HYDROGEN BURNER TECHNOLOGY INC, S-1/A, 2000-11-03

HYDROGEN BURNER TECHNOLOGY INC
S-1/A, 2000-11-03
ELECTRICAL INDUSTRIAL APPARATUS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 2000

REGISTRATION NO. 333-45450

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HYDROGEN BURNER TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
CALIFORNIA 3629 33-0556632
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification No.)
of incorporation) Classification Code Number)
</TABLE>

19300 SUSANA ROAD
RANCHO DOMINGUEZ, CALIFORNIA 90221
(310) 900-0400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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DAVID M. MOARD
CHIEF EXECUTIVE OFFICER
HYDROGEN BURNER TECHNOLOGY, INC.
19300 SUSANA ROAD
RANCHO DOMINGUEZ, CALIFORNIA 90221
(310) 900-0400

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:

<TABLE>
<S> <C>
NANCY H. WOJTAS, ESQ. WILLIAM P. ROGERS, JR., ESQ.
MANATT, PHELPS & PHILLIPS, LLP CRAVATH, SWAINE & MOORE
11355 W. OLYMPIC BLVD 825 EIGHTH AVENUE
LOS ANGELES, CALIFORNIA 90064 NEW YORK, NEW YORK 10019
TELEPHONE: (310) 312-4307 TELEPHONE: (212) 474-1270
FACSIMILE: (310) 312-4224 FACSIMILE: (212) 474-3700
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If delivery of this prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PRICE(1) REGISTRATION FEE
<S> <C> <C> <C>
Common Stock, no par value............................... 9,200,000 shares $119,600,000 $31,574.40(2)
</TABLE>

(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).

(2) $30,360 previously paid.

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT BECOMES EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.

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<PAGE>

SUBJECT TO COMPLETION, DATED NOVEMBER 3, 2000

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospective is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
PROSPECTUS

8,000,000 SHARES

[LOGO]

COMMON STOCK

$ PER SHARE

---------

We are selling 8,000,000 shares of our common stock. We have granted the
underwriters an option to purchase up to 1,200,000 additional shares of common
stock to cover over-allotments.

This is the initial public offering of our common stock. We currently expect
the initial public offering price to be between $11.00 and $13.00 per share. We
intend to apply to have our common stock included for quotation on the Nasdaq
National Market under the symbol "HBTI."

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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 6.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public Offering Price....................................... $ $

Underwriting Discount....................................... $ $

Proceeds to Hydrogen Burner Technology (before expenses).... $ $
</TABLE>

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
2000.

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SALOMON SMITH BARNEY
CIBC WORLD MARKETS
LEHMAN BROTHERS

, 2000
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
COVER GRAPHICS DESCRIPTION

The front inside cover folds out in a two-page format, following a first page
inside-cover graphic. This layout, in effect, provides a three-page format
inside the front cover.

Beginning on page one, clockwise from the top left corner, the HBT corporate
logo, a photograph of a restaurant table setting (a commercial power application
example), a photograph of an emergency room medical team (an example of
auxiliary power backup for an emergency hospital application), a photograph of
two people boarding a municipal bus (transportation applications), and a
photograph of a supermarket aisle (commercial applications for power,
cogeneration, thermal refrigeration). These four photographs have a graphical
depiction, as a backdrop, of a man standing on a pathway that encircles a globe
of the earth with a graphic of a space shuttle and city buildings.

The second page folds out of the first page and creates a two page graphic (two
pages total). This page contains three rows of photographs and graphics.
Beginning clockwise from the top left corner, the first picture in the first row
is a graphical chart depicting the CO(2) emissions for consumed HBT hydrogen,
produced from natural gas, versus gasoline consumed (kilograms per 100
kilometers traveled). The next picture in the first row is centered in the
middle, when page two and page three are folded out side by side, and is a
combination caricature of a residential home with two photographs depicting our
fuel processor as one photograph (with a man standing next to the photograph to
provide context) and a graphical arrow pointing to the second photograph of a
residential fuel cell with our fuel processor inside as one of three main
components to the fuel cell. That fuel cell picture has an arrow pointing to a
position to the left of the residential home that shows a scaled version of the
residential fuel cell outside the home. The picture of the residential home
depicts applications for the use of the fuel cell, power for lighting rooms,
providing hot water to a shower, providing heat and air-conditioning, and a
refueling in the garage of the automobile powered by a fuel cell. The third
picture in the first row is a graphical depiction of the Company's Solid Oxide
Fuel Cell Technology. The second row beginning on the left contains seven
photographs. The first is an agricultural farm scene (depicting biomass
applications), to the right of this scene is a photograph of a
telecommunications satellite dish (depicting remote power applications, the
third photograph to the right is a city-scape overlaid to its right with a
fourth photograph of a high power transmission line (depicting commercial power
applications), the fifth through seventh photographs form a cluster of a fuel
cell vehicle and an HBT on-board fuel processor (depicting transportation
applications). The third row beginning on the left side depicts our on-site
industrial generation applications, starting with a graphic of the industrial
unit process depiction (simple process flow), to its right is a photograph of a
natural gas fueled HBT 600SCF on-site generator (depicting industrial
application benefits), above it is our industrial division's logo "PHOENIX GAS
SYSTEMS - A DIVISION OF HYDROGEN BURNER TECHNOLOGY, INC.", to its right is a
graphical depiction of a hydrogen refueling station for transportation
applications overlaid on a photograph of a municipal hydrogen fueled bus at the
Sunline transportation center where our on-site generator is located, to its
right is a graphical table depicting the economical comparison for the cost in
dollars of hydrogen per 100 standard feet, as compared with an HBT technology
versus steam methane reforming or electrolysis using cost of capital and
operation and maintenance comparisons.

The back inside cover shows, clock-wise from the top left corner the HBT
corporate logo, followed by several customer and strategic partner logos, and
ending with a photograph of a handshake. The various corporate customer and
partner logos are:

Ballard, DCH Technology, Hydrogenics, Visteon, ZeTek Power, Sunline Transit
Agency, Hpower, California Hydrogen Business Council, National Hydrogen
Association, Gaz de France, Sosinox and FIBA.
<PAGE>

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Special Note Regarding Forward-Looking Statements........... 18
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 21
Selected Consolidated Financial Data........................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 29
Management.................................................. 48
Certain Relationships and Related Transactions.............. 58
Principal Shareholders...................................... 62
Description of Capital Stock................................ 65
Repurchase Offer............................................ 68
Shares Eligible for Future Sale............................. 69
Underwriting................................................ 72
Legal Matters............................................... 74
Experts..................................................... 74
Available Information....................................... 74
Index to Consolidated Financial Statements.................. F-1
</TABLE>

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Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.

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UOB-TM- is our trademark. This prospectus also includes trademarks of other
entities.

i
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
BEFORE DECIDING TO INVEST IN OUR COMMON SHARES, YOU SHOULD CAREFULLY READ THIS
ENTIRE PROSPECTUS, INCLUDING THE SECTION ENTITLED "RISK FACTORS."

HYDROGEN BURNER TECHNOLOGY

We design and develop hydrogen fuel processors for fuel cell systems and
industrial hydrogen generators. The efficient and cost-effective production of
hydrogen is critical to the commercial introduction of fuel cell systems into
the mass transportation and stationary markets. In the transportation market, we
are developing on-board hydrogen processors for fuel cell vehicles and other
transportation market applications. In the stationary fuel cell market, we are
designing our initial products for residential and small commercial market
applications. In addition, we are developing hydrogen generation systems that
can be used at hydrogen refueling stations to fuel municipal bus systems and
other fleet vehicles. For example, as a participant in a California Fuel Cell
Project program, we have installed a large-scale hydrogen generation system at
the SunLine Transit Agency to fuel buses powered by XCELLSIS The Fuel Cell
Engine Company, an alliance among DaimlerChrysler Corp., Ford Motor Company and
Ballard Power Systems Inc.

Our goal is to become the leading provider of hydrogen fuel processors by
capitalizing on our patented Under-Oxidized Burner (UOB-TM-) technology for
hydrogen production. Since 1993, we have completed substantial field tests of
our hydrogen generators with industrial gas companies such as Gaz de France and
Air Liquide Canada, Inc. and have demonstrated our hydrogen processors for fuel
cell systems to leading fuel cell manufacturers such as Ballard Power Systems,
Plug Power Inc., H Power Corp. and EnAble-TM- Fuel Cell Corporation, a
subsidiary of DCH Technology, Inc. We delivered our first commercial industrial
hydrogen generation systems in 1997 for field testing purposes and expect to
deliver our first commercial fuel processors for fuel cell systems by the end of
2000 for field testing purposes.

OUR PRODUCTS AND OUR TECHNOLOGY

Our fuel processors and hydrogen generators are used to "reform"
hydrocarbon-based fuels, such as gasoline or natural gas, to produce hydrogen.
Reforming is a process by which hydrocarbon-based fuels are converted into
hydrogen gas. Our products can utilize a broad range of readily available fuels,
including natural gas, propane, gasoline and diesel. We believe that we are one
of the few companies to offer such a fuel-flexible solution, thereby allowing
our technology to be used in a greater variety of applications than that of our
competitors. When compared to other currently available methods of producing
hydrogen, we believe that our technology is more efficient, lower in emissions
and lower in capital costs.

MARKET OPPORTUNITIES FOR OUR PRODUCTS

IMPORTANCE OF HYDROGEN FUEL PROCESSORS TO FUEL CELL SYSTEMS. A fuel cell is
an electrochemical device that produces electricity from hydrogen without
combustion, with water and heat as the only by-products. Fuel cell systems have
several advantages over conventional power generation systems, including lower
emissions, higher fuel efficiency, quieter operation, lower vibration and
potentially lower maintenance and capital costs. These advantages enable fuel
cells to offer cleaner and more efficient alternatives to existing power
sources.

There are three major components to a fuel cell system: the fuel processor,
the fuel cell stack and the power conditioning equipment. We produce fuel
processors that are designed to generate hydrogen efficiently and in a
scaled-down fashion suitable for broad commercial market applications. The cost
of the fuel processor represents approximately 40% of the cost of all of the
components of an entire fuel

1
<PAGE>
cell system. Accordingly, any significant cost reductions that are achieved by
manufacturers of fuel processors could provide meaningful cost reductions in the
completed fuel cell system. Such overall price reductions should greatly assist
a fuel cell manufacturer's ability to achieve significant market penetration. We
believe our products address these efficiency and cost issues.

FUEL CELL MARKETS. Automotive companies, fuel cell developers, component
suppliers and power suppliers are investing large amounts of capital in the
development of fuel cell systems, many of which incorporate fuel processors.
Trends that will influence the penetration of fuel cells into broad commercial
markets include:

- Increasing demand for power, particularly for continuous and reliable
power;

- Deregulation in the energy industry, which is opening markets for fuel
cells;

- Advantages of fuel cells over traditional power technologies; and

- Environmental concerns regarding conventional power technologies.

INDUSTRIAL HYDROGEN GENERATION MARKETS. Our hydrogen generators are
completely integrated units that we believe offer an attractive on-site hydrogen
generation alternative to bulk-delivered hydrogen by providing:

- Cost advantages due to eliminating delivery, transfer and storage
expenses;

- Increased safety by reducing the amount of potentially hazardous hydrogen
stored at an end-user's location; and

- More consistent hydrogen purity with the flexibility to adjust purity to
the user's desired level.

OUR STRATEGIC RELATIONSHIPS

We have entered into strategic relationships with several corporations to
expand our research and development efforts, increase marketing and distribution
channels for our products and enhance our production and manufacturing
capabilities.

RELATIONSHIP WITH VISTEON CORPORATION. We have created a strategic alliance
with Visteon Corporation to obtain engineering support services, contract
manufacturing and a technology sharing and development program with respect to
the development and manufacture of our hydrogen fuel processors for proton
exchange membrane fuel cell applications.

RELATIONSHIP WITH GAZ DE FRANCE. Gaz de France has become the exclusive
distributor of our industrial hydrogen generating systems for industrial use and
refueling stations in the European Union, Norway and Switzerland.

RELATIONSHIP WITH ENGELHARD CORPORATION. We have entered into an agreement
with Engelhard Corporation to jointly develop hydrogen fuel processing systems
using our shared technologies.

OUR STRATEGY

DESIGN AND DEVELOP SUPERIOR PRODUCTS FOR FUEL CELL MARKETS. We are
designing and developing proprietary hydrogen processors for proton exchange
membrane fuel cell systems that will be used to power vehicles, residences,
industrial and commercial facilities, devices at remote locations and certain

2
<PAGE>

military applications. In addition, we are also developing a fuel processor for
solid oxide fuel cells to be used in stationary market applications.

BUILD ON RELATIONSHIPS WITH FUEL CELL MANUFACTURERS. We have existing
commercial relationships with Ballard Power Systems, Plug Power, H Power and
EnAble-TM-. We intend to be the provider of choice of hydrogen processors to all
of the leading fuel cell system manufacturers.

BENEFIT FROM STRATEGIC ALLIANCES AND SEEK NEW PARTNERS. We have strategic
alliances with Visteon, Gaz de France and Engelhard. We believe that these
relationships and other potential alliances will aid us in achieving our goal of
becoming the world's leading producer of hydrogen processors for fuel cell
systems and on-site hydrogen generation systems.

CONTINUE TO REDUCE COSTS. We plan to continue to focus on reducing costs by
efficiently combining our patented technology with existing commercial
technologies. We plan to improve product performance and reduce production costs
through the implementation of new technologies, such as microprocessor
controllers, advanced catalysts and miniaturized components. We also expect to
attain significant cost efficiencies as economies of scale in production are
achieved.

CONTINUE TECHNOLOGICAL ADVANCEMENTS. We are continuing our research and
development of hydrogen processing technology to achieve technological
advancements and establish our technological leadership in our target markets,
improve our existing products and position us to develop technologies and
products for additional market applications.

ACQUIRE AND LICENSE COMPLEMENTARY TECHNOLOGIES. We intend to evaluate the
acquisition and licensing of complementary technologies that can potentially
accelerate the development and market penetration of our products.

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Our executive offices are located at 19300 Susana Road, Rancho Dominguez,
California 90221, and our telephone number is (310) 900-0400. We were
incorporated as a California corporation in November 1992 but we expect to
reincorporate as a Delaware corporation immediately prior to the completion of
this offering.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common stock offered.............................. 8,000,000 shares
Common stock to be outstanding after this
offering........................................ 33,894,396 shares
Use of proceeds................................... For capital expenditures, research and
development, sales and marketing expenses,
working capital, potential acquisitions and
investments and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol............ HBTI
</TABLE>

The number of shares of our common stock to be outstanding after this
offering:

- is based on 12,377,352 shares of common stock outstanding as of
October 31, 2000;

- reflects the issuance of 4,862,158 shares of common stock in connection
with the reorganization of our subsidiaries to consolidate our assets that
will occur immediately prior to the closing of this offering. See "Certain
Relationships and Related Transactions;"

- includes 5,476,886 shares of common stock issuable upon exercise of
warrants to be issued to Visteon prior to the closing of this offering, at
an exercise price of $.0001 per share. See "Certain Relationships and
Related Transactions;"

- reflects the issuance immediately prior to the closing of this offering of
1,000,000 shares of common stock upon exercise of all outstanding and
vested warrants at an exercise price of $4.00 per share;

- reflects the sale of 2,178,000 shares of our common stock in connection
with the reorganization of our subsidiaries to consolidate our assets that
will occur immediately prior to the closing of this offering. See "Certain
Relationships and Related Transactions;"

- excludes 3,698,401 shares of common stock issuable upon exercise of
options outstanding as of October 31, 2000 at a weighted average exercise
price of $3.61 per share; and

- excludes 504,599 shares of common stock available for grant under our 2000
Stock Incentive Plan as of October 31, 2000.

Except as otherwise indicated, the information in this prospectus:

- assumes our common stock will be sold in this offering at an initial
public offering price of $12.00 per share, the mid-point of the estimated
range of the initial offering price;

- assumes no exercise of the underwriters' option to purchase 1,200,000
additional shares of common stock to cover over-allotments; and

- assumes our reincorporation in Delaware and the filing of our new
certificate of incorporation, which will occur prior to the closing of
this offering.

4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables set forth our summary consolidated financial data. You
should read this information together with our consolidated financial statements
and the notes to those statements beginning on page F-1 of this prospectus, the
information under "Selected Consolidated Financial Data," "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The pro forma net loss per share, basic and diluted gives effect to the
issuance of 4,862,158 shares of common stock in connection with the
reorganization of our subsidiaries to consolidate our assets. No adjustments
have been made to reflect federal income taxes because the pro forma income tax
provision would be zero.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 278 $ 145 $ 1,238 $ 516 $ 76
Gross profit (loss).................................. 99 (47) 132 9 76
Loss from operations................................. (2,629) (3,128) (3,394) (1,841) (2,370)
Net loss............................................. $(1,846) $(2,244) $(2,937) $(1,511) $(2,140)
======= ======= ======= ======= =======
Net loss per share, basic and diluted................ $ (0.31) $ (0.20)
======= =======
Shares used in computing net loss per share, basic
and diluted........................................ 9,554 10,698
======= =======
Pro forma net loss per share, basic and diluted(1)... $ (0.20) $ (0.14)
======= =======
Shares used in computing pro forma net loss per
share, basic and diluted(1)........................ 14,416 15,560
======= =======
</TABLE>

The balance sheet data on a pro forma basis assumes the issuance of
4,862,158 shares of common stock in connection with the reorganization of our
subsidiaries to consolidate our assets. The balance sheet data on a pro forma as
adjusted basis assumes the consolidation transaction described above and the
sale of 8,000,000 shares of common stock in this offering at an assumed initial
public offering price of $12.00 per share, the mid-point of the estimated range,
after deducting the estimated underwriting discounts and commissions and our
estimated offering expenses.

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $2,040 $2,040 $89,840
Working capital............................................. 1,115 1,115 88,915
Total assets................................................ 3,662 3,662 91,462
Net shareholders' (deficiency) equity....................... (2,733) 969 88,769
</TABLE>

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(1) Shares used in computing pro forma net loss per share, basic and diluted,
excludes the issuance immediately prior to the closing of this offering of
1,000,000 shares of common stock upon the exercise of all outstanding,
vested warrants at an exercise price of $4.00 per share; the issuance of
5,476,886 shares of common stock upon the exercise of warrants during a
one-year vesting period following the closing of this offering; and the sale
of 2,178,000 shares of our common stock in connection with the
reorganization of our subsidiaries immediately prior to the closing of this
offering. See "Certain Relationships and Related Transactions."

5
<PAGE>
RISK FACTORS

INVESTING IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF
ANY OF THE FOLLOWING RISKS OCCUR, THE MARKET PRICE OF OUR SHARES OF COMMON STOCK
COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

RISKS RELATING TO OUR COMPANY

OUR LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT FOR YOU TO ASSESS OUR
BUSINESS AND FUTURE PROSPECTS.

We have a limited operating history on which you can evaluate our business
and future prospects. We are in the early stage of development and our proposed
operations are subject to the risks inherent in the growth of a new business
enterprise, including the absence of any significant operating history. We began
to manufacture commercial units of our on-site hydrogen generation systems in
1997 and are now developing and field testing commercial units of our hydrogen
fuel processors for fuel cell systems. We have not yet begun to manufacture
either on-site industrial hydrogen generators or fuel processors for the fuel
cell market in significant quantities. The likelihood of our success must be
considered in light of the expenses, difficulties, complications, problems and
delays frequently encountered in connection with the growth of a new business,
the development of new technology, and the competitive environment in which we
operate. In light of the foregoing, it is difficult or impossible for us to
predict future results and you should not rely on our historical results of
operations as indications of future performance.

WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION AND EXPECT FUTURE LOSSES AND
NEGATIVE CASH FLOW, WHICH MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS
STRATEGY, AND THE PRICE OF OUR COMMON STOCK MAY DECLINE.

Our business has generated significant losses and negative cash flow since
our inception and we expect our losses to continue. As of June 30, 2000, we had
an accumulated deficit of approximately $12.2 million. Continuing losses may
adversely affect the price of our common stock. In order to achieve
profitability or positive cash flow, we need to both increase our sales volumes
and reduce manufacturing costs of our products. Even if we do achieve
profitability, we cannot be certain that we will be able to sustain
profitability or positive cash flow.

WE MAY NOT BE ABLE TO COMPLETE THE DEVELOPMENT OF THE NECESSARY TECHNOLOGY TO
COMMERCIALIZE OUR PRODUCTS, WHICH WOULD NEGATIVELY IMPACT OUR BUSINESS AND OUR
ANTICIPATED GROWTH.

Our success will depend upon our products meeting acceptable cost and
performance criteria, and upon their timely introduction into the marketplace.
Our product development efforts for hydrogen fuel processors and industrial
hydrogen generators may be subject to unanticipated and significant delays,
expenses and technical or other problems, as well as the possible lack of
funding to complete this development. Our proposed products and technologies may
never be successfully developed on a mass commercial scale, and even if
developed, they may not perform to commercially acceptable standards. We may
experience delays in meeting our development milestones or delays in achieving
performance goals relating to efficiency, cost-effectiveness, reliability and
service arrangements set by us or our customers. Failure to develop our products
for mass production or significant delays in the development of our products
would have a material adverse effect on our relationship with potential
customers, cause us to lose business and cause the market price of our common
stock to decline.

6
<PAGE>

PRODUCT FAILURES IN OUR FIELD TESTS COULD NEGATIVELY IMPACT DEMAND FOR OUR
PRODUCTS, WHICH WOULD SUBSTANTIALLY HARM OUR BUSINESS, FINANCIAL CONDITION AND
PROFITABILITY.

We are currently field testing our products both at our own facilities and
our customers' facilities. We have only recently begun to field test our
hydrogen processors for fuel cell systems. We may encounter problems and delays
during our field tests for a number of reasons, including the failure of our
technology or the technology of third parties, as well as the failure, of
ourselves or our customers, to maintain and service these units properly. Some
of these potential problems and delays are beyond our control. Any problem or
perceived problem with our field tests could materially harm our reputation and
impair market acceptance of, and demand for, our products, which would
substantially harm our business, financial condition and ability to achieve
profitability.

IF WE ARE NOT ABLE TO LOWER THE UNIT COST OF PRODUCTION OF OUR PRODUCTS AND
PRODUCE A COST-EFFECTIVE PRODUCT FOR LARGE-SCALE MANUFACTURE, WE WILL NOT BE
ABLE TO MEET OUR BUSINESS AND GROWTH OBJECTIVES.

To date, we have derived revenues principally from research and development
contracts and from limited sales of our industrial hydrogen generating systems.
Our sales of hydrogen fuel processors for fuel cell systems have been limited to
demonstration and prototype models. Currently, the costs of producing our
products exceed the price of our products. To make our products commercially
viable, we must reduce the cost of producing our products. We may not be able to
produce any of our products in a cost-effective manner on a large commercial
scale, and, if produced, we may not be able to market these products
successfully. We expect the production costs of our initial commercial units to
be higher than their sales price and there can be no assurance that we will
attain higher production levels or that sales prices will ever exceed our
production costs. If we fail to reduce the cost of our products, we will not be
able to meet our business and growth objectives.

WE ARE DEPENDENT ON OUR RELATIONSHIPS WITH STRATEGIC PARTNERS AND THE FAILURE TO
MAINTAIN OR DEVELOP THESE RELATIONSHIPS MAY MATERIALLY IMPEDE OUR ABILITY TO
EXPAND OUR OPERATIONS IN A COST-EFFECTIVE MANNER.

We have entered and plan to enter into relationships with a number of
strategic partners for the design, manufacture and distribution of our products
and the loss of or failure to develop any of these relationships could
materially impede our access to broad market opportunities. Our contract
manufacturing arrangement with Visteon makes us dependent upon Visteon for the
mass-scale manufacture of our hydrogen processors for fuel cell systems. If
Visteon does not provide us with the necessary manufacturing support on
commercially acceptable terms, we could lose sales or experience delays in
obtaining alternative sources, or in developing our own manufacturing expertise,
to satisfy our manufacturing needs. These delays could adversely affect our
ability to manufacture and market our products.

We have entered into a distribution agreement with Gaz de France for our
industrial hydrogen generating systems in Europe, but do not have any definitive
arrangements of significance for distribution in other parts of the world or for
our hydrogen fuel processors for fuel cell systems. Unless we can arrange for
distribution in these other markets and for our hydrogen fuel processors for
fuel cell systems, we will be required to develop our own distribution and
marketing network which will require substantial time, cost and effort.
Furthermore, Gaz de France may extend the period in which to make the minimum
number of purchases under our distribution agreement by an additional
12 months, which may delay our ability to terminate our distribution agreement
and implement alternative distribution arrangements.

As part of our agreement with Engelhard, we are relying on access to their
proprietary catalyst technology to develop commercial units of our stationary
fuel cell systems. Upon expiration of this agreement on December 31, 2001,
Engelhard is not obligated to license any of its proprietary catalyst

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technology to us and we may be unable to develop or acquire, or may experience
delays in developing or acquiring, acceptable catalyst technology to develop our
products. Engelhard may terminate our agreement on 90 days' notice. If Engelhard
does terminate the agreement, we are only entitled to royalty-free access to its
solely owned patents and technology for production of our first 100 stationary
fuel processors. After 100 units we will have to negotiate with Engelhard for a
royalty-based license of its patents and technology to produce additional
processors or we will have to find alternate suppliers. Any lack of access to
such technology could have a material adverse effect on our ability to
commercialize our stationary fuel systems on a timely basis.

We cannot assure you that we will be able to obtain or maintain necessary
strategic relationships or that our current or future strategic partners will
provide us with the resources for marketing or manufacturing our products.

OUR COMPETITORS MAY HAVE EXISTING AGREEMENTS WITH THE LIMITED NUMBER OF FUEL
CELL MANUFACTURERS THAT EXIST TODAY, WHICH AGREEMENTS COULD HINDER OR PREVENT US
FROM SUCCESSFULLY MARKETING OUR PRODUCTS TO SUCH FUEL CELL MANUFACTURERS.

Only a limited number of fuel cell manufacturers exist today and we must
successfully market our hydrogen processor for fuel cells to as many of these
companies as possible in order to achieve our business goals. However, some of
these fuel cell manufacturers may already have agreements with other companies
to provide fuel processors for their fuel cell systems, some of which may be on
an exclusive basis. These existing arrangements between fuel cell manufacturers
and other fuel processor companies may hinder or prevent us from successfully
marketing our products to such fuel cell manufacturers. Moreover, although there
is a fairly broad industry practice by fuel cell manufacturers of entering into
agreements with multiple suppliers of components in order to maintain diverse
sources of supplies, there is no guarantee that we would be chosen as one of
these suppliers even if a fuel cell manufacturer did not have an exclusive
arrangement with another company for fuel processor technology.

WE HAVE NO EXPERIENCE MANUFACTURING OUR PRODUCTS ON A LARGE-SCALE BASIS AND WE
NEED TO DEVELOP OR OBTAIN SUCH EXPERTISE TO BE CAPABLE OF SATISFYING LARGE
COMMERCIAL ORDERS IN A TIMELY FASHION.

We will need to significantly expand our manufacturing capability in order
to expand our business. While we intend to rely heavily on our manufacturing
alliance with Visteon for the production of our fuel cell products, we may need
to develop or obtain additional manufacturing expertise. We may not be able to
develop or obtain the necessary manufacturing expertise for our hydrogen
generators and fuel processors to be capable of satisfying large commercial
orders in time to meet our product commercialization schedule or satisfy the
requirements of our customers.

WE MAY NOT BE ABLE TO MANAGE THE RAPID EXPANSION OF OUR OPERATIONS SUCCESSFULLY
AND OUR FAILURE TO DO SO COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND PROFITABILITY.

The rapid expansion of our manufacturing operations will place significant
demands on our managerial, technical, financial and other resources. We are
undergoing rapid growth in the number of our employees, the size and capability
of our manufacturing facility and the scope of our operations. We will be
required to make significant investments in our engineering and logistics
systems, and our financial and management information systems. There can be no
assurance that our management skills and the systems we currently have in place
will enable us to implement our expansion strategy successfully or that we will
be able to attract and retain skilled management and production personnel. Our
failure to manage our growth effectively would have a material adverse effect on
our business, financial condition and ability to achieve profitability.

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<PAGE>

WE FACE INTENSE COMPETITION AND MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST
COMPETITORS, WHO MAY PRODUCE MORE COST-EFFECTIVE PRODUCTS.

The markets for hydrogen fuel processors for fuel cell applications and
on-site hydrogen generation are evolving rapidly and are extremely competitive
and there is no assurance that we can succeed. In the fuel cell market, there
are several companies currently developing a hydrogen processor to work with
fuel cells in stationary and transportation applications. In the industrial
hydrogen market, we compete with several other reforming technologies, including
other partial oxidation methods, electrolysis, steam methane and methanol
reforming. In addition, our on-site industrial hydrogen production system
competes with merchant delivery of hydrogen. It is uncertain at this time which,
if any, of the technologies currently under development will ultimately become
industry standards and whether our technology and products will be accepted or
gain or maintain significant market share. Our competitors range from
development stage companies to major domestic and international companies, many
of which have:

- substantially greater financial, technical, marketing and human resource
capabilities;

- established relationships with original equipment manufacturers;

- name-brand recognition; and

- established positions in the markets that we have targeted for
penetration.

These or other companies may succeed in developing and bringing to market
more quickly products or technologies that are more cost-effective than those
being developed by us or that would render our products and technology
non-competitive in the marketplace.

OUR SUCCESS DEPENDS HEAVILY ON OUR RELATIONSHIPS WITH A LIMITED NUMBER OF FUEL
CELL MANUFACTURERS AND FAILURE TO MAKE OUR FUEL PROCESSORS COMPATIBLE WITH THEIR
PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

During the next few years, even after the year 2003, when fuel cell systems
are expected to become commercially available, we expect that as much as 85% of
our revenues will be derived from sales of our hydrogen processors for fuel cell
systems. There is a limited number of manufacturers of these products and our
success will be dependent upon them. Accordingly:

- If we fail to make our fuel cell processors compatible with the products
of fuel cell manufacturers or component manufacturers, or if these
manufacturers fail to design or make necessary modifications to their fuel
cell products to integrate our processors, it could significantly impair
or preclude our ability to sell our products.

- We will be adversely affected if fuel cell manufacturers that incorporate
our products are less successful than other fuel cell manufacturers.

- Any design, manufacturing or marketing problems encountered by
manufacturers of fuel cell systems or components could adversely affect
the market for our hydrogen fuel processors.

- Due to the limited number of fuel cell manufacturers, we may be required
to provide volume discounts or other allowances, which may reduce our
profitability.

WE ARE DEPENDENT UPON A LIMITED NUMBER OF SUPPLIERS FOR KEY COMPONENTS OF OUR
PRODUCTS AND ANY CHANGE IN THE PRICES OR AVAILABILITY OF THOSE COMPONENTS COULD
HAVE A NEGATIVE IMPACT ON OUR MANUFACTURING CAPABILITY AND THE PRICE OF OUR
PRODUCTS.

Our results of operations will suffer if we are unable to maintain
relationships with suppliers on acceptable terms, or if these suppliers should
fail to deliver components on a timely basis that meet our quality, quantity or
cost standards. We depend upon a limited number of suppliers for the following

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<PAGE>

components: major vessels, refractory linings, burner assembly and preheat
coils, air compressors, natural gas compressors and hydrogen filters. Although
we are not solely dependent upon a single supplier for any critical component,
our business may suffer if our primary supplier cannot supply components on
schedule and budget. If we are required to use alternate suppliers, our costs
may be higher and we may experience production delays while we integrate the
products of new suppliers into our units.

- QuestAir Technologies, Inc., a Canadian firm, manufactures hydrogen
filters which represent approximately 25% of the total cost of our on-site
industrial hydrogen unit.

- We rely on Engelhard to manufacture catalysts, which are a key component
for our hydrogen fuel processor for fuel cell systems.

In particular, any change in the prices and/or availability of these
important components could have a negative impact on our ability to manufacture
our products.

