing
the amount of zinc in the manufacturing waste stream and state and local
regulations governing fire protection, air quality standards and employee
safety, training and preparedness.

During 1996, the Company eliminated the addition of mercury to its
zinc-air cells and batteries without sacrificing size, weight or power. Under
federal regulations, the Company's rechargeable zinc-air batteries with no
added mercury are not considered hazardous waste and can be disposed of as
household garbage. However, the Company believes that some of the chemicals
currently used in its batteries, such as zinc metal and potassium hydroxide,
may subject its batteries to regulation in the future.

COMPETITION

The development and marketing of battery products is highly competitive.
The industry consists primarily of major domestic and international companies,
the vast majority of which have financial, technical, marketing, sales,
manufacturing, distribution and other resources and name recognition
substantially greater than those of the Company as well as established
positions in the market and established ties with OEMs.

The Company is not aware of any competitor currently developing
rechargeable zinc-air batteries for portable computers and other portable
electronic products. Although the Company does not have extensive knowledge of
specific competitive activities, the Company is aware that a great deal of
battery research is in progress on a global basis. The Company believes that
its major competitors are makers of nickel-cadmium, nickel-metal hydride and
lithium-based batteries. Ralston Purina's Eveready Division, Gillette's
Duracell Division, Sanyo Electric Co., Ltd., Toshiba Corporation, Matsushita
Electric Industrial Co., Ltd., SAFT and Varta Batterie AG, among others,
currently manufacture nickel-cadmium or nickel-metal hydride batteries or both.
Sony Corporation, Sanyo Electric Co., Ltd. and Matsushita Electric, among
others, are marketing a lithium-ion battery that is designed for use with
portable computers, video cameras and cellular telephones. Valence Technology,
Inc., Ultralife Batteries, Inc., Hydro-Quebec, Yuasa Battery Company, Ltd.,
Dowty Battery Company and Asahi Chemical Industry Company, Ltd. are engaged in
the research and development of lithium-polymer batteries, which are not yet
commercially available. In addition, companies such as Sony, Matsushita,
Sanyo, SAFT, Tadiran Electronic Industries, Eveready, Duracell and Toshiba, and
possibly other companies, have active research and development programs to
commercialize high energy density batteries.

<PAGE> 9

No assurance can be given that such companies will not develop batteries
similar or superior to the Company's zinc-air batteries.

PATENTS AND LICENSES

The Company relies on certain technology for which either the Company or
DEMI has sought patent protection, including certain patents licensed to the
Company by DEMI. The Company has sought to protect certain technology that the
Company believes to be proprietary, filing patent applications for such
technology both in the United States and in certain countries abroad. The
Company plans to prosecute infringements to its patent rights, where
appropriate. However, there can be no assurance that any particular
infringement will be prosecuted, or if prosecuted, that it will be successful.
The Company also plans to rely upon trade secrets, know-how, continuing
technological innovations and its ability to exploit new opportunities to
develop and maintain its competitive position.

The Company has exclusive rights to nine DEMI patents (except for motor
vehicle applications) which have been issued in the United States, (three of
which have issued in Japan and one has issued in Europe), three of which cover
the air manager system. The air manager system regulates the flow of air
within the battery, a critical variable affecting zinc-air battery life.
During the last six years, the Company has been granted thirteen United States
and three European patents. In addition, the Company has filed eight United
States and eighteen foreign patent applications and currently has nine patent
disclosures in review. It is the Company's intention to continue to consider
filing new patent applications in the United States, Japan, Europe and Canada
as appropriate for technology, products and product improvements that its
research and commercialization activities might yield.

United States patents, either issued to or applied for by DEMI, Mr. Cheiky,
or the Company, and in each case subject to the DEMI License, relate to some of
the operating parameters of the zinc-air battery system. The Company and DEMI
entered into the DEMI License in July 1989 whereby DEMI granted to the Company
the exclusive worldwide rights to DEMI's zinc-air battery patents and technology
(including trade secrets) for all applications other than motor vehicles for so
long as the Company wishes to use such licensed rights. The DEMI License
includes the right to sublicense and it covers any new zinc-air technology
developed or acquired by DEMI, or by Mr. Mike Cheiky, DEMI's former principal
scientist, prior to expiration of his employment agreement with DEMI. For
these rights, the Company agreed to pay DEMI royalties, beginning in 1991, of 4%
of net sales through July 18, 2004, subject to certain minimum amounts and
possible increases or decreases to a maximum of 4% and a minimum of 2%, as
specified in the DEMI License. The applicable percentage of royalties is
currently 4% of net sales. After July 18, 2004, the Company may continue to use
such licensed technology without payment of further royalties. In order to
maintain exclusive rights to the technology covered by the DEMI License, the
Company must pay minimum royalties to DEMI for the first ten years of the DEMI
License (through 1999). Pursuant to a Technology Assignment Agreement, DEMI
also had rights to battery technology developed by Mr. Cheiky after the
expiration of his employment agreement with DEMI (which expired on October 15,
1993) and prior to July 19, 2004, subject to certain annual

<PAGE> 10

payments to be made to Mr. Cheiky and certain other conditions and exceptions.
This Technology Assignment Agreement was terminated on December 26, 1995.
Effective October 15, 1993, the DEMI License was amended so that, under certain
circumstances, some or all of the royalties due under the DEMI License are
payable to the shareholders of DEMI rather than to DEMI. DEMI has also agreed
to the terms of a proposed OEM air manager license agreement to be entered into
by the Company and any OEMs licensing the air manager system, which provides
that 4% of the royalties the Company receives from sublicensing the air manager
system will be payable to DEMI, subject to the reduction as provided in the
proposed agreement. Pursuant to the DEMI License, a relationship for the
exchange of technology exists between the Company and DEMI.

The DEMI License currently includes nine patents. The DEMI patents relate
to air manager systems, an electrolyte recirculating system, a flexible cell
case which allows for internal volume change during charge and discharge, a
continuous consumable anode, a coated air electrode and an attachment method for
zinc-air batteries. The Company currently is utilizing only the technology
embodied in the air manager system. The Company has designed its air manager
system to use the principles described in DEMI's United States Patent No.
4,913,983, which expires in the year 2008, No. 5,387,477, which expires in 2012,
and No. 5,571,630 which expires in 2014. The Company has done a validity study
and believes that these patents are valid over prior art known to the Company.
The Company has developed several air manager system improvements and has five
United States patent applications on its designs relating to the air manager
system. The Company believes that the air manager patents and pending
applications under which it has rights have the potential to provide significant
intellectual property benefits for the Company's zinc-air batteries.

In order to manufacture air electrodes for its zinc-air batteries at its
present production facility, the Company purchased production equipment and
licensed the accompanying air electrode and process technology pursuant to the
Westinghouse License. The Westinghouse License included two patents. One,
which expired in August 1993, relates to an air electrode which can both charge
and discharge and the other, which expires in 1997, relates to a multi-ply
pasted air electrode. Presently the Company believes that the trade secrets
covered by the Westinghouse License will offer more benefit to the Company than
the patents covered by the Westinghouse License. The Company paid Westinghouse
a total of $325,000 to purchase the production equipment. The Company's rights
with respect to use of Westinghouse's air electrode technology are exclusive
for portable computer products, but non-exclusive for all other portable
products. The Westinghouse License entitled the Company to improvements
developed or acquired by Westinghouse prior to May 1, 1995. The Company has an
option to negotiate with Westinghouse to acquire certain other Westinghouse
improvements developed or acquired by Westinghouse from May 1, 1995 to May 1,
1998. Under the Westinghouse License, the Company paid an initial license fee
of $250,000 and is obligated to pay royalties of 1% of its revenues from sales
of zinc-air battery products up to $300,000, followed by royalties of 0.5% of
such revenues up to an additional $350,000, at which time no further royalties
for product sales will be due. In addition, for ten years the Company will pay
Westinghouse the greater of (i) 50% of any sublicense fees it receives if it
sublicenses the technology licensed from Westinghouse, or (ii) 0.5% of
sublicensee product sales. Currently, the Company has no plans to license its
rights to zinc-air technology to any other company, except for possibly
sublicensing the air manager system to OEMs in connection with design-in
products.

<PAGE> 11

In addition to potential patent protection, the Company attempts to
protect its trade secrets and other proprietary information through secrecy
agreements with customers, suppliers, employees and consultants and other
security measures. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful.

EMPLOYEES

At December 31, 1996, the Company had 64 regular employees and 2 temporary
employees. Of the total number of regular employees, 20 were engaged in
product research and development, 31 (including 10 hourly employees) were
engaged in manufacturing and manufacturing process development and 13 were in
marketing and general and administrative functions. The Company's success will
depend in large part on its ability to attract and retain skilled and
experienced employees. None of the Company's employees are covered by a
collective bargaining agreement, and the Company considers its relations with
its employees to be good.

FORWARD LOOKING STATEMENTS

This report contains statements which to the extent that they are not
recitations of historical fact, may constitute "forward looking statements"
within the meaning of applicable federal securities laws and are based on the
Company's current expectations and assumptions. These expectations and
assumptions are subject to a number of risks and uncertainties which could
cause actual results to differ materially from those anticipated, which include
but are not limited to the following: ability of the Company to achieve
development goals, ability of the Company to commercialize its battery
technology, development of competing battery technologies, ability of the
Company to protect its proprietary rights to its technology, improvements in
conventional battery technologies, demand for and acceptance of the Company's
products in the marketplace, ability to obtain commitments from OEMs of
portable computers to design portable computers mechanically and electrically
compatible with the Company's batteries, Company's ability to ramp up
production to meet anticipated sales, impact of any future governmental
regulations, impact of pricing, costs of materials, ability of the Company to
raise additional funds and other factors affecting the Company's business that
are beyond the Company's control.

ITEM 2. PROPERTIES.

The Company leases 9,600 square feet of office administration, engineering
and testing space and an additional 24,800 square feet of production and
manufacturing space in Smyrna, Georgia. Both facilities are located within the
same industrial park. The Company believes that its existing facilities and
equipment, together with equipment to be purchased with existing cash, will be
adequate to manufacture its zinc-air batteries in commercial quantities through
1997. Should the Company need additional space, management believes that the
Company will be able

<PAGE> 12

to secure additional space at reasonable rates.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not currently a party to, and no property of the Company is
presently the subject of, any pending legal proceeding.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.

