EXHIBIT 99.2


BASIS OF PRESENTATION
  The information
below should be read in conjunction with the Audited Consolidated Financial
Statements for the year ended December 31, 2009. Our Consolidated Financial
Statements have been prepared in accordance with Canadian generally accepted
accounting principles (“GAAP”). The effect of significant differences between
Canadian and U.S. GAAP has been disclosed in note 22 to the Consolidated
Financial Statements for the year ended December 31, 2009. Unless the context
otherwise requires, all references to “Ballard”, “the Company”, “we”, “us” and
“our” refer to Ballard Power Systems Inc. and its subsidiaries. This discussion
and analysis is dated March 9, 2010.
  All amounts in
this report are in U.S. dollars, unless otherwise stated.
  FORWARD-LOOKING
STATEMENTS
  This document
contains forward-looking statements that are based on the beliefs of management
and reflect our current expectations as contemplated under the safe harbor
provisions of Section 21E of the United States Securities Exchange Act of 1934,
as amended. Such statements include, but are not limited to, statements with
respect to our objectives, goals and outlook including our estimated revenue,
cash flow from operations and operating cash consumption (see Non-GAAP Measures)
contained in our “Outlook”, as well as statements with respect to our beliefs,
plans, objectives, expectations, anticipations, estimates and intentions. Words
such as "estimate", "project", "believe", "anticipate", "intend", "expect",
"plan", "predict", "may", "should", "will", the negatives of these words or
other variations thereof and comparable terminology are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and involve assumptions, risks and uncertainties that are difficult
to predict.
  In particular,
these forward-looking statements are based on certain factors and assumptions
disclosed in our “Outlook” as well as specific assumptions relating to our
expectations with respect to the generation of new sales, producing, delivering
and selling the expected product volumes at the expected prices, and controlling
our costs. They are also based on a variety of general factors and assumptions
including, but not limited to, our expectations regarding product development
efforts, manufacturing capacity, product pricing, market demand, and the
availability and prices of raw materials, labour and supplies. These assumptions
have been derived from information available to the Company including
information obtained by the Company from third parties. These assumptions may
prove to be incorrect in whole or in part. In addition, actual results may
differ materially from those expressed, implied, or forecasted in such
forward-looking statements. Factors that could cause our actual results or
outcomes to differ materially from the results expressed, implied or forecasted
in such forward-looking statements include, but are not limited to: the
condition of the global economy; the rate of mass adoption of our products;
changes in product pricing; changes in our customers' requirements, the
competitive environment and related market conditions; product development
delays; changes in the availability or price of raw materials, labour and
supplies; our ability to attract and retain business partners, suppliers,
employees and customers; changing environmental regulations; our access to
funding and our ability to provide the capital required for product development,
operations and marketing efforts; our ability to protect our intellectual
property; the magnitude of the rate of change of the Canadian dollar versus the
U.S. dollar; and the general assumption that none of the risks identified in the
Risks and Uncertainties section of this report or in our most recent Annual
Information Form will materialize. Readers should not place undue reliance on
Ballard's forward-looking statements.
  Page 1 of 30
     
  The
forward-looking statements contained in this document speak only as of the date
of this Management Discussion and Analysis. Except as required by applicable
legislation, Ballard does not undertake any obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this Management Discussion and Analysis, including the
occurrence of unanticipated events.
  BUSINESS OVERVIEW
  Ballard is a
clean energy growth company. We are recognized as a world leader in proton
exchange membrane (“PEM”) fuel cell development and commercialization. Our
principal business is the design, development, manufacture, sale and service of
fuel cell products for a variety of applications, focusing on motive power
(material handling and buses) and stationary power (back-up power, supplemental
power, and distributed generation).
  A fuel cell is
an environmentally clean electrochemical device that combines hydrogen fuel with
oxygen (from the air) to produce electricity. The hydrogen fuel can be obtained
from natural gas, kerosene, methanol or other hydrocarbon fuels, or from water
through electrolysis. As long as fuel is supplied, the fuel cell produces
electricity efficiently and continuously without combustion, with water and heat
as the main by-products when hydrogen is used as the fuel source.
  Ballard® fuel
cell products feature high fuel efficiency, low operating temperature, low noise
and vibration, compact size, quick response to changes in electrical demand,
modular design and environmental cleanliness.
  Over the past
five years, we have refined the Company’s business strategy to establish a sharp
focus on what we believe to be key growth opportunities with near-term
commercial prospects in our core fuel cell markets. We sold our automotive fuel
cell systems operations to DaimlerChrysler AG (“Daimler”) and Ford Motor Company
(“Ford”) on August 31, 2005. We subsequently sold our electric drive operations
to Siemens VDO Automotive Corporation ("Siemens VDO") on February 15,
2007.
  We completed our
exit from the fuel cell car business in 2008 by selling our automotive fuel cell
research and development assets to Daimler, Ford and a newly created private
corporation, AFCC Automotive Fuel Cell Cooperation Corp. (“AFCC”). We completed
this transaction (the “AFCC Transaction”) on January 31, 2008 and recorded a
gain of $96.8 million (see note 3 to our consolidated financial statements).
Under the terms of the AFCC Transaction, we retained a 19.9% interest in AFCC,
which is subject to a Share Purchase Agreement under which Ford, either at our
option or Ford’s election, could purchase our interest in AFCC at any time on or
after January 31, 2013 for $65 million plus interest accruing at LIBOR from
January 31, 2008.
  Page 2 of 30
     
  Finally, we
decided to discontinue operations in EBARA Ballard Corporation (“EBARA BALLARD”)
on May 24, 2009. EBARA BALLARD was a joint venture with EBARA Corporation
(“Ebara”) that was focused on the development, manufacture, sale, and servicing
of stationary power systems for the residential cogeneration market in Japan.
EBARA BALLARD was formally dissolved in October 2009.
  Following the
completion of these strategic dispositions, we have focused on bolstering our
cash reserves to strengthen our capability to execute on our clean energy growth
priorities.
  In 2008, we
executed a transaction to extract value from our tax attributes through a
restructuring agreement (“Arrangement”) with Superior Plus Income Fund
("Superior Plus") resulting in a non-dilutive financing with net cash proceeds
of $33.8 million (Canadian $41.2 million). The Arrangement, which closed on
December 31, 2008, is described more fully in our Management Information
Circular dated November 14, 2008 (see note 2 to our consolidated financial
statements).
  In December
2009, we announced an agreement with a financial institution to monetize our
rights under the above noted Share Purchase Agreement with Ford relating to our
19.9% equity investment in AFCC for expected gross proceeds of $44.5 million,
comprising of an immediate cash payment of $37 million and a contingent payment
of $7.5 million. The contingent payment of $7.5 million is due upon maturation
of the Share Purchase Agreement on or before January 31, 2013 and is contingent
only on the financial institution’s rights in the transaction remaining
unsubordinated. On the closing of this transaction (the “AFCC Monetization”) on
December 21, 2009, we recorded a gain of $34.3 million (see note 8 to our
consolidated financial statements).
  In February
2010, we announced a sale and leaseback agreement with Madison Pacific
Properties Inc. (“Madison”) to further bolster our cash reserves. On the closing
of this transaction on March 9, 2010, we sold our head office building in
Burnaby, British Columbia in return for gross cash proceeds of $20.0 million
(Canadian $20.8 million). We then leased this property back from Madison for an
initial 15-year term plus two renewal options.
  In January 2010,
we announced an agreement to acquire a controlling interest in Denmark-based
Dantherm Power, partnering with co-investors Danfoss A/S and Dantherm A/S. In
exchange for a controlling interest, we will be investing $6.0 million in
Dantherm Power through two tranches, $3.0 million payable on closing on January
18, 2010, and $3.0 million payable after November 2010. Dantherm Power is a
40-person company focused on development and production of commercially viable
fuel cell-based back-up power systems for use in IT and telecom network base
stations. Dantherm Power’s financial results for 2010 will be 100% consolidated
into Ballard’s.
  Page 3 of 30
     
  We are based in
Canada, with head office, research and development, testing and manufacturing
facilities in Burnaby, British Columbia. In addition, we have sales, research
and development and manufacturing facilities in Lowell, Massachusetts. We report
our results in the following reporting units:
  1. Fuel Cell
Products  (core segment) : fuel cell products and services for
motive power (material handling and bus markets) and stationary power (back-up
power, supplemental power, and distributed generation markets);
  2. Contract
Automotive (supporting segment) : contract manufacturing of light-duty
automotive fuel cell products and testing and engineering services provided
primarily for AFCC, Daimler and Ford.
  3. Material
Products (supporting segment) : carbon friction material products
primarily for automotive applications and gas diffusion layer (“GDL”) material
for fuel cell products.
  SELECTED ANNUAL FINANCIAL
      INFORMATIONYears ended December 31 (Expressed
      in thousands of U.S. dollars, except per share amounts)2009
              
              
              2008 (1
              )
              
              2007 (1)Product and service
    revenues
              
              $
              46,722
              
              
              $
              52,726
              
              
              $
              43,352Engineering
      development revenue
              
              
              -
              
              
              
              6,854
              
              
              
              22,180Total
      revenues
              
              $
              46,722
              
              
              $
              59,580
              
              
              $
              65,532Net income (loss)
              
              $
              (3,258
              )
              
              $
              31,456
              
              
              $
              (55,633
              )Net income
      (loss) per share
              
              $
              (0.04
              )
              
              $
              0.37
              
              
              $
              (0.49
              )Income (loss) from continuing operations
              
              $
              (3,258
              )
              
              $
              31,456
              
              
              $
              (56,418
              )Income (loss)
      per share from continuing operations
              
              $
              (0.04
              )
              
              $
              0.37
              
              
              $
              (0.49
              )Normalized net loss (2)
              
              $
              (39,283
              )
              
