UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                  For the quarterly period ended June 26, 2004

                                       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 0-20852

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

             Delaware                                    16-1387013
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

                 2000 Technology Parkway, Newark, New York 14513
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (315) 332-7100
              (Registrant's telephone number, including area code)

--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

      Common stock, $.10 par value - 14,198,825 shares of common stock
      outstanding, net of 727,250 treasury shares, as of June 26, 2004.


                                       1


                            ULTRALIFE BATTERIES, INC.
                                      INDEX
--------------------------------------------------------------------------------

                                                                            Page
PART I    FINANCIAL INFORMATION

Item 1.     Financial Statements (Unaudited)

            Condensed Consolidated Balance Sheets -
              June 26, 2004 and December 31, 2003 ...........................  3

            Condensed Consolidated Statements of Operations -
              Three and Six months ended June 26, 2004
              and June 28, 2003 .............................................  4

            Condensed Consolidated Statements of Cash Flows -
              Three and Six months ended June 26, 2004
              and June 28, 2003 .............................................  5

            Notes to Consolidated Financial Statements ......................  6

Item 2.     Management's Discussion and Analysis of
              Financial Condition and Results of Operations ................. 14

Item 3.     Quantitative and Qualitative Disclosures
               About Market Risk. ........................................... 22

Item 4.     Controls and Procedures ......................................... 22

PART II   OTHER INFORMATION

Item 1.     Legal Proceedings ............................................... 23

Item 4.     Submission of Matters to a Vote of Security Holders ............. 24

Item 6.     Exhibits and Reports on Form 8-K ................................ 24

            Signatures ...................................................... 26

            Index to Exhibits ............................................... 27


                                       2


PART I FINANCIAL INFORMATION
Item 1. Financial Statements

                           ULTRALIFE BATTERIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (Dollars in Thousands, Except Per Share Amounts)
                                   (unaudited)

                                                       June 26,     December 31,
              ASSETS                                    2004            2003
                                                      ---------     ------------
Current assets:
  Cash and cash equivalents                           $     941      $     830
  Restricted cash                                            51             50
  Trade accounts receivable (less
    allowance for doubtful accounts
    of $223 at June 26, 2004 and
    $168 at December 31, 2003)                           20,205         17,803
  UTI note receivable                                        --          2,350
  Inventories                                            16,131         10,209
  Prepaid expenses and other current
    assets                                                1,662          1,314
                                                      ---------      ---------

      Total current assets                               38,990         32,556
                                                      ---------      ---------

Property, plant and equipment, net                       19,169         18,213

Other assets:
  Investment in UTI                                          --          1,550
  Technology license agreements
    (net of accumulated amortization
    of $1,451 at June 26, 2004 and
    $1,418 at December 31, 2003)                             --             33
                                                      ---------      ---------
                                                             --          1,583
                                                      ---------      ---------
Total Assets                                          $  58,159      $  52,352
                                                      =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Short-term debt and current
    portion of long-term debt                         $   5,439      $   8,295
  Accounts payable                                        7,720          6,385
  Income taxes payable                                       13            106
  Other current liabilities                               3,828          3,068
                                                      ---------      ---------
       Total current liabilities                         17,000         17,854

Long-term liabilities:
  Debt and capital lease obligations                         68             68
Commitments and contingencies
  (Note 10)

Shareholders' equity:
  Preferred stock, par value $0.10
    per share, authorized 1,000,000
    shares; none outstanding                                 --             --
  Common stock, par value $0.10 per
    share, authorized 40,000,000
    shares; issued - 14,926,075 at
    June 26, 2004 and 14,302,782 at
    December 31, 2003                                     1,493          1,430
  Capital in excess of par value                        124,276        120,626
  Accumulated other comprehensive loss                     (638)          (723)
  Accumulated deficit                                   (81,662)       (84,525)
                                                      ---------      ---------
                                                         43,469         36,808
  Less -- Treasury stock, at cost
    -- 727,250 shares                                     2,378          2,378
                                                      ---------      ---------
      Total shareholders' equity                         41,091         34,430
                                                      ---------      ---------
Total Liabilities and Shareholders'
  Equity                                              $  58,159      $  52,352
                                                      =========      =========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                       3


                            ULTRALIFE BATTERIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (Dollars in Thousands, Except Per Share Amounts)
                                   (unaudited)



                                                                      Three Months Ended                     Six Months Ended
                                                                  June 26,           June 28,           June 26,           June 28,
                                                                    2004               2003               2004               2003
                                                                  --------           --------           --------           --------
                                                                                                               
Revenues                                                          $ 28,439           $ 20,110           $ 55,427           $ 35,538

Cost of products sold                                               21,391             15,379             42,047             27,648
                                                                  --------           --------           --------           --------

Gross margin                                                         7,048              4,731             13,380              7,890
                                                                  --------           --------           --------           --------

Operating expenses:
  Research and development                                             560                646              1,063              1,231
  Selling, general, and
   administrative                                                    2,858              2,187              5,329              4,149
                                                                  --------           --------           --------           --------
Total operating expenses                                             3,418              2,833              6,392              5,380
                                                                  --------           --------           --------           --------

Operating income                                                     3,630              1,898              6,988              2,510

Other income (expense):
  Interest income                                                       27                  4                 47                  5
  Interest expense                                                    (150)              (110)              (235)              (242)
  Write-off of UTI investment and
    note receivable                                                 (3,951)                --             (3,951)                --
  Miscellaneous                                                         32                397                 93                187
                                                                  --------           --------           --------           --------
(Loss) income before income taxes                                     (372)             2,149              2,942              2,460
                                                                  --------           --------           --------           --------

Income taxes                                                            --                 --                 79                 --
                                                                  --------           --------           --------           --------

Net (loss) income                                                 $   (372)          $  2,149           $  2,863           $  2,460
                                                                  ========           ========           ========           ========

(Loss) earnings per share - basic                                 $  (0.03)          $   0.17           $   0.21           $   0.19
                                                                  ========           ========           ========           ========
(Loss) earnings per share - diluted                               $  (0.03)          $   0.16           $   0.19           $   0.19
                                                                  ========           ========           ========           ========
Weighted average shares
  outstanding - basic                                               14,115             12,927             13,930             12,895
                                                                  ========           ========           ========           ========
Weighted average shares
  outstanding - diluted                                             14,115             13,651             15,109             13,266
                                                                  ========           ========           ========           ========


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                       4


                            ULTRALIFE BATTERIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
                                   (unaudited)
--------------------------------------------------------------------------------

                                                           Six Months Ended
                                                       June 26,        June 28,
                                                         2004            2003

OPERATING ACTIVITIES
Net income                                            $   2,863       $   2,460
Adjustments to reconcile net
  income to net cash used in
  operating activities:
Depreciation and amortization                             1,705           1,504
Gain on asset disposal                                      (14)             --
Foreign exchange gain                                       (87)           (192)
Write-off of UTI investment
  and note receivable                                     3,951              --
Write-down of inventory damaged
  in fire                                                   543              --
Write-down of fixed assets
  damaged in fire                                           112
Non-cash stock-based compensation                            10              26
Changes in operating assets
  and liabilities:
  Accounts receivable                                    (2,402)         (6,940)
  Inventories                                            (6,465)           (916)
  Prepaid expenses and other
    current assets                                          399            (142)
  Insurance receivable relating
    to fires                                               (798)             --
  Income taxes payable                                      (93)             --
  Accounts payable and other
    current liabilities                                   2,095           3,957
                                                      ---------       ---------
Net cash provided by (used in)
  operating activities                                    1,819            (243)
                                                      ---------       ---------

INVESTING ACTIVITIES
Purchase of property and equipment                       (2,628)         (3,278)
Proceeds from asset disposal                                 16              --
Purchase of securities                                       (1)             --
                                                      ---------       ---------
Net cash used in investing activities                    (2,613)         (3,278)
                                                      ---------       ---------

FINANCING ACTIVITIES
Change in revolving credit facilities                    (2,456)          2,440
Proceeds from issuance of common stock                    3,703           1,128
Proceeds from issuance of debt                              500              --
Principal payments on long-term
  debt and capital lease obligations                       (400)           (401)
Proceeds from grant                                         117              --
                                                      ---------       ---------
Net cash provided by financing
  activities                                                847           3,784
                                                      ---------       ---------