12
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EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company as of March 15, 1997 were as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------ --- ------------------------------------------
<S> <C> <C>

David W. Dorheim 47 President, Chief Executive Officer and
Director

R. Dennis Bentz 46 Vice President -- Manufacturing

M. Beth Donley 44 Vice President -- Chief Financial Officer,
Treasurer and Secretary

Frank M. Harris 44 Vice President -- Marketing and Sales

Lawrence A. Tinker 44 Vice President -- Engineering
</TABLE>

David W. Dorheim joined the Company in 1989 as President, Chief Executive
Officer and a director. From 1985 to 1989, Mr. Dorheim was Vice President,
Battery Assembly Division, Gates Energy Products, Inc., with responsibility for
assembly operations in Juarez, Mexico, Newcastle, England and Hong Kong as well
as a design center in El Paso, Texas. Prior to 1985, Mr. Dorheim held various
marketing and sales positions with the General Electric Battery Division in
Gainesville, Florida, including Regional Sales Manager and Manager of Marketing
Programs. Mr. Dorheim is a director of DEMI.

R. Dennis Bentz joined the Company in 1990 as Vice President --
Manufacturing. Mr. Bentz was employed from 1978 to 1990 by Duracell
International, Inc., a battery manufacturer. Mr. Bentz's last four years at
Duracell were spent as Product Engineering Manager, with responsibility for
product and process design of alkaline, lithium and disposable zinc-air
batteries. Prior to 1987, Mr. Bentz managed the Duracell development and
testing facility in Tarrytown, New York and served as Engineering Manager and
Product Engineer.

M. Beth Donley joined the Company in August 1994 as Cost Accounting
Manager and was promoted to Vice President -- Chief Financial Officer,
Treasurer and Secretary in September 1994. From 1987 to 1994, Ms. Donley was
employed by BraeLoch Holdings Inc., a New Orleans-based independent operator of
oil and gas properties, where she served as Manager of Financial Reporting and
Manager of Corporate Planning and Analysis. Prior to 1987, Ms. Donley served
as a consulting manager for Ernst & Young LLP, a national public accounting
firm, was a partner in a Texas-based public accounting firm, and held various
supervisory positions with E. I. Dupont de Nemours and Co., a chemical
manufacturing company, and GHR Industries, Inc., an independent oil and gas
producer and refiner. Ms. Donley is a certified public accountant.

Frank M. Harris joined the Company in 1990 as Vice President -- Marketing
and Sales.

<PAGE> 14

From 1987 through 1989, Mr. Harris was employed by International Components
Corporation, a Chicago-based manufacturer of battery chargers, as Vice
President of Engineering and Director of Sales. From 1986 to 1987, Mr. Harris
served as Manager of Marketing Programs for a lighting product line of the GE
Business Lighting Group. From 1981 to 1986, Mr. Harris worked with the battery
business of General Electric where he held positions in market research and
served as manager of private label battery marketing.

Lawrence A. Tinker joined the Company in January 1993 as Vice President --
Engineering. During the prior five years, Dr. Tinker was employed by Gates
Energy Products, Inc., where his most recent position was Manager, Technology
for aerospace batteries. In this position, Dr. Tinker managed a group of
scientists responsible for developing nickel-cadmium, nickel-metal hydride and
nickel-hydrogen aerospace battery systems. Prior to 1988, Dr. Tinker was
employed by Ballard Research Inc. for six years, where he managed the research
and development effort for rechargeable lithium battery systems. Dr. Tinker
holds a Bachelors and Masters degree in Chemistry from Georgia State
University, and a Doctorate degree in Chemistry from the University of Texas.

14
<PAGE> 15

PART II

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

Information contained under the caption "Shareholder Information" in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1996 (the "1996 Annual Report to Shareholders") is incorporated herein by
reference in response to this Item 5.

On May 20, 1996, the Company sold for $10 million 1,584,158 shares of its
common stock and warrants to purchase an additional 835,000 shares of common
stock at $6.31 per share to one accredited investor. The transaction was
exempt from registration under the Securities Act of 1933 by reason of Section
4(2) and Regulation D promulgated thereunder. The Company paid finders' fees to
Wasserstein Perella & Co., Inc. and UBS Securities, Inc. of $250,000 each, for a
total of $500,000.

ITEM 6. SELECTED FINANCIAL DATA.

Information contained under the caption "Selected Financial Data" in the
Company's 1996 Annual Report to Shareholders is incorporated herein by
reference in response to this Item 6.

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

Information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
1996 Annual Report to Shareholders is incorporated herein by reference in
response to this Item 7.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial Statements for the Company and the Report of Independant
Auditors thereon are contained in the Company's 1996 Annual Report to
Shareholders and are incorporated herein by reference in response to this Item
8.

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

None.

<PAGE> 16

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information concerning the nominees for Directors of the Company set
forth under "Election of Directors" in the Company's Proxy Statement for its
1997 Annual Meeting of Shareholders is incorporated herein by reference in
response to the information required by this Item 10.

Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 set forth under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders is incorporated herein by reference in response
to the information required by this Item 10.

Information concerning the Executive Officers of the Company is contained
in a separate section captioned "Executive Officers of the Registrant" in Part
I of this report and is incorporated herein by reference in response to the
information required by this Item 10.

ITEM 11. EXECUTIVE COMPENSATION.

The information set forth under "Executive Compensation" in the Company's
Proxy Statement for its 1997 Annual Meeting of Shareholders is incorporated
herein by reference in response to the information required by this Item 11.

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

The information set forth under "Voting Securities" in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders is incorporated herein by
reference in response to the information required by this Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information set forth under "Certain Transactions" and "Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders is incorporated herein by
reference in response to the information required by this Item 13.

16
<PAGE> 17

PART IV

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

(a) Documents:

(1) The following financial statements of the Company and Report of
Independent Auditors are contained in the Company's 1996 Annual Report to
Shareholders and are incorporated by reference in Part II, Item 8.

Balance Sheets as of December 31, 1996 and 1995

Statements of Operations for the years ended December 31, 1996, 1995, and
1994, and for the period from July 17, 1989 (date of inception) to December 31,
1996

Statements of Stockholders' Equity for the years ended December 31, 1996,
1995, and 1994, and for the period from July 17, 1989 (date of inception) to
December 31, 1996

Statements of Cash Flows for the years ended December 31, 1996, 1995, and
1994, and for the period from July 17, 1989 (date of inception) to December 31,
1996

Notes to Financial Statements

Report of Independent Auditors

(2) Financial Statement Schedules

Financial statement schedules have been omitted either because they are
not applicable or because the information that would be included in such
schedules is included elsewhere in the financial statements or the notes
thereto.

(3) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
- -------
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
3.1 -- Articles of Incorporation of the Company, as amended.(1)

3.2 -- Bylaws of the Company, as amended.(1)

4.1 -- See Articles II and VII of the Company's Articles of Incorporation located within Exhibit 3.1.

4.2 -- See Articles 2, 3 and 4 of the Company's Bylaws located within Exhibit 3.2.

10.1 -- License Agreement dated July 19, 1989 among the Company, Dreisbach
</TABLE>

17
<PAGE> 18

<TABLE>
<S> <C> <C>
Electromotive, Inc. and Mike Cheiky.(2)

10.2 -- Technology Assignment Agreement dated July 19, 1989 among the Company, Dreisbach Electromotive, Inc. and Mike
Cheiky.(2)

10.3 -- Shareholders Agreement among the existing stockholders of the Company.(2)

10.4 -- Industrial Real Estate Lease dated February 5, 1991 between the Company and Brentwood One and Brentwood II Joint
Venture.(2)

10.5 -- Lease dated September 16, 1992 between the Company and Indian Trail Development Company.(2)

10.6* -- AER Energy Resources, Inc. 1992 Stock Option Plan, as amended.(2)

10.7* -- Form of Non-Qualified Stock Option Agreement.(3)

10.8* -- Form of Incentive Stock Option Agreement.(3)

10.9 -- Agreement dated May 12, 1993 between the Company and Westinghouse Electric Corporation.(2)

10.10* -- Form of Indemnity Agreement with Directors.(2)

10.11 -- Voting and Co-Sale Agreement dated July 17, 1992 among the Company, Jon A. Lindseth, Battery Partners, Elmwood
Partners II, The Kindt-Collins Company, Odyssey Partners, L.P. and Chemical Equity Associates.(2)

10.12 -- Consent to Partial Assignment of Royalties and Amendment No. 2 to License Agreement dated as of October 15, 1993
among the Company, Dreisbach Electromotive, Inc. and Mike Cheiky.(4)

10.13 -- Amended and Restated DEMI/AER Air Manager Agreement dated October 15, 1993 among the Company, Dreisbach
Electromotive, Inc. and Mike Cheiky.(4)

10.14* -- AER Energy Resources, Inc. 1993 Non-Employee Directors' Restricted Stock Award Plan.(4)

10.15* -- Form of Director's Restricted Stock Award Agreement.(5)

10.16* -- Stock Option Agreement dated November 2, 1989 by and between David W. Dorheim and Aerobic Power Systems, Inc. (now
AER Energy Resources, Inc.) (6)

10.17* -- Stock Option Agreement dated February 8, 1991 by and between R. Dennis Bentz and AER Energy Resources, Inc. (6)

</TABLE>
18

<PAGE> 19

<TABLE>
<S> <C> <C>
10.18* -- Stock Option Agreement dated July 1, 1990 by and between Frank M. Harris and Aerobic Power Systems, Inc. (now AER
Energy Resources, Inc.). (6)

10.19 -- Lease Agreement dated November 15, 1993 between AER Energy
Resources, Inc. and Highlands Park Associates. (7)

10.20 -- Lease Agreement dated March 25, 1994 between AER Energy
Resources, Inc. and Highlands Park Associates. (7)

10.21* -- Stock Option Agreement dated December 20, 1994 between H.
Douglas Johns and AER Energy Resources, Inc. (8)

10.22* -- Consulting Agreement dated December 20, 1994 between H.
Douglas Johns and AER Energy Resources, Inc. (9)

10.23 -- Form of Convertible Debenture Subscription Agreement. (10)

10.24 -- Form of 8% Convertible Debenture due November 17, 1997. (10)

10.25 -- Registration Rights Agreement. (10)

10.26 -- Warrant to Purchase Common Stock. (10)

10.27 -- Amendment No. 3 to License Agreement and Termination of
Technology Assignment Agreement dated December 26, 1995.

