The company’s proven ore reserves are generally expected to be extracted utilizing the existing mine infrastructure. Additional capital expenditures will be required to extract the company’s probable ore reserves.

(1)		Reserves are defined as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Proven reserves are defined as reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. Probable reserves are defined as reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation. The proven and probable reserves reflect variations in the PGM content and structural impacts on the J-M Reef. These variations are the result of localized depositional and structural influences on the distributions of economic PGM mineralization. The historical weighted average percent tonnage that could be mined economically for the Stillwater Mine is 33% and for the East Boulder Mine it is 61%. Areas within the reserve boundaries of the two mines include areas where as little as 7% and up to 100% of the J-M Reef is economically mineable. There are significant portions of the reef that are known to be barren. The reserve estimate gives effect to these assumptions. See “Business and Properties — Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results and Financial Condition.”
(2)		Total probable reserves include 17.4 million tons and 17.5 million tons in the area of the Stillwater Mine and 21.4 million tons and 21.1 million tons in the area of the East Boulder Mine, all at December 31, 2002 and 2001, respectively. Significant sustaining capital investments will be required to access the company’s probable reserves. See “Business and Properties — Current Operations — East Boulder Mine” and “Business and Properties – Current Operations – Stillwater Mine.”

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(3)		Expressed as palladium plus platinum ounces per ton at a ratio of 3.5 parts palladium to one part platinum.
(4)		The average mine grade dilution of 10% has not been included, and the average mill processing recovery of 90% has not been deducted from the contained ounces.

     Ore reserves, primarily proven ore reserves, are consumed during mining operations and the company generally replaces proven ore reserves by drilling on a close-spaced pattern probable ore reserve or mineralized material which has been identified geologically but not yet established as proven ore reserves. Because of the expense of the close-spaced drilling necessary to establish proven mining reserve estimates, the company has set an objective to achieve and maintain proven ore reserves to support approximately three years of mine production.

     In the second quarter of 2002, the company announced that it was engaged in discussions with the SEC concerning its estimate of probable ore reserves. The reserve discussions arose in connection with the SEC’s review of the company’s “shelf” registration statement, which was filed in December 2001. As a result of these discussions, the company determined to modify certain parameters used in determining its probable ore reserve estimate. Historically, the company has vertically projected its probable ore reserves in certain ore blocks for distances of up to 1,900 feet beyond sample points. These projections were based on demonstrated ore continuity within the J-M Reef, the company’s knowledge of geologic features affecting ore continuity and reconciliation of prior ore reserve estimates with actual mining results. The revised parameters limit ore reserve projections to 1,000 feet beyond sample points. These changes caused a decrease in the company’s aggregate ore reserves of approximately 10%. The effect of this change on the company’s depletion rate is reflected in the company’s financial statements as a change in estimate commencing with the second quarter of 2002. The impact was not material to the company’s financial condition or results of operations. The company will continue its practice of selectively limiting ore reserve projections to distances less than 1,000 feet on the basis of its knowledge of geologic features. The company filed with the SEC an amended Form 10-K for 2001 giving effect to the ore reserve change. The company is subject to certain stockholder litigation in connection with the ore reserve issue. See “Stockholder Suits” under Item 3 hereof.

CURRENT OPERATIONS

     The company’s original long-term deposit development strategy and certain elements of its current planning and mining practices on the J-M Reef were founded with initial feasibility and engineering studies conducted in the 1980’s. Initial mine designs and practices were established in response to available technologies and the particular characteristics and challenges of the J-M Reef ore deposit. The company’s current development plans, mining methods and ore extraction schedules are designed to provide systematic access and development of the ore deposit within the framework of current and forecast economic, regulatory and technological considerations as well as the specific characteristics of the J-M Reef ore deposit. Comprehensive optimization, development and capital planning is conducted for proven and probable ore reserves in the context of ongoing ore reserve expansion programs and a longer term life-of-mine development strategy for the entire J-M Reef. Some of the challenges specific to the development of the J-M Reef include:

•		Surface access limitations (property ownership and environmental sensitivity)
•		Topographic and climatic extremes involving rugged mountainous terrain and substantial elevation differences
•		Specific characteristics of the mineralized zone (narrow – average width 5 feet, and long – approximately 28 miles in length)
•		Downward angle of mineralized zone dipping from near vertical to 38 degrees
•		A deposit which extends both laterally and to depth from available mine openings
•		Probable ore reserves extend for a lateral distance of approximately 32,000 feet at the Stillwater Mine and approximately 17,000 feet at the East Boulder Mine — a combined distance of approximately 9.3 miles.

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STILLWATER MINE

     The company wholly owns and performs underground mining operations at the Stillwater Mine, near Nye, Montana. The mining operation accesses, extracts and processes PGM ores from the eastern portion of the J-M Reef from mine openings located in the Stillwater Valley. In addition, the company owns and maintains ancillary buildings that contain the concentrator, shop and warehouse, changing facilities, headframe, hoist house, paste plant, water treatment, storage facilities and office. All structures and tailings management facilities are located within a 2,450 acre Stillwater Mine Operating Permit area. Ore reserves developed at the Stillwater Mine are controlled by patented mining claims either leased or owned outright by the company. The mine is located approximately 85 miles southwest of Billings, Montana and is accessed by a paved road. The mine has adequate water and power from established sources. See “Business and Properties — Risk Factors.”

     The Stillwater Mine accesses and has developed a 5.6-mile segment of the J-M Reef, between the elevations of 7,000 and 2,900 feet above sea level. Access to the ore at the Stillwater Mine is accomplished by means of a 1,950-foot vertical shaft and by a system of horizontal adits and drifts driven parallel to the strike of the J-M Reef at vertical intervals of between 200 feet and 300 feet. Seven main adits have been driven from surface portals on the west and east slopes of the Stillwater Valley at various elevations between 5,000 and 5,900 feet above sea level. Five principal levels have been developed below the valley floor by ramping down from the 5,000-foot level to extract ore from the reef down to the 3,800-foot elevation. Four additional major levels below the 5,000-foot level are accessed principally from a vertical shaft and shaft ramp system. The company is currently developing a decline system from the 3,200-foot elevation to access and develop deeper areas in the central part of the mine below those currently serviced by the existing shaft.

     The 1,950-foot vertical shaft was constructed between 1994 and 1997 as part of the company’s plan to increase output from 1,000 to 2,000 tons of ore per day and was sunk adjacent to the concentrator to increase efficiency of the operation. Ores and any waste rock to be transported to the surface from the off-shaft and deeper areas of the mine are crushed prior to being hoisted up the shaft. The production shaft and underground crushing station reduced haulage times and costs, improved the material handling of ore and waste and improved the grinding capabilities of the concentrator. Ore from those areas above the 5,000-foot west elevation is hauled to the surface by train. Waste not used for backfill in underground excavations is transported to the surface and used in the rock embankment of the tailings dam or placed in the permitted waste rock disposal sites.

     The Stillwater Mine currently uses its 28 footwall laterals, totaling approximately 220,000 feet, and 6 primary ramps, totaling approximately 57,000 feet, and vertical excavations to provide personnel and equipment access, supply haulage and drainage, intake and exhaust ventilation systems, muck haulage, backfill plant access, powder storage and/or emergency egress. To date, all footwall laterals continue to support mining activities. The footwall lateral and primary ramp systems will continue to provide support of production and ongoing development activities. Currently, all underground infrastructure, including footwall laterals, are located adjacent to the company’s proven and probable ore reserve area and are intended to be used for the life of the mine. The company’s capitalized mine development, including footwall laterals and ramps, consist of permanent infrastructure that is integral and necessary not only for current operations, but also for all future planned operations. Accordingly, it is appropriate that these costs be amortized over the proven and probable ore reserves to be benefited utilizing the unit of production method. In addition, certain mine levels are required as an integral component of the ventilation system and serve as required intake and or exhaust levels, or as parallel splits to maintain electrical ventilation horsepower balance and to meet Mine Safety and Health Administration (“MSHA”) requirements. In addition, MSHA regulations contain requirements for alternate (secondary) escapeways from mine workings. These levels, in addition to comprising critical functional components of the ventilation and escapeway system, serve as permanent mine service and utility infrastructure for road and rail transportation, dewatering and backfill pumping facilities designed and intended to be used for the life of the mine. The cost of the company’s capitalized mine development (which only includes the costs measured to date) is amortized over the proven and probable ore reserves to be benefited utilizing the unit of production method. Significant additional development costs will be required to exploit the company’s probable reserves. These estimated future costs are not reflected in the amortization rate; however, the company gives effect to all of its proven and probable reserves in its determination of its amortization rate.

     Prior to 1994, almost all of the company’s mining activities utilized “cut-and-fill” stoping methods. This method extracts the orebody in ten-foot high horizontal cuts. The open space created by the extraction of each cut is filled with waste rock and coarse concentrator tailings and becomes the floor for the next level of mining as the process moves upward. Commencing in 1994, the company introduced two mechanized mining methods: “ramp-and-fill” and “sub-level stoping.” Ramp-and-fill is a mining method in which a succession of horizontal cuts are extracted from the orebody using mobile equipment. Access to the orebody is from ramps driven in or adjacent to the orebody allowing the use of hydraulic drills and load-haul-dump equipment. Sub-level stoping is a mining method in which blocks of the reef approximately 50 feet high and up to 75 feet in length are extracted in 30-foot intervals utilizing

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mobile electric hydraulic long-hole drills and remote control rubber tired load-haul-dump equipment. The reef is mined in a retreat sequence and mined out areas are filled with development waste. Mechanized mining accounted for approximately 96% of total tons mined in 2002. The company determines the appropriate mining method to be used on a stope-by-stope basis.

     The company processes ore from the Stillwater Mine through a concentrator plant adjacent to the Stillwater Mine shaft. The mill has a capacity of 3,000 tons per day. Ore is fed into the concentrator, mixed with water and ground to a slurry in the concentrator’s mill circuit to liberate the PGM-bearing sulfide minerals from the rock matrix. Various reagents are added to the slurry to separate the valuable sulfides from the waste rock in a flotation circuit. In this circuit, the sulfide minerals are floated, recycled, reground and refloated to produce a concentrate suitable for further processing. The flotation concentrate, which represents approximately 1.5% of the original ore weight, is filtered and transported in bins approximately 46 miles to the company’s metallurgical complex in Columbus, Montana. Approximately 55% of the tailings material from this process is returned to the mine and used for backfill to provide a foundation upon which additional mining activities can occur. The balance is placed in tailings containment areas. No additional steps are necessary to treat any tailings placed back into the mine. Tailings placed into the impoundment areas require no additional treatment and are disposed of pursuant to the company’s operating permits. Mill recovery of PGMs was 90%, 90% and 91% for 2002, 2001 and 2000, respectively.

     In 1998, the company received an amendment to its existing operating permit which provided for the construction of a lined tailings impoundment that would serve the Stillwater Mine for approximately the next 30 years. During 1999, construction commenced on the tailings impoundment which was completed and placed into operation in late 2000. See “Business and Properties — Current Operations — Regulatory and Environmental Matters — Permitting and Reclamation”.

