UNITED
STATES
 
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 FORM
20-F
 
 (Mark
One)
 [_]
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, 2004
 
 [_]
TRANSITION 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.
 26,316,551
COMMON SHARES
 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
[_]
 Indicate
by check mark which financial statement item the registrant has elected to
follow.
 Item 17
[X]         Item 18 [_]
 (Applicable
only to Issuers involved in Bankruptcy proceedings during the past five years)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
 Yes [_]
            No
[_]
 
 1
 
 **TABLE
OF CONTENTS**
 
 Part
I
 
 Item
1. Identity of Directors, Senior Management and Advisers
 
 Item
2. Offer Statistics and Expected Timetable
 
 Item
3. Key Information
 
 Item
4. Information on the Company
 
 Item
5. Operating and Financial Review and Prospects
 
 Item
6. Directors, Senior Management and Employees
 
 Item
7. Major Shareholders, Related Party Transactions and Non-Related Party Common
Stock Transactions
 
 Item
8. Financial Information
 
 Item
9. The Offer and Listing
 
 Item
10. Additional Information
 
 Item
11. Quantitative and Qualitative Disclosures About Market Risk
 
 Item
12. Description of Securities Other than Equity Securities
 
 Part
II
 
 Item
13. Defaults, Dividend Arrearages and Delinquencies
 
 Item
14. Material Modifications to the Rights of Security Holders
 and
Use of Proceeds
 
 Item
15. Controls and Procedures
 
 Item
16.
 
 Part
III
 
 Item
17. Financial Statements
 
 Item
18. Financial Statements
 
 Item
19. Exhibits
 
 
 I
 
 
 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.
 2
 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".
 
 December
      31,
    
    
    December
      31,
    
    
    December
      31,
    
    
    December
      31,
    
    
    December
      31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(RESTATED)
    
    
    (RESTATED
    )
    
    (RESTATED
    )Revenue
    
    $
    88,798
    
    $
    67,870
    
    $
    180,168
    
    $
    35,104
    
    $
    22,824Net
      Loss from Operations
    
    
    (3,462,257
    )
    
    (2,206,969
    )
    
    (620,654
    )
    
    (743,644
    )
    
    (412,228
    )Net
      Loss
    
    
    (3,462,257
    )
    
    (2,206,969
    )
    
    (743,472
    )
    
    (705,555
    )
    
    (35,580
    )Basic
      and Diluted Loss
    
    
    (0.16
    )
    
    (0.12
    )
    
    (0.05
    )
    
    (0.06
    )
    
    (0.00
    )per
      ShareTotal
      Assets
    
    
    509,124
    
    
    435,235
    
    
    676,500
    
    
    190,376
    
    
    281,705Net
      Assets
    
    
    253,294
    
    
    (135,975
    )
    
    135,620
    
    
    (207,150
    )
    
    (249,870
    )Long
      Term Obligations
    
    
    -
    
    
    100,000
    
    
    120,400
    
    
    114,000
    
    
    114,000Share
      Capital
    
    
    6,227,074
    
    
    3,343,853
    
    
    2,525,239
    
    
    1,979,201
    
    
    1,397,923Number
      of Shares
    
    
    26,316,551
    
    
    19,230,425
    
    
    16,106,403
    
    
    12,936,178
    
    
    11,733,743Cash
      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 rate of each month in such
periods), and the range of high and low exchange rates for such
periods.
 
 **Year
      ended December 31,**
    **2004**
    **2003**
    **2002**End
      of Period
    .83
    .77
    .63Average
      for Period
    .77
    .71
    .63High
      for Period
    .85
    .78
    .65Low
      for Period
    .71
    .64
    .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 2005.  The exchange rates used are the closing
rates as provided by the Bank of Canada.
 
 **Month**
    **High**
    **Low**January
      2005
    .83
    .80February
      2005
    .82
    .79March
      2005
    .83
    .80
 
 The
exchange rate on December 31, 2004 for the conversion of United States dollars
into Canadian dollars was $1.2020 (CDN$1.00 = US$.83). As of April 1, 2005 the
close rate of exchange for the conversion of United States dollars into Canadian
dollars was 1.2151 (CDN$1.00 = US$.82).  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.
 
 3
 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$8,990,427 as of December 31, 2004. It expects to
continue to incur net losses at least through fiscal year 2005, 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
up to 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.
 
 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 1, 2005, 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. Until the Company has adequate capital resources
and sufficient demand for its products, 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.
 
 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.
 
 4
 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 its 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.
 
 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 in 1983 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, the Euro and the Czech Republic
koruna. 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 OF 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.
 
 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.
 
 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 2004 from a high of US$0.70 to a low of US$0.30 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.
 
 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 $5.00 per share or an exercise
price of less than US$5.00 per share. This subject to certain exemptions based
upon minimum assets or revenues. As of April 1, 2005, the closing bid and asked
prices for the Common Shares were US$.26 and US$.29 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.
 
 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.
 
 5
 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.
 
 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 pilot
production 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 have tremendous global market
potential and anticipated earlier adoption. 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 or 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 during 2004 tested the Model E8 Portable Power Generator that
provides 2.4 kW for backup of off-grid power requirements.
 
 Working
closely together 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 and initial negotiations have already begun.
 
 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 exceptional progress for Astris and its worldwide
leadership in alkaline fuel cell technology. With prospects targeted, Astris has
a series of systems ready for independent field tests.
 
 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.
 
 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.
 
 6
 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.
 
 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.
 
 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
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.
 
 The
Company's principal fuel cell products are the POWERSTACKTM MC250, E8 generator
and Freedom 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.
 
 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 an outstanding 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.
 
 7
 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 sold its first E8 generator in December 2004 under a
value added reseller agreement with Alternate Energy Corp.
 
 FREEDOM
II GOLF CAR
 
 The
Freedom 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 Freedom 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. Subsequent to year end, the Company sold its first Freedom II.
 
 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.
 
 QUICKELLTM
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.
 
 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. 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. Almost
CDN$9 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 now 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$700,000 for
2004. For the years ended December 31, 2004, 2003 and 2002, the Company expended
a total of approximately CDN$1,354,695, CDN$1,229,184, CDN$197,488 on research
and development. The research and development budget for 2005 is contingent upon
the Company's ability to raise capital.
 
 Since
"going public" in Canada in December 1995, 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 2004, the Company received
or received notification of investment tax credit refunds of
$203,626.
 
 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 2005 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.
 
 8
 INTELLECTUAL
PROPERTY
 
 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, QUICKELLTM QC200, POWERSTACKTM MC250 and TESTMASTERTM.
 
 The
Company has copyright protection on its TL5 Testload and TESTMASTERTM
software.
 
 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.
 
 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 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, Hydrogenics, Plug Power
and ReliOn. 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, and operate at low temperatures, 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.
 
 9
 LEGAL
PROCEEDINGS
 
 On
November 10, 1999, E. Roy Birkett, a former director and officer of the Company,
instituted an action against the Company in the Superior Court of Justice
(Ontario) (File No. 99-CV-179868) seeking recovery of CDN $315,000 he had
advanced on behalf of the Company. Mr. Birkett was President of the Company in
1995 when it acquired Astris Inc. Included in a March 1995 Letter of Intent for
the acquisition of Astris Inc. was the binding obligation of Mr. Birkett and the
other then principals of the Company to advance funds to keep AEI operating
until such time as they had raised or arranged a financing for the Company of a
minimum of US$10,000,000. Such financing was never obtained. Mr. Birkett
originally sought actual damages in excess of CDN $315,000, plus costs.
 
 In
February 2001, Mr. Birkett's counsel requested the Company to consent to an
expansion of Mr. Birkett's initial claim to CDN $1,942,301 in order to cover
additional expenses he allegedly incurred on behalf of the Company in 1995 with
regards to the proposed financing.
 
 The
trial occurred on October 7, 2002. Subsequent to quarter ended September 30,
2002, the lawsuit was dismissed by the Superior Court of Justice of Ontario. The
Company was successful in its defense and the entire claim was
dismissed.
 
 On
December 18, 2002, the court ordered Mr. Birkett to pay CDN$81,000 to the
Company as partial indemnity for the legal costs it incurred in its successful
defence.  Mr. Birkett appealed to the Ontario Court of Appeal from the
judgment dismissing his claim.  The Ontario Court of Appeal unanimously
dismissed the appeal on June 15, 2004.  The Company was awarded additional
costs in the amount of CDN$20,000.
 
 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”). Astris served notice in November 2003 that its agreements with
Care were terminated, as Care did not meet its funding commitment for the
proposed joint venture which was to manufacture and market Astris fuel cell
systems for vehicular use.
 
 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.
 
 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 three years ending October 31,
2005.  The minimum annual lease payments under the terms of the existing
lease are CDN$33,800 to October 31, 2005, 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 value of the building less depreciation is
CDN$313,195 and the property is CDN$25,080.
 
 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, 2004, 2003 and 2002.
 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 15 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.
 
 10
 The
Company restated its fiscal 2002 Canadian financial statements. The net effect
of the adjustments was an $83,354 increase in the net loss in 2002, to $743,472
and a $78,644 increase in the deficit as of January 1, 2003 to
$3,321,201.
 
 Adjustments
to the financials include the expensing of non-employee stock-based
compensation, accounting for warrants attached to private placements as
contributed surplus and reversal of a previously recorded $315,287 advance from
related parties, first recorded in 1995 as a liability. In 2003, the Company
began expensing all employee stock-based compensation.
 
 The
auditors’ reports 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.
 
 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.
 
 A.
 OPERATING RESULTS.
 
 The
financial statements included in this report are stated in Canadian
dollars.
 
