In 1999, Toyota began development on a second generation Prius under chief engineer Shigeyuki Hori. In 2001, Hiroshi Okamoto's exterior design was approved and frozen for production. In 2003, the Prius was completely redesigned as a compact liftback, with redistributed mechanical and interior space significantly increasing rear-seat legroom and luggage room. The 2004 Prius is even more environmentally-friendly than the 1997–2003 model (according to the EPA), and is 6 inches (150 mm) longer than the previous version. Its more aerodynamic Kammback body balances length and wind resistance resulting in a drag coefficient ( Cd) of 0.26. Chief engineer Shigeyuki Hori's development effort, led to 530 patents for the vehicle.
The Prius uses an all-electric A/C compressor for cooling, an industry first, and also adds an electric power steering system to further minimize engine belt-driven engine accessories. Combined with a smaller and lighter NiMH battery, the XW20 is more powerful and more efficient than the XW11. In the U.S., the battery pack of the 2004 Prius is warranted for 100,000 miles (160,000 km) or 8 years. The warranty for hybrid components in California and the seven Northeastern states that have adopted the stricter California emission control standards is 150,000 miles (240,000 km) or 10 years.
The second generation Toyota Prius makes use of a 201.6-volt NiMH battery composed of 28 modules, where each module is made of six individual 1.2-volt, 6.5 Ah Prismatic NiMH cells. The 7.2-volt modules each contain a charge controller and a relay. The 28 modules are connected in series to produce a total energy storage capacity of 1.310 kWh (via 201.6-volts × 6.5 Ah). The battery control computers keep the state of charge (SOC) between approximately 40 and 80 percent (shallow cycling), where the average SOC hovers around 60 percent, allowing about 400 Wh of useful energy storage to capture energy from regenerative braking and to release it back into the hybrid drive-train through Motor-generator 1 and Motor-generator 2 in the power split device. The shallow cycling enables the hybrid battery to last tens of thousands of cycles, which translates into decades of use and in many case more than 200,000 miles (320,000 km) of operation. The computer controlled charging and discharging of the battery enhances its cycle life, calendar life, and thermal control performance. Passive battery cooling and heating is accomplished through the metal case of the battery assembly pack, while a forced air cooling system with a blower motor and ducting system enables active cooling of the HV battery.
Among the Prius's options are Toyota's implementation of a Smart Key System (the feature can be user-deactivated), DVD navigation on the multi-function display, Vehicle Stability Control and Bluetooth for hands-free calling. A new Intelligent Parking Assist system was available in Japan and Europe since its launch.