UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549

                                    FORM 20-F
                                    ---------

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE
    SECURITIES EXCHANGE ACT OF 1934

                                       OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
               For the fiscal year ended December 31, 2003

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
         For the transition period from             to
                                       ------------   ------------
                         Commission File Number: 0-27524

                     DYNAMOTIVE ENERGY SYSTEMS CORPORATION
             (Exact name of Registrant as specified in its charter)

                     Province of British Columbia (Canada)
               (Jurisdiction of incorporation or organization)

                        Suite 105 -1700 West 75th Avenue
                           Vancouver, British Columbia
                           V6P 6G2 Canada
                 (Address of principal executive offices)

        Securities registered or to be registered pursuant to Section 12(b)
                                 of the Act: None

Securities registered or to be registered  pursuant to Section 12(g) of the Act:
                         Common Shares Without Par Value
                                (Title of Class)

       Securities for which there is a reporting obligation pursuant to
                    Section 15(d) of the Act: None

Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital or common stock as of the close of the period covered by the annual
                                     report:

Title of Each Class                          Outstanding at December 31, 2003
Common Shares Without Par Value                       69,915,654

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]


                                       1

<PAGE>

Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [X]  Item 18 [ ]

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes [ ] No [ ] Not applicable [X]

This report contains  statements of a forward-looking  nature relating to future
events or our future  performance.  These  statements are only  predictions  and
actual events or results may differ  materially.  In evaluating such statements,
you should  carefully  consider the various  factors  identified  in this report
which could cause actual results to differ materially from those expressed in or
implied by, any forward-looking  statements,  including those set forth in "Risk
Factors" See "Cautionary Note Regarding Forward- Looking Statements".



                                       2

<PAGE>

                         TABLE OF CONTENTS
                                                                         Page
PART I                                                                     4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS              4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                            4
ITEM 3. KEY INFORMATION                                                    4
ITEM 4. INFORMATION ON THE COMPANY                                         8
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                      17
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                        25
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                 32
ITEM 8. FINANCIAL INFORMATION                                             34
ITEM 9. THE OFFER AND LISTING                                             35
ITEM 10. ADDITIONAL INFORMATION                                           36
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       39
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES           41

PART II                                                                   41
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                  41
ITEMS14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND
         USE OF PROCEEDS                                                  41
ITEM 15. CONTROLS AND PROCEDURES                                          41
ITEM 16. [RESERVED]                                                       41

PART III                                                                  42
ITEM 17. FINANCIAL STATEMENTS                                             42
ITEM 18. FINANCIAL STATEMENTS                                             43
ITEM 19. EXHIBITS                                                         90


                                       3

<PAGE>

Part I
------


Item 1. Identity Of Directors, Senior Management and Advisers

Not applicable, this is an Annual Report only.

Item 2. Offer Statistics and Expected Timetable

Not applicable, this is an Annual Report only.


Item 3. Key Information

A. Selected financial data

The following table represents selected  consolidated  financial  information of
DynaMotive  Energy Systems  Corporation.  The table should be read together with
"Item 5.  Operating and  Financial  Review and  Prospects."  Except as otherwise
indicated,   the  following  selected  financial  data  have  been  prepared  in
accordance with Canadian generally accepted accounting principles.


<TABLE>
<CAPTION>


                                                  Fiscal Year
                                  2003        2002       2001      2000          1999
----------------------------------------------------------------------------------------------
<S>                          <C>          <C>        <C>         <C>         <C>
(US Dollars)
Results of operations:
Revenue                           ----      68,569     274,360    907,744    1,259,668
Loss from operations        (4,995,624) (3,733,499) (5,798,827) (4,863,482) (2,444,931)
Loss from continuing
 operations                 (4,921,650) (4,366,454) (6,437,461) (4,756,873) (2,444,931)
Net loss per Cdn GAAP       (4,984,681) (5,261,607) (6,838,264) (4,756,873) (2,444,931)
Net loss per US GAAP        (4,984,681) (5,264,469) (6,602,892) (6,103,362) (2,638,157)
Net loss per share Cdn GAAP    (0.09)     (0.12)      (0.19)      (0.15)     (0.11)
Net loss per share US GAAP     (0.09)     (0.12)      (0.18)      (0.12)     (0.29)
Net loss from continuing
 operation per share           (0.09)     (0.10)      (0.18)      (0.15)     (0.11)

Financial position at year-end:
Total assets, Cdn GAAP       3,759,605   1,285,813   6,454,399    4,469,120   2,312,435
US GAAP                      3,759,605   1,285,813   6,457,263    4,390,740   2,232,666

Total liabilities,
Cdn GAAP                     2,035,168   1,957,625   5,179,271      898,374     892,850
US GAAP                      2,035,168   1,957,625   5,179,271      898,374     892,850

Shareholder's equity,
Cdn GAAP                     1,724,437    (671,812)  1,275,128     3,570,746   1,419,585
Shareholder's equity,
US GAAP                      1,724,437    (671,812)  1,277,992     3,492,366   1,339,816

Deficit, Cdn GAAP          (36,136,236) (31,151,555) (25,773,048) (18,934,784) (14,177,911)
US GAAP                    (38,603,514) (33,618,833) (28,354,364) (21,381,691) (15,648,110)

Common shares issued        69,915,654   49,941,000   40,942,115   35,851,060   24,617,402
----------------------------------------------------------------------------------------------
</TABLE>


During  2003,  significant  impacts  to  results  of  operations  and  financial
condition and comparability of results of operations and financial  condition in
2003 versus 2002 occurred  principally  due to completing the divestiture of the
operating  assets of the  Company's  DynaPower  subsidiary  in April  2002,  the
December 2002 liquidation of the Company's 75% owned subsidiary  Border BioFuels
Ltd.  ("BBL") and the  commencement  of  construction  of the  Company's  100tpd
commercial  demonstration plant during 2003. The liquidation of BBL is described
in Item 8(b), and included in the Company's consolidated financial statements as
Discontinued  Operations.  The Company is now solely  focused on BioOil  related
activities.


                                       4

<PAGE>

B. Capitalization and indebtedness

Not applicable, this is an Annual Report only.

C. Reasons for the offer and use of proceeds

Not applicable, this is an Annual Report only.

D. Risk factors

RISK FACTORS
You  should  carefully  consider  the  risks,  uncertainties  and other  factors
described below because they could materially and adversely affect our business,
financial condition, operating results, prospects and or the market price of our
common  shares.  This Risk Factors  section is written in  accordance  with U.S.
Securities  and  Exchange  Commission's  "plain  English"  guidelines.  In  this
section,  the words "we,"  "us," "our" and "ours"  refer only to the Company and
its subsidiaries and not any other person.

RISKS RELATED TO OUR OPERATIONS

WE HAVE INCURRED NET LOSSES SINCE COMMENCING BUSINESS AND EXPECT FUTURE
LOSSES

We have  had  limited  revenues  to date  and  have  not  shown a  profit  since
inception.  The Company had a net loss of $4,984,681 for the year ended December
31, 2003 as well as a net loss of  $5,261,607  for the year ended  December  31,
2002.  As  this  is  a  new  business,   we  may  experience  typical  problems,
difficulties, complications and delays. We expect to show a substantial net loss
for  the  year  ended  2004.  We do  not  expect  revenues  to  increase  in any
significant  way  until  we  have  successfully  established  commercial  BioOil
operations.  Accordingly,  we  may  not  be  able  to  operate  profitably  on a
consistent basis, if at all.

WE HAVE LIMITED FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE OUR GROWTH
STRATEGY

Our  growth  strategy  may  place  a  significant   strain  on  our  management,
operational and financial resources.  We have negative cash flow from operations
and  continue  to seek  additional  capital.  We  will  likely  have  to  obtain
additional  capital  either  through  debt or equity  financing  to continue our
research and development strategies. There can be no assurance, however, that we
will be able to obtain such  financing on terms  acceptable  to the Company.  If
adequate  funds are not  available  when  needed,  we may be  required to delay,
scale-back or eliminate the manufacturing,  marketing or sales of one or more of
our products or research and development programs.


                                       5

<PAGE>

If we raise  additional  funds  through the  issuance  of equity or  convertible
securities,  these new securities  may contain  certain  rights,  preferences or
privileges  that are senior to those of our  Common  Shares.  Additionally,  the
percentage  of ownership of the Company  held by existing  shareholders  will be
reduced.

WE MUST DEVELOP AND EXPAND OUR SALES AND MARKETING CAPABILITIES

Our sales and  marketing  experience  is very  limited.  We will be  required to
further   develop  our  marketing  and  sales  force  in  order  to  effectively
demonstrate the advantages of our technology over more  traditional  technology,
as well  as  other  competitors'  technology.  We may  not be able to  establish
adequate sales and distribution capabilities, and there is no guarantee that our
sales and marketing experience will be successful.

WE MAY NOT BE ABLE TO SUCCESSFULLY PROTECT OUR PROPRIETARY RIGHTS

Patents and other  intellectual  property  are a critical  aspect of the present
operation and future success of our business.  Policing  unauthorized use of our
proprietary  technologies and other intellectual rights could entail significant
expense and could be difficult or impossible,  particularly  given that the laws
of some countries  afford little or no effective  protection of our intellectual
property.  Given the nature of our  business,  third parties may bring claims of
copyright,  patent or trademark  infringement against us. Further, third parties
may  claim  that we have  misappropriated  their  creative  ideas  or  otherwise
infringed on their proprietary  rights in connection with our technologies.  Any
claims of  infringement,  with or  without  merit,  could be time  consuming  to
defend, result in costly litigation,  divert management attention, require us to
enter into  costly  royalty  or  licensing  agreements  or prevent us from using
important technologies or methods.

OUR TECHNOLOGY HAS NOT YET BEEN COMMERCIALIZED

To date,  our technology has been tested only at a  pre-commercial  scale.  Full
commercialization  may expose operational flaws and unanticipated costs that may
inhibit market acceptance.

OUR MARKET IS VERY COMPETITIVE

The  markets  for  our  products  and  technologies  are  traditionally   highly
competitive,  and other  providers  of products  and  technologies  have various
advantages and  disadvantages  in competition with ours. Many of our competitors
have established  long-standing  relationships with power generation  companies,
utilities,  manufacturers and others that we view as potential  customers.  Most
competitors  also have  substantially  greater  access to capital and  technical
resources than we do and may therefore have a significant competitive advantage.

Our primary  technologies  face market  acceptance  barriers  that do not affect
already established technologies. To date, our primary technologies and products
have gained only limited market acceptance and have generated no revenues.

WE MAY BE SUBJECT TO HAZARDOUS WASTE LIABILITIES

BioOil and some of its derivative  products may be deemed to be hazardous wastes
for which a  liability  may be  imposed  upon us should any  contamination  from
improper   storage  or  handling   occur.   Liability   costs   associated  with
environmental cleanups of contaminated sites historically have been very high as
have been the level of fines  imposed by  regularity  authorities  upon  parties
deemed to be  responsible  for  environmental  contamination.  We have  obtained
limited insurance protection but this may not be sufficient insurance protection
from such  liabilities if they should ever arise. If  contamination  should take
place for which we are deemed to be liable,  potentially liable or a responsible
party, the resulting costs could have a material effect on our business.

OUR BUSINESS WILL SUFFER IF WE LOSE KEY SKILLED PERSONNEL


                                       6

<PAGE>

We are dependent on certain members of our management and engineering staff, and
if  we  lose  their  services  our  business  could  be  severely  impacted.  In
particular,  we rely on the  services of our Chief  Executive  Officer and Chief
Technology Officer.  In addition,  our ability to manage growth effectively will
require that we continue to  implement  and improve our  management  systems and
recruit and train new employees.  We may not be able to successfully attract and
hire skilled and experienced personnel.

OUR STRATEGIC ALLIANCES MAY NOT ACHIEVE THEIR GOALS

We expect to partially rely on strategic  alliances for  development  contracts,
assistance in research and development and marketing  expertise.  Even if we are
successful in forming these alliances, they may not achieve their goals.

RISKS RELATED TO OUR COMMON SHARES

THE ABILITY TO TRADE THE COMPANY'S STOCK MAY BE LIMITED

Shares  of  the  Company's   Common  Shares   currently   trade  only  upon  the
Over-the-Counter  Bulletin Board market. This may not provide the same liquidity
for the  trading of  securities  as the Nasdaq or other  exchange.  Because  our
shares  are not  listed on Nasdaq or any other  exchange,  the  Company's  stock
presently  comes  within  the  definition  of a "penny  stock" as defined in the
Securities Exchange Act of 1934 and the rules under that Act.

Generally,  the penny stock rules require a broker-dealer,  before a transaction
in a penny stock to deliver a standardized risk disclosure  document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks in the  penny  stock  market.  The  broker-dealer  must also  provide  the
customer  with  current  bid and  offer  quotations  for the  penny  stock,  the
compensation of the  broker-dealer  and its salesperson in the transaction,  and
monthly account  statements showing the market value of each penny stock held in
the customer's  account.  In addition,  the penny stock rules generally  require
that the broker-dealer must make a special written  determination that the penny
stock is a suitable  investment  for the purchaser  and receive the  purchaser's
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading  activity in the secondary  market for a
stock that is subject to the penny stock rules. Therefore, investors may find it
more difficult to sell their shares.

OUR STOCK'S TRADING PRICE MAY BE SUBJECT TO MARKET VOLATILITY

In  recent  years,  the  stock  market in  general,  and the  prices of stock of
technology   companies   including  our  own,  have  experienced  extreme  price
fluctuations,  sometimes  without regard to the  fundamentals  of the particular
company.  These broad market and industry  fluctuations may adversely affect the
market price of our Common Shares.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking  statements,  within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933  that  reflect  our  current  expectations  about  our  future  results,
performance,  prospects and opportunities.  Where possible,  the forward-looking
statements are identified by words such as "believes,"  "anticipates,"  "plans,"
"expects,"  "seeks,"  "estimates,"  "intends,"  "may," "will," and other similar
expressions;  however,  these words are not the exclusive  means of  identifying
such  statements.  In  addition,  any  statements  that  refer to  expectations,
projections  or other  characterization  of future events or  circumstances  are
forward-looking  statements.  The  forward-looking  statements  are  subject  to
significant risks, uncertainties and other factors including those identified in
the "Risk Factors"  section of this Form 20-F, which may cause actual results to
differ materially from those expressed in or implied by, these  statements.  The
Company   undertakes   no   obligation   to   publicly   update  or  revise  any
forward-looking   statements  to  reflect  events  or  circumstances   occurring
subsequent to the filing of this report or for any other reason.


                                       7

<PAGE>

Item 4. Information On The Company

A. History and development of the Company

DynaMotive  Energy Systems  Corporation (the "Company" and or "DynaMotive") is a
leader  in  biomass-to-liquid   fuel  conversion,   a  process  known  as  "Fast
Pyrolysis".  Its principal business is the development and  commercialisation of
its  renewable  energy  process  called  BioThermTM,  which is a fast  pyrolysis
process  that  produces  liquid  BioOil  fuel  from  biomass  or  biomass  waste
feedstocks.  BioOil is a clean,  renewable  fuel which can replace  natural gas,
diesel and other fossil fuels to produce  power,  mechanical  energy and heat in
industrial  boilers,  fuel gas  turbines  and fuel  reciprocating  engines.  The
Company aims to unleash significant amounts of energy production, in the form of
BioOil  fuels,  based upon  utilization  of abundant  biomass waste streams from
agricultural and forest operations and other  post-industrial  biomass residues.
In many cases, the feedstock  sources are costly to dispose of and therefore are
available at zero cost or are potentially revenue generating when converted into
BioOil.  The process of biomass to energy  conversion is sustainable,  renewable
and  greenhouse  gas neutral,  and is  consistent  with other  renewable  energy
sources  such as wind,  hydro and solar.  The  significant  advantage of biomass
energy  over  other  renewable  forms of energy,  is that  biomass is capable of
delivering energy on a 24/7 basis,  whereas wind, hydro and solar energy sources
are all subject to natural  fluctuations.  Information for the total revenues by
category of activity and  geographic  market for each of the last three years is
detailed in Note 16 to the Consolidated Financial Statements.

DynaMotive is  attempting  to establish its patented  technology as the industry
standard for the production of liquid biomass based fuels,  in competition  with
other  pyrolysis  technologies,  and other biomass to energy  applications.  The
Company's fast  pyrolysis  process  efficiently  converts raw biomass or biomass
wastes  into  three  fuel  types:   Liquid   (BioOil),   Solid  (char)  and  Gas
(non-condensable  gases).  The  non-condensable  gases  are  used  to  fuel  the
pyrolysis process. The entire system is a closed loop with no emissions or waste
byproducts.

The Company and its partners are also engaged in research and  development  on a
range of derivative  products  that, if  successful,  could further  enhance the
market and value for BioOil as an alternative fuel and product source.

The  Company  was  incorporated  on April 11,  1991 in the  Province  of British
Columbia,  Canada,  under the name of DynaMotive Canada Corporation.  On October
31, 1995, the shareholders approved a change of name to DynaMotive  Technologies
Corporation  and on June 26, 2001, the  shareholders  again approved a change of
name to the Company's current name.

As of  December  31,  2003,  the  Company  had  six  wholly-owned  subsidiaries:
DynaMotive  Corporation  (incorporated  in the  State of Rhode  Island in 1990),
DynaMotive Europe Limited (formerly known as DynaMotive  Technologies (UK) Ltd.,
incorporated  in the  United  Kingdom  in 1996),  and  DynaMotive  Canada,  Inc.
(incorporated  in Canada in November 2000), the West Lorne BioOil Co- Generation
Limited  Partnership  formed under the laws of Ontario,  DynaMotive  ElectroChem
Corporation  (incorporated  in  the  Province  of  British  Columbia  in  1993),
DynaMillTM Systems Limited  (incorporated in the Province of British Columbia in
1996) and DynaMotive  Puerto Rico, Inc.  (incorporated  in Puerto Rico in 1997).
The  latter  three  are  currently  inactive  and  the  Company's   wholly-owned
subsidiary,  DynaMotive  Europe  Ltd.,  purchased  75% of the  shares  of Border
Biofuels Ltd.  (BBL), a United  Kingdom  company,  in April,  2001. In 2002, BBL
became insolvent and the Company now treats it as a discontinued operation.



                                       8

<PAGE>

In this report,  unless the context otherwise requires,  the terms the "Company"
and  "DynaMotive"  refer  to  DynaMotive  Energy  Systems  Corporation  and  its
subsidiaries.  The Company is currently listed on the over-the-counter  bulletin
board (OTCBB) under the symbol: DYMTF.OB.

The  principal  executive  office of the  Company  is Suite 105 - 1700 West 75th
Avenue, Vancouver, British Columbia, Canada V6P 6G2 (Telephone: 604-267- 6000).

B. Business Overview

Financial  information  concerning the Company's industry segments is summarized
in Note 16 to the Consolidated Financial Statements. Unless otherwise indicated,
all  financial  information  contained in this Annual  Report on Form 20-F is in
U.S.  dollars and based on Canadian  generally  accepted  accounting  principles
("GAAP").

DynaMotive's  primary focus is to commercialize  its patented BioOil  production
technology and establish this technology as the worldwide  industry standard for
production of BioOil as a clean, renewable fuel utilizing biomass feedstocks. To
support  this  goal,  the  Company  plans  over the next  year to  develop  full
commercial scale BioOil  production  facilities in conjunction with its alliance
partners  and then expand upon its  existing  marketing  efforts to generate new
licensee's throughout Canada, Europe, the USA, Asia and Latin America.

The  Company  is  currently   commercializing  its  BioTherm   biomass-to-energy
technology that converts low or zero cost forest and agricultural biomass wastes
into liquid BioOil that is then used as a "green" renewable fuel alternative for
power  generation,  industrial  use  or as  the  raw  material  for a  range  of
derivative products.

In April  2002,  the  Company  completed  the sale of the  operating  assets  of
DynaPower,   its  metal  cleaning   subsidiary  to  former  employees  to  focus
exclusively  in the  bioenergy  field  and  in the  development  of  BioOil  and
derivative  products.  The  Company  retains  ownership  in all  of  DynaPower's
intellectual  property  and  expects  to  receive  on-going  royalties  from its
patents. DynaPower produces industrial metal cleaning systems that eliminate the
need for toxic chemicals  traditionally used by the wire manufacturing  industry
to clean their  products.  DynaPower  systems  have been sold in North and South
America, Europe and Asia

I.    CORE TECHNOLOGIES

The Company  develops  and  markets the  BioThermTM  process  which  efficiently
converts  forest  and  agricultural  biomass  waste into  BioOil,  char and non-
condensable  gases. There is zero waste from the process.  Initial  applications
for BioOil are targeted for  generating  heat,  power and  mechanical  energy in
industrial boilers, gas turbines and stationary  reciprocating engines. The char
can also be used as a fuel or as a  feedstock  for the  production  of  charcoal
briquettes, in its raw form as a coal or coke alternative; or in other potential
value added  applications  including  activated  carbon for use in the water and
wine  industries  and  carbon  black  for  domestic  and  industrial  uses.  The
non-condensable  gases are re-cycled in the  BioThermTM  process and provide the
majority of the energy required for the process. DynaMotive aims to position its
technology  as the  worldwide  industry  standard for the  production  of BioOil
clean, renewable fuel.

The Company has  demonstrated  a high level of success from its  BioThermTM  and
BioOil  commercialisation  program in recent years. DynaMotive has six phases to
its commercialisation program as shown below:

Phase 1: Bench scale,  "proof of concept" was  completed by Resource  Transforms
International, Ltd. (RTI) in 1996. DynaMotive licensed the BioThermTM technology
in 1997 and purchased the exclusive  worldwide rights to the technology from RTI
in 2000.

Phase 2: In 1997, DynaMotive built a 0.5 tonnes per day (tpd) prototype plant in
Vancouver, BC, which was upgraded in 1998 to a capacity of 2 tpd. This plant has
operated for over 3,000 hours. In 1999, Stone & Webster Engineering,  a major US
based power engineering company, completed technical due diligence and concluded
that the process was "reliable and scaleable."



                                       9

<PAGE>

Phase 3: In 2001,  DynaMotive  entered into a strategic alliance with Tecna S.A.
of  Argentina.  to  develop  commercial  energy  systems  based on  DynaMotive's
pyrolysis  technology  in Latin  America  and other  markets on a  non-exclusive
basis.  Tecna would also collaborate with DynaMotive to provide technical design
and optimization input on DynaMotive's BioOil production  technology.  Tecna has
provided  valuable  technical  support,  engineering and consulting  services to
validate the basic  engineering and operation of the BioTherm  technology and to
evaluate and quantify the potential for  improvements  to the  efficiency of the
BioTherm  technology.  This  work  has  been on  going  since  and  resulted  in
confirmation of the basic BioTherm designs and process efficiencies, development
of process designs and equipment specification and design details that are being
incorporated into the current BioTherm plant designs.

Phase 4: DynaMotive completed commissioning of a new 10 tpd pilot plant in March
2001.  The plant has been built to  industrial  specifications  complete  with a
state-of-the-art  distributed  control system (DCS).  The plant has a production
capacity  of 6,000  litres  of  BioOil  per day.  In  January  2003,  DynaMotive
completed its pilot plant program having confirmed the technology's  scalability
and reliability as well as the capacity to replicate the technology enhancements
achieved.  The plant has exceeded  design  parameters  operating on a continuous
basis at 50% above its nominal design capacity.  The Company also announced full
focus of its  resources to the  construction  of a 100 tpd  commercial  plant in
Canada.

Phase 5:  Following  successful  operation of the 10 tpd pilot,  DynaMotive  has
begun   construction  of  a  100  tpd  commercial   demonstration   plant,  with
commissioning expected in Q3 2004. This plant will use the same design, and will
process wood residues to demonstrate continuous 24-hour production at commercial
scale. This project is also intended to demonstrate  continuous operation of end
use  applications  (boilers/kilns  and gas turbines).  The principal goal of the
commercial demonstration project is to demonstrate the economics of the process,
and to secure future engineering, procurement and construction (EPC) commitments
from the Company's  current  partners and potential future service and equipment
providers.  Ultimately,  the Company expects these EPC commitments to facilitate
lending commitments to execute on BioThermTM/BioOil project developments as part
of the Company's final commercialization phase.

Phases 6/7: On  completion  of the field  demonstration  stage,  DynaMotive  and
partners plan to develop  multiple  commercial  plants at the 100-400 tpd scale.
The Company is presently  seeking to secure  rights to multiple  'high  disposal
cost'  biomass  waste  streams  around the  world,  in order to launch its final
commercial  efforts.  The  Company  believes  that by  securing  rights to these
biomass  waste  streams  and  related  BioOil,   power  and/or  energy  purchase
commitments  will be able to  catalyze  the  development  of  commercial  BioOil
projects  that  incorporate  the  design,   engineering  and  licensing  of  its
BioThermTM technology.

BioOil  can  also be used  as the  basis  for a  range  of  derivative  products
including,  but not limited to, blended fuels for  transportation,  slow release
fertilizers  and  specialty  chemicals.  The  Company  continues  to pursue  its
strategy to secure  industrial  partners  to develop  commercial  products  from
BioOil derivatives,  based upon prototypes  developed by DynaMotive allowing the
Company to leverage its resources.

By virtue of being derived from biomass  waste,  all BioOil fuels are considered
to be carbon dioxide and greenhouse gas neutral. When combusted, they produce no
sulfur dioxide and significantly  reduced nitrogen oxide emissions compared with
diesel fuel, therefore having significant  environmental  advantages over fossil
fuels with respect to atmospheric pollution.