WE MAY NEED ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US ON ACCEPTABLE
TERMS OR AT ALL, IN WHICH CASE WE MIGHT BE UNABLE TO FUND THE IMPLEMENTATION OF
OUR BUSINESS OR MEET WORKING CAPITAL REQUIREMENTS.

We expect that we may need additional financing in the future, which may not
be available to us on acceptable terms. We anticipate, based on current
proposals and assumptions relating to the implementation of our business plan,
that the net proceeds of this offering, together with the proceeds from the
issuance of shares to current shareholders immediately prior to this offering
and all other existing sources of capital, will be sufficient to satisfy our
funding requirements through the next 24 months, but a number of alternative
scenarios is possible.

- It is possible those funds may be expended prior to that time due to
changes in our business plan or unanticipated changes in economic
conditions or other circumstances.

- In the event that our plans change, our assumptions change or prove to be
inaccurate, or if the net proceeds of this offering and projected revenues
otherwise prove to be insufficient to fund the implementation of our
business plan or working capital requirements, we could be required to
seek additional financing sooner than currently expected.

- As we have no current arrangements with respect to any additional
financing, there can be no assurance that any additional financing will be
available when needed or on commercially reasonable terms. Any inability
to obtain additional financing when needed would have a material adverse
effect on our ability to fund our research and development activities and
on the development of our manufacturing capabilities, which could require
us to delay our product development and commercialization schedule.

- Lack of adequate financing may force us to reduce our sales and marketing
efforts or forego attractive business opportunities. If we raise
additional funds through the issuance of equity or convertible debt
securities, a purchaser will have reduced ownership percentage and may
experience significant dilution.

- To attract investment capital, we may be required to issue securities that
contain rights, preferences or privileges that are senior to those of our
common stock.

WE DEPEND ON INTELLECTUAL PROPERTY LAWS AND REGULATIONS AND CONTRACTUAL
ARRANGEMENTS TO MAINTAIN EXCLUSIVE OWNERSHIP OF OUR TECHNOLOGY AND OUR FAILURE
TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR COMPETITIVE
POSITION.

Our ability to compete effectively against other companies designing
hydrogen fuel processors and generators will depend on our ability to maintain
the exclusive ownership of our UOB-TM- technology and

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other proprietary technology systems. Our inability to maintain the proprietary
nature of our technology and processes could harm our business prospects,
results of operations and financial condition. While we seek to protect these
rights through a combination of patent and trade secret protection,
non-disclosure agreements and other arrangements, the following risks exist:

- Patents may not be issued under pending or future applications or with the
breadth of coverage sought by us, and any issued patents that we hold for
our UOB-TM- technology may not provide adequate protection for our
products or processes.

- Our UOB-TM- technology, which pursuant to our agreement with Gaz de France
is being marketed and sold in Switzerland, the Netherlands and throughout
the European Union, may be at risk in those territories. Effective patent,
trademark, copyrights and trade secret protection for our UOB-TM-
technology may be unavailable, limited or not applied for in these
countries and in other countries in which we do business in the future.

- Patent applications filed in foreign countries are subject to laws, rules
and procedures that differ from those of the United States and any
resulting patents may be difficult to enforce. There can be no assurance
that our competitors will not either independently develop or acquire
proprietary information that is substantially similar or superior to ours
or obtain access to our proprietary information.

- Because there can be no assurance that we would prevail if challenges to
our intellectual property rights are asserted by third parties against us,
we could incur substantial costs defending patent infringement suits
brought by others and prosecuting patent infringement suits against third
party infringers.

- If we are found to be infringing on third party patents, we do not know
whether we will be able to obtain licenses to use such patents or on
acceptable terms. Failure to obtain needed licenses could delay or prevent
the development, manufacture or sale of our hydrogen fuel processors and
generators.

- Competitors' products may infringe upon our patents and the cost of
protecting our rights may be substantial, if not cost prohibitive, thereby
undermining our ability to protect our products effectively.

- We also rely on confidentiality agreements with our employees and third
parties to protect our proprietary and intellectual property, including
intellectual property that may not be patented or patentable, know-how and
trade secrets, but we may not be successful in enforcing compliance with
the terms of these agreements.

CHANGES IN ENVIRONMENTAL LAWS AND REGULATIONS, POTENTIAL LIABILITY FOR
ENVIRONMENTAL DAMAGES AND RELATED ENFORCEMENT ACTIONS COULD ADVERSELY IMPACT OUR
OPERATIONS.

Our business is subject to numerous laws and regulations that govern
environmental protection. These laws and regulations have changed frequently in
the past and it is reasonable to expect additional changes in the future. Our
operations may not comply with future laws and regulations and we may be
required to make significant unanticipated capital and operating expenditures.

- If we fail to comply with applicable environmental laws and regulations,
governmental authorities may seek to impose fines and penalties on us or
to revoke or deny the issuance or renewal of operating permits and private
parties may seek damages from us. Under those circumstances, we might be
required to curtail or cease operations, conduct site remediation or other
corrective action or pay substantial damage claims.

- Our business also exposes us to the risk of accidental release of
hazardous or flammable materials, such as natural gas and hydrogen, which
could result in personal injury or damage to

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property. Depending on the nature of the claim, our current insurance
policies may not adequately reimburse us for costs incurred in settling
environmental damage claims and in some instances we may not be reimbursed
at all for these costs. Specifically, although we have a general liability
insurance policy, this policy has a fairly broad exclusion that removes
coverage for any liabilities that we incur for environmental
pollution-related occurrences.

WE WILL NEED TO ATTRACT AND RETAIN KEY PERSONNEL TO SUCCESSFULLY EXPAND OUR
BUSINESS.

The successful development, marketing and manufacturing of our products will
depend on our ability to attract and retain a highly skilled management team and
specialized workforce, including scientists, engineers, researchers, and
manufacturing and marketing professionals. Based on our planned expansion, we
will require a significant increase in the number of our employees and outside
contractors. Because a large portion of our expense relates to personnel that
cannot be easily reduced without adversely affecting our business plan, our
financial commitment to personnel may limit us from effectively adjusting
spending to compensate for revenue shortfalls, which would increase our losses
and negative cash flow or reduce, or eliminate, any operating income. We do not
maintain "key-man" life insurance policies on our personnel.

OUR EXPANSION INTO INTERNATIONAL MARKETS EXPOSES US TO UNFAMILIAR COMMERCIAL AND
LEGAL REQUIREMENTS, AND THE RISK OF CURRENCY FLUCTUATIONS, ALL OF WHICH MAY
ADVERSELY EFFECT OUR PLANNED EXPANSION.

We have only recently begun to sell and license our products and
technologies internationally and our success depends, in part, on our ability to
secure foreign customers and our ability to manufacture products that meet
foreign regulatory and commercial requirements. Our international expansion
poses a number of challenges to our business:

- We have limited experience developing and manufacturing our products to
comply with the commercial and legal requirements of international
markets.

- We are subject to tariff regulations and requirements for export licenses,
particularly with respect to the export of certain technologies.

- We face numerous unpredictable factors, including unexpected changes in
regulatory requirements, fluctuations in managing international
operations, potentially adverse tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety
of foreign laws.

RISKS RELATING TO OUR INDUSTRY

FUEL CELLS ARE NOT COMMERCIALLY AVAILABLE AT THIS TIME AND MAY NEVER BECOME
COMMERCIALLY VIABLE PRODUCTS, IN WHICH CASE SALES OF OUR HYDROGEN PROCESSORS FOR
FUEL CELLS WOULD SUFFER AND OUR PROJECTED REVENUES WOULD BE SIGNIFICANTLY
REDUCED.

Fuel cells are still a relatively new technology and are not presently
commercially available. Significant obstacles to commercialization of fuel cells
remain and additional obstacles may arise due to unforeseen technical challenges
or increased governmental regulations.

The following technical and logistical disadvantages present significant
obstacles to the broad commercial application of fuel cell technology:

- current fuel cell technology does not have the proven dependability that
many of the existing alternative technologies have in our target markets;

- the high manufacturing costs currently associated with low-volume fuel
cell production make many commercial applications in our target markets
prohibitively expensive;

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- appropriate integration of current fuel cell systems into existing
conventional technology may be difficult;

- hydrogen gas is not readily available through a broad distribution system;
and

- fuels such as hydrogen are not as readily available as fuels such as
natural gas, propane, gasoline and methanol, which are used in some of the
alternative technologies of our competitors in our target markets.

Due to the fact that our projected revenues depend, in significant part,
upon the sale of hydrogen processors for fuel cells, the absence or delay in
establishment of a commercially viable market for such products could have a
material adverse impact on our financial condition and our plans for growth.

IF THE MARKETS FOR FUEL CELL SYSTEMS AND INDUSTRIAL HYDROGEN GENERATION DO NOT
EXPAND AS WE ANTICIPATE, OR IF ALTERNATIVES TO OUR PRODUCTS ARE MORE SUCCESSFUL
THAN OUR PRODUCTS, OUR BUSINESS WILL SUFFER.

A significant market may never develop for our products or may develop more
slowly than we anticipate, resulting in our inability to generate sufficient
revenue to attain profitability. Fuel cell products for stationary and
transportation applications represent an emerging market and we do not know
whether our targeted distributors, resellers or end-users will purchase our
hydrogen fuel processors for fuel cell products. To date, the market for on-site
hydrogen generation has generally been limited to large-scale steam methane
reformers and we cannot assure you that a market will develop for our on-site
industrial hydrogen generators. The development of a significant market for our
products may be impacted by many factors, some of which are out of our control,
including:

- the future costs of obtaining natural gas, propane, diesel, gasoline,
methane and other fuels used by our systems;

- environmental and other regulatory requirements;

- the emergence of more competitive technologies and products;

- cost competitiveness of our systems with competing products;

- consumer reluctance to try our systems; and

- consumer perception of the safety and reliability of our products.

Due to these factors, we cannot anticipate with any degree of certainty what
our revenues and profitability, if any, will be in future periods. If we do
achieve profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future. If we fail to do so,
the market price for our common stock could suffer.

THE FUELS ON WHICH OUR PRODUCTS RELY MAY NOT BE AVAILABLE ON A COST-EFFECTIVE
BASIS, WHICH MAY DISCOURAGE POTENTIAL CUSTOMERS FROM PURCHASING OUR PRODUCTS.

Our products require fuels or "feedstocks" to operate, such as natural gas,
propane, diesel, gasoline, methane and other hydrocarbon-based products. Such
feedstocks may not be available on a cost-effective basis in the future. Even if
these fuels are available, if our systems are unable to produce hydrogen at a
cost that is comparable to hydrogen supplied by merchant gas companies or
electricity provided through the electric grid system, potential customers will
be less likely to purchase our products.

CHANGES IN GOVERNMENT POLICIES AND REGULATIONS COULD IMPAIR DEMAND FOR OUR
PRODUCTS.

Government regulation of our systems at the federal, state or local level
could increase our costs and, therefore, harm our business, prospects and
financial condition. Our products and their installation

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<PAGE>

are subject to state and local ordinances relating to building codes, safety,
utility connections, environmental protection and related matters. At this time,
we cannot anticipate which jurisdictions, if any, will impose regulations
directed at our products or their use.

- Because the fuel cell industry is still in the developmental stage, there
are not industry-specific government regulations regarding fuel cells in
the United States covering the design, storage, transportation or
installation of fuel cell systems. However, significant government
regulation has traditionally existed concerning the production of
electrical energy and, therefore, there may be industry-specific
government regulations to be imposed on fuel cells in the markets in which
we plan to offer our products.

- It is also possible that future and existing regulations, particularly
licensing, will impact our ability to distribute, install and service our
products. For example, stationary power systems cannot be operated without
permits in many, if not all, of the markets in which we will be marketing
and selling our products. The inability of our potential customers to
obtain a permit, or the inconvenience often associated with the permit
process, could harm demand for our products. As we distribute our products
to our early target markets, federal, state or local government entities
or competitors may seek to impose regulations impacting us directly or
indirectly.

- Changes in environmental policies could also have a negative impact on our
business. For example, our principal target markets for our hydrogen fuel
processors for fuel cell systems are the stationary and transportation
markets and our business will suffer if environmental policies change and
no longer encourage the development and growth of these markets.

OUR PRODUCTS USE INHERENTLY DANGEROUS, FLAMMABLE FUELS THAT COULD SUBJECT OUR
BUSINESS TO PRODUCT LIABILITY CLAIMS THAT MAY EXCEED THE SCOPE OF OUR INSURANCE
COVERAGE.

Our business exposes us to potential product liability claims that are
inherent in hydrogen and products that use hydrogen. Hydrogen is a flammable gas
and therefore a potentially dangerous product. Hydrogen is typically generated
from gaseous and liquid fuels that are also flammable and dangerous, such as
propane, natural gas or methane, in a process known as reforming.

- Natural gas and propane could leak into a residence or commercial location
and combust if ignited by another source. Any accidents involving our
systems or other hydrogen-based products could materially impede
widespread market acceptance and demand for our products.

- We may be held responsible for damages beyond the scope of our insurance
coverage.

- We cannot predict whether we will be able to maintain our insurance
coverage on acceptable terms.

UTILITY COMPANIES COULD PLACE BARRIERS ON OUR ENTRY INTO THE MARKET FOR
RESIDENTIAL POWER, SUCH AS ADDING FEES FOR A CUSTOMER'S USE OF LESS ELECTRICITY,
WHICH WOULD REDUCE DEMAND FOR OUR PRODUCTS.

If utility companies begin to charge fees to residential customers for using
less utility-based electricity or if residential customers begin to use the
electric utility grid for backup purposes only, these fees could effectively
increase the cost to residential customers using fuel cell systems that contain
our hydrogen fuel processors by making fuel cells less cost-effective and less
attractive to potential customers. Although these reduced-use fees are currently
charged only to industrial users, it is possible that, as the market for
residential power generation develops, utility companies could charge similar
fees to residential customers in the future.

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WE FACE RAPID TECHNOLOGICAL CHANGE IN OUR MARKETS THAT COULD MAKE OUR PRODUCTS
LESS DESIRABLE OR OBSOLETE, WHICH MAY REQUIRE US TO EXPEND SIGNIFICANT RESOURCES
TO REMAIN COMPETITIVE.

Our product is one of a number of hydrogen processing systems being
developed today. Technological advances in alternative hydrogen processing
systems may render our existing proprietary technology and systems obsolete.
Future advances in technology may not be beneficial to, or compatible with, our
business. Further, we may not use new technologies effectively or adapt our
proprietary technology and hydrogen-processing systems to user requirements or
emerging industry standards on a timely basis. Our ability to remain
technologically competitive may require substantial expenditures and lead-time.

RISKS RELATING TO THE OFFERING

OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO BE VOLATILE IN THE FUTURE AND THIS
COULD NEGATIVELY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.

Our quarterly operating results are likely to vary significantly in the
future. Fluctuations in our quarterly financial performance may result from, for
example:

- unevenness in demand and orders for our products;

- significant short-term capital expenses as we develop our manufacturing
facilities;

- a shortage of the raw materials used in the production of our hydrogen
fuel processors; and

- difficulties with our manufacturing operations.

Because of these anticipated fluctuations, our sales and operating results
between fiscal quarters are likely to be inconsistent, may not be indicative of
our future performance and may be difficult for investors to evaluate properly.
As a result, the market price of our common stock may be adversely affected.

OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD MEAN THAT YOU MAY NEVER BE ABLE TO
SELL YOUR STOCK FOR A PROFIT.

Prior to this offering there has been no public market for our common stock.
We cannot predict the extent to which, or if, investor interest will lead to the
development of an active and liquid trading market. The initial public offering
price for the shares of our common stock has been determined by negotiations
between us and the representatives of the several underwriters and may not be
indicative of the market price of our common stock that will prevail in the
trading market. The market price of our common stock may decline below the
initial public offering price and this decline may be significant. The value of
your investment could decline due to the impact of any of the following factors
upon the market price of our common stock:

- variations in our actual and anticipated operating results;

- changes in our earnings estimates by research analysts;

- our failure to meet analysts' performance expectations; and

- lack of liquidity.

In addition, stock markets, particularly the Nasdaq National Market, have
experienced extreme price and volume fluctuations, and the market prices of
securities of technology companies have been highly volatile. These fluctuations
are often unrelated to operating performance and may adversely affect the market
price of our common stock. As a result, you may not be able to sell your shares
at or above the initial public offering price.

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<PAGE>

OUR CHARTER DOCUMENTS AUTHORIZE THE ISSUANCE OF PREFERRED STOCK AND CONTAIN
LIMITATIONS ON OUR SHAREHOLDERS' RIGHTS, WHICH MAY ADVERSELY AFFECT YOUR RIGHTS
AND THE PRICE OF OUR COMMON STOCK.

Upon completion of this offering, our board of directors will have the
authority to issue shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by you. Your rights will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock.

Our charter documents also provide for limitations on the ability of
shareholders to call special meetings and act by written consent and prohibit
cumulative voting for directors. The charter documents also establish advance
notice requirements for nominations for election to the board of directors or
for proposing matters that can be acted on by shareholders at shareholder
meetings. Provisions in our certificate of incorporation and bylaws could
substantially impede a change of control or changes in our management that you
might consider favorable. See "Description of Capital Stock" for a description
of these provisions. If a change of control or change in management is delayed
or prevented, the market price of our common stock could decline.

OUR PRINCIPAL SHAREHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL
CONTROL OVER OUR AFFAIRS AND YOU WILL NOT BE ABLE TO INFLUENCE THE OUTCOME OF
MANY IMPORTANT TRANSACTIONS OR BUSINESS POLICIES.

After consummation of this offering, executive officers, directors and
shareholders who beneficially own more than 5% of our common stock will have the
power, in the aggregate, to direct the vote of approximately 75% of our voting
securities. Therefore, these persons may have the power to influence our
business policies and affairs and determine the outcome of any matter submitted
to a vote of our shareholders, including mergers, sales of substantially all of
our assets and changes in control. These stockholders may use their influence to
approve or take actions that are adverse to your interests. A concentration of
such voting power may have a negative impact on the market price of our common
stock. See "Principal Shareholders" for more information on the stock holdings
of our directors, officers and large shareholders.

FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE, IN WHICH
CASE YOU MAY NOT BE ABLE TO RECOGNIZE A PROFIT ON YOUR INVESTMENT.

If our shareholders sell, or if there is a perception that our shareholders
intend to sell, substantial amounts of our common stock in the public market
following this offering, including shares issued upon the exercise of
outstanding options, the trading price of our common stock could fall. Such
sales also might make it more difficult for us to raise capital in the future at
a time and price that we deem appropriate. Upon completion of this offering,
assuming the exercise of all warrants, we will have outstanding
33,894,396 shares of common stock (based upon shares outstanding as of
October 31, 2000), assuming no exercise of outstanding options after
October 31, 2000. Of these shares, the 7,600,000 shares sold in this offering
will be freely tradable. Other shares will be eligible for sale in the public
market after the date of this prospectus, substantially all of which are subject
to lock-up agreements, and, in some cases, to the holding period, volume
limitations and other requirements of Rule 144 under the Securities Act. Within
180 days after the date of this prospectus, shares will be available
for sale. In addition, at various times thereafter, at such times as the
relevant one-year holding periods for such shares expire, shares shall
become available for sale.

Sofinov Societe Financiere d'Innovation, Inc., who will hold 7,466,905
shares of our common stock, will be entitled to certain rights after this
offering with respect to registration of its shares under the Securities Act.
These rights may permit Sofinov to request registration of 25% of its holdings
six

16
<PAGE>

months after this offering and the balance of its holdings one year after this
offering. Visteon Corporation, who may acquire at a nominal price 5,476,886
additional shares of our common stock within one year after this offering
through the exercise of warrants, will be entitled to demand registration of 25%
of those shares commencing two years after this offering and the balance of
those shares three years after this offering. In addition, the exercise of these
registration rights may allow either Sofinov or Visteon, or both, to sell their
shares in the market in connection with any future public offerings by us of our
equity securities. See "Description of Capital Stock--Registration Rights".

We cannot predict if future sales of our common stock, or the availability
of our common stock, will harm the market price for our common stock or our
ability to raise capital by offering equity securities.

WE DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE AND OUR INTENTION NOT TO PAY DIVIDENDS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK AND THE RETURN ON YOUR INVESTMENT.

We have not paid any cash dividends on our common stock and we do not intend
to pay any dividends on our common stock for the foreseeable future. We
currently intend to retain all of our earnings, if any, to finance the
development and growth of our business. The failure to pay dividends may have an
adverse effect on the market price of our common stock and the return on your
investment.

OUR MANAGEMENT MAY NOT USE THE PROCEEDS FROM THIS OFFERING EFFECTIVELY, IN WHICH
CASE WE MAY NOT BE ABLE TO SUCCESSFULLY OPERATE AND GROW OUR BUSINESS.

If our management does not use the proceeds from this offering effectively,
we may not be able to operate and grow our business successfully. The net
proceeds of this offering are estimated to be approximately $87.8 million, at
the assumed initial public offering price of $12 per share, after deducting the
estimated underwriting discount and our estimated offering expenses. At present,
we have wide ranges in planned expenditures to be funded with the proceeds due
to our need to retain flexibility to respond to factors affecting our business.
Accordingly, our management will retain broad discretion as to the allocation of
the proceeds of this offering and may use such proceeds in a manner with which
you may not agree. See "Use of Proceeds" for more information regarding the use
of proceeds from this offering.

17
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business" contains forward-looking
information. This forward-looking information is subject to risks and
uncertainties including the factors listed under "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements. We do not intend
to update any of our forward-looking statements after the date of this
prospectus, other than as required by law. You should not place undue reliance
on forward-looking statements.

18
<PAGE>
USE OF PROCEEDS

We expect to receive approximately $87.8 million in net proceeds from the
sale of 8,000,000 common shares being offered by us in this offering, based on
an estimated initial public offering price of $12.00 per common share. We
estimate that the net proceeds will be approximately $101.2 million if the
underwriters' over-allotment option is exercised in full.

The primary purposes of this offering are to increase our equity capital,
create a public market for our common shares and facilitate future access to
public markets. As of the date of this prospectus, we have not made any specific
expenditure plans with respect to the net proceeds of this offering, except as
described below. We expect to use the net proceeds of this offering for general
corporate purposes and capital expenditures. Our projected budget through 2003
includes capital expenditures of approximately $20.0 million to purchase
equipment and make leasehold improvements to expand our production capacity. Our
projected budget also includes approximately $52.0 million for funding research
and development programs, engineering and manufacturing, as well as sales,
marketing and services costs in support of these new product programs together
with existing products. Also, we believe that there will be significant
opportunities to make acquisitions of, or investments in, businesses, products
or technologies that expand, complement or are otherwise related to our current
business and we may also use net proceeds from this offering for these purposes.
We continually engage in preliminary discussions with other parties concerning
possible acquisitions that will complement our business. However we do not
currently have any agreement for any acquisition, except for discussions
relating to one potential acquisition, which, if consummated, would not exceed
$250,000 in purchase price. This transaction involves the possible acquisition
of Sagim, a French corporation that produces electrolyzers, which use
electricity to convert gases to hydrogen in special applications, such as
weather balloons. The estimated purchase price indicates the highest potential
valuation of Sagim. Depending on the actual terms of an agreement with Sagim,
this amount could be significantly lower and may be paid out over several years.

The amounts actually expended for the purposes listed above will depend upon
a number of factors, including the growth of our product sales and competitive
developments in the alternative fuel market. We may find it necessary to use a
portion of the net proceeds of this offering for other purposes. Therefore, we
cannot specify with certainty the particular uses of the net proceeds of this
offering, and the amounts that we actually spend could exceed the ranges set
forth above. Our management will have significant flexibility and discretion in
applying the net proceeds of this offering.

Pending their use for the purposes listed above, we intend to invest the net
proceeds of this offering in short-term, interest-bearing, investment grade
securities.

DIVIDEND POLICY

We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain all available funds for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay dividends will be at the
discretion of our board of directors and will depend on our results of
operations, financial conditions, contractual and legal restrictions and other
factors the board deems relevant.

19
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000:

- on an actual basis;

- on a pro forma basis to reflect the issuance of 4,862,158 shares of common
stock in connection with the reorganization of our subsidiaries to
consolidate our assets; and

- on a pro forma as adjusted basis to reflect the transactions described
above and the sale of 8,000,000 shares of common stock in this offering at
an assumed initial public offering price of $12.00 per share, after
deducting the estimated underwriting discounts and commissions and our
estimated offering expenses.

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 2,040 $ 2,040 $ 89,840
======== ======== ========
Loans and notes payable, including current portion.......... 749 749 749
Minority interest........................................... 3,702 -- --
Shareholders' equity:
Common stock; $0.0001 par value, pro forma; 30,000,000
shares authorized and 11,307,352 shares issued and
outstanding, actual; 200,000,000 shares authorized and
16,169,510 shares issued and outstanding, pro forma;
24,169,510 shares issued and outstanding, pro forma as
adjusted................................................ 9,482 2 2
Additional paid-in capital.................................. -- 13,182 100,982
-------- -------- --------
Accumulated deficit......................................... (12,215) (12,215) (12,215)
-------- -------- --------
Net shareholders' (deficiency) equity..................... (2,733) 969 88,879
-------- -------- --------
Total capitalization.................................... $ 1,718 $ 1,718 $ 89,518
======== ======== ========
</TABLE>

The number of shares of common stock issued and outstanding as of June 30,
2000:

- excludes up to 1,200,000 shares that may be issued pursuant to the
underwriters' over-allotment option;

- excludes 2,628,000 shares of common stock issuable upon exercise of
options outstanding at June 30, 2000, at a weighted average exercise price
of $3.04 per share;

- excludes 896,950 shares of common stock available for grant under our
incentive stock option plan at June 30, 2000;

- excludes the sale of 2,178,000 shares of our common stock in connection
with the reorganization of our subsidiaries that will occur immediately
prior to the closing of this offering. See "Certain Relationships and
Related Transactions";

- excludes the issuance, immediately prior to the closing of this offering,
of 1,000,000 shares of our common stock upon exercise of all outstanding,
vested warrants at an exercise price of $4.00 per share; and

- excludes 5,476,886 shares of common stock issuable upon exercise of
warrants to be issued to Visteon prior to the closing of this offering, at
an exercise price of $.0001 per share.

20
<PAGE>
DILUTION

Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of our common stock in this offering and the
net tangible book value per share as adjusted of our common stock immediately
after completion of the offering. Pro forma net tangible book value per share
represents the amount of our total assets less total liabilities, divided by
8,000,000 shares of common stock outstanding as of June 30, 2000, after giving
effect to the issuance of 4,862,158 shares of common stock in connection with
the reorganization of our subsidiaries to consolidate our assets.

As of June 30, 2000, we had a pro forma net tangible book value of
$1.0 million, or $0.06 per share of common stock. After giving effect to the
sale of the 8,000,000 shares of common stock offered by this prospectus at an
assumed initial public offering price of $12.00 per share, and after deducting
the estimated underwriting discounts and commissions and our estimated offering
expenses, our pro forma net tangible book value on an as adjusted basis, as of
June 30, 2000, would have been $88.8 million, or $3.67 per share. This
represents an immediate increase in net tangible book value on a pro forma as
adjusted basis of $3.61 per share to our existing stockholders and an immediate
dilution of $8.33 per share to new investors in this offering.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.00
Pro forma net tangible book value per share at June 30,
2000.................................................... $0.06
Increase in pro forma net tangible book value per share
attributable to this offering........................... 3.61
Pro forma net tangible book value per share after this
offering.................................................. 3.67
-------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.33
=======
</TABLE>

The following table sets forth, as of June 30, 2000 after giving effect to
the offering, the number of shares of common stock issued by us, the total
consideration paid in cash or other consideration for those shares and the
average price per share paid in cash or other consideration by existing
shareholders and by new investors. The table is presented assuming the issuance
of 4,862,158 shares of common stock in connection with the reorganization of our
subsidiaries to consolidate our assets.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ------------ -------- -----------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................ 16,169,510 66.9% $ 13,184,000 12.1% $ 0.82
New investors........................ 8,000,000 33.1 96,000,000 87.9 12.00
---------- ----- ------------ -----
Total.............................. 24,169,510 100% $109,184,000 100%
========== ===== ============ =====
</TABLE>

Each of the above tables excludes:

- up to 1,200,000 additional shares that may be issued by us pursuant to
the underwriters' over-allotment option;

- 2,628,000 shares of common stock issuable upon exercise of stock
options outstanding as of June 30, 2000, at a weighted average exercise
price of $3.04 per share;

- 896,500 shares of common stock available for grant under our incentive
stock option plan at June 30, 2000;

- 2,178,000 shares of common stock to be sold in connection with the
reorganization of our subsidiaries that will occur immediately prior to
the closing of this offering. See "Certain Relationships and Related
Transactions";

- 1,000,000 shares of our common stock issuable upon exercise of all
outstanding, vested warrants at an exercise price of $4.00 per share;
and

- 5,476,886 shares of common stock issuable upon exercise of warrants to
be issued to Visteon prior to the closing of this offering, at an
exercise price of $.0001 per share.

To the extent these shares are issued, new investors will be further
diluted. See "Management" and the notes to our financial statements included
elsewhere in this prospectus.

21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data
as of December 31, 1998 and 1999 have been derived from our financial statements
which are included elsewhere in this prospectus. The balance sheet and statement
of operations data as of and for the year ended December 31, 1995 have been
derived from our unaudited financial statements, and the balance sheet and
statement of operations data as of and for the years ended December 31, 1996 and
1997 have been derived from our audited financial statements, which are not
included in this prospectus. The statement of operations data for the six-month
periods ended June 30, 1999 and 2000 and the balance sheet data as of June 30,
2000 are derived from our unaudited financial statements included in this
prospectus and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our results of operations and financial condition for those
periods. Results for any interim period are not necessarily indicative of the
results that may be expected for any other interim period or for a full year.

The pro forma net loss per share basic and diluted gives effect to the
issuance of 4,862,158 shares of common stock in connection with the
reorganization of our subsidiaries to consolidate our assets. No adjustments
have been made to reflect federal income taxes because the pro forma income tax
provision would be zero.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 46 $ 141 $ 278 $ 145 $ 1,238 $ 516 $ 76
Cost of sales.................................. 41 98 179 192 1,106 507 --
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)............................ 5 43 99 (47) 132 9 76
Operating expenses:
Selling, general and administrative
expenses................................... 24 1,615 1,906 1,782 2,216 1,114 1,700
Research and development expenses............ -- 787 822 1,299 1,310 736 746
------- ------- ------- ------- ------- ------- -------
Loss from operations........................... (19) (2,359) (2,629) (3,128) (3,394) (1,841) (2,370)
Interest expense............................... -- 21 96 6 37 23 40
Interest income................................ -- 17 116 97 7 4 9
Minority interest in net loss of
subsidiaries................................. -- 632 763 793 487 349 261
------- ------- ------- ------- ------- ------- -------
Net loss....................................... $ (19) $(1,731) $(1,846) $(2,244) $(2,937) $(1,511) $(2,140)
======= ======= ======= ======= ======= ======= =======
Net loss per share, basic and diluted.......... $ (0.31) $ (0.20)
======= =======
Shares used in computing net loss per share,
basic and diluted............................ 9,554 10,698
======= =======
Pro forma net loss per share, basic and
diluted(1)................................... $ (0.20) $ (0.14)
======= =======
Shares used in computing pro forma net loss per
share, basic and diluted(1).................. 14,416 15,560
======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- --------------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 96 $ 2,469 $ 743 $ 157 $ 352 $ 2,040
Working capital........................................... 268 1,604 (281) (1,307) (579) 1,115
Total assets.............................................. 257 3,119 2,136 1,537 1,687 3,662
Long term debt, less current portion...................... 298 328 362 341 657 500
Net shareholders' deficiency.............................. (30) (1,223) (5,063) (4,853) (4,693) (2,733)
</TABLE>

------------------

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS, THE
NOTES TO THOSE FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING SECTION CONTAINS FORWARD-LOOKING
STATEMENTS INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR PLANS,
STRATEGIES, OBJECTIVES, EXPECTATIONS, INTENTIONS AND RESOURCES. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS."

