Polymer electrolyte membrane (PEM) fuel cell performance is largely controlled by the microstructure of the catalyst layer. Hence, a need exists to develop fundamental understanding of the effect of catalyst layer microstructure on a PEM fuel cell operational characteristics. Significant obstacles to commercialization of a PEM fuel cell have been attributed to high cost of the platinum catalyst, slow kinetics of the oxygen reduction reaction (ORR), and low catalyst utilization. In order to address these limiting factors, a model has been developed to investigate the effect of catalyst particle size, loading, utilization and distribution of catalyst layer components. The model predicts a large increase in the exchange current and in cell potential following a corresponding reduction in activation polarization as catalyst particle size decreases to a few nanometers. Model predictions compare well with published experimental data. The model also predicts an upper statistical limit of 22% to the amount of catalyst that can be utilized for current generation, even for best-prepared catalyst layer. This explains the observed low catalyst utilization (<25%) reported in the literature. In the proposed model, this statistical limit is attributed to the intrinsic characteristics of "randomly" distributed catalyst layer components. To achieve higher utilization, catalyst layer components must be distributed in an engineered design that ensures maximum number of active sites. (C) 2004 Elsevier B.V. All rights reserved.