                                       10

<PAGE>

1) BIOOIL PRODUCTION PROCESS

BioOil  is  produced  using  a  patented  fast  pyrolysis  process  trade  named
BioThermTM that converts forest and agricultural biomass wastes such as sawdust,
sugar cane bagasse,  rice husks and wheat straw amongst  others into  commercial
fuels (BioOil,  char and  non-condensable  gases).  The process was developed by
RTI.

In 1996, the Company  obtained the exclusive  worldwide  rights from RTI for air
emissions  control  products  from  this  technology.  In 1998,  this  exclusive
arrangement  with  RTI was  expanded  to  include  the  BioThermTM  process  and
virtually any new products  derived from BioOil including fuels and slow release
fertilizers.  In  February  2000,  the  Company  acquired  the  patent  to  this
technology  from RTI and entered into a research  agreement with RTI on biofuels
and BioOil derivative products.

In the  BioThermTM  reactor,  biomass waste  materials are rapidly heated in the
absence of oxygen.  The rapidly vaporized  volatiles are then quickly condensed,
forming a liquid  fuel  referred to as BioOil,  solid char and non-  condensable
gases.  Depending upon the feedstock used (many  different  sources of feedstock
have been bench tested thus far), the process  typically  produces 60-75 tons of
BioOil,  15-25 tons of char and  approximately 15 tons of non- condensable gases
from 100 tons of biomass waste. The Company believes that the overall simplicity
of the BioThermTM  process and the fact that all the major  equipment is already
well proven in existing  related  industrial  applications  gives the  Company's
BioOil  technology   competitive  advantages  over  other  pyrolysis  conversion
technologies such as lower capital and operating costs, higher product yields, a
significantly  higher  quality  BioOil  and the  flexibility  to  process a wide
variety of feedstocks.

The Company began  producing  batch  quantities of BioOil in 1997 in its 0.5 tpd
BioThermTM  pilot  plant  located  at the  Company's  research  and  development
facility in Vancouver BC. By the end of 1998,  the BioOil  Technology  Group had
upgraded,  commissioned  and  operated  the plant to a capacity  of two tpd on a
continuous  basis.  In 1999,  further  changes  were  made to the  feed  system,
BioThermTM reactor,  cyclone, and instrumentation and control systems to provide
increased  stable  operation.  Once these changes were made,  the BioThermTM was
re-commissioned  and produced BioOil of  sufficiently  high quality to meet fuel
specification requirements as defined by our engine testing partners.

The Company's 10 tpd BioOil plant was commissioned in March, 2001. Commissioning
included a sustained  10 day, 24 hr/7 day a week  operation  which  demonstrated
that this  design  with minor  adjustments  could yield 14.5 tpd rather than the
estimated  10  tons.  The  Company  believes  that  the  plant  conforms  to all
applicable British Columbia safety,  electrical and mechanical design standards,
utilizing   state-of-the-art   "smart"   instrumentation   and  a   high-powered
industrial-grade  distributed  control  system.  The Company adopted this design
policy in order to facilitate easy scale-up to commercial plant capacities.

In January 2003, the Company announced that it successfully  completed its pilot
plant program confirming the technology's scalability and reliability as well as
the capacity to replicate the technology enhancements achieved. As a result, the
Company  closed its test  facilities  and  consolidated  its  operations  at its
corporate headquarters in Vancouver.  In 2003, the Company focused its resources
on construction of a 100 tpd commercial plant in West Lorne, Ontario and entered
into  agreements for the development  and  construction of the 100tpd  pyrolysis
reactor for the plant and  completed  engineering  review of the design with UMA
Engineering Ltd.

2) BIOOIL COMMERCIAL DEMONSTRATIONS, APPLICATIONS AND MARKETS

During  2003,  the  Company  began  development  of its  first  100 tpd plant in
Ontario,  Canada  that  will  be  hosted  at Erie  Flooring  and  Wood  Products
facilities. The integrated plant is to utilize wood residue from Erie flooring's
operations and will be comprised of wood conditioning equipment, pyrolysis plant


                                       11

<PAGE>

and power  island.  Pyrolysis  and  generation  equipment  are to be provided by
DynaMotive and Magellan Aerospace,  Orenda division (Orenda)  espectively.  Erie
Flooring is to provide wood residue for the project and will receive electricity
and process  heat for its  operations.  The project is expected to export  green
power to Ontario's grid system beginning in Q3, 2004. The project is expected to
be operating cash flow positive in 2005 and to prove the commercial viability of
the technology.

In June 2003,  the Company  announced  that it was approved to receive a funding
contribution  for  the  Erie  Flooring  Project  from  Sustainable   Development
Technology  Canada (SDTC).  On March 5, 2004 the Company signed the Contribution
Agreement with SDTC,  confirming  their  C$5,000,000  (US$ 3.8 million)  capital
grant  to the  Project,  subject  to  completion  of the  agreed  work  plan and
documentation  of eligible costs and other reporting  requirements  over a three
year period following completion of the Project (the "Contract Period").  If the
Company  sells the project or otherwise  dispose  during the Contract  Period of
assets  financed by the SDTC funding,  SDTC may have a claim on a portion of the
proceeds proportionate to their percentage contribution to the asset.

The Company believes that the near term commercial  application for BioOil is as
a clean burning fuel that can be used to replace  natural gas,  diesel and other
fossil fuels in boilers,  gas  turbines and slow and medium speed  reciprocating
engines  for heat and power  generation,  to replace  natural  gas in the forest
industry and for lumber dry kiln and lime kiln applications. Initial markets may
include  Canada,  the US,  Brazil and European  countries,  in addition to sugar
producing  regions  in other  parts  of Latin  America,  Asia and  Island  based
economies.

Orenda is in the second phase of a program to develop a  commercial  gas turbine
package fueled by DynaMotive's  BioOil. The 2.5 MW (megawatt) GT2500 turbine was
successfully  pre-commissioned  on BioOil in March 2004 and is being readied for
shipment  to  the  Erie  Flooring  site.  Orenda  has  also  identified  further
commercial  demonstration  projects for its turbines and BioOil,  in addition to
Erie Flooring as referred to above.

DynaMotive also targets the industrial  fuels market.  Working with the Canadian
federal  department  of Natural  Resources  CANMET Energy  Technology  Centre in
Ottawa,  Ontario,  it developed a burner  nozzle  design for stable  BioOil fuel
combustion. This has created opportunities for early commercial applications for
BioOil as a clean burning fuel to replace  natural gas,  diesel and other fossil
fuels in the multi-billion  dollar industrial boilers,  kiln fuels and specialty
heating applications markets. Testing of BioOil in lumber kilns was successfully
completed in 2002. In 2003, DynaMotive completed pilot scale limekiln testing of
BioOil  fuel in  conjunction  with the  University  of British  Columbia  (UBC).
Customers  for BioOil  fuels  could  potentially  include  local,  regional  and
international  power generators and electrical  utilities (fuel  substitution in
large scale power  plants and fuel for  district  heating),  fuel  distributors,
forest  companies  (natural  gas  substitute  in lime  kilns,  lumber  kilns and
boilers),   oil  and  gas  producers  (steam   production  for  extraction)  and
manufacturing  companies  (process  heat)  including  sawmills,  pulp  mills and
greenhouses.   Beyond  the  programs  above,   testing  continued  with  various
industrial burner and boiler combustion experts and manufacturers in 2003.

The Company  also  continues  to work with Cosan Bon Jesus  ("Cosan" is Brazil's
largest  sugar  and  ethanol   producer)   with  which  the  Company   signed  a
comprehensive  Memoranda of  Understanding  in March 1998.  Cosan and DynaMotive
have tested  bagasse and optimized  technical  design for  bagasse-based  BioOil
pyrolysis  plants.  The Company is  concentrating on optimizing the design for a
bagasse-fed  BioOil pyrolysis plant and further  validating  applications,  fuel
quality and chemical composition of BioOil made from bagasse.

The Company has completed a series of production  runs  converting 100% softwood
bark  derived from spruce,  pine and fir into fuel quality  BioOil.  Lower value


                                       12

<PAGE>

bark residues are a major problem for the forest industry; as bark has little or
no  value  and  is  costly  to  dispose  of.  Canada,   for  example,   produces
approximately  18  million  tons of  sawmill  residues  per year of which 5 to 6
million  tons  are  considered  wastes  and  are  subsequently   incinerated  or
landfilled.  Canada's  wood waste alone could  potentially  be  converted  to 15
million  barrels of BioOil per year and  represents a significant  source of raw
materials for DynaMotive.

3) BIOOIL APPLICATIONS & DERIVATIVE PRODUCTS

BioOil  has a wide range of  potential  commercial  applications.  As the BioOil
industry  matures it has the potential to follow a similar  development  path as
the petroleum  industry,  beginning with  exploitation of basic unrefined BioOil
fuels for power generation and district heating followed by blends and emulsions
for   transportation.   Development   of  higher   value   products,   including
agro-products,  resins, adhesives, specialty chemicals, slow release fertilizers
and other  derivatives,  may occur as refining  and  processing  techniques  are
established by future licensees or partnerships  with DynaMotive.  Over time, we
anticipate  that BioOil will be refined in much the same way that  petroleum  is
today in order to derive the highest value energy and chemical products.

The Company is  following a staged  approach  to product  development,  focusing
initially on the earliest and most appropriate application of BioOil as a clean,
renewable fuel to generate power and heat in industrial  boilers and kilns,  gas
turbines and  stationary  reciprocating  engines.  The Company is also upporting
efforts  to  develop  a  next  generation  of  higher-value   fuels,   including
BioOil/ethanol blends, BioOil/diesel emulsions and catalytic reforming of BioOil
to produce synthetic fuels and bio-methanol.  BioOil also has potential as a raw
material to produce  agro-products  such as slow release  fertilizers  and other
high-value products.

Over the longer  term,  the Company  believes  that  exploitation  of  specialty
chemicals contained in BioOil has the potential to create significant value. RTI
and other research  institutions are developing  techniques to extract chemicals
such as hydroxyacetaldehyde,  levoglucosan, levoglucosenone, acetol, acetic acid
and formic acid.  These  chemicals have a wide variety of possible  applications
including  food  flavorings,   adhesives,  resins,  pharmaceuticals,   bio-based
pesticides and paper brighteners.



CHAR PRODUCTION

Char is a significant  co-product of the Company's pyrolysis process.  Char is a
granular  solid  with  properties  similar to coal.  At 23 - 25 Giga  Joules per
tonne,  pyrolysis  char has a higher  heating value than wood and many grades of
coal. Like BioOil,  it is a "green" fuel which is CO2 (carbon  dioxide)  neutral
and does not contain any sulfur.

A commercial  scale BioOil plant  processing 400 tpd of wood residue is expected
to produce  approximately 26,000 tons per year of char with a total energy value
of 600,000 - 650,000 Giga Joules,  dependent on the  composition  and species of
the feedstock.

Early  stage  applications  of  char  will  focus  on  direct   substitution  or
augmentation of fossil fuels to produce process heat and power via  commercially
available technologies in BioOil plants, sawmills,  thermal power generation and
cement  production.  Char  also  has  potential  for  use  as  a  feedstock  for
manufacturing  of charcoal  briquettes.  DynaMotive  char has been  successfully
tested  at  industrial  scale  and the  prototype  briquettes  showed  excellent
results, meeting or exceeding all charcoal industry quality standards.

In 2003, the Company,  with the University of  Saskatchewan,  completed  initial
analysis  concluding that char is an appropriate  material for activated carbon.
Research and testing in this area is expected to continue in 2004.


                                       13

<PAGE>

4) BIOOIL STRATEGIC PARTNERS, INVESTMENT AND GOVERNMENT FUNDING

The Company's  BioOil  technologies  are consistent with the  environmental  and
economic objectives of many governments around the world.

The  Company  has  also  received   strong  support  from  Canadian   government
departments and funded entities.  In 2003, the Company was approved to receive a
funding contribution for the Erie Flooring Project from Sustainable  Development
Technology  Canada (SDTC).  On March 5, 2004 the Company signed the Contribution
Agreement with SDTC,  confirming  their  C$5,000,000  (US$ 3.8 million)  capital
grant  to the  Project,  subject  to  completion  of the  agreed  work  plan and
documentation  of eligible costs and other reporting  requirements  over a three
year period following completion of the Project (the "Contract Period").  If the
Company  sells the project or otherwise  dispose  during the Contract  Period of
assets  financed by the SDTC funding,  SDTC may have a claim on a portion of the
proceeds.

In 2002 and 2003,  the Company  entered  into  amendments  to its  Research  and
Development  Contribution  agreement  with  the  Government  of  Canada  through
Technology   Partnerships   Canada  (TPC).  The  agreement  confirms  a  maximum
reimbursement cap of C$8.235 million (US$6.3 million).  The investment will help
the Company  further its  commercial-scale  demonstration  programs,  as well as
continue its research,  development and testing of DynaMotive's  BioThermTM fast
pyrolysis technology.

TPC is a key element in the federal government's innovation strategy, leveraging
private sector investments in research,  development and innovation in critical,
leading-edge  technologies.  DynaMotive originally entered into the Contribution
agreement with TPC in 1997 and as at December 31, 2003, has drawn US$2.8 million
to  fund  pre-commercial  BioThermTM  research  and  development.   The  amended
agreement  modifies and expands key terms and conditions  placed on the Company.
The Company is required to repay these funds from a  percentage  of future sales
up to a maximum of US$12.4 million.  The Company will focus all funding from the
amended Contribution  agreement towards construction of a full  commercial-scale
forestry demonstration BioOil facility in Canada.

In  2002,  the  Company  announced  that the US  Department  of  Energy  awarded
US$250,000 to a consortium  including the Company to determine the technical and
commercial  viability of  integrated  pyrolysis / combined  cycle  biomass power
systems (IPCC).

DynaMotive's US subsidiary,  its R&D partner RTI, Alliant Energy Corporation and
partner experts in power plant design,  electric  utility  operation and biomass
energy  conducted  the program.  The IPCC concept  combines a biomass  pyrolysis
plant with a  conventional  combined  cycle power plant.  In this system,  solid
biomass  is  converted  into a liquid  biooil  that is a mixture  of  oxygenated
hydrocarbons  and water.  This liquid  serves as fuel for a gas turbine  topping
cycle.  Waste  heat  from the gas  turbine  provides  thermal  energy to a steam
turbine bottoming cycle.

The proposed cycle could be  commercially  offered in the near term with minimal
research and development  needs. In contrast,  implementation of the value-added
products design will require the development of new technologies and will entail
some technological risk.

II.  RAW MATERIALS AND SUPPLIERS

For the most part, the Company's  products are custom designed and  manufactured
and are not  produced  for  inventory.  BioOil  units will only be produced  for
specific  projects with  procurement  commencing  when project  funding has been
fully committed.

The Company outsources the final assembly of its products prior to sale and does
not manufacture the major components of its systems. The manufactured components
and materials used in the Company's products are obtained from both domestic and


                                       14

<PAGE>

foreign sources. Historically,  lead-time for delivery of materials has not been
a problem.

While the  Company  has  intentionally  chosen  to use only a limited  number of
manufacturers to produce the components for its technologies,  in the opinion of
management,  the Company has a readily  available  supply of components  and raw
materials for all of its anticipated  products from various sources and does not
anticipate  any  difficulties  in obtaining  the  components  and raw  materials
necessary to its business.

The Company believes that this licensing and focused,  outsourced  manufacturing
strategy  allows  it to  deliver  superior  products  without  the high  capital
expenditures  that the Company would  otherwise  require in order to manufacture
the components in house. As a result of limiting the number of suppliers for the
key components  for the Company's  products,  the Company  believes it is better
able to control costs while still  maintaining high quality  specifications  for
the components'  manufacture.  Moreover,  the Company believes that it is better
able to limit  the  number of third  parties  who have  access to the  Company's
proprietary technologies.

III.  EFFECT OF GOVERNMENTAL AND ENVIRONMENTAL PROTECTION REGULATIONS

The  Company may be subject to material  federal,  provincial,  state or foreign
environmental  laws. If full commercial use of BioOil in power generation,  heat
and other  applications  commences,  the  Company  believes  that it may  become
subject to various federal, local and foreign laws and regulations pertaining to
the discharge of material  into the  environment,  the use of  biological  waste
products  as  feedstock,  and  otherwise  relating  to  the  protection  of  the
environment.  The Company  believes  that it will be able to fully comply in all
material  aspects with all such laws and  regulations to the extent that they be
deemed applicable to the Company's product with only limited resources  expected
to be required by the Company in so complying.

The Company believes that the environmental  regulations  currently imposed upon
the targeted  consumers of the Company's  primary  technologies are likely to be
maintained if not expanded upon for the foreseeable future. The Company believes
that the  imposition of such  regulations  upon these  targeted  customers  will
provide  significant  assistance to the Company's  ability to sell its products.
Any  stringent  environmental  protection  laws  enacted  in an area in  which a
targeted  customer is located  could further  enhance the  Company's  ability to
attract customers to use these products.

                                       15

<PAGE>

C.  Organizational Structure

(Please refer to the attached organization chart)



As of December 31, 2003, the Company had six wholly-owned subsidiaries plus 100%
ownership of a limited partnership:  DynaMotive Corporation (incorporated in the
State of Rhode Island in 1990),  DynaMotive  Europe Limited  (formerly  known as
DynaMotive  Technologies (UK) Ltd., incorporated in the United Kingdom in 1996),
DynaMotive Canada,  Inc.  (incorporated in Canada in November 2000),  DynaMotive
ElectroChem  Corporation  (incorporated  in the Province of British  Columbia in
1993),  DynaMillTM  Systems  Limited  (incorporated  in the  Province of British
Columbia in 1996),  DynaMotive Puerto Rico, Inc. (incorporated in Puerto Rico in
1997) and the West Lorne BioOil Co-Generation  Limited Partnership (the "Limited
Partnership") which was formed in Ontario,  Canada in September 2003. The latter
three  corporations are currently  inactive.  DynaMotive Canada Inc. acts as the
General Partner of the Limited  Partnership,  which will develop and operate the
Erie Flooring Project. In April 2001,  DynaMotive Europe Ltd.,  purchased 75% of
the shares of Border Biofuels Ltd. (BBL), a United Kingdom company.  In December
2002, BBL was placed into  liquidation  and the Company now accounts for it as a
discontinued   operation  (see  note  4  of  the  Company's   audited  financial
statements).

D.  Property, Plants and Equipment.

The Company's office facilities are leased. The Company's corporate headquarters
are  located  in  a  business  park  complex  in  Vancouver,   BC,  Canada  with
approximately  4,400 square feet of office space.  In February 2004, the Company
entered into a five-year  lease for  approximately  8,000 square feet at he same
address.

Since December 2002, the Company's 10 tpd pilot plant has been in storage and is
intended for use to demonstrate the feasibility of new biomass waste streams.

In addition to furniture and computer  equipment,  the majority of the Company's
capital  assets  consist  of  capital  assets  under  construction  for the Erie
Flooring  Project,  initial  amounts  paid for the second 100 tpd plant and test
equipment (10 tpd pilot plant).


                                       16

<PAGE>

Item 5. Operating and Financial Review and Prospects

THE  FOREGOING  DISCUSSION IN "OPERATING  AND  FINANCIAL  REVIEW AND  PROSPECTS"
CONTAINS  FORWARD-LOOKING  STATEMENTS  CONCERNING,  AMONG OTHER  THINGS,  FUTURE
ENERGY PRICES,  THE AMOUNT OF SAVINGS DUE TO THE COMPANY'S COST CUTTING  PROGRAM
AND  THE  LEVEL  OF  FUTURE  CAPITAL  EXPENDITURES.   THESE  STATEMENTS  REFLECT
MANAGEMENT'S   CURRENT  VIEWS  WITH  RESPECT  TO  FUTURE  EVENTS  AND  FINANCIAL
PERFORMANCE.  THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANY ASSUMPTIONS AND
FACTORS INCLUDING COMPETITIVE PRICING FOR PRODUCTS,  COMMODITY PRICES,  ECONOMIC
CONDITIONS IN COUNTRIES WHERE THE COMPANY DOES BUSINESS, THE EFFECTS OF CURRENCY
FLUCTUATIONS  AND THE  EFFECTS OF  GOVERNMENT  REGULATIONS.  ANY CHANGES IN SUCH
ASSUMPTIONS OR FACTORS COULD PRODUCE SIGNIFICANTLY DIFFERENT RESULTS.

OVERVIEW

This  section  should  be read  in  conjunction  with  the  Company's  financial
statements included under Item 17 of this Form 20-F.


In 2003, DynaMotive continued its research and development activities related to
its BioTherm  technology along with business  development  activities to develop
initial commercial projects and market acceptance of BioOil.  Ongoing operations
were focused in Canada.

A. RESULTS OF OPERATIONS

For the years 2003,  2002 and 2001,  the Company had expended on an annual basis
$969,419,  $453,710 and $677,482 respectively,  on research and development.  Of
these amounts, $456,438,  $288,445 and $60,667 respectively,  were reimbursed by
government  funding.  The remainder of the respective  annual  expenditures were
paid by the  Company.  The level of research  and  development  expenditure  has
increased  in the  current  year in support  of  development  of the  commercial
demonstration  plant and other product development  activities.  Future research
and development expenditures are expected to be at a similar or increased level.

The Company has been able to draw  significantly  from government grant and loan
facilities,  including the Government of Canada's Technology Partnerships Canada
program both for  expenditures  made in 2002 and technical  and project  related
expenditures  in 2003.  The Company's  agreement  with  Technology  Partnerships
Canada pertains to maximum funding of C$8.235 million (US$6.3 million), of which
C$3.88 million (US$ 2.9 million) has been received as of year end 2003.

General and administrative salaries and benefits increased to $2,693,430 in 2003
from  $1,483,443  in 2002.  The  increase  in 2003 was  mainly due to the higher
market price of the company's  stock  resulting in higher  recorded  stock based
compensation  expenses.   General  and  administrative   salaries  and  benefits
increased to  $1,483,443 in 2002 from  $1,461,553 in 2001.  The increase in 2002
was mainly due to employing more internal consultants.

Professional  fees  increased to $954,223  (comprised of legal & accounting  and
audit fees of $297,349 and  consulting  fees of $656,874) in 2003 from  $861,199
(comprised of legal & accounting and audit fees of $322,876 and consulting  fees
of $538,323) in 2002.  The increase was due mainly to the higher market price of
the  company's  stock  resulting  in higher  recorded  stock based  compensation


                                       17

<PAGE>

expenses.  Professional  fees  decreased  to  $861,199  (comprised  of  legal  &
accounting and audit fees of $322,876 and  consulting  fees of $538,323) in 2002
from $1,970,843  (comprised of legal & accounting and audit fees of $378,379 and
consulting  fees of  $1,592,464)  in 2001.  The  decrease  was due  mainly  to a
reduction in consultants  replaced with permanent  staff and the  non-renewal of
certain consulting agreements.

Amortization  and  depreciation  decreased to $125,580 in 2003 from  $313,474 in
2002 due to the  write-down  of assets in 2002.  Amortization  and  depreciation
decreased  to $313,474 in 2002 from  $404,495 in 2001 due to the  write-down  of
assets in the Biolime unit.

Interest  and other  income  increased  to $73,974 in 2003 from $982 in 2002 due
mainly to increase of miscellaneous  revenue in 2003.  Interest and other income
decreased to $982 in 2002 from $18,405 in 2001 due to reduced cash resources and
related investments.

Interest expense  increased in 2003 to $320,643 from $123,013 in 2002 due mainly
to the increase in total liabilities and interest accretion on convertible loan.
Interest  expense  increased in 2002 to $123,013 from $26,080 in 2001 due mainly
to the interest accretion from the convertible loan.

Marketing  expense  decreased to $155,914 in 2003 from $183,294 in 2002 due to a
reduction  in the use of external  assistance.  Marketing  expense  decreased to
$183,294  in  2002  from  $670,415  in 2001  due to a  reduction  of  personnel,
including consulting assistance, to carry out market research and development of
markets for products from the BioOil process.

Office  supplies,  telephone  and  insurance  increased to $300,751 in 2003 from
$230,808  in 2002 due to the  increase  of  insurance  costs.  Office  supplies,
telephone and insurance  decreased to $230,808 in 2002 from $371,663 in 2001 due
to the reduction of staff.

Rent for leased premises decreased to $109,653 in 2003 from $515,446 in 2002 due
to the  elimination  of the pilot  plant space and U.K.  lease.  Rent for leased
premises  increased  to $515,446  in 2002 from  $351,738 in 2001 due to the full
year's rent for the office in London, U.K.

Currency  exchange  gain in 2003  amounted  to  $177,551  compared  to a gain of
$80,461 in 2002 due to the depreciation of the US Dollar.  Currency exchange ain
in 2002  amounted  to  $80,461  compared  to a gain of $6,313 in 2001 due to the
currency exchange on the European operations.

Loss on the  write-down  of long-term  assets was decreased to $nil in 2003 from
$872,114 in 2002.  No  write-down  occurred in 2003.  Loss on the  write-down of
long-term  assets was  increased to $872,114 in 2002 from  $585,078 in 2001.  In
2002,  DynaMill  assets in the amount of $46,944 and Wire Die Cleaning assets in
the amount of $31,303  were  written  off  because the Company is focused on the
application of BioOil for energy. The Company wrote-off its 2 TPD pilot plant of
$159,096 as it completed its testing.  Amounts  related to the10 TPD pilot plant
assets totaling $237,913 were partially written-down,  as the Company intends to
keep the 10 TPD plant for testing and market development purposes. The 50 TPD UK
pilot plant  development  assets of $212,749 were written-off due to the Company
focusing on the 100 demo plant in Canada.  Other  assets of $65,377 were written
off. Patents for DynaPower of $118,732 were written-down.