 In 2004,
revenue from the sale of fuel cells and related products and contract work was
$88,798 compared with $67,870 in 2003 and compared with $180,168 in 2002. The
increase was due to the sale of the Company’s first E8 generator. Sales of fuel
cells and related products to parties in 2004 amounted to $7,508 in Canada and
$81,290 internationally; 2003 amounted to $7,008 in Canada and $60,862
internationally; in 2002, sales amounted to $591 in Canada, and $179,577
internationally.
 
 AEC
accounted for a majority of the sales. Throughout its history, the Company's
expenses have varied based upon the amount of funds available to the Company.
 
 Expenses
totaled $3,551,015 in 2004, compared with an amount of $2,274,839 in 2003, and
compared with a restated amount of $800,822 in 2002.
 The main
increases were in general and administrative expenses.
 
 General
and administrative expenses were significantly higher at $1,943,799 in 2004
compared with $880,585 in 2003 and compared with a restated $332,831 in 2002.
 This reflects mainly the expensing of employee stock-based compensation,
additions to management, higher financial consulting fees to raise additional
funding and the hiring of additional administrative staff to support the growth
of the Company.
 
 Professional
fees were $243,076 compared with $145,100 in 2003 and compared with restated
$254,487 in 2002, reflecting the Company’s increase in corporate activity, legal
activity, accounting and compliance activity.
 
 The
Company reported a net loss of $3,462,257 (a loss of $0.16 per share basic and
diluted) in 2004, $2,206,969 (a loss of $0.12 per share basic and diluted) in
2003, compared with a restated loss of $743,472 ($0.053 per share basic and
diluted) in 2002.  The increase in the loss primarily reflects increased
expenses as the Company ramps up pilot production.
 
 B.
 LIQUIDITY AND CAPITAL RESOURCES.
 
 The
Company had an operating cash flow deficit of $2,002,906 in 2004, compared with
an operating cash flow deficit of $1,156,031 in 2003, and compared with a
restated operating cash flow deficit of $380,285 in 2002. The company invested
$16,807 in plant and equipment in Mississauga, advanced $700,000 to Astris
s.r.o. to build the pilot production facility and incurred $48,190 in
pre-acquisition costs in 2004. Expenses were offset by financings through
private placements totaling $2,076,041 for a net decrease in cash at year end of
$169,434, resulting in cash at year end of $178,351, providing the Company with
2 months operating capital at current burn rates.
 
 At year
end, the Company had $509,124 of assets, and a shareholders’ equity of $253,294
compared to a shareholders’ deficiency of $135,975 in 2003 and compared to a
shareholders’ equity of $135,620 in 2002.
 
 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 2004 amounted to $199,586
compared to nil in 2003 and 216,608 in 2002.
 
 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
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. During 2002, the Company raised $628,631 through private
placements of shares and warrants.
 
 Subsequent
to the year end, the Company engaged the services of investment banker Fraser
Mackenzie to raise capital. These services are provided on an exclusive basis. 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.
 
 11
 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.
 
 C.
 PROSPECTS
 
 Currently
management is in discussions with a number of parties that are interested in
becoming customers and/or joint venture partners.
 
 In August
2003, the Company announced it had signed a letter of intent (LOI) with
Alternate Energy Corporation (AEC), a Nevada based corporation to form a joint
venture.  The proposed joint venture planned to combine the Company’s fuel
cell and hydrogen technologies to produce and sell complete back up stationary
electric power systems for household and business markets.
 
 In May
2004, a value-added reseller agreement was signed between the two companies.
 AEC will act as a value-added reseller for Astris generators. All products
that include any part of Astris technology will be appropriately identified with
Astris logos or trademarks.  Astris will provide necessary publicity
material and training to AEC representatives as required.  In the event any
intellectual property is created as a result of this agreement, the property
created with respect to Astris generator will be owned by Astris and property
created with respect to AEC hydrogen generator will be owned by AEC. Any other
intellectual property will be the owned by the creator. In December 2004, the
Company sold the first E8 generator to AEC under the terms of the reseller
agreement.
 
 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. As well, El.Ma. specializes in research and advancement of
manufacturing processes, an expertise applicable to Astris’ current AFC
production line initiative.
 
 Subsequent
to year end the Company announced that it has signed a 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.
 
 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.
 
 
 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
 
 
 12
 In
December 2003, the Company cleared its POWERSTACKTM MC250 power module for pilot
production commencing in 2004, and unveiled its 2.4 kW model E8 portable power
generator which was co-financed by the Czech Republic.
 
 
 CONTRACTUAL
OBLIGATIONS
 
 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 1, 2005 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
    65
    President,
      Chief Executive Officer and Director
    1996Arthur
      Laudenslager (1)
    78
    Director
    2003Anthony
      Durkacz
    29
    Vice
      President Finance
    2003H.
      David Ramm
    53
    Managing
      Director
    2004Brian
      Clewes (1) (2)
    46
    Director
    2004Michael
      Liik (2)
    45
    Director
    2004Peter
      Nor
    34
    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.
 
 H. David
Ramm **,** MBA, is
a widely experienced corporate executive in the field of alternate energy
systems. He was formerly Chairman and CEO of International Fuel Cells (now UTC
Fuel Cells, a division of United Technologies Corporation), Managing Director of
Enron's renewable energy business and former President and CEO and Director of
Integrated Electrical Services (a Fortune 1000 firm). Under Mr. Ramm’s
leadership, UTC developed the first-ever commercialized fuel cell, a 200kW
phosphoric acid fuel cell power plant sold under warranty as the power source of
back-up generators for mission critical applications. The Company hired H. David
Ramm **** as
Executive Vice President, heading up business development. On October 22, 2004
his position changed to managing director, his focus still maintained on
business development.
 
 Brian D.
Clewes is a twenty-year veteran of the insurance industry, he is currently a
principal 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 successful 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 a professional engineer with solid 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
is a direct family relationship between Jiri Nor and Peter Nor.  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.
 
 13
 B.
 COMPENSATION
 
 For the
2004 fiscal year, the Company paid compensation for salaries of CDN$186,496 in
cash.  Macnor Corp. received CDN$123,996 for the services of Mr. Jiri Nor
and Mr. Peter Nor, Mr. Ramm received CDN$nil and Fortius received CDN$62,500.
 In addition, the Company issued Common Shares at market value in lieu of
cash to its Executive Officers for services rendered to the Company and not paid
in cash. (See below).
 
 For the
2003 fiscal year, the Company paid compensation for salary of CDN$113,998 in
cash.  Macnor Corp. received CDN$103,998, Mr. Emerson received CDN$nil and
Fortius received CDN$10,000.  In addition, the Company issued Common Shares
at market value in lieu of cash to its Executive Officers for services rendered
to the Company and not paid in cash. (See below).
 
 For
the 2002 fiscal year, the Company paid compensation for salary of CDN$36,000 in
cash. Macnor Corp. received CDN$36,000 and Mr. Emerson received CDN$nil. In
addition, the Company issued Common Shares at market value in lieu of cash to
its Executive Officers for services rendered to the Company and not paid in
cash. (See below).
 
 There
does not currently exist any compensation arrangement for any of the Directors
except for Michael Liik, nor does the Company have any pension, retirement or
similar plan for its Executive Officers or Directors. Michael Liik is
compensated $8,333 per month billed through Liikfam Holdings Inc. for financial
consulting services.
 
 An
executive compensation committee was appointed in January 2005 to study and
determine appropriate levels of compensation and to structure employment
agreements for officers. The compensation committee will also determine
appropriate levels of compensation for Board members in the near
future.
 
 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.  All features of the plan remain unchanged.
 
 The
following table outlines the options and warrants that are outstanding as of
April 1, 2004 of the directors and senior management of the
Company:
 
 **Name**
    **Number
      of Shares**
    **Exercise
      Price**
    **Expiry**----
    ----------------
    --------------
    ------Jiri
      Nor
    50,000
    US$0.505
    08/15/05Jiri
      Nor
    300,000
    US$0.24
    11/12/06Michael
      Liik (1)
    500,000
    US$0.36
    12/11/09Liikfam
      Holdings Inc. (2)
    500,000
    US$0.37
    12/09/07Peter
      Nor
    100,000
    US$0.36
    12/06/09Anthony
      Durkacz
    112,500
    US$0.50
    04/24/05Anthony
      Durkacz
    250,000
    US$0.20
    07/22/07H.
      David Ramm
    250,000
    US$0.50
    09/09/08
 
 (1) The
option becomes effective only once certain financing conditions are
met.
 (2) The
warrant becomes effective only once certain financing conditions are
met
 
 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
2005.
 
 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.
 
 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 one managing director, four Officers and eight-teen other
employees, including full-time lab technicians, a bookkeeper, and two part-time
technical experts. The President is also the General Manager of the current
projects on a full-time basis. 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 executive assistants are responsible for reception and other
details of general office administration, including assisting the executives.
 The present employees are not represented by a labor union. The Company
considers its relationship with its employees to be satisfactory.
 
 14
 E.
 SHARE OWNERSHIP.
 
 The
following table lists, as of April 1, 2005, the beneficial share holdings 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
    Amount
      and Nature
      of
      Beneficial Owner
    Percent
      of
      Class----
    -------------------
    --------Jiri
      K. Nor (1)
    7,596,884
    23.96%Brian
      Clewes
    100,390
    0.31%Arthur
      Laudenslager (2)
    102,430
    0.32%Michael
      Liik
    0
    0.00%Anthony
      Durkacz (3)
    279,670
    0.88%H.
      David Ramm
    60,945
    0.19%Peter
      Nor
    0
    0.00%All
      Executive Officers and Directors as a group
    8,140,319
    25.68%
 
 ---------------------------------------------------------------------------
 
 (1)
 Includes (i) 117,500 Common Shares held by Jiri K. Nor and (ii) 7,479,384
Common Shares held by Macnor Corp.
 