     During 2002, the Stillwater Mine produced approximately 491,700 ounces of palladium and platinum, compared to approximately 504,000 ounces in 2001 and approximately 430,000 ounces in 2000. See “Selected Financial and Operating Data.” The Stillwater Mine’s total cash costs were $263 per ounce in 2002 compared to $264 per ounce in each of 2001 and 2000.

EAST BOULDER MINE

     The East Boulder Mine is located in Sweet Grass County, Montana and provides access to the western portion of the J-M Reef. The mine is fully permitted independent of the Stillwater Mine and serves as a second access to the J-M Reef. Surface facilities for the East Boulder Mine are situated on unpatented mill site claims maintained on federal lands administered under the Gallatin National Forest but all facilities are wholly owned and operated by the company. Proven and probable ore reserves for the mine are controlled by patented mining claims owned by the company. The mine is located approximately 45 miles southeast of Big Timber, Montana, and is accessed by a public road. All surface facilities including the tailings management complex are located within a 977-acre operating permit area. Development of the mine commenced in 1998 and consists of underground mine development and surface support facilities, including a concentrator, shop and warehouse, changing facilities, storage facilities, office and tailings management facility. The mine commenced commercial production effective January 1, 2002.

     The J-M reef is accessed by two 18,500-foot, 15-foot diameter tunnels. The access tunnels intersect the orebody at an elevation 6,450 feet above sea level. The orebody is currently developed by two levels of footwall lateral drives parallel to the orebody totaling approximately 11,600 feet, and by two primary ramps totaling approximately 5,100 feet. The orebody will initially be developed vertically by ramp systems driven approximately every 1,000 feet along the length of the deposit. The predominant mining methods are sub-level stoping and ramp-and-fill mining methods. During the first half of 2002, a sand fill plant was constructed and commissioned underground to facilitate the application of the cut-and-fill mining method to portions of the orebody.

     The ore is transported by rail haulage to the surface and processed through a concentrator plant, which has a capacity of 2,000 tons per day, in which the ore is mixed with water and ground to a slurry in the concentrator’s mill circuit to liberate the PGM bearing sulfides from the rock matrix. Consistent with the process at the Stillwater Mine, reagents are then added to the slurry to separate the valuable sulfide from the waste rock in a flotation circuit. The sulfide minerals are floated, recycled, reground and refloated to produce a concentrate. The flotation concentrate, which represents 1.8% of the original ore weight, is filtered and transported in bins approximately 90 miles to the company’s metallurgical complex in Columbus, Montana. Approximately 50% of the tailings material from this process is returned to the mine and used for backfill to provide a foundation upon which additional mining activities can occur. The balance is placed in tailings containment areas. No additional steps are necessary to treat any tailings placed back into the mine. Tailings placed into the impoundment areas require no additional treatment and are disposed of pursuant to the company’s operating permits. The impoundment area has an estimated life of approximately 20 years at the original planned production and processing rate of 2,000 tons per day. During 2002, mill recovery of PGM’s was 87%.

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     During 2002, the East Boulder Mine produced approximately 125,000 ounces of palladium and platinum. During 2001, the mine recovered 22,000 ounces of PGMs generated from construction and development activities. Proceeds of $7.1 million received from the sale of this material were credited against capitalized mine development during 2001.

OPERATING PLAN

     The global economic downturn beginning in early 2001 and the events of September 11, 2001 caused a steep and unexpected decline in commodities prices, including PGM prices. In early September 2001, the prices of palladium and platinum on the London PM Fix had fallen to $460 per ounce and $450 per ounce, respectively, down from $1,090 per ounce and $639 per ounce, respectively, earlier in the year. Demand for PGMs also began to fall sharply in 2001, as the company’s primary customers, automobile manufacturers, themselves faced decreased demand due to the economic slowdown. Following the September 11 events, the price of palladium fell to approximately $320 per ounce by early October, representing a 71% decrease from the price of $1,090 in late January, 2001. The price of platinum, approximately $420 per ounce in October 2001, was less affected. See “Competition: Palladium and Platinum Market” below.

     As a result of the significant decline in the demand for and price of palladium and platinum, on November 5, 2001, the Board unanimously approved an optimization plan for the business operation and development of the East Boulder and Stillwater mines. The plan was implemented because the Board recognized that increasing production (and incurring the associated capital costs) did not make sense in the face of lower demand and prices for platinum and palladium. The plan held production at Stillwater Mine at a constant level of approximately 2,500 tons per day and reduced the initial production targets for the East Boulder Mine to 1,000 tons per day, while preserving the company’s ability to gradually increase production at the Stillwater and East Boulder mines if PGM prices improved.

     During 2002, the company experienced a number of problems in achieving its production goals. In an effort to reduce costs, in June 2002, the company amended certain provisions of the incentive bonus plan at the Stillwater Mine which reduced the amount of incentive bonus paid to affected employees by 25% and which restructured the manner in which these bonuses are paid. As a result the company experienced industrial relations problems, including reduced production in the third quarter of 2002. In the summer of 2002 the company increased the level of production at the Stillwater Mine in an area of the mine known as the upper west. The ore grade from the upper west was lower than the grade for the other ore mined by the company, thus reducing the company’s ability to produce ounces in line with its prior forecasts. East Boulder Mine ore grade improved during 2002, but was below the company’s target. In addition, the company experienced delays with infrastructure modifications for ventilation and electrical services at the Stillwater Mine, which also affected production. By August 2002, the price of palladium had dropped to $318 per ounce and subsequently decreased to a low of $222 per ounce on December 23, 2002. This resulted in a further modification of the 2003 operating plan. The company is now implementing a long-range operating plan that focuses on reducing operating and capital costs. The Stillwater Mine will change from a production-driven to a cost-driven emphasis. Following an adjustment period in the first half of 2003, the mining rate at the Stillwater Mine is expected to be 2,250 tons of ore per day. The mine will begin to focus on production from the offshaft higher-grade areas of the mine and de-emphasize production from the upper west area. The production capacity of the East Boulder Mine will be increased to better realize the economic cost benefits of its design capacity. The East Boulder Mine is expected to increase its mining rate to 1,250 tons of ore per day in 2003. The company is considering ramping up the rate over the next three to four years to 1,650 tons of ore per day. This ramp up will require additional capital expenditures of approximately $7.7 million, to take advantage of the surface plant design capacity. In connection with fully implementing this plan, the company received an amendment to its credit agreement on March 20, 2003. See “Credit Agreement” below.

EXPLORATION AND DEVELOPMENT ACTIVITIES

     The J-M Reef has been explored from the surface along its entire 28-mile strike length by surface sampling and drilling. Surface exploration drilling consists of an array of over 900 drill holes with a maximum horizontal spacing between holes of 1,000 feet. Exploration activities have also included driving and underground drilling from two exploratory adits, the West Fork Adit and the Frog Pond Adit. Comprehensive evaluation of PGM mineralization encountered in the J-M Reef has allowed delineation of probable reserves adjacent to the Stillwater and East Boulder Mines and confirmation of the existence of mineralized material over much of the remaining strike length. Exploration to date has defined sufficient probable reserves to sustain mining for a number of years in the

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future. It is the company’s practice to systematically convert its established probable reserves to the proven category coincident with planned advances of underground development. The company’s exploration focus is on its current delineated PGM reserves and adjacent mineralization along the J-M Reef within the company’s mining claims rather than the exploration of other mineral occurrences within the Stillwater Complex or at other prospective mineral properties. Consequently, exploration does not presently represent a significant expenditure for the company.

     As part of the company’s ongoing development activities, it continues to convert its established probable ore reserves to proven ore reserves through the lateral and vertical development of the Stillwater and East Boulder Mines. These ongoing activities involve the construction of mine development workings to access established ore reserves and the continuous advancement of definition drilling, engineering and mine plans to replace depleted ore reserves. During 2002, 2001, and 2000, $31 million, $86 million and $74 million respectively, were incurred in connection with capitalized mine development activities and are included in total capital expenditures.

     During 2002, to advance the company’s continuing evaluation of structural controls on deep mineralization and to facilitate longer term planning at the Stillwater Mine, drill penetrations of the J-M Reef were accomplished in two areas of the extrapolated mineralized material zone beneath limits of the company’s established probable reserves. Results of the drilling provided additional PGM intercepts as well as geologic information valuable in confirming the existence of PGM mineralization at depth and allowing further interpretation of significant structural features. The limited deep drilling conducted during 2002 resulted in a modest increase to the company’s inventory of mineralized material.

     Diagrams of the Stillwater and East Boulder Mines as currently developed and as planned to be developed in the future are as follows:

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METALLURGICAL COMPLEX

     Smelter. The company owns the land and a 37,199 square foot smelter plant located in Columbus, Montana. Concentrates from the mine sites are fed to a 5.0-megawatt electric furnace, where it is melted and separated into a silica oxide rich slag and a PGM rich matte. The matte is tapped from the furnace and granulated. The granulated furnace matte is re-smelted in a top blown rotary converter (TBRC), which separates iron from the converter matte. The converter matte is poured from the TBRC, granulated and transferred to the refinery for further processing. The granulated converter matte, approximately 10% of the original smelter feed weight, consists of copper and nickel oxides containing about 2% PGMs.

     The gasses released from the smelting operations are routed through a gas/liquid scrubbing system, which removes approximately 99.8% of the sulfur dioxide. Spent scrubbing solution is treated in a process that converts the sulfur dioxide to gypsum, or calcium sulfate, and regenerates clean scrubbing solution. The gypsum is used by local farmers as a soil amendment.

     The company has continued to expand smelter capacity since 1997, increasing the daily smelting capacity from 22 tons of concentrate per day in 1997 to 100 tons of concentrate per day at year-end 2001. The expanded facility consists of a larger furnace, a new top blown rotary converter (TBRC), an additional granulator and additional gas handling and solution regeneration systems. During the fourth quarter of 2001, the company completed the installation of a second TBRC to treat the additional material expected from the East Boulder Mine.

     Refinery. In 1996, the company constructed and commissioned the refinery on property it owns adjacent to the smelter in Columbus, Montana. The refinery utilizes the patented Sherritt Process, whereby sulfuric acid is used to dissolve the nickel, copper, cobalt and iron from the converter matte. This process upgrades the converter matte product substantially from 2% PGMs to 55-60% PGMs. During 2001 and 2002, the refinery was expanded to its current 49,000 square-foot facility and in 2002 additional surge capacity was added to the copper treatment circuits.

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     In the refinery, relatively minor amounts of byproduct copper, nickel, cobalt, and other accessory metals are separated from the PGM bearing converter matte and marketed as byproducts. Iron precipitated from an iron-copper-nickel-cobalt solution and returned to the smelter to be processed and removed in the slag. A nickel crystallizer circuit produces a crystalline nickel sulfate byproduct containing minor amounts of cobalt is which is marketed into sales contracts with refineries in Canada and Finland. A copper electrowinning circuit removes copper from solution as cathode copper which is marketed into sales contracts with smelters in Arizona and New York.

     A PGM rich filter cake, containing minor amounts of gold and silver, is shipped via airfreight to finish refineries in New Jersey and California and is returned to the account of the company as 99.95% PGM sponge after approximately 18-35 days. The refined material is then available for delivery to the company’s customers. The company pays its refiners a refining charge in United States dollars per ounce for the toll processing of the refinery filter cake.

