[SUSTAINABLE DEVELOPMENT TECHNOLOGY CANADA LOGO]



                  SUSTAINABLE DEVELOPMENT TECHNOLOGY CANADA
                            CONTRIBUTION AGREEMENT

THIS AGREEMENT  (the  "Agreement")  is made in triplicate  this 5th day of March
2004(the "Effective Date") between Canada Foundation for Sustainable Development
Technology,  a corporation  without share capital  incorporated under the Canada
Corporations  Act  (Canada)  and  continued  under  the  Canada  Foundation  for
Sustainable  Development  Technology  Act (Canada)  (hereinafter  referred to as
"SDTC")  and West  Lorne  BioOil  Co-Generation  Limited  Partnership  a Limited
Partnership formed under the laws of Ontario. Canada (hereinafter referred to as
the "Lead Contractor").

WHEREAS  SDTC is a not for  profit  foundation  constituted  for the  purpose of
fostering the  development  and adoption of  technologies  that  contribute to a
sustainable  development technology  infrastructure in Canada by contributing to
the   rapid   development.   demonstration   and  pre-,   commercialization   of
technological solutions which address climate change and air quality; and

WHEREAS SDTC has entered into an agreement  (the "Funding  Agreement")  with Her
Majesty  the Queen in Right of Canada  represented  by the  Minister  of Natural
Resources and the Minister of the Environment dated March 26, 2001:

WHEREAS  SDTC and the Lead  Contractor  agree  that for the Lead  Contractor  to
perform the project  entitled the Eric  Flooring  BioOil  Cogeneration  Plant as
described  in the Proposal  dated 22 October 2002 and in the Work Plan  attached
hereto as Schedule A (hereinafter  referred to as the "Project" and assigned the
contract number  SDTC-2002-B-448)  to develop and demonstrate the technology for
the purpose of  commercializing  it, the Lead Contractor will require  financial
assistance from SDTC: and

WHEREAS  SDTC is willing to provide a  Contribution  (as defined  herein) to the
Lead  Contractor  for the  Project on and  subject  to the terms and  conditions
contained herein.

NOW  THEREFORE  in  consideration  of the  premises  and  the  mutual  covenants
contained herein SDTC and the Lead Contractor agree as follows:

I        Interpretation
         --------------

1.1      Definitions.      In this Agreement the following terms shall have  the
following meaning` respectively and other terms may be defined elsewhere in this
Agreement:

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                                                                    CONFIDENTIAL

                   Sustainable Development Technology Canada
  230 Oueen Street, Suite 250, Ottawa. Ontario Canada KIP 5E4 Tel 613.234.6313
                                Fax 613.234.0303
                                   www.sdtc.ca

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"Agreement",  "hereto", "herein", "hereof',  "hereunder" and similar expressions
refer to this Agreement and not to any particular  section of this Agreement and
includes the Schedules attached hereto.

"Acceptance" means written  acknowledgement by the Acceptance Authority that the
supplies  or  services   including   reports  conform  to  applicable   contract
requirements.

"Acceptance Authority" means SDTC or any of its delegates.

"Ancillary   Agreements"  means  the  ancillary   agreements  (other  than  this
Agreement) defined and described in the Master Consortium Agreement.

"Audited  Project Report" shall have the meaning ascribed thereto in Section 6.2
hereof.

"Budget" shall have the meaning ascribed thereto in Section 5.1 (a) hereof,  and
may be amended pursuant to Section 3,7 hereof.

"Business  Day" shall mean any day other than a  Saturday,  Sunday or  statutory
holiday in the Province of Ontario.

"Claim" has the meaning ascribed thereto in Section 3 3 hereof.

"Commercially  Available" means, with respect to a product,  generally available
to he sold, leased, licensed,  sublicensed,  distributed,  deployed or otherwise
transferred in commercial quantities to customers or end users.

"Commercial   Availability  Date"  means  the  date  on  which  the  product  or
technologies  developed pursuant to the Project are made Commercially  Available
by the Lead Contractor, any member of the Consortium or by any other party.

"Completion Date" means the date on which the Project is completed in accordance
with the Work Plan.

"Competitive Entities" shall have the meaning ascribed thereto in Section 12.3
hereof

"Confidential  Information" means any information,  whether printed,  in machine
readable  form  or  otherwise,  that  is  proprietary  or  confidential  to  the
disclosing  party and disclosed to the receiving party and which is disclosed by
the  disclosing  party in  writing  and is  marked  as  "Confidential"  (or like
designation) at the time of disclosure.

"Consortium" means all the entities listed in Schedule D. "Contribution" has the
meaning ascribed thereto in Section 3.1 hereof

"Declaration"  shall mean the declaration  dated September 12. 2003 and filed by
the Lead Contractor under the Limited Partnerships Act (Ontario).

"Deliverables"  means all  project  requirements  including  but not  limited to
reports  that  are  outlined  in  Schedule  C.  Deliverables  may be  priced  or
not-priced.

"Dollars" means Canadian Dollars

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"Eligible  Costs"  include  (a) all  goods and  services  and  professional  and
technical  personnel  costs  required to conduct the  scientific  and  technical
activities  directly  related to the Project;  and (b) where  capital  items are
specifically  required for the delivery of the Project,  such as data collection
equipment required as part of a time-limited  research activity, or required for
development  or  demonstration  of prototypes,  the cost of. or the  depreciated
value of such capital items.

"Eligible Project" means a project which is carried on, or primarily carried on,
in Canada by an Eligible  Recipient and which will, in the reasonable opinion of
SDTC, develop or demonstrate any one of the following new technologies:

(a) technologies related to energy end-use technologies,  such as transportation
    and building technologies, and technologies to reduce ground level ozone:

(b) technologies  related to sustainable energy production,  such as hydrogen or
    renewable   energy   technologies,   conversion  or   combustion   processes
    technologies,  fuel cells, CO, management technologies,  particulate control
    technologies and acid rain technologies;

(c) greenhouse gas emissions reduction  technologies related to areas other than
    energy  production  and use,  such as  technologies  to reduce CO, in cement
    manufacturing.

(d) air quality improvement technologies. such as toxic substance recovery
    systems;

(e) enabling or cross-cutting technologies, such as sensors and controls, closed
    loop waste treatment technologies,  and process technologies for the purpose
    of increasing energy efficiency : or

(f) any other new Sustainable  Development technology related to climate change
    and clean air

"Eligible  Recipient"  means an  entity  that (a) has been  established,  or has
entered into a collaborative  arrangement for the purpose of participating in an
Eligible  Project:  (b) has  expertise  in  Sustainable  Development  technology
projects, (c) has legal capacity in Canada or is composed of organizations. each
of which has legal  capacity in Canada,  and which  undertakes to he jointly and
severally or  solidarity  liable for the  obligations  hereunder,  (d) meets the
following  criteria (1) will develop the project as a  combination  of a private
sector  commercial  corporation and one or more of the following:  (A) a private
sector commercial corporation (which could be a technology supplier or a user of
technology).  (B) a  university  or college,  or (C) a private  sector  research
institute;  or (ii) the entity is a not-for-profit  corporation acting on behalf
of its  membership,  the purpose of which is to  undertake  or fund  Sustainable
Development technology development or demonstration;  and (e) is not an Excluded
Recipient.

"Event of Default" shall have the meaning ascribed in Section 13.1 hereof.

"Excluded  Recipient" means any (a) federal  department (as defined in section 2
of the FAA), (b) departmental  corporation (as defined in section 2 of the FAA),
(c) parent  Crown  Corporation  or wholly  owned  subsidiary  of a parent  Crown
Corporation  (as defined in subsection  83(l ) of the FAA),  (d)  not-for-profit
corporation  or  trust   controlled  by  a  federal   department.   departmental
corporation,  parent Crown  Corporation  or wholly owned  subsidiary of a parent
Crown  Corporation.  (e)  provincial  department or ministry or any proponent or
corporation of a similar nature controlled  directly or indirectly by a province
or (f) entity or person that does not have legal capacity in Canada.


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Any consortia members, partners, subcontractors,  consultants or contributors to
the  project  that do not meet  the  definition  of an  Eligible  Recipient  may
collaborate with Eligible Recipients in relation to an Eligible Project, and can
contribute  in-kind or  advisory  work,  or perform  work under  contract to the
Eligible  Recipient,  provided that such parties do not receive  direct  funding
from SDTC.

"FAA" means the Financial Administration Act (Canada).

"Financial Statements" shall have the meaning ascribed in Section 8.10) hereof.

"Funding  Agreement" means the agreement  between SDTC and Her Majesty the Queen
in Right of Canada  represented  by the  Minister of Natural  Resources  and the
Minister of the Environment dated March 26, 2001.

"GAAP" means the generally  accepted  accounting  principles  which are. for the
purposes  of  applying  the  same in  accordance  with  the  provisions  of this
Contract, in effect in Canada,  including those published in the handbook of the
Canadian Institute of Chartered  Accountants,  as the same arc generally applied
to Persons carrying on the type of business or activity carried on by SDTC

"General Partner" means Dynamotive Canada Inc.. a corporation incorporated under
the laws of Canada, the general partner of the Lead Contractor.

"Government  Funding" means any grant,  loan or other financial  assistance from
any federal,  provincial or municipal government or government agency, including
funding from SDTC pursuant to this Agreement and federal and provincial SRED tax
credits which relate to Project development work.

"Government  Funding limit" shall have the meaning ascribed thereto in Section 3
2(b) hereof.

"Governmental Entity" shall have the meaning ascribed in Section 8.1 (d) hereof.

" Holdback"  means money that is retained by SDTC for future  disbursment  until
all Project requirements have been completed as defined in Section 3.4 hereof.

"Insurance Policies" shall have the meaning ascribed in Section 7.6 hereof.

"Intellectual  Property  Rights" means any and all (by whatever name or known or
designated)  tangible and  intangible  and now known or  hereafter  existing (a)
rights  associated with works of authorship  throughout the universe,  including
but not limited to copyrights  and moral rights,  (h) trade secret  rights,  (c)
patents, designs. algorithms and other industrial property rights, (d) all other
intellectual  and industrial  property and proprietary  rights of every kind and
nature throughout the universe and however  designated (other than trademark and
trade name rights and similar  rights),  whether  arising by  operation  of law,
contract,  license  or  otherwise,  and  (e)  all  registrations,  applications,
renewals,  extensions,  continuations.  divisions  or  reissues  thereof  now or
hereafter in force throughout the universe  (including without limitation rights
in any of the foregoing ).

"Limited  Partnership  Agreement" means the limited partnership  agreement dated
December A 1, 2003 between the General Partner and the limited partner(s).

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"Master Consortium  Agreement" means the agreement dated February l1, 2004 among
Dynamotive Energy Systems  Corporation,  Satin Finish Hardwood Flooring Limited,
Erie Flooring and Wood Products Ltd. And Magellan Aerospace Corporation.

"Milestone"  means a  milestone  described  in the Work Plan and in  Schedule  C
attached hereto, the achievement of which entitles the Lead Contractor to submit
a Claim  to SDTC  for  payment  of an  installment  of the  Contribution,  which
milestone may be amended pursuant to Section 3.7 hereof.