 (2)
 Includes (i) 95,430 Common Shares held by Arthur Laudenslager and (ii)
7,000 Common Shares held by First Energy Advisors.
 
 (3)
 Includes (i) 98,100 Common Shares by Anthony Durkacz and (ii) 181,570
Common Shares by Fortius Research and Trading Corp.
 
 ITEM
7.
 MAJOR
SHAREHOLDERS AND RELATED AND NON-RELATED PARTY TRANSACTIONS.
 
 A. MAJOR
SHAREHOLDERS.
 
 The
following table lists, as of April 1, 2005, 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                              Amount
and Nature          
Percent
 of Beneficial Owner           
of Class
 ----------------------------------------------------------------------
 Jiri
K. Nor (1)
                      7,596,884      
                
23.96%
 ----------------------------------------------------------------------
 
 (1)
 Includes (i) 117,500 Common Shares held by Jiri K. Nor and (ii) 7,479,384
Common Shares held by Macnor Corp.
 
 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.
 
 Subsequent
to the year end, effective January 2, 2005, the Company acquired the remaining
outstanding shares of its foreign affiliate in the Czech Republic, Astris s.r.o.
The aggregate purchase price was CDN$2,209,000 compensated by issuing 5,000,000
common shares of the Company for CDN$1,955,000 and 5,000,000 warrants for
CDN$254,000. 2,500,000 common shares will be held in escrow for one year until
January 2, 2006. Each warrant entitles the holder to one common share
exercisable as follows:
 
 2,000,000
warrants at CDN$0.90; 2,000,000 warrants at CDN$1.10 and 1,000,000 warrants at
CDN$1.30 expiring on January 27, 2008. The transaction closed on January 27,
2005.
 
 On March
27, 2002, the Company issued 363,225 shares of common stock to settle
obligations owing by the Company to certain directors and/or officers and
consultants of the Company.  The Company approved the issuance of the
following shares at a price of US$0.20 per share:
 
 Director and officer
    51,800 sharesCompany
      controlled by a directorand
      officer
    164,125 sharesDirector
    25,750 sharesFormer
      director
    77,800 sharesDirector and officer
    43,750 shares
 15
 On July
2, 2002, the Company issued 172,775 shares of common stock to settle obligations
owing by the Company to certain directors and/or officers and consultants of the
Company. The Company approved the issuance of the following shares at a price of
US$0.20 per share:
 
 Director and officer
    74,000 sharesCompany controlled by a
      directorand
      officer
    98,775 shares
 
 On
October 18, 2002, the Company issued 121,925 shares of common stock to settle
obligations owing by the Company to certain directors and/or officers and
consultants of the Company. The Company approved the issuance of the following
shares at a price of US$0.20 per share:
 
 Director and officer
    23,625 sharesCompany controlled by a directorand
      officer
    37,800 sharesDirector and officer
    60,500 shares
 
 On
January 10, 2003, the Company issued 192,685 shares of common stock to settle
obligations owing by the Company to certain directors and/or officers and
consultants that provided services or benefits between October and December 2002
to the Company. The following issuance of shares was approved at a price of
US$0.29 per share:
 
 Company
      controlled by a directorand
      officer
    26,775
      sharesDirector and officer
    99,810 sharesCompany
      controlled by a directorand
      officer
    20,600
      sharesDirector
    45,500 shares
 
 On
May 8, 2003, the Company issued 103,290 shares of common stock to settle
obligations owing by the Company to certain directors and/or officers and
consultants of the Company through the issuance of common shares of stock in the
Company.  The following were provided compensation for services as noted at
a price of US$0.56 per share:
  Company
      controlled by a directorand
      officer
    14,640 sharesDirector and officer
    58,160 sharesCompany
      controlled by a directorand
      officer
    30,490
shares
 
 On July
16, 2003, the Company issued 63,700 shares of common stock to settle obligations
owing by the Company to certain directors and/or officers and consultants of the
Company through the issuance of common shares of stock in the Company.  The
following were provided compensation for services as noted at a price of US$0.53
per share:
 
 Company
      controlled by a directorand
      officer
    18,200 sharesDirector and officer
    10,500 sharesCompany
      controlled by a directorand
      officer
    35,000
shares
 
 On August
11, 2003 the Company issued 19,750 shares of common stock as a severance package
at a price of US$0.51 per share to a senior executive.
 
 On
October 28, 2003, the Company issued 43,900 shares of common stock to settle
obligations owing by the Company to certain directors and/or officers and
consultants of the Company through the issuance of common shares of stock in the
Company.  The following were provided compensation for services as noted at
a price of US$0.55 per share:
 
 Company
      controlled by a directorand
      officer
    20,200 sharesOfficer
    3,500 sharesCompany
      controlled by directorand
      officer
    20,200
shares
 
 On
December 16, 2003, the Company issued 35,000 shares of common stock to settle
obligations owing by the Company to certain directors and/or officers and
consultants of the Company through the issuance of common shares of stock in the
Company.  The following were provided compensation for services as noted at
a price of US$0.43 per share:
 
 company
      controlled by a director and officer
    35,000
      shares
 
 During
the four quarters of 2004, the company issued shares of common stock to settle
obligations owing by the Company to certain directors and/or officers of the
Company as follows:
 
  First
      Quarter
    Second
      Quarter
    Third
      Quarter
    Fourth
      Quarter
    AnnualCompany
      Controlled by a Director & Officer
    17,565
    28,167
    58,033
    58,254
    162,019Directors
    66,318
    64,138
    282,085
    105,659
    518,200Officers
    
    22,819
    34,822
    46,603
    104,244Director
      and Officer
    17,565
    
    29,765
    48,550
    95,880Total
    101,448
    115,124
    404,705
    259,066
    880,343
 These
shares were issued at prices ranging from $US 0.61 to 0.30
 
 16
 As
of September 13, 1999, the Company entered into a royalty arrangement with
Macnor Corp., an Ontario corporation ("Macnor"), which is wholly-owned by Jiri
K. Nor, President, Chief Executive Officer and Director of the Company. This
arrangement called for Macnor to sell certain fuel cell products, developed and
manufactured by Astris s.r.o. (small fuel cells), through a website and mail
order opened and operated by Macnor. Macnor was to pay an annual royalty equal
to five percent (5%) from all sales of such goods, based upon gross revenues. In
the year 2002 the Company recognized revenues of CDN$2,476 related to this
arrangement and CDN$837 in the year 2003. This agreement has been terminated as
of May 31, 2003.
 
 Peter
K. Nor is a director and secretary of Macnor Corp.
 
 Anthony
Durkacz is President and CEO of Fortius Research & Trading. Fortius is 100%
owned by Anthony Durkacz.
 
 Arthur
Laudenslager is Vice President of First Energy Advisors.  First Energy
Adivsor is 33.33% owned by Arthur Laudenslager.
 
 Michael
Liik is President of Liikfam Holdings Inc. Liikfam Holdings is 100% owned by
Michael Liik.
 
 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 was repaid in full by the issuance of
260,175 common shares of the Company.
 
 The
management of the Company believes that each of the aforementioned transactions
was on terms as fair to the Company as any which could have been made with
unaffiliated parties.
 
 C.
NON-RELATED PARTY COMMON STOCK TRANSACTIONS.
 
 On March
27, 2002, the Company agreed to settle obligations owing to certain individuals
and companies.  The following shares were issued at a price of US$0.20 per
share:
 
 Non-related
parties    79,000
shares
 
 On July
2, 2002, the Company agreed to settle obligations owing to certain individuals
and companies.  The following shares were issued at a price of US$0.20 per
share:
 
 Non-related
parties   131,000
shares
 
 For
services provided between July and September 2002, the Company issued 135,100
shares of common stock to settle obligations owing to certain individuals and
companies.  The following shares were issued at a price between US$0.20 and
US$0.25 per share:
 
 Non-related
parties   135,100
shares
 
 For
services provided between October and December 2002, the Company issued 160,950
shares of common stock to settle obligations owing to certain individuals and
companies.  The following shares were issued at a price between US$0.23 and
US$0.29 per share:
 
 Non-related
parties   160,950
shares
 
 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
 
 During
the four quarters of 2004, the company issued shares of common stock to settle
obligations owing by the Company to certain directors and/or officers of the
Company as follows:
  17
  First
      Quarter
    Second
      Quarter
    Third
      Quarter
    Fourth
      Quarter
    AnnualTotal
      Non-Related Parties
    306,040
    136,092
    565,535
    721,205
    1,728,872
 
 
 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 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.  In 2002, the Company
had export sales in the amount of $179,577.
 
 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 1, 2005, the Company had approximately 277 stockholders of record for
its Common Shares and 31,702,901 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 1, 2005,
the shareholder list showed 275 registered shareholders holding a total of
10,482,227 Common Shares, 5,583,797 Common Shares in the name of Cede & Co
and 15,636,877 Common shares in the name of CDS & Co (the depository in
Canada).
 
