UNITED
      STATES





SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


FORM
      20-F





(Mark
      One)


o REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
      1934





x
      ANNUAL REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
      YEAR ENDED DECEMBER 31, 2005





o
      TRANSITION REPORT PURSUANT TO SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
      __________ TO __________





o
      SHELL COMPANY REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
      FROM __________ TO __________





Commission
      file number 0-31481




ASTRIS
      ENERGI INC.


(Exact
      name of Registrant as specified in its charter)


Not
      Applicable


(Translation
      of Registrant's Name into English)


ONTARIO


(Jurisdiction
      of incorporation or organization)


2175
      DUNWIN DRIVE, UNIT 6


MISSISSAUGA,
      ONTARIO L5L 1X2 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


(Title
      of
      Class)





Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act.


NONE


(Title
      of
      Class)





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.


37,906,569
      COMMON SHARES





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o        No
      x





If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934.


Yes
o         No
      x




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 reporting requirements
      for the past 90 days.


Yes
x             No
      o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
      accelerated filer o  Accelerated
      filer o Non-accelerated filer x





Indicate
      by check mark which financial statement item the registrant has elected to
      follow.


Item
      17  x         Item
      18 o





If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Exchange Act).


Yes 
       o        No 
x





(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  
      o             No  o







TABLE
      OF
      CONTENTS





Part
                IItem
                1.
            
            Identity
                of Directors, Senior Management and Advisers
            3Item
                2.
            
            Offer
                Statistics and Expected Timetable
            3Item
                3.
            
            Key
                Information
            3Item
                4.
            
            Information
                on the Company
            11Item
                4A.
            
            Unresolved
                Staff Comments
            22Item
                5.
            
            Operating
                and Financial Review and Prospects
            22Item
                6.
            
            Directors,
                Senior Management and Employees
            22Item
                7.
            
            Major
                Shareholders and Related Party Transactions
            35Item
                8.
            
            Financial
                Information
            38Item
                9.
            
            The
                Offer and Listing
            39Item
                10.
            
            Additional
                Information
            40Item
                11.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            47Item
                  12.
            
            Description
              of Securities Other than Equity Securities
            47Part
                  IIItem
                13.
            
            Defaults,
                Dividend Arrearages and Delinquencies
            47Item
                14.
            
            Material
                Modifications to the Rights of Security Holders and Use of
                Proceeds
            47Item
                15.
            
            Controls
                and Procedures
            47Item
                16.
            
            [Reserved]
            48Item
                16A.
            
            Audit
                Committee Financial Expert
            48Item
                16B.
            
            Code
                of Ethics
            49Item
                16C.
            
            Principal
                Accountant Fees and Services
            49Item
                16D.
            
            Exemptions
                from Listing the Standards for Audit Committees
            49Item
                16E.
            
            Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers
            49Part
                IIIItem
                17.
            
            Financial
                Statements
            49Item
                18.
            
            Financial
                Statements
            49Item
                19.
            
            Exhibits
            49










FORWARD
      LOOKING STATEMENTS Certain statements in this annual report are based upon
      the
      beliefs of management of Astris Energi Inc., as well as assumptions made by
      and
      information currently available to management, and such statements may
      constitute "forward-looking statements" within the meaning of the U. S. Private
      Securities Litigation Reform Act of 1995. Investors should note that many
      factors, some of which are discussed elsewhere in this Report, could affect
      the
      future operations and the future financial results of the Company and could
      cause future operations and future financial results to differ materially from
      those expressed in such forward-looking statements.





PART
      I.





ITEM
      1.
 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.


Not
      Applicable.





ITEM
      2.
 OFFER STATISTICS AND EXPECTED TIMETABLE.


Not
      Applicable.





ITEM
      3.
 KEY INFORMATION.





A.
       SELECTED FINANCIAL DATA.





The
      following table sets forth, in Canadian dollars, selected historical information
      concerning the Company presented in accordance with Canadian GAAP and is
      qualified by reference to the consolidated financial statements and notes
      thereto. See "Item 17. Financial Statements".


3





**As
                at**
              **December
                31,**
              **2005**
            ****
            **As
                at**
              **December
                31,**
              **2004**
            ****
            **As
                at**
              **December
                31,**
              **2003**
            ****
            **As
                at**
              **December
                31,**
              **2002**
            ****
            **As
                at**
              **December
                31,**
              **2001****(RESTATED)**
            
            **(RESTATED)**Revenue
            
            $
            291,512
            
            $
            88,798
            
            $
            67,870
            
            $
            180,168
            
            $
            35,104Net
                Loss from
              Operations
            
            
            (5,330,864
            )
            
            (3,462,257
            )
            
            (2,206,969
            )
            
            (620,654
            )
            
            (743,644
            )Net
                Loss
            
            
            (5,330,864
            )
            
            (3,462,257
            )
            
            (2,206,969
            )
            
            (743,472
            )
            
            (705,555
            )Basic
                andDiluted
                Loss from operationsper
                Share
            
            
            (0.16
            )
            
            (0.16
            )
            
            (0.12
            )
            
            (0.05
            )
            
            (0.06
            )Total
                Assets
            
            
            982,494
            
            
            509,124
            
            
            435,235
            
            
            676,500
            
            
            190,376Net
                Assets
            
            
            (228,456
            )
            
            253,294
            
            
            (135,975
            )
            
            135,620
            
            
            (207,150
            )Long
                Term Obligations
            
            
            -
            
            
            -
            
            
            100,000
            
            
            120,400
            
            
            114,000Share
                Capital
            
            
            10,030,096
            
            
            6,227,074
            
            
            3,343,853
            
            
            2,525,239
            
            
            1,979,201Number
                of Shares
            
            
            37,906,596
            
            
            26,316,551
            
            
            19,230,425
            
            
            16,106,403
            
            
            12,936,178Cash
                Dividends
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -





EXCHANGE
      RATES





The
      following table sets out the exchange rates for the conversion of Canadian
      dollars into United States dollars.  The exchange rates used are the
      closing rates provided by The Bank of Canada.  The table lists the rate in
      effect at the end of the following periods, the average exchange rates (based
      on
      the average of the exchange rates for the closing date of each month in such
      periods), and the range of high and low exchange rates for such
      periods.





**Year
                ended December 31,**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003**
            ****
            **2002**
            ****
            **2001**End
                of Period
            
            
            .86
            
            
            .83
            
            
            .77
            
            
            .63
            
            
            .63Average
                for Period
            
            
            .825
            
            
            .77
            
            
            .71
            
            
            .63
            
            
            .65High
                for Period
            
            
            .875
            
            
            .85
            
            
            .78
            
            
            .65
            
            
            .67Low
                for Period
            
            
            .785
            
            
            .71
            
            
            .64
            
            
            .63
            
            
            .63





The
      following table sets out the range of high and low exchange rates, for the
      conversion of Canadian dollars into United States dollars for each of the
      corresponding months during 2006. The exchange rates used are the closing rates
      as provided by the Bank of Canada.


4





**Month**
            ****
            **High**
            ****
            **Low**November
                2005
            
            
            .86
            
            
            .83December
                2005
            
            
            .87
            
            
            .85January
                2006
            
            
            .88
            
            
            .85February
                2006
            
            
            .88
            
            
            .86March
                2006
            
            
            .885
            
            
            .85April
                2006
            
            
            .89
            
            
            .85





The
      exchange rate on December 31, 2005 for the conversion of United States dollars
      into Canadian dollars was $1.1630 (CDN$1.00 = US$.86). As of April 15, 2006
      the
      close rate of exchange for the conversion of United States dollars into Canadian
      dollars was 1.1453(CDN$1.00 = US$.873).  The exchange rates used are the
      closing rates as provided by the Bank of Canada.





B.
       CAPITALIZATION AND INDEBTEDNESS.


Not
      Applicable.





C.
       REASON FOR THE OFFER AND USE OF PROCEEDS.


Not
      Applicable.





D.
       RISK FACTORS. An investment in the securities of the Company involves a
      high degree of risk. The following risk factors should be considered carefully
      in evaluating the Company and its business. If any of the risks described below
      occurs, the business, results of operations and financial condition of the
      Company could be adversely affected.





HISTORY
      OF LOSSES SINCE INCEPTION, EXPECTATION OF LOSSES IN THE IMMEDIATE FUTURE, AND
      POSSIBILITY THAT THE COMPANY MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY. The
      Company has incurred net losses each year since inception. The accumulated
      deficit of the Company was CDN$14,321,291 as of December 31, 2005. The Company
      expects to continue to incur net losses at least through fiscal year 2006,
      and
      these losses may be substantial. To implement the current business strategy,
      the
      Company will have to incur a high level of fixed operating expenses and will
      continue to incur considerable research and development expenses and capital
      expenditures. Accordingly, if additional capital, revenues and positive cash
      flows cannot be generated, to which no assurance can be given, the Company
      will
      not achieve profitability. Even if profitability is achieved, it may not be
      sustained or increased on a quarterly or annual basis.





THE
      AUDITED ANNUAL REPORT OF THE COMPANY STATES THAT THE ABILITY OF THE COMPANY
      TO
      CONTINUE AS A GOING CONCERN IS IN SUBSTANTIAL DOUBT. Whether the Company
      continues as a going concern is dependent upon the Company's ability to raise
      additional capital, the successful commercialization of one or more of the
      Company's research projects, and the attainment of profitable operations. The
      ability to generate future revenues will depend on a number of factors, many
      of
      which are beyond control of the Company. These factors include the rate of
      market acceptance of its fuel cell products, competitive activities, regulatory
      developments and general economic trends.





ABILITY
      TO OBTAIN ADDITIONAL CAPITAL, THEREBY RESULTING IN CURTAILMENT OR CESSATION
      OF
      OPERATIONS.  The ability of the Company to realize its objectives depends
      in large part upon obtaining additional capital. The Company has a present
      need
      for capital in connection with its fuel cell development activities and
      transition to commercial operations. The Company believes that it will require
      at least US$10 million over the next three to five years to establish production
      and subsequently market the fuel cells and fuel cell products developed by
      the
      Company.  There is no assurance that any additional financing will be
      available on commercially attractive terms, in a timely fashion, in sufficient
      amounts, not substantially dilutive to shareholders, or at all. If adequate
      funds are not available, the Company would have to scale back its operations,
      including its product development, manufacturing and marketing activities,
      all
      of which could lead ultimately to cessation of operations.


5





LACK
      OF
      EXPERIENCE IN MANUFACTURING AND MARKETING PRODUCTS. To date, the Company has
      derived revenues principally from sales of demonstrators or small ancillary
      products, contract research and government grants. Sales have been limited
      to
      demonstration products and prototype models. The Company's prototypes are
      pre-commercial production products assembled on a one-off basis, by hand. The
      Company is not yet adequately financed to produce commercial products. The
      Company has produced its fuel cells on a semi- automated basis but has not
      designed a proven automated assembly facility. In addition, the Company still
      has not been able to determine whether or not its prototypes can be assembled
      through automation or if there is a sufficient level of product acceptance
      for
      the Company to sell fuel cells in sufficient volume to become
      profitable.





The
      Company may not be able to produce or commercialize any of its products in
      a
      cost-effective manner and it may not be able to successfully market these
      products. Production costs of the initial commercial units may be higher than
      their sales price.  There can be no assurance that higher production levels
      will occur or that sales prices will ever exceed production costs.





MARKET
      ACCEPTANCE OF THE FUEL CELL PRODUCTS MAY TAKE LONGER TO ACHIEVE OR MAY NEVER
      BE
      ACHIEVED. The Company's alkaline fuel cell products represent a new technology
      and any success will depend on this technology achieving market acceptance.
      Because the Company's products are designed to capitalize on markets that
      presently utilize or are serviced by products from traditional and
      well-established power generation sources, such as engine-generators or
      batteries, the Company may face significant resistance from end-users to adopt
      a
      new and alternative power source technology. Fuel cell products for portable
      and
      mobile applications represent an emerging market. The Company does not know
      whether its targeted customers will purchase such products.





ABILITY
      TO MEET PROJECTED DEMAND FOR THE COMPANY'S PRODUCTS. Locating and establishing
      new manufacturing facilities, if required, will place significant demands on
      the
      Company's managerial, technical, financial and other resources.





The
      Company's business plan contemplates significant growth in sales and personnel
      which may place a strain upon its current management systems and resources,
      as
      well as its ability to obtain capital. As of April 15, 2006, the Company had
      fewer than 25 employees. The Company's business plan and anticipated product
      sales will require the Company to hire, train and manage additional employees
      and to establish or contract for production capacity. If the Company is unable
      to hire the skilled employees it needs or to establish its production capacity
      in a timely manner, it might be unable to fulfill orders for its products or
      meet its business plans. There can be no assurance that the Company will be
      able
      to effectively manage its anticipated growth.





ABILITY
      TO COMPETE SUCCESSFULLY IN A HIGHLY COMPETITIVE MARKET. The development and
      marketing of fuel cells and fuel cell systems is extremely competitive. A number
      of firms throughout the world have established fuel cell development programs.
      The Company competes directly with alternative energy and entrenched
      power-generation and power-storage technologies. Competitors range from
      development stage companies to major domestic and international companies.
      Other
      companies may succeed in developing and bringing to market products or
      technologies that are more cost-effective than those being developed by the
      Company, or that would render its products and technology obsolete or
      non-competitive in the marketplace. The Company's competitors have greater
      name
      recognition, larger customer bases and significantly greater financial,
      technical, marketing, public relations, sales, distribution and other resources
      than the Company. There can be no assurance that the Company will be able to
      compete effectively with such companies. In addition, the Company expects that
      additional competition will develop, from both existing businesses in the energy
      industry and from new entrants.





DEPENDENCE
      ON THIRD-PARTY MANUFACTURERS. The Company will depend on third parties for
      the
      manufacture of its products and for parts necessary to manufacture its products.
      If manufacturers or suppliers are unable or unwilling to manufacture or provide
      the materials and components to manufacture the Company's products on
      commercially reasonable terms, or at all, delays in identifying and contracting
      for alternative manufacturing and supply sources could adversely affect the
      ability to market the products.


6





POSSIBLE
      LIABILITY FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS AND
      DIFFICULTIES IN PROTECTING THE COMPANY'S INTELLECTUAL PROPERTY.  Despite
      the Company's efforts to protect its proprietary rights, unauthorized parties
      may attempt to copy aspects of the Company's products and product designs,
      or to
      obtain and use information that the Company regards as proprietary. If required,
      policing unauthorized use of the Company's proprietary technology may be
      difficult, time-consuming and costly. In addition, the laws of certain countries
      in which the Company's products may be sold or licensed do not protect its
      products and related intellectual property rights to the same extent as the
      laws
      of Canada or the United States. The Company does not believe that any of its
      products infringe the proprietary rights of any third parties.  From time
      to time, however, third parties may contest the Company's rights to use its
      intellectual property. Any such claims, with or without merit, could be
      time-consuming, result in costly litigation, cause product shipment delays
      or
      require the Company to enter into royalty or licensing agreements. Such royalty
      or licensing agreements, if required, may not be available on terms acceptable
      to the Company.





ASTRIS’
      PRODUCTS MAY NOT MEET PERFORMANCE EXPECTATIONS IN FIELD TESTS, WHICH COULD
      NEGATIVELY AFFECT ITS CUSTOMER RELATIONSHIPS AND INCREASE ITS MANUFACTURING
      COSTS.  The components of its fuel cell products may contain defects or
      errors that could negatively affect its customer relationships and increase
      its
      manufacturing and warranty costs. In internal bench tests, the POWERSTACKTM MC250
      has performed at up to 60% over the original design specification and the E8
      Portable AFC power generator has operated at an electrical efficiency in excess
      of 50%. These results do not guarantee similar or greater performance in future
      independent field tests.





ASTRIS
      MAY NOT BE ABLE TO MANAGE SUCCESSFULLY THE EXPANSION OF ITS OPERATIONS.
 Astris will need to recruit, train and retain key management and other
      qualified personnel to successfully expand its business **.** Astris
      has been gradually expanding its management and technical team to meet customer
      demand and pilot production requirements. Transition to pilot production is
      a
      critical one to meet demand for its products, and validate its ability to
      produce the POWERSTACKTM MC250 in volume leading to commercialization.





NEED
      FOR COMPATIBILITY WITH THE PRODUCTS OF THIRD-PARTY MANUFACTURERS OR POTENTIAL
      CUSTOMERS. The Company's success will depend in large part upon its ability
      to
      make its products compatible with the products of third-party manufacturers.
      The
      Company's products will be successful only if manufacturers redesign or modify
      their existing products to fully incorporate the Company's products and
      technologies. The Company's failure to make its products and technologies
      compatible with the products of third-party manufacturers, or the failure of
      potential customers to redesign or make necessary modifications to their
      existing products to accommodate the Company's products would significantly
      impair or preclude the Company’s ability to sell its products.





ACCIDENTS
      INVOLVING THE FLAMMABLE FUELS USED WITH THE PRODUCTS COULD IMPAIR THEIR MARKET
      ACCEPTANCE. The fuel cell products use hydrogen, which typically is generated
      from gaseous and liquid fuels such as propane, natural gas or methanol, in
      a
      process known as reforming. While the Company's fuel cell products do not use
      these fuels in a combustion process, natural gas, propane and hydrogen are
      flammable fuels that could leak into a residence or commercial location and
      combust, if ignited by another source. Since the Company's products have not
      yet
      gained widespread market acceptance, any accidents involving the Company's
      systems, or other fuel cell-based products, could materially impede demand
      for
      the products. At
      present, the Company does not carry insurance to cover such
      accidents.





THE
      COMPANY'S PRODUCTS MAY FROM TIME TO TIME CONTAIN DESIGN DEFECTS THAT ARE
      DIFFICULT TO DETECT AND CORRECT. Although the Company does not know of any
      existing design defects, there can be no assurance that defects or flaws will
      not be found in new products after commencement of commercial shipments or,
      if
      discovered, that the Company will be able to successfully correct such defects
      or flaws in a timely manner or at all. The occurrence of defects or flaws in
      the
      Company's products could result in loss of, or delay in, market acceptance
      of
      the Company's products.  Correcting such defects or flaws could require
      significant expenditures by the Company.


7





DEPENDENCE
      ON ATTRACTING AND RETAINING KEY PERSONNEL. The success of the Company is largely
      dependent on the performance of its key employees, particularly Jiri K. Nor.
      Mr.
      Nor founded Astris and is the principal developer of Astris' alkaline fuel
      cell
      technology. Additionally, the Company is dependent on a small number of
      employees who have been with Astris for numerous years and who actually
      construct Astris' technological components and are familiar with its proprietary
      designs. Loss of the services of Mr. Nor or the failure to attract and retain
      additional key employees with necessary skills could have a material adverse
      impact upon the Company's growth and profitability. Competition for highly
      skilled management, technical, research and development and other employees
      is
      intense and the Company may not be able to obtain key person life insurance
      policies on any of its employees.





RISKS
      INHERENT IN INTERNATIONAL OPERATIONS INCLUDING CURRENCY EXCHANGE RATE
      FLUCTUATIONS AND TARIFF REGULATIONS. A substantial portion of the Company's
      revenues is expected to be realized in currencies other than Canadian dollars.
      The Company's operating expenses are primarily paid in Canadian dollars.
      Fluctuations in the exchange rate between the Canadian dollar and such other
      currencies may have a material effect on the Company's results of operations.
      In
      particular, the Company may be adversely affected by a significant strengthening
      of the Canadian dollar against the U.S. dollar because the Company sells its
      products and services and receives investment in U.S. dollars. In addition,
      the
      Company does not intend to enter into any hedging or other similar agreements
      or
      arrangements to protect it against any of these currency risks. The Company
      may
      also be subject to tariff regulations and requirements for export licenses,
      particularly with respect to certain technologies, unexpected changes in
      regulatory requirements, difficulties in managing international operations,
      potentially adverse tax consequences, restrictions on repatriation of earnings
      and the burdens of complying with a wide variety of foreign laws.





POSSIBLE
      DIFFICULTIES BY UNITED STATES PERSONS TO EFFECT SERVICE OF PROCESS WITHIN THE
      UNITED STATES UPON THE COMPANY OR ITS DIRECTORS OR OFFICERS, OR TO REALIZE
      IN
      THE UNITED STATES UPON JUDGMENTS. The Company is an Ontario corporation with
      its
      principal place of business in Canada. Most of its Directors and Officers are
      residents of Canada and most of the assets of such persons and of the Company
      are located outside the United States. US Persons should not assume that
      Canadian courts (i) would enforce judgments of United States courts obtained
      in
      actions against the Company or its Officers and Directors predicated upon the
      civil liability provisions of the United States federal securities laws or
      the
      securities or "blue sky" laws of any state within the United States or (ii)
      would enforce, in original actions, liabilities against the Company or its
      Officers and Directors predicated upon the United States federal securities
      laws
      or any such state securities or blue sky laws. Canadian
      courts can enforce such judgments but are not required to give “full faith and
      credit” to such judgments as would courts lying in separate United States
      jurisdictions. For instance, a Florida court would have to enforce a New York
      judgment, but a Canadian court can decide not to enforce a US judgment in
      Canada.








THE
      COMPANY HAS NEVER PAID DIVIDENDS AND IT DOES NOT ANTICIPATE PAYING DIVIDENDS
      IN
      THE FORESEEABLE FUTURE. The Company has never declared any cash dividends on
      its
      Common Shares, and if the Company were to become profitable, it would be
      expected that most or all of such earnings would be retained to support the
      business. As a result, shareholders must rely on stock appreciation for any
      return on their investment in the Common Shares.





THE
      COMPANY HAS AUTHORIZED AN UNLIMITED NUMBER OF COMMON SHARES AND UP TO 10,000,000
      PREFERRED SHARES OF SHARE CAPITAL. Under Canadian law the Company is able to
      issue an unlimited number of its common shares and up to 10 million preferred
      shares. The Company does not need the consent of its shareholders to issue
      these
      additional shares. Therefore, there is a high likelihood of dilution from the
      issuance of additional shares. The additional shares can be used to thwart
      a
      takeover attempt that the Board of Directors does not deem in the Company’s best
      interest, however the Company has not made any provision for issuing shares
      in
      that manner. The Company has not issued any preferred shares.





VOLATILE
      AND LIMITED MARKET FOR THE COMPANY'S COMMON SHARES. The Company's Common Shares
      are not actively traded.  The Company's Common Shares began trading on the
      Over The Counter Bulletin Board Exchange (“OTC.BB”) on June 20, 2001.  The
      Common Shares traded in 2005 from a high of US$0.54 to a low of US$0.11 per
      share. The Common Shares are not presently publicly traded in Canada. There
      can
      be no assurance given that trading activity will increase investor
      recognition.


8





APPLICATION
      OF THE SEC PENNY STOCK REGULATIONS AND RESTRICTIONS. The Securities and Exchange
      Commission has adopted regulations which generally define Penny Stocks to be
      an
      equity security that has a market price less than US$5.00 per share or an
      exercise price of less than US$5.00 per share. This is subject to certain
      exemptions based upon minimum assets or revenues. As of April 30, 2006, the
      closing bid and asked prices for the Common Shares were US$.19 and US$.21 per
      share. As a Penny Stock, the Company's Common Shares may become subject to
      Rule
      15g-9 under the Securities Exchange Act of 1934, as amended, or the Penny Stock
      Rule. This Rule imposes additional sales practice requirements on broker-dealers
      that sell such securities to persons other than established customers and
      "accredited investors" (generally defined as individuals with a net worth in
      excess of US$1,000,000 or annual incomes exceeding US$200,000, or combined
      annual income with spouse of US$300,000).  For transactions covered by Rule
      15g-9, a broker-dealer must make a special suitability determination for the
      purchaser and have received the purchaser's written consent to the transaction
      prior to sale. As a result, this Rule may affect the ability of broker-dealers
      to sell the Company's securities and may affect the ability of purchasers to
      sell any of the Company's securities in the secondary market.





For
      any transaction involving a Penny Stock, unless exempt, the Rule requires that
      prior to any transaction in a Penny Stock, a disclosure schedule prepared by
      the
      SEC relating to the Penny Stock market is delivered. Disclosures about sales
      commissions payable to both the broker-dealer and the registered representative
      and about current quotations for the securities are also required. Finally,
      monthly statements are required to be sent disclosing recent price information
      for the Penny Stock held in the account and information on the limited market
      in
      penny stock.





IF
      AN
      EVENT OF DEFAULT OCCURS UNDER THE CONVERTIBLE DEBENTURE ISSUED TO CORNELL,
      IT
      COULD SERIOUSLY HARM OUR OPERATIONS. On
      April
      10, 2006 we issued a secured convertible debenture to Cornell Capital LP. The
      debenture and related agreements contain numerous events of default which
      include:





·
            failure
                to pay interest, principal payments or other fees when due;





·
            breach
                by us of any material covenant or term or condition of the debenture
                or
                any agreements made in connection therewith;





·
            breach
                by us of any material representation or warranty made in the debenture
                or
                in any agreements made in connection therewith;





·
            default
                on any indebtedness exceeding, in the aggregate, $100,000, to which
                we or
                our subsidiaries are a party;





·
            assignment
                for the benefit of our creditors, or a receiver or trustee is appointed
                for us;





·
            bankruptcy
                or insolvency proceeding instituted by or against us and not dismissed
                within 30 days;





·
            common
                stock suspension for 5 consecutive trading days o from a principal
                market;
                and




If
      we
      default on the debenture and the holder demands all payments due and payable,
      the cash required to pay such amounts would most likely come out of working
      capital, which may not be sufficient to repay the amounts due. In addition,
      since we rely on our working capital for our day to day operations, such a
      default on the note could materially adversely affect our business, operating
      results or financial condition to such extent that we are forced to restructure,
      file for bankruptcy, sell assets or cease operations. Further, our obligations
      under the debenture are secured by substantially all of our assets. Failure
      to
      fulfill our obligations under the debenture and related agreements could lead
      to
      loss of these assets, which would be detrimental to our
      operations.


9





THE
      RESTRICTIONS ON OUR ACTIVITIES CONTAINED IN THE CORNELL FINANCING DOCUMENTS
      COULD NEGATIVELY IMPACT OUR ABILITY TO OBTAIN FINANCING FROM OTHER SOURCES. For
      a
      period of 18 months after the date of issuance of the Cornell debenture, the
      Cornell financing documents restrict us from obtaining additional equity
      financing (including securities convertible or exchangeable into equity) without
      Cornell’s approval and subject to certain specified exceptions. To the extent
      that Cornell declined to approve a financing that does not otherwise qualify
      for
      an exception to the consent requirement, we would be unable to obtain such
      financing. Cornell’s right of first refusal could act as a deterrent to third
      parties which may be interested in providing us with financing or purchasing
      our
      equity securities. To the extent that such a financing is required for us to
      conduct our operations, these restrictions could materially adversely impact
      our
      ability to achieve our operational objectives.





THE
      CONVERSION OF THE SECURED CONVERTIBLE DEBENTURE AND THE EXERCISE OF WARRANTS
      WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS. As
      of
      April 30, 2006, we had outstanding warrants to purchase a total of 16,580,359
      shares of our common stock with exercise prices ranging from US$0.19 to US$1.20
      per share. In addition, as of April 30, 2006 we had:


·
            40,212,228
                shares of common stock issued and outstanding,
                and


·
            6.041,079
                shares of our common stock issuable upon the conversion of the outstanding
                principal balance due on a secured convertible debenture in the remaining
                principal amount of $1,500,000 which was issued to Cornell Capital
                as of
                April 10 2006 based upon a fixed conversion price of $0.2483
                share.




The
      conversion prices of the secured convertible debenture and the common stock
      purchase warrants to purchase an aggregate of 9,241,079 of our common stock
      issued or sold in connection with those transactions are all subject to
      adjustment in the event of stock splits and combinations, dividends or
      distributions, reclassifications or reorganizations, or in the event we issue
      or
      sell any additional shares of common stock or other securities which are
      convertible into common stock or common stock equivalents at a price less than
      the then current conversion price. In addition, remaining common stock purchase
      warrants currently outstanding to purchase an aggregate of 3,200,000 shares
      of
      our common stock are also subject to adjustment in the event of stock splits
      and
      combinations, dividends or distributions, reclassifications or reorganizations.
      As a result, the number of shares of our common stock into which the secured
      convertible debenture or the outstanding warrants are convertible may
      substantially increase based upon future events. We cannot predict with any
      certainty at this time, however, if any of these anti-dilution provisions will
      ever apply in the future to any of these securities and therefore we are unable
      to estimate the ultimate number of shares of our common stock which may be
      issuable upon the conversion of either the secured convertible debenture or
      the
      warrants.  The conversion of the secured convertible debenture and the
      exercise of outstanding warrants may materially adversely affect the market
      price of our common stock and will have a dilutive effect on our existing
      stockholders.







If
      Our
      Secured Convertible Debenture and Warrants is Converted into Common Stock,
      these
      Converting Stockholders Will Have Significant Voting Power, and They Will Have
      the Ability to Exert Substantial Influence Over Matters Requiring Stockholder
      Approval. Our secured convertible debenture and warrants are convertible into
      shares of our common stock. If all such securities are converted into common
      stock, the shares issued upon this conversion will total approximately 23%
      of
      our outstanding common stock, and will have the ability to exert substantial
      influence over all matters requiring approval of our stockholders, including
      the
      election and removal of directors, the approval of mergers or other business
      combinations, and other significant corporate actions. This ability to influence
      our affairs might be disadvantageous to our other stockholders.





FORWARD
      LOOKING INFORMATION ****





The
      following discussion, as well as other sections within this annual report,
      contains forward-looking information which is based on current expectations
      and
      entails various risks and uncertainties. These risks and uncertainties could
      cause or contribute to actual results that are materially different from those
      expressed or implied. The forward-looking information contained in this document
      is current only as of the date of the document. There should not be an
      expectation that such information will in all circumstances be updated,
      supplemented or revised whether as a result of new information, changing
      circumstances, future events or otherwise.


10





ITEM
      4.
      INFORMATION ON THE COMPANY.





A.
      HISTORY AND DEVELOPMENT OF THE COMPANY.





Astris
      Energi Inc. ("AEI" or the "Company") was incorporated as Kayty Exploration
      Ltd.
      on March 18, 1981, pursuant to the Companies Act of the Province of Alberta,
      Canada to engage in oil and gas exploration activities. The Company subsequently
      changed its name to Kayty Inc. in August 1987, changed the place of
      incorporation to the Province of Ontario, Canada, and effected a one-for-ten
      reverse split of its Common Shares. In December 1994, the Company changed its
      name to WLD Inc. ("WLD") and effected a one-for-three reverse split of its
      Common Shares, reducing the outstanding Common Shares to 5,000,000 shares.
      By
      1995, WLD had ceased exploration activities and sought other business
      activities. In February 1996, the Company acquired Astris Inc. in exchange
      for
      1,500,000 Common Shares and warrants for the purchase of 3,500,000 Common
      Shares, which warrants were subsequently exercised in 1997 at an exercise price
      of CDN$0.05 per warrant. Additionally, in June 1995, the Company changed its
      name to Astris Energi Inc. The purpose of the acquisition was for the Company
      to
      obtain a potentially promising business activity, and Astris Inc. was seeking
      to
      be part of a public company to facilitate raising working capital to further
      the
      development of its fuel cell research.  AEI began trading on the OTC.BB
      under the trading symbol “ASRNF” on June 20, 2001.





The
      Company's principal business office is located at 2175 Dunwin Drive, Unit 6,
      Mississauga, Ontario, Canada L5L 1X2 and its telephone number is (905)608-2000.
      The Company's e-mail address is questions@astris.ca. The Company maintains
      a
      website at www.astris.ca. The Company is not incorporating, by reference in
      this
      Form 20-F, the information on its website.





