Ballard Issues 2001 Third Quarter Report.

Business Editors

VANCOUVER, B.C.--(BUSINESS WIRE)--Oct. 31, 2001

Ballard Power Systems (NASDAQ:BLDP) (TSE:BLD.) today issued its report to shareholders for the third quarter ending September 30, 2001. All amounts are reported in Canadian dollars.

"Ballard has just completed one of the most significant periods in its history," said Firoz Rasul, Ballard's Chairman and Chief Executive Officer. "Ballard today is a stronger company. The combination of the capabilities of our associated companies, XCELLSIS and Ecostar, together with Ballard's leadership position will form an integrated organization to successfully launch commercial products in all our target markets. The significantly increased commitment of our partners DaimlerChrysler and Ford provides us with greater capabilities and benefits. During the quarter, we unveiled our first commercial fuel cell product, the Nexa(TM) power module, received our largest fuel cell order to date and had our first 250-kW power generator successfully complete its field trial program."

On October 2, Ballard announced a fundamental restructuring of its Vehicular Alliance with Ford and DaimlerChrysler through the purchase of jointly owned associated companies, XCELLSIS and Ecostar. This transaction better positions Ballard to lead the industry going forward by expanding its range of products from components to power generators and vehicular fuel cell engines and power trains. It also provides Ballard with an unrivaled intellectual property portfolio. The commitment of DaimlerChrysler and Ford to Ballard is reflected in an exclusive purchase arrangement for Proton Exchange Membrane ("PEM") fuel cells and PEM fuel cell engines and an agreement not to compete with Ballard for a 20-year period. DaimlerChrysler and Ford have also committed to invest a minimum of $110 million in cash in Ballard, $55 million on closing and the remainder as part of a Ballard equity financing in the next three years. As well, Ballard will benefit from additional senior representatives from DaimlerChrysler and Ford on its Board of Directors as it launches commercial fuel cell products.

"This transaction will provide significant competitive advantages to us as we enter into commercial production," said Noordin Nanji, Ballard's Vice-President, Strategic Development. "We will have an expanded product line, a stronger management team, an enhanced intellectual property position, enhanced value capture by offering complete system solutions, and a more streamlined product development process."

Ballard shareholders will vote to approve the transaction at a special shareholders meeting on November 27, 2001.

Ballard's strategy of simplifying its alliances as it adds commercial manufacturing capabilities is moving forward with the changes to its stationary power alliance that were announced during the period. The role of GPU is expanding with GPU becoming an investor in Ballard and a distributor for stationary BALLARD(R) fuel cell products. The relationship with Ebara is also expanding and will simplify Ballard's corporate and operational structure, enhancing Ballard's ability to leverage product development across markets. Ballard's relationship with Ebara continues through Ebara Ballard, its jointly held stationary fuel cell product company in Japan. Upon completion of the Ebara and GPU transactions, Ballard will own 81.6 percent of BGS and ALSTOM will own 18.4 percent. Both Ebara and GPU will become shareholders of Ballard. The company is currently in discussions with ALSTOM, the remaining minority shareholder of BGS, with respect to potential ways of optimizing the structure of the stationary power alliance for Europe.

In September, Ballard achieved another corporate objective for 2001 with the unveiling of its first commercial product, the Nexa(TM) power module. The power module produces 1.2-kW of DC power with the only byproducts being water and heat. These attributes enable the Nexa(TM) power module to be incorporated by original equipment manufacturers ("OEMs") in products that can be used indoors and in other locations not possible with existing internal combustion generator technologies.

Its compact size and quiet operation make it ideal for the backup and intermittent power market. The Nexa(TM) power module is capable of providing extended backup operation for as long as fuel is supplied, unlike battery technology's limited run-times.

The Nexa(TM) power module has heightened the interest of the power generation marketplace. In the third quarter, Ballard built 133 pre-commercial Nexa(TM) power modules for Coleman Powermate and 10 other OEMs. Each of these manufacturers has expressed its desire to introduce a leading edge power generator product that is environmentally friendly, quiet and reliable. The Nexa(TM) power module meets these criteria. In October, following the Nexa(TM) power module's commercial launch, Ballard has received purchase orders from three OEMs totaling $1.9 million.

In September, Ballard received its largest automotive fuel cell order to date when Ford signed a three-year agreement for fuel cells and related services worth $34.5 million (US $22.0 million). This order shows Ford's continuing interest in the development of fuel cell vehicles and moves Ford closer to its stated commercial fuel cell vehicle introduction target of 2004.

In October, XCELLSIS announced that the Sunline Transit Agency had successfully concluded the ZEbus (zero emission fuel cell bus powered by an XCELLSIS engine) field trial program in Palm Springs, as part of the California Fuel Cell Partnership. The ZEbus traveled more than 24,000 km (14,900 miles) during the 13-month demonstration, often in harsh desert conditions. More recently, the ZEbus carried the media contingent over the 364 km (226 mile) Michelin Bibendum Road Rally from Los Angeles to Las Vegas. The learnings from this field trial program are being incorporated into the next generation Phase 5 bus engine that will be installed in 30 buses ordered by DaimlerChrysler for delivery to Europe in 2002 and 2003.