10.28 -- Securities Purchase Agreement, dated as of May 20, 1996, by and
between FW AER Partners, L.P. and AER Energy Resources, Inc. (11)

10.29 -- Warrant to Purchase Common Stock (11)

10.30* -- Agreement between H. Douglas Johns and AER Energy Resources, Inc.
dated November 7, 1996, amending Mr. Johns' Consulting Agreement and
Stock Option Agreement.

11 -- Computation of Per Share Loss.

13 -- The Registrant's Annual Report to Shareholders for the year ended
December 31, 1996. Only those portions of said report which are
specifically designated in this Form 10-K as being incorporated by
reference are being electronically filed pursuant to the Securities
Exchange Act of 1934.

21 -- Subsidiaries of the Company. (2)

23 -- Consent of Ernst & Young LLP., Independent Auditors

</TABLE>
19

<PAGE> 20

27 -- Financial Data Schedule (for SEC use only).

- ------------------------------------------------------------------------
* Indicates management contract or compensatory plan or arrangement.

<TABLE>
<S> <C>
(1) Filed on June 17, 1993 as an Exhibit to Amendment No. 2 to the
Registrant's Registration Statement on Form S-1 (File No. 33-62668) and
incorporated herein by reference.
(2) Filed on May 14, 1993 as an Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-62668) and incorporated herein by reference.
(3) Filed on October 5, 1993 as an Exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 33-69982) and incorporated herein by
reference.
(4) Filed on October 29, 1993 as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q (File No. 0-21926) for the quarter ended September 30,
1993 and incorporated herein by reference.
(5) Filed on September 24, 1993 as an Exhibit to the Registrant's
Registration Statement on Form S-8 (File No. 33-69462) and incorporated
herein by reference.
(6) Filed on March 25, 1994 as an Exhibit to the Registrant's Annual Report
on Form 10-K (File No. 0-21926) for the year ended December 31, 1993 and
incorporated herein by reference.
(7) Filed on September 23, 1994 as an Exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 33-84300) and incorporated
herein by reference.
(8) Filed on February 2, 1995 as an Exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 33-89068) and incorporated herein by reference.
(9) Filed on March 23, 1995 as an Exhibit to the Registrant's Annual Report on
Form 10-K (File No. 0-21926) for the year ended December 31, 1994 and
incorporated herein by reference.
(10) Filed on December 13, 1995 as an Exhibit to the Registrant's Form 8-K
(File No. 0- 21926) and incorporated herein by reference.
(11) Filed on May 20, 1996 as an Exhibit to the Registrant's Form 8-K (File
No. 0-21926) and incorporated herein by reference.

(b) Reports on Form 8-K filed in the fourth quarter of 1996:

The registrant did not file any reports on Form 8-K during quarter ended
December 31, 1996.
</TABLE>

20
<PAGE> 21

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 27, 1997.

AER ENERGY RESOURCES, INC.

By: /s/ David W. Dorheim
--------------------
David W. Dorheim,
President and Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------- --------------------------------- --------------
<S> <C> <C>

/s/ Jon A. Lindseth Chairman March 27, 1997
---------------------
Jon A. Lindseth

/s/ David W. Dorheim Director, President and Chief March 27, 1997
---------------------
David W. Dorheim Executive Officer

/s/ M. Beth Donley Vice President -- Chief Financial March 27, 1997
--------------------- Officer, Treasurer and Secretary
M. Beth Donley (Principal Accounting Officer and
Principal Financial Officer)

/s/ David G. Brown Director March 27, 1997
---------------------
David G. Brown

/s/ Charles M. Boesenberg Director March 27, 1997
--------------------------
Charles M. Boesenberg

/s/ William L. Jackson Director March 27, 1997
--------------------------
William L. Jackson

/s/ H. Douglas Johns Director March 27, 1997
--------------------------
H. Douglas Johns

/s/ John L. Wilkes Director March 27, 1997
-------------------
John L. Wilkes
</TABLE>

<PAGE> 1
Exhibit 10.30

AGREEMENT

THIS IS AN AGREEMENT (this "Agreement") made and entered into on November 7,
1996 by and between AER Energy Resources, Inc., a Georgia corporation ("AER
Energy") and H. Douglas Johns, a resident of Atlanta, Georgia ("Johns"), in
which the parties hereto, in consideration of the mutual promises set forth
below and other good and valuable consideration, the mutuality, adequacy and
sufficiency of which are hereby acknowledged, hereby agree as follows:

1. Purpose. The purpose of this Agreement is to amend the
Consulting Agreement, dated December 20, 1994, by and between AER Energy and
Johns (the "Consulting Agreement") and the Stock Option Agreement, also dated
December 20, 1994, by and between AER Energy and Johns (the "Stock Option
Agreement"). The Nasdaq Stock Market has indicated that the grant of an option
to Johns to acquire 50,000 shares of the common stock of AER Energy at an
exercise price of $4.25 per share without first obtaining shareholder approval
was in violation of certain of its rules. In order to satisfy the Nasdaq Stock
Market and to bring the grant of this option into compliance with its rules,
the parties have agreed to amend Johns' option so that is covers 25,000 common
shares at an exercise price of $2.125 per share.

2. Amendment of Consulting Agreement and Stock Option Agreement.

(a) Consulting Agreement. Paragraph 4 of the Consulting
Agreement is hereby amended by deleting it in its entirety and
replacing in lieu thereof the following:

"4. Stock Option. AER Energy has granted Johns
an option to acquire 25,000 shares of AER Energy stock, as
provided in the attached stock option agreement."

(b) Stock Option Agreement. Paragraph 1 of the Stock
Option Agreement is hereby amended by deleting it in its entirety and
replacing in lieu thereof the following:

"1. Option Grant. AER hereby grants to Optionee
the option (this "Option") to acquire from AER all or any part
of an aggregate of 25,000 shares of AER's no par value common
stock at an exercise price of $2.125 per share, subject to the
terms and conditions hereinafter set forth. The shares of the
no par value common stock of AER are hereinafter referred to
as the "Shares."
<PAGE> 2

3. No Other Amendment. Except as specifically amended as
described above, each of the Consulting Agreement and the Stock Option
Agreement shall remain in full force and effect in its current form.

DULY EXECUTED AND DELIVERED by the undersigned as of the date first
above written.

AER ENERGY RESOURCES, INC.

By: /s/ David W. Dorheim
------------------------------
Name: David W. Dorheim
------------------------------
Title: President & CEO
------------------------------

/s/ H. Douglas Johns
-------------------------------------

* * * *

<PAGE> 1

EXHIBIT 11

AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)

COMPUTATION OF PER SHARE LOSS

<TABLE>
<CAPTION>
PERIOD FROM JULY
17, 1989 (DATE OF
YEARS ENDED DECEMBER 31, INCEPTION) TO
------------------------------------------ DECEMBER 31,
1996 1995 1994 1996
------------ ------------- ------------- -----------------------------
<S> <C> <C> <C> <C>
Weighted average
Common Stock
outstanding...... 22,673,126 17,228,972 14,904,822 11,214,248
Common Stock issued
and stock options
granted in
accordance with
Staff
Accounting Bulletin
No.83............ -- -- -- 1,470,525
----------- ------------ ------------ -----------------------------
Total:.......... 22,673,126 17,228,972 14,904,822 12,684,773
=========== ============ ============ =============================
Net loss........... $(7,559,321) $(10,198,195) $(10,188,824) $(45,693,079)
=========== ============ ============ =============================
Per share amount... $(0.33) $(0.59) $(0.68) $(3.60)
</TABLE>

<PAGE> 1

EXHIBIT 13

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock is traded under the symbol "AERN" on the Nasdaq
National Market (Nasdaq).

The following table sets forth, for the quarters indicated, the high and
low sales prices for the Company's common stock on the Nasdaq. Nasdaq
quotations are based on actual transactions and not bid prices.

<TABLE>
<CAPTION>
Price
Quarter Ended: High Low
------- -------
<S> <C> <C>

March 31, 1995 6 1/8 2 3/4
June 30, 1995 6 1/4 4 5/16
September 30, 1995 5 7/8 4 1/8
December 31, 1995 5 1/8 2 1/4

March 31, 1996 3 7/16 1 7/8
June 30, 1996 7 3/4 4
September 30, 1996 4 11/16 2 15/16
December 31, 1996 3 7/8 2 3/16
</TABLE>

On December 31, 1996, the closing price of the common stock as reported on
the Nasdaq was $2.19 per share. On March 17, 1997, there were 272 holders of
record of the Company's common stock. This number excludes shareholders
holding stock under nominee or street name accounts with brokers.

The Company has not declared a cash dividend on its common stock since
inception. The Company has incurred operating losses since inception and
expects to incur operating losses at least through 1998. Thus, the Company
anticipates that for the foreseeable future, earnings, if any, will be retained
for the operation and growth of its business. Accordingly, the Company does
not anticipate paying any dividends in the foreseeable future.