Overall capital  expenditures,  net of government grants and disposal,  used for
developing and patenting the Company's  technologies  increased to $1,502,100 in
2003 from $183,473 in 2002. Capital  expenditures for the BioThermTM  technology
increased  to  $1,497,398  in 2003 from  $182,637 in 2002.  The  increase in the
BioThermTM  capital  expenditures in 2003 was due to commencement of the 100 tpd
industrial  demonstration  plant in Ontario,  Canada and initial payments on the
second 100 tpd plant to be constructed at a Canadian forestry site.

                                       18

<PAGE>

Overall capital  expenditures,  net of government grants and disposal,  used for
developing  and patenting the  Company's  technologies  decreased to $183,473 in
2002 from $607,649 in 2001. Capital  expenditures for the BioThermTM  technology
decreased  to  $182,637  in 2002 from  $543,980  in 2001.  The  decrease  in the
BioThermTM  capital  expenditures  was  due to the  commissioning  of the 10 tpd
demonstration plant in 2001, followed by only limited capital expenditures being
required during 2002. Capital  expenditures for its BioOil Power Generation unit
were $182,637 in 2002 related to the design and  development of a 100 tpd BioOil
Demo Plant.

The  Company's  total  assets  increased to  $3,759,605  at the end of 2003 from
$1,285,813 at the end of 2002,  due mainly to the building of 100 tpd industrial
demo plants.  Capital  assets  increased to  $2,293,422 in 2003 from $750,409 in
2002 due to the building of 100 tpd industrial demo plants.  Current Liabilities
increased to  $2,035,168  at the end of 2003 from  $1,957,625 at the end of 2002
due almost entirely to a increase in accounts payable and accrued liabilities of
the 100 tpd industrial demo plants.  There were no long-term  liabilities at the
end of 2003 and 2002.

During the year ended  December 31, 2003,  the Company  recorded a net operating
loss of $4,984,681,  compared to a net operating loss of $5,261,607 for the year
2002.  The decrease in operating  loss in 2003 as compared to 2002 was primarily
attributable to (i) a decrease in amortization and depreciation, (ii) a decrease
in rent,  (iii) a decrease in loss on write-down  long-term  assets,  and (iv) a
decrease in loss from  discontinued  operations.  The net operating loss in 2003
reflected  professional fees totaling $954,223,  the majority of which, $592,385
was non-cash amounts paid in shares. The non-cash  rofessional fees in 2002 were
$546,286.  During the year ended December 31, 2002,  the Company  recorded a net
operating loss of $5,261,607, compared to a net operating loss of $6,838,264 for
the year 2001.  The decrease in  operating  loss in 2002 as compared to 2001 was
primarily  attributable to (i) a decrease in marketing expense,  (ii) a decrease
in professional  fees, (iii) a decrease in research & development  expense,  and
(iv) a decrease in Capital Tax expense.

The basic and diluted loss per common share  decreased to nine cents ($0.09) for
the year 2003 from twelve cents  ($0.12) for the year 2002.  The loss per common
share for the year 2001 was nineteen  cents  ($0.19).  The decrease in basic and
diluted  loss per  share for 2003 and 2002 was due to both the  decrease  in the
loss for each year and the  increase in the  weighted  average  number of Common
Shares  outstanding from 36,458,969  shares in 2001 to in 45,104,978 in 2002 and
56,617,490 in 2003.

B. LIQUIDITY AND  CAPITAL RESOURCES

Principal  sources of liquidity during the year ended December 31, 2003 were (i)
$2,321,852 in net proceeds ($2,413,473 gross) after deducting related ssue costs
and expenses from private placement offerings of the Company's Common Shares and
the exercise of Common Share options for cash,  (ii)  $1,476,012 in deposits for
Common  Shares to be issued in 2004  pursuant  to  private  placement  offerings
commenced in 2003, and (iii) $154,488 in project deposit received.

For the  previous  year  ended  December  31,  2002 were (i)  $1,545,400  in net
proceeds  ($1,546,669  gross) after  deducting  related issue costs and expenses
from private placement offerings of the Company's Common Shares and the exercise
of Common Share options for cash, (ii) $352,376 in deposits for Common Shares to
be issued in 2003 pursuant to private placement  offerings commenced in 2003 and
(iii)  convertible  loans  from  the  existing  shareholders  in the  amount  of
$263,416,  and  (iv)  $196,596  from a  short-term  bank  indebtedness.  For the
previous year ended December 31, 2001,  the principal  sources of liquidity were


                                       19

<PAGE>

(i) $1,995,094 in net proceeds  ($2,012,273 gross) after deducting related issue
costs and expenses  from private  placement  offerings of the  Company's  Common
Shares and the  exercise  of Common  Share  options for cash,  (ii)  $479,026 in
deposits for Common  Shares to be issued in 2002  pursuant to private  placement
offerings   commenced  in  2002  and  (iii)  $39,999  from  a  short-term   bank
indebtedness.

Overall cash flows  increased  during 2003 as the Company  raised more in equity
offerings than during 2002. During the year ended December 31, 2003, the Company
used cash in operating  activities and in investing activities of $2,742,215 and
$530,209   respectively,   and  generated  cash  from  financing  activities  of
$3,793,813.

During the  previous  year ended  December  31,  2002,  the Company used cash in
operating  activities  and in investing  activities  of  $2,347,796  and $64,902
respectively, and generated cash from financing activities of $2,357,788. During
the year ended December 31, 2001, the Company used cash in operating  activities
and in  investing  activities  of  $2,854,237  and  $672,105  respectively,  and
generated cash from financing activities of $2,514,119.

The net amount of cash used in operating activities during 2003 increased by 17%
of cash used in operating  activities  during 2002.  Cash generated in operating
activities  consisted  primarily of a net loss for 2003 of  $4,984,681  that was
offset  by (i)  amortization  of  non-cash  items in the sum of  $125,580,  (ii)
non-cash equity compensation expenses,  $2,427,857,  (iii) accretion of interest
on convertible  debt of $239,245 and (iv) net change in non-cash working capital
balances related to operations of $372,665.

The net amount of cash used in operating  activities  during 2002  decreased 17%
from 2001. Cash used in operating  activities  consisted primarily of a net loss
for 2002 of $5,261,607  that was  significantly  offset by (i)  amortization  of
non-cash  items  in the  sum of  $313,474,  (ii)  non-cash  equity  compensation
expenses,  $1,326,010,  (iii) write down of capital assets of $872,114, and (iv)
net  change in  non-cash  working  capital  balances  related to  operations  of
$451,059.

Financing activities during 2003 generated a net increase in cash of $3,793,813,
primarily  from the Company's  private  placements of Common  Shares.  Financing
activities during 2002 generated a net increase in cash of $2,357,788, primarily
from the Company's private placements of Common Shares.  Financing activities in
2001 generated a net cash increase of  $2,514,119,  primarily from the Company's
private placements of Common Shares.

Investing  activities  in  2003  resulted  in use of  cash,  net of  grants  and
disposal, in the amount of $530,209 that consisted of $491,057 that was incurred
in the acquisition of capital assets, $6,479 was expended on patents and $32,673
was expended other long-term  assets.  Investing  activities in 2002 resulted in
use of cash, net of grants and disposal, in the amount of $64,902 that consisted
of  $70,071  was  incurred  in the  acquisition  of capital  assets,  $7,946 was
expended on patents and offset by proceeds of $13,115 on the sale of  equipment.
Investing  activities  in  2001  resulted  in use of  cash,  net of  grants  and
disposal,  in the amount of $672,105 that  consisted of $576,460 was incurred in
the  acquisition of capital  assets,  $70,243 was incurred in the acquisition of
BBL,  $31,189  was  expended  on patents and offset by proceeds of $5,787 on the
sale of equipment.

During the first  quarter of 2003,  the Company  commenced  a private  placement
financing  of up to $2  million  and raised a total of $2.1  million,  including
$1.76 million in cash and cancellation of $390,006 in consulting fees payable by
the  Company  at  share  prices  ranging  from  $.15 to $.40 for a total of 11.5
million Common Shares  issued,  including  5.75 million  three-year  warrants to
purchase  the  Company's  Common  Share at prices  ranging from $.25 to $.67 per
share.

During the third  quarter of 2003,  the Company  commenced  a private  placement
financing of up to $2 million and raised a total of $2 million  during the first
tranche,  including  $1.66  million  in cash and  cancellation  of  $354,537  in
consulting fees payable by the Company at share prices ranging from $.19 to $.40
for a total of 5,858,769 Common Shares issued,  including  2,981,688  three-year
warrants to purchase the Company's  Common Share at prices  ranging from $.32 to


                                      20

<PAGE>

$.67 per share.  Subscribed  into the  placement  for a total of  $101,537  were
finder's fees (included in the $354,537  consulting fees amount) relating to the
funding  commenced during the first quarter for a total of 534,376 Common Shares
and 169,492 Common share purchase warrants issued.

Subsequent  to  year-end,  the Board  approved to increase  the funding  from $2
million to $4 million to further  assist the  Company in the  completion  of its
first commercial plant. As a result, the Company received  subscription funds of
$1.6 million relating to the second tranche of the private  placement  commenced
during the third  quarter  including  $1.3 million in cash and  cancellation  of
$288,637  in  consulting  fees  payable by the  Company at  subscription  prices
ranging from $.40 to $.485 per share.  3.7 million shares and 1.8 million Common
Share Purchase Warrants remain to be issued as a result of this funding.

In total,  the  Company  raised  during  the year an  aggregate  of  $4,169,941,
including  $3,425,398 in cash which includes $744,543 in consulting fees payable
by the Company for a total of  17,359,166  Common  Shares and  8,731,886  Common
Share Purchase Warrants.

With the  current  cash on hand  and  anticipated  sales  revenue,  the  Company
anticipates that it will require additional funding for its continued operations
and the commercialization of its BioThermTM  technologies through the year 2004.
Given market  conditions and other  factors,  there can be no guarantee that the
Company will be successful in securing additional finance. If adequate funds are
not  available on acceptable  terms when needed,  the Company may be required to
delay,  scale-back or eliminate the manufacturing,  marketing or sales of one or
more of its products or research and development programs.

The Company's 2004 financing  plan is structured to enable  construction  of the
Company's first commercial scale BioOil  Demonstration  manufacturing  facility.
The core of the strategy  surrounds  market and project  based equity  financing
that minimizes equity dilution while raising  sufficient  capital for operations
and projects.

In addition to contemplated equity offerings,  the Company expects to be able to
draw  significantly  from government  grant and loan  facilities,  including the
Government  of Canada's  Technology  Partnerships  program and from the approved
SDTC funding towards the Erie Flooring  Project.  The Company expects to draw in
2004 a significant portion of the remaining in the TPC project funding.

In connection with the Company's West Lorne project, the Company is committed to
outstanding  construction  commitments  of  approximately  $3.3  million and the
project expects to complete in summer of 2004.

The  Company's  funding plan for 2004 is  structured  so that equity  placements
explained  above  will  maintain  the  operations  for the next  twelve  months.
Additionally,  the Company  contemplates a private placement and project finance
strategy which,  with government  contributions  and other project funding,  are
expected to fund the commercial  demonstration projects which are expected to be
constructed  and  commissioned  during Q3, 2004.  Any delay in securing  project
funding for a project  will delay the  construction  and  commissioning  of that
project.

CRITICAL ACCOUNTING POLICIES

Our  consolidated  financial  statements  are prepared  based on the  accounting
policies described in Note 2 to our consolidated  financial  statements in "Item
17. Financial Statements" in this Annual Report on Form 20-F. The preparation of
financial  statements in conformity with Canadian generally accepted  accounting
principles requires management to make estimates and assumptions that affect the


                                       21

<PAGE>

amounts  reported in the financial  statements  and notes.  Actual results could
differ from these estimates.

Government Assistance And Investment Tax Credits

Government  assistance towards current expenses is included in the determination
of income for the period as a  reduction  of the  expenses  to which it relates.
Amounts received for future  expenditures  are recorded as a current  liability.
Government assistance towards the acquisition of capital assets is deducted from
the cost of the related capital assets.

Investment tax credits are accounted for under the cost reduction method whereby
they are netted  against  the  expense or  capital  asset to which they  relate.
Investment tax credits are recorded when the Company has incurred the qualifying
expenditures and there is reasonable assurance the tax credits will be realized.

Research And Development Costs

Research  costs are  expensed  in the  period  incurred.  Development  costs are
expensed in the period  incurred  unless the Company  believes  the  development
project meets Canadian generally accepted  accounting  criteria for deferral and
amortization.  In evaluating these criteria the Company considers  technological
feasibility to be established only when a product demonstrates it operates under
conditions which are acceptable to target  customers.  If management  determines
that the  development  of products to which such costs have been  capitalized is
not reasonably  certain,  or that costs exceed recoverable value, such costs are
charged to operations.

Projects Under Development

The Company  expenses all  preliminary  stage costs  incurred  with respect to a
potential  capital  project,  including  costs related to the  consideration  of
alternatives,  feasibility  studies,  and  activities  occurring  prior  to  the
decision  to  proceed  with the  project  until the  capital  project  meets the
Company's  capitalization  policy and is considered a project under development.
The Company begins to capitalize  costs for projects under  development  when it
has  determined  that it is more  likely  than not that  the  financing  for the
capital  project is  available  and it is more  likely than not that the Company
will be able to meet the requisite local and other  governmental  regulations to
develop the capital project.

For those capital projects that meet the Company's  capitalization  policy,  the
Company  capitalizes  incremental costs that are directly  identifiable with the
specific capital project until the capital project is substantially complete and
ready for its intended use. Financing costs, including interest, are capitalized
when they arise from indebtedness incurred,  directly or indirectly,  to finance
the construction of the capital project.  Capitalization of financing costs will
cease when a capital  project is  considered  to be  substantially  complete and
ready for its intended use.

Annually,  or more frequently as  circumstances  require,  the Company  performs
periodic  evaluations  to  assess  the  recoverability  of  its  projects  under
development. When the carrying value of projects under development is determined
to exceed its recoverable  amount,  an impairment loss is recorded to reduce the
carrying value of the projects under development to its fair value.

Stock Based Compensation Plan

                                       22

<PAGE>

The Company has two stock based compensation plans - a stock appreciation rights
("SA Rights") plan and a stock option plan for  directors and  employees,  which
are  described in note 9 of the  consolidated  financial  statements.  Under the
terms of the stock  option plan the  Company may grant fixed  options or options
whose vesting is contingent on future  performance.  Compensation  is recognized
under the  intrinsic  method when fixed or  performance  based stock options are
granted  to  employees  and  directors.  Compensation  is  recognized  using the
intrinsic  method for SA Rights when the  performance  criteria has been met and
the SA Rights are vested.

The Company has a compensation  arrangement with several officers of the Company
whereby the  officers  receive a fixed  number of common  shares per month.  The
Company  records  compensation  expense  monthly  based on the month- end quoted
market price of the Company's stock.

In  addition,  the Company has entered  into  compensation  arrangements,  which
entitle non-employees to specific amounts, which can only be settled by applying
the amounts to exercise  outstanding  options to purchase  common shares monthly
over a period  of up to  twelve  months.  The  Company  recognizes  compensation
expense  based  on the  fair  value  of the  common  stock  issuable  under  the
arrangement,  when related  services are performed.  The common shares  issuable
under these  arrangements  are  generally  issued in the quarter  following  the
period in which they are earned.

The Company may also issue stock  options,  and  warrants as  consideration  for
services  rendered by  non-employees.  Such equity  awards are recorded at their
fair value,  as  compensation  expense or  capitalized  to capital  assets under
construction  when the  Company  receives  the related  services  and the equity
awards vest.  No  compensation  is  recognized  in  connection  with options and
warrants  awarded in connection with private  placements,  since the share issue
costs are netted against the proceeds raised.

If shares or stock options are repurchased, the excess of the consideration paid
over the carrying  value of the shares or stock options  cancelled is charged to
contributed surplus or deficit.

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES, ETC.

The  Company  considers  patents  to be an  important  aspect  of the  Company's
business.  The Company aggressively  protects its intellectual  property such as
rademarks,  patents,  product designs,  manufacturing  processes and new product
research and concepts.  These rights are protected  through the  development and
acquisition  of utility and design  patents  and  trademark  registrations,  the
maintenance  of trade secrets and, when  necessary and  appropriate,  litigation
against those who, in the  Company's  opinion,  are competing  unfairly with the
Company. The Company also maintains stringent procedures to maintain the secrecy
of  its  confidential  business   information.   These  procedures  include  the
establishment  of "need to  know"  criteria  for the  dissemination  of  certain
information and the use of written confidentiality agreements in cases where the
sharing of proprietary information with third parties is necessary.

As of December 31, 2003, the Company has active inventions  protected by patents
issued and patents  pending via in-house  development or license.  The Company's
key U.S. patents are scheduled to expire in year 2016.

The key  BioTherm  patents  expire in years  2016 and 2017 in all  jurisdictions
except India where they expire in 2010.

Research costs are expensed in the year incurred. Development costs are expensed
in the year incurred unless the Company  believes the development  project meets


                                      23

<PAGE>

Canadian generally accepted  accounting  criteria for deferral and amortization.
In evaluating these criteria the Company considers technological  feasibility to
be established  only when a product  demonstrates it operates under  conditions,
which are acceptable to target customers.

If management  determines  that the  development of products to which such costs
have  been  capitalized  is  not  reasonably   certain,  or  that  costs  exceed
recoverable value, such costs are charged to operations

Please refer to the Item 5 (a) Results of operations for additional  information
on research and development.

D. TREND INFORMATION.

The Company's BioTherm technology produces BioOil, a fuel that will compete with
conventional  energy  sources.  Therefore,  price  trends  in the  broad  energy
industry  and  developments  in the  alternative  energy  sector will effect the
commercial viability and attractiveness of BioOil.  Early technical  development
and market acceptance of BioOil is significantly effected by the availability of
ongoing  governmental  financial support for the alternative  energy industry in
general and for the Company's BioTherm process in particular.

E. OFF-BALANCE SHEET ARRANGEMENTS

Nil

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The  following  table  provides  as of  December  31,  2003 the known  long term
obligations and commitments of the Company:


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Contractual Obligations           Total     Less than     1 - 3      3 - 5    More than
                                             1 year       years      years      years
-----------------------------------------------------------------------------------------
<S>                             <C>         <C>         <C>         <C>       <C>
Operating lease obligations -
 Office equipment                6,246       6,246         Nil        Nil         Nil
-----------------------------------------------------------------------------------------
Premise lease obligations -
 Head office                   647,177      81,125      241,280     275,833     48,939
-----------------------------------------------------------------------------------------
Total                          653,423      87,371      241,280     275,833     48,939
-----------------------------------------------------------------------------------------
</TABLE>



We have  operating  lease for office  facilities  of our head  office and office
equipment.

G. Safe Harbor

Forward Looking Statement
Statements in this report  concerning the company's  business  outlook or future
economic performance;  anticipated profitability,  revenues,  expenses, or other
financial items; and statements  concerning  assumptions made or expectations as
to  any  future  events,   conditions,   performance   or  other  matters,   are
"forward-looking   statements"  as  that  term  is  defined  under  the  Federal
Securities Laws.  Forward-looking statements are subject to risks, uncertainties
and other factors  which could cause actual  results to differ  materially  from
those stored in such statements.  Such risks, uncertainties and factors include,
but are not  limited to,  future  capital  needs,  changes and delays in product
development plans and schedules, customer acceptance of new products, changes in
pricing or other  actions by  competitors,  patents owned by the Company and its
competitors, and general economic conditions, as well as other risks detailed in
the Company's filings with the Securities and Exchange Commission



                                       24

<PAGE>


Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management
As at March 31, 2004, the Company's directors and executive officers are:

Name                            Age           Position

Richard Chen-Hsing Lin (2)(3)    60       Chairman, Vice President, Asian
                                          Affairs and Director

R. Andrew Kingston (3)           44       President, Chief Executive Officer
                                          And Director

Curtin Winsor, Jr., Ph.D. (1)(2) 65       Director

Desmond Radlein, Ph.D. (1)(2)(3)  56       Director

Shing-Cheng Hong (1)             71       Director

Chih-Lin Chu                     37       Director

Brian Richardson                 41       Chief Financial Officer

Luc Duchesne, Ph.D.              43       Chief Forester

Warren Johnson                   44       Chief Technology Officer

Laura Santos                     54       Corporate Secretary

 (1) Member of the Audit  and Corporate Governance Committee of the Board of
     Directors.
 (2) Member of the Compensation Committee of the Board of Directors.
 (3) Member of the Executive Committee of the Board of Directors.

All  Directors  are  elected   annually  at  the  Company's  Annual  Meeting  of
Shareholders.  The executive officers of the Company are elected annually at the
first meeting of the Company's Board of Directors held after each annual meeting
of shareholders. Each director and executive officer of the Company holds office
until his or her  successor  is duly  elected and  qualified or until his or her
death or resignation or until he or she shall be removed in the manner  provided
by the Company's by-laws.  There is no arrangement or understanding  between any
director  or  executive  officer  and any  other  person  pursuant  to which any


                                       25

<PAGE>

director or  executive  officer is selected.  There are no family  relationships
between any director or executive officers.

Richard Chen Hsing Lin. Mr. Lin has been a Director of  the  Company  since 1992
and Chairman of the  Company  since  May of 1995. He was President of the Taiwan
Entrepreneurs  and  Investors   Association   in  Canada.  Mr.  Lin is also co-
founder,  Vice  President  and  Secretary of   Neoventi   Technology Corporation
since 1991  and   Neoventi  Investment  Corporation  since 1992, and  has been a
Director of Concert Industries Ltd. since December 1992. Mr. Lin  was  President
of the Taiwan Entrepreneurs Association in B.C., Vice President of R.C.A. Taiwan
and a Director of Consolidated Peritronics  Medical Inc.  from  February 1992 to
April 1994.

Robert Andrew Kingston. Mr. Kingston was  appointed President  and  CEO in April
1999. Mr. Kingston  has held  senior  positions in multi-national oil companies,
property  and  investment  corporations  and  financial  institutions in Europe,
the USA and South America. From   1996  to 1999, Mr.  Kingston  was  advisor  to
public  and  private   companies  in  the  U.S. Canada and the U.K. From 1995 to
1996, Mr. Kingston  was  senior advisor  to the Chairman of Rotch Property Group
Ltd., a UK property investment and  development  company  with  assets in excess
of US $1.8 billion.  From 1992  to  1995, Mr. Kingston  was  a financial advisor
on corporate restructuring for  Interpetrol S.A., a South  American  oil trading
company that  at  the  time  was  partly  owned  by  the  Argentine National Oil
Company (NYSE: YPF). He held a  number  of  positions  with  the Gatoil Group of
Companies   from    1986  to  1990, a  fully  integrated,  privately  owned  oil
conglomerate,  including   Managing Director of Gatoil Services (UK) Limited and
Financial Vice  President of  Gatoil  Enterprises Inc. (USA). He also worked for
Price   Waterhouse & Co.   and  Ducilo   S.A.,  a   subsidiary to E.I. DuPont de
Nemours & Co.

Curtin  Winsor,  Jr.,  Ph.D. Dr. Winsor has been a Director of the Company since
June 1996.  He received  his MA and Ph.D.  in Latin  American  Area  Studies and
History of  Diplomacy  from the  School of  International  Service  of  American
University  in  1979.  He  served  at  the   Department  of  State's  Office  of
Congressional  Relations  until 1971.  Dr.  Winsor became  Special  Assistant to
Senator Bob Dole, Chairman of the Republican National Committee,  from June 1971
to  May  1973.   Moving  to  the  private  sector,  he  served  as  Manager  for
International Affairs at the Washington office of Chase Manhattan Bank from 1973
to 1979. He helped to found the Alliance for Free  Enterprise in 1979 and served
as its Deputy  Director  until 1983. Dr. Winsor served as US Ambassador to Costa
Rica from 1983 to 1985. He continued to serve as  Consultant on Central  America
to the Under Secretary of Defense from 1985 to 1987. Dr. Winsor is a Governor of
the Donner  Canadian  Foundation of Toronto,  and a Trustee of the  Pan-American
Development  Foundation (of the  Organization of American States) in Washington,
DC. He has been the owner of the American  Chemical  Services Company of Marmet,
WV, which provides  chemical  blending,  storage and  distribution  services for
larger  chemical  companies  servicing  the coal industry for more than the past
five years.

Desmond Radlein, Ph.D.  Dr. Radlein became a Director of the Company in December
1997.  Dr.  Radlein  has  been    the   President of RTI -  Resource  Transforms
International, Ltd., an R&D company specializing  in  pyrolysis  technology  and
applications, since 1994. Dr. Radlein received a  B.Sc. in Chemistry (1986) from
the Alcan Scholar  University  of  the  West   Indies   in Jamaica  and M.Sc. in
Theoretical Chemistry (1970)  from  the  University  of  Calgary in Alberta.  He
received his Ph.D. from the  University of Cambridge, England (1975) in Physical
Chemistry. He was a member of the  Board of the Waterloo Region Community  Legal
Services from 1994 to 1995. Dr. Radlein was also an Associate Research Professor
at the Chemical Engineering Department of the University of Waterloo  from  1987
to 1994. He is an  inventor  or  co-inventor  of  10  patents  on  pyrolysis and
petroleum processing  and  has  also  authored  over  20 publications in various
scientific   journals. Some  of  his  research  activities    include: pyrolytic
production of fermentable sugars, fundamental   studies on   biomass   pyrolysis


                                       26

<PAGE>

mechanisms, catalytic hydropyrolysis   for   hydrocarbon production and catalyst
development for gasification.