     During 2002, 2001 and 2000, total byproduct sales were approximately $10.6 million, $8.2 million and $8.6 million, respectively, and were credited against production costs.

SECONDARY MATERIALS PROCESSING

     Recycled autocatalysts are processed by the company through the metallurgical complex. A sampling facility for secondary materials was completed in late 1997 to crush and sample spent autocatalysts prior to being blended for smelting in the electric furnace. Several test lots were processed during 1997 to determine that the spent autocatalysts were suitable for processing at the company’s facilities. Since 1998, the company has been processing small shipments of spent autocatalysts. The facility processed approximately 1,035 tons, 1,358 tons and 795 tons of spent autocatalysts in 2002, 2001 and 2000, respectively, recovering 46,200 ounces, 68,800 ounces and 29,900 ounces of palladium and platinum in 2002, 2001 and 2000, respectively. The income generated from the processing of recycled autocatalysts in 2002, 2001 and 2000 reduced production costs by approximately $1.0 million, $2.0 million and $1.2 million, respectively.

OTHER PROPERTIES

     The company owns a 17,600 square foot warehouse facility and also leases 10,100 square feet of office space in buildings in Columbus. The annual lease expense for the executive offices in Columbus, Montana is approximately $83,100 per year. The company believes that its existing facilities are adequate to service current production levels. The company also owns parcels of rural land in Stillwater and Sweetgrass Counties, Montana near its mine sites totaling approximately 3,024 acres and additional properties in Columbus and Big Timber, Montana which are used as support facilities. All of the company’s properties are subject to a mortgage in favor of the company’s credit facility.

CREDIT AGREEMENT

     In February 2001, the company entered into a $250 million credit facility with a syndicate of financial institutions which replaced a previous $175 million bank facility. The credit facility has been amended or waivers have been obtained seven times with the most recent amendment effective March 20, 2003. The credit facility provides for a $65 million five-year term loan facility (Term A), a $135 million seven-year term loan facility (Term B) and a $25 million revolving credit facility (reduced from $50 million at the company’s request as of March 20, 2003). Amortization of the term loan facilities commenced on March 31, 2002. The final maturity of the Term A facility and revolving credit facility is December 30, 2005. The Term B facility’s final maturity date is December 31, 2007.

     As of December 31, 2002, the company has $57.1 million and $129.8 million outstanding under the Term A and Term B facilities, respectively, bearing interest at 5.06% and 6.75%, respectively. During 2002, the company obtained a letter of credit in the amount of $7.5 million, which reduces amounts available under the revolving credit facility at December 31, 2002, bearing interest at 3.375%. The revolving credit facility requires an annual commitment fee of 0.5% on the remaining unadvanced amount. Of the $25 million revolving credit facility, $17.5 million remains available to the company.

     The required principal payments for the Term A loan total $19.5 million in 2003 and 2004 and $18.1 million in 2005. The required principal payments for the Term B loan total $1.4 million in 2003, 2004 and 2005, $60.8 million in 2006 and $65 million in 2007. Any outstanding balance under the revolving credit facility will be due in its entirety on December 30, 2005.

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     The loans are required to be prepaid from excess cash flow, proceeds from asset sales and the issuance of debt or equity securities, subject to specified exceptions. Proceeds of the term loan facility were used to finance a portion of the company’s expansion plan. Proceeds of the revolving credit facility are being used for general corporate and working capital needs. At the company’s option, the Term A credit facility bears interest at the London Interbank Offered Rate (LIBOR) plus a margin of 3.0% to 3.375% or an alternate base rate plus a margin of 2.0% to 2.375%, in each case where the margin is adjusted depending upon the company’s ratio of debt to operating cash flow. The Term B credit facility bears interest at LIBOR, subject to a 2.5% minimum, plus a margin of 4.25% or an alternate base rate plus a margin of 3.25%. Substantially all the property and assets of the company and the stock of the company’s subsidiaries are pledged as security for the credit facility.

     Covenants in the credit facility include restrictions on: (1) additional indebtedness; (2) payment of dividends or redemption of capital stock; (3) liens; (4) investment, acquisitions, dispositions or mergers; (5) transactions with affiliates; (6) capital expenditures (other than those associated with the company’s mine plan); (7) refinancing or prepayment of subordinated debentures; (8) changes in the nature of business conducted or ceasing operations at the principal operating properties; and (9) commodities hedging based upon annual palladium and platinum production. The company is also subject to financial covenants including a debt to operating cash flow ratio, a debt service coverage ratio and a debt to equity ratio.

     Events of default in the credit facility include: (1) a cross-default to other indebtedness of the company; (2) any material modification to the life-of-mine plans; (3) a change of control of the company other than the Norilsk Nickel transaction; (4) the failure to maintain agreed-upon annual PGM production levels; (5) any breach or modification of any of the sales contracts; and (6) failure to consummate by January 2, 2004 the Norilsk Nickel transaction or an alternate transaction which provides adequate levels of funding to the company through the issuance of equity or subordinated debt.

     During the fourth quarter of 2002, the company determined that it would likely not be in compliance with a minimum production covenant for 2002 in its credit agreement. As a result, the company obtained a waiver from its lenders dated December 31, 2002, which reduced the trailing four quarters production covenant requirement from 620,000 ounces to 612,500 ounces of palladium and platinum. As a result of the waiver, the company was in compliance with all production and financial covenants of the credit agreement as of December 31, 2002.

     In the first quarter of 2003, the company began implementing a long-range operating plan, which focuses on reducing its operating and capital costs with a 2003 PGM production target of 615,000 ounces. As a result, it determined that it would not likely be in compliance with its covenants under the credit agreement at March 31, 2003. Despite historically achieving positive net income, the company requires substantial funds for its necessary capital expenditures and to make the interest and principal payments under its credit facility. At December 31, 2002, the company’s available cash was $25.9 million. At the current palladium prices and without access to additional capital or borrowings under the revolving credit facility, management did not believe that the company’s cash would be sufficient to maintain its projected liquidity requirements through 2003. Consequently, the company began working with its lead banks to obtain amendments or waivers of various covenants under the credit agreement and to obtain access to additional borrowings under the revolving credit facility.

     On March 20, 2003, the company obtained an amendment to the credit agreement that, among other things, modifies certain production and financial covenants for the remaining term of the agreement and allows for the Norilsk Nickel transaction. The amendment also provides the company with access to the $17.5 million of availability under the revolving credit facility. This amendment modified covenants relating to the debt to EBITDA ratio, the debt service coverage ratio, production ounces and the minimum average primary development for the Stillwater and East Boulder mines. During the first quarter of 2003, the company’s debt to EBITDA ratio may not be greater than 3.55:1.0, its debt service coverage ratio may not be less than 2.20:1.0, annual production for the company may not be less than 565,000 ounces, its average primary development with respect to the Stillwater Mine may not be less than 5,000 feet and its average primary development with respect to the East Boulder Mine may not be less than 1,900 feet. All such covenants thereafter change quarterly as set forth in the credit agreement and the amendment. The amendment did not alter the debt to equity ratio, which, during the term of the credit agreement shall not be greater than 1.0:1.0. This amendment also modified the maximum capital expenditures permitted; during the fiscal year 2003, the company is permitted to make capital expenditures up to $57 million. Additionally, the developed proven ore reserves measure based on equivalent months of production was modified.

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     Pursuant to the credit agreement, the company is required to use 50% of the net equity proceeds received from the sale of any equity securities to prepay the term loans. As such, the company is required to use $50 million of the $100 million cash proceeds received in the Norilsk Nickel transaction to prepay the term loans. In addition, pursuant to the amendment, the company must use 50% of the net cash proceeds from the sale of palladium received in the Norilsk Nickel transaction to prepay its term loans. In connection with the amendment, the company agreed to an amendment fee of 0.5% (approximately $1.1 million) and a 0.5% increase in the interest rate payable on the loans. A copy of such amendment is attached as Exhibit 10.1 of the company’s Form 8-K filed March 21, 2003. As a result of the amendments, the company believes it will remain in full compliance with the credit agreement throughout 2003.

PGM SALES AND HEDGING ACTIVITIES

     Palladium, platinum, rhodium and gold are sold to a number of consumers and dealers with whom the company has established trading relationships. Refined PGMs of 99.95% purity in sponge form are transferred upon sale from the company’s account at third party refineries to the account of the purchaser. Byproduct metals are purchased at market price by customers, brokers or outside refiners.

     During 1998, the company entered into long-term sales contracts with General Motors Corporation, Ford Motor Company and Mitsubishi Corporation, which, when combined, represent more than 97% of the company’s revenues.

     In late 2000 and in 2001, the company amended these contracts to extend the terms and to modify the pricing mechanisms. The contracts apply to the company’s production through December 2010. Under the contracts, the company has committed between 80% to 100% of its palladium production and between 70% to 100% of its platinum production. Metal sales are priced at a modest discount to market. The remaining production is not committed under these contracts and remains available for sale at prevailing market prices. The contracts provide for floor and ceiling price structures as summarized below:

     At March 24, 2003, the market prices for palladium and platinum were $216 and $655 per ounce, respectively. The sales contracts provide for adjustments to ounces committed based on actual production. The sales contracts contain termination provisions that allow the purchasers to terminate in the event the company breaches certain provisions of the contract and the breach is not cured within periods ranging from 10 to 30 days of notice by the purchaser. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     The company has historically entered into hedging agreements from time to time to manage the effect of price changes in palladium and platinum on the company’s cash flow. Hedging activities consist of “forward delivery contracts” for future deliveries of specific quantities of PGMs at specific prices, the sale of call options and the purchase of put options and financially settled forwards. Gains or losses can occur as a result of hedging strategies. Hedging gains or (losses) of $9.2 million, $5.5 million and ($15.8) million were realized in 2002, 2001 and 2000, respectively. The percentage of the company’s sales ounces that are made pursuant to modified pricing mechanisms are summarized below:

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     As of December 31, 2002, the company had no palladium or platinum committed for future delivery under either forward delivery contracts or under put and call option strategies. The company has credit agreements with its major trading partners that provide for margin deposits in the event that forward prices for metals exceed the company’s hedge contract prices by a predetermined margin limit.

TITLE AND ROYALTIES

     The company holds 995 patented and unpatented lode or millsite claims covering approximately 16,000 acres along the J-M Reef mineral zone and on adjacent federal lands utilized for the company’s operations facilities. The company believes that approximately 130 of these claims cover 100% of the known apex of the J-M Reef. The remainder of the company’s unpatented claims either adjoin the apex of the J-M Reef or secure sites for surface operations. Prior to the moratorium on processing new applications for mining claim patents, the company had leasehold control on 1 patented claim under the Mouat Agreement, had been granted patents on 34 of its own claims (a combined total of 735 acres), and had 33 patent applications pending on 135 additional mining claims covering an area of 2,249 acres. The applications included claims owned directly by the company or held by the company in leasehold. During the fourth quarter of 2001, 31 new patents were issued to the company for 126 mining claims covering 2,126 acres. At year end 2001, patents had been issued for all submitted applications involving the claims owned directly by the company. In a decision dated April 30, 2002, the Montana State Office of the Bureau of Land Management rejected two mineral patent applications submitted prior to July 13, 1993 covering 123 acres in 9 mining claims held by the company in leasehold under the Mouat Agreement. The company has joined with the Mouat interests in appealing the decision to the U.S. Department of the Interior Board of Land Appeals (IBLA). In the event the decision is upheld, the 9 original claims will revert to unpatented mining claim status. The company does not believe that the final decision will have any adverse affect on the company’s operations or interest under the Mouat Agreement. The company presently maintains 825 active unpatented mining and millsite claims. Unpatented mining claims may be located on lands open to mineral appropriation and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain and claims are more commonly subject to challenges of third parties, regulatory or statutory changes, or contests by the federal government. The validity of an unpatented mining claim or millsite claim, in terms of establishing and maintaining possessory rights, depends on strict compliance with a complex body of federal and state statutory and decision law regarding the location, qualifying discovery of valuable minerals, occupancy and beneficial use by the claimant.