Also in October, the California Fuel Cell Partnership, of which Ballard is a founding member, unveiled a major study highlighting fuel pathways that can be used to support commercial vehicle introduction plans.

The conclusion of the study is that there are no roadblocks to the successful commercial introduction of fuel cells. The study reviewed both challenges and solutions, and will provide a foundation to make decisions regarding fuels in preparation for fuel cell vehicles entering the marketplace.

In Ballard's stationary power generator business, its subsidiary BGS unveiled an alpha prototype 60-kW hydrogen gas fuelled stationary fuel cell power generator, achieving a stated corporate goal for 2001. This is an important milestone achievement on the path to commercialization for stationary fuel cell products. The prototype will undergo testing for the remainder of 2001 with beta units to be produced next year. Ballard's first commercial stationary fuel cell product will be introduced for backup/intermittent duty applications in 2003.

During the quarter, two 250-kW stationary fuel cell power generators passed factory acceptance testing prior to shipment to customer sites in Germany. Additionally, in September Ballard successfully completed its first 250-kW stationary fuel cell power generator two-year field trial testing program. This unit was located in Crane, Indiana with the utility Cinergy since October, 1999 and exported power to the grid in excess of 7,000 hours.

In October, an agreement was signed with Osaka Gas  to collaborate on residential fuel cell power generator applications.

The agreement is significant as it broadens the potential market for BALLARD(R) fuel cells in Japan to include Osaka, Japan's second largest city, in addition to Ballard's initial target market of Tokyo through Tokyo Gas. It also gives Ballard the opportunity to work with another fuel reformation technology.

On a final note, an executive search is currently underway for a President and Chief Operating Officer, as Kip Smith is leaving for personal reasons. Kip will continue as President and Chief Operating Officer through closing of the acquisition of XCELLSIS and Ecostar and thereafter, will be available to assist with the integration activities.

A conference call will be held to discuss Ballard's third quarter results on Wednesday, October 31, 2001 at 5:00 p.m. EST  (2:00 p.m. PST). Access to the call may be obtained by calling the operator at [phone] prior to the scheduled start time. A playback version of the conference call will be available for 24 hours after the call at [phone]. The confirmation number to access the playback version is 149092#. A live webcast can be accessed from Ballard's web site at www.ballard.com. A playback of the call will also be available on Ballard's web site for two weeks.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This discussion and analysis covers Ballard's interim consolidated financial statements for the three and nine-month periods ended September 30, 2001. As well, it provides an update to the discussion and analysis contained in Ballard's 2000 Annual Report. This discussion and analysis should be read in conjunction with the "Management's Discussion & Analysis" section and the annual consolidated financial statements contained in Ballard's 2000 Annual Report.

Significant Transactions

On May 25, 2001, Ballard completed the acquisition of the carbon products business unit of Textron Systems Inc. through its wholly owned subsidiary, Ballard Material Products Inc. ("BMP") (see note 10 to the Consolidated Financial Statements). The business and its operating results are included in Ballard's financial results since the date of acquisition.

On October 2, 2001, Ballard entered into an agreement with DaimlerChrysler and Ford to acquire their respective interests in XCELLSIS and Ecostar through a series of transactions (the "Transaction") (see note 10 to the Consolidated Financial Statements).

On August 23, 2001, Ballard agreed in principal, to purchase all BGS shares owned by GPU representing 13.3% of BGS's outstanding shares for 1,366,063 common shares of Ballard. On October 1, 2001, Ballard agreed in principal, to purchase all BGS shares owned by Ebara representing 10.6% of BGS's outstanding shares for US$35.8 million funded through the issuance of common shares (see note 4 to the Consolidated Financial Statements).

Results from Operations

Revenues increased during the quarter by $1.8 million or 13% from the same quarter last year. Included in revenues are $5.5 million of engineering services. Costs associated with engineering services are included in research and product development expenses. The increased revenue for the quarter resulted primarily from revenues of $5.1 million from our newly acquired carbon products business and a slight increase in revenues from our transportation business. These increases were partly offset by lower revenues from our stationary business as revenues from our 250-kW field trial programs occurred primarily in 2000. For the nine-month period, year-over-year revenues increased by $14.5 million or 66% to $36.4 million. Higher year-to-date revenues are due to our newly acquired carbon products business ($7.3 million) and increased purchases of fuel cells and related engineering services by automobile manufacturers, and the sale of fuel cells to several original equipment manufacturers for product development.

Investment and other income declined by $1.2 million and $1.0 million for the three and nine-month periods ended September 30, 2001, respectively. The declines were the result of lower average balances of cash and short-term investments, lower interest rates, partly offset by increases in foreign exchange gains of $1.5 million and $2.1 million for the three and nine-month periods, respectively.

Cost of revenues which relates to the cost of manufactured products, decreased by $9.3 million during the quarter primarily because the comparative period in 2000 included higher costs associated with BGS's field trial programs. As well, based on our experience with field trial programs, we reduced our warranty provision during the quarter to reflect our expectations.

For the nine-month period ending September 30, 2001, cost of revenues increased by $0.9 million relative to the same period in 2000 due primarily to higher sales volumes.

