MANAGEMENTS DISCUSSION AND
ANALYSIS

This discussion and analysis of
financial condition and results of operations of Ballard Power Systems Inc.
(Ballard, the Company, we, us or our) is prepared as at February 22,
2012 and should be read in conjunction with the audited consolidated financial
statements and accompanying notes for the year ended December 31, 2011. The
results reported herein are presented in U.S. dollars unless otherwise stated and
have been prepared in accordance with International Financial Reporting
Standards (IFRS). Additional information relating to the Company, including
our Annual Information Form, are filed with Canadian (www.sedar.com) and
U.S. securities regulatory authorities (www.sec.gov) and are also available
on our website atwww.ballard.com.

BUSINESS OVERVIEW

At Ballard, we are building 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 (backup power and distributed
generation) markets. We also provide engineering services for a variety of fuel
cell applications.

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. 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.
Embedded in each Ballard PEM fuel cell product lies a stack of unit cells
designed with our proprietary esenciaTM technology which draws on
intellectual property from our patent portfolio together with our extensive
experience in key areas of fuel cell stack operation, system integration, and
fuel processing.

We provide our customers with the
positive economic and environmental benefits unique to fuel cell power. We plan
to build value for our shareholders by developing, manufacturing, selling and
servicing industry-leading fuel cell products to meet the needs of our customers
in select target markets. We are focused on our core competencies of PEM fuel
cell design, development, manufacture, sales and service.

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. To support this strategy, we
have focused on bolstering our cash reserves to strengthen our capability to
execute on our clean energy growth priorities.

In March 2010, we completed a sale
and leaseback agreement whereby we sold our head office building in Burnaby,
British Columbia in return for gross cash proceeds of $20.4 million and then
leased this property back for an initial 15-year term plus two renewal options.
In December 2009 and July 2010, we completed agreements with a financial
institution to monetize our rights under a Share Purchase Agreement with Ford
Motor Company (Ford) relating to our 19.9% equity investment in AFCC
Automotive Fuel Cell Cooperation Corp. (AFCC) for an initial cash payment in
2009 of $37.0 million and a subsequent cash payment in 2010 of $5.0 million.

Page 1 of 38

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In March 2011, we completed a
sub-lease agreement with Mercedes-Benz Canada Inc. (MBC) for the rental of
21,000 square feet of surplus production space in our specialized fuel cell
manufacturing facility located in Burnaby, British Columbia. This sub-lease is
effective from August 1, 2011 until July 31, 2019 and is expected to result in
annual savings of approximately $1 million in real estate and related overhead
costs.

In June 2011, we obtained a $7.0
million Canadian award agreement from Sustainable Development Technology Canada
(SDTC) for the period from 2011 to 2013 to be used to extend the operating
life and lower the product cost of FCgen-1300, the fuel cell product that
powers Ballards CLEARgen distributed generation system. This award is in
addition to a $4.8 million Canadian award agreement from SDTC announced in 2010
for the period from 2010 to 2012 to be used to further develop fuel cell power
module technology for the transit bus market.These awards are recorded primarily
as a cost offset against our research and product development expenses as the
expenses are incurred on these programs.

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 and Hobro,
Denmark.

In 2011, we reported our results
in the following operating segments:

1.Fuel Cell Products: fuel cell products and services for motive power (material handling and
bus markets) and stationary power (backup power and distributed generation
markets) applications; and engineering services for a variety of fuel cell
applications;

2.Contract Automotive: contract manufacturing services provided primarily for Daimler AG
(Daimler);

3.Material Products: carbon fiber products primarily for automotive transmissions and gas
diffusion layers (GDLs) for fuel cells.

