Ballard Power Systems Reports 2002 Results, Part 2 of 2

Business Wire, Feb 19, 2003

Part 2.

RISKS & UNCERTAINTIES

Our development and commercialization plans for Ballard PEM fuel cell products, carbon fiber products, combustion engine power generator products, electric drives and power electronics products which are presented in this News Release and Management's Discussion & Analysis are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to a number of risks and uncertainties including those detailed below.

We are a development stage company and our business entails risks and uncertainties that affect our outlook and eventual results of our business and commercialization plans. The primary risks relate to meeting our product development and commercialization milestones, which require that our products exhibit the functionality, cost, durability, and performance required in a commercial product. To be commercially useful, certain of our PEM fuel cell products, carbon fiber products, combustion engine power generator products, electric drives and power electronics products must be integrated into products manufactured by original equipment manufacturers. There is no guarantee that original equipment manufacturers will manufacture appropriate products, or, if they do manufacture such products, that they will choose to use our products as components. There is also a risk that market acceptance might take longer to develop than anticipated and there is no guarantee that we will continue to develop, manufacture or market our product or components if market acceptance levels do not support the continuation of the product or component. Our business plan recognizes and, to the extent possible, attempts to manage these risks by pursuing diverse end markets for our PEM fuel cell products, carbon fiber products, combustion engine power generator products, electric drives and power electronics products. Within these markets, our commercialization plan is focused on products that we believe have a competitive advantage. We are developing components and subsystems for fuel cell systems that we are leveraging into non-fuel cell applications to further our technology, build recurring revenues, create distribution channels, reduce costs by increasing volumes and to develop the operating disciplines required to manufacture and sell commercial products. Additionally, the plan for product and market development is to work closely with strategic partners and key customers who together have the capability and understanding of specific markets to develop products that incorporate our products to meet consumer requirements.

The demonstration programs in portable, stationary, transportation, and other applications that are required for development and testing of our products in actual field operations entail significant risks. These risks include problems or delays in demonstrations due to technical difficulties, inability to meet design performance goals, including power output, life and reliability and, for transportation applications, the risk of motor vehicle accidents. We mitigate these risks to the extent possible through detailed project management, formal design reviews, reviews by external experts, contingency plans which anticipate likely problems, safety reviews, training and testing programs related to the operation and maintenance of fuel cells for portable power products and stationary generators, fuel cell engines for transportation, combustion engine power generators, electric drives and power electronics, and by carrying appropriate liability insurance. However, there can be no assurance that the demonstrations will be successful in meeting our product development, market development and commercialization objectives.

PEM fuel cell vehicles utilize a different fuel than gasoline. The construction of a system to deliver hydrogen, or a suitable fuel containing hydrogen, requires significant investment by third parties. There is no guarantee that an adequate fuel distribution infrastructure will be built. Also, the fuel delivered through such distribution infrastructure may have a higher price than consumers are willing to pay, due to the cost of the delivery system and the cost of the fuel itself. If consumers are unable to obtain fuel conveniently and affordably, a mass market for vehicles powered by PEM fuel cells is unlikely to develop. Advances in technology or vehicle design must occur before sufficient quantities of hydrogen can be affordably stored in vehicles to provide comparable range to that of an internal combustion engine vehicle. Our automotive customers have reached consensus that their first commercial PEM fuel cell vehicles will be hydrogen-fueled. We are focusing our development activities on hydrogen-based systems to meet our customers' needs. The California Fuel Cell Partnership, a collaboration of automotive manufacturers, energy companies, fuel cell technology companies and government agencies, is working to successfully demonstrate fuel cell technology, create public awareness and solve common issues, including fuel infrastructure, along the path to commercialization of fuel cell vehicles. This increased visibility and greater public awareness of the technology and its advantages helps to create political will to put government policies and programs in place that will speed up the adoption of fuel cells and the development of a hydrogen infrastructure. Globally, governments continue to support fuel cells through a variety of programs, including funding the development of a fuel infrastructure (such as the recent Freedom Car and Hydrogen Fuel initiative, which is proposing funding for fuel cell vehicle and hydrogen fuel research and development over the next five years), support for vehicle demonstrations, and the development and field testing of portable and stationary fuel cell power generators and light-duty vehicles.