Shing-Cheng Hong. Mr. Hong became a Director of  the  Company  in December 1997.
With 40 years  of  industrial  and   financial    background, Mr. Hong led a 42-
member management  team  of  Hotung  Venture  Capital  Corp. where  he served as
President until his retirement in 2001. Hotung is the  leading  venture  capital
group in Taiwan. Mr. Hong  still  serves  as  Chairman of Honho Consulting Corp.
which manages  the  Hong  Tung VC, a subsidiary  of  Hotung, with funds of US$55
million. He is also President of Taiwan  based  Giga  Venture Partners & Co. Mr.
Hong   is  also  Advisor  to  Taiwan    based   Acer  SoftCapital  Incorporated.

Chih-Lin Chu.  Mr. Chu became a Director of   the  Company  in  June 2001. He is
General Manager for Business Development at  China  Strategic  Holdings  Limited
(CSH)  since  March  2000. CSH  is  a  public  company  listed on  the Hong Kong
Exchange with investments  in  energy,  tire  manufacturing,  breweries,  paper,
pharmaceuticals and other   light   and heavy industries including power plants,
diesel engine manufacturing, cement,   chemical   plants,  electrical  machinery
and auto parts as   well   as  information  technology  and  e-commerce  related
projects. From 1999 to 2000, Mr.Chu   was Vice   Chairman   and President, China
Operation for  Tricom   Holdings   Limited, also a public   company in Hong Kong
with a focus   on   telecommunication   products.   Since  1994, Mr.Chu has been
involved in business development  and   government   relationship   in China for
various companies   including   Cathay   Pacific Airline O.B.C. G.S.A., Shanghai
E&T Wako Express Co. Ltd   and   Shanghai   Tricom Limited. Mr. Chu received his
MBA from the China Europe International Business School in China.

Brian  Richardson,  CA. Mr.  Richardson was appointed Chief Financial Officer of
the Company in August 2003.  From 1993 - 2002,  Mr.  Richardson  was a financial
consultant  in a variety of  industries,  including  working for four years as a
project manager for Westcoast Energy on gas and electric infrastructure projects
in Latin America.  In the early 1990's,  he was CFO of a publicly traded venture
capital  firm,  helping  to bring it onto the TSE via a reverse  take-over.  Mr.
Richardson also worked in investment banking,  and as CFO of a biotech start-up.
He has significant experience in project planning, management and control and in
working  with early stage  technology  companies.  Mr.  Richardson  received his
designation as a Chartered Accountant in 1987, and in 1990, graduated with a MBA
degree from IMD in Switzerland.

Luc Duchesne Ph.D. Dr.  Duchesne was appointed  Chief Forester of the Company in
August 2003.  He is a 13-year  veteran  research  scientist on  bioproducts  and
non-timber  forest  products  with Natural  Resources  Canada at the Great Lakes
Forestry  Center in Sault Ste  Marie,  Ontario.  He is one of  Canada's  leading
authorities  in  Non-timber   Forest  Products  and  has  been  instrumental  in
mainstreaming  this industry.  Dr. Duchesne is widely published in a broad range
of disciplines; he is the author or co-author of 85 book chapters and scientific
articles,  and has presented  over 150 lectures in symposia,  international  and
national meetings. He is an associate editor at of The Forestry Chronicle and of
Soil,  Water  and  Air  Pollution  and  has  taught  in 7  Universities  at  the
undergraduate and graduate levels.  Dr. Duchesne graduated in 1983 with a BSc in
Forest Ecology, Laval University; MSc in Forest Pathology, University of Toronto
in 1985 and Ph.D. in Botany, University of Guelph in 1988.

Warren Johnson, P.Eng. Mr. Warren   Johnson was   appointed   Chief   Technology
Officer in September 2001. Mr. Johnson   leads   the   BioOil design engineering
and construction group. Before joining the  Company,   he worked for 18 years in
the domestic   and   international   chemical,  pulp and paper and environmental
industries in  process   design,   design   and   construction   management, new
technology   development   and   commercialization,   start-up,   operations and
safety. His   recent   responsibility   included   technology   development  and
commercialization as VP, Engineering at Conor Pacific Environmental Technologies

                                       27

<PAGE>

Inc.  He is a Professional Engineer and holds a B.Sc. from   the   University of
Alberta.

Laura Santos.  Mrs.  Santos has been  Secretary of the Company since March 1998,
Assistant  Secretary and Executive  Assistant  since 1994.  Prior to joining the
Company,  she was Accounting  Supervisor  with Everex Systems from 1990 to 1993;
Senior Accounting Clerk with Walbar, Canada from 1989 to 1990 and with CitiBank,
N.A. and Chemical Bank in New York from 1983 to 1988.  She was also Assistant to
the Executive  Secretary of the Philippine  American  Chamber of Commerce in New
York from 1982 to 1983.  Mrs.  Santos  graduated  with a  Bachelor  of Fine Arts
degree from the University of the East, Philippines.

B. Compensation of Directors and Senior Management
The  following  table  contains  a summary  of  compensation  paid or payable to
directors and senior management during the year ended December 31, 2003*:

<TABLE>
<CAPTION>
                                                Long-term    Long-term
                                                Incentive    Incentive
Name                    Salary      Bonus         Plan         Plan
                         ($)         ($)           ($)         ($)
-----------------------------------------------------------------------
<S>                      <C>         <C>           <C>         <C>
Richard Chen-Hsing Lin   160,600**   6,692          -           -
Robert Andrew Kingston   233,413     9,702          -           -
Curtin Winsor, Jr., PhD    1,652**     -            -           -
Shing-Cheng Hong             457**     -            -           -
Desmond Radlein              577**     -            -           -
Chih-Lin Chu                -          -            -           -
Brian Richardson          77,268     4,461          -           -
Luc Duchesne              44,612     4,461          -           -
Warren Johnson           107,066     4,461          -           -
Laura Santos              60,670     2,528          -           -
-----------------------------------------------------------------------
</TABLE>

*Except as otherwise noted, all compensation are disclosed in U.S. dollars based
upon 2003's average exchange rate of $0.7138 per dollar.

**Salary includes both cash and share compensation. Please refer to Item 7-B for
details of Mr. Lin's compensation.

The  following  table lists stock  options  outstanding  at December 31, 2003 to
purchase common shares of the Company for directors and senior management:

                               Number of    Exercise     Expiry Date
Name                            Shares       Price
--------------------------------------------------------------------------------
Richard Chen Hsing Lin          56,000      $1.00     18-Jan-04 to 22-Dec-04
Richard Chen Hsing Lin         750,000      $0.50     2-Feb-05 to 28-Apr-06
Richard Chen Hsing Lin         300,000      $0.23     30-Aug-06
Richard Chen Hsing Lin         176,929      $0.20     30-Aug-05
Robert Andrew Kingston         775,000      $0.50     2-Feb-05 to 23-Feb-07
Robert Andrew Kingston         633,750      $0.20     30-Aug-05


                                       28

<PAGE>
                               Number of    Exercise     Expiry Date
Name                            Shares       Price
--------------------------------------------------------------------------------
Robert Andrew Kingston         300,000      $0.23     30-Aug-06
Robert Andrew Kingston       2,400,000      $0.22     30-Aug-06 to 22-Dec-06
Curtin Winsor, Jr., Ph.D        10,000      $1.00     3-Jun-04
Curtin Winsor, Jr., Ph.D        24,000      $0.90     9-Dec-06
Curtin Winsor, Jr., Ph.D        24,000      $0.33     22-Dec-08
Desmond Radlein, Ph.D           10,000      $1.00     12-Dec-04
Desmond Radlein, Ph.D           20,000      $0.90     9-Dec-06
Desmond Radlein, Ph.D           24,000      $0.33     22-Dec-08
Shing-Cheng Hong                10,000      $1.00     12-Dec-04
Shing-Cheng Hong                16,000      $0.90     9-Dec-06
Shing-Cheng Hong                16,000      $0.33     22-Dec-08
Chih-Lin Chu                    16,000      $0.90     9-Dec-06
Chih-Lin Chu                    16,000      $0.33     22-Dec-08
Luc Duchesne                   100,000      $0.50     30-Aug-06
Brian Richardson               240,000      $0.23     06-May-06
Brian Richardson               100,000      $0.45     30-Aug-06
Warren Johnson                 110,000      $1.00     31-Oct-04
Warren Johnson                 150,000      $0.50     31-Mar-06 to 29-Apr-06
Warren Johnson                  58,976      $0.20     30-Aug-05
Warren Johnson                 200,000      $0.23     31-Mar-06
Laura Santos                    80,000      $1.50     14-Jun-05 to 31-Jan-06
Laura Santos                    10,000      $1.00     2-Feb-05
Laura Santos                    15,000      $0.50     28-Apr-06
Laura Santos                   100,000      $0.23     30-Aug-07
Laura Santos                   33,4200      $0.20     30-Aug-05


C. Board Practices and Share Ownership
Members of the Board of  Directors  have served in their  respective  capacities
since  their  election.  Each  director  elected  will  hold  office  until  the
conclusion of the next Annual General Meeting of the Company at which a director
is elected,  unless the director's  office is earlier vacated in accordance with
the  Articles of the  Company or the  provisions  of the  Company  Act  (British
Columbia).

The Company maintains standing Executive, Compensation  and  Audit   Committees,
but  does  not  have  a   nominating   committee. The   Executive   Committee is
comprised   of   Dr. Desmond   Radlein, Messrs. R.  Andrew Kingston  and Richard
Chen-Hsing Lin. The purpose of the Committee is to act on  behalf of   the Board
to provide direction to management and to  authorize  and  approve  expenditures
in excess of the authority   delegated by  the  Board to   management, with such
approvals to be ratified by the Board at the next regular scheduled Meeting.

                                       29

<PAGE>

The Company's Audit and Corporate Governance Committee, whose   members  include
Drs. Curtin Winsor, Jr. and Desmond Radlein  and  Mr.  Shing-Cheng Hong, reviews
the financial  reporting  process   of   the   Company on behalf of the Board by
reviewing   the   independence   of   the   Company's  independent auditors, the
adequacy of   internal   controls, the   quality   of   financial reporting, and
accounting estimates involving the use of significant management judgment.

The Compensation  Committee of the Board of Directors makes  recommendations  to
the Board of Directors on compensation  issues,  including (i) salary levels for
officers;  (ii)  executive  compensation  plans;  (iii) the  review of  employee
benefit programs;  (iv) the review of proposed  compensation plans applicable to
the  Company's  officers  and  employees;  and  (v)  the  administration  of the
Company's  stock  option  plans as  authorized  by the Board.  The  Committee is
comprised  of Drs.  Desmond  Radlein  and Curtin  Winsor,  Jr.  and Mr.  Richard
Chen-Hsing Lin.

At the October 30, 2001 Board  Meeting,  the Board  approved a new  compensation
plan  proposed  by the  Compensation  Committee  for  non-management  Board  and
Committee members,  retroactive to July 1, 2001, as follows:  a) annual retainer
of 16,000, 8,000 and 4,000 stock options for Board members, Committee chairs and
Technical  Advisory  Committee  members,  respectively;  the  term of the  stock
options is for five (5) years and priced on the day of respective Annual General
Meeting ("AGM") of Shareholders for the year, based on the lower of the price of
that day or the average of the five trading days prior to the AGM date; b) Board
and  Committee  meeting fees - C$300 per meeting under two (2) hours and C$1,200
per meeting over two (2) hours;  Committee  chairs are  compensated  150% of the
above  rates.  The fees are  payable  in  shares  with  the  provision  that the
recipient may elect to receive up to 30% in cash, and shares are priced based on
the last trading day of the respective quarter at the lower of the price on such
day or the previous five (5) day trading average. The Compensation  Committee of
the Board regularly reviews the appropriateness of Director's compensation.  The
directors  are also  reimbursed  for  out-of-pocket  expenses such as reasonable
traveling,  hotel and other  expenses  incurred in and about the business of the
Company.

Executive officers of the Company  who also act as  directors  of the Company do
not receive any  additional compensation for services rendered in their capacity
as  directors,  other  than as paid by the Company to such executive officers in
their capacity as executive officers.

The following table sets out the names of directors and senior  management,  the
period of time during  which each has been a director  or senior  manager of the
Company,  and the number of common shares of the Company  beneficially  owned by
each of them,  directly or  indirectly,  or over which  control or  direction is
exercised and percentage of ownership as at March 31, 2004:


                                       30

<PAGE>

                                Periods during which       Shares Owned and %
                                   Has Served as a           of Ownership
                                 Director or Senior
Name                                   Manager
--------------------------------------------------------------------------------
Richard Chen-Hsing Lin(2)(3)       Since 1992               1,906,168 Common
Chairman, Vice-President, Asian                             shares (4) 2.44%
Affairs and Director
--------------------------------------------------------------------------------
Robert Andrew Kingston (3)         Since 1999                830,853 Common
President, Chief Executive                                  shares(5) 1.06%
Officer and Director
--------------------------------------------------------------------------------
Curtin Winsor, Jr., Ph.D.(1) (2)   Since 1996                248,557 Common
Director                                                     Shares 0.31%
--------------------------------------------------------------------------------
Desmond Radlein, Ph.D.(1) (2)(3)   Since 1997                44,563 Common
Director                                                     Shares 0.057%
--------------------------------------------------------------------------------
Shing-Cheng Hong(1)                Since 1997                40,836 Common
Director                                                     Shares 0.052%
--------------------------------------------------------------------------------
Chih-Lin Chu                       Since 2001                nil
Director
--------------------------------------------------------------------------------
Brian Richardson                   Since 2003                nil
Chief Financial Officer
--------------------------------------------------------------------------------
Luc Duchesne, Ph.D                 Since 2003                nil
Chief Forester
--------------------------------------------------------------------------------
Warren Johnson                     Since 2001                5,000 Common
Chief Technology Officer                                     shares 0.006%
--------------------------------------------------------------------------------
Laura Santos                       Since 1998                24,172 Common
Corporate Secretary                                          Shares 0.031%
--------------------------------------------------------------------------------
Notes:
(1) Member of the Audit and Corporate Governance Committee of the Board.
(2) Member of the Compensation Committee of the Board.
(3) Member of the Executive Committee of the Board.
(4) Includes 1,906,168 Common Shares, of which 1,733,256 Common Shares are
    held by Cantai Property  Limited,  a company  controlled by Mr. Lin of which
    60,000 Common Shares are held in escrow subject to the Company's  attainment
    of certain performance criteria; also includes 172,912 Common Shares held by
    Neoventi  Technology  Corporation  over which  Shares Mr. Lin has voting and
    disposition powers.
(5) Includes  830,853  Common  Shares  held by Cape Fear  Limited  a UK  company
    whereby Mr. Kingston serves as a director.

The number of shares  beneficially owned by the directors and senior management,
directly or  indirectly,  are based on  information  furnished by  Computershare
Trust Company of Canada, the registrar and transfer agent of the Company, and by
the  nominees  themselves.  The  Directors  and  Officers  beneficially  own  or
effectively control as a group a total of 3,100,149 shares which represent 3.97%
of the total issued and outstanding shares of the Company.


                                       31

<PAGE>

The Directors and Senior Management hold a total of 7,477,820 options. 5,265,820
options are exercisable between $0.20 and $0.33 each;  1,890,000 are exercisable
between $0.45 and $0.50 each; and 322,000 options are exercisable  between $0.90
and $1.50 each.  7,155,820  unexercised  options  were in the money based on the
average  trading  price of $0.63 per Common  share as listed on the OTC BB as at
March 31, 2004.

Percentage of class is calculated  based on the outstanding  common shares as at
March 31, 2004 of 77,917,558.

The  Company  has a Stock  Option  Plan (the  "Plan"),  enabling  the Company to
provide its  directors,  officers and employees  with an opportunity to share in
increases in the value of the Company's shares.  The Plan is intended to attract
and retain the services of directors, officers, employees and consultants to the
Company  for the  benefit of the  Company  and its  shareholders  and to provide
additional  incentive for such directors,  officers and employees to continue to
work  in the  best  interests  of  the  Company  and  its  shareholders  through
continuing  ownership of its Common Stock.  At March 31, 2004,  943,690  options
were issuable under the Plan and 10,743,944 options were outstanding at exercise
prices ranging from $0.20 to $1.50 per common share.

D. Employees
The  following  table lists the number of employees at the end of the period for
each of the past three financial years broken down by geographic location.

                          2003           2002          2001
---------------------------------------------------------------------------
Canada                     16             17            25
US                          1              2             2
UK                          1              2             6

                           18             21            33


Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders
To the Company's knowledge, it is not directly or indirectly owned or controlled
by another  corporation  or by any  foreign  government,  nor is it aware of any
person who owns more than 5% of the Company's common stock (the only outstanding
class of the Company's voting securities) except as noted below:

Shareholder Name and Address                   Number of      Percentage of
                                              Shares Held     Issued Shares
Cede & Co.(1)                                  24,092,824           30.9%.
Box 20
Bowling Green Station
New York, New York, 10274

The Canadian Depository for Securities         24,784,554           31.8%
Limited ("CDS")(1)
85 Richmond Street West
Toronto, Ontario   M5H 2C9


                                       32

<PAGE>

(1) Cede & Co. and CDS are brokerage clearing houses and hold shares on behalf
of brokerage firms.  Management of the Company is unaware of the beneficial
ownership of the shares although certain of these figures may include shares of
management held in their brokerage accounts.

The above information was supplied by Computershare Trust Company of Canada, the
Company's registrar and transfer agent.

Canadian law does not permit  disclosure  of the  beneficial  shareholders  of a
company's voting securities.

Major shareholders do not have different voting rights.

The Company knows of no arrangements  which may, at a subsequent date, result in
a change of control.

Computershare Trust Company of Canada (Computershare) is the Company's registrar
and transfer agent for the Company's shares. Computershare's records as of March
31, 2004 indicate  77,917,558  shares of common stock issued and  outstanding as
follows:

Residence of     Number of Holders    Number of Shares(1)   Percent
Shareholder
------------------------------------------------------------------------
Canada               93                 31,130,976           39.95%
U.S.A.              211                 24,351,775           31.25%
Other               117                 22,434,807           28.80%

Total               421                 77,917,558          100.00%

(1) Includes the total number of shares held by registered and beneficial
shareholders.

B. Related Party Transactions
Pursuant to a  Consulting  Agreement,  commencing  April 11, 2003 with Cape Fear
Limited  ("CFL")  until  December  31,  2007,  the Company pays a monthly fee of
$18,750 plus rate of inflation as published by Statistics Canada, to CFL for the
services  of Mr.  Kingston  as  President  and  Chief  Executive  Officer,  plus
reimbursement of out-of-pocket  expenses.  For the year ended December 31, 2003,
the Company paid CFL a total of $233,413 in cash. As per  consulting  agreement,
Mr.  Kingston  can also  earn a bonus of up to 50% of his base  compensation  if
certain milestones are achieved.  In the event that CFL's contract is terminated
by the Company, the terms of the contract shall remain in force.

Pursuant to a Consulting  Agreement,  commencing July 1, 2003 until December 31,
2007 with Cantai Property Ltd. ("Cantai"),  a company controlled by Mr. Lin, the
Company pays a monthly  consulting  fee of $13,384 to Cantai for the services of
Mr.  Lin,  plus  reimbursement  of  out-of-pocket  expenses.  For the year ended
December 31, 2003, the Company paid Cantai a total of $160,600,  $45,505 of this
amount was subscribed  into the Company's  private  placement at $0.15 per share
including a half a warrant,  expiring  three  years from issue to  purchase  the
Company's  common share at $0.25 per share.  Mr. Lin can also earn a bonus of up
to 50% of his base compensation if certain milestones are achieved. In the event
that Cantai's  contract is terminated by the Company,  the terms of the contract
shall remain in force.

Consulting  fees and share issue costs of $1,002,085 for the year ended December
31, 2003 have been paid to a shareholder of the Company.  Included in the amount
above, is $1,002,085 paid by stock based compensation.

As at December 31, 2003,  $32,673 was advanced to Desmond Radlein, a Director of
the  Company  in  connection  with  the  formation  of a joint  venture  for the


                                       33

<PAGE>

development of the Company's BioOil technology and related  products.  The joint
venture had not been formalized at December 31, 2003.

On June 3, 2003 the Company entered into a loan agreement with an officer of the
Company for $50,000.  The loan bear interest at 2% per month and have a 12-month
term.  The loan  agreement  also  calls for the  Company  to issue  0.5  million
warrants  exercisable  at $0.20  each for a period of five  years as part of the
loan  financings.  In December 2003, the Company repaid the loan and the lenders
released the Company from the general security agreement.


Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

See Item 17 and 18 for the Company's  Consolidated  Financial Statements for the
year ended December 31, 2003.

B. Significant Changes

Operations
The Company  focused its efforts during 2003 on development of its core BioTherm
technology and the  development of its first  commercial  scale (100 tpd) BioOil
production facility to be located in Ontario,  Canada. The Company completed the
sale of its  DynaPower  assets In April 2002 and in December  the  Company's  UK
operations  were  scaled  back  following  the  liquidation  of  its  75%  owned
subsidiary  BBL.  Accordingly,  the results of operations of BBL for the current
and prior periods have been accounted for as discontinued operations

In Canada,  the Company's R&D efforts with its 10 tpd pilot plant were completed
and all  continuing  efforts are now focused on development of the 100 tpd first
commercial  plant.  Opportunities in British Columbia continue to be pursued and
additional  projects were  investigated  including  promising  opportunities  in
Ontario and elsewhere.

Subsequent  to  year-end,  the  Company  signed a  Contribution  Agreement  with
Sustainable  Development  Technology  Canada  ("SDTC") that provides C$5 million
(US$3.75  million)  of  financial  support  for its  Erie  Flooring  BioOil  Co-
generation  project based in Ontario,  Canada. The project is being developed in
partnership   with  Orenda  division  of  Magellan   Aerospace,   Ontario  Power
Generation, UMA Engineering and Erie Flooring and Wood Products.

Financing Activities

The  Company's  financing  efforts  were  successful  to a  limited  degree  and
continued to support the Canadian focused operations of the Company. The Company
is continuing to raise equity capital in support of its project  development and
its ongoing operations.

                                       34

<PAGE>

Item 9. The Offer and Listing

DynaMotive Energy Systems  Corporation's Common Shares is traded on the Over the
Counter  Bulletin Board (OTC:BB) under the symbol  DYMTF.OB.  As at December 31,
2003,  the closing  market  sales price on the OTC BB for the  Company's  Common
Share was $0.59 per  share.  The  following  table  shows the High and Low sales
prices for the  securities  traded on the NASD OTC  Bulletin  Board for the five
years  ended;  quarter  ended  the past  three  years  and  three  months  ended
subsequent to year ended 2003 as follows:

Year Ended                    High        Low
----------                    ----        ---
1999                          1.88        0.25
2000                          4.11        0.28
2001                          1.69        0.49
2002                          0.67        0.18
3003                          0.79        0.14


Quarter Ended                 High        Low
-------------                 ----        ---
June 30, 2002                 0.50        0.27
September 30, 2002            0.41        0.26
December 31. 2002             0.67        0.18
March 31, 2003                0.22        0.14

June 30, 2003                 0.70        0.15
September 30, 2003            0.79        0.36
December 31, 2003             0.64        0.31
March 31, 2004                0.80        0.51


Month Ended                   High        Low
-----------                   ----        ---
November 2003                 0.60        0.33
December 2003                 0.64        0.57
January 2004                  0.61        0.51
February 2004                 0.58        0.54
March 2004                    0.80        0.55
April 2004                    0.67        0.57


The Company has never declared or paid cash dividends on its Common Shares.  The
Company currently  intends to retain its earnings,  if any, to provide funds for
the operation and expansion of its business and, therefore,  does not anticipate
declaring or paying cash dividends in the foreseeable future.

On June 10,  2003,  the  Company  received a cease  trade order from the British
Columbia  Securities  Commission  for  failure  to file the  Company's  year-end
financial  statements  on time.  On August 21,  2003,  the cease trade order was
revoked by the Executive Director of the British Columbia Securities  Commission
as a result of the Company's filing of the required 2003 financial report.

                                       35

<PAGE>

Item 10. Additional Information

A. Share capital

Not required.

B. Company Act Memorandum, Amendments and Articles of Incorporation

Previously filed as exhibits to the Company's Quarterly Report on Form 10-QSB
dated August 15, 2000 and Form 10-Q dated August 14, 2001. (Commission File
No. 0-27524).

C. Material contracts

There have been no material contracts entered into, other than contracts entered
into in the ordinary  course of business,  to which the Company or any member of
the group is a party,  for the two years  immediately  preceding  publication of
this document.

D. Exchange controls

Nil

There are no Canadian  laws,  decrees or  regulations  applicable to the Company
that  restrict the export or import of capital or that affect the  remittance of
dividends or other payments,  if any, to  non-resident  holders of the Company's
Common  Shares,  other than British  Columbia  corporate laws which restrict the
company from paying  dividends where the Company is or as a result of paying the
dividend will become insolvent.