During the last half of 2011, we
refined the Companys business strategy and established a new engineering
services operating unit in order to leverage our expertise in fuel cell design,
prototyping, manufacturing and servicing. This new operating unit offers a full
suite of fuel cell engineering solutions for a variety of fuel cell applications
and is recorded in our core Fuel Cell Products segment. As a result of this
increased management focus on engineering services, and the completion of our
Contract Automotive manufacturing supply agreement with Daimler in October 2011,
we have made changes to the composition of our operating segments to align to
our current reporting structure. As a result, revenues of $2.1 million for the
first three quarters of 2011, and revenues of $1.5 million for 2010, previously
recorded in our Contract Automotive segment relating to engineering services
have been retroactively restated to the Fuel Cell Products segment. While the
Contract Automotive segment will continue to be reported on in 2012 from a
comparative perspective, it will cease to be an active operating unit as of the
end of 2011.

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SELECTED ANNUAL FINANCIAL
INFORMATION

Years ended December
31  (Expressed in thousands of U.S. dollars, except per share amounts)


|                                                          |  | 2011 |         | 2010 |   | 2009    |  
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|Revenues                                                  |  | $    | 76,009  |      | $ | 65,019  |  
|Net income
      (loss) attributable to Ballard           |  | $    | (33,420 | )    | $ | (31,532 | )
|Net income (loss) per share
      attributable to Ballard |  | $    | (0.40   | )    | $ | (0.37   | )
|Adjusted EBITDA (1)                                       |  | $    | (22,295 | )    | $ | (26,163 | )
|Cash, cash equivalents and short-term investments         |  | $    | 46,194  |      | $ | 74,445  |  
|Total assets                                              |  | $    | 165,290 |      | $ | 190,027 |  

|1 |  | Adjusted EBITDA is a non-GAAP measure. 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 the
      Supplemental Non-GAAP Measures section.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS  Fourth
Quarter of 2011

Revenue and gross margin

|*(Expressed in thousands of U.S. dollars)* | Three months ended December 31, |       
|------------------------------------------ | ------------------------------- | ------
|                                           | 2011                            |       
|Fuel Cell Products                         | $                               | 16,871
|Contract
      Automotive                  |                                 | 101   
|Material Products                          |                                 | 4,024 
|Revenues                                   |                                 | 20,996
|Cost of goods sold                         |                                 | 16,854
|Gross Margin                               | $                               | 4,142 
|Gross Margin %                             |                                 | 20%   

Our revenues for the fourth
quarter of 2011 of $21.0 million were flat compared to the fourth quarter of
2010 as increases in our core Fuel Cell Products segment of $3.1 million were
offset by declines in Contract Automotive revenues of $2.9 million and declines
in Material Products revenues of $0.3 million.

In our core Fuel Cell Products
segment, fourth quarter of 2011 revenues increased 23%, or $3.1 million, to
$16.9 million compared to the fourth quarter of 2010, primarily as a result of
our increased focus on building our engineering services business. This increase
in engineering services revenues, combined with relatively stable Stationary
power revenues, was partially offset by lower Motive power market revenues. In
our Motive power market, higher material handling revenues as a result of
increased shipments to support Plug Power Inc.s GenDrive systems were more
than offset by lower fuel cell bus revenues. Fuel cell bus revenues in the
fourth quarter of 2011 were lower than anticipated (see 2011 Revenue section) as
new fourth quarter of 2011 shipments to Van Hool NV and UNDP-EMTU Brazil, were
lower than fuel cell bus revenues in the fourth quarter of 2010 arising from
shipments to Daimler and to the Transport for London fuel cell bus program.
Stationary power revenues were relatively stable quarter over quarter as
increased shipments of Dantherm Power backup power system products including a
150kW fuel cell system supplied to Anglo American Platinum Limited, were offset
by a decline in shipments of hydrogen-based backup power units.