Research and product development expenses for the quarter increased by $13.4 million, or 60% and by $34.4 million, or 58% on a year-to-date basis. The increases are due to higher development activity related to fuel cell engineering and manufacturing process development, fuel cells for automotive applications, stationary fuel cell power generators, portable fuel cells and fuel processing systems, cost reduction, testing and preparation for commercial product launch.

General and administrative and marketing expenses for the quarter increased by $1.9 million and $0.4 million, respectively, compared to the corresponding period in 2000. For the nine-month period, expenses in these areas increased by $5.1 million and $2.1 million, respectively. These increases reflect costs associated with implementing the business systems processes and capabilities required to support Ballard's commercial introduction of fuel cell products.

Equity in loss of associated companies for the three and nine-month periods increased by $5.8 million and $10.8 million respectively, when compared to the same periods in 2000. The higher losses are primarily the result of increased investment in research and development activities undertaken by associated companies.

Minority interest decreased by $4.2 million and $3.9 million for the three and nine-month periods respectively, relative to the corresponding periods last year. A lower net loss from Ballard's subsidiary BGS, partly offset by a higher minority interest in that company, was the primary reason for the decreases. The minority ownership in BGS increased to 42.3% at September 30, 2001 from 39.9% at this time last year as a result of the completion of milestone investments by GPU and ALSTOM.

Gain on the issuance of shares by subsidiary relates to the issuance of shares of BGS to GPU and ALSTOM during 2001 and to GPU, ALSTOM and Ebara in 2000.

License income (fees) during the quarter of $2.7 million relate to the sale of manufacturing rights by BGS to Ebara Ballard. License income (fees) during the three and nine-month periods ended September 30, 2000 were ($3.2) million and ($6.3) million, respectively and represent license fees for access to manufacturing technology and know-how of ALSTOM as part of its equity investment in BGS.

As a result of our increased activities, the net loss for the quarter ended September 30, 2001 was $32.4 million, or ($0.36) per share, compared with a net loss of $5.7 million, or ($0.06) per share, during the same period in 2000. For the nine-month period, Ballard's net loss was $95.8 million, or ($1.06) per share, compared to $39.1 million, or ($0.45) per share, in the prior year. The increased losses for the first nine months of 2001 reflect the accelerated pace of research and development activities and the increase in equity in losses of associated companies. Higher spending related to the implementation of business systems and infrastructure necessary to support Ballard's commercial introduction of fuel cell products and reduced gains from issuance of shares of subsidiaries, were also contributing factors.

Financial Condition

Cash and short-term investments were $658.8 million as at September 30, 2001, compared to $769.7 million at the end of 2000.

Net losses, capital spending and additional investments, including the acquisition of BMP, were partly offset by the issue of share capital, including share capital issued by BGS.

Accounts receivable increased by $3.0 million from the beginning of the year, to $26.0 million. The increase is due to $5.1 million of accounts receivable related to the recently acquired business of BMP, partly offset by improved collections.

Inventory increased by $14.8 million from December 31, 2000 to $32.5 million on September 30, 2001. Of this increase, $3.4 million represents inventory of BMP and the remainder reflects the timing of finished product shipments and a higher level of raw materials required for planned increases in production for portable and automotive fuel cells.

Property, plant & equipment increased to $110.7 million from $86.8 million at the beginning of year. The increase reflects the BMP acquisition, accounting for $13.5 million and capital spending, accounting for $20.6 million, partially offset by depreciation of $10.3 million. Capital spending was primarily for manufacturing process and testing equipment and facility improvements in Plant One, Ballard's initial manufacturing facility.

Intangible assets increased by $0.5 million mainly as a result of intellectual property and goodwill from the BMP acquisition, partly offset by amortization.

Investments increased by $5.5 million in the first nine months of the year due to investments made in Ballard's associated companies, XCELLSIS, Ebara Ballard and Ecostar of $7.7 million, $6.0 million and $1.3 million, respectively. Also during the period, investments were made in MicroCoating Technologies Inc., Graftech Inc. and QuestAir Technologies Inc. of $9.8 million, $8.1 million and $2.0 million, respectively. These investments were partly offset by an increase in equity loss in associated companies of $29.4 million.

Other long-term assets increased by $7.0 million from the beginning of the year due primarily to capitalization of costs related to the pending acquisition of XCELLSIS and Ecostar. These costs will be included as part of the cost of acquisition.

Accounts payable and accrued liabilities increased by $13.8 million from the beginning of the year. BMP accounted for $5.8 million of the increase, liabilities associated with the pending acquisition of XCELLSIS and Ecostar accounted for $2.3 million of the increase, and liabilities to associated companies for joint development work accounted for $2.9 million of the increase. The remainder of the increase is due to general increases in activity.

Allowance for warranty decreased by $2.3 million to $23.8 million during the nine-month period. Based on positive results with respect to reliability in field trials of Ballard stationary power generators and fuel cells, Ballard has reduced its warranty provision to reflect management's best estimate of future requirements.

Long-term deferred income increased by $2.1 million due to the sale of manufacturing rights by BGS to Ebara Ballard which resulted in a gain of $5.4 million, of which 49% or $2.6 million, representing Ballard's interest in Ebara Ballard, is being deferred and will be recognized as income over five years. Of the deferred portion of the gain, $0.5 million is current and $2.1 million is long-term.