OVERVIEW

We design and develop hydrogen fuel processors for fuel cell systems and
industrial hydrogen generators. Because fuel cells require hydrogen to produce
electricity, the efficient and cost effective production of hydrogen for fuel
cells is critical to the commercial introduction of fuel cell systems into the
mass transportation and stationary markets. We have developed and patented the
Under-Oxidized Burner (UOB-TM-), an innovative technology for hydrogen
production. In comparison to other means of producing hydrogen, we believe our
products provide more efficiency, lower emissions, lower capital costs and
greater fuel-flexibility. Our proprietary UOB-TM- system produces hydrogen from
hydrocarbon feedstocks, such as natural gas, propane, diesel and gasoline, and
can be utilized as an on-site source of hydrogen in a variety of applications.
Since 1993, we have completed substantial field-testing and have successfully
demonstrated our products to a number of leading fuel cell manufacturers and
industrial gas companies.

In November of 2000, we entered into a series of agreements with Visteon
Corporation to obtain engineering support services and to form a product
manufacturing and a technology sharing and development alliance with respect to
the development and manufacture of our hydrogen fuel processors for proton
exchange membrane fuel cell applications. We believe that our relationship with
Visteon will significantly accelerate our efforts to achieve large-scale
commercial production of our hydrogen fuel processors and permit us to produce
higher quality and more cost-efficient products.

In return for these services and as part of our alliance, we will issue
Visteon warrants, which will vest over a period of one year, to purchase up to
5,476,886 shares of our common stock for an exercise price equal to the $0.0001
par value per share, or approximately $548 for all such shares.

We have accounted for these warrants pursuant to SFAS No. 123 and
EITF 96-18. Accordingly, the fair value of the warrants, aggregating
$27.4 million, will be recorded as an asset and will be amortized as research
and development expense over the one-year vesting period of the warrants.

On July 13, 2000, we entered into a five-year agreement with Gaz de France,
a natural gas supplier and distributor, whereby Gaz de France became the
exclusive European distributor of our hydrogen generating systems for industrial
use and refueling stations. The agreement includes a minimum purchase quota,
which is agreed upon between the parties on an annual basis. Concurrent with
this agreement, we issued 1,050,000 shares of our common stock to a wholly owned
subsidiary of Gaz de France for total consideration of $5.2 million. The total
consideration included cash of $3.7 million, the forgiveness of $1.0 million in
amounts due for research and development performed by Gaz de France on our
behalf and forgiveness of $500,000 previously advanced to us by Gaz de France.
The common stock issued upon the forgiveness of the aforementioned liabilities
was recorded at the estimated fair market value of the common stock at the time
of the forgiveness. In addition, we issued a fully vested and nonforfeitable
warrant to purchase 1,000,000 shares of common stock at $4.00 per share. Gaz de
France is required to exercise the warrant immediately prior to the closing of
this offering. We accounted for the warrant pursuant to SFAS No. 123 and
EITF 96-18. Accordingly, the fair value of the warrant, aggregating
$1.1 million, will be recorded as an asset representing the future value of
Gaz de France becoming our exclusive European distributor. This asset will be
amortized over the five-year term of the agreement.

23
<PAGE>

Effective January 19, 1999, we entered into an agreement with Engelhard to
develop and commercialize a hydrogen fuel processing system by combining
Engelhard's proprietary catalyst technology with our proprietary fuel
processor-related technology, specifically for residential and small stationary
fuel cell systems applications. We and Engelhard have royalty-free access to
each other's patents and technology for products produced prior to the end of
2001. All patents and technology jointly developed will be jointly owned and
both parties have an exclusive right to use the jointly owned patents and
technology through the end of 2004. If the agreement is terminated early, then
the rights to jointly owned patents and technology will not be exclusive and we
must negotiate a royalty-based license for each other's solely owned patents and
technology. The impact on our future operations from this arrangement is not
currently estimable.

REVENUES

We record revenues from the sale of our products. Revenues from product
sales are recorded when shipped and we record deferred revenue until shipment of
our products has taken place.

Since inception, virtually all of our revenues have been derived from sales
of our on-site industrial hydrogen generation systems to the merchant gas
industry and sales of pre-production hydrogen fuel processors to fuel cell
manufacturers, government entities, and other research agencies.

COST OF SALES

Cost of sales consists primarily of the cost of compensation and benefits
for manufacturing staff, and related engineering and support staff, as well as
materials and supplies used in the manufacturing process. Our cost of sales for
our products has been greater than the revenues that we receive for our
products. We expect that our gross margins will increase in the future because
the commercial units manufactured pursuant to our relationship with Visteon, or
by other contract manufacturers, should cost less than our current average unit
costs. There has been no material impact on cost of sales for any inventory
reserves.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Our selling, general and administrative expenses consist primarily of
compensation and benefits for our sales and marketing personnel, as well as our
corporate staff. These expenses also contain our professional fees and
facilities costs, including lease payments. We expect our selling, general and
administrative expenses to increase as we hire additional employees, expand our
infrastructure, increase our manufacturing volume and grow our operations in
response to increased demand for our products and technology.

RESEARCH AND DEVELOPMENT EXPENSES

Our research and development expenses consist primarily of salaries and
benefits for research and development personnel, costs of research and
development equipment and materials and other costs associated with the
development of our technologies. We expect to increase our research and
development expenses as we continue to invest in the development of our
products. A significant portion of our research and development expenses are
funded under cost reimbursement research contracts and have been accounted for
as a reduction of research and development costs incurred.

INTEREST EXPENSE AND INTEREST INCOME

Interest expense is primarily attributable to interest expense associated
with our notes payable to investors. Interest income is primarily attributable
to interest income from cash on hand from our private financings.

24
<PAGE>
MINORITY INTEREST IN NET LOSSES OF SUBSIDIARIES

Minority interest in net losses of subsidiaries represents minority
interests in our subsidiaries held by Sofinov and other shareholders.
Immediately prior to the closing of our offering as part of our reorganization,
these minority interests will be eliminated and Sofinov and these other
shareholders will be issued shares of our common stock.

ACCUMULATED DEFICIT

We have generated losses since our inception, and as of June 30, 2000, our
accumulated deficit was $12.2 million. We expect to make continued investments
in product design, development and manufacturing.

RESULT OF OPERATIONS

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000.

REVENUES

Revenues for the six-month periods ended June 30, 1999 and 2000 were
$516,000 and $76,000, respectively. Revenues in the 1999 period were related to
the completion of certain prototype units sold for third-party research and
development purposes ($300,000) and product sales of a limited number of
pre-production units ($216,000). During the six months ended June 30, 2000, no
product shipments were made as we are in the process of manufacturing our
commercial units.

COST OF SALES

Cost of sales for the six-month periods ended June 30, 1999 and 2000 were
$507,000 and $0, respectively, as we did not have any product sales in the 2000
period. Due to the developmental nature of our products to date, gross margin
information is not meaningful.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the six-month periods ended
June 30, 1999 and 2000 were $1.1 million and $1.7 million, respectively. The
increase in selling, general and administrative expenses during the 2000 period
resulted principally from additional administrative employees hired to support
our increased operations ($350,000), higher legal expenses associated with
recently completed capital transactions and strategic relationships ($300,000),
and increased rent and related costs from our new headquarters and manufacturing
facility ($125,000).

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for the six-month periods ended June 30,
1999 and 2000 were $736,000 and $746,000, respectively.

INTEREST EXPENSE AND INTEREST INCOME

We incurred interest expense of $23,000 and $40,000 during the six-month
periods ended June 30, 1999 and 2000, respectively, as a result of net
borrowings from our shareholders. We earned interest income of $4,000 and $9,000
during the six-month periods ended June 30, 1999 and 2000, respectively, from
cash on hand.

25
<PAGE>
MINORITY INTEREST IN NET LOSSES OF SUBSIDIARIES

Minority interests in net losses of subsidiaries were $349,000 and $261,000
for the six-month periods ended June 30, 1999 and 2000, respectively, reflecting
the minority shareholders' share of our net losses.

COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

REVENUES

Revenues were $278,000, $145,000, and $1.2 million in 1997, 1998 and 1999,
respectively. Revenues in 1997 consisted of the sale of prototype fuel
processors for fuel cells for third-party research and development activities.
In 1998, we completed the development and sale of our prototype fuel processors
for fuel cells. The majority of the increase in revenues in 1999 is attributable
to the completion of a substantial number of outstanding prototype fuel
processors for fuel cells sold to third parties for research and development
purposes and the initial sales of our pre-production units.

COST OF SALES

Cost of sales was $179,000, $192,000 and $1.1 million in 1997, 1998 and
1999, respectively. The increase in cost of sales in 1999 is attributable to
sales of our pre-production fuel processors for fuel cells. Due to the
developmental nature of our product, gross margin is not meaningful.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $1.9 million,
$1.8 million, and $2.2 million in 1997, 1998 and 1999, respectively. Selling,
general and administrative expenses in 1998 as compared to 1997 were relatively
flat. During 1997 and 1998, we focused on the refinement of our hydrogen
generators. The increase in selling, general and administrative expenses in 1999
resulted principally from our hiring of additional administrative employees
($185,000) and the increased operations relating to our hydrogen fuel processor
business ($250,000).

RESEARCH AND DEVELOPMENT EXPENSES

Rearch and development expenses were $822,000, $1.3 million, and
$1.3 million in 1997, 1998 and 1999, respectively. During 1997 and 1998, we
focused on the development of our industrial on-site hydrogen generators. During
1999, we expanded our development efforts to also focus on our hydrogen fuel
processors for the fuel cell markets. Research and development expenses
increased from 1997 to 1998 principally due to increased expenses incurred under
two reimbursement research contracts with the Department of Energy. In 1999, our
research and development expenses were primarily due to $1.0 million of expense
representing the approximate value of services provided by Gaz de France to us.
These research and development contracts developed technologies consistent with
our core applications.

INTEREST EXPENSE AND INTEREST INCOME

We incurred interest expense of $96,000, $6,000 and $37,000 in 1997, 1998
and 1999, respectively, primarily related to our loans and notes payables. We
earned interest income of $116,000, $97,000 and $7,000 in 1997, 1998 and 1999,
respectively, as a result of the infusion of equity capital from one of our
shareholders in 1996.

26
<PAGE>
MINORITY INTEREST IN NET LOSSES OF SUBSIDIARIES

Minority interest in net losses of subsidiaries was $763,000, $793,000 and
$487,000 in 1997, 1998 and 1999, respectively, representing the minority
shareholders' share of our net losses of our subsidiaries in those years.

Due to the start-up nature of our operations, the lack of significant
activity of operations and the non-cyclical nature of our operations, quarterly
financial data has not been presented. The information would not be meaningful
to the understanding of our results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements depend on numerous factors, including completion of
our product development activities, our ability to commercialize our hydrogen
fuel processors, market acceptance of our products and other factors. We expect
to devote substantial capital resources to continue our development programs
related to our products, to hire and train additional production staff, develop
and expand our manufacturing capacity, expand our sales and marketing activities
and begin commercial production of our fuel cell processors.

We have historically financed our operations primarily from the sale of
common stock, and borrowings from shareholders that were subsequently converted
into our common stock, for an aggregate total proceeds of $9.5 million since
inception. During 1997, 58,000 shares of our common stock were sold to one
investor for $250,000. During 1998, 507,000 shares of our common stock were sold
to various investors for $950,000 and certain shareholders and others converted
$408,000 of their notes payable and $164,000 of accrued liabilities into 572,000
shares of our common stock. During 1999, 1,889,000 shares of common stock were
issued to various investors for cash consideration of $1.5 million. Also during
1999, certain shareholders and others converted $863,000 of notes payable,
including a $500,000 convertible note payable, and $674,000 of accrued
liabilities into 1,590,000 shares of our common stock. During the six-month
period ended June 30, 2000, 814,000 shares of our common stock were sold to
various investors for $4.1 million and a $31,000 loan to us was converted into
6,000 shares of our common stock.

Our primary cash requirements have been to fund our research and development
efforts, capital expenditures and production costs. Net cash used in operating
activities was approximately $3.0 million, $2.4 million and $2.7 million for
1997, 1998 and 1999, respectively and $2.5 million for the six months ended
June 30, 2000. Net cash used in investing activities was $151,000, $15,000 and
$42,000 for 1997, 1998 and 1999, respectively, and $53,000 for the six months
ended June 30, 2000, and was primarily used for the purchase of property and
equipment.

As of December 31, 1998 and 1999 and June 30, 2000, we had loans with
shareholders aggregating $162,000, $157,000 and $80,000, respectively, at an
interest rate of 10% per annum. As of December 31, 1998 and 1999 and June 30,
2000, the related accrued interest amounts to $43,000, $31,000 and $5,000,
respectively. The shareholders had the option to convert these loans into our
common stock at $1 per share and, as of August 28, 2000 all of these loans had
been repaid or converted into shares of our common stock.

We intend to use the net proceeds of this offering for capital expenditures,
research and development, sales and marketing expenses, working capital and
general corporate purposes. We believe that our current cash balances and the
net proceeds from this offering, together with the proceeds of additional
investments by one of our shareholders immediately prior to this offering, will
provide us with sufficient capital to fund our operations for the next
24 months. There can be no assurance, however, that we will not require
additional financing to fund our operations and that, if required, any
additional financing will be available to us on acceptable terms.

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REORGANIZATION

On September 29, 2000, we entered into a reorganization agreement pursuant
to which we will consolidate our subsidiaries by merging them with and into us.
The ownership percentages of the shareholders of the individual entities prior
to the reorganization and of us after the reorganization will be the same, and
as a result, the reorganization will be accounted for similar to a pooling of
interests transaction. Accordingly, the historical basis in the assets and the
interests of the subsidiaries' investors will be retained and the statement of
operations will include the results of operations for us and our subsidiaries
for all periods presented.

In addition, the reorganization agreement provides that Sofinov has the
right to purchase an additional 2,178,000 shares of our common stock for
$10,890,000 in cash immediately prior to the closing of this offering. When
Sofinov purchases these shares immediately prior to the closing of this
offering, we will record a constructive dividend to Sofinov in the amount of the
difference between the offering price and the $5.00 per share price of Sofinov's
purchases.

MARKET RISK

We currently have no significant floating rate indebtedness, hold no
derivative instruments and do not earn income denominated in foreign currencies.
Accordingly, changes in interest rates do not generally have a direct effect on
our financial position. However, to the extent that changes in interest rates
and currency exchange rates affect general economic conditions, we would be
effected by such changes. All of our revenues are recognized in dollars and
almost all of our revenues are from customers in the United States. Therefore,
we do not believe we have any significant direct foreign currency exchange risk
and do not hedge against foreign currency exchange rate changes.

NEW ACCOUNTING PRONOUNCEMENTS

On March 3, 1999, the staff of the Securities and Exchange Commission issued
SEC Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, as amended on June 26, 2000. This bulletin provides guidance in
applying generally accepted accounting principles to revenue recognition in
financial statements. Adoption of this bulletin is required no later than the
fourth fiscal quarter of the fiscal year beginning after December 15, 1999. The
bulletin is not expected to have a material impact upon our financial
statements.

On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION--AND INTERPRETATION OF APB OPINION NO. 25 (FIN 44). This
interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. FIN 44 applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards and changes in grantee status that occur on
or after July 1, 2000, except for provisions related to repricings and the
definition of an employee which apply to awards issued December 15, 1998. The
provisions related to modifications to fixed stock option awards to a reload
feature are effective for awards modified after January 12, 2000. The new
interpretation is not expected to have a material impact upon our financial
statements.

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BUSINESS

OVERVIEW

We design and develop hydrogen fuel processors for fuel cell systems and
industrial hydrogen generators. Our on-site hydrogen generators can be used in
numerous industrial manufacturing applications and at hydrogen refueling
stations for fuel cell vehicles. The efficient and cost-effective production of
hydrogen is critical to the commercial introduction of fuel cell systems into
the mass transportation and stationary markets. Our goal is to be the leading
provider of hydrogen fuel processors by capitalizing on our patented UOB-TM-
technology for hydrogen production. Since 1993, we have completed substantial
field tests with industrial gas companies such as Gaz de France and Air Liquide
and have demonstrated our hydrogen processor for fuel cell systems to leading
fuel cell manufacturers such as Ballard Power Systems, Plug Power, H Power and
EnAble-TM-. We have also entered into contract discussions with Hydrogenics to
deliver commercial units for testing. We are in discussions with ZeTek Power and
others for the development of products that will meet their specific needs. We
delivered our first commercial industrial hydrogen generation systems in 1997
for field testing evaluation purposes. We used the feedback from these field
tests to further refine the industrial hydrogen generation systems for
additional field testing and for use in a test program installed at the SunLine
transit agency. We did not ship any commercial hydrogen generation systems in
the first six months of 2000 because the field test demonstrations were still in
process. We expect to deliver our first commercial fuel processors for fuel cell
systems by the end of 2000 for field testing purposes.

We believe that significant demand for fuel cells is being driven largely by
the increasing demand for electricity, particularly high quality and more
reliable electric power, deregulation of the electric power industry, and
increasing environmental concerns and regulation regarding conventional power
technologies. Market applications for fuel cells include systems used for
transportation applications and systems used to power residences, industrial and
commercial facilities, devices in remote locations and certain military
applications.

In the stationary fuel cell market, we are designing our initial products
for residential and small commercial market applications. In the transportation
market, we are developing on-board hydrogen processors for fuel cell vehicles
and other transportation market applications. In addition, we are developing
hydrogen generation systems that can be used at hydrogen refueling stations to
fuel municipal bus systems and other fleet vehicles. For example, as a
participant in a California Fuel Cell Project program, we have installed a
large-scale hydrogen generation system at the SunLine Transit Agency to fuel
buses powered by XCELLSIS The Fuel Cell Engine Company, an alliance among
DaimlerChrysler, Ford Motor Company and Ballard Power Systems. We received our
first revenues from this installation during the first quarter of 2000.

Our industrial on-site hydrogen generators, which we believe eliminate or
greatly reduce the cost, transportation and storage problems associated with
bulk-delivered hydrogen, have immediate commercial applications in numerous
industrial manufacturing markets, such as: metals, for heat treating and iron
reduction processes; electronics, for manufacturing integrated circuits and
semiconductors; and glass, for float glass production and manufacturing fiber
optics and automotive windshields.

OUR PRODUCTS AND OUR TECHNOLOGY

Our fuel processors and hydrogen generation systems are used to process or
"reform" hydrocarbon-based fuel to produce hydrogen. Reforming is a process by
which hydrocarbon-based fuels are converted into a hydrogen-rich gas stream.
There are several methods of fuel reforming.

- Partial oxidation, which is one type of reforming, involves the
introduction of oxygen to the hydrocarbon-based fuel in order to burn only
a portion of the fuel, thereby allowing the

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remaining fuel to be converted into hydrogen. The partial oxidation
process generates heat, which is also referred to as "thermal energy."

- Catalyzed partial oxidation is a type of partial oxidation that is
performed by introducing a catalyst to the fuel reforming process. A
catalyst is used in order to reduce the temperature at which the necessary
chemical reaction can efficiently occur. The catalyst achieves this by
presenting a solid surface upon which the chemical reaction can occur.

- Steam methane reforming is a type of reforming in which water, in the form
of steam, is introduced to the fuel reforming process in order to react
with the fuel to release hydrogen. Heat must be added to the steam methane
reforming process. A catalyst typically is used in steam methane reforming
to allow for the required chemical reaction to occur at a lower
temperature.

- Autothermal reforming utilizes a combination of catalyzed partial
oxidation and steam methane reforming so that the thermal environment of
the reforming process is self-sustaining, i.e., heat does not need to be
added or removed.

- Our patented UOB-TM- technology employs both autothermal reforming and
partial oxidation. The UOB-TM- also employs a preheating process that
recirculates heat generated by the gases leaving the primary reaction
chamber of the fuel processor back into the primary reaction chamber in
order to increase the efficiency of the fuel reforming process. When
compared to other currently available methods of producing hydrogen, we
believe that our technology is more efficient, lower in emissions and
lower in capital costs.

MARKET OPPORTUNITIES FOR OUR PRODUCTS

IMPORTANCE OF HYDROGEN FUEL PROCESSORS TO FUEL CELL SYSTEMS

A fuel cell is an electrochemical device that produces electricity from
hydrogen without combustion, with water and heat as the only by-products. Fuel
cell systems have several advantages over conventional power generation systems,
including lower emissions, higher fuel efficiency, quieter operation, lower
vibration and potentially lower maintenance and capital costs. These advantages
enable fuel cells to offer cleaner and more efficient alternatives to existing
power sources. The predominant types of fuel cells include alkaline fuel cells,
phosphoric acid fuel cells, molten carbonate fuel cells, solid oxide fuel cells
and proton exchange membrane fuel cells. These fuel cell types have different
operating characteristics and market applications. We are developing fuel
processors for proton exchange membrane fuel cells and solid oxide fuel cells.

[GRAPHIC]

Many fuel processor companies and fuel cell manufacturers, such as
Enable-TM-, are facing challenges in generating hydrogen in a more
cost-efficient manner and in a scaled-down fashion suitable for broad commercial
market applications. Other fuel cell manufacturers have developed fuel processor
technology but are finding that it may be significantly more cost-effective to
utilize our proprietary fuel processor technology. Accordingly, companies such
as Ballard are faced with making a

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decision as to whether it would be more efficient and economical to build their
own fuel-processing technology or buy technology from a third party like us. We
are in the process of demonstrating to these companies that we produce a
cost-effective, efficient and fuel-flexible fuel processor so that these
companies will incorporate our fuel processors into their units to produce a
more efficient and cost-effective fuel cell.

There are three major components to a fuel cell system: the fuel processor,
the fuel cell stack and the power conditioning equipment. We produce fuel
processors. The integration of these components into a unified system represents
about 10% of the cost of an entire fuel cell system. Moreover, the cost of the
fuel processor represents approximately 40% of the cost of producing the entire
fuel cell system. Accordingly, any significant cost reductions that are achieved
by manufacturers of fuel processors, such as our company, could provide
meaningful cost reductions in the completed fuel cell system. Such overall price
reductions should greatly assist a fuel cell manufacturer's ability to achieve
market penetration in what is likely to be a cost-competitive environment. The
major components of a fuel cell system and the cost breakdown are described
below:

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

System Cost Breakdown

<TABLE>
<CAPTION>
FUEL PROCESSOR 40%
<S> <C>
Stack 30%
Power Conditioning Equipment 20%
System Integration 10%
</TABLE>

Source: HBTI

Because a fuel cell system requires hydrogen in order to produce
electricity, a reliable source of hydrogen is critical to fuel cell
manufacturers and end-users. There is no established commercial hydrogen
delivery infrastructure for the transportation market, which we believe may
eventually prove to be the largest commercial market for fuel cells.
Furthermore, liquid hydrogen, one possible source of hydrogen that is currently
available, must be stored at extremely low temperatures, resulting in a
competitive disadvantage due to the high costs associated with such storage
requirements. By contrast, our hydrogen processing systems deliver hydrogen on
demand, at the required point of use and at the desired level of purity.
Therefore, we believe that hydrogen processors such as ours are an essential
component of fuel cell systems.

FUEL CELL MARKETS

We believe that a number of trends are focusing attention on the use of fuel
cells as an attractive alternative solution for power generation. As a result,
automotive companies, fuel cell developers, component suppliers and power
suppliers are investing substantially increasing amounts of capital in the
development of fuel cell systems, many of which incorporate fuel processors.

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Trends that will influence the penetration of fuel cells into broad
commercial markets include:

- Increasing demand for power, particularly for continuous and reliable
power, which is partially attributable to the proliferation of computers,
the Internet, communication networks and advanced electronic devices;

- Deregulation in the energy industry, which is likely to expand the market
for alternative power technologies;

- Operational efficiencies and other advantages of fuel cells over
traditional power technologies; and

- Environmental concerns regarding conventional power technologies,
including combustion-based power generation.

However, there are also a number of technical and logistical disadvantages
that present significant obstacles to the broad commercial application of fuel
cell technology, including:

- current fuel cell technology does not have the proven dependability that
many of the existing alternative technologies have in our target markets;

- the high manufacturing costs currently associated with fuel cell
production make many commercial applications in our target markets
prohibitively expensive;

- appropriate integration of current fuel cell systems into existing
conventional technology may be difficult; and

- fuels such as hydrogen are not as readily available as fuels such as
natural gas, propane, gasoline and methanol used in some of the
alternative technologies in our target markets.

STATIONARY FUEL CELL MARKET. Worldwide demand for electricity, particularly
for higher quality power, with smaller variations in voltage and current, and
more reliable power, with fewer interruptions, has been increasing rapidly in
recent years. This rapid increase is partially attributable to the proliferation
of computers, the Internet, communications networks and advanced electronics.
According to a 2000 issue of THE HUBER-MILLS POWER REPORT, electricity accounted
for approximately 25% of U.S. energy consumption in the mid 1970's, accounts for
approximately 37% of U.S. energy consumption today, and will account for more
than half of U.S. energy consumption early in the twenty-first century.
Traditional methods of delivering electric power are proving to be inadequate.
Grid power worldwide is regularly unreliable or inadequate and is simply
unavailable in many locations throughout the world. The Electric Power Research
Institute estimated that electric power reliability problems cost the U.S. more
than $50 billion annually. Fuel cells represent a cost-effective and efficient
alternative to meeting this increasing demand for electricity and high quality
power.

Moreover, increasing environmental concerns and deregulation in the electric
power industry in North America and elsewhere are also creating demand for
alternative power generation technologies such as fuel cells. Furthermore, power
suppliers and other energy providers are looking to implement decentralized or
distributed power generating solutions in order to avoid the high capital costs
of expanding and maintaining power transmission and distribution systems. Power
producers are also searching for methods to manage energy supply and demand more
efficiently by supplying power strategically to where it is used.

TRANSPORTATION FUEL CELL MARKET. In the transportation market, the United
States federal government, California and several other states (principally New
York, Massachusetts and Maine) have adopted or proposed laws and regulations
establishing vehicle emission standards and requirements for the sale,
commencing as early as 2003, of low, ultra-low, super ultra-low and zero
emission vehicles. Some of the regulations adopted by these states provide that
a significant percentage of the new vehicles sold in these states must meet
certain "zero emission" guidelines by 2003. Using currently available
technology, we believe that fuel cell powered vehicles are the best choice to
meet the

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performance requirements of consumers and the regulatory requirements for such
low emission vehicles and will provide competitive advantages over battery
powered and hybrid vehicles.

While environmental considerations provided the initial impetus for
automobile manufacturers to seek alternatives to the use of the internal
combustion engine, we believe that automobile manufacturers are beginning to
recognize that fuel cells offer an opportunity to deliver power that is more
attractive to a large segment of automobile consumers. Fuel cell powered
vehicles can provide consumers with higher fuel efficiency, lower noise and
vibration, enhanced passenger comfort and performance and new vehicle design
options and have the potential to provide a lower purchase price and maintenance
costs. As a result, automotive manufacturers are committing substantial
resources towards the development of fuel cell powered vehicles. In addition to
power generation for automobiles, there are other transportation market
applications for our fuel processors such as auxiliary power generation, rail
transport, bus, truck and heavy equipment applications.

INDUSTRIAL HYDROGEN MARKET

Hydrogen is a critical component in many manufacturing processes. According
to a 1998 report by SRI Consulting, an industrial consulting firm, demand for
hydrogen has been the fastest growing among industrial gases during the past
five years. SRI Consulting estimates that the demand for delivered hydrogen will
grow at an average annual rate of approximately 10 to 11% through 2001.

Hydrogen users range from oil refiners and ammonia manufacturers, which use
very large volumes, to microelectronics manufacturers, metals manufacturers and
scientific laboratories, which use relatively small volumes on an industrial
scale. Larger users usually produce their own hydrogen on-site using large-scale
steam methane reformers. Small- and medium-volume users, whose requirements do
not support the cost of steam methane reformers, have traditionally purchased
their hydrogen from industrial gas suppliers and distributors who deliver the
hydrogen by truck, with the hydrogen then stored in tanks, tubes or cylinders at
the user's site.

While bulk-delivered hydrogen is widespread, it is the most expensive way to
obtain hydrogen due to the high cost of packaging and delivery. The
inefficiencies of bulk-delivered hydrogen are reflected in the fact that the
compressed hydrogen gas cylinder weighs approximately 125 pounds but only
contains about 250 cubic feet of hydrogen gas that weighs just over one pound.
In addition to the high cost associated with cylinder-packaged hydrogen, there
are numerous safety concerns relating to current technology for over the road
delivery and storage of flammable hydrogen gas.

These cost and safety concerns are not unique to hydrogen. The industrial
gas industry has already implemented on-site gas generation technologies for
nitrogen and oxygen as a way of reducing cost and safety concerns for small- and
medium-volume users of these gases. However, economical on-site hydrogen
production has generally not been available for all but the largest volume
users. Our hydrogen generators are a completely integrated unit that we believe
will, both in the near term and for the foreseeable future, offer an attractive
on-site hydrogen generation solution by providing:

- Cost advantages due to eliminating delivery, transfer and storage expenses
once we are able to prove that we are a viable alternative to delivered
hydrogen;

- Increased safety by reducing the amount of potentially hazardous hydrogen
inventory stored at an end-user location; and

- More consistent hydrogen purity, due to eliminating the need to connect
and disconnect cylinders that contain hydrogen of varying levels of
purity, with the flexibility to adjust purity to the user's desired level.

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OUR STRATEGIC RELATIONSHIPS

We believe our strategic alliances with Visteon, Gaz de France and Engelhard
will provide us with the opportunity to expand our research and development,
increase marketing and distribution channels for our products, and enhance our
production and manufacturing capabilities more rapidly than without such
alliances.

RELATIONSHIP WITH VISTEON

In November of 2000, we entered into a series of agreements with Visteon
Corporation to obtain engineering support services and to form a product
manufacturing and a technology sharing and development alliance with respect to
the development and manufacture of our hydrogen fuel processors for proton
exchange membrane fuel cell applications. Visteon is the world's second largest
independent supplier of automotive systems, modules and components to global
vehicle manufacturers. In return for these services and as part of our alliance,
we will issue Visteon warrants, which will vest over a period of one year, to
purchase up to 5,476,886 shares of our common stock for a nominal exercise
price. The vesting of these warrants may be accelerated at Visteon's option if
we do not hire a specified number of technical staff.

With Visteon's assistance we intend to develop our own core competency to
implement optimal design and manufacturing processes to establish one of our
current facilities as a prototyping facility for the development, testing and
design of our hydrogen fuel cell processors, with the capability of
manufacturing approximately 1,000 to 2,000 units per year, and to achieve
independence as to product design, product development, and managing contract
manufacturing relationships to insure stability of supply for our customers.

Pursuant to a separate manufacturing services agreement, we have agreed that
Visteon will manufacture, assemble, and act as our purchasing agent for, all of
our fuel processors, parts and components for proton exchange membrane fuel cell
applications; provided Visteon's pricing remains competitive. Beyond exercising
a good-faith obligation, Visteon is not required to assemble our products,
except on standards it deems commercially acceptable. We have also entered into
a separate joint development agreement with Visteon to share each others
technology for the purpose of improving the design and manufacturing technology
related to our hydrogen fuel cell processors. We believe that our relationship
with Visteon will significantly accelerate our efforts to achieve large-scale
commercial production of our hydrogen fuel processors and permit us to produce
higher quality and more cost-efficient products.

Assuming the exercise by Visteon of the warrants for all of the 5,476,886
shares of our common stock, which will vest one year after the offering, and
Visteon's previous purchase of 400,000 shares of our common stock in June of
2000, Visteon would own approximately 17.3% of our common stock after giving
effect to the offering.