              $
              (53,928
              )
              
              $
              (40,278
              )Normalized
      net loss per share (2)
              
              $
              (0.47
              )
              
              $
              (0.64
              )
              
              $
              (0.35
              )Operating cash
      consumption (2)
              
              $
              (27,542
              )
              
              $
              (29,275
              )
              
              $
              (36,691
              )Cash, cash equivalents and
      short-term investments
              
              $
              82,231
              
              
              $
              85,399
              
              
              $
              145,574Total
      assets
              
              $
              195,348
              
              
              $
              208,443
              
              
              $
              298,691
 1
              The comparative figures have been adjusted to reflect a change in
      accounting policy applied on a retroactive basis. See note 1(c)(ii) to our
      consolidated financial statements.2
              Normalized net loss and operating cash consumption are non-GAAP
      measures. We use certain Non- GAAP measures to assist in assessing our
      financial performance. Non-GAAP measures do not have any standardized
      meaning prescribed by GAAP and are therefore unlikely to be comparable to
      similar measures presented by other companies. See reconciliation to GAAP
      in Non-GAAP Measures section.
  FINANCIAL OVERVIEW – Quarter ended
December 31, 2009
  Revenue
  Our revenues for
the fourth quarter of 2009 decreased 13%, to $16.5 million, compared to $18.9
million for the fourth quarter of 2008. Increases in our supporting Contract
Automotive and Material Products business segments of $1.5 million were more
than offset by declines in our core Fuel Cell Products business segment of $3.9
million. Revenues for the fourth quarter of 2009 represent 35% of our total year
revenues and reflect an increase of 83%, or $7.5 million, compared to the third
quarter of 2009.
  Page 4 of 30
     
  In our core Fuel
Cell Products business segment, fourth quarter 2009 revenues decreased 34%, or
$3.9 million, to $7.7 million compared to the fourth quarter of 2008. The
decline in 2009 was due primarily to lower fuel cell bus revenues as the fourth
quarter of 2008 benefited from the commencement of shipments of fuel cell bus
modules related to the B.C. Transit 2010 Olympic fuel cell bus program (which
contributed $6.0 million to revenue in December 2008). Fourth quarter of 2009
revenues were also impacted by a deferral from 2009 to 2010 on the FirstEnergy
Corp. (“First Energy”) distributed power generator project related to delays in
testing and customer acceptance.
  In our
supporting Contract Automotive and Material Products business segments, fourth
quarter of 2009 revenues increased 21%, or $1.5 million, to $8.8 million
compared to the fourth quarter of 2008. Improvements in our Material Products
segment of $0.8 million represents increased volumes at higher prices of carbon
friction material products related to the recovery in the U.S. automotive sector
during the quarter. Improvements in our Contract Automotive segment of $0.7
million related to increased shipments of light duty automotive products in
support of Daimler’s Highway 2/3 programs, partially offset by lower automotive
testing and engineering services provided to AFCC.
  Net income (loss)
  Our net income
for the fourth quarter of 2009 increased to $25.6 million, or $0.31 per share,
compared with a net loss of $19.2 million, or ($0.23) per share, in the fourth
quarter of 2008. Net income for the fourth quarter of 2009 includes a gain on
sale of assets of $34.3 million resulting from the AFCC Monetization, partially
offset by an acceleration of amortization expense of $2.5 million for patents
that were no longer in use. Net loss for the fourth quarter of 2008 includes a
write-down of non-core investments of $3.0 million primarily related to our
investment in Chrysalix Energy Limited Partnership (“Chrysalix”).
  Normalized net loss
  Our normalized
net loss (see Non-GAAP Measures) for the fourth quarter of 2009 decreased $6.8
million, or 44%, to $8.6 million, or ($0.10) per share, compared with a
normalized net loss of $15.4 million, or ($0.19) per share, for 2008. The
improvement in normalized net loss was driven by increases in investment and
other income of $6.1 million primarily as a result of increases in foreign
exchange gains combined with a curtailment gain and improved investment returns
related to our employee future benefit plans.
  Our fourth
quarter of 2009 operating expenses (excluding depreciation and amortization,
restructuring, acquisition and related expenses) decreased $2.0 million, or 17%,
to $10.2 million, compared with operating expenses of $12.2 million for the
fourth quarter of 2008. The decline was primarily as a result of our workforce
reduction and cost optimization initiatives, which were partially offset by a
one-time commodity tax assessment combined with the negative effects of a
stronger Canadian dollar, relative to the U.S. dollar, quarter over
quarter.
  Page 5 of 30
     
  Operating cash consumption (contribution)
  Operating cash
consumption (contribution) (see Non-GAAP Measures) for the fourth quarter of
2009 decreased $12.8 million to positive ($4.5) million, compared to $8.3
million for the fourth quarter of 2008. The $12.8 million improvement in
operating cash consumption (contribution) was driven by improvements in cash
flow from operating activities (net of restructuring and related payments) of
$10.1 million related to our 2009 workforce reduction and cost optimization
initiatives, combined with improvements in working capital requirements,
including customer collections on our B.C. Transit 2010 Olympic fuel cell bus
program and light-duty automotive shipments. Operating cash consumption
(contribution) in the fourth quarter of 2009 also benefited from lower capital
expenditures (net of proceeds on sale) of $2.7 million as we financed the
acquisition of certain manufacturing assets through capital leases versus
outright purchase.
  FINANCIAL OVERVIEW – Year ended December
31, 2009
  We generated
revenues of $46.7 million in 2009, a decline of 22%, or $12.9 million from 2008.
Revenues were slightly lower than our revised guidance target of $50.0 million
due to the delay of expected 2009 fuel cell bus shipments and First Energy
distributed power generator project milestones to 2010.
  We reduced
operating cash consumption in 2009 (see non-GAAP measures section) by 6% to
$27.5 million, down from $29.3 million in 2008, essentially meeting our guidance
target of $27 million. The improvement was due primarily to a reset of our
operating cost base through restructuring activities in March and August, which
offset margin declines as a result of the decline in revenues.
  We ended 2009
with cash reserves of $82.2 million. Cash reserves were augmented in December
2009 through the monetization of our rights under the Share Purchase Agreement
with Ford relating to our 19.9% equity investment in AFCC.
  Revenue
  Our revenues for
the year ended December 31, 2009 decreased to $46.7 million, or 22%, compared to
$59.6 million for 2008 due primarily to declines in our supporting Contract
Automotive business segment of $10.0 million.
  Fuel Cell
Products revenues declined $3.5 million, or 13%, from 2008 as increases in
product and service revenues of $1.7 million were offset by declines in
engineering development revenues of $5.2 million primarily as a result of our
decision to discontinue operations in EBARA BALLARD in May 2009. Fuel Cell
Products product and service revenues increased 8% to $24.1 million driven by an
increase in fuel cell bus shipments as a result of the B.C. Transit 2010
Olympic, Transport of London, and Advanced Public Transportation System BV
(“APTS”) fuel cell bus programs. In addition, increases in back-up power market
revenues driven by work completed on the First Energy distributed power
generator project and increased unit shipments as a result of the successful
completion of the hydrogen unit product acceptance milestone with ACME supported
overall revenue growth of Fuel Cell Products product and service revenue. These
increases were partially offset by lower shipments in the material handing
market and by lower residential cogeneration market revenues.
  Page 6 of 30
     
  Contract
Automotive revenues decreased 52% to $9.2 million due to lower shipments of
light-duty automotive fuel cell modules to AFCC, Daimler and Ford, combined with
lower testing and engineering services provided to AFCC. In addition, the
absence of engineering development revenues as a result of the elimination of
light-duty automotive fuel cell program work subsequent to the closing of the
AFCC Transaction on January 31, 2008 (the “AFCC Transaction”) contributed to the
overall decline in Contract Automotive revenue.
  Material
Products revenues increased 5% to $13.4 million due to increased volumes of fuel
cell GDL shipments combined with the maintenance of carbon friction material
product revenues as price increases offset the impact of lower volumes as a
result of the slowdown in the U.S. automotive sector during the first half of
2009.
  Net income (loss)
  Our net loss for
the year ended December 31, 2009 increased to $3.3 million, or ($0.04) per
share, compared with net income of $31.5 million, or $0.37 per share, in 2008.
The net loss for 2009 includes a gain on sale of assets resulting from the AFCC
Monetization of $34.3 million, restructuring and related expenses of $6.2
million relating to a 20% workforce reduction initiated in August 2009 and a 7%
workforce reduction initiated in March 2009, and a non-cash gain (net of equity
losses prior to dissolution) of $8.4 million related to our decision to
discontinue operations in EBARA Ballard Corporation (“EBARA BALLARD”) on May 24,
2009. The net income for 2008 includes a gain on sale of assets of $96.8 million
related to the AFCC Transaction, partially offset by a write-down of a non-core
investment in Chrysalix of $3.0 million.
  Normalized net loss
  Our normalized
net loss (see Non-GAAP Measures) for 2009 decreased $14.6 million, or 27%, to
$39.3 million, or ($0.47) per share, compared with a normalized net loss of
$53.9 million, or ($0.64) per share, for 2008. Reductions in operating expenses
(excluding restructuring, acquisition and related expenses) of $12.5 million
primarily as a result of our workforce reduction and cost optimization
initiatives, combined with increases in investment and other income of $8.9
million primarily as a result of increases in foreign exchange gains and a
curtailment gain and improved investment returns related to our employee future
benefit plans, more than offset the decline in revenues (including engineering
development revenue) and the related gross margin impacts of $6.2 million.
  Operating cash consumption
  Operating cash
consumption (see Non-GAAP Measures) for 2009 decreased 6% to $27.5 million,
compared to $29.3 million for 2008. The $1.7 million improvement in operating
cash consumption was driven by improvements in cash flow from operating
activities (net of restructuring and related payments) of $3.3 million partially
offset by increased investment (net of proceeds on sale) in building
manufacturing capacity. The improvement in cash flow from operations was
primarily a result of our workforce reduction and cost optimization initiatives
in 2009, which more than offset the impacts of the decline in revenue and
related gross margin and the decline in working capital improvements. The
decline in working capital improvements of $0.4 million were driven primarily by
a drawdown of deferred revenue on our First Energy distributed power generator
project combined with reduced improvements in inventory requirements, which more
than offset improvements in accounts receivable due primarily to increased
customer collections on our B.C. Transit 2010 Olympic fuel cell bus program and
light-duty automotive shipments.
  Page 7 of 30
     