"Non-Eligible  Costs" include (a) general overhead costs of the Lead Contractor,
including  operating  costs  related  to the  general  maintenance,  repair  and
overhead  costs of the Lead  Contractor;  (b) the cost to purchase or lease real
property;  (c)  administrative  costs not associated  with eligible  costs;  (d)
conference or travel costs not specifically  required for the project; (e) costs
of office  supplies,  equipment and furniture not required for the project;  and
(f) capital costs associated with ongoing scientific or technical  activities of
the Lead Contractor.

"Payment  Date" means the date on which an installment  of the  Contribution  is
paid by SDTC to the Lead Contractor.

"Project" means the Project described, or referred to in Schedule A, and defined
in the Proposal.

"Project  Intellectual  Property" means any and all  intellectual and industrial
property  developed,  produced,  created  or  invented  in  connection  with the
performance of the Protect  including.  without  limitation,  data,  techniques,
methods, processes, know-how, inventions,  improvements,  enhancements, designs,
formulae,  photographs,  drawings,  plans,  specifications,   reports,  studies,
technical and  procedural  manuals,  programs  including  computer  hardware and
software and source code, whether  susceptible to copyright or not,  proprietary
and confidential information, including technical data and customer and supplier
lists, trade secrets and know how and databases,  and all Intellectual  Property
Rights therein.

"Proposal" means the written document(s) supplied to SDTC by the Lead Contractor
and its  consortium  partners  in  response  to the  request  for  Phase If full
proposal

"Proposal Date" means the date of the Proposal.

"Sustainable  Development" means development that meets the needs of the present
without  compromising the ability of future generations to meet their own needs.
including  technologies that will mitigate,  substitute or sequester  greenhouse
gas emissions and reduce criteria air contaminants.

"Work Plan" means the Work Plan for the Project attached hereto as Schedule A.

1.2  Currency.  Unless  otherwise  indicated all dollar amounts referred to in
this Agreement. including the symbol $, refer to lawful money of Canada.

1.3 Knowledge.  Where any  representation,  warranty or other  statement in this
Agreement is expressed to be made by any parry to its  knowledge or is otherwise
expressed  to be  limited in scope to  matters  known to a party,  or of which a
party is aware,  it shall mean such  knowledge as is actually known to, or which
would have or should have come to the attention of such party,  or if such party
is a corporation the officers or employees of such party who have overall

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responsibility  for or knowledge of the matters  relevant to such  statement and
such party hereby' confirms that it has made  appropriate  inquiries of all such
officers and employees.

1.4      Schedules. The following are the Schedules attached to and incorporated
in this Agreement by' reference and deemed to be a part hereof:

Schedule A - Work Plan

Schedule B - Budget, Eligible Costs of Project and Summary of Contributions

Schedule C - Deliverables and Milestones

Schedule D - Consortium Members

Schedule E - Reports

2       Term
        ----

The term of this  Agreement  shall  commence on the Effective  Date and,  unless
terminated earlier in accordance with Section 13 hereof,  shall continue in full
force and effect until the Acceptance by SDTC' of the Third Annual Project SDIRS
Report.

3       Contribution Payments
        ---------------------

3 1 Subject to the terms and conditions  contained herein, SDTC shall pay to the
Lead Contractor up to $1,900,000.00 for Phase one of the Project and conditional
upon  successful  completion  of Phase one of the Project  shall pay to the Lead
Contractor  an  additional  amount  up to  $3,100,000.00  (the  "Contribution").
payable in  installments as provided in Schedule C attached  hereto.  SDTC shall
not make any  payment  on account of any cost  incurred  by the Lead  Contractor
prior to June 1, 2003 or in excess  of the costs set out in the  Project  Budget
attached hereto as schedule B.

3.2 Notwithstanding any other provision of this Agreement.

(a) The Contribution  shall not exceed fifty percent (50%) of the Eligible Costs
for the Project:

(b)  the  sum  of  all  Government  Funding  for  the  Project,   including  the
Contribution,  shall not exceed seventy-five percent (75%) of Eligible Costs for
the Project (the "Government Funding Limit"); and

(c)  SDTC  shall  not  have  any  obligation  to pay  the  Contribution,  or any
installment thereof, unless the Lead Contractor,  on or before the first Payment
Date, has established, to the satisfaction of SDTC, that the Lead Contractor has
obtained a commitment, and has the financial capacity to finance the Project.

3.3 Installments of the  Contribution  shall be paid to the Lead Contractor upon
the achievement of' various project milestones and upon receipt by SDTC and SDTC
acceptance  of all required  reports.  A written claim  ("Claim")  requesting an
installment payment for a milestone and all associated required reports shall be
submitted  by the Lead  Contractor  upon the  achievement  of each  Milestone in
accordance  with the schedule of payments set out in Schedule C attached  hereto
Each Claim shall  include a statement of Eligible  Costs  incurred in connection
with the

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Milestone  and shall be  certified  by an  officer  of the Lead  Contractor  and
accompanied by such supporting documentation as SDTC may require. Where the cost
of any item of a Claim exceeds $1,000.00  invoices or receipts shall be attached
to the Claim with respect to such items.  Upon acceptance by SDTC of a Claim for
payment  of an  installment  of the  Contribution,  SDTC  shall  pay to the Lead
Contractor such  installment of the  Contribution.  SDTC shall have 45 days from
the receipt of all required reports to provide notice of acceptance or rejection
of a Claim.  If a Claim is  rejected  by SDTC then SDTC will give notice of such
rejection to the Lead Contractor,  together with its reasons  therefor,  and the
Lead Contractor shall have 20 days to provide revised reports in support of such
Claim.  SDTC shall have 10 days to provide  notice of acceptance or rejection of
revised reports.  If the Claim is again rejected by SDTC then the aforementioned
process and time periods for the  submission of reports will continue until such
time as the Claim is accepted or the Contract is  terminated.  Any Claim that is
reasonably  rejected by SDTC after 3  submissions  shall be  considered to be an
Event of Default and SDTC may take action to terminate the contract.  Payment of
a Claim  shall  be made  only  after  acceptance  by  SDTC.  Early  delivery  is
permitted,  but SDTC shall not be  required to release  payment  until the dates
specified in Schedule.

3.4 SDTC shall withhold ten percent  l0%)(the  "Holdback") from each installment
of the Contribution payable hereunder until:

(a)      the Project has been completed to the satisfaction of SDTC;

(b)      a final report documenting the completion of the Project has been
         received and approved by SDTC: and

(c)      SDTC has approved a final statement of Eligible Costs paid in respect
         of the Project;

at which time, SDTC shall, subject to Section 3.6 hereof, pay  the  Holdback  to
the Lead Contractor,

3.5 The  obligation  of SDTC to make a payment  to the Lead  Contractor  of each
installment of the Contribution is subject to the fulfillment,  or the waiver by
SDTC,  of each of the  following  conditions  on or before the time of each such
payment:

(a)      Accuracy  of  Representations  and Warranties.  Each representation and
warranty  contained in Section 8.1 hereof shall be true on and as of the Payment
Date with the same force and effect as though such  representation  and warranty
had been made on and as of that date; and

(b)      Performance.  The  Lead  Contractor  shall  have performed and complied
with  all  covenants,  agreements  and  conditions  contained  in this Agreement
required to be performed  or complied with by the Lead Contractor prior to or on
the Payment Date

3.6  The Lead Contractor acknowledges and agrees that in the event that:

(a)      SDTC has paid a Claim and later determines that the Claim contained a
         cost which was a Non-Eligible Cost, or

(b)      Government Funding for the Project exceeds the Government Funding
         Limit, or

(c)      SDTC's contribution to the project exceeds 50 %, of the Project's
         Eligible Costs,

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then the amount of the  overpayment  or the excess over the  Government  Funding
Limit,  as the case  may be,  shall  constitute  a debt due to SDTC and the Lead
Contractor shall repay such amount to SDTC immediately or SDTC shall be entitled
to set-off such amount against future installments of the Contribution.

3.7 The Lead Contractor may propose  reasonable  amendments to any or all of the
Work Plan,  Milestones or Budget,  and shall provide SDTC with written notice of
the proposed  amendment,  including its scope,  anticipated cost and anticipated
results.  SDTC  shall  have the right to review the  proposed  amendment  and to
consult with the Lead  Contractor  and with any external  consultants  as deemed
appropriate by SDTC in respect thereof. Within sixty (60) days of SDTC's receipt
of the aforementioned amendment notice: (i) if SDTC, after consultation with the
Lead Contractor and with any external consultants as deemed appropriate by SDTC.
does not agree with the proposed amendment, it shall not be accepted; or (ii) if
SDTC agrees with the proposed amendment,  it shall so advise the Lead Contractor
in writing and the Agreement  shall thereupon be deemed to he so amended without
requiring  further  acts of the  parties.  Lack of consent by SDTC to a proposed
amendment  shall not  preclude the Lead  Contractor  from  submitting  any other
reasonable  proposed  amendment  in  respect  of any or  all of the  Work  Plan,
Milestones or Budget at any other time

Costs
-----

4 l The Lead  Contractor  hereby  certifies  that:  (a) all costs  described  in
Schedule B as Eligible Costs and submitted to SDTC for payment of an installment
of the Contribution arc accurate and arc Eligible Costs of the Project,  and (b)
all labour  rates  submitted  in the budget as  Eligible  Costs are equal to the
salary of the actual employee performing the work or if paid to a consultant and
not an  employee  are the  lowest  labour  rates  charged  by any  member of the
Consortium  to a third  party,  and  (c)  the  cost  claimed  for any  equipment
submitted as an Eligible Cost shall not include profit to the Lead Contractor or
any member of the Consortium and must he supported by invoice, and (d) all costs
for labour rates claimed will he directly related to the person  undertaking the
work.

4.2 SDTC may exercise its discretion in a reasonable manner to determine whether
a cost is an Eligible Cost or a Non-Eligible Cost.

4.3 lf, prior to the Completion Date of the Project,  the Lead Contractor or any
other Consortium member sells, leases, or otherwise disposes of any equipment or
capital assets, where the cost of the equipment or capital assets is part of the
Eligible  Costs  under the  Project  to which  SDTC has  contributed  under this
Agreement pursuant to a Claim by the Lead Contractor,  the Lead Contractor shall
immediately  notify SDTC in writing of the disposition and, if SDTC so requires,
the Lead Contractor shall share with SDTC the proceeds of the disposition in the
same ratio as that of SDTC's  contribution  to the purchase of the  equipment or
capital  assets,  except  that SDTC's  share  shall not exceed its  Contribution
hereunder.