The
      Company’s U.S. agent is CT Corporation System, 111 Eighth Avenue, 13 th Floor,
      New York City, New York, U.S.A. 10011.





B.
      BUSINESS OVERVIEW.





THE
      COMPANY'S PURPOSE





The
      Company's mission is to become the leading provider of affordable fuel cells
      and
      fuel cell power generators. The Company’s near term priority is to achieve the
      required business partnerships and financing to successfully achieve
      manufacturing capability leading to commercialization. The Company’s business
      plan calls for commercialization within three years provided that adequate
      funding can be secured.




DESCRIPTION
      OF THE COMPANY'S BUSINESS ACTIVITIES





Astris
      Energi Inc. is a Canadian (Mississauga, Ontario) company that since 1983 has
      been pioneering the development of alkaline fuel cells (“AFCs”) and AFC
      generators and now has a series of such power systems tested and ready for
      commercialization. While most fuel cell companies are targeting the eventual
      car-truck-bus market or large utility type generating stations, Astris has
      specialized, in one-to-ten kilowatt systems which we believe have tremendous
      global market potential and anticipated earlier adoption then the markets
      previously discussed. The company also anticipates linking modules together
      in
      larger units for larger applications.





Since
      1995, the Company has been engaged in the design, production and
      commercialization of alkaline fuel cell systems for industrial, commercial
      and
      retail markets. Specifically, the Company's main focus has been to develop
      and
      market an AFC system which could be used to provide backup or off-grid power,
      portable power for small niche vehicles. In December 2004, the Company completed
      its second version of an operating golf car powered by its new Model E7 AFC
      fuel
      cell system and since 2004 tested the Model E8 Portable Power Generator that
      provides 2.4 kW for backup of off-grid power requirements.




11




Working
      closely with the
      company's development and manufacturing subsidiary in the Czech Republic,the
      Company has completed a series of alkaline fuel cell generators
      including:


A 1-kilowatt portable system for extensive testing by the Czech military





A
      1-kilowatt fuel cell power generator capable of powering golf cars, in-plant
      delivery vehicles and other small vehicles required at airports, warehouses,
      retirement communities among others. This system was further integrated into
      the
      AFC Powered Golf Car. A second version of the AFC Powered Golf Car with 1.8
      kilowatt of fuel cell power was completed in December 2004.





A
      4-kilowatt power unit capable of providing electricity, heat and hot water
      for
      individual homes, motor homes and boats.





A
      2.4-kilowatt portable power unit that can deliver backup power or portable
      power
      for a variety of applications.





The
      Company continues to demonstrate the world's first alkaline fuel cell-powered
      golf car fueled by hydrogen.  To realize the full potential of these
      markets, Astris intends to partner with or license to major manufacturers in
      each field.





In
      addition, assuming success with the current fuel cell projects, in the future
      the Company will also seek to develop and market AFC systems up to ten or more
      kilowatts for other uses, such as powering small vehicles, power supplies in
      individual homes and emergency, uninterruptible power supplies for larger
      telecommunication needs, hospital emergency rooms and computers.





The
      past three years have yielded progress for Astris in alkaline fuel cell
      technology. With prospects targeted, Astris has a series of systems ready for
      independent field tests.





Improvements
      towards automated manufacturing are required to both reduce costs and allow
      volume production. We expect to be able to commercially sell products within
      36
      months, as long as the necessary financing is available. There are no specific
      requirements for certification for the sale of fuel cells at this time. However,
      Astris participates in the workings of the CSC/IEC TC 105 (Canadian
      Sub-Committee to the International Electrotechnical Commission, Technical
      Committee 105) which has been set up to create such future standards. Astris
      will comply with all the relevant standards as they come into force. For
      specific applications standards that apply to certain fuel cell systems are
      of
      some interest such as: ANSI/CSA America FC 1-2004 American National Standard/CSA
      America Standard for Stationary Fuel Cell Power Systems, and ANSI/CSA America
      FC
      3-2004 American National Standard/CSA America Standard for Portable Fuel Cell
      Power Systems.





Astris’
      facilities comply with the NFPA 55 (National Fire Protection Association -
      U.S.)
      standard for handling gases (hydrogen). No part of this standard pertains to
      usage of hydrogen in the quantities used in Astris’ fuel cell
      products.





DESCRIPTION
      OF FUEL CELLS





Fuel
      cells are electrochemical devices that supply electricity directly from hydrogen
      without combustion and the associated noise and pollution. Applications are
      numerous and include three broad categories including portable, stationary
      and
      mobile. Astris fuel cells have excellent potential in all three market segments
      and current development is focused on those market segments that are expected
      to
      have earliest adoption. These early markets include stationary, portable and
      select mobile applications. Currently, many portable and stationary applications
      are served by a combination of batteries and gasoline or diesel generators.
      Since fuel cells generate electricity in an efficient and clean manner from
      the
      electrochemical reaction of hydrogen and oxygen, many early applications are
      available where existing technologies are otherwise eliminated. The fuel cell
      is
      a potential substitute for both mobile and stationary applications currently
      using a battery backup or internal combustion engine today. Examples of these
      applications included all kinds of vehicles, home energy requirements,
      commercial buildings, remote sites and situations requiring electricity that
      are
      not connected to distributed power supplies. Hydrogen can be derived from a
      variety of sources including conventional fuels such as natural gas or propane,
      through chemical reactions and through electrolysis of water. Oxygen for Astris
      fuel cells is drawn from the air.


12





Astris
      fuel cells are environmentally cleaner and designed to be more cost-effective
      than power generation using fossil fuels. Fuel cells produce little noise,
      some
      heat and water as a waste product. These benefits offer great advantages over
      gasoline generators, as such generators are often responsible for producing
      large amounts of air and noise pollution. In addition, fuel cells are nominally
      at least two times more energy efficient than current gasoline generators and
      perform at high efficiency over a wide range of power requirements.





All
      Astris fuel cells and related products have been offered for sale and have
      been
      selling for years on a demonstration basis only, from cells to complete
      generators and golf cars. They have not been sold commercially because they
      have
      not been certified for commercial sales as of yet and improvements are still
      being made to the products so that they can be sold on a commercial basis.
      The
      products have been tested over a number of years.





Currently,
      Astris Energi products fall into three categories. These categories
      are:





1.
            Fuel
                Cell Modules such as the LABCELLTM LC50, LABCELLTM LC200 and POWERSTACKTM
                MC250





2.
            Fuel
                Cell Systems such as models E1, E2, E3, E4B, E5, E6, E7 and
                E8





3.
            Test
                Equipment such as TL5 Test Load, TL6 Test Load, TESTMASTERTM Data
                Acquisition and Control Software Suite and the QUICKCELLTM
                QC200





The
      state
      of commercialization is slightly different between the three different groups
      although products in all three categories have been sold to a variety of
      customers on a demonstration basis. Specifically sales from the three categories
      are summarized as follows:





1.
            Fuel
                Cell Modules are available through a number of sales channels that
                include
                our direct channel (through our website at
                www.astris.caunder
                “ONLINE SALES”) and through a select number of resellers including the
                Fuel Cell Store. Current sales volumes of fuel cells are small but
                increasing.





2.
            Fuel
                Cell Systems prior to the E7 and E8 are based on our earlier fuel
                cell
                stacks and were delivered to a small number of end-users including
                academic institutions and the military. The feedback provided through
                these interactions allowed Astris to better understand the requirements
                of
                a commercial system and lead to the development of the POWERSTACKTM MC250
                and generators based on this stack technology including the E7 and
                E8. The
                current systems (E7 and E8) are available on a demonstration basis
                to a
                variety of selected organizations that are seen as potential partners
                in
                bringing our technology to commercial success. As described elsewhere
                the
                strategy of Astris is to partner with organizations that have specific
                knowledge of manufacturing, certification and customer requirements
                in a
                variety of end-user applications. Complete fuel cell systems are
                made
                available to these potential partners in order to allow them to evaluate
                and validate the technology.





3.
            Test
                Equipment is available through the same sales channels as our Fuel
                Cell
                Modules. Sales are immaterial but with a ready product we are currently
                planning a targeted advertising campaign for
                September.





There
      are currently five basic types of fuel cell technologies: Alkaline ("AFCs"),
      Proton Exchange Membrane ("PEMFCs"), Phosporic Acid ("PAFCs"), Molten Carbonate
      ("MCFCs"), and Solid Oxide ("SOFCs"). All of these fuel cell chemistries are
      considered to have a variety of viable commercial applications. The five fuel
      cell types are divided into two groups; Low temperature (AFC, PEMFC) and High
      temperature (PAFC, MCFC, SOFC). The Company believes that low temperature fuel
      cells are the only fuel cells that currently have relevance for applications
      that require quick start-up and smaller size.  This premise is based on the
      fact that AFCs and PEMFCs operate at temperatures of 0 to 100 degrees Celsius
      and deliver power that is suited for smaller to mid-size applications.




13




The
        largest issue hindering fuel cell production today is that fuel cells are
        still
        relatively expensive to produce. The high cost of manufacturing fuel cells
        is
        primarily due to the low volume of production that does not allow for economies
        of scale. Direct material costs are currently higher than incumbent
        technologies. As demand for fuel cells increases and research and development
        continues, the cost of the fuel cell and manufacturing should be reduced
        to make
        them more competitive with traditional energy sources.




In
      addition, while fuel cells can produce energy more efficiently and are
      environmentally cleaner than traditional sources of power, other energy sources
      are more entrenched in the world economy. For instance, all golf cars currently
      being manufactured are designed to be powered from batteries or internal
      combustion engines. In order for fuel cells to be used in such products,
      manufacturers must adjust their current designs to be compatible with the fuel
      cell design.





However,
      due to new government pollution regulations, increased energy costs and a
      growing demand for "off-grid" power supplies, demand for fuel cells is
      increasing at a fast pace. As fuel cells become better known to the public
      and
      more cost competitive with other energy sources, this demand is expected to
      increase.





AFCs
      vs.
      PEMFCs





Astris
      engineers have been engaged in development of AFCs since 1983, deciding early
      that this technology had both technical and economic advantages over the PEMFC
      technology that was being pursued by most other companies in the field. Both
      NASA and the Russian space program had chosen AFCs over PEMFCs to provide
      electricity, heat and pure water for all manned space vehicles.  This
      certainly supported the Astris choice as a credible option. Additionally,
      developers in nearly all foreign countries have pursued alkaline
      technology.





Originally,
      critics said only governments with deep pockets could afford AFCs, that they
      could never be "brought down to earth" and be commercially competitive. In
      fact,
      AFCs are inherently more economical to produce and operate than PEMFCs. AFCs
      also provide the highest electrochemical conversion efficiency.  Their
      advantage of instant start, wide temperature range, even in sub-freezing weather
      gives AFC technology great credibility. Broad range of low-cost electrocatalysts
      (not platinum that PEMFCs require) can be built from inexpensive materials
      -
      plastics, carbon, base metals and metal oxides, etc. As well, AFCs allow for
      easier heat and water management.





ASTRIS
      FUEL CELL SYSTEM





Fuel  cells
      are
      like batteries that can be connected to a fuel source and therefore will not
      run
      down as long as fuel is supplied. They generate electric power in a chemical
      reaction between hydrogen and oxygen from the air. They are odorless, noiseless
      and produce no polluting emissions - their only by-products are water and heat.
      The fuel cells designed and built by the Company are AFCs. While both AFC and
      PEMFC fuel cells have potential environmental and efficiency advantages over
      traditional power sources, the Company believes that AFCs can be manufactured
      less expensively, operated more efficiently and therefore are more practical
      in
      small and medium sized applications.





This
      alkaline system will start and operate at temperatures under 0 degrees
      centigrade. This ability to work in extreme temperatures is one of several
      advantages AFCs have over the competing PEMFC fuel cells being developed by
      others.





ALKALINE
      FUEL CELLS





An
      AFC system is an assembly comprised of fuel cell "stack(s)", which generate
      electricity, together with ancillary components.  In an integrated
      assembly, these “stack(s)” constitute a complete, operating fuel cell
      system.





The
      Company believes that all principal material developmental issues in alkaline
      fuel cell technology have been resolved by both the Company and the industry
      at
      large. However, the Company believes that continued research and development
      will improve alkaline fuel cell catalysts and electrode materials. This should
      improve the cost/performance ratio of alkaline fuel cells relative to more
      traditional energy sources.


14





The
      ancillary components to the AFC system supply, filter and re-circulate hydrogen,
      air and liquid electrolyte to the stack(s), deliver electricity to the end-use
      application, remove the aqueous by-product of the fuel cell operation, and
      electrically and electronically control, coordinate and integrate all the
      functions of the system into a single operating whole.





The
      following comments are supported by information from the following published
      books and papers, although it appears in numerous other sources:





1.
            P.
                Gouérec, L. Poletto, J. Denizot, E. Sanchez-Cortezon, J.H.
                Miners,


The
      evolution of the performance of alkaline fuel cells with circulating
      electrolyte


Journal of Power Sources: Volume 129, 2004, pp 193-204, Elsevier
      Publishers





2.
            Erich
                Gülzow,


Alkaline fuel cells: a critical view


Journal
      of Power Sources: Volume 61, 1996, pp 99-104, Elsevier Publishers





3.
            Eddy
                De Geeter, Michael Mangan, Staf Spaepen, William Stinissen, Georges
                Vennekens,


Alkaline fuel cells for road traction


Journal of Power Sources: Volume 80, 1999, pp 207-212, Elsevier
      Publishers





4.
            K.
                Kordesch, M. Cifrain,


Handbook of Fuel Cells - Fundamentals, Technology and
      Applications


Pp 789-793, 2003, John Wiley & Sons, Ltd, Chichester





5.
            G.F.
                McLean, T. Niet, S. Prince-Richard, N.
                Djilali,


An
      assessment of alkaline fuel cell technology


International Journal of Hydrogen Energy: Volume 27, 2002, pp 507-526, Pergamon
      Press





6.
            K.
                Kordesch inComprehensive
                Treatise of Electrochemistry,


Vol. 3, editor J. O’M. Bockris, Plenum Press, New York - London,
      1985.





7.
            T.G.Benjamin,
                E.H.Camara,


The Fuel Cell: Key to Practically Unlimited Energy


Foote Prints Vol. 48, No. 2, Foote Mineral Co., Exton, PA 19341.





8.
            Fuel
                Cells: A Handbook


U.S. Department of Energy, Morgantown Energy Technology Center, Morgantown,
      West
      Virginia.





The
      current E8 Generator has an electrical efficiency of ~55-60% based on the LHV
      (depending on power output being considered). This number is slightly better
      than the 51% (LHV) value that was recently published by Eident Energy in
      reference #1. References #7 and #8 give the efficiency range of gasoline
      electric generators (1 - 100 kW) as 7 - 22 %; for 1 - 10 kW generators as 7
      - 18
      %. Comparing these numbers it is clear that the statement of “...at least two
      times...” is in fact conservative. The real value when comparing the low-end range
      of the Astris system with the high range of an internal combustion generator
      is
      in the range of 55% / 15% = 3.7 times.





The
      basis
      of the statement that AFCs are inherently more economical to produce than PEMFCs
      is based on three major cost items required for PEMFCs; platinum catalyst,
      expensive membrane (eg Nafion) and expensive graphite flow field plates that
      must be machined. Comparatively, the AFC system developed by Astris requires
      no
      platinum, replaces the membrane with a very inexpensive solution of potassium
      hydroxide and replaces graphite plates with inexpensive epoxy or plastic frames.
      All of the references listed above (among others) make statements to support
      the
      cost advantages of AFCs. Some of these statements are included here as
      supporting material (important items highlighted):





i)
            “The
                inherent performance and cost advantages of a fuel cell with an alkaline
                electrolyte may be ascribed to two key factors. The higher kinetics
                for
                the oxygen reduction reaction (ORR) in alkaline over acidic media
                permits
                the use of a lower quantity of precious metals for a given overpotential.
                This results in a greater efficiency for the AFC when compared to
                the PEM
                as well as a large margin for the cost reduction. Secondly the alkaline
                media (i.e. KOH) is less aggressive/corrosive to metal and carbon
                than
                acid. The less-corrosive nature of an alkaline environment ensures
                a
                potential greater longevity and allows the implementation of non-noble
                catalysts, both for the cathode and the anode [6,7]. Low cost structural
                materials such as nickel current collectors and plastic composite
                frames
                are also stable in contact with KOH.” Reference #1, pp
                193


15




ii)
              “In
                  practice, the alkaline cell is very well developed, simple to operate
                  with
                  a built-in cooling system, has excellent reliability, and is inexpensive
                  to manufacture, even in small quantities.” Reference #3, pp
                  207
 
 iii)
              “Alkaline
                  fuel cells are excellent and efficient performers with an excellent
                  pedigree of reliability and life. While the AFC s used in space
                  applications are complex and costly, the terrestrial versions,
                  operating
                  as hybrid systems with buffer battery, are not. Furthermore, the
                  AFC does
                  not rely on high volume manufacture to reduce the cost to an affordable
                  level since the materials are inexpensive and the processing is
                  straightforward.” Reference #3, pp
                  212
 
 The
        lower
        operating cost of AFCs when compared to PEMFCs are based on three facts;
        1- The
        higher electrochemical efficiency described above results directly in lower
        consumption of hydrogen, 2- Balance of plant for the AFC system is simple
        and
        does not include components that have a consume considerable energy (humidifier
        and compressor) required for a PEMFC system and 3- having eliminated the
        Platinum catalyst the systems is not susceptible to carbon-monoxide (CO)
        poisoning and therefore can run on lower grade, hence less expensive hydrogen.
        Commercially available hydrogen for Astris AFCs (99.9%) costs ~$80 CAD per
        cylinder and a cylinder of same size, containing the same quantity of hydrogen
        required for platinum catalyzed fuel cells costs ~$360 CAD. Combining the
        lower
        fuel cost with higher efficiency the end result is a very substantial difference
        in fuel costs during operational life.
 
 iv)
              For
                  the PEMFC systems air must be supplied at high pressures to ensure
                  sufficient partial pressure of Oxygen. Therefore “Air supplied by a
                  controlled compressor can only solve such problems at a considerable
                  over-all system efficiency loss and a high cost increase. The alkaline
                  system produces the reaction water at the hydrogen anode, the acidic
                  membrane system at the air-cathode. Hydrogen can be efficiently
                  circulated
                  in a closed system with a simple condenser arrangement.” Reference #4, pp
                  791
 
 v)
              From
                  the Department of Energy Website: “The platinum catalyst is also extremely
                  sensitive to CO poisoning, making it necessary to employ an additional
                  reactor to reduce CO in the fuel gas if the hydrogen is derived
                  from an
                  alcohol or hydrocarbon fuel. This also adds cost.”http://www.eere.energy.gov/hydrogenandfuelcells/fuelcells/fc_types.html
 
 In
        a
        hydrogen-oxygen fuel cell the theoretical limit of cell voltage is 1.23 V.
        Therefore a cell that produces a voltage of 1.23 V would be considered 100%
        efficient. In practice this voltage limit cannot be reached due to the peroxide
        reaction on the oxygen electrode. Reduction of oxygen takes place in two
        steps,
        via peroxide, in which some of the energy is irreversibly converted into
        heat.
        In reference #6 Kordesch shows the “Pourbaix Diagram” (after M. Pourbaix) for
        hydrogen-oxygen that characterizes the electrode voltages as a function of
        pH.
        The voltage differential between hydrogen and peroxide is constant in the
        range
        of pH 0 - 10, acidic (this includes PEMFC) to mild basic. At about pH = 10
        the
        effect of the peroxide reaction begins to be less pronounced, and by the
        time we
        reached pH = 15, the operation point of alkaline fuel cell, some 100 mV have
        been gained. Everything else being equal, alkaline cell will exhibit higher
        voltage. If the typical cell voltage is 0.6 - 0.7 V, the difference of 100
        mV
        represents 14 - 16 % advantage. This is purely a gift from mother nature,
        not a
        man’s doing. In addition to the aforesaid reference #6, this fact is supported
        by a number of publications including the two presented here:
 
 1.
              “Alkaline
                  hydrogen/air fuel cells have an operating voltage of about 0.8V
                  at
                  300mAcm−2. Assuming that PEM fuel cells deliver 600mAcm−2 at 0.7V, this is
                  a loss of 10-15% in efficiency.” Reference #4, pp
                  791
 
 2.
              “The
                  higher kinetics for the oxygen reduction reaction (ORR) in alkaline
                  over
                  acidic media permits the use of a lower quantity of precious metals
                  for a
                  given overpotential. This results in a greater efficiency for the
                  AFC when
                  compared to the PEM as well as a large margin for the cost reduction.”
                  Reference #1, pp 193
  16
 
 In
        addition to the advantages that have been described thus far including; higher
        electrochemical efficiency, lower cost to manufacture and lower cost to operate
        which are critical to the widespread acceptance the AFC has a number of distinct
        advantages over the PEMFC:
 
 ·
            Quick
                start-up and shutdown even in subfreezing temperatures (due to the
                fact
                that the electrolyte (KOH) freezes at below -40oC at concentrations used
                in the Astris system versus the need for water (freezes at 0oC) for
                membrane hydration in the PEMFC 
 ·
            Better
                reaction dynamics and therefore better performance and easier start
                at low
                temperatures and pressures, noticeable already at room temperature
                and
                even more pronounced at still lower
                temperatures 
 ·
            Wide
                range of humidity tolerance which again is related to the membrane
                hydration requirement of the PEMFC. 
 “Furthermore,
        the circulating electrolyte used in an AFC results in a simple and rapid
        start-up and shutdown procedures [4] and has the additional advantage of
        simplifying the water and the heat management [8].” Reference # 1, pp
        195
 
 Glossary
        of terms
 
 LHV
        -  lower
        heating value, amount of energy of oxidation of fuel, excluding the heat
        of
        condensation of product water (this is a correct basis of comparison as the
        engines in question such as fuel cell systems and internal combustion engines
        do
        not recover the heat of condensing the product water)
 
 HHV
        -
        higher heating value, amount of energy of oxidation of fuel, including the
        heat
        of condensation of the product water
 
 KOH-  potassium
        hydroxide
 
 CO-  carbon
        monoxide
 
 pH-  measure
        of acidity/alkalinity. pH=7 denotes a neutral solution; pH less than seven
        denotes acidic solutions, pH greater than seven denotes basic (alkaline)
        solutions
 
 THE
        COMPANY'S PRODUCTS
 
 The
        Company presently offers products ranging from demonstration and educational
        fuel cells and accessories, to scientific products such as electrochemical
        test
        cells, associated electronic and computer based test equipment. This test
        equipment is useful in research and development and the testing of electrodes,
        fuel cells and batteries, and sub-kilowatt fuel cells and stacks.
 
 In
        2003
        the Company unveiled a new, further optimized proprietary alkaline fuel cell
        stack, the POWERSTACK MC250 that could be used for fuel cell systems up to
        10
        kilowatts or more for use in uninterrupted power supplies, portable generators
        and small vehicles such as forklifts. The Company anticipates that such a
        fuel
        cell will be ready for commercial application within the next one to three
        years
        depending on funding.
 
 The
        Company's principal fuel cell products are the POWERSTACKTM MC250, E8 generator
        and Astris II golf car. These demonstrator units are pre-commercial products
        provided on a limited basis to individual customers and assembled by hand.
        These
        demonstration units are in contrast to "pilot production" systems, which
        are
        systems manufactured in a pilot production facility not on a full commercial
        basis, and to commercial systems, which are manufactured by volume production
        methods. The Company has begun test runs of its pilot production line to
        produce
        the POWERSTACKTM MC250.
  17
 
 The
        Company contracted Claude L. Rivoire, an internationally recognized fuel
        cell
        specialist, to lead the development of the Company’s pilot production facility.
        Mr. Rivoire has a track record in industrial automation, production technology
        and plant management, spanning the transportation industry (buses and industrial
        vehicles), the food and high-tech rubber industries and, since 1997, the
        fuel
        cell industry.
 
 POWERSTACKTM
        MC250 is a 250 square centimeter, medium size alkaline fuel cell. In early
        test
        results the POWERSTACK MC250 performed 60% over the original design
        specification.  The POWERSTACK MC250 makes a large step in increasing power
        density and overall performance when compared to its predecessor the LABCELL.
 
 MODEL
        E8
        PORTABLE AFC GENERATOR
 
 MODEL
        E8 Portable Power Generator is an advanced touch start fuel cell system that
        offers up to 2.4kW of power primarily targeted for back up power requirements.
        The E8 fuel cell generator was partially developed by the Company's Czech
        Republic subsidiary in a joint project partially funded by the Czech Ministry
        of
        Industry and Trade.
 
 ASTRIS
        II
        GOLF CAR
 
 The
        Astris II is the Company’s second-generation golf car. The new, faster golf car
        is powered by Astris’ recently completed 1.8kW, Model E7 AFC Generator, which
        gives Astris II double the power and double the acceleration of the original
        model which was the world’s first alkaline fuel cell powered golf car using
        hydrogen. In the first quarter of 2005, the Company sold its first Astris
        II. The
        intellectual property of the actual golf car belongs to the supplier from
        whom
        AEI bought the golf car, E-Z-Go. AEI simply bought the golf car and added
        its E8
        generator to replace the existing battery engine.
 
 In
        addition to the Company's principal fuel cell products, the Company has several
        small fuel cells and products, primarily for educational purposes and testing,
        for sale through its website.
 
 SMALL
        FUEL CELLS AND RELATED PRODUCTS
 
 In
        addition to developing fuel cells, the Company presently sells by mail order
        small fuel cells, test cells and electronic test equipment. They are described
        briefly, as follows:
 
 LABCELLTM
        LC50 is a 50 square centimeter, small alkaline fuel cell for laboratory
        demonstration and experimentation which produces 1.5 to 6 volts.
 
 LABCELLTM
        LC200 is a 200 square centimeter, medium size alkaline fuel cell for laboratory
        experimentation and small power applications which produces .75 to 12
        volts.
 
 QUICKCELLTM
        QC200 is an electrochemical test cell designed for the testing of gas diffusion
        or solid electrodes in a controlled laboratory environment for fuel cell
        and
        battery research, development and quality control.
 
 MODEL
        TL5 TEST LOAD is a monitor for fuel cells and batteries with a built-in
        microprocessor. It functions to briefly interrupt the current and take
        resistance-free cell readings up to 40 volts. TL5 has a maximum power
        dissipation of 100 watts.
 
 MODEL
        TL6
        TEST LOAD is a monitor for fuel cells and batteries with a built-in
        microprocessor. It functions to briefly interrupt the current and take
        resistance-free cell readings up to 40 volts. TL6 has a maximum power
        dissipation of ten times more than the TL5, up to 1,000 watts.
  18
 
 TESTMASTERTM
        is a powerful, integrated software package designed for testing fuel cells
        and
        batteries. TESTMASTER performs all the tasks required for short-term or
        long-term testing of fuel cells or batteries, monitoring, control, data
        collection and storage, and graphical data representation.
 
 Astris
        s.r.o. produces and ships electrodes on behalf of the Company. The Company
        does
        not presently have any insurance on these products. Shipping insurance is
        obtained at the customer's request and expense. Astris s.r.o. does not maintain
        a substantial inventory of electrodes or fuel cells.
 
 The
        Company currently derives minor amounts of revenues from the sale of small
        products. It remains unknown whether the Company will be able to further
        develop
        a market for these products. The Company is not aware of any other entity,
        which
        markets products similar to its small products.
 
 The
        Company is primarily targeting markets in North America and Europe for the
        sale
        of small stationary, portable and select mobile applications including light
        vehicles and emergency power supplies.
 
 RESEARCH
        AND DEVELOPMENT
 
 AEI
        has been involved in fuel cell research since its formation in 1995. Over
        CDN$14
        million has been expended since then.  AEI had entered into the 1995
        acquisition with WLD to be in a better position to raise capital for additional
        research and development. As sufficient financing was not obtained as part
        of
        the AEI acquisition, some of the research and development activities in Canada
        were curtailed. Because labor costs are significantly lower in the Czech
        Republic than in Canada, and the capital needs of Astris s.r.o. for research
        and
        development activities are less than what would have been required in Canada,
        the Company's research and development on fuel cells had primarily been carried
        out in the Czech Republic, through the Company's wholly owned subsidiary,
        Astris
        s.r.o.
 
 Astris
        s.r.o. has been engaged in fuel cell research and development since 1992.
        Its
        current research and development efforts are primarily focused on electrode
        technology to improve the electrochemical efficiency, durability and economy
        of
        alkaline fuel cells.  These research and development efforts have also been
        focused on reduction of production costs, improving product quality and
        consistency, and on identifying new features and innovations for future product
        development. Funds advanced from the Company for expenditures on manufacturing
        and research and development at Astris s.r.o. were approximately CDN$367,000
        for
        2005. For the years ended December 31, 2005, 2004 and 2003, the Company expended
        a total of approximately CDN$ 909,873, CDN$1,343,695 and CDN$1,229,184 on
        research and development. The research and development budget for 2006 is
        contingent upon the Company's ability to raise capital.
 
 The
        Company's research and development activities have been performed both at
        the
        Mississauga, Ontario headquarters and at the Astris s.r.o. facility in the
        Czech
        Republic. Of the research and development completed in Canada during 2005
        the
        Company received or received notification of investment tax credit refunds
        of
        $283,900.
 
 The
        Company has also completed the initial research in the development of an
        advanced fuel cell stack design for systems of up to 25 kilowatts or larger
        for
        use in commercial buildings and automobiles. Such fuel cells will be developed
        initially as prototypes and will later be developed as commercial
        products.
 
 The
        Company's projected initial manufacturing and research and development budget
        for 2006 is CDN$1.6 million subject to financing. Such amount will be used
        to
        continue development and production of the POWERSTACK MC250 fuel cell power
        module. If less than CDN$2.5 million is obtained from financing, the Company
        will reduce its research and development budget and the development and
        production of the fuel cell power module will continue, albeit at a slower
        pace.
        If no adequate funding is secured, the research and development of the Company's
        fuel cell products will have to be deferred until such financing is in
        place.
 
 INTELLECTUAL
        PROPERTY
  19
 
 In
        1986, Josef V. Soltys of Mississauga, Canada (a shareholder and former director
        of the Company), assigned to AI a Canadian patent application for QUICKCELL,
        a
        test cell structure for fuel cell technology. The patent, Canadian Patent
        #1,295,679, issued February 11, 1992, expires February 11, 2009. The Company
        also holds a United States patent, #5,0008,162, which was issued on April
        16,
        1991, and expires on April 16, 2008, for the same product. A former employee
        of
        AI, who was a co-inventor of such technology, did not assign any right in
        such
        patents to the Company prior to his departure.  Management does not believe
        that these patents are material to the development of the intended business
        goal
        and the Company ceased maintaining the patent.
 
 In
        December 2004, AEI filed two US patent applications in preparation for the
        sale
        of its POWERSTACKTM MC250 and E7 and E8 generators. Application serial
        #11/004,988 is on its electrode structure for stacked alkaline cells.
        Application serial #10/905,148 is on the alkaline fuel cell systems. However,
        the Company's policy is still to maintain the confidentiality of its products
        through trade secrecy.
 
 The
        Company has unregistered trademarks on some of its products, including LABCELLTM
LC50, LABCELLTM LC200, QUICKCELLTM QC200, POWERSTACKTM MC250 and TESTMASTERTM.
 
 The
        Company has copyright protection on its TL6 Testload, TL5 Testload and
        TESTMASTERTM software.
 