  CRITICAL ACCOUNTING POLICIES, ESTIMATES
AND JUDGMENT APPLIED
  Our consolidated
financial statements are prepared in accordance with Canadian GAAP, which
require us to apply judgment when making estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements, the reported amounts of revenues and expenses of the reporting
period, as well as disclosures made in the accompanying notes to the financial
statements. The estimates and associated assumptions are based on past
experience and other factors that are considered relevant. Actual results could
differ from these estimates. The following are our most critical accounting
estimates, which are those that require management’s most challenging,
subjective and complex judgments, requiring the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods. The application of these and other accounting policies are described
more fully in note 1 to the consolidated financial statements.
  REVENUE
RECOGNITION
  Revenues are
generated primarily from product sales and services in our core Fuel Cell
Products and supporting Contract Automotive and Material Products segments. We
have also historically earned revenues by providing engineering development
services in our core Fuel Cell Products and supporting Contract Automotive
segments. Product revenues are derived primarily from standard equipment and
material sales contracts and from long-term fixed price contracts. Service
revenues are derived primarily from cost-plus reimbursable contracts.
Engineering development revenues are derived primarily from long-term fixed
price contracts.
  On standard
equipment and material sales contracts, revenues are recorded when the product
is shipped to the customer, the risks of ownership are transferred to the
customer, the price is fixed and determinable, and collection is reasonably
assured. Provisions are made at the time of sale for warranties. Revenue
recognition for standard equipment and material sales contracts does not usually
involve significant estimates.
  On cost-plus
reimbursable contracts, revenues are recognized as costs are incurred, and
include applicable fees earned as services are provided. Revenue recognition for
cost-plus reimbursable contracts does not usually involve significant
estimates.
  Page 8 of 30
     
  On long-term
fixed price contracts, revenues are recorded on the percentage-of-completion
basis over the duration of the contract, which consists of recognizing revenue
on a given contract proportionately with its percentage of completion at any
given time. The percentage of completion is determined by dividing the
cumulative costs incurred as at the balance sheet date by the sum of incurred
and anticipated costs for completing a contract.
 The determination of
  anticipated costs for completing a contract is based on estimates that can be
  affected by a variety of factors such as variances in the timeline to
  completion, the cost of materials, the availability and cost of labour, as
  well as productivity.
        The determination of
  potential revenues includes the contractually agreed amount and may be
  adjusted based on the estimate of our attainment on achieving certain defined
  contractual milestones. Management’s judgment is required in determining the
  probability that the revenue will be received and in determining the
  measurement of that amount. Estimates used
to determine revenues and costs of long-term fixed price contracts involve
uncertainties that ultimately depend on the outcome of future events and are
periodically revised as projects progress. There is a risk that a customer may
ultimately disagree with our assessment of the progress achieved against
milestones or that our estimates of the work required to complete a contract may
change. The cumulative effect of changes to anticipated revenues and anticipated
costs for completing a contract are recognized in the period in which the
revisions are identified. In the event that the anticipated costs exceed the
anticipated revenues on a contract, such loss is recognized in its entirety in
the period it becomes known.
 
 During the years
ended December 31, 2009 and 2008, there were no material adjustments to revenues
relating to revenue recognized in a prior period.
  ASSET IMPAIRMENT
  Asset impairment
incorporates an evaluation of our goodwill as well as our long-lived assets for
impairment.
  Goodwill is
subject to at least an annual assessment of impairment by applying a fair value
based test at the reporting unit level. An impairment loss is recognized to the
extent that the carrying amount of goodwill for each reporting unit exceeds its
estimated fair market value. The fair market values of the reporting units are
derived from certain valuation models, which may consider various factors such
as normalized and estimated future earnings, price earnings multiples, terminal
values and discount rates. All factors used in the valuation models are based on
management’s estimates and are subject to uncertainties and judgments. Changes
in any of these estimates could affect the fair value of the reporting units
and, consequently, the value of the reported goodwill. We perform the annual
review of goodwill as at December 31 of each year, more often if events or
changes in circumstances indicate that it might be impaired. Based on the
impairment test performed as at December 31, 2009 and 2008, we have concluded
that no goodwill impairment loss was required.
  Page 9 of 30
     
  In addition, we
review our long-lived assets, which include intangible assets, and property,
plant and equipment, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. To
determine whether impairment exists, we compare the estimated undiscounted
future cash flows that are projected to be generated by those assets to their
respective carrying value. If the undiscounted future cash flows are lower than
the carrying value, then the assets are written down to fair market value and an
impairment loss is recognized. Estimated undiscounted cash flows reflect
management’s estimates, and changes in those estimates could affect the carrying
amount of the long-lived assets. During the years ended December 31, 2009 and
2008, we have concluded that no impairment charge was required for our
long-lived assets.
  During the year
ended December 31, 2009, we recorded an acceleration of amortization expense of
$2.5 million for patents that were no longer in use.
  WARRANTY
PROVISION
  A provision for
warranty costs is recorded on product sales at the time of shipment. In
establishing the accrued warranty liabilities, we estimate the likelihood that
products sold will experience warranty claims and the cost to resolve claims
received. In making such determinations, we use estimates based on the nature of
the contract and past and projected experience with the products. Should these
estimates prove to be incorrect, we may incur costs different from those
provided for in our warranty provisions. During the years ended December 31,
2009 and 2008 we recorded provisions to accrued warranty liabilities of $3.7
million and $4.4 million, respectively, for new product sales.
  We review our
warranty assumptions and make adjustments to accrued warranty liabilities
quarterly based on the latest information available and to reflect the expiry of
contractual obligations. Adjustments to accrued warranty liabilities are
recorded in cost of product and service revenues. As a result of these reviews
and the resulting adjustments, our warranty provision and cost of revenues for
the years ended December 31, 2009 and 2008 were adjusted downwards by a net
amount of $0.5 million and $0.4 million, respectively. The adjustments to reduce
accrued warranty liabilities were primarily due to contractual expirations and
improved lifetimes of our fuel cell products.
  INVENTORY
PROVISION
  In determining
the lower of cost and net realizable value of our inventory and establishing the
appropriate provision for inventory obsolescence, we estimate the likelihood
that inventory carrying values will be affected by changes in market pricing or
demand for our products and by changes in technology or design which could make
inventory on hand obsolete or recoverable at less than cost. We perform regular
reviews to assess the impact of changes in technology and design, sales trends
and other changes on the carrying value of inventory. Where we determine that
such changes have occurred and will have a negative impact on the value of
inventory on hand, appropriate provisions are made. If there is a subsequent
increase in the value of inventory on hand, reversals of previous write-downs to
net realizable value are made. Unforeseen changes in these factors could result
in additional inventory provisions, or reversals of previous provisions, being
required. During the years ended December 31, 2009 and 2008, inventory
provisions of $0.9 million and $0.7 million, respectively, were recorded as a
charge to cost of product and service revenues.
  Page 10 of 30
     
  INVESTMENTS
  We have made
strategic investments in other companies or partnerships that are developing
technology with potential fuel cell applications. Each of these investments is
either accounted for by the equity method or carried at cost, depending on
whether or not we have the ability to exercise significant influence over the
company or partnership. We regularly review such investments and should
circumstances indicate that an impairment of value has occurred that is other
than temporary, we would record this impairment in the earnings of the current
period. Given that these entities are in the development stage, there is
significant judgment required in determining whether impairment has occurred in
the value of these investments. During the year ended December 31, 2009, we
recorded a gain of $10.8 million representing the reversal of historic equity
losses (including $2.4 million of equity losses recorded in 2009 prior to the
wind-up) in excess of our net investment in EBARA BALLARD as a result of the
announcement of our intentions to discontinue operations in EBARA BALLARD.
During the year ended December 31, 2008, we recorded a $3.0 million write-down
of our non-core investment in Chrysalix.
  INCOME TAXES
  We use the
liability method of accounting for income taxes. Under this method, future
income tax assets and liabilities arise from temporary differences between the
tax bases of assets and liabilities and their carrying amounts reported in the
financial statements. Future income tax assets also reflect the benefit of
unutilized tax losses than can be carried forward to reduce income taxes in
future years. Such method requires the exercise of significant judgment in
determining whether or not our future tax assets are “more likely than not” to
be recovered from future taxable income and therefore, can be recognized in the
consolidated financial statements. Also estimates are required to determine the
expected timing upon which tax assets will be realized and upon which tax
liabilities will be settled, and the enacted or substantially enacted tax rates
that will apply at such time.
  Page 11 of 30
     