Reporting
---------

5.1 The Lead Contractor shall submit the following  reports to SDTC in such form
and containing such information as SDTC may require from time to time:

(a)      progress reports on Deliverables as provided in Schedule C attached
hereto:

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(b) an annual Project  budget (the "Budget")  (within 30 days prior to year end)
listing all project costs both actual and estimated and all expenses incurred;

(c)  unaudited  financial  statements  relating  to  the  Project,  including  a
discussion  of  variances  from the  Budget,  at the time of each  Claim for the
payment  of an  installment  of the SDTC  contribution;

(d)  a final  report  on the Project  describing the outcome of the Project and
audited financial  statements for the Project;

(e) emission impact reports at various stages of the Project as required by SDTC
and in the format required by SDTC (the SDIRS Report);

(f) follow-up  reports due annually for three (3) years after the  completion of
the Project which  describes the diffusion of the  technology  developed and its
impact on emissions and Sustainable Development,  in the format required by SDTC
and  provided  electronically  by SDTC (the  SDIRS  Report)  and  referenced  in
Schedule E;

(g)   such other information and reports as may reasonably be requested by SDTC.

5.2  Subject  to Section 10 hereof,  Lead  Contractor  hereby  grants to SDTC' a
license to copy and distribute  all reports  submitted to it pursuant to Section
5.1 hereof.

5.3 Upon completion of the Project,  the Lead Contractor shall provide SDTC with
a certificate of an officer of the Lead Contractor setting out any contributions
or  payments  received  by the Lead  Contractor  in  respect  of the  Project in
addition to, or from sources other than, those named in its Proposal,  and shall
further certify as to any amounts owing to SDTC resulting from such  overfunding
and/or over-payment either as a result of changes in Project costs or accounting
errors, or both

6.       Accounts, Audits and Inspections
         --------------------------------

6.1 From the  Effective  Date and for a period of seven (7) years  following the
Completion Date, the Lead Contractor shall:

(a) keep proper books, accounts and records of its financial contributions both,
cash and inkind, all its costs and expenses  incurred  and  paid  in  connection
with the Project and shall keep invoices, receipts and vouchers relating thereto

(b) keep proper and accurate records relating to the environmental impact, sales
revenues,  employment impacts,  technology  developments  (including patents and
patent applications) and other impacts of the Project;

(c) on demand, make available to SDTC such books, accounts,  records,  invoices,
receipts and vouchers referred to above and permit SDTC to examine and audit and
take copies and extracts from such documents; and

(d)  supply  SDTC with any  reports  as  requested  in the  format  provided  as
attachments to this contract.

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6.2 The Project  shall be audited at the expense of the Lead  Contractor  and/or
the Consortium,  by an auditor  acceptable to SDTC at the end of the Project and
such auditor shall prepare a report (the "Audited  Project  Report")  based upon
such audit.  The Audited  Project Report shall include an itemized  statement of
all Eligible  Costs  incurred and paid for in connection  with the Project.  The
Project may also be audited by SDTC's auditors or another auditor  acceptable to
SDTC, at SDTC's cost, at such other time or times as SDTC may require.

6.3 The Lead  Contractor  shall ensure that SDTC or its designate has reasonable
access during normal  working hours to any premise or place where the Project is
being  carried out for the purpose of  inspecting  and assessing the progress of
the Project and all matters relating thereto.

Covenants of the Lead Contractor
--------------------------------
7.1 I he Lead  Contractor  shall  complete  the Project by the  Completion  Date
unless the Completion) Date is extended by SDTC, in its sole discretion.

7.2 The Lead Contractor shall comply with all federal,  provincial and municipal
laws in relation to the Project.

7.3 The Lead Contractor shall use commercially reasonable efforts to ensure that
within three (3) years of the Completion Date the Project Intellectual  Property
and technology developed in connection with the Project, including any products,
processes or services relating thereto, is commercialized, marketed and deployed
for the benefit of Canada.

7.4 The Lead Contractor  shall ensure that all employees or contractors  working
on the Project  assign any and all  Intellectual  Property  Rights in and to any
Project  Intellectual  Property  to  the  Lead  Contractor  or a  member  of the
Consortium  and that each such  employee  or  contractor  also waives his or her
moral  rights  in  any  copyright   arising  in  connection   with  the  Project
Intellectual Property.

7.5  Except  as  provided  in  the  Proposal,  the  Lead  Contractor  shall  not
subcontract  all or any  part of the  Project  unless  the Lead  Contractor  has
obtained the prior written consent of SDTC.  Every  subcontract  entered into by
the Lead Contractor shall provide that the  subcontractor  shall comply with the
terms and conditions of this Agreement that are applicable to the subcontract

7.6 The Lead  Contractor  shall maintain valid policies of employer's  liability
insurance  and of insurance  with respect to its  properties  and business  (the
"Insurance  Policies")  of the kinds and in the amounts  which are customary for
the nature and scope of the business  carried on by the Lead  Contractor and for
the Project.

7.7 The Lead Contractor shall perform all of its obligations under,  comply with
all of the terms of. and enforce its rights under the Ancillary Agreements.

7.8 The Lead  Contractor  shall do or cause to be done all things  necessary  to
keep in full force and effect its  existence  as a limited  partnership  and all
rights,  licenses,  permits,  approvals and qualifications necessary to carry on
its  business  or own  property  in each  jurisdiction  in which it  carries  on
business or owns property.

7.9 The Lead Contractor shall not, without the prior written consent of SDTC:

(a)      amend the Limited Partnership Agreement or the Declaration:

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(b)      effect or consent to the dissolution of the Lead Contractor;

(c)         enter into,  and not permit the General  Partner to enter into,  any
corporate   transaction  (whether  by  way  of  reorganization,   consolidation,
amalgamation, merger or otherwise) pursuant to which all or substantially all of
the  undertaking,  property  and assets of the Lead  Contractor  or the  General
Partner, as the case may be, would become the property of any other party, or in
the  case  of an  amalgamation,  the  property  of  the  continuing  corporation
resulting therefrom.

(d)      permit any change in its general partner from the General Partner or
any change in the share ownership of the General Partner;

(e)      permit any change in the membership of the Consortium.

8.       Representations and Warranties
         ------------------------------
8.1 Of the Lead Contractor.  The Lead Contractor  hereby represents and warrants
on its own behalf and on behalf of the Consortium and each member  thereof,  and
the  Lead  Contractor   hereby   acknowledges  that  SDTC  is  relying  on  such
representations and warranties for the purpose of entering into this Agreement:

(a) Corporate Power and Due Authorization. The General Partner has the corporate
power and  capacity and  authority  under the limited  Partnership  Agreement to
execute  and  deliver  this  Agreement  (and  any  agreements  relating  to this
Agreement) on behalf of the Lead  Contractor.  The Lead Contractor has the power
and capacity to perform its obligations under this Agreement. This Agreement has
been duly authorized, executed and delivered by the General Partner on behalf of
the Lead Contractor and is a valid and binding obligation of the Lead Contractor
enforceable  against it in  accordance  with its terms,  subject to  bankruptcy.
insolvency.  moratorium,  reorganization and other laws relating to or affecting
the  enforcement  of creditors'  rights  generally,  and the fact that equitable
remedies,  including the remedies of specific  performance and  injunction,  may
only be granted in the discretion of a court.

(b) Status.  The Lead Contractor is a limited  partnership duly registered under
the laws of the  Province of Ontario and is validly  existing  under the laws of
such jurisdiction.  The Lead Contractor is in good standing in each jurisdiction
where,  by reason of its  business or assets,  it is required to be qualified or
licensed.  The General Partner is a corporation  incorporated  under the laws of
the  Province  of  Ontario  and is  validly  existing  under  the  laws  of such
jurisdiction.  The  General  Partner is in good  standing  in each  jurisdiction
where,  by reason of its  business or assets,  it is required to be qualified or
licensed.

(c) Capital  Contributions.  The capital  contributions  to the Lead  Contractor
provided for in the  Consortium  Master  Agreement and the Ancillary  Agreements
have  been made and  neither  the  Consortium  Master  Agreement  nor any of the
Ancillary  Agreements has been amended and each such agreement continues in full
force and effect,

(d) Contribution Eligibility. The Lead Contractor is an Eligible Recipient and
the Project is an Eligible Project.

(e) No Conflicts. The execution and performance of the transactions contemplated
by this Agreement and compliance with their respective provisions by the Lead
Contractor will

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not (i)  conflict  with or violate  any  provision  of the  Limited  Partnership
Agreement, (ii) except as provided for or required in this Agreement, require on
the part of the Lead  Contractor any filing with, or any permit,  authorization,
consent or approval of. any court,  arbitration tribunal,  administrative agency
or commission or other  governmental or regulatory  authority or agency (each of
the  foregoing  is  hereafter  referred to as a  "Governmental  Entity"),  (iii)
conflict with,  result in a breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of, create in
any party the right to accelerate,  terminate,  modify or cancel, or require any
notice,  consent  or waiver  under,  any  contract,  lease,  sublease,  license,
sublicense,  franchise,  permit,  indenture,  agreement or mortgage for borrowed
money,  instrument  of  indebtedness  or other  arrangement  to  which  the Lead
Contractor  is a party or by which the Lead  Contractor is bound or to which its
assets are subject, other than any of the foregoing events which do not and will
not,  individually  or in the aggregate,  have a material  adverse effect on the
Lead Contractor, (iv) result in the imposition of any security interest upon any
assets of the Lead  Contractor,  or (v)  violate  any order,  writ,  injunction,
decree,  statute, rule or regulation applicable to the Lead Contractor or any of
its properties or assets.

(f) Governmental Consents. No consent,  approval,  order or authorization of, or
registration,  qualification,  designation,  declaration  or  filing  with,  any
Governmental Entity is required on the part of the Lead Contractor in connection
with the execution and delivery of this  Agreement  except such filings as shall
have been made prior to and shall he effective on and as of the Effective Date.

(g) Accuracy of Proposal.  All factual matters  contained in the Proposal and in
all material submitted in support are true and accurate, and that all estimates,
forecasts and other  related  matters  involving  judgment were prepared in good
faith  and to the best of its  ability,  skill and  judgment  and that all costs
submitted to SDTC as Eligible Costs for  reimbursement  as an installment of the
Contribution hereunder are Eligible Costs

(h)  Conduct of the  Project  The Lead  Contractor  shall  carry out the Project
promptly,  diligently  and in a professional  manner and in accordance  with the
terms and conditions of this Agreement and the Proposal.

(i)  Litigation.   There  is  no  action,  suit,  proceeding,   or  judgment  or
governmental  inquiry  or  investigation,  pending,  or, to the best of the Lead
Contractor's knowledge,  any basis therefor or threat thereof,  against the Lead
Contractor or to the best of the Lead Contractor's knowledge, any of the members
of the Consortium,  or which  questions the validity of this  Agreement,  or the
right of the Lead  Contractor  to enter  into  this  Agreement,  or which  might
result,  either individually or in the aggregate.  in a material adverse effect,
nor is there any litigation  pending,  or, to the best of the Lead  Contractor's
knowledge,  any basis therefor or threat thereof, against the Lead Contractor or
any member of the  Consortium by reason of the actual or proposed  activities of
the Lead Contractor or the Consortium.