Minority interest decreased by $3.3 million to $13.1 million during the nine-month period due to the minority interest portion of BGS's losses, partially offset by an investment by ALSTOM and GPU in BGS.

Share capital increased by $28.9 million from the beginning of the year to $1,198.2 million. The increase is due to the issue of shares as consideration for investments in MicroCoating Technologies Inc. and Graftech Inc. of $7.1 million and $7.7 million, respectively, the exercise of $9.5 million of employee stock options and the exercise of $4.6 million of warrants issued in prior years. As at September 30, 2001, there were 90,498,415 shares issued and outstanding and 6,202,979 options outstanding.

CAPITAL REQUIREMENTS, RESOURCES AND LIQUIDITY

As of September 30, 2001, Ballard had cash, cash equivalents and short-term investments totaling $658.8 million. After considering the effects of the planned acquisition of XCELLSIS and Ecostar, Ballard believes that its cash, cash equivalents and short-term investments will provide Ballard with sufficient capital to fund its operations through 2004. Ballard will use the funds to meet its capital needs to fund the commercialization of its products for its target markets, including research and product development for PEM fuel cells, PEM fuel cell systems, PEM fuel cell engines, electric drive trains and power electronics, the purchase of equipment for manufacturing facilities and the further development of high-volume manufacturing processes. Ballard's actual funding requirements will vary depending on a variety of factors, including the success of the integration of XCELLSIS and Ecostar, progress of research and development efforts, relationships with strategic partners and the results of development and demonstration programs.

Ballard expects to incur net losses for the next several years due to the fact that Ballard expects to continue to make significant investments in research and product development activities to achieve commercialization of its products and expect that these investments will be expensed in the period that they are made. Ballard expects the acquisition of XCELLSIS and Ecostar, and resulting expansion of its business, will increase its cash requirements for operations and capital expenditures. Ballard estimates that in 2001, its cash requirements for operations and capital expenditures will increase as a result of the transaction by approximately $70 million to a total of $190 million. Approximately $47 million of this increase is attributable to one-time expenditures related to the acquisitions and initial corporate restructuring with the remainder attributable to cash requirements for operations and capital expenditures of XCELLSIS and Ecostar after the closing of the Transaction. In 2002, assuming Ballard has completed the acquisitions, Ballard expects its cash requirements for operations and capital expenditures to be between $195 million and $225 million. Based on its current business strategy, as XCELLSIS and Ecostar are fully integrated into Ballard, Ballard expects its cash requirements for operations and capital expenditures to decline in 2003 and 2004, compared to its estimate for 2002.

Ballard also expects that the acquisition of XCELLSIS and Ecostar will increase its revenues. Assuming the acquisitions are completed, Ballard expects its revenues (excluding investment income) in 2002 to increase to at least $130 million from expected revenues of $50 million in 2001. Given that the acquisitions will close near the end of 2001, they will not have a significant effect on Ballard's revenues in 2001. In 2002, the increase in revenues will be primarily attributable to sales of fuel cell engines, electric drive trains and power conversion systems, related services, as well as revenue from Nexa(TM) power module sales.

Over the next three years, Ballard expects to raise additional capital to continue to expand its business and production capacity beyond 2004. In addition to the funds to be provided under the Alliance Private Placement ($55 million), DaimlerChrysler and Ford have agreed to invest at least an additional $55 million in Ballard ($30 million by DaimlerChrysler and $25 million by Ford) if and when Ballard engages in any equity offerings during the three years following the closing of the acquisition of XCELLSIS and Ecostar. If external sources of financing are not available when needed or on terms acceptable to Ballard, or if Ballard experiences significant cost overruns on any of its programs for which Ballard cannot obtain additional funds, certain of its research and development activities or investments in manufacturing capacity may be delayed or eliminated, resulting in potential delays in the commercialization of Ballard's products. In addition, Ballard regularly reviews acquisition opportunities (including those relating to intellectual property) and, depending on the size of the transaction, Ballard may be required to raise additional capital through the issuance of debt or equity. If Ballard is unable to raise additional capital on terms acceptable to it, Ballard may be unable to pursue these acquisition opportunities.

RISKS & UNCERTAINTIES

Both the acquisition of XCELLSIS and Ecostar and Ballard's business are subject to a number of risks. For a discussion of the risks related to the acquisition, including the challenges that Ballard will face integrating the businesses of XCELLSIS and Ecostar, and details as to how certain risks Ballard presently faces may increase as a result of the acquisition, Ballard refers you to the "Risk Factors Relating to the Transaction" in its Management Proxy Circular dated October 18, 2001. For a discussion of the risks related to its business, Ballard refers you to the "Risk Factors" in its Annual Information Form dated April 20, 2001.

This release contains forward-looking statements that are based on the beliefs of Ballard's management and reflect Ballard's current expectations as contemplated under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. When used in this release, the words "estimate", "project", "believe", "anticipate", "intend", "expect", "plan", "predict", "may", "should", "will", the negative of these words or such other variations thereon or comparable terminology are intended to identify forward-looking statements. Such statements reflect the current views of Ballard with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in those forward-looking statements.