  ACCOUNTING POLICY
CHANGES
  Business Combinations, Consolidated
Financial Statements and Non-Controlling Interest
  On December 31, 2009, we
elected to early adopt the new recommendations of the Canadian Institute of
Chartered Accountants (“CICA”) forBusiness
Combinations(CICA Handbook Section 1582),Consolidations(CICA Handbook Section 1601)
andNon-Controlling
Interests(CICA Handbook Section 1602). Section 1582, which replaces the former Section
1581, requires all business combinations to be accounted for by applying the
acquisition method. Under this method, assetsacquired and liabilities
assumed are measured at their full fair value at the date of acquisition unless
another standard requires otherwise. Section 1582 provides the option of
accounting for non-controlling interest at either fair value, or at the
non-controlling interest’s proportionate share of the identifiable net assets
acquired. Acquisition costs associated with a business combination are to be
expensed in the period in which they are incurred. Section 1601 carries forward
the standards for the preparation of consolidated financial statements of former
Section 1600, while Section 1602 requires non-controlling interests to be
reported as a separate component of equity, with net income calculated without
deduction for non-controlling interests. Consolidated net income is to be
allocated between controlling and non-controlling interest. These three new
sections, which are effectively harmonized with International Financial
Reporting Standards and U.S. GAAP, were implemented effective January 1, 2009
and apply prospectively to all business combinations. There was no impact on our
2009 financial statements as a result of adopting these new standards other than
the expensing of acquisition costs of $0.5 million incurred for our subsequent
acquisition of Dantherm Power.
  Employee Future Benefit
Plans
  In 2009, we have
changed our accounting policy for accounting for actuarial gains and losses for
employee future benefit plans from the corridor method to the fair value method
of accounting. This change in accounting policy applies to a defined benefit
pension plan and other post-retirement benefits for our current and former
employees in the United States. We have made this accounting policy change, as
we believe it is the preferred policy to better reflect the costs and liability
of these employee future benefits to us as it better reflects the current
estimated cost to terminate these plans. This change in accounting policy was
made concurrent with a December 31, 2009 curtailment of future benefits in the
defined benefit pension plan. As a result of this change, employee future
benefit plan assets and accrued benefit obligations have been recorded at their
fair values on each balance sheet date with the actual return on plan assets and
any net actuarial gains or losses recognized immediately in the statement of
operations. This change in accounting policy has been applied on a retroactive
basis and has resulted in a $0.2 million increase in accumulated deficit as at
December 31, 2007, an $2.6 million decrease in net income for 2008, and a $2.2
million increase in net income for 2009. The offsetting adjustment as a result
of the retroactive application has been recorded to long-term liabilities (see
note 1(c)(ii) to the consolidated financial statements). Certain comparative
figures on the consolidated statement of cash flows have been reclassified to
conform to the current year presentation.
  Financial Instruments – Presentation and
Disclosure
  In 2009, we
adopted the amendments to CICA Handbook Section 3862 for Financial Instruments – Presentation and
Disclosure. The
adoption of these amendments resulted in enhanced disclosures regarding the fair
value measurement of financial instruments (see note 20 to the consolidated
financial statements) but had no impact on our results, financial position or
cash flows.
  Page 12 of 30
     
  NEW ACCOUNTING PRONOUNCEMENTS AND
DEVELOPMENTS
  Convergence with
International Financial Reporting Standards
  In February
2008, Canada’s Accounting Standards Board (“AcSB”) confirmed that Canadian GAAP,
as used by publicly accountable companies, would be fully converged to
International Financial Reporting Standards (“IFRS”), as issued by the
International Accounting Standards Board (“IASB”). For our 2011 interim and
annual financial statements, we will be required to report under IFRS and to
provide IFRS comparative information for the 2010 financial year.
  IFRS uses a
conceptual framework similar to Canadian GAAP, but there are significant
differences on recognition, measurement and disclosures. As part of the IFRS
conversion project, we have established an implementation team, which includes a
project manager, management from all relevant departments and a steering
committee to oversee the project. We have also engaged an external advisor to
assist in the conversion to IFRS.
  The conversion
project consists of three phases.
  Scoping Phase – This phase involves a detailed review
and initial scoping of accounting differences between Canadian GAAP and IFRS, a
preliminary evaluation of IFRS 1 exemptions for first-time IFRS adopters and a
high-level assessment of potential consequences for financial reporting,
business processes, internal controls, and information systems.
  Design Phase – This phase involves prioritizing
accounting treatment issues and preparing a conversion plan, quantifying the
impact of conversion to IFRS, reviewing and approving accounting policy choices,
performing a detailed impact assessment and designing changes to systems and
business processes, developing IFRS training material and drafting IFRS
financial statement content.
  Implementation Phase – This phase involves embedding changes
to systems business processes and internal controls; determining the opening
IFRS transition balances sheet and tax impacts; parallel accounting under
Canadian GAAP and IFRS; and preparing detailed reconciliations of Canadian GAAP
to IFRS financial statements. This phase also involves conversion assessment,
evaluating improvements for a sustainable operational IFRS model, and testing
the internal controls environment.
  We have
completed the scoping phase and are continuing with the project design phase and
continue to develop solutions to execute the project implementation phase.
Initial training has been given to key employees, and further investments in
training and resources will be made throughout the transition to facilitate a
timely and efficient changeover to IFRS.
  We have
performed an initial assessment of the exemptions from full retrospective
application available under IFRS 1, “First-Time Adoption of International
Financial Reporting Standards,” and their potential impacts on our financial
position.
  Page 13 of 30
     
  On adoption of IFRS, the exemptions being
considered by us that could result inmaterial impacts are as
follows:
  Exemptions
              
              Application of
      exemptionBusiness combinations
              
              The Company expects to elect not the restate any business
      combinations that occurred prior to January 1, 2010.Assets and
      liabilities of subsidiaries,associates and joint ventures(entities
      in the same group mayadopt IFRS at different dates)
              
              The Company may
      elect different IFRS accounting policies than its subsidiaries (but the
      subsidiaries would need to align those policies when preparing
      consolidated IFRS financial statements).Cumulative transaction differences(IAS 21, “The Effects of
      Changes inForeign Exchange Rates”)
              
              The Company has elected to reset all cumulative translation gains
      and losses to zero in opening earnings at January 1,
  2010.
  We are in the
process of quantifying the expected material differences between IFRS and the
current accounting treatment under Canadian GAAP. Differences with respect to
recognition, measurement, presentation and disclosure of financial information
are expected to be in the following key account areas:
  Key Accounting
Area
              
              Differences with Potential Impact
      to the CompanyPresentation of FinancialStatements (IAS 1)
              
              Additional disclosures
        in the notes to the financial statements.
                  Statement of Operations
        expected to be presented by functional category versus by type of
        expenditure.Property
      and Equipment (IAS 16)
              
              Evaluating impact of
        componentization on accounting policy
                  All significant components
        of furniture and fixtures, office equipment and computer hardware will
        be amortized accordingly to their useful lives determined in accordance
        with IFRS.Impairment
      of Assets (IAS 36)
              
              Grouping of assets in
        cash-generating units (CGUs) on the basis of independent cash inflows
        for impairment testing purposes, using a Fair Value or Value-in-Use
        (i.e. discounted cash-flow method (DCF)) approach.
                  Goodwill allocated to,
        and tested in, conjunction with its related CGU or group of CGUs.
                  Under certain
        circumstances, previous impairment taken (other than goodwill) is
        required to be reversed.
                  The Company is
        currently in the process of defining a CGU.Income
      Taxes (IAS 12)(Subject to
      adoption at transition ofa revised IAS 12
    standard)
              
              Recognition and
        measurement criteria for deferred tax assets and liabilities may
        differ.Share-based Payments (IFRS 2)
              
              Each installment
        accounted for as a separate arrangement. Compensation expense for a
        share-based payment award that vests over a three-year period will be
        calculated and recognized as three separate awards (graded vesting)
        instead of as a single award recognized on a straight-line basis.Provisions
      and Contingencies(IAS 37)
              
              Different threshold
        used for recognition of a contingent liability, which could have an
        impact on timing of when a provision may be recorded.
  The above is not
an exhaustive list of all the significant impacts that could occur during the
conversion to IFRS. We continue to monitor and assess the impact of evolving
differences between Canadian GAAP and IFRS, since the IASB is expected to
continue to issue new accounting standards during the transition period. As a
result, the final impact of IFRS on our consolidated financial statements can
only be measured once all the applicable IFRS at the conversion date are
known.
  Our IFRS
conversion project is progressing according to schedule. As the project
advances, the Company could alter its intentions and the milestones communicated
at the time of reporting as a result of changes to international standards
currently in development, or in light of new information or other external
factors that could arise between now and when the changeover has been
completed.
  Page 14 of 30
     
  RESULTS OF OPERATIONS
  Revenues for the year ended December 31, 2009
were $46.7 million, a decrease of $12.9 million, or 22%, from 2008 due primarily
to declines in our supporting Contract Automotive segment of $10.0
million.
  The following table provides a
      breakdown of our revenues for the reported periods:(Expressed in thousands of U.S.
      dollars)
              
              Year ended December
31,2009
              
              
              
              
              
              
              
              2008Product and
              
              Engineering
              
              
              
              Product and
              
              EngineeringService
              
              Development
              
              Total
              
              Service
              
              Development
              
              TotalFuel Cell Products
              
              $
              24,142
              
              $
              -
              
              $
              24,142
              
              $
              22,405
              
              $
              5,236
              
              $
              27,641Contract Automotive
              
              
              9,170
              
              
              -
              
              
              9,170
              
              
              17,598
              
              
              1,618
              
              
              19,216Material
      Products
              
              
              13,410
              
              
              -
              
              
              13,410
              
              
              12,723
              
              
              -
              
              
              12,723$
              46,722
              
              $
              -
              
              $
              46,722
              
              $
              52,726
              
              $
              6,854
              
              $
              59,580
  Fuel Cell
Products product and service revenues for the year ended December 31, 2009
increased $1.7 million, or 8%, compared to 2008. Increased fuel cell bus
revenues as a result of the shipment of the remaining ten fuel cell bus modules
for the B.C. Transit 2010 Olympic fuel cell bus program in the second quarter of
2009 ($6.0 million) combined with fuel cell bus module shipments for the
Transport of London and the Advanced Public Transportation System by (“APTS”)
fuel cell bus programs drove the increase. Increases in back-up power market
revenues as a result of work completed on the First Energy distributed power
generator project combined with increased unit shipments as a result of the
successful completion of the hydrogen unit product acceptance milestone with
ACME in the second quarter of 2009 were more than offset by lower shipments in
the material handling and residential cogeneration markets. Fuel Cell Products
shipments in our back-up power and materials handling markets totaled 988 units
and 182 units, respectively, for the year ended December 31, 2009, as compared
to 720 units and 508 units, respectively, for the year ended December 31,
2008.
  Fuel Cell
Products engineering development revenues were nil for the year ended December
31, 2009, a $5.2 million reduction compared to 2008. The absence of Fuel Cell
Products engineering development revenues in 2009 was expected due primarily to
the completion of our 1kW residential cogeneration fuel cell program and the
completion of pre-production work related to the B.C. Transit 2010 Olympic fuel
cell bus program in the third quarter of 2008. The costs associated with these
engineering development revenues are included in research and development
expenses.
  Page 15 of 30
     