 The
        alkaline fuel cell electrode technology which has been developed by the
        Company’s subsidiary, Astris s.r.o., is solely owned by Astris s.r.o. No other
        party has rights to the electrode technology developed by Astris s.r.o. The
        Company, which had 30% beneficial ownership of Astris s.r.o. prior to the
        acquisition effective January 2, 2005, has full ownership of Astris s.r.o
        and
        its technology. Revenues attributable to products that rely on the electrode
        technology of Astris s.r.o. were $182,030 in 2005, $84,011 in 2004 and $35,191
        in 2003.
 
 MARKETING
 
 The
        Company has a limited production capacity for its demonstration and scientific
        products. While direct sales efforts will continue through the Internet,
        Astris'
        principal strategy is to form joint ventures with leading manufacturers of
        the
        products that can use fuel cell power.  Manufacturers in the back up power
        and UPS industries are believed to be the primary targets. Manufacturers
        in the
        golf car, NEV and/or recreational vehicle industries are believed to be
        secondary targets.  As an alternative, the Company is also considering
        licensing such manufacturers to both produce and market the Astris power
        sources
        on an O.E.M. basis, with Astris collecting both license fees and royalties
        based
        on sales.
 
 Such
        established industry specific companies already have manufacturing facilities
        and marketing organizations in place and provide an intimate knowledge of
        their
        respective markets. These types of strategic business relationships will
        allow
        Astris to continue specializing in its business expertise, which is the
        development of new products for the burgeoning international fuel cell
        field.
 
 In
        October 2000, the Company entered into an agreement with FuelCellStore.com,
        Inc.
        for the inclusion of the Company's products on the FuelCellStore.com internet
        website on a non-exclusive basis for sales anywhere in the world.
        FuelCellStore.com, Inc. receives a ten percent (10%) commission based upon
        sales
        of the Company's products over its internet website.
 
 Currently,
        the Company's fuel cell products are shipped to the customer from Canada.
        It is
        expected that the future customers of the Company's fuel cell systems will
        be
        manufacturers of all types of products which will be adapted to utilize the
        Company's fuel cell technology. The Company expects such fuel cell systems
        will
        be shipped directly from its facilities to such manufacturers or through
        a
        network of distributors and agents to such manufacturers.
 
 RAW
        MATERIALS AND SUPPLIES
 
 The
        principal raw materials that the Company uses are common and widely available
        from numerous suppliers. The Company's principal materials are largely various
        types of plastics, carbons, metals and their compounds and conventional
        components, which are all relatively inexpensive to obtain and which currently
        do not present supply problems.
  20
 
 COMPETITION
 
 Fuel
        cells are a competitive business. Competition arises from other fuel cell
        companies and from entities engaged in offering existing conventional energy
        services. The Company competes with companies that are developing all types
        of
        fuel cells. While there are currently five basic types of fuel cell technologies
        (see "Description of Fuel Cells" above), the Company believes that AFCs and
        PEMFCs are the only fuel cells that are presently of competitive relevance
        for
        the relatively small power, stationary and portable applications that the
        Company intends to focus upon. This is because AFCs and PEMFCs normally operate
        at ambient temperatures (above 0 degrees Celsius to 100 degrees Celsius)
        and
        deliver kilowatts, which are more suited to meet the needs of small, off-grid
        applications. The Company constructs only AFCs. While both AFC and PEMFC
        fuel
        cells have potential environmental and efficiency advantages over traditional
        power sources, the Company believes that AFCs can be manufactured less
        expensively, more efficiently and more practically than PEMFCs in small-scale
        applications.
 
 Astris
        has essentially no competition in any application area using alkaline fuel
        cells
        where its 1 kilowatt to 10 kilowatt power systems are targeted. Other AFC
        companies in the early R&D stages include Apollo Energy Systems and Ovonic
        Fuel Cell Company .
        The
        Company is focusing on the potential market in back up and UPS applications
        of
        small-capacity fuel cells, as are other PEMFC fuel cell companies. There
        are
        several competitors in this market including Ballard Power Systems, Hydrogenics,
        Plug Power, Ida Tech, Hoku Scientific and Nuvera Fuel Cells. There are no
        barriers to Ballard, or any other known or unknown competitor of the Company,
        entering the market covering the industries that the Company is focusing
        on.
 
 Apart
        from specific market competition, the Company believes that AFCs have inherent
        advantages over PEMFCs, regardless of specific applications. AFCs use potassium
        hydroxide electrolyte, a chemically basic substance, while PEMFCs are chemically
        acidic, requiring platinum as a catalyst. They also use an expensive membrane
        as
        an electrolyte. In addition, AFCs have been scientifically proven to be 10%
        more
        energy-efficient than PEMFCs and offer a higher electricity yield from a
        given
        quantity of fuel. That is to say, while PEMFCs might be 40-50% efficient,
        AFCs
        are 50-60% efficient. This provides a significant advantage in terms of raw
        energy consumption and cost savings. In addition, AFCs are able to start
        instantly, without warm-up, even below freezing, to minus 30-40 degrees Celsius.
        PEMFCs can only operate above freezing from 0 degrees Celsius to 80 degrees
        Celsius unless a heating mechanism is added, causing significant loss of
        efficiency and extra cost.
 
 LEGAL
        PROCEEDINGS
 
 On  June
        30,
        2004 the Quebec Superior Court ruled in Astris’ favour and supported its
        application to immediately wind up and liquidate Astris Transportation Systems
        Inc. (“ATSI”), a corporation that was formed jointly with Care Automotive
        Inc.(“Care”). A
        liquidator was selected to dissolve ATSI. To date, the liquidator has been
        unable to fully perform his duties to liquidate ATSI due to the inability
        to
        obtain certain corporate and financial records from the President of ATSI.
 
 GOVERNMENTAL
        REGULATION
 
 The
        Company knows of no governmental license or approval required in connection
        with
        the manufacture or sale of the Company's current products. There are no
        extraordinary governmental regulations known to the Company that affects
        its
        ability to sell or produce its products. The Company does not believe that
        it
        will be subject to existing regulations governing traditional electric
        utilities.
 
 The
        Company knows that its products must comply, where applicable, with the existing
        rules and regulations for electrical and electronic products, and is prepared
        to
        meet such requirements.
  21
 
 The
        Company anticipates that its products and their installation may be subject
        to
        oversight and regulation related to their safety due to their use of hydrogen,
        which is flammable and regarded as a hazardous gas. However, hydrogen is
        a
        commonplace industrial gas, which is produced in enormous quantities every
        day
        in numerous industrial facilities around the world. Regulations have been
        in
        place for decades regarding hydrogen, which provide routine specifications
        for
        manufacturers of hydrogen-using equipment.  Therefore, the Company does not
        anticipate any new regulations regarding hydrogen, or any difficulties in
        complying with existing regulations.
 
 ENVIRONMENTAL
        COMPLIANCE
 
 There
        are no environmental laws known to the Company, which may affect any of its
        operations as they are currently constituted. The Company is not involved
        in a
        business which involves the use of materials which are likely to result in
        a
        violation of any existing environmental laws, rules or regulations, nor does
        it
        own any real property which would lead to liability as a land
        owner.
 
 C.
         ORGANIZATIONAL STRUCTURE.
  The
        Company had a subsidiary, Astris Inc. ("AI") which was amalgamated with Astris
        Energi Inc. ("AEI") effective January 1, 2005. AI was incorporated initially
        as
        Astris Science Inc. on April 8, 1983, in the Province of Ontario, and changed
        its name to Astris Inc. in 1986. AEI also owns 100% of holding company 2062540
        Ontario Inc.("Holdco"), incorporated in the Province of Ontario on January
        12,
        2005. Holdco owns 100% of Astris s.r.o., which was organized under the laws
        of
        the Czech Republic.  The Company, up until January 27, 2005 owned a 30%
        minority interest in Astris s.r.o. The Company transferred its 30% ownership
        to
        Holdco as part of the acquisition of the remaining 70% of Astris s.r.o. The
        remaining 70% interest in Astris s.r.o. was owned by Macnor Corp., an Ontario
        corporation that is wholly owned by Jiri K. Nor, an Executive Officer, Director
        and principal shareholder of the Company. Unless otherwise indicated or outside
        the context of the disclosure, all references to the Company shall include
        AI,
        2062540 Ontario Inc. and Astris s.r.o.
  D.
         PROPERTY, PLANT AND EQUIPMENT (FIXED ASSETS).
 
 AEI
        has leased a 3,750 square foot industrial unit located at 2175 Dunwin Drive,
        Mississauga, Ontario, Canada for a period of one year ending October 31,
        2006.
 The minimum annual lease payments under the terms of the existing lease
        are CDN$34,800 to October 31, 2006, plus proportionate share of common
        costs.
 
 Astris
        s.r.o. purchased an industrial building in the town of Vlasim, Czech Republic
        with approximately 8,000 square feet of manufacturing and office space on
        two
        floors.  The building is situated on a 1.5 acre lot, allowing for future
        expansion, if necessary. The net book value of the building is CDN$231,538
        and
        the property is CDN$128,940.
 
 The
        Company believes that the present premises are suitable for its present
        requirements.
 
 ITEM
        5.
        OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
 
 The
        following is a discussion of the results of operations and financial condition
        of the Company for the fiscal years ended December 31, 2005, 2004 and 2003.
         The financial statements are prepared in accordance with Canadian
        generally accepted accounting principles (“GAAP”) and are presented in Canadian
        dollars.  Differences between Canadian GAAP and United States GAAP can be
        found in Note 16 of Item 17 of this filing.  This discussion should be read
        in conjunction with the consolidated financial statements and notes thereto
        forming a part of this annual report.
 
 In
        2003,
        the Company began expensing all employee stock-based compensation.
 
 The
        auditor report attached to the Company's audited financial statements note
        that
        the Company's ability to continue as a going concern is in substantial doubt.
        It
        is dependent on the ability of the Company to raise additional long-term
        financing, either from its own resources or from third parties, the successful
        commercialization of one or more of the Company's research projects, and
        attaining profitable operations.
  22
 
 As
        noted under “Liquidity and Capital Resources” herein, the future of the Company
        is dependent upon its ability to raise additional capital to fund the
        commencement of the commercialization of products based upon the Company’s fuel
        cell technology. Management is of the opinion that the Company should continue
        to exist and grow, based upon encouraging results of research and development
        to
        date, recent world-wide interest in fuel cell technology and the completion
        of
        the golf car program. With the advancement of this research and development
        program, and the completion of the Company’s POWERSTACK MC250 program, the
        Company is in a better position to pursue financing in the form of private
        placements of its Common Shares.
 
 The
        following discussion, as well as other sections within this annual report,
        contain forward-looking information which is based on current expectations
        and
        entails various risks and uncertainties. These risks and uncertainties could
        cause or contribute to actual results that are materially different from
        those
        expressed or implied.  The forward-looking information contained in this
        document is current only as of the date of the document. There should not
        be an
        expectation that such information will in all circumstances be updated,
        supplemented or revised whether as a result of new information, changing
        circumstances, future events or otherwise.
 
 The
        only
        critical accounting policy is income taxes. Because there is uncertainty
        when
        the Company will make sufficient profits in future years to absorb the losses
        before they expire, the Company takes a valuation allowance which results
        in no
        tax being recovered.
 
 A.
         OPERATING RESULTS.
 
 The
        financial statements included in this report are stated in Canadian
        dollars.
 
 REVENUE
 
 For
        the
        year ended December 31, 2005, revenue from the sale of fuel cells and related
        products and contract work was $291,512 compared with $88,798 for the same
        period in 2004. The 328% increase in sales year over year was attributable
        to
        the sale of its first Astris II golf car in the first quarter, the E8 Generator,
        fuel cells and supporting test equipment and services to El.Ma in the fourth
        quarter. Sales of fuel cells and related products to unrelated parties in
        2005
        amounted to $53,019 to Canada, $10,381 to the Czech Republic and $228,112
        to the
        rest of the world; in 2004 amounted to $7,508 to Canada, $4,310 to the Czech
        Republic and $76,980 to the rest of the world; in 2003, sales amounted to
        $7,008
        to Canada, $45,901 to the Czech Republic and $14,961 to the rest of the world.
        The main source of revenue in 2004 was from the sale of fuel cells and an
        E8
        generator.
 
 EXPENSES
 
 For
        the
        year ended December 31, 2005, expenses totaled $5,622,376, compared with
        $3,551,055 for the same period in 2004. The main increase was a one time
        accounting write off of $1,500,000 of the technology acquired by the Company
        on
        the purchase of Astris sro. Under US GAAP, the acquisition of this significant
        technology cannot be recognized as an asset. General and Administrative expenses
        were $2,537,127 in 2005 compared with $1,943,799 in 2004 due to an increase
        of
        approx. $290,000 in warrant and option expense reflecting the additional
        warrants and options issued to consultants to help the Company raise capital
        and
        find strategic business partners, an increase of $100,000 reflecting annual
        compensation to a director for financial consulting services, $110,000 in
        bonus
        to an officer and director and $98,000 in first time compensation to directors
        and board committee chairs.
 
 Professional
        fees were $333,555 compared with $243,076 in 2004, reflecting the Company’s
        increased corporate activity, legal activity, accounting and compliance activity
        in conjunction with the Astris sro acquisition, the amalgamation of Astris
        Inc.
        and Astris Energi Inc. and the increased costs due to being a public company
        in
        the United States.
  23
 
 For
        the
        year ended December 31, 2004, expenses totaled $3,551,055, compared with
        $2,274,839 for the same period in 2003. The main increases were in General
        and
        Administrative expenses to $1,943,799 in 2004 compared with $880,585 in 2003;
        and in Research and Development, to $1,343,695 in 2004 compared with $1,229,184
        in 2003. The small increase in Research and Development reflects primarily
        an
        increase in work on the Company’s POWERSTACKTM MC250 power module, the 1.8kW
        model E7 power generator Astris II project, the 2.4 kW model E8 portable
        power
        generator project, and the equipment purchase, assembly and tests for pilot
        production.
 
 The
        significant increase in G&A expenses reflected stock option expensing,
        additions to management, higher consulting expenses to raise additional funding
        and the hiring of additional technical and administrative staff to support
        the
        fast growth of the Company.
 
 Professional
        fees were $243,076 compared with $145,100 in 2003, reflecting the Company’s
        increased corporate activity, legal activity, accounting and compliance
        activity.
  NET
        LOSS
        FOR THE YEAR ENDED DECEMBER 31, 2005
 
 The
        Company reported a net loss of $5,330,864 (a loss of $0.16 per share basic
        and
        diluted) for the year ended December 31, 2005, compared with a loss of
        $3,462,257 ($0.16 per share basic and diluted) in 2004. The increase in the
        loss
        primarily reflects the increased expenses due to the write off of the intangible
        technology asset, write off of Astris sro acquisition costs, increased
        compensation to consultants and additional warrant and option
        expense.
 
 The
        Company reported a net loss of $3,462,257 (a loss of $0.16 per share basic
        and
        diluted) for the year ended December 31, 2004, compared with a loss of
        $2,206,969 ($0.12 per share basic and diluted) in 2003. The increase in the
        loss
        primarily reflects the increased expenses due to ramping up support for
        production.
 
 As
        at
        December 31, 2005, the Company has non-capital loss carry forwards of
        approximately $8,357,000. If unused, the tax losses will expire as
        follows:
 
 2006
              $
              61,0002007
              $
              188,0002008
              $
              294,0002009
              $
              323,0002010
              $
              1,734,0002014
              $
              2,882,0002015
              $
              2,875,000
 
 In
        addition, the company has undeductible scientific research and development
        expenditures amounting to $1,701,658, which have no expiry date.
 
 B.
         LIQUIDITY AND CAPITAL RESOURCES.
 
 The
        Company had a restated operating cash flow deficit of $702,281 in 2005, compared
        with an operating cash flow deficit of $2,102,906 in 2004, compared with
        an
        operating cash flow deficit of $1,156,031 in 2003. The decrease is a result
        of
        the Company having to issue common shares in lieu of cash to continue operations
        and paying employees.
 
 At
        2005
        year end, the Company had $982,494 of assets, and a shareholders’ deficiency of
        $228,456 compared to a shareholders’ equity of $253,294 in 2004 and compared to
        a shareholders’ deficiency of $135,975 in 2003.
 
 The
        company plans to finance operations including pilot production through the
        continuing sale of fuel cells, related products and contract work, new business
        partnerships with early adopters of the fuel cell, and additional long-term
        financing through private placements.  The company additionally will
        capitalize on available government incentives for alternative energy
        development. Government incentives recoverable in 2005 amounted to nil compared
        to $199,586 in 2004 and nil in 2003.
  24
 
 The
        Company’s cash position and working capital requirements mean that the company
        will require continuing external financing until it becomes cash flow positive
        through commercialization of one or more of its products.
 
 The
        Company does not have any off-balance sheet arrangements.
 
 During
        2005, the Company raised $493,350 through the convertible debenture below
        and
        the issuance of shares for options exercised. During 2004, the Company raised
        $2,076,041 through private placements of shares and warrants. During 2003,
        the
        Company raised $1,193,165 through private placements of shares and warrants.
 
 On
        March
        28, 2005, the Company announced that it had closed a convertible debenture
        financing for gross proceeds of CDN$420,000. The debenture was available
        for
        subscription to “Canadian accredited investors” only and included a coupon for
        6%, payable in common shares upon conversion or maturity. Each debenture
        is
        convertible into Common Shares at a conversion rate that in no case shall
        be
        less than USD$0.20 or more than USD$0.70. Warrants may be issued to the
        debenture holders depending on the terms of a second larger equity financing.
        The debentures mature on December 10, 2005, 270 days from the date of issuance.
        Total net proceeds were CDN$378,000. Fraser Mackenzie Limited, for facilitating
        the funding, also received 156,000 broker warrants at CDN$0.27 exercisable
        until
        March 24, 2007. These debenture holders agreed to amend to the same terms
        of the
        Cornell Capital debenture below.
 
 On
        April
        12, 2006, the Company issued a press release announcing the completion of
        a One
        Million Five Hundred Thousand Dollars ($1,500,000) million financing (the
        “Financing”). The Company entered into a Securities Purchase Agreement (the
“Agreement”) on April 10, 2006 with Cornell Capital Partners, LP, an
        institutional investor (the “Investor”), relating to the sale of One Million
        Five Hundred Thousand Dollars ($1,500,000) of secured convertible debentures
        (the “Convertible Debentures”), which will be convertible into shares (the
“Conversion Shares”) of the Company’s common stock (the “Common Stock”) of which
        Seven Hundred Fifty Thousand Dollars ($750,000) was funded on April 18, 2006
        (the “First Closing”) and Seven Hundred Fifty Thousand Dollars ($750,000) will
        be funded, assuming certain conditions are satisfied, two (2) business days
        prior to the date a registration statement (the “Registration Statement”) is
        filed, pursuant to the Registration Rights Agreement (hereinafter defined),
        with
        the United States Securities and Exchange Commission (the “SEC”), for a total
        purchase price of up to One Million Five Hundred Thousand Dollars ($1,500,000),
        (the “Purchase Price”). Pursuant to the Agreement, the Investor also received
        common stock purchase warrants (the “Warrants”) to purchase (i) 1,000,000 shares
        of the Company's common stock at an exercise price of $.30 per share (ii)
        600,000 shares of the Company's common stock at an exercise price of $.20
        per
        share and (iii) 1,600,000 shares of the Company's common stock at an exercise
        price of $.19 per share. The Company received net proceeds from the First
        Closing Six Hundred Seventeen Thousand Five Hundred Dollars ($617,500), which
        are to be used primarily for working capital purposes.
 
 The
        Convertible Debentures have an initial conversion price of the lesser of
        (i) a
        price equal to $.2483 (the “Fixed Conversion Price”) or (ii) ninety
        percent (90%) of the lowest daily Volume Weighted Average Price of the
        Common Stock during the ten (10) trading days immediately preceding the
        Conversion Date as quoted by Bloomberg, LP per share and provides for
        anti-dilution protection (in certain circumstances). At the Fixed Conversion
        Price, the Convertible Debentures will be convertible into an aggregate of
        6,041,079 shares of common stock. The Convertible Debentures bear interest
        at
        10% per annum. Interest is payable in cash or, at the Company's option, in
        shares of common stock (the “Interest Shares”) provided certain conditions are
        satisfied. At any time after their respective issuance dates and prior to
        April
        9, 2009, the Convertible Debentures may be redeemed at the election of the
        Company at the principal amount plus a redemption premium equal to 20% of
        the
        principal amount being redeemed, plus accrued but unpaid interest, subject
        to
        the satisfaction of certain conditions.
 
 The
        Investor was granted a security interest in the assets of the Company and
        the
        assets of the Company's subsidiary, 2062540 ONTARIO INC.
  25
 
 The
        Warrants may be exercised for cash, as indicated above, and also contain
        a
        cashless exercise provision, which may be exercised in certain circumstances.
        The Warrants provide for anti-dilution protection in certain circumstances.
        The
        Warrants are exercisable for 1,000,000, 600,000 and 1,600,000 shares of Common
        Stock (the “Warrant Shares”), respectively, and if fully exercised for cash at
        the initial exercise price, the Warrant would yield approximately $724,000
        of
        additional proceeds to the Company.
 
 The
        Company has agreed to file a registration statement (the “Registration
        Statement”) with the SEC in order to register the resale of the shares issuable
        upon conversion of the Convertible Debentures and the shares issuable upon
        exercise of the Warrants.
 
 Pursuant
        to the Securities Purchase Agreement, the Investor has certain rights to
        participate in future financings of the Company. In addition, subject to
        certain
        exceptions, so long as any of the Convertible Debentures are outstanding,
        the
        Company may not, without the prior written consent of the investor, issue
        shares
        of common stock or common stock equivalents.
 
 Pursuant
        to the Securities Purchase Agreement, the Company and the Investor entered
        into
        a Share Escrow Agreement and an Irrevocable Letter of Instructions to the
        Company’s transfer agent (the “Transfer Agent”). Pursuant to the Share Escrow
        Agreement, the Irrevocable Letter of Instructions is being held by an escrow
        agent (“Escrow Agent”) and upon the occurrence of an “Event of Default” (as that
        term is defined in the Convertible Debentures) may be delivered to the Transfer
        Agent by the Escrow Agent directing the Transfer Agent to issue 34,500,000
        shares of Common Stock to the Investor without any further action by the
        Company.
 
 The
        Investor may not convert the Convertible Debentures or exercise the Warrant
        to
        the extent that, after giving effect to such conversion or exercise, as the
        case
        may be, the Investor would beneficially own in excess of 4.99% of the number
        of
        shares of common stock of the Company outstanding immediately after giving
        effect to such conversion or exercise, calculated in accordance with Section
        13(d) of the Securities Exchange Act of 1934, as amended, and the rules and
        regulations promulgated thereunder. Such limitation with respect to such
        conversion or exercise may be waived by the Investor upon not less than 65
        days
        prior notice to the Company.
 
 The
        offering, sale and issuance of the Convertible Debentures and the Warrants
        were
        effected pursuant to the exemption from registration provided by Rule 506
        promulgated under the Securities Act of 1933, as amended. The Convertible
        Debentures and Warrants have not been registered under the Securities Act
        of
        1933, as amended, and may not be offered or sold in the United States absent
        registration or an applicable exemption from registration
        requirements.
 
 The
        Company will continue to seek to enter into private placements, strategic
        partnerships and joint ventures in order to further finance the on-going
        development and commercialization of its fuel cell technology. There is no
        assurance that the Company will be able to find or enter into any private
 placements,
        strategic partnerships or finalize the proposed joint venture, on terms
        acceptable to the Company or not highly dilutive to shareholders.
 
 As
        with
        most technology companies, Astris needs to conserve as much cash as practical
        while maintaining its operations for the core R&D work. It does have a need
        for other functions such as raising financing, office expenses, rent, legal
        and
        audit fees, investor relations etc. As noted in our Statement of Cash Flow,
        we
        use equity to pay non related parties who bring financial expertise, consulting
        and certain professional fees. The company uses cash to pay its engineers,
        which
        are the heart of the company’s research and development activities; also its
        daily administrative staff such as the administrative assistants and the
        bookkeepers; also certain operating expenses for which shares are not usually
        accepted such as rent, office supplies, travel, etc.
 
 We
        use
        options to pay non employees who provide services to us. Also all of our
        senior
        management have been willing to support the company through accepting part
        cash
        and part equity for their services provided.
 
 C.
         PROSPECTS
  26
 
 Currently
        management is in discussions with a number of parties that are interested
        in
        becoming customers and/or joint venture partners.
 
 In
        May
        2004, the Company approved the blueprint for its manufacturing facility to
        produce the POWERSTACKTM MC250 and E8 generator on a pilot production basis. The
        production line was completed in October 2004 in the Czech Republic and trial
        runs have been ongoing to perfect the product.
 
 On
        October 19, 2004, the company announced that it signed a Cooperation Agreement
        with Italy’s Electronic Machining s.r.l. (El.Ma.). El.Ma. is a privately held
        company with offices and technical development facilities in Rovereto, Trento,
        Italy. El.Ma. has particular interest in the development of alkaline fuel
        cells
        for stationary and distributed generation of electrical power. Their fuel
        cell
        and hydrogen usage R&D is funded by the Provincia Autonoma di Trento, which
        is committed to the development of these technologies with an eye to early
        market opportunities in Europe. As well, El.Ma. specializes in research and
        advancement of manufacturing processes, an expertise applicable to Astris’
current AFC production line initiative. Under the terms of the agreement,
        Astris
        will licence the use of its AFC technology and market its products and
        consulting services to El.Ma. All goods and services provided by Astris will
        be
        purchased by El.Ma. El.Ma will apply its research and manufacturing expertise
        to
        the development of Astris technology in the areas of production. Any
        intellectual property resulting from the execution of the agreement will
        be
        owned exclusively by Astris. The agreement has an initial term of 3 years,
        extension upon mutual consent. Either party can terminate upon 60-day written
        notification to the other party. Astris may terminate immediately if El.Ma
        is in
        breach of the agreement and does not remedy within 15-days. Compensation
        in the
        amount of 50,000 stock options in the Company was issued to Energie Rinnovabili
        Italia srl for assisting in co-ordinating the agreement with El.Ma. Astris
        earned approx. $200,000 in revenue from El.Ma to date.
 
 On
        February 24, 2005, the Company announced that it signed a non-exclusive Teaming
        Agreement with Plasma Environmental Technologies Inc. (PET) (TSXV: PE) of
        Burlington, Ontario for the development of a real-world installation utilizing
        PET’s hydrogen-producing waste processing system and Astris’ AFC technology.
        There was no compensation paid to any party for this agreement. The agreement
        has an initial term of 5 years with the potential for an additional 5 years
        upon
        mutual consent. The agreement may be terminated upon 30-day written notification
        by either party.
 
 The
        first
        of three phases outlined in the agreement will be to determine the suitability
        of the hydrogen gas produced in the PAG waste destruction process for use
        in
        Astris’ hydrogen AFC systems and for PET to make adjustments, if necessary to
        their current PAG.
 
 Upon
        completion of Stage 1, Stage 2 of the Agreement calls for PAG installations
        that
        will be developed to demonstrate the practical application of the PAG process
        in
        conjunction with Astris’ AFC-powered generators. It is anticipated that this
        Stage will be financed by appropriate stakeholders such as local, provincial
        or
        federal governments, or special interest groups.
 
 In
        addition, PET has agreed to introduce Astris to any of its current or future
        clients who might desire to purchase or use Astris’ services or products. For
        this, PET will be paid a mutually agreed to commission.
 
 On
        August
        4, 2005, the Company announced that Astris s.r.o., the wholly owned European
        subsidiary of Astris Energi Inc., received a grant from the Ministry of Industry
        and Trade (MPO) of the Czech Republic. The funding will be used to subsidize
        Astris’ fuel cell development efforts at its Czech based subsidiary.
 
 The
        amount of funding is approx. 8,750,000 Czech Korunas (CZK) or approx. USD
        $0.4
        million against anticipated program spending of 17,500,000 CZK or approx.
        USD$0.8 million over the next 2 1⁄2 years. Every USD $1 spent in the Czech
        Republic is comparable to at least USD $5 spent in North America due to the
        lower working and living costs in the Czech Republic.
 
 Currently
        it is the largest fuel cell grant ever awarded by the MPO in the Czech Republic,
        it is indicative of the growing global government support for fuel cells.
        The
        work will be carried out by the Astris scientific team in cooperation with
        several leading academic and industrial institutions, including the Institute
        of
        Macromolecular Chemistry of the Academy of Sciences of Czech Republic, and
        the
        Department of Chemical Technology of University of Pardubice.
  27
 
 On
        November 23, 2005, the Company signed an agreement with Tropical S.A. in
        Greece,
        whereby Tropical becomes a reseller for Astris' alkaline fuel cell power
        generator products, fuel cells and test equipment.
 
 The
        purpose of this Reseller arrangement is to enable Tropical to demonstrate
        and
        make available Astris products primarily within the Greek market. Tropical
        S.A.,
        Athens, Greece, is a leading organization in Renewable Energy and Hydrogen
        Technologies markets. The agreement may be terminated by either party with
        30
        day notice for any reason. Initial orders under the reseller agreement are
        expected to be forthcoming in the near future.
  On
        October 26, 2005, the Company hired Ardour Capital Investments LLC (“Ardour”) as
        its exclusive financial advisor. For a 24 month engagement, Ardour will receive
        1,250,000 common shares of Astris stock. Ardour is also entitled to 7%
        commission on any funds raised through them.
  D.
         RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
 
 See
        "Research and Development" in Section 4.
 
 E.
         TREND INFORMATION.
 
 Independent
        researchers forecast that fuel cells will prove to be a transformational
        technology, once remaining cost, technical and public acceptance hurdles
        are
        overcome.
 
 The
        fuel
        cell industry is evolving gradually, with the pace of demand determined by
        a
        number of factors including:
 
 ·
            Capital
                available to fund further development of
                technology 
 ·
            The
                level of government commitment to develop a clean energy economy,
                which
                currently is greater in Europe, Japan and Canada than in the
                U.S. 
 ·
            The
                price, availability and long-term security of conventional power
                sources,
                which affect the demand for fuel cells as an alternative energy
                source 
 There
        are
        a number of factors contributing to growing demand for fuel cells,
        including:
 
 ·
            Increasing
                demand for reliable power accentuated by power blackouts of recent
                years 
 ·
            Deregulation
                of power markets and introduction of
                competition 
 ·
            Environmental/political
                concerns 
 ·
            Developing
                regions without power grids 
 ·
            Geographic
                considerations/remote power 
 ·
            Distributed
                power generation; and 
 ·
            Increasing
                price of oil 
 CONTRACTUAL
        OBLIGATIONS
  28
  There
        are
        no contractual obligations to be disclosed.
 
 ITEM
        6.
        DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
 
 A.
        DIRECTORS AND SENIOR MANAGEMENT.
 
 The
        following table sets forth the name, age and office held with the Company
        as of
        April 30, 2006 and the period during which such person has served as a Director,
        Executive Officer and/or senior management.
  **Name**
              ****
              **Age**
              ****
              **Office
                  Held**
              ****
              **Director
                  Since**Jiri
                  K. Nor
              
              66
              
              President,
                  Chief Executive Officer and Director
              
              1996Arthur
                  Laudenslager (1)
              
              79
              
              Director
              
              2003Anthony
                  Durkacz
              
              30
              
              Vice
                  President Finance and Director
              
              2003Gary
                  G. Brandt
              
              47
              
              Director
              
              2005Brian
                  Clewes (1) (2)
              
              47
              
              Director
              
              2004Michael
                  Liik (2)
              
              46
              
              Director
              
              2004Peter
                  Nor
              
              35
              
              Vice
                  President Marketing
              
              Not
                  a Director
 
 Notes:
 
 (1)
              Members
                  of the Company's Audit Committee.
 (2)
              Members
                  of the Company’s Compensation
                  Committee.
 