Consolidated Balance Sheets
Unaudited (Expressed in thousands of Canadian Dollars, except share
and per share amounts)

                                      September 30,  December 31,
                                               2001          2000

Assets

Current assets
 Cash and cash equivalents              $   180,072   $   288,729
 Short-term investments                     478,715       480,944
 Accounts receivable                         26,009        23,054
 Inventories                                 32,463        17,643
 Prepaid expenses                               757           667
                                        -------------------------
                                            718,016       811,037

Property, plant and equipment               110,717        86,765
Intangible assets (note 3)                   43,233        42,760
Investments (note 4)                        122,917       117,370
Other long-term assets                        8,717         1,700
                                        -------------------------
                                        $ 1,003,600   $ 1,059,632
                                        -------------------------

Liabilities

Current liabilities
 Accounts payable and accrued
  liabilities                           $    42,854   $   29,085
 Current portion of capital
  lease obligation                              117          117
 Deferred income                              1,418          784
 Allowance for warranty                      23,785       26,098
                                        ------------------------
                                             68,174       56,084
Capital lease obligation                         99          191
Long-term deferred income                     8,088        5,989
Minority interest                            13,117       16,395
                                        ------------------------
                                             89,478       78,659

Shareholders' equity
 Share capital                            1,198,152    1,169,231
 Accumulated deficit                       (284,030)    (188,258)
                                        ------------------------
                                            914,122      980,973
                                        ------------------------
                                        $ 1,003,600  $ 1,059,632
                                        ------------------------



Consolidated Statements of Operations and Accumulated Deficit
Unaudited (Expressed in thousands of Canadian dollars, except share
and per share amounts)

                          Three months ended       Nine months ended
                                September 30            September 30
                            2001        2000        2001        2000

Revenues                 $15,394     $13,642     $36,444     $21,918
Investment and other
 income                   11,950      13,170      31,651      32,606
                      ----------------------------------------------
                          27,344      26,812      68,095      54,524

Cost of revenues and expenses
 Cost of revenues          8,665      17,981      27,921      27,060
 Research and product
  development             35,497      22,128      94,165      59,767
 General and
  administrative           5,079       3,149      14,469       9,322
 Marketing                 1,064         637       4,000       1,879
 Amortization of fuel
  cell technology and
   goodwill                  933         916       2,772       2,749
 Capital taxes              (123)        112         105         524
                      ----------------------------------------------
                          51,115      44,923     143,432     101,301
                      ----------------------------------------------

Loss before undernoted   (23,771)    (18,111)    (75,337)    (46,777)
Equity in loss of
 associated companies    (11,822)     (6,035)    (29,375)    (18,527)
Minority interest            678       4,927       5,877       9,820
Gain on issuance of
 shares by subsidiary        118      17,185       1,496      24,260
License and royalty
 income (fees)             2,731      (3,183)      2,731      (6,321)
                      ----------------------------------------------
Loss before income
 taxes                   (32,066)     (5,217)    (94,608)    (37,545)
Income taxes                 347         491       1,164       1,523
                      ----------------------------------------------
Net loss for period      (32,413)     (5,708)    (95,772)    (39,068)
Accumulated deficit,
 beginning of period    (251,617)   (135,885)   (188,258)   (102,525)
                      ----------------------------------------------
Accumulated deficit,
 end of period         ($284,030)  ($141,593)  ($284,030)  ($141,593)
                      ----------------------------------------------
Net loss per share        ($0.36)     ($0.06)     ($1.06)     ($0.45)
                      ----------------------------------------------

Weighted average number
 of common shares
  outstanding         90,482,909  88,592,467  90,088,396  87,459,391
                      ----------------------------------------------



Consolidated Statements of Cash Flows
Unaudited (Expressed in thousands of Canadian dollars, except share
and per share amounts)


                          Three months ended       Nine months ended
                                September 30            September 30
                            2001        2000        2001        2000

Cash provided by (used for):

Operating activities:
 Net loss for period    ($32,413)    ($5,708)   ($95,772)   ($39,068)
 Items not affecting cash:
  Gain on issuance of
   shares by subsidiary     (118)    (17,185)     (1,496)    (24,260)
  Gain on sale of license (2,731)          -      (2,731)          -
  Depreciation and
   amortization            5,205       3,496      13,077       9,758
  License received on
   issuance of shares
    of subsidiary              -       3,183           -       6,321
  Equity in loss of
   associated companies   11,822       6,035      29,375      18,527
  Minority interest         (678)     (4,927)     (5,877)     (9,820)
                      ----------------------------------------------
                         (18,913)    (15,106)    (63,424)    (38,542)

Changes in non-cash working capital:
 Accounts receivable        (271)    (12,216)         (7)      2,586
 Inventories              (3,837)     (4,828)    (10,422)    (16,282)
 Prepaid expenses             77        (126)        (90)       (261)
 Accounts payable and
  accrued liabilities      6,366       8,800      12,662       4,942
 Deferred revenue            182        (410)        109         319
 Allowance for warranty   (4,921)      4,478      (2,313)      2,575
                      ----------------------------------------------
                          (2,404)     (4,302)        (61)     (6,121)
                      ----------------------------------------------
Cash used by operations  (21,317)    (19,408)    (63,485)    (44,663)