(j)Financial Statements. Upon request from SDTC the Lead Contractor will furnish
to SDTC a complete and correct copy of (i) the  unaudited  balance  sheet of the
Lead Contractor  (the "Balance  Sheet") as at the date requested by SDTC and the
related  unaudited  statements  of  operations  and cash flows for the requested
period, and (ii) the audited balance sheet of the Lead Contractor as at the date
requested by SDTC and the related  audited  statements  of  operations  and cash
flows for the fiscal year then ended,


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(collectively,  the "Financial  Statements").  The Financial Statements shall be
complete and correct,  shall be in accordance  with the books and records of the
Lead  Contractor  and  present  fairly the  financial  condition  and results of
operations  of the  Lead  Contractor,  as at  the  dates  and  for  the  periods
indicated,  and shall be prepared in accordance with GAAP, consistently applied.

(k) Insurance.  The Insurance Policies arc in full force and effect and the Lead
Contractor  is not in default (i) with  respect to the payment of any premium or
(ii) with respect to any material  provisions  contained in such  policies.  The
Lead  Contractor and each member of the Consortium  maintains  valid policies of
worker's  compensation  insurance to the extent  required by law.

(l) Absence of Changes. Since the Proposal Date, there has not been: (a) any
change in the assets, liabilities, financial condition or operations of the Lead
Contractor or the Consortium or any member thereof from that reflected in the
Proposal and the Financial  Statements,  except  changes in the ordinary  course
of business that have not been, either individually or in the aggregate,
materially adverse; (b) any damage, destruction or loss, whether or not covered
by insurance, materially and adversely  affecting  the Project or the properties
or business of the Lead Contractor or any member of the Consortium.

(m)  Permits.  The Lead  Contractor  has all  requisite  licenses,  permits  and
certificates,  including  environmental,  work, health and safety permits,  from
federal,  provincial and local authorities necessary to conduct its business and
to carry out the Project The Lead  Contractor  and each member of the Consortium
has  complied  (and will in carrying  out the Project  comply),  in all material
respects, with all applicable laws.

(n) Environmental  Matters The Lead Contractor and each member of the Consortium
has complied (and will in  carrying out  the  Project comply)  in  all  material
respects, with all applicable environmental laws. There is no pending or, to the
best knowledge of the Lead Contractor, threatened  civil or criminal litigation,
written notice of violation, formal administrative proceeding, or investigation,
inquiry or  information  request by any  Governmental  Entity,  relating  to any
environmental  law involving the Lead Contractor or any member of the Consortium

(o) Disclosures. Neither the Proposal, this Agreement, nor any Schedule attached
hereto,  nor  any  report,  certificate  or  instrument  furnished  to  SDTC  in
connection with the transactions  contemplated by this Agreement,  including the
financial  projections  provided  by the Lead  Contractor,  when read  together,
contains or will  contain any untrue  statement  of a material  fact or omits or
will omit to state a material  fact  necessary  in order to make the  statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.

8.2  Of SDTC. SDTC hereby  represents and warrants to the Lead
Contractor and hereby  acknowledges  that the Lead Contractor is relying on such
representations  and warranties for the purpose of entering into this Agreement:

(a) Corporate  Power and Due  Authorization.  SDTC has the  corporate  power and
capacity to enter into and to perform its obligations under this Agreement. This
Agreement  has been duly  authorized,  executed  and  delivered by SDTC and is a
valid and binding  obligation of SDTC enforceable  against it in accordance with
its terms,  subject to bankruptcy,  insolvency,  moratorium,  reorganization and
other laws relating to or affecting the


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enforcement  of  creditors'  rights  generally,  and  the  fact  that  equitable
remedies,  including the remedies of specific  performance and  injunction,  may
only be granted in the discretion of a court.

(b)Incorporation and Status. SDTC is duly incorporated and organized and validly
existing  under the laws of Canada and is in good standing in each  jurisdiction
where,  by reason of its  business or assets,  it is required to be qualified or
licensed.

9.       Intellectual Property
         ---------------------

Subject to  Sections  13,2(d)  and  13.2(e)  hereof,  title to all  Intellectual
Property  Rights  in  Project  Intellectual  Property  shall  vest  in the  Lead
Contractor and the members of the  Consortium,  in the manner agreed upon by the
Lead Contractor and the members of the Consortium,  and, for greater  certainty,
shall not vest in SDTC

l0. Confidential Information

10.1 Any Confidential Information received by  either party  hereto  pursuant to
this Agreement shall be used, disclosed, or copied, only for the purposes of,and
only in accordance  with.  this  Agreement.  The receiving party shall use, as a
minimum,  the same  degree of care as it uses to  protect  its own  Confidential
Information of a similar nature,  but no less than  reasonable  care, to prevent
the  unauthorized  use,  disclosure or publication of Confidential  Information.
Without limiting the generality of the foregoing:

(a) the receiving party shall only disclose Confidential Information to its bona
fide  employees,  contractors or suppliers who need to obtain access thereto for
purposes consistent with this Agreement:

(b) the receiving party shall not make or have made any copies  of  Confidential
Information except those copies which are  necessary  for  the  purposes of this
Agreement: and

(c) the receiving  party shall affix to any copies it makes of the  Confidential
Information,  all  proprietary  notices or legends  affixed to the  Confidential
Information  as  they  appear  on the  copies  of the  Confidential  Information
originally   received  from  the  disclosing  party.

10.2  The  Lead  Contractor  recognizes  the  necessity  for  SDTC  to   provide
verification  pursuant  to the Funding  Agreement to Her Majesty the  Oueen (the
"Crown") in Right of Canada as represented  by the Minister of Natural Resources
and the  Minister of the Environment that the purpose and objectives of SDTC are
being achieved. The Lead Contractor shall cooperate with SDTC to enable  SDTC to
effectively report to the Crown,  provided however that SDTC shall not  disclose
Confidential Information received from the Lead Contractor to the  Crown  unless
such Information is aggregated with similar information from other projects  and
is not attributed to the Lead  Contractor  or other  members  of the consortium,
in which   case    the    information    will    be     deemed       not   to be
Confidential  Information.  Such  aggregated   information  may   include  green
house gas  emissions  reduction  and clean air impacts reporting, both estimated
and actual, and all other information  reported  under   Section 5  after it has
been  compiled by Sector,  sub-sector,  technology segment and/or region.

10.3  The  receiving  party  shall  not  be  bound  by  obligations  restricting
disclosure and use set forth in this Agreement with respect to any  Confidential
Information which:


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(a) was known by the receiving party prior to disclosure, as  evidenced  by  its
business records;

(b) was  lawfully  in the public  domain  prior to its  disclosure,  or lawfully
becomes publicly  available other than through a breach of this Agreement or any
other confidentiality obligation on behalf of any third party;

(c) was disclosed to the receiving  party by a third party  provided  such third
party, or any other party from whom such third party receives  such information,
is not   in  breach  of  any  confidentiality  obligation  in  respect  of  such
information;

(d) is  independently  developed  by  the  receiving party, as evidenced  by its
business records;  or

(e) is disclosed  when such disclosure is compelled pursuant to legal, judicial,
or       administrative      proceedings,  or    otherwise   required    by law,
provided  that the  receiving  party  advises the  disclosing  party of any such
disclosure  in a timely  manner  prior to making  any such  disclosure  (so that
either  party can apply  for such  legal  protection  as may be  available  with
respect to the confidentiality of the information which is to be disclosed), and
provided that the receiving  party shall apply for such legal  protection as may
be available with respect to the confidentiality of the Confidential Information
which is required to be disclosed.

10.4 Except for disclosures authorized under the  terms of this  Agreement,  the
receiving  party shall notify the  disclosing party immediately upon learning of
any disclosure of the  disclosing  party's Confidential Information.

11. Indemnity

11.1 The Lead Contractor shall indemnify and save harmless SDTC and its hoard of
directors,  members,  employees and agents and the Government of Canada from and
against any and all claims.  damages, loss, costs and expenses which they or any
of them may at any time  incur or suffer as a result of or  arising  out of:

(a) any injury to persons (including injuries resulting  in death) or loss of or
damage to  property  which may be or be alleged to be caused by or suffered as a
result of the  carrying out of the Project or any part  thereof,  except  to the
extent caused by the negligence of SDTC, its board members, employees or agents;

(b) any claim, demand or action for the infringement or alleged  infringement of
any  Intellectual  Property Right of a third party based upon the use thereof by
the Lead Contractor or upon the use of the Project Intellectual Property by SDTC
or the Government of Canada in accordance with the terms hereof; and

(c)any claim, demand or action made by a third party against them or any of them
based upon  SDTC's  capacity as a provider of  financial  assistance  under this
Agreement,  including without  limitation,  any claim in respect of materials or
services  provided by a third parry to the Lead Contractor or to a subcontractor
of the Lead Contractor.


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12.      Limitation of Liability

12.1 IN NO EVENT  SHALL  EITHER  PARTY  HAVE  ANY  LIABILITY  FOR ANY  INDIRECT,
INCIDENTAL,  SPECIAL OR CONSEQUENTIAL DAMAGES,  HOWEVER CAUSED AND ON ANY THEORY
OF LIABILITY (INCLUDING  NEGLIGENCE).  ARISING OUT OF THIS AGREEMENT,  INCLUDING
BUT NOT  LIMITED  TO LOSS OF  ANTICIPATED  PROFITS,  EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE  POSSIBILITY  OF SUCH  DAMAGES.  THESE  LIMITATIONS  SHALL  APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

12.2 Except for claims under  Section  11.1(b)  hereof,  neither  party shall be
liable to the other fort  damages  in excess of the  amount of the  Contribution
actually paid to the Lead Contractor by SDTC pursuant to this Agreement.

12.3 The Lead Contractor  hereby  acknowledges  that SDTC may provide funding to
numerous  companies,  entities and  consortia,  some of which may be competitive
with  the  Lead  Contractor  or  members  of  the  Consortium  or  which  may be
competitive  with the  Technology  developed  in  connection  with  the  Project
("Competitive  Entities").  SDTC shall not be liable to the Lead  Contractor for
any claim  arising out of, or based on: (i) the  provision of funding by SDTC to
any Competitive  Entity; or (ii) actions taken by any partner,  officer or other
representative  of SDTC to assist a  Competitive  Entity (in the  capacity  as a
director  of such  company  or  otherwise),  whether  or not such  action  has a
detrimental  effect on the Lead  Contractor  or the Project,  provided that SDTC
will  in all  circumstances  maintain  the  confidentiality  of all  information
provided  to it by  the  Lead  Contractor  in  accordance  with  the  terns  and
conditions hereof.

13       Termination of Agreement

13.1 The  following  shall  constitute  events  of  default  (each an  "Event of
Default")  under  this  Agreement:

(a) the  Lead Contractor becomes  bankrupt or insolvent, goes into receivership,
or takes the benefit of any statute from  time  to  time  in  force  relating to
bankrupt or insolvent debtors.

(b) an order is made or  resolution  passed  for  the  winding up  of  the  Lead
Contractor,  or the Lead Contractor is dissolved;

(c) the Lead Contractor has made misrepresentations to SDTC in  respect  of  the
Proposal or this Agreement;

(d) the  Lead  Contractor is in  material  breach  of  this  Agreement and  such
material  breach has not been remedied by the Lead Contractor  within sixty (60)
days of receiving  notice of such  material  breach  from SDTC; or

(e) the rejection by SDTC of the  third consecutive submission of any one report
in support of a Claim under section 3.3 hereof.