RELATIONSHIP WITH GAZ DE FRANCE

On July 13, 2000, we entered into a five-year agreement with one of the
leading natural gas suppliers and distributors in the world, Gaz de France,
under which Gaz de France became the exclusive distributor of our hydrogen
generating systems for industrial use and refueling stations in the European
Union, Norway and Switzerland. This distribution agreement includes an annual
take-or-pay requirement equal to one-half of the agreed upon minimum purchase
quota. For 2001, the minimum purchase quota is eight units of our industrial
hydrogen generation systems. Gaz de France's minimum purchase quota and
resulting take-or-pay requirement are determined annually based on our projected
number of domestic sales for the ensuing year, but the minimum purchase quota
and the take-or-pay requirement may be adjusted up or down, if our actual
domestic sales differ from our projected sales for any given 12-month period.
For example, if our projected domestic sales are for 10 units, but we actually
sell 12 units, then we will adjust Gaz de France's current minimum purchase
quota of eight

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<PAGE>

units proportionately upward by 20%, which, when rounded, would result in a new
minimum purchase quota of 10 units. Accordingly, in this example, the
take-or-pay requirement would be for five units, and Gaz de France would be
required to submit a firm purchase order for the full price of all five units.
If Gaz de France fails to meet its annual take-or-pay requirement, we may
terminate this agreement upon giving Gaz de France an additional 12 months to
fulfill its obligations under the firm purchase order. In addition, either of us
may terminate the distribution agreement upon the occurrence of a material
default that remains uncured for more than 90 days or upon the initiation of any
bankruptcy proceedings by or against the other party that is not dismissed
within 60 days after the filing of the petition.

We plan to develop enhanced hydrogen generation systems and conduct related
research together with Gaz de France. Assuming the exercise of the warrant
issued under the distribution agreement, a wholly owned subsidiary of Gaz de
France will own approximately 6.0% of our common stock, after giving effect to
the offering.

RELATIONSHIP WITH ENGELHARD

Effective January 19, 1999, we entered into an agreement with Engelhard
Corporation, the world's largest catalyst supplier, to develop and commercialize
a hydrogen fuel processing system by combining Engelhard's proprietary catalyst
technology with our proprietary fuel processor-related technology, specifically
for residential and small stationary fuel cell systems applications. This joint
development agreement also contemplates further development activities between
our companies.

We and Engelhard have royalty-free access to each other's patents and
technology for products produced prior to the end of 2001. All patents and
technology jointly developed will be jointly owned and both parties have an
exclusive right to use the jointly owned patents and technology through the end
of 2004. Either party may terminate this agreement upon 90 days' notice, in
which case the rights to jointly owned patents and technology will not be
exclusive and we must negotiate a royalty-based license for each other's solely
owned patents and technology. If Engelhard terminates our agreement, it must
provide us royalty-free access to its solely owned patents and technology for
production of our first 100 stationary fuel processors and must enter into good
faith negotiations with us for a royalty-based license of its patents and
technology so that we can produce additional processors.

OUR STRATEGY

Our goal is to be the world's leading developer and producer of hydrogen
fuel processors used in fuel cell systems and on-site hydrogen generators used
in industrial applications. Therefore, in the pursuit of this market, we are
working to develop fuel cell related products that will meet the demands of
industry and our customers. By utilizing our intellectual property, we intend to
be able to address a variety of near and long-term markets. We seek to provide
fuel-flexible, cost-effective, environmentally friendly and highly efficient
products as an enabling technology to fuel cell markets. By providing the best
combination of performance and price, we aim to be the fuel processor supplier
of choice for fuel cell manufacturers. To achieve our objectives, we have
implemented the following strategies:

DESIGN AND DEVELOP SUPERIOR PRODUCTS FOR FUEL CELL MARKETS. Our technology
and products have the potential to be utilized in multiple applications across
several different industries. We are designing and developing proprietary
hydrogen processors for proton exchange membrane fuel cell systems that will be
used to power vehicles, residences, industrial and commercial facilities,
devices at remote locations and certain military applications. In addition, we
are also developing a solid oxide fuel cell fuel processor. Because of the
higher heat by-product, solid oxide fuel cells can be used for residential and
other stationary applications and may prove to be a superior technology for
these markets in the future.

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CAPITALIZE ON IMMEDIATE COMMERCIAL MARKETS FOR ON-SITE HYDROGEN GENERATION
SYSTEMS. We believe that our hydrogen generation systems significantly reduce
the cost, logistical, safety and regulatory problems associated with
bulk-delivered hydrogen and have immediate applications in numerous industrial
manufacturing markets such as metals for heat treating and iron reduction
processes and electronics for manufacturing integrated circuits and
semiconductors. We commenced delivery of commercial on-site hydrogen generation
systems in 1997 for field testing purposes. We used feedback from these field
tests to refine our commercial hydrogen generation systems. We continue to field
test these systems and expect to deliver our first commercial fuel processors
for fuel cell systems by the end of 2000. Sales of these systems should also
help to support our development efforts of hydrogen processors for fuel cells.

BUILD ON RELATIONSHIPS WITH FUEL CELL MANUFACTURERS. We have existing
commercial relationships with Ballard Power Systems, Plug Power, H Power, and
EnAble-TM- as indicated:

- We have leased a complete natural gas fuel cell processing subsystem to
Ballard for internal evaluation.

- Plug Power purchased two fuel-processing units from us in February of
1999. In June of 2000, we entered into a design agreement and purchase
order with Plug Power for a propane gas fuel processing system.

- We have delivered one fuel-processing system and are scheduled to deliver
an additional four fuel processing systems to H Power pursuant to a
purchase order executed in September of 2000.

- In June of 2000 we executed a purchase order with EnAble-TM- for the
delivery of five fuel processing systems to be tested in locations
worldwide with a follow-on commitment for an additional 100 units if the
tests are successful.

We intend to be the provider of choice of hydrogen fuel processors to all of
the leading fuel cell system manufacturers. Furthermore, we seek to continue to
enter into additional relationships with other fuel cell system manufacturers to
reach new areas of application, such as cable and telecommunications,
recreational and marine vehicles and military applications.

BENEFIT FROM STRATEGIC ALLIANCES AND SEEK NEW PARTNERS. We believe that our
strategic alliances with Gaz de France, Engelhard and Visteon, and other
potential alliances will aid us in achieving our goal of becoming the world's
leading producer of hydrogen processors for fuel cell systems and on-site
hydrogen generation systems. We will continue to seek out additional strategic
arrangements in order to enhance research and development, expand our marketing
and distribution channels and ensure high quality manufacturing and service on
an international level.

CONTINUE TO REDUCE COSTS. We plan to continue to focus on reducing costs of
our fuel processors and hydrogen generators by efficiently combining our
patented technology with existing commercial technologies. We plan to improve
product performance and reduce production costs through the implementation of
new technologies, such as microprocessor controllers, advanced catalysts and
miniaturized components. We also expect significant labor efficiencies as
economies of scale in production are achieved. Moreover, we believe that our
expected relationship with Visteon will allow us to reduce production costs
significantly and achieve rapid commercialization of our products with reduced
risk.

CONTINUE TECHNOLOGICAL ADVANCEMENTS. We are continuing and expanding our
research and development of hydrogen processing technology to achieve
technological advancements and establish our technological leadership in our
target markets, improve existing products and position us to develop
technologies and products for other market applications. We have patents pending
and patents in preparation that will protect our intellectual property. We will
also aggressively protect our trade secrets.

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ACQUIRE AND LICENSE COMPLEMENTARY TECHNOLOGIES. We intend to evaluate
acquiring and licensing complementary technologies that can potentially
accelerate our development and market penetration of our products.

CONTINUE TO DEVELOP STRONG RELATIONSHIPS WITH GOVERNMENT AND OTHER
NON-PROFIT ORGANIZATIONS. We have relationships with various state and federal
governmental agencies and are also involved in several hydrogen and
environmentally conscious organizations. We believe that these relationships
will contribute to widespread acceptance of our technology in our target
markets. For example:

- We have nearly completed a testing program for a liquid fuels fuel cell
processor with the United States Department of Energy;

- Through our installation at the SunLine refueling station, we are
extensively involved with the California Air Resource's Board Innovative
Clean Air Technologies Program; and

- In conjunction with our relationship with the South Coast Air Quality
Management District, we are developing the technical and commercial
viability of a landfill gas methanol reformer.

We have entered into these tests, contracts and programs because they
complement our current target markets and provide leverage on our path to
commercial production of our base technology. We believe that our participation
in these tests, contracts and programs provide us with invaluable field test
experience on our designs and that they will lead to other types of state and
federal contracts involving hydrogen generation.

OUR COMPETITIVE ADVANTAGES

We believe that the following competitive advantages have established us as
a leader in the design and development of hydrogen fuel processors used in fuel
cell systems as well as on-site hydrogen generators:

TECHNOLOGICAL ADVANCEMENTS. Our customer base has recognized us as an
innovative designer of hydrogen processors for fuel cell systems and on-site
hydrogen generation systems. We believe that, in comparison to other currently
available methods of producing hydrogen, our patented UOB-TM- technology for
hydrogen generation provides higher efficiency, lower emissions, decreased
capital costs, and increased safety and reliability, while affording greater
fuel flexibility. In addition, our products utilize a fast and efficient
preheating process and can be scaled to operate in a variety of applications. We
provide our customers with a complete, packaged subsystem that has integrated
controls in order to meet their commercial needs and we plan to continue to make
improvements upon our existing designs in order to make our products more
attractive to a broader spectrum of customers. However, we will continue to face
significant competition from companies that will also be expending significant
resources to refine existing technology and develop new technologies that will
compete with our products in the marketplace. If any of our competitors produces
a new, technologically superior product and we are unable to meet or exceed the
performance specifications of such a new product, we could experience a loss of
market share and a failure to achieve acceptance of our products.

FUEL-FLEXIBLE PRODUCTS. Our products can utilize a broad range of readily
available fuels, including natural gas, propane, gasoline, diesel and other
hydrocarbons. One of the advantages of our fuel-flexible technology is that, as
the price of any particular fuel feedstock rises or as that fuel feedstock
becomes difficult to obtain, our customers can switch to a relatively lower-cost
or more readily available fuel feedstock for use in generating hydrogen without
any design changes to the fuel processor. We believe that we are one of the few
companies to offer such a fuel-flexible solution, thereby allowing our
technology to be used in a greater variety of applications than that of our
competitors. If any of our competitors are able, at some future date, to produce
similar or superior quality fuel-flexible fuel processors, we will lose our
advantage over any such competitors and we could experience a loss of market
share for our products.

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<PAGE>

SUCCESSFUL FIELD TESTING AND PRODUCT DEMONSTRATIONS. Since 1993, we have
logged over 30,000 hours of operations with our on-site hydrogen generation
systems. We have demonstrated our hydrogen processor for fuel cell systems to
leading fuel cell manufacturers such as Ballard Power Systems, Plug Power,
H Power and EnAble-TM-. Given that both our on-site hydrogen generation systems
and our hydrogen processors for fuel cells employ our patented UOB-TM-
technology, this extensive experience from field testing and product
demonstrations positions us as one of the more experienced designers of hydrogen
processors. We have been selected as one of two participants in a California
Fuel Cell Project program, where we have installed a large-scale hydrogen
generation system at the SunLine Transit Agency that will be used as a hydrogen
refueling station for buses powered by XCELLSIS The Fuel Cell Engine Company, an
alliance among DaimlerChrysler, Ford Motor Company and Ballard Power Systems.
Although we have had successful field tests of our products for a number of
customers, there can be no guarantee that extended use of our products under a
variety of conditions will not reveal performance problems that did not become
evident in such field tests. Depending on the nature and severity of any such
performance problems, and our ability to address and correct such problems, the
acceptance of our products could suffer if they do not consistently meet
performance expectations.

KEY ALLIANCE PARTNERS. We believe that our strategic partnerships will
provide us with significant competitive advantages. Our relationship with Gaz de
France provides access to major distribution channels as well as critical input
relating to technological advancements of our products. Our relationship with
Engelhard provides us a joint development partner with the most widely accepted
catalysts, which are a key component of fuel cell systems. In addition, we
believe that our relationship with Visteon will significantly accelerate our
efforts to achieve large-scale production of our hydrogen fuel processors for
fuel cell systems. Other than our relationship with Visteon, and with Gaz de
France, as it relates to Western Europe, our present relationships with
strategic alliance partners do not prevent us from entering into similar
arrangements with other strategic partners. However, we do not have experience
manufacturing our products on a large-scale commercial basis. We are relying on
Visteon, initially, to provide technical support and expertise for the
manufacture of our hydrogen processors for fuel cells and also to provide us
with assistance and training to develop our own manufacturing processes.
Accordingly, the premature termination of our relationship with Visteon or the
failure of Visteon to perform under our agreements will have a material adverse
effect on our ability to achieve commercial production of our hydrogen processor
for fuel cells in a timely fashion. Similarly, should our joint development
agreement with Engelhard or our exclusive distribution agreement with Gaz de
France prematurely terminate, our ability to succeed in our target market areas
will be materially adversely effected.

INTELLECTUAL PROPERTY. We have either obtained or filed patents covering
many of the technological advancements that make our UOB-TM- technology unique.
These advancements include the burner, the mixing injectors, combustion chamber
configurations, the internal preheat heat exchanger arrangements, and advanced
shift reactor designs. We currently hold ten U.S. patents and numerous foreign
patents. We have also filed for six additional patents in the United States.
Moreover, we have also applied to protect our patents outside of the United
States to cover advancements for which we have already obtained patents in the
United States or for which we have filed for patents in the United States.

STRONG MANAGEMENT TEAM. We believe that we have a strong management team
with the vision, experience and skills necessary to enable us to achieve our
objectives. Our founder, Chairman, President and Chief Executive Officer, David
Moard, has considerable experience in research, development, manufacturing and
operations in energy-related companies. Our co-founder and a contributing member
of our scientific advisory panel for research and development, Leonard Greiner,
is an internationally recognized expert in fuels and propellants with more than
thirty years of experience in a wide variety of energy-related fields. In
addition to the experience of our executive officers, our engineering and
manufacturing employees have 120 years and 250 years, respectively, of combined
industry experience as a group. However, if we are unable to retain our
management personnel or our key engineering and manufacturing employees, it may
be difficult, or impossible, to replace such individuals with other employees
that have a similarly high level of experience and skills.

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<PAGE>
OUR PRODUCTS AND CUSTOMERS

Our products provide an efficient and cost-effective way to generate
hydrogen. Our UOB-TM- technology allows for hydrogen gas generation using
readily available inputs such as electricity, natural gas, and water. Our
industrial hydrogen generation systems have historically produced a very large
percentage of our revenues but our hydrogen processor for fuel cells has
recently produced an increased percentage of our revenues. In 1997 and 1998, 98%
and 100%, respectively, all of our revenues were derived from our industrial
hydrogen generation systems. By contrast, in 1999, 33% of our revenues were
derived from our industrial hydrogen generation systems and the remaining 67%
percent of our revenues were derived from hydrogen processors for fuel cell
systems.

HYDROGEN PROCESSORS FOR FUEL CELL MARKETS

We are currently focused on three primary fuel cell product lines:

- Stationary fuel processing products for residential and commercial fuel
cell systems;

- On-board fuel processors for transportation fuel cell applications; and

- Hydrogen generation systems for refueling stations for bus systems and
other fleet vehicles.

The following table sets forth our products for the fuel cell markets and
describes their respective applications, target markets and development status:

<TABLE>
<CAPTION>
PRODUCT APPLICATION TARGET MARKET STATUS
<C> <S> <C> <C>

Fuel cell power system Residential homes and - Commercial units in
STATIONARY FUEL using existing fuel commercial buildings; production
PROCESSOR delivery remote locations and
(Less than 25kw) infrastructures (e.g., military
natural gas, propane)

ON-BOARD FUEL PROCESSOR Transportation fuel Transportation - Prototypes in
(50-100 kw) cell systems (on-board (automobiles, buses, development for
and or stand-by power) light trucks) multiple fuel types,
(2.5kw auxiliary power including diesel
unit) - Sacramento Municipal
Utility District bus
program being
conducted

Hydrogen refueling Transportation - Unit installed at
station. Utilizes (filling stations for SunLine Transit
REFUELING STATION natural gas feedstock mobile applications) Agency
4200 SCFH to produce hydrogen
for fuel cell
transport market.
</TABLE>

Our stationary fuel processor can be used as the hydrogen processor in fuel
cell applications that require less than 25 kilowatts of power output. These
applications include residential homes and small commercial buildings in which
our stationary fuel processor supplies hydrogen to fuel cells that can be used
to provide electricity, heat and hot water. Other fuel cell applications for our
stationary fuel processors include the generation of electrical power for remote
locations and military uses in which a fuel cell serves as either the primary
power source or as a back-up power generator.

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<PAGE>

Our on-board fuel processor can be used as the hydrogen processor in
transportation fuel cell applications in which approximately 50 to 100 kilowatts
of power output are required as the primary power source for an automobile, bus
or light truck. Our on-board fuel processor can also be used in transportation
fuel cell applications in which approximately 2.5 kilowatts of power are needed,
such as an auxiliary power unit.

Our hydrogen refueling station can be used as a hydrogen filling station for
transportation applications because it is a larger-scale unit that processes a
greater volume of hydrogen gas in a relatively short period of time. Thus it can
be used in transportation applications including the fueling of fleets of
fuel-cell powered vehicles such as municipal buses.

We have development and purchase contracts with several of the leading
manufacturers of fuel cells and with other power suppliers, which contracts
provide for delivery of commercial models of our hydrogen processor for fuel
cells for testing prior to delivery of production quantities. For example,
Ballard Power Systems, EnAble-TM-, Plug Power and H Power are each testing one
of our fuel processors. Each of these companies is also currently testing fuel
processors of certain of our competitors. In addition, we will deliver four more
units to EnAble-TM- and EnAble-TM- has a follow-on purchase commitment for an
additional 100 units if our tests are successful. We are scheduled to begin
delivery of these additional units by the end of 2000. We have also entered into
contract negotiations with Hydrogenics for delivery of fuel processors for
testing. We are in discussions with ZeTek Power and others for the development
of products that will meet their specific needs. In addition, SunLine Transit
Agency, FIBA Technologies, Inc. and Ballard Power Systems have formed a venture
to operate hydrogen-based fuel cell systems on a municipal bus system in Palm
Desert, California and we believe that our currently installed 4200 SCFH system
will form the core of their hydrogen refueling station because the 4200 SCFH
Unit provides the appropriate scale in terms of capacity of output in comparison
to units produced by our competitors. The 4200 SCFH is also well suited to this
application because it is capable of refueling a large number of vehicles in a
single day and has demonstrated its general reliability in successful field
tests in other applications.

Although we have made significant progress in designing, developing and
testing hydrogen processors for fuel cells, we still face several significant
developmental hurdles to producing a commercially viable hydrogen processor for
fuel cells. For example, we need to better address the challenges of processing
liquid fuels such as diesel, gasoline and gasahol. Specifically, we need to
manage the vaporization of such liquid fuels in our fuel processor and reduce
the impact of the relatively high sulphur concentrations that are present in
such fuels. In addition, in order to make our hydrogen processor for fuel cells
a viable commercial solution for on-board transportation applications, our
product must produce relatively low vibrations, while managing the different
load cycles and changes in operating environment that frequently occur in such
transportation applications. At the same time, we must also reduce the size and
weight of our hydrogen processor for fuel cells so that it can be installed in a
variety of vehicles in order to achieve broad commercialization of the product.

INDUSTRIAL HYDROGEN GENERATION SYSTEMS

We are currently focused on three primary industrial hydrogen generation
product lines:

- 600 standard cubic feet per hour (SCFH) hydrogen generation product for
commercial applications as an alternative to bulk-delivered hydrogen;

- 4,200 standard cubic feet per hour (SCFH) hydrogen generation product for
larger-scale industrial applications as an alternative to bulk-delivered
hydrogen; and

- 15,000 standard cubic feet per hour (SCFH) hydrogen generation product for
very large industrial facilities requiring on-site hydrogen generation.

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<PAGE>
The following table sets forth our products for industrial hydrogen
generation and describes their respective target markets and development status:

<TABLE>
<CAPTION>
PRODUCT TARGET MARKET STATUS
<S> <C> <C>
600 SCFH Semiconductor, microelectronics, - Commercial units delivered; over
scientific laboratories, power plant 10,000 hours of in-field service
cooling, specialty gas
4200 SCFH Glass, hydrogenation, oil recycling, - Commercial units delivered; over
tertiary oil recovery, metals, primary 1,000 hours of commercial operating
steel reduction, heat treating experience
15000 SCFH and larger Very large industrial facilities, - In development
requiring on-site hydrogen generation
such as metals, chemicals and
petrochemicals
</TABLE>

We are in discussions with Air Products and Chemicals, Inc., AGA of Sweden,
and Air Liquide for the sale of our on-site hydrogen generation systems. In
addition, Gaz de France is currently testing our 4200 SCFH unit as part of our
exclusive European distribution arrangement for industrial hydrogen generation
systems.

We have made significant progress in designing, developing and testing our
industrial hydrogen generation systems, especially for small and medium scale
applications. However, we face at least one major developmental hurdle to
producing a commercially viable industrial hydrogen generation system.
Specifically, we need to achieve a more complete integration of the autothermal
reforming process into our industrial gas production system so that this
combination of catalyzed partial oxidation and steam methane reforming will
consistently maintain the desired self-sustaining thermal environment at higher
pressures, with greater capacity and at varying levels of hydrogen purity. This
integration of autothermal reforming must be achieved without a material adverse
effect on the equipment that is being fueled by our hydrogen processor.

We continue to seek additional applications for our products in various
markets. For example, we are currently under contract with the South Coast Air
Quality Management District in California in order to determine the efficiency
of our on-site hydrogen generators to produce hydrogen from "simulated" landfill
gas. In connection with this program, we have entered into a memorandum of
understanding with DTE Biomass Energy, a wholly-owned subsidiary of DTE Energy,
a large electrical utility, in order to investigate the feasibility and economic
viability of reforming landfill gas to produce hydrogen for sale as either a
chemical or a fuel. DTE Biomass Energy is considering a demonstration program
that will utilize one of our units at a landfill at which DTE Biomass Energy has
the gas rights. If such a product is technically successful and economically
viable, the potential for a significant new market may exist for us. However,
there is no assurance that we will be able to successfully penetrate these new
markets. To date, we have not committed any substantial resources nor have we
entered into any material financial commitments relating to these new markets.

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<PAGE>
MILESTONES

HYDROGEN PROCESSORS FOR FUEL CELL SYSTEMS

To date, we have achieved the following major milestones in the development
and commercialization of our hydrogen processor for fuel cells:

<TABLE>
<CAPTION>
YEAR MILESTONE
---- ---------
<C> <S>
1995 - Completed successful preliminary UOB-TM- fuel processor
evaluation with one of the leading U.S.-based
multinational oil companies.

1996 - Delivered a small transportation prototype using UOB-TM-
design to operate on liquid fuels, such as diesel and
gasoline, to Aerojet and the Department of Defense.

1997 - Prepared preliminary design for the advanced Fuel Flexible
Fuel Processor (F(3)P) for automobiles as a prime
contractor to the Department of Energy in cooperation
with the Partnership for New Generation Vehicles.

1998 - Completed design and manufacture of the F(3)P.

- Completed the design of our 50kw fuel processor under a
contract with the Department of Energy in cooperation
with the Partnership for New Generation Vehicles.

- Successfully designed and delivered to H Power a
multi-fuel prototype fuel processor.

1999 - Entered into our strategic alliance with Engelhard for the
joint development of fuel processor subsystems.

- Delivered initial evaluation residential unit to customer
with satisfactory results.

2000 - Entered into a strategic alliance with Visteon for
contract manufacturing services.
</TABLE>

INDUSTRIAL HYDROGEN GENERATION SYSTEMS

To date, we have achieved the following major milestones in the development
and commercialization of our industrial hydrogen generation systems:

<TABLE>
<CAPTION>
YEAR MILESTONE
---- ---------
<C> <S>
1993 - Delivered prototype hydrogen generator under contract with
Southern California Gas Company for use by the
California Polytechnic University Pomona.

1995 - Demonstrated UOB-TM- and hydrogen generation system for
the electronics industries with Teledyne Brown
Engineering and Bend Research at their research center.

1996 - Fabricated and delivered a complete industrial on-site
hydrogen generation system for initial field tests.

- Began UOB-TM- hydrogen generation system product sales to
BOC Gases and MG Industries for on-site applications.

- Demonstrated UOB-TM- fuel flexibility by using propane as
a feedstock for on-site hydrogen generation.

1997 - Shipped our first commercial units to BOC, Air Products
and American Air Gas for field testing.

2000 - Achieved 10,000 hours of in-field commercial operation for
one of our 600 SCFH units.

- Entered into our strategic alliance with Gaz de France for
distribution of our industrial hydrogen generators in
Europe.
</TABLE>

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<PAGE>
OUR TECHNOLOGY

THE UNDER-OXIDIZED BURNER--UOB-TM-

The heart of our fuel processors for fuel cells and on-site hydrogen
generating systems is the UOB-TM-. Through a unique patented burner design and a
reactor vessel configuration, we are able to reform hydrocarbon feedstock into
the basic chemical constituents of hydrogen, carbon monoxide, carbon dioxide,
and water vapor. In comparison to other available methods for producing
hydrogen, our technology:

- is more cost-effective;

- integrates well with fuel cell systems;

- is more energy efficient than electrolysis and steam methane reforming;

- quickly produces a reliable flow of hydrogen gas to the user;

- maximizes the production of hydrogen at the desired purity level; and

- provides scalability for a variety of commercial applications.

The UOB-TM- is fed a hydrocarbon feedstock (typically, natural gas), an
oxidant (typically, air), and steam. The UOB-TM- process first preheats these
gases, which are then mixed and ignited, allowing the product to reach
equilibrium compositions of hydrogen and carbon monoxide. As the exhaust gases
travel through the UOB-TM-, they pass through an internal heat transfer
compartment, which lowers the gas temperature, but more importantly, raises the
inlet air and fuel gas temperatures. This unique internal heat recovery system
helps reduce the capital cost by minimizing the number of containment vessels
that are needed to produce the desired hydrogen. By controlling the air-to-gas
ratio, steam-to-gas ratio and the pre-combustion mixing of air and feedstocks, a
partial oxidation reaction takes place. A fraction of the feedstock is combusted
to generate the heat necessary to process the remaining fuel into hydrogen and a
relatively small portion of other gases. The UOB-TM- process includes either a
non-catalyzed partial oxidation process or a catalyzed autothermal reform
process. The UOB-TM- combustion process takes place at temperatures as high as
2800 DEG.F. This temperature leads to a very thorough reaction of the
feedstocks, resulting in conversion efficiencies over 97%, with little
non-reacted fuel. The output of the UOB-TM- combustion process is a mixed gas
stream that consists of hydrogen, nitrogen, carbon monoxide, carbon dioxide,
water vapor and trace gases, such as argon, which are then further processed
based upon the specific application.

OUR FUEL PROCESSORS FOR FUEL CELLS

Our fuel processor for fuel cell applications utilizes our UOB-TM-
technology to convert fuels into a hydrogen rich mixed gas stream, which is fed
directly to the fuel cell to generate electricity. Our fuel processors integrate
a number of chemical processes in order to produce the required hydrogen-rich
gas. In addition to the key process of producing hydrogen from the hydrocarbon
fuel, our fuel processors also perform a variety of other important functions,
including reducing the temperature, carbon monoxide levels and contaminants in
the product gas in order to satisfy the stringent requirements for successful
operation of a proton exchange membrane fuel cell. Strict control of the entire
process is also necessary in order to ensure that the proper composition of
hydrogen-rich gas is produced. To accomplish this, we employ advanced control
software and systems. The following is a diagram of our fuel processor for fuel
cells.

We are also developing a fuel processor for solid oxide fuel cells. The
solid oxide fuel cell differs from the proton exchange membrane fuel cell in
that it is better suited for continuous operation applications, has a longer
life, lower cost of materials, has a 25% higher electrical efficiency and
requires no catalysts. Because of the higher heat by-product, solid oxide fuel
cell systems are primarily

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<PAGE>

for residential and other stationary uses, and may prove to be an excellent
technology for applications involving co-generation of power. The solid oxide
fuel cell is an efficient fuel cell for such markets because, in addition to
producing electricity, the heat by-product of the solid oxide fuel cell can also
be used to drive cooling and heating appliances, including steam generation to
heat air and water in such applications. We are committed to developing fuel
processing technologies for a variety of fuel cell systems, including solid
oxide fuel cells, in order to meet the varied demands of different types of fuel
cells.

OUR INDUSTRIAL HYDROGEN GENERATION SYSTEMS

Our patented UOB-TM- technology is used in our industrial hydrogen
generation systems to convert hydrocarbon feedstocks into pure hydrogen gas and
other basic chemical components. Our industrial hydrogen generation systems use
hydrocarbon feedstocks, such as natural gas, that are readily available through
existing infrastructures. Due to its relatively simple design and low capital
costs, we believe that our UOB-TM- technology is a superior alternative to other
on-site production and distribution methods of supply for hydrogen, by providing
the customer the ability to produce hydrogen on-site and as required. The
following is a diagram of our UOB-TM- technology:

[GRAPHIC]

Our industrial hydrogen generation system first converts hydrocarbon fuel
into a mixed gas stream. The mixed gas stream then enters the purification
process and produces the desired purity level up to 99.9999% quality hydrogen.
Our industrial hydrogen generation systems are created as modular units that are
mounted on metal skids so that the system can easily be installed outside of an
industrial facility at minimum cost. Electricity is used to compress process
feedstock (fuel, air, and water) to provide for hydrogen product gas at the
customer's normal supply pressure. We use industrial instrumentation and
controls to provide durability and reliability. Simplified equipment
integration, packaging and assembly is achieved through the use of a separate
coded vessel. Our system purifies the hydrogen using an advanced pressure swing
adsorption process. Pressure swing adsorption is a process for purifying
hydrogen from a gas stream that contains a mixture of hydrogen and other gases.
The adsorption process utilizes the fact that hydrogen gas molecules are smaller
and thus travel unimpeded through the adsorbent material. By contrast, the other
gas molecules are larger so that they adhere to and are thereby slowed down by
the adsorbent material. By pressurizing and depressurizing the chamber through
which the mixed gas stream flows, the faster moving pure hydrogen gas can be
extracted from the chamber outlet. The balance of the mixed gasses is exhausted
from the intake of the chamber during the depressurization stage. We have also
implemented an automatic controller that provides safe operation with remote
diagnostics and monitoring, in order to maximize system reliability and enhance
our field support of customer needs.

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<PAGE>
MANUFACTURING AND FACILITIES

Our current research and development facility includes 15,259 square feet of
office, manufacturing and test facilities. We have recently acquired a 55,000
square foot facility, which should meet our near-term production and prototype
manufacturing needs.

We are in the process of expanding our manufacturing capacity in order to
meet the needs of our expanding operations and the commercialization of our
products. In addition, pursuant to our manufacturing services agreement with
Visteon, we believe Visteon will be our principle contract manufacturer for
hydrogen processors for fuel cell applications. Our expanded capacity and our
relationship with Visteon will enable us to satisfy larger volume sales demand
that cannot be met by our existing manufacturing capacity. It is anticipated
that small production runs of custom or low volume products may continue to be
produced at our current facilities.

The manufacturing capacity of our present facility is adequate for our
near-term projected industrial hydrogen generation system sales. As the market
for our industrial gas products grows, we will need to further expand our
production facilities. We are currently exploring options such as joint
manufacturing agreements, outsourcing and the acquisition or lease of existing
acceptable manufacturing facilities, to achieve commercialization on a timely
basis while minimizing cost.

SALES AND MARKETING

STATIONARY FUEL CELL MARKETS

We plan to sell our hydrogen processors for fuel cell systems through our
internal sales force to original equipment manufacturers and fuel cell
manufacturers. Our latest generation of fuel processing products will serve as
the foundation for future commercial units through a steady progression in
performance, size, operability and customization of stationary fuel cell
systems.