E. Taxation

ALL  PROSPECTIVE  INVESTORS  ARE ADVISED TO CONSULT  THEIR OWN TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMMON SHARES.

Certain United States Federal Income Tax Consequences to United States
Holders

The  Canada-U.S.  Income Tax Convention  (1980),  as amended,  provides that the
normal 25% withholding tax rate is reduced to 15% on dividends paid on shares of
a  corporation  resident in Canada to residents of the United  States,  and also
provides for a further  reduction of this rate to 5% where the beneficial  owner
of the dividends is a  corporation  which is a resident of the United States and
which  owns at least 10% of the  voting  shares of the  corporation  paying  the
dividend.

Passive Foreign Investment Company


                                       36

<PAGE>

For any  taxable  year of the  Company,  if 75% or more of the  Company's  gross
income is  "passive  income"  (as defined in the Code) or if at least 50% of the
Company's  assets, by average fair market value (or by adjusted income tax bases
if the Company  elects),  are assets that produce or are held for the production
of passive  income,  the Company will be a Passive  Foreign  Investment  Company
("PFIC").  The Company  may be a PFIC and, if so, may  continue to be a PFIC for
the foreseeable future.

A U.S. Shareholder of a PFIC is subject to special U.S. federal income tax rules
in Sections 1291 to 1297 of the Code. As described  below,  these provisions set
forth two alternative tax regimes at the election of each such U.S. Shareholder,
depending  upon  whether the U.S.  Shareholder  elects to treat the Company as a
"qualified electing fund" (a "QEF Election").

1. The QEF Election Alternative

Each U.S.  Shareholder  is  strongly  urged to  consider  making a QEF  Election
because of the potential  benefits of such election that are discussed below and
because the Company  anticipates  that it will not have any earnings and profits
(as computed for United  States  federal  income tax  purposes)  for the current
taxable year and little,  if any,  earnings  and profits for any future  taxable
year in which the Company is a PFIC. (There can be no assurance,  however,  that
this will be the case.) Accordingly,  the timely making of the QEF election,  as
discussed below,  generally should, subject to the discussion below under "Other
PFIC Rules",  avoid any  significant  adverse  United States  federal income tax
consequences  resulting  from  any  classification  of the  Company  as a  PFIC,
although  this  may  depend  on  a  particular  U.S.  Shareholder's   particular
circumstances.

A U.S.  Shareholder  who elects in a timely manner to treat the Company as a QEF
(an  "Electing  U.S.  Shareholder")  will be subject,  under Section 1293 of the
Code, to current federal income tax for any taxable year in which the Company is
a PFIC (or is treated as a PFIC with  respect to the U.S.  Shareholder)  on such
Electing  U.S.  Shareholder's  pro-rata  share of the Company's (i) "net capital
gain" (the excess of net  long-term  capital  gain over net  short-term  capital
loss),  which  will be taxed as  long-term  capital  gain to the  Electing  U.S.
Shareholder  and (ii)  "ordinary  earnings"  (the excess of earnings and profits
over net capital gain),  which will be taxed as ordinary  income to the Electing
U.S. Shareholder,  in each case, for the shareholder's taxable year in which (or
with which) the Company's taxable year ends,  regardless of whether such amounts
actually are distributed. An Electing U.S. Shareholder,  however, would not take
into  account  any income with  respect to any  taxable  year of the Company for
which it has no earnings and  profits.  Adjustments  are  provided  generally to
prevent double taxation at the time of later distributions on or dispositions of
common shares.

The QEF election  also allows the Electing  U.S.  Shareholder  to (i)  generally
treat any gain  realized on the  disposition  of common  shares (or deemed to be
realized on the pledge of such  shareholder's  common  shares) as capital  gain;
(ii) treat such  shareholder's  share of the Company's net capital gain, if any,
as long-term capital gain instead of ordinary income;  (iii) probably  (although
in the absence of regulations  this matter is not free from doubt) retain in the
case of an individual Electing U.S. Shareholder,  the "step-up" in the tax basis
of common  shares to the fair  market  value of such  shares on the date of such
Electing U.S.  Shareholder's death (which would otherwise not be retained);  and
(iv) generally avoid interest charges resulting from PFIC status altogether.



                                       37

<PAGE>

In the event the Company is deemed a PFIC,  the  Company  intends to comply with
the reporting  requirements  prescribed by Treasury regulations.  In particular,
the Company will  maintain  information  so that the  ordinary  earnings and net
capital gain of the Company may be determined.  However,  future regulations may
contain  reporting and  record-keeping  requirements that are so onerous that it
would not be  practicable  for the Company to comply.  If,  after  review of the
requirements,  the Company  decides  not to comply with the PFIC  record-keeping
requirements, the Company will so notify its shareholders.

A QEF election must be made by attaching  the following  documents to the timely
filed U.S.  federal  income tax  return for the first  taxable  year of the U.S.
Shareholder  in which or with which a taxable  year of the Company  during which
the Company was a PFIC and the U.S.  Shareholder held (or was considered to have
held) common shares ends:  (i) a "Shareholder  Section 1295 Election  Statement"
executed by the U.S.  Shareholder,  (ii) a "PFIC Annual  Information  Statement"
received by the U.S.  Shareholder  from the Company,  and (iii) a Form 8621.  In
addition,  the Electing  U.S.  Shareholder  must file a copy of the  Shareholder
Section 1295 Election  Statement with the Internal Revenue Service Center,  P.O.
Box 21086, Philadelphia,  PA 19114. In the case of common shares owned through a
U.S. entity, the election is made at the entity level.

2. The Non-QEF Election Alternative

If a U.S.  Shareholder does not timely make a QEF election for the first taxable
year of the Company  during which he holds (or is considered to hold) the common
shares  in  question   and  the  Company  is  a  PFIC  (a   "Non-electing   U.S.
Shareholder"),  then special  rules under Section 1291 of the Code will apply to
(i) gains realized on the  disposition  (or deemed to be realized by reason of a
pledge) of common shares, and (ii) certain "excess distributions" (as defined in
the Code) by the  Company.  The  Company has never made any  distributions  with
respect  to the  common  shares  and it does  not  anticipate  making  any  such
distributions in the foreseeable future.

A  non-electing  U.S.  Shareholder  generally  would be required to pro-rate all
gains realized on the disposition of common shares and all excess  distributions
over such  shareholder's  entire holding period for the common shares. All gains
or  excess  distributions  allocated  to prior  years  of the  U.S.  Shareholder
(provided  that such periods are not prior to the first day of the first taxable
year of the Company during such U.S.  Shareholder's holding period and beginning
after  December  31, 1986 for which it was a PFIC) would be taxed at the highest
tax rates for each such prior  year  applicable  to  ordinary  income.  (Special
foreign tax credit  rules apply with  respect to  withholding  taxes  imposed on
amounts  that are  treated  as  excess  distributions.)  The  Non-electing  U.S.
Shareholder also would be liable for interest on the foregoing tax liability for
each such prior year  calculated as if such  liability had been due with respect
to  each  such  prior  year.  A  Non-electing  U.S.  Shareholder  that  is not a
corporation  must treat this  interest  charge as "personal  interest"  which is
non-deductible.  The  balance  of the gain or the  excess  distribution  will be
treated as ordinary income in the year of the disposition or distribution and no
interest charge will be incurred with respect to such balance.

If the Company is a PFIC for any taxable year during which a  Non-electing  U.S.
Shareholder  holds (or is  considered to hold) common  shares,  then the Company


                                       38

<PAGE>


will continue to be treated as a PFIC with respect to such common  shares,  even
if it is no longer  definitely  a PFIC.  A  Non-electing  U.S.  Shareholder  may
terminate  this deemed PFIC status by electing to recognize  gain (which will be
taxed under the rules discussed above for Non-electing U.S.  Shareholders) as if
such common  shares had been sold on the last day of the last  taxable  year for
which it was a PFIC.  Certain other elections are also available to Non-electing
U.S. Shareholders.

Other PFIC Rules:

Certain special,  generally adverse, rules will apply with respect to the common
shares while the Company is a PFIC,  regardless of whether the common shares are
held (or considered to be held) by an Electing or Non-electing U.S. Shareholder.
For example,  under Section 1297(b)(6) of the Code, a U.S.  Shareholder who uses
PFIC stock as security for a loan (including a margin loan) will,  except as may
be provided in regulations,  be treated as having made a taxable  disposition of
such stock.  In addition,  under Section 1291 (f) of the Code,  the Treasury has
authority to issue  regulations  that would treat as taxable  certain  transfers
that  are  generally  not so  treated,  such as  gifts,  exchanges  pursuant  to
corporate reorganizations, and transfers at death, although it is not clear that
such authority extends to transfers by Electing U.S. Shareholders.

F. Dividends and paying agents

Not applicable.

G. Statements by experts

Not applicable.

H. Documents on display

Documents  and  exhibits  referred to in this  document  may be inspected at the
offices of the Securities  and Exchange  Commission or obtained from the Company
by  telephoning  (604)  267-6013  or in  writing  at Suite  105 - 1700 West 75th
Avenue, Vancouver, BC, V6P 6G2.

I. Subsidiary Information

No applicable

Item 11. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to financial market risks,  including changes in interest
rates and foreign currencies.

FOREIGN CURRENCY RISK

The Company has  operations  in Canada,  the U.S.  and the United  Kingdom,  and
therefore the Company is subject to risks typical of an  international  business


                                       39

<PAGE>


including,  but not  limited  to,  differing  economic  conditions,  changes  in
political climate, differing tax structures,  other regulations and restrictions
and foreign exchange rate volatility.  Accordingly, the Company's future results
could be materially adversely affected by changes in these or other factors.

The Company can be adversely  affected when the Canadian  currency  appreciates.
Management has the ability,  to some extent, to time the exchange and enter into
forward  exchange  contracts in an attempt to mitigate such risk.  The Company's
financial statements are reported in U.S. currency.  The extent of the Company's
exposure depends on the degree of fluctuation in foreign currencies.  Due to the
nature  of  foreign  currency  exchange,  the exact  exposure  is  difficult  to
estimate.

The Company's sales, corresponding receivables   and   the   majority   of   its
expenses are in  Canadian  and U.S.   dollars.   The Company holds cash in U.S.,
Canadian and U.K.  funds,  and exchanges  from  U.S.  currency  to  Canadian and
U.K. currency as necessary.  Through  operations  in  Canada  and  the U.S., the
Company incurs  research  and  development   and   administrative   expenses  in
Canadian   dollars   and U.S. dollars  and potentially other foreign currencies.
The Company is exposed, in  the  normal  course of business, to foreign currency
risks on any non-Canadian dollar expenditures. The  Company  has  evaluated  its
exposure  to  these  risks  and has determined that the only significant foreign
currency exposure at  this  time  is to  the  U.S. dollar,  through  receipt  of
proceeds  of  U.S.  dollar  denominated  share  offerings.  At  this  time,  the
Company does not believe the exposure to other currency fluctuations is
material.

INTEREST RATE RISK

The Company invests its cash in a variety of short-term  financial  instruments,
including  bank deposits,  commercial  paper and money market  instruments.  Our
portfolio is diversified and consists  primarily of investment  grade securities
to minimize credit risk.  These  investments  are typically  denominated in U.S.
dollars.  Cash balances in other foreign  currencies are operating  balances and
are only invested in demand or short- term deposits of the local operating bank.
Investments  in both fixed rate and floating rate interest  earning  instruments
carry a degree of interest rate risk.  Fixed rate securities may have their fair
market  value  adversely  impacted  because of a rise in interest  rates,  while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors,  the Company's future  investment income may
fall short of expectations because of changes in interest rates or we may suffer
losses in  principal if forced to sell  securities  which have seen a decline in
market value because of changes in interest rates.

The  Company's  investments  are made in accordance  with an  investment  policy
approved  by  our  Board  of  Directors.   Under  this  policy,  all  short-term
investments must be made in investment grade securities with original maturities
of less than one year at the time of acquisition.

The Company does not attempt to reduce or eliminate its  investment  exposure to
interest rate risk through the use of derivative  financial  instruments  due to
the  short-term  nature of the  Company's  investments.  Based on a  sensitivity
analysis  performed on the  balances as of December 31, 2003,  the fair value of
short term investments would not be significantly impacted by either a 100 basis
point increase or decrease in interest rates.
The Company has no bank loans outstanding.


                                       40

<PAGE>

Item 12. Description Of Securities Other Than Equity Securities

Not applicable.


Part II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14. Material Modifications To The Right Of Security Holders and Use Of
Proceeds

Not applicable.

Item 15. Controls And Procedures

As a consequence  of the  Sarbanes-Oxley  Act of 2002,  the Company's  principal
executive and financial  officers are required to review the Company's  internal
controls  and  corporate  disclosure  controls  and  procedures  based  on their
evaluation  as of the date  within 90 days  prior to the  filing  of the  Annual
Report.  As of the date of  filing  of this  Annual  Report  the  executive  and
financial officers are currently reviewing the Company's controls and procedures
and  formalising  additional  policies  in regard to them.  It is not  currently
possible to provide a conclusion in regards to the  reliability of the Company's
internal  controls  however  the  Company  notes that its modest  asset base and
relatively limited number of individually significant transactions suggests that
sophisticated  financial  and  disclosure  controls and  procedures  will not be
warranted for the Company.  The Company's financial  procedures require that two
persons who are either  officers or directors sign all cheques and other banking
documents. There have not been any significant changes in the Company's internal
controls or other factors that could  significantly  affect these  controls over
the last  several  years.  The  Company's  disclosure  of  financial  and  other
operational  results  is only made after  they have been  reviewed  by the Chief
Executive and Chief Financial officers and by the board.

Item 16. [Reserved]

ITEM 16A. Audit committee financial expert

Our board of directors has determined that Mr. Shing-Cheng Hong is the
committee financial expert on our audit committee. For details on his
professional career see "Item 6. Directors, Senior Management and Employees".

ITEM 16B Code of Ethics

The  Company  has  adopted a code of ethics  which  requires  all  employees  to
acknowledge a responsibility  for honest,  fair and respectful  dealings between
the  Company and its  employees,  customers  and  suppliers.  The Code  requires
observance of high standards of respect for the laws applicable to the Company's


                                       41

<PAGE>


business  activities  and  precludes  offering or  accepting  any benefit from a
customer or supplier  which could be construed as an improper  inducement  to do
business.  The Company's insiders  acknowledge their  responsibility for careful
compliance  with corporate  disclosure and securities  trading laws. The Code is
available for review on the Company's website.

ITEM 16C Principal accountant fees and services

A summary of accountant fees and services are provided in a table below:

                                     Total Fees
                             -------------------------
                               2003              2002
                               ----              ----
Audit Fees (1)                122,698           86,613
Audit-Related Fees (2)              -                -
Tax Fees (3)                    7,923              701
All Other Fees (4)                  -            5,413
------------------------------------------------------
Total                         130,621           92,727
------------------------------------------------------

(1) Audit fees are the  aggregate  fees billed by our external  auditors for the
audit of our annual  consolidated  financial  statements  and services  that are
normally  provided  by  external  auditors  in  connection  with  statutory  and
regulatory filings.

(2)  Audit-related  fees in 2003 and 2002 include fees related to services  that
are  reasonably  related  to the  performance  of the  audit  or  review  of our
financial statements but not included under "Audit Fees".

(3) Tax  fees in  2003  and  2002  include  fees  related  to  services  for tax
compliance and tax planning.

(4) All other fees  include  miscellaneous  financial  advises  other than above
categories.


Part III

Item 17. Financial Statements

Financial Statements required under this item are filed herewith and attached to
this Form 20-F and form part of this Annual Report.


                                       42

<PAGE>

Item 18. Financial Statements

Not applicable.

Index to Financial Statements

Auditors' Report
Consolidated Balance Sheets as at
       December 31, 2003 and December 31, 2002
Consolidated Statements of Loss for the years ended
       December 31, 2003,  December 31, 2002 and December 31, 2001  Consolidated
Statements of Deficit for the years ended
       December 31, 2003,  December 31, 2002 and December 31, 2001  Consolidated
Statements of Cash Flows for the years ended
       December  31,  2003,  December  31, 2002 and  December  31, 2001 Notes to
Consolidated Financial Statements


                                       43

<PAGE>


              Consolidated Financial Statements (in U.S. dollars)

                      DynaMotive Energy Systems Corporation
                           December 31, 2003 and 2002

                                      44

<PAGE>


                                AUDITORS' REPORT


To the Shareholders of
DynaMotive Energy Systems Corporation

We have audited the  consolidated  balance  sheets of DynaMotive  Energy Systems
Corporation as at December 31, 2003 and 2002 and the consolidated  statements of
loss,  deficit  and cash  flows for each of the years in the three  year  period
ended December 31, 2003. These financial  statements are the  responsibility  of
the company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  these consolidated  financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2003
and 2002 and the  results of its  operations  and its cash flows for each of the
years in the three year  period  ended  December  31,  2003 in  accordance  with
Canadian generally accepted accounting principles.


                                                           By: Ernst & Yang LLP
                                                           --------------------
Vancouver, Canada,                                         Ernst & Yang LLP
April 16, 2004.                                            Chartered Accountants


Comments by Auditors for U.S. Readers on Canada-United States Reporting
Difference

United  States  reporting  standards  for  auditors  require the  addition of an
explanatory  paragraph when the financial  statements are affected by conditions
and events that cast substantial doubt on the company's ability to continue as a
going concern,  such as those  described in Note 1 to the financial  statements.
Although we conducted  our audits in  accordance  with both  Canadian  generally
accepted  auditing  standards  and United  States  generally  accepted  auditing
standards,  our report to the shareholders  dated April 16, 2004 is expressed in
accordance with Canadian reporting  standards which do not permit a reference to
such  conditions  and events in the auditors'  report when these are  adequately
disclosed in the financial statements.

                                                           By: Ernst & Yang LLP
Vancouver, Canada,                                         ---------------------
April 16, 2004.                                            Chartered Accountants

                                       45
<PAGE>

DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia, Canada



                           CONSOLIDATED BALANCE SHEETS
        ( See Nature of Business and Going Concern Uncertainty - Note 1)
                       As at December 31 (in U.S. dollars)



<TABLE>
<CAPTION>
                                                                       2003             2002
                                                                        $                 $
 -------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>
 ASSETS [note 7]
 Current
 Cash                                                                  283,514             25,093
 Accounts receivable                                                    97,501             59,102
 Government grants receivable [note 15]                                732,776            160,316
 Prepaid expenses and deposits                                          74,280             78,846
 -------------------------------------------------------------------------------------------------
 Total current assets                                                1,188,071            323,357
 Other long-term assets                                                 32,673                 --
 Capital assets [note 5]                                             2,293,422            750,409
 Patents [note 6]                                                      245,439            212,047
 -------------------------------------------------------------------------------------------------
                                                                     3,759,605          1,285,813
 =================================================================================================

 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
 Current
 Short-term loans [note 7]                                                  --            158,539
 Accounts payable and accrued liabilities [notes 4(b) and 8]         1,880,680          1,698,052
 Project advance [note 17]                                             154,488                 --
 Convertible loans [note 12(c)]                                             --            101,034
 -------------------------------------------------------------------------------------------------
 Total liabilities                                                   2,035,168          1,957,625
 -------------------------------------------------------------------------------------------------
 Commitments and contingencies [notes 1, 11, 12 and 15]
 Shareholders' Equity (Deficiency)
 Share capital [note 9(b)]                                          30,907,990         27,553,040
 Shares to be issued [note 9(c)]                                     2,827,111            771,449
 Contributed surplus [note 9(h)]                                     4,815,679          2,698,998
 Cumulative translation adjustment                                    (690,107)          (543,744)
 Deficit                                                           (36,136,236)       (31,151,555)
 -------------------------------------------------------------------------------------------------
 Total shareholders' Equity (Deficiency)                             1,724,437           (671,812)
 -------------------------------------------------------------------------------------------------
                                                                     3,759,605          1,285,813
 =================================================================================================
</TABLE>
See accompanying notes

On behalf of the Board:


                         "Richard Lin"          "Andrew Kingston"
                         Director                Director

                                       46
<PAGE>

DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia

                         CONSOLIDATED STATEMENTS OF LOSS
                For the Year Ended December 31 (in U.S. dollars)



<TABLE>
<CAPTION>
                                                    2003              2002              2001
                                                     $                  $                 $
 -------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>              <C>
 REVENUE
 Sales                                                   --             68,569           274,360
 -------------------------------------------------------------------------------------------------

 EXPENSES [note 12]
 Cost of sales                                           --              6,587           205,898
 Amortization and depreciation                      125,580            313,474           404,495
 Interest expense [note 14]                         320,643            123,013            26,080
 Marketing [note 9(i)]                              155,914            183,294           670,415
 Office supplies, telephone and insurance           300,751            230,808           371,663
 Professional fees [note 9(i)]                      954,223            861,199         1,970,843
 Rent [note 9(i)]                                   109,653            515,446           351,738
 Research and development [note 15]                 512,981            165,265           616,815
 General and administrative salaries and
    benefits [note 9(i)]                          2,693,430          1,483,443         1,461,553

 Foreign Exchange gain                             (177,551)           (80,461)           (6,313)
 -------------------------------------------------------------------------------------------------
                                                  4,995,624          3,802,068         6,073,187
 -------------------------------------------------------------------------------------------------
 Loss from operations                            (4,995,624)        (3,733,499)       (5,798,827)

 OTHER REVENUE AND EXPENSES
 Interest and other income                           73,974                982            18,405
 Gain (loss) on asset disposals                          --            (31,615)           (3,170)
 Loss on write-down of long-term assets                  --           (872,114)         (585,078)
 [notes 5 and 6]
 Gain on recovery of government grants                   --            269,792                --
 [note 15]
 Capital tax expenses                                    --                 --           (68,791)
 -------------------------------------------------------------------------------------------------
                                                 (4,921,650)          (632,955)         (638,634)
 -------------------------------------------------------------------------------------------------
 Loss from continuing operations                 (4,921,650)        (4,366,454)       (6,437,461)

 Loss from discontinued operations [note 4]         (63,031)          (895,153)         (400,803)
 -------------------------------------------------------------------------------------------------
  Loss for the year                               (4,984,681)        (5,261,607)       (6,838,264)
 =================================================================================================

 Weighted average number of common
    shares outstanding [note 9[j]]               56,617,490         45,104,978        36,468,969
 =================================================================================================

 Basic and diluted loss per common share
 Continuing operations [note 9[j]]                    (0.09)             (0.10)            (0.18)
 Discontinued operations [note 9[j]]                    --               (0.02)            (0.01)
 -------------------------------------------------------------------------------------------------

 Loss per share                                       (0.09)             (0.12)            (0.19)
 =================================================================================================
</TABLE>
See accompanying notes


                                       47
<PAGE>

DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia

                       CONSOLIDATED STATEMENTS OF DEFICIT
                       As at December 31 (in U.S. dollars)



<TABLE>
<CAPTION>
                                                    2003              2002              2001
                                                     $                  $                 $
 -------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>               <C>
 Deficit, beginning of year                     (31,151,555)       (25,773,048)      (18,934,784)
 Effect of change in accounting policy                   --           (116,900)               --
 [note 3]
 -------------------------------------------------------------------------------------------------

 Deficit, beginning of year restated            (31,151,555)       (25,889,948)      (18,934,784)
 Loss for the year                               (4,984,681)        (5,261,607)       (6,838,264)
 -------------------------------------------------------------------------------------------------

 Deficit, end of year                           (36,136,236)       (31,151,555)      (25,773,048)
 =================================================================================================
</TABLE>

See accompanying notes

                                       48

<PAGE>

DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                       As at December 31 (in U.S. dollars)
<TABLE>
<CAPTION>
                                                    2003              2002              2001
                                                      $                 $                $
 -------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>               <C>
 OPERATING ACTIVITIES
 Loss for the year                                (4,984,681)       (5,261,607)       (6,838,264)
 Add items not involving cash:
    Amortization and depreciation                    125,580           313,474           404,495
    Interest-non cash                                239,245                --                --
    Loss on write-down of long-term assets                --           753,382           323,850
    Loss on write-down of patents                         --           118,732           261,228
    Stock based compensation [note 9(i)]           2,427,857         1,326,010         2,107,595
    Loss on discontinued operations                       --                --          (279,971)
    Other                                           (177,551)          (48,846)           (3,145)
 Net change in non-cash working capital
    balances related to operations [note 14]        (372,665)          451,059         1,169,975
 -------------------------------------------------------------------------------------------------
 Cash used in operating activities                (2,742,215)       (2,347,796)       (2,854,237)
 -------------------------------------------------------------------------------------------------

 FINANCING ACTIVITIES
 Increase (decrease) in bank indebtedness
    - short-term                                    (158,539)          196,596            39,999
 Increase in short term loan                         265,000                --                --
 Repayment of short term loan                       (265,000)               --                --
 Increase in project advance                         154,488                --                --
 Proceeds from convertible loan                           --           263,416                --
 Share capital issued                              2,321,852         1,545,400         1,995,094
 Shares to be issued                               1,476,012           352,376           479,026
 -------------------------------------------------------------------------------------------------
 Cash provided by financing activities             3,793,813         2,357,788         2,514,119
 -------------------------------------------------------------------------------------------------

 INVESTING ACTIVITIES
 Increase in other long-term assets                  (32,673)               --                --
 Increase in patent costs                             (6,479)           (7,946)          (31,189)
 Purchase of capital assets (net of
    government grants)                              (491,057)          (70,071)         (576,460)
 Acquisition costs                                        --                --           (70,243)
 Proceeds on sale of equipment                            --            13,115             5,787
 -------------------------------------------------------------------------------------------------
 Cash used in investing activities                  (530,209)          (64,902)         (672,105)
 -------------------------------------------------------------------------------------------------

 Increase (decrease) in cash and cash
    equivalents from operations                      521,389           (54,910)       (1,012,223)
 Effects of foreign exchange rate changes           (262,968)           18,462           (21,951)
 on cash
 -------------------------------------------------------------------------------------------------
 Increase (decrease) in cash and cash
    equivalents during year                          258,421           (36,448)       (1,034,174)
 Cash and cash equivalents, beginning of year         25,093            61,541         1,095,715

 -------------------------------------------------------------------------------------------------
 Cash and cash equivalents, end of year              283,514            25,093            61,541
 -------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes


                                       49

<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



1. NATURE OF BUSINESS AND GOING CONCERN UNCERTAINTY

[a]  Nature of business

DynaMotive  Energy  Systems  Corporation  ("the  Company" or  "Dynamotive")  was
incorporated  on April  11,  1991  under  the laws of the  Province  of  British
Columbia.  Dynamotive  is  focused  on  the  development  of  innovative  energy
solutions based on its patented fast pyrolysis system. The Company's focus is to
commercialize  its patented  BioOil  production  technology  and establish  this
technology for production of BioOil clean fuels.

