Last week, we looked at Plug Power (NASDAQ:PLUG) and a few of the companies burning cash in hopes of developing new power sources -- FuelCell Energy (NASDAQ:FCEL) and Ballard Power (NASDAQ:BLDP) being the most prominent examples. Yesterday, yet another entry in this field, Millennium Cell (NASDAQ:MCEL), reported its fiscal 2004 annual results.

With a market cap of just $90 million, Millennium is by far the smallest of those four companies, in part because its finances are not at all strong. As reported yesterday, Millennium saw a 60% decline in its revenue, year-on-year, and an evaporation of the already tenuous gross profits it earned in 2003. Even so, the company cut its operating costs significantly. As a result, its net loss for the year, although still massive at $10.8 million, was one-third less than the loss it incurred in 2003.

Millennium's market cap was an even smaller $66 million before Monday, when the company's shares shot up a remarkable 32%. But it wasn't the financial report that caused the shares to surge. Rather, this little R&D shop found itself swept into the arms of a powerful white knight when Motley Fool Income Investor pick Dow Chemical (NYSE:DOW) rode in to save the day. (Trumpets sound.)

What's happening appears to be as follows: Dow will partner with Millennium in developing and marketing small-size fuel cells to be used in powering portable electronics for consumers and the military. The initial partnership is to last for three years, with Dow providing funding to Millennium as "milestones" are reached in the creation of viable and marketable prototype fuel cells.

Regardless of the market's reaction yesterday, this Fool believes that the deal seems weighted in Dow's favor. Initially, Dow will receive 3% of Millennium's equity in the form of preferred shares. Later, at each of four milestones, Dow will receive the right to purchase additional convertible preferred shares from Millennium, in which case Millennium will also issue Dow even more preferred shares (apparently free of charge) and warrants to purchase additional common shares. Should all go as planned, Dow will seemingly end up with nearly 20% of Millennium's equity in exchange for about $5 million -- a considerable discount to Millennium's market valuation as of last week.

This doesn't look like a very attractive deal for Millennium's current shareholders, but on the other hand, it's probably better than watching their company go broke.

Millennium's not the only beneficiary of Dow's cash. Fool Income Investors have already earned a total return of better than 42% since the newsletter picked Millennium as one of two recommendations in March 2004. Want to find similarly strong investment ideas? Sign up now for a one-month trial of Income Investor, and your first two recommendations are free of charge.

Fool contributor Rich Smith has no position, short or long, in any of the companies mentioned in this article.