<PAGE> 2

SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
PERIOD FROM
JULY 17, 1989
(DATE OF
INCEPTION)
YEARS ENDED DECEMBER 31, TO
(IN THOUSANDS EXCEPT ---------------------------------------------------- DECEMBER 31,
PER SHARE DATA) 1996 1995 1994 1993 1992 1996
-------- -------- -------- -------- --------- -------------

<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
REVENUES $ 23 $ 159 $ 49 $ -- $ -- $ 230
GROSS MARGIN (1,288) (2,020) (546) -- -- (3,854)
COSTS AND EXPENSES:
RESEARCH AND
DEVELOPMENT 4,207 4,696 6,341 5,045 3,242 26,693
MARKETING,
GENERAL, AND
ADMINISTRATIVE 3,123 4,174 3,766 2,514 1,613 17,568
TOTAL COSTS AND
EXPENSES 7,330 8,870 10,107 7,559 4,855 44,261
OPERATING LOSS (8,618) (10,890) (10,653) (7,559) (4,855) (48,115)
INTEREST INCOME
(EXPENSE), NET 1,059 692 464 297 78 2,422
NET LOSS $ (7,559) $(10,198) $(10,189) $ (7,262) $ (4,777) $ (45,693)
NET LOSS PER SHARE $ (0.33) $ (0.59) $ (0.68) $ (0.56) $ (0.43) $ (3.60)
WEIGHTED AVERAGE
SHARES
OUTSTANDING (1) 22,673 17,229 14,905 13,047 11,046 12,685

(IN THOUSANDS)
BALANCE SHEET DATA:
CASH AND CASH
EQUIVALENTS $ 18,728 $ 16,417 $ 16,030 $ 5,343 $ 3,224
WORKING CAPITAL 18,502 16,125 15,953 13,502 4,192
TOTAL ASSETS 20,688 18,895 19,007 16,314 5,673
TOTAL LIABILITIES 512 703 665 679 459
DEFICIT ACCUMULATED
DURING THE
DEVELOPMENT STAGE (46,008) (38,223) (27,936) (17,747) (10,484)
TOTAL STOCKHOLDERS'
EQUITY 20,176 18,192 18,342 15,635 5,214
</TABLE>

(1) COMPUTED ON THE BASIS DESCRIBED IN NOTE 1 OF THE NOTES TO THE FINANCIAL
STATEMENTS.

<PAGE> 3

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

GENERAL

Since its inception, the Company has been a development stage company
primarily engaged in developing rechargeable zinc-air battery technology,
establishing the manufacturing process, defining and developing market
opportunities, testing and selling rechargeable zinc-air batteries and
recruiting and training personnel. From inception through 1994, the Company's
research and development expenses increased as the Company progressed from a
company with a basic rechargeable zinc-air technology to a company producing
rechargeable zinc-air batteries in quantity. Starting in 1994 with the sale of
the Company's first battery product, a portion of the research and development
effort became focused on the manufacturing process and the production of both
prototype batteries and batteries for sale to customers. The Company
introduced its first product, a zinc-air stand-alone accessory battery, in
August 1994. During 1995, the Company began shipping two customized zinc-air
accessory batteries designed for computer original equipment manufacturers
("OEMs"); the AER Energy PowerProTM and the AER Energy PowerSlice LXTM. The
AER Energy PowerPro battery was designed for certain models of Toshiba portable
computers that went out of production in late 1995. During the quarter ended
September 30, 1996, the Company phased out its AER Energy PowerPro battery.
The AER Energy PowerSlice LX battery was designed for the Hewlett-Packard
OmniBook 600 portable computer. In September 1996, Hewlett-Packard introduced
the OmniBook 800 portable computer, an upgrade of its OmniBook 600. An
increase in the power requirements of the OmniBook 800 over the OmniBook 600
plus the Company's incorporation of recent technology enhancements into its
battery products have resulted in delays in shipping the Company's AER Energy
PowerSlice LX battery. Product sales through December 31, 1996 have been
minimal. The Company has incurred cumulative losses of $45.7 million since
inception to December 31, 1996. The Company expects to continue to incur
operating losses through at least the end of 1998.

The Company was formed to develop and commercialize rechargeable zinc-air
batteries for portable electronic products using technology licensed from
Dreisbach Electromotive, Inc. ("DEMI"). DEMI was formed in 1982 to conduct
research and development on electric vehicles and battery systems utilizing,
among others, zinc-air technology. DEMI's zinc-air development programs
included applications for electric vehicles and portable products. The Company
has licensed, through DEMI (the "DEMI License"), the rights to use certain DEMI
technology including zinc-air, in non-motor vehicle applications, while DEMI
has retained the rights to zinc-air technology for motor vehicle applications
and to its other technologies for motor vehicle applications and batteries
producing over 500 watts continuous power output. Effective October 15, 1993,
the DEMI License was amended so that, under certain circumstances, some or all
of the royalties due under the DEMI License are payable to the shareholders of
DEMI rather than to DEMI. DEMI had rights pursuant to a Technology Assignment
Agreement to battery technology developed by Mr. Cheiky, DEMI's principal
scientist, through July 19, 2004, subject to certain annual payments to be made
to Mr. Cheiky and certain other conditions and exceptions. On December 26,
1995, the Technology Assignment Agreement with Mr. Cheiky was terminated.

RESULTS OF OPERATIONS

Net revenues for the years ended December 31, 1996, 1995 and 1994 were
$23,000, $159,000 and $49,000, respectively. Net revenues during 1994 were
attributable to the Company's first product introduced in August 1994. Net
revenues during 1995 and 1996 were attributable to the Company's AER Energy
PowerPro and AER Energy PowerSlice LX battery products.

<PAGE> 4

The Company's cost of sales for the years ended December 31, 1996, 1995
and 1994 were $1.3 million, $2.2 million and $0.6 million, respectively. The
high cost of sales in all three years is primarily due to manufacturing
inefficiencies and high material costs resulting from low production volumes.

Research and development expenses decreased to $4.2 million for the year
ended December 31, 1996 from $4.7 million for the same period in 1995. This
decrease was primarily the result of a $351,000 reduction in the costs related
to the design and development of the Company's battery products. These design
and development costs include an allocation of manufacturing overhead
pertaining to the production and testing of prototype zinc-air batteries and
cells. During the years ended December 31, 1996 and 1995, a total of
$1,127,000 and $389,000 in manufacturing overhead expenses were allocated to
the research and development effort, respectively. The reduction in research
and development expenses in 1996 compared to 1995 also resulted from an $83,000
decrease in personnel related costs, and a $40,000 decrease in legal expenses.

Research and development expenses decreased to $4.7 million for the year
ended December 31, 1995 from $6.3 million for the year ended December 31, 1994.
This decrease was primarily due to $1.2 million of direct labor and
manufacturing overhead costs which were classified as either cost of sales or
inventory in the financial statements for the year ended December 31, 1995,
rather than as research and development expenses as they were classified in the
financial statements for the year ended December 31, 1994. This resulted from
the Company's commencement of commercial production of its rechargeable
zinc-air batteries during 1994. The Company also experienced $687,000 in lower
material, design and tooling costs related to its development of customized
zinc-air accessory batteries for OEMs during the year ended December 31, 1995,
as compared to the year ended December 31, 1994. These decreases were
partially offset by $155,000 in increased staffing costs, a $42,000 increase in
allocated facility costs and a $26,000 increase in travel related expenses.
The Company also experienced a $101,000 increase in depreciation expense
relating primarily to improvements in the manufacturing facilities.

Marketing, general and administrative expenses decreased to $3.1 million
for the year ended December 31, 1996 from $4.2 million for the same period in
1995. This decrease of $1.1 million was largely due to a $315,000 reduction in
marketing, advertising, and public relations expenses. The Company also
experienced a decrease of $186,000 in consulting fees, a reduction of $157,000
in the write-off of obsolete inventory, a decrease of $155,000 in warranty
expense, a reduction of $146,000 in professional fees, a $96,000 decrease in
royalty payments pursuant to the DEMI License, and a $42,000 reduction in
amortization expenses. These decreases were partially offset by a $60,000
increase in personnel costs.

Marketing, general and administrative expenses increased to $4.2 million
for the year ended December 31, 1995 compared to $3.8 million for the year
ended December 31, 1994. The increase of $0.4 million in 1995 over 1994 was
largely due to a $247,000 increase in professional fees and expenses and
investor relations expenses, a $207,000 increase in consulting fees, increases
in the charges to warranty and obsolescence reserves of $157,000 and $297,000,
respectively, and a $50,000 increase in staffing related expenses. These
increases in 1995 as compared to 1994 were partially offset by a $332,000
reduction in marketing, advertising and public relations expenses, a $104,000
reduction in amortization expenses, a $53,000 reduction in the minimum royalty
expense pursuant to the DEMI License and a $22,000 reduction in compensation
expense due to the amortization of unearned stock compensation associated with
the award of shares to non-employee directors under the

<PAGE> 5

Company's 1993 Non-Employee Director's Restricted Stock Award Plan.

Interest income increased in 1996 to $1,059,000 from $691,000 in 1995 and
$464,000 in 1994. The increases in interest income in 1996 and 1995 were due
to the higher cash balances resulting from the Company receiving net proceeds
of $9.4 million from the private placement of common stock and warrants during
May 1996 and the private placement of $10.7 million in 8% convertible
debentures during November 1995. Both financings are discussed below in the
"Liquidity, Capital Resources and Financial Condition" section.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

The Company financed its operations from inception through July 9, 1993 with
debt and private placements of common stock. On July 9, 1993, the Company
received, net of underwriting discounts and commissions but before deducting
expenses, proceeds of $16.3 million from its initial public offering of
2,500,000 shares of common stock. On August 6, 1993, the Company issued an
additional 311,700 shares pursuant to the exercise of the underwriters'
over-allotment option, and received additional proceeds of $2.0 million, net of
underwriting discounts and commissions. On November 9, 1994, the Company
closed a second public offering of 2,500,000 shares of its common stock,
generating proceeds of $12.3 million, net of underwriting discounts and
commissions but before deducting expenses. On December 7, 1994, an additional
150,000 shares were issued pursuant to the underwriters' overallotment option,
generating additional proceeds of $736,500, net of underwriting discounts and
commissions.