     Of the company’s 995 controlled claims, 869 are subject to royalties, including 711 subject to a 5% net smelter royalty payable to Newmont Capital Limited, 56 subject to a 0.35% net smelter royalty payable to the Mouat family, and 102 subject to both royalties. During 2002, 2001 and 2000, the company incurred royalty expenses of approximately $6.9 million, $7.0 million and $7.2 million, respectively. At December 31, 2002, 100% of the company’s proven and probable ore reserves were secured by either its 161 patented mining claims or the 9 first-half certified claims pending the appeal ruling by the IBLA. Processing facilities at the East Boulder Mine are situated on 127 validated unpatented millsite claims.

SAFETY

     Mining operations are conducted at the Stillwater Mine and at the East Boulder Mine and involve the use of heavy machinery and drilling and blasting in confined spaces. The pursuit of safety excellence continues with the creation and implementation of our G.E.T. Safe safety and health management system. A new safety policy was developed and endorsed by the Chief Executive Officer. Senior Management re-emphasized there would be no compromise on the operating principle of Safety First, Production Will Follow. Safety stand-down training was utilized to demonstrate the urgency and commitment of management in the reduction of workplace accidents. Formal supervisor safety skills enhancement training was developed and provided in key safety management areas. Safety systems were implemented to support the identification and remediation of workplace hazards. Joint Union and Management Health and Safety Committees were created to enhance employee and management relationships regarding all aspects of health and safety.

     During 2002, the company improved its safety incident results by 24% and they are presently at historic lows. With continued focus and commitment to the G.E.T. Safe system, the company anticipates continuous and sustained health and safety improvements. The company’s total incident rate in 2002 was 7.7 for every 200,000 man hours worked, a significant improvement compared to a rate of 10.1 in 2001 and a rate of 15.1 in 2000. The company’s lost time accident rate in 2002 was 3.9 for every 200,000 man hours worked, as compared to 2.1 lost time accidents for every 200,000 man hours worked in 2001 and 2.2 in 2000. The increase in the company’s lost time accident rate is due to a change in policy during 2002 where the company eliminated all modified and restricted duty opportunities. The result of this policy change caused an increase in the lost time accident rate, however, in 2002 the company

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experienced a reduction in the number of accidents and their severity, with the severity rate decreasing from 353.8 in 2001 to 167.0 in 2002.

     The recognition and elimination of fatality potentials continues to be an organizational focus. The company is currently addressing this concern with a focus on Critical Task Analysis. This initiative utilizes natural work teams and their supervisors to identify all job tasks, analyze the tasks to identify the critical few and develop written safe work procedures derived from this analysis. The initiative will provide assurance that the critical aspects of each job have been analyzed for loss potential and training procedures developed. The outcome will be enhanced employee involvement, competency skills training and reduced loss potentials.

     In December 2002, the Mine Safety and Health Administration (MSHA) of the U.S. Department of Labor conducted certain inspections with respect to the company’s mining equipment. As a result of these inspections, it was determined that some of the company’s mining equipment did not comply with MSHA’s noise regulations. The correction of conditions noted in these inspections has significantly disrupted production. Included in these corrections are concerns dealing with machinery noise levels, new interpretations of standards and renewed emphasis on explosives by the U.S. Department of Homeland Security, which restricts the handling of explosives by non-U.S. employees. The company is aggressively working with MSHA to address the concerns raised with respect to these inspections. The company hopes to resolve these issues in the near future; however, there can be no certainty that future disruptions will not occur.

     The metallurgical complex in Columbus, Montana has continued to maintain a low lost-time accident rate and is the first ever three-time recipient of the Governor’s Safety and Health Achievement Award. The smelter is a nine-time recipient and the refinery is a five-time recipient of the Sharp’s Award, which exempts these facilities from routine Occupational Safety and Health Administration inspections. See “Business and Properties — Risk Factors”.

EMPLOYEES

     As of December 31, 2002 and 2001, the company had 1,575 and 1,617 employees, respectively, in the following areas:

     All of the company’s hourly employees at the Stillwater Mine, the East Boulder Mine, the smelter and refinery are represented by the Paper, Allied Industrial, Chemical and Energy Workers International Union (PACE). On July 1, 1999, a new five-year contract was negotiated which covers substantially all hourly workers at the Stillwater Mine, the smelter and the refinery and calls for an annual average wage increase of approximately 4% per annum. On July 1, 2002, a new three-year contract was negotiated which covers all hourly workers at the East Boulder Mine and calls for an average wage increase of approximately 4% per annum.

     The company competes for individuals skilled in underground hard rock mining techniques. Although the company has historically experienced a shortage of qualified miners, the periodic downturns affecting gold, silver and base metal mining has made available a number of skilled underground miners. In addition, the company has instituted a training program to bring new employees up to the status of qualified, experienced underground miners bringing the total number of miners at the Stillwater Mine and the East Boulder Mine at the end of 2002 to 337 and 106, respectively, as compared to 381 and 75, respectively, at the end of 2001. See “Business and Properties — Risk Factors”.

     In an effort to reduce costs, in June 2002, the company amended certain provisions of the incentive bonus plan at the Stillwater Mine which reduced the amount of incentive bonus paid to affected employees by 25% and which restructured the manner in which these bonuses are paid. As a result the company began experiencing industrial relations problems, including reduced production in the third quarter of 2002.

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REGULATORY AND ENVIRONMENTAL MATTERS

     General. The company’s business is subject to extensive federal, state and local government controls and regulations, including regulation of mining and exploration which could involve the discharge of materials and contaminants into the environment, disturbance of land, reclamation of disturbed lands, associated potential impacts to threatened or endangered species and other environmental concerns. In particular, statutes including, the Clean Air Act, the Clean Water Act, the Solid Waste Disposal Act, the Emergency Planning and Community Right-to-Know Act, the Endangered Species Act and the National Environmental Policy Act, impose permit requirements, effluent standards, air emission standards, waste handling and disposal restrictions and other design and operational requirements, as well as record keeping and reporting requirements, upon various aspects of mineral exploration, extraction and processing. In addition, the company’s existing mining operations may become subject to additional environmental control and mitigation requirements if applicable federal, state and local laws and regulations governing environmental protection, land use and species protection are amended or become more stringent in the future. Additionally, the company is aware that federal regulation under the Solid Waste Disposal Act governing the manner in which secondary materials and byproducts of mineral extraction and benefication are handled, stored and reclaimed or reused are pending final revision which could affect the company’s facility design, operations, and permitting requirements. See “Business and Properties — Risk Factors.”

     The Stillwater Mine and East Boulder Mine are located on the northern edge of the Absaroka-Beartooth wilderness, about 30 miles north of Yellowstone National Park. Due to the proximity of the company’s operations to Yellowstone National Park and a wilderness area, the company’s operations are subject to stringent environmental controls which may adversely impact the company’s revenues. For example, increasingly stringent requirements may be adopted under the Clean Water Act, Clean Air Act or Endangered Species Act which could require installation of environmental controls not required of competitors located overseas. See “Business and Properties — Risk Factors.”

     The company’s past and future activities may also cause it to be subject to liabilities under provisions of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), and analogous state law. Such laws impose strict liability on certain categories of potentially responsible parties including current property owners for releases or threatened releases of hazardous substances into the environment which cause the incurrence of cleanup costs.

     Generally, compliance with the above statutes requires the company to obtain permits issued by federal, state and local regulatory agencies and to file various reports and keep records of its operations affecting the environment. Certain permits require periodic renewal or review of their conditions. The company cannot predict whether it will be able to renew such permits or whether material changes in permit conditions will be imposed, non-renewal of permits or the imposition of additional conditions could have a material adverse effect on the company’s financial condition and results of operations. See “Business And Properties — Risk Factors.”

     The company believes that its operations and facilities comply in all material respects with current federal, state and local permits and regulations, and that it holds all necessary permits for its operations at the Stillwater and East Boulder Mines and to complete all of its planned expansion projects, including the East Boulder Mine. However, compliance with existing and future laws and regulations may require additional control measures and expenditures which cannot be estimated at this time. Compliance requirements for new mines and mills may require substantial additional control measures that could materially affect permitting and proposed construction schedules for such facilities. Under certain circumstances, facility construction may be delayed pending regulatory approval. The cost of complying with future laws and regulations may render currently operating or future properties less profitable and could adversely affect the level of the company’s reserves and, in the worst case, render its mining operations uneconomic.

     Permitting and Reclamation. Operating Permit 00118 and 00149 issued by the Montana Department of State Lands encompasses approximately 2,450 acres at the Stillwater Mine located in Stillwater County, Montana and 977 acres at the East Boulder Mine located in Sweetgrass County, Montana. The permits delineate lands that may be subject to surface disturbance. At present, approximately 327 acres have been disturbed at the Stillwater Mine, 150 of which are occupied by two tailings impoundments, and 175 acres have been disturbed at the East Boulder Mine. The company employs concurrent reclamation wherever feasible.

     Reclamation regulations affecting the company’s operations are promulgated and enforced by the Hard Rock Bureau of the Montana Department of Environmental Quality (DEQ). Additional reclamation requirements may be imposed by the United States Forest Service (USFS) during the permitting process. For regulatory purposes, reclamation does not mean restoring the land to its pre-mining state. Rather, it means returning the post-mining land to a state which has stability and utility comparable to pre-mining conditions. Reclamation concerns include stabilization and vegetation of disturbed lands, controlling drainage from portals and waste

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rock dumps, removal of roads and structures, neutralization or removal of process solutions and visual aesthetics. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Environmental Obligations.”

     Permits governing air and water quality are issued to the company by the Montana DEQ, which has been delegated such authority by the federal government. Operating permits issued to the company by the Montana DEQ and the USFS do not have an expiration date but are subject to periodic reviews. The reviews evaluate bonding levels, monitor reclamation progress, and assess compliance with all permit requirements and mitigation measures.

     In April 1996, the company submitted a permit amendment application for the expansion of the Stillwater Mine. This expansion proposal included selection and construction of a new tailings impoundment and removal of the 2,000 tons of ore per day production cap. During 1997, as a result of this application, the Montana DEQ began preparation of an Environmental Impact Statement in order to assess the environmental impacts of the amendment. The Montana DEQ issued the final Environmental Impact Statement in 1998, subsequent to review of draft issuances and a public hearing. In November 1998, the Record of Decision was issued by the Montana DEQ and the USFS. There were no material changes from the original application.