 The
Common Shares were previously traded in Canada on the Canadian Dealing Network
(CDNX), but presently has an inactive listing on the CDNX. The Company would
seek to reactivate such listing once it meets the initial listing requirements
of the TSX Venture Exchange (TSX.V). The Company does not presently meet the
following requirements to qualify to list on the TSX.V: net tangible assets of
CDN$750,000, unallocated funds of CDN$100,000 and/or the required amount of
working capital to cover the Company's administrative expenses for 12 months.
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:
 
 
 **2003**
    ****
    **High**
    ****
    **Low**First
    
    $
    .90
    
    $
    .42Second
    
    
    .65
    
    
    .42Third
    
    
    1.11
    
    
    .35Fourth
    
    
    .87
    
    
    .40**2004**
    ****
    ****
    **High**
    ****
    ****
    **Low**First
    
    $
    .61
    
    $
    .49Second
    
    
    .53
    
    
    .39Third
    
    
    .57
    
    
    .32Fourth
    
    
    .51
    
    
    .37
 
 The
following table sets forth the high and low market prices for each of the past 3
months:
 
 **Month
      2005**
    
    **High,**
      **US$
      /share**
    
    **Low,**
      **US$
      /share**January
    
    $
    .38
    
    $
    .31February
    
    
    .40
    
    
    .26March
    
    
    .32
    
    
    .23
 18
 
 ITEM 10.
ADDITIONAL INFORMATION.
 
 A.
 SHARE CAPITAL.
 
 Not
Applicable.
 
 B.
 MEMORANDUM AND ARTICLES OF ASSOCIATION.
 
 ORGANIZATION.
 
 The
Company was incorporated in the Province of Ontario, Canada.
 
 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.
 
 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.
 
 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.
 
 19
 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
 
 (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.
 
 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.
 
 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.
 
 20
 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.
 
 There may
be tax consequences if the Company is considered a passive foreign investment
company.
 
 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.
 
 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.
 
 21
 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 450 Fifth Street, N.W., 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
 
 EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
 
 The
Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures" (as defined in the Securities Exchange Act of 1934
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as
of December 31, 2004 (the "Evaluation Date"). Based on that evaluation,
these officers have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were effective to ensure that material
information relating to the Company and the Company's consolidated subsidiaries
would be made known to them by others within those entities.
 
 It should
be noted that while the Company's Chief Executive Officer and Chief Financial
Officer believe that the Company's disclosure controls and procedures provide a
reasonable level of assurance that they are effective, they do not expect that
the Company's disclosure controls and procedures or internal control over
financial reporting will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met.
 
 While we
believe our controls provide reasonable assurance regarding the reliability of
our financial reporting and the preparation of financial statements, we have not
yet completed or undergone a Section 404 audit. We are presently reviewing
and testing our material internal control systems, processes and procedures in
compliance with the requirements of Section 404. There can be no assurances
that such a review will not result in the identification of significant control
deficiencies or that our auditors will be able to attest to the adequacy of our
internal controls.
 
 CHANGES
IN INTERNAL CONTROLS
 
 There
were no significant changes in the Company's internal controls or, to the
Company's knowledge, in other factors that could significantly affect the
Company's internal controls subsequent to the Evaluation Date.  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.
 
 22
 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.
 
 C.
 PRINCIPAL
ACCOUNTANT FEES AND SERVICES
 
 For the
year ended 2004 and 2003, the audit fees were CDN$22,000 and CDN$50,000.
 For the year ended 2004 and 2003, the audit-related fees for the principal
accountants were CDN$nil and CDN$nil.  For the year ended 2004 and 2003,
the tax related fees for the principal accountants were CDN$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.
 
 E.
 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, 2004.
 Auditors’
Report for the year ended December 31, 2003.
 Auditors’
Report for the year ended December 31, 2002.
 Consolidated
Balance Sheets for the year ended December 31, 2004, 2003 and 2002.
 Consolidated
Statements of Loss and Deficit for the years ended December 31, 2004, 2003 and
2002.
 Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2003 and
2002.
 Notes to
Consolidated Financial Statements for the year ended December 31, 2004, 2003 and
2002.
 
 ITEM 18.
FINANCIAL STATEMENTS
 
 Not
applicable.
 
 ITEM 19.
EXHIBITS
 
 EXHIBIT
23.1 AUDITORS’ CONSENTS
 
 EXHIBIT
31.1 and 31.2 302 CERTIFICATION
 
 EXHIBIT
32.1 SECTION 906 CERTIFICATION
 
 EXHIBIT
99 CODE OF ETHICS
 23
 
 
 
  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. Nor
 ---------------
 President
and Chief Executive Officer
 Date:
April 29, 2005
 
 
 
 
 
 
 
 
 **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Consolidated
Financial Statements**
 **(Canadian
Dollars)**
 December
31, 2004
   **ASTRIS
ENERGI INC.**
 
 **INDEX**
 
 **December
31, 2004**
 
 ****PAGE****AUDITORS’
      REPORT - DECEMBER 31, 2004 AND DECEMBER 31, 2003**
    R-1**AUDITOR’S
      REPORT - DECEMBER 31, 2002**
    R-2**FINANCIAL
      STATEMENTS**Consolidated
      Balance Sheets - Statement I
    R-3Consolidated
      Statements of Loss and Deficit - Statement II
    R-4Consolidated
      Statements of Cash Flows - Statement III
    R-5**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
    R-6
      - 33**
 
 
 **AUDITORS’
REPORT**
 
 **To
the Directors of**
 **ASTRIS
ENERGI INC.**
 
 We have
audited the consolidated balance sheets of **ASTRIS
ENERGI INC.** as at
December 31, 2004 and 2003 and the consolidated statements of loss and deficit
and cash flows for the years then ended. 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
audit.
 
 We
conducted our audit 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, 2004 and
2003, and the results of its operations and cash flows for the years then ended,
in accordance with Canadian generally accepted accounting
principles.
 
 
 /s/
Danziger & Hochman
 
 **Toronto,
Ontario Chartered Accountants**
 **April
26, 2005**
 
 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 directors dated
April 26, 2005, 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.
 
 
 /s/
Danziger & Hochman
 
 **Toronto,
Ontario Chartered Accountants**
 **April
26, 2005**
 
   R-1
   Auditors’
Report
 To the
Shareholders of Astris Energi Inc.
 
 We have
audited the consolidated balance sheets of Astris Energi Inc. as at December 31,
2002 and 2001 and the consolidated statements of loss and deficit and cash flows
for the years then ended. 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. 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, 2002 and 2001
and the results of its operations and its cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.
 
 /s/
Lugowy Associates
 CHARTERED
ACCOUNTANTS
 Hamilton,
Ontario
 May 25,
2004
 
 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
a company’s ability to continue as a going concern, such as those described in
Note 1 to the consolidated financial statements of the Company and when there is
a correction of an error in the application of accounting principles, such as
those described in Note 3.  Our report to the shareholders dated May 25,
2004, 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.
 
 /s/
Lugowy Associates
 CHARTERED
ACCOUNTANTS
 Hamilton,
Ontario
 May 25,
2004
 
 
 
   R-2
   **ASTRIS
ENERGI INC.** **Statement 
I**
 **(A
Development Stage Company)**
 **Consolidated
Balance Sheets**
 As at
December 31, 2004
 (Canadian
Dollars)
 **2004**
    
    **2003**
    
    **2002**Restated(Note3)**ASSETS****CURRENT**Cash
    
    $
    178,351
    
    $
    347,785
    
    $
    253,938Receivables
    
    
    3,544
    
    
    1,000
    
    
    30,440Prepaid
      expenses and deposits (note 5)
    
    
    10,118
    
    
    37,206
    
    
    149,777Investment
      tax credits refundable
    
    
    199,586
    
    
    -
    
    
    216,608Goods
      and services tax receivable
    
    
    27,387
    
    
    16,120
    
    
    -Other
      assets
    
    
    53,692
    
    
    -
    
    
    -472,678
    
    
    402,111
    
    
    650,763Property,
      plant and equipment (note 4)
    
    
    36,446
    
    
    33,124
    
    
    25,737$
    509,124
    
    $
    435,235
    
    $
    676,500**LIABILITIES****CURRENT**Payables
      and accruals (note 5)
    
    $
    255,830
    
    $
    399,140
    
    $
    420,480Deposit
      on shares (note 7)
    
    
    -
    
    
    72,070
    
    
    -255,830
    
    
    471,210
    
    
    420,480Advances
      from related parties (note 5)
    
    
    -
    
    
    100,000
    
    
    120,400255,830
    
    
    571,210
    
    
    540,880**SHAREHOLDERS’
      EQUITY****SHARE
      CAPITAL**(note
      7)
    
    
    6,227,074
    
    
    3,343,853
    
    
    2,525,239**CONTRIBUTED
      SURPLUS**(note 7)
    
    
    3,016,647
    
    
    2,048,342
    
    
    931,582**DEFICIT**-
      Statement II
    
    
    (8,990,427
    )
    
    (5,528,170
    )
    
    (3,321,201
    )253,294
    
    
    (135,975
    )
    
    135,620$
    509,124
    
    $
    435,235
    
    $
    676,500Description
      of Business and Going Concern (note 1)Commitments
      (note 10)**APPROVED
      ON BEHALF OF THE BOARD**/s/
      Jiri Nor, Director/s/
      Anthony Durkacz, Director
 
   R-3
   **ASTRIS
ENERGI INC.** **Statement
II**
 **(A
Development Stage Company)**
 **Consolidated
Statements of Loss and Deficit**
 For
the Year Ended December 31, 2004
 (Canadian
Dollars)
 **2004**  **2003**  **2002**
 Restated
 (Note
3)
 **REVENUE**(note 5)
    
    $
    88,798
    
    $
    67,870
    
    $
    180,168**EXPENSES**Research
      and development (note 5)
    
    
    1,343,695
    
    
    1,229,184
    
    
    197,488General
      and administrative
    
    
    1,943,799
    
    
    880,585
    
    
    332,831Professional
      fees
    
    
    243,076
    
    
    145,100
    
    
    254,487Interest
      on advance from related parties (note 5)
    