Effect of exchange rate changes
  on cash                                                    58              27
                                                      ---------       ---------

Increase in cash and cash equivalents                       111             290

Cash and cash equivalents at
  beginning of period                                       830           1,322
                                                      ---------       ---------
Cash and cash equivalents at end
  of period                                           $     941       $   1,612
                                                      =========       =========

SUPPLEMENTAL CASH FLOW INFORMATION
Taxes paid                                            $     255       $      --
                                                      =========       =========
Interest paid                                         $     173       $     116
                                                      =========       =========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                       5


                            ULTRALIFE BATTERIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       (Dollar Amounts in Thousands - Except Share and Per Share Amounts)
                                   (unaudited)
--------------------------------------------------------------------------------

1.    BASIS OF PRESENTATION

            The accompanying unaudited condensed consolidated financial
      statements have been prepared in accordance with generally accepted
      accounting principles for interim financial information and with the
      instructions to Article 10 of Regulation S-X. Accordingly, they do not
      include all of the information and footnotes for complete financial
      statements. In the opinion of management, all adjustments (consisting of
      normal recurring accruals and adjustments) considered necessary for a fair
      presentation of the condensed consolidated financial statements have been
      included. Results for interim periods should not be considered indicative
      of results to be expected for a full year. Reference should be made to the
      consolidated financial statements contained in the Company's Form 10-K for
      the twelve-month period ended December 31, 2003.

            The Company's monthly closing schedule is a weekly-based cycle as
      opposed to a calendar month-based cycle. While the actual dates for the
      quarter-ends will change slightly each year, the Company believes that
      there are not any material differences when making quarterly comparisons.

2.    WRITE-OFF OF UTI INVESTMENT AND NOTE RECEIVABLE

            In June 2004, the Company recorded a $3,951 non-cash, non-operating
      charge related to the Company's ownership interest in Ultralife Taiwan,
      Inc. ("UTI") that consisted of a write-off of its $2,401 note receivable
      from UTI, including accrued interest, and the book value of its $1,550
      equity investment in UTI. The Company decided to record this charge due to
      recent events that have caused increasing uncertainty over UTI's near-term
      financial viability, including a failure by UTI to meet commitments made
      to the Company and its other creditors to secure additional financial
      support before July 1, 2004. Based on these factors, and UTI's operating
      losses over several years, the Company's investment has had an other than
      temporary decline in fair value and the Company believes that the
      probability of being reimbursed for the note receivable is nominal. The
      Company continues to hold a 9.2% equity interest in UTI, and it is working
      with UTI to help it through its financial difficulties in an effort to
      ensure a satisfactory outcome for all parties involved. The Company does
      not believe the write-off poses a risk to its current operations or future
      growth prospects because UTI continues to manufacture product for it and
      the Company has taken steps to establish alternate sources of supply.

3.    EARNINGS (LOSS) PER SHARE

            Basic earnings per share are calculated by dividing net income by
      the weighted average number of common shares outstanding during the
      period. Diluted earnings per share are calculated by dividing net income,
      adjusted for interest on convertible securities, by potentially dilutive
      common shares, which include stock options, warrants and convertible
      securities.

            Net loss per share is calculated by dividing net loss by the
      weighted average number of common shares outstanding during the period.
      The impact of conversion of dilutive securities, such as stock options and
      warrants, are not considered where a net loss is reported as the inclusion
      of such securities would be anti-dilutive. As a result, basic loss per
      share is the same as diluted loss per share.


                                       6


            The computation of basic and diluted earnings per share is
      summarized as follows:



(In thousands, except per share data)                                 Three Months Ended                    Six Months Ended
                                                                --------------------------------------------------------------------
                                                                June 26, 2004     June 28, 2003      June 26, 2004     June 28, 2003
                                                                --------------------------------------------------------------------
                                                                                                               
Net (Loss) / Income (a)                                           $   (372)          $  2,149           $  2,863           $  2,460
Effect of Dilutive Securities:
  Stock Options / Warrants                                              --                 44                 --                 44
  Convertible Note                                                      --                  6                 --                  9
                                                                  -----------------------------------------------------------------
    Net (Loss) / Income - Adjusted (b)                            $   (372)          $  2,199           $  2,863           $  2,513
                                                                  =================================================================

Average Shares Outstanding - Basic (c)                              14,115             12,927             13,930             12,895
Effect of Dilutive Securities:
  Stock Options / Warrants                                              --                557              1,179                246
  Convertible Note                                                      --                167                 --                125
                                                                  -----------------------------------------------------------------
    Average Shares Outstanding - Diluted (d)                        14,115             13,651             15,109             13,266
                                                                  =================================================================

EPS - Basic (a/c)                                                 $  (0.03)          $   0.17           $   0.21           $   0.19
EPS - Diluted (b/d)                                               $  (0.03)          $   0.16           $   0.19           $   0.19


            The Company also had the equivalent of 1,056,880 options and
      warrants outstanding for the three-month period ended June 26, 2004 which
      were not included in the computation of diluted EPS because these
      securities would have been anti-dilutive for that period.

4.    STOCK-BASED COMPENSATION

            The Company has various stock-based employee compensation plans. The
      Company applies Accounting Principles Board (APB) Opinion No. 25,
      "Accounting for Stock Issued to Employees," and related interpretations
      which require compensation costs to be recognized based on the difference,
      if any, between the quoted market price of the stock on the grant date and
      the exercise price. As all options granted to employees under such plans
      had an exercise price at least equal to the market value of the underlying
      common stock on the date of grant, and given the fixed nature of the
      equity instruments, no stock-based employee compensation cost is reflected
      in net (loss) income. The effect on net (loss) income and (loss) earnings
      per share if the Company had applied the fair value recognition provisions
      of Statement of Financial Accounting Standards ("SFAS") No. 148,
      "Accounting for Stock-Based Compensation - Transition and Disclosure, an
      Amendment of SFAS No. 123", to stock-based employee compensation is as
      follows:


                                       7




(In thousands, except per share data)                                Three Months Ended                     Six Months Ended
                                                              ----------------------------------------------------------------------
                                                              June 26, 2004      June 28, 2003      June 26, 2004      June 28, 2003
                                                              ----------------------------------------------------------------------
                                                                                                             
Net (loss) income, as reported                                  $   (372)          $  2,149           $  2,863           $  2,460

Add: Stock-based employee compensation
expense included in reported net (loss)
income, net of related tax effects                                    --                 --                 --                 --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects                                          (467)              (317)              (681)              (540)
                                                                -----------------------------------------------------------------

Pro forma net (loss) income                                     $   (839)          $  1,832           $  2,182           $  1,920

(Loss) earnings per share:
   Basic - as reported                                          $  (0.03)          $   0.17           $   0.21           $   0.19
   Basic - pro forma                                            $  (0.06)          $   0.14           $   0.16           $   0.15
   Diluted - as reported                                        $  (0.03)          $   0.16           $   0.19           $   0.19
   Diluted - pro forma                                          $  (0.06)          $   0.13           $   0.14           $   0.14


            During the first six months of 2004, the Company issued 623,293
      shares of common stock as a result of exercises of stock options and
      warrants. The Company received approximately $3,703 in cash proceeds as a
      result of these transactions.