TRANSPORTATION FUEL CELL MARKETS

We plan to sell our hydrogen processors to the automotive manufacturing
industry, other segments of the transportation industry and fuel cell
manufacturers through our internal sales force. Lightweight, durable,
liquid-fueled hydrogen processors must be developed to meet the future demands
of fuel cell vehicle manufacturers. By capitalizing on our experience in
stationary fuel processing systems, we plan to introduce an advanced,
liquid-fueled, on-board hydrogen processor for our customers. We will continue
to develop and enhance our products by maintaining and expanding our current
relationships with automotive manufacturers in the development of a
liquid-fueled testing program.

INDUSTRIAL ON-SITE HYDROGEN GENERATION MARKETS

Our preliminary strategy for our on-site hydrogen generation business is to
capitalize on our market penetration within merchant gas companies. Our next
step is to target early adopters of our on-site generation technology, which are
being identified by focusing our sales and marketing effort on gas distributors
in the United States and chemical manufacturing companies in Europe. Through our
alliance with Gaz de France, we have established a major distribution channel in
Europe, and are currently seeking to establish distribution channels in North
America, Asia and South America. We are also taking steps to establish strategic
commercial partnerships with equipment manufacturers who are well established in
their respective markets. These strategic partners will have the potential to
expand their products and services portfolio into the industrial gas industry by
utilizing our systems.

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<PAGE>
COMPETITION

The market for our products is highly competitive and is changing rapidly.
The principal bases of competition are system reliability, availability, cost
(including initial cost and total cost of ownership), and customer endorsement
and brand recognition.

FUEL PROCESSORS FOR FUEL CELLS

Our fuel processors for fuel cell systems compete with products produced by
companies such as Harvest Technologies, Idatech, International Fuel Cells, a
division of United Technologies, Johnson Matthey Incorporated, Mitsubishi and
Nuvera Fuel Cells.

INDUSTRIAL HYDROGEN GENERATION SYSTEMS

Our industrial hydrogen generation systems compete with products produced by
companies such as Air Liquide, Air Products and Chemicals, Linde and Praxair.
Other companies, such as Electrolyser, Norsk Hydro, Teledyne-Brown, Proton
Energy Systems, Inc. and Stuart Energy Systems Corporation produce
electrolysis-based hydrogen generation equipment.

RESEARCH AND DEVELOPMENT

We have a centralized, highly talented engineering team and will continue to
develop new technologies and products, as well as improve existing products. We
also plan to continue to make significant investments in research and
development programs. Moreover, we will continue to design and develop
innovative hardware configurations in order to achieve improved operating
efficiencies that can be applied across our product lines. We also focus on
advanced concepts for power generation and hydrogen purification applications
that form the basis for new commercial product lines and improved integration of
concepts in order to simplify hardware controls and reduce costs.

Our engineering group designs and retains expertise in core technologies,
including our UOB-TM- design, systems integration and control systems. In
addition, our engineering team provides both technical and marketing support to
the marketing and project management for our various product lines. We will
continue to pursue strategic development partnerships and alliances when it is
advantageous from either a cost or competitive standpoint. Throughout product
design and development the engineering department has attempted to minimize
costs and simplify production by standardizing parts and designs across various
product lines. Our engineers work with our various customers, using the best
available technology, to design and develop our products to meet their
specifications.

INTELLECTUAL PROPERTY

We have an active policy of protecting our intellectual property, which is
an important component of being a technology leader in the design and
development of hydrogen fuel processors used in fuel cell systems and on-site
hydrogen generators. We rely on a combination of patent, copyright, trademark,
trade secret and contract laws, as well as international treaties, to protect
our proprietary rights to our intellectual property, which includes technical
know-how, designs, special materials, manufacturing techniques, test equipment
and procedures. Our existing patents are scheduled to expire beginning in 2013.
We do not currently license any material intellectual property owned by others
at this time. We have, however obtained ownership of all technology originally
developed and patented by our co-founders, Messrs. Moard and Greiner, in
exchange for shares of our common stock. We also seek to protect our proprietary
intellectual property, including intellectual property that may not be patented
or patentable, in part, through the execution of confidentiality agreements with
our strategic partners and employees. We cannot assure you that these agreements
will not be breached, that we will

46
<PAGE>

have adequate remedies for any such breach or that persons will not assert
rights to our intellectual property arising out of our relationships with them.

GOVERNMENT REGULATION

Our products and their installation are subject to state and local
ordinances relating to building codes, safety, utility connections and related
matters. At this time, we cannot anticipate which jurisdictions, if any, will
impose regulations directed at our products or installation. We also do not know
the extent to which any existing or new regulations may impact our ability to
distribute, install and service our products. Once our products reach the
commercial stage and we begin distributing our systems to our early target
markets, federal, state or local government entities or competitors may seek to
impose regulations impacting us directly or indirectly. We intend to encourage
the standardization of industry codes to avoid having to comply with differing
regulations on a state-by-state or locality-by-locality basis.

EMPLOYEES

We currently have approximately 70 employees. None of our employees is
represented by a labor union, and we believe that our relations with our
employees are excellent. We have attracted a highly educated, experienced team
of professionals, of which approximately three have doctorate degrees and twelve
have M.S. or B.S. degrees in engineering disciplines.

LEGAL PROCEEDINGS

We are not currently involved in any legal proceedings, nor have we been
involved in any such proceedings that have had or may have a significant effect
on our financial position. We are not aware of any material legal proceedings
pending or threatened against us. However, we may be required to repurchase
common stock that we issued to certain of our shareholders, see "Repurchase
Offer".

47
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table lists our executive officers and directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
David M. Moard............................ 44 Chairman, President and
Chief Executive Officer
Michael K. Burke.......................... 42 Chief Financial Officer and Assistant
Secretary
Hazen Burford............................. 41 Vice President of Engineering and General
Manager
Richard "Root" Woods...................... 49 Vice President of Research and Development
Larry Frost............................... 52 Treasurer and Secretary
Roger Saillant............................ 57 Director
Jean-Louis Exbrayat....................... 51 Director
Dr. James N. Goffi(1)..................... 54 Director
Dr. Larry L. Berg(2)...................... 61 Director
Ivan Roch(1).............................. 57 Director
Henry Wedaa(1)............................ 76 Director
Fred R. Seddiqui(2)....................... 48 Director
David Freeman(2).......................... 74 Director
</TABLE>

--------------

(1) Member of the compensation committee

(2) Member of the audit committee

EXECUTIVE OFFICERS

DAVID M. MOARD. David Moard has served as the Chairman of our board of
directors, President and Chief Executive Officer since our incorporation in
1992. Mr. Moard conceived, developed and, with Leonard Greiner, co-patented the
UOB-TM- technology. Prior to our founding, Mr. Moard was Manager of Fuel Cells
at Southern California Gas Company, where he was responsible for the
establishment of commercial on-site cogeneration using fuel cells. As a result
of his experiences, Mr. Moard has broad technical, marketing and business
knowledge with regard to manufacturing. He also served as Manager of Fuel Cells
for the Gas Research Institute where he managed and directed field testing,
final product development and commercialization of fuel cells. Mr. Moard has a
B.S. degree in Mechanical Engineering from California Polytechnic State
University at San Luis Obispo.

MICHAEL K. BURKE. Michael Burke has served as our Chief Financial Officer
since joining us effective May 8, 2000 and our Assistant Secretary since
November of 2000. Mr. Burke has over 19 years of combined investment and
merchant banking experience to the power technology, energy and electric utility
industries. Prior to joining us in May of 2000, Mr. Burke was a Managing
Director within the U.S. Investment Banking Department of CIBC Oppenheimer Corp.
Previously, Mr. Burke was a Director within the Global Investment Banking
Division of the Barclays Bank Group, BZW. Mr. Burke's professional experience
includes mergers and acquisitions, merchant banking, and project and corporate
finance. Mr. Burke is a graduate of Lake Forest College with a B.A. degree in
Economics.

HAZEN BURFORD. Hazen Burford has served as our Vice President of
Engineering and General Manager since joining us in September of 1996.
Mr. Burford has over 16 years of experience in project management, engineering,
design and management of petrochemical and utility projects. He has worked in a
number of technical and management positions regarding such plants and
refineries, and with respect to a wide range of energy-related projects
worldwide. In 1993, Mr. Burford founded Nova-

48
<PAGE>

Industries, an engineering construction company, for which he served as Vice
President of Engineering until he joined us in 1996. From 1989 to 1993,
Mr. Burford was also responsible for management of the engineering department
for Parsons Main, a large Southern California architectural and engineering
firm. Mr. Burford has a B.S. degree in Mechanical Engineering from California
Polytechnic State University at San Luis Obispo.

RICHARD "ROOT" WOODS. Richard Woods has served as our Vice President of
Research and Development since joining us in January of 1996. Mr. Woods has over
21 years of experience in the fuel cell industry and an additional six years of
research experience with electrochemical systems. From 1991 to just prior to
joining us, Mr. Woods was Executive Advisor and Marketing Manager for M-C Power
Corporation, a developer of molten carborate fuel cell systems. From 1980
through 1991, Mr. Woods was manager of Gas Research Institute's Phosphoric Acid
Fuel Cell program. He also conducted several analytical studies for its Power
Generation Department. Mr. Woods has a B.S. degree in Engineering from Case
Western Reserve University, with a major in Macro-Molecular Science and a minor
in Bio-Medical Engineering.

LARRY FROST. Larry Frost has been our Treasurer since January 1, 1996 and
our Secretary since November of 2000. Prior to May 15, 2000, Mr. Frost was also
our Chief Financial Officer and prior to November of 2000 he was our Assistant
Secretary and Controller. Prior to joining us, Mr. Frost was a founder of
Sterling Bank, a private Los Angeles financial institution. He also worked with
the accounting firm of Femrite, Yager & Blank, and served as chief operating
officer of Calabassas Enterprises, Inc. Mr. Frost was a partner in JL
Enterprises, which specialized in the development of high quality real estate
projects such as hotels, industrial plazas and office buildings. Mr. Frost has a
B.S. degree in Accounting from California State University at Northridge.

NON-MANAGEMENT DIRECTORS

ROGER SAILLANT. Mr. Saillant has served as a director since July 20, 2000.
Mr. Saillant joined Ford Motor Company in 1970 as a Research Scientist. He moved
to Engine Engineering in 1975 and began a series of supervisor positions in the
catalyst and emissions area. From 1986 to 1989, as Plant Manager, Mr. Saillant
launched Ford Motor Company's Electronic Division's new Altec Plant in Mexico.
Other assignments in different component operations followed, including a post
as General Manufacturing Manager starting in 1990. Throughout the 1990s, Ford
operated a division known as Visteon Automotive Systems as an internal
enterprise until June of 2000, when Visteon Corporation was spun off as its own
independent company. In August of 1994, Mr. Saillant was Director of Technology
and Process Leadership of the Visteon division, a job he held until being named
Operations Manager of Component Engineering and Manufacturing of the Visteon
division in November of 1996. Mr. Saillant was promoted to Vice President and
General Manager of Visteon's Interior Systems in September of 1997. In November
of 1998, he was appointed to his present position as Vice President and General
Manager of Visteon's Energy Transformation Systems. Mr. Saillant holds a B.S.
degree in Chemistry from Bowdoin College in Maine, a Ph.D. in Chemistry from
Indiana University, and a post-doctorate degree from the University of
California.

JEAN-LOUIS EXBRAYAT. Mr. Exbrayat has served as a director since July 20,
2000. Mr. Exbrayat is currently the Project Manager for the Commercial Division
of Gaz de France, and has held this position since January of 1999. As Project
Manager, Mr. Exbrayat is responsible for energy development and distribution for
Gaz de France. In 1998, Mr. Exbrayat served as the advisor to the Chief
Executive Officer of EDF-GDF Services, a division of Gaz de France. From 1995
through 1997, Mr. Exbrayat was Deputy Chief Executive Officer of Centre Paris
Aurore, a business unit of EDF-GDF Services, which distributes gas and
electricity in Paris, France. Mr. Exbrayat is a graduate of Ecole Polytechnique
and Ecole Nationale de Statistique et d'Administration Economique.

49
<PAGE>

DR. JAMES N. GOFFI. Dr. Goffi has served as a director since March of 1997.
Dr. Goffi is also the Chairman of the compensation committee of our board. Since
1996, Dr. Goffi has been the General Manager of Sunbeam Corporation's
Waynesboro, Mississippi electric bedding manufacturing facility. Prior to this
position, Dr. Goffi worked 25 years with Scott Paper Company. During his career
in the pulp and paper industry, Dr. Goffi held various management positions,
including Vice President of Procurement, Plant Manager and Director of
Commercial Business Systems. Dr. Goffi received his B.S., M.S. and Ph.D. degrees
in Chemical Engineering from the University of Maine.

DR. LARRY L. BERG. Dr. Berg has served as a director since March of 1998.
In 1984, Dr. Berg formed Larry Berg and Associates, a consulting firm
specializing in energy and environmental technologies and related governmental
policies and politics, after a twenty-six year career as a professor and
administrator at the University of Southern California. From 1983 to 1993 he
served as the Speaker of the California Assembly's representative on the
Governing Board of the Southern California Air Quality Management District
before leaving to pursue environmental and energy development activities in the
private business sector. Dr. Berg negotiated a technology sharing agreement with
the Province of Ontario, Canada; this agreement being the forerunner to the
first formal Memorandum of Understanding between the Province of British
Columbia and the Southern California Air Quality Management District. From 1994
to 1997, Dr. Berg served on the board of directors of Ballard Power
Systems Inc. Dr. Berg received his B.A. and M.A. degrees from the University of
Iowa, and his Ph.D. from the University of California Santa Barbara.

IVAN ROCH. Mr. Roch has served as a director since November of 1999.
Mr. Roch is a member of the compensation committee of our board of directors.
From 1997 to 1999, Mr. Roch served as a consultant (in the capacity of a general
manager) to Ateliers Wood Inc., a company that specializes in electrochemical
equipment repairs. Mr. Roch was employed from 1995 to 1997 as the President and
General Manager of Les Materiaux De Pointe Precitech Inc., a start-up venture
that manufactured powder metal parts for industrial uses. From 1994 to 1995,
Mr. Roch was a Project Manager for Les Enterprises Barrette Ltee and focused on
developing products from excess raw material used in a saw milling operation.
Mr. Roch holds a B.S. degree in Industrial Mechanics from the University of
Montreal.

HENRY WEDAA. Mr. Wedaa has served as a director since March of 1998.
Mr. Wedaa is a member of the compensation committee of our board of directors.
Mr. Wedaa is president of Valley Environment Associates in Yorba Linda,
California, an organization he started in 1970 that specializes in environmental
studies, air quality issues, intergovernmental relations and new business
activities. He served as Board Chairman of the Governing Board of the Southern
California Air Quality Management District for several years. Mr. Wedaa has
written, or co-written more than 30 technical papers on various subjects
including shock tube phenomena, weapons and explosive systems, warhead
development, fuel cells, and airport land use. Mr. Wedaa received his bachelor's
degree in Physics from Gettysburg College in Pennsylvania in 1949.

FRED R. SEDDIQUI. Mr. Seddiqui has served as a director since February of
1999. Mr. Seddiqui is a member of the audit committee of our board of directors.
Since 1998, Mr. Seddiqui has served as the President and Chief Executive Officer
of Product Success Corp., an internet-based service provider for the product
development community in the high-tech industry. Since 1998, Mr. Seddiqui has
also served as President of Silicon Valley Venture Partners, a private fund for
investment in early-stage high-tech startups. Mr. Seddiqui was formerly
President and Chief Executive Officer of Fidus Medical Technology, which
develops, manufactures and sells systems for the treatment of cardiac arrythmia,
since founding that company in 1992. Mr. Seddiqui holds an M.B.A. from Golden
Gate University in California, as well as B.S. and M.S. degrees in Engineering
from Fairleigh Dickenson University. He is past chairman of the American Society
of Mechanical Engineering, Santa Clara Valley Section. He has

50
<PAGE>

authored the book "Engineering Functions Concerning Industry" published by
Vantage Press, New York.

DAVID FREEMAN. Mr. Freeman has served as a director since July of 2000.
Since September of 1997, Mr. Freeman has been the General Manager of the Los
Angeles Department of Water and Power. Prior to this appointment, Mr. Freeman
served as the Trustee for the California Independent System Operator and the
California Power Exchange Trusts, Mr. Freeman was President and Chief Executive
Officer of the New York Power Authority from 1994-1996. Mr. Freeman has
20 years of experience as a public power chief executive officer, including
positions at the Tennessee Valley Authority (as a director from 1977-1984), the
lower Colorado River Authority, and the Sacramento Municipal Utility District
(as general manager from 1990-1994). Mr. Freeman has also served in various
high-level government positions including being an energy advisor to President
Carter and as an energy consultant to the U. S. Senate Commerce Committee, head
of the energy policy staff in the White House Office of Science and Technology
and as executive assistant to the chairman of the Federal Power Commission.
Mr. Freeman earned his B.S. degree in Civil Engineering from the Georgia
Institute of Technology and his law degree from the University of Tennessee Law
School.

BOARD COMPOSITION

Our board of directors currently is comprised of nine members. Directors are
elected by our shareholders at each annual meeting and serve for one year or
until their successors are elected and qualified. Pursuant to the reorganization
agreement entered into in September of 2000 with Sofinov and the seven
individual members of Phoenix Gas Systems, LLC, Sofinov will retain the right
following the closing of this offering to nominate for election one director to
our board of directors so long as Sofinov holds our unregistered securities and
owns five percent or more of our outstanding securities on a fully diluted
basis. There are no family relationships among any of our directors and
executive officers.

ELECTION OF DIRECTORS

Following the offering, our certificate of incorporation will provide that
our board of directors will be divided into three classes with staggered,
three-year terms. The term of office of our Class I directors will expire at the
annual meeting of shareholders to be held in 2001; the term of office of our
Class II directors will expire at the annual meeting of shareholders to be held
in 2002; and the term of office of our Class III directors will expire at the
annual meeting of the shareholders to be held in 2003. At each annual meeting of
the shareholders, beginning with the 2001 annual meeting, the successors to the
directors whose terms have expired will be elected to serve until the third
annual meeting following their election or until their successors have been
elected, unless they resign or are removed earlier. Messrs. Wedaa, Freeman and
Seddiqui have been designated as Class I directors; Messrs. Roch, Goffi and
Exbrayat have been designated as Class II directors; and Messrs. Moard, Berg and
Saillant have been designated as Class III directors. The classification of our
board of directors could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, control of
us.

BOARD COMMITTEES

COMPENSATION COMMITTEE. Our board of directors established the compensation
committee in April of 1999. The non-employee members of the compensation
committee are Dr. James Goffi, Henry Wedaa and Ivan Roch. The compensation
committee reviews and makes determinations of, or recommendations to our board
of directors with respect to, compensation and benefits of senior officers as
well as the total compensation structure of similarly situated job categories
applicable to all of our other employees. Our compensation committee also
administers and grants stock options and

51
<PAGE>
stock awards to our employees pursuant to our 2000 Stock Incentive Plan. The
compensation committee met four times in 1999.

AUDIT COMMITTEE. Our board of directors established the audit committee in
August of 2000. The members of the audit committee are Dr. Larry Berg, Fred
Seddiqui and David Freeman. None of the audit committee members is or has ever
been an employee of our company or any affiliated company or large shareholder
of our company. Our audit committee will meet with the independent auditors to
review the adequacy of our internal control systems and financial reporting
procedures; review the general scope of the annual audit and the fees charged by
the independent auditors; review and monitor the performance of non-audit
services by the auditors; review the fairness of any proposed transaction
between us and any officer, director or other affiliate, and after such review,
make recommendations to our board of directors; and shall perform such further
functions as may be required by any stock market or quotation service upon which
our common stock may be listed.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.

None of the members of the compensation committee is or has been our
employee at any time since our formation. None of our executive officers serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee.

DIRECTOR COMPENSATION

Each of our non-employee directors receives a fee of $500 for each of our
board meetings attended and all members of our board of directors are reimbursed
for all reasonable expenses incurred in attending our board and committee
meetings. In April of 2000, we adopted the 2000 Stock Incentive Plan, which
provides, in addition to the grant of employee stock compensation, non-employee
director stock compensation.

Non-employee directors receive options as of January 15 of each year of
service as a member of our board of directors. Such options are immediately
vested and remain exercisable, for seven years from the date of grant unless the
director resigns or is not re-elected prior to the expiration date of the
options. Incumbent non-employee directors each received 7,000 options in 1999,
and 5,000 options in 2000. Beginning in 2001, non-employee directors will
receive grants of 5,000 options each year, for so long as shares remain
available for issuance under our 2000 Stock Incentive Plan. Any non-employee
director elected for the first time after January 15 of a year is entitled to an
unprorated grant of 5,000 options for that year and will continue to receive
5,000 options each year, for so long as shares remain for issuance available
under our 2000 Stock Incentive Plan.

EXECUTIVE COMPENSATION

The following table provides information concerning the compensation paid
during the years ended December 31, 1997, 1998 and 1999, to our chief executive
officer and each of our other most highly compensated executive officers whose
total compensation exceeded $100,000 during our 1999 fiscal year. We did not pay
any other executive officer over $100,000 in 1999.

52
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
--------------------------- -------- -------- --------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David M. Moard, 1997 $150,000 -- -- -- --
Chairman of the Board, President & 1998 $150,000 -- -- 620,000 --
Chief Executive Officer 1999 $150,000 -- -- 105,000

Hazen Burford, 1997 $110,500 -- -- -- --
Vice President of Engineering 1998 $110,500 -- -- 197,500 --
1999 $110,500 -- -- 70,000 --

Richard "Root" Woods, 1997 $110,000 -- -- -- --
Vice President of Research and 1998 $110,000 -- -- 197,500 --
Development 1999 $110,000 -- -- 70,000 --

Larry Frost, 1997 $125,000 -- -- -- --
Treasurer & Secretary 1998 $125,000 -- -- 197,000 --
1999 $125,000 -- -- 70,000 --
</TABLE>

OPTION GRANTS DURING FISCAL YEAR 1999

The table below provides information regarding stock options we granted in
fiscal year 1999 to our chief executive officer and the other executive officers
whose compensation exceeded $100,000 in fiscal 1999. The exercise price
represents our board of directors' estimate of the fair market value of our
common stock on the grant date. The table includes the potential realizable
value over the seven-year term of the options, assuming that the market value of
our stock appreciates from the date of grant to the expiration of the option at
rates of 5% and 10%, compounded annually. The assumed rates of appreciation that
we included in the table below are prescribed by the Securities and Exchange
Commission for illustrative purposes only and are not intended to forecast or
predict future stock prices. Any actual gains on option exercises will depend on
the future performance of our stock.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
OPTION GRANTS DURING FISCAL YEAR 1999 VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR 1999 PRICE ($/SH) DATE 5%($) 10%($)
---- ---------- ---------------- ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
David M. Moard.................. 105,000 19.7% $5 10/28/06 $738,728 $1,023,076
Hazen Burford................... 70,000 13.1% $5 10/28/06 $492,485 $ 682,051
Richard "Root" Woods............ 70,000 13.1% $5 10/28/06 $492,485 $ 682,051
Larry Frost..................... 70,000 13.1% $5 10/28/06 $492,485 $ 682,051
</TABLE>

FISCAL YEAR-END OPTION VALUES

None of our executive officers whose compensation exceeded $100,000 in
fiscal year 1999 exercised any options in 1999. The table below provides
information regarding options exercised during 1999 and unexercised options held
as of December 31, 1999 by our chief executive officer and the other executive
officers whose compensation exceeded $100,000 in fiscal 1999. The value of
realized options and the value of unexercised in-the-money options is calculated
on the basis of an assumed initial public offering price of $12 per share.

53
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED IN-
SECURITIES UNDERLYING THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT FISCAL
FISCAL YEAR END(#) YEAR-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David M. Moard................................... 655,000 70,000 $7,860,000 $840,000
Hazen Burford.................................... 220,833 46,667 $2,649,996 $560,004
Richard "Root" Woods............................. 220,833 46,667 $2,649,996 $560,004
Larry Frost...................................... 220,833 46,667 $2,649,996 $560,004
</TABLE>

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

We have entered into an employment agreement with David Moard, our President
and Chief Executive Officer, effective as of August 1, 2000. Mr. Moard's
employment agreement has a term of three years and provides for an annual base
salary of $200,000, a performance bonus of up to 200% of his base salary and an
increase in his base salary to $300,000 commencing January 1, 2001. In addition,
the agreement provides for termination of employment on 30 days' written notice
by either party, subject to continuation of his base compensation for up to two
years if Mr. Moard is terminated without cause and he agrees to certain
non-competition provisions. In connection with the execution of his employment
agreement, Mr. Moard received fully vested options to purchase 105,000 shares of
our common stock at a purchase price of $5.00 per share and fully vested options
to purchase 3,750 shares of our common stock at a purchase price of $5.50 per
share. Mr. Moard may receive additional option grants, if approved by the
compensation committee.

Mr. Burke, our Chief Financial Officer and Assistant Secretary, has entered
into an employment agreement with us effective May 8, 2000, which provides for
an annual base salary of $175,000. Mr. Burke's employment agreement further
provides that his annual base salary will increase to $200,000 upon the later to
occur of January 1, 2001 or the completion of this offering. Mr. Burke is also
eligible to receive, at the discretion of our board of directors, a performance
bonus of up to 200% of his base salary. Mr. Burke has been granted options to
purchase 1,000,000 shares of our common stock at an exercise price of $5.00 per
share. Options for 200,000 shares are vested and exercisable by Mr. Burke up
until the day before this offering. Options for an additional 100,000 shares are
vested and remain exercisable through May 15, 2007. An additional 200,000
options will vest upon the completion of this offering and shall remain
exercisable through May 15, 2007. An additional 300,000 options will vest in
100,000 share increments on each January 1, beginning in 2001, and will remain
exercisable through May 15, 2007. The remaining 200,000 options will vest if
within one year following the date of this offering, the market capitalization
of our issued and outstanding common stock achieves a specified minimum average
over twenty consecutive trading days. Mr. Burke's employment agreement is
subject to termination upon his death, illness, disability or other incapacity,
or upon Mr. Burke providing 30 days' prior written notice or by a notice of
termination from us. We may terminate Mr. Burke's employment immediately for
cause or upon 30 days' prior notice without cause. In the event Mr. Burke is
terminated without cause, he will receive his base salary for a period of
12 months provided he provides consulting services and does not violate
confidentiality and non-competition covenants set forth in his employment
agreement.

We have entered into employment agreements with each of Messrs. Frost,
Burford and Woods, all effective as of August 1, 2000. Each of these employment
agreements has a maximum term of three years, however, the agreements may be
terminated at any time by either party upon 30 days' written notice. If we
terminate any of Messrs. Frost, Burford or Woods without cause, then we are
obligated to continue to pay such individual's then-existing base salary for one
year, so long as such individual agrees to certain non-competition provisions.
For the year ending December 31, 2000, Mr. Frost's

54
<PAGE>
annual base salary is $131,250 and Messrs. Burford and Woods each have an annual
base salary of $115,500. Commencing January 1, 2001, Mr. Frost's base salary
shall be increased to $150,000 per year, Mr. Burford's salary shall be increased
to $175,000 and Mr. Woods' base salary shall be increased to $160,000 per year.
Each of Messrs. Frost, Burford and Woods may receive a performance-based bonus
of up to 160% of their base salary at the end of each year of service to us. In
addition, in connection with the execution of their employment agreements, each
of Messrs. Frost, Burford and Woods received fully vested options to purchase
70,000 shares of common stock at a purchase price of $5.00 per share and each of
them may receive additional option grants, if approved by the compensation
committee.

BENEFIT PLANS

STOCK OPTIONS

On July 31, 1998, our board of directors adopted a resolution calling for
the issuance of options under certain individual non-statutory option agreements
to certain key executives in consideration of their past services, and in lieu
of cash bonuses that we had been unable to pay to them through 1998. Grants of
such options to individual executives consisted of 620,000 options granted to
David Moard, 40,000 options granted to Leonard Greiner, 197,500 options granted
to each of Larry Frost, Hazen Burford and Richard Woods, 7,500 options granted
to John Cuzens and 25,000 options granted to Dick Williams, an executive who has
since left our employment. The options granted were in an aggregate amount of
1,285,000 shares. The options are immediately exercisable in their entirety at a
price of $1.00 per share and remain exercisable through July 30, 2005.

Our board of directors, by a unanimous written consent effective as of
October 29, 1999, ratified the 1998 grants and approved a form of option
agreement for the implementation of such option grants and further granted
options for 343,000 additional shares to five executive officers for their 1999
service to our company. The individual grants consisted of 105,000 shares to
David Moard, 70,000 shares to each of Larry Frost, Hazen Burford and Richard
Woods, and 28,000 shares to John Cuzens. One third of the options vested on
January 1, 2000 and an additional one third will vest on each January 1
thereafter if the relevant employee remains employed by us on that date. The
options are exercisable any time prior to October 28, 2006, at the price of
$5.00 per share unless they expire earlier by reason of the optionee's
termination. Early termination provisions are substantially the same as the
provisions that apply to our 2000 Stock Incentive Plan, as described below.

2000 STOCK INCENTIVE PLAN

Our 2000 Stock Incentive Plan was adopted by our board of directors on
April 30, 2000 and approved by our shareholders on July 20, 2000. Our 2000 Stock
Incentive Plan reserves 1,575,000 shares of our common stock for grants to
employees, non-employee directors and consultants. Grants permitted under this
plan include incentive stock options, nonstatutory stock options and shares of
stock sold subject to forfeiture restrictions. Our 2000 Stock Incentive Plan is
administered by the compensation committee of our board of directors, which
determines the terms and conditions of individual grants pursuant to the 2000
Stock Incentive Plan. The minimum exercise price of incentive stock options
granted under the 2000 Stock Incentive Plan is 100% of the fair market value of
the stock at the time of grant, as determined by the board of directors in good
faith. The exercise price of incentive stock options must at least equal 110% of
fair market value in the case of incentive stock options granted to an employee
who holds, at the time the option is granted, more than 10% of the total voting
power of all classes of our stock. Our compensation committee determines the
term of the options, which may not exceed ten years, or five years in the case
of an incentive stock option granted to an employee who holds, at the time the
option is granted, more than 10% of the total voting power of all classes of our
stock.

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<PAGE>
With respect to nonstatutory stock options, the minimum exercise price
permitted by our 2000 Stock Incentive Plan is 85% of the fair market value at
the time of grant, as determined by the board of directors in good faith. Our
compensation committee has granted both incentive stock options and nonstatutory
stock options pursuant to the 2000 Stock Incentive Plan, generally exercisable
at 100% of its determination of fair market value at the date of grant. The 2000
Stock Incentive Plan permits early exercise of stock option grants prior to
vesting, whereby the shares of common stock purchased pursuant to such early
exercise remain subject to restrictions during the original period of vesting.
However, our compensation committee has thus far not permitted early exercise.
The minimum vesting required by the 2000 Stock Incentive Plan is 20% per year
from the date of grant. However, our compensation committee has generally
followed a policy of permitting options to vest as to one-third of the shares as
of each January 1 following the date of grant, provided the optionee remains in
service with us. Options generally expire on the day before the seventh
anniversary of the date of grant but will expire earlier under certain
circumstances. The options expire immediately in the event of a termination of
employment for cause. In the event of a termination for reasons other than for
cause, the option expires three months after termination of employment provided
that such three-month period is extended by nine months in the event termination
of service is involuntary on the part of the optionee, but without cause. The
period of time for exercise is generally extended to three years in the case of
death, disability, retirement (as defined) of the optionee, or change in control
of our company. Options may be subject to forfeiture in the event of violation
of certain confidentiality provisions or, in certain limited circumstances, if
the optionee competes with us. The enforceability of these forfeiture provisions
by us is not free from doubt.

No option may be transferred by the optionee other than by will or the laws
of descent or distribution. To the extent an optionee would have the right in
any calendar year to exercise for the first time one or more incentive stock
options for shares having an aggregate fair market value in excess of $100,000
as of the date the options were granted, the excess options will be treated as
non-statutory stock options.