     In the first quarter of 1999, an environmental group filed a complaint against the Montana DEQ challenging the adequacy of the Environmental Impact Statement and reclamation provisions developed in connection with the amendment to the permit. The company was not named in the complaint. In mid-2000, the company signed an agreement with the group and its affiliates (the Councils). Under the terms of the agreement, the Councils withdrew litigation against the Montana DEQ. The Councils also agreed not to file a protest against the renewal of the company’s water quality permit at the East Boulder Mine. For its part, the company agreed to programs that will reduce traffic flows to both the Stillwater Mine and the East Boulder Mine. In addition, the company will fund expanded monitoring programs and the development of a watershed partnership for the Boulder River basin to assist residents in improving the quality of surface and ground water. Included in this is the funding of a long-term fishery study. The company estimates the total cost of all the environmental programs associated with the implementation of the agreement to be approximately $320,000 annually.

PENDING TRANSACTION WITH MMC NORILSK NICKEL

     On November 20, 2002, the company and Mining and Metal Company Norilsk Nickel (Norilsk Nickel), a Russian mining company, signed a definitive agreement whereby Norimet, a wholly-owned subsidiary of Norilsk Nickel, will acquire a 51% majority ownership in Stillwater through the issuance of 45.5 million newly issued shares of Stillwater common stock in exchange for $100 million cash and approximately 877,000 ounces of palladium, valued at $241 million, based on the November 19, 2002, London PM fix of $275 per ounce and $189 million based on the March 24, 2003 London PM fix of $216 per ounce. Additionally, after the closing of the transaction and subject to certain conditions, Norilsk Nickel would commence a tender offer to acquire additionally up to 4.3 million Stillwater shares, 10% of the currently outstanding shares, from the public at a cash price of $7.50 per share. If completed, the tender offer would increase Norilsk Nickel’s ownership in Stillwater to approximately 56% of the outstanding shares.

     Norimet and Stillwater have established accounts with J.P. Morgan Chase Bank in London, UK for the storage, evaluation and transfer of the palladium consideration in connection with the transaction. The palladium consideration, comprised of approximately 877,000 ounces of palladium, is currently being held in Norimet’s account at J.P. Morgan, and will remain in such account until closing, subject to certain conditions. An independent expert is in the process of verifying the purity and weight of the palladium.

     The agreement provides that Stillwater and Norilsk Nickel will negotiate in good faith to enter into a PGM agreement within 6 months following the closing, whereby Stillwater will purchase at least one million ounces of palladium annually from Norilsk Nickel. Stillwater intends that the metal received from Norilsk Nickel, as well as the metal purchased under the PGM agreement, will be sold to customers, depending upon market conditions and the ability to place the metal, pursuant to new long-term contracts. In an effort to minimize market risk, the company does not intend to agree to purchase any palladium from Norilsk Nickel before such long-term contracts are in place.

     A new Board of directors would be formed consisting of nine members. The Board would include five Norilsk Nickel appointees, at least two of whom would be independent, Stillwater’s CEO who would be Chairman of the Board and three independent members from Stillwater’s current Board. Thus, a majority of the Board would be independent as defined by the NYSE and the current management team would be retained to manage the operations.

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     The company presently expects to complete the transaction with Norilsk Nickel during the second quarter of 2003. The transaction is subject to a number of conditions, including the approval of Stillwater’s stockholders, the completion of Hart-Scott-Rodino antitrust review and other customary approvals. The company is required to use half of the cash proceeds and half of the net proceeds from the sale of the palladium received from the transaction to prepay the term loans. See “Credit Agreement.”

     The company and Norilsk Nickel have received a request for additional information from the U.S. Federal Trade Commission as part of its review of mergers and acquisitions reported under the Hart-Scott-Rodino Antitrust Improvements Act. The parties are in the process of gathering information to respond to the request, have provided some responsive information to the Federal Trade Commission and intend to comply with the request as soon as practicable.

     On January 17, 2003, the company received notice from the Committee for Foreign Investment in the United States, that no further action would be taken with respect to the transaction under the Section 721 of the Defense Production Act, commonly known as the Exon-Florio Amendment.

     Further information regarding the transaction with Norilsk Nickel is available in the company’s preliminary proxy statement filed with the Securities and Exchange Commission, as amended. The company expects to schedule a special meeting of its stockholders to consider the transaction in the second quarter of 2003, and will mail to stockholders a definitive proxy statement in connection with such meeting. On March 20, 2003, the company received the necessary amendment under its credit agreement in connection with the transaction.

COMPETITION: PALLADIUM AND PLATINUM MARKET

GENERAL

     Palladium and platinum are rare precious metals with unique physical qualities that are used in diverse industrial applications and in the jewelry industry. The development of a less expensive alternative alloy or synthetic material which has the same characteristics as PGMs could have a material adverse effect on the company’s revenues. Although the company is unaware of any such alloy or material, there can be no assurance that none will be developed.

     The company competes with other suppliers of PGMs, some of which are significantly larger than the company and have access to greater mineral reserves and financial and commercial resources. See “Supply” below. New mines may open over the next several years, increasing supply. Furthermore, in certain industrialized countries, an industry has developed for the recovery of PGMs from scrap sources, mostly from spent automotive and industrial catalysts. There can be no assurance that the company will be successful in competing with these existing and emerging PGM producers. See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

DEMAND

     Palladium demand increased for the period 1993 through 2000 but dropped in 2001 and 2002 as a result of several factors including a general worldwide downturn in economic conditions, efforts by car companies to limit the amount of palladium used in their products, substitution of other materials for Palladium, customer use of stockpiled material and high prices experienced in 2000 and 2001. According to Johnson Matthey, PLC’s report published in November 2002, demand or purchases of palladium had grown from 4.3 million ounces in 1993 to 9.0 million ounces in 2000, thereafter decreasing to 6.8 million ounces in 2001 and an estimated 4.9 million ounces in 2002 as consumers switched to alternative materials, including platinum, engaged in thrifting (obtaining the same or better performance results with less material), and began to use safety stocks accumulated prior to 2001. While consumption of palladium as compared with demand is difficult to measure, Johnson Matthey estimates consumption for autocatalysts in 2002 likely exceeded demand by 1.5 million ounces as U.S. auto manufacturers made large scale use of inventory stocks.

     Johnson Matthey also reported that platinum demand has increased from 4.1 million ounces in 1993 to 6.4 million ounces in 2002, a 56% increase and that demand for platinum exceeded supply in 2002 by 490,000 ounces, or 8%.

     PGMs unique physical qualities include: (i) a high melting point; (ii) superior conductivity and ductility; (iii) a high level of resistance to corrosion; (iv) strength and durability; and (v) strong catalytic properties. Palladium, like platinum, has numerous industrial applications and when combined with silver, provides an extremely conductive material.

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     The largest application for palladium is in the automotive industry. This industry represented approximately 71% of the worldwide palladium demand in 2001, but fell to 57% of the worldwide demand in 2002. According to Johnson Matthey, demand for palladium in the next several years is expected to resume growing, driven primarily by its use in the production of automotive catalysts which reduce harmful automobile emissions. In the U.S., the automobile industry must comply with standards that decrease automotive emissions to National Low Emission Vehicle standards beginning with the 1999 model year vehicles. Europe and Japan have adopted more stringent standards for the future as well. With growing concern for cleaner air, it is expected that greater attention to automobile emissions will continue. This will have an undetermined effect on palladium and platinum. Prices of palladium reached record levels in 2001. On January 26, 2001, the price of palladium on the London PM Fix was $1,090. Given the 2001 prices, some substitution of platinum for palladium has been experienced in the manufacturing and automotive catalyst sectors.

     Norilsk Nickel and the company have been advised by certain U.S. customers that such consumers are reluctant to enter into long-term supply contracts with Russian palladium companies because: (i) some Russian companies have not on a timely basis and/or consistently delivered metal in the past; (ii) Russian secrecy laws and regulation of exports will create supply reliability risk; and (iii) these companies have little or no assets in the U.S., which gives the consumers little recourse if a supply contract is breached. Additionally, Norilsk Nickel has advised the company that is has had little success in procuring long-term contracts for the sale of substantial amounts of its palladium. The company will receive 877,000 ounces of palladium from Norilsk Nickel, and expects to enter into a PGM Agreement to purchase an additional 1,000,000 ounces of palladium annually from Norilsk Nickel. The company believes that U.S. consumers may be interested in purchasing such palladium, based upon the company’s contact with such consumers, the company’s reputation and its presence in the U.S. The company therefore believes that the transaction with Norilsk Nickel will increase the reliability of the palladium supply in North America and thereby increase consumer confidence in the palladium marketplace, and that this could lead to an increase in demand for palladium.

     Johnson Matthey estimated that approximately 15% of the palladium supply is consumed in the production of electronic components for personal computers, cellular telephones, facsimile machines and other devices. However, given the higher palladium price during the first half of 2001, some substitution of base metals for lower end applications has occurred. Johnson Matthey also reported that dentistry continues to be a major user of palladium for gold-based dental alloys, and represented approximately 15% of the palladium demand for 2002.

     According to Johnson Matthey, approximately 55% of current world platinum production is used for industrial and manufacturing processes, most significantly for the manufacture of catalytic converters for the global auto industry. In addition to catalytic converters, industrial uses of platinum include the production of data storage disks, glass, paints, nitric acid, anti-cancer drugs, fiber optic cables, fertilizers, unleaded and high-octane gasolines and fuel cells. The balance of current platinum demand is for the production of jewelry, such as gem settings for rings, and for investment/collector coins. Johnson Matthey also reported that demand for platinum exceeded supply in 2002 by 490,000 ounces, or 8%. See “Business and Properties — Risk Factors.”

SUPPLY

     The leading global sources of palladium and platinum production are mines located in the Republic of South Africa and Russia. The Johnson Matthey report estimated that South Africa provided approximately 45% of the palladium and 76% of the platinum worldwide during 2002. Johnson Matthey noted that the principal PGM mining companies in the Republic of South Africa are Anglo American Platinum Corporation, Ltd., Impala Platinum Holdings, Ltd. and Lonmin Ltd. The same Johnson Matthey report estimated that Russia, as a byproduct of nickel production, provided approximately 33% of the palladium and approximately 16% of the platinum worldwide in 2002. Additionally, the report indicated that Russia had a large above ground strategic inventory of palladium, of unknown size, which has been somewhat depleted by sales over the last decade. Palladium and platinum are also produced in Canada primarily as a byproduct of nickel and copper mining.

     Johnson Matthey expects the supply of palladium will be relatively flat in the near term but may increase in the future as a result of the expansion of platinum production in South Africa. Johnson Matthey estimates that MMC Norilsk Nickel in Russia produces approximately 3.0 million ounces of palladium a year as a byproduct of nickel mining, and that portions of Russian government stockpiles accumulated over the years also are exported each year. If Russian government stockpiles of palladium and platinum still exist and are extensive, and if they are disposed of in the market in significant quantities, the increased supply could result in lower prices. The company has been informed by U.S. automotive manufacturers that they have been reluctant to source their long-term PGM requirements from Russia, due the erratic nature of Russian deliveries in the past, differing legal systems and limited assets in the U.S., providing little or no recourse to the automotive companies.

