Before the war, most of Badme’s estimated 5,000 residents voted in Ethiopian elections and used the Ethiopian Birr currency.
The 1,000-km (620-mile) border between the two countries has never been properly demarcated. Before the war, people crossed it regularly to graze their herds, trade and find work.
While the two governments remained on friendly terms, this fluidity did not pose a problem. But this changed as tensions grew between the two governments.
What has happened since the 2000 peace agreement?
The 2000 peace agreement created a 25-kilometre-wide (15-mile-wide) buffer zone between the two countries. This has been patrolled by the U.N. Mission in Ethiopia and Eritrea (UNMEE) of 3,300 peacekeepers.
As part of the 2000 peace agreement, an independent boundary commission was set up to decide on the exact location of the border based on past colonial treaties. Ethiopia and Eritrea agreed they would accept the commission’s decision and there would be no right of appeal.
In April 2002 the commission ruled on the boundary, and gave the flashpoint town of Badme to Eritrea. Ethiopia appealed against the ruling, but the commission maintained its decision.
Now both sides are in a stalemate. Ethiopia refuses to co-operate with the physical demarcation of the boundary until it can hold talks on the issue and Eritrea refuses to hold talks until Ethiopia accepts the ruling.
Eritrea says the Ethiopian presence north of the commission’s boundary is illegal.