  Contract Automotive product
and service revenues for the year ended December 31, 2009 decreased $8.4 million, or 48%, compared to 2008
due to lower contract manufacturing of light-duty automotive fuel cell products
at lower prices to AFCC, Daimler and Ford, combined with lower automotive
service revenues derivedprimarily from testing and
engineering services to AFCC. Contract Automotive engineering development
revenues were nil for the year ended December 31, 2009, a $1.6 million reduction
compared to 2008. The absence of Contract Automotive engineering development
revenues in 2009 was expected due to the closing of the AFCC Transaction on
January 31, 2008. The costs associated with these engineering development
revenues are included in research and development expenses.
  Material
Products revenues for the year ended December 31, 2009 increased $0.7 million,
or 5%, compared to 2008 due primarily to increased volumes of fuel cell GDL
shipments combined with the maintenance of carbon friction material product
revenues as price increases offset the impact of lower volumes as a result of
the slowdown in the U.S. automotive sector during the first half of 2009.
  Cost of product and service
revenues for
the year ended December 31, 2009 were $40.8 million, a decrease of $6.6 million,
or 14%, compared to 2008. The 14% decrease year over year is reflective of the
11% decrease in product and service revenues for the respective
periods.
  Gross margins on
product and service revenues increased to $5.9 million, or to 12% of revenues
for the year ended December 31, 2009, compared to $5.3 million, or 10% of
product and service revenues for 2008. Increased gross margins 2009 as a result
of increased shipments fuel cell buses and carbon fiber products combined with
work performed on the First Energy distributed power generator program more than
offset the decline in gross margin as a result of lower automotive shipments and
service revenues. Gross margins in 2009 were also negatively impacted by more
aggressive product pricing on our back-up power products in order to encourage
market adoption whereas gross margins in 2008 were negatively impacted by more
aggressive product pricing and enhanced warranty coverage on our materials
handling products in order to encourage market adoption.
  Research and product
development  expenses for
the year ended December 31, 2009 were $26.6 million, a decrease of $10.6
million, or 28%, compared to 2008. The decline in expenditures is due primarily
to the 20% workforce reduction initiated in August 2009 and the 7% workforce
reduction initiated in March 2009 combined with the disposition of our
automotive fuel cell development programs on the closing of the AFCC Transaction
on January 31, 2008, the completion of our 1kW residential cogeneration fuel
cell program in the third quarter of 2008, and the positive effects of a weaker
Canadian dollar relative to the U.S. dollar. In addition, as part of our
restructuring events we have significantly narrowed our research efforts in the
business and have begun to aggressively pursue government funding for our
programs. Government research funding is reflected as a cost offset to research
and product development expenses.
  Included in
research and product development expenses for 2008 were costs of $5.9 million
related to our achievement of predefined milestones for our customers under the
development programs for which we earned engineering development
revenue.
  General and
administrative expenses for the year ended December 31, 2009 were $10.8 million, a decrease of
1.7 million, or 14%, compared to 2008. This decline in expenditures is due
primarily to the 20% workforce reduction initiated in August 2009 and the 7%
workforce reduction initiated in March 2009 combined with the positive effects
of a weaker Canadian dollar relative to the U.S. dollar, which more than offset
the negative impacts of a one-time commodity tax assessment.
  Page 16 of 30
     
  Sales and marketing expenses for
the year ended December 31, 2009 were $7.2 million, a decrease of 0.3 million,
or 3%, compared to 2008. Increased investment in sales and marketing capacity in
2009 in support of commercial efforts was more than offset by cost optimization
efforts and the positive effects of a weaker Canadian dollar, relative to the
U.S. dollar.
  Restructuring and
related expenses for the year ended December 31, 2009 were $6.2 million and relate to
the 20% workforce reduction initiated in August 2009 and the 7% workforce
reduction initiated in March 2009.
  Acquisition
charges for
the year ended December 31, 2009 were $0.5 million and relate to costs incurred
on the acquisition of a controlling interest in Dantherm Power, completed on
January 18, 2010.
  Depreciation and
amortization  was $6.6
million for the year ended December 31, 2009, an increase of $0.5 million, or
9%, compared to 2008. Depreciation and amortization increased in 2009 due
primarily to an acceleration of amortization expense of $2.5 million for patents
that were no longer in use. This increase was only partially offset by declines
in depreciation and amortization expense as some assets became fully depreciated
or amortized during 2008.
  Investment and other income
(loss)  was $6.0
million for the year ended December 31, 2009, compared to a loss of ($2.9)
million for 2008. The following table provides a breakdown of our investment and
other income and foreign exchange gain for the reported periods:
  2009
              
              2008Curtailment gain on employee future
      benefit plans
              $
              1,055
              
              $
              -Investment return (loss) less interest cost onemployee future benefit plans
              
              741
              
              
              (2,686
              )Investment income
              
              387
              
              
              2,012Foreign exchange gain (loss)
              
              3,187
              
              
              (3,653
              )Other
      income
              
              625
              
              
              1,456Investment and other income
      (loss)
              $
              5,995
              
              $
              (2,871
              )
  Curtailment gain
on employee future benefit plans was $1.1 million for the year ended December
31, 2009 and resulted from a freeze in future benefits of a defined benefit
pension plan applicable for our current and former employees in the United
States. As a result of the curtailment, there will be no further current service
cost related to this defined benefit pension plan.
  Page 17 of 30
     
  Investment return (loss) less
interest cost on employee future benefit plans was $0.7 million for the year
ended December 31, 2009 as compared to a loss of ($2.7) million during 2008. The
improvement in 2009, as compared to 2008, was primarily a result of a recovery
in the capital markets in 2009 which resulted in increasedreturns on
plan assets related to the above defined benefit pension plan. We account for
future employee benefits using the fair value method of accounting. As a result,
employee future benefit plan assets and accrued benefit obligations are recorded
at their fair values on each balance sheet date with the actual return on plan
assets and any net actuarial gains or losses recognized immediately in the
statement of operations. The fair values are determined directly by reference to
quoted market prices.
  Investment
income was $0.4 million for the year ended December 31, 2009, a decrease of $1.6
million, or 81%, compared to 2008. The decrease was a result of declining
interest rates combined with lower average cash balances in 2009 compared to
2008. We classify our cash, cash equivalents and short-term investments as
held-for-trading and measure these assets at fair value with changes in fair
value recognized in income. The fair values are determined directly by reference
to quoted market prices. During 2008 and into 2009, the investment market was
negatively impacted by liquidity and credit market concerns along with increased
concerns about a global economic slowdown. We continue to review our exposure to
these issues and have determined that there are no material impacts on our
investment portfolio.
  Foreign exchange
gains and losses are attributable to the effect of the changes in the value of
the Canadian dollar, relative to the U.S. dollar, on our Canadian
dollar-denominated net monetary assets and on outstanding foreign exchange
contracts to buy or sell Canadian dollars over the respective periods. The
foreign exchange gains in the second, third and fourth quarters of 2009 of $2.3
million, $1.0 million, and $1.2 million, respectively, resulted primarily from
the strengthening of the Canadian dollar during the quarters and more than
offset the first quarter of 2009 foreign exchange loss of $1.4 million, which
had resulted primarily from the weakening of the Canadian dollar during that
quarter. Compared to the U.S. dollar, the Canadian dollar has strengthened to
1.05 at December 31, 2009, as compared to 1.07 at September 30, 2009, 1.16 at
June 30, 2009, 1.26 at March 31, 2009 and 1.22 at December 31, 2008. The foreign
exchange loss of $3.7 million for 2008 resulted from the weakening of the
Canadian dollar in 2008. Compared to the U.S. dollar, the Canadian dollar
weakened in 2008 from 0.99 at December 31, 2007 to 1.22 at December 31, 2008. In
addition to foreign exchange contracts, we hold Canadian dollar cash and
short-term investments to reduce the foreign currency risk inherent in
expenditures denominated in Canadian dollars. Our foreign denominated cash and
short-term investments do not qualify for hedge accounting and therefore foreign
exchange gains and losses are recognized when they occur.
  See note 20 to
our consolidated financial statements for additional information about the
significance of financial instruments to our financial position and performance,
the nature and extent of risks arising from those financial instruments to which
we are exposed, and how we manage those risks.
  Page 18 of 30
     