 Jiri
        K. Nor has been a Director and the President of the Company since March 1996.
        He
        is a trained engineer, with particular expertise in mechanics, aeronautics,
        electronics and electrochemistry. He is the principal inventor/developer
        of the
        Company's AFC fuel cell technology. Mr. Nor is also an entrepreneur with
        extensive business experience and the President and sole stockholder of Macnor
        Corp. He was the founder of Sonotek, an electronics company, inventor of
        the
        Minitcharger  ̈ fast battery charging technology and founder of the Norvik group
        of companies. For more than five years until August 1997, he was Vice President
        of Research for Norvik Technologies and Norvik Traction, companies in the
        business of developing fast battery chargers.
 
 Arthur
        E.
        Laudenslager was formerly a senior officer and director of several public
        and
        private corporations, is currently Vice President, First Energy Advisors
        Inc.,
        and a business consultant who brings to the Astris Energi Board a great deal
        of
        experience and knowledge in corporate structure and financing.
 
 Anthony
        Durkacz, Vice President Finance, is a graduate of Brock University in Business
        Administration, and joined the Astris team in summer 2002. He served previously
        as Manager of Foreign Exchange on the capital market trading floor with TD
        Securities in Toronto, and as President of Fortius Research and Trading
        (“Fortius”), an investment company servicing high net worth clients.
 
 Gary
        G.
        Brandt is a senior business leader with extensive cross-industry and
        cross-border experience in alternative energy, telecommunications, and
        technology.   From 2001 to 2005, he was CFO of Hydrogenics Corporation, a
        hydrogen and PEM fuel cell technology company based in Toronto.   During
        his tenure, the Company completed a fully marketed equity offering that raised
        US $62 million with excellent participation from US institutional investors.
          As well, the Company completed three acquisitions, including the
        acquisition of Stuart Energy for US $120 million. Prior to his position at
        Hydrogenics, Mr. Brandt was CFO of Colorado-based @Link Networks, Inc.  
Mr. Brandt completed his Bachelor of Commerce (Honours) Degree at Queen's
        University, Kingston, Ontario and his Masters of Business Administration
        at York
        University, Toronto. Mr. Brandt is currently the Vice President of Corporate
        Development at SatCon Technology Corporation.
  29
  Brian
        D.
        Clewes is a twenty-year veteran of the insurance industry, he is currently
        a
        principal since 1983 in Clewes & Associates Life Insurance Consultancy Inc.,
        the largest supplier of benefits consulting services to Ontario Chartered
        Accounting firms.   Mr. Clewes is an outstanding entrepreneur with solid
        connections in the angel financing community.
 
 Michael
        Liik, P. Eng, MBA is currently
        President of Liikfam Holdings Inc., an investment/venture capital company.
        He
        has a record of investing in and leading both early-stage and high-growth
        Canadian public companies including Cymat Corp. and Slater Steel. He brings
        to
        the Board extensive merchant banking skills to assist in raising investment
        financing for Astris' next stage of development.
 
 Peter
        K.
        Nor **,** P.Eng,
        MBA, is the son of Jiri Nor and is a professional engineer with experience
        in
        both technical marketing and research and development.  He has professional
        experience as a Network and Business Planner for Nortel Networks and as a
        Research Council Officer at the Institute for Aerospace Research of the National
        Research Council-Canada. Mr. Nor joined Astris in 2004.
  There
        are
        no other family relationships between any of the persons above, nor are there
        any arrangements or understandings with major shareholders, customers, suppliers
        or others, pursuant to which any person referred to above was selected as
        a
        Director or member of senior management.
 
 B.
         COMPENSATION
 
 Under
                  the current financial circumstances, executives and directors or
                  their
                  affiliate companies often elect to take all or part of their compensation
                  in the form of restricted common stock. An individual or entity
                  that
                  receives common stock of the Company in lieu of cash is still responsible
                  to pay tax on the income earned in the current fiscal year even
                  though the
                  shares issued are restricted from trading for a minimum of one
                  year or
                  longer. In Canada, the personal income tax rate is higher in most
                  cases
                  than the corporate tax rate. This benefit does not limit the Company’s
                  ability to deduct the compensation in any way.
  (1)  Paid
        in
        Cash
 
 **2005**
              
              ****
              **2004**
              ****
              ****
              **2003**Macnor
                  Corp (Note 1)
              
              66,665
              
              
              115,279
              
              
              101,610Fortius
                  Research & Trading (Note 2)
              
              15,000
              
              
              47,500
              
              
              3,437Total
              
              81,665
              
              
              162,779
              
              
              105,047
 
 Note
        1.
        Macnor Corp is an Ontario Corporation owned and controlled by Jiri Nor, the
        CEO
        and Director of Astris. Macnor also provides research and development services
        by Jiri Nor and marketing services by his son Peter Nor, who is an Officer
        of
        Astris.
 
 Note
        2.
        Fortius Research & Trading Corporation is an Ontario Corporation owned and
        controlled by Anthony Durkacz, an Officer and Director of Astris.
 
 (2)  Paid
        in
        Shares
  30


In
      2003,
      we issued to related parties 412,825 common shares for a value of $266,246
      for
      consulting services and expense reimbursements rendered to the following
      entities or individuals:





Individual
                  or Entity
              
              #
                  of Shares
              
              $
                  ValueMacnor
                  Corp(Note 1)
              
              
              79,815
              
              
              52,000Director
                  - Gordon Emerson
              
              
              188,220
              
              
              115,079Director
                  - David Ramm
              
              
              3,500
              
              
              2,604Fortius
                  Research & Trading(Note 2)
              
              
              141,290
              
              
              96,563Total
              
              
              412,825
              
              
              266,246








In
      2004,
      we issued to related parties 586,592 common shares for a value of $332,360
      for
      consulting services rendered and 293,751 shares for $128,000 to pay down debt
      and accrued interest on that debt for a total of 880,343 shares for a total
      of
      $473,060. These shares and amounts were issued to the following entities or
      individuals:





**Individual
                or Entity**
            ****
            **#
                of Shares**
            
            **$
                Value**Jiri
                Nor as an individual
            
            
            117,500
            
            
            51,200Macnor
                Corp. (Note 1)
            
            
            266,263
            
            
            144,455Fortius
                Research & Trading (Note 2)
            
            
            95,880
            
            
            52,500Director
                - David Ramm
            
            
            57,445
            
            
            34,422Director
                - Gordon Emerson
            
            
            118,032
            
            
            81,443Director
                - Gerald Crawford
            
            
            89,793
            
            
            46,435Director
                - Donald Blenkarn
            
            
            117,500
            
            
            51,200Director
                - Arthur Laudenslager
            
            
            17,930
            
            
            11,405Total
            
            
            880,343
            
            
            473,060








Note
      1.
      Macnor Corp is an Ontario Corporation owned and controlled by Jiri Nor, the
      CEO
      and Director of the Company. Macnor also provides research and development
      services by Jiri Nor and marketing services by his son Peter Nor, who is an
      Officer of Astris.





Note
      2.
      Fortius Research & Trading Corporation is an Ontario Corporation owned and
      controlled by Anthony Durkacz, an Officer and Director of Astris.





In
      2005,
      we issued to related parties, 5,000,000 shares for the purchase of 2062540
      Ontario Inc. for a value of $1,955,000; 1,160,803 shares for professional
      services for a value of $284,666; 125,000 shares to repay a liability worth
      $26,150; 719,873 shares for consulting services for a value of $168,437; and
      3,415 shares for expense recovery for a value of $1,205. These shares and
      amounts were issued to the following entities or individuals:





**Individual
                or Entity**
            ****
            **#
                of Shares**
            ****
            **$
                Value**Macnor
                Corp (Note 1)
            
            
            6,285,803
            
            
            2,265,816Fortius
                Research and Trading (Note 2)
            
            
            327,269
            
            
            72,500Liikfaam
                Holdings (Note 3)
            
            
            392,604
            
            
            95,937Director
                - A. Laudenslager
            
            
            3,415
            
            
            1,205Total
            
            
            7,009,091
            
            
            2,435,458





Note
      1.
      Macnor Corp is an Ontario Corporation owned and controlled by Jiri Nor, the
      CEO
      and Director of the Company. Macnor also provides research and development
      services by Jiri Nor and marketing services by his son Peter Nor, who is an
      Officer of Astris.





Note
      2.
      Fortius Research & Trading Corporation is an Ontario Corporation owned and
      controlled by Anthony Durkacz, an Officer and Director of Astris.


31


Note
      3.
      Liikfam Holdings is an Ontario Corporation owned and controlled by Michael
      Liik,
      a Director of Astris.





Directors





(3)  Currently,
      the compensation arrangement for the Directors is as follows:


I.
            Attendance
                for each Board Meeting attended$1,000


II.
            Chairman
                of the audit committee35,000
                shares


III.
            Member
                of the audit committee20,000
                shares


IV.
            Member
                of the Compensation committee20,000
                shares





The
      Company does not have any pension plan, retirement or similar plan for its
      Executive Officers or Directors. Michael Liik is compensated $8,333 per month
      billed through Liikfam Holdings Inc., an Ontario Corporation, for financial
      consulting services.





(4)  Governance





An
      executive compensation committee was appointed in January 2005 to study and
      determine appropriate levels of compensation and to structure employment
      agreements for officers.





(5)  Stock
      Option Plan





The
      Company has stock option plans for its employees and consultants who are
      regarded as integral to the benefit and progress of the Company and its
      operations.  Options are normally issued as a bonus of employment or are
      tied into performance related compensation.  Performance related
      compensation includes completion of research and development projects within
      specific timeframes and budget, achieving financial targets on behalf of the
      Company or introduction/referral/ completion of business agreements or
      arrangements. In general, the minimum vesting requirement of options issued
      is
      one year. The maximum term of options is five years from the grant date.
 Normally the exercise price of the option is determined using the five-day
      closing average of the shares prior to the grant date.





On
      October 22, 2004, the Board of Directors passed a resolution authorizing an
      amendment to a stock option plan dated September 25, 2001 and amended October
      30, 2002 increasing the number of shares available in the plan by 2,600,000
      shares, to a total of 5,100,000 shares.  The amendment was adopted by the
      Company’s shareholders at its annual and special meeting of shareholders held on
      October 22, 2004.  On Oct 12, 2005, the Board of Directors received
      approval from shareholders at the Annual General Meeting to increase the common
      shares available for the Company’s Stock Option Plan by 2,000,000. All features
      of the plan remain unchanged.





(6)  Options
      and Warrants outstanding as at April 30, 2006





The
      following table outlines the options and warrants that are outstanding as of
      April 30, 2006 of the directors and senior management or their affiliates of
      the
      Company:





Name
            
            Number
                of Shares
            
            Exercise
                Price
            
            ExpiryGary
                Brandt
            
            200,000
            
            US$
                .15
            
            07/19/10Gary
                Brandt (3)
            
            200,000
            
            US$
                .15
            
            07/19/10Jiri
                Nor
            
            300,000
            
            US$0.24
            
            11/12/06Jiri
                Nor (3)
            
            200,000
            
            US$
                0.15
            
            07/19/10Macnor
                Corp.
            
            5,000,000
            
            CDN$1.06
            
            01/27/08Michael
                Liik (1)
            
            500,000
            
            US$0.36
            
            12/11/09Michael
                Liik (3)
            
            200,000
            
            US$
                .15
            
            07/19/10Liikfam
                Holdings Inc. (2)
            
            500,000
            
            US$0.37
            
            12/09/07Peter
                Nor
            
            100,000
            
            US$0.36
            
            12/06/09Peter
                Nor (3)
            
            200,000
            
            US$
                .15
            
            07/19/10Brian
                Clewes (3)
            
            200,000
            
            US$0.15
            
            07/19/10Anthony
                Durkacz
            
            250,000
            
            US$0.20
            
            07/22/07Anthony
                Durkacz (3)
            
            200,000
            
            US$
                .15
            
            07/19/10H.
                David Ramm (3)
            
            200,000
            
            US$0.15
            
            07/19/10H.
                David Ramm
            
            250,000
            
            US$0.50
            
            09/09/08Arthur
                Landenslager (3)
            
            200,000
            
            US$0.15
            
            07/19/10




32


Options
      to M. Liik of 500,000 at $U.S. 0.36 will become vested as follows:





1.
      (i)
      200,000 upon raising a minimum of $U.S. 1 million in equity


(ii) 300,000 upon raising additional minimum of $US 5 million in
      equity





2.
      Warrants to Liikfam Holdings Inc. of 500,000 at $U.S. 0.37 will become vested
      as
      follows:





(i) 200,000 upon raising a minimum of $U.S. 1 million in equity


(ii) 300,000 upon raising additional minimum of $US 5 million in
      equity





3.  Option
      to
      vest upon completion of a successful raise of $3 million in equity financing
      for
      the Corporation.





C.
       BOARD PRACTICES.





The
      Board of Directors may consist of from three to ten members, and currently
      consists of six members. Each Director is elected by the shareholders to serve
      until the next annual meeting or until a successor is elected or appointed.
      The
      next annual meeting is expected to take place sometime in June
      2006.





For
      a list of the Directors and the period during which the current Directors have
      served in that office, please see Section 6A above.





The
      Directors of the Company do not currently have any service contracts with the
      Company providing for benefits upon termination of employment. There does not
      currently exist any compensation arrangement for any of the Directors. The
      Company does not have any pension, retirement or similar plan for its
      Directors.





Gary
      Brandt, Arthur Laudenslager and Brian Clewes are members of the Company's Audit
      Committee. Michael Liik and Brian Clewes are members of the Company’s
      Compensation Committee. There are no additional committees of the
      Board.





D.
       EMPLOYEES.





AEI
      presently has three officers and seventeen other employees, including one
      general manager, six technical experts, four lab technicians, one accountant,
      two bookkeepers, one office administrator, one office assistant and two
      labourers. Job descriptions for employees in small, entrepreneurial companies
      such as the Company tend to be rather flexible, but clearly the principal role
      of the General Manager is to oversee the progress of the current projects to
      ensure they are completed satisfactorily, on budget and on time. The present
      employees are not represented by a labor union. The Company considers its
      relationship with its employees to be satisfactory.


33


E.
       SHARE OWNERSHIP.





The
      following table lists, as of April 30, 2006, the beneficial share holdings
      (see
      (4)) in the Common Shares, which are the only outstanding voting securities
      of
      the Company, of (i) each of the Company's Executive Officers and Directors
      of
      the Company; and (ii) all of the Company's Executive Officers and Directors
      as a
      group:




**Name**
            
            **Options,
                Warrants**
              **or
                Agreements**
              **Vested**
            
            **Directly
                Owned**
            
            **Total
                Owned**
              **included
                Vested**
              **Amounts**
            
            **Percent**
              **of
                Class**Gary
                Brandt
            
            200,000(6)
            
            53,428
            
            253,428
            
            *Jiri
                K. Nor (1)
            
            5,300,000(6)
            
            9,683,825
            
            14,983,825
            
            32.08%Brian
                Clewes
            
            
            
            256,818
            
            256,818
            
            *Arthur
                Laudenslager (2)
            
            
            
            230,903
            
            230,903
            
            *Michael
                Liik (4)
            
            400,000(6)
            
            455,896
            
            855,896
            
            1.83%Anthony
                Durkacz (3)
            
            250,000(6)
            
            668,367
            
            918,367
            
            1.97%H.
                David Ramm
            
            250,000(6)
            
            60,945
            
            310 ̧945
            
            *Peter
                Nor
            
            100,000(6)
            
            0
            
            100 ̧000
            
            *All
                Executive Officers and Directors as a group (5)
            
            6,500,000
            
            11,410,182
            
            17,910,182
            
            38.34%





*
      Denotes
      less than 1%





(1)
            Includes
                (i) 2,127,907 Common Shares held by Jiri K. Nor and (ii) 7,555,918
                Common
                Shares held by Macnor Corp. (iii) 5,000,000 warrants held by Macnor
                Corp.
                (iv) 300,000 options held by Jiri
                Nor





(2)
            Includes
                (i) 230,903 Common Shares held by Arthur Laudenslager





(3)
            Includes
                (i) 159,528 Common Shares by Anthony Durkacz and (ii) 508,839 Common
                Shares by Fortius Research and Trading
                Corp.





(4)
            Includes
                (i) 89,142 Common shares held by Michael Liik and (ii)366,754 Common
                shares by Liikfam Holdings inc. (iii) 200,000 options held by Michael
                Liik
                (iv) 200,000 warrants held by Liikfam Holdings Inc.





(5)
            All
                the individuals included in the table above are beneficial owners
                as
                defined in General Instruction F to this form 20-F. Each person in
                the
                above table either owns or has the right to acquire the common shares
                within 60 days by options, warrants or other
                agreement.





(6)  Options
      and Warrants vested as at April 30, 2006





The
      following table outlines the options and warrants exercisable into common shares
      of the Company that are outstanding as of April 30, 2006 of the directors and
      senior management or their affiliates:





**Name**
            ****
            **Number
                of Shares**
            ****
            **Exercise
                Price**
            ****
            **Expiry**Gary
                Brandt
            
            200,000
            
            US$0.15
            
            07/19/10Jiri
                Nor
            
            300,000
            
            US$0.24
            
            11/12/06Macnor
                Corp.
            
            5,000,000
            
            CDN$1.06
            
            01/27/08Peter
                Nor
            
            100,000
            
            US$0.36
            
            12/06/09Michael
                Liik
            
            200,000
            
            US$0.36
            
            12/11/09Liikfam
                Holdings Inc.
            
            200,000
            
            US$0.37
            
            12/09/07H.
                David Ramm
            
            250,000
            
            US$0.50
            
            09/09/08Anthony
                Durkacz
            
            250,000
            
            US$0.20
            
            07/22/07




34


ITEM
      7.





MAJOR
      SHAREHOLDERS AND RELATED AND NON-RELATED PARTY TRANSACTIONS.





A.
      MAJOR
      SHAREHOLDERS.





The
      following table lists, as of April 30, 2006, the beneficial share holdings
      in
      the Common Shares, which are the only outstanding voting securities of the
      Company, of all persons who are known to the Company to beneficially own,
      directly or indirectly, five percent or more of the issued and outstanding
      Common Shares:





**Name
                of**
              **Beneficial
                Owner**
            ****
            **Amount
                and Nature**
              **of
                Class**
            ****
            **Percent**Jiri
                K. Nor (1)
            
            
            14,983,825
            
            
            32.08
            %





(1)
      Includes (i) 2,127,907 Common Shares held by Jiri K. Nor and (ii) 7,555,918
      Common Shares held by Macnor Corp. (iii) 5,000,000 warrants held by Macnor
      Corp.
      (iv) 300,000 options held by Jiri K. Nor





There
      has been significant change in the percentage ownership held by the major
      shareholder during the past three years due to dilution incurred by private
      placements, the issuance of Common Shares to reduce debt and the issuance of
      common shares for the acquisition of Astris s.r.o.





The
      Company's major shareholder does not have any different voting rights than
      other
      holders of the Common Shares.





For
      a discussion of the number of shares of Common Stock held in Canada, please
      see
      Item 9 below.





To
      the Company's knowledge, it is not directly or indirectly owned or controlled
      by
      another corporation(s), by any foreign government or by any other natural or
      legal person(s). The Company does not know of any arrangement that may, at
      a
      subsequent date, result in a change in control of the Company.








B.
       RELATED PARTY TRANSACTIONS.





(1)  Astris
      s.r.o.;





The
      Company acquired 100% of the ownership (increased from 30% ownership) in Astris
      s.r.o., a Czech Republic company on January 27, 2005. The results of its
      operations from the effective date of January 2, 2005 are fully consolidated
      with the results of the parent company. In prior years, this investment in
      Astris s.r.o. was accounted for on the equity basis. As the Company’s share of
      losses was in excess of the original investment, the investment was written
      down
      to nil in a prior year.


35




The
      Company regularly subcontracts portions of its research and development
      activities to s.r.o. To facilitate these activities, the Company advances funds
      to them. In addition, the Company sells its products to s.r.o., as required.
      As
      at December 31, 2005, any funds advanced to Astris s.r.o. since acquisition
      and
      any trade receivables and payables have been eliminated on consolidation. The
      table below summarizes the balances with s.r.o. for the years ended December
      31,
      2004 and 2003:





****
            **2004**
            ****
            **2003**As
                at December 31:Balance
                of funds paid included in prepaid expenses and deposits
            
            $
            -
            
            $
            30,000Included
                in payables and accruals
            
            
            588
            
            
            137,480Year
                ended December 31:Total
                funds advanced
            
            
            700,000
            
            
            416,000Sales
            
            
            -
            
            
            45,901Purchases
                included in research and development
            
            $
            563,108
            
            $
            729,800





The
      funds
      advanced to s.r.o. were for operating expenses, the purchase of land and a
      building as well as equipment for the new electrode production
      facility.




(2)  Amounts
      owing to Directors and Officers:





Payables
      and accruals as at December 31, 2005 include the following amounts:




**Entity**
            
            **Position
                in**
              **Company**
            
            **Amount**
              **2005**
            
            **Amount**
              **2004**
            
            **Amount**
              **2003**Anthony
                Durkacz
            
            Director
                & Officer
            
            $
                34,596
            
            $
                17,441
            
            $
                29,735Arthur
                Laudenslager
            
            Director
            
            20,358
            
            -
            
            -Brian
                Clewes
            
            Director
            
            25,465
            
            -
            
            -David
                Ramm
            
            Director
            
            10,000
            
            -
            
            -Fortius
                Research and Trading
            
            Controlled
                by A.D.
            
            31,125
            
            1,043
            
            26,750Gary
                Brandt
            
            Director
            
            8,698
            
            -
            
            -Jiri
                Nor
            
            Director
                & Officer
            
            61,915
            
            -
            
            8,125Liikfam
                Holdings Inc.
            
            Controlled
                by M.L.
            
            26,750
            
            -
            
            -Macnor
                Corp.
            
            Controlled
                by J.N.
            
            102,720
            
            13,826
            
            24,266Michael
                Liik
            
            Director
            
            14,512
            
            -
            
            -Peter
                Nor
            
            Officer
            
            6,971
            
            -
            
            -$343,110
            
            $
                32,310
            
            $
                88,876





(3)  Compensation
      Expensed to Directors and Officers





The
      following amounts were expensed as consulting and other compensation to
      directors and officers:





**Entity**
            
            **Position
                in**
              **Company**
            
            **Amount**
              **2005**
            
            **Amount**
              **2004**
            
            **Amount**
              **2003**Gary
                Brandt
            
            Director
            
            $
                8,698
            
            $
                -
            
            $
                -Brian
                Clewes
            
            Director
            
            25,465
            
            -
            
            -Anthony
                Durkacz
            
            Director
                & Officer
            
            10,000
            
            -
            
            -Fortius
                Research and
            
            DirectorTrading
            
            Controlled
                by A.D.
            
            112,500
            
            100,000
            
            100,000Arthur
                Laudenslager
            
            Director
            
            19,768
            
            -
            
            -Liikfam
                Holdings Inc.
            
            Controlled
                by M.L.
            
            118,750
            
            -
            
            -Macnor
                Corp. re Jiri Nor
            
            Controlled
                by J.N.
            
            315,998
            
            166,279
            
            143,331Macnor
                Corp re Peter Nor
            
            Controlled
                by J.N.
            
            120,000
            
            93,455
            
            10,279Michael
                Liik
            
            Director
            
            14,511
            
            -
            
            -Jiri
                Nor
            
            Director
                & Officer
            
            10,000
            
            -
            
            -David
                Ramm
            
            Director
            
            10,000
            
            -
            
            -$765,690
            
            $359,734
            
            $253,610




36





(4)  Agreements
      with Macnor Corp





Macnor
      has a verbal agreement with Astris. Macnor bills Astris Energi Inc. monthly
      for
      services provided at the rates approved by the Astris Board or its Compensation
      Committee from time to time. Macnor is presently paid by Astris CDN $13,333
      per
      month plus expenses at cost for the services of Jiri Nor and CDN $8,000 per
      month for the services of Peter Nor. Payment is in the form of both cash and
      common shares depending on the financial condition of the Company as determined
      by the Board . The proportions are stated in the above table. The services
      of
      Jiri Nor include acting as CEO and to perform any duties necessary by the
      Company related to the position, as well as, Chief Technology Officer and any
      duties necessary by the Company related to the position. All technology has
      been
      assigned to Astris Energi Inc as shown in Exhibit 10.17. The services of Peter
      Nor include acting as Vice President of Marketing and Business Development
      and
      to perform any duties necessary by the Company related to the
      position.





(5)  Agreement
      with Fortius Research and Trading





Fortius
      Research and Trading Corp. has a verbal agreement with Astris. Fortius bills
      Astris Energi Inc. quarterly for services provided at the rates approved by
      the
      Astris Board or its Compensation Committee from time to time. Fortius is
      presently paid CDN $8,333 per month plus expenses at cost by Astris for the
      services of Anthony Durkacz. Payment is in the form of both cash and common
      shares depending on the financial condition of the Company as determined by
      the
      Board. The services of Anthony Durkacz include acting as CFO, Vice President
      of
      Finance and the principal accounting officer and to perform any duties necessary
      by the Company related to the positions.





(6)  Agreement
      with Liikfam Holdings Inc.





Liikfam
      Holdings Inc. has an agreement with Astris. Liikfam bills Astris Energi Inc.
      quarterly for services provided at the rates approved by the Astris Board or
      its
      Compensation Committee from time to time. Liikfam is presently paid CDN $8,333
      per month plus expenses at cost by Astris for the services of Michael Liik.
      Payment is in the form of common shares and could change depending on the
      success of his efforts to raise financing for the Company. The agreement may
      be
      terminated by either party with a 30-day notice.








(7)
            Debenture
                Transaction with Directors and Advances from Related
                Parties


37





At
      year
      end December 31, 2003, the Company owed CDN$100,000 in principal and CDN$21,000
      of accrued interest to Mr. Blenkarn, a Former Director (CDN$8,400), Mr. Crawford
      (CDN$4,200) and Mr. Nor (CDN$8,400), as payment for advances made by them to
      the
      Company under the terms of a debenture, dated September 30, 1996. The amount
      owed was secured and bore interest at twelve percent (12%) per annum. Mr.
      Blenkarn, Mr. Crawford and Mr. Nor agreed that they would not demand repayment
      of the principal and interest until after January 1, 2005. The amount owed
      was
      collateralized by a lien on all of the assets and business of Astris Inc. On
      August 4, 2004, the debenture and all accrued interest was repaid in full by
      the
      issuance of 260,175 common shares of the Company. The shareholders released
      the
      security on the liability. During 2004, the following amounts were expensed
      as
      interest to these shareholders:





J.
                Nor
            
            $
            2,800
            
            
            (2003
                - $4,800
            )D.
                Blenkarn
            
            $
            2,800
            
            
            (2003
                - $4,800
            )G.
                Crawford
            
            $
            1,400
            
            
            (2003
                - $2,400
            )





Advances
      from related parties at December 31, are summarized as follows:





**2005**
            
            **2004**
            
            **2003**Advances
                from directors
            
            $
            -
            
            $
            -
            
            $
            -Debenture
                due to shareholders
            
            
            -
            
            
            -
            
            
            100,000$
            -
            
            $
            -
            
            $
            100,000








C.
      NON-RELATED PARTY COMMON STOCK TRANSACTIONS.





On
      January 10, 2003, the Company agreed to settle obligations owing to certain
      individuals and companies.  The following shares were issued at a price at
      US$0.29 per share:





Non-related
      parties    75,000
      shares





On
      May 8,
      2003, the Company agreed to settle obligations owing to certain individuals
      and
      companies.  The following shares were issued at a price at US$0.56 per
      share:





Non-related
      parties    30,652
      shares





On
      July
      16, 2003, the Company agreed to settle obligations owing to certain individuals
      and companies.  The following shares were issued at a price at US$0.53 per
      share:





Non-related
      parties    48,470
      shares





On
      October 28, 2003, the Corporation agreed to settle obligations owing to certain
      individuals and companies.  The following shares were issued at a price at
      US$0.55 per share:





Non-related
      parties    43,960
      shares





On
      December 16, 2003, the Corporation agreed to settle obligations owing to certain
      individuals and companies.  The following shares were issued at a price at
      US$0.43 per share:





Non-related
      parties    11,000
      shares


38




During
        the four quarters of 2004, the company issued shares of common stock to settle
        obligations owing by the Company to certain individuals and companies as
        follows:






First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            AnnualTotal
                Non-Related Parties
            
            
            306,040
            
            
            136,092
            
            
            565,535
            
            
            721,205
            
            
            1,728,872





During
      the four quarters of 2005, the company issued shares of common stock to settle
      obligations owing by the Company to certain individuals and companies as
      follows:





First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            AnnualTotal
                Non-Related Parties
            
            
            261,350
            
            
            1,113,757
            
            
            2,373,045
            
            
            557,775
            
            
            4,305,927








D.
      INTERESTS OF EXPERTS AND COUNSEL.





Not
      Applicable.





ITEM
      8.
      FINANCIAL INFORMATION.





A.
       CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.





Reference
      is made to Item 17 for a list of all financial statements and notes related
      thereto filed as part of this Annual Report.





A.6.
      EXPORT SALE DISCLOSURE





In
      2005,
      the Company had export sales in the amount of $238,493. In 2004, the Company
      had
      export sales in the amount of $81,290.  In 2003, the Company had export
      sales in the amount of $60,862.





B.
       SIGNIFICANT CHANGES.





There
      have been no significant changes, which have occurred since the date of the
      annual financial statements included in this Report except as reported in Item
      7B “Acquisition of Astris s.r.o.”





DIVIDEND
      POLICY.





The
      Company has not paid dividends within the last five fiscal years. For a
      description of the ability of the Board of Directors to distribute dividends,
      please see Item 10B below.





ITEM
      9.
      THE OFFER AND LISTING.





MARKETS
      AND PRICE HISTORY OF THE COMPANY'S STOCK.





As
      of April 30, 2006, the Company had approximately 267 stockholders of record
      for
      its Common Shares and 40,212,228 Common Shares were issued and outstanding.
      The
      Company believes that there are a considerable number of beneficial holders
      of
      the Common Shares, as a substantial number of Common Shares are held of record
      by principal depositories in Canada and the United States. As at April 30,
      2006,
      the shareholder list showed 265 registered shareholders holding a total of
      13,778,194 Common Shares, 7,653,061 Common Shares in the name of Cede & Co
      and 18,780,973 Common shares in the name of CDS & Co (the depository in
      Canada).


39





The
      Common Shares were previously traded in Canada on the Canadian Dealing Network
      (CDNX), but presently has an inactive listing on the CDNX. Since June 20, 2001,
      the Company's Common Shares have been posted for trading on the O.T.C. Bulletin
      Board under the symbol ASRNF.  The
      quarterly high and low prices for the past two fiscal years are tabulated
      below:





2004
            
            High
            
            LowFirst
            
            $
            .61
            
            $
            .49Second
            
            
            .53
            
            
            .39Third
            
            
            .57
            
            
            .32Fourth
            
            
            .51
            
            
            .372005
            
            
            High
            
            
            LowFirst
            
            
            .40
            
            
            .24Second
            
            
            .30
            
            
            .12Third
            
            
            .54
            
            
            .13Fourth
            
            
            .22
            
            
            .11





The
      following table sets forth the high and low market prices for each of the past
      4
      months:





Month
                2006
            
            High,
              US$
                /share
            
            Low,
              US$
                /shareJanuary
            
            
            .18
            
            
            .13February
            
            
            .16
            
            
            .13March
            
            
            .16
            
            
            .11April
            
            
            .29
            
            
            .14








ITEM
      10.
      ADDITIONAL INFORMATION.