    
    7,000
    
    
    12,000
    
    
    12,000Amortization
    
    
    13,485
    
    
    7,970
    
    
    4,0163,551,055
    
    
    2,274,839
    
    
    800,822**LOSS
      BEFORE THE FOLLOWING**
    
    
    (3,462,257
    )
    
    (2,206,969
    )
    
    (620,654
    )Deferred
      costs written off
    
    
    -
    
    
    -
    
    
    (122,818
    )**LOSS
      FOR THE YEAR**
    
    
    (3,462,257
    )
    
    (2,206,969
    )
    
    (743,472
    )**DEFICIT,
      BEGINNING OF YEAR AS****PREVIOUSLY
      REPORTED**
    
    
    (5,528,170
    )
    
    (3,242,557
    )
    
    (2,582,439
    )Prior
      period adjustments (note 3)
    
    
    -
    
    
    (78,644
    )
    
    4,710**DEFICIT,
      BEGINNING OF YEAR AS****RESTATED**
    
    
    (5,528,170
    )
    
    (3,321,201
    )
    
    (2,577,729
    )**DEFICIT,
      END OF YEAR**
    
    $
    (8,990,427
    )
    $
    (5,528,170
    )
    $
    (3,321,201
    )**LOSS
      PER COMMON SHARE, BASIC****AND
      DILUTED**(note 7)
    
    $
    (0.16
    )
    $
    (0.12
    )
    $
    (0.05
    )
 
 
   R-4
   **ASTRIS
ENERGI INC.** **Statement
III**
 **(A
Development Stage Company)**
 **Consolidated
Statements of Cash Flows**
 For
the Year Ended December 31, 2004
 (Canadian
Dollars)
 **** **2004** **** **2003** **** **2002**
 **** Restated
 (Note
3)
 **OPERATING
      ACTIVITIES******Loss
      for the year
    
    $
      (3,462,257)
    
    $
      (2,206,969)
    
    $
      (743,472)Items
      not requiring cashAmortization
    
    13,485
    
    7,970
    
    4,016Consulting
      and professional fees andpaid
      in capital stock to non-related parties
    
    890,097
    
    136,122
    
    166,801Consulting
      and professional fees andexpenses
      paid in options to non-employees
    
    227,406
    
    131,063
    
    83,354Consulting
      fees and expenses paid incapital
      stock to related parties
    
    460,360
    
    266,247
    
    207,456Stock-based
      compensation to employees
    
    105,962
    
    188,377
    
    -Warrants
      issued to directors
    
    91,655
    
    -
    
    -Deferred
      costs written off
    
    -
    
    -
    
    122,818Net
      change in non-cash working capitalbalances
      related to operations (note 8)
    
    (329,614)
    
    321,159
    
    (221,258)**CASH
      (USED) IN OPERATING ACTIVITIES**
    
    (2,002,906)
    
    (1,156,031)
    
    (380,285)**INVESTING
      ACTIVITIES******Purchase
      of other assets
    
    (53,692)
    
    -
    
    -****Purchase
      of property, plant and equipment
    
    (16,807)
    
    (15,357)
    
    (11,797)(70,499)
    
    (15,357)
    
    (11,797)**FINANCING
      ACTIVITIES******(Decrease)
      increase in advances from relatedparties
    
    (100,000)
    
    -
    
    6,400Deposit
      on shares
    
    (72,070)
    
    72,070
    
    -****Issuance
      of common shares
    
    1,538,874
    
    395,845
    
    171,781****Issuance
      of warrants
    
    537,167
    
    797,320
    
    456,8501,903,971
    
    1,265,235
    
    635,031**NET
      INCREASE (DECREASE) IN CASH****DURING
      THE YEAR**
    
    (169,434)
    
    93,847
    
    242,949**CASH,
      BEGINNING OF YEAR**
    
    
    347,785
    
    
    253,938
    
    
    10,989**CASH,
      END OF YEAR**
    
    $
    178,351
    
    $
    347,785
    
    $
    253,938Supplemental
      disclosureInterest
      paid
    
    $
    -
    
    $
    -
    
    $
    15,000Investment
      tax credits recovered
    
    
    5,820
    
    
    388,499
    
    
    -
 
 
   *{See
accompanying notes.}*
 R-5
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (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.
 
 ***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 $1,984,263 to date on this project as at December 31, 2004
(2003 - $1,127,862).  No revenue has yet been earned from this project and
no amounts have been capitalized or deferred to date.
 
 ***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 $963,897 to date on this project as at December 31, 2004
(2003 - $298,810). Included in revenue is the Company’s first sale of an E8
generator in 2004.
 
 ***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 2004, utilized
$2,002,906 of cash in operations. At December 31, 2004, the Company reported a
deficit of $8,990,427 and continues to expend cash amounts that significantly
exceed revenues.  These conditions cast substantial doubt as to the ability
of the Company to continue in business and meet its obligations as they come
due. Management is considering various alternatives, including possible private
placements and an IPO on the Toronto Venture Stock Exchange to raise capital in
fiscal 2005.  Nevertheless, there is no assurance that these initiatives if
undertaken will be successful.
 
   R-6
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **1.**   **DESCRIPTION
OF BUSINESS AND GOING CONCERN** **** (continued)
 
 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.
 
 
 **2.**  **SIGNIFICANT
ACCOUNTING POLICIES**
 
 ***Basis
of Presentation***
 
 These
consolidated financial statements have been prepared in accordance with Canadian
GAAP and reflect the accounts of the Company and its subsidiary, Astris Inc.,
which was acquired on December 31, 1995.  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.
 
 ***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 useful lives
of these assets, calculated as follows:
 
 Office
furniture and equipment  20%
declining balance
 Leasehold
Improvements  20% straight line per annum
 
 In the
event that the future undiscounted net cash flows relating to these long lived
assets exceed their carrying amounts, they are written down to fair value.
 Such impairment loss is reflected in operations in the year of impairment.
 
   R-7
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **2.**   **SIGNIFICANT
ACCOUNTING POLICIES** (continued)
 
 ***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.
 
 ***Taxes
payable***
 
 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
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.
  R-8
  **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **2.**   **SIGNIFICANT
ACCOUNTING POLICIES** **** (continued)
 
 ***Financial
instruments***
 
 The
      fair value of financial instruments reported in these consolidated
      financial statements approximates book value unless otherwise indicated.
 
 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
and the regular review of their credit limit.
 
 ***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.
 
 ***Investments***
 
 The
Company accounts for its investments in affiliated companies over which it has
significant influence on the equity basis of accounting, whereby the investments
are initially recorded at cost, and subsequently adjusted to recognize the
Company’s share of earnings or losses of the investee companies and reduced by
dividends received.
 
   R-9
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **2.**   **SIGNIFICANT
ACCOUNTING POLICIES** **** (continued)
 
 ***Foreign
currency translation***
 
 The
      reporting currency of the Company is the Canadian dollar.  Monetary
      assets and liabilities denominated in currencies other than the Canadian
      dollar are translated at the rates of exchange in effect at the end of the
      year.  Non-monetary assets and liabilities are translated at historic
      rates of exchange.  Revenues and expense items denominated in
      currencies other than the Canadian dollar are translated into Canadian
      dollars at the average rates of exchange for the year.
 
 ***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.  The treasury stock method is used to determine the incremental
number of shares that would have been outstanding had the Company used proceeds
from the exercise of options and warrants to acquire common shares.
 
 
 **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 atJanuary
      1, 2002
    
    $
    342,899
    
    $
    -
    
    $
    12,000
    
    $
    (12,776
    )
    $
    (31,546
    )
    $
    (315,287
    )
    $
    4,710Increase
      (decrease)in
      loss for the yearended
      December31,
      2002
    
    
    83,354
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    83,354Increase
      (decrease)in
      deficit as atJanuary
      1, 2003
    
    $
    426,253
    
    $
    -
    
    $
    12,000
    
    $
    (12,776
    )
    $
    (31,546
    )
    $
    (315,287
    )
    $
    78,644
 
   R-10
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **3.**   **PRIOR
PERIOD ADJUSTMENTS** **** (continued)
 
 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.
 
 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.
 
   R-11
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **3.**   **PRIOR
PERIOD ADJUSTMENTS** **** (continued)
 
 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**
 
 **2004****2004**
    
    **Net****2004**
    
    
    **Accumulated**
    
    
    **Book****Cost**
    
    
    **Amortization**
    
    
    **Value**Office
      furniture and equipment
    
    $
    54,226
    
    $
    23,277
    
    $
    30,949Leasehold
      improvements
    
    
    10,939
    
    
    5,442
    
    
    5,497$
    65,165
    
    $
    28,719
    
    $
    36,446
 
 
 **2003****2003**
    
    
    **Net****2003**
    
    
    **Accumulated**
    
    
    **Book****Cost**
    
    
    
    
    
    **Amortization**
    
    
    **Value**Furniture,
      fixtures and equipment
    
    $
    37,419
    
    $
    11,980
    
    $
    25,439Leasehold
      improvements
    
    
    10,939
    
    
    3,254
    
    
    7,685$
    48,358
    
    $
    15,234
    
    $
    33,124
 
 
 **2002****2002**
    
    
    **Net****2002**
    
    
    **Accumulated**
    
    
    **Book****Cost**
    
    
    
    
    
    **Amortization**
    
    
    **Value**Furniture,
      fixtures and equipment
    
    $
    25,800
    
    $
    5,823
    
    $
    19,977Leasehold
      improvements
    
    
    7,200
    
    
    1,440
    
    
    5,760$
    33,000
    
    $
    7,263
    
    $
    25,737
 
   R-12
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **5.**  **RELATED
PARTY TRANSACTIONS AND BALANCES**
 
 The
      Company, in the course of its regular business activities, has routine
      transactions with affiliates.  These transactions are recorded at the
      exchange amount.
 