13.2 Upon the  occurrence  of an Event of  Default,  SDTC may, in its discretion
exercise one or more of the  following  options:

(a)  terminate the whole or any part of this Agreement;


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(b) suspend or terminate  SDTC's  obligation to pay any further  installments of
the Contribution in respect of the Project, including monies due or accruing due
which have not yet been  paid;

(c) in the event of a breach  by  the  Lead  Contractor of Section 3.2(a) and/or
3.2(b),  exercise  either of the remedies described in Section 3.6;

(d) Subject to Section  13.3, in the event of a breach by the Lead Contractor of
Section  7.3  hereof,  SDTC (on  behalf  of  Canada)  may  obtain  from the Lead
Contractor  and  the   Consortium   either  (i)  a   non-exclusive,   worldwide,
unrestricted,  fully paid up, royalty free,  sub-licensable,  license to use, or
(ii) an assignment of, the  Intellectual  Property  developed in connection with
the project for any purpose,  including to develop,  copy,  market,  distribute,
commercialize, re-assign and otherwise exploit the Intellectual Property.

(e) request the Lead Contractor to transfer  and  assign to SDTC all of the Lead
Contractor's right, title and interest in and to: (i) equipment,  capital assets
and supplies  purchased by the Lead  Contractor to carry out the Project (to the
extent  such were  acquired  and  reimbursed  as Eligible  Costs),  and (ii) the
Project Intellectual  Property;  and-or

(f) direct the Lead Contractor to  repay  forthwith  all  or  any  part  of  the
Contribution paid by SDTC pursuant to this Agreement.

13.3 In the event that the Lead Contractor determines in good faith that (i) the
Project  should be  terminated  prior to  completion  or (ii) at any time  after
completion  of the  Project  commercialization  is not  reasonably  commercially
feasible,  the Lead Contractor  shall provide SDTC with detailed written reasons
for the  termination of the Project or termination of  commercialization  as the
case may he.  SDTC shall have a period of sixty (60) days to assess the  Project
and the reasons for the Lead Contractor's  determination that the Project should
not continue. In connection with such  assessment by SDTC, SDTC  may  engage the
services  of  consultants  and  advisors  and  the  Lead  Contractor   shall  be
responsible for the fees and expenses relating  thereto.  In the event that SDTC
agrees  that the  Project  or  commercialization  as the case may be,  should be
terminated, SDTC shall give notice to the Lead Contractor that as of the date of
such notice from SDTC:

(a)  this Agreement shall be terminated; and

(b)  SDTC  shall  have no  obligation  to pay any  further  installments  of the
Contribution  in respect of the Project,  other than amounts due or accruing due
as of the date of termination which have not yet been paid.

In the event that SDTC does not agree  that the  Project  should be  terminated,
then SDTC shall give notice to the Lead  Contractor  that as of the date of such
notice from SDTC:

(c) this Agreement shall be terminated;

(d) SDTC  shall  have  no  obligation  to pay any further  installments  of  the
Contribution in respect of the Project, including amounts due or accruing due as
of the date of termination which have not yet been paid; and


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(e) request the Lead Contractor to transfer and assign to Canada all of the Lead
Contractor's  right,  title  and  interest  in and to the  Project  Intellectual
Property and any project trade secrets.

13.4 SDTC may terminate  this  Agreement upon thirty (30) days written notice to
the  Lead  Contractor  in the  event  of  any  substantial  amendment  to or the
termination  of the  Funding  Agreement  for any  reason.  In the  event  of the
termination  hereof  pursuant to this Section 13.3, any Claims  submitted by the
Lead  Contractor  prior to the effective date of notice of termination  shall be
processed  by SDTC in  accordance  with the terms  hereof.  The Lead  Contractor
hereby releases SDTC from any and all claims relating to the termination of this
Agreement  pursuant to this  Section 13.3 (other than the payment of any part of
the  Contribution  properly payable by SDTC to the Lead Contractor in accordance
with the terms and conditions hereof).

13.5   In  the event that SDTC  determines that the Project has not successfully
completed phase 1 than SDTC will be under no obligation to pay  the second Phase
contribution of $3,100,000.00.

14.       Fees and Expenses

Whether or not the  transactions  contemplated  hereby are  completed,  the Lead
Contractor  shall pay all  reasonable  out-of-pocket,  due  diligence  and other
related expenses of SDTC including, without limitation, the fees and expenses of
legal  counsel  to SDTC  relating  to the  negotiation  and  settlement  of this
Agreement  and the fees paid to  consultants  and  advisors  pursuant to Section
13.3.  The Lead  Contractor  and  members  of the  Consortium  shall  bear their
respective  expenses  incurred in connection with the negotiation,  preparation,
execution and  performance of this Agreement and the  transactions  contemplated
hereby,  including,  without  limitation,  all  fees  and  expenses  of  agents.
representatives,  counsel  and  accountants,  and  in no  event  shall  SDTC  he
responsible for such costs.

15.       Assignment

This Agreement  shall not be assigned in whole or in part by the Lead Contractor
without the prior written  consent of SDTC and any assignment  made without that
consent is void and of no force or effect.

16.      Dispute Resolution

16.1 Best  Endeavours to Settle  Disputes.  In the event of any dispute.  claim,
question or  difference  arising out of or  relating  to this  Agreement  or any
breach hereof, the parties hereto shall use their best endeavours to settle such
dispute,  claim, question or difference.  To this effect, they shall consult and
negotiate  with each  other,  in good faith and  understanding  of their  mutual
interests,  to reach a just and equitable solution  satisfactory to all parties.

16.2 Mediation.  If a dispute  arising out of this  Agreement  cannot be settled
amicably  through  negotiation,  then the parties  agree that  either  party may
submit  the  dispute  to  mediation  (as  administered  by the  Arbitration  and
Mediation Institute of Canada Inc.,) upon written notice to the other party. The
cost of mediation shall be borne equally by the parties.

16.3 Arbitration. Except as is expressly  provided  in  this  Agreement, if  the
parties do not reach  a  solution  pursuant  to  paragraph 16.1 or 16.2 within a
period of thirty (30) Business Days, then upon written notice by  any  party  to
the other, the dispute, claim, question or difference shall be


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finally  settled  by  arbitration  in  accordance  with  the  provisions  of the
Arbitrations Act (Ontario) and any amendments thereto, based upon the following:

(a) the arbitration tribunal shall consist of one arbitrator appointed by mutual
agreement  of the  parties,  or in the event of failure to agree within ten (10)
Business  Days,  any party may apply to a Court to  appoint an  arbitrator.  The
arbitrator  shall be  qualified  by  education  and  training  to pass  upon the
particular matter to be decided;

(b) the arbitrator shall be instructed that time is of the essence in proceeding
with his determination of any dispute, claim, question or difference and, in any
event,  the arbitration  award must be rendered within thirty (30) Business Days
of the submission of such dispute to arbitration;

(c) the arbitration shall take place in Ottawa, Ontario and  shall be  conducted
in English;

(d) the  arbitration  award  shall be given in  writing  and  shall he final and
binding  on the  parties,  not  subject to any  appeal,  and shall deal with the
question of costs of arbitration and all matters related thereto:

(e) each party shall bear the  cost of  preparing  its  own case. The arbitrator
shall have the right to include in  the  award  the  prevailing party's costs of
arbitration and reasonable  fees  of attorneys, accountants, engineers and other
professionals incurred by it in connection with the arbitration; and

(f) judgment   upon  the  award   rendered may be entered in  any  Court  having
jurisdiction,  or,  application  may  be  made  to  such  Court  for a  judicial
recognition of the award or an order of enforcement thereof, as the case may be.
In addition,  if it appears to either party that the arbitrator  lacks the power
to give effective  interim relief,  such party may apply to an appropriate Court
for such relief.

17 Publicity and Acknowledgements

17.1 The Lead Contractor will  acknowledge the financial  support of SDTC in all
publicly  disseminated  information  relating  to the Project  unless  otherwise
directed  by  SDTC.  The Lead  Contractor  hereby  consents  and  agrees  to the
participation  by SDTC or a  representative  of the  Government of Canada at any
public ceremony relating to the Project and to have the ceremony take place on a
date mutually  agreed upon by the Lead  Contractor and SDTC The Lead  Contractor
shall have the right to use SDTC's  corporate  name and logo  provided that such
use is strictly in accordance with SDTC's policies  relating thereto and only as
it relates to the Project and for no other use without the prior written consent
of SDTC.

17.2 No press releases,  public  announcements or other material prepared by the
Lead Contractor for promotional and general information purposes relating to the
Project,  SDTC or the Contribution  shall be issued or distributed to the public
without the prior written approval of SDTC.

17.3 SDTC may issue  press  releases  and other  materials  prepared by SDTC for
promotional and general information purposes which refer to the Lead Contractor,
the Project  and the  Contribution  without the  approval or consent of the Lead
Contractor.


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<PAGE>
                                                                              20

17.4 SDTC  shall be  permitted  to use  information  about the  Project  that is
furnished in all reports submitted to it pursuant to Section 5.1 hereof and such
reports  shall  not be  Confidential  Information  of the Lead  Contractor.

18. Notices

18.1 All reports,  delivery  documentation,  claims  for   payments,   requests,
notices and information  referred to in this Agreement shall be sent in writing,
or when appropriate by any method of telecommunication and, unless notice to the
contrary is given,  shall be addressed to the party  concerned at the  following
address:

To SDTC:
Sustainable Development Technology Canada 230 Oueen Street
Suite 250
Ottawa, ON Canada KIP 5E4
Attention: Manager, Contracts

To Lead Contractor:
DynaMotive Energy Systems Corporation 105-1700 West 75th Avenue
Vancouver, BC Canada
V6P 6G2
Attention: David Sanguinetti, Manager of Project Development

18.2 Reports,  notices, requests and documents arc deemed to have been received,
if sent by registered mail, when the postal receipt is acknowledged by the other
party;  by  facsimile  or  electronic  mail,  when  transmitted  and  receipt is
confirmed; and by messenger or specialized courier agency when delivered

19       General Contract Provisions

19.1     Time is of the Essence. Time is of the essence of this Agreement.

19.2 Excusable Delays.  The dates and times by which either party is required to
perform any obligation under this Agreement shall be postponed  automatically to
the  extent,  for the  period  of time,  and to the  degree  that  the  party is
prevented from so performing by  circumstances  beyond its  reasonable  control.
Said circumstances shall include acts of nature, strikes,  lockouts, riots, acts
of war,  epidemics,  government  regulations imposed after the fact, fire, power
failures,  earthquakes  or other  disasters.  A party seeking  relief under this
Section  shall,  as promptly as possible  under the  circumstances,  provide the
other party with written notice of  the circumstances, and its anticipated scope
and time of postponement of its obligations.

19.3    Amendments. This Agreement may only be amended, modified or supplemented
by a written agreement signed by both of the parties.