A.
       SHARE CAPITAL.





Not
      Applicable.





ITEM
      10
      B.  MEMORANDUM AND ARTICLES OF ASSOCIATION.





1.
      ORGANIZATION.





The
      Company was incorporated in the Province of Ontario, Canada as required under
      the Business Corporations Act (Ontario). The registrant’s memorandum and
      articles do not provide for any specific objects or purposes.





2.
      DIRECTORS POWERS.





A
      director who is a party to, or who is a director or officer of or has a material
      interest in a proposal, arrangement or contract cannot vote on any resolution
      to
      approve the potential conflict of interest. A director may not vote, in the
      absence of an independent quorum, on compensation to themselves or any members
      of their body.


40




No
      person
      shall be qualified for election as a director if such person is less than 18
      years of age, is of unsound mind and has been so found by a court in Canada
      or
      elsewhere, is not an individual, or has the status of a bankrupt. Directors
      are
      not required to retire upon reaching a specific age. A director need not be
      a
      shareholder. A majority of the directors shall be resident Canadians.





CORPORATE
      GOVERNANCE.





The
      Company's by-laws provide that, subject to any unanimous shareholder agreement,
      the Board of Directors shall manage or supervise the management of the business
      and affairs of the Corporation. The powers of the board may be exercised at
      a
      meeting at which a quorum is present or by resolution in writing signed by
      all
      the Directors entitled to vote on that resolution at a meeting of the Board.
      Where there is a vacancy in the board, the remaining Directors may exercise
      all
      the powers of the Board, so long as a quorum remains in office.





MEETINGS
      OF THE BOARD OF DIRECTORS.





The
      Company's by-laws provide that meetings of the Board of Directors may be held
      at
      any place within or outside Ontario and in any financial year of the Corporation
      a majority of the meetings need not be held in Canada. Meetings of the board
      shall be held from time to time at such time and at such place as the Board
      of
      Directors, the Chair of the Board, the Managing Director, the President or
      any
      two Directors may determine.





BORROWING
      POWER.





The
      Company's by-laws provide that without limiting the borrowing powers of the
      Corporation, as set forth in the Business Corporation Act (Ontario) (the "Act"),
      but subject to the articles and any unanimous shareholder agreement, the Board
      of Directors may from time to time on behalf of the Corporation, without
      authorization of the shareholders:





borrow
      money upon the credit of the Corporation;





issue,
      reissue, sell or pledge bonds, debentures, notes or other evidences of
      indebtedness or guarantee of the Corporation, whether secured or unsecured;





to
      the
      extent permitted by the Act, give directly or indirectly financial assistance
      to
      any person by means of a loan, a guarantee or otherwise on behalf of the
      Corporation to secure performance of any present or future indebtedness,
      liability or obligation of any person;





and





mortgage,
      hypothecate, pledge or otherwise create a security interest in all or any
      currently owned or subsequently acquired real or personal, movable or immovable,
      property of the Corporation including book debts, rights, powers, franchises
      and
      undertakings, to secure any such bonds, debentures, notes or other evidences
      of
      indebtedness or guarantee or any other present or future indebtedness, liability
      or obligation of the Corporation.





Nothing
      limits or restricts the borrowing of money by the Corporation on bills of
      exchange or promissory notes made, drawn, accepted or endorsed by or on behalf
      of the Corporation.





Unless
      the articles of the Corporation otherwise provide, the board
      may
      from time to time delegate to a director, a committee of the board, or an
      officer of
      the
      Corporation any or all of the powers conferred on the board to such extent
      and
      in such manner as the board may determine at the time of such
      delegation.




3.  R IGHTS,
      PREFERENCES AND RESTRICTIONS OF PREFERRED AND COMMON SHARES




41


The
      holders of the common shares are entitled to receive notice of and to attend
      and
      vote at all meetings of shareholders of the company and to one vote in respect
      of each common share held at all such meetings, except meetings at which only
      holders of a specified class of shares (other than the common shares) are
      entitled to vote. Holders of common shares are entitled to receive, subject
      to
      the rights of holders of other classes of shares, dividends as and when declared
      by the company. Holders of common shares are entitled to receive, subject to
      the
      rights of holders of other classes of shares, the remaining property of the
      company on the liquidation, dissolution or winding up of the company, whether
      voluntary or involuntary, or any other distribution of the assets of the company
      among its shareholders for the purpose of winding up its affairs.




The
      holders of the preferred shares shall have preferred rights as to dividends
      as
      determined by the directors of the company. The preferred shares may be issued
      in one or more series, each series to consist of such number of shares as may
      before the issue thereof be determined by the directors who may by resolution
      fix before the issue thereof the designation, preference, rights, privileges,
      restrictions, conditions and limitations attached to the preferred shares of
      each series including the rate and nature of preferential dividends, the date
      of
      payment thereof, the redemption price and conditions of redemption, if any,
      conversion rights and conditions of conversion, if any, and voting rights,
      if
      any.





DIVIDENDS





The
      Company's by-laws provide that, subject to the Act, the articles and any
      unanimous shareholder agreement, the Board of Directors may from time to time
      declare dividends payable to the shareholders according to their respective
      rights and interests in the Corporation. Dividends may be paid in money or
      property or by issuing fully paid shares of the Corporation or options or rights
      to acquire fully paid shares of the Corporation. Any dividend unclaimed after
      a
      period of six years from the date on which the same has been declared to be
      payable shall be forfeited and shall revert to the Corporation.





4.  CHANGING
      RIGHTS OF SHAREHOLDERS





The
      rights of shareholders may not be modified other than by a majority vote of
      the
      common shares voting on such modification at a special meeting. The rights
      of
      shareholders may also be modified by a unanimous shareholder agreement.





5.  ANNUAL
      GENERAL MEETINGS AND SPECIAL MEETINGS





The
      annual meeting of shareholders shall be held at such time in each year and
      at
      such place anywhere in the world as the board, chair of the board, the managing
      director or the president may from time to time determine. The board, chair
      of
      the board, the managing director or the president shall have the power to call
      a
      special meeting of shareholders at anytime. Notice of the time and place of
      each
      meeting of shareholders will be given no less than 21 and no more than 50 days
      before the date of the meeting to each director, to the auditor, and to each
      shareholder who at the close of business on the record date for notice is
      entered in the securities register as the holder of one or more shares carrying
      the right to vote.





6.  LIMITATIONS
      TO OWN SECURITIES





There
      are
      no limitations on the rights to own securities, to hold securities or exercise
      voting rights on securities imposed by foreign law.





7.  ISSUES
      RELATED TO MERGERS, ACQUISITIONS OR CORPORATE RESTRUCTURING





Currently
      there are no provisions in the company’s articles or by-laws that would have an
      effect of delaying, deferring or preventing any of item 7 above.


42





8.  OWNERSHIP
      THRESHOLD





There
      are
      no bylaw provisions governing the ownership threshold above which shareholder
      ownership must be disclosed. However, in the United States, 5% ownership or
      more
      must be publicly disclosed. In Canada, 10% ownership or more must be publicly
      disclosed.





9
&
      10.LAW





The
      laws
      of Ontario, Canada, relating to Items 2-8 are not significantly different from
      the laws of the United States. The conditions imposed by the memorandum and
      articles of association governing changes in capital are not more stringent
      than
      is required by law.





C.  MATERIAL
      CONTRACTS





The
      Company entered into a value added reseller agreement with Alternate Energy
      Inc.
      and a co-operation agreement with El.Ma, as previously mentioned under Item
      5C
“Prospects”.





D.
       EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
      HOLDERS





There
      are no governmental laws, decrees or regulations in Canada relating to
      restrictions on the import/export of capital affecting the remittance of
      interest, dividends or other payments to non-residential holders of the
      Company's Common Shares. Any such remittances to United States residents,
      however, are subject to a 15% withholding tax pursuant to Article X of the
      reciprocal tax treaty between Canada and the United States. See Part E
      below.





Except
      as provided in the Investment Canada Act (the "Act"), there are no limitations
      under the laws of Canada, the Province of Ontario or in the charter or any
      other
      constituent documents of the Company on the right of foreigners to hold and/or
      vote the Common Shares of the Company.





The
      Act requires a non-Canadian making an investment to acquire control of a
      Canadian business, the gross assets of which exceed certain defined threshold
      levels, to file an application for review with Investment Canada, the federal
      agency created by the Act.





As
      a result of the Canada-U.S. Free Trade Agreement, the Act was amended in January
      1989 to provide distinct threshold levels for Americans who acquire control
      of a
      Canadian business.





A
      Canadian business is defined in the Act as a business carried on in Canada
      that
      has a place of business in Canada, an individual or individuals in Canada who
      are employed or self-employed in connection with the business, and assets in
      Canada used in carrying on the business.





An
      American, as defined in the Act, includes: an individual who is an American
      national or a lawful permanent resident of the United States; a government
      or
      government agency of the United States; an American-controlled entity,
      corporation or limited partnership or trust which is not controlled in fact
      through ownership of its voting interests of which two-thirds of its Board
      of
      Directors, general partners or trustees, as the case may be, are any combination
      of Canadians or Americans.





The
      following investments by a non-Canadian are subject to review by Investment
      Canada:





(a)
       all direct acquisitions of control of Canadian businesses with


assets of CDN$5 million or more;





(b)
       all indirect acquisitions of control of Canadian businesses
      with


assets of CDN$50 million or more if such assets represent
      less


than 50% of the value of the assets of the entities, the
      control


of which is being acquired; and


43




(c)
       all indirect acquisitions of control of Canadian businesses
      with


assets of CDN$5 million or more if such assets represent more


than 50% of the value of the assets of the entities, the
      control


of which is being acquired.





Review
      by Investment Canada is required when investments by Americans exceed CDN$150
      million for direct acquisitions of control. For the purposes of the Act, direct
      acquisition of control means: a purchase of the voting interest on a
      corporation, partnership, joint venture or trust carrying on a Canadian
      business, or any purchase of all or substantially all of the assets used in
      carrying on a Canadian business; and indirect acquisition of control means
      a
      purchase of the voting interest of a corporation, partnership, joint venture
      or
      trust, whether a Canadian or foreign entity, which controls a corporation,
      partnership, joint venture or trust carrying on a Canadian business in
      Canada.





The
      acquisition of certain Canadian businesses is excluded from the higher
      thresholds set out for Americans. These excluded businesses include oil, gas,
      uranium, financial services (except insurance); transportation services and
      cultural services (i.e. the publication, distribution or sale of books,
      magazines, periodicals (other than printing or typesetting businesses), music
      in
      print or machine readable form, radio, television, cable and satellite services;
      the publication, distribution, sale or exhibitions of film or video recordings
      or audio or video music recordings).





Direct
      or indirect acquisitions of control of these excluded businesses are reviewable
      at the CDN$5 and CDN$50 million thresholds.





A
      non-Canadian shall not implement an investment reviewable under the Act unless
      the investment has been reviewed and the Minister responsible for Investment
      Canada is satisfied or is deemed to be satisfied that the investment is likely
      to be of net benefit to Canada. If the Minister is not satisfied that the
      investment is likely to be a net benefit to Canada, the non-Canadian shall
      not
      implement the investment or, if the investment has been implemented, shall
      divest himself of control of the business that is the subject of the
      investment.





A
      non-Canadian or American making the following investments:





(i)
       an investment to establish a new Canadian business; and





(ii)
      an investment to acquire control of a Canadian business which


investment
      is not subject to review under the Act, must notify


Investment
      Canada, within prescribed time limits, of such


investments.





E.
       TAXATION.





CANADIAN
      INCOME TAX CONSEQUENCES





Management
      of the Company considers that the following discussion respecting taxation
      fairly describes the principal and material Canadian federal income tax
      consequences applicable to shareholders of the Company who are residents of
      the
      United States and are not residents of Canada and do not hold, and are deemed
      not to hold, Common Shares of the Company in connection with carrying on a
      business in Canada (a "non-resident").





Generally,
      dividends paid by Canadian corporations to non-resident shareholders are subject
      to a withholding tax of 25% of the gross amount of such dividends. However,
      Article X of the reciprocal tax treaty between Canada and the United States
      reduced to 15% the withholdings tax on the gross amount of dividends paid to
      residents of the United States. A further 10% reduction in 1997 in the
      withholding tax rates on the gross amount of dividends is applicable when a
      U.S.
      corporation owns at least 10% of the voting stock of the Canadian corporation
      paying the dividends.


44




A
      non-resident who holds Common Shares as capital property will not be subject
      to
      tax on capital gains realized on the disposition of such Shares unless such
      Shares are "taxable Canadian property" within the meaning of the Income Tax
      Act
      (Canada), and no relief is afforded under any applicable tax treaty.
 However, the Common Shares of Astris are taxable Canadian property because
      they are not traded on a prescribed stock exchange.  This creates Canadian
      filing requirements for non-residents. Non-Canadian Residents would be required
      to file a special Canadian Income Tax Return for dispositions of shares in
      Astris stock and would be taxable in Canada on any Net Capital Gains earned
      on
      such dispositions.





UNITED
      STATES FEDERAL INCOME TAX CONSEQUENCES





The
      following discussion describes the United States federal income tax consequences
      of the ownership and disposition of Common Shares of the Company. The discussion
      contained in this summary is based on the Internal Revenue Code of 1986, as
      amended (the "Code"), existing and proposed Treasury Regulations, judicial
      decisions and administrative pronouncements, all of which are subject to change.
      Any such changes may be applied retroactively in a manner that could result
      in
      federal income tax consequences different from those discussed
      below.





This
      summary discusses only Common Shares of the Company held by a U.S. Holder
      (defined below) as a capital asset within the meaning of Section 1221 of the
      Code, and does not deal with special situations, such as those of banks, thrift
      institutions, real estate investment trusts, regulated investment companies,
      insurance companies, dealers in securities or commodities, tax-exempt investors,
      holders whose functional currency is not the U.S. dollar, persons who hold
      Common Shares of the Company as a position in a straddle, as part of a synthetic
      security or hedge, as part of a conversion transaction or other integrated
      investment, or persons who are not U.S. Holders (as defined below). Further,
      the
      summary does not include any description of any alternative minimum tax
      consequences or any state, local or foreign tax consequences that may be
      applicable. This summary assumes that no U.S. Holder will own, directly or
      indirectly, Common Shares of the Company representing 10% or more of the voting
      power of the Company.





HOLDERS
      OF COMMON SHARES OF THE COMPANY ARE URGED TO CONSULT THEIR TAX ADVISORS WITH
      RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF
      SUCH
      SHARES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, INCLUDING THE TAX
      CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, AND THE POSSIBLE
      EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.





As
      used herein, a "U.S. Holder" means a beneficial owner of Common Shares of the
      Company who is (I) a citizen or resident of the United States, (ii) a
      corporation, partnership or other entity created or organized in or under the
      laws of the United States or any State thereof or the District of Columbia,(iii)
      an estate the income of which is subject to United States federal income
      taxation regardless of its source, or (iv) a trust the administration of which
      is subject to the primary supervision of a court within the United States and
      for which one or more U.S. persons have the authority to control all substantial
      decisions.





If
      dividends were to be declared, they could be treated as dividends from a
      qualified foreign corporation and, accordingly, be subject to a 15% U.S. tax
      rate.





Dividends





Distributions
      with respect to the Common Shares (other than liquidating distributions and
      certain distributions in redemption of the Common Shares) which are paid out
      of
      current or accumulated earnings and profits, as calculated for United States
      federal income tax purposes, generally will constitute dividends taxable as
      ordinary income. To the extent the amount of any such distribution paid with
      respect to the Common Shares exceeds current and accumulated earnings and
      profits, as calculated for United States federal income tax purposes, such
      excess distribution will not constitute a dividend for United States federal
      income tax purposes, but will be treated first as a tax-free return of capital
      to the extent of the holder's adjusted tax basis in his Common Shares (with
      a
      corresponding reduction in such basis) and, to the extent the distribution
      exceeds such basis, as a capital gain.


45





Foreign
      Tax Credit




A
      U.S. Holder who pays (or has had withheld from distributions) Canadian income
      tax with respect to the ownership of Common Shares of the Company may be
      entitled, at the option of the U.S. Holder, to either a deduction or a tax
      credit for such foreign tax paid or withheld. This election is made on a
      year-by-year basis and applies to all foreign taxes paid by (or withheld from)
      the U.S. Holder during that year. There are significant and complex limitations
      that apply to the credit, among which is the general limitation that the credit
      cannot exceed the proportionate share of the U.S. Holder’s United States Federal
      income tax liability that the U.S. Holder’s foreign source income bears to his
      worldwide taxable income. The availability of the foreign tax credit and the
      application of the limitations on the credit are fact specific and holders
      and
      prospective holders of Common Shares should consult their own tax advisors
      regarding their individual circumstances.





Dispositions,
      Including Redemptions





Any
      sale, exchange, redemption (except as discussed below) or other disposition
      of
      the Common Shares generally will result in taxable gain or loss equal to the
      difference between the amount received upon the sale, exchange, redemption
      or
      other disposition and the holder's adjusted tax basis in the Common Shares.
      Such
      gain or loss generally will be capital gain or loss and will be long-term
      capital gain or loss if the holding period for the Shares of the Company exceeds
      one year.





In
      certain cases, a redemption of Common Shares may be treated as a dividend,
      rather than as a payment in exchange for the Shares of the Company. In such
      events, the redemption payment will be treated as ordinary dividend income
      to
      the extent that such payment is made out of current or accumulated earnings
      and
      profits, as calculated for United States federal income tax purposes. The
      determination of whether the redemption will be treated as a dividend rather
      than as payment in exchange for the Common Shares of the Company will depend
      upon whether and to what extent the redemption reduces the holder's percentage
      stock ownership interest in the Company. A redemption will be treated as an
      exchange of stock that produces a capital gain if the redemption either (1)
      completely terminates the holder's interest in the Company under Section
      302(b)(3) of the Code, (2) is "substantially disproportionate" with respect
      to
      the holder under Section 302(b)(2) of the Code, or (3) is "not essentially
      equivalent to a dividend" under Section 302(b)(1) of the Code.





A
      redemption will completely terminate the holder's interest in the Company if,
      as
      a result of the redemption, the holder no longer has any stock interest in
      the
      Company, directly or constructively after application of the attribution rules
      of Section 302(c) of the Code. A redemption will be "substantially
      disproportionate" with respect to the holder if (1) the ratio of the voting
      stock owned by the holder (including stock attributed to the holder under
      Section 302(c) of the Code) immediately after the redemption to all the voting
      stock of the Company is less than 80% of the same ratio for the voting stock
      owned by the holder immediately before the redemption, (2) there is a similar
      percentage reduction in the ownership by the holder of Common Shares of the
      Company, and (3) the holder owns less than 50% of the voting stock of the
      Company. Whether a redemption is "not essentially equivalent to a dividend"
      with
      respect to a holder will depend upon the holder's particular circumstances.
      The
      IRS has ruled that a minority shareholder in a publicly held corporation whose
      relative stock interest is minimal and who exercises no control with respect
      to
      corporate affairs is considered to have a "meaningful reduction" if such
      shareholder has a reduction in his percentage stock ownership. In determining
      whether any of the foregoing tests have been satisfied, the holder is deemed,
      under the constructive ownership rules of Section 302(c) of the Code, to own
      any
      Common Shares in the Company owned by certain related persons and entities
      and
      any Common Shares which the holder or certain related persons and entities
      have
      an option to acquire. However, because of the ambiguities in applying the
      foregoing rules, holders should consult their tax advisors to determine whether
      a redemption of Common Shares will be treated as a dividend or as a payment
      in
      exchange for the Common Shares of the Company.





F.
       DIVIDENDS AND PAYING AGENTS





Not
      Applicable.


46




G.
       STATEMENT BY EXPERTS





Not
      Applicable.





H.
       DOCUMENTS ON DISPLAY





The
      Company is subject to the informational requirements for foreign private issuers
      under the Securities Exchange Act of 1934, as amended. In accordance with these
      requirements, the Company files reports on Form 20-F and 6-K with the United
      States Securities and Exchange Commission. These materials, including this
      annual report and the exhibits thereto, may be inspected and copied at the
      Commission's Public Reference Room at 100 F Street, N.E., Washington, DC 20549.
      Copies of the materials may be obtained from the Public Reference Room at
      prescribed rates. The public may obtain information on the operations of the
      Commission's Public Reference Room by calling the Commission in the United
      States at 1-800-SEC-0330. The Commission also maintains a web site at
      http://sec.gov that contains reports, proxy statements and other information
      regarding registrants that file electronically with the Commission.





I.
       SUBSIDIARY INFORMATION





Not
      Applicable.





ITEM
      11.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





INTEREST
      RATE RISK.





The
      Company does not have any significant exposure to changes in interest
      rates.





IMPACT
      OF
      CURRENCY FLUCTUATIONS





The
      Company's operating expenses are primarily paid in Canadian dollars.
 Fluctuations in the exchange rate between the Canadian dollar and such
      other currencies may have a material effect on the Company's results of
      operations. In particular, the Company may be adversely affected by a
      significant strengthening of the Canadian dollar against the U.S. dollar or
      Euro. The Company has not previously engaged in, and does not now intend to
      enter into, any currency hedging or other similar currency hedging transactions.
      The Company may enter into such transactions on a non-speculative basis to
      the
      extent that it might in the future have substantial foreign currency
      exposure.





ITEM
      12.
      DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





Not
      Applicable.





PART
      II.





ITEM
      13.
      DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





None.





ITEM
      14.
      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS





None.





ITEM
      15.
      CONTROLS AND PROCEDURES


47





EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES





As
      required by Rule 13a-15 under the Securities Exchange Act of 1934, as
      amended(the "Exchange Act"), the Company carried out an evaluation under the
      supervision and with the participation of the Company's management, including
      the Chief Executive Officer and President and the Chief Financial Officer,
      of
      the effectiveness of the Company's disclosure controls and procedures as of
      December 31, 2005. In designing and evaluating the Company's disclosure controls
      and procedures, the Company and its management recognize that there are inherent
      limitations to the effectiveness of any system of disclosure controls and
      procedures, including the possibility of human error and the circumvention
      or
      overriding of the controls and procedures. Accordingly, even effective
      disclosure controls and procedures can only provide reasonable assurance of
      achieving their desired control objectives. Additionally, in evaluating and
      implementing possible controls and procedures, the Company's management was
      required to apply its reasonable judgment. Furthermore, in the course of this
      evaluation, management considered certain internal control areas, including
      those discussed below, in which we have made and are continuing to make changes
      to improve and enhance controls. Based upon the required evaluation, the Chief
      Executive Officer and the Chief Financial Officer concluded that as of December
      31, 2005, the Company's disclosure controls and procedures were effective (at
      the "reasonable assurance" level mentioned above).





From
      time
      to time, the Company and its management have conducted and will continue to
      conduct further reviews and, from time to time put in place


additional
      documentation, of the Company's disclosure controls and procedures, as well
      as
      its internal control over financial reporting. The Company may from time to
      time
      make changes aimed at enhancing their effectiveness, as well as changes aimed
      at
      ensuring that the Company's systems evolve with, and meet the needs of, the
      Company's business. These changes may include changes necessary or desirable
      to
      address recommendations of the Company's management, its counsel and/or its
      independent auditors, including any recommendations of its independent auditors
      arising out of their audits and reviews of the Company's financial statements.
      These changes may include changes to the Company's own systems, as well as
      to
      the systems of businesses that the Company has acquired or that the Company
      may
      acquire in the future and will, if made, be intended to enhance the
      effectiveness of the Company's controls and procedures. The Company is also
      continually striving to improve its management and operational efficiency and
      the Company expects that its efforts in that regard will from time to time
      directly or indirectly affect the Company's disclosure controls and procedures,
      as well as the Company's internal control over financial reporting.





CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING





There
      were no changes in the Company's internal controls over financial reporting
      that
      has materially affected or that are reasonably likely to materially affect
      the
      Company's internal controls over financial reporting during the period covered
      by this Annual Report.  We maintain evidential matter, including
      documentation, to provide reasonable support for management’s assessment of the
      effectiveness of the issuer’s internal control over financial reporting. As more
      fully described in Note 3 to the audited consolidated financial statements
      included in Item 17 of this Annual Report, during our preparation and analysis
      of our 2003 consolidated financial statements, certain errors to our previously
      reported financial information were identified and corrected. These items
      related to new accounting standards not being adopted on a timely basis and
      misinterpretation of certain circumstances related to contingent liabilities
      and
      consolidation accounting.  These corrections required restatement of
      previously issued consolidated financial statements for 2002 and 2001.





ITEM
      16.





A. AUDIT
      COMMITTEE FINANCIAL EXPERT





Members
      of the Audit Committee have broad financial experience which has been gained
      in
      a variety of disciplines including investment banking, supervision of finance
      functions and general management, and the Board is satisfied that collectively
      they have the requisite financial skills and expertise to enable them fully
      to
      carry out their responsibilities. However, the Board considers that no
      individual member of the committee qualifies as a “financial expert” within the
      terms of the definition set out in the Sarbanes-Oxley Act of 2002. All current
      members of the Audit Committee are independent.


48





ITEM
      16B. CODE OF
      ETHICS




he
      Company's Code of Ethics is attached hereto as Exhibit 14.1




ITEM
      16C. PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





For
      the
      year ended 2005, 2004 and 2003, the audit fees were CDN$28,200, CDN$22,000
      and
      CDN$50,000.  For the year ended 2005 and 2004, the audit-related fees for
      the principal accountants were CDN$42,545 and CDN$nil.  For the year ended
      2005 and 2004, the tax related fees for the principal accountants were CDN$nil
      and CDN$nil.  The Company’s audit committee’s pre-approval of audit fees is
      discussed in advance with the principal accountant and the audit committee.
      If
      there are any adjustments, they are approved by the audit committee.




ITEM
      16D. EXEMPTIONS FROM
      LISTING THE STANDARDS FOR AUDIT COMMITTEES.




Not
      Applicable.




ITEM
      16E. PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS





Not
      Applicable.




PART
      III.





ITEM
      17.
      FINANCIAL STATEMENTS





The
      following documents are filed as Attachment A hereto and are included as part
      of
      this Form 20-F.





ASTRIS
      ENERGI INC. CONSOLIDATED FINANCIAL STATEMENTS





Description
      of Document:





Auditors'
      Report for the year ended December 31, 2005.


Auditors’
      Report for the year ended December 31, 2004.


Auditors’
      Report for the year ended December 31, 2003.


Consolidated
      Balance Sheets for the year ended December 31, 2005, 2004 and 2003.


Consolidated
      Statements of Loss and Deficit for the years ended December 31, 2005, 2004
      and
      2003.


Consolidated
      Statements of Cash Flows for the years ended December 31, 2005, 2004 and
      2003.


Notes
      to
      Consolidated Financial Statements for the year ended December 31, 2005, 2004
      and
      2003.





ITEM
      18.
      FINANCIAL STATEMENTS





Not
      applicable.





ITEM
      19.
      EXHIBITS





3.1*  Memorandum
      of Association of Kayty Exploration Ltd., filed March 18,1981 with the Province
      of Alberta Office of Consumer and Corporate Affairs.





3.2*  Articles
      of Association of Kayty Exploration Ltd., filed March 18,1981 with the Province
      of Alberta Office of Consumer and Corporate Affairs.





3.3*  Certificate
      amending the Memorandum of Association of Kayty Exploration Ltd., filed July
      9,
      1981 with the Province of Alberta Office of Consumer and Corporate
      Affairs.





3.4*  Certificate
      amending the Memorandum of Association of Kayty Exploration Ltd., filed November
      6, 1981 with the Province of Alberta Office of Consumer and Corporate
      Affairs.


49





3.5*  Certificate
      amending the Memorandum of Association of Kayty Exploration Ltd., filed March
      11, 1982 with the Province of Alberta Office of Consumer and Corporate
      Affairs.





3.6*  Certificate
      amending the Memorandum of Association of Kayty Exploration Ltd., filed August
      9, 1982 with the Province of Alberta Office of Consumer and Corporate
      Affairs.





3.7*  Articles
      of Continuance for Kayty Exploration Ltd., filed September 22, 1987 with the
      Ministry of Consumer and Commercial Relations, Province of Ontario,
      Canada.





3.8*  Articles
      of Amendment for Kayty Inc., filed December 7, 1994 with the Ministry of
      Consumer and Commercial Relations, Province of Ontario, Canada.





3.9*  Articles
      of Amendment for WLD Inc., filed July 4, 1995 with the Ministry of Consumer
      and
      Commercial Relations, Province of Ontario, Canada.





3.10*  By-Laws
      of Astris Energi Inc., dated April 12, 1996.





4.1*  Astris
      Energi Inc. Stock Option Plan, dated June 2000.





4.2*
      Form
      of Convertible Debenture Document with Cornell Capital Partners, LP, dated
      April
      10, 2006.





4.3*  Warrant
      number CCP-001 to Cornell Capital Partners, LP dated April 10,
      2006.





4.4*  Warrant
      number CCP-002 to Cornell Capital Partners, LP dated April 10, 2006.





4.5*  Warrant
      number CCP-003 to Cornell Capital Partners, LP dated April 10, 2006.




10.1*  License
      Agreement between Astris Energi Inc. and Energy Ventures Inc.(Canada) dated
      October 22, 1998.





10.2*  Debenture
      by Astris Energi Inc and Astris Inc. to and in favor of Energy Ventures Inc.
      (Canada) dated October 22, 1998.





10.3*  Equipment
      Lease between Astris Energi Inc. and Astris Inc. and Energy Ventures Inc.
      (Canada) dated October 22, 1998.





10.4*  License
      Agreement with Macnor Corp. dated October 1, 1999.





10.5*  Lease
      for
      property located at 2175 Dunwin Drive, Unit 6, Mississauga, Ontario, between
      789542 Ontario Limited and Astris Energi Inc., dated April 14,
      2000.





10.6*  License
      Agreement, between Astris Inc. and Astris s.r.o., dated January 30,
      1995.





10.7*  Grant
      of
      Options by Astris Energi Inc. to Energy Ventures Inc., dated October 22,
      1998.





10.8*  Agreement
      between Astris Energi Inc. and Fuelcellstore.com, Inc., dated October 12,
      2000.





10.9*  Assignment
      Agreement between Josef Soltys and Astris Inc. for Canadian Patent #1,295,679,
      for QUICKCELL, dated November 15, 1995.





10.10*
      Debenture between Astris Inc. and Donald Alex Blenkarn, in trust, dated
      September 30, 1996.





10.11*
      Value Added Reseller Agreement with Alternate Energy Corp., dated May 14,
      2004.





10.12*
      Co-operation agreement with El.ma, dated October 15, 2004.


50





10.13*
      Consulting Agreement with Liikfam Holdings, dated December 10,
      2004.





10.14*
      Purchase and Escrow Agreement between Astris Energi Inc., Macnor Corporation
      and
      2062540 Ontario Inc. dated January 20, 2005.





10.15*
      Teaming Arrangement with Plasma Environmental Technologies Inc., dated February
      23, 2005.





10.16*
      Agreement with First Energy Advisors, dated May 22, 2003.





10.17*
      Assignment of technology to Astris Energi Inc. from Macnor Corporation, dated
      July 25, 2005.