  Other income was
$0.6 million for the year ended December 31, 2009, a decrease of $0.8 million,
or 57%, compared to 2008. The decline was expected due to fewer administrative
support services provided to AFCC in 2009.
  Gain on assets held for
sale  was $34.3 million for the year ended
December 31, 2009 compared to $96.8 million for 2008. The 2009 gain was
primarily a result of the AFCC Monetization whereas the 2008 gain reflects the
disposition of automotive assets pursuant to the AFCC Transaction.
  Loss on disposal and write-down of
long-lived assets were $2.8 million for the year ended December 31, 2008 primarily as a
result of a $3.0 million write-down in our investment in Chrysalix to $0.5
million, representing estimated net realizable value.
  Equity income (loss) of associated
companies was
income of $8.4 million for the year ended December 31, 2009, compared to a loss
of ($8.6) million, for 2008 and related to our share of the losses of EBARA
BALLARD. On the announcement of our decision in May 2009 to discontinue
operations in EBARA BALLARD, the $10.8 million of historic recorded equity
losses in EBARA BALLARD (including $2.4 million of equity losses recorded in
2009 prior to the wind-up) in excess of our net investment in EBARA BALLARD, was
reversed to net income as (i) Ebara was solely responsible for the liquidation
obligations of EBARA BALLARD; and (ii) we are not committed to provide, nor do
we intend to provide, any further financial support to EBARA BALLARD. EBARA
BALLARD was formally dissolved in October 2009.
  CASH FLOWS, LIQUIDITY AND CAPITAL
RESOURCES
  CASH FLOWS
  Cash, cash
equivalents and short-term investments were $82.2 million as at December 31,
2009, compared to $85.4 million at the end of 2008. The decrease of $3.2 million
in 2009 was driven by a net loss (excluding non-cash items) of $35.5 million, an
advance to EBARA BALLARD of $5.0 million, capital expenditures (net of proceeds
on sale of capital assets) of $4.6 million and payment of non-dilutive financing
costs of $3.2 million. These outflows were partially offset by proceeds on the
AFCC Monetization of $37.0 million and working capital inflows of $8.5
million.
  For the year
ended December 31, 2009, working capital requirements resulted in cash inflows
of $8.5 million compared to cash inflows of $8.9 million for 2008. In 2009,
working capital inflows were driven by lower accounts receivable of $6.1 million
due primarily to collections of our fuel cell bus and contract automotive
product and service revenues, higher accrued warranty liabilities of $4.0
million due primarily to product shipments for the B.C. Transit 2010 Olympic and
APTS fuel cell bus programs, lower inventory expenditures of $1.4 million and
higher accounts payable and accrued liabilities of $1.6 million. These working
capital inflows in 2009 were partially offset by cash outflows from the draw
down of deferred revenue of $3.7 million due primarily to amounts earned under
the First Energy distributed power generator program. Working capital inflows of
$8.9 million for 2008 were driven by lower inventory of $4.5 million due to
higher fourth quarter shipments of fuel cell bus, materials handing and back-up
power products combined with improved inventory management and increased
platinum recoveries, higher accrued warranty liabilities of $3.1 million as a
result of the above noted fourth quarter product shipments, and higher deferred
revenue of $0.8 million due to the timing of payments on pre-funded
contracts.
  Page 19 of 30
     
  Investing
activities resulted in cash inflows of $19.7 million for the year ended December
31, 2009, compared to cash outflows of $6.0 million in 2008. Investing
activities in 2009 include gross proceeds received on the closing of the AFCC
Monetization of $37.0 million. The AFCC Monetization closing costs of $1.4
million were accrued at December 31, 2009 and paid during 2010. Changes in
short-term investments resulted in cash outflows of $7.6 million in 2009 as
compared to inflows of $64.9 million in 2008. Balances changed between cash
equivalents and short-term investments as we make investment decisions with
regards to the term of investments and our future cash requirements. Capital
spending (net of proceeds on sale) of $4.6 million in 2009, and $3.1 million in
2008, was primarily for manufacturing equipment in order to build production
capacity. The cash flows used for other investing activities in 2009 of $5.1
million include an investment in EBARA BALLARD of $5.0 million and an investment
in Chrysalix Energy Limited Partnership of $0.2 million. The cash flows used for
other investing activities in 2008 of $6.2 million represent a net investment in
EBARA BALLARD of $5.9 million, comprising of an additional investment of $11.2
million offset by licensing cash receipts of $5.3 million, combined with an
investment in Chrysalix of $0.3 million.
  Financing
activities resulted in cash outflows of $3.5 million for the year ended December
31, 2009, compared to cash inflows of $36.9 million for 2008. Financing
activities in 2009 represent the payment of the remaining closing costs of $3.2
million which were accrued at December 31, 2008 on the closing of the
Arrangement with Superior, and the purchase of treasury stock under our market
purchase restricted share unit plan of $0.2 million. Financing activities in
2008 represent gross proceeds received on the closing of the Arrangement with
Superior of $38.0 million less initial closing costs paid in 2008 of $1.1
million.
 
 As at March 9,
2010, we had 84,059,291 common shares issued and outstanding and stock options
to purchase 5,410,838 of our common shares outstanding.
  LIQUIDITY AND CAPITAL RESOURCES
  As at December
31, 2009, we had cash, cash equivalents and short-term investments totaling
$82.2 million. We will use our funds to meet net funding requirements for the
development and commercialization of products in our target markets. This
includes research and product development for fuel cells and material products,
the purchase of equipment for our manufacturing and testing facilities, the
further development of business systems and low-cost manufacturing processes and
the further development of our sales and marketing, product distribution and
service capabilities.
  Page 20 of 30
     
  At this stage of
our development, we expect to record losses for at least the next few years as
we continue to make significant investments in research and product and market
development activities necessary to commercialize our products. Our actual
funding requirements will vary based on the factors noted above, our
relationships with our lead customers and strategic partners, our success in
developing new channels to market and relationships with customers, our success
in generating revenue growth from near-term product opportunities, our working
capital requirements, foreign exchange fluctuations, and the progress and
results of our research, development and demonstration programs.
  Our financial
strategy is to manage our cash resources with strong fiscal discipline, focus on
markets with high product and service revenue growth potential, license
technology in cases where it is advantageous to us, and access available
government funding for research and development projects. Our current financing
principle is to maintain cash balances sufficient to fund at least six quarters
of operating cash consumption at all times. We believe that our current cash,
cash equivalents and short-term investments, combined with our subsequent
monetization of our head office building in Burnaby, British Columbia through a
sale and leaseback transaction, are sufficient to meet our planned growth and
development activities for the foreseeable future without the need to access
public market financing. However, circumstances could change which would make it
advantageous for us to access additional capital.
  2010 OUTLOOK
  We expect
revenues for 2010 to be in excess of 35% over our 2009 revenues of $46.7
million.  Our revenue outlook for 2010 is based on
our internal revenue forecast which reflects an assessment of overall business
conditions and takes into account actual sales in the first two months of 2010,
sales orders received for units and services to be delivered in 2010, and an
estimate with respect to the generation of new sales in each of our markets. Our
2010 revenue outlook is supported by committed orders for products and services
of $22.7 million at December 31, 2009 (consisting of $12.5 million for Fuel Cell
Products, $5.8 million for Contract Automotive, and $4.5 million for Material
Products); and by the following expected growth milestones:
 Commencement of shipments of
  back-up power fuel cell stacks for deployment to Idatech, LLC’s
  reformate-based supplemental power systems for the Indian telecom
  market.
        Deployment of Dantherm Power
  hydrogen-based back-up power systems in one major new
  network;
        Commissioning of the 1 MW
  distributed generation system for FirstEnergy Corp.;
        Recording our first distributed
  generation system sale utilizing by-product hydrogen;
        More than doubling volumes of
  material handling fuel cell stack shipments, in line with Plug Power Inc.’s
  2010 shipment target of 1,100 GenDrive TM systems; and
        Recording new fuel cell bus
  contracts to support the deployment of more than 25 buses. Page 21 of 30
     
  We expect to
improve our cash flow from operations in 2010 by 30% over our 2009 cash used by
operations of ($26.9) million. A primary driver for this expected reduction in
cash flow from operations for 2010 are expected increases in gross margins as a
result of the above 35% expected increase in revenues, combined with the full
year benefit of our streamlined operating expense base as a result of the 20%
workforce reduction initiated in August 2009 and the 7% workforce reduction
initiated in March 2009. Our cash flow from operations outlook for 2010 is based
on our internal cash flow from operations forecast and takes into account our
forecasted gross margin and working capital impacts related to the above revenue
forecast, the costs of our current operating expense base, and assumes an
average U.S. dollar exchange rate of 1.10 in relation to the Canadian
dollar.
  Cash used by
operations is expected to be materially higher in the first quarter of 2010, as
compared to the last three quarters of the year, due primarily to working
capital impacts related to the payment of accrued severance, accrued AFCC
Monetization expenses and accrued acquisition costs related to the subsequent
purchase of Dantherm Power; the buildup of inventory to support automotive fuel
cell shipments to Daimler expected to commence in the second quarter of 2010;
and the expected timing of revenues and the related customer collections.
  OFF-BALANCE SHEET ARRANGEMENTS &
CONTRACTUAL OBLIGATIONS
  In 2009, we
completed the AFCC Monetization with a financial institution to monetize our
rights under a Share Purchase Agreement with Ford relating to our 19.9% equity
investment in AFCC. On the closing of the AFCC Monetization in 2009, we received
a cash payment of $37 million and a contingent payment of $7.5 million. The
contingent payment of $7.5 million is due upon maturation of the Share Purchase
Agreement on or before January 31, 2013, and is contingent on the financial
institution’s rights in the transaction remaining unsubordinated. Due to the
contingent nature of the $7.5 million receipt in 2013, this receipt has not been
accrued in our consolidated financial statements as at December 31,
2009.
  Periodically, we
use foreign exchange contracts to manage our exposure to currency rate
fluctuations and platinum forward purchase contracts to manage our exposure to
platinum price fluctuations. We record these contracts at their fair value as
either assets or liabilities on our balance sheet. Any changes in fair value are
recorded in our consolidated statements of operations.
  As at December
31, 2009, we did not have any other material obligations under guarantee
contracts, retained or contingent interests in transferred assets, outstanding
derivative instruments or non-consolidated variable interests.
  During 2009, a
Canadian governmental agency agreed to terminate potential royalties payable of
Canadian $5.4 million in respect of future sales of fuel cell-based stationary
power products under a historic development program. As a result, total
royalties payable in respect of future sales of fuel cell-based stationary power
products under two development programs with certain Canadian government
agencies have been reduced from up to a maximum of Canadian $49.0 million at
December 31, 2008 to a maximum of Canadian $43.7 million at December 31, 2009.
  Page 22 of 30
     