On November 29, 1995, the Company issued $10,675,000 principal amount of
8% convertible subordinated debentures due November 17, 1997. Beginning
January 13, 1996 and ending November 17, 1997, a holder of a debenture may
elect to convert the debenture into common stock of the Company at a conversion
price equal to the lesser of $3.60 per share or a percentage ranging from 85%
to 100% of the average closing bid price for the five trading days immediately
prior to the conversion. If a holder does not elect to convert the debentures,
the debentures automatically are converted into common stock on November 17,
1997 based on the above formula. Upon the occurrence of a specific event, such
as a merger, joint venture, or strategic partner involvement, the Company, at
its option, may redeem the debentures, in whole or in part, for cash at 130% of
the debenture issue price plus accrued interest. Interest on the debentures
accrues at 8% per year and is payable in common stock upon conversion. In
connection with the transaction, the Company paid to a placement agent $840,500
in fees and delivered a warrant to purchase 225,590 shares of common stock at an
exercise price of $4.32 per share. The cash payment has been charged to
stockholders' equity. During 1996, debentures with a principal amount of $9.8
million plus accrued interest were converted into 5,394,992 shares of the
Company's common stock at an average conversion price of $1.86 per share.

On May 20, 1996, the Company issued 1,584,158 shares of its common stock,
and warrants to purchase an additional 835,000 shares, in a private placement
at an aggregate purchase price of $10 million. The transaction generated
proceeds of $9.4 million, net of expenses. The warrants have an exercise price
of $6.3125 per share and expire in five years. The value of the warrants is
included in common stock on the balance sheet.

The net proceeds from these financings have been and will be used to fund
capital equipment purchases, research and development efforts, sales and
marketing activities, production of commercial and prototype zinc-air battery
products, development of OEM relationships and working capital and general
corporate purposes as determined by management. In the interim, the Company
invests the net proceeds in government securities and other short-term,
investment grade, interest bearing investments.

<PAGE> 6

As of December 31, 1996 the Company had cash and cash equivalents of $18.7
million.

Net cash used in operating activities dropped to $6.9 million in 1996 from
$9.2 million in 1995. Net cash used in operating activities for 1995 was
$600,000 lower than the $9.8 million used in operating activities in 1994. The
changes in net cash used in operating activities are primarily due to the
changes in costs and expenses discussed above in "Results of Operations."

During the years ended December 31, 1996 and 1995, cash used in investing
activities was $158,000 and $324,000, respectively, which primarily reflected
the purchase of manufacturing and battery testing equipment and improvements to
leased facilities. Investing activities provided $7.8 million for the year
ended December 31, 1994 resulting primarily from the maturity of marketable
securities totaling $8.7 million which was partially offset by $894,000 in
purchases of equipment and leasehold improvements.

Net cash provided by financing activities was $9.4 million in 1996 as
compared to $9.9 million in 1995 and $12.7 million in 1994. The cash provided
by financing activities in 1996 was primarily due to the private placement sale
of the Company's common stock and warrants for $10 million, net of $635,000 in
expenses. The cash provided by financing activities in 1995 was primarily due
to the issuance of $10.7 million of 8% convertible debentures, net of $841,000
of placement fees. The cash provided by financing activities in 1994 was
primarily due to the sale of common stock through the Company's second public
offering.

As discussed in Note 7 to the Financial Statements, the Company has agreed
to pay DEMI royalties pursuant to the DEMI License. The Company recorded
royalty expense related to the DEMI License for the years ended December 31,
1996, 1995, and 1994 and for the period from inception to December 31, 1996 of
$150,000, $250,000, $300,000, and $1,150,000, respectively.

As discussed in Note 8 to the Financial Statements, the Company executed
an agreement with Westinghouse Electric Corporation (the "Westinghouse
License") pursuant to which the Company pays 1% of revenues up to $300,000
followed by 0.5% of revenues up to $350,000, at which time no further royalties
for product sales will be due.

At December 31, 1996, the Company had available net operating loss
carryfowards for income tax purposes of approximately $36.9 million and
research and development credit carryfowards of $1.1 million. These
carryforward items will both begin to expire in 2004. Additionally, the
Company's net operating loss and research and development credit carryforwards
are both subject to certain limitations on annual utilization because of
changes in ownership of the Company. These limitations could significantly
reduce the amount of the net operating loss and credit carryforwards available
to the Company in the future.

As discussed in Note 6 to the Financial Statements, on November 7, 1996,
the Company amended a stock option agreement with a member of the Board of
Directors. For the year ended December 31, 1996, the Company recorded $14,000
in compensation expense related to the amended stock option.

As described in Note 1 to the Financial Statements, the Company adopted
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" during the first quarter of 1996.

<PAGE> 7

As discussed in Note 6 to the Financial Statements, the Company has
elected to follow APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its employee stock
options. Under FASB Statement No. 123, "Accounting for Stock-Based
Compensation", certain pro forma information is required regarding net income
and earnings per share to be determined as if the Company has accounted for its
employee stock options subsequent to December 31, 1994 under the fair value
method of that Statement. The Company estimates its pro forma net loss using
the fair value method for valuing employee stock options for the years ended
December 31, 1996 and 1995 to be $8.0 million and $10.7 million, respectively.

The Company currently anticipates that its existing cash balances will
fund operations and continue technology development at the current level of
activity into 1998. However, it may be necessary for the Company to increase
its research and development and marketing expenses as it continues to work to
improve its zinc-air technology and to expand its relationships with portable
computer OEMs. It may also be necessary for the Company to expand its
manufacturing capacity in 1997 to meet anticipated sales requirements. The
Company will continue to need working capital beyond that generated by its May
1996 stock and warrant placement, and depending on the Company's results of
operations, the Company may find it necessary to obtain additional working
capital on an accelerated basis or in amounts greater than currently
anticipated. There can be no assurance that additional equity or debt
financing will be available when needed or on terms acceptable to the Company.
To date, both costs and development times have substantially exceeded the
Company's forecasts. In addition, the battery business is a chemical
processing business and, as such, the Company will require specialized
equipment to manufacture its zinc-air batteries. Future equipment additions
could exceed current Company estimates in cost, complexity and development
time.

The market price of the Company's common stock has fluctuated
significantly since it began to be publicly traded in 1993 and may continue to
be highly volatile. Factors such as delays by the Company in achieving
development goals, inability of the Company to commercialize or manufacture its
products, fluctuation in the Company's operating results, changes in earning
estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, perceived changes in the markets
for various OEM applications incorporating the Company's products, the
announcement or termination of relationships with OEMs, and general market
conditions may cause significant fluctuations in the market price of the
Company's common stock. The market prices of the stock of many high technology
companies have fluctuated substantially, often unrelated to the operating or
research and development performance of the specific companies. Such market
fluctuations could adversely affect the market price for the Company's common
stock.

<PAGE> 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995
------------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1)............................... $ 18,728,427 $ 16,417,152
Trade accounts receivable (less allowance of $2,411 at
December 31, 1996 and $19,790 at December 31, 1995)............ 3,475 8,025
Inventories (Notes 1 and 2)...................................... 100,399 254,008
Prepaid expenses................................................. 178,137 141,132
------------------ ------------
Total current assets............................................... 19,010,438 16,820,317
Equipment and improvements:
Machinery and equipment.......................................... 2,993,555 2,874,394
Office equipment................................................. 445,926 427,905
Leasehold improvements........................................... 254,766 252,299
------------------ ------------
3,694,247 3,554,598
Less accumulated depreciation.................................... 2,033,392 1,496,406
------------------ ------------
1,660,855 2,058,192
Other assets....................................................... 16,841 16,841
------------------ ------------
Total assets....................................................... $ 20,688,134 $ 18,895,350
================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 168,911 $ 331,435
Accrued royalties - related party (Note 7)....................... 30,000 60,000
Other accrued expenses........................................... 309,855 304,315
------------------ ------------
Total current liabilities.......................................... 508,766 695,750
Deferred rental expense............................................ 2,957 7,056
Stockholders' equity:
Convertible debentures (Note 11)................................. 909,198 9,924,073
Preferred stock, no par value:
Authorized - 10,000,000 shares; no shares issued and outstanding - -
Common stock, no par value:
Authorized - 100,000,000 shares; issued and outstanding-
24,276,080 shares at December 31, 1996 and 17,269,180 shares
at December 31, 1995......................................... 65,675,743 46,905,677
Notes receivable from common stock sales......................... (71,875) (71,875)
Unearned stock compensation (Note 4)............................. (328,455) (342,000)
Deficit accumulated during the development stage................. (46,008,200) (38,223,331)
------------------ ------------
Total stockholders' equity......................................... 20,176,411 18,192,544
------------------ ------------
Total liabilities and stockholders' equity......................... $ 20,688,134 $ 18,895,350
================== ============
</TABLE>

See accompanying notes.

<PAGE> 9

AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS

<TABLE>

PERIOD FROM JULY
17, 1989 (DATE OF
INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994 1996
---------------------- -------------------- ---------------- ----------------

<S> <C> <C> <C> <C>
Revenues................... $ 22,633 $ 158,602 $ 48,540 $ 229,775
Cost of sales............ 1,310,360 2,178,681 594,846 4,083,887
-------------------- ------------------- ---------------- ----------------
Gross margin............... (1,287,727) (2,020,079) (546,306) (3,854,112)
Costs and expenses:
Research and development
- related party (Note 7) - - - 1,145,913
- other................ 4,207,551 4,695,756 6,341,100 25,546,867
Marketing, general and
administrative
- related party (Note 7) 149,317 245,242 298,542 1,143,101
- other................ 2,973,899 3,928,550 3,467,009 16,425,039
-------------------- ------------------- ---------------- ----------------
Total costs and expenses... 7,330,767 8,869,548 10,106,651 44,260,920
-------------------- ------------------- ---------------- ----------------
Operating loss............. (8,618,494) (10,889,627) (10,652,957) (48,115,032)
Interest income............ 1,059,173 691,432 464,133 2,686,398
Interest expense
- - related parties.......... - - - (264,445)
-------------------- ------------------- ---------------- ----------------
Net loss................... $ (7,559,321) $ (10,198,195) $ (10,188,824) $ (45,693,079)
==================== =================== ================ ================
Net loss per share......... $ (0.33) $ (0.59) $ (0.68) $ (3.60)
==================== =================== ================ ================
Weighted average shares
outstanding................ 22,673,126 17,228,972 14,904,822 12,684,773
</TABLE>

See accompanying notes.