In the event that we are a party to a merger or consolidation, outstanding
options shall be subject to any such agreement of merger or consolidation.
Without the optionee's consent, outstanding options may be continued, assumed or
substituted by the successor corporation. If the party that survives the merger
or consolidation does not agree to continue, assume or substitute, the options
will terminate upon the closing of the transaction, subject to an opportunity to
exercise vested options being afforded to the optionee.

Our board of directors may amend, modify or terminate the 2000 Stock
Incentive Plan if any amendment, modification or termination does not impair
existing rights of plan participants. Additionally, shareholder approval is
required for an amendment to the extent required by applicable law, regulations
or rules.

As of October 31, 2000:

- a total of 1,575,000 shares had been reserved for issuance under the 2000
Stock Incentive Plan;

- options to purchase an aggregate of 3,698,401 shares of common stock,
1,070,401 of which were granted under our 2000 Stock Incentive Plan, have
been granted at exercise prices of $1 to $5.50 per share;

- no outstanding options under the stock option agreements or our 2000 Stock
Incentive Plan had been exercised; and

- 504,599 shares remained available for future grant under the 2000 Stock
Incentive Plan.

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401(k) PLAN

We maintain a 401(k) plan that covers all our employees who satisfy our
plan's eligibility requirements relating to minimum age, length of service and
hours worked. We may make an annual contribution for the benefit of eligible
employees in an amount determined by our board of directors. We have not made
any contribution to date and have no current plans to do so. Eligible employees
may make pretax elective contributions of up to 15% of their compensation,
subject to maximum limits on contributions prescribed by law.

DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY

Our certificate of incorporation, to be effective upon completion of this
offering provides for indemnification of our directors and officers to the
maximum extent permitted by the Delaware General Corporation Law, and our
bylaws, to be effective upon completion of this offering provide for
indemnification of our directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law.

In addition, we have entered into indemnification agreements with our
directors and officers containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require us, among other
things, to indemnify our directors and officers against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.

We have obtained a policy of directors' and officers' liability insurance
that insures our directors and officers against the cost of defense, settlement
or payment of a judgment under certain circumstances. The policy is effective
through December of 2000 and we plan to renew such policy or obtain a suitable
replacement policy.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PHOENIX HYDROGEN SYSTEMS LLC AND PHOENIX GAS SYSTEMS LLC

In April of 1996, we formed Phoenix Gas Systems LLC, a California limited
liability company, with three other individuals. We contributed $24,250,000 for
a 97% membership interest in Phoenix Gas Systems LLC, and the three individuals
contributed $250,000 each for their respective 1% membership interests. Phoenix
Gas Systems LLC was formed in anticipation of our relationship with Sofinov to
exploit our UOB-TM- technology in conventional hydrogen markets.

In August of 1996, we entered into a joint venture arrangement with Sofinov
for the exploitation and licensing of our hydrogen production technology and
related patents, trademarks and licenses. In connection with the joint venture
agreement we jointly formed Phoenix Hydrogen Systems LLC, a California limited
liability company, in which Sofinov acquired, through an affiliate, a 30%
membership interest for $2 million in cash and we acquired the remaining 70%
interest in exchange for $250,000 in cash, a note for $750,000 and a worldwide
exclusive license to make, use, sublicense, sell and exploit in perpetuity our
UOB-TM- technology and related patents, trademarks, trade names, and other
intellectual property for all uses. In addition, Sofinov, through another
affiliate, acquired an approximate 28.6% interest in Phoenix Gas Systems LLC for
a $2 million cash investment, thereby diluting our membership interest to
approximately 68.4% and diluting the three individuals' membership interests to
just below 1% each. In August of 1996, Phoenix Hydrogen Systems LLC sublicensed
to Phoenix Gas Systems LLC an exclusive worldwide license to make, use, market,
sell and exploit, in perpetuity, the technology for the limited "field of use"
of all conventional hydrogen markets, including chemical, refinery, metals,
food, hydrogen peroxide, glass, electronics and other uses where hydrogen is not
used as fuel but rather as a feedstock to industrial products and processes. The
sublicense to Phoenix Gas Systems LLC excluded the right to use or exploit such
technology in fields of use where hydrogen is used directly as a fuel, including
fuel cells and internal combustion engines, boilers, burners and heat
processors.

In 1997, four additional individuals made contributions of $125,000 each to
obtain a 0.5% membership interests in Phoenix Gas Systems, thereby diluting our
interest to approximately 66.5%. Over the next three years, there were 13 cash
calls made to all of the members of Phoenix Gas Systems for additional
contributions to the company. Not all of the members contributed every time a
cash call was made and to the extent that they did not contribute, their
membership interests were diluted. We made additional equity contributions in
1998 in the aggregate amount of $780,000, bringing our membership interest in
Phoenix Gas Systems to approximately 66.6%. In 1999, we made additional equity
contributions in the aggregate amount of $1,743,500, bringing our membership
interest in Phoenix Gas Systems to approximately 66.9%. In 2000, we made
additional equity contributions in the aggregate amount of $478,000, to maintain
our approximate 66.9% membership interest in Phoenix Gas Systems.

Prior to entering into the formation agreements with Sofinov, we conducted
both our on-site hydrogen generator operations and our fuel cell systems on a
unified basis. Because Sofinov desired to focus its investments on developing
our on-site generator operations and we desired to also continue to grow and
develop the fuel cell business, we determined that forming the two subsidiaries
would best help us achieve these goals.

REORGANIZATION TRANSACTION

In September of 2000, we entered into a reorganization agreement with
Sofinov and the seven individual members of Phoenix Gas Systems LLC to merge our
subsidiaries, Phoenix Hydrogen Systems LLC and Phoenix Gas Systems LLC, into a
new California corporation, named Phoenix Hydrogen Systems, Inc. The purpose of
the reorganization was to consolidate our assets and the interests of the
subsidiaries' investors into one corporate entity because we determined that the
multi-tier arrangement

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was no longer necessary and was cumbersome for us at this stage of our
development. In this reorganization, we received 9,353,169 shares of common
stock of Phoenix Hydrogen Systems, Inc., or approximately 65.81% of the
outstanding stock, Sofinov received 4,187,458 shares, or approximately 29.46% of
the outstanding stock, and the seven individuals received in the aggregate
674,700 shares, or approximately 4.73% of the outstanding stock. The
reorganization agreement further provides that, immediately prior to the closing
of a public offering of our common stock, our shares in Phoenix Hydrogen
Systems, Inc. will be cancelled and Phoenix Hydrogen Systems, Inc. will be
merged into us. Each outstanding share of stock in Phoenix Hydrogen
Systems, Inc. owned by the minority shareholders and Sofinov will be exchanged
for one share of our common stock. In addition, the reorganization agreement
provides that Sofinov has the right to purchase an additional 2,178,000 shares
of our common stock for $10,890,000 in cash, or $5.00 per share, immediately
prior to the closing of this offering. Sofinov has indicated that it intends to
exercise this purchase right. As a result of this reorganization transaction,
all of the rights, liabilities and properties held by Phoenix Hydrogen
Systems, Inc., including the technology, will be transferred and assigned to us
by operation of law and we will be the surviving corporation, with the
shareholders of Phoenix Hydrogen Systems, Inc. becoming our shareholders. The
reorganization transaction will be effective immediately prior to the closing of
this offering.

SOFINOV

In April of 1999, we sold 1,101,447 shares of our common stock to Sofinov
for $1,101,447 in the form of $800,000 in cash and the cancellation of a
$300,000 demand promissory note and the interest accrued thereon in the
approximate amount of $1,447. Our director, Mr. Roch is Sofinov's appointee to
our board of directors.

VISTEON CORPORATION

Assuming the exercise of the warrants for all of the 5,476,886 shares of our
common stock, which will vest one year after this offering, and Visteon's
previous purchase of 400,000 shares of our common stock in June of 2000, Visteon
would own approximately 17.3% of our common stock after giving effect to the
offering.

Our director, Roger Saillant, is the Vice President and General Manager of
Visteon's Energy Transformations Division.

GAZ DE FRANCE

In October of 1999, we entered into a research and development contract with
Gaz de France, under which Gaz de France advanced $500,000 to us and provided us
with various research and development services, valued at $1,050,000. The 1999
research and development contract was cancelled on July 13, 2000, when we
entered into a five-year agreement with Gaz de France, under which Gaz de France
will become the exclusive distributor of our hydrogen generating systems for
industrial use and refueling stations in the European Union, Norway and
Switzerland.

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<PAGE>

As part of this distribution arrangement, G.D.F. International, a wholly
owned subsidiary of Gaz de France, acquired 1,050,000 shares of our common stock
in exchange for $3,700,000 in cash and the conversion of our outstanding debt to
Gaz de France under the 1999 development agreement in the amount of $1,550,000.
The common stock issued upon conversion of these liabilities was recorded at the
estimated fair market value of the common stock at the time of conversion. In
addition, we issued to G.D.F. International a warrant to acquire 1,000,000
shares of our common stock for $4.00 per share, which G.D.F. International has
advised us that it intends to exercise prior to the commencement of this
offering. Assuming exercise of the warrant, G.D.F. International would own
approximately 6.0% of our common stock, after giving effect to the offering.

Our director, Jean-Louis Exbrayat is the Product Manager of the Commercial
Division of Gaz de France.

TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT SHAREHOLDERS

In addition to the transactions described above, we have engaged in the
following transactions with our directors, executive officers, and significant
shareholders.

In 1996, we issued 44,444 shares of our common stock to three of our
executive officers, Messrs. Burford, Frost and Woods, in exchange for promissory
notes from each of them in the amount of $168,047, or $3.78 per share, payable
to us. The notes bear interest at 5% per annum and provide that principal and
interest amounts may be forgiven at each employee's discretion, however the
principal is due no later than January 1, 2002. The employees may not transfer
or sell the stock until the related promissory note is repaid or forgiven.

These were stock compensation arrangements entered into in order to defer
the adverse tax impact on these officers. In September of 1998, we paid a stock
dividend of 1.4 shares on each outstanding share of our common stock.
Accordingly, in January of 1999 we cancelled the 1996 notes, issued new notes
for $44,444 each and adjusted the shares to 106,666 for each of Messrs. Burford,
Frost and Woods to reflect the dividend. Until each note is repaid or forgiven,
we retain the right to repurchase the stock at a price of $3.78 per share if the
employee voluntarily leaves our employment or is fired for misconduct. As of
October 31, 2000, $49,518 remained outstanding under each note including accrued
interest.

In December of 1998 and in March of 1999, we issued an aggregate of 23,277
and 287,000 shares of our common stock, respectively, valued at $1.00 per share,
to David Moard, our Chief Executive Officer and President, and his spouse in
exchange for past services and the conversion of debts owed by us to Mr. Moard.
Also in December of 1998, Mr. Moard and his spouse purchased 100,000 shares of
our common stock for $1.00 per share.

Dr. James N. Goffi, one of our directors, and his spouse made the following
stock purchases for cash:

<TABLE>
<CAPTION>
DATE OF PURCHASE NUMBER OF SHARES PRICE PER SHARE
------------------------ ------------------------ ------------------------
<S> <C> <C>
May 1998 6,000* $20.83*
July 1998 1,200* $20.83*
January 1999 50,000 $1.00
</TABLE>

--------------

* The number of shares and their purchase price were later adjusted to
effectively lower the purchase price to $2.00 per share by issuing an
aggregate of 57,270 shares to Mr. Goffi and his spouse for no consideration.

In January of 1999, we issued 8,000 shares of common stock, valued at $1.00
per share, to Henry Wedaa, one of our directors, in exchange for past services
rendered. In April of 1999,

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<PAGE>

Mr. Wedaa purchased 42,000 shares of our common stock at $1.00 per share and in
April of 2000, he purchased an additional 20,000 shares of our common stock at
$5.00 per share.

In April of 1999, Richard Woods, our Vice President of Research and
Development, together with his spouse, received 25,000 shares of our common
stock, valued at $1.00 per share, in exchange for the conversion of a debt owed
by us to Mr. Woods.

In July of 1999, Larry Berg, one of our directors, purchased 16,666 shares
of our common stock at a purchase price of $1.50 per share paid in cash.

In December of 1998 and in April of 1999, Leonard Greiner, who owns more
than 5% of our outstanding common stock, received 287,000 and 353,125 shares of
our common stock, respectively, valued at $1.00 per share, in exchange for the
conversion of debts owed by us to Mr. Greiner.

INDEMNIFICATION AGREEMENTS

We have entered into indemnification agreements with all of our executive
officers and directors. See "Management--Director and Officer Indemnification
and Liability."

We believe that the terms of each of the foregoing transactions were at
least as favorable to us as we could have obtained from an unrelated third
party.

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<PAGE>
PRINCIPAL SHAREHOLDERS

PRINCIPAL SHAREHOLDERS

The following table provides information regarding the beneficial ownership
of our outstanding common stock, for:

- our chief executive officer;

- the other executive officers whose compensation exceeded $100,000 in
fiscal 1999;

- each of our directors;

- each person or group that we know beneficially owns more than 5% of the
outstanding shares of our common stock; and

- all of our directors and executive officers as a group.

The percentage of beneficial ownership before the offering is based on the
beneficial ownership of our common stock as of October 31, 2000, as adjusted to
reflect the issuance of 4,862,158 shares of our common stock in connection with
the reorganization of our subsidiaries to consolidate our assets occurring
immediately prior to the completion of this offering. See "Certain Relationships
and Related Transactions."

The percentage of beneficial ownership after the offering is based on
28,417,510 shares, including the 8,000,000 shares of common stock to be sold in
this offering; 2,178,000 shares of our common stock being purchased in
connection with the reorganization of our subsidiaries; 4,862,158 shares of
common stock being issued in connection with the reorganization of our
subsidiaries; and 1,000,000 shares of common stock issued upon exercise of all
outstanding and vested warrants; and excluding 5,746,886 shares of common stock
that will be issued upon exercise of warrants over a one-year vesting period
following the closing of this offering; and assuming that the individuals and
entities listed on the beneficial ownership table do not purchase any additional
shares of our common stock in the offering.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Except as otherwise indicated, the persons named in
the table have sole voting and investment power with respect to all common stock
held by them. The number of shares of common stock outstanding used in
calculating the percentage for each listed person includes the common stock
underlying warrants, options or other rights to acquire our common stock held by
such person that are exercisable within sixty (60) days of October 31, 2000, but
excludes common stock underlying warrants, options or other rights to acquire
our common stock held by any other person.

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<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OF COMMON STOCK
OUTSTANDING
NUMBER OF SHARES ----------------------
OF COMMON STOCK BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
--------------------------------------- ------------------------------ -------- --------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
David M. Moard (2)................................ 3,306,060 18.30% 11.31%
Michael K. Burke (3).............................. 500,000 2.82% 1.73%
Hazen Burford (4)................................. 431,239 2.45% 1.50%
Larry Frost (5)................................... 446,238 2.54% 1.55%
Richard Woods (6)................................. 437,499 2.43% 1.52%
Jean-Louis Exbrayat (7)........................... 2,055,000 11.26% 6.98%
Dr. James N. Goffi (8)............................ 274,264 1.59% *%
Dr. Larry Berg (9)................................ 33,666 *% *%
Ivan Roch (10).................................... 7,478,905 31.67% 24.43%
Roger Saillant(11)................................ 405,000 2.35% 1.42%
Henry Wedaa (12).................................. 82,000 *% *%
Fred R. Seddiqui (12)............................. 12,000 *% *%
David Freeman (13)................................ 5,000 *% *%
OTHER 5% SHAREHOLDERS
Sofinov Societe Financiere d'Innovation, Inc.
(14)............................................ 7,466,905 31.63% 24.41%
G.D.F. International (15)......................... 2,050,000 11.26% 6.97%
Leonard Greiner (16).............................. 2,984,421 17.26% 10.48%
DIRECTORS AND OFFICERS AS A GROUP (13 PERSONS)
(17).............................................. 15,466,871 80.86% 51.03%
</TABLE>

--------------

* Less than 1%

(1) Unless otherwise noted, the shareholders' address is 19300 Susana Road,
Rancho Dominguez, California 90221.

(2) Owned jointly with Mr. Moard's spouse; includes 2,000 shares owned by
Mr. Moard's minor children and 822,083 shares issuable upon exercise of
options.

(3) Owned jointly with Mr. Burke's spouse; represents 500,000 shares issuable
upon exercise of options.

(4) Owned jointly with Mr. Burford's spouse and includes 330,833 shares
issuable upon exercise of options.

(5) Owned jointly with Mr. Frost's spouse and includes 330,833 shares issuable
upon exercise of options.

(6) Owned jointly with Mr. Wood's spouse and includes 330,833 shares issuable
upon exercise of options.

(7) Mr. Exbrayat is G.D.F. International's appointee to our board of directors
and is deemed to have beneficial ownership of the shares owned by G.D.F.
International. See Note 15 below. Also includes 5,000 shares issuable upon
exercise of options.

(8) Owned jointly with Mr. Goffi's spouse; includes 12,000 shares issuable upon
exercise of options and 2,000 shares owned by Mr. Goffi's descendants.

(9) Includes 5,000 shares owned by Zene Berg, Mr. Berg's mother and 12,000
shares issuable upon exercise of options.

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(10) Mr. Roch is Sofinov Societe Financiere d'Innovation, Inc.'s appointee to
our board of directors and is deemed to be a beneficial owner of the
shares owned by Sofinov. See Note 14 below. Also includes 12,000 shares
issuable upon exercise of options.

(11) Mr. Saillant is Visteon Corporation's appointee to our board of directors
and is deemed to be a beneficial owner of the 400,000 shares owned by
Visteon. Also includes 5,000 shares issuable upon exercise of options.

(12) Includes 12,000 shares issuable upon exercise of options.

(13) Includes 5,000 shares issuable upon exercise of options.

(14) The principal executive offices of Sofinov Societe Financiere
d'Innovation, Inc. are located at 1981 Avenue McGill College, Montreal
(Quebec) H3A 3C7. Includes an aggregate of 6,365,458 shares of our common
stock to be issued and purchased in connection with the reorganization of
our subsidiaries to consolidate our assets.

(15) The principal executive offices of G.D.F. International are located at 23
rue Philibert Delorme, 75017 Paris, France. Includes 1,000,000 shares
issuable upon exercise of warrants immediately prior to the close of this
offering.

(16) Owned jointly with Mr. Greiner's spouse, includes 330,000 shares held by
Mr. Greiner's children and in trusts for his grandchildren and 49,767
shares issuable upon exercise of options.

(17) Includes all shares set forth in Notes 2-13.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

We are currently authorized to issue 30,000,000 shares of common stock, no
par value. Immediately prior to the completion of this offering, we will
reincorporate as a Delaware corporation and our authorized capital stock will
consist of 200,000,000 shares of common stock, $0.0001 par value per share, and
10,000,000 shares of preferred stock, $0.0001 par value per share. The following
description of our securities and certain provisions of our certificate of
incorporation and bylaws under Delaware law are summaries. Statements contained
in this prospectus relating to these provisions are not necessarily complete.
Copies of our certificate of incorporation and bylaws have been filed with the
Securities and Exchange Commission as exhibits to our registration statement, of
which this prospectus forms a part. The descriptions of common stock and
preferred stock reflect changes to our capital structure that will occur upon
the closing of this offering in accordance with the terms of the certificate of
incorporation that will be adopted by us immediately prior to the closing of
this offering.

COMMON STOCK

As of October 31, 2000, there were 12,377,352 shares of common stock
outstanding and held of record by 93 shareholders. Based on the number of shares
of common stock outstanding as of that date and giving effect to the issuance of
4,862,158 shares of common stock and the sale of 2,178,000 shares of common
stock in connection with the reorganization of our subsidiaries to consolidate
our assets; the issuance of 6,476,886 shares of our common stock upon exercise
of warrants; and the issuance of the 8,000,000 shares of common stock offered by
us hereby, there will be 33,874,396 shares of common stock outstanding, assuming
no exercise of outstanding stock options, after this offering.

Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of the shareholders. Cumulative voting for the
election of directors is prohibited in our certificate of incorporation, which
means that the holders of a majority of the shares voted can elect all of the
directors then standing for election. Holders of common stock are entitled to
receive ratably any dividends that may be declared by our board of directors out
of legally available funds, subject to any preferential dividend rights of any
outstanding preferred stock. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to receive ratably our net
assets available after the payment of all debts and other liabilities, subject
to the prior rights of any outstanding preferred stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are, and the shares offered by us in this
offering will be upon receipt of payment for such shares, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future without further shareholder approval. Upon the closing of the offering,
there will be no shares of preferred stock outstanding.

PREFERRED STOCK

Upon completion of this offering and the filing of our certificate of
incorporation in Delaware, our board of directors will be authorized without
further shareholder approval to issue from time to time up to an aggregate of
10,000,000 shares of preferred stock in one or more series and to fix or alter
the designations, preferences, rights, qualifications, limitations or
restrictions of the shares of each series, including the dividend rights,
dividend rates, conversion rights, voting rights, term of redemption including
sinking fund provisions, redemption price or prices, liquidation preferences and
the number of shares constituting any series or designations of such series
without further vote or action by the shareholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of our management without further action by the shareholders and may
adversely

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<PAGE>

affect the voting, dividend and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. We have no present plans to issue any shares of
preferred stock.

WARRANTS

On July 13, 2000, we issued to G.D.F. International, a wholly owed
subsidiary of Gaz de France, a warrant to purchase 1,000,000 shares of our
common stock at an exercise price of $4.00 per share. This warrant may be
exercised all or in part through payment of the $4.00 per share cash exercise
price or through the application of a formula whereby G.D.F International would
receive a number of shares of our common stock based on the difference between
the $4.00 cash exercise price and the public offering price of the shares sold
in the offering. G.D.F. International's warrant expires on the date the
registration statement filed by us for this offering becomes effective. G.D.F.
International intends to exercise the warrant prior to its expiration.

We have entered into a warrant purchase agreement with Visteon Corporation
to issue to Visteon, on the effective date of this offering, warrants to
purchase up to 5,476,886 shares of our common stock at their par value of
$0.0001 per share. The warrants will vest in one third increments at 90 days,
180 days and 365 days following the effective date of this offering.

RIGHT TO NOMINATE DIRECTORS

Pursuant to the investor rights agreement entered into in September of 2000
with Sofinov, Sofinov will retain the right following the closing of this
offering to nominate for election one director to our board of directors so long
as Sofinov holds our unregistered securities and owns five percent or more of
our outstanding securities on a fully diluted basis. Pursuant to an investor
rights agreement we have entered into with Visteon, Visteon will have the right
to nominate for election one director to our board so long as Visteon holds our
unregistered securities and owns five percent or more of our outstanding
securities on a fully diluted basis.

REGISTRATION RIGHTS

Pursuant to the investor rights agreement, Sofinov, who will hold
7,466,905 shares of common stock following this offering, may demand that we
file a registration statement under the Securities Act, beginning 180 days after
the closing of this offering, with respect to the sale of up to 25% of its
holdings and, beginning a year after the closing of this offering, with respect
to the sale of up to 100% of its holdings. Additionally, following the closing
of this offering, if we propose to register in an underwritten public offering
any of the shares of our common stock under the Securities Act, either for our
own account or for the account of other security holders, Sofinov is entitled to
notice of the registration and is entitled to include its shares of our common
stock in the registration under certain conditions.

Pursuant to the investor rights agreement with Visteon, Visteon, who will
hold warrants to purchase up to 5,476,866 shares of our common stock, may demand
that we file a registration statement under the Securities Act, beginning two
years after the closing of this offering, with respect to the sale of up to 25%
of its warrant shares and, beginning three years after the closing of this
offering, with respect to the sale of up to 100% of its warrant shares.
Additionally, following the closing of this offering, if we propose to register
in an underwritten public offering any of the shares of our common stock under
the Securities Act, either for our own account or for the account of other
securities holders, Visteon is entitled to notice of the registration and is
entitled to include its shares of our common stock in the registration under
certain conditions.

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ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS

Certain provisions of our certificate of incorporation and bylaws, which
will become effective immediately prior to the closing of this offering, may
make it more difficult to acquire control of us by various means. These
provisions could deprive our shareholders of opportunities to realize a premium
on their shares of common stock. In addition, these provisions may adversely
affect the market price of the stock. These provisions are intended to:

- enhance the likelihood of continuity and stability in the composition of
the board and in the policies formulated by our board of directors;

- discourage certain types of transactions which may involve an actual or
threatened change in control of us;

- discourage certain tactics that may be used in proxy fights;

- encourage persons seeking to acquire control of us to consult first with
our board of directors to negotiate the terms of any proposed business
combination or offer; and

- reduce our vulnerability to an unsolicited proposal for a takeover that
does not contemplate the acquisition of all of our outstanding shares of
stock or that is otherwise unfair to our shareholders.

CLASSIFIED BOARD OF DIRECTORS; REMOVAL; FILLING VACANCIES AND
AMENDMENT. Our certificate of incorporation and bylaws provide that upon the
closing of this offering our board of directors shall be divided into three
classes of directors serving staggered, three-year terms. The classification of
the board has the effect of requiring at least two annual shareholder meetings,
instead of one, to replace a majority of members of our board of directors.
Subject to the rights of the holders of any outstanding series of preferred
stock, the articles authorize only our board of directors to fill vacancies,
including newly created directorships. Accordingly, this provision could prevent
a shareholder from obtaining majority representation on our board of directors
by enlarging our board of directors and filling the new directorships with its
own nominees. Our certificate of incorporation also provides that directors may
be removed by shareholders only for cause and only by the affirmative vote of
holders of two-thirds of our outstanding shares of voting stock.

SHAREHOLDER ACTION; SPECIAL MEETING OF SHAREHOLDERS. Our certificate of
incorporation provides that shareholders may not take action by written consent,
but may only take action at duly called annual or special meetings of
shareholders. Our certificate of incorporation further provides that special
meetings of our shareholders may be called only by the chairman of our board of
directors or a majority of our board of directors. This limitation on the right
of our shareholders to call a special meeting could make it more difficult for
our shareholders to initiate actions that are opposed by our board of directors.
These actions could include the removal of an incumbent director or the election
of a shareholder nominee as a director. They could also include the
implementation of a rule requiring shareholder ratification of specific
defensive strategies that have been adopted by the board of directors with
respect to unsolicited takeover bids. In addition, the limited ability of the
shareholders to call a special meeting of shareholders may make it more
difficult to change the existing board and management.

ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our bylaws provide that shareholders seeking to bring business
before an annual meeting of our shareholders, or to nominate candidates for
election as members of our board of directors at an annual meeting of
shareholders, must provide timely notice thereof in writing. The bylaws also
provide that Sofinov will have the right to nominate for election one member of
our board of directors, subject to certain requirements relating to Sofinov's
ownership of our common stock. To be timely, a shareholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 60 days prior to the date of our annual meeting. Our bylaws also specify
certain requirements as to the form

67
<PAGE>

and content of a shareholder's notice. These provisions may preclude our
shareholders from bringing matters before an annual meeting of shareholders or
from making nominations for directors at an annual meeting of shareholders.

AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
shareholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.

SUPERMAJORITY VOTE TO AMEND ARTICLES AND BYLAWS. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. Our
certificate of incorporation imposes supermajority vote requirements in
connection with business combination transactions and the amendment of certain
provisions of our certificate of incorporation and bylaws, including those
provisions relating to the classified board of directors, action by written
consent, the ability of shareholders to call special meetings and the ability of
shareholders to bring business before an annual meeting or to nominate
directors. Following the completion of this offering, our present directors and
executive officers and their respective affiliates will beneficially own
approximately 52% of our common stock. This gives them veto power with respect
to any shareholder action or approval requiring a simple majority.

STOCK OPTION PLAN. Our 2000 Stock Incentive Plan provides for assumption of
our plan or substitution of equivalent options of a successor corporation or,
alternatively, at the discretion of the board of directors, exercise of some or
all of the options, including those for non-vested shares, or acceleration of
vesting of shares issued pursuant to stock grants, upon a change of control of
the Company or similar event. These provisions in our 2000 Stock Incentive Plan
plan may have the effect of delaying, deterring or preventing a change of
control of us.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock will be ChaseMellon
Shareholder Services.

NASDAQ NATIONAL MARKET LISTING

We intend to apply to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "HBTI".

REPURCHASE OFFER

We have sold shares of common stock to certain of our employees, business
consultants and associates and to their friends and family members, all of whom
are located or resident in California. Due to the financial qualifications of
some of these purchasers, the issuance of these shares may not have complied
with all of the requirements for an exemption from the registration requirements
of Section 5 of the Securities Act nor an exemption from qualification under
California securities laws. We intend to make a repurchase offer with respect to
these sales of stock as provided under the California securities law.

Beginning approximately 180 days after the date of this prospectus, we
intend to make an offer to repurchase these shares at their original purchase
price, plus interest at a statutory rate from the date of purchase to the
expiration of the repurchase offer, as provided by California law. The purchase
price for most of these shares was approximately $1.00 to $2.00 per share.
However, 24,000 of these shares

68
<PAGE>

were initially sold for $20.83 per share, although we subsequently issued
additional shares to these purchasers to reduce their effective purchase price
to $2.00 per share. Subject to the approval of the California Department of
Corporations, the repurchase offer will cover a total of approximately
951,800 shares. Based upon the number of shares subject to the repurchase offer
and their purchase price, and assuming that all such shares are tendered in the
repurchase offer, the cost to us would be approximately $1,290,000, plus
interest.

The Securities Act does not expressly provide that a repurchase offer will
terminate a purchaser's right to rescind a sale of stock which was not
registered as required under the Securities Act and rescission rights under
federal law may apply to more purchasers than is generally provided under the
California law repurchase procedure. Accordingly, we may continue to be
contingently liable for the purchase price of shares which were not issued in
compliance with the Securities Act or applicable state securities laws and that
are not repurchased. While any determination of the maximum amount of our
potential liability for these sales is based on the particular facts surrounding
each sale, and therefore subject to uncertainty, we believe that we could be
liable for a total amount of up to approximately $1,656,999, plus interest.

As of the date of this prospectus, we are not aware of any rescission claims
against us.

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of the common stock offered hereby.

Upon completion of the offering, we will have 33,894,396 shares of common
stock outstanding, assuming no exercise of options after October 31, 2000 but
also assuming that 6,476,886 shares of common stock are issued upon exercise of
all warrants and the sale and issuance of 7,040,158 shares of common stock in
connection with the reorganization of our subsidiaries. Of this amount, the
8,000,000 shares offered by this prospectus will be available for immediate sale
in the public market as of the date of this prospectus. Approximately
additional shares will be available for sale in the public market
following the expiration of 180-day lock-up agreements with the representatives
of our underwriters, subject in some cases to compliance with the volume and
other limitations of the Commission's Rule 144. An additional shares
will be available for sale in the public market 90 days following the date of
this prospectus, subject in some cases to compliance with the volume and other
limitations of the Commission's Rule 144, but which are subject to lock-up
agreements.

<TABLE>
<CAPTION>
APPROXIMATE SHARES
ELIGIBLE FOR FUTURE
DAYS AFTER THE DATE OF THIS PROSPECTUS SALE COMMENT
--------------------------------------- ------------------- ---------------------------------------
<S> <C> <C>
Upon Effectiveness..................... Freely tradeable shares sold in the
offering and shares saleable under
Rule 144(k) that are not subject to the
180-day lock-up.

90 days................................ -- Shares saleable under Rule 144, 144(k)
or 701 that are not subject to 180-day
lock-up.

180 days............................... 180-day lock-up released; shares
saleable under Rule 144, subject, in
some cases, to volume limitations,
144(k) or 701.

180 days............................... 180-day lock-up released; shares
saleable under Rule 144 subject to
vesting requirements and volume
limitations.
</TABLE>

69
<PAGE>
RULE 144

In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares, including shares attributable to such person, for at
least one year is entitled to sell within any three-month period commencing
90 days after the date of this prospectus a number of shares that does not
exceed the greater of:

- 1% of the then outstanding shares of common stock, which will be equal to
approximately shares immediately after the offering; or

- the average weekly trading volume during the four calendar weeks preceding
such sale, subject to the filing of a form 144 with respect to such sale.

