Competitive Advantage

Palcan competes directly with developers of PEM fuel cell systems (100 W to 5 kW) and low-pressure, ambient temperature, metal hydride hydrogen storage products. At present, many fuel cell developers are unable to produce their own MEA's and most do not have proprietary hydrogen fuel storage technology. Direct control of core component and subsystem development in key systems gives Palcan a potential advantage over competitors who are simply integrating purchased components.

The main issues facing all competitors and blocking the commercialization of competing products are cost and fueling infrastructure issues. In order for PEM fuel cells to compete successfully against batteries and internal combustion engines in the 100 W to 5 kW power range, all fuel cell developers must reduce the costs of manufacturing PEM fuel cells to less than $1000 US per kW. Palcan is aggresively targeting cost reduction through system design simplification, supply chain development, and sourcing of volume manufacturing in low cost countries. As the industry matures, it is anticipated that Palcan's manufacturing costs will fall below $1000 US per kW.

Membrane Electrode Assembly (MEA)

The MEA is the heart of the PEM fuel cell and has the most significant influence on overall cost and performance. The foundation of the Company's development program is the MEA and associated competencies including electrochemistry, catalysis, materials and proprietary manufacturing techniques. A primary focus has been to increase power density while improving the economics through the development and incorporation of low-cost materials and processes. One of Palcan's most valuable intellectual properties and assets lies in its manufacturing "know-how", as it relates to the MEA.

Fuel Cell Stacks

Effective integration of multiple technologies is required for optimum stack performance and cost. The Company's technology eliminates complexity by not requiring air compressors and water pumps/valves associated with high pressure, water-cooled systems. Palcan is a leader in developing small (< 1 kW), ambient pressure, air-cooled and air breathing fuel cells. Palcan's novel low pressure, high power density, water-cooled fuel cells, optimize systems from 1 kW to 5 kW. Design and material improvements and manufacturing processes are being developed to produce fuel cells with optimum power density, acceptable lifetimes, and affordable costs. Key technologies and expertise include:

• Fuel cell plate, manifold and stack design and optimization
• Engineered materials, manufacturing and assembly processes
• Mechanical and structural modeling, virtual prototyping and optimization
• Computational fluid dynamics and thermodynamic analysis

Hydrogen Storage

Palcan's rare earth, metal hydride technology removes the last significant barrier to fuel cell introduction - hydrogen storage and distribution. When hydrogen bonds with metal atoms Metal hydrides are formed. They are stable compounds and are ideal mediums for portable, hydrogen fuel storage. Metal hydrides provide safety advantages over high pressure, compressed storage or low temperature, cryogenic storage, as the hydrogen is stored in a solid metal matrix at a low pressure of 40 psi with a slow release rate. Alternate solutions include storing and transporting the hydrogen in a liquid chemical state such as a hydrocarbon (i.e. methanol). This solution requires either special reformers to extract the hydrogen or special types of fuel cells such as direct methanol. In both cases, the system complexity, cost and reliability are compromised. Metal hydride hydrogen storage is extremely well suited for use in consumer products requiring safety, ease of operation and distribution through conventional stores. To refuel Palcan's portable products a customer would simply exchange the small empty canister with a full one. Palcan's proprietary metal hydride materials also have the following advantages over competing metal hydride products:

• Ambient (25 °C nominal) temperature operation (no need for heating to release hydrogen)
• Good resistance to impurities
• Long term stability
• Low cost
• Long life (over 1000 charge cycles)

Systems Integration and Control

Optimization of system levels is key to Palcan's integrated product solution strategy. Direct control of core component and subsystem development in key systems gives the Company a significant advantage over competitors as they are simply integrating purchased components. In addition to the previously mentioned technologies, the Company's system integration technologies and knowledge include:

• Design, modeling, analysis and optimization of PEM fuel cell systems
• Fuel, air and water management systems
• Multivariable adaptive power and control electronics

Target Markets

Since its inception, Palcan has carried out a thorough investigation of potential fuel cell markets around the world. The Company, taking advantage of its location on the Pacific Rim, has paid special attention to the Asian market, particularly in Taiwan, China, Japan and Korea. Markets in North America and Europe which can support higher initial pricing and rapid infrastructure deployment are being specifically targeted for short term commercial product launches.

The primary target market segment will be under 5 kW consumer power products. Fuel cell products that replace batteries, or engines, in existing portable, stationary or electric vehicle products will gain immediate market access and acceptance through joint venture partners' sales and distribution.

Palcan's initial Fuel Cell and PalPac™ Power Products will target small mobile and portable power applications such as UPS and back up power. This range of initial markets testifies to the flexibility of the Palcan technology.

Similarly, portable and backup power markets that can use the same PalPac™ Power Product core technology are expanding rapidly due to the ever-increasing number of powered personal devices for business, home and recreation, and represent a significant short term Palcan market opportunity.

Fuel cells, with their zero pollution, superior performance and fuelling advantages over recharging, are expected to enable these markets to become multibillion-dollar industries within a few years.