 Advances
from related parties at December 31, are summarized as follows:
 
 **2004**
    
    **2003**
    
    **2002**Advances
      from directors
    
    $
    -
    
    $
    -
    
    $
    20,400Debenture
      due to shareholders
    
    
    -
    
    
    100,000
    
    
    100,000-
    
    $
    100,000
    
    $
    120,400
 
 ***Debenture
due to shareholders***
 
 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. During the year the debenture and interest accrued was
      completely paid to the shareholders by the issuance of 260,175 common
      shares. The shareholders released the security on the
      liability.
 
 Astris
s.r.o (“s.r.o.”)
 
 The
      Company has a 30% ownership interest in s.r.o., a Czech company, in which
      the remaining 70% is owned by a company controlled by a director, officer
      and shareholder.  The Company’s 30% interest in losses of s.r.o. has
      been applied to its investment.  As the Company’s share of losses is
      in excess of the original investment, the investment was written down to
      nil in 1996.
 
 The
Company has not recorded any further share of the losses of s.r.o. over and
above the original investment as the Company has not guaranteed the obligations
of s.r.o.
 
 The
following summarizes the cumulative unrecognized losses of s.r.o. as a result of
this treatment:
 
 **2004**
    
    
    **2003**
    
    
    **2002**Unrecognized
      income during the year
    
    $
    22,992
    
    $
    6,924
    
    $
    6,331Unrecognized
      cumulative profits (losses)
    
    $
    (1,648
    )
    $
    (24,640
    )
    $
    (31,564
    )
 
 The
      Company regularly subcontracts portions of its research and development
      activities to s.r.o. In addition, the Company sells its products to
      s.r.o., as required.
 
   R-13
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **5**   **RELATED
PARTY TRANSACTIONS AND BALANCES** **** (continued)
 
 As
      at December 31:
    
    
    **2004**
    
    
    **2003**
    
    
    **2002**Balance
      of funds paid included in prepaidexpenses
      and deposits
    
    $
    -
    
    $
    30,000
    
    $
    146,074Included
      in payables and accruals
    
    $
    588
    
    $
    137,480
    
    $
    123,919Year
      ended December 31:Total
      funds advanced
    
    $
    700,000
    
    $
    416,000
    
    $
    23,000Sales
    
    $
    -
    
    $
    45,901
    
    $
    140,575Purchases
      included in research and development
    
    $
    563,108
    
    $
    729,800
    
    $
    89,159
 
 The
      large amount of funds advanced to sro in 2004 were for operating expenses,
      the purchase of land and a building as well as equipment for the new
      electrode production facility.
 
 In
addition, payables and accruals as at December 31, 2004 include the following
amounts:
 
 $13,826
owing to a company controlled by a director, officer and shareholder for
consulting
 fees
(2003 - $24,266; 2002- $55,061);
 
 $17,441,
      $1,043, and $nil owing to three directors, officers and shareholders for
      consulting fees or bonuses (2003 - $29,735, $26,750 and $8,125; 2002 -
      $45,900, $9,231 and $nil);
 
 $nil
      accrued interest owing to each of the three shareholders holding the
      debenture payable (2003 - $8,400, $8,400, $4,200; 2002 - $3,600, $3,600
      and $1,800).
 
 During
2004, the following amounts were expensed as consulting fees to directors and
officers:
 
 Company
      controlled by a director,officer
      and shareholder
    $166,279
    (2003
      - $143,331;
    2002
      - $120,000)Director
      and shareholders
    $
      80,875
    (2003
      - $115,080;
    2002
      - $ 80,299)Company
      controlled by a director,officer
      and shareholder
    $100,000
    (2003
      - $100,000;
    2002
      - $ 28,461)Officer
      and shareholder
    $
      93,455
    (2003
      - $ 10,279;
    2002
      - $nil)
 
   R-14
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **5.**  **RELATED
PARTY TRANSACTIONS AND BALANCES** **** (continued)
 
 During
2004, the following amounts were expensed as interest to
shareholders:
 
 Director,
      officer and shareholder
    $2,800
    (2003
      - $4,800;
    2002
      - $4,800)Former
      director and shareholder
    $2,800
    (2003
      - $4,800;
    2002
      - $4,800)Director
      and shareholder
    $1,400
    (2003
      - $2,400;
    2002
      - $2,400)
 
 On May
26, 2003 the Board of Directors approved a compensation package for a senior
executive whereby he will receive commission on funds raised through First
Energy Advisors. The commission schedule was 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, the
following amounts were paid to the Senior Executive: $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.
 
 **6.**
    **INCOME
      TAXES**
 
 The
      Company has tax non-capital loss carryforwards of approximately
      $5,449,000. If unused, the tax losses will expire as
    follows:
 
 2005
    $6,0002006
    61,0002007
    188,0002008
    294,0002009
    323,0002010
    1,734,0002014
    2,843,000
 
 In
      addition, the Company has undeductible scientific research and development
      expenditures amounting to $1,520,417, which have no
  expiry.
 
 Investment
      tax credits recorded during the year as a reduction of expenses aggregated
      to $203,626 (2003 - $172,959).
 
   R-15
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **6.**
    **INCOME
      TAXES**(continued)
 
 The
      Company’s computation of income tax recovery is as
  follows:
 ****2004**
    
    
    **2003**
    
    
    **2002**Loss
      before income taxes
    
    $
    (3,462,257
    )
    $
    (2,206,969
    )
    $
    (743,472
    )Statutory
      income tax rate
    
    
    36.12
    %
    
    35.12
    %
    
    33.62
    %Income
      tax recovery at statutory rate
    
    
    (1,250,567
    )
    
    (775,088
    )
    
    (287,129
    )Non-deductible
      expenses
    
    
    125,285
    
    
    114,832
    
    
    33,742Effect
      of income tax rate changes on futureincome
      taxes
    
    
    -
    
    
    59,360
    
    
    19,547Change
      in valuation allowance and other items
    
    
    1,125,282
    
    
    600,896
    
    
    233,840Income
      tax expense
    
    $
    -
    
    $
    -
    
    $
    -Components
      of the Company’s net future income tax assets are:Non
      capital losses ($5,449,000 X 0.3612)
    
    $
    1,968,179
    
    $
    982,658
    
    $
    354,532Scientific
      research and development expense($1,520,417
      X 0.3612)
    
    
    549,175
    
    
    273,234
    
    
    300,464Valuation
      allowance
    
    
    (2,517,354
    )
    
    (1,255,892
    )
    
    (654,996
    )Net
      future income tax asset
    
    $
    -
    
    $
    -
    
    $
    -**
 ****
 ****
 **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
 
 
 
 
   R-16
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **6.**
    **SHARE
      CAPITAL AND CONTRIBUTED SURPLUS**(continued)
 
 **Issued
and outstanding**
 
 **2004**
    **2003**
    **2002****Common
      Shares**
    **Common
      Shares**
    **Common
      Shares**Issued
      at January 1
    19,230,425
    $3,343,853
    16,106,403
    $2,525,239
    12,936,178
    $1,979,201Issued
      during year-in
      exchange forConsulting
      andProfessional
      feesand
      expenses fromnon-related
      parties
    1,728,872
    890,096
    209,082
    136,122
    506,050
    166,801-
      in exchange forConsulting
      fees
      andexpenses
      fromrelated
      parties
    586,592
    332,360
    412,825
    266,247
    657,925
    207,456-
      In repayment offromdirectors
    293,751
    128,000
    45,500
    20,400
    -
    --
      for cash
    4,476,911
    1,532,765
    2,456,615
    395,845
    2,006,250
    171,7817,086,126
    2,883,221
    3,124,022
    818,614
    3,170,225
    546,038Balance
      as atDecember
      31
    26,316,551
    $6,227,074
    19,230,425
    $3,343,853
    16,106,403
    $2,525,239
 
   R-17
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 The
      weighted average number of shares outstanding during 2004 is 21,106,312
      (2003 - 17,818,830; 2002 - 14,076,243). These figures are used for
      purposes of calculation of the loss per share. No effect has been given to
      the potential exercise of stock options and warrants in the calculations
      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.
 
 b)
    **Common
      stock issued to settle obligations of the Company to Directors, Officers
      and Consultants of the Company**
 
 On
      March 27, 2002, the Company issued 442,225 shares of common stock to
      settle obligations owing by the Company to certain directors and/or
      officers and consultants of the Company. The following shares were issued
      April 2, 2002 pursuant to the Directors’ Resolution dated March 27, 2002,
      at a price of $0.20 (U.S.) per share:
 
 Director
      and officer
    51,800sharesCompany
      controlled by a director and office
    164,125sharesDirector
    25,750sharesFormer
      director
    77,800sharesDirector
      and officer
    43,750sharesNon-related
      parties
    79,000shares
 
 On
      July 2, 2002, the Company issued 303,775 shares of common stock to settle
      obligations owing by the Company to certain directors and/or officers and
      consultants of the Company. The Company approved the issuance of the
      following shares at a price of $0.20 (U.S.) per share:
 
 Director
      and officer
    74,000sharesCompany
      controlled by a director and officer
    98,775Non-related
      parties
    131,000shares
 
 On
      October 18, 2002, the Company issued 121,925 shares of common stock to
      settle obligations owing by the Company to certain directors and/or
      officers and consultants of the Company. The Company approved the issuance
      of the following shares at a price of $0.20 (U.S.) per share:
 
   R-18
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUED SURPLUS** (continued)
 
 Director
      and officer
    23,625sharesCompany
      controlled by a director and officer
    37,800sharesDirector
      and officer
    60,500shares
 