A person, or persons whose shares are aggregated, who is not deemed to have
been one of our affiliates at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Persons deemed to be affiliates must always sell
pursuant to Rule 144, even after the applicable holding periods have been
satisfied.

We are unable to estimate the number of shares that will be sold under
Rule 144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered hereby.

LOCK-UP AGREEMENTS

At our request, the underwriters have reserved up to 5% of the shares of
common stock in the offering for sale at the initial public offering price to
our directors, officers and employees and other parities associated with us who
have advised us of their desire to purchase shares. All the shares purchased
through the directed share program will be subject to lock-up agreements for a
period of 180 days from the date of this prospectus.

We and our officers, directors and major shareholders have agreed that, for
a period of 180 days from the date of this prospectus, we will not, without the
prior written consent of Salomon Smith Barney Inc., dispose of or hedge any
shares of our common stock or any securities convertible into, or exercisable or
exchangeable for, our common stock. Salomon Smith Barney Inc., in its sole
discretion, may release any of the securities subject to these lock-up
agreements at any time without notice.

RULE 701

Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus.

REGISTRATION RIGHTS

After this offering, Sofinov will be entitled to certain rights with respect
to registration of its shares of our common stock under the Securities Act. See
"Description of Capital Stock--Registration Rights." After the sale of these
shares pursuant to a registration statement, such shares will be freely
tradeable without restriction under the Securities Act. These sales could cause
our market price to decline.

70
<PAGE>

WARRANTS

After this offering, Visteon will have warrants to purchase up to 5,476,886
shares of our common stock for a nominal exercise price. Such warrants will vest
in increments of one-third each of such amount over a period of one year
following this offering. Visteon will also be entitled to certain rights with
respect to registration of these shares under the Securities Act. See
"Description of Capital Stock--Registration Rights." Upon exercise of these
warrants and sale of the shares pursuant to a registration statement, such
shares will be freely tradeable without restriction under the Securities Act.
Such sales could cause our market price to decline.

STOCK PLANS

We intend to file a registration statement on Form S-8 under the Securities
Act shortly after the completion of the offering to register the shares of
common stock issuable under our 2000 Stock Incentive Plan, thus permitting the
resale of such shares by nonaffiliates in the public market without restriction
under the Securities Act. As of October 31, 2000, there were outstanding options
to purchase approximately 504,599 shares of common stock under our 2000 Stock
Incentive Plan.

71
<PAGE>
UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to each underwriter, the number of shares
set forth opposite the name of that underwriter.

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Salomon Smith Barney Inc................................
CIBC World Markets Corp.................................
Lehman Brothers Inc.....................................
---------
Total............................................... 8,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to the
approval of particular legal matters by the underwriters' counsel and to other
conditions. The underwriters are obligated to purchase all the shares, other
than those covered by their over-allotment option described below, if they
purchase any of the shares.

The underwriters, for whom Salomon Smith Barney Inc., CIBC World Markets
Corp. and Lehman Brothers Inc. are acting as representatives, propose to offer
some of the shares directly to the public at the public offering price set forth
on the cover page of this prospectus and some of the shares to dealers at the
public offering price less a concession not in excess of $ per share.
The underwriters may allow, and dealers may reallow, a concession not in excess
of $ per share on sales to other dealers. If all the shares are not
sold at the initial offering price, the underwriters may change the public
offering price and other selling terms. The representatives have advised us that
the underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,200,000 additional shares of
our common stock at the public offering price less the underwriting discount.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to specified
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitment.

At our request, the underwriters have reserved up to 5% of the shares of
common stock for sale at the initial public offering price to our directors,
officers and employees and other parties associated with us who have advised us
of their desire to purchase shares. All the shares purchased through the
directed share program will be subject to lock-up agreements for a period of
180 days from the date of this prospectus. The number of shares of common stock
available for sale to the general public will be reduced to the extent that
these individuals purchase reserved shares. Any reserved shares that are not
purchased through this directed share program will be offered by the
underwriters to the general public on the same basis as all other shares of
common stock offered by this prospectus. We have agreed to indemnify the
underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, in connection with the sales of the directed shares.

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares was
determined by negotiations among us and the underwriters. Among the factors
considered in determining the initial public offering price were:

- our record of operations;

72
<PAGE>
- our current financial condition;

- our future prospects;

- our markets;

- the economic conditions in and future prospects for the industry in which
we compete;

- our management; and

- currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies
considered comparable to us.

The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in our common stock may not
develop and continue after this offering.

We intend to apply to have our common stock included for quotation on the
Nasdaq National Market under the symbol "HBTI."

The following table shows the underwriting discounts and commissions that we
will pay to the underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' options
to purchase additional shares of common stock.

<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share................................................... $ $

Total....................................................... $ $
</TABLE>

In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of our common stock in the open
market. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
"Covered" short sales are sales of shares made in an amount up to the number of
shares represented by the underwriters' over-allotment option. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of the shares available for
purchase in the open market as compared to the price at which they may purchase
shares through the over-allotment option. Transactions to close out the covered
syndicate short involve either purchases of the common stock in the open market
after the distribution has been completed or the exercise of the over-allotment
option. The underwriters may also make "naked" short sales of shares in excess
of the over-allotment option. The underwriters must close out any naked short
position by purchasing shares of common stock in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of bids for or purchases of shares in
the open market while the offering is in progress.

The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering a syndicate short position or making a
stabilizing purchase, repurchases shares originally sold by that syndicate
member.

A prospectus in electronic format may be made available on the website
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. The representative will allocate shares to underwriters that
may make Internet distributions on the same basis as other allocations. In
addition, shares may be sold by underwriters to securities dealers who resell
shares to online brokerage account holders.

Any of these activities may cause the price of the common stock to be higher
than it would otherwise be in the open market in the absence of these
transactions. Salomon Smith Barney Inc. may

73
<PAGE>
effect these transactions on the Nasdaq National Market or in the
over-the-counter market, or otherwise, and may discontinue them at any time.

We estimate that our total expenses of this offering, if commenced, will be
$1.5 million.

CIBC World Markets Corp. has acted as a private placement agent for us in
connection with our sale of 400,000 shares of common stock to Visteon in June of
2000 and the sale of 1,050,000 shares of common stock, and the issuance of a
warrant to purchase 1,000,000 shares of common stock, to G.D.F. International in
July of 2000.

We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Security Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Manatt, Phelps & Phillips, LLP, Los Angeles, California. As of April of 2000,
Donald W. Meaders, a partner of Manatt, Phelps & Phillips, LLP, owned 4,000
shares of our common stock. Certain legal matters will be passed upon for the
underwriters by Cravath, Swaine & Moore, New York, New York.

EXPERTS

The consolidated financial statements of Hydrogen Burner Technology, Inc.
and subsidiaries as of December 31, 1998 and 1999, and for each of the years in
the three-year period ended December 31, 1999, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.

AVAILABLE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the shares of common stock to be sold in this offering. This
prospectus, which is part of the registration statement, does not contain all
the information included in the registration statement. For further information
with respect to us and the shares to be sold in the offering, reference is made
to the registration statement and the exhibits and schedules attached to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. If the contract or other document is filed as an exhibit
to the registration statement, each statement is qualified by the provisions of
that exhibit.

In addition, we intend to file annual, quarterly and current reports, proxy
statements and other information with the Commission. You may read and copy all
or any portion of the registration statement or any reports, statements or other
information that we file at the Commission's public reference facilities in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may also obtain copies of these materials from the
public reference facilities of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain
information on the operation of the public reference by calling the Commission
at 1-800-SEC-0330. The Commission maintains a Web site at http://www.sec.gov
that contains reports, proxy and information statements and other information we
have filed with the Commission.

74
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 1998 and 1999
(audited) and June 30, 2000 (unaudited)................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 (audited) and six months
ended June 30, 1999 and 2000 (unaudited).................. F-4
Consolidated Statements of Shareholders' Deficiency for the
years ended December 31, 1997, 1998 and 1999 (audited) and
six months ended June 30, 2000 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 (audited) and six months
ended June 30, 1999 and 2000 (unaudited).................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Hydrogen Burner Technology, Inc.:

We have audited the accompanying consolidated financial statements of
Hydrogen Burner Technology, Inc. and subsidiaries as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hydrogen
Burner Technology, Inc. and subsidiaries as of December 31, 1998 and 1999 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.

KPMG LLP

Los Angeles, California
March 24, 2000, except for the
first paragraph of note 6, which
is as of June 30, 2000.

F-2
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 157,000 352,000 2,040,000
Restricted cash equivalents.......................... 50,000 -- --
Trade accounts receivable............................ 185,000 243,000 24,000
Related party receivables............................ -- 154,000 117,000
Inventory............................................ 643,000 550,000 917,000
Prepaids and other current assets.................... 99,000 82,000 84,000
----------- ----------- -----------
Total current assets............................... 1,134,000 1,381,000 3,182,000

Property and equipment, net (note 2)................... 171,000 175,000 288,000
Deposits and other assets.............................. 98,000 20,000 73,000
Patents, net (note 4).................................. 134,000 111,000 119,000
----------- ----------- -----------
$ 1,537,000 1,687,000 3,662,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable..................................... $ 377,000 319,000 204,000
Accrued expenses..................................... 822,000 275,000 455,000
Accrued interest (note 5)............................ 37,000 68,000 101,000
Lease payable (note 7)............................... 1,000 25,000 23,000
Customer deposits.................................... 103,000 103,000 35,000
Convertible note payable (note 5).................... 500,000 -- --
Loans and notes payable, current portion (note 5).... 150,000 170,000 249,000
Deferred revenue..................................... 451,000 -- --
Other current liability (note 11).................... -- 1,000,000 1,000,000
----------- ----------- -----------
Total current liabilities.......................... 2,441,000 1,960,000 2,067,000

Lease payable (note 7)................................. -- 41,000 126,000
Loans and notes payable, less current portion
(note 5)............................................. 341,000 657,000 500,000
----------- ----------- -----------
Total liabilities.................................. 2,782,000 2,658,000 2,693,000
----------- ----------- -----------
Minority interest (note 6)............................. 3,608,000 3,722,000 3,702,000

Shareholders' deficiency (note 6):
Common stock, no par value. Authorized 30,000,000
shares; issued and outstanding 7,061,000,
10,487,000 and 11,307,000 shares (net of notes
receivable of $578,000, $153,000 and $153,000,
respectively) at December 31, 1998 and 1999 and
June 30, 2000, respectively........................ 2,285,000 5,382,000 9,482,000
Accumulated deficit.................................... (7,138,000) (10,075,000) (12,215,000)
----------- ----------- -----------
Net shareholders' deficiency....................... (4,853,000) (4,693,000) (2,733,000)
----------- ----------- -----------
Commitments, contingencies and subsequent event (notes
7 and 11)............................................
----------- ----------- -----------
$ 1,537,000 1,687,000 3,662,000
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
---------------------------------------- -------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 278,000 145,000 1,238,000 516,000 76,000
Cost of sales................... 179,000 192,000 1,106,000 507,000 --
------------ ----------- ----------- ----------- -----------
Gross profit (loss)........... 99,000 (47,000) 132,000 9,000 76,000
Selling, general and
administrative expenses....... 1,906,000 1,782,000 2,216,000 1,114,000 1,700,000
Research and development
expenses (note 8)............. 822,000 1,299,000 1,310,000 736,000 746,000
------------ ----------- ----------- ----------- -----------
Loss from operations.......... (2,629,000) (3,128,000) (3,394,000) (1,841,000) (2,370,000)
Minority interest in net losses
of subsidiaries............... 763,000 793,000 487,000 349,000 261,000
Interest expense................ (96,000) (6,000) (37,000) (23,000) (40,000)
Interest income................. 116,000 97,000 7,000 4,000 9,000
------------ ----------- ----------- ----------- -----------
Net loss...................... $ (1,846,000) (2,244,000) (2,937,000) (1,511,000) (2,140,000)
============ =========== =========== =========== ===========
Net loss per share, basic and
diluted....................... $ (0.31) $ (0.37) $ (0.31) $ (0.17) $ (0.20)
============ =========== =========== =========== ===========
Weighted average, basic and
diluted, shares outstanding... 5,962,000 6,048,000 9,554,000 8,771,000 10,698,000
============ =========== =========== =========== ===========
Pro forma information:
Pro forma net loss per share,
basic and diluted............. $ (0.17) $ (0.21) $ (0.20) $ (0.11) $ (0.14)
============ =========== =========== =========== ===========
Pro forma weighted average,
basic and diluted, shares
outstanding................... 10,824,000 10,910,000 14,416,000 13,633,000 15,560,000
============ =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY (NOTES 5 AND 6)

<TABLE>
<CAPTION>
NET
COMMON STOCK SHAREHOLDERS'
----------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIENCY)
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................. 5,924,000 $ 513,000 (3,048,000) (2,535,000)
Issuance of common stock for cash
consideration.............................. 58,000 250,000 -- 250,000
Net loss..................................... -- -- (1,846,000) (1,846,000)
---------- ---------- ----------- ----------
Balance at December 31, 1997................. 5,982,000 763,000 (4,894,000) (4,131,000)
Issuance of common stock for cash
consideration.............................. 507,000 950,000 -- 950,000
Conversion of notes payable and accrued
liabilities to common stock................ 572,000 572,000 -- 572,000
Net loss..................................... -- -- (2,244,000) (2,244,000)
---------- ---------- ----------- ----------
Balance at December 31, 1998................. 7,061,000 2,285,000 (7,138,000) (4,853,000)
Issuance of common stock for cash
consideration.............................. 1,889,000 1,507,000 -- 1,507,000
Conversion of notes payable and accrued
liabilities to common stock................ 1,537,000 1,590,000 -- 1,590,000
Net loss..................................... -- -- (2,937,000) (2,937,000)
---------- ---------- ----------- ----------
Balance at December 31, 1999................. 10,487,000 5,382,000 (10,075,000) (4,693,000)
Issuance of common stock for cash
consideration (unaudited).................. 814,000 4,069,000 -- 4,069,000
Conversion of notes payable and accrued
liabilities to common stock (unaudited).... 6,000 31,000 -- 31,000
Net loss (unaudited)......................... -- -- (2,140,000) (2,140,000)
---------- ---------- ----------- ----------
Balance at June 30, 2000 (unaudited)......... 11,307,000 $9,482,000 (12,215,000) (2,733,000)
========== ========== =========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------------- -----------------------
1997 1998 1999 1999 2000
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(1,846,000) (2,244,000) (2,937,000) (1,511,000) (2,140,000)
----------- ---------- ---------- ---------- ----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 62,000 85,000 126,000 42,000 67,000
Minority interest.................................. (763,000) (793,000) (487,000) (349,000) (261,000)
Other current liability............................ -- -- 1,000,000 300,000 --
Changes in assets and liabilities:
Trade accounts receivable........................ (76,000) (49,000) (58,000) (189,000) 219,000
Related party receivables........................ -- -- (154,000) -- 37,000
Inventory........................................ (549,000) 189,000 93,000 96,000 (367,000)
Prepaids and other current assets................ (25,000) (153,000) 17,000 52,000 (2,000)
Deposits and other assets........................ 21,000 -- 78,000 82,000 (53,000)
Accounts payable, accrued expenses and accrued
interest....................................... 57,000 274,000 99,000 98,000 98,000
Customer deposits................................ -- 103,000 -- -- (68,000)
Deferred revenue................................. 127,000 141,000 (451,000) (240,000) --
----------- ---------- ---------- ---------- ----------
Total adjustments.............................. (1,146,000) (203,000) 263,000 (108,000) (330,000)
----------- ---------- ---------- ---------- ----------
Net cash used in operating activities.......... (2,992,000) (2,447,000) (2,674,000) (1,619,000) (2,470,000)
----------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment.................. (64,000) (15,000) (42,000) (16,000) (38,000)
Patents.............................................. (87,000) -- -- -- (15,000)
----------- ---------- ---------- ---------- ----------
Net cash used in investing activities.......... (151,000) (15,000) (42,000) (16,000) (53,000)
----------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock............... 250,000 950,000 1,507,000 1,768,000 4,069,000
Subsidiary's sale of minority members' interest...... 500,000 526,000 602,000 -- 241,000
Proceeds (repayments) of loans payable............... 670,000 453,000 752,000 (75,000) (47,000)
Decrease (increase) in cash restricted for letter of
credit............................................. -- (50,000) 50,000 50,000 --
Capital lease obligation payments.................... (3,000) (3,000) -- -- (52,000)
----------- ---------- ---------- ---------- ----------
Net cash provided by financing activities...... 1,417,000 1,876,000 2,911,000 1,743,000 4,211,000
----------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents.................................. (1,726,000) (586,000) 195,000 108,000 1,688,000
Cash and cash equivalents at beginning of period....... 2,469,000 743,000 157,000 157,000 352,000
----------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period............. $ 743,000 157,000 352,000 265,000 2,040,000
=========== ========== ========== ========== ==========
Cash paid during the period for:
Interest............................................. $ 18,000 43,000 7,000 -- 5,000
Income taxes......................................... 2,000 3,000 2,000 -- --
=========== ========== ========== ========== ==========
</TABLE>

Noncash financing activities:

During 1998, notes payable and accrued liabilities in the amount of
$572,000 were converted to 572,000 shares of common stock.

During 1999, notes payable and accrued liabilities in the amount of
$1,590,000 were converted to 1,537,000 shares of common stock.

During 1999, property and equipment amounting to $75,000 was financed under
capital lease obligations.

During the six months ended June 30, 1999, notes payable and accrued
liabilities in the amount of $1,223,000 were converted to 1,223,000 shares
of common stock.

During the six months ended June 30, 2000, property and equipment amounting
to $135,000 was financed under capital lease obligations.

During the six months ended June 30, 2000, notes payable in the amount of
$31,000 were converted to 6,000 shares of common stock.

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BACKGROUND

Hydrogen Burner Technology, Inc. (the Company) was incorporated in 1992. The
Company is a leading designer and developer of hydrogen fuel processors for fuel
cell systems and industrial hydrogen generators that can be used in numerous
industrial manufacturing applications at hydrogen refueling stations for fuel
cell vehicles. The Company has developed and patented a unique method of
generating hydrogen from common fossil fuels known as the Under-Oxidized Burner
(UOB-TM-). Because fuel cells require hydrogen to produce electricity, the
efficient and cost effective production of hydrogen for fuel cells is critical
to the commercial introduction of fuel cell systems into the mass transportation
and stationary markets. The Company's goal is to be the leading provider of
hydrogen fuel processors by capitalizing on its patented UOB-TM- technology for
hydrogen production, a reforming process that is more efficient, lower in
emissions, lower in capital cost, safer and more reliable than other currently
available methods of producing hydrogen.

The consolidated financial statements of the Company include the accounts of
its majority-owned subsidiaries, Phoenix Gas Systems LLC (a limited liability
company) (PGS) and Phoenix Hydrogen Systems LLC (a limited liability company)
(PHS). All significant intercompany transactions have been eliminated in
consolidation.

In April 1996, the Company formed PGS to commercialize the technology as it
relates to the conventional hydrogen markets where hydrogen is used as a feed
stock to industrial products and processes. In August 1996, Sofinov Societe
Financiere d'Innovation, Inc. (Sofinov) purchased a 29.1% interest in PGS.
Sofinov's interest in PGS was 28.7% at December 31, 1999. At December 31, 1998
and 1999, the Company owned 66.7% and 66.9%, respectively, of PGS. The remaining
ownership of PGS is held by seven individual members.

On August 7, 1996, the Company and Sofinov entered into an agreement
pursuant to which they formed PHS which is owned 70% by the Company and 30% by
Sofinov. PHS then purchased from the Company a worldwide, exclusive license to
make, use and sell in perpetuity the UOB-TM- technology and concurrently granted
to PGS a similar sublicense to the technology as it relates to the conventional
hydrogen markets described above.

The Company has recorded the rights related to the UOB-TM- patents,
technology, trademarks and trade names granted to PHS in accordance with
generally accepted accounting principles, whereby the value of such rights is
based upon the historical-cost basis.

On September 29, 2000, the Company entered into a reorganization agreement
whereby the Company's subsidiaries will be merged with and into the Company. The
ownership percentages of the shareholders of the individual entities prior to
the reorganization and of the Company after the reorganization will be the same,
and as a result, the reorganization will be accounted for similar to a pooling
of interests transaction. Accordingly, the historical basis in the assets and
the interests of the subsidiaries' investors have been retained and the
statement of operations will include the results of operations of the Company
and its subsidiaries for all periods presented.

F-7
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In addition, the reorganization agreement provides that Sofinov has the
right to purchase an additional 2,178,000 shares of the Company's common stock
for $10,890,000 in cash immediately prior to the closing of the Company's
planned initial public offering (IPO). Their option vests and becomes
exercisable only if the Company successfully completes an IPO. When Sofinov
purchases the shares immediately prior to the closing of the IPO, the Company
will record a constructive dividend to Sofinov in the amount of the fair value
of the option at the time of the IPO (the measurement date - the date when the
contingencies are resolved). See note 12 for a presentation of the pro forma
balance sheet giving effect to the aforementioned transactions.

(b) CASH EQUIVALENTS

For purposes of the statements of cash flows, cash equivalents include
certificates of deposit and all highly liquid instruments with original
maturities of three months or less which are not securing any corporate
obligations.

At December 31, 1998, the Company had a standby letter of credit in the
amount of $50,000. The letter of credit was fully secured by a certificate of
deposit which expired March 28, 1999. The letter of credit expired July 15,
1999. During 1999, the Company satisfied the terms of the letter of credit which
unencumbered the related certificate of deposit.

Inventory, consisting principally of partially completed underoxidized
burners and parts for the production of these machines, is valued at the lower
of cost or market (net realizable value) using the first-in, first-out (FIFO)
method. The Company had no inventory reserves at December 31, 1998 and 1999 and
June 30, 2000.

(d) DEPRECIATION AND AMORTIZATION

Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (ranging from three to seven years). Leasehold
improvements are amortized on a straight-line basis over their estimated
economic useful life or the life of the lease, whichever is less.

(e) REVENUE RECOGNITION

The Company records revenues from the sale of its products. Revenue from
product sales is recognized upon shipment. The products are inspected by the
customer prior to shipment and are shipped by a third party to the customer
location. The Company records billings on certain prototype units for research
and development purposes and the related deferred revenue based on established
milestones agreed upon in the contracts with its customers. The cost elements
incurred on these units, as a percentage of total costs, approximate the
percentage of revenues recorded on these units (i.e. recorded on the percentage
of completion method). At December 31, 1998 and 1999, deferred revenues were
$436,000 and $0, respectively.

F-8
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) INCOME TAXES

As a result of the investment in the Company by a foreign investor, the
Company terminated its S Corporation election and became a C Corporation. The
termination was effective April 6, 1999. The Company has not provided any
pro-forma income tax information as the Company has incurred net losses since
inception.

The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(g) USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, and revenues and expenses
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.

(h) IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR SALE

The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future undiscounted operating cash flows
expected to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell. No impairment write-downs were recorded during the three-year
period ended December 31, 1999 and the six months ended June 30, 2000.

(i) STOCK SPLIT

Effective September 25, 1998, the Company split its outstanding shares by
means of a stock dividend whereby each holder of common stock received 1.4
additional shares for each share held. All share data included in the Company's
consolidated financial statements have been retroactively restated to reflect
the stock split.

F-9
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) STOCK COMPENSATION

The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), and has elected
to measure compensation cost under Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and comply with the pro forma
disclosure requirements of SFAS No. 123, except for options and warrants granted
to nonemployees, which are recorded for under SFAS No. 123.

(k) COMPREHENSIVE INCOME

On January 1, 1999, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. The Company does not have any transactions or other
economic events that qualify as comprehensive income as defined under SFAS
No. 130. As such, net loss equaled comprehensive loss for each of the years in
the three-year period ended December 31, 1999 and the six months ended June 30,
2000.

(l) FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses are reflected in the consolidated financial statements at carrying
value, which approximates fair value due to the short-term nature of these
instruments. The carrying value of the Company's borrowings approximates the
fair value based on the current rates available to the Company for similar
instruments.

(m) INTERIM FINANCIAL DATA

The unaudited operating results have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation for the periods presented. The results of operations for the
six months ended June 30, 1999 and 2000 are not necessarily indicative of
results to be achieved for the full fiscal year. The unaudited financial
statements should be read in conjunction with the audited consolidated financial
statements presented for the three years ended December 31, 1999.

(n) PRO FORMA INFORMATION

The pro forma loss per share information reflects the weighted average
shares outstanding during the periods presented retroactively adjusted for the
impact of the issuance of 4,862,158 shares of common stock in connection with
the reorganization of the Company's subsidiaries with and into the Company.

The pro forma balance sheet information is presented in note 12 and reflects
the reorganization and the purchase of 2,178,000 shares of common stock by
Sofinov for $10,890,000.

F-10
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) RECENTLY ISSUED ACCOUNTING STANDARD

On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION--AND INTERPRETATION OF APB OPINION NO. 25 (FIN 44). This
interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. FIN 44 applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
The provisions related to modifications to fixed stock option awards to add a
reload feature are effective for awards modified after January 12, 2000. The new
interpretation is not expected to have a material impact upon the financial
statements.

(2) PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31
------------------- JUNE 30,
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Software.................................................... $ -- 60,000 65,000
Shop furniture, fixtures and equipment...................... 120,000 138,000 248,000
Office furniture, fixtures and equipment, including
leaseholds................................................ 197,000 226,000 284,000
-------- ------- -------
317,000 424,000 597,000
Less accumulated depreciation and amortization.............. 146,000 249,000 309,000
-------- ------- -------
$171,000 175,000 288,000
======== ======= =======
</TABLE>

(3) LICENSE AGREEMENTS AND RELATED PARTY TRANSACTIONS

The Company entered into a license agreement with PHS, a 70%-owned
subsidiary, as of August 7, 1996, pursuant to which the Company granted to PHS
in perpetuity, an exclusive, irrevocable worldwide license to make, use, offer
for sale, sell, sublicense and otherwise exploit the licensed UOB-TM- patents,
technology, trademarks and trade names. PHS then sublicensed the
UOB-TM-technology in perpetuity for the specific field of use to PGS. The field
of use is limited and confined to all conventional hydrogen markets, including
but not limited to, chemical, refinery, metals, food, hydrogen

F-11
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(3) LICENSE AGREEMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
peroxide, glass, electronics and all other uses where hydrogen is not used as a
fuel but instead as a feed stock to industrial products and processes.

As payment for the license, PHS paid $250,000 and signed a note payable to
the Company in the amount of $750,000. The note is payable at the earliest
occurrence of the aggregate sales of UOB-TM- systems made by PGS totaling
$22,000,000 and annual net profits of PGS of at least $3,500,000 using generally
accepted accounting principles. The note receivable has been eliminated in
consolidation.

In addition to the note payable, the Company is to receive royalties
equivalent to 2% of the net selling price of any UOB-TM- system and its pro rata
share of any net royalty income paid to PHS. Minimal royalties were earned
during the years ended December 31, 1997, 1998 and 1999 and the six months ended
June 30, 2000. All royalties earned have been eliminated in consolidation.

Certain officers of the Company are also officers of PGS and PHS. In
addition, the Company currently shares a facility with both PHS and PGS. Rent,
salaries and other expenses are allocated by management between the Company and
PGS based on their estimated usage.

(4) PATENTS

The Company has capitalized certain costs associated with obtaining its
patents. The patents are being amortized over their estimated useful lives of
17 years.

(5) LOANS AND ADVANCES PAYABLE AND CONVERSION OF DEBT AND LIABILITIES

During the year ended December 31, 1998, certain shareholders and others
converted $408,000 of their notes payable and $164,000 of accrued liabilities
into 572,000 shares of HBT's common stock.

During the year ended December 31, 1999, certain shareholders and others
converted $863,000 (including a $500,000 convertible note payable) of notes
payable and $674,000 of accrued liabilities into 1,590,000 shares of the
Company's common stock. These liabilities were converted into common shares
based upon the fair value of the common stock at the time of conversion.

During 1999, the Company entered into an agreement with Gaz de France to
establish a marketing and strategic partnership with the Company. The agreement
dated, October 28, 1999, provides the Company a $500,000 advance for costs
associated with the development of on-site hydrogen systems based on the
Company's technology. Per the agreement, if the parties do not proceed in a
partnership agreement, the Company is to repay Gaz de France the $500,000
advance no later than the end of the third year following the date of the
agreement. The advance is classified as long term debt and accrues interest at
10%. The advance was converted to equity on July 13, 2000 (note 11). The
conversion terms of the note did not contain any imbedded yield upon the
original issuance.

As of December 31, 1998 and 1999 and at June 30, 2000, the Company has
certain loans with shareholders aggregating $162,000, $157,000 and $80,000,
respectively, at an interest rate of 10% per annum. These loans and accrued
interest are to be paid out of the profits of the Company, pro rata with other
loans, before any dividends are paid to shareholders. The shareholders have the
option to convert the loans into common stock of the Company at $1 per share.
The conversion terms of the

F-12
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(5) LOANS AND ADVANCES PAYABLE AND CONVERSION OF DEBT AND LIABILITIES
(CONTINUED)

convertible debt did not contain any imbedded yield upon the original issuance.
At December 31, 1999, these loans are classified as long term as the repayments
were contingent on the net earnings of the Company. As of December 31, 1998 and
1999 and June 30, 2000, the related accrued interest amounts to $43,000, $31,000
and $5,000, respectively. However, subsequent to June 30, 2000, the Company
elected to repay those loans.

At December 31, 1998, the Company had a note payable, secured by office
equipment, in the amount of $6,000. This note was repaid in 1999.

In 1993, the Company received a loan of $90,000 from Southern California Gas
Company (SoCal Gas) under which the Company will have to repay SoCal Gas
$180,000 as repayment for the loan when certain sales criteria are met. In the
event minimum sales are not met by the expiration of the loan agreement, the
Company shall repay to SoCal Gas all amounts paid by SoCal Gas to the Company
together with interest at the rate of 10% per annum. The loan was scheduled to
mature in June 1998, but was extended for two years, until June 15, 2000. As of
December 31, 1998 and 1999, the Company paid $7,000 and $11,000, respectively,
in connection with this loan. The balance remaining at December 31, 1998 and
1999 was $173,000 and $169,000, respectively. The loan was repaid on August 21,
2000.

(6) STOCK ISSUANCES

During 1998, 507,000 shares of common stock were sold to various investors
for $950,000. During 1999, 1,889,000 shares of common stock were sold for cash
consideration to various investors for $1,507,000. During the six months ended
June 30, 2000, the Company sold 414,000 shares of the Company's common stock at
a price of $5 per share. On June 30, 2000, the Company sold 400,000 shares of
common stock to Visteon at a price of $5 per share. Additionally, during the six
months ended June 30, 2000, a note payable of $31,000 was converted to common
stock at a price of $5 per share.

During 1996, common stock was issued to certain key employees in exchange
for promissory notes payable to the Company. Under the original terms, each of
three employees received 107,000 shares in exchange for promissory notes bearing
interest at 5% per annum. The notes contain provisions that principal and
interest amounts may be forgiven at the employee's discretion if certain other
terms are fulfilled. The employees may not transfer or sell the stock until the
related promissory note is repaid or forgiven. Until the note is repaid or
forgiven, the Company retains the right to repurchase the stock for the same
amount as originally sold if the employee voluntarily leaves the Company's
employment or is fired for misconduct.

Additional stock was previously issued to one of the key employees discussed
above in 1996. The employee purchased 47,000 shares in exchange for a promissory
note at 5% per annum, interest payable beginning October 1, 1997. The note
contains provisions that principal and interest amounts may be forgiven at the
employee's discretion. During 1996, a total of 13,000 additional shares were
issued to the same key employee for assumption of certain liabilities of the
Company payable to a vendor of the Company. During 1998, the notes were amended
to allow for the total of the original

F-13
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(6) STOCK ISSUANCES (CONTINUED)

shares issued of 367,000 and related notes receivable of $578,000 (outstanding
balance at December 31, 1998) to be canceled and new shares along with new notes
receivable amounting to 367,000 and $153,000 (outstanding balance at
December 31, 1999), respectively, to be issued. The common stock and the related
notes were reissued at the fair market value of the common stock on the date of
the amendment. Notes receivable totaling $578,000, $153,000 and $153,000 at
December 31, 1998, 1999 and June 30, 2000, respectively relating to the stock
issuances described above were netted against the common stock recorded on the
date issued.