5.    COMPREHENSIVE (LOSS) INCOME

            The components of the Company's total comprehensive (loss) income
      were:



                                                                      Three Months Ended                      Six Months Ended
                                                                  June 26,           June 28,           June 26,           June 28,
                                                                    2004               2003               2004               2003
                                                                  -----------------------------------------------------------------
                                                                                                               
Net (loss) income                                                 $   (372)          $  2,149           $  2,863           $  2,460
Foreign currency translation adjustments                                15               (124)                85                (65)
                                                                  -----------------------------------------------------------------
Total comprehensive (loss) income                                 $   (357)          $  2,025           $  2,948           $  2,395
                                                                  =================================================================



                                       8


6.    INVENTORIES

            Inventories are stated at the lower of cost or market with cost
      determined under the first-in, first- out (FIFO) method. The composition
      of inventories was:

                                                June 26, 2004  December 31, 2003
                                                --------------------------------
Raw materials                                     $   6,368       $   5,946
Work in process                                       4,004           2,306
Finished goods                                        6,266           2,699
                                                  -------------------------
                                                     16,638          10,951
Less: Reserve for obsolescence                          507             742
                                                  -------------------------
                                                  $  16,131       $  10,209
                                                  =========================

7.    PROPERTY, PLANT AND EQUIPMENT

            Major classes of property, plant and equipment consisted of the
      following:

                                                June 26, 2004  December 31, 2003
                                                --------------------------------
Land                                              $     123       $     123
Buildings and leasehold improvements                  2,540           1,845
Machinery and equipment                              34,053          33,207
Furniture and fixtures                                  371             358
Computer hardware and software                        1,664           1,554
Construction in progress                              2,762           1,748
                                                  -------------------------
                                                     41,513          38,835
Less:  Accumulated depreciation                      22,344          20,622
                                                  -------------------------
                                                  $  19,169       $  18,213
                                                  =========================

8.    DEBT

            As of June 26, 2004, the Company had $867 outstanding under the term
      loan component of its credit facility with its primary lending bank, and
      had $4,209 of borrowings outstanding under the revolver component of the
      credit facility. The Company's additional borrowing capacity under the
      revolver component of the credit facility as of June 26, 2004 was
      approximately $5,900, net of outstanding letters of credit of $3,600. At
      June 26, 2004, the Company's net worth was $41,091, compared to the debt
      covenant requiring a minimum net worth of approximately $22,406. (See Note
      13 for information on the Company's new credit facility.)

            As of June 26, 2004, the Company's wholly-owned U.K. subsidiary,
      Ultralife Batteries (UK) Ltd., had approximately $345 outstanding under
      its revolving credit facility with a commercial bank in the U.K. This
      credit facility provides the Company's U.K. operation with additional
      financing flexibility for its working capital needs. Any borrowings
      against this credit facility are collateralized with that company's
      outstanding accounts receivable balances. There was approximately $476 in
      additional borrowing capacity under this credit facility as of June 26,
      2004.


                                       9


9.    INCOME TAXES

            The liability method, prescribed by SFAS No. 109, "Accounting for
      Income Taxes", is used in accounting for income taxes. Under this method,
      deferred tax assets and liabilities are determined based on differences
      between financial reporting and tax bases of assets and liabilities and
      are measured using the enacted tax rates and laws that may be in effect
      when the differences are expected to reverse. The Company recorded an
      income tax expense of $79 for the six months ended June 26, 2004 relating
      to alternative minimum tax calculations.

            As of December 31, 2003, the Company had foreign and domestic net
      operating loss carryforwards totaling approximately $76,829 that are
      available to reduce future taxable income. The Company has not reported a
      deferred tax asset on its Consolidated Balance Sheet due to prior
      operating losses. It is reasonably possible the Company's profitability in
      2003 and 2004 would result in the recognition of a deferred tax asset
      during 2004. The Company has determined that a change in ownership as
      defined under Internal Revenue Code Section 382 occurred during the fourth
      quarter of 2003. As a result, the net operating loss carryforwards will be
      subject to an annual limitation, currently estimated to be in the range of
      approximately $14,000 to $18,000. Such a limitation could result in the
      possibility of a cash outlay for income taxes in a future year when
      earnings exceed the amount of NOLs that can be used by the Company.

10.   COMMITMENTS AND CONTINGENCIES

            As of June 26, 2004, the Company had $51 in restricted cash in
      support of a corporate credit card account.

            As of June 26, 2004, the Company had open capital commitments to
      purchase approximately $2,071 of production machinery and equipment.

            The Company estimates future costs associated with expected product
      failure rates, material usage and service costs in the development of its
      warranty obligations. Warranty reserves, included in other current
      liabilities on the Company's Consolidated Condensed Balance Sheet, are
      based on historical experience of warranty claims and generally will be
      estimated as a percentage of sales over the warranty period. In the event
      the actual results of these items differ from the estimates, an adjustment
      to the warranty obligation would be recorded. Changes in the Company's
      product warranty liability during the first six months of 2004 were as
      follows:

             Balance at December 31, 2003                         $ 278
             Accruals for warranties issued                         237
             Settlements made                                      (147)
                                                                  -----
             Balance at June 26, 2004                             $ 368
                                                                  =====

            The Company is subject to legal proceedings and claims which arise
      in the normal course of business. The Company believes that the final
      disposition of such matters will not have a material adverse effect on the
      financial position or results of operations of the Company.

            In conjunction with the Company's purchase/lease of its Newark, New
      York facility in 1998, the Company entered into a payment-in-lieu of tax
      agreement which provides the Company with real estate tax concessions upon
      meeting certain conditions. In connection with this agreement, a
      consulting firm performed a Phase I and II Environmental Site Assessment
      which revealed the existence of contaminated soil and ground water around
      one of the buildings. The Company retained an engineering firm which
      estimated that the cost of remediation should be in the range of $230.
      This cost, however, is merely an estimate and the cost may in fact be much
      higher. In February, 1998, the


                                       10


      Company entered into an agreement with a third party, which provides that
      the Company and this third party will retain an environmental consulting
      firm to conduct a supplemental Phase II investigation to verify the
      existence of the contaminants and further delineate the nature of the
      environmental concern. The third party agreed to reimburse the Company for
      fifty percent (50%) of the cost of correcting the environmental concern on
      the Newark property. The Company has fully reserved for its portion of the
      estimated liability. Test sampling was completed in the spring of 2001,
      and the engineering report was submitted to the New York State Department
      of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed the
      report and, in January 2002, recommended additional testing. The Company
      submitted a work plan to NYSDEC in October 2003, which was approved
      shortly thereafter. The Company sought proposals from engineering firms to
      complete the remedial work outlined in the work plan. A firm was selected
      to perform the tasks associated with the remediation activities, which
      were completed in December 2003. The test results were then forwarded to
      NYSDEC for comment. NYSDEC responded to the Company in March 2004
      requesting a report summarizing the data, findings, discussions and
      conclusions. The report has been submitted to NYSDEC who will review and
      make recommendations as to whether additional remediation is required.
      Because the Company believes that the source of the contamination has been
      removed, NYSDEC recommended that the Company conduct quarterly monitoring
      of the groundwater for one year. The Company believes that the final cost
      to remediate will not exceed the original estimate. The Company awaits
      final comments from the NYSDEC and will begin the additional sampling upon
      approval of the conclusions stated in the report. Because this is a
      voluntary remediation, there is no requirement for the Company to complete
      the project within any specific time frame. The ultimate resolution of
      this matter may have a significant adverse impact on the results of
      operations in the period in which it is resolved. Furthermore, the Company
      may face claims resulting in substantial liability which could have a
      material adverse effect on the Company's business, financial condition and
      the results of operations in the period in which such claims are resolved.

            A retail end-user of a product manufactured by one of Ultralife's
      customers (the "Customer") has made a claim against the Customer wherein
      it is asserted that the Customer's product, which is powered by an
      Ultralife battery, does not operate according to the Customer's product
      specification. No claim has been filed against Ultralife. However, in the
      interest of fostering good customer relations, in September 2002,
      Ultralife agreed to lend technical support to the Customer in defense of
      its claim. The claim between the end-user and the Customer has now been
      settled. Ultralife has renewed its commitment to the Customer to honor its
      warranty by replacing any batteries that may be determined to be
      defective. In the event a claim is filed against Ultralife and it is
      ultimately determined that Ultralife's product was defective, replacement
      of batteries to this Customer or end-user may have a material adverse
      effect on the Company's financial position and results of operations.

11.   BUSINESS SEGMENT INFORMATION

            The Company reports its results in three operating segments: Primary
      Batteries, Rechargeable Batteries, and Technology Contracts. The Primary
      Batteries segment includes 9-volt, cylindrical and various other
      non-rechargeable specialty batteries. The Rechargeable Batteries segment
      includes the Company's lithium polymer and lithium ion rechargeable
      batteries. The Technology Contracts segment includes revenues and related
      costs associated with various government and military development
      contracts. The Company looks at its segment performance at the gross
      margin level, and does not allocate research and development or selling,
      general and administrative costs against the segments. All other items
      that do not specifically relate to these three segments and are not
      considered in the performance of the segments are considered to be
      Corporate charges.