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     The company believes that the transaction with Norilsk Nickel will increase the reliability of the palladium supply in North America and thereby increase customer confidence in the palladium marketplace, and that this could lead to an increase in demand for palladium. The company will receive 877,000 ounces of palladium in the transaction, and expects to enter into a PGM Agreement to purchase an additional 1,000,000 ounces of palladium annually from Norilsk. The company believes that U.S. consumers may be interested in purchasing such palladium from the company, based upon the company’s contact with such consumers, the company’s reputation and its presence in the U.S..

     In addition to these sources, PGMs are recovered from automotive catalytic converters acquired from scrap dealers. A small but growing industry has developed in the collection and recovery of PGMs from scrap sources, including automotive catalytic converters, electronic and communications equipment and petroleum catalysts. The company also processes small shipments of spent automotive catalysts.

PRICES

     The company’s revenue and earnings depend upon world palladium and platinum prices. The company has no control over these prices, which tend to fluctuate widely. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Revenue” and “Factors That May Affect Future Results and Financial Condition.” The company believes that the transaction with Norilsk Nickel will increase the reliability of the palladium supply in North America and thereby increase customer confidence in the palladium marketplace, and that this could lead to an increase in demand for palladium. (See “Supply” above.) However, this increased supply of palladium in North America without corresponding increase in demand could result in lower palladium prices which could in turn adversely affect the Company’s revenues from the sale of palladium mined by the Company. The volatility of palladium and platinum prices is illustrated in the following table of the London PM Fix of annual high, low and average prices per ounce.

*     (Through March 24, 2003)

AVAILABLE INFORMATION

The company’s Internet Website is http://www.stillwatermining.com. The company makes available, free of charge, through its Internet Website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after the company electronically files such materials with, or furnishes them to, the Securities & Exchange Commission.

RISK FACTORS

     Set forth below are certain risks faced by the company.

FURTHER AMENDMENTS OR WAIVERS OF THE COMPANY’S CREDIT AGREEMENT MAY BE NECESSARY AND MAY NOT BE OBTAINED

     The company’s agreement with a syndicate of financial institutions provides a credit facility used to finance a portion of the expansion plan and contains covenants relating to the accomplishment of specific production objectives, capital cost and financial targets. The company’s liquidity is an ongoing concern of management. Despite historically achieving positive net income, the

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company requires substantial funds for its necessary capital expenditures and to make the interest and principal payments under its credit facility. The company’s plans and operating decisions are limited by the company’s available funds and it needs to comply with covenants in the credit agreement. The credit facility consists of term loans and a revolving credit facility. The company has obtained amendments or waivers of various covenants on seven occasions.

     Based upon the company’s current cash projections at the present low price of palladium and taking into effect the sales contracts and the March 20, 2003 amendment to the credit agreement, the company believes that it will have sufficient cash liquidity through the end of 2003, not taking into account unexpected or extraordinary events. However, if significant operational problems are incurred, the company may breach one of its covenants and require a further amendment. Under such circumstances, if necessary amendments are not granted, the loans will be in default and immediately due and payable. For further information on the credit facility, see “Business and Properties – Current Operations – Credit Agreement.”

THE COMPANY WILL FACE OPERATIONAL, LIQUIDITY AND CAPITAL RISKS IF THE NORILSK NICKEL TRANSACTION IS NOT CONSUMMATED

     The company explored its strategic alternatives for more than one year prior to entering into the agreement with Norilsk Nickel. Since September 2001 the company and its financial advisors have contacted more than 18 parties and executed confidentiality agreements with 14 of these parties. However, the company only received the Norilsk Nickel proposal and a preliminary proposal from another company to discuss a possible joint venture at East Boulder. The company’s efforts were largely unsuccessful prior to the Norilsk Nickel proposal. Therefore, if the Norilsk Nickel transaction is not consummated, there may be no other strategic alternatives available to the company. Due to the production, cost and credit agreement issues, the company believes that it may face substantial financial difficulties if the company continues to operate on a stand-alone basis. If the Norilsk Nickel transaction is not consummated, the company expects to examine alternative sources of funding, as well as possible changes to its operating plans, which could include downsizing operations, altering development plans and reducing employment.

     The company’s board of directors approved the Norilsk Nickel transaction as a result of its numerous concerns about the company’s prospects and following an extensive exploration of financial and third party alternatives. The company’s board of directors believes that consummation of the Norilsk Nickel transaction is in the best interests of the stockholders.

     The Norilsk Nickel transaction is subject to a number of conditions, including the approval of the company’s stockholders, the completion of Hart-Scott-Rodino antitrust review and other customary approvals. The company cannot assure that all of these approvals will be obtained or that the Norilsk Nickel transaction will be completed.

     The company will be in default of the credit agreement if by January 2, 2004 the Norilsk Nickel transaction or an alternate transaction which provides adequate levels of funding to the company through the issuance of equity or subordinated debt is not completed. The company believes there may be no other strategic alternative available to the company at this time if the Norilsk Nickel transaction is not completed. Thus the company will likely be in default of its credit agreement if the Norilsk Nickel transaction is not completed by January 2, 2004. The consequences of a default would be that the bank lenders would have the right to declare all of the outstanding loans immediately due and payable.

THE COMPANY EXPERIENCED CERTAIN OPERATING AND PRODUCTION ISSUES IN 2002 WHICH MAY CONTINUE IN 2003

     In the summer of 2002, the company increased the level of production in the Stillwater Mine in an area of the mine known as the upper west. The ore grade (percentage of PGMs contained in rock mined) from the upper west was lower than the grade for the other ore mined by the company, thus reducing the company’s ability to produce ounces in line with its prior forecasts. East Boulder Mine ore grade improved during 2002, but was below the company’s target rate of increase in ore grade. In addition, the company experienced delays with infrastructure modifications for ventilation and electrical services at the Stillwater Mine, which also affected production.

     In an effort to reduce costs, in June 2002, the company amended certain provisions of the incentive bonus contract with its labor unions regarding the Stillwater Mine to correct an unintended prior increase in the amount of incentive bonus paid to affected employees in January 2002. As a result, the company experienced industrial relations problems in the third quarter, including reduced production by affected employees from historical levels.

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     From and after the fourth quarter of 2002, production at the Stillwater Mine has been affected by issues arising from increased MSHA enforcement activity. The correction of conditions noted in these inspections has significantly disrupted production. Included in these corrections are new interpretations of standards and renewed emphasis on explosives use and handling driven by the U.S. Department of Homeland Security. The company is aggressively working with MSHA to address the concerns raised with respect to these inspections. The company hopes to resolve these issues in the near future, however, there can be no certainty that further disruptions will not occur. During the last six months the company’s accident incident rate has been at historic lows and management fully expects this trend to continue as a result of actions it has taken.

     The company continues to work toward resolution of these issues, however, some or all of these problems may continue or worsen in 2003.

THE COMPANY MAY NOT MEET THE NEW YORK STOCK EXCHANGE’S CONTINUED LISTING STANDARDS IF ITS COMMON STOCK IS LESS THAN $1.00 PER SHARE FOR 30 DAYS OR IT IS UNABLE TO MEET ITS DEBT OBLIGATIONS

     The price of the company’s common stock has declined since early 2001, due to its operational, labor and production problems and its recurring need to amend the covenants under its credit agreement, as well as general domestic and worldwide economic conditions, including declining stock and commodity prices in the United States, depressed palladium prices and the events of September 11, 2001. (See “Operating Plan”). The company’s stock closed at $35.90 on January 2, 2001, $19.20 on January 2, 2002, $5.42 on January 2, 2003 and $2.81 on March 24, 2003. During this period, the company has been required to obtain seven amendments and/or waivers under its credit agreement. (See “Credit Agreement”).

     The company issued a press release on February 18, 2003, announcing that it was seeking an amendment or waiver of the covenants under its credit agreement and to gain access to an additional $17.5 million under the revolving credit facility. The press release noted that the company’s loan would be immediately due and payable if the company was unable to obtain such amendment or waiver and that its cash would not be sufficient to maintain its projected liquidity requirements through 2003.

     Following this announcement, the company received a letter from the New York Stock Exchange (“NYSE”), dated February 26, 2003, regarding the NYSE’s continued listing standards. The letter informed the company that the NYSE would be monitoring its listing status, and that the company could lose its listing if it did not meet these standards, including if its share price fell below $1.00 per share for 30 consecutive days or if it was unable to meet its debt obligations.

     The company received the necessary waivers and amendments to its credit agreement on March 20, 2003 and gained access to the $17.5 million revolver under the credit facility. The company currently believes it has sufficient funds to continue its operations and meet its debt obligations through 2003. The company further believes that the Norilsk Nickel transaction should be completed in 2003. The consideration to be received by the Company from Norilsk Nickel, comprised of $100 million in cash and 877,000 ounces of palladium, will provide the company with sufficient liquidity for the foreseeable future. However, there are a number of conditions to the Norilsk Nickel transaction and if the transaction is not completed in 2003, the company may not be able to continue to meet the listing requirements of the NYSE. (See “The Company Will Face Operational, Liquidity and Capital Risks if the Norilsk Nickel Transaction Is Not Consummated” above).

     The closing price of the company’s common stock was $2.81 per share on March 24, 2003, which is above the $1.00 per share continued listing standard. However, due to the company’s ongoing production, labor and operational problems, as well as worldwide economic conditions, the company is also unable to assure that its stock price will remain above $1.00 per share. If the company’s stock price falls below $1.00 per share, the company may also lose its listing on the NYSE.

     If the company loses is listing on the NYSE for any reason, it could lose an important source for potential new capital and stockholders would likely have decreased liquidity with respect to their shares.

VULNERABILITY TO METALS PRICE VOLATILITY—CHANGES IN SUPPLY AND DEMAND COULD REDUCE MARKET PRICES

     Since the company’s sole source of revenue is the sale of platinum group metals, changes in the market price of platinum group metals significantly impacts profitability. Many factors beyond the company’s control influence the market prices of these metals.

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These factors include global supply and demand, speculative activities, international political and economic conditions and production levels and costs in other platinum group metal producing countries, principally Russia and South Africa.

     The market prices of palladium fell significantly during 2002. The price for palladium, which had reached record high price levels of $1,090 per ounce in January 2001 had fallen sharply to approximately $440 per ounce by December 31, 2001 and fell further to approximately $222 per ounce by the fourth quarter of 2002. At March 24, 2003, palladium was approximately $216 per ounce. The price for platinum fell from $640 per ounce early in 2001 to approximately $480 per ounce by December 31, 2001 but recovered to approximately $655 per ounce at March 24, 2003. The economic contraction experienced in the United States and worldwide may lead to further volatility in market prices of PGMs, particularly if demand for PGMs falls in connection with reduced automobile and electronics production. In addition, the worldwide economy may be adversely affected by political events and related events and conditions in the United States and abroad, including in the Middle East. Any such economic downturn or drop in prices could adversely impact the company’s results of operations and could impair its ability to achieve its financial and operating plans. Because of the recent declines in the price of palladium, the company has adjusted its production goals to consider the PGM market outlook, cost of production, ore grade and tonnage, and ounces to be produced. In the current price environment and considering the company’s funding requirements, its production target for 2003 has been revised to approximately 615,000 ounces.