Investing activities:
 Net decrease (increase)
  in short-term
   investments          (168,427)    (16,369)      2,229    (218,705)
 Additions to property,
  plant and equipment     (5,063)     (9,953)    (20,618)    (22,074)
 Proceeds on sale of
  manufacturing rights     5,355           -       5,355           -
 Investments              (6,559)          -     (20,050)    (18,900)
 Acquisition of
  other companies            174           -     (22,775)          -
 Other long-term assets   (7,127)          -      (7,017)       (350)
                      ----------------------------------------------
                        (181,647)    (26,322)    (62,876)   (260,029)

Financing activities:
 Net proceeds on issuance
  of share capital           534       5,529      14,049     502,082
 Proceeds on issuance
  of shares by subsidiary      -      28,245       3,747      37,805
 Capital lease obligation    (31)        (30)        (92)        (87)
                      ----------------------------------------------
                             503      33,744      17,704     539,800
                      ----------------------------------------------

Increase (decrease) in cash
 and cash equivalents   (202,461)    (11,986)   (108,657)    235,108
Cash and cash equivalents,
 beginning of period     382,533     333,556     288,729      86,462
                      ----------------------------------------------
Cash and cash equivalents,
 end of period           180,072    $321,570     180,072    $321,570
                      ----------------------------------------------

Supplemental disclosure of cash flow information (note 7)

Notes to Consolidated Financial Statements

Unaudited (Expressed in thousands of Canadian dollars, except share and per share amounts)

1. Basis of Presentation

The accompanying financial information reflects the same accounting policies and methods of application as Ballard's fiscal 2000 Annual report. The accompanying financial information does not include all disclosure required under generally accepted accounting principles because certain information included in Ballard's fiscal 2000 Annual report has not been included in this report. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Ballard's Annual Report.

During the first quarter, Ballard retroactively adopted the Canadian Institute of Chartered Accountants new recommendations on earnings per share calculations. Under these recommendations, diluted earnings per share under Canadian GAAP is calculated using the treasury share method which is consistent with the calculation under U.S. GAAP for diluted earnings per share. However, there was no impact on the figures presented.

2. Acquisition of Ballard Material Products Inc.

On May 25, 2001, Ballard purchased the carbon products business unit of Textron Systems for US$12.8 million (CDN$19,712) cash, plus a working capital adjustment of $1,040 and estimated acquisition costs of $2,023. The purchase price allocation has been assigned to the specific assets acquired and liabilities assumed based on estimates and are subject to revision. The estimated goodwill of approximately $1,429 is being amortized on a straight-line basis over 20 years.

The acquisition has been accounted for using the purchase method of accounting and the results of operations have been included in the financial statements since the acquisition date.

The cost of acquisition based on management's estimate has been allocated to the acquired assets as follows:

Acquisition Cost

Purchase price (US$ 12.8 million)            $  19,712
Working capital adjustment                       1,040
Estimated acquisition costs                      2,023
                                             ---------
                                             $  22,775
                                             ---------

Purchase Price Allocation

Accounts receivable                          $   2,948
Inventories                                      4,398
Property, plant & equipment                     13,633
Intangible assets                                2,903
Accounts payable and accrued liabilities        (1,107)
                                             ---------
                                             $  22,775
                                             ---------



3.  Intangible assets

                             September 30, 2001   December 31, 2000

Fuel cell technology acquired          $ 41,479            $ 42,760
Goodwill                                  1,754                   -
                                       ----------------------------
                                       $ 43,233            $ 42,760
                                       ----------------------------

4. Investments

During the first quarter of 2001 Ballard made an additional investment including acquisition costs of $2,013 in cash in QuestAir Technologies Inc. Ballard's ownership is approximately 10%.

Ballard also made additional cash investments in the first quarter of 2001 of $7,731 in XCELLSIS GmbH ("XCELLSIS") and $1,307 in Ecostar Electric Drive Systems L.L.C ("Ecostar"), representing Ballard's proportionate share of financing of XCELLSIS and Ecostar by those company's shareholders. Ballard's equity interests in XCELLSIS and Ecostar continues to be 26.7% and 20.9% respectively (see note 10).

In May 2001, Ballard entered into a collaboration, license and supply agreement with MicroCoating Technologies, Inc. ("MicroCoating") that included Ballard acquiring approximately three percent of the equity of MicroCoating on a fully diluted basis in exchange for US$7.0 million. The purchase was funded by the payment of US$1.5 million in cash (CDN$2,310), and US$4.0 million of the purchase was funded through issuance of 88,963 common shares valued at $7,137. A remaining cash payment of US$1.5 million will be paid upon completion of certain performance milestones. Included in investments are acquisition costs of $371 related to the transaction.

In June 2001, Ballard entered into a development and collaboration agreement with Graftech Inc. ("Graftech") that include Ballard acquiring 2.5% ownership interest of Graftech for US$5.0 million (CDN$7,735). The purchase was funded through the issuance of 92,685 common shares of Ballard. Included in investments are acquisition costs of $369 related to the transaction.

During the third quarter, Ballard Generation Systems ("BGS") made an additional investment of $5,949 in Ebara Ballard Corporation ("Ebara Ballard"), representing Ballard's proportionate share of financing by the company's shareholders. The additional investment was satisfied through selling to Ebara Ballard manufacturing rights for $5,949. The granting of these rights resulted in a gain of $5,355, of which $2,624 has been deferred. Ballard's equity interests in Ebara Ballard continues to be 49%.