                                       11


Three Months Ended June 26, 2004



                                                        Primary        Rechargeable       Technology
                                                       Batteries        Batteries         Contracts       Corporate          Total
                                                       -----------------------------------------------------------------------------
                                                                                                            
Revenues                                                $ 26,321         $  1,691         $    427        $     --         $ 28,439
Segment contribution                                       7,048              (82)              82          (3,418)           3,630
Interest expense, net                                                                                          (83)             (83)
Write-down of UTI investment
  and note receivable                                                                                       (3,951)          (3,951)
Miscellaneous                                                                                                   32               32
Income taxes                                                                                                    --               --
                                                                                                                           --------
Net loss                                                                                                                   $   (372)
Total assets                                            $ 48,928         $  4,179         $    243        $  4,809         $ 58,159


Three Months Ended June 28, 2003



                                                        Primary        Rechargeable       Technology
                                                       Batteries        Batteries         Contracts       Corporate          Total
                                                       -----------------------------------------------------------------------------
                                                                                                            
Revenues                                                $ 19,570         $    258         $    282        $     --         $ 20,110
Segment contribution                                       5,008             (389)             112          (2,833)           1,898
Interest expense, net                                                                                         (146)            (146)
Miscellaneous                                                                                                  397              397
Income taxes                                                                                                   --               --
                                                                                                                           --------
Net income                                                                                                                 $  2,149
Total assets                                            $ 31,956         $  3,249         $    140        $  6,191         $ 41,536


Six Months Ended June 26, 2004



                                                        Primary        Rechargeable       Technology
                                                       Batteries        Batteries         Contracts       Corporate          Total
                                                       -----------------------------------------------------------------------------
                                                                                                            
Revenues                                                $ 51,643         $  3,065         $    719        $     --         $ 55,427
Segment contribution                                      13,822             (567)             125          (6,392)           6,988
Interest expense, net                                                                                         (188)            (188)
Write-down of UTI investment
  and note receivable                                                                                       (3,951)          (3,951)
Miscellaneous                                                                                                   93               93
Income taxes                                                                                                   (79)             (79)
                                                                                                                           --------
Net income                                                                                                                 $  2,863
Total assets                                            $ 48,928         $  4,179         $    243        $  4,809         $ 58,159


Six Months Ended June 28, 2003



                                                        Primary        Rechargeable       Technology
                                                       Batteries        Batteries         Contracts       Corporate          Total
                                                       -----------------------------------------------------------------------------
                                                                                                            
Revenues                                                $ 34,202         $    638         $    698        $     --         $ 35,538
Segment contribution                                       8,172             (596)             314          (5,380)           2,510
Interest expense, net                                                                                         (237)            (237)
Miscellaneous                                                                                                  187              187
Income taxes                                                                                                    --               --
                                                                                                                           --------
Net income                                                                                                                 $  2,460
Total assets                                            $ 31,956         $  3,249         $    140        $  6,191         $ 41,536



                                       12


12.   FIRES AT MANUFACTURING FACILITIES

            In May 2004 and June 2004, the Company experienced two fires that
      damaged certain inventory and property at its facilities. The May 2004
      fire occurred at the Company's U.S. facility and was caused by cells that
      shorted out when a forklift truck accidentally tipped the cells over in an
      oven in an enclosed area. Certain inventory, equipment and a small portion
      of the building where the fire was contained were damaged. The June 2004
      fire happened at the Company's U.K. location and mainly caused damage to
      various inventory and the U.K. company's leased facility. The fire was
      contained mainly in a bunkered, non-manufacturing area designed to store
      various material, and there was additional smoke and water damage to the
      facility and its contents. It is unknown how the U.K. fire was started.
      The fires caused relatively minor disruptions to the production
      operations, and had no impact on the Company's ability to meet customer
      demand during the quarter.

            The Company maintains replacement cost insurance on the property and
      equipment it owns or rents, with relatively low deductibles. The total of
      the two losses related to company-owned assets, including expenditures
      required to repair and clean up the facilities, is expected to be in the
      range of $2,000. The Company is working closely with the insurance
      companies on these matters, and it expects to be fully reimbursed by the
      insurance companies for these losses. The impacts on the Consolidated
      Statement of Operations and the net cash outflows from the Company are
      expected to be negligible. At June 26, 2004, the Company's prepaid and
      other current assets on its Consolidated Balance Sheet included a
      receivable from insurance companies for approximately $800 for equipment
      losses, inventory losses and clean-up costs incurred to date.

13.   SUBSEQUENT EVENT - NEW CREDIT FACILITY

            On June 30, 2004, the Company closed on a new secured $25,000 credit
      facility, comprised of a five-year $10,000 term loan component and a
      three-year $15,000 revolving credit component. This agreement replaces the
      Company's $15,000 credit facility that expired on the same date.

            On June 30, 2004, the Company drew down the full $10,000 term loan.
      The proceeds of the term loan, which is to be repaid in equal monthly
      installments over five years, are to be used for the retirement of
      outstanding debt and capital expenditures. Availability under the
      revolving credit component is subject to a debt to earnings ratio, whereas
      availability under the previous facility was limited by various asset
      values. The lenders of the new credit facility are JP Morgan Chase Bank
      and Manufacturers and Traders Trust Company, with JP Morgan Chase Bank
      acting as the administrative agent.

            On July 1, 2004, the Company entered into an interest rate swap
      arrangement to be effective on August 2, 2004, related to the $10,000 term
      loan, in order to take advantage of historically low interest rates. The
      Company received a fixed rate of interest in exchange for a variable rate.
      The swap rate received was 3.98% for five years and will be adjusted
      accordingly for a Eurodollar spread incorporated in the agreement, which
      is dependent upon a debt to earnings ratio within a predetermined grid. At
      July 1, 2004, the total adjusted rate of interest that the Company will
      pay on the outstanding portion of the $10,000 term loan was 5.23%.


                                       13


Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In whole dollars)

      The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services (particularly from the U.S. Government for BA-5390
batteries), the successful commercialization of the Company's advanced
rechargeable batteries, general economic conditions, government and
environmental regulation, competition and customer strategies, technological
innovations in the primary and rechargeable battery industries, changes in the
Company's business strategy or development plans, capital deployment, business
disruptions, including those caused by fires, raw materials supplies,
environmental regulations, and other risks and uncertainties, certain of which
are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.

      This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Form 10-K for the year ended December 31, 2003.

      The financial information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is presented in whole dollars.

General

      Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable), lithium ion and
lithium polymer rechargeable batteries for use in a wide array of applications.
The Company believes that its technologies allow the Company to offer batteries
that are flexibly configured, lightweight and generally achieve longer operating
time than many competing batteries currently available. The Company has focused
on manufacturing a family of lithium primary batteries for military, industrial
and consumer applications, which it believes is one of the most comprehensive
lines of lithium manganese dioxide primary batteries commercially available. The
Company also supplies rechargeable lithium ion and lithium polymer batteries for
use in portable electronic applications.

      The Company reports its results in three operating segments: Primary
Batteries, Rechargeable Batteries, and Technology Contracts. The Primary
Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable batteries.
The Technology Contracts segment includes revenues and related costs associated
with various government and military development contracts. The Company looks at
its segment performance at the gross margin level, and does not allocate
research and development or selling, general and administrative costs against
the segments. All other items that do not specifically relate to these three
segments and are not considered in the performance of the segments are
considered to be Corporate charges.


                                       14


Results of Operations (in whole dollars)

Three months ended June 26, 2004 and June 28, 2003

      Revenues. Consolidated revenues for the three-month period ended June 26,
2004 amounted to $28,439,000, an increase of $8,329,000, or 41%, from the
$20,110,000 reported in the same quarter in the prior year. Primary battery
sales increased $6,751,000, or 34%, from $19,570,000 last year to $26,321,000
this year, as a result of strong shipments of HiRate(R) battery products,
including sales of BA-5390 batteries used mainly in various military
communications and weapons applications. Modestly lower sales of 9-volt
batteries partially offset this increase. Rechargeable revenues rose $1,433,000
to $1,691,000, primarily due to higher shipments to military and commercial
customers of various rechargeable battery packs to an increasing customer base.
Technology Contract revenues were $427,000 in the second quarter of 2004,
attributable to work on the Company's $2,700,000 development contract with
General Dynamics. Compared with the same period a year ago, technology contract
revenues increased $145,000 related to contracts with different customers in
each period.