 For
      services provided between July and September 2002, the Company issued
      135,100 shares of common stock to settle obligations owing to certain
      individuals and companies. The following shares were issued at a price
      between $0.20 (U.S.) and $0.25 (U.S.) per share:
 
 Non-related
      parties
    135,100
      shares
 
 For
      services provided between October and December 2002, the Company issued
      160,950 shares of common stock to settle obligations owing to certain
      individuals and companies. The following shares were issued at a price
      between $0.23 (U.S.) and $0.29 (U.S.) per share:
 
 Non-related
      parties
    160,950
      shares
 
 On
      January 10, 2003, the Company issued 267,685 shares of common stock to
      settle obligations owing by the Company to certain directors and/or
      officers and consultants that provided services or benefits between
      October and December 2002 to the Company. The following issuance of shares
      was approved at a price of $0.29 (U.S.) per share:
 
 Company
      controlled by a director and officer
    26,775sharesDirector
      and officer
    99,810sharesCompany
      controlled by a director and officer
    20,600sharesDirector
    45,500sharesNon-related
      parties
    75,000shares
 
 On
      May 8, 2003, the Company issued 133,942 shares of common stock to settle
      obligations owing by the Company to certain directors and/or officers and
      consultants of the Company through the issuance of common shares of stock
      in the Company The following were provided compensation for services as
      noted at a price of $0.56 (U.S.) per share:
 
 Company
      controlled by a director and officer
    14,640sharesDirector
      and officer
    58,160sharesCompany
      controlled by a director and officer
    30,490sharesNon-related
      parties
    30,652shares
 
   R-19
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 On
      July 16, 2003, the Company issued 112,170 shares of common stock to settle
      obligations owing by the Company to certain directors and/or officers and
      consultants of the Company through the issuance of common shares of stock
      in the Company The following were provided compensation for services as
      noted at a price of $0.53 (U.S.) per share:
 
 Company
      controlled by a director and office
    18,200sharesDirector
      and officer
    10,500sharesCompany
      controlled by a director and officer
    35,000sharesNon-related
      parties
    48,470shares
 
 On
      August 11, 2003, the Company issued 19,750 shares of common stock as a
      severance package at a price of $0.51 (U.S.) per share to a senior
      executive.
 
 On
      October 28, 2003, the Company issued 87,860 shares of common stock to
      settle obligations owing by the Company to certain directors and/or
      officers and consultants of the Company through the issuance of common
      shares of stock in the Company. The following were provided compensation
      for services as noted at a price of $0.55 (U.S.) per
  share:
 
 Company
      controlled by a director and officer
    20,200sharesDirector
      and officer
    3,500sharesCompany
      controlled by a director and officer
    20,200sharesNon-related
      parties
    43,960shares
 
 On
      December 16, 2003, the Company issued 46,000 shares of common stock to
      settle obligations owing by the Company to certain directors and/or
      officers and consultants of the Company through the issuance of common
      shares of stock in the Company. The following were provided compensation
      for services as noted at a price of $0.43 (U.S.) per
  share:
 
 Company
      controlled by a director and officer
    35,000sharesNon-related
      parties
    11,000shares
 During
      the four quarters of 2004, the Company issued shares of common stock to
      settle obligations owing by the Company to certain directors and/or
      officers and consultants of the Company as
follows:
 
 
 
 
 
 
   R-20
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 First
    Second
    Third
    FourthQuarter
    Quarter
    Quarter
    Quarter
    AnnualCompany
      controlled by aDirector
      and Officer
    17,565
    28,167
    58,033
    90,208
    193,973Directors
    66,318
    64,138
    282,085
    105,659
    518,200Officers
    -
    22,819
    34,822
    14,649
    72,290Director
      and Officer
    17,565
    -
    29,765
    48,550
    95,880Total
    101,448
    115,124
    404,705
    259,066
    880,343
 
 These
      shares were issued at prices ranging from U.S.$0.61 to
    $0.30.
 
 c)  **Contributed
surplus consists of the following** :
 
 **2004**
    
    **2003**
    
    **2002**Contributed
      surplus, beginning of year
    
    $
    2,048,342
    
    $
    931,582
    
    $
    391,378Consulting
      and professional fees paid inoptions
      to non-employees
    
    
    192,481
    
    
    131,063
    
    
    83,354Stock
      based compensation to employees
    
    
    140,892
    
    
    188,377
    
    
    -Proceeds
      on issuance of warrants
    
    
    6,110
    
    
    -
    
    
    -Issuance
      of warrants
    
    
    628,822
    
    
    797,320
    
    
    456,850Contributed
      surplus, end of year
    
    $
    3,016,647
    
    $
    2,048,342
    
    $
    931,582
 
 d)  **Common
stock issued for cash**
 
 Pursuant
to a subscription agreement dated February 8, 2002, with an accredited investor
as defined under the laws of the province of Ontario, the Company issued as a
private placement, 125,000 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $25,000 (U.S.).
 The common share purchase warrants are exercisable up to February 8, 2005,
each entitling the holder to purchase one common share at $ 0.50 (U.S.) per
share.
 
 In
      accordance with the terms of a financing agreement dated November 7, 2002,
      with a Canadian company, the Company had granted to it an option to
      purchase 500,000 common shares at a price of $0.20 (U.S.) per share,
      expiring on February 15, 2003. The option was fully exercised on February
      13, 2003 for proceeds of $100,000 (U.S.).
 
 
   R-21
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 7.  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 Pursuant
to a subscription agreement dated April 24, 2002, with an accredited investor as
defined under the laws of the province of Ontario, the Company issued as a
private placement, 112,500 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $22,500 (U.S.).
 The common share purchase warrants are exercisable up to April 24, 2005,
each entitling the holder to purchase one common share at $ 0.50 (U.S.) per
share.
 
 Pursuant
to a subscription agreement dated April 24, 2002, with an accredited investor as
defined under the laws of the province of Ontario, the Company issued as a
private placement, 12,500 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $2,500 (U.S.).
 The common share purchase warrants are exercisable up to April 24, 2005,
each entitling the holder to purchase one common share at $ 0.50 (U.S.) per
share.
 
 Pursuant
to a subscription agreement dated June 14, 2002, with an accredited investor as
defined under the laws of the province of Ontario, the Company issued as a
private placement, 487,500 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $150,000.
 The common share purchase warrants are exercisable up to June 14, 2007,
each entitling the holder to purchase one common share at $ 0.50 (U.S.) per
share.
 
 Pursuant
to a subscription agreement dated July 17, 2002, with an accredited investor as
defined under the laws of the province of Ontario, the Company issued as a
private placement, 100,000 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $30,450.
 The common share purchase warrants are exercisable up to July 17, 2005,
each entitling the holder to purchase one common share at $ 0.50 (U.S.) per
share.
 
 Pursuant
      to a subscription agreement dated November 1, 2002, with an accredited
      investor as defined under the laws of the province of Ontario, the Company
      issued as a private placement, 50,000 units, comprising one common share
      and one common share purchase warrant each, for an aggregate purchase
      price of $10,000 (U.S.).  The common share purchase warrants are
      exercisable up to November 1, 2007, each entitling the holder to purchase
      one common share at $ 0.50 (U.S.) per share.
 
 Pursuant
to a subscription agreement dated November 21, 2002, with an accredited investor
as defined under the laws of the province of Ontario, the Company issued as a
private placement, 100,000 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $35,000.
 The common share purchase warrants are exercisable up to November 21,
2005, each entitling the holder to purchase one common share at $ 0.50 (U.S.)
per share.
 
 Pursuant
to a subscription agreement dated November 30, 2002, with an accredited investor
as defined under the laws of the province of Ontario, the Company issued as a
private placement, 450,000 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $90,000 (U.S.).
 The common share purchase warrants are exercisable up to November 30,
2007, each entitling the holder to purchase one common share at $ 0.50 (U.S.)
per share.
 ****
 **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 Pursuant
to a subscription agreement dated November 30, 2002, with an accredited investor
as defined under the laws of the province of Ontario, the Company issued as a
private placement, 175,000 units, comprising one common share and one common
share purchase warrant each, for an aggregate purchase price of $35,000 (U.S.).
 The common share purchase warrants are exercisable up to November 30,
2005, each entitling the holder to purchase one common share at $ 0.50 (U.S.)
per share.
 
 Pursuant
      to a subscription agreement dated December 31, 2002, with an accredited
      investor as defined under the laws of the province of Ontario, the Company
      issued as a private placement, 325,000 units, comprising one common share
      and one common share purchase warrant each, for an aggregate purchase
      price of $65,000 (U.S.).  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 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.
 
 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.
 
   R-22
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 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.
 
 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.
 
   R-23
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 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 private placements
      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.
 
 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.
 
   R-24
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 e)  **Stock
option plans**
 
 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 increasing the maximum number of common shares for issuance
      under the Company’s Stock Option Plan to
5,100,000.
 
 For
      the year ended December 31, 2002, a total of 395,000 stock options were
      granted to employees in accordance with the terms of the employee share
      option plan. Had the Company determined compensation cost based on the
      fair value method, the fair value of the stock options granted during the
      year and the related expense for the year would have been $116,897 or
      $0.008 per share on a basic and diluted basis. Proforma loss for the year
      ended December 31, 2002 would have been $860,369 or $0.061 per share on a
      basic and diluted basis.
 
 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.
 
 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.
 