  As at December
31, 2009, we have made total royalty payments of Canadian $5.3 million against
this potential obligation, including royalty payments of Canadian $0.1 million
in 2009. The conditions under which these royalties become payable are described
in more detail in note 15 to our consolidated financial statements.
  We have
committed to make future capital contributions of $0.3 million (Canadian $0.3
million) in Chrysalix, in which we have a limited partnership
interest.
  As at December
31, 2009 we had the following contractual obligations and commercial
commitments:
  (Expressed in thousands of U.S. dollars)
              
              Payments due by period,Contractual
      Obligations
              
              
              
              Less than
              
              
              
              
              
              After 5Total
              
              one year
              
              1-3 years
              
              4-5 years
              
              yearsOperating leases
              
              $
              18,522
              
              $
              1,789
              
              $
              3,577
              
              $
              3,631
              
              $
              9,525Asset retirement
      obligations
              
              
              3,988
              
              
              -
              
              
              -
              
              
              -
              
              
              3,988Total
      contractual obligations
              
              $
              22,510
              
              $
              1,789
              
              $
              3,577
              
              $
              3,631
              
              $
              13,513
  In addition to
the contractual purchase obligations above, we have commitments to purchase $1.4
million of capital assets as at December 31, 2009. Capital expenditures pertain
to our regular operations and will be funded through either capital leases or
cash on hand.
  The Arrangement
with Superior Plus includes an indemnification agreement dated December 31, 2008
(the "Indemnity Agreement"), which sets out the parties’ continuing obligations
to the other. The Indemnity Agreement has two basic elements: it provides for
the indemnification by each of the parties to the other for breaches of
representations and warranties or covenants as well as, in our case, any
liability relating to our business which is suffered by Superior Plus. Our
indemnity to Superior Plus with respect to our representation relating to the
existence of our tax pools immediately prior to the completion of the
Arrangement is limited to an aggregate of $7.0 million (Canadian $7.4 million)
with a threshold amount of $0.5 million (Canadian $0.5 million) before there is
an obligation to make a payment. Second, the Indemnity Agreement provides for
adjustments to be paid by us, or to us, depending on the final determination of
the amount of our Canadian non-capital losses, scientific research and
development expenditures and investment tax credits generated to December 31,
2008, to the extent that such amounts are more or less than the amounts
estimated at the time the Arrangement was executed. At December 31, 2009, we
have not accrued any amount owing, or receivable, as a result of the Indemnity
Agreement.
  RELATED PARTY TRANSACTIONS
  Related parties
include shareholders with a significant ownership interest in us, together with
their subsidiaries and affiliates, our key management personnel and our
equity-accounted investees. Revenues and costs recognized from such transactions
reflect the prices and terms of sale and purchase transactions with related
parties, which are in accordance with normal trade practices. Related parties
include EBARA BALLARD and EBARA Corporation prior to the discontinuance of our
operations in EBARA BALLARD in May 2009; and Daimler and Ford prior to the
closing of the AFCC Transaction on January 31, 2008. AFCC is not considered to
be a related party as we do not have the ability to exercise significant
influence over AFCC’s strategic operating, investing or financing
policies.
  Page 23 of 30
     
  We have earned
revenues from related parties from the sale of products and services and from
engineering development revenues. We have provided funding to related parties
for the purposes of conducting research and development on our behalf. We have
also purchased intellectual property and obtained licenses from, and granted
licenses to, related parties. As a result of the AFCC Transaction and the
discontinuance of operations in EBARA BALLARD, related party transactions have
been reduced.
  Related party
transactions and balances are as follows:
  (Expressed in thousands of U.S.
      dollars)
              
              Years Ended
      December 31,Transactions with related
      parties
              
              2009
              
              2008Revenues from products, engineering
      services and other
              
              $
              380
              
              $
              7,906Purchases
              
              
              78
              
              
              188Net
      investments and advances
              
              
              5,000
              
              
              5,939(Expressed in thousands of U.S.
      dollars)
              
              As at December 31,Balances with related
      parties
              
              2009
              
              2008Accounts receivable
              
              $
              -
              
              $
              4,500Accounts payable
      and accrued liabilities
              
              $
              -
              
              $
              31
  The AFCC
Transaction, which closed on January 31, 2008, is also a related party
transaction.
  For 2010, the
operating results of Dantherm Power will be consolidated with Ballard’s. As
such, all transactions between Dantherm Power and Ballard will be eliminated.
Transactions between Ballard and Dantherm Power’s non-controlling partners,
Danfoss A/S and Dantherm A/S, will be considered to be related party
transactions.
  Page 24 of 30
     
  SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
  The following
table provides summary financial data for our last eight quarters:
  (Expressed in thousands of U.S.
      dollars, except per share amounts)
              
              Quarter ended,Dec 31,
              
              
              Sep 30,
              
              
              Jun 30,
              
              
              Mar 31,2009
              
              
              2009
              
              
              2009
              
              
              2009Product and service
    revenue
              
              $
              16,516
              
              
              $
              9,047
              
              
              $
              13,075
              
              
              $
              8,084Engineering
      development revenue
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total revenue
              
              $
              16,516
              
              
              $
              9,047
              
              
              $
              13,075
              
              
              $
              8,084Net income (loss)
              
              $
              25,634
              
              
              $
              (11,352
              )
              
              $
              1,583
              
              
              $
              (19,123
              )Net income (loss) per share, basic
      and diluted
              
              $
              0.31
              
              
              $
              (0.14
              )
              
              $
              0.02
              
              
              $
              (0.23
              )Weighted average common shares
      outstanding(000’s)
              
              
              83,974
              
              
              
              83,955
              
              
              
              83,941
              
              
              
              82,662Dec 31,
              
              
              Sep 30,
              
              
              Jun 30,
              
              
              Mar 31,2008
              
              
              2008
              
              
              2008
              
              
              2008Product and service
    revenue
              
              $
              18,605
              
              
              $
              10,879
              
              
              $
              11,131
              
              
              $
              12,111Engineering
      development revenue
              
              
              296
              
              
              
              1,406
              
              
              
              1,220
              
              
              
              3,932Total revenue
              
              $
              18,901
              
              
              $
              12,285
              
              
              $
              12,351
              
              
              $
              16,043Net income (loss)
              
              $
              (19,161
              )
              
              $
              (16,186
              )
              
              $
              (13,638
              )
              
              $
              80,440Net income (loss) per share, basic
      and diluted
              
              $
              (0.23
              )
              
              $
              (0.20
              )
              
              $
              (0.17
              )
              
              $
              0.86Weighted average common shares
      outstanding(000’s)
              
              
              82,116
              
              
              
              82,102
              
              
              
              82,086
              
              
              
              93,447
  Summary of Quarterly Results :
There were no significant seasonal variations in our quarterly results.
Variations in our net income (loss) for the above periods were affected
primarily by the following factors:
 Product and service
  revenues: Variations in fuel cell product revenues
  reflect the timing of our customers’ fuel cell vehicle, bus and field cell
  product deployments. Product revenues in the second quarter of 2009 and the
  fourth quarter of 2008 were positively impacted by the shipments of fuel cell
  bus modules related to the B.C. Transit 2010 Olympic fuel cell bus program
  totaling $6.0 million in each of those quarters. Revenue from testing and
  engineering services to AFCC commenced in the first quarter of 2008.
  Variations in fuel cell service revenues reflect the timing of work performed
  and the achievements of milestones under the First Energy distributed power
  generator program which commenced in the second quarter of 2009 and from
  government contracts in the material handling and back-up power
  markets.
        Engineering development
  revenue: Variations in engineering development
  revenue reflect the timing of work performed and the achievements of
  milestones under the 1kW residential cogeneration fuel cell development
  program and from light duty automotive and fuel cell bus programs. As a result
  of the AFCC Transaction, there were no light duty automotive fuel program
  engineering development revenues subsequent to January 2008. In addition, the
  1kW residential cogeneration fuel cell development program was completed in
  the third quarter of 2008. Page 25 of 30
     
 Operating
  expenditures: Operating expenses have declined in the
  last three quarters of 2009 as a result of the 20% workforce reduction
  initiated in August 2009 and the 7% workforce reduction initiated in March
  2009. Operating expenses also include restructuring and related expenses of
  $4.8 million in the third quarter of 2009 and $1.4 million in the first
  quarter of 2009 as a result of the above workforce reduction initiatives.
  Operating expenses also reflect changes in the value of the Canadian dollar
  versus the U.S. dollar.
        Depreciation and
  amortization: Depreciation and amortization has declined
  for the first three quarters of 2009 and the four quarters of 2008 as several
  assets became fully depreciated or amortized during 2007 and certain
  intangible assets were disposed of in the AFCC Transaction. Depreciation and
  amortization expense increased in the fourth quarter of 2009 due an
  acceleration of amortization expense of $2.5 million for patents that were no
  longer in use.
        Investment and other income:Investment and
  other income include foreign exchange gains (losses), investment income,
  curtailment and mark to market gains (losses) on our employee future benefit
  plans, and other income. Foreign exchange gains (losses) have varied in each
  quarter due to fluctuations in the Canadian dollar, relative to the U.S.
  dollar, on our Canadian dollar-denominated cash and short-term investments,
  and on our outstanding foreign exchange contracts to buy or sell Canadian
  dollars. Investment income has continually declined for the last eight
  quarters due to declines in our cash equivalents and short-term investment
  portfolios and declines in interest rates. Investment and other income in the
  fourth quarter of 2009 was positively impacted by a $1.1 curtailment gain
  resulting from a freeze in future benefits of a defined benefit pension plan
  applicable for our current and former employees in the United
  States.
        Loss on disposal and write-down of
  long-lived assets:The net loss for the fourth quarter of 2008 was negatively impacted by
  a $3.0 million write-down of our investment in Chrysalix.
        Gain on sale of
  assets:The net
  income for the fourth quarter of 2009 was significantly impacted by a $34.3
  million gain on the AFCC Monetization. The net income for the first quarter of
  2008 was significantly impacted by a $96.8 million gain on the sale of assets
  pursuant to the AFCC Transaction.
        Equity income (loss) of associated
  companies:The net
  income for the second quarter of 2009 was significantly impacted by a $10.8
  million gain recorded on the discontinuance of operations in EBARA BALLARD,
  representing the reversal of our historic recorded equity losses in EBARA
  BALLARD in excess of our net investment in EBARA BALLARD at that time. Net
  income (loss) for the first quarter of 2009 and the four quarters of 2008, was
  impacted by equity losses in EBARA BALLARD ranging from approximately $1.0
  million to $3.0 million, respectively, per quarter. Page 26 of 30
     