In April 2001, the Company acquired Border Biofuels Limited ("BBL"), in the U.K.
In December  2002, BBL was  petitioned  into  bankruptcy by creditors and became
insolvent  [note 4]. In April 2002, the Company sold certain assets in its metal
cleaning subsidiary, DynaPower, Inc. to focus all of its resources on its BioOil
production technology [note 10].


[b]  Going concern uncertainty

These  financial  statements  have been  prepared in  accordance  with  Canadian
generally  accepted  accounting  principles  on a  going  concern  basis,  which
presumes  the  Company  will be able to realize  its assets  and  discharge  its
liabilities in the normal course of operations for the foreseeable future. As at
December 31, 2003, the Company has a working capital deficiency of $847,097, and
has incurred a loss of $4,984,681 for the year ended December 31, 2003.

The  ability of the Company to  continue  as a going  concern is in  substantial
doubt and  dependent on achieving  profitable  operations,  commercializing  its
BioOil production  technology and obtaining the necessary  financing in order to
develop this  technology.  The outcome of these  matters  cannot be predicted at
this time. The Company is in the process of raising additional capital financing
in  order  to  continue  its  operations,  fund  its  research  and  development
activities,  and ensure  orderly  realization of its assets and discharge of its
liabilities.

                                       50

<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



1. NATURE OF BUSINESS AND GOING CONCERN UNCERTAINTY (cont'd.)

The Company is not expected to be  profitable  during the ensuing  twelve months
and therefore must rely on securing additional funds from government sources and
by the issuance of shares of the Company for cash  consideration.  Subsequent to
the  period-end,  the  Company  has  received  additional  commitments  from the
Canadian  governmental  agencies and has received  additional  equity  financing
[note 19].

The  consolidated  financial  statements do not reflect  adjustments in carrying
values and  classifications  of assets and  liabilities  that would be necessary
should the Company not be able to continue its operations.


2. SIGNIFICANT ACCOUNTING POLICIES

The  consolidated  financial  statements  have been  prepared by  management  in
accordance with Canadian generally accepted accounting principles.

The  following  is a summary  of  significant  accounting  policies  used in the
preparation of these consolidated financial statements:

Principles of consolidation

These consolidated  financial statements include the accounts of the Company and
its wholly-owned  subsidiaries  DynaMotive  Corporation,  incorporated under the
laws of Rhode Island, U.S.A.; DynaMotive Europe Limited,  incorporated under the
laws of the United Kingdom; DynaMotive Canada Inc., federally incorporated under
the laws of  Canada;  DynaPower  Inc.,  incorporated  under the laws of  British
Columbia [note 10]; DynaMotive Puerto Rico, Inc., incorporated under the laws of
Puerto  Rico;  DynaMill  Systems Ltd. and  DynaMotive  Electrochem  Corporation,
incorporated  under the laws of  British  Columbia,  and the West  Lorne  BioOil
Co-Generation Limited Partnership formed under the laws of Ontario.

The consolidated  financial  statements include the results of operations of BBL
 as discontinued  operations [note 4].  DynaMotive  Electrochem  Corporation,
DynaMill  Systems Ltd. and DynaMotive  Puerto Rico,  Inc. are companies with no
significant net assets or operations.


                                       51

<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)

Use of estimates

The preparation of financial  statements in conformity  with Canadian  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from these estimates.

Foreign currency translation

The accounts of the Company and its consolidated subsidiaries are measured using
the Canadian dollar as the functional  currency.  Monetary items  denominated in
foreign  currencies are translated into Canadian dollars using exchange rates in
effect at the balance sheet date and  non-monetary  items are  translated  using
historical  exchange rates.  Exchange gains or losses arising on the translation
or settlement of foreign currency denominated monetary items are included in the
determination of net income.

The Company uses the U.S. dollar as the reporting  currency for its consolidated
financial  statements.  Assets and liabilities are translated into U.S.  dollars
using current exchange rates in effect at the balance sheet date and revenue and
expense  accounts  are  translated  using the average  exchange  rate during the
period.   Gains  and  losses   resulting  from  this  process  are  recorded  in
shareholders' equity as an adjustment to the cumulative  translation  adjustment
account.

Revenue recognition

[a] Revenue from the sale of products is recognized upon shipment of the product
    to the customer.

[b]  Revenue from contracts  relating to  implementation  of the Company's metal
     cleaning  systems in a commercial  application is recognized on a completed
     contract  basis,  except for those which are greater  than three  months in
     duration,  for which  revenue is  recognized  on a percentage of completion
     basis  where the basis of measure of  performance  is based on  engineering
     estimates of  completion.  Losses on contracts are fully  provided for when
     they become known.

[c]  Revenue from services contracts is recognized when the services are
     provided.

                                       52

<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)

[d]  Royalty  revenue is  recognized  when the  Company  has earned the right to
     collect  payment  pursuant to the terms of the relevant  agreement and when
     the amount is reasonably determinable and collectible.

Government assistance and investment tax credits

Government  assistance towards current expenses is included in the determination
of income for the period as a  reduction  of the  expenses  to which it relates.
Amounts received for future  expenditures  are recorded as a current  liability.
Government assistance towards the acquisition of capital assets is deducted from
the cost of the related capital assets.

Investment tax credits are accounted for under the cost reduction method whereby
they are netted  against  the  expense or  capital  asset to which they  relate.
Investment tax credits are recorded when the Company has incurred the qualifying
expenditures and there is reasonable assurance the tax credits will be realized.

Research and development costs

Research  costs are  expensed  in the  period  incurred.  Development  costs are
expensed in the period  incurred  unless the Company  believes  the  development
project meets Canadian generally accepted  accounting  criteria for deferral and
amortization.  In evaluating these criteria the Company considers  technological
feasibility to be established only when a product demonstrates it operates under
conditions which are acceptable to target  customers.  If management  determines
that the  development  of products to which such costs have been  capitalized is
not reasonably  certain,  or that costs exceed recoverable value, such costs are
charged to operations.

Patents

Patents are recorded at cost,  including  related legal costs, and are amortized
on a  straight-line  basis over the lesser of the  estimated  useful life of the
related  technology  and  the  life of the  patent  commencing  with  commercial
production.  If  management  determines  that  development  of products to which
patent costs relate is not reasonably  certain, or that costs exceed recoverable
value,  such costs are charged to  operations.  Due to the  long-term  nature of
estimates  inherent in  determining  future cash flows,  it is possible that the
future cash flows or the  estimated  useful life of such assets could be reduced
in the future.


                                       53
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)

Capital assets

Capital assets are recorded at cost, net of government assistance, and amortized
using the following methods and annual rates:

     Furniture and fixtures            20% declining balance
     Computer equipment                30% declining balance
     Computer software                 100% declining balance
     Test equipment                    20% declining balance
     Leasehold improvements            Straight line over the term of the lease
     Motor vehicles                    50% the first year and 25% thereafter
                                        declining balance

Annually,  or more frequently as  circumstances  require,  the Company  performs
periodic  evaluations to assess the  recoverability of its capital assets.  When
the carrying  value of capital  assets is determined  to exceed its  recoverable
amount,  an  impairment  loss is  recorded to reduce the  carrying  value of the
capital asset to its fair value.  In 2002 and 2001, the Company  determined that
write-downs of the carrying values of certain assets were required [note 5].

Projects under development

The Company  expenses all  preliminary  stage costs  incurred  with respect to a
potential  capital  project,  including  costs related to the  consideration  of
alternatives,  feasibility  studies,  and  activities  occurring  prior  to  the
decision  to  proceed  with the  project  until the  capital  project  meets the
Company's  capitalization  policy and is considered a project under development.
The Company begins to capitalize  costs for projects under  development  when it
has  determined  that it is more  likely  than not that  the  financing  for the
capital  project is  available  and it is more  likely than not that the Company
will be able to meet the requisite local and other  governmental  regulations to
develop the capital project.

For those capital projects that meet the Company's  capitalization  policy,  the
Company  capitalizes  incremental costs that are directly  identifiable with the
specific capital project until the capital project is substantially complete and
ready for its intended use. Financing costs, including interest, are capitalized
when they arise from indebtedness incurred,  directly or indirectly,  to finance
the construction of the capital project.  Capitalization of financing costs will
cease when a capital  project is  considered  to be  substantially  complete and
ready for its intended use.


                                       54
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)

Annually,  or more frequently as  circumstances  require,  the Company  performs
periodic  evaluations  to  assess  the  recoverability  of  its  projects  under
development. When the carrying value of projects under development is determined
to exceed its recoverable  amount,  an impairment loss is recorded to reduce the
carrying value of the projects under development to its fair value.

Cash

The Company considers all highly liquid financial  instruments purchased with an
original  maturity  of  three  months  or  less  to be  cash  equivalents.  Cash
equivalents are recorded at cost, which approximates fair value. At December 31,
2003 and 2002, the Company did not have cash equivalents.

Income taxes

The  Company  accounts  for  income  taxes  using  the  liability  method of tax
allocation.  Future  income  taxes are  recognized  for the  future  income  tax
consequences  attributable to differences  between the carrying values of assets
and liabilities and their respective income tax bases.  Future income tax assets
and  liabilities  are  measured  using  substantively  enacted  income tax rates
expected  to  apply  to  taxable  income  in  the  periods  in  which  temporary
differences are expected to be recovered or settled. The effect on future income
tax assets and  liabilities  of a change in rates is included in earnings in the
period that includes the enactment  date.  Future income tax assets are recorded
in the  consolidated  financial  statements if  realization  is considered  more
likely than not.

Stock based compensation plan

The Company has two stock based compensation plans - a stock appreciation rights
("SA Rights") plan and a stock option plan for  directors and  employees,  which
are  described  in note 9. Under the terms of the stock  option plan the Company
may grant  fixed  options  or options  whose  vesting  is  contingent  on future
performance. Compensation is recognized under the intrinsic method when fixed or
performance  based  stock  options  are  granted  to  employees  and  directors.
Compensation  is recognized  using the  intrinsic  method for SA Rights when the
performance criteria has been met and the SA Rights are vested.

The Company has a compensation  arrangement with several officers of the Company
whereby the  officers  receive a fixed  number of common  shares per month.  The
Company  records  compensation  expense  monthly based on the  month-end  quoted
market price of the Company's stock.


                                       55
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)




2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)

In  addition,  the Company has entered  into  compensation  arrangements,  which
entitle non-employees to specific amounts, which can only be settled by applying
the amounts to exercise  outstanding  options to purchase  common shares monthly
over a period  of up to  twelve  months.  The  Company  recognizes  compensation
expense  based  on the  fair  value  of the  common  stock  issuable  under  the
arrangement,  when related  services are performed.  The common shares  issuable
under these  arrangements  are  generally  issued in the quarter  following  the
period in which they are earned.

The Company may also issue stock  options,  and  warrants as  consideration  for
services  rendered by  non-employees.  Such equity  awards are recorded at their
fair value,  as  compensation  expense or  capitalized  to capital  assets under
construction  when the  Company  receives  the related  services  and the equity
awards vest.  No  compensation  is  recognized  in  connection  with options and
warrants  awarded in connection with private  placements,  since the share issue
costs are netted against the proceeds raised.

If shares or stock options are repurchased, the excess of the consideration paid
over the carrying  value of the shares or stock options  cancelled is charged to
contributed surplus or deficit.

Loss per common share

Loss per  common  share  is  based on the  weighted  average  number  of  shares
outstanding for the period excluding contingently issuable shares. The effect of
potential  issues of shares  under share  option,  share  purchase  warrants and
conversion agreements are antidilutive. Therefore, diluted loss per common share
is equivalent to basic loss per common share.

Financial instruments

The fair values of the financial  instruments  approximate  their carrying value
except as otherwise disclosed in the financial statements.

Leases

Leases are  classified  as either  capital or  operating  leases.  Leases  which
transfer  substantially  all the benefits and risks of ownership of the property
to the Company are accounted for as capital  leases.  Capital lease  obligations
reflect the present value of future  minimum lease  payments,  discounted at the
appropriate  interest  rate.  All other  leases are  accounted  for as operating
leases wherein rental payments are expensed as incurred.



                                       56
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


3. CHANGE IN ACCOUNTING PRINCIPLES

[a]  Stock based compensation

Effective  January 1, 2002, the Company adopted the  recommendations  of the new
CICA Handbook  Section 3870,  "Stock-Based  Compensation  and Other  Stock-Based
Payments".  This section establishes standards for the recognition,  measurement
and disclosure of stock-based  compensation and other stock-based  payments made
in exchange for goods and services.  The standard  requires that all stock-based
awards made to  non-employees  and direct  awards of stock,  stock  appreciation
rights and awards  that call for  settlement  in cash or other  assets  that are
outstanding or granted for fiscal years beginning on or after January 1, 2002 to
be  measured  and  recognized  using a fair value based  method.  Awards that an
entity has the ability to settle in stock are recorded as equity, whereas awards
that the  entity  is  required  to or has a  practice  of  settling  in cash are
recorded as liabilities.

As a result of adopting this new standard, opening deficit as at January 1, 2002
is  increased by $116,900  and  contributed  surplus is increased by $116,900 to
reflect  certain SA Rights  that were  outstanding  as at  January  1, 2002.  As
required  by the  standard,  prior  period  comparative  figures  have  not been
restated. The fair value method is encouraged for all other employee stock based
compensation  but other  methods  of  accounting  such as  intrinsic  method are
permitted. If the fair value method is not adopted, then proforma disclosure for
net loss and loss per share is required to show the effects as if the fair value
method has been used.  The Company has  elected to use the  intrinsic  method to
account for awards granted to employees and directors.

[b]  Impairment of long-lived assets

Effective  January  1, 2002,  the  Company  has  prospectively  adopted  the new
recommendations  of the CICA  Handbook  Section 3063  "Impairment  of Long-lived
Assets" with  respect to the  recognition,  measurement  and  disclosure  of the
impairment of long-lived  assets.  This standard  required the recognition of an
impairment  loss for a  long-lived  asset to be held and used  when  changes  in
circumstances  cause its carrying  value to exceed the total  undiscounted  cash
flows  expected from its use. An  impairment  loss, if any, is determined as the
excess of the carrying value of the assets over its fair value.


                                       57
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



4. BORDER BIOFUELS LTD.

[a]  Liquidation of BBL

On April 6, 2001, the Company  acquired 75% of the outstanding  common shares of
Border  Biofuels  Limited   ("BBL"),   a  United  Kingdom  Green  Power  project
development  company for a nominal  cash  consideration  of $2  ((pound)1)  plus
acquisition cost of $70,241 ((pound)49,537).

On December 13, 2002, BBL was placed into  liquidation  when a petition was made
by  creditors   under  the  Insolvency  Act  of  1986  of  the  United  Kingdom.
Substantially all of its assets will be liquidated by a bank appointed receiver.
The  Company  does not expect to  recover  any  proceeds  from the sale of BBL's
assets.

As BBL is in liquidation  at December 31, 2003,  the Company no longer  controls
the  operating,  financing  and  investing  decisions  of the BBL. As such,  the
financial position and results of operations have been  deconsolidated  from the
date that BBL was  petitioned  into  bankruptcy.  Accordingly,  the  results  of
operations of BBL for the current and prior  periods have been  accounted for as
discontinued operations.

Condensed financial information for BBL as at December 13, 2002 is as follows:

<TABLE>
<CAPTION>
                                                                  $
--------------------------------------------------------------------------------
<S>                                                        <C>
Current assets                                                 44,906
Non-current assets                                          4,235,771
Current liabilities                                        (1,790,768)
Non-current liabilities                                    (3,100,340)
--------------------------------------------------------------------------------
Net assets                                                   (610,431)
================================================================================
</TABLE>

The result of the discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                 2003                2002              2001
                                                   $                  $                  $
 -------------------------------------------------------------------------------------------------
 <S>                                             <C>              <C>                 <C>
 Sales                                                --                  --            357,046
 -------------------------------------------------------------------------------------------------
 Net loss from discontinued operations           (63,031)         (1,508,189)          (400,803)
 Gain on disposal                                     --             613,036                 --
 -------------------------------------------------------------------------------------------------
                                                 (63,031)           (895,153)          (400,803)
 =================================================================================================
</TABLE>


                                       58
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)




4. BORDER BIOFUELS LTD. (cont'd.)

[b]  Guarantee provided by Dynamotive

In 2001, BBL entered into a credit facility with Bank of Scotland for a  maximum
of $355,700  ((pound)200,000). The credit facility  is  denominated  in  British
Pounds Sterling. Interest is charged at the bank's base rate
(as at December 31, 2001 - 4%) plus 3%. The credit facility is guaranteed by the
Company.  During 2002, BBL became insolvent. If the Bank is unable to realize on
its security with BBL, it has the right to seek settlement from the Company for
payment. Although there is currently  no  indication  that  the Bank will pursue
the Company,  the Company has recognized  the full amount of the  guarantee as a
current  liability in 2002 and included the impact as part of the 2002 loss from
discontinued operations.

[c]  Acquisition of BBL

The  acquisition  of BBL was  accounted  for  using  the  purchase  method.  The
consolidated  financial  statements reflect the results of operation of BBL from
the date of  acquisition  through  December  13, 2002 at which time the accounts
were  deconsolidated  as  discussed  above.  The  consideration  paid  had  been
allocated to the net identifiable  assets acquired based on their estimated fair
value as follows:

<TABLE>
<CAPTION>
                                                                       $
--------------------------------------------------------------------------------
<S>                                                             <C>
Net assets acquired
Cash                                                                 1,994
Non-cash working capital                                        (1,237,786)
Capital assets                                                     100,663
Power purchase agreements                                        3,538,463
Bank indebtedness                                               (1,627,303)
Shareholders loans                                                (486,674)
Long term debt                                                     (75,046)
Minority interest                                                 (144,068)
--------------------------------------------------------------------------------
Total                                                               70,243
--------------------------------------------------------------------------------

Consideration provided
Cash                                                                     2
Costs of acquisition                                                 70,241
--------------------------------------------------------------------------------
Total                                                                70,243
================================================================================
</TABLE>


                                       59
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


4. BORDER BIOFUELS LTD. (cont'd.)

The costs of acquisition  related to legal and professional fees incurred by the
Company  in the  acquisition.  The power  purchase  agreements  are  contractual
agreements  with  government  agencies  in the  UK for  the  Company  to  supply
electricity from renewable energy sources. The power purchase agreements have an
average remaining term of 15 years. The contracts  provide a guaranteed  premium
price based on the bid price per kWh of electricity generated. The premium price
is index linked to a consumer  price index through to 2017.  The  agreements are
not site specific and are transferable.


5. CAPITAL ASSETS

<TABLE>
<CAPTION>
                                                   2003                         2002
                                       -----------------------------------------------------------
                                                        Accumulated                  Accumulated
                                             Cost      Amortization       Cost       Amortization
                                              $             $              $              $
 -------------------------------------------------------------------------------------------------
 <S>                                       <C>             <C>             <C>           <C>
 Furniture and fixtures                       172,248      119,926         140,748        87,801
 Computer equipment and software              299,811      258,917         242,941       198,872
 Test equipment                               603,015      324,938         495,061       209,692
 Projects under development:
    Construction in Progress - West         1,235,510           --         335,491            --
    Lorne
    Pre-construction advances                 664,057           --              --            --
 Leasehold improvements                        88,065       88,065          72,299        69,262
 Motor vehicles                                53,462       30,900          43,891        14,395
 -------------------------------------------------------------------------------------------------
                                            3,116,168      822,746       1,330,431       580,022
 -------------------------------------------------------------------------------------------------
 Net book value                                  2,293,422                     750,409
 =================================================================================================
</TABLE>

The Company is constructing a 100 tonne per day BioOil co-generation  project at
the site of Erie Flooring in West Lorne,  Ontario (See note 17). At December 31,
2003 the Company had recorded pre-construction advances of $664,057 representing
initial  payments  on a second  proposed  100  tonne per day  plant.  All of the
pre-construction advances were unpaid and included in accounts payable or shares
to be issued as appropriate at December 31, 2003.

During 2003,  government  grants of $416,708 [2002 - $122,474] have been applied
to reduce  the cost of capital  assets  under  construction.  For 2003 and 2002,
capital  assets under  construction  comprise the costs to construct a 100 tonne
per day BioOil plant.


                                       60
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


5. CAPITAL ASSETS (cont'd.)


In 2002, the Company recorded  write-downs of capital assets totaling  $753,382,
pertaining to the BioOil Power Generation  segment.  The Company determined that
the net  realizable  value of certain test  equipment  was below their  carrying
values.

In 2001, the Company recorded  write-downs of capital assets totaling  $323,850,
including  $148,813 for capital  assets  pertaining  to the BioLime  segment and
$175,037 for capital  assets  pertaining to the DynaPower  segment.  The Company
determined  that the  development of  commercially  viable BioLime  products was
uncertain and therefore,  the carrying value of these assets was written down to
$nil.  The DynaPower  capital  assets were held for disposal and the Company had
written the carrying value down to their net realizable value of $1 [note 10].


                                       61
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



6. PATENTS

<TABLE>
<CAPTION>
                                                 2003                          2002
                                    --------------------------------------------------------------
                                                      Accumulated                    Accumulated
                                           Cost       Amortization       Cost        Amortization
                                            $              $              $               $
 -------------------------------------------------------------------------------------------------
 <S>                                       <C>             <C>           <C>              <C>
 Patents                                   320,250         74,811        257,599          45,552
 -------------------------------------------------------------------------------------------------
 Net book value                                245,439                        212,047
 =================================================================================================
</TABLE>

In 2002,  the  Company  recorded  a  write-down  on  patents  pertaining  to the
DynaPower metal cleaning technology of $118,732. The Company determined that the
future cash flows from these licenses  granted upon the management  buyout [note
10] of  DynaPower  were  insufficient  to support  the  carrying  value of these
patents.  Therefore,  these  patents  were  written  down to  management's  best
estimates  of the  future  discounted  cash  flows  from the  licenses  on these
patents.

In 2001, the Company recorded write-down of patents totaling $261,228, including
$181,531 pertaining for BioLime patents, $72,514 for Actuator patents and $7,183
for other patents.  The Company  determined that the development of commercially
viable uses for the  products to which the costs for the  BioLime,  Actuator and
other patents  relate was uncertain  and  therefore,  the costs related to these
patents were charged to operations.


7. SHORT-TERM LOANS

[a]  On June 3, 2003 the Company entered into a loan agreement with a U.S. based
     Trust for  $200,000  and an officer of the Company for  $50,000.  The loans
     bear interest at 2% per month and have a 12-month  term. The loan agreement
     also calls for the Company to issue 2.5  million  warrants  exercisable  at
     $0.20 each for a period of five years as part of the loan  financings.  The
     proceeds of the loan have been allocated to the loans and warrants based on
     their  relative  fair values.  Accordingly,  $104,167 was  allocated to the
     loans and $145,833 was allocated to the warrants. The carrying value of the
     debt  will be  accreted  up to its fair  value  over the term to  maturity.
     Accretion  of $12,153 has been  recognized  in the year ended  December 31,
     2003. The Company  provided the lenders with a general  security  agreement
     and other undertakings in regard to the loans.

     In December 2003,  the Company repaid the loan and the lender  released the
     Company from the general security agreement.


                                       62
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



7. SHORT-TERM LOANS (cont'd.)

[b]  During the year ended December 31, 2003 the Company was advanced $15,000 by
     a director which was non-interest bearing and was repaid in August 2003.

[c]  At  December  31,  2002 the Company had a loan with the Bank of Nova Scotia
     for $158,539  (C$250,000).  In April 2003,  the Company repaid the loan and
     the Bank terminated the credit facilities and released the Company from the
     general security agreement and all other obligations. The fair market value
     of the loan at December 31, 2002 approximates its carrying value because it
     had a current market interest rate.