      Cost of Products Sold. Cost of products sold totaled $21,391,000 for the
quarter ended June 26, 2004, an increase of $6,012,000, or 39% over the same
three-month period a year ago. The gross margin on consolidated revenues for the
quarter was $7,048,000, or 25% of revenues, an improvement of $2,317,000 over
the $4,731,000, or 24% of revenues, reported in the same quarter in the prior
year. Gross margins in the Company's primary battery operations improved
$2,040,000, from $5,008,000 in 2003 to $7,048,000 in 2004 due to volume
increases and improved manufacturing efficiencies. In the Company's rechargeable
operations, the gross margin loss amounted to $82,000 in the second quarter of
2004, compared to a loss of $389,000 in 2003, an improvement of $307,000 due to
the increased volumes. Gross margins in the Technology Contract segment were
$82,000 in the second quarter of 2004 compared to $112,000 in 2003, a decrease
of $30,000 mainly due to the timing and realized margins of different technology
contracts.

      Operating Expenses. Operating expenses for the three months ended June 26,
2004 totaled $3,418,000, a $585,000 increase over the prior year's amount of
$2,833,000. Research and development charges decreased $86,000 to $560,000 in
2004 due to the consolidation of all R&D efforts to the U.S. facility in order
to reduce costs and combine efforts. Although the R&D line reflects a decline,
the Company also considers its efforts in the Technology Contracts segment to be
related to key battery development efforts. Selling, general, and administrative
expenses increased $671,000 to $2,858,000 due mainly to planned resource
additions in sales and marketing and information systems to support the
Company's commitment to support a higher volume of development opportunities. In
addition, various administrative costs associated with running a larger business
also increased, including insurance and professional fees. Overall, operating
expenses as a percentage of sales improved, declining from 14% in the June 2003
quarter to 12% in the June 2004 quarter.

      Other Income (Expense). Interest expense, net, for the second quarter of
2004 was $83,000, a decrease of $63,000 from the comparable period in 2003,
mainly as a result of lower balances of debt outstanding. Miscellaneous income /
expense decreased from income of $397,000 in 2003 to income of $32,000 in 2004
mostly due to changes in foreign currency in connection with the Company's
intercompany loan with its U.K. subsidiary. The strength of the U.K. pound
against the U.S. dollar rose more rapidly in 2003 as compared with 2004. In June
2004, the Company recorded a $3,951,000 non-cash, non-operating charge related
to the Company's ownership interest in Ultralife Taiwan, Inc. ("UTI") that
consisted of a write-off of its $2,401,000 note receivable from UTI, including
accrued interest, and the book value of its $1,550,000 equity investment in UTI.
The Company decided to record this charge due to recent events that have caused
increasing uncertainty over UTI's near-term financial viability, including a
failure by UTI to meet commitments made to the Company and its other creditors
to secure additional financial support before July 1, 2004. Based on these
factors, and UTI's operating losses over several years, the Company's investment
has had an other than temporary decline in fair value and the


                                       15


Company believes that the probability of being reimbursed for the note
receivable is nominal. The Company continues to hold a 9.2% equity interest in
UTI, and it is working with UTI to help it through its financial difficulties in
an effort to ensure a satisfactory outcome for all parties involved. The Company
does not believe the write-off poses a risk to its current operations or future
growth prospects because UTI continues to manufacture product for it and the
Company has taken steps to establish alternate sources of supply.

      Income Taxes. The Company did not record income tax expense for the three
months ended June 26, 2004 due to the loss that was reported for the quarter.

      Net (Loss) Income. Net loss and loss per share were $372,000 and $0.03,
respectively, for the three months ended June 26, 2004, compared to net earnings
and earnings per share of $2,149,000 and $0.16, respectively, for the same
quarter last year, primarily as a result of the reasons described above. Average
common shares outstanding used to compute basic and diluted loss per share
increased to 14,115,000 in 2004 mainly due to the impact of stock options and a
private equity placement of 200,000 common shares during the fourth quarter of
2003. The impact from "in the money" stock options and warrants resulted in an
additional 724,000 shares for the average diluted shares outstanding computation
in 2003.

Six months ended June 26, 2004 and June 28, 2003

      Revenues. Consolidated revenues for the six-month period ended June 26,
2004 amounted to $55,427,000, an increase of $19,889,000, or 56%, from the
$35,538,000 reported in the same period in 2003. Primary battery sales increased
$17,441,000, or 51%, from $34,202,000 last year to $51,643,000 this year, as a
result of strong shipments of HiRate(R) battery products, led by sales of
BA-5390 batteries to military customers. Somewhat lower sales of 9-volt
batteries partially offset this increase. Rechargeable revenues rose $2,427,000
to $3,065,000, primarily due to higher shipments of various rechargeable battery
packs to a growing number of customers. Technology Contract revenues were
$719,000 in the first half of 2004, attributable mainly to work on the Company's
$2,700,000 development contract with General Dynamics. Compared with the same
period a year ago, technology contract revenues increased $21,000 related to
contracts with different customers in each period.

      Cost of Products Sold. Cost of products sold totaled $42,047,000 for the
six months ended June 26, 2004, an increase of $14,399,000, or 52% over the same
six-month period a year ago. The gross margin on consolidated revenues for the
first half of 2004 was $13,380,000, or 24% of revenues, an improvement of
$5,490,000 over the $7,890,000, or 22% of revenues, reported in the same period
in 2003. Consolidated gross margins rose 70% for the first half of 2004 compared
with 2003 on the 56% increase in revenue. Gross margins in the Company's primary
battery operations improved $5,650,000, from $8,172,000 in 2003 to $13,822,000
in 2004. In the Company's rechargeable operations, the gross margin loss
amounted to $567,000 in the first two quarters of 2004, improving slightly from
a loss of $596,000 in 2003. The 2004 results included a $250,000 charge for
increasing reserves for obsolete rechargeable inventory. Gross margins in the
Technology Contract segment were $125,000 in the first half of 2004, decreasing
$189,000 from $314,000 in 2003, mainly due to the timing and realized margins of
different technology contracts.

      Operating Expenses. Operating expenses for the six months ended June 26,
2004 totaled $6,392,000, a $1,012,000, or a 19% increase over the prior year's
amount of $5,380,000. Research and development costs decreased $168,000 to
$1,063,000 in 2004 due to the consolidation of all R&D efforts to the U.S.
facility in order to reduce costs and combine efforts. Although the R&D line
reflects a decline, the Company also considers its efforts in the Technology
Contracts segment to be related to key battery development efforts. Selling,
general, and administrative expenses increased $1,180,000 to $5,329,000 due
mainly to planned resource additions in sales, marketing and administrative
functions that are necessary for the company to execute on its target growth
opportunities, in addition to higher costs


                                       16


associated with a growing business. Overall, operating expenses as a percentage
of sales improved, declining from 15% in the first half of 2003 to 12% in the
same period in 2004.

      Other Income (Expense). Interest expense, net, for the first six months of
2004 was $188,000, a decrease of $49,000 from the comparable period in 2003,
mainly as a result of lower outstanding debt balances. Miscellaneous income /
expense decreased from income of $187,000 in 2003 to income of $93,000 in 2004
mostly due to changes in foreign currency in connection with the Company's
intercompany loan with its U.K. subsidiary. The strength of the U.K. pound
against the U.S. dollar rose more rapidly in 2003 as compared with 2004. In June
2004, the Company recorded a $3,951,000 non-cash, non-operating charge related
to the Company's ownership interest in Ultralife Taiwan, Inc. ("UTI") that
consisted of a write-off of its $2,401,000 note receivable from UTI, including
accrued interest, and the book value of its $1,550,000 equity investment in UTI.
The Company decided to record this charge due to recent events that have caused
increasing uncertainty over UTI's near-term financial viability, including a
failure by UTI to meet commitments made to the Company and its other creditors
to secure additional financial support before July 1, 2004. Based on these
factors, and UTI's operating losses over several years, the Company's investment
has had an other than temporary decline in fair value and the Company believes
that the probability of being reimbursed for the note receivable is nominal. The
Company continues to hold a 9.2% equity interest in UTI, and it is working with
UTI to help it through its financial difficulties in an effort to ensure a
satisfactory outcome for all parties involved. The Company does not believe the
write-off poses a risk to its current operations or future growth prospects
because UTI continues to manufacture product for it and the Company has taken
steps to establish alternate sources of supply.