Page 3 of 38

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The following table provides a
summary of our fourth quarter fuel cell stack shipments):

|                                |  | Three months ended December
      31, | 
|------------------------------- |  | ------------------------------------- | 
|                                |  | 2011                                  | 
|Material handling               |  | 799                                   | 
|Backup
      power              |  | 124                                   | 
|Distributed generation          |  | 7                                     | 
|Other                           |  | 12                                    | 
|Fuel Cell Stack
      Shipments |  | 942                                   | 

In our Contract Automotive and
Material Products segments, fourth quarter of 2011 revenues declined 44%, or
$3.2 million, to $4.1 million compared to the fourth quarter of 2010. Contract
Automotive segment revenues were down significantly as we completed our supply
agreement with Daimler and made the final shipments of FCvelocity 1100 fuel cell
products for Daimlers Hyway 2/3 programs in October 2011. Material Products
segment revenues were down slightly as increased volumes of carbon friction
material products were offset by lower fuel cell GDL shipments.

Gross margins
declined to $4.1 million, or 20% of revenues, for the fourth quarter of 2011,
compared to $5.1 million, or 24% of revenues, for the fourth quarter of 2010.
The decline in gross margin is primarily as a result of lower shipments of
higher margin fuel cell bus units combined with lower platinum prices in
December 2011 which negatively impacted our fourth quarter platinum recycling
efforts and the mark to market value of our 2012 platinum purchase contracts.
These gross margin declines were partially offset by our ongoing product cost
reduction efforts across all of our platforms.

Cash Operating Costs

|(Expressed
      in thousands of U.S. dollars)                |  | Three months ended December 31, |      
|------------------------------------------------------------- |  | ------------------------------- | -----
|                                                              |  | 2011                            |      
|Research and Product                                          |  |                                 |      
|Development                                                   |  | $                               | 4,169
|General and Administration                                    |  |                                 | 2,308
|Sales and Marketing                                           |  |                                 | 1,892
|Operating costs                                               |  |                                 | 8,369
|Less: Stock-based
      compensation       (expense) recovery |  |                                 | 257  
|Cash Operating
    Costs                                      |  | $                               | 8,626

Cash Operating Costs is a non-GAAP
measure. 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 the Supplemental
Non-GAAP Measures section. Cash Operating Costs adjusts operating expenses for
stock-based compensation expense, depreciation and amortization, restructuring
charges and acquisition costs.


Page 4 of 38

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Cash Operating Costs (see
Supplemental Non-GAAP Measures) for the fourth quarter of 2011 were $8.6
million, a decline of $1.0 million, or 11%, compared to the fourth quarter of
2010. The 11% reduction in the fourth quarter of 2011 was driven by lower
general and administrative and sales and marketing expenses primarily as a
result of a downward adjustment to accrued compensation expense as a result of
not achieving our corporate performance targets relating to revenue and Adjusted
EBITDA for the year.

While excluded from Cash Operating
Costs, stock-based compensation expense declined significantly in the fourth
quarter of 2011 to a recovery position, as a result of a downward adjustment to
accrued share-based compensation expense as certain outstanding restricted share
units failed to meet the vesting criteria and were cancelled.

Adjusted
EBITDA

|(Expressed in thousands of
      U.S. dollars) |  | Three months ended
      December 31, |       
|---------------------------------------------- |  | ------------------------------------- | ------
|                                               |  | 2011                                  |       
|Adjusted
      EBITDA                          |  | $                                     | (3,765

EBITDA and Adjusted EBITDA 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 the Supplemental
Non-GAAP Measures section. Adjusted EBITDA adjusts EBITDA for stock-based
compensation expense, transactional gains and losses, finance and other income,
and acquisition costs.

Adjusted EBITDA (see Supplemental
Non-GAAP Measures) for the fourth quarter of 2011 was ($3.7) million, flat
compared to the fourth quarter of 2010. Gross margin declines of $1.0 million in
the fourth quarter of 2011 were primarily a result of lower shipments of higher
margin fuel cell bus units, combined with lower platinum prices in December 2011
which negatively impacted our fourth quarter platinum recycling proceeds, and
the mark to market value of our 2012 platinum purchase contracts. This decline
in gross margin was offset by lower Cash Operating Costs of $1.0 million
primarily as a result of a downward adjustment to accrued compensation expense
as a result of not achieving our corporate performance targets relating to
revenue and Adjusted EBITDA for the year.