During the third quarter, Ballard agreed to purchase all BGS shares owned by GPU International Inc. ("GPU") representing 13.3% of BGS's outstanding shares for 1,366,063 common shares of Ballard. The transaction is subject to regulatory approval, but we expect the transaction to close before year end.

Subsequent to September 30, 2001 Ballard agreed to purchase all BGS shares owned by Ebara Corporation representing 10.6% of BGS's outstanding shares for US$35.8 million funded through the issuance of common shares. We expect the transaction to close before year end.

Upon completion of these transactions, Ballard will own 81.6% of BGS and Alstom will own 18.4%.

5. Share Capital

During the first quarter of 2001, 540,000 warrants were exercised upon payment of $8.54 per warrant.

Under Ballard's share option plan, 1,818,450 options were issued and 546,763 options were exercised during the nine months ended September 30, 2001. At September 30, 2001, 6,202,979 options were outstanding.

6.  Segmented financial information

                              Fuel   Fuel Cell     Carbon
                             Cells     Systems   Products      Total

Three months ended September 30, 2001

Total revenues for
 reportable segments   $     8,069 $     2,176 $    6,735 $   16,980
Elimination of
 intersegment revenues           -           -     (1,586)    (1,586)
                       ---------------------------------------------
Total revenues to
 external customers    $     8,069       2,176      5,149 $   15,394
                       ---------------------------------------------
Segment income (loss)
 for period            $   (29,517)$    (4,675)$     (719)$  (34,911)
                       ---------------------------------------------
Identifiable assets    $   807,567 $   166,574 $   29,459 $1,003,600
                       ---------------------------------------------

Reconciliation of net loss for period

Segment loss for period                                   $  (34,911)
Investment income                                             11,950
Gain on issuance of shares by subsidiary                         118
Equity in loss of associated companies                       (11,822)
Amortization of fuel cell technology and goodwill               (933)
License and royalty income (fees)                              2,731
Minority interest                                                678
Capital taxes                                                    123
                                                          ----------
Loss before income taxes                                  $  (32,066)
                                                          ----------


                              Fuel   Fuel Cell     Carbon
                             Cells     Systems   Products      Total

Three months ended September 30, 2000

Revenues               $     9,373       4,269          - $   13,642
                       ---------------------------------------------
Segment loss for
 the period            $  (21,421) $   (8,832) $        - $  (30,253)
                       ---------------------------------------------
Identifiable assets    $  920,477  $  179,156  $        - $1,099,633
                       ---------------------------------------------

Reconciliation of net loss for period

Segment loss for period                                   $  (30,253)
Investment income                                             13,170
Gain on issuance of shares by subsidiary and
 associated company                                           17,185
Equity in loss of associated companies                        (6,035)
Amortization of fuel cell technology and goodwill               (916)
License and royalty income (fees)                             (3,183)
Minority interest                                              4,927
Capital taxes                                                   (112)
                                                          ----------
Loss before income taxes                                  $   (5,217)
                                                          ----------


                              Fuel   Fuel Cell     Carbon
                             Cells     Systems   Products      Total

Nine months ended September 30, 2001

Total revenues for
 reportable segments   $    25,176 $     4,723 $    9,301 $   39,200
Elimination of
 intersegment revenues        (749)          -     (2,007)    (2,756)
                       ---------------------------------------------
Total revenues to
 external customers    $    24,427       4,723      7,294 $   36,444
                       ---------------------------------------------
Segment income (loss)
 for period            $   (86,527)$   (17,119)$     (465)$ (104,111)
                       ---------------------------------------------
Identifiable assets    $   807,567 $   166,574 $   29,459 $1,003,600
                       ---------------------------------------------

Reconciliation of net loss for period

Segment loss for period                                   $ (104,111)
Investment income                                             31,651
Gain on issuance of shares by subsidiary                       1,496
Equity in loss of associated companies                       (29,375)
Amortization of fuel cell technology and goodwill             (2,772)
License and royalty income (fees)                              2,731
Minority interest                                              5,877
Capital taxes                                                   (105)
                                                          ----------
Loss before income taxes                                  $  (94,608)
                                                          ----------

                              Fuel   Fuel Cell     Carbon
                             Cells     Systems   Products      Total

Nine months ended September 30, 2000

Revenues               $    15,154       6,764          - $   21,918
                       ---------------------------------------------
Segment loss for
 the period            $   (56,300)$   (19,810)$        - $  (76,110)
                       ---------------------------------------------
Identifiable assets    $   920,477 $   179,156 $        - $1,099,633
                       ---------------------------------------------

Reconciliation of net loss for period

Segment loss for period                                   $  (76,110)
Investment income                                             32,606
Gain on issuance of shares by subsidiary and
 associated company                                           24,260
Equity in loss of associated companies                       (18,527)
Amortization of fuel cell technology and goodwill             (2,749)
License and royalty income (fees)                             (6,321)
Minority interest                                              9,820
Capital taxes                                                   (524)
                                                          ----------
Loss before income taxes                                  $  (37,545)
                                                          ----------

Ballard's three reportable segments, fuel cells, fuel cell systems and carbon products, represent strategic business units that offer different products to different markets and require the use of different technologies in their manufacture and development.