      Income Taxes. The Company recorded income tax expense of $79,000 for the
first half of 2004. While the Company has significant net operating loss
carryforwards (NOLs) related to past years' cumulative losses, it is subject to
a U.S. alternative minimum tax where NOLs can offset only 90% of taxable income.

      Net Income. Net income and diluted earnings per share for the first six
months of 2004 were $2,863,000 and $0.19, respectively, compared to $2,460,000
and $0.19, respectively, for the same six months in 2003, primarily as a result
of the reasons described above. Average common shares outstanding used to
compute basic earnings per share increased from 12,895,000 in the first half of
2003 to 13,930,000 in 2004 mainly due to stock option exercises, as well as the
conversion of a short-term note into 125,000 common shares in the second quarter
of 2003 and a private equity placement of 200,000 common shares during the
fourth quarter of 2003. The impact from "in the money" stock options and
warrants resulted in an additional 1,179,000 and 371,000 shares for the average
diluted shares outstanding computation in 2004 and 2003, respectively.

Liquidity and Capital Resources (in whole dollars)

      As of June 26, 2004, cash and cash equivalents totaled $941,000, excluding
restricted cash of $51,000. During the six months ended June 26, 2004, the
Company provided $1,819,000 of cash in operating activities as compared to using
$243,000 for the six months ended June 28, 2003, mainly due to the increase in
net income offset by an increase in inventory due to higher production volumes.
In the six months ended June 26, 2004, the Company used $2,628,000 to purchase
plant, property and equipment, a decrease of $650,000 from the prior year's
capital expenditures. This decrease was mainly attributable to the timing of
various projects. During the six month period ended June 26, 2004, the Company
generated $847,000 in funds from financing activities. The financing activities
included inflows from the issuance of stock, mainly as stock options were
exercised during the period, and outflows resulting from a reduction in the
Company's revolving loan balance. During the first six months of 2004, the
Company issued 623,293 shares of common stock as a result of exercises of stock
options and warrants, and the Company received approximately $3,703,000 in cash
proceeds as a result of these transactions. The


                                       17


Company reduced its debt by $2,856,000 during the first six months of 2004 as
loan principal was paid and revolving debt was reduced.

      Inventory turnover for the first half of 2004 was at an annualized rate of
6.0 turns per year, a decline from the 6.7 turns reflected during the full year
of 2003, mainly due to the timing of production and shipments and a modest
buildup of inventory related to higher production volumes, a semi-annual
shutdown week at the beginning of the third quarter, and a production conversion
project at the U.K. operation. The Company's Days Sales Outstanding (DSOs) was
an average of 50 days for the first half of 2004, remaining constant with the 50
days reflected for the full 12-month period in 2003.

      At June 26, 2004, the Company had a capital lease obligation outstanding
of $86,000 for the Company's Newark, New York offices and manufacturing
facilities.

      As of June 26, 2004, the Company had open capital commitments to purchase
approximately $2,071,000 of production machinery and equipment.

      In May 2004 and June 2004, the Company experienced two fires that damaged
certain inventory and property at its facilities. The May 2004 fire occurred at
the Company's U.S. facility and was caused by cells that shorted out when a
forklift truck accidentally tipped the cells over in an oven in an enclosed
area. Certain inventory, equipment and a small portion of the building where the
fire was contained were damaged. The June 2004 fire happened at the Company's
U.K. facility and mainly caused damage to various inventory, and to contained,
non-manufacturing area in the building that is leased by the Company. It is
unknown how the U.K. fire was started. The fires caused relatively minor
disruptions to the production operations, and had no impact on the Company's
ability to meet customer demand during the quarter. The Company maintains
replacement cost insurance on the property and equipment it owns or rents, with
relatively low deductibles. The total of the two losses related to company-owned
assets, including expenditures required to repair and clean up the facilities,
is expected to be in the range of $2,000,000. The Company is working closely
with the insurance companies on these matters, and it expects to be fully
reimbursed by the insurance companies for these losses. The impacts on the
Consolidated Statement of Operations and the net cash outflows from the Company
are expected to be negligible. At June 26, 2004, the Company's prepaid and other
current assets on its Consolidated Balance Sheet included a receivable from
insurance companies for approximately $800,000 for equipment losses, inventory
losses and clean-up costs incurred to date.

      As of June 26, 2004, the Company had $867,000 outstanding under the term
loan component of its credit facility with its primary lending bank, and had
$4,209,000 of borrowings outstanding under the revolver component of the credit
facility. The Company's additional borrowing capacity under the revolver
component of the credit facility as of June 26, 2004 was approximately
$5,900,000, net of outstanding letters of credit of $3,600,000. At June 26,
2004, the Company's net worth was $41,091,000, compared to the debt covenant
requiring a minimum net worth of approximately $22,406,000.

      On June 30, 2004, the Company closed on a new secured $25,000,000 credit
facility, comprised of a five-year $10,000,000 term loan component and a
three-year $15,000,000 revolving credit component. This agreement replaces the
Company's $15,000,000 credit facility that expired on the same date. On June 30,
2004, the Company drew down the full $10,000,000 term loan. The proceeds of the
term loan, which is to be repaid in equal monthly installments over five years,
are to be used for the retirement of outstanding debt and capital expenditures.
Availability under the revolving credit component is subject to a debt to
earnings ratio, whereas availability under the previous facility was limited by
various asset values. The lenders of the new credit facility are JP Morgan Chase
Bank and Manufacturers and Traders Trust Company, with JP Morgan Chase Bank
acting as the administrative agent. On July 1, 2004, the Company entered into an
interest rate swap arrangement to be effective on August 2, 2004, related to the
$10,000,000 term loan, in order to take advantage of historically low interest
rates. The Company received a fixed rate of interest in exchange for a variable
rate. The swap


                                       18


rate received was 3.98% for five years and will be adjusted accordingly for a
eurodollar spread incorporated in the agreement which is dependent upon a debt
to earnings ratio within a predetermined grid. At July 1, 2004, the total
adjusted rate of interest that the Company will pay on the outstanding portion
of the $10,000,000 term loan was 5.23%.

      As of June 26, 2004, the Company's wholly-owned U.K. subsidiary, Ultralife
Batteries (UK) Ltd., had approximately $345,000 outstanding under its revolving
credit facility with a commercial bank in the U.K. This credit facility provides
the Company's U.K. operation with additional financing flexibility for its
working capital needs. Any borrowings against this credit facility are
collateralized with that company's outstanding accounts receivable balances.
There was $476,000 of additional borrowing capacity under this credit facility
as of June 26, 2004.

      The Company continues to be optimistic about its future prospects and
growth potential. However, the recent rapid growth of the business has created a
near-term need for certain machinery, equipment and working capital in order to
enhance capacity and build product to meet demand. The recent positive financial
results during 2003 have enhanced the Company's ability to acquire additional
financing, as evidenced by the new credit facility entered into as of June 30,
2004. The Company continually explores various sources of capital, including
issuing new or refinancing existing debt, and raising equity through private or
public offerings. While it continually evaluates these alternatives, the Company
believes it has the ability over the next 12 months to finance its operations
primarily through internally generated funds, or through the use of financing
that currently is available to the Company.

      As described in Part II, Item 1, "Legal Proceedings", the Company is
involved in certain environmental matters with respect to its facility in
Newark, New York. Although the Company has reserved for expenses related to
this, there can be no assurance that this will be the maximum amount. The
ultimate resolution of this matter may have a significant adverse impact on the
results of operations in the period in which it is resolved.

      The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. While the Company believes that its
current warranty reserves are adequate, there is no assurance that future
warranty claims will be consistent with past history. In the event the Company's
experiences a significant increase in warranty claims, there is no assurance
that the Company's reserves are sufficient. This could have a material adverse
effect on the Company's business, financial condition and results of operations.