<PAGE> 10

AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
NOTES DEFICIT
RECEIVABLE ACCUMULATED
FROM DURING THE TOTAL
CONVERTIBLE COMMON STOCK COMMON UNEARNED DEVELOPMENT STOCKHOLDERS'
DEBENTURES SHARES AMOUNT STOCK SALES COMPENSATION STAGE EQUITY
----------- ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
For cash ranging from $0.02
to $7.00 per share, inception
to August 1993............... $ - 11,233,450 $28,858,185 $ - $ - $ - $28,858,185
For promissory notes ranging
from $0.89 to $1.89 per
share, February 1990 to
January 1993................. - 135,450 169,675 (169,675) - - -
For exchange of debt ranging
from $1.22 to $1.89 per
share, May 1991 to July 1992 - 3,079,305 4,438,934 - - - 4,438,934
Payments received on
promissory notes............... - - - 34,300 - - 34,300
Shares granted under Restricted
Stock Award Plan (Note 4)...... - 87,000 891,750 - (891,750) - -
Compensation under Restricted
Stock Award Plan .............. - - - - 50,063 - 50,063
Cancellation of promissory note.. - (21,375) (40,375) 40,375 - - -
Net loss, inception to
December 31, 1993.............. - - - - - (17,746,739) (17,746,739)
------ ---------- ----------- -------- --------- ------------ ----------
Balance at December 31, 1993 - 14,513,830 34,318,169 (95,000) (841,687) (17,746,739) 15,634,743
Issuance of common stock:
For cash at $5.25 per share,
November to December
1994....................... - 2,650,000 12,656,153 - - - 12,656,153
Exercise of stock options:
$1.89 per share, May 1994...... - 2,250 4,252 - - - 4,252
$1.22 per share, June 1994..... - 8,100 9,900 - - - 9,900
$0.89 per share, July 1994..... - 40,500 36,045 - - - 36,045
$1.89 per share, August 1994... - 5,400 10,206 - - - 10,206
$1.22 per share, October 1994.. - 4,500 5,490 - - - 5,490
Shares granted under Restricted
Stock Award Plan (Note 4) ..... - 12,750 102,000 - (102,000) - -
Shares cancelled under Restricted
Stock Award Plan (Note 4)...... - (12,000) (96,000) - 96,000 - -
Compensation under Restricted
Stock Award Plan .............. - - (195,750) - 361,687 - 165,937
Payments received on
promissory notes .............. - - - 8,125 - - 8,125
Net loss......................... - - - - - (10,188,824) (10,188,824)
------ ---------- ----------- -------- --------- ------------ -----------
Balance at December 31, 1994..... - 17,225,330 46,850,465 (86,875) (486,000) (27,935,563) 18,342,027
</TABLE>

Continued on next page

<PAGE> 11

AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>

NOTES DEFICIT
RECEIVABLE ACCUMULATED
COMMON STOCK FROM DURING THE TOTAL
CONVERTIBLE --------------------- COMMON UNEARNED DEVELOPMENT STOCKHOLDERS'
DEBENTURES SHARES AMOUNT STOCK SALES COMPENSATION STAGE EQUITY
---------- ---------- ---------- -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options:
$0.89 per share, March 1995.... - 11,250 10,013 - - - 10,013
$1.22 per share, May 1995...... - 9,500 11,590 - - - 11,590
$1.89 per share, May 1995...... - 2,700 5,103 - - - 5,103
$1.89 per share, June 1995..... - 5,400 10,206 - - - 10,206
$1.22 per share, August 1995... - 5,000 6,100 - - - 6,100
$1.22 per share, October 1995.. - 10,000 12,200 - - - 12,200
Compensation under Restricted
Stock Award Plan .............. - - - - 144,000 - 144,000
Payments received on
promissory notes .............. - - 15,000 - - 15,000
Sale of convertible debentures
for cash, November 1995........ 9,834,500 - - - - - 9,834,500
Interest payable on convertible
debentures .................... 89,573 - - - - (89,573) -
Net loss ....................... - - - - (10,198,195) (10,198,195)
---------- ---------- ---------- ---------- ---------- ------------ -------------
Balance at December 31, 1995.... 9,924,073 17,269,180 46,905,677 (71,875) (342,000) (38,223,331) 18,192,544
Issuance of common stock:
For cash at $6.31 per share,
May 1996 .................... - 1,584,158 9,365,217 - - - 9,365,217
Exercise of stock options:
$1.22 per share, June 1996... - 2,000 2,441 - - - 2,441
$5.00 per share, June 1996... - 2,000 10,000 - - - 10,000
Conversion of debentures into
common stock................. (9,240,423) 5,394,992 9,240,423 - - - -
Interest payable on convertible
debentures .................. 225,548 - - - - (225,548) -
Shares granted under Restricted
Stock Award Plan............. - 29,750 185,922 - (185,922) - -
Shares cancelled under
Restricted Stock Award Plan.. - (6,000) (48,000) - 48,000 - -
Compensation under Restricted
Stock Award Plan............. - - - - 151,467 - 151,467
Grant of Compensatory Stock
Options...................... - - 14,063 - - - 14,063
Net loss........................ - - - - - (7,559,321) (7,559,321)
---------- ---------- ---------- -------------- ---------- ------------ -----------
Balance at December 31, 1996..... $ 909,198 24,276,080 $65,675,743 $(71,875) $(328,455) $(46,008,200) $20,176,411
========== ========== =========== ============== ========== ============ ===========
</TABLE>

See accompanying notes.

<PAGE> 12

AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS

PERIOD FROM JULY
17, 1989 (DATE OF
YEARS ENDED DECEMBER 31, INCEPTION) TO
------------------------------------------------- DECEMBER 31,
1996 1995 1994 1996
---------------- --------------- -------------- -------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................... $ (7,559,321) $(10,198,195) $(10,188,824) $ (45,693,079)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 547,530 640,371 631,916 2,429,399
Amortization of unearned stock compensation.... 151,467 144,000 165,937 511,467
Grant of compensatory stock options............ 14,063 - - 14,063
Loss on disposal of equipment ................. 7,390 14,936 11,788 38,591
Deferred rental expense........................ (4,099) (9,901) (3,743) 2,957
Accretion of discount on marketable securities. - - (52,790) (187,407)

Changes in operating assets and liabilities:
Advanced royalties............................. - - 37,139 -
Trade accounts receivable...................... 4,550 (6,962) (1,063) (3,475)
Inventories.................................... 153,609 124,845 (378,853) (100,399)
Prepaid expenses and other current assets...... (37,005) 49,816 (58,224) (178,447)
Accounts payable............................... (162,524) (66,011) 77,814 168,911
Accrued royalties payable - related party...... (30,000) (30,343) 341 30,000
Other current liabilities...................... 5,540 144,393 (88,669) 468,789
------------ ------------ ------------ -------------
Net cash used in operating activities.............. (6,908,800) (9,193,051) (9,847,231) (42,498,630)

INVESTING ACTIVITIES:
Purchases of equipment and improvements............ (157,583) (324,296) (894,011) (3,755,172)
Purchase of marketable securities.................. - - - (11,512,296)
Purchase of license agreement...................... - - - (250,000)
Proceeds from marketable securities................ - - 8,700,000 11,700,000
Changes in other assets............................ - - (2,524) (140,501)
------------ ------------ ------------ -------------
Net cash (used in) provided by investing activities (157,583) (324,296) 7,803,465 (3,957,969)

FINANCING ACTIVITIES:
Proceeds from revolving credit note to related
parties........................................ - - - 5,430,000
Issuance of convertible debentures, net of issuance
costs.......................................... - 9,834,500 - 9,834,500
Payments on notes payable to related parties....... - - - (1,150,000)
Payments received on promissory notes.............. - 15,000 8,125 57,425
Issuance of common stock upon exercise of stock
options........................................ 12,441 55,212 65,893 133,546
Issuance of common stock, net of issuance costs.... 9,365,217 - 12,656,153 50,879,555
------------ ------------ ------------ -------------
Net cash provided by financing activities.......... 9,377,658 9,904,712 12,730,171 65,185,026
------------ ------------ ------------ -------------
Increase in cash and cash equivalents.............. 2,311,275 387,365 10,686,405 18,728,427

Cash and cash equivalents at beginning of period... 16,417,152 16,029,787 5,343,382 -
------------ ------------ ------------ -------------
Cash and cash equivalents at end of period......... $ 18,728,427 $ 16,417,152 $ 16,029,787 $ 18,728,427
============ ============ ============ =============
</TABLE>

See accompanying notes.

<PAGE> 13

AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. SIGNIFICANT ACCOUNTING POLICIES

Description of Business

AER Energy Resources, Inc. (the "Company") was incorporated on July 17,
1989 and since inception has engaged in the development and commercialization
of high energy density, rechargeable zinc-air batteries. The Company's
operations to date have been primarily focused on developing and updating the
technology, setting up the manufacturing process, testing and selling zinc-air
batteries, recruiting personnel and similar activities. The Company began
selling its first product in August 1994. Sales through December 31, 1996 have
been minimal. Until significant product sales occur, the Company is considered
to be a development stage company for financial reporting purposes.

Uses of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

In accordance with FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Based on the Company's estimate of
future undiscounted cash flows, the Company expects to recover the carrying
amounts of its remaining fixed assets. Nonetheless, it is reasonably possible
that the estimate of undiscounted cash flows may change in the near term
resulting in the need to write-down those assets to fair value. During the
year ended December 31, 1996, the Company recorded a write-off of obsolete
equipment with a net book value of $7,890, which was included in marketing,
general and administrative expenses.

Cash and Cash Equivalents

For purposes of the balance sheets and statements of cash flows, cash and
cash equivalents consist of cash, bank deposits and highly liquid investments
with maturities of three months or less when purchased and are stated at cost,
which approximates market.

Inventories

Inventories are valued at lower of cost or market, using the first-in,
first-out (FIFO)

<PAGE> 14

method.

Equipment and Improvements

Equipment and improvements are stated at cost. Depreciation of equipment
and improvements is computed using the straight-line method over their
estimated useful lives. Certain equipment is used to advance the development
of production processes, refine product designs for volume production and
produce batteries for laboratory and field testing. The Company plans to
utilize this equipment to manufacture batteries in commercial quantities.
Amortization of leasehold improvements is recorded over the shorter of the
lives of the related assets or the lease terms.