Net loss attributable to
Ballard

|(Expressed in thousands of
      U.S. dollars) | Three months ended December
      31,
|---------------------------------------------- | -------------------------------------
|                                               | 2011                                 
|Net loss attributable to
      Ballard         | $                                    

Net loss attributable to Ballard
for the fourth quarter of 2011 was ($7.3) million, or ($0.09) per share,
compared to net loss of ($9.0) million, or ($0.11) per share, in the fourth
quarter of 2010. The $1.7 million reduction in net loss for the fourth quarter
of 2011 was driven by lower stock-based compensation expense of $1.4
million.

Net loss in the fourth quarter of
2011 includes a $1.7 million impairment charge related to the write-down of
manufacturing equipment whereas net loss in the fourth quarter of 2010 includes
an acceleration of depreciation expense of $2.3 million.

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Cash provided by operating
activities

|(Expressed in thousands of
      U.S. dollars) | Three months ended December
      31,
|---------------------------------------------- | -------------------------------------
|                                               | 2011                                 
|Cash provided by operating
      activities    | $                                    

Cash provided by operating
activities in the fourth quarter of 2011 was $3.9 million, an increase of $2.1
million compared to cash provided by operating activities of $1.8 million in the
fourth quarter of 2010. The $2.1 million increase was driven by improvements in
changes of working capital of $1.7 million combined with reductions in cash
operating losses of $0.4 million.

RESULTS OF OPERATIONS  2011

Revenue and gross margin

|*(Expressed in thousands of U.S. dollars)* | Years ended December 31,
|------------------------------------------ | ------------------------
|                                           |                         
|Fuel Cell Products                         | $                       
|Contract
      Automotive                  |                         
|Material Products                          |                         
|Revenues                                   |                         
|Cost of goods sold                         |                         
|Gross Margin                               | $                       
|Gross Margin %                             |                         

Our revenues in 2011 increased
17%, or $11.0 million, to $76.0 million, compared to $65.0 million for 2010. The
17% increase was driven by increases in our core Fuel Cell Products segment of
36%, or $12.2 million, which more than offset minor declines in our Contract
Automotive and Material Products revenues.

While revenue growth for the year
of 17% was less than expected, and less than our original 2011 full year
guidance for growth in excess of 30%, the negative variance was largely
attributable to delays in the timing of module shipments (particularly fuel cell
bus modules to Brazil) initially planned in 2011 that are now expected in 2012.
While we achieved significant revenue growth in 2011, the heightened risk
factors to our original 2011 revenue guidance that were identified in our third
quarter of 2011 Outlook update, ultimately ended up materializing. In
particular, delays in the timing of completion of negotiations with Sao Paulo
Transit Agency in Brazil for a 10 to 30 fuel cell bus RFP, resulted in the
deferral of approximately $5 million of expected 2011 fuel cell bus module
shipments. In addition, unexpected delays in the closing of fuel cell bus
contracts in the United States and Europe, and planned backup power system
contracts in Dantherm Power, resulted in an additional deferral of approximately
$3.5 million from 2011. While delays in the timing of planned shipments
negatively impacted 2011 results, these delays had a positive impact on our
year-end 12-month order book which increased to $45.3 million, an improvement of
29% over 2010.