     If other producers dispose of substantial amounts of platinum group metals from stockpiles or otherwise, the increased supply could reduce the prices of palladium and platinum. Reductions in PGM prices adversely impact the company’s revenues, profits and cash flows. Protracted periods of low metals prices could significantly reduce revenues and the availability of required development funds to levels that could cause portions of the company’s ore reserves and production plan to become uneconomic causing substantial reductions to PGM production or suspension of our mining operations. See “Business and Properties — Competition: Palladium and Platinum Market” for further explanation of these factors.

     In consummating the Norilsk Nickel transaction, a substantial portion of the consideration to be received will be paid in palladium. Norilsk Nickel must pay the company approximately 877,000 ounces of palladium, which was valued at approximately $241 million as of November 19, 2002, the last trading day before the date on which the agreement with Norilsk Nickel was signed (based on the then current price of palladium, which was approximately $275 per ounce). Based on the price of palladium on March 24, 2003 ($216 per ounce), the palladium portion of the consideration to be received from Norilsk Nickel was valued at approximately $189 million.

     Any increase or decrease in the price of palladium after closing will affect the cash proceeds ultimately realized from the sale of such palladium.

     Following the closing of the Norilsk Nickel transaction, the company’s primary source of revenue will continue to be the sale of PGMs. The company also expects to enter into a PGM Agreement with Norilsk Nickel to purchase 1 million ounces of palladium on an annual basis for sale to customers in order to provide an additional source of revenue. This increased supply of palladium in North America could negatively affect the price of palladium in the world market, which could in turn adversely affect the company’s revenues from the sale of palladium mined by the company. The PGM Agreement would provide the company with an additional source of palladium (as well as other platinum group metals) but would not create any diversification in its product line.

HEDGING AND LONG-TERM SALES CONTRACTS COULD LIMIT THE REALIZATION OF HIGHER METAL PRICES

     The company enters into hedging contracts from time to time in an effort to reduce the negative effect of price changes on its cash flow. These hedging activities typically consist of contracts that require the company to deliver specific quantities of metal, or to financially settle the obligation in the future at specific prices, the sale of call options and the purchase of put options. At March 24, 2003, the market prices for palladium and platinum were $216 and $655 per ounce, respectively. At December 31, 2002, the company had no outstanding hedge commitments. See “Business and Properties — Current Operations – Sales and Hedging Activities” for a discussion of the company’s hedge positions. While hedging transactions are intended to reduce the negative effects of price decreases, they can also prevent the company from benefiting from price increases. When PGM prices are above the price for which future production has been sold, the company would have an opportunity loss. During 2002, 2001 and 2000, the company reported hedging gains or (losses) of approximately $9.2 million, $5.5 million and ($15.8) million, respectively. The company has entered into long-term sales contracts that provide a floor price and a ceiling price for sales of a portion of its production. To the extent commodity prices exceed the ceiling price of the sales contracts, the company will not receive full market price at the time of sale. For a description of these contracts, see “Business and Properties—Current Operations — Sales and Hedging Activities”.

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ACHIEVEMENT OF THE COMPANY’S PRODUCTION GOALS IS SUBJECT TO SIGNIFICANT UNCERTAINTIES

     The company’s achievement of production goals depends upon its ability to sustain production at the Stillwater and East Boulder Mines and its related facilities. Ongoing operations require the company to develop mine facilities to commence and maintain production within budgeted levels. The company has previously and may need to further revise its plans and cost estimates for the Stillwater Mine and East Boulder Mine as the mining progresses. See “Business and Properties — Current Operations” for further discussion of the company’s operating plans. Among the major risks to a successful operating plan are potential cost overruns during development of mine operations and the ability to retain sufficient numbers of skilled underground miners.

     Based on the complexity and uncertainty involved in operating underground mines, it is difficult to provide accurate production and cost estimates. The company cannot be certain that either the Stillwater or East Boulder Mines will achieve the production forecast or that the expected operating cost levels will be achieved or that funding will be available from internal and external sources in necessary amounts or on acceptable terms to continue the necessary development work. Failure to achieve the company’s production forecast would negatively impact the company’s revenues, profits and cash flows. The reduction of production levels would also impact certain covenants under the company’s credit facility relating to the accomplishment of specified production and financial goals. As underground operations expand at depth and horizontally, it is likely that operating costs will increase unless employee productivity is increased. In addition, as additional underground infrastructure is constructed, amortization will increase unless additional ore reserves are identified. Such increase in costs could adversely affect the company’s profitability.

     In order to pursue the mine plan, the company incurs continuing costs to construct the expanding infrastructure of the mine. Such costs, which include costs of construction of shafts, footwall laterals, ramps, ventilation, electrical, and piping systems, are included in cost pools that accumulate (net of amortization) over the life of the mine. The company amortizes these costs over the expected units of production over the life of the mine using a per unit calculation that is based on accumulated costs to date (net of amortization to date) divided by the proven and probable reserves at the point of estimate. There are changes in the per unit estimate of infrastructure cost allocation as the cost pool changes and as the proven and probable reserves change as a result of production and development of new reserves. The per unit rate of amortization may be higher or lower from one period to another as the cost pool may change disproportionately in relation to the change in proved and probable reserves. If infrastructure costs are incurred and accumulated during a period when reserves change in a manner and/or at a rate that is disproportionate to the change in the amortizable cost pool, the amortization rate per unit will increase or decrease. Since infrastructure costs will continue to be incurred over most of the life of the mine and will be amortized over the proven and probable reserves over the life of the mine, there will be variation in the amortization rate as new costs are incurred and estimates of proven and probable reserves change. If actual ore produced is less than the estimates of proven and probable reserves on which the amortization rate is calculated, the company may recognize lower margins or may incur losses in the later periods of production to the extent that unamortized costs are spread over a lower number of units of production.

     In the course of seeking to increase production, the company has historically experienced difficulties resulting from development shortfalls and production constraints including underground materials handling constraints, equipment unavailability, operational inconsistencies, ventilation constraints and service interruptions. New mining operations often experience unexpected problems during the development and start-up phases, which can result in substantial delays in reaching commercial production. The operating plan further contemplates a significant effort to reduce expenses. The company may experience difficulties in achieving these production goals. The company may also continue to experience difficulties and delays as it adjusts production. Furthermore, at the Stillwater Mine, the company has experienced an increase in total cash costs per PGM ounce increasing from $198 in 1999 to $264 in 2000 and 2001 and to $263 in 2002.

     New mining operations often experience unexpected problems during initial years of operation, which can result in substantial delays in reaching commercial production. The East Boulder Mine commenced commercial operations in 2002 and has an operating history of one year. As a result, estimates of future cash operating costs at East Boulder are based largely on the company’s limited experience at the East Boulder Mine and operating experience at the Stillwater Mine portion of the J-M Reef. Actual production, cash operating costs and economic returns may differ significantly from those currently estimated or those established in future studies and estimates.

THE COMPANY DEPENDS UPON A FEW CUSTOMERS AND ITS SALES AND OPERATIONS COULD SUFFER IF IT LOSES ANY OF THEM

     The company is party to long-term sales contracts with General Motors Corporation, Ford Motor Company and Mitsubishi

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Corporation, each of whom represent more than 10% of the company’s revenues. For more information about these sales contracts, see “Business and Properties — Current Operations — Sales and Hedging Activities”.

     As a result of these contracts, the company is subject to the customers’ compliance with the terms of the contracts, their ability to terminate or suspend the contracts and the customers’ willingness and ability to pay. The loss of any of these customers would require the company to sell at prevailing market prices, which may expose it to lower metal prices as compared to the floor price structures under the sales contracts. In the event the company becomes involved in a disagreement with one or more of its customers, their compliance with these contracts may be at risk. In such an event, the company’s operating plans could be threatened. In addition, under the company’s syndicated credit facility, a default or modification of the sales contracts could prohibit additional loans or require the repayment of outstanding loans. A termination or breach by a customer could impact the company’s operations and negatively impact the company’s financial results. The contracts are designed to limit the downside risk of metal prices at the risk of foregoing a portion of upside price potential should market prices exceed the price ceilings. See “Business and Properties — Current Operations — Sales and Hedging Activities” for additional information about the sales contracts.

USERS OF PGMS MAY SUBSTITUTE OTHER MATERIALS FOR PALLADIUM AND PLATINUM

     High PGM prices may lead users of PGMs to substitute other materials for palladium and platinum. The automobile, electronics and dental industries are the three largest sources of palladium demand. In response to supply questions and high market prices for palladium, some automobile manufacturers have sought alternatives to palladium and may reduce their PGM purchases. There has been some substitution of other metals for palladium in the automobile, electronics and dental applications. Substitution in all of these industries may increase significantly if the PGM market prices rise or if supply becomes unreliable. Significant substitution for any reason, in the absence of alternative uses for palladium being identified, could result in a material PGM price decrease, which would negatively impact the company’s revenues.

LIMITED AVAILABILITY OF ADDITIONAL MINING PERSONNEL AND UNCERTAINTY OF LABOR RELATIONS MAY AFFECT THE COMPANY’S ABILITY TO ACHIEVE ITS PRODUCTION TARGETS

     The company’s operations depend significantly on the availability of qualified miners. Historically, the company has experienced high turnover with respect to its miners. In addition, the company must compete for individuals skilled in the operation and development of mining properties. The number of such persons is limited, and significant competition exists to obtain their skills. The company cannot be certain that it will be able to maintain an adequate supply of miners and other personnel or that its labor expenses will not increase as a result of a shortage in supply of such workers. The company currently employs 443 miners. Failure to maintain an adequate supply of miners could limit the company’s ability to meet its contractual requirements. The company currently has approximately 1,575 employees, about 870 located at the Stillwater Mine and 102 at the Columbus facilities, which are covered by a collective bargaining agreement with PACE Local 8-001, expiring June 30, 2004. On July 1, 2002, employees at the East Boulder Mine became covered by a collective bargaining agreement with PACE Local 8-001, expiring June 30, 2005. About 245 employees were covered under this agreement at December 31, 2002. In the event the company’s employees were to engage in a strike or other work stoppage, it could experience a significant disruption of the company’s operations and higher ongoing labor costs, which could limit the company’s ability to meet its contractual requirements.

IF THE COMPANY IS UNABLE TO OBTAIN SURETY BONDS TO COLLATERALIZE ITS RECLAMATION LIABILITIES, OPERATING PERMITS MAY BE IMPACTED

     The company is required to post surety bonds, letters of credit, cash or other acceptable financial instruments to guarantee performance of reclamation activities at the Stillwater and East Boulder Mines. As a result of a significant reduction of liquidity in the surety bond market, the total bonding capacity of the U.S. insurance industry has been severely reduced. In addition, the State of Montana has been requiring higher bonding levels at mining operations throughout the state. For example, the bonded amount at the East Boulder Mine was increased from $4.0 million to $11.2 million during 2002. The Stillwater Mine currently posts a bond of $9.2 million which may require a substantial increase. The company expects that the Stillwater Mine bond will be reviewed and adjusted by the Agencies during 2003, and in all likelihood, be increased. In the event that increased bonding requirements are imposed and the company is unable to obtain the required bonds, the ability to operate under existing operating permits could be adversely affected.