Income Taxes

The liability method 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 will be in effect when the
differences are expected to reverse.

Research and Development

Research and development costs are charged to expense as incurred.

Advertising Expenses

The Company expenses advertising costs upon first showing. Advertising
costs included in marketing, general and administrative expense were $74,272,
$272,866, $437,566 and $1,181,201 for the years ended December 31, 1996, 1995
and 1994 and for the period from inception to December 31, 1996, respectively.

2. INVENTORIES

Inventories are summarized below.

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995
------------- --------
<S> <C> <C>
Raw material....................... $ 95,814 $238,101
Work in progress................ 4,585 13,893
Finished goods.................... -- 2,014
-------- --------
$100,399 $254,008
======== ========
</TABLE>

3. LEASES

The Company leases office and manufacturing space under operating leases
which expire in 1997 and 1998. Rent expense under the operating leases for the
years ended December 31, 1996, 1995, and 1994 and for the period from inception
to December 31, 1996 was $201,253,

<PAGE> 15

$189,780, $178,291, and $829,754, respectively. Future minimum lease payments
by year and in the aggregate under the operating leases consist of the
following at December 31, 1996:

<TABLE>
<S> <C>
Years ending December 31,
1997 .................... $143,682
1998 .................... 51,631
--------
$195,313
========
</TABLE>

4. 1993 NON-EMPLOYEE DIRECTORS' RESTRICTED STOCK AWARD PLAN

On August 26, 1993, the Board of Directors adopted, subject to shareholder
approval, the Company's 1993 Non-Employee Directors' Restricted Stock Award
Plan. The plan provides for the grant of up to an aggregate of 240,000 shares
of the Company's common stock to directors of the Company who are not officers
or employees of the Company. In general, the plan provides for awards of
15,000 shares of common stock to each non-employee director, with 3,000 vesting
after each year of his or her service as a director.

On October 1, 1993 and November 11, 1993, in accordance with the plan, the
Company issued a total of 87,000 shares of this restricted common stock to
eligible members of the Company's Board of Directors. The plan was
subsequently approved by shareholders at the Company's 1994 Annual Meeting of
Shareholders. A summary of the activity related to the 1993 Non-Employee
Directors' Restricted Stock Award Plan follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>

Shares outstanding-beginning of year.............. 87,750 87,750 87,000
Issued............................................ 29,750 -- 12,750

Canceled.......................................... (6,000) -- (12,000)
------- -------- -------

Shares outstanding-end of year.................... 111,500 87,750 87,750
======= ======== =======

Shares vested-end of year......................... 51,750 33,750 15,750
======= ======== =======

</TABLE>

5. STOCKHOLDERS' EQUITY

On November 29, 1995, the Company reserved 225,590 shares of common stock
for issuance in connection with a warrant delivered to the placement agent of
$10,675,000 principal amount of 8% convertible subordinated debentures, as
discussed in Note 11.

During the period from inception to December 31, 1994, the Company issued
shares of stock to officers and employees of the Company in exchange for notes
receivable. These notes are secured by the shares of common stock issued and
bear interest at 10%. The notes required payments of interest only through
1993. In December 1994, the notes were amended to include

<PAGE> 16

full recourse against the borrowers in the event of nonpayment with principal
and accrued interest payable in equal annual installments in 1997 and 1998.
The amended notes also include a forgiveness provision for the entire
indebtedness contingent on the length of employment of the makers of the notes.
Any forgiveness of indebtedness will result in a write-off of the related
notes receivable and a charge to expense.

During 1991, a major stockholder and another stockholder exchanged notes
due from the Company in the amount of $2,400,000 plus accrued interest of
$125,545 for 2,066,355 shares of the Company's common stock. During 1992, a
major stockholder of the Company advanced $1,880,000 to the Company under a
revolving credit note bearing interest at prime plus 2%. During 1992, the
stockholder exchanged the outstanding balance plus accrued interest of $33,389
for 1,012,950 shares of the Company's common stock.

6. STOCK OPTIONS

In December 1994, the Company entered into a stock option agreement with a
member of the Board of Directors which granted the Director the option to
acquire 50,000 shares of the Company's common stock at an exercise price of
$4.25 per share. The agreement was entered into as part of the consulting
arrangement discussed in Note 7. On November 7, 1996, the agreement was
amended to reduce the number of shares subject to the option from 50,000 shares
to 25,000 shares and to reduce the option exercise price from $4.25 per share
to $2.125 per share. The Company recorded $14,063 in compensation expense
related to the amended agreement since the closing market price for the
Company's common stock on November 7, 1996 was $2.6875 per share and therefore
higher than the amended option exercise price. The option is 100% vested and
expires in 2004.

During 1992, the Company established the 1992 Stock Option Plan whereby
options may be granted to key employees to purchase shares of common stock at
prices not less than the fair value of the shares on the date of the grant for
incentive stock options and not less than 50% of the fair value of the shares
on the date of the grant for non-qualified stock options. Options become
vested 20% per year not earlier than 12 months from the date of the grant and
are exercisable for a period of ten years from the grant date. On May 9, 1996,
the Company amended the 1992 Stock Option Plan to increase the number of shares
reserved for future issuance to 1,500,000.

On March 1, 1996, the Compensation Committee of the Company's Board of
Directors approved a plan to reprice certain options to purchase shares of the
Company's common stock granted to employees pursuant to the 1992 Stock Option
Plan. The options were repriced effective March 22, 1996. Options originally
priced from $4.63 to $8.00 per share were repriced at $3.19 per share, the
closing market price of the common stock on March 22, 1996. Each of the
repriced options, whether or not vested, could not be exercised for a period of
one year ending February 28, 1997. Options to purchase a total of 795,000
shares of common stock were repriced, of which 71,000 were fully vested prior
to repricing.

The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for its employee stock

<PAGE> 17

options because, as discussed below, the alternative fair value accounting
provided for under FASB Statement No. 123 ("Statement 123"), "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.

Pro forma information regarding net loss and net loss per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for both 1995 and 1996: risk-free interest rates of 5.0%; a
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock of 91%; and a weighted-average expected life of the
option of five years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
Statement 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until the year 1999.
The Company's pro forma information follows (in thousands except for loss per
share information):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
---------- -----------
<S> <C> <C>
Pro forma net loss....................................... $(7,996) $(10,722)
Pro forma net loss per share:
Primary.................................................. $ (0.35) $ (0.62)
With effect of convertible debentures*................... $ (0.34) $ (0.62)
</TABLE>

*Assumes all debentures converted during 1996 were converted at January 1,
1996.

A summary of option activity related to the 1992 Stock Option Plan
follows:

<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE EXERCISE
SHARES PRICE PER SHARE
------ ----------------
<S> <C> <C>
Granted during 1992............................................................ 57,375 $1.89
-------- ----------------
Outstanding at December 31, 1992............................................... 57,375 1.89
Granted...................................................................... 111,125 4.88
Canceled..................................................................... (32,625) 1.89
-------- ----------------
Outstanding at December 31, 1993............................................... 135,875 4.33
Granted...................................................................... 505,000 7.55
Canceled..................................................................... (124,000) 7.14
</TABLE>

<PAGE> 18

<TABLE>
<S> <C> <C>
Exercised.................................................................. (7,650) 1.89
-------- ----
Outstanding at December 31, 1994............................................. 509,225 6.87
Granted.................................................................... 525,000 5.07
Canceled................................................................... (158,500) 6.32
Exercised.................................................................. (8,100) 1.89
-------- ----
Outstanding at December 31, 1995............................................. 867,625 5.93
Granted.................................................................... 85,000 4.83
Canceled................................................................... (50,000) 6.04
Exercised.................................................................. (2,000) 5.00
-------- ----
Outstanding at December 31, 1996 (1)......................................... 900,625 $ 3.37
======== ====
Outstanding at December 31, 1996 (1):
Exercise price ranging from $1.89 to $2.19 (2) with a weighted-average
remaining contractual life of 6.0 years 32,625 $ 1.89
Exercise price ranging from $2.20 to $6.19 with a
weighted-average remaining contractual life of 8.6 years 868,000 3.43
-------- ----
900,625 $ 3.37
======== ====
Options exercisable at December 31, 1996 (1):
Exercise price ranging from $1.89 to $2.19 (2)......... 19,575 $ 1.89
Exercise price ranging from $2.20 to $6.19 (3)......... 222,000 3.25
-------- ----
241,575 $ 3.14
======== ====
Weighted-average fair value of options granted during 1996 $ 3.51
====

(1) Exercise price reflects repricing to $3.19 per share on March 22, 1996.
(2) $2.19 reflects the market price for the Company's common stock at December 31, 1996.
(3) Includes vested repriced options with a one year holding period expiring February 28, 1997.
</TABLE>

Prior to adoption of the 1992 Stock Option Plan, the Company entered into
stock option agreements with key employees to purchase common stock of the
Company. Options granted under these stock option agreements were immediately
100% vested and expire in 1999. A summary of option activity related to these
agreements follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
OPTION SHARES PRICE PER SHARE
------------ ----------------
<S> <C> <C>
Outstanding at December 31, 1990 and 1991...... 254,250 $ .89
Granted...................................... 48,600 1.22
------------ ----------------
Outstanding at December 31, 1992............... 302,850 .94
Granted...................................... -- --
------------ ----------------
Outstanding at December 31, 1993............... 302,850 .94
Exercised.................................... (53,100) .97
------------ ----------------
Outstanding at December 31, 1994............... 249,750 .94
Exercised.................................... (35,750) 1.12
------------ ----------------
Outstanding at December 31, 1995............... 214,000 .91
Exercised.................................... (2,000) 1.22
------------ ----------------
Outstanding at December 31, 1996............... 212,000 $ .90
============ ================
Options exercisable at December 31, 1996....... 212,000 $ .90
============ ================
</TABLE>

7. RELATED PARTY TRANSACTIONS

In December 1994, the Company entered into a consulting agreement with a
member of the Board of Directors for a period of one year. Under the terms of
the agreement, the director

<PAGE> 19

provided the Company with certain business and marketing consulting services in
return for approximately $209,000 plus an option to acquire 50,000 shares of
the Company's common stock, as discussed in Note 6. The agreement expired in
December 1995 and was not renewed. As discussed in Note 6, in November 1996,
the number of shares of common stock subject to the option was reduced from
50,000 shares to 25,000 shares.