 For
      the three months ended December 31, 2004, stock options were granted as
      follows under the Company’s Stock Option
Plan:
 
   R-25
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 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
 
 Stock
      options are valued using the Black-Scholes option pricing model with the
      following assumptions: risk free interest rate of 3.62%, expected life of
      between 1 year and 5 years, expected volatility of 112%, closing rate of
      exchange on the issue date and no dividends. The total expense charged
      against income related to options in 2004 was $333,372 (2003 - $319,440;
      2002 - $83,354). This includes $227,411 (2003 - $131,063; 2002 - $83,354)
      for consulting and professional fees and expenses paid in options to a
      director or officer and $105,962 (2003 - $188,377; 2002 - $Nil) for
      stock-based compensation to employees. These amounts are included in the
      contributed surplus account.
 
 **Weighted****Average******
    
    
    **OptionsFor**
    
    
    **Exercise****CommonShares**
    
    
    **PriceU.S.$**Balance,
      December 31, 2001
    
    
    2,400,000
    
    
    0.33Options
      granted in 2002
    
    
    1,725,000
    
    
    0.23Options
      exercised in 2002
    
    
    -
    
    
    -Options
      forfeited in 2002
    
    
    (500,000
    )
    
    0.20Balance,
      December 31, 2002
    
    
    3,625,000
    
    
    0.30Options
      granted in 2003
    
    
    580,000
    
    
    0.52Options
      exercised in 2003
    
    
    (600,000
    )
    
    0.22Options
      terminated in 2003
    
    
    (250,000
    )
    
    0.40Balance,
      December 31, 2003
    
    
    3,335,000
    
    
    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
    
    
    0.35
 
   R-26
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 **Weighted****Average****Options
      For**
    **Exercise****Common
      Shares**
    **Price
      U.S.$**Exercisable
      at December 31, 2002
    2,400,000
    0.32Exercisable
      at December 31, 2003
    2,775,000
    0.30Exercisable
      at December 31, 2004
    2,343,840
    0.35
 
 
 The
      following table summarizes information about the Company’s stock options
      outstanding as at December 31, 2004:
 
 
 **Weighted******
    
    
    **Number**
    
    
    **Average**
    
    
    **Weighted**
    
    
    **Number**
    
    
    **Weighted****Exercise**
    
    
    **Outstanding
      at**
    
    
    **Remaining**
    
    
    **Average**
    
    
    **Exercisable**
    
    
    **Average****Price**
    
    
    **December
      31,**
    
    
    **Contractual**
    
    
    **Share
      Price**
    
    
    **December
      31,**
    
    
    **Share
      Price****U.S.$**
    
    
    **2004**
    
    
    **Life
      in Years**
    
    
    **U.S.$**
    
    
    **2004**
    
    
    **U.S.$**.17
      - 0.25
    
    
    1,160,000
    
    
    1.99
    
    
    0.22
    
    
    1,160,000
    
    
    0.220.26
      - 0.50
    
    
    1,453,840
    
    
    3.95
    
    
    0.41
    
    
    853,840
    
    
    0.450.51
      - 0.63
    
    
    330,000
    
    
    1.92
    
    
    0.54
    
    
    330,000
    
    
    0.542,943,840
    
    
    
    
    
    
    
    
    2,343,840
 
 f)  **Common
share purchase warrants**
 
 At
      December 31, 2002, the Company had a total of 2,212,500 common share
      purchase warrants issued. These warrants had expiry dates ranging from
      September 2004 to November 2007. The weighted average exercise price of
      the warrants was $0.50 (U.S.).
 
 As
      at December 31, 2003, the Company has 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.).
 
 On
      December 9, 2004, the Company issued 500,000 warrants to a director to
      purchase 500,000 common shares at a strike price of $0.37 U.S., expiring
      on December 9, 2007, for proceeds of $6,110. This was subject to the
      director raising an agreed upon amount of
financing.
 
   R-27
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **7.**  **SHARE
CAPITAL AND CONTRIBUTED SURPLUS** (continued)
 
 As
      at December 31, 2004, the Company had a total of 8,524,476 common share
      purchase warrants issued (2003 - 4,746,615 common share purchase
      warrants). These warrants have expiry dates ranging from April 2005 to
      December 2007. The weighted average price of the warrants was $0.68
      (U.S.).
 
 Warrants
      are valued using the Black-Scholes option pricing model with the following
      assumptions: risk free interest rate of 2.34 - 3.74%, expected life of
      between 1 year and 3 years; expected volatility of between 55% and 183%,
      closing rate of exchange on the issue date and no
    dividends.
 
 
 **8.**  **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 
 The
      net change in non-cash operating working capital balances related to
      operations consists of the following:
 
 **2004**
    
    
    **2003**
    
    
    **2002**Decrease
      (increase) in receivables
    
    $
    (2,544
    )
    $
    29,440
    
    $
    7,123Decrease
      (increase in prepaid expenses
    
    
    27,088
    
    
    112,571
    
    
    (148,727
    )Decrease
      (increase) in investment tax creditsrefundable
    
    
    (199,586
    )
    
    216,608
    
    
    (216,608
    )Increase
      (decrease) in payables and accruals
    
    
    (143,303
    )
    
    (10,913
    )
    
    149,568Increase
      (decrease) in goods and servicesTax
      payable
    
    
    (11,269
    )
    
    (26,547
    )
    
    (12,614
    )$
    (329,614
    )
    $
    321,159
    
    $
    (221,258
    )
 
 
   R-28
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (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)
      and alkaline fuel cell systems, fuel cell and battery test loads and
      provides engineering and other services.  Substantially all of the
      Company’s long lived assets are located in Canada.  Revenue is
      derived primarily from the sale of goods and services to customers located
      as follows:
 
 **2004**
    
    
    **2003**
    
    
    **2002**Canada
    
    $
    7,508
    
    $
    7,008
    
    $
    591Czech
      Republic
    
    
    4,310
    
    
    45,901
    
    
    140,575Rest
      of the World
    
    
    76,980
    
    
    14,961
    
    
    39,002$
    88,798
    
    $
    67,870
    
    $
    180,168
 
 
 **10.**  **COMMITMENTS**
 
 The
      Company has operating leases for office and laboratory space.  The
      minimum annual lease payments under the terms of the existing leases are $
      33,800 to October 31, 2005, plus proportionate share of common costs.
 
 
 **11.**  **COMPARATIVE
FIGURES**
 
 Certain
      comparative figures have been reclassified to conform to the current
      year’s presentation.
 
 
 **12.**  **SUBSEQUENT
EVENTS**
 
 a)
    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.
 
 b)
    On
      January 2, 2005, the Company acquired the remaining 70% of the outstanding
      shares in Astris s.r.o., its affiliate company in the Czech
      Republic.
 
   R-29
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **12.**  **SUBSEQUENT
EVENTS** (continued)
 
 The
aggregate purchase price was $2,209,000 compensated 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 will be held in escrow for one year until January 2,
2006. Each warrant entitles the holder to one common share of the
Company.
  The value
of the 30% of Astris s.r.o. already owned by the Company had been written down
to a value of $Nil.
 
 The
      following table summarizes the fair value of the assets acquired and
      liabilities assumed at the date of acquisition based on a conversion rate
      of 18.6637 Czech Korunas for each Canadian $1.00.
 The
following amounts are based on that valuation in CDN$:
 
 Current
      assets
    
    $
    150,041Property,
      plant and equipment
    
    
    570,564Technology
    
    
    1,520,847Total
      assets acquired
    
    
    2,241,452Less:
      Current liabilities assumed
    
    
    (32,452
    )Net
      assets acquired
    
    $
    2,209,000
 
 Had
      the Company and Astris s.r.o. been consolidated for the year ended
      December 31, 2004, the pro-forma financial statements would have shown the
      following:
 
 **Pro-Forma
      Consolidated Balance Sheet as at December 31,
2004****Assets**Current
    
    $
    569,027Property
      and equipment
    
    
    607,010Technology
    
    
    1,520,847$
    2,696,884
 
 
 
   R-30
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 **12.**  **SUBSEQUENT
EVENTS** (continued)
 
 **Liabilities**Current
    
    $
    288,282**Shareholders’
      Equity**Share
      capital
    
    
    8,090,419Contributed
      surplus
    
    
    3,270,647Deficit
    
    
    (8,952,464
    )2,408,602$
    2,696,884
 
 **Pro-Forma
      Consolidated Statement of Loss for the Year Ended December 31,
      2004****Revenue**
    
    $
    122,974**Expenses**Research
      and Development
    
    
    954,344General
      and administrative
    
    
    2,195,430Interest
      expense
    
    
    7,000Professional
      fees
    
    
    243,077Amortization
    
    
    153,1663,553,017Net
      loss for the year
    
    
    ($3,430,043
    )
 
 
 **13.**
    **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, 2004, 2003 and 2002 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.
 
   R-31
   **ASTRIS
ENERGI INC.**
 **(A
Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 December
31, 2004
 (Canadian
Dollars)
 
 
 **13.**
    **DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES ACCOUNTING
      PRINCIPLES**(continued)
 
 There
would be no adjustments needed to arrive at net loss for the years ended
December 31, 2004, 2003 and 2002 if US GAAP were employed.  Similarly,
there would be no adjustments needed to arrive at shareholders’ equity as at
December 31, 2004, 2003 and 2002 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, 2004, 2003 and 2002, 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.
 
 ***Variable
      interest entities***
 
 The
      Company has determined that the provisions of FIN46 (variable interest
      entities) are not relevant to its interest in its Astris s.r.o. affiliate.
      (See Subsequent Events Note 12.)
 
 ***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 is called “fixed
assets”.
 
 ***Contributed
      surplus***
 
 There
      is a difference between U.S. GAAP and Canadian GAAP for contributed
      surplus with respect to terminology. Under U.S. GAAP, contributed surplus
      is called “additional paid in capital”.
  R-32