10.18*
      Form of Convertible Debenture document, dated March 24, 2005.





10.19*
      Securities Purchase Agreement with Cornell Capital Partners LP, dated April
      10,
      2006.





10.20*
      Investor Registration Rights Agreement with Cornell Capital Partners LP, dated
      April 10, 2006.





10.21*
      Security Agreement with Cornell Capital Partners LP, dated April 10,
      2006.





10.22*
      Security Agreement between 2062540 Ontario Inc. and Cornell Capital Partners
      LP,
      dated April 10, 2006.





10.23*
      Share Escrow Agreement with Cornell Capital Partners LP, dated April 10,
      2006.





10.24*
      Irrevocable Transfer Agent Instructions between Equity Transfer Services, Inc.,
      Cornell Capital Partners LP and Astris Energi Inc.




14.1
      Code of Ethics




23.1
      AUDITORS’ CONSENT





31.1
      and
      31.2 302 CERTIFICATION





32.1
      SECTION 906 CERTIFICATION




99.1*
      WHISTLEBLOWER POLICY




*
      Previously filed. Otherwise all other exhibits filed herewith.




51




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.




**ASTRIS
              ENERGI INC.**By:
            /s/ 
Jiri
              K.
              NorPresident
              and Chief Executive OfficerDate:
              May 18, 2006     52


**ASTRIS
        ENERGI INC.**
 **(A
        Development Stage Company)**
 **Consolidated
        Financial Statements**
 **(Canadian
        Dollars)**
 December
        31, 2005, 2004 and 2003
  
 
 **ASTRIS
        ENERGI INC.**
 **(A
        Development Stage Company)**
  **INDEX**
  **December
        31, 2005**
  **PAGE****INDEPENDENT
                  AUDITORS’ REPORT**
              
              1**FINANCIAL
                  STATEMENTS**Consolidated
                  Balance Sheets - Statement I
              
              2Consolidated
                  Statements of Operations and Deficit - Statement II
              
              3Consolidated
                  Statements of Cash Flows - Statement III
              
              4**NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
              
              5
                  -
                  44
  
 
 **INDEPENDENT
        AUDITORS’ REPORT**
 
 **To
        the Board of Directors and Shareholders of**
 **ASTRIS
        ENERGI INC.**
 **(A
        Development Stage Company)**
  We
        have
        audited the consolidated balance sheets of **ASTRIS
        ENERGI INC.** as at
        December 31, 2005, 2004 and 2003 and the consolidated statements of operations
        and deficit and cash flows for each of the years then ended and the period
        December 31, 1995 (date of inception of development stage company) through
        December 31, 2005. These consolidated 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 generally accepted auditing
        standards and the standards of the Public Company Accounting Oversight Board
        (United States). 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, 2005,
        2004
        and 2003, and the results of its operations and cash flows for each of the
        years
        then ended and the period December 31, 1995 (date of inception of development
        stage company) through December 31, 2005 in accordance with Canadian generally
        accepted accounting principles.
  
 **Toronto,
                  Ontario**
              **Chartered
                  Accountants****April
                  20, 2006**
              /s/
                  Danziger & Hochman
 
 Comments
        by Auditors for U.S. Readers on Canada - United States Reporting Difference
 
 In
        the
        United States, reporting standards for auditors require the addition of an
        explanatory paragraph (following the opinion 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 statement and when there is a correction of an error
        in
        the application of accounting principles, such as those described in Note
        3
        relating to prior year’s financial statements. Our report to the Board of
        Directors and Shareholders dated April 20, 2006, is expressed in accordance
        with
        Canadian reporting standards which do not permit a reference to such events
        and
        conditions in the auditors’ report when these are adequately disclosed in the
        financial statements.
 
 **Toronto,
                  Ontario**
              **Chartered
                  Accountants****April
                  20, 2006**
              /s/
                  Danziger & Hochman
  Page
            1
 
 **ASTRIS
                  ENERGI INC.**
              **Statement
                  I**
 Consolidated
            Balance Sheets
 As
          at
          December 31, 2005, 2004 and 2003
 (Canadian
          Dollars)
 **2005**
              
              **2004**
              
              **2003****ASSETS****CURRENT**Cash
              
              $
              27,857
              
              $
              178,351
              
              $
              347,785Receivables
              
              
              114,300
              
              
              3,544
              
              
              1,000Inventory
              
              
              13,657
              
              
              -
              
              
              -Prepaid
                  expenses and deposits
              
              
              168,509
              
              
              10,118
              
              
              37,206Investment
                  tax credits refundable
              
              
              -
              
              
              199,586
              
              
              -Goods
                  and services tax receivable
              
              
              41,838
              
              
              27,387
              
              
              16,120Pre-acquisition
                  costs
              
              
              -
              
              
              48,190
              
              
              -366,161
              
              
              467,176
              
              
              402,111Property,
                  plant and equipment (note 4)
              
              
              603,848
              
              
              36,446
              
              
              33,124Technology
                  and patent costs
              
              
              12,485
              
              
              5,502
              
              
              -$
              982,494
              
              $
              509,124
              
              $
              435,235**LIABILITIES****CURRENT**Payables
                  and accruals
              
              $
              773,094
              
              $
              255,830
              
              $
              399,140Deposits
                  on shares
              
              
              -
              
              
              -
              
              
              72,070Deferred
                  revenue
              
              
              17,856
              
              
              -
              
              
              -Convertible
                  debenture (note 10)
              
              
              420,000
              
              
              -
              
              
              -1,210,950
              
              
              255,830
              
              
              471,210Long
                  termAdvances
                  from related parties (note 5)
              
              
              -
              
              
              -
              
              
              100,0001,210,950
              
              
              255,830
              
              
              571,210**SHAREHOLDERS’
                  EQUITY****SHARE
                  CAPITAL**(note
                  7)
              
              
              10,030,096
              
              
              6,227,074
              
              
              3,343,853**CONTRIBUTED
                  SURPLUS**(note
                  7)
              
              
              4,062,739
              
              
              3,016,647
              
              
              2,048,342**DEFICIT
                  ACCUMULATED DURING****DEVELOPMENT
                  STAGE**-
                  Statement II
              
              
              (14,321,291
              )
              
              (
                  8,990,427
              )
              
              (
                  5,528,170
              )(228,456
              )
              
              253,294
              
              
              (
                  135,975
              )$
              982,494
              
              $
              509,124
              
              $
              435,235
  Description
        of Business and Going Concern (note 1)
 Commitments
        (note 11)
  *{See
        accompanying notes.}*
  Page
            2
  **ASTRIS
                    ENERGI
                    INC.**
                **Statement
                    II** **(A
          Development Stage Company)**
 **Consolidated
        Statements of Operations and Deficit**
 For
        the
        Years Ended December 31, 2005, 2004 and 2003 and December 31, 1995 through
        December 31, 2005
 (Canadian
        Dollars)
 
 
 **2005**
              
              **2004**
              
              **2003**
              
              **From**
                      **Inception**
                      **Dec.
                        31, 1995**
                      **to
                        Date****REVENUE**Sales
              
              $
              291,512
              
              $
              88,798
              
              $
              67,870
              
              $
              783,902**EXPENSES**Research
                  and development
              
              
              909,873
              
              
              1,343,695
              
              
              1,229,184
              
              
              4,730,581General
                  and administrative
              
              
              2,537,127
              
              
              1,943,799
              
              
              880,585
              
              
              6,243,629Professional
                  fees
              
              
              333,555
              
              
              243,076
              
              
              145,100
              
              
              1,211,509Interest
                  to related parties
              
              
              -
              
              
              7,000
              
              
              12,000
              
              
              116,329Debenture
                  interest and financing costs
              
              
              83,538
              
              
              -
              
              
              -
              
              
              83,538Amortization
              
              
              73,113
              
              
              13,485
              
              
              7,970
              
              
              218,530Write
                  off of technology
              
              
              1,500,000
              
              
              -
              
              
              -
              
              
              1,500,000Acquisition
                  costs
              
              
              185,170
              
              
              -
              
              
              -
              
              
              372,9155,622,376
              
              
              3,551,055
              
              
              2,274,839
              
              
              14,477,031**NET
                  (LOSS) FOR THE YEAR**
              
              
              (5,330,864
              )
              
              (3,462,257
              )
              
              (2,206,969
              )
              
              ($13,693,129
              )**DEFICIT,
                  BEGINNING OF YEAR AS****PREVIOUSLY
                  REPORTED**
              
              
              (8,990,427
              )
              
              (5,528,170
              )
              
              (3,242,557
              )**PRIOR
                  PERIOD ADJUSTMENTS**(note
                  3)
              
              
              -
              
              
              -
              
              
              78,644**DEFICIT,
                  BEGINNING OF YEAR AS****PREVIOUSLY
                  RESTATED**
              
              
              (8,990,427
              )
              
              (5,528,170
              )
              
              (3,321,201
              )**DEFICIT,
                  END OF YEAR**
              
              
              ($14,321,291)
              
              
              ($8,990,427
              )
              
              ($5,528,170
              )**NET
                  (LOSS) PER COMMON SHARE,****BASIC
                  AND DILUTED**(note
                  7)
              
              
              ($0.16
              )
              
              ($0.16
              )
              
              ($0.12
              )
 
 *{See
        accompanying notes.}*
  Page
            3
  **ASTRIS ENERGI INC.**
                **Statement
                    III**
 **(A
        Development Stage Company)**
 **Consolidated
        Statements of Cash Flows**
 For
        the Years Ended December 31, 2005, 2004 and 2003 and December 31, 1995 through
        December 31, 2005
 (Canadian
        Dollars)
 
 
 **2005**
              
              **2004**
              
              **2003**
              
              **From**
                        **Inception**
                        **Dec.
                          31, 1995**
                        **to
                          Date****OPERATING
                  ACTIVITIES**Loss
                  for the year
              
              
              ($5,330,864
              )
              
              ($3,462,257
              )
              
              ($2,206,969
              )
              
              ($13,693,129
              )Items
                  not requiring cashWrite
                  off of technology
              
              
              1,500,000
              
              
              -
              
              
              -
              
              
              1,500,000Depreciation
                    and amortization of capital assets
              
              
              73,113
              
              
              13,485
              
              
              7,970
              
              
              164,609Amortization
                  and write-off of goodwill
              
              
              21,972
              
              
              -
              
              
              -
              
              
              553,336Consulting
                    and professional fees paid incapital
                    stock to non-related parties
              
              
              1,235,824
              
              
              890,097
              
              
              136,122
              
              
              2,549,514Consulting
                  fees paid in capital stock torelated
                  parties
              
              
              554,308
              
              
              360,360
              
              
              266,247
              
              
              1,646,421Options
                  and warrants issued tonon-employees
              
              
              718,242
              
              
              319,061
              
              
              131,063
              
              
              1,160,065Stock
                  based compensation to employees
              
              
              58,391
              
              
              105,962
              
              
              188,377
              
              
              352,730(Loss)
                  on sale of marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              (414,737
              )Other
              
              
              -
              
              
              -
              
              
              -
              
              
              221,524Net
                    change in non-cash working capitalbalances related to operations
                    (note 8)
              
              
              466,733
              
              
              (329,614
              )
              
              321,159
              
              
              787,174(702,281
              )
              
              (2,102,906
              )
              
              (1,156,031
              )
              
              (5,172,493
              )**INVESTING
                  ACTIVITIES**Purchase
                  of property, plant and equipment
              
              
              (69,206
              )
              
              (16,807
              )
              
              (15,357
              )
              
              (134,690
              )Cash
                  acquired on purchase of Astris sro
              
              
              87,091
              
              
              -
              
              
              -
              
              
              87,091Astris
                  sro pre-acquisition costs written off
              
              
              48,190
              
              
              (48,190
              )
              
              -
              
              
              48,190Proceeds
                  on sale of marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              514,735Purchase
                  of other assets
              
              
              (7,638
              )
              
              (5,502
              )
              
              -
              
              
              (61,330
              )58,437
              
              
              (70,499
              )
              
              (15,357
              )
              
              453,996**FINANCING
                  ACTIVITIES**Issuance
                  of convertible debenture
              
              
              420,000
              
              
              -
              
              
              -
              
              
              420,000Advances
                  from related parties
              
              
              -
              
              
              -
              
              
              -
              
              
              (115,819
              )Deposit
                  on shares
              
              
              -
              
              
              (72,070
              )
              
              72,070
              
              
              -Issuance
                  of warrants
              
              
              -
              
              
              537,167
              
              
              395,845
              
              
              1,506,268Issuance
                  of common shares on optionsexercised
              
              
              73,350
              
              
              1,538,874
              
              
              797,320
              
              
              2,784,623493,350
              
              
              2,003,971
              
              
              1,265,235
              
              
              4,695,072**NET
                  INCREASE (DECREASE) IN CASH**
              
              
              (150,494
              )
              
              (169,434
              )
              
              93,847
              
              
              (23,425
              )**CASH,
                  BEGINNING OF YEAR**
              
              
              178,351
              
              
              347,785
              
              
              253,938
              
              
              -Cash
                  balance of Astris Inc. on acquisition
              
              
              -
              
              
              -
              
              
              -
              
              
              51,282**CASH,
                  END OF YEAR**
              
              $
              27,857
              
              $
              178,351
              
              $
              347,785
              
              $
              27,857
 
 Note
        17 –
        Supplemental Disclosure of Cash Flows Information
 *{See
        accompanying notes.}*
  Page
            4


**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**1.**
            **DESCRIPTION
                OF BUSINESS AND GOING
                CONCERN**





Astris
                Energi Inc. (the “Company”) designs, develops, manufactures and sells
                alkaline fuel cells (AFCs) and alkaline fuel cell systems, fuel cell
                and
                battery test loads and provides engineering and other services. The
                Company is based in Mississauga,
                Canada.





Since
                inception, the efforts of the Company have been devoted to the development
                of AFCs for industrial, commercial, educational, scientific,
                transportation and similar applications. To date, the Company has
                not
                earned significant revenues and is considered to be in the development
                stage.Currently the Company has two projects under development at
                its
                Canadian division and two at its Czech Republic
                division.





a) Canadian
      Division





***(i)***
            ***POWERSTACK
                MC250 Project***





The
                POWERSTACK MC250 project represents fuel cell stack improvement in
                several
                aspects of AFC technology. The POWERSTACK MC250 is at a pre-commercial
                stage. The Company started a pilot production line of the POWERSTACK
                MC250
                in 2004.





The
                Company has expensed $3,061,828 as at December 31, 2005 (2004 -
                $1,984,263) (2003 - $1,127,862) in connection with this project and
                no
                amounts have been capitalized or deferred to
                date.





***(ii)***
            ***E8
                Generator Project***





The
                E8 generator project uses the POWERSTACK MC250 to produce 2.4 kW
                of
                nominal rated power. The E8 generator is ready to be installed in
                demonstration and pilot
                applications.





The
                Company has expensed $1,049,069 as at December 31, 2005 (2004 - $963,897)
                (2003 - $298,810) in connection with this project. The Company has
                sold
                two E8 generators on a demonstration basis to a potential OEM and
                a
                potential reseller. There is no assurance that there will be future
                revenues from either party.


Page
          5





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**1.** **DESCRIPTION
      OF BUSINESS AND GOING CONCERN** (continued)





b) Czech
      Republic Division





***(i)*** ***Verification
      of electrode production technology*** .




The
        Company has expensed $177,227 to date on this project as at December 31,
        2005 in
        connection with this project.





***(ii)*** ***Research
      and Development of fuel cells with a liquid
      electrolyte***




The
        Company has expensed $207,331 to December 31, 2005 in connection with this
        project.




This
        project has been grant assisted by the Czech Government (Ministry of Industry
        and Trade of the Czech Republic) in the amount of $137,000 which amount was
        netted against the related expenses. Drawing of this grant is subject to
        a
        special audit report to be completed subsequently.





***Going
      Concern***





The
      financial statements of the Company have been prepared on a going concern basis
      which contemplates the realization of assets and discharge of obligations in
      the
      normal course of business as they come due. No adjustments have been made to
      assets or liabilities in these financial statements should the Company not
      be
      able to continue normal business operations.





The
      Company has incurred several years of losses and during 2005, utilized $702,281
      (2004 -$2,102,906) (2003 - $1,156,031) of cash in operations. At December 31,
      2005, the Company reported a deficit of $14,321,291 and continues to expend
      cash
      amounts that significantly exceed revenues. These conditions cast substantial
      doubt on the ability of the Company to continue in business and meet its
      obligations as they come due. Management is considering various alternatives,
      including an investment from an institutional investor. Nevertheless, there
      is
      no assurance that these initiatives if undertaken will be successful.





The
      Company’s continuance as a going concern is dependent on the success of the
      efforts of its directors and principal shareholders in providing financial
      support in the short term, the success of the Company in raising additional
      long-term financing either from its own resources or from third parties, the
      commercialization of one or more of the Company’s research projects and the
      Company achieving profitable operations. In the event that such resources are
      not secured, the assets may not be realized or liabilities discharged at their
      carrying amounts, and differences from the carrying amounts reported in these
      financial statements could be material.


Page
          6





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**2.** **SIGNIFICANT
      ACCOUNTING POLICIES**





***Basis
      of Presentation***





Effective
      January 1, 2005, the Company, Astris Energi Inc., and its wholly-owned
      subsidiary, Astris Inc. were amalgamated to streamline administrative functions.
      The amalgamated Company continues with the same name as the parent company.





These
      consolidated financial statements have been prepared in accordance with Canadian
      Generally Accepted Accounting Principles (“GAAP’) and reflect the accounts of
      the parent company and its holding company 2062540 Ontario Inc. which holds
      all
      the outstanding shares of its foreign subsidiary, Astris sro. Astris s.r.o.
      was
      acquired on January 27, 2005. All intercompany transactions and balances have
      been eliminated on consolidation.





***Revenue
      recognition***





Revenues
      from the sale of fuel cell products and related components are recognized when
      there is persuasive evidence of an arrangement, goods have been delivered,
      the
      fee is fixed or determinable and collection is reasonably assured.





Revenues
      relating to engineering and testing services are recognized as the services
      are
      rendered.





***Change
      in Accounting Estimate for Amortization Expense***





Effective
      January 1, 2005, the company has adopted a new amortization policy across all
      its operating divisions on a go forward basis. The rates noted below reflect
      this new policy.





***Cash
      and Cash Equivalents***





Cash
      equivalents comprise certain highly liquid instruments with a maturity of three
      months or less when purchased.


Page
          7





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**2.** **SIGNIFICANT
      ACCOUNTING POLICIES** (continued)





***Property,
                Plant and Equipment***





Property,
                plant and equipment are recorded at cost less provision for amortization
                and impairment where indicated. Amortization is provided over the
                estimated useful lives of these assets on a straight line basis,
                except as
                noted, calculated as follows:





Building
            
            40yearsOffice
                furniture and Fixtures
            
            10yearsMachinery
                and Equipment
            
            5yearsLeasehold
                Improvements
            
            Term
                of the lease





In
      the
      event that the future undiscounted net cash flows relating to these long lived
      assets are less than their carrying amounts, they are written down to fair
      value. Such impairment loss is reflected in operations in the year of
      impairment.





***Inventory***





Inventory
      is valued at the lower of cost or market value. Cost is determined on a first
      in
      first out basis.





***Development
      costs and scientific research***





All
      costs
      relating to scientific research and product evaluation are expensed as incurred.
      Product development costs are expensed as incurred unless the product or process
      is clearly defined, the associated costs can be identified, technical
      feasibility is reached, there is intention to produce or market the product,
      the
      future market is clearly defined, and adequate resources exist or are expected
      to be available to complete the project. To date, these criteria have not been
      met and, accordingly, no development costs have been deferred.





Investment
      tax credits and government grants received toward these costs are netted against
      the related expenses. Investment tax credits are recognized in the period in
      which the credits are earned and realization is considered more likely than
      not.
      Government grants are recognized when collected.


Page
          8





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**2.** **SIGNIFICANT
      ACCOUNTING POLICIES** (continued)





***Income
                Taxes***





Income
                taxes are recorded using the liability method. Future income and
                deduction
                amounts arise due to temporary differences between the accounting
                and
                income tax bases of the Company’s assets and liabilities. Future income
                tax assets and liabilities are measured using substantively enacted
                income
                tax rates in effect for the year in which those temporary differences
                are
                expected to be recovered or settled. The effect on future income
                tax
                assets and liabilities of a change in income tax rates is recognized
                in
                the period that includes the date of substantive enactment. Valuation
                allowances are provided to the extent that realization of such benefits
                is
                considered to be more unlikely than
                not.




***Use
                of estimates***





The
                preparation of the consolidated financial statements in conformity
                with
                Canadian Generally Accepted Accounting Principles requires management
                to
                make estimates and assumptions that affect the reported amounts of
                assets
                and liabilities and the reported amounts of revenue and expenses
                during
                the year. Actual amounts could differ from those
                estimates.




***Financial
                instruments***





The
                Company uses no Financial
                Instruments.




The
                Company is exposed to risks arising from fluctuations in interest
                rates
                and the degree of volatility of these rates. The Company does not
                use
                derivative instruments to reduce its exposure to interest
                risk.





The
                Company is exposed to credit risk on the accounts receivable from
                its
                customers. In order to reduce its credit risk, the Company has adopted
                credit policies which include the analysis of the financial position
                of
                its customers, the regular review of their credit limit and a requirement
                of a substantial deposit from the customer prior to beginning production
                of a major order.




The
                Company is exposed to risks arising from fluctuations in foreign
                exchange
                rates and the degree of volatility of these rates. The Company does
                not
                use derivative instruments to reduce its exposure to foreign exchange
                risk.


Page
          9




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**2.** **SIGNIFICANT
      ACCOUNTING POLICIES** (continued)





***Stock
                based compensation***





The
                Company accounts for stock-based compensation in accordance with
                CICA
                Handbook section 3870 “Stock-Based Compensation and Other Stock-Based
                Payments”. This standard was effective January 1, 2002 and requires that
                stock-based payments to non-employees and direct awards of stock
                to
                employees and non-employees are accounted for using a fair-value
                method of
                accounting. For fiscal years beginning before January 1, 2004, this
                standard allows the estimated fair value of stock awards granted
                to
                employees to be either recognized as a compensation expense, or
                alternatively, disclosed in the notes to the financial statements,
                with
                accompanying disclosure of pro-forma net earnings and earnings per
                share
                data as if the estimated fair-value of the stock-based compensation
                had
                been recognized in earnings.




Effective
                January 1, 2003, the Company has voluntarily adopted early application
                of
                the portion of the standard related to grants of stock options to
                employees. Under the standard, grants of stock options to employees
                are
                recognized in earnings as a compensation expense, based on the estimated
                fair value at the date of the grant. This accounting change has been
                applied prospectively for options granted to employees on or after
                January
                1, 2003.





***Foreign
                currency translation***




Integrated
                foreign operations are translated using the temporal method. Under
                this
                method, monetary items are translated at the exchange rate prevailing
                at
                the balance sheet date, non- monetary items are translated at historical
                exchange rates and revenue and expenses are translated at the average
                rate
                during the period.





Self-sustaining
                foreign operations are translated using the current rate method.
                Under
                this method, assets and liabilities are translated at the exchange
                rates
                prevailing at the balance sheet date and revenues and expenses at
                the
                average exchange rate during the period. The net effect of foreign
                currency translation is deferred and shown as a currency translation
                adjustment in shareholders’ equity until charged against earnings when the
                investment in the operation is
                reduced.




***Loss
                per share***





Basic
                loss per share is calculated on the weighted average number of common
                shares outstanding during the year. The diluted loss per share is
                calculated based on the weighted average number of common shares
                that
                would have been outstanding during the year had all potential common
                shares been issued at the beginning of the year or when the underlying
                options or warrants were granted, if
                later.


Page
          10




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**3.** **PRIOR
      PERIOD ADJUSTMENTS**





The
      financial statements of 2002 and prior years have been restated to reflect
      the
      following errors identified therein and change in accounting policy, summarized
      as follows:





**A**
            
            **B**
            
            **C**
            
            **D**
            
            **E**
            
            **F**
            
            **Total**Increase
                    (decrease)in deficit as at January
                    1, 2002
            $
            342,899
            
            $
            -
            
            $
            12,000
            
            $
            (12,776
            )
            $
            (31,56
            )
            $
            (315,287
            )
            $
            4,710Increase
                  (decrease) in
                  loss for the year ended
                  December 31,
                  2002
            
            83,354
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            83,354Increase
                  (decrease) in
                  deficit as at January
                  1, 2003
            $
            426,253
            
            $
            -
            
            $
            12,000
            
            $
            (12,776
            )
            $
            (31,546
            )
            $
            (315,287
            )
            $
            78,644





A)
            The
                Company was not previously accounting for the expense associated
                with the
                granting of stock options to non-employees as payment for services
                received. Under Canadian generally accepted accounting principles,
                the
                Company should have been expensing stock options granted to non-
                employees
                since its fiscal year beginning January 1, 2002. As a result of correcting
                this accounting error, there was an increase in loss for the year
                ended
                December 31, 2002 and an increase in contributed surplus as at December
                31, 2002 of $83,354. In addition, the Company has voluntarily elected
                to
                change its accounting policy with respect to stock options granted
                to non-
                employees as payment for services received prior to January 1, 2002.
                As a
                result of this change in accounting policy, there was an increase
                in
                deficit and an increase in contributed surplus as at January 1, 2002
                of
                $342,899.





B)
            The
                Company was not previously accounting for warrants attached to shares
                issued. Under Canadian generally accepted accounting principles,
                the
                Company should have been allocating the cash consideration received
                from
                the issuance of shares and attached warrants based on the fair market
                value of each of those financial instruments with the resulting amounts
                being recorded as share capital and contributed surplus, respectively.
                The
                Company was previously recording all cash received as share capital.
                As a
                result of correcting this accounting error, there was an increase
                in
                contributed surplus and a decrease in share capital as at January
                1, 2002
                of $48,479. In addition for warrants issued during 2002, there was
                a
                further increase in contributed surplus and a decrease in share capital
                for the year ended December 31, 2002 of
                $456,850.


Page
          11





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**3.** **PRIOR
      PERIOD ADJUSTMENTS**(continued)





C)
            The
                Company had not previously recorded the interest on the debenture
                due to
                shareholders for 1999. As a result of correcting this accounting
                error,
                there was an increase in deficit and an increase in advances from
                related
                parties as at January 1, 2002 of
                $12,000.





D)
            The
                Company had made an error in the amounts used with respect to a property,
                plant and equipment disposal in 1998. The correction of this accounting
                error resulted in an increase in property, plant and equipment and
                a
                decrease in deficit as at January 1, 2002 of
                $12,776.




E)
            The
                Company had previously accounted for having owned all of the outstanding
                common shares of its subsidiary Astris Inc. However, there are 404,041
                issued and outstanding shares of Astris Inc. that are not owned by
                the
                Company. As a result of correcting this accounting error, there was
                a
                decrease in deficit and a decrease in share capital (shares to be
                issued)
                as at January 1, 2002 of $31,546.





F)
            The
                Company had recorded a liability in 1995 but at the time of recording
                the
                amount it did not have the characteristics of a liability. As a result
                of
                correcting this accounting error, there was a decrease in deficit
                and a
                decrease in advances from related parties as at January 1, 2002 of
                $315,287.








**4.** **PROPERTY,
      PLANT AND EQUIPMENT**





**2005**
              **Cost**
            
            **2005**
              **Accumulated
                Amortization**
            
            **2005**
              **Net**
              **Book**
              **Value****Property,
                Plant and Equipment**Land
            $
            128,940
            
            $
            -
            
            $
            128,940Building
            
            238,328
            
            
            6,790
            
            
            231,538Machinery
                and equipment
            
            243,420
            
            
            30,183
            
            
            213,237Furniture
                and fixtures
            
            38,198
            
            
            8,065
            
            
            30,133Leasehold
                improvements
            
            10,939
            
            
            10,939
            
            
            -$
            659,825
            
            $
            55,977
            
            $
            603,848




Page
          12


**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**4.** **PROPERTY,
      PLANT AND EQUIPMENT**





**2004**
              **Cost**
            
            **2004**
              **Accumulated
                Amortization**
            
            **2004**
              **Net**
              **Book**
              **Value****Property,
                Plant and Equipment**Office
                furniture and equipment
            $
            54,226
            
            $
            23,277
            
            $
            30,949Leasehold
                improvements
            
            10,939
            
            
            5,442
            
            
            5,497$
            65,165
            
            $
            28,719
            
            $
            36,446





**2003**
              **Cost**
            
            **2003**
              **Accumulated
                Amortization**
            
            **2003**
              **Net**
              **Book**
              **Value****Property,
                Plant and Equipment**Office
                furniture and equipment
            $
            37,419
            
            $
            11,980
            
            $
            25,439Leasehold
                improvements
            
            10,939
            
            
            3,254
            
            
            7,685$
            48,358
            
            $
            15,234
            
            $
            33,124




Page
          13




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**5.**
            **RELATED PARTY TRANSACTIONS AND
                BALANCES**


**(a)
                Astris sro**


The
                Company acquired 100% of the ownership (increased from 30% ownership)
                in
                Astris sro, a Czech Republic company on January 27, 2005. The results
                of
                its operations from the effective date of January 2, 2005 are fully
                consolidated with the results of the Parent company. Details
                of the transaction are more fully summarized in note 15 to these
                financial
                statements. In
                prior years, this investment in Astris sro was accounted for on the
                equity
                basis. As the Company’s share of losses was in excess of the original
                investment, the investment had been written down to nil in a prior
                year.







The
                Company regularly subcontracts portions of its research and development
                activities to Astris sro. To facilitate these activities, the Company
                advances funds to them. In addition, the Company sells its products
                to
                Astris sro, as required. As at December 31, 2005, any funds advanced
                to
                Astris sro since acquisition and any trade receivables and payables
                have
                been eliminated on consolidation. The table below summarizes the
                balances
                with sro for the years ended December 31, 2004 and
                2003:





**2004**
            
            **2003**Balance
                of funds paid included in prepaid
              expenses
                and deposits
            
            $
            -
            
            $
            30,000Included
                in payables and accruals
            
            $
            588
            
            $
            137,480Total
                funds advanced
            
            $
            700,000
            
            $
            416,000Sales
            
            $
            -
            
            $
            45,901Purchases
                included in research and development
            
            $
            563,108
            
            $
            729,800





The
      funds advanced to sro in 2004 were for operating expenses, the purchase of
      land
      and a building and equipment for the new electrode production facility.




Page
          14




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**5.**
              **RELATED****PARTY
                  TRANSACTIONS AND BALANCES**(continued)





**(b)**
            **Amounts
                owing to Directors and
                Officers**





Payables
                and accruals as at December 31, 2005 include the following
                amounts:





**Entity**
            
            **Position
                in**
              **Company**
            
            **Amount**
              **2005**
            
            
            **Amount**
              **2004**
            
            
            **Amount**
              **2003**Anthony
                Durkacz
            
            Director&
                Officer
            
            $
            34,596
            
            $
            17,441
            
            $
            29,735Arthur
                Laudenslager
            
            Director
            
            
            20,358
            
            
            -
            
            
            -Brian
                Clewes
            
            Director
            
            
            25,465
            
            
            -
            
            
            -David
                Ramm
            
            Director
            
            
            10,000
            
            
            -
            
            
            -Fortius
                Research and Trading
            
            Controlled
                by A.D.
            
            
            31,125
            
            
            1,043
            
            
            26,750Gary
                Brandt
            
            Director
            
            
            8,698
            
            
            -
            
            
            -Jiri
                Nor
            
            Director
                & Officer
            
            
            61,915
            
            
            -
            
            
            8,125Liikfam
                Holdings Inc.
            