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In our core Fuel Cell Products
segment, 2011 revenues improved 36%, or $12.2 million, to $46.5 million compared
to 2010, due to improvements in both our Motive power and Stationary power
markets, combined with our increased focus on building our engineering services
business. Motive power market increases were driven by higher fuel cell bus
revenues as a result of new shipments in 2011 to Tuttotrasporti, Van Hool NV,
UNDP, Daimler and FTA National Fuel Cell Bus Programs, partially offset by
slightly lower material handling market revenues. Material handling revenues
were down slightly due to a decline in service revenues and a change in sales
mix to lower power units, which offset the overall impact of the increase in
volume in support of Plug Power Inc.s GenDrive systems. Stationary power
revenues increased as a result of a change in sales mix to larger scale
hydrogen-based backup power units which offset the overall impact of the decline
in volume, increased shipments of distributed generation units, increased
shipments of Dantherm Power backup power systems, and work performed on the K2
Pure Solutions and Toyota distributed power CLEARgen fuel cell system
projects.

The following table provides a
summary of our fuel cell stack shipments for the year:

|                                | Years ended December 31, | 
|------------------------------- | ------------------------ | 
|                                | 2011                     | 
|Material handling               | 1,422                    | 
|Backup
      power              | 1,447                    | 
|Distributed generation          | 176                      | 
|Other                           | 220                      | 
|Fuel Cell Stack
      Shipments | 3,265                    | 

In our Contract Automotive and
Material Products segments, 2011 revenues declined 4%, or $1.2 million, to $29.5
million, compared to 2010. Contract Automotive segment revenues of $9.3 million
were down 5%, or $0.5 million, due to slightly lower shipments of FCvelocity
1100 fuel cell products to Daimler. As we have now completed all FCvelocity 1100
shipments to Daimler under our initial supply agreement, this segment will cease
to be an operating unit as of the end of 2011. Material Products segment
revenues of $20.2 million were down 3%, or $0.7 million, as increased shipments
of fuel cell GDL products were offset by lower carbon friction material product
revenues.

Gross margins increased to $13.9
million, or 18% of revenues, for 2011, compared to $10.1 million, or 16% of
revenues, for 2010. The increase in gross margin is primarily as a result of
increased revenues in all of our Fuel Cell Products markets (except material
handling) including increased shipments of higher margin fuel cell bus modules,
combined with our ongoing product cost reduction efforts across all of our
platforms, lower unabsorbed manufacturing overhead as a result of the higher
overall volume, and improved warranty performance on our material handling and
backup power products. These gross margin improvements were partially offset by
lower margins in our Material Products segment.

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Cash Operating Costs

|(Expressed in thousands of U.S. dollars)      | Years ended December 31, |       
|--------------------------------------------- | ------------------------ | ------
|                                              |                          | 2011  
|Research and Product
             Development | $                        | 21,623
|General and Administration                    |                          | 10,838
|Sales and
      Marketing                     |                          | 9,487 
|Operating costs                               |                          | 41,948
|Less: Stock-based
      compensation          |                          | (2,646
|Cash Operating
    Costs                      | $                        | 39,302

Cash Operating Costs is a non-GAAP
measure. 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 the Supplemental
Non-GAAP Measures section. Cash Operating Costs adjusts operating expenses for
stock-based compensation expense, depreciation and amortization, restructuring
charges and acquisition costs.

Cash Operating Costs (see
Supplemental Non-GAAP Measures) for 2011 were $39.3 million, a decline of $2.8
million, or 7%, compared to 2010. The 7% reduction in 2011 was primarily as a
result of operational efficiencies, the aggressive pursuit of government funding
for our research and product development efforts, the redirection of engineering
resources to revenue bearing engineering service projects, lower accrued
compensation expense as a result of not achieving our corporate performance
targets relating to revenue and Adjusted EBITDA for the year, and by lower
operating costs in Dantherm Power as a result of our cost reduction efforts in
the third quarter of 2010 which included a 25% workforce reduction. These
expense reductions in 2011 were partially offset by increased investment in
sales and marketing capacity in support of commercial efforts, and by the
negative effects (approximately $2.0 million) of a 4% stronger Canadian dollar
relative to the U.S. dollar on our Canadian operating cost base.

While excluded from Cash Operating
Costs, stock-based compensation expense declined 26% in 2011, as compared to
2010, as a result of lower accrued share-based compensation expense as certain
outstanding restricted share units failed to meet the vesting criteria and were
cancelled.