  RISKS & UNCERTAINTIES
  An investment in
our common shares involves risk. Investors should carefully consider the risks
described below and the other information contained in, and incorporated into,
this Management Discussion and Analysis, our financial statements for the year
ended December 31, 2009, and our Annual Information Form. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties, including those that we do not know about now or that we
currently deem immaterial, may also adversely affect our business. For a more
complete discussion of risks and uncertainties summarized below which apply to
our business and our operating results, please see our Annual Information Form
and other filings with Canadian ( www.sedar.com ) and U.S. securities regulatory authorities ( www.sec.gov ). These documents are also available on
our website at www.ballard.com .
  Our business
entails risks and uncertainties that affect our outlook and eventual results of
our business and commercialization plans. The primary risks relate to meeting
our product development and commercialization milestones, which require that our
products exhibit the functionality, cost, durability and performance required in
a commercial product and that we have sufficient access to capital to fund these
activities. To be commercially useful, most of our products must be integrated
into products manufactured by system integrators or OEMs. There is no guarantee
that system integrators or OEMs will provide products that use our products as
components. There is also a risk that mass markets for certain of our products
may never develop, or that market acceptance might take longer to develop than
anticipated.
  A summary of
these identified risks and uncertainties are as follows:
 We may not be able to achieve
  commercialization of our products on the timetable we anticipate, or at
  all;
        We expect our cash reserves
  will be reduced due to future operating losses, and we cannot provide
  certainty as to how long our cash reserves will last or that we will be able
  to access additional capital when necessary;
        We may not be able to
  successfully execute our business plan;
        Potential fluctuations in our
  financial and business results make forecasting difficult and may restrict our
  access to funding for our commercialization plan;
        Exchange rate fluctuations
  are beyond our control and may have a material adverse effect on our business,
  operating results, financial condition or profitability;
        Commodity price fluctuations
  are beyond our control and may have a material adverse effect on our business,
  operating results, financial condition and profitability;
        A mass market for our
  products may never develop or may take longer to develop than we anticipate;   Page 27 of 30
     
 We have limited experience
  manufacturing fuel cell products on a commercial basis;
        We are dependent on third
  party suppliers for the supply of key materials and components for our
  products;
        We are dependent upon
  Original Equipment Manufacturers and Systems Integrators to purchase certain
  of our products;
        Global economic conditions
  are beyond our control and may have an adverse impact on our business or on
  our key suppliers and / or customers;
        Public Policy and regulatory
  changes could hurt the market for our products;
        We depend on our intellectual
  property and our failure to protect that intellectual property could adversely
  affect our future growth and success;
        We may be involved in
  intellectual property litigation that causes us to incur significant expenses
  or prevents us from selling our products;
        We currently face and will
  continue to face significant competition;
        We could lose or fail to
  attract the personnel necessary to run our business;
        We could be liable for
  environmental damages resulting from our research, development or
  manufacturing operations;
        Our products use flammable
  fuels, which could subject our business to product liability claims;   MANAGEMENT’S REPORT ON DISCLOSURE
CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
  Disclosure controls and procedures
  Disclosure
controls and procedures are designed to provide reasonable assurance that all
relevant information is gathered and reported to senior management, including
the President and Chief Executive Officer (“CEO”) and the Chief Financial
Officer (“CFO”), on a timely basis so that appropriate decisions can be made
regarding public disclosure.
  As of the end of
the period covered by this report, we evaluated, under the supervision and with
the participation of management, including the CEO and the CFO, the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a–15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (“Exchange Act”). The CEO and CFO have concluded that as of
December 31, 2009, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified therein, and accumulated and reported to management
to allow timely discussions regarding required disclosure.
  Page 28 of 30
     
  Internal control over financial reporting
  The CEO and CFO, together
with other members of management, are responsible forestablishing and
maintaining adequate internal control over the Company’s financial reporting.
Internal control over financial reporting is designed under our supervision, and
effected by the Company’s board of directors, management, and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in Canada and the requirements of
the Securities and Exchange Commission in the United States, as
applicable.
  There are
inherent limitations in the effectiveness of internal control over financial
reporting, including the possibility that misstatements may not be prevented or
detected. Accordingly, even effective internal controls over financial reporting
can provide only reasonable assurance with respect to financial statement
preparation. Furthermore, the effectiveness of internal controls can change with
circumstances.
  Management,
including the CEO and CFO, have evaluated the effectiveness of internal control
over financial reporting, as defined in Rules 13a–15(f) of the Exchange Act, in
relation to criteria described in Internal Control–Integrated
Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on this evaluation, Management has determined that internal control over
financial reporting was effective as of December 31, 2009.
  KPMG LLP, our
independent registered public accounting firm, has audited our consolidated
financial statements and expressed an unqualified opinion thereon. KPMG has also
expressed an unqualified opinion on the effective operation of our internal
control over financial reporting as of December 31, 2009.
  Changes in internal control over
financial reporting
  During the year
ended December 31, 2009, there were no material changes in internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
  NON-GAAP MEASURES
  We use certain
non-GAAP measures to assist in assessing our financial performance and
liquidity. Non-GAAP measures do not have any standardized meaning prescribed by
GAAP and are therefore unlikely to be comparable to similar measures presented
by other companies. A description of non-GAAP measures and reconciliations to
financial statement line items for the periods indicated are as
follows:
  Normalized net
loss measures
our net loss after excluding items that are unusual in nature or do not reflect
the normal continued operating activity of the business. Gains on sale of
assets, write-downs of investments, restructuring and related expenses, equity
income (loss) in associated companies, and acquisition and related costs are
either not considered part of our core activities, or are expected to occur
infrequently. Therefore we have removed these items in our calculation of
normalized net loss. We believe normalized net loss assists investors in
assessing our actual and future performance.
  Page 29 of 30
     
  (Expressed in thousands of U.S.
      dollars, except per
              
              Three
      months endedshare amounts)
              
              December 31,
              
              Year ended December 31,Normalized net
loss
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Reported net income
(loss)
              
              $
              25,634
              
              
              $
              (19,161
              )
              
              $
              (3,258
              )
              
              $
              31,456Restructuring and related
      expenses
              
              
              36
              
              
              
              -
              
              
              
              6,229
              
              
              
              -Gain loss on sale of
    assets
              
              
              (34,297
              )
              
              
              -
              
              
              
              (34,297
              )
              
              
              (96,845
              )Equity (income) loss in associated
      companies
              
              
              (421
              )
              
              
              942
              
              
              
              (8,364
              )
              
              
              8,649Write-down (gain on sale) of
      investments
              
              
              (71
              )
              
              
              2,812
              
              
              
              (122
              )
              
              
              2,812Acquisition
      charges
              
              
              529
              
              
              
              -
              
              
              
              529
              
              
              
              -Normalized
      net loss
              
              $
              (8,590
              )
              
              $
              (15,407
              )
              
              $
              (39,283
              )
              
              $
              (53,928
              )Normalized net
      loss per share
              
              $
              (0.10
              )
              
              $
              (0.19
              )
              
              $
              (0.47
              )
              
              $
              (0.64
              )Weighted
      average common shares outstanding (000’s)
              
              
              83,974
              
              
              
              82,116
              
              
              
              83,637
              
              
              
              84,922
  Operating cash
consumption measures the amount of cash required to fund the operating activities of our
business (net of restructuring and related costs) and excludes financing and
investing activities except for capital lease payments and additions, net of
proceeds on sale, of property, plant and equipment. We believe operating cash
consumption assists investors in assessing our requirements to fund future
operations.
  (Expressed in thousands of U.S.
      dollars)
              
              Three months
      endedDecember 31,
              
              Year ended December 31,Operating cash (consumption)
      contribution
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Cash from (used by)
      operations
              
              $
              1,578
              
              
              $
              (7,305
              )
              
              $
              (26,962
              )
              
              $
              (26,190
              )Restructuring and related expenses(cash paid component)
              
              
              1,190
              
              
              
              -
              
              
              
              4,067
              
              
              
              -Additions to property, plant and
      equipment
              
              
              (402
              )
              
              
              (1,460
              )
              
              
              (6,778
              )
              
              
              (3,560
              )Proceeds on sale of property, plant
      and equipment(net of capital lease
      payments)
              
              
              2,127
              
              
              
              466
              
              
              
              2,131
              
              
              
              475Operating
      cash (consumption) contribution
              
              $
              4,493
              
              
              $
              (8,299
              )
              
              $
              (27,542
              )
              
              $
              (29,275
              )
  Page 30 of 30