19.4 Legal  Relationship. Nothing contained herein shall create the relationship
of principal and agent,  master and servant,  settler and trustee,  employer and
employee,  partnership  or joint  venture  between the parties and neither party
shall  have any  right to  obligate  or bind the other in any  manner.  The Lead
Contractor shall not, and shall ensure that the members of Consortium do not,


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

make any  representation  that the Lead  Contractor is an agent of SDTC nor make
any  representation  that  could  reasonable  lead any  member of the  public to
believe that the Lead  Contractor or any member of the Consortium is an agent of
SDTC.

19.5 Severability.  If any  provision  of  this  Agreement  is  determined to be
invalid or unenforceable  by an arbitrator or a court of competent  jurisdiction
from which no further appeal lies or is taken, that provision shall be deemed to
be severed herefrom and the remaining  provisions of this Agreement shall not be
affected  thereby and shall remain valid and  enforceable;  provided that in the
event that any portion of this Agreement  shall have been so determined to be or
become invalid or unenforceable,  the parties shall negotiate in good faith such
changes to this Agreement as will best preserve for the parties the benefits and
obligations of such offending portion.

19.6 No  Implied  Waivers.  Rights  Cumulative.  No  failure  on the part of the
parties to  exercise  and no delay in  exercising  any right,  power,  remedy or
privilege under this Agreement, or provided by statute or at law or in equity or
otherwise,  including,  but not limited to. the right or power to terminate this
Agreement,  shall  impair,  prejudice or  constitute a waiver of any such right,
power,  remedy or  privilege  or be  construed as a waiver of any breach of this
Agreement  or as an  acquiescence  therein,  nor  shall any  single  or  partial
exercise of any such right,  power,  remedy or  privilege  preclude any other or
further  exercise thereof or the exercise of any other right,  power,  remedy or
privilege.

19.7 Further  Assurances.  Each of the parties covenants and agrees that it will
sign such further  agreements,  assurances,  waivers and  documents,  and do and
perform or cause to be done and performed such further and other acts and things
as may be necessary or desirable  from time to time in order to give full effect
to this Agreement and every part hereof.

19.8 Governing Law This Agreement shall be governed by, interpreted andconstrued
in  accordance  with the laws of the Province of Ontario  and the  federal  laws
of Canada  applicable  therein. The courts of the Province of Ontario shall have
exclusive and original jurisdiction in any action or  proceeding  brought  under
this Agreement or for the purpose of enforcing  this Agreement or any  provision
of it and the parties  irrevocably attorn to  the jurisdiction of the  courts of
the province of Ontario.  The clauses  set out  above  combine  to  support  the
proposition that  notwithstanding  the fact that an  Eligible  Recipient resided
in a  jurisdiction outside  Ontario,  the Agreement is entered into in Ontario.

19.9 Entire Agreement. This Agreement constitutes the entire  agreement  between
the parties with  respect  to  the  subject  matter  hereof  and  supersedes all
previous negotiations, communications, and other agreements, whether written  or
verbal, between the parties.

19.10 Successors and Assigns.  This Agreement shall  enure to the benefit of and
be binding on the parties and their respective successors and permitted assigns.

20.      Limits on Funding

20.1 The  preparation of this Agreement by SDTC and the completion of any blanks
herein shall not be construed as an offer by SDTC to the Lead  Contractor.  This
Agreement  shall not be binding on SDTC until it has been  executed  by SDTC and
the Lead Contractor and a fully executed copy is delivered to the head office of
SDTC in Ottawa.  Unless fully executed,  this document shall expire on March 31,
2004.  If this Funding  Agreement  is  not fully executed by its expiration date
potential funding may be unilaterally withdrawn by SDTC.


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<PAGE>
                                                                              22

IN WITNESS  WHEREOF this Agreement has been executed by the parties hereto as of
the Effective Date.

                     Canada  Foundation for Sustainable  Development  Technology

                     By: /s/Greg Graham
                    ------------------------------------------------------------
                     Name: Greg Graham
                     Title: Vice Presideent, Operations

                     By: /s/ Victoria Sharpe
                    ------------------------------------------------------------
                     Name:   Victoria Sharpe
                     Title:  Presideent & CEO


                    West Lorne BioOil Co-Generation Limited Partnership,  by its
                    general partner, DynaMotive Canada Inc.

                    By: /S/ Richard Lin
                   -------------------------------------------------------------
                    Name: Richard Lin
                    Title: Chairman


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                                                                              23

                                   Schedule A
                                   ----------

                Work Plan and Statement of Project Objectives

Description of the  technology:

BioOil Fuelled  Cogeneration  System

This Green Power development  project  will validate the individual and combined
capability of two Canadian leading edge renewable energy technologies.

DynaMotive is commercializing the patented BioTherm  fast  pyrolysis  technology
for production of liquid fuels from low value forest  and  agricultural residues
(e.g. wood,  bark,     straw).  This    Canadian        technology       rapidly
heats        biomass        creating      a       gas       stream          that
is re-condensed into a clean   burning   liquid   fuel. BioOil   can   be   used
as a fossii fuel  substitute  in kilns,  boilers,  turbines and diesels  engines
reducing  Greenhouse Gas (GHG) emissions as biomass is considered CO2: neutral.
A granulated char co-product is also produced with no waste streams generated in
the  process.  The  char  can be  used  for  BBQ  briquette  production  or as a
substitute  for coal for green power.  Utilization  of residual  biomass in this
manner also reduces GHG emissions and Criteria Air Contaminants (CAC) associated
with  disposal  methods  such as Methane from  landfilling  and  stockpiling  or
particulates from bee-hive burners.

The second technology is Orenda's 2.5 MW gas turbine (GT) developed specifically
for operation on BioOil.  Recognizing  the opportunity and demand  for renewable
energy,  Orenda has incorporated specific turbine blade coatings and  engineered
new fuel handling and combustion  systems allowing,  the turbine  to  operate on
Blood.

Once integrated,  the BioOiL/turbine system will  produce green power displacing
brown  energy from the grid while generating  GHG offsets.  As well,  the  green
power  delivered to the grid can be marketed at a premium in deregulated markets
like Alberta and Ontario by  green  power  marketers  such  as  project  partner
Ontario Power Generation.


Objectives:

-  The  overall   objective  is  to  commercialize  our  renewable  fuel  energy
technologies   allowing  rapid  deployment  across  Canada  and  internationally
reducing GHG emissions while simultaneously  addressing residue disposal issues.

- Scale up and  demonstrate  the  BioTherm  fast  pyrolysis  technology  at near
commercial scale. o Demonstrate green power generation based on a BioOil fuelled
gas turbine.

- Demonstrate the integrated power package.

- Refine  and  validate  capital  and  operating  cost  projections  to  develop
"bankable"  documents  to assist  project  replication.

-  Provide a  marketing vehicle to show potential  customers and facilitate  the
education process, as customer knowledge of this technology is usually  limited.

-  Raise  the environmental profile of the project partners.

Note: Char production is relatively low compared to  that  of  BioOil  therefore
this project is focused primarily on BioOil.


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                                                                             24

Sustainable Development Focus:

The primary focus of the green energy technologies  contemplated in this project
will result   in reduced  Greenhouse  Gas (GHG)  emissions.  Secondary  areas of
impact are the  reduction  of  criteria  air  contaminants  (CAC) and  increased
industrial efficiency and resource utilization.  This project will realize these
benefits  immediately upon execution and over the long term by facilitating wide
spread deployment of the technologies.

Combusting  sustainably  produced  biomass  derived  products is considered  CO2
neutral as there is no overall change in the level of atmospheric  carbon due to
the "carbon cycle". When biomass grows, the  carbon from CO2   in the atmosphere
is captured in the structure of the plant.  Subsequent  combustion of that plant
will  release the carbon back into the  atmosphere  as CO2,  again available  to
support plant growth hence  repeating  the cycle with no net effect.  This is in
contrast to fossil fuel combustion  where carbon is removed from underground and
released to the atmosphere with no significant  return of carbon to the Earth to
maintain  the  balance.

BioOil can be burned in   systems  such as    gas     turbines, diesel  engines,
boilers,    kilns    and    furnaces     displacing     the     fossil     fuels
currently  used. The emissions  associated  with the displaced  fossil fuels are
avoided  reducing the overall GHG output.  In addition as a result of the unique
properties  of  BioOil,  a number of CACs  including  SO2, and NO2,  may also be
reduced.  BioOil contains only trace amounts of sulphur  resulting in negligible
SO2   emissions   while  turbine   testing  to  date   indicates  a  significant
(approximately  50%) reduction of NO2 when  compared to fossii fuels.

BioOil production from residual  biomass also  reduces the emissions  associated
with current disposal methods. Every year millions of tonnes of biomass residues
are disposed of in landfills or else combusted inefficiently with limited energy
recovery. Methane (CH4) is emitted  during natural  decomposition  of biomass in
landfills and to a lesser degree by incomplete  combustion during  incineration.
Significant GHG emissions result as the greenhouse  effect attributed to methane
is 21 times that of CO2 In addition,  BioOil  burns  cleanly so  converting  the
biomass into BioOil for  combustion  dramatically  reduces the high  particulate
emissions  associated  with  inefficient  biomass  burning.

A further  benefit to sustainability  is   the increased  efficiency of existing
industrial  activities that will be realized  by  deployment  of   the  BioTherm
technology.   Converting    residual    biomass    into    green    fuels    and
electricity    will     also    reduce     other     high     costs   associated
with     current    biomass      disposal      methods (i.e.     infrastructure,
transportation, compliance, remediation, etc.) while leveraging an underutilized
resource  by creating  products  and  recovering  energy  currently  squandered.
Conversion  of biomass into BioOil,  which is more easily  transported  than raw
biomass, may open opportunities for exploiting iomass sources that are otherwise
not economic to recover.

Primary areas of  application of DynaMotive and Orenda technologies are:

* Renewable Energy Production

  - Green  renewable  biomass based liquid fuels from  DynaMotive  process.
  - Green electricity and heat from  bio-fuelled  Orenda gas turbine.

*  Waste  Management

  - Value added disposal option for biomass  residuals.
  - Reduced methane emissions through alternate disposal methods
    (i.e. BioOil production).

Secondary  application  areas for the  technologies  are:

* Energy  Utilization

  - Self-generation and co-generation options for industry.
  - District heating systems based on DynaMotive and/or Orenda technologies.
  - Exploitation of biomass sources that were previously un-economic.


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                                                                              25

* Energy Transmission and Distribution
  - Reduced transmission losses due to localized I distributed power generation.

* Transportation (long term objective)

  - Renewable  transportation  fuels  based  on  BioOil  blends,  emulsions  and
    synthetic fuels.