Adjusted
EBITDA

|(Expressed in thousands of
      U.S. dollars) | Years ended December
  31,
|---------------------------------------------- | --------------------------
|                                               | 2011                      
|Adjusted
    EBITDA                            | $                         

EBITDA and Adjusted EBITDA 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 the
Supplemental Non-GAAP Measures section. Adjusted EBITDA adjusts EBITDA for
stock-based compensation expense, transactional gains and losses, finance and
other income, and acquisition costs.

Adjusted EBITDA (see Supplemental
Non-GAAP Measures) for 2011 was ($22.3) million, an improvement of $3.9 million,
or 15%, compared to 2010. The 15% reduction in Adjusted EBITDA loss in 2011 was
driven by gross margin improvements of $3.8 million primarily as a result of the
17% increase in revenues, and by lower Cash Operating Costs of $2.8 million
primarily as a result of our continued cost optimization efforts, which more
than offset the negative impacts (approximately $2.0 million) of a 4% stronger
Canadian dollar relative to the U.S. dollar on our Canadian operating cost base.
A 1% increase in the Canadian dollar, relative to the U.S. dollar, negatively
impacts annual Cash Operating Costs and Adjusted EBITDA by approximately $0.4
million to $0.5 million. These improvements in Adjusted EBITDA were partially
offset by restructuring charges of $1.4 million in 2011, relating to a corporate
leadership restructuring initiated in September 2011 and a Dantherm Power
leadership restructuring initiated in March 2011, and by a decline in the net
loss attributable to Dantherm Powers non-controlling interests of $1.2
million.

Page 8 of 38

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As part of our focus on
profitability, we have taken steps to reduce our cost base in 2011. In addition
to the measures taken earlier in the year at Dantherm Power to streamline its
organization with the reduction in the number of executive officers, a similar
action was taken at corporate headquarters in September of 2011, with a
reduction in the number of executive officers from six to five. These actions
have resulted in the above noted restructuring charge of $1.4 million for the
year.

While improvement in Adjusted
EBITDA of 15% for the year was less than expected and less than our original
2011 full year guidance for improvement in excess of 40%, the negative variance
was largely attributable to the above noted delays in the timing of fuel cell
bus shipments, combined with the above noted negative foreign exchange impacts
of approximately $2.0 million and restructuring charges of $1.4 million that we
were unable to offset. The heightened risk factors to our original 2011 Adjusted
EBITDA guidance that were identified in our third quarter of 2011 Outlook update
ultimately ended up materializing.

Net loss attributable to
Ballard

|(Expressed in thousands of
      U.S. dollars) | Years ended December 31, |        
|---------------------------------------------- | ------------------------ | -------
|                                               | 2011                     |        
|Net loss attributable to
      Ballard         | $                        | (33,420

Net loss attributable to Ballard
for 2011 was ($33.4) million, or ($0.40) per share, compared to net loss of
($31.5) million, or ($0.37) per share, in 2010. Net loss in 2010 includes a $4.8
million transactional gain related to the monetization of the Share Purchase
Agreement with Ford, as well as a gain on sale of property, plant and
equipmentof $3.3 million related to the land portion of the sale
and leaseback of our head office building. Net loss in 2011 includes a $1.7
million impairment charge related to a write-down of manufacturing
equipment.

Excluding the impact of these
transactional gains of $8.1 million in 2010 and impairment charges of $1.7
million in 2011, Normalized Net Loss (see Supplemental Non-GAAP Measures) in
2011 would have improved by $7.9 million, or 20%, as compared to
2010.

Cash used by operating
activities

|(Expressed in thousands of
      U.S. dollars) | Years ended December 31, |        
|---------------------------------------------- | ------------------------ | -------
|                                               | 2011                     |        
|Cash used by operating
      activities        | $                        | (33,221

Cash used by operating activities
in 2011 increased by ($3.9) million to ($33.2) million, compared to ($29.3)
million for 2010. The increase in cash used by operating activities of ($3.9)
million was driven by increased working capital requirements of ($10.2) million,
which more than offset reductions in cash operating losses of $6.3
million.