The Company has a license agreement with Dreisbach Electromotive, Inc.
("DEMI"). Under DEMI's agreement, the Company has an exclusive license to use
the patent rights for the purpose of manufacturing and marketing certain
batteries and other products employing similar technology. In addition, the
Company agreed to pay DEMI royalties, beginning in 1991, of 4% of net sales
subject to certain minimum amounts and possible increases or decreases to a
maximum of 4% and a minimum of 2%, as specified in the agreement. The
applicable percentage of royalties is currently 4% of net sales. The Company
recorded royalty expense related to the DEMI license for the years ended
December 31, 1996, 1995, and 1994 and for the period from inception to December
31, 1996 of $150,000, $250,000, $300,000, and $1,150,000, respectively.
Minimum royalty expenses are included in marketing, general and administrative
expenses in the statements of operations. Actual royalties due as a percentage
of sales are included in the cost of sales. As of December 31, 1996 and 1995,
$30,000 and $60,000 of these royalty payments remained unpaid, respectively.
The future minimum royalty payments specified by the agreement consist of the
following:

Years Ending December 31,
<S> <C>
1997 .................... $100,000
1998 .................... $100,000
1999 .................... $50,000
</TABLE>

The Company recorded research and development expenses as a part of the
agreement for the period from inception to December 31, 1996 of approximately
$1,146,000, all of which were recorded prior to 1993. No additional amounts of
research and development expenses were required under the agreement after 1992.

8. LICENSE AGREEMENT

On May 12, 1993, the Company executed an agreement with Westinghouse
Electric Corporation ("Westinghouse") whereby the Company obtained exclusive
license and sublicense rights to use Westinghouse's air electrode technology
for portable computer products and non-exclusive license and sublicense rights
for all other portable products. The agreement entitles the Company to
improvements developed or acquired by Westinghouse prior to May 1, 1995.
Pursuant to the agreement, the Company paid an initial license fee of $250,000
and pays 1% of revenues up to $300,000 followed by 0.5% of revenues up to
$350,000, at which time no further royalties for product sales will be due. In
addition, the Company purchased specific production equipment for $325,000 from
Westinghouse. The agreement also includes certain provisions requiring
additional payments to Westinghouse if the Company sublicenses the technology.

<PAGE> 20

9. INCOME TAXES

A reconciliation of the provision for income taxes to the federal
statutory rate of 34% is as follows:

<TABLE>

PERIOD FROM JULY
17, 1989 (DATE OF
YEARS ENDED DECEMBER 31, INCEPTION) TO
--------------------------------------- DECEMBER 31,
1996 1995 1994 1996
----------- ----------- ----------- -----------------------
<S> <C> <C> <C> <C>
Tax at statutory rate......... $(2,570,161) $(3,467,386) $(3,464,200) $ (15,535,638)
Research and development costs (80,319) (123,621) (288,445) (1,140,017)
Other......................... 4,329 4,546 3,866 23,782
Valuation reserve............. 2,646,151 3,586,461 3,748,779 16,651,873
----------- ----------- ----------- -----------------------
$ -- $ -- $ -- $ --
=========== =========== =========== =======================
</TABLE>

The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.. $12,538,803 $ 9,534,450
Depreciation...................... 102,190 213,620
Accrued royalties................. 212,499 212,498
Capitalized start-up costs........ 2,524,251 2,860,549
Research and development credits.. 1,140,017 1,059,698
Warranty reserve.................. 48,789 48,974
License agreement................. 59,004 59,004
Accounts receivable reserve....... 820 6,729
Inventory obsolescence............ 25,500 10,200
----------- -----------
Gross deferred assets............. 16,651,873 14,005,722
Valuation allowance............... 16,651,873 14,005,722
----------- -----------
Net deferred tax assets............. $ -- $ --
=========== ===========
</TABLE>

At December 31, 1996, the Company had available net operating loss
carryforwards for income tax purposes of approximately $36.9 million and
research and development credit carryforwards of approximately $1.1 million.
These carryforward items will both begin to expire in 2004. Additionally, the
Company's net operating loss and research and development credit carryforwards
are both subject to certain limitations on annual utilization because of
changes in ownership of the Company. These limitations could significantly
reduce the amount of the net operating loss and credit carryforwards available
to the Company in the future.

10. PROCEEDS FROM THE SALE OF COMMON STOCK

<PAGE> 21

expenses. The warrants have an exercise price of $6.3125 per share and expire
in five years. The value of the warrants is included in common stock on the
balance sheet.

On November 9, 1994, the Company closed a public offering of 2.5 million
shares of its common stock, generating proceeds of $12.3 million, net of
underwriting discounts and commissions but before deducting expenses. On
December 7, 1994, an additional 150,000 shares of common stock were issued
pursuant to the underwriters' over-allotment option, generating additional
proceeds of $736,500, net of underwriting discounts and commissions.

On July 9, 1993, the Company closed an initial public offering of 2.5
million shares of its common stock, generating proceeds of $16.3 million, net
of underwriting discounts and commissions but before deducting expenses. On
August 6, 1993, an additional 311,700 shares of common stock were issued
pursuant to the underwriters' over-allotment option, generating additional
proceeds of $2.0 million, net of underwriting discounts and commissions.

The net proceeds from the common stock sales have been and continue to be
used to fund capital equipment purchases, research and development efforts,
sales and marketing activities, working capital and general corporate purposes
at the Company's discretion.

11. PROCEEDS FROM THE SALE OF CONVERTIBLE DEBENTURES

On November 29, 1995, the Company issued $10,675,000 principal amount of
8% convertible subordinated debentures due November 17, 1997. Beginning
January 13, 1996 and ending November 17, 1997, a holder of a debenture may
elect to convert the debenture into common stock of the Company at a conversion
price equal to the lesser of $3.60 per share or a percentage ranging from 85%
to 100% of the average closing bid price for the five trading days immediately
prior to the conversion. If a holder does not elect to convert the debentures,
the debentures automatically are converted into common stock on November 17,
1997 based on the above formula. Upon the occurrence of a specific event, such
as a merger, joint venture, or strategic partner involvement, the Company, at
its option, may redeem the debentures, in whole or in part, for cash at 130% of
the debenture issue price plus accrued interest. Interest on the debentures
accrues at 8% per year and is payable in common stock upon conversion. In
connection with the transaction, the Company paid to a placement agent $840,500
in fees and delivered warrants to purchase 225,590 shares of the Company's
common stock at an exercise price of $4.32 per share. The warrants expire in
four years. The cash payment has been charged to stockholders' equity. As of
December 31, 1996, $9,775,000 principal amount of debentures had been converted
into 5,394,992 shares of common stock at an average conversion price of $1.86
per share. Subsequent to December 31, 1996, an additional $150,000 principal
amount was converted into 67,992 shares of common stock. Assuming all debenture
conversions occurred at January 1, 1996, net loss per share for the year ended
December 31, 1996 was $(0.32).

<PAGE> 22

12. DEFINED CONTRIBUTION BENEFIT PLAN

Effective February 1, 1993, the Company adopted the AER Energy Resources 401(k)
Plan, a defined contribution benefit plan which qualifies under Section 401(k)
of the Internal Revenue Code. All employees of the Company as of February 1,
1993 were eligible to participate in the plan. Employees hired after February
1, 1993 who have completed six months of service with the Company may
participate in the plan. Participants may contribute up to 15% of their base
salary to the plan and any employer matching contribution is discretionary.
There was no employer matching contribution for either the year ended December
31, 1996 or 1995.

<PAGE> 23

REPORT OF INDEPENDENT AUDITORS

The Stockholders and Board of Directors
AER Energy Resources, Inc.

We have audited the accompanying balance sheets of AER Energy Resources,
Inc. (a development stage company) as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996 and for the period
from July 17, 1989 (date of inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our 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 AER Energy Resources, Inc.
(a development stage company) at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and for the period from July 17, 1989 (date of
inception) to December 31, 1996, in conformity with generally accepted
accounting principles.

/s/ Ernst & Young LLP
Ernst & Young LLP

Atlanta, Georgia
January 17, 1997

<PAGE> 1
Exhibit 23

Consent of Ernst & Young LLP, Independent Auditors

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of AER Energy Resources, Inc. of our report dated January 17, 1997, included in
the 1996 Annual Report to Shareholders of AER Energy Resources, Inc.

We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-69982) pertaining to the AER Energy Resources, Inc. 1992 Stock
Option Plan and in the Registration Statement (Form S-8 No. 33-69462)
pertaining to the AER Energy Resources, Inc. 1993 Non-Employee Director's
Restricted Stock Award Plan and in the Registration Statement (Form S-8 No.
33-89068) pertaining to the AER Energy Resources, Inc./H. Douglas Johns Stock
Option Agreement of our report dated January 17, 1997, with respect to the
financial statements of AER Energy Resources, Inc. incorporated by reference in
the Annual Report (Form 10-K) for the year ended December 31, 1996.

/s/ Ernst & Young LLP
ERNST & YOUNG LLP

Atlanta, Georgia
March 26, 1997

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,728,427
<SECURITIES> 0
<RECEIVABLES> 5,886
<ALLOWANCES> 2,411
<INVENTORY> 100,399
<CURRENT-ASSETS> 19,010,438
<PP&E> 3,694,247
<DEPRECIATION> 2,033,392
<TOTAL-ASSETS> 20,688,134
<CURRENT-LIABILITIES> 508,766
<BONDS> 0
0
0
<COMMON> 65,675,743
<OTHER-SE> (45,499,332)
<TOTAL-LIABILITY-AND-EQUITY> 20,688,134
<SALES> 22,633
<TOTAL-REVENUES> 22,633
<CGS> 1,310,360
<TOTAL-COSTS> 1,310,360
<OTHER-EXPENSES> 7,330,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,559,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,559,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,559,321)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> 0

</TABLE>