During 1998, PGS raised $1,713,000 in additional members' equity (of which
$526,000 was raised from minority group interests) increasing the Company's
interest in PGS to 66.7%. During 1999, PGS raised $1,930,000 in additional
members' equity (of which $602,000 was raised from minority group interests)
increasing the Company's interest in PGS to 66.9%. During the six months ended
June 30, 2000, PGS raised $715,000 in additional members' equity (of which
$241,000 was raised from minority group interests).

(7) COMMITMENTS AND CONTINGENCIES

The Company leases its corporate office and warehouse facilities under
operating leases which expire through April 2005. The Company also pays certain
expenses applicable to the property such as property taxes and insurance. The
Company also leases equipment under service agreements with monthly minimum
payments.

The Company leases various equipment under long-term leases and has the
option to purchase the equipment for a nominal cost at the termination of the
lease. Included in property and equipment at June 30, 2000 are net assets
aggregating approximately $213,000 which are held under capital leases.

Minimum lease commitments at December 31, 1999, inclusive of leases executed
through the date of this report, under all noncancelable leases are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
Year ending December 31:
2000...................................................... $ 44,000 299,000
2001...................................................... 54,000 327,000
2002...................................................... 52,000 315,000
2003...................................................... 26,000 340,000
2004...................................................... 26,000 349,000
2005...................................................... 1,000 118,000
-------- ----------
Total minimum lease payments.......................... 203,000 $1,748,000
==========
Less amount representing interest......................... 41,000
--------
Present value of net minimum lease commitments........ $162,000
========
</TABLE>

F-14
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the years ended December 31, 1997, 1998 and 1999 and the
six months ended June 30, 1999 and 2000 aggregated $82,000, $89,000, $92,000,
$48,000 and $99,000, respectively.

The Company has entered into employment agreements with five members of
management which have various terms and conditions which generally have
three-year terms.

The Company has sold shares of common stock to certain employees, business
consultants and associates and their friends and family members, and, due to the
financial qualification of some of these purchasers, such sales may not have
complied with all of the requirements for an exemption from the registration
requirements of various Federal and state securities laws. The Company intends
to make an offer to repurchase 951,800 shares at their original purchase price,
of approximately $1,290,000 in the aggregate, plus interest from the date of
purchase. While the determination of amounts is subject to uncertainty, the
Company believes it could be liable for a total amount up to approximately
$1,656,999. The Company has not accrued for such potential repurchases as
management believes that the likelihood of such repurchases is low.

(8) RESEARCH CONTRACTS

The Company obtained two cost reimbursement research contracts with the
Department of Energy (DOE) during 1997: the "Gasoline" contract and the
"Stationary" contract. These contracts are summarized as follows:

- Gasoline--The Company agreed to design, develop, demonstrate and deliver a
fuel-flexible fuel processor subsystem capable of converting gasoline into
a hydrogen (H2) rich gas stream that is compatible with the anode gas
requirements of a polymer electrolyte membrane fuel cell. In addition, the
Company agreed to investigate an advanced humidifier low-temperature shift
reactor to attempt to achieve extremely low carbon monoxide (CO)
concentration without the addition of downstream selective CO reduction
hardware. This cooperative agreement is partially funded on a
cost-reimbursement basis without fee or profit. The total estimated cost
of the project is $2,253,000, of which the estimated cost to the DOE
(i.e., reimbursement) is $1,690,000 and the estimated cost to the Company
is $563,000.

- Stationary--The Company and Acurex Environmental Corporation (AEC) agreed
to study the application of a natural gas fueled, underoxidized burner
(UOB-TM-) fuel processor (NGFP) in a polymer electrolyte membrane fuel
cell system intended for stationary building applications. This study is
intended to result in the design of an optimized NGFP subsystem based on a
trade-off analysis. A plan is to be developed to verify subsystem concepts
and qualify precommercial hardware with the greatest potential for
commercial success and implementation. This cooperative agreement is
partially funded on a cost-reimbursement basis without fee or profit. The
total estimated cost of the project is $679,000, of which the estimated
cost to the DOE (i.e., reimbursement) is $503,000 and the estimated cost
to the Company is $176,000.

During the years ended December 31, 1997, 1998 and 1999 and the six months
ended June 30, 1999 and 2000, the Company recorded $85,000, $1,057,000,
$956,000, $670,000 and $62,000, respectively, in cost reimbursements under these
contracts and incurred $113,000, $1,409,000, $770,000,

F-15
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(8) RESEARCH CONTRACTS (CONTINUED)
$770,000 and $71,000, respectively, in research and development costs. The total
contract proceeds have been netted against the respective expenses and included
in research and development expense.

The Company accrues for any projected losses as identified.

In addition to the above contracts, the Company entered into a research and
development arrangement with Gaz de France whereby this entity performed a
variety of research and development activities on the Company's behalf that lead
to the further development of the Company's technology. Under this arrangement,
the value of the services has been estimated at $1.0 million. This value has
been recorded in the consolidated financial statements at December 31, 1999 as
research and development expense and a corresponding current liability. This
note was subsequently converted into Common Stock as a part of an equity
transaction entered into with Gaz de France on July 13, 2000. (See note 11).

(9) INCOME TAXES

Income tax expense for the year ended December 31, 1999 was all current and
consisted of the minimum state tax. For the periods prior to April 6, 1999, the
Company was an S Corporation and all tax attributes were allocated to the
respective shareholders.

The components of deferred taxes are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ---------
<S> <C> <C>
Deferred tax assets:
Cumulative basis adjustments from partnerships............ $1,652,000 1,652,000
Net operating loss carryforwards.......................... 938,000 1,621,000
Research and development credit carryforwards............. 155,000 155,000
Other..................................................... 13,000 13,000
---------- ---------
2,758,000 3,441,000
Less valuation allowance.................................. 2,711,000 3,391,000
---------- ---------
Net deferred tax assets............................... 47,000 50,000
Deferred tax liabilities--amortization.................... (47,000) (50,000)
---------- ---------
$ -- --
========== =========
</TABLE>

As there exists significant uncertainty about the Company's ability to
recognize the benefits of the recorded deferred tax assets, management has
recorded a valuation allowance to offset all net deferred tax assets at
December 31, 1999 and June 30, 2000.

(10) STOCK OPTIONS AND WARRANTS

On July 31, 1998, the Board of Directors adopted a resolution and the
Company issued nonstatutory stock options to purchase 1,285,000 shares of common
stock at an exercise price of $1 per

F-16
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(10) STOCK OPTIONS AND WARRANTS (CONTINUED)
share, representing the approximate fair value of the common stock on the date
issued. These options were immediately exercisable and expire on July 30, 2005.

On October 29, 1999, the Board of Directors approved and the Company granted
343,000 shares to purchase common stock at $5 per share, representing the
approximate fair value of the common stock on the date issued. These options are
immediately exercisable and expire on October 28, 2006.

The Company adopted the 2000 Stock Incentive Plan (the Plan) on July 20,
2000. The Plan reserves 1,575,000 shares of common stock for grants to
employees, nonemployee directors and consultants. Grants permitted under the
Plan include incentive stock options (ISO), nonstatutory stock options and
shares of stock sold subject to forfeiture restrictions. The minimum exercise
price of ISOs granted under the Plan is 100% of the fair market value of the
stock on the date of grant, but also at least equal to 110% of the fair market
value in the case of ISOs granted to an employee who holds more than 10% of the
common stock. Options issued under the Plan vest generally over three years and
expire generally on the seventh anniversary of the date of grant.

The Company's stock option activity is summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Shares under option at December 31, 1997.................... -- $ --
Granted..................................................... 1,285,000 1.00
--------- -----
Shares under option at December 31, 1998.................... 1,285,000 1.00
Granted..................................................... 343,000 5.00
--------- -----
Shares under option at December 31, 1999.................... 1,628,000 1.84
Granted..................................................... 1,000,000 5.00
--------- -----
Shares under option at June 30, 2000........................ 2,628,000 $3.04
========= =====
</TABLE>

During the six months ended June 30, 2000, the Company granted options to
purchase 1,000,000 shares of the Company's common stock at an exercise price of
$5.00 per share, representing the approximate fair market value of the common
stock on the date issued. Of the total grant, options for 200,000 shares are
fully vested and exercisable up until the day before the Company's initial
public offering. An additional 100,000 shares are fully vested and are
exercisable within seven years from the May 15, 2000 date of grant. An
additional 200,000 shares will vest upon the completion of the Company's initial
public offering and 300,000 shares will vest in 100,000 share increments on each
subsequent anniversary of the May 15, 2000 date of grant, all exercisable over a
seven-year period. The remaining 200,000 shares will vest in the event the
Company's common stock maintains a certain average trading price following the
Company's initial public offering. Options that are contingent upon the
occurrence of future events will be subject to potential compensation expense in
the amount of the intrinsic difference between the exercise price and the fair
value of the stock at the measurement date. The compensation expense will be
recorded as a charge to earnings in the period in which such contingencies are
resolved.

F-17
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(10) STOCK OPTIONS AND WARRANTS (CONTINUED)
At June 30, 2000, the weighted-average remaining contractual life of
outstanding options was 5.3 years.

The Company has adopted the disclosure-only provisions of Statement
No. 123. Accordingly, for the stock options granted to employees, no
compensation cost has been recognized in the accompanying consolidated
statements of operations because the exercise price equaled or exceeded the fair
value of the underlying common stock at the date of grant. Had compensation cost
for the Company's stock granted to employees been determined based upon the fair
value at the grant date for awards consistent with Statement No. 123, the
Company's reported and pro forma net loss for the years ended December 31, 1998
and 1999 would have been as follows:

<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Net loss:
As reported............................................... $2,244,000 2,937,000
Pro forma................................................. 3,075,000 3,350,000
========== =========
Net loss per share, basic and diluted:
As reported............................................... $ (0.21) (0.20)
Pro forma................................................. $ (0.28) (0.23)
</TABLE>

The effects of applying Statement No. 123 for pro forma disclosure purposes
may not be representative of the effects on reported net income or loss for
future years' disclosures.

The fair value of common stock options is estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended December 31, 1998 and 1999: risk-free interest
rate of 5.49% and 4.32%, respectively; weighted-average expected life of the
option of 7 years; no expected volatility; and no expected dividends.

(11) STRATEGIC RELATIONSHIPS AND SUBSEQUENT EVENTS (UNAUDITED)

On July 13, 2000, the Company entered into a five-year agreement with Gaz de
France, a natural gas supplier and distributor, whereby Gaz de France became the
exclusive European distributor of the Company's hydrogen generating systems for
industrial use and refueling stations. The agreement includes a minimum purchase
quota, which is agreed upon between the parties on an annual basis. In addition,
the Company plans to develop enhanced hydrogen generation systems and conduct
related research together with Gaz de France. Concurrent with this agreement,
the Company issued 1,050,000 shares of common stock for total consideration of
$5.2 million. The total consideration included cash of $3.7 million, the
forgiveness of $1.0 million in amounts due for research and development
performed by Gaz de France on behalf of the Company and forgiveness of $500,000
previously advanced under the October 28, 1999 agreement with Gaz de France. The
common stock issued upon the conversion of the aforementioned liabilities was
recorded at the estimated fair market value of the common stock at the time of
the conversion. In addition, the Company issued a fully vested and
nonforfeitable warrant to purchase 1,000,000 shares of common stock at $4 per
share. Gaz de France is required to exercise the warrant immediately prior to
the closing of the Company's IPO. The Company accounted for the warrant pursuant
to SFAS No. 123 and EITF 96-18. Accordingly, the fair value of the warrant,

F-18
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(11) STRATEGIC RELATIONSHIPS AND SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)

aggregating $1.1 million, will be recorded as an asset representing the future
value of Gaz de France becoming the Company's exclusive European distributor.
This asset will be amortized over the five-year term of the agreement.

Effective January 19, 1999, the Company entered into an agreement with
Engelhard, the world's largest catalyst supplier, to develop and commercialize a
hydrogen fuel processing system by combining Engelhard's proprietary catalyst
technology with our proprietary fuel processor-related technology, specifically
for residential and small stationary fuel cell systems applications. This joint
development agreement also contemplates further development activities between
our companies.

The Company and Engelhard have royalty-free access to each other's patents
and technology for products produced prior to the end of 2001. All patents and
technology jointly developed will be jointly owned and both parties have an
exclusive right to use the jointly owned patents and technology through the end
of 2004. Either party may terminate this agreement upon 90 days notice, in which
case the rights to jointly owned patents and technology will not be exclusive
and we must negotiate a royalty-based license for each other's solely owned
patents and technology. No royalties have been paid by either party under this
agreement.

In November of 2000, the Company entered into a series of agreements with
Visteon Corporation to obtain engineering support services, and to form a
product manufacturing and a technology sharing and development alliance with
respect to the development and manufacture of the Company's hydrogen fuel
processors for PEM fuel cell applications. The Company believes that its
relationship with Visteon will significantly accelerate its efforts to achieve
large-scale commercial production of its hydrogen fuel processors and permit the
Company to produce higher quality and more cost-efficient products.

In return for these services and as part of the Company's alliance with
Visteon, the Comany will issue Visteon warrants, which will vest over a period
of one year, to purchase up to 5,476,886 shares of the Company's Common Stock
for an exercise price equal to the $0.0001 per share, or approximately $548 for
all such shares.

The Company has accounted for these warrants pursuant to SFAS No. 123 and
EITF 96-18. Accordingly, the fair value of the warrants, aggregating
$27.4 million, will be recorded as an asset and will be amortized into
engineering and research and development expense over the one-year vesting
period of the warrants.

In September of 2000, the Company filed with the Securities and Exchange
Commission for its IPO. Prior to the Company's filing, the Company entered into
a reorganization agreement to merge the Company's subsidiaries, PHS and PGS,
with and into the Company. This transaction is discussed in Note 1.

(12) PRO FORMA INFORMATION

As discussed in Note 1, the Company entered into a reorganization agreement
on September 29, 2000 to merge its subsidiaries with and into the Company.

F-19
<PAGE>
HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1999 (AUDITED) AND
JUNE 30, 2000 (UNAUDITED)

(12) PRO FORMA INFORMATION (CONTINUED)

The following pro forma balance sheet at December 31, 1999 and June 30, 2000
reflects the financial position as if the reorganization had occurred on
December 31, 1999 and June 30, 2000, respectively.

The pro forma income (loss) per share information, presented on the income
statement has been computed pursuant to SFAS No. 128. Under SFAS No. 128, the
Company must present basic and diluted income (loss) per share on the face of
the statements of operations. Basic income (loss) per share includes only the
weighted average shares outstanding during each period. Pro forma basic income
(loss) per share reflects the issuance of 4,862,158 shares of common stock in
connection with the reorganization. Diluted loss per share is computed using the
dilutive effect of all options and warrants to purchase the Company's common
stock. A full statement of operations on a pro forma basis is not presented
because there are no differences between historical and pro forma statements of
operations resulting from the reorganization.

The Company incurred a net loss for the periods included for the pro forma
information and recorded a 100% valuation allowance against all deferred tax
assets at December 31, 1999 and June 30, 2000.

F-20
<PAGE>

HYDROGEN BURNER TECHNOLOGY, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
----------------------------------------- ---------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................. 352,000 352,000 2,040,000 2,040,000
Trade accounts receivable................. 243,000 243,000 24,000 24,000
Related party receivables................. 154,000 154,000 117,000 117,000
Inventory................................. 550,000 550,000 917,000 917,000
Prepaids and other current assets......... 82,000 82,000 84,000 84,000
----------- ------------- ----------- -----------
Total current assets.................... 1,381,000 1,381,000 3,182,000 3,182,000
Property and equipment, net................. 175,000 175,000 288,000 288,000
Deposits and other assets................... 20,000 20,000 73,000 73,000
Patents, net................................ 111,000 111,000 119,000 119,000
----------- ------------- ----------- -----------
1,687,000 1,687,000 3,662,000 3,662,000
----------- ------------- ----------- -----------

LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)

Current liabilities:
Accounts payable.......................... 319,000 319,000 204,000 204,000
Accrued expenses.......................... 275,000 275,000 455,000 455,000
Accrued interest.......................... 68,000 68,000 101,000 101,000
Lease payable............................. 25,000 25,000 23,000 23,000
Customer deposits......................... 103,000 103,000 35,000 35,000
Loans and notes payable, current
portion................................. 170,000 170,000 249,000 249,000
Other current liability................... 1,000,000 1,000,000 1,000,000 1,000,000
----------- ------------- ----------- -----------
Total current liabilities............... 1,960,000 1,960,000 2,067,000 2,067,000
Lease payable............................... 41,000 41,000 126,000 126,000
Loans and notes payable, less current
portion................................... 657,000 657,000 500,000 500,000
----------- ------------- ----------- -----------
Total liabilities....................... 2,658,000 2,658,000 2,693,000 2,693,000
----------- ------------- ----------- -----------
Minority interest........................... 3,722,000 (3,722,000) -- 3,702,000 (3,702,000) --
Shareholders' equity (deficiency):
Common stock, no par value, actual;
$0.0001 par value, pro forma; 30,000,000
shares authorized and 10,487,349 and
11,307,352 shares issued and outstanding
at December 31, 1999 and June 30, 2000,
respectively, actual; 200,000,000 shares
authorized and 15,349,507 and
16,169,510 shares issued and outstanding
at December 31, 1999 and June 30, 2000,
respectively, pro forma................. 5,382,000 (5,380,000) 2,000 9,482,000 (9,480,000) 2,000
Additional paid-in capital.................. -- 9,102,000 9,102,000 -- 13,182,000 13,182,000
Accumulated deficit......................... (10,075,000) (10,075,000) (12,215,000) (12,215,000)
----------- ------------- ----------- -----------
Net shareholders' equity (deficiency)... (4,693,000) 3,722,000 (971,000) (2,733,000) 3,702,000 969,000
----------- ---------- ------------- ----------- ----------- -----------
Commitments, contingencies and subsequent
event.....................................
1,687,000 1,687,000 3,662,000 3,662,000
=========== ============= =========== ===========
</TABLE>

F-21
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

8,000,000 SHARES

HYDROGEN BURNER TECHNOLOGY, INC.

COMMON STOCK

[LOGO]

------

P R O S P E C T U S

, 2000

---------

SALOMON SMITH BARNEY

CIBC WORLD MARKETS
LEHMAN BROTHERS

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table states the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the common stock being registered by this registration
statement. All amounts shown are estimates, except the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 31,575
NASD filing fee............................................. 12,000
Nasdaq National Market listing fee.......................... 100,000
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 800,000
Accounting fees and expenses................................ 200,000
Transfer Agent and Registrar fees........................... 25,000
Miscellaneous expenses...................................... 100,000
----------
Total....................................................... $1,518,575
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Immediately prior to the completion of this offering we will reincorporate
as a Delaware Corporation. Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. Our
Certificate of Incorporation, to be filed and effective upon completion of this
offering (Exhibit 3.1 hereto), provide for indemnification of our directors and
officers to the maximum extent permitted by the Delaware General Corporation
Law, and our bylaws, to be effective upon completion of this offering
(Exhibit 3.2 hereto), provide for indemnification of our directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law.

In addition, the we have entered into Indemnification Agreements
(Exhibit 10.4 hereto) with our directors and officers containing provisions that
are in some respects broader than the specific indemnification provisions
contained in the Delaware General Corporation Law. The Indemnification
Agreements may require us, among other things, to indemnify our directors and
officers against certain liabilities that may arise by reason of their status or
service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.

The underwriting agreement filed as Exhibit 1.1 to this registration
statement provides for indemnification by the underwriters of us and our
officers and directors for certain liabilities under the Securities Act, or
otherwise.

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following is a summary of transactions since August 1997 involving sales
of our securities that were not registered under the Securities Act.

1. In May and July of 1998, we sold an aggregate of 24,000 shares of our
common stock at a purchase price of $20.83 per share to four purchasers (and in
some cases, together with their spouses) for an aggregate purchase price of
$500,000.

2. In September of 1998 we issued an aggregate of 3,523,016 shares of our
common stock to all stockholders of record as the result of a stock dividend of
1.4 shares of our common stock being paid on each outstanding share.

3. In December of 1998, the following transactions occurred:

- We issued an aggregate of 100,000 shares of our common stock to two
individuals in exchange for the conversion of a $100,000 loan owed by
us to them;

- We issued an aggregate of 23,277 shares of our common stock to
Mr. Moard and his spouse in exchange for past services and the
conversion of a debt owed to Mr. Moard by us;

- Joseph Stell (and his spouse) received 63,149 shares of common stock in
exchange for past legal services rendered;

- Three individuals (including Mr. Greiner) received an aggregate of
385,129 shares of common stock in exchange for the conversion of debts
owed by us to such individuals; and

- 450,000 shares of our common stock were acquired by three purchasers,
for an aggregate price of $450,000, or $1.00 per share.

4. In January of 1999, we issued 8,000 shares of common stock to Mr. Wedaa
in exchange for past services rendered and we sold 265,000 shares of our common
stock to nine purchasers at a purchase price of $1.00 per share.

5. In February of 1999, 110,000 shares of our common stock were acquired by
four purchasers at a purchase price of $1.00 per share.

6. In March of 1999, Mr. Moard received 287,000 shares of stock in exchange
for the cancellation of a note owed by us to him.

7. In April of 1999, the following transactions occurred:

- We sold 1,101,447 shares of our common stock to Sofinov Societe
Financiere d'Innovation, Inc. for $1,101,447 in the form of $800,000 in
cash and the cancellation of a $300,000 promissory note and the
interest accrued thereon;

- We sold an aggregate of 92,000 shares to two purchasers at a purchase
price of $1.00 per share;

- Mr. Woods (together with his spouse) and Mr. Greiner's Trust received
25,000 and 353,125 shares of our common stock, respectively, in
exchange for the conversion of debts owed by us to them; and

- The four purchasers described in paragraph number 1, above (and in some
cases together with their spouses) received an aggregate of 394,600
shares of our common stock as the result of an adjustment made to
shares previously purchased by them at the $20.83 purchase price.

8. In May of 1999, we issued an aggregate of 250,000 shares of common stock
to three purchasers in consideration of $200,000 in cash and the conversion of a
$50,000 debt owed by us.

II-2
<PAGE>
9. In July of 1999, three individuals purchased 26,666 shares of our common
stock at $1.50 per share for an aggregate purchase price of $39,999.

10. In September of 1999, DCH Technology, Inc. received 13,000 shares of
our common stock valued at $5.00 per share in exchange for the cancellation of
our $65,000 debt to that company.

11. In November of 1999, we issued an aggregate of 500,000 shares of common
stock to Peter Susi and Mathewson Greene in cancellation of a $500,000 face
amount promissory note payable by Phoenix Gas Systems, LLC to Messrs. Susi and
Greene, and guaranteed by us.

12. In January of 2000, we sold 80,000 shares of our common stock to one
individual at a purchase price of $5.00 per share for an aggregate purchase
price of $400,000.

13. In March, April and May of 2000, we sold an aggregate of 360,000 shares
or our common stock to seven investors at a purchase price of $5.00 per share
and we converted a $31,000 loan into 6,000 shares of our common stock.

14. In June of 2000, Visteon Corporation purchased 400,000 shares of our
common stock for $2 million in cash.

15. In July of 2000, G.D.F. International, a wholly owned subsidiary of Gaz
de France, purchased 1,050,000 shares of our common stock in exchange for
$3.7 million in cash and the cancellation of our outstanding debt to Gaz de
France in the amount of $1,550,000. In addition, we issued to G.D.F.
International a warrant to purchase 1,000,000 shares of our common stock
exercisable at $4.00 per share. Unless it is exercised, the warrant will expire
on the date this registration statement becomes effective. G.D.F. International
intends to exercise the warrant prior to its expiration.

16. Since August of 1997, we have granted options to purchase common stock
to our executive officers, employees and consultants. The following table sets
forth information regarding these grants.

<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Fiscal Year 1998............................................ 1,285,000 $1.00
Fiscal Year 1999............................................ 343,000 5.00
Fiscal Year 2000............................................ 1,991,651 5.00
Fiscal Year 2000*........................................... 78,750 5.50
</TABLE>

--------------

* Incentive Stock Options granted to Mr. Moard.

There were no underwriters employed in connection with any of the
transactions set forth in this Item 15, except that CIBC Oppenheimer acted as a
private placement agent in connection with the transactions described in the
paragraphs numbered 14 and 15, above.

At the time that each of the securities transactions listed above occurred,
we believed that all of such sales and issuances were considered to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions under compensatory benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients of
securities in each of these transactions represented their intention to acquire
the securities for investment only and not with a view to or for sale with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in these transactions. As set forth in the
prospectus contained in this registration statement, however, we intend to make
a rescission offer with respect to certain shares of our common stock issued
pursuant to certain sales set forth in the paragraphs numbered 1 through 11,
above, and as described in the section of the prospectus entitled "Repurchase
Offer".

II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Certificate of Incorporation.
3.2** Bylaws.
4.1** Form of specimen common stock certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of our Certificate
of Incorporation and Bylaws defining the rights of our
shareholders.
5.1** Opinion of Manatt, Phelps & Phillips, LLP, regarding
legality of the securities being issued.
10.1**+ Hydrogen Burner Technology, Inc., Key Employee Contract with
Michael Burke dated May 15, 2000.
10.2+ Hydrogen Burner Technology, Inc., Key Employee Contract with
David M. Moard dated August 1, 2000.
10.3+ Hydrogen Burner Technology, Inc., Key Employee Contract with
Larry Frost dated August 1, 2000.
10.4+ Hydrogen Burner Technology, Inc., Key Employee Contract with
Hazen Burford dated August 1, 2000.
10.5+ Hydrogen Burner Technology, Inc., Key Employee Contract with
Richard Woods dated August 1, 2000.
10.6**+ Form of Indemnity Agreement entered into by Registrant with
each of its executive officers and directors.
10.7* Industrial/Commercial Lease between The Allan and Georgianna
Kolsky Trust and Hydrogen Burner Technology, Inc., dated
March 27, 1996.
10.8* Amendment to Industrial/Commercial Lease between The Allan
and Georgianna Kolsky Trust and Hydrogen Burner
Technology, Inc., dated October 22, 1998.
10.9* Amendment to Industrial/Commercial Lease between The Allan
and Georgianna Kolsky Trust and Hydrogen Burner
Technology, Inc., dated December 28, 1999.
10.10* Industrial/Commercial Lease between The Bloom Family Trust
and Hydrogen Burner Technology, Inc., dated April 13,
2000.
10.11 Reorganization Agreement dated September 7, 2000, among
Sofinov, Societe Financiere d'Innovation, Inc., Hydrogen
Burner Technology, Inc., Sofical Investment Corp. I,
Phoenix Gas Systems, LLC, Phoenix Hydrogen Systems, LLC
and the individuals named therein.
10.12* Common Stock and Warrant Purchase Agreement between Hydrogen
Burner Technology, Inc. and G.D.F. International dated
July 13, 2000.
10.13* Warrant of Hydrogen Burner Technology, Inc. issued to G.D.F.
International on July 13, 2000.
10.14* Distribution Agreement among Phoenix Gas Systems, LLC, Gaz
de France and Hydrogen Burner Technology, Inc., dated July
13, 2000.
10.15 [RESERVED]
10.16* Stock Purchase Agreement between Visteon Corporation and
Hydrogen Burner Technology, Inc., dated June 30, 2000.
10.17* Common Stock Purchase Agreement between Hydrogen Burner
Technology, Inc. and Dieter Bakic dated January 14, 2000.
10.18* Equipment Purchase and Service Agreement between Air Liquide
Canada, Inc. and Phoenix Gas Systems, LLC dated June 26,
1997.
10.19* Sales Agreement between DCH Technology, Inc. and Phoenix
Hydrogen Systems, LLC, dated January 15, 1997.
10.20* Development Agreement between Engelhard Corporation and
Hydrogen Burner Technology, Inc., dated January 19, 1999.
10.21* Agreement between H Power Corp. and Hydrogen Burner
Technology, Inc., dated December 7, 1994.
10.22* Subcontractor Agreement between H Power Corp. and Hydrogen
Burner Technology, Inc., dated October 9, 1999.
10.23*+ Hydrogen Burner Technology, Inc. 401(k) Plan.
10.24*+ Hydrogen Burner Technology, Inc. 2000 Stock Incentive Plan.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
10.25 Formation Agreement dated August 7, 1996 between Hydrogen
Burner Technology, Inc. and Sofinov Societe Financiere
d'Innovation, Inc.
10.26** Form of Stock Option Agreement and list of persons subject
to such agreement.
11 Statement of Computation of Earnings Per Share (this exhibit
is omitted because the information is shown in the
financial statements and the notes thereto).
23.1 Consent of KPMG LLP.
23.2 Consent of Manatt, Phelps & Phillips, LLP (contained in
Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>

----------------

* Previously filed in Registration Statement on Form S-1 filed on
September 8, 2000.

** To be filed by amendment.

+ Management and/or compensation plan or agreement.

(b) Financial Statement Schedules.

None

All financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the registrant or in the related notes to the financial statements.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is therefore unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act, and will be governed by the
final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and

(2) for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rancho
Dominguez, State of California, on the 2nd day of November, 2000.

<TABLE>
<S> <C> <C>
Hydrogen Burner Technology, Inc.

By: /s/ DAVID M. MOARD
-----------------------------------------
David M. Moard
President and Chief Executive Officer
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated below:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President, Chief Executive
/s/ DAVID M. MOARD Officer and Director
------------------------------------------- (Principal Executive November 2, 2000
David M. Moard Officer)

Chief Financial Officer and
/s/ MICHAEL K. BURKE Assistant Secretary
------------------------------------------- (Principal Financial and November 2, 2000
Michael K. Burke Accounting Officer)

*
------------------------------------------- Treasurer and Secretary November 2, 2000
Larry Frost

*
------------------------------------------- Director November 2, 2000
Roger Saillant

*
------------------------------------------- Director November 2, 2000
Jean-Louis Exbrayat

*
------------------------------------------- Director November 2, 2000
Dr. James N. Goffi

*
------------------------------------------- Director November 2, 2000
Dr. Larry L. Berg
</TABLE>

II-6
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*
------------------------------------------- Director November 2, 2000
Ivan Roch

*
------------------------------------------- Director November 2, 2000
Henry Wedaa

*
------------------------------------------- Director November 2, 2000
Fred R. Seddiqui

*
------------------------------------------- Director November 2, 2000
David Freeman
</TABLE>

<TABLE>
<S> <C>
*By /s/ MICHAEL K. BURKE
--------------------------------------
Michael K. Burke, ATTORNEY-IN-FACT
</TABLE>

II-7
<PAGE>
INDEX TO EXHIBITS

<PAGE>

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
10.22* Subcontractor Agreement between H Power Corp. and Hydrogen
Burner Technology, Inc., dated October 9, 1999.
10.23*+ Hydrogen Burner Technology, Inc. 401(k) Plan.
10.24*+ Hydrogen Burner Technology, Inc. 2000 Stock Incentive Plan.
10.25 Formation Agreement dated August 7, 1996 between Hydrogen
Burner Technology, Inc. and Sofinov Societe Financiere
d'Innovation, Inc.
10.26** Form of Stock Option Agreement and list of persons subject
to such agreement.
11 Statement of Computation of Earnings Per Share (this exhibit
is omitted because the information is shown in the
financial statements and the notes thereto).
23.1 Consent of KPMG LLP.
23.2 Consent of Manatt, Phelps & Phillips, LLP (contained in
Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>

--------------

* Previously filed in Registration Statement on Form S-1 filed on
September 8, 2000.

** To be filed by amendment.

+ Management and/or compensation plan or agreement.