8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                            2003                    2002
                                                              $                       $
 -------------------------------------------------------------------------------------------------
 <S>                                                      <C>                      <C>
 Trade accounts payable                                     911,949                1,022,311
 Accrued compensation                                            --                  105,726
 Accrued liabilities                                        613,023                  249,132
 Bank of Scotland guarantee [note 4(b)]                     355,708                  320,883
 -------------------------------------------------------------------------------------------------
                                                          1,880,680                1,698,052
 =================================================================================================
</TABLE>

9. SHARE CAPITAL

[a]  Authorized share capital

The Company's  authorized  capital consists of 100,000,000 common shares [2002 -
100,000,000]  with  no par  value  and  100,000,000  preferred  shares  [2002  -
100,000,000]  with a par value of $5.00 each, having attached special rights and
restrictions.  No preferred  shares were issued and  outstanding at December 31,
2003 and 2002.


                                       63
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


9. SHARE CAPITAL (cont'd.)

[b]  Issued and outstanding common shares

<TABLE>
<CAPTION>
                                                                            Issued
                                                                        #                $
 -------------------------------------------------------------------------------------------------
 <S>                                                                <C>               <C>
 Balance, December 31, 2000                                         35,851,060        21,040,882
 Issued for cash
    Pursuant to private placement                                    2,614,404         1,853,516
    Pursuant to exercise of stock options                              333,946           141,578
 Issued to settle fees payable                                         323,408           259,635
 Issued for services (i)                                             1,819,297         1,322,303
 -------------------------------------------------------------------------------------------------
 Balance, December 31, 2001                                         40,942,115        24,617,914
 -------------------------------------------------------------------------------------------------
 Issued for cash
    Pursuant to private placement                                    4,503,872         1,545,400
 Issued on conversion of convertible loan                              856,551           200,000
 Issued for settlement of fees payable and severances                  479,025           145,598
 Issued for services (i)                                             3,159,437         1,136,507
 Shares to be redeemed and cancelled (ii)                                   --           (92,379)
 -------------------------------------------------------------------------------------------------
 Balance, December 31, 2002                                         49,941,000        27,553,040
 -------------------------------------------------------------------------------------------------
 Issued for cash
    Pursuant to private placement                                   12,863,895         1,544,715
    Pursuant to exercise of stock options                              580,100           183,050
 Issued on conversion of convertible loan [note 12(e)]               1,389,746           182,254
 Issued for settlement of fees payable                               2,206,966           699,037
 Issued for services (i)                                             2,973,947           745,894
 Shares redeemed and cancelled (ii)                                    (40,000)               --
 -------------------------------------------------------------------------------------------------
 Balance, December 31, 2003                                         69,915,654        30,907,990
 =================================================================================================
</TABLE>


                                       64
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


9. SHARE CAPITAL (cont'd.)

[i]  The Company has entered  into  various  agreements  for  services  with its
     employees,  directors  and  non-employees  to be settled with various stock
     awards.

a.       The    Company  has  entered   into  compensation   arrangements   with
         non-employees  for  specified  amounts,  which can only be  settled  by
         applying the amounts to exercise outstanding options to purchase common
         shares monthly over a period of up to twelve months. Included in issued
         for services are 1,536,141  [2002 - 1,379,447]  shares,  fair valued at
         $321,082 [2002 - $552,387].
b.       In  addition,  the  Company  issued  980,753  [2002 - 675,486]
         restricted  shares  to  non-employees  for  services,  fair  valued  at
         $363,764  [2002 -  $217,269].  The shares have a 12 months  restriction
         from the issued date.
c.       The Company has issued  455,794 [2002 - 1,054,916]  shares to
         employees,  directors and officers for services   rendered, recorded at
         fair value of $60,922 [2002 - $349,901].
d.       In  addition,   the  Company  issued  8,590  [2002  -  49,588]
         restricted shares to employees and directors for services,  fair valued
         at $2,686 [2002 - $16,950]. The shares have a 12 month restriction from
         the issue  date.  During the year,  7,331  [2002 - nil]  common  shares
         previously  issued to a director  of the  Company  were  cancelled  and
         returned to Treasury with a fair value of $2,560 [2002 - $nil].

[ii] At December 31, 2003, the Company has 306,748 [December 31, 2002 - 346,748]
     common  shares to be redeemed.  These  shares,  which were  outstanding  at
     year-end, were issued for services in relation to termination of agreements
     with  non-employees and will be redeemed upon satisfying  conditions of the
     termination  agreements.  Full settlement in cash of $88,000  [December 31,
     2002 - $nil] has already been paid to the holder of these common  shares as
     compensation for the redemption.

[c]  Shares to be issued

At December 31, 2003, the Company has 7,107,160 [2002 - 3,225,508] common shares
to be issued which comprise:

[i]  2,783,677  [2002 -  1,695,484]  common  shares  which are to be issued to a
     director and non-employees for services rendered under compensation
     arrangements with a value of $1,351,099 [2002 - $419,073].


                                       65
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



9. SHARE CAPITAL (cont'd.)

[ii] 4,185,150  common shares relating to a private  placement  commenced during
     the year ended  December  31, 2003 [2002 -  1,530,024]  and 138,333  common
     shares are related to exercise of warrants. The private placement is for up
     to $2.0 million at an offering price between $0.30 and $0.385.  At December
     31, 2003, the Company had received $1,476,012 [2002 - $352,376] in cash for
     these shares to be issued [note 19(a)].

[d]  Escrow agreement

At December 31, 2003,  556,000  common shares were held in escrow to be released
at a rate of one  share  for  each  $0.17  of  "cash  flow"  as  defined  in the
agreement, generated by the Company.

At December 31, 2003, 225,334 common shares were held in escrow from an original
total of 676,000  common  shares put into escrow.  These common shares are to be
released from escrow as to 1/3 upon the Company  achieving a  capitalized  stock
value (as defined) of $30 million (which occurred in 2000); 1/3 upon the Company
achieving a capitalized  stock value of $50 million (which occurred in 2000) and
1/3 upon the Company achieving a capitalized stock value of $100 million.

During the period  ended  December  31,  2003,  nil [2002 and 2001 - nil] common
shares were  released  from escrow and at December  31,  2003,  781,334  [2002 -
781,334] common shares are held in escrow.

[e]  Stock options

At December 31, 2003,  the following  stock options to Directors,  employees and
others were outstanding:

<TABLE>
<CAPTION>

                                          Options Outstanding              Options Exercisable
                                     -----------------------------    -----------------------------
                                      Weighted-
                       Number          Average         Weighted-         Number      Weighted-Average
    Range of       Outstanding at     Remaining         Average      Outstanding at     Exercise
    Exercise        December 31,     Contractual       Exercise       December 31,        Price
     Prices             2003             Life            Price            2003
-----------------------------------------------------------------------------------------------------
<S>                    <C>            <C>                <C>            <C>               <C>
  $0.20 - $0.23        5,277,088      2.50 years         $0.21          5,240,063         $0.21
  $0.30 - $0.90        3,946,900      1.95 years         $0.51          3,946,900         $0.51
      $1.00              442,000      0.73 years         $1.00            442,000         $1.00
      $1.50              350,000      1.16 years         $1.50            326,000         $1.50
-----------------------------------------------------------------------------------------------------
                      10,015,988                                        9,954,963
=====================================================================================================
</TABLE>



                                       66
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



9. SHARE CAPITAL (cont'd.)


From time to time,  the Company  has  provided  incentives  in the form of share
purchase options to the Company's directors, officers, employees and others. The
Company has  reserved  10,487,348  [2002 - 7,491,150]  (15%)  common  shares for
issuance  upon the  exercise  of stock  options of which at December  31,  2003,
471,360 [2002 - 1,663,313]  are available to be granted.  The exercise price and
the vesting terms of the options are determined by the  Compensation  Committee.
The exercise  price will  generally be at least equal to the market price of the
common  shares at the date of the grant and the term may not  exceed  five years
from the date of the grant.

Stock option  transactions  for the  respective  periods and the number of stock
options outstanding are summarized as follows:

<TABLE>
<CAPTION>
                                                                No. of Common   Weighted Average
                                                               Shares Issuable   Exercise Price
 -------------------------------------------------------------------------------------------------
 <S>                                                               <C>                  <C>
 Balance, December 31, 2000                                         5,229,642           1.14
 Options granted                                                    1,246,859           0.72
 Options forfeited or expired                                         (97,000)          3.61
 Options exercised                                                 (1,377,538)          0.64
 -------------------------------------------------------------------------------------------------
 Balance, December 31, 2001                                         5,001,963           1.15
 Options granted                                                    4,638,298           0.44
 Options forfeited or expired                                      (1,598,725)          0.96
 Options exercised                                                 (2,213,699)          0.38
 -------------------------------------------------------------------------------------------------
 Balance, December 31, 2002                                         5,827,837           0.63
 Options granted                                                    7,603,409           0.24
 Options forfeited or expired                                      (1,299,017)          0.32
 Options exercised                                                 (2,116,241)          0.52
 -------------------------------------------------------------------------------------------------
 Balance, December 31, 2003                                        10,015,988           0.41
 =================================================================================================
</TABLE>

During  2003,  the Company  repriced  500,000  options  issued to a director (or
company  controlled by Director) from the original  exercise price of $0.50 to a
new exercise price of $0.30. During 2002, the Company repriced 1,800,000 options
issued to directors from the original  exercise price of $1.50 to a new exercise
price of $0.50.

Included in the options granted in 2003, were 817,300 [2002 - 1,953,170] options
to  non-employees  for  services  rendered  recorded at a fair value of $145,711
[2002 - $613,787].

The weighted-average fair value of options granted in 2003 where the stock price
is equal to the exercise  price of the options,  greater than the exercise price
of the options and less than the exercise of the options was $0.20,  $0.38,  and
$0.21  respectively  [2002 - $0.37,  $0.41, and $0.32;  2001 - $nil,  $0.35, and
$0.96].


                                       67
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



9. SHARE CAPITAL (cont'd.)

The Black Scholes  options  valuation  model was developed for use in estimating
the fair value of traded  options,  which have no vesting  restrictions  and are
fully  transferable.  In addition,  option valuation models require the input of
highly  subjective  assumptions  including the expected stock price  volatility.
Because the Company's employee stock options have characteristics  significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

Pro forma information regarding net income and earnings per share is required by
CICA Handbook  Section 3870,  "Stock-Based  Compensation  and Other  Stock-Based
Payments",  which also  requires  that the  information  be determined as if the
Company has  accounted  for stock  options,  SA Rights and  warrants  granted to
employees  under the fair value  method.  The fair value for these  options,  SA
Rights and warrants is estimated at the  measurement  date using a Black Scholes
pricing  model  with  the  following   assumptions  for  2003,  2002,  and  2001
respectively:  Risk free interest rate of 4.5%, 4.5%, and 3.9%;  dividend yields
of 0%;  volatility  factors of the expected market price of the Company's common
stock of 1.16,  1.13,  and 1.19,  and a weighted  average  expected  life of the
option of 2.7 years [2002 - 4.3 years; 2001 - 4.9 years].

Supplemental disclosure of pro forma loss and loss per share:

<TABLE>
<CAPTION>
                                                   2003               2002              2001
                                                     $                  $                $
 -------------------------------------------------------------------------------------------------
 <S>                                            <C>                 <C>               <C>
 Loss for the period as stated                  (4,984,681)         (5,261,607)       (6,838,264)
 Less stock-based compensation                     676,354             121,248           564,257
 -------------------------------------------------------------------------------------------------
 Pro forma loss                                 (5,661,035)         (5,382,855)       (7,402,521)
 =================================================================================================

 -------------------------------------------------------------------------------------------------
 Basic and diluted loss per share as stated          (0.09)              (0.12)            (0.18)
 Proforma basic and diluted loss per share           (0.10)              (0.12)            (0.20)
 =================================================================================================
</TABLE>


                                       68
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



9. SHARE CAPITAL (cont'd.)

[f]  Common share purchase warrants

During 2003, the Company repriced  200,000  warrants from the original  exercise
price of $0.40 to a new exercise price of $0.15 and the compensation  expense of
$16,000 has been recorded.

During the fourth  quarter of 2001,  the Company  made an offer to all  existing
warrant holders to reduce the exercise price of all outstanding  warrants from a
weighted  average  exercise price of $1.59, to a weighted average exercise price
of $0.70 in exchange for a reduction in the number of warrants  outstanding.  No
other terms in the original warrants would change. Warrant holders were given 30
days to accept the offer.  As at December 31, 2001,  4,009,167  warrants  with a
weighted  average  exercise  price of $1.55 were  cancelled  and  exchanged  for
1,907,526 new warrants with a weighted average  exercise price of $0.70.  During
2002, an additional 1,323,372 warrants with a weighted-average exercise price of
$1.72  were   cancelled   and   exchanged   for  618,577  new  warrants  with  a
weighted-average  exercise price of $0.70. No compensation expense resulted from
the warrant repricing.

At December  31, 2003 the common share  purchase  warrants  outstanding  were as
follows:

<TABLE>
<CAPTION>
                           No. of Common         Exercise
                           Shares Issuable        Price       Expiration Date
 ---------------------------------------------------------------------------------------------------
 <S>                           <C>            <C>             <C>
 Series F Warrants               933,333          $0.70       March 5, 2005
 Series M Warrants               152,897      $0.70 to $1.50  September 18, 2004 - May 09, 2005
 Series N-b Warrants             275,756          $0.70       September 5, 2004 - October 1, 2004
 Series O Warrants               300,000          $0.35       June 10, 2005
 Series P Warrants             1,777,147          $0.40       July 29, 2005 - May 6, 2006
 Series Q Warrants             7,200,862      $0.20 to $0.67  August 31, 2005 - August 31, 2008
 Series R Warrants             2,500,000          $0.20       August 31, 2008
 ---------------------------------------------------------------------------------------------------
</TABLE>

As at December 31, 2003, all warrants are vested.

(1)  933,333 of the Series F warrants were   issued   as   part  of  a   private
     placement. These warrants vested  upon successful completion of the private
     placement. 35,000 of  the  Series F warrants have  expired  and  have  been
     cancelled.
(2)  84,000 Series G warrants expired and were cancelled during the year.
(3)  The Series J warrants expired and were cancelled during the year.
(4)  The Series K warrants expired and were cancelled during the year.
(5)  64,491,Series L warrants expired and were cancelled during the year.



                                       69
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


9. SHARE CAPITAL (cont'd.)

(6)  The Series M warrants  were issued as part of a private  placement for cash
     and  services.  These  warrants  vested upon  successful  completion of the
     private placement and as services were performed. 242,375 Series M warrants
     expired and were cancelled during the year.
(7)  The Series N-b warrants were issued as part of a private  placement.  These
     warrants vested upon successful completion of the private placement.
(8)  The  Series O  warrants  were  issued as a part of a loan  agreement  [note
     12(e)] during the year ended 2002 and the warrants vested  immediately upon
     issue.
(9)  The Series P warrants  were issued as part of a private  placement  and for
     services of non-employees. These warrants vested upon successful completion
     of the private  placement  and as  services  were  performed  respectively.
     1,235,482 Series P warrants were issued during the year.
(10) The Series Q warrants  were issued in the current year as part of a private
     placement  for cash and services.  These  warrants  vested upon  successful
     completion of the private placement and as services were performed. 818,418
     Series Q  warrants  were  issued  as part of a loan  agreement  to  certain
     directors of the Company [note 12(e)].
(11) The Series R warrants  were  issued in the  current  year as part of a loan
     agreement.  2,500,000  Series R  warrants  were  issued as part of the loan
     financings [note 7(a)].
Compensation expenses recognized for warrants granted during 2003 was $1,265,474
[2002 - $45,994; 2001 - $558,632].

[g]  Stock appreciation rights

In 1998, the Company  established a stock  appreciation  rights plan whereby the
participants  will be  entitled  to  require  the  Company  to redeem  the stock
appreciation  rights  ("SA  Rights")  for an amount  equal to the  excess of the
market value of the  underlying  common  shares over the initial value of the SA
Right at the date of grant.

The SA Rights vest as the Company achieves stock value targets as defined in the
agreement:  1/3  of the SA  Rights  issued  may be  redeemed  upon  the  Company
achieving a capitalized  stock value (as defined) of $30 million;  1/3 of the SA
Rights  issued may be redeemed upon the Company  achieving a  capitalized  stock
value of $50  million;  1/3 of the SA Rights  issued  may be  redeemed  upon the
Company achieving a capitalized stock value of $100 million.

The  Company  also has the right to redeem  the SA  Rights at its  option  under
certain circumstances. The Company has the sole exclusive election to redeem the
SA Rights in cash, shares or in a combination of cash and shares.  The number of
SA Rights  that can be granted  under the plan until  December  31,  2008 cannot
exceed 2,500,000.


                                       70
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


9. SHARE CAPITAL (cont'd.)

At December  31,  2003  1,468,335  [December  2002 -  1,471,668]  SA Rights were
outstanding and 1,106,668 [December 2002 - 1,111,667] were vested.  Compensation
expense of $158,808 was recognized during the year for vested SA Rights.

SA Rights  transactions and the number of SA Rights outstanding is summarized as
follows:

<TABLE>
<CAPTION>
                                                                                     No. of
                                                                                SA Rights Issued
 -------------------------------------------------------------------------------------------------
 <S>                                                                                 <C>
 Balance, December 31, 2001                                                          1,486,667
 SA Rights forfeited                                                                   (14,999)
 -------------------------------------------------------------------------------------------------
 Balance, December 31, 2002                                                          1,471,668
 SA Rights forfeited                                                                    (3,333)
 =================================================================================================
 Balance, December 31, 2003                                                          1,468,335
 =================================================================================================
</TABLE>

At December  31,  2003,  the  following  SA Rights,  all of which were issued to
employees, were outstanding:

<TABLE>
<CAPTION>
          SA Rights             SA Rights          Initial                Expiration
         Outstanding              Vested            Value                    Date
 -----------------------------------------------------------------------------------------------
             <S>                   <C>               <C>               <C>
             300,000               200,000           $0.400            December 31, 2008
             822,501               635,834           $0.400            January 28, 2004
             200,000               133,333           $0.625            May 1, 2004
             145,834               137,501           $1.000            May 1, 2004
 -----------------------------------------------------------------------------------------------
           1,468,335             1,106,668
 ===============================================================================================
</TABLE>

Subsequent  to December  31, 2003 the Company  received  redemption  notices for
693,335  SA  Rights  for  $108,433  of which  $38,666  is to be paid by cash and
$69,767 is to be paid by shares.

The Company has an arrangement with a former director of the Company for 300,000
outstanding SA Rights of which 200,000 SA Rights has been vested with an initial
value of $0.40 extending the expiration date to December 31, 2008.

[h]  Contributed surplus

Contributed surplus includes the fair value of stock options and warrants issued
to non-employees for services rendered,  the fair value of warrants issued under
short-term  loan  agreements  [note 7],  the fair value of  warrants  related to
convertible  debts,  and  the  intrinsic  value  of  equity  awards  granted  to
employees.


                                       71
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


9. SHARE CAPITAL (cont'd.)

[i] Stock based compensation

The Company has recorded stock based compensation as follows:

<TABLE>
<CAPTION>
                                                  2003                2002              2001
                                                    $                  $                 $
 -------------------------------------------------------------------------------------------------
 <S>                                            <C>                   <C>             <C>
 Balance sheet items
 Capital assets                                 1,004,564             105,455            108,137
 Share issue costs                                947,202                  --                 --
 Patents and intellectual property                     --                  --             15,500
 Other                                             51,000              11,989                 --
 -------------------------------------------------------------------------------------------------
                                                2,002,766             117,444            123,637
 Income statement items
 Professional fees                                655,416             546,286          1,591,381
 General and administrative salaries and
    benefits                                    1,712,658             689,397            383,094
 Marketing                                         51,628              42,385            121,790
 Rent expense                                          --              40,848             11,330
 Interest expense and other                         8,155               7,094                 --
 -------------------------------------------------------------------------------------------------
                                                2,427,857           1,326,010          2,107,595

 Total stock based compensation                 4,430,623           1,443,454          2,231,232
 =================================================================================================
</TABLE>


                                       72
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


9. SHARE CAPITAL (cont'd.)

[j]  Basic and diluted loss per common share

<TABLE>
<CAPTION>
                                                   2003             2002              2001
--------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>             <C>
Numerator
Loss from continuing operations                  (4,921,650)       (4,366,454)     (6,437,461)
Loss from discontinued operations                   (63,031)         (895,153)       (400,803)
--------------------------------------------------------------------------------------------------
Net loss                                         (4,984,681)       (5,261,607)     (6,838,264)
--------------------------------------------------------------------------------------------------

Denominator
Weighted average number of common shares
   outstanding                                   57,398,824        45,886,312      37,250,303
Escrowed shares                                    (781,334)         (781,334)       (781,334)
--------------------------------------------------------------------------------------------------
                                                 56,617,490        45,104,978      36,468,969
--------------------------------------------------------------------------------------------------

Basic and diluted loss per common share
Continuing operations                              (0.09)            (0.10)           (0.18)
Discontinued operations                              --              (0.02)           (0.01)
--------------------------------------------------------------------------------------------------
Loss per share                                     (0.09)            (0.12)           (0.19)
==================================================================================================
</TABLE>


10. DYNAPOWER MANAGEMENT BUYOUT

In April  2002,  the  Company  sold all  tangible  assets of its metal  cleaning
subsidiary,   DynaPower,  Inc.  to  the  management  of  DynaPower  for  nominal
consideration of $1 plus future royalties.  The Company retains ownership of the
intellectual property related to the DynaPower metal cleaning technology and has
licensed the intellectual property to DynaPower for a period of seven years from
the closing of the sales agreement. The royalties over the seven year period are
based on an  increasing  percentage  of the  cumulative  revenues  generated  by
DynaPower on sales of DynaPower systems. The intellectual property will transfer
from the Company to DynaPower on the  expiration of the royalty  period at March
31, 2009 only if a cumulative sales threshold is reached.

In 2002, the Company  recorded  write-downs of patents  related to DynaPower for
$118,732 and in 2001,  recorded  write-downs of the DynaPower  capital assets of
$175,037 [notes 5 and 6].


                                       73
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



11. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has the following future minimum lease  commitments for premises and
equipment:

                                                                    $
--------------------------------------------------------------------------------

2004                                                              87,000
2005                                                             116,000
2006                                                             125,000
2007                                                             136,000
2008                                                             139,000
--------------------------------------------------------------------------------
                                                                 603,000
================================================================================

In connection  with the Company's West Lorne project (see Note 5) the Company is
committed to outstanding construction commitments of approximately $3.3 million.

Contingencies

In the ordinary course of business  activities,  the Company may be contingently
liable for litigation and claims with customers, suppliers and former employees.
Management  believes that adequate provisions have been recorded in the accounts
where required.  Although it is not possible to estimate the extent of potential
costs and losses, if any,  management  believes that the ultimate  resolution of
such  contingencies  will not have a material adverse effect on the consolidated
financial position of the Company.


12. RELATED PARTY TRANSACTIONS

The transactions with related parties are in the normal course of operations and
are recorded at amounts  established and agreed between the related parties.  In
addition  to the  transactions  described  in notes 7 and 9, the Company had the
following transactions with related parties:

[a]  Consulting  fees and salaries of $1,591,097 for the year ended December 31,
     2003 [years 2002 - $639,910;  2001 - $768,336]  have been paid to Directors
     (or companies  controlled  by  Directors)  of the Company.  Included in the
     amount above,  is  $1,233,418  [2002 - $447,789;  2001 - $371,669]  paid by
     stock based compensation [note 9(b)(i)].


                                       74
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


12. RELATED PARTY TRANSACTIONS (cont'd.)

[b]  Consulting  fees and share  issue  costs of  $1,002,085  for the year ended
     December  31,  2003  [years  2002 - $nil;  2001 - $nil] have been paid to a
     shareholder  of the Company.  Included in the amount  above,  is $1,002,085
     [2002 - $nil; 2001 - $nil] paid by stock based compensation.

[c]  As at December 31, 2003,  $32,673 was advanced to a Director of the Company
     in connection  with the formation of a joint venture for the development of
     the Company's BioOil technology and related products. The joint venture had
     not been formalized at December 31, 2003.

[d]  The Company has entered into:

     [i]  a royalty  agreement,  pursuant to an  agreement  to purchase  certain
          patents for an unlimited term with a company  controlled by a previous
          Director of the Company,  based on 4% of the gross  receipts from unit
          sales. No sales have occurred to date.

     [ii] a 24 month consulting and research  agreement,  which expired February
          9,  2002,  with a company  controlled  by a director  of the  Company.
          Included in research and development expenses are fees of $nil [2002 -
          $nil; 2001 - 90,387] to this related party.

[e]  In 2002, the Company entered into loan  agreements  with certain  Directors
     totaling $182,254.  The loans comprised $118,839,  which was used to settle
     amounts owing to certain  Directors and $63,415 which was received in cash.
     The  loans  and  accrued  interest  were  converted  in May  2003  into the
     Company's  common  shares at 75% of the  10-day  average  of the  Company's
     market share price prior to  conversion.  A total of 818,418  warrants were
     also granted to the lenders in connection with the loans. The warrants have
     an exercise price ranging from $0.20 to $0.44,  expire from May 06, 2006 to
     December  23, 2006,  and are  outstanding  at December  31,  2003.  For the
     portion of the loans received in cash, interest was charged at a rate of 1%
     per month and was included in the converted amount.  The remaining debt was
     non-interest bearing.

     The carrying  value of the loans was accreted up to its fair value over the
     term to  maturity.  For the year  ended  December  31,  2003,  $115,633  of
     accretion interest has been charged to the statement of loss.