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MINING RISKS AND POTENTIAL INADEQUACY OF INSURANCE COVERAGE — THE COMPANY’S BUSINESS IS SUBJECT TO SIGNIFICANT RISKS THAT MAY NOT BE COVERED BY INSURANCE

     Underground mining and milling, smelting and refining operations involve a number of risks and hazards, including:

•		unusual and unexpected rock formations affecting ore or wall rock characteristics,
•		ground or slope failures,
•		cave-ins, ground water influx and other mining or ground-related problems,
•		environmental hazards,
•		industrial accidents,
•		organized labor disputes or work slow-downs,
•		metallurgical and other processing, smelting or refining problems,
•		wild fires, flooding and periodic interruptions due to inclement or hazardous weather conditions or other acts of God,
•		mechanical equipment failure and facility performance problems and
•		the availability of critical materials and equipment.

     Such risks could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability. Fatalities have occurred at the company’s mine since operations began in 1986. Industrial accidents could have a material adverse effect on its business and operations. The company cannot be certain that its insurance will cover certain of the risks associated with mining or that it will be able to maintain insurance to cover these risks at economically feasible premiums. Furthermore, the cost of insurance has dramatically increased as a result of worldwide economic conditions. The company might also become subject to liability for environmental damage or other hazards which it cannot insure against or which it may elect not to insure against because of premium costs or other reasons. Losses from such events could have a negative impact on the company’s business, financial condition and results of operations.

CHANGES TO REGULATIONS AND COMPLIANCE WITH REGULATIONS COULD INCREASE COSTS AND CAUSE DELAYS

     The company’s business is subject to extensive federal, state and local environmental controls and regulations, including regulations associated with the implementation of the Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, Metals Mines Reclamation Act and numerous permit stipulations as documented in the Record of Decision for each operating entity. These laws are continually changing and, as a general matter, are becoming more restrictive. Generally, compliance with these regulations requires the company to obtain permits issued by Federal, State and Local regulatory agencies. Certain permits require periodic renewal or review of their conditions. The company cannot predict whether it will be able to renew such permits or whether material changes in permit conditions will be imposed. Nonrenewal of permits or the imposition of additional conditions could prohibit the company’s ability to conduct its operations. See “Business and Properties — Regulatory and Environmental Matters”.

     Compliance with existing and future environmental laws and regulations may require additional control measures and expenditures which the company cannot predict. Environmental compliance requirements for new mines may require substantial additional control measures that could materially affect permitting and proposed construction schedules for such facilities. Under certain circumstances, facility construction may be delayed pending regulatory approval. Expansion may require new environmental permitting at the Stillwater Mine and mining and processing facilities at the East Boulder Mine. Private parties may pursue legal challenges of the company’s permits. See “Business and Properties – Regulatory and Environmental Matters”.

     The company’s activities are also subject to extensive federal, state and local laws and regulations governing matters relating to

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mine safety, occupational health, labor standards, prospecting, exploration, production, exports, smelting and refining operations and taxes. Compliance with these and other laws and regulations, including new requirements implemented under guidance of the Department of Homeland Security, could require additional capital outlays. From and after the fourth quarter of 2002, production at the Stillwater Mine has been affected by issues arising from increased MSHA enforcement activity. The correction of conditions noted in these inspections has significantly disrupted production. Included in these corrections are concerns dealing with machinery noise levels, new interpretations of standards and renewed emphasis on explosives by Homeland Security, which restricts the handling of explosives by non-U.S. employees. The company is aggressively working with MSHA to address the concerns raised with respect to these inspections. The company hopes to resolve these issues in the near future, however, there can be no certainty that future disruptions will not occur.

THE STILLWATER MINE IS THE COMPANY’S LARGEST SOURCE OF REVENUES

     A significant portion of the company’s revenues is currently derived from its mining operations at the Stillwater Mine. An interruption in operations at the Stillwater Mine or at any of its processing facilities would have a negative impact on the company’s ability to generate revenues and profits in the future. A smaller but growing portion of the company’s revenues is derived from its mining operations at the East Boulder Mine. Material factors that could cause an interruption in its operations at either mine include:

•		ground or slope failures,
•		cave-ins, groundwater influx and other mining or ground-related problems,
•		industrial accidents,
•		mechanical equipment failure and facility performance problems,
•		the availability of critical materials and equipment,
•		adverse changes in the regulatory environment and
•		organized labor disputes or work slow-downs.

UNCERTAINTY OF TITLE TO PROPERTIES — THE VALIDITY OF UNPATENTED MINING CLAIMS IS SUBJECT TO TITLE RISK

     The company has a number of unpatented mining claims. See “Business and Properties — Current Operations — Title and Royalties”. The validity of unpatented mining claims on public lands, which constitute most of the company’s property holdings, is often uncertain and possessory rights of claimants subjected to challenge. Unpatented mining claims may be located on lands open to appropriation of mineral rights, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain and the vulnerability to challenges of third parties or the federal government. The validity of an unpatented mining claim or millsite, in terms of its location and its maintenance, depends on strict compliance with a complex body of federal and state statutory and decisional law and, for unpatented mining claims, the existence of a discovery of valuable minerals. In addition, few public records exist to definitively control the issues of validity and ownership of unpatented mining claims or millsites. While the company pays annual maintenance fees and has obtained mineral title reports and legal opinions for some of the unpatented mining claims or millsites in accordance with the mining laws and what the company believes is standard industry practice, the company cannot be certain that the mining laws will not be changed and the company’s possessory rights to any of its unpatented claims may not be deemed defective and challenged. See “Business and Properties — Ore Reserves”.

ORE RESERVES ARE VERY DIFFICULT TO ESTIMATE AND ORE RESERVE ESTIMATES MAY REQUIRE ADJUSTMENT IN THE FUTURE; CHANGES IN ORE GRADES COULD MATERIALLY IMPACT THE COMPANY’S PRODUCTION AND REPORTED RESULTS

     Ore reserve estimates are necessarily imprecise and depend to some extent on statistical inferences drawn from limited drilling, which may prove unreliable. Ore reserve estimates are expressions of professional judgment based on knowledge, experience and

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industry practice. The company cannot be certain that its estimated ore reserves are accurate, and future production experience could differ materially from such estimates. Should the company encounter mineralization or formations at any of its mines or projects different from those predicted by drilling, sampling and similar examinations, reserve estimates may have to be adjusted and mining plans may have to be altered in a way that might adversely affect its operations. Declines in the market prices of platinum group metals may render the mining of some or all of the company’s ore reserves uneconomic. The grade of ore may vary significantly from time to time and between the Stillwater Mine and the East Boulder Mine, as with any mining operation. The company cannot give any assurances that any particular level of metal may be recovered from the ore reserves. Moreover, short-term factors relating to the ore reserves, such as the need for additional development of the orebody or the processing of new or different ore types or grades, may impair the company’s profitability in any particular accounting period.

CONTINUED LOW PALLADIUM PRICES MAY RESULT IN ASSET IMPAIRMENT WRITEDOWNS

     The company follows Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured as the amount by which the asset-carrying value exceeds fair value. Fair value is determined using estimated discounted future cash flow analysis. Future cash flows include estimates of recoverable ounces, platinum and palladium prices (considering current and historical prices, price trends and related factors), production levels, capital and reclamation expenditures, all based on detailed life-of-mine plans derived from engineering reports. In estimating future cash flows, assets are grouped together at each individual mine property which is the lowest level for which there are identifiable cash flows that are largely independent of cash flows from other asset groups. Assumptions underlying future cash flows are subject to risks and uncertainties. Any differences between significant assumptions and market conditions such as declining PGM prices, lower than expected recoverable ounces, and/or the company’s performance could have a material effect on the company’s ability to recover the carrying amounts of its long lived assets resulting in potential impairment charges. In addition, a significant asset writedown could impact certain of the financial covenants in the company’s credit facility.

     For the calendar years ended December 31, 2002, 2001 and 2000, respectively, the company realized a combined average PGM price per ounce of $454, $554 and $541, respectively. Based upon the company’s current mine plans, an asset impairment could potentially be required at a combined realized PGM price below a three-year average of approximately $400 per ounce. During the first two months of 2003, based upon market prices and giving effect to the company’s marketing contracts, it realized a combined PGM price of $416 per ounce sold. As of March 24, 2003, the combined PGM price as quoted in the London Metal Exchange was $318 per ounce.

THE COMPLEXITY OF PROCESSING PLATINUM GROUP METALS POSES OPERATIONAL AND ENVIRONMENTAL RISKS IN ADDITION TO TYPICAL MINING RISKS

     Producers of platinum group metals are required to conduct processing procedures and construct and operate additional facilities beyond those for gold and silver producers. In addition to concentration facilities at the mine site, the company operates its own smelting and refining facilities in Columbus, Montana to produce a filter cake that is shipped for final refining by a third party refiner. The operations of a smelter and refinery by the company require environmental steps and operational expertise not required of most other precious metals producers. This additional complexity of operations poses additional operational and environmental risks, such as solution spills, the release of sulfur dioxide from the storage vessels and product spills in transportation.

ITEM 3

LEGAL PROCEEDINGS

     The company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the company’s consolidated financial position, results of operations or liquidity.

STOCKHOLDER SUITS

     During the second quarter of 2002, seven lawsuits were filed against the company and certain senior officers in United States District Court, Southern District of New York. These actions purport to be a class action filed on behalf of all persons who purchased

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or otherwise acquired common stock of the company between April 20, 2001 through and including April 1, 2002, and asserts claims against the company and certain of its officers under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs challenge the accuracy of certain public disclosures made by the company regarding its financial performance, and in particular, its accounting for probable ore reserves. On September 23, 2002, an amended complaint was filed which has consolidated the cases and lead counsel was appointed to represent the plaintiff. In October 2002 defendants moved to dismiss the complaint and to transfer the case to federal district court in Montana. These motions are pending.

     On June 24, 2002, a stockholder derivative lawsuit was filed against the company and its directors in state court in Delaware. It arises out of allegations similar to the class actions for the period from April 20, 2001 through and including April 20, 2002 and seeks damages allegedly on behalf of the stockholders of Stillwater for breach of fiduciary duties by the directors.

     The company considers the lawsuits without merit and intends to vigorously defend itself in both of these actions.

ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

PART II

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

     On January 31, 2002, the company completed a $60 million private placement of its common stock involving approximately 4.3 million shares or approximately 10% of the outstanding shares after such issuance. The Company filed a registration statement for the resale of such shares, which was declared effective as of June 7, 2002.

     The company’s common shares are traded on the New York Stock Exchange (“NYSE”) under the trading symbol “SWC.” For the period from January 1, 2001 through December 31, 2002, the high and low sales prices for the company’s common stock for each quarter as reported by the American Stock Exchange prior to June 26, 2001 and by the New York Stock Exchange from and after June 26, 2001, were:

     STOCKHOLDERS. As of March 24, 2003, the company had 507 stockholders of record.

     DIVIDENDS. The company has never paid any dividends on its common stock and expects for the foreseeable future to use all of its cash flow from operations for use in expanding and developing its business. Any future decision as to the payment of dividends will be at the discretion of the company’s Board of Directors and will depend upon the company’s earnings, financial position, capital requirements, plans for expansion, loan covenants and such other factors as the Board of Directors deems relevant. Covenants in the company’s credit facility and its exempt facility revenue bond indenture significantly restrict the payment of dividends on common stock.

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Table of Contents

ITEM 6

SELECTED FINANCIAL AND OPERATING DATA