Fuel cell operations comprise the development, manufacture and marketing of proton exchange membrane fuel cells. Fuel cell systems comprise the development, manufacture and marketing of fuel cell systems that incorporate a fuel cell to provide power for applications such as transportation engines and stationary power plants. Carbon products comprise the development, manufacture and marketing of carbon materials for automotive and fuel cell applications.

7. Supplemental disclosure of cash flow information

                          Three months ended     Nine months ended
                                September 30          September 30
                             2001       2000       2001       2000

Interest paid             $     5   $     30   $     24   $     46
                          ----------------------------------------
Income taxes paid         $   466   $    899   $  2,357   $  1,928
                          ----------------------------------------

Non-cash financing and investing activities

Issuance of shares by subsidiary
 for license received     $     -   $  3,183   $      -   $  6,321
                          ----------------------------------------
Issuance of shares for
 fuel cell technology     $     -   $    696   $      -   $    696
                          ----------------------------------------
Common shares issued for
 long-term investment     $ 1,080   $      -   $ 14,872  $       -
                          ----------------------------------------

8. Financial Instruments

Ballard enters into forward exchange contracts to manage exposure to currency rate fluctuations. The purpose of Ballard's foreign currency hedging activities is to minimize the effect of exchange rate fluctuations on business decisions and the resulting uncertainty on future financial results.

Over the next four months Ballard has forward contracts to purchase 16,673,431 EUR. At September 30, 2001, Ballard would have to pay $33 to settle its outstanding forward exchange contracts. As these forward exchange contracts qualify for accounting as hedges, gains or losses are deferred and recognized in the same period and in the same financial statement category as the gains or losses on the corresponding hedged transactions.

9. Comparative Figures

Certain income statement classifications from prior quarters have been reclassified to conform with the basis of presentation adopted in the current period.

10. Subsequent Events

On October 2, 2001, Ballard entered into an agreement with DaimlerChrysler AG ("DaimlerChrysler") and Ford Motor Company ("Ford") to acquire their respective interests in XCELLSIS and Ecostar through a series of transactions (the "Transaction"). As part of the Transaction, Ballard will acquire:

-- from DaimlerChrysler, its 51.5% interest in XCELLSIS and its 17.0% interest
in Ecostar in exchange for 9,405,271 common shares of Ballard; and

-- from Ford, its 62.1% interest in Ecostar and its 21.8% interest in XCELLSIS
in exchange for 8,998,252 common shares of Ballard;

such that Ballard will ultimately own 100% of XCELLSIS and Ecostar. To complete the acquisition of XCELLSIS in an efficient manner under German tax law, Ballard will acquire DaimlerChrysler's interest in XCELLSIS in two stages. Ballard will acquire 1.6% of XCELLSIS and 17.0% of Ecostar from DaimlerChrysler on the closing of the Transaction for 1,792,059 common shares of Ballard, such that together with the interest in XCELLSIS acquired from Ford, Ballard will own 50.1% and therefore have majority control of XCELLSIS. Ballard will acquire DaimlerChrysler's remaining 49.9% interest in XCELLSIS on or before November 15, 2004 in exchange for 7,613,212 common shares of Ballard. At the closing of the Transaction by way of private placement, DaimlerChrysler will purchase 1,103,549 common shares of Ballard for $30,000 and Ford will purchase 919,624 common shares of Ballard for $25,000 for a total investment of $55,000.

This transaction is subject to shareholder approval. If approved, the Transaction will be accounted for using the purchase method of accounting. The assets purchased, liabilities assumed and the results of operations will be included in Ballard's financial statements on a consolidated basis once the acquisition has been approved by the shareholders and the Transaction has closed.

Ballard Power Systems is recognised as the world leader in developing, manufacturing and marketing zero-emission proton exchange membrane ("PEM") fuel cells for use in transportation, electricity generation and portable power products. Ballard Power Systems' proprietary fuel cell technology is enabling automobile, electrical equipment and portable power product manufacturers to develop environmentally clean products for sale. The fundamental component of these end-user products is the BALLARD(R) fuel cell that combines hydrogen (which can be obtained from methanol, natural gas, petroleum or renewable sources) and oxygen (from air) without combustion to generate electricity. Ballard is partnering with strong, world-leading companies, including DaimlerChrysler, Ford, ALSTOM and EBARA, to commercialise BALLARD(R) fuel cells. Ballard has also supplied fuel cells to Honda, Nissan, Volkswagen, Yamaha, Cinergy, Coleman Powermate and Matsushita Electric Works, among others. Ballard Material Products, a subsidiary of Ballard Power Systems, is a Tier 1 automotive supplier of friction materials for power train components to General Motors and Borg Warner, as well as a supplier of gas diffusion layer materials for the fuel cell industry.

Ballard's Common shares are listed on The Toronto Stock Exchange under the trading symbol "BLD" and on the Nasdaq National Market System under the symbol "BLDP". Ballard and the Ballard logo and Power to Change the World are registered trademarks of Ballard Power Systems Inc.