                                       75
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


12. RELATED PARTY TRANSACTIONS (cont'd.)


[f]  During 2002, the Company entered into a loan agreement with related parties
     for $200,000  cash,  which was converted in 2002 into the Company's  common
     shares at 75% of the 10 day  average of the  Company's  market  share price
     prior to  conversion.  A total of  300,000  warrants  were  granted  to the
     lenders in connection  with the loans.  The warrants have an exercise price
     of $0.35 per  common  share and  expire on April  30,  2005.  Interest  was
     charged  at a rate of 1% per month and was  payable up to  conversion.  The
     warrants are outstanding at December 31, 2003.

     The  proceeds of the above noted  convertible  debts were  allocated to the
     debts,  the  embedded  conversion  feature  and the  warrants  based on the
     relative fair values. Accordingly,  $94,118 was recorded as liabilities and
     $105,882  recorded  as  contributed   surplus   representing  the  embedded
     conversion  feature and  warrants.  The  carrying  values of the debts were
     accreted  up to their fair value over their  maturity  terms.  For the year
     ended December 31, 2002,  $105,882 of accretion interest was charged to the
     statement of loss.

[g]  On June 3, 2003 the Company  entered into a loan  agreement with an officer
     of the Company  for  $50,000.  The loan bears  interest at 2% per month and
     have a 12-month  term.  The loan  agreement  also calls for the  Company to
     issue 500,000 warrants exercisable at $0.20 each for a period of five years
     as part of the loan  financings.  In December  2003, the Company repaid the
     loan  and the  lenders  released  the  Company  from the  general  security
     agreement.

[h]  Pursuant to  consulting  agreements  with certain  officers of the Company,
     which  expire on December  31,  2007,  the Company is obligated to paid the
     full term of contract in the event of the officers' early  termination.  As
     at December 31, 2003 the compensation obligation payable over the next four
     years amounts to $1,542,432.


                                       76
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


13.   LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES

As at December 31, 2003,  the Company has loss  carryforwards  of  approximately
$22,707,000 to apply against future taxable income in Canada  ($20,866,000)  and
the United  Kingdom  ($1,826,000)  and  $742,000  and  $319,000  of federal  and
provincial  investment  tax  credits  respectively  available  for future use in
Canada.   The  United  Kingdom  loss   carryforwards   can  be  carried  forward
indefinitely. The Canadian losses and investment tax credits expire as follows:

<TABLE>
<CAPTION>
                                       Federal Investment       Provincial            Loss
                                           Tax Credits        Investment Tax     Carryforwards
                                                $                Credits               $
                                                                    $
 -------------------------------------------------------------------------------------------------
 <S>                                          <C>                  <C>               <C>
 2004                                              --                   --           2,070,000
 2005                                              --                   --           2,605,000
 2006                                          12,000                   --           2,460,000
 2007                                         104,000                   --           4,274,000
 2008                                          22,000                   --           4,852,000
 2009                                          44,000                7,000           2,176,000
 2010                                         151,000               85,000           2,429,000
 2011                                         177,000               98,000                  --
 2012                                          78,000               43,000                  --
 2013                                         154,000               86,000                  --
 -------------------------------------------------------------------------------------------------
                                              742,000              319,000          20,866,000
 =================================================================================================
</TABLE>

In addition,  the Company has scientific  research and experimental  development
expenditures   of   approximately   $5,301,000   that  can  be  carried  forward
indefinitely to apply against future taxable income in Canada.

Future income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts  used for income tax  purposes.  The Company  has  recognized  a
valuation allowance for those future tax assets for which it is more likely than
not that  realization  will not occur.  Significant  components of the Company's
future tax assets as of December 31, 2003 and December 31, 2002 are as follows:


                                       77
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


13. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES
    (cont'd.)

<TABLE>
<CAPTION>
                                                                         2003               2002
                                                                           $                  $
---------------------------------------------------------------------------------------------------------
<S>                                                                <C>                 <C>
Loss carryforwards                                                   8,164,000          6,628,000
Research and development deductions and credits                      2,588,000          1,712,000
Capital assets                                                         208,000            681,000
Financing costs                                                        380,000             64,000
---------------------------------------------------------------------------------------------------------
Total future tax assets                                             11,340,000          9,085,000
Valuation allowance                                                (11,340,000)        (9,085,000)
---------------------------------------------------------------------------------------------------------
Net future tax assets                                                       --                 --
=========================================================================================================
</TABLE>

The potential  income tax benefits  relating to these future tax assets have not
been recognized in the consolidated  financial  statements as their  realization
did not meet the  requirements  of "more  likely  than not" under the  liability
method of tax allocation. Accordingly, no future tax assets have been recognized
as at December 31, 2003 and 2002.


14. SUPPLEMENTARY CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                  2003                2002              2001
 Net change in non-cash working capital             $                  $                 $
 -------------------------------------------------------------------------------------------------
 <S>                                             <C>                 <C>               <C>
 Accounts receivable                              (38,399)              8,737            215,908
 Government grants receivable                    (572,460)           (160,316)           639,665
 Inventory                                             --              10,043              9,548
 Prepaid expenses and deposits                     10,566             136,434            (36,764)
 Deferred revenue                                      --             (51,981)           (47,189)
 Accounts payable and accrued liabilities         227,628             508,142            388,807
 -------------------------------------------------------------------------------------------------
                                                 (372,665)            451,059          1,169,975
 =================================================================================================

 Interest paid
 Short-term interest paid                          63,522              48,661             26,080
 =================================================================================================
</TABLE>


                                       78
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


14. SUPPLEMENTARY INFORMATION (cont'd.)

For the period ended December 31, 2003 the Company recorded no revenue.  For the
year ended December 31, 2002, 69% and 10% of sales were from two customers.  For
the year ended  December  31,  2001,  31%,  17% and 16% of sales were from three
customers.  As at December 31, 2003 there were no accounts  receivable  balances
relating to these customers [2002 - $nil].


15. GOVERNMENT ASSISTANCE

Government  assistance  received  during the year ended December 31, 2003 in the
amount of $915,237  [2002 - $467,832;  2001 - $674,304]  has been  recorded as a
reduction of expenditures.
<TABLE>
<CAPTION>
 Government assistance applied to:                2003              2002               2001
                                                   $                  $                 $
 -------------------------------------------------------------------------------------------------
 <S>                                              <C>                <C>               <C>
 Capital assets and other                         422,176            127,144           613,637
 Research and development                         456,438            288,445            60,667
 Other expenses                                    36,623             52,243                --
 -------------------------------------------------------------------------------------------------
 Total                                            915,237            467,832           674,304
 =================================================================================================
</TABLE>


[a]  Technology Partnerships Canada

     During  1997,  the  Company  entered  into a  contribution  agreement  with
     Industry Canada-Technology Partnerships Canada (TPC) whereby the Company is
     entitled  to  receive a maximum of  approximately  $6.3  million  (Cdn$ 8.2
     million) or 37% of eligible expenditures,  as defined in the agreement. The
     Company has received extensions to the original contribution agreement with
     TPC to June 30,  2004  while  retaining  the  original  cumulative  maximum
     assistance level of $6.3 million. The agreement, as amended, specifies that
     in the event  commercial  viability is  achieved,  then the  assistance  is
     repayable,  commencing  January  1, 2003 based on  royalties  from sales of
     specified products resulting from the project to a maximum of $12.4 million
     (Cdn$ 16 million) or until the expiration of contract on December 31, 2012.
     In early 2002, subsequent to the original amendment,  the Company recovered
     $269,792 relating to eligible expenditures made in 2001. As at December 31,
     2003,   $695,437  [2002  -  $139,745]  is  included  in  government  grants
     receivable.


                                       79
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


15. GOVERNMENT ASSISTANCE (cont'd.)


[b]  Other contribution agreements

     The Company had  contribution  agreements with other Canadian  governmental
     agencies  for a  maximum  contribution  of  $376,428  over  the 2001 - 2003
     period.  In the year ended December 31, 2003, the Company  received $73,709
     [2002 - $98,266; 2001 - $204,244] under these agreements. Of these amounts,
     $37,339 is included in government grants receivable as at December 31, 2003
     [2002 - $20,571; 2001 - $nil].

     In the year ended  December  31,  2003,  $73,709  [2002 -  $98,266;  2001 -
     $164,266]  has been used to reduce  expenditures  made in the current  year
     with the remaining  amount at December 31, 2003,  $nil [2002 - $nil; 2001 -
     $39,978] included in current  liabilities to be used to reduce expenditures
     made in  subsequent  periods.  A portion  of these  funds,  to a maximum of
     $94,238, are repayable under certain defined terms of non-performance.


                                       80
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


16. Segmented information

In 2003 the Company has one reportable  segment,  BioOil Power  Generation.  The
BioOil Power  Generation  segment relates to the  biomass-to-energy  technology,
BioTherm(TM).  Substantially  all of the Company's  operations and assets are in
Canada and are solely focused on the  development and  commercialization  of its
BioTherm  technology.  BioOil Power Generation is  biomass-to-energy  technology
that converts low value forest waste and  agricultural  by-products  into BioOil
for use in power generation or other industrial energy purposes.

In prior years,  the Company also had two other reportable  segments:  DynaPower
and Actuator. In 2002, the Company sold the operating assets of DynaPower to the
management  of  DynaPower  and  entered  into a  licensing  arrangement  for the
DynaPower intellectual property retained by the Company [note 10]. The licensing
agreement  under the Actuator  segment expired in 2002 and has not been renewed.
Corporate  includes other  corporate  related  amounts that are not a separately
reportable segment.

<TABLE>
<CAPTION>
                                                    2003              2002              2001
                                                      $                 $                $
 -------------------------------------------------------------------------------------------------
 <S>                                              <C>                <C>                <C>
 Revenue
 Actuator                                                 --            47,419                --
 DynaPower                                                --            18,480           274,360
 BioOil Power Generation                                  --             2,580                --
 Corporate                                                --                90                --
 -------------------------------------------------------------------------------------------------
                                                          --            68,569           274,360
 -------------------------------------------------------------------------------------------------
 Loss for the period from continuing
 operations
 Actuator                                                 --            47,419          (111,574)
 DynaPower                                                --          (105,074)         (578,527)
 BioOil Power Generation                          (4,921,650)         (856,475)       (2,276,293)
 Corporate                                                --        (3,452,324)       (3,471,067)
 -------------------------------------------------------------------------------------------------
                                                  (4,921,650)       (4,366,454)       (6,437,461)
 -------------------------------------------------------------------------------------------------
 Capital expenditures, including patents
    (net of government grants and disposal)
 DynaPower                                                --                --            18,412
 BioOil Power Generation                           1,497,398           182,637           543,980
 Corporate                                             4,702               836            44,257
 -------------------------------------------------------------------------------------------------
                                                   1,502,100           183,473           607,649
 -------------------------------------------------------------------------------------------------
 Amortization and depreciation
 Actuator                                                 --                --            33,912
 DynaPower                                                --                --           100,323
 BioOil Power Generation                              90,373           197,005           215,546
 Corporate                                            35,207           116,469            54,714
 -------------------------------------------------------------------------------------------------
                                                     125,580           313,474           404,495
 -------------------------------------------------------------------------------------------------
 Total assets
 BioOil Power Generation                           3,211,780           865,647
 Corporate                                           547,825           420,166
 --------------------------------------------------------------------------------
                                                   3,759,605         1,285,813
 --------------------------------------------------------------------------------
</TABLE>


                                       81
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


16. Segmented information (cont'd.)

<TABLE>
<CAPTION>
                                                    2003              2002              2001
                                                      $                 $                $
 -------------------------------------------------------------------------------------------------
 <S>                                               <C>                 <C>             <C>
 Geographic information
 Revenue
 United States                                            --            47,419           109,795
 Canada                                                   --            21,060           109,935
 Other                                                    --                90            54,630
 -------------------------------------------------------------------------------------------------
                                                          --            68,569           274,360
 -------------------------------------------------------------------------------------------------
 Capital assets
 United States                                           685               792
 Canada                                            2,270,176           720,122
 United Kingdom                                       22,561            29,495
 --------------------------------------------------------------------------------
                                                   2,293,422           750,409
 ================================================================================
</TABLE>


17. PROJECT ADVANCE

In June 2003 the  Company  received  $154,488  (C$200,000)  from  Ontario  Power
Generation Inc. ("OPG") as an initial investment in a proposed Ontario based 100
TPD  BioOil  co-generation  project  (the  "Project").  The funds  were used for
pre-development  work  related to the  Project  and are to be  converted  into a
Project ownership interest or Company equity upon the decision of whether or not
to proceed with the Project.  The Project is now  proceeding at the site of Erie
Flooring  in West Lorne  Ontario,  but the Company has agreed with OPG that they
may extend the time until  December  31,  2004 to decide  whether to convert the
Project Advance into either a Project ownership  interest or into Company equity
based on then current market value.


                                       82
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)



18.   RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The Company  prepares the consolidated  financial  statements in accordance with
Canadian  generally accepted  accounting  principles  ("Canadian  GAAP"),  which
conform in all material  respects to those in the United States  ("U.S.  GAAP"),
except as follows:

[i]   Under U.S. GAAP, the excess,  if any, between the fair value of the shares
      in escrow and the carrying value, will be recorded as compensation expense
      upon release from escrow. Under Canadian GAAP, shares released from escrow
      do not give rise to compensation expense.

[ii]  Under U.S.  GAAP,  patent costs are amortized  over the life of the patent
      commencing  with the date the  patent is  granted.  Under  Canadian  GAAP,
      patent costs are  amortized  over the life of the patent  commencing  with
      commercial production.

[iii] Prior  to  January 1, 2002,  the   Company   did  not  record  stock-based
      compensation for Canadian GAAP purposes and as such there was a difference
      between Canadian and U.S. GAAP. Effective January 1, 2002, the Company has
      adopted the guidance  under  CICA  Handbook Section 3870 [note 3] which is
      consistent with U.S. GAAP.

      For U.S.  GAAP  purposes,  the Company  has  elected to follow  Accounting
      Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
      (APB 25) and related  interpretations,  in  accounting  for stock  options
      granted to officers,  directors,  and employees.  Compensation  expense is
      calculated based on the difference,  on the measurement date,  between the
      fair market value of the  Company's  stock and the  exercise  price and is
      recorded over the vesting period of the options.  During 2003,  there were
      1,595,456 [2002 - nil; 2001 - 15,940] fixed employee stock options granted
      with exercise prices less than the market price of the underlying stock on
      the date of the grant.  For U.S.  GAAP  purposes,  the stock  appreciation
      rights ("SA Rights") and performance-based stock options are accounted for
      as a variable  compensation  plan under APB 25.  Compensation  relating to
      variable plans is recorded in the reconciliation  when it becomes probable
      that the award will be earned.

[iv]  For U.S. GAAP purposes,  the Company presents the disclosure  requirements
      of   Financial   Accounting   Standard  No.  130  ("SFAS  130")  in  these
      consolidated  financial statements.  SFAS 130 requires the presentation of
      comprehensive income and its components. Comprehensive income includes all
      changes in equity during a period except shareholder  transactions.  Other
      accumulated comprehensive income comprises only the cumulative translation
      adjustment.


                                       83
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


18.   RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.)

If US  GAAP  were  followed,  the  significant  variations  on the  consolidated
statements  of loss and  comprehensive  loss would be as summarized in the table
below.

<TABLE>
<CAPTION>
                                                    2003              2002              2001
                                                      $                 $                $
 -------------------------------------------------------------------------------------------------
 <S>                                               <C>               <C>               <C>
 Loss for the year, Canadian GAAP                  4,984,681         5,261,607         6,838,264
 Adjustment for patent cost amortization                  --                --               951
 Adjustment for stock based compensation                  --                --          (166,595)
 Adjust for patent write-down                             --             2,862           (69,728)
 -------------------------------------------------------------------------------------------------
 Loss for the year, U.S. GAAP                      4,984,681         5,264,469         6,602,892
 -------------------------------------------------------------------------------------------------

 Unrealized losses on foreign currency               146,363            24,321           148,360
 translation
 -------------------------------------------------------------------------------------------------
 Comprehensive loss for the year, U.S. GAAP        5,131,044         5,288,790         6,751,252
 =================================================================================================

 Weighted average number of common shares
    outstanding                                   56,617,490        45,094,978        36,458,969
 =================================================================================================

 Basic and diluted loss per common share,
    U.S. GAAP                                          (0.09)            (0.12)            (0.18)
 =================================================================================================
</TABLE>



Consolidated  balance  sheet items  which vary  significantly  under  accounting
principles generally accepted in the United States would be as follows:

<TABLE>
<CAPTION>
                                                           2003            2002
                                                             $              $
 -----------------------------------------------------------------------------------
 <S>                                                     <C>             <C>
 Share capital                                            33,094,758      29,739,808
 Shares to be issued                                       2,827,111         771,449
 Contributed surplus                                       5,096,189       2,979,508
 Other accumulated comprehensive income                     (690,107)       (543,744)
 Deficit                                                 (38,603,514)    (33,618,833)
 -----------------------------------------------------------------------------------
 Shareholders' equity                                      1,724,437        (671,812)
 -----------------------------------------------------------------------------------
</TABLE>


                                       84
<PAGE>

DynaMotive Energy Systems Corporation


                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

December 31, 2003                                   (expressed in U.S. dollars)


19. SUBSEQUENT EVENTS

[a]  As described in note 9(c),  during the first 4 months in 2004,  the Company
     issued 7,189,609 common shares for total proceeds of $2,755,162,  inclusive
     of  $1,476,012  received  as at  December  31,  2003  relating to a private
     placement commencing during third quarter of 2003.

[b]  On February 17, 2004 the Company subscribed for an additional 9,980 A Units
     and Magellan  Aerospace  subscribed for 10 A Units of the West Lorne Biooil
     Co-generation   Limited   Partnership  to  bring  the  relative   ownership
     percentage to 99.9% as to DynaMotive and 0.1% as to Magellan.

[c]  On  March  5,  2004  the  Company  signed  a  Contribution  Agreement  with
     Sustainable  Development  Technology  Canada  ("SDTC")  whereby  SDTC  will
     contribute  C$5,000,000  (US$3.8  million)  to  the  capital  cost  of  the
     Company's  Erie  Flooring  100 tonne per day BioOil  co-generation  project
     development.  This  amount will be a grant and will be  accounted  for as a
     reduction in the capital cost of the project.

20. COMPARATIVE FIGURES

Certain  comparative figures have been reclassified in order to conform with the
presentation adopted in the current year.


                                       85

<PAGE>


CERTIFICATIONS


I, R. Andrew Kingston, President and Chief Executive Officer of DynaMotive
Energy Systems Corporation, certify that;

(1) I have reviewed this Annual Report on Form 20-F of DynaMotive Energy Systems
Corporation;

(2) Based on my knowledge, this report does not contain any  untrue statement of
a material fact or omit to state a material fact necessary to make the statement
made, in light of the  circumstances  under which such statements were made, not
misleading with respect to the period covered by this report;

(3) Based  on  my  knowledge,  the  financial  statements, and  other  financial
information included in this report, fairly present in all material respects the
financial condition,  results of  operations  and cash flows of  the  Registrant
as of, and for, the periods presented in this report;

(4) The  registrant's   other   certifying  officers  and I are responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

        (a)     Designed such disclosure controls and procedures, or caused such
                disclosure  controls  and  procedures  to  be designed under our
                supervision, to ensure that material information relating to the
                registrant, including its  consolidated  subsidiaries,  is  made
                known to us by others within those entities, particularly during
                the period in which this report is being prepared;

        (b)     Evaluated  the  effectiveness  of  the  registrant's  disclosure
                controls  and procedures and presented in this report our
                conclusions  about the effectiveness of the disclosure  controls
                and procedures,  as of the end of the period covered by this
                report based on such evaluation; and

        (c)     Disclosed in this report any change in the registrant's internal
                control  over  financial  reporting  that  occurred  during  the
                registrant's   most  recent  fiscal quarter that has  materially
                affected,  or is  reasonably  likely to  materially  affect, the
                registrant's  internal  control  over  financial  reporting; and

(5) The registrant's other certifying officer(s) and I have disclosed,  based on
our most recent evaluation of the internal control over financial reporting,  to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

        (a)     All  significant  deficiencies  and  material weaknesses in  the
                design or operation of internal control over financial reporting
                which  are  reasonably likely  to  adversely  affect  the
                registrant's  ability  to  record, process, summarize and report
                financial information; and


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<PAGE>

        (b)     Any fraud, whether or not material,  that involves management or
                other employees who have a significant role in the registrant's
                internal control over financial reporting.

Date:   May 17, 2004



/S/ R. Andrew Kingston
------------------------------
By: R. Andrew Kingston
Title:President and Chief Executive Officer



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<PAGE>


                                 CERTIFICATIONS


I, Brian Richardson, Chief Financial Officer of DynaMotive Energy Systems
Corporation, certify that;

(1)I have reviewed this Annual  Report on Form 20-F of DynaMotive Energy Systems
Corporation.

(2) Based on my knowledge, this report does not contain any  untrue statement of
a material fact or omit to state a material fact necessary to make the statement
made, in light of the  circumstances  under which such statements were made, not
misleading with respect to the period covered by this report;

(3) Based  on  my  knowledge,  the  financial  statements, and  other  financial
information included in this report, fairly present in all material respects the
financial condition,  results of  operations  and cash flows of  the  Registrant
as of, and for, the periods presented in this report;

(4) The  registrant's   other   certifying  officers  and I are responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

        (a)     Designed such disclosure controls and procedures, or caused such
                disclosure  controls  and  procedures  to  be designed under our
                supervision, to ensure that material information relating to the
                registrant, including its  consolidated  subsidiaries,  is  made
                known to us by others within those entities, particularly during
                the period in which this report is being prepared;

        (b)     Evaluated  the  effectiveness  of  the  registrant's  disclosure
                controls  and procedures and presented in this report our
                conclusions  about the effectiveness of the disclosure  controls
                and procedures,  as of the end of the period covered by this
                report based on such evaluation; and

        (c)     Disclosed in this report any change in the registrant's internal
                control  over  financial  reporting  that  occurred  during  the
                registrant's   most  recent  fiscal quarter that has  materially
                affected,  or is  reasonably  likely to  materially  affect, the
                registrant's  internal  control  over  financial  reporting; and

(5) The registrant's other certifying officer(s) and I have disclosed,  based on
our most recent evaluation of the internal control over financial reporting,  to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

        (a)     All  significant  deficiencies  and  material weaknesses in  the
                design or operation of internal control over financial reporting
                which  are  reasonably likely  to  adversely  affect  the
                registrant's  ability  to  record, process, summarize and report
                financial information; and


                                       88

<PAGE>

        (b)     Any fraud, whether or not material,  that involves management or
                other employees who have a significant role in the registrant's
                internal control over financial reporting.


Date:   May 17, 2004



/s/ Brian Richardson
------------------------------
By: Brian Richardson
Title: Chief Financial Officer


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<PAGE>



Item 19. Exhibits


Exhibit          Exhibit Description

3.1(a)           Company Act Memorandum of DynaMotive  Technologies
                 Corporation,  as amended to August 15,  2000  (filed as Exhibit
                 3.1 to the Company's  Quarterly  Report on Form 10-QSB filed on
                 August 15, 2000 and incorporated herein by reference.)

3.1(b)           Amendment  to  the  Company  act   Memorandum  of
                 DynaMotive  Energy  Systems  Corporation,  dated  July 3,  2001
                 (filed as Exhibit 3.1(b) to the Company's  Quarterly  Report on
                 Form 10-Q filed on August 14, 2001 and  incorporated  herein by
                 reference.)

3.2              Articles of DynaMotive Technologies Corporation,
                 as  amended  to date  (filed as  Exhibit  3.2 to the  Company's
                 Quarterly  Report on Form  10-QSB  filed on August 15, 2000 and
                 incorporated herein by reference.)

4.1              Sustainable Development Technology Canada Contribution
                 Agreement dated as of March 5, 2004.

4.2              Modification No. M1 to the Sustainable Development
                 Technology Canada  Contribution  Agreement dated as of April 6,
                 2004.

4.3              Loan Agreement between Memorial Gift Trust, James Acheson
                 and the Company dated June 3, 2003

4.4              Technology Partnerships Canada Agreement dated July 29, 1997
                 including amendments dated February 2, 1998 to August 29,
                 2003

10.21            Escrow Agreement,  dated January 10, 1995, by and
                 among the  Company,  Montreal  Trust  Company of Canada and the
                 holders  of the  3,140,900  escrowed  shares  (filed as Exhibit
                 10.21 to the  Company's  Registration  Statement  on Form SB-2,
                 Registration   No.  33-98622,   and   incorporated   herein  by
                 reference.)

10.28            February 9, 2000 Agreement to Purchase Patents and
                 Rights  between  DynaMotive  Technologies  Corporation  and RTI
                 Resource  Transforms  International,  Ltd.,  (filed as  Exhibit
                 10.28 to the Company's  Form 10-QSB filed on May 15, 2000,  and
                 incorporated herein by reference.)

12.1             Certification of chief executive officer

12.2             Certification of chief financial officer



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<PAGE>




SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the  undersigned to sign
this annual report on its behalf.

DynaMotive Energy Systems Corporation

Date: May 17, 2004
By:  /s/ R. Andrew Kingston
-------------------------------------
R. Andrew Kingston
President and Chief Executive Officer



By:  /s/ Brian Richardson
-------------------------------------
Brian Richardson
Chief Financial Officer



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