High-power battery technology is crucial to the commercial success of hybrid electric vehicles. In the United States, high-power lithium-ion batteries are being studied as part of the Advanced Technology Development (ATD) program. Lithium ion-cells, ranging in capacity from 1 mAh to 1Ah, are built and tested to determine suitable electrode-electrolyte combinations that will meet the calendar life, safety and cost goals of the ATD program. The cells are aged, cycled, and/or abused according to established test procedures. After test completion, the cell components are examined by various diagnostic tools to determine the nature and extent of physical, chemical, and structural changes that resulted from the testing conditions. These diagnostic results are used to improve cell chemistries and cell designs of the next generation of lithium-ion batteries. The capacity and power loss of lithium-ion cells are governed by the chemical and electrochemical side reactions that occur at the electrode-electrolyte interface. The formation of a Solid Electrolyte Interface (SEI) layer on negative electrodes that are polarized below electrolyte reduction potential (~0.8 V vs. Li/Li+) is a well-known phenomenon. The SEI layer, which contains various organic and inorganic electrolyte decomposition products, protects the negative electrode from further reduction and allows stable lithium-intercalation processes at low potential. Capacity loss appears to result from changes and growth of the SEI layer during cell aging. The cell power loss results from impedance increases at the positive electrode, which may be the consequence of changes in the electrode surface films. Data from X-ray photoelectron spectroscopy, secondary ion mass spectroscopy, transmission electron microscopy, electron energy loss spectroscopy, and nuclear magnetic resonance analysis will be presented to support the conclusions of our study.