Page 9 of 38

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Total working capital requirements
of ($6.7) million in 2011 were driven by higher accounts receivable of $4.3
million as a result of the timing of revenues and the related customer
collections, combined with increased inventory levels of $1.3 million to support
future growth. This compares to total working capital sources of $3.5 million in
2010.

OPERATING EXPENSES AND OTHER
ITEMS

Research and product
development expenses

|(Expressed in thousands of
      U.S. dollars)    | Three months ended December
      31, |       
|------------------------------------------------- | ------------------------------------- | ------
|Research and product
      development            | 2011                                  |       
|Research and product development expense          | $                                     | 5,125 
|Less: depreciation and
      amortization expense | $                                     | (956  
|Research and product
      development            | $                                     | 4,169 
|                                                 
|(Expressed in thousands of
      U.S. dollars)    | Years ended December 31,              |       
|Research and product
      development            | 2011                                  |       
|Research and product development expense          | $                                     | 25,480
|Less: depreciation and
      amortization expense | $                                     | (3,857
|Research and product
      development            | $                                     | 21,623

Research and product development
expenses for the three months ended December 31, 2011 were $5.1 million, a
decrease of $1.8 million, or 26%, compared to the corresponding period of 2010.
Excluding depreciation and amortization expense of $1.0 million and $2.5
million, respectively, research and product development expense declined $0.2
million, or 4%, compared to 2010. Depreciation and amortization expense of $2.5
million in the fourth quarter of 2010 includes a charge related to the
acceleration of depreciation expense of $1.5 million for research and product
development assets that were considered no longer in use or impaired.

Research and product development
expenses for the year ended December 31, 2011 were $25.5 million, a decrease of
$3.3 million, or 11%, compared to 2010. Excluding depreciation and amortization
expense of $3.9 million and $5.0 million, respectively, research and product
development expense declined $2.1 million, or 9%, compared to 2010.

The respective 4% and 9%
reductions in 2011 were primarily as a result of the aggressive pursuit of
government funding for our research and product development efforts, the
redirection of engineering resources to revenue bearing engineering service
projects, lower operating costs in Dantherm Power as a result of our cost
reduction efforts in the third quarter of 2010 which included a 25% workforce
reduction, and downward adjustments to accrued share-based and cash-based
compensation expense in 2011 as a result of not achieving our corporate
performance targets relating to revenue and Adjusted EBITDA for the year.

Page 10 of 38

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Government research funding is
reflected as a cost offset to research and product development expenses. These
expense reductions and improved cost recoveries in 2011 were partially offset by
the negative effects of a 4% stronger Canadian dollar relative to the U.S.
dollar on our Canadian operating cost base.

General and administrative
expenses

|(Expressed in thousands of
      U.S. dollars)    | Three months ended December
      31, |       
|------------------------------------------------- | ------------------------------------- | ------
|General and
      administrative                  | 2011                                  |       
|General and administrative expense                | $                                     | 2,464 
|Less:
      Depreciation and amortization expense | $                                     | (77   
|Less: Restructuring
      expense                 | $                                     | (79   
|General and
    administrative                    | $                                     | 2,308 
|                                                 
|(Expressed in thousands of
      U.S. dollars)    | Years ended December 31,              |       
|General and
      administrative                  | 2011                                  |       
|General and administrative expense                | $                                     | 12,500
|Less:
      Depreciation and amortization expense | $                                     | (306  
|Less: Restructuring
      expense                 | $                                     | (1,356
|General and
    administrative                    | $                                     | 10,838