            Controlled
                by M.L.
            
            
            26,750
            
            
            -
            
            
            -Macnor
                Corp.
            
            Controlled
                by J.N.
            
            
            102,720
            
            
            13,826
            
            
            24,266Michael
                Liik
            
            Director
            
            
            14,512
            
            
            -
            
            
            -Peter
                Nor
            
            Officer
            
            
            6,971
            
            
            -
            
            
            -$
            343,110
            
            $
            32,310
            
            $
            88,876





All
      payables and accruals arose from consulting fees charged during the
      year.


Page
          15





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**5.**
            **RELATED
                PARTY TRANSACTIONS AND BALANCES**(continued)





**(c)
      Compensation Expensed to Directors and Officers**





The
      following amounts were expensed as consulting and other compensation to
      directors and officers:





**Entity**
            
            **Position
                in**
              **Company**
            
            **Amount****2005**
            
            **Amount****2004**
            
            **Amount****2003**Gary
                Brandt
            
            Director
            
            $
            8,698
            
            $
            -
            
            $
            -Brian
                Clewes
            
            Director
            
            
            25,465
            
            
            -
            
            
            -Anthony
                Durkacz
            
            Director
                & Officer
            
            
            10,000
            
            
            -
            
            
            -Fortius
                Research and
            
            DirectorTrading
            
            Controlled
                by A.D.
            
            
            112,500
            
            
            100,000
            
            
            100,000Arthur
                Laudenslager
            
            Director
            
            
            19,768
            
            
            -
            
            
            -Liikfam
                Holdings Inc.
            
            Controlled
                by M.L.
            
            
            118,750
            
            
            -
            
            
            -Macnor
                Corp. re Jiri Nor
            
            Controlled
                by J.N.
            
            
            315,998
            
            
            166,279
            
            
            143,331Macnor
                Corp re Peter Nor
            
            Controlled
                by J.N.
            
            
            120,000
            
            
            93,455
            
            
            10,279Michael
                Liik
            
            Director
            
            
            14,511
            
            
            -
            
            
            -Jiri
                Nor
            
            Director
                & Officer
            
            
            10,000
            
            
            -
            
            
            -David
                Ramm
            
            Director
            
            
            10,000
            
            
            -
            
            
            -$
            765,690
            
            $
            359,734
            
            $
            253,610





(d)  Interest
      expensed to Directors and Officers





The
      following amounts were expensed as interest to directors:





**2005**
            
            **2004**
            
            **2003**Jiri
                Nor
            
            $
            -
            
            $
            2,800
            
            $
            4,800Don
                Blenkarn
            
            $
            -
            
            $
            2,800
            
            $
            4,800Gerald
                Crawford
            
            $
            -
            
            $
            1,400
            
            $
            2,400





On
      May
      26, 2003 the Board of Directors approved a compensation package for a senior
      executive whereby he would receive commission on funds raised through First
      Energy Advisors. The commission schedule is as follows: 5% paid on the first
      $1
      million, 4% on the second $1 million, 3% on the third $1 million, 2% on the
      fourth million and 1% on all money raised afterward. During the year, a Senior
      Executive was paid $Nil (2004 - $51,140) (2003 -$29,735).





This
      senior executive was not re-appointed as a Director at the Shareholder Meeting
      held on October 22, 2004. At a Board Meeting subsequent to the year-end, the
      Board terminated this compensation package.


Page
          16





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**5.**
              **RELATED
                  PARTY TRANSACTIONS AND BALANCES**(continued)





**(e)*****Related
                Party Transactions***





Advances
      from related parties at December 31, are summarized as follows:





**2005**
            
            **2004**
            
            **2003**Debenture
                due to shareholders
            
            $
            -
            
            $
            -
            
            $
            100,000





The
      debenture due to shareholders was secured by a fixed and floating charge on
      all
      of the assets and business of Astris Inc. and bore interest at 12% per annum.
      Near the end of July 2004, the debenture plus interest accrued was completely
      paid to the shareholders by the issuance of 260,175 common shares. The
      shareholders released the security on the liability.





**6.**  **INCOME
      TAXES**





The
      Company has non-capital tax losses carried forward of approximately $8,357,000.
      If unused, these tax losses will expire as follows:





2006
            61,0002007
            188,0002008
            294,0002009
            323,0002010
            1,734,0002014
            2,882,0002015
            2,875,000





In
      addition, the Company has non-deductible scientific research and development
      expenditures amounting to $1,701,658 which have no expiry.





Investment
      tax credits recorded during the year as a reduction of expenses aggregated
      to
      $283,900; (2004 - $192,870); (2003 - $172,959).


Page
          17





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**6.**
              **INCOME
                  TAXES**(continued)





The
      Company’s computation of future income tax recovery is as follows:





**2005**
            
            **2004**
            
            **2003**Loss
                before income taxes
            
            
            (5,330,864
            )
            
            (3,462,257
            )
            
            (2,206,969
            )Statutory
                income tax rate
            
            
            36.12
            %
            
            36.12
            %
            
            35.12
            %Income
                tax recovery at statutory rate
            
            
            (1,925,50)8
            
            
            (1,250,567
            )
            
            (775,088
            )Non-deductible
                expenses
            
            
            138,919
            
            
            125,285
            
            
            114,832Effect
                  of income tax rate changes on futureincome taxes
            
            
            -
            
            
            -
            
            
            59,360Change
                in valuation allowance and other items
            
            
            1,786,589
            
            
            1,125,282
            
            
            600,896Income
                tax expense
            
            $
            -
            
            $
            -
            
            $
            -





Components
      of the Company’s net future income tax assets are:





Non
                capital losses ($8,357,000 x 0.3612)
            
            $
            3,018,548
            
            $
            1,968,179
            
            $
            982,658Scientific
                research and development expense
              ($1,701,658
                x 0.3612)
            
            
            614,639
            
            
            549,175
            
            
            273,234Valuation
                allowance
            
            
            (3,633,187
            )
            
            (2,517,354
            )
            
            (1,255,892
            )Net
                future income tax asset
            
            $
            -
            
            $
            -
            
            $
            -




Page
          18




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED
                SURPLUS**





**a)**
            **Share capital**





Share capital consists of the
                following:





**Authorized
              (see note below)**


Unlimited
              common shares


10,000,000
              preferred shares





**Issued
              and outstanding**




**2005**
              **Common
                Shares**
            
            **2004**
              **Common
                Shares**
            
            **2003**
              **Common
                Shares****Number**
            
            **$Value**
            
            **Number**
            
            **$Value**
            
            **Number**
            
            **$Value**Issued
                at January 1
            
            
            26,316,551
            
            $
            6,227,074
            
            
            19,230,425
            
            $
            3,343,853
            
            
            16,106,403
            
            $
            2,525,239Issued
                during year in exchange for acquisition of Astris s.r.o.
            
            
            5,000,000
            
            
            1,955,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -In
                exchange for consulting and professional feesand
                expenses fromnon-related
                parties
            
            
            4,305,927
            
            
            1,294,214
            
            
            1,728,872
            
            
            890,096
            
            
            209,082
            
            
            136,122In
                exchange for consulting and professional feesand
                expenses from related parties
            
            
            1,884,091
            
            
            454,308
            
            
            586,592
            
            
            332,360
            
            
            412,825
            
            
            266,247In
                repayment of advance fromdirectors
            
            
            125,000
            
            
            26,150
            
            
            293,751
            
            
            128,000
            
            
            45,500
            
            
            20,400For
                cash
            
            
            275,000
            
            
            73,350
            
            
            4,476,911
            
            
            1,532,765
            
            
            2,456,615
            
            
            395,84511,590,018
            
            
            3,803,022
            
            
            7,086,126
            
            
            2,883,221
            
            
            3,124,022
            
            
            818,614Balance
                as at December 31
            
            
            37,906,569
            
            $
            10,030,096
            
            
            26,316,551
            
            $
            6,227,074
            
            
            19,230,425
            
            $
            3,343,853





Page
            19





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)





The
                weighted average number of shares outstanding during 2005 is 33,656,293
                (2004 - 21,106,312 ;2003 - 17,818,830). These figures are used for
                purposes of calculating the loss per share. No effect has been given
                to
                the potential exercise of stock options and warrants in the calculation
                of
                diluted loss per share as the effect would be
                anti-dilutive.





At
                the Company’s Annual Meeting held on October 22, 2004, an amendment was
                passed increasing the authorized capital of the corporation to an
                unlimited number of common shares.





No
                preferred shares have been issued.




Page
            20





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)





**b)**
            **Common
                stock issued to settle obligations of the Company to directors, officers
                and former director of the
                Company.**





In
                2003, the Company issued 412,825 shares of common stock to settle
                obligations owing by the Company to certain directors and/or officers
                of
                the Company and/or to companies owned by
                them.





**Name**
            
            **Date**
            
            **Number******
              **of
                Shares**
            
            **$
                Value******
              **of
                Shares**
            
            **Services
                Performed**Macnor
                Corp.
            
            
            Jan.
                10, 2003
            
            
            26,775
            
            
            12,000
            
            
            Professional
                services MC250May
                8, 2003
            
            
            14,640
            
            
            12,000July
                16, 2003
            
            
            18,200
            
            
            13,000Oct.
                28, 2003
            
            
            20,200
            
            
            15,000**Total**
            
            
            **79,815**
            
            
            **52,000**G.
                Emerson
            
            
            Jan.
                10, 2003
            
            
            76,620
            
            
            35,245
            
            
            Consulting/AdministrationJan.
                10, 2003
            
            
            23,190
            
            
            10,654May
                8, 2003
            
            
            49,015
            
            
            40,190May
                8, 2003
            
            
            9,145
            
            
            7,500July
                16, 2003
            
            
            10,500
            
            
            7,500Aug.
                11, 2003
            
            
            2,100
            
            
            1,490Aug.
                11, 2003
            
            
            17,650
            
            
            12,500**Total**
            
            
            **188,220**
            
            
            **115,079**D.
                Ramm
            
            
            Oct.
                28, 2003
            
            
            3,500
            
            
            2,604
            
            
            Managing
                Director**Total**
            
            
            **3,500**
            
            
            **2,604**Fortius
                Research and
                Trading
            
            
            Jan.
                10, 2003
            
            
            20,600
            
            
            9,231
            
            
            Finance
                ConsultingMay
                8, 2003
            
            
            30,490
            
            
            25,000July
                16, 2003
            
            
            35,000
            
            
            25,000Oct.
                28, 2003
            
            
            20,200
            
            
            15,000Dec.
                16, 2003
            
            
            35,000
            
            
            22,332**Total**
            
            
            **141,290**
            
            
            **96,563**





Page
            21





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)





In
                2004, the Company issued 880,343 shares of common stock to settle
                obligations owing by the Company to certain directors and/or officers
                of
                the Company and/or to companies owned by
                them.





**Name**
            
            **Date**
            
            **Number******
              **of
                Shares**
            
            **$
                Value******
              **of
                Shares**
            
            **Services
                Performed**Macnor
                Corp.
            
            
            Jan.
                28, 2004
            
            
            17,565
            
            
            15,000
            
            
            Professional
                servicesApril
                30, 2004
            
            
            50,986
            
            
            36,455
            
            
            regarding
                MC250July
                23, 2004
            
            
            92,855
            
            
            39,000Oct.
                7, 2004
            
            
            42,430
            
            
            27,000Dec.
                6, 2004
            
            
            62,427
            
            
            27,000**Total**
            
            
            **266,263**
            
            
            **144,455**G.
                Emerson
            
            
            Jan.
                28, 2004
            
            
            34,820
            
            
            29,735
            
            
            Consulting/AdministrationApril
                30, 2004
            
            
            35,985
            
            
            25,729July
                23, 2004
            
            
            420
            
            
            175Oct.l
                7, 2004
            
            
            13,650
            
            
            8,679Dec.
                6, 2004
            
            
            33,157
            
            
            17,125**Total**
            
            
            **118,032**
            
            
            **81,443**D.
                Ramm
            
            
            Jan.
                26, 2004
            
            
            9,515
            
            
            8,125
            
            
            Managing
                DirectorApril
                30, 2004
            
            
            11,365
            
            
            8,125July
                23, 2004
            
            
            19,345
            
            
            8,125Oct.
                7, 2004
            
            
            12,770
            
            
            8,125Dec.
                6, 2004
            
            
            4,450
            
            
            1,922**Total**
            
            
            **57,445**
            
            
            **34,422**Fortius
                Research and
                Trading
            
            
            Jan.
                28, 2004
            
            
            17,565
            
            
            15,000
            
            
            Finance
                ConsultingJuly
                23, 2004
            
            
            29,765
            
            
            12,500Oct.
                7, 2004
            
            
            19,650
            
            
            12,500Dec.
                6, 2004
            
            
            28,900
            
            
            12,500**Total**
            
            
            **95,880**
            
            
            **52,500**J.
                Nor
            
            
            Feb.
                2, 2004
            
            
            6,715
            
            
            4,800
            
            
            Expense
                RecoveryApril
                30, 2004
            
            
            6,715
            
            
            4,800July
                27, 2004
            
            
            104,070
            
            
            41,600**Total**
            
            
            **117,500**
            
            
            **51,200**





Page
            22




**ASTRIS
        ENERGI INC.**
 **(A
        Development Stage Company)**
 **Notes
        to the Consolidated Financial Statements**
 December
        31, 2005, 2004 and 2003
 (Canadian
        Dollars)


**7.      ******
            
            **SHARE CAPITAL AND CONTRIBUTED SURPLUS**(continued)





**Name**
            
            **Date**
            
            **Number******
              **of
                Shares**
            
            **$
                Value******
              **of
                Shares**
            
            **Services
                Performed**G.
                Crawford
            
            
            Jan.
                28, 2004
            
            
            3,358
            
            
            4,435
            
            
            ExpenseFeb.
                2, 2004
            
            
            5,195
            
            
            2,400
            
            
            RecoveryApril
                30, 2004
            
            
            3,358
            
            
            2,400July
                23, 2004
            
            
            2,145
            
            
            900Oct.
                7, 2004
            
            
            22,315
            
            
            14,900July
                27, 2004
            
            
            52,035
            
            
            20,800Dec.
                6, 2004
            
            
            1,387
            
            
            600**Total**
            
            
            **89,793**
            
            
            **46,435**D.
                Blenkarn
            
            
            Feb.
                2, 2004
            
            
            6,715
            
            
            4,800
            
            
            ExpenseApril
                30, 2004
            
            
            6,715
            
            
            4,800
            
            
            RecoveryJuly
                27, 2004
            
            
            104,070
            
            
            41,600**Total**
            
            
            **117,500**
            
            
            **51,200**A.
                Laudenslager
            
            
            Oct.
                27, 2004
            
            
            17,930
            
            
            11,405
            
            
            Expense**Total**
            
            
            **17,930**
            
            
            **11,405**
            
            
            Recovery





Page
            23








**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)


In
                2005, the Company issued 7,009,091 shares of common stock to settle
                obligations owing by the Company to certain directors and/or officers
                of
                the Company and/or to companies owned by
                them.





**Name**
            
            **Date**
            
            **Number**
              **of
                Shares**
            
            **$
                Value******
              **of
                Shares**
            
            **Services
                Performed**Macnor
                Corp.
            
            
            Jan.
                25, 2005
            
            
            5,000,000
            
            
            1,955,000
            
            
            Sale
                of 2062540 Ontario Inc. to the CompanyApril
                5, 2005
            
            
            34,015
            
            
            12,000
            
            
            Marketing
                services by P. NorApril
                5, 2005
            
            
            42,519
            
            
            15,000
            
            
            Professional
                services by J. NorJune
                28, 2005
            
            
            125,000
            
            
            26,150
            
            
            Repayment
                of liabilityJune
                28, 2005
            
            
            246,969
            
            
            51,666
            
            
            Professional
                services by Jiri
                and Peter NorAugust
                2, 2005
            
            
            378,000
            
            
            110,000
            
            
            Bonus
                to Jiri NorSept.
                30, 2005
            
            
            287,062
            
            
            60,000
            
            
            Professional
                services by J. NorSept.
                30, 2005
            
            
            172,238
            
            
            36,000
            
            
            Marketing
                services by P. Nor**Total**
            
            
            **6,285,803**
            
            
            **2,265,816**Fortius
                Research and
                Trading
            
            
            April
                5, 2005
            
            
            28,346
            
            
            10,000
            
            
            Finance/ConsultingJune
                28, 2005
            
            
            119,503
            
            
            25,000Sept.
                30, 2005
            
            
            179,420
            
            
            37,500**Total**
            
            
            **327,269**
            
            
            **72,500**Liikfam
                Holdings
            
            
            April
                5, 2005
            
            
            93,681
            
            
            33,437
            
            
            Finance/ConsultingJune
                28, 2005
            
            
            119,503
            
            
            25,000Sept.
                30, 2005
            
            
            179,420
            
            
            37,500**Total**
            
            
            **392,604**
            
            
            **95,937**A.
                Laudenslager
            
            
            April
                5, 2005
            
            
            **3,415**
            
            
            **1,205**
            
            
            Expense
                Recovery**7,009,091**
            
            
            **2,435,458**




Page
            24




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**7.**
            **SHARE CAPITAL AND CONTRIBUTED SURPLUS**(continued)





**c)**  **Contributed
      surplus consists of the following** :





**2005**
            
            **2004**
            
            **2003**Contributed
                surplus, beginning of year
            
            $
            3,016,647
            
            $
            2,048,342
            
            $
            -Prior
                period adjustments
            
            
            -
            
            
            -
            
            
            931,582Options
                issued for consulting and professional fees paid to
                non-related
            
            
            -
            
            
            -
            
            
            131,063Options
                issued to employees
            
            
            21,144
            
            
            105,962
            
            
            188,377Options
                issued to related parties
            
            
            215,030
            
            
            227,411
            
            
            -Warrants
                issued on acquisition of Astris sro
            
            
            254,000
            
            
            -
            
            
            -Warrants
                issued with private placements
            
            
            -
            
            
            537,167
            
            
            797,320Warrants
                issued to related parties
            
            
            -
            
            
            91,655
            
            
            -Warrants
                issued to non-related parties
            
            
            482,068
            
            
            -
            
            
            -Proceeds
                on issuance of warrants to relatedparties
            
            
            -
            
            
            6,110
            
            
            -Remaining
                value of loan repaid by issuanceof
                shares to a director
            
            
            73,850
            
            
            -
            
            
            -Contributed
                surplus, end of year
            
            $
            4,062,739
            
            $
            3,016,647
            
            $
            2,048,342





**d)**  **Common
      stock issued for cash**





Pursuant
      to a subscription agreement dated February 20, 2003, with an accredited investor
      as defined under the laws of the province of Alberta, the Company issued as
      a
      private placement, 625,000 units, comprising one common share and one common
      share purchase warrant each, for an aggregate purchase price of $250,000. The
      common share purchase warrants are exercisable up to February 20, 2006, each
      entitling the holder to purchase one common share at $ 0.50 (U.S.) per
      share.





Pursuant
      to a subscription agreement dated July 30, 2003, with an accredited investor
      as
      defined under the laws of the province of Ontario, the Company issued as a
      private placement, 500,000 units, comprising one common share and two common
      share purchase warrants each, for an aggregate purchase price of $250,000.
      The
      first tranche of common share purchase warrants is exercisable up to July 30,
      2004, at $ 0.50 (U.S.) per share. The second tranche of common share purchase
      warrants is exercisable up to July 30, 2006 at $ 1.00 (U.S.) per share. Each
      warrant entitles the holder to purchase one common share.


Page
          25





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**7.**
            **SHARE CAPITAL AND CONTRIBUTED SURPLUS**(continued)





Pursuant
      to a subscription agreement dated September 10, 2003, with an accredited
      investor as defined under the laws of the province of Ontario, the Company
      issued as a private placement, 384,615 units, comprising one common share and
      one common share purchase warrant each, for an aggregate purchase price of
      $250,000. The common share purchase warrants are exercisable up to September
      12,
      2006, each entitling the holder to purchase one common share at $ 0.85 (U.S.)
      per share.





Pursuant
      to a subscription agreement dated September 19, 2003, with an accredited
      investor as defined under the laws of the province of Ontario, the Company
      issued as a private placement, 169,500 units, comprising one common share and
      one common share purchase warrant each, for an aggregate purchase price of
      $100,000 (U.S.). The common share purchase warrants are exercisable up to
      September 25, 2006, each entitling the holder to purchase one common share
      at $
      1.00 (U.S.) per share.





Pursuant
      to a subscription agreement dated December 30, 2003, with an accredited investor
      as defined under the laws of the province of Alberta, the Company issued as
      a
      private placement, 177,500 units, comprising one common share and two common
      share purchase warrants each, for an aggregate purchase price of $120,000.
      The
      first tranche of common share purchase warrants is exercisable up to December
      29, 2004, at $ 0.80 (U.S.) per share. The second tranche of common share
      purchase warrants is exercisable up to December 29, 2006 at $ 1.00 (U.S.) per
      share. Each warrant entitles the holder to purchase one common
      share.





Pursuant
      to a subscription agreement dated December 30, 2003, with an accredited investor
      as defined under the laws of the province of Ontario, the Company received
      a
      down payment for a private placement, 111,529 units, comprising one common
      share
      and one common share purchase warrant each, for an aggregate purchase price
      of
      $72,070 ($55,765 U.S.). The common share purchase warrants are exercisable
      up to
      January 21, 2007, each entitling the holder to purchase one common share at
      $
      1.00 (U.S.) per share. The payment is shown as a deposit on shares on the
      balance sheet.





Pursuant
      to a subscription agreement dated March 3, 2004, with an accredited investor
      as
      defined under the laws of the province of Alberta, the Company issued as a
      private placement 651,450 units, comprising one common share and two common
      share purchase warrants each, for an aggregate purchase price of $390,870
      ($300,669 U.S.). The first tranche of common share purchase warrants are
      exercisable up to October 1, 2005, at $0.80 (U.S.) per share. The second tranche
      of common share purchase warrants is exercisable up to April 1, 2007 at $1.00
      (U.S.) per share. Each warrant entitles the holder to purchase one common
      share.




Page
          26





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)





Pursuant
      to a subscription agreement dated March 26, 2004, with an accredited investor
      as
      defined under the laws of the province of Ontario, the Company issued as a
      private placement 236,035 units, comprising one common share and one common
      share purchase warrant each, for an aggregate purchase price of $138,080
      ($106,216 U.S.). The common share purchase warrants are exercisable up to March
      27, 2007, each entitling the holder to purchase one common share at $0.50 (U.S.)
      per share.





Pursuant
      to a subscription agreement dated March 31, 2004, with an accredited investor
      as
      defined under the laws of the province of Alberta, the Company issued as a
      private placement 104,500 units, comprising one common share and two common
      share purchase warrants each, for an aggregate purchase price of $61,100
      ($47,000 U.S.). The first tranche of common share purchase warrants are
      exercisable up to October 1, 2005, at $0.80 (U.S.) per share. The second tranche
      of common share purchase warrants is exercisable up to April 1, 2007 at $1.00
      (U.S.) per share. Each warrant entitles the holder to purchase one common
      share.





Pursuant
      to a subscription agreement dated June 3, 2004, with an accredited investor
      as
      defined under the laws of the province of Alberta, the Company issued as a
      private placement 79,630 units, comprises of one common share and one common
      share purchase warrant each, for an aggregate purchase price of $43,000. The
      common share purchase warrants are exercisable up to June 30, 2007 each
      entitling the holder to purchase one common share at $0.80 (U.S.) per
      share.





Pursuant
      to subscription agreements dated July 26 - 28, 2004, with certain accredited
      investors as defined under the laws of the province of Alberta, Canada and
      the
      United States, the Company issued as a private placement 1,694,167 units
      comprised of one common share and one common share purchase warrant each, for
      an
      aggregate purchase price of $660,725. The common share purchase warrants are
      exercisable up to December 31, 2005, each entitling the holder to purchase
      one
      common share at $0.50 (U.S.) per share.





Pursuant
      to a subscription agreement dated October 1, 2004, with a U.S. company, the
      Company issued as a private placement 88,900 units, comprising one common share
      and one common share purchase warrant each, for an aggregate purchase price
      of
      $52,000. The common share purchase warrants are exercisable up to September
      30,
      2007 each entitling the holder to purchase one common share at $0.90 (U.S.)
      per
      share.





Pursuant
      to a subscription agreement dated October 1, 2004, with a U.S. company, the
      Company issued as a private placement 88,900 units, comprising one common share
      and one common share purchase warrant each, for an aggregate purchase price
      of
      $52,000. The common share purchase warrants are exercisable up to September
      30,
      2007 each entitling the holder to purchase one common share at $0.90 (U.S.)
      per
      share.




Page
          27





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**7.**
            **SHARE CAPITAL AND CONTRIBUTED SURPLUS**(continued)





Pursuant
      to subscription agreement dated October 8, 2004, with an accredited investor
      as
      defined under the laws of the province of Ontario, Canada, the Company issued
      as
      a private placement 20,000 units comprising one common share and one common
      share purchase warrant each, for an aggregate purchase price of $11,500. The
      common share purchase warrants are exercisable up to October 8, 2007, each
      entitling the holder to purchase one common share at $0.90 (U.S.) per
      share.





Pursuant
      to a subscription agreement dated December 3, 2004, with a U.S. company, the
      Company issued as a private placement 166,700 units, comprising one common
      share
      and one common share purchase warrant each, for an aggregate purchase price
      of
      $62,500. The common share purchase warrants are exercisable up to December
      3,
      2007 each entitling the holder to purchase one common share at $0.60 (U.S.)
      per
      share.





During
      2005, there were no shares issued for cash (except for the exercise of options
      noted below)





**e)** **Stock
      option plans**





The
      Company has stock option plans for its employees and consultants who are
      regarded as integral to the progress of the Company and its operations. Options
      are normally issued as a bonus on employment or are tied into performance
      related compensation. Performance related compensation includes completion
      of
      research and development projects within specific timeframes and budget,
      achieving financial targets on behalf of the Company or
      introduction/referral/completion of business agreements or arrangements. In
      general, the minimum vesting requirement of options issued is one year. The
      maximum term of options is five years from the grant date. Normally, the
      exercise price of the option is determined using the five-day closing average
      of
      the shares prior to the grant date.





On
      October 22, 2004, the Board of Directors passed a resolution authorizing an
      amendment increasing the maximum number of common shares for issuance under
      the
      Company’s Stock Option Plan to 5,100,000.





On
      October 12, 2005, the Board of Directors received approval from shareholders at
      the Annual General Meeting to increase the common shares available for the
      Company’s Stock Option Plan by 2,000,000.




Page
          28





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)





(i)
            Stock
                options granted





For
      the
      year ended December 31, 2003, stock options were granted as follows under the
      Company’s Stock Option Plan:





To
      employees, 30,000 at a price of $0.62 (U.S.) expiring November 17,
      2008.


To
      a
      consultant, 200,000 at a price of $0.50 (U.S.) expiring July 30, 2004


To
      a
      consultant, 100,000 at a price of $0.57 (U.S.) expiring December 1, 2008


To
      a
      director, 250,000 at a price of $0.50 (U.S.) expiring December 1,
      2008





For
      the
      year ended December 31, 2004, stock options were granted as follows under the
      Company’s Stock Option Plan:





To
      employees, 149,170 at a price of $0.35 (U.S.) expiring December 16,
      2009.


To
      consultants, 154,670 at a price of $0.35 (U.S.) expiring December 16,
      2009.


To
      an
      officer, 100,000 at a price of $0.36 (U.S.) expiring December 6,
      2009.


To
      a
      director, 500,000 at a price of $0.36 (U.S.) expiring December 11, 2009


subject
      to certain conditions





For
      the
      year ended December 31, 2005, stock options were granted as follows under the
      Company’s Stock Option Plan:





To
      one
      director, 200,000 at a price of $0.15 (US) expiring July 19, 2010


To
      all
      directors, 1,400,000 at a price of $0.15 (US) expiring July 19, 2010 subject
      to
      certain conditions


To
      an
      officer, 200,000 at a price of $0.15 (US) expiring July 19, 2010


To
      employees, 225,000 at a price of $0.15(US) expiring November 4, 2010


To
      a
      consultant, 25,000 at a price of $0.15(US) expiring November 4,
      2010





(ii)
            Stock
                Options exercised





In
      November 2003, one non-related party exercised 100,000 options at $0.30 (U.S.)
      for total proceeds of $30,000 (U.S.).





For
      the
      three months ended June 30, 2004, one employee exercised 40,000 options at
      $0.20
      (U.S.) for total proceeds of $10,400 and one non-related party exercised 200,000
      options at $0.30 (U.S.) for total proceeds of $81,732.





For
      the
      three months ended September 30, 2004, one non-related party exercised 120,000
      options at $0.30 (U.S.) for total proceeds of $46,770.




Page
          29


**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**7.** **SHARE
      CAPITAL AND CONTRIBUTED SURPLUS** (continued)





For
      the
      three months ended December 31, 2004, one non-related party exercised 580,000
      options at $0.30 (U.S.) for total proceeds of $219,358. One director exercised
      62,500 options for $0.25 for total proceeds of $15,625.





On
      January 21, 2005, Gordon Emerson exercised 125,000 options at $0.17 (U.S.)
      for
      proceeds of $31,250.





On
      November 26, 2005, Jiri Nor exercised 150,000 options at $0.24 (U.S.) for
      proceeds of $42,100.





(iii)
            Stock
                options expired or forfeited ( See table in (e)
                (v))





(iv)
            Stock
                option valuation





Stock
      options issued are valued using the Black-Scholes option pricing model with
      the
      following assumptions: risk free interest rate of 3.60%, expected life of
      between 1 year and 5 years, expected volatility of 112%, closing rate of
      exchange on the issue date and no dividends.




Page
          30





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**7.**
              **SHARE
                  CAPITAL AND CONTRIBUTED SURPLUS**(continued)





(v)
      Summary Table





**Options
                For**
              **Common
                Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price
                U.S.$**Balance,
                January 1, 2003
            
            
            3,625,000
            
            
            0.30Options
                granted in 2003
            
            
            580,000
            
            
            0.52Options
                exercised in 2003
            
            
            (600,000
            )
            
            0.22Options
                terminated in 2003
            
            
            (250,000
            )
            
            0.4Balance,
                December 31, 2003
            
            
            3,355,000
            
            
            0.34Options
                granted in 2004
            
            
            903,840
            
            
            0.36Options
                exercised in 2004
            
            
            (1,002,500
            )
            
            0.29Options
                forfeited or terminated in 2004
            
            
            (312,500
            )
            
            0.44Balance,
                December 31, 2004
            
            
            2,943,840
            
            
            0.35Options
                granted in 2005
            
            
            2,050,000
            
            
            0.15Options
                exercised in 2005
            
            
            (275,000
            )
            
            0.27Options
                forfeited or terminated in 2005
            
            
            (675,000
            )
            
            0.39Balance,
                December 31, 2005
            
            
            4,043,840
            
            
            0.25





(vi)  Exercisable
      Date and Weighted Average Exercise price by Year




**Options
                For**
              **Common
                Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price
                U.S.$**Exercisable
                at December 31, 2003
            
            
            2,775,000
            
            
            0.30Exercisable
                at December 31, 2004
            
            
            2,343,840
            
            
            0.35Exercisable
                at December 31, 2005
            
            
            1,943,840
            
            
            0.31




Page
          31




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)




**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)




(vii)  Weighted
      Average Remaining Contractual Life




The
      following table summarizes information about the Company’s stock options
      outstanding as at December 31, 2005





**Exercise**
              **Price**
              **U.S.$**
            
            **Number**
              **Outstanding
                at**
              **December
                31,**
              **2005**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                in Years**
            
            **Weighted**
              **Average**
              **Share
                Price**
              **U.S.$**
            
            **Number**
              **Exercisable**
              **December
                31,**
              **2005**
            
            **Weighted**
              **Average**
              **Share
                Price**
              **U.S.$**0.15
                –0.25
            
            
            2,635,000
            
            
            3.89
            
            
            0.16
            
            
            1,035,000
            
            
            0.180.26
                – 0.50
            
            
            1,028,840
            
            
            3.57
            
            
            0.37
            
            
            528,840
            
            
            0.390.50
                – 0.62
            
            
            380,000
            
            
            2.77
            
            
            0.53
            
            
            380,000
            
            
            0.534.043,840
            
            
            3.70
            
            
            0.25
            
            
            1,943,840
            
            
            0.31





**f)**  **Common
      share purchase warrants**




As
      at
      December 31, 2003, the Company had a total of 4,746,615 common share purchase
      warrants issued. These warrants have expiry dates ranging from September 2004
      to
      November 2007. The weighted average exercise price of the warrants was $0.63
      (U.S.).