Outlook (in whole dollars)

      For the full year of 2004, the Company is reaffirming its guidance
provided last quarter of $106,000,000 in revenues, compared with $79,450,000 in
2003, an increase of approximately 33%. Overall, military sales are continued to
comprise at least 60% of the total revenues for the year, and rechargeable
revenues are expected to reach approximately $7,000,000 for the full 12-month
period ending December 31, 2004. Compared to the $55,427,000 in revenues for the
first half of 2004, management anticipates a modest flattening of order flow
from the military in the second half of the year compared to the first half,
consistent with the Company's outlook at the beginning of fiscal 2004.
Management cautions that uncertainties exist arising from the pending October
transfer of procurement authority from the U.S. Army Communications and
Electronics Command (CECOM) to the Defense Logistics Agency (DLA) and the
outcome of the Next Gen II Phase IV award.


                                       19


      The results in each quarter can be subject to fluctuations as the timing
of some customer orders is not often easy to predict. In particular, 9-volt
revenues depend upon continued demand from the Company's customers, some of
which depend upon retail sell-through. Similarly, revenues from sales of
cylindrical products, primarily to military customers, depend upon a variety of
factors, including the timing of the battery solicitation process within the
military, the Company's ability to successfully win contract awards, successful
qualification of the Company's products in the applicable military applications,
the timing of shipments related to lot acceptance, and the timing of order
releases against such contracts. Additionally, there is always a risk that
Congressional appropriations might vary from what is needed or expected. Some of
these factors are outside of the Company's direct control.

      At the present time, there is some uncertainty with military order
activity as it relates particularly to the BA-5390 batteries. In October 2004,
the battery procurement responsibility for the U.S. military is scheduled to be
shifting from CECOM to DLA. Due to this change, and the impending award for Next
Gen Phase IV contract (discussed below), it is unclear at this time what the
level of orders for the BA-5390 batteries will be from the military during the
remainder of 2004. Current orders for the BA-5390 by the U.S. military provide
for production to take place into the early part of the fourth quarter. The
above guidance assumes that the military will place an order for additional
BA-5390's within the next couple of months for production and delivery during
the fourth quarter, at a slightly lower level than what the Company produced and
shipped during the first half of 2004. The guidance assumes no more than a
minimal disruption from the transfer to DLA and that the Company will be
successful in receiving an award under the Next Gen II Phase IV contract. As a
result of the uncertainty with the military orders at this time, we believe that
the second half results will likely be evenly split between the third and fourth
quarters.

      Over the next three to five years, with anticipated growth in various
target markets, such as military, medical, automotive telematics, and search and
rescue, the Company has targeted an annual growth rate in revenues of 20% - 30%,
heading toward annual revenues of $200 million. While the Company's revenues are
expected to be comprised of approximately 60% from military sales in 2004, this
percentage is expected to decline over time as the Company generates sales from
customers in commercial markets. For 2005, the Company currently expects
consolidated revenues to range from $125 million to $135 million, including
business comprised of approximately 50% military and a doubling of rechargeable
revenues from 2004 in the range of $14 million. Significant growth in commercial
markets such as medical and automotive telematics is also expected to contribute
significantly to the 2005 outlook.

      As discussed in the Company's Form 10-K for the year ended December 31,
2003, the solicitation for the Next Gen II Phase IV lithium battery procurement,
referred to as the "Rectangular" phase, was issued in January 2004. This phase
was split into two pieces, one of which included the BA-5390 battery that the
Company is already manufacturing under exigent, or non-bid, contracts. The other
piece consisted of the BA-5347 battery, for which the solicitation will result
in a small business set-aside contract. Bids were submitted for these products
in mid-March 2004. At this time, the Company is expecting that awards will be
made on this contract in August or September of 2004; however, the Company
cannot predict precisely when final awards will be made or what the final
outcome may be. The total amount for this phase of Next Gen II is expected to be
in the range of up to approximately $200-$300 million over five years. In the
meantime, the Company plans to continue to fulfill its current obligations
related to exigent contracts, and to pursue other such contracts as the
opportunity arises. The Company's current guidance incorporates ongoing BA-5390
contracts.

      The Company has a fairly substantial fixed cost infrastructure to support
its overall operations. As sales continue to grow, manufacturing efficiencies
are realized, and operating expenses (R&D and SG&A) are closely controlled, the
Company believes it can generate favorable returns in the range of 30%, and
possibly as high as 50%, on incremental revenues, depending on product mix.
Conversely, decreasing volumes will likely result in the opposite effect. Gross
margins in 2004 are expected to be in the range of 23% - 24%. Within the next
couple of years, the Company believes that its gross margins


                                       20


can reach a range of 26%-27% as operating efficiencies improve and the mix of
products with higher margins increases. It has set a target of 30% gross margins
for the longer-term, i.e. within the next five years.

      The interest from potential customers for various types of new batteries
continues to increase significantly. As a result, management made a commitment
to increase resources in the R&D area, mainly related to new product
development, all of which will be done at the Company's U.S. facility. The
Company plans to continue its recent successful efforts related to new
cylindrical battery development for applications that initially have a military
focus, but often have sizeable commercial applications as well. In addition, it
is committing funds for the development of various Thin Cell and rechargeable
products. In order to keep up with this increase in opportunities, R&D costs are
now expected to be in the range of $600,000 to $700,000 per quarter for the
remainder of 2004. While the R&D expense line is now expected to increase
somewhat, it is also important to note that the Company also enhances its R&D
efforts with technology contracts, the revenues and related costs for which are
reported as a part of the Technology Contracts segment.

      While the Company continues to monitor its operating costs very tightly,
it expects that SG&A costs will increase modestly in 2004 over 2003 as it
invests in additional sales and marketing efforts, and general administrative
costs rise to support increasing efforts for new product development
opportunities as well as to support the growth of the business. Overall, the
Company expects that total quarterly operating expenses (R&D and SG&A) for the
last two quarters of 2004 will remain roughly around the amount reported for the
second quarter. For the full year, operating expenses are expected to amount to
approximately 12% of total revenues during 2004, compared with 14% in 2003.
Within the next couple of years, the Company believes that its operating
expenses will be in the range of 11%-12% of revenues, and it has set a target to
reach 10% of revenues in the longer-term.

      At this time, the Company expects to achieve operating income in the
second half of 2004 of approximately $5,500,000. For the full year 2004, the
Company expects operating income to amount to approximately $12,500,000,
reaffirming its previous guidance. With second half revenues expected to be
fairly evenly split between the third and fourth quarters, second half operating
income is similarly expected to be split proportionately. Within the next couple
of years, operating income as a percentage of revenues, is projected to be in
the range of 15%, with a longer-term target of 20%, resulting from higher gross
margins and lower operating expenses as a percentage of sales.

      At December 31, 2003, the Company had approximately $76,829,000 in net
operating loss (NOL) carryforwards available to offset current and future
taxable income. The Company determined there was not sufficient positive
evidence in accordance with FAS 109 to record a deferred tax asset at December
31, 2003. The Company has not reported a deferred tax asset on its Consolidated
Balance Sheet due to prior operating losses. It is reasonably possible the
Company's profitability in 2003 and 2004 would result in the recognition of a
deferred tax asset during 2004.

      In addition, in early 2004, the Company determined that a change in
ownership, as defined under Internal Revenue Code Section 382, had occurred
during fourth quarter of 2003, resulting in an annual limitation on the
utilization of the net operating loss carryforwards. The Company currently
estimates that the amount of such limitation will be in the range of
approximately $14,000,000 to $18,000,000 annually. If the Company's U.S. taxable
income were to exceed this annual limitation, it could result in a higher than
anticipated current tax expense for any year in which this occurs.

      During 2004, the Company projects that it will spend approximately
$5,000,000 to $6,000,000 on capital expenditures for machinery and equipment.
Nearly one-half of these expenditures are expected to be for projects that
enhance manufacturing productivity, with relatively quick returns. The remainder
of these expenditures will be used to alleviate bottlenecks and increase
capacity, as well as for tooling of new products.