Economic Sectors Impacted:

The green  energy  technologies  in this  project  will  eventually  impact  all
economic  sectors  directly  and/or  indirectly.  The following  illustrates the
sector and associated  impacts:

* Forest Industry/Wood Product  Manufacturers

  - GHG and CAC emissions reduced by diverting  residues  to BioOil  production.
  - Residue disposal costs  reduced, avoided as diverted  to BioOil  production.
  - Exposure to energy pricing  risk reduced as BioOil  based heat and power not
    driven by fossil fuel  volatility.
  - Environmental  profile enhanced due to green profile  of the  technologies.
  - Forest   communities strengthened by   increased   industrial   and economic
    activity.
  - Utilization of biomass  resource  increased as  value created  from  a waste
    stream.
* Residential/Commercial
  - Green power  available  from green energy  marketers  such as OPG.
  - Energy costs reduced via self-generation or local  co-generation.
* Agriculture (medium term: development to  follow  deployment  in  the forest
    sector)
  - Better utilization  of low/negative  value  agricultural  residues  such  as
    straw, oat hulls and corn stover
  - Agricultural communities strengthened by additional industrial  and economic
    activity
* Transportation (long term: requires further development)
  - GHG emissions reduced through BioOil based fuel blends and emulsions.
  - Synthetic fuels (e.g. bio-methanol) derived from BioOil for fuel cells.

Technological Feasibility:

DynaMotive

Since   1997,   DynaMotive   has   intensively   focused  on   development   and
commercialization of the BioTherm fast pyrolysis process for production of clean
burning renewable BioOil.  The fundamental  research completed at bench scale by
Resource Transforms International has been scaled up and validated by DynaMotive
through a series of  developmental  stages with the key  milestones  illustrated
below.

Key technology development timelines and milestones completed:
1994 /97: Bench scale development of BioTherm process (at RTI)
1997:  DynaMotive licenses  technology  from  original  inventors, RTI
1997 /98:  DynaMotive design/build  500 kg/d batch mode prototype  plant
           (BioTherm I )
1998: Upgrade BioTherm l to 2000 kg/d,  continuous mode operation
1999: Third party technology validation  (Stone  and  Webster)
2000/01: DynaMotive  design  build  10 tpd industrial  pilot plant (BioTherm 2)
2001: Third party validation of technology (TECNA & SGS)
2001:  DynaMotive  acquires  technology from RTI (patent purchase)
2001: BioOil  characterization  completed
2002: Increase BioTherm 2 capacity 50% (from 10 to 15 tpd)
2002: BioOil  validated as fuel for natural gas replacement in lumber dry kilns
2003: BioOil validated as fuel for natural gas replacement in pilot scale lime
      kilns
Not yet completed:
2003/04:  Construct 100 tpd BioOil production facility.


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                                                                              26

The next stage of BioTherm  development  is to scale the  technology  to 100 tpd
capacity.  This scale is expected to be commercial  in some niche  opportunities
and the 100 tpd  reactor is  expected to become the  standard  modular  building
block of larger full scale plants.  Commercial plants in the range of 200 to 400
tpd may be  constructed  using  multiple  100 tpd reactors in  combination  with
common ancillaries.

The most significant technological challenge at this time is scaling the reactor
from 15 to 100 tpd capacity.  Based on our pilot plant operating  experience and
the  predictability  and  repeatability  of process  parameters from bench scale
through to 15 tpd, we are confident that this scale step is readily  achievable.
In addition, we are working with a world-class fluidized bed design company with
the expertise and experience to engineer our design.

Orenda

Since 1999,  Orenda has been working closely with DynaMotive BioOil to develop a
gas turbine  suitable for  industrial  deployment.

Key  technology  development timelines and milestones completed:

1999: Fundamental BioOil combustion testing complete
2000: Full scale combustion  testing completed in the Ukraine
2000: Hot corrosion resistant coatings developed
2000: BioOil specific turbine wash system developed
2001:  BioOil fuel  handling and injection  system  developed

Not yet completed:
2002/ 03: BioOil fuelled GT2500 construction complete
2003: Full capacity turbine testing on BioOil

The key technical challenge faced  by Orenda is   determining the  operating and
maintenance  regime   tier   the   GT2500.  Without   the   actual     operating
experience,  Orenda cannot offer industrial customers the performance guarantees
they require to commit to the  technology  thus limiting the market  opportunity
for the integrated green power system.


Patents and Intellectual Property:

DynaMotive's BioTherm technology is patented in various jurisdictions around the
world.  The priority filing patent is the US Patent a 5853548 "Energy  Efficient
Liquefaction of Biomaterials by Thermolysis", which is attached as Appendix C to
the  proposal  for  reference.

DynaMotive  and Orenda   have an MOU   in  place that   identifies   clearly how
each     others    intellectual      property (IP)    is    managed     in   the
relationship.  In general,  regardless of who originated the concept or idea, if
it pertains to pyrolysis,  it is  DynaMotive's  technology  and if it is turbine
related it is Orenda's. A mechanism is in place that should any IP arise that is
clearly not one or the other  parties,  it will be joint  property  owned  50/50
between the partners and its treatment and exploitation subject to negotiation


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<PAGE>
                                                                              27

Work Plan

GRAPHIC OMITTED

<TABLE>
<CAPTION>
                  Major milestones and associated eligible costs
                  ----------------------------------------------

                                                               Eligible              SDTC           SDTC
         Milestone                  Date    Expenditure      Expenditure          Contribution     Holdback
------------------------------------------------------------------------------------------------------------
         <S>                        <C>        <C>              <C>                 <C>            <C>
         1. Project Start           6/16/03    $3,043,153        $3,043,153         $       -       $      -

         2. Construction            2/23/03    $3.019,035        $2,685,035         $2,250,000      $250,000

         3. Complete Commissioning  4/1/04     $7,062,812        $6,309,812         $2,250,000      $250,001

         4. WorkPlan Complete       6/30/04        --                --             $500,000        $(500,000)
                   (Holdback)                  --------------------------------------------------------------

                  Total                        $13,125,000      $12,038,000         $5,000,000
                                               ===============================================

</TABLE>

Note:
The major activities to be completed under each of the above  milestones  is  as
follows:

1. Project start: Finalization of contracts and other legal agreements; Detailed
   Feasibility Study; Detailed engineering completed; Turbine Ordered; Pyrolysis
   and all other equipment items ordered.
2. Construction started on  turbine  and  reactor  foundations;  Fabrication  of
   Reactor skids completed: shipment of turbine and reactor skids.
3. Complete balance of plant, mechanical completion;  Commissioning;  Operations
   study.


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<PAGE>
                                                                              28
<TABLE>
<CAPTION>
                          Contributions to the Project
                          ----------------------------
Funding Breakdown:
                               Confirmed      Unconfirmed     Confirmed           Unconfirmed
Consortium Member                 Cash           Cash          In-kind              In-kind        Total
--------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>            <C>                  <C>          <C>
Dynamotive                   3,981,000                          299,000                           4,280,000
Magellan/Orenda                  1,000                        3,644,000                           3,645,000
OPG                            200,000                                                              200,000

Other Contributors
                             ------------------------------------------------------------------------------
Subtotal                     4,182,000                        3,943,000                           8,125,000
                             ------------------------------------------------------------------------------
SDTC Funds                  $5,000,000                                                           $5,000,000

Total Project Funding:                                                                          $13,125,000
                                                                                                ===========
</TABLE>

i) Total Cost of Project:                   $13,125,000
ii) Funding Amount Requested from SDTC:     $5,000,000
iii) % of SDTC Funding to Total Cost of
Project:                                         38%
Iv) Total non-SDTC cash into Project:       $4,182,000
v) % of non-SDTC cash to Total Cost of
Project:                                         32%
vi) % of Cash to In-kind Contribution:          235%
vii) % of Government Funding to Total Cost of
Project:                                         38%



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<PAGE>
                                                                              29
<TABLE>
<CAPTION>

                                                          Budgetary Control
                                       ---------------------------------------------------------
Eqpt                                              Committed       Uncommitted         Forecast
 No.     Description                   Budget      Costs            Costs              Budget
                                         C$          C$               C$                 C$
---------------------------------------------------------------------------------------------------
<S>     <C>                            <C>        <C>            <C>                  <C>
(A) Estimated Engineering & Construction Costs

01     Feed Preparation                547,000    293,794        118,000              411,794
02     Feed Transport                  108,000     91,580         23,000              114,580
03     Feed System                     489,000    267,169        105,749              372,918
04     Reactor                         783,000    309,452        316,281              625,733
05     Combustion                       60,000    452,076         26,200              478,276
06     Char System                     529,000    305,091         74,692              379,782
07     BioOil Separation               746,000    424,487        291,167              715,654
08     Recycle Gas System              210,000    193,919              0              193,919
09     BioOil Storage                   97,000     70,267         81,414              151,681
10     Cooling Water                   197,000     64,419         50,000              114,419
11     Power Island                  3,965,000  3,854,212        433,000            4,287,212
12     HRSG                            399,000    245,500        109,000              354,500
13     Electrical Equipment and
        Instrumentation              1,404,000    502,501      1,038,496            1,540,997
14     Spark/Fire Protection           130,000          0        140,000              140,000
15     Site & Services                  45,000      6,694         40,000               46,694
16     Building and Structures          71,000          0        312,000              312,000
17     Concrete & Foundations & Slabs  339,000          0        239,000              239,000
18     Project Management,
        Engineering & Office         1,065,000    643,099        410,351            1,053,450
19     N2 Generation                    55,000          0         55,000               55,000
20     Miscellaneous                   365,000        274        345,726              346,000
                                    ---------------------------------------------------------
Total Estimated Costs before        11,604,000  7,724,533      4,209,075           11,933,608
  Contingency

Contingency                            943,170          0        383,950              383,950
                                    ---------------------------------------------------------
Total Estimated Engineering &
 Construction Costs                 12,547,170  7,724,533      4,593,025           12,317,558
                                    =========================================================

(B) Other Costs

OT-100 Spares                                0          0         40,000               40,000
0T-110 Land Costs                            0          0              0                    0
OT-120 Financing Costs                       0          0              0                    0
OT-130 Noise & Environmental                 0          0         50,000               50,000
       Start-up, training and comissioning                       100,000              100,000
                                    ---------------------------------------------------------
Total Estimated Other Costs                  0          0        190,000              190,000
                                    ---------------------------------------------------------

Total Costs - Project Specific      $12,547,170  7,724,533     4,783,025           12,507,588
                                    =========================================================

(C) Developmental Engineering after June 1, 2003


Harper - Engineering & Final Design          0    347,048              0              347,048
 Study
UMA Feasibility Study                        0    146,753              0              146,753
Legal tax and other professional                   75,000         50,000              125,000
                                   ----------------------------------------------------------
Total Estimated Other Costs                  0    568,801         50,000              618,801
                                   ----------------------------------------------------------
Total Costs - Specific & Non-Specific  12,547,170 8,293,335      4,833,025         13,126,359
                                   ----------------------------------------------------------
                                                        Estimate to Completion     13,126,359
</TABLE>


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                                                                              30
<TABLE>
<CAPTION>
                                  Project Budget
                                  --------------