As
      at
      December 31, 2004, the Company had a total of 8,524,476 common share purchase
      warrants issued. These warrants have expiry dates ranging from February 2005
      to
      December 2007. The weighted average exercise price of the warrants was $0.68
      (U.S.).





On
      January 27, 2005, the Company issued 5,000,000 warrants to Macnor Corporation,
      a
      company controlled by Jiri Nor, in partial payment for the purchase by the
      Company of 2062540 Ontario Inc. which owns 70% of the Company’s Czech affiliate,
      Astris sro. Of these 2,000,000 warrants have a strike price of $ 0.90 (Can)
      and
      expire January 27, 2008; 2,000,000 warrants have a strike price of $1.10 (Can)
      and expire January 27, 2008 and 1,000,000 warrants have an exercise price of
      $1.30 (Can) and expire January 27, 2008.


Page
          32


**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)




**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)




**2,750,744
      warrants were issued in 2003 as follows:**





**Issue******
              **Date**
            
            **Expiry******
              **Date**
            
            **Number
                of******
              **Warrants**
            
            **Exercise******
              **Price****Recipient**The
                Taylor Made Mgmt Corp.
            
            
            May
                9, 2003
            
            
            Feb.
                20, 2006
            
            
            625,000
            
            
            U.S.$0.50PSSI
                Paralegal Support Services
            
            
            July
                30, 2003
            
            
            July
                30, 2004
            
            
            500,000
            
            
            ExpiredPSSI
                Paralegal Support Services
            
            
            July
                30, 2003
            
            
            July
                30, 2006
            
            
            500,000
            
            
            U.S.$1.00Dympna
                Carroll
            
            
            Sept.
                12, 2003
            
            
            Sept.
                12, 2006
            
            
            384,615
            
            
            U.S.$0.85Donal
                Carrol
            
            
            Sept.
                25, 2003
            
            
            Sept.
                25, 2006
            
            
            169,500
            
            
            U.S.$1.00The
                Taylor Made Mgmt Corp. –
                A
            
            
            Dec.
                29, 2003
            
            
            Sept.
                29, 2004
            
            
            50,000
            
            
            ExpiredThe
                Taylor Made Mgmt Corp. – B
            
            
            Dec.
                29, 2003
            
            
            Dec.
                29, 2006
            
            
            282,100
            
            
            U.S.$1.00PSSI
                Paralegal Support Serv.
            
            
            Dec.
                30, 2003
            
            
            Jan.
                21, 2007
            
            
            239,529
            
            
            U.S.$1.002,570,744





**Closing
      balance at December 31, 2003 = 4,746,615 warrants**


**4,386,232
      warrants were issued in 2004 as follows:**





**Issue**
              **Date**
            
            **Expiry**
              **Date**
            
            **Number
                of**
              **Warrants**
            
            **Exercise**
              **Price****Recipient**The
                Taylor Made Mgmt Corp.-A
            
            
            March
                31, 2004
            
            
            Oct.
                1, 2005
            
            
            651,450
            
            
            ExpiredThe
                Taylor Made Mgmt Corp.-B
            
            
            March
                31, 2004
            
            
            April1,
                2007
            
            
            651,450
            
            
            U.S.$1.00PSSI
                Paralegal Support Services
            
            
            March
                26, 2004
            
            
            March
                26, 2007
            
            
            236,035
            
            
            U.S.$1.00The
                Taylor Made Mgmt Corp.-A
            
            
            March
                31, 2004
            
            
            Oct.
                1, 2005
            
            
            104,500
            
            
            U.S.$0.80The
                Taylor Made Mgmt Corp.-B
            
            
            March
                31, 2004
            
            
            March
                1, 2007
            
            
            104,500
            
            
            U.S.$1.00The
                Taylor Made Mgmt Corp.-A
            
            
            June
                30, 2004
            
            
            June
                30, 2007
            
            
            79,630
            
            
            U.S.$0.80Michael
                Wright
            
            
            July
                27, 2004
            
            
            Dec.
                31, 2005
            
            
            200,000
            
            
            ExpiredAlternate
                Energy Corp.
            
            
            July
                27, 2004
            
            
            Dec.
                31, 2005
            
            
            1,000,000
            
            
            ExpiredDonal
                Carrol
            
            
            July
                27, 2004
            
            
            Dec.
                31, 2005
            
            
            140,000
            
            
            ExpiredPhillip
                Patterson
            
            
            July
                27, 2004
            
            
            Dec.
                31, 2005
            
            
            10,000
            
            
            ExpiredThe
                Taylor Made Mgmt Corp.-A
            
            
            July
                27, 2004
            
            
            Dec.
                31, 2005
            
            
            344,167
            
            
            ExpiredBelcor
                Development Corporation
            
            
            Oct.
                1, 2004
            
            
            Sept.
                30, 2007
            
            
            88,900
            
            
            U.S.$0.90Belcor
                Development Trust
            
            
            Oct.
                1, 2004
            
            
            Sept.
                30, 2007
            
            
            88,900
            
            
            U.S.$0.90Phillip
                Patterson
            
            
            Oct.
                8, 2004
            
            
            Sept.
                30, 2007
            
            
            20,000
            
            
            U.S.$0.90Belcor
                Development Corporation
            
            
            Dec.
                3, 2004
            
            
            Dec.
                3, 2007
            
            
            166,700
            
            
            U.S.$0.60Liikfam
                Holdings Inc.
            
            
            Dec.
                9, 2004
            
            
            Dec.
                9, 2007
            
            
            500,000
            
            
            U.S.$0.374,386,232





**Closing
      balance as at December 31, 2004 = 8,524,476 warrants.**




Page
          33




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**7.**
            **SHARE
                CAPITAL AND CONTRIBUTED SURPLUS**(continued)





**10,156,000
      warrants were issued in 2005 as follows:**





**Issue****Date**
            
            **Expiry****Date**
            
            **Number
                  of****Warrants**
            
            **Exercise****Price****Recipient**Macnor
                Corp
            
            
            Jan.
                27, 2005
            
            
            Jan.
                27, 2008
            
            
            2,000,000
            
            
            U.S.
                $0.75Macnor
                Corp
            
            
            Jan.
                27, 2005
            
            
            Jan.
                27, 2008
            
            
            2,000,000
            
            
            U.S.
                $0.92Macnor
                Corp
            
            
            Jan.
                27, 2005
            
            
            Jan.
                27, 2008
            
            
            1,000,000
            
            
            U.S.
                $1.08Fraser
                McKenzie
            
            
            Mar.
                24, 2005
            
            
            Mar
                24, 2007
            
            
            156,000
            
            
            U.S.$0.23New
                Century Capital Consultants
            
            
            Aug.
                02, 2005
            
            
            Sept.
                02, 2005
            
            
            1,000,000
            
            
            ExpiredNew
                Century Capital Consultants
            
            
            Aug.
                02, 2005
            
            
            Nov.
                02, 2005
            
            
            1,000,000
            
            
            ExpiredNew
                Century Capital Consultants
            
            
            Aug.
                02, 2005
            
            
            Aug.
                02, 2007
            
            
            1,000,000
            
            
            U.S.
                $0.25Optima
                Capital
            
            
            Aug.
                02, 2005
            
            
            Oct.
                02, 2005
            
            
            1,000,000
            
            
            ExpiredBina
                Consulting
            
            
            Aug.
                08, 2005
            
            
            Aug.
                08, 2007
            
            
            800,000
            
            
            U.S.
                $0.36Elliott
                Goldstein Consulting
            
            
            Aug.
                08,2005
            
            
            Aug.
                08, 2007
            
            
            200,000
            
            
            U.S.
                $0.3610,156,000





**6,300,117
      warrants expired (850,000 from 2002; 2,450,117 from 2004; and 3,000,000 from
      2005).**





As
      at
      December 31, 2005, there were 12,380,359 common share purchase warrants issued.
      These warrants have expiry dates ranging from February 2006 to December 2008.
      The weighted average exercise price of the warrants was $0.71(U.S.).





**8.**
            **CONSOLIDATED
                STATEMENTS OF CASH FLOW**





The
      net
      change in non-cash operating working capital balances related to operations
      consists of the following:





**2005**
            
            **2004**
            
            **2003**Decrease
                (increase) in receivables
            
            
            ($91,752
            )
            
            ($2,544
            )
            $
            29,440Decrease
                (increase in prepaid expenses
            
            
            (140,178
            )
            
            27,088
            
            
            112,571Decrease
                (increase) in investment tax creditsrefundable
            
            
            199,586
            
            
            (199,586
            )
            
            216,608Decrease
                (increase) in inventory
            
            
            (10,594
            )
            
            –
            
            
            –Increase
                (decrease) in payables and accruals
            
            
            483,288
            
            
            (143,303
            )
            
            (10,913
            )Increase
                (decrease) in deferred revenue
            
            
            17,856
            
            
            –
            
            
            –Increase
                (decrease) in goods and servicestax
                payable
            
            
            8,527
            
            
            (11,269
            )
            
            (26,547
            )$
            466,733
            
            
            ($329,614
            )
            $
            321,159




Page
          34





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**9.**
            **SEGMENTED
                FINANCIAL INFORMATION**





The
      Company currently operates in a single reporting segment, being the design,
      development, manufacturing and sale of alkaline fuel cells (AFCs), alkaline
      fuel
      cell systems, fuel cell and battery test loads and also provides engineering
      and
      other services. Most of the Company’s long term assets are located in the Czech
      Republic. Revenue is derived primarily from the sale of goods and services
      to
      customers in the following locations and amounts.





**2005**
            
            **2004**
            
            **2003**Canada
            
            $
            53,019
            
            $
            7,508
            
            $
            7,008Czech
                Republic
            
            
            10,381
            
            
            4,310
            
            
            45,901Rest
                of the World
            
            
            228,112
            
            
            76,980
            
            
            14,961$
            291,512
            
            $
            88,798
            
            $
            67,870





The
      Company’s segmented information by geographical location is as
      follows:





**Canada**
            
            **Czech**
              **Republic**Assets
            
            $
            471,853
            
            $
            510,641Revenue
            
            
            281,131
            
            
            10,381Net
                loss
            
            
            4,713,833
            
            
            617,031





**10.**
            **CONVERTIBLE
                DEBENTURE**





On
      March
      15, 2005, the Company entered into a subscription (the “Agreement) to issue a
      $420,000 secured convertible debenture (the “debenture”) to Canadian Accredited
      Investors. The maturity date of the debenture was December 10, 2005. The Company
      did not have the ability to pay the debt when due and are attempting to
      negotiate a new convertible debt agreement. The convertible debt is currently
      in
      default and the Company is paying 10% interest on the convertible debt. The
      original terms of the convertible debenture was 6% interest and the investors
      were granted a security interest in the Company’s assets including intellectual
      property.





The
      principal amount of the debenture is convertible at the holder’s option at a 20%
      discount on the average closing price in the five preceding trading days of
      the
      shares listed on the Nasdaq OTCBB, subject to a minimum price per share of
      US$0.20 and a maximum share price of US$0.70. The Company could force a
      conversion based on the terms of future equity financing.


Page
          35





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)


**11.**
              **COMMITMENTS**
 
 The
                Company has an operating lease for office and laboratory space. The
                minimum annual lease payments under the terms of the existing leases
                are
                $34,800 to October 31, 2006, plus a proportionate share of common
                area
                costs. The lease expires as of October 31,
                2006. 
 **12.**
              **COMPARATIVE
                  FIGURES**
 
 Certain
                comparative figures have been reclassified to conform to the current
                year’s presentation. Page
              36




**ASTRIS
        ENERGI INC.**
 **(A
        Development Stage Company)**
 **Notes
        to the Consolidated Financial Statements**
 December
        31, 2005, 2004 and 2003
 (Canadian
        Dollars)
 
  **13.**
              **STATEMENT
                  OF EQUITY**
  The
        Statement of Equity from January 1, 1995 to the present is as
        follows:
 
 **Number
                  of Shares Issued**
              
              **Consideration
                  Amount**
              
              **Contributed
                  Surplus**
              
              **Deficit
                  Accumulated During Development Stage**
              
              **Total**Balance,
                  January 1, 1995
              
              
              5,000,000
              
              $
              558,927
              
              $
              -
              
              ($
              628,162
              )
              ($
              69,235
              )To
                  purchase Astris Inc. at December 31, 1995
              
              
              1,500,000
              
              
              150,000
              
              
              -
              
              
              -
              
              
              150,000Balance,
                  December 31, 1995
              
              
              6,500,000
              
              
              708,927
              
              
              -
              
              
              (628,162
              )
              
              80,765Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,055,819
              )
              
              (1,055,819
              )Balance,
                  December 31, 1996
              
              
              6,500,000
              
              
              708,927
              
              
              -
              
              
              (1,683,981
              )
              
              (975,054
              )Issued
                  for cash on exercise of warrants
              
              
              3,220,000
              
              
              3,220
              
              
              -
              
              
              -
              
              
              3,220Issued
                  for cash on exercise of warrants
              
              
              174,850
              
              
              175
              
              
              -
              
              
              -
              
              
              175Issued
                  in exchange for outstanding liabilities
              
              
              748,706
              
              
              374,354
              
              
              -
              
              
              -
              
              
              374,354Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (89,568
              )
              
              (89,568
              )Balance,
                  December 31, 1997
              
              
              10,643,556
              
              
              1,086,676
              
              
              -
              
              
              (1,773,549
              )
              
              (686,873
              )Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (138,660
              )
              
              (138,660
              )Balance,
                  December 31, 1998
              
              
              10,643,556
              
              
              1,086,676
              
              
              -
              
              
              (1,912,209
              )
              
              (825,533
              )Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (40,666
              )
              
              (40,666
              )Balance,
                  December 31, 1999
              
              
              10,643,556
              
              
              1,086,676
              
              
              -
              
              
              (1,952,875
              )
              
              (866,199
              )Consulting
                  fees to non-related parties
              
              
              62,500
              
              
              10,500
              
              
              -
              
              
              -
              
              
              10,500Consulting
                  fees to non-related parties
              
              
              18,750
              
              
              10,500
              
              
              -
              
              
              -
              
              
              10,500Consulting
                  fees to related parties
              
              
              200,000
              
              
              50,000
              
              
              -
              
              
              -
              
              
              50,000Cash
                  on exercised warrants
              
              
              102,900
              
              
              103
              
              
              -
              
              
              -
              
              
              103Share
                  issuance for outstanding liabilities
              
              
              1,110,078
              
              
              277,519
              
              
              -
              
              
              -
              
              
              277,519Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (35,580
              )
              
              (35,580
              )Balance,
                  December 31, 2000
              
              
              12,137,784
              
              
              1,435,298
              
              
              -
              
              
              (1,988,455
              )
              
              (553,157
              )
 
  Page
            37
  **ASTRIS
        ENERGI INC.**
 **(A
        Development Stage Company)**
 **Notes
        to the Consolidated Financial Statements**
 December
        31, 2005, 2004 and 2003
 (Canadian
        Dollars)
 
  **13.**
              **STATEMENT
                  OF EQUITY**(continued)
  **Number
                  of Shares Issued**
              
              **Consideration
                  Amount**
              
              **Contributed
                  Surplus**
              
              **Deficit
                  Accumulated During Development Stage**
              
              **Total**Balance,
                  December 31, 2000
              
              
              12,137,784
              
              $
              1,435,298
              
              $
              -
              
              ($
              1,988,455
              )
              ($
              553,157
              )Consulting
                  fees to non-related parties
              
              
              182,300
              
              
              99,672
              
              
              -
              
              
              -
              
              
              99,672Consulting
                  fees to related parties
              
              
              341,885
              
              
              208,050
              
              
              -
              
              
              -
              
              
              208,050Cash
                  on exercise of options
              
              
              325,000
              
              
              121,206
              
              
              -
              
              
              -
              
              
              121,206Issued
                  for cash
              
              
              353,250
              
              
              195,000
              
              
              -
              
              
              -
              
              
              195,000Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (593,984
              )
              
              (593,984
              )Balance,
                  December 31, 2001
              
              
              13,340,219
              
              
              2,059,226
              
              
              -
              
              
              (2,582,439
              )
              
              (523,213
              )Consulting
                  fees to non-related parties
              
              
              486,050
              
              
              166,801
              
              
              -
              
              
              -
              
              
              166,801Consulting
                  fees to related parties
              
              
              657,925
              
              
              207,456
              
              
              -
              
              
              -
              
              
              207,456Issued
                  for cash
              
              
              2,006,250
              
              
              628,631
              
              
              -
              
              
              -
              
              
              628,631Share
                  adjustment
              
              
              (
                  384,041
              )
              
              (80,025
              )
              
              391,378
              
              
              -
              
              
              311,353Consulting
                    and professional fees paid in options tonon-employees
              
              
              -
              
              
              -
              
              
              83,354
              
              
              -
              
              
              83,354Warrants
                  issued
              
              
              -
              
              
              (456,850
              )
              
              456,850
              
              
              -
              
              
              -Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (738,762
              )
              
              (738,762
              )Balance,
                  December 31, 2002
              
              
              16,106,403
              
              
              2,525,239
              
              
              931,582
              
              
              (3,321,201
              )
              
              135,620Consulting
                  fees to non-related parties
              
              
              209,082
              
              
              136,122
              
              
              -
              
              
              -
              
              
              136,122Consulting
                  fees to related parties
              
              
              412,825
              
              
              266,247
              
              
              -
              
              
              -
              
              
              266,247Repayment
                  of advances from directors
              
              
              45,500
              
              
              20,400
              
              
              -
              
              
              -
              
              
              20,400Issued
                  for cash
              
              
              2,456,615
              
              
              1,193,165
              
              
              -
              
              
              -
              
              
              1,193,165Warrants
                  issued
              
              
              -
              
              
              (797,320
              )
              
              797,320
              
              
              -
              
              
              -Options
                  to non-employees
              
              
              -
              
              
              -
              
              
              131,063
              
              
              -
              
              
              131,063Options
                  to employees
              
              
              -
              
              
              -
              
              
              188,377
              
              
              -
              
              
              188,377Loss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,206,969
              )
              
              (2,206,969
              )Balance,
                  December 31, 2003
              
              
              19,230,425
              
              
              3,343,853
              
              
              2,048,342
              
              
              (5,528,170
              )
              
              (135,975
              )
  Page
            38




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)








**13.**
            **STATEMENT
                OF EQUITY**(continued)




**Number
                of Shares Issued**
            
            **Consideration
                Amount**
            
            **Contributed
                Surplus**
            
            **Deficit
                Accumulated During Development Stage**
            
            **Total**Balance,
                December 31, 2003
            
            19,230,425
            
            
            3,343,853
            
            
            2,048,342
            
            
            (5,528,170
            )
            
            (135,975
            )Consulting
                fees to non-related parties
            
            1,728,872
            
            
            890,096
            
            
            -
            
            
            -
            
            
            890,096Consulting
                fees to related parties
            
            586,592
            
            
            332,360
            
            
            -
            
            
            -
            
            
            332,360Repayment
                of advances from directors
            
            293,751
            
            
            128,000
            
            
            -
            
            
            -
            
            
            128,000Issued
                for cash
            
            4,476,911
            
            
            2,161,587
            
            
            -
            
            
            -
            
            
            2,161,587Warrants
                issued
            
            -
            
            
            (
                628,822
            )
            
            628,822
            
            
            -
            
            
            -Options
                to non-employees
            
            -
            
            
            -
            
            
            192,481
            
            
            -
            
            
            192,481Options
                to employees
            
            -
            
            
            -
            
            
            140,892
            
            
            -
            
            
            140,892Proceeds
                on issuance of warrants
            
            -
            
            
            -
            
            
            6,110
            
            
            -
            
            
            6,110Loss
                for the year
            
            -
            
            
            -
            
            
            -
            
            
            (3,462,257
            )
            
            (3,462,257
            )Balance,
                December 31, 2004
            
            26,316,551
            
            
            6,227,074
            
            
            3,016,647
            
            
            (8,990,427
            )
            
            253,294Acquisition
                of sro
            
            5,000,000
            
            
            1,955,000
            
            
            254,000
            
            
            -
            
            
            2,209,000Consulting
                fees to non-related parties
            
            4,305,927
            
            
            1,294,214
            
            
            -
            
            
            -
            
            
            1,294,214Consulting
                fees to related parties
            
            1,884,091
            
            
            454,308
            
            
            -
            
            
            -
            
            
            454,308Repayment
                of advances by director
            
            125,000
            
            
            26,150
            
            
            73,850
            
            
            -
            
            
            100,000Options
                exercised for cash
            
            275,000
            
            
            73,350
            
            
            -
            
            
            -
            
            
            73,350Options
                to employees
            
            -
            
            
            -
            
            
            21,144
            
            
            -
            
            
            21,144Options
                to related parties
            
            -
            
            
            -
            
            
            215,030
            
            
            -
            
            
            215,030Warrants
                issued to non-related parties
            
            -
            
            
            -
            
            
            482,068
            
            
            -
            
            
            482,068Loss
                for the year
            
            -
            
            
            -
            
            
            -
            
            
            (5,330,864
            )
            
            (5,330,864
            )Balance,
                December 31, 2005
            
            37,906,569
            
            $
            10,030,096
            
            $
            4,062,739
            
            
            ($14,321,291
            )
            
            ($228,456
            )




Page
          39




**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)







**14.**
            **PRIOR
                YEAR AMOUNTS INCLUDED IN THE DEVELOPMENT STAGE
                COMPANY**




On
                December 31, 1995, the Company was redefined as a development stage
                company in accordance with Accounting Guideline AcG-11, “Enterprises in
                the Development Stage”. The amount included in opening deficit at December
                31, 2005 is $628,162. All amounts recorded in the “inception to date”
                category as comparative amounts have been accumulated since December
                31,
                1995.





**15.**
            **ACQUISITION
                OF ASTRIS SRO**





On
                January 27, 2005, the Company acquired 70% of the outstanding shares
                in
                Astris sro, its affiliate company in the Czech Republic. The Company
                owned
                the remaining 30% of Astris sro making it a 100% subsidiary
                company.





The
                aggregate purchase price of $2,209,000 was paid by issuing 5,000,000
                common shares of the Company for $1,955,000 and 5,000,000 warrants
                for
                $254,000. 2,500,000 common shares were held in escrow for one year
                until
                January 2, 2006, and were released on that date. Each warrant entitles
                the
                holder to one common share of the
                Company.





The
                value of the 30% of Astris sro already owned by the Company had been
                written down to $Nil in a previous year. Technology acquired was
                written
                off in the year of acquisition.





The
                following table summarizes the fair value of the assets acquired
                and
                liabilities assumed on the date of acquisition based on a conversion
                rate
                of 18.6637 Czech Korunas for each Canadian
                $1.00.




Page
          40





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003





**15.**
            **ACQUISITION
                OF ASTRIS SRO**(continued)





The
                following amounts are based on that valuation in
                CDN$:





Net
                assets acquired:Cash
            
            $
            87,091Other
                current assets
            
            
            63,259150,350Other
                assetsLand
            
            
            128,935Building
            
            
            235,400Equipment
            
            
            184,708Furniture
                and fixtures
            
            
            21,520Property,
                plant and equipment
            
            
            570,563Technology
            
            
            1,521,972Total
                assets
            
            $
            2,242,885Less:Current
                liabilities
            
            
            33,885Purchase
                price
            
            $
            2,209,000Consideration:5,000,000
                common shares
            
            $
            1,955,0002,000,000
                Class “A” warrants
            
            
            124,0002,000,000
                Class “B” warrants
            
            
            94,0001,000,000
                Class “C” warrants
            
            
            36,000$
            2,209,000




Page
          41





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**16.**
            **DIFFERENCES
                BETWEEN CANADIAN AND UNITED STATES ACCOUNTING********PRINCIPLES******





This
      reconciliation only covers measurement issues and not disclosure issues pursuant
      to the rules and regulations of the Securities and Exchange
      Commission.





The
      consolidated financial statements of the Company for the years ended December
      31, 2005, 2004 and 2003 and the period December 31, 1995 (date of inception
      of
      development stage company) through December 31, 2005 have been prepared in
      accordance with generally accepted accounting principles as applied in Canada
      (“Canadian GAAP”). In the following respects, generally accepted accounting
      principles as applied in the United States (“US GAAP”) differ from those applied
      in Canada.





There
      would be no adjustments needed to arrive at net loss for the years ended
      December 31, 2005, 2004 and 2003 and the period December 31, 1995 (date of
      inception of development stage company) through December 31, 2005 if US GAAP
      were employed. Similarly, there would be no adjustments needed to arrive at
      shareholders’ equity as at December 31, 2005, 2004 and 2003 if US GAAP were
      employed.





***Stock-Based
      Compensation Plan***





Note
      3A
      to the financial statements includes an element for Canadian GAAP purposes
      that
      is a correction of error and an element that is a change in accounting policy.
      Under US GAAP, the Company should have been expensing stock options granted
      to
      non-employees since January 1, 1996. As such the prior period adjustment due
      to
      the change in accounting policy, described in Note 3A, is a prior period
      adjustment due to correction of error for U.S. GAAP purposes.





***Accounting
      for future (deferred) income taxes***





The
      significant differences between U.S. GAAP and Canadian GAAP in the accounting
      for future income taxes relate to the treatment of proposed changes in income
      tax rates and terminology. Under Canadian GAAP, future income tax assets and
      liabilities are measured using substantively enacted tax rates and laws expected
      to apply when the differences between the accounting basis and tax basis of
      assets and liabilities reverse. Under U.S. GAAP, future income tax assets and
      liabilities are called deferred income tax assets and liabilities and are
      measured using only currently enacted tax rates and laws. As at December 31,
      2005, 2004 and 2003, the difference in rate determination did not result in
      any
      adjustment from Canadian to U.S. GAAP since any deferred tax assets were not
      considered more likely than not to be realized and, accordingly, a full
      valuation allowance was recorded on such assets.





***Property,
      plant and equipment***




There
      is
      a difference between U.S. GAAP and Canadian GAAP for property, plant and
      equipment with respect to terminology. Under U.S. GAAP, property, plant and
      equipment are called “fixed assets”.




Page
          42





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**16.**
              **DIFFERENCES
                  BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES**(continued)





***Contributed
                surplus***





There
                is a difference between U.S. GAAP and Canadian GAAP with respect
                to
                terminology. Under U.S. GAAP, contributed surplus is referred to
                as
                “additional paid in capital”.





**17.**
            **SUPPLEMENTARY
                DISCLOSURES WITH RESPECT TO CONSOLIDATED STATEMENT OF CASH FLOW AND
                NON-CASH ITEMS**





**2005**
            
            **2004**
            
            **2003**Non-cash
                items(Decrease)
                increase in advances from related party
            
            $
            (100,000
            )
            
            100,000
            
            
            -Supplementary
                disclosuresInterest
                paid
            
            
            -
            
            
            -
            
            
            -Investment
                tax credits recovered
            
            
            476,770
            
            
            5,820
            
            
            388,499




**18.**
            **SUBSEQUENT
                  EVENTS**





The
      Company entered into a Securities Purchase Agreement (the “Agreement”) on April
      10, 2006 with Cornell Capital Partners, LP an institutional investor, relating
      to the sale of one million five hundred thousand dollars ($1,500,000) of secured
      convertible debentures (the “Convertible Debentures”), which will be convertible
      into shares (the “Conversion Shares”) of the Company’s common stock (the “Common
      Stock”) of which seven hundred and fifty thousand dollars ($750,000) was funded
      on April 18, 2006 (the “First Closing”) and seven hundred and fifty thousand
      dollars ($750,000) will be funded assuming certain conditions are satisfied
      two
      (2) business days prior to the date a registration statement (the “Registration
      Statement”) is filed, pursuant to the Registration Rights Agreement (hereinafter
      defined) with the United States Securities and Exchange Commission (the “SEC”),
      for a total purchase price of up to one million five hundred thousand dollars
      ($1,500,000).(the “Purchase Price”). Pursuant to the Agreement, the investor
      also received common stock purchase warrants (the “Warrants”) to purchase (i)
      1,000,000 shares of the Company’s common stock at an exercise price of $0.30 per
      share; (ii) 600,000 shares of the Company’s common stock at an exercise price of
      $0.20 per share and (iii) 1,600,000 shares of the Company’s common stock at an
      exercise price of $0.19 per share. The Company received net proceeds from the
      First Closing of six hundred and seventeen thousand five hundred dollars
      ($617,500) which are to be used primarily for working capital
      purposes.




Page
          43





**ASTRIS
      ENERGI INC.**


**(A
      Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**


December
      31, 2005, 2004 and 2003


(Canadian
      Dollars)





**18.**
            **SUBSEQUENT
                EVENTS**(continued)





The
                Convertible Debentures have an initial conversion price of the lesser
                of
                (i) a price equal to $.2483 (the “Fixed Conversion Price”) or (ii) ninety
                percent (90%) of the lowest daily Volume Weighted Average Price of
                the
                common stock during the ten (10) trading days immediately preceding
                the
                Conversion Date as quoted by Bloomberg, LP per share and provides
                for
                anti-dilution protection (in certain circumstances). At the Fixed
                Conversion Price, the Convertible Debentures will be convertible
                into an
                aggregate of 6,041,079 shares of common stock. The Convertible Debentures
                bear interest at 10% per annum. Interest is payable in cash or, at
                the
                Company’s option, in shares of common stock (the “Interest Shares”)
                provided certain conditions are satisfied. At any time after their
                respective issuance dates and prior to April 9, 2009, the Convertible
                Debentures may be redeemed at the election of the Company at the
                principal
                amount, plus accrued but unpaid interest, subject to the satisfaction
                of
                certain conditions.





The
                Investor was granted a security interest in the assets of the Company
                and
                the assets of the Company’s subsidiary 2062540 Ontario
                Inc.





The
                Warrants may be exercised for cash, as indicated above, and also
                contain a
                cashless exercise provision, which may be exercised in certain
                circumstances. The Warrants provide for anti-dilution protection
                in
                certain circumstances. The Warrants are exercisable for 1,000,000,
                600,000
                and 1,600,000 shares of Common Stock (the “Warrant Shares”), respectively,
                and if fully exercised for cash at the initial exercise price, the
                Warrant
                could yield approximately $724,000 of additional proceeds to the
                Company.





The
                Company has agreed to file a registration statement (the “Registration
                Statement”) with the SEC in order to register the resale of the shares
                issuable upon conversion of the Convertible Debentures and the shares
                issuable upon exercise of the
                Warrants.




Page
          44