                                       21


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. At June 26,
2004, the Company did not invest in derivative financial instruments. In July
2004, the Company entered into an interest rate swap arrangement in connection
with its new credit facility. (See Note 13 in Notes to Consolidated Financial
Statements for additional information.)

Item 4. Controls and Procedures

      Evaluation Of Disclosure Controls And Procedures - The Company's president
and chief executive officer (principal executive officer) and its vice
president- finance and chief financial officer (principal financial officer)
have evaluated the disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based on this evaluation, the president and chief executive
officer and vice president - finance and chief financial officer concluded that
the Company's disclosure controls and procedures were effective as of such date.

      Changes In Internal Controls Over Financial Reporting - There has been no
change in the internal controls over financial reporting that occurred during
the fiscal quarter covered by this quarterly report that has materially
affected, or is reasonably likely to materially affect, the internal controls
over financial reporting.


                                       22


PART II OTHER INFORMATION

Item 1. Legal Proceedings

      The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.

      In conjunction with the Company's purchase/lease of its Newark, New York
facility in 1998, the Company entered into a payment-in-lieu of tax agreement
which provides the Company with real estate tax concessions upon meeting certain
conditions. In connection with this agreement, a consulting firm performed a
Phase I and II Environmental Site Assessment which revealed the existence of
contaminated soil and ground water around one of the buildings. The Company
retained an engineering firm which estimated that the cost of remediation should
be in the range of $230,000. This cost, however, is merely an estimate and the
cost may in fact be much higher. In February, 1998, the Company entered into an
agreement with a third party which provides that the Company and this third
party will retain an environmental consulting firm to conduct a supplemental
Phase II investigation to verify the existence of the contaminants and further
delineate the nature of the environmental concern. The third party agreed to
reimburse the Company for fifty percent (50%) of the cost of correcting the
environmental concern on the Newark property. The Company has fully reserved for
its portion of the estimated liability. Test sampling was completed in the
spring of 2001, and the engineering report was submitted to the New York State
Department of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed
the report and, in January 2002, recommended additional testing. The Company
submitted a work plan to NYSDEC in October 2003, which was approved shortly
thereafter. The Company sought proposals from engineering firms to complete the
remedial work outlined in the work plan. A firm was selected to perform the
tasks associated with the remediation activities, which were completed in
December 2003. The test results were then forwarded to NYSDEC for comment.
NYSDEC responded to the Company in March 2004 requesting a report summarizing
the data, findings, discussions and conclusions. The report has been submitted
to NYSDEC who will review and make recommendations as to whether additional
remediation is required. Because the Company believes that the source of the
contamination has been removed, NYSDEC recommended that the Company conduct
quarterly monitoring of the groundwater for one year. The Company believes that
the final cost to remediate will not exceed the original estimate. The Company
awaits final comments from the NYSDEC and will begin the additional sampling
upon approval of the conclusions stated in the report. Because this is a
voluntary remediation, there is no requirement for the Company to complete the
project within any specific time frame. The ultimate resolution of this matter
may have a significant adverse impact on the results of operations in the period
in which it is resolved. Furthermore, the Company may face claims resulting in
substantial liability which could have a material adverse effect on the
Company's business, financial condition and the results of operations in the
period in which such claims are resolved.

      A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein it is
asserted that the Customer's product, which is powered by an Ultralife battery,
does not operate according to the Customer's product specification. No claim has
been filed against Ultralife. However, in the interest of fostering good
customer relations, in September 2002, Ultralife agreed to lend technical
support to the Customer in defense of its claim. The claim between the end-user
and the Customer has now been settled. Ultralife has renewed its commitment to
the Customer to honor its warranty by replacing any batteries that may be
determined to be defective. In the event a claim is filed against Ultralife and
it is ultimately determined that Ultralife's product was defective, replacement
of batteries to this Customer or end-user may have a material adverse effect on
the Company's financial position and results of operations.


                                       23


Item 4. Submission of Matters to a Vote of Security Holders

      (a)   On June 10, 2004 an Annual Meeting of Shareholders of the Company
            was held.

      (b)   At the Annual Meeting, the Shareholders of the Company elected to
            the Board of Directors all seven nominees for Director with the
            following votes:

                      DIRECTOR                              FOR         AGAINST

                      Patricia C. Barron                 12,941,993      99,580
                      Anthony J. Cavanna                 12,997,490      44,083
                      Paula H. J. Cholmondeley           12,997,290      44,283
                      Daniel W. Christman                12,941,993      99,580
                      John D. Kavazanjian                12,997,490      44,083
                      Carl H. Rosner                     12,692,550     349,023
                      Ranjit C. Singh                    12,926,390     115,183

      (c)   At the Annual Meeting, the Shareholders of the Company voted for the
            ratification of PricewaterhouseCoopers LLP as its independent
            registered public accounting firm for 2004 with the following votes:

                                                             FOR        AGAINST

                                                         12,826,320      35,673

      (d)   At the Annual Meeting, the Shareholders of the Company voted for the
            approval of the Company's 2004 Long -Term Incentive Plan:

                          FOR        AGAINST     ABSTAIN     UNVOTED

                       7,498,899    1,187,239    54,492     4,300,943

Item 6. Exhibits and Reports on Form 8-K

      (a)   Exhibits

            10.1  Credit Agreement dated as of June 30, 2004 with JPMorgan Chase
                  Bank as Administrative Agent

            10.2  General Security Agreement dated as of June 30, 2004 in favor
                  of JPMorgan Chase Bank

            31.1  Section 302 Certification - CEO

            31.2  Section 302 Certification - CFO

            32    Section 906 Certifications


                                       24


      (b)   Reports on Form 8-K

            On April 14, 2004, the Company filed Form 8-K with the Securities
      and Exchange Commission announcing that it will report its first quarter
      2004 results for the period ended March 27, 2004 before the market opens
      on Thursday, April 29, 2004.*

            On April 22, 2004, the Company filed Form 8-K with the Securities
      and Exchange Commission announcing it had received an order valued at
      approximately $1.5 million to supply custom lithium ion batteries and
      chargers to Cubic Defense Applications.*

            On April 27, 2004, the Company filed Form 8-K with the Securities
      and Exchange Commission announcing that it had received an order valued at
      $6 million from the U.S. Army Communications Electronics Command (CECOM)
      for its BA-5372/U military batteries.*

            On April 29, 2004, the Company filed a Form 8-K with the Securities
      and Exchange Commission announcing its financial results for the quarter
      ended March 27, 2004.*

            On April 29, 2004, the Company filed a Form 8-K with the Securities
      and Exchange Commission disclosing that two sitting directors would not
      stand for re-election to the Board of Directors at the Annual Meeting.

            On May 4, 2004, the Company filed a Form 8-K with the Securities and
      Exchange Commission announcing the election of Philip M. Meek, Vice
      President of Manufacturing, as an officer of the company.

            On May 27, 2004, the Company filed Form 8-K with the Securities and
      Exchange Commission indicating that it would hold its annual meeting of
      shareholders for the period ending December 31, 2003, at the JPMorgan
      Chase Conference Center in New York City on Thursday, June 10, 2004.*

            On June 15, 2004, the Company filed a Form 8-K with the Securities
      and Exchange Commission announcing the election of Paula H. J.
      Cholmondeley to its board of directors.*

            *This information was furnished but not filed in accordance with
      Regulation FD.


                                       25


                                   SIGNATURES

Pursuant to the requirements 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.

                                                   ULTRALIFE BATTERIES, INC.
                                                           (Registrant)

     Date: August 2, 2004                          By: /s/ John D. Kavazanjian
                                                   -----------------------------
                                                   John D. Kavazanjian
                                                   President and Chief Executive
                                                   Officer

     Date: August 2, 2004                          By: /s/ Robert W. Fishback
                                                   -----------------------------
                                                   Robert W. Fishback
                                                   Vice President - Finance and
                                                   Chief Financial Officer


                                       26


                                Index to Exhibits

10.1  Credit Agreement dated as of June 30, 2004 with JPMorgan Chase Bank as
      Administrative Agent

10.2  General Security Agreement dated as of June 30, 2004 in favor of JPMorgan
      Chase Bank

31.1  Section 302 Certification - CEO

31.2  Section 302 Certification - CFO

32    Section 906 Certifications


                                       27