AREA     DESCRIPTION                         MATERIAL COST              INSTALLATION           TOTAL
<S>      <C>                                  <C>                         <C>                   <C>
01       Feed Preparation                     $293,794                    $118,000              $411,794
02       Feed Transport                       $101,580                    $13,000               $114,580
03       Feed System                          $357,918                    $15,000               $372,918
04       Reactor                              $425,733                    $200,000              $625,733
05       Combustion                           $478,276                    $ -                   $478,276
06       Char System                          $341,782                    $38,000               $379,782
07       BioOil Separation                    $430,654                    $285,000              $715,654
08       Recycle Gas System                   $193,919                    $ -                   $193,919
09       BioOil Storage                       $115,681                    $35,000               $151,681
10       Cooling Water                        $94,419                     $20,000               $114,419
11       Power Island                         $4,090,212                  $197,000              $4,287,212
12       HRSG                                 $354,500                    $ -                   $354,500
13       Electrical Eqmt. & Instrumentation   $1,192,997                  $348,000              $1,540,997
14       Spark Fire Protection                $75,000                     $65,000               $140,000
15       Site & Service                       $10,000                     $36,694               $46,694
16       Building & Structures                $252,000                    $60,000               $312,000
17       Concrete & Foundations & Slabs       $71,000                     $168,000              $239,000
18       Project Management,
          Engineering & Site Office           $ -                         $1,547,251            $1,547,251
19       N2 Generation                        $45,000                     $10,000               $55,000
20       Miscellaneous                        $207,000                    $454,000              $661,000
                                              -------------------------------------------------------------
Sub Total                                     $9,132,464                  $3,609,945            12,742,409

PST - on equipment and material
       To be exempt                           $                           $                     $  -
Contingency                                   $                           $                     $  382,591
TOTAL                                         (Accuracy + or 5%)                                $13,125,000
-------------------------------------------------------------------------------------------------------------
</TABLE>

Not included:
GST (not applicable)
Land Costs (operating lease)
Host Project Management Costs
Financing Costs



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                                                                              31
                                   Schedule C
                          Deliverables and Milestones


Delivery no.  Project Deliverable           Delivery Date     SDTC Contribution

0001          Initial Contribution Payment  Feb 28, 2004      $1,900,000.00
Milestone: Successful Completion of:
- Engineering/Design
- Plant Layout, GA's Evaluations

0001A    Project Status Report
Report on Project status including anticipated project  achievements,  failures,
risks,  actual or potential  schedule  delays,  number and description of patent
applications,  economic  market  analysis  and other  relevant  project  issues,
Provide verifiable documents as evidence of project achievements. Report must be
signed by a minimum of two consortium members.

0001B Sustainable Development Impacts Reporting System (SDIRS) Report
- Complete Benchmarks including all inputs and outputs (see Schedule E for SDIRS
   details)

0001C Project Financial Certification Report (PFCR) (see Schedule E for PFCR
      details)

0001D Project  Impacts Report (as a direct result of SDTC support)
    1) Technology Impacts
        a) Describe the long term goals for the technology, its application and
           any potential application,  its  efficiency  increases  and  impacts
           and  its forecasted  impacts  on  emissions   reduction.
    2)  Partnerships
        a)  Project organizational  (Org.)  chart
        b)  Statement  of any  changes  to  consortium
    3)  Economic Impacts
        a) Report on current economic activity by region and by product category
           - Subsequent financing
           - Company  infrastructure growth
           - Investment
    4)  Commercialization  Development
        a) Report  on new  licensing  of the  technology (manufacturing  and any
            other  licenses) by region and by product  category.
        b) Report on new distributor and dealer  agreements signed by region and
           by product category.
        c) Report on  competition,  market trends and market  intelligence
    5)  Research  and  Development   Reporting
        a)  Report  on  new  technologies  under development
        b) Report on new  patents  applied  for and new  patents  issued
        c) Report on all new Intellectual Property creation


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                                                                              32
0001E    Corporate Reports

1) Corporate Financial Statements
   a) Balance sheet
   b) Profit and loss statement
   c) Cash flow statement


0002     Contribution Payment 2     May 31, 2004      $1,217,363.00
         Milestone: Successful Completion of:
         - Permits, Licenses and Site Issues
         - Fabrication and Delivery
         - Site Work and Installation

0002A    Project Status Report
Full  report  on  Phase I of  project  including  successful  completion  of all
detailed  engineering and technical  studies  (results of technical and economic
evaluation,  feedstock  analysis  and  trials,  site  analysis  and  integration
requirements  studies).

Report on Project status including  anticipated project achievements,  failures,
risks,       actual    or     potential     schedule     delays,    number   and
description of patent applications,  economic market analysis and other relevant
project   issues.   Provide   verifiable   documents   as  evidence  of  project
achievements. Report must be signed by a minimum of two consortium members.

0002B Sustainable Development Impacts Reporting System (SDIRS) Report

- Complete Benchmarks including all inputs and outputs (see Schedule E for SDIRS
 details)

0002C    Project Financial Certification Report (PFC.) (see Schedule E for PFC.
         details)

0002D Project  Impacts Report (as a direct result of SDTC support)

1) Technology Impacts
   a) Describe the long term goals for the technology,  its application and  any
      potential  application,  its  efficiency  increases  and  impacts  and its
      forecasted   impacts  on  emissions   reduction.
2) Partnerships
   a)  Project organizational  (Org.)  chart
   b)  Statement  of any  changes  to  consortium
3) Economic Impacts
   a) Report on current economic activity by region and by product category -
      Subsequent  financing Company  Infrastructure  growth - Investment
4) Commercialization  Development
   a) Report  on new  licensing  of the  technology (manufacturing and any other
      licenses) by region and by product  category.
   b) Report on new distributor and dealer  agreements signed by region  and  by
      product category.
   c) Report on competition, market trends and market intelligence


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<PAGE>
                                                                              33

5) Research and Development Reporting
   a) Report on new technologies under development
   b) Report on new patents applied for and new patents issued
   c) Report on all new Intellectual Property creation

0002E   Corporate Reports
        1) Corporate Financial Statements
           a) Balance sheet
           b) Profit and loss statement
           c) Cash flow statement


0003     Final Project Report       Jun 30, 2004            $1,882,637.00
         Signed by all members of the Consortium
         Milestone:  Successful  Completion of:
         - Commissioning and Training
         - Production Ramp-up

0003A   Project  Completion  Report
        1) All project  achievements  and/or project failures
        2) Verifiable  documents as evidence of project achievements
        3) Any other relevant project issues
        4) A narrative about your experience with SDTC and how  we  have  helped
           you achieve your goals

0003B   Marketing and Commercialization Report

        1)  Updated Business plan with a Tactical Marketing Plan describing  the
        post-demonstration activities for commercialization and marketing of the
        technology,  by  product  category,  including:
        a) product  cost  and  pricing information  including  margin  stack
        b) a  competitive  analysis  of the market including both prime and
           indirect  competitors
        c) forecasted market uptake rates
        d) and the forecasted size of the market for the technology by product
           category
        2) Any changes from the original marketing plan provided in the  project
           proposal.
        3) Any future risks or barriers to the full  commercialization of the
           technology
        4) Any potential or actual delays to commercializing and/or marketing
           the technology

0003C  Sustainable  Development  Impacts  Reporting  System  (SDIRS) Report (see
       Schedule E for SDIRS details)

0003D  Project  Financial  Certification  Report (PFCR)
       (see Schedule E for PFCR details)


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                                                                              34

0003E Project  Impacts Report (as a direct result of SDTC support)
      1) Technology impacts
         a) Describe any updates to the long term goals for the  technology, its
            application and any potential application,  its efficiency increases
            and impacts its; forecasted impacts on emissions reduction.
      2) Partnerships
         a) Statement of any changes to consortium
      3) Economic Impacts
         a) Report on current economic activity   by   region   and  by  product
            category
            - Subsequent financing
            - Company infrastructure growth
            - Investment
      4) Commercialization  Development
         a) Report  on new  licensing  of the  technology (manufacturing and any
            other  licenses) by region and by product  category.
         b) Report on new distributor and dealer  agreements  signed  by  region
            and by product category.
         c) Report on  competition,  market trends and market  intelligence
      5) Research  and  Development   Reporting
         a) Report  on  new  technologies  under development
         b) Report on new  patents  applied  for and new  patents  issued
         c) Report on all new  Intellectual  Property  creation
      6) Other  Participation
         a) Report on other Loans or Grants  secured for  subsequent  rounds  of
            financing
         b) Report on Partnership  Creation including number of new partnerships
            created

0003F Corporate Reports
      1) Corporate Financial  Statements
         a) Balance  sheet
         b) Profit  and loss  statement
         c) Cash flow  statement


0004A Final Project Audit          July 31, 2004         Payment of 10%
                                                         Holdback

0005  Annual Project SDIRS Reports
      (See Schedule E for SDIRS  details)

0005A First Annual Project SDIRS     Jun 30, 2005
0005B Second Annual  Project SDIRS   Jun 30, 2006
0005C Third Annual Project SDIRS     Jun 30, 2007


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STDC-2002-B-448                                                     CONFIDENTIAL




<PAGE>
                                                                              35
                                  Schedule D
                                  ----------
                               Consortium Members

Lead Contractor:
    DynaMotive Energy Systems Corporation
    105-1700 West 75 Avenue
    Vancouver, BC Canada V6P 6G2
Contact Person : David Sanguinetti
Title : Manager of Project Development
Telephone : (604)267-6029
Fax: (604)267-6005
E-mail : david.sanquinetti@dynamotive.com

Partner 2:
    Orenda division of Magellan Aerospace Corporation.
    Mississauga, Ontario, Canada
Contact Person: Frank Button
Title: General Manager, Orenda Turbines
Telephone; (905)673-3250 ext. 3445
Fax: (905)678-1538
E-mail: fbutton@orenda.com

Partner 3:
    Erie Flooring and Wood Products
    West Lorne, Ontario, Canada
Contact Person: Alan Vandenbrink
Title: General Manager
Telephone: (519)768-1200 ext, 30
Fax: (519)768-2737
E-mail: avandenbrink@erieflooring.com

Partner 4:
    Ontario Power Generation Inc. (OPG)
    Toronto, Ontario, Canada
Contact Person: James Perry
Title: Senior Business Development Engineer
Telephone: (416)592-7390
Fax: (416)592-4301
E-mail: james.perry@opg.com

Partner 5:
     UMA Engineering Ltd.
     Vancouver, BC, Canada
Contact Person: Peter Smith
Title: Senior Vice President
Telephone: (604)412-3511
Fax: (604)438-5587
E-mail: pismith@umagrouD.com


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STDC-2002-B-448                                                     CONFIDENTIAL




<PAGE>
                                                                              36

                                     Schedule E
                                     ----------

                                      Reports

Corporate Reports:
   (Refer to schedule C for detailed requirements).

Project Status Report:
   (Refer to schedule C for detailed requirements).

Project Completion Report:
   (Refer to schedule C for detailed requirements).

Project Financial Certification Report (PFCR):
   Budgeted costs vs. Actual expenditures to date.
   Provide copies of all invoices over $1,000.00
   (See Excel Spreadsheet provided by SDTC for report format)


Sustainable Development Impacts Reporting System (SDIRS):
   (Electronic copy provided by SDTC)


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STDC-2002-B-448                                                     CONFIDENTIAL