General and
administrativeexpenses for the three months ended December 31, 2011
were $2.5 million, a decrease of $2.6 million, or 51%, compared to the
corresponding period of 2010. Excluding depreciation and amortization expense
and restructuring charges, general and administrative expense declined $1.6
million, or 40%, compared to 2010. The 40% reduction in the fourth quarter of
2011 was driven by downward adjustments to accrued share-based and cash-based
compensation expense in 2011 as a result of not achieving our corporate
performance targets relating to revenue and Adjusted EBITDA for the year,
combined with lower impairment losses on trade receivables. General and
administrative expense includes impairment losses on trade receivables of $0.3
million and $0.7 million, respectively, in the fourth quarters of 2011 and 2010.
Depreciation and amortization expense of $1.2 million in the fourth quarter of
2010 includes a charge related to the acceleration of depreciation expense of
$0.8 million for information technology assets that were considered no longer in
use or impaired.

General and administrative
expenses for the year ended December 31, 2011 were $12.5 million, a decrease of
$2.3 million, or 15%, compared to 2010. Excluding depreciation and amortization
expense and restructuring charges, general and administrative expense declined
$2.2 million, or 17%, compared to 2010. The 17% expense reduction in 2011 was
driven by lower accrued compensation expense combined with lower impairment
losses on trade receivables and the continued cost optimization efforts across
the company. General and administrative expense includes impairment losses on
trade receivables of $0.1 million and $0.7 million, respectively, in 2011 and
2010. These expense reductions were partially offset by the negative effects of
a 4% stronger Canadian dollar relative to the U.S. dollar on our Canadian
operating cost base.

Page 11 of 38

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Restructuring charges of $1.4
million in 2011 relate to a Dantherm Power leadership restructuring initiated in
March 2011 and a corporate leadership restructuring initiated in September 2011,
whereas the restructuring charge of $0.3 million in 2010 relates to a 25%
workforce reduction initiated at Dantherm Power in August 2010.

Sales and marketing expenses

|(Expressed in thousands of
      U.S. dollars) | Three months ended December
      31, |      
|---------------------------------------------- | ------------------------------------- | -----
|Sales and
    marketing                        | 2011                                  |      
|Sales and marketing expense                    | $                                     | 1,892
|Less: acquisition costs                        | $                                     | -    
|Sales and marketing                            | $                                     | 1,892
|                                              
|(Expressed in thousands of
      U.S. dollars) | Years ended December 31,              |      
|Sales and
    marketing                        | 2011                                  |      
|Sales and marketing expense                    | $                                     | 9,487
|Less: acquisition costs                        | $                                     | -    
|Sales and marketing                            | $                                     | 9,487

Sales and
marketingexpenses for the three months ended December 31, 2011
were $1.9 million, a decrease of $0.8 million, or 31% compared to the
corresponding period of 2010. The 31% reduction in the fourth quarter of 2011
was driven by downward adjustments to accrued share-based and cash-based
compensation expense as a result of not achieving our corporate performance
targets relating to revenue and Adjusted EBITDA for the year.

Sales and
marketingexpenses for 2011 were $9.5 million, an increase of $0.4
million, or 4% compared to 2010. The 4% increase in 2011 was primarily as a
result of increased investment in sales and marketing capacity in support of
commercial efforts, combined with the negative effects of a 4% stronger Canadian
dollar relative to the U.S. dollar on our Canadian operating cost base. This
increase was partially offset by lower accrued compensation expenses and
acquisition costs of $0.3 million in 2010 related to costs incurred for the
acquisition of Dantherm Power.

Finance and other income
(loss)for the three months ended December, 2011 were $0.1
million, a decrease of $0.5 million, compared to the corresponding period of
2010. Finance and other income (loss)for the year ended December 31, 2011
were $0.2 million, an increase of $0.3 million, compared to 2010. The following
table provides a breakdown of our finance and other income (loss) for the
reported periods:

|(Expressed in thousands of
      U.S. dollars) | Three months ended December
      31, |    
|---------------------------------------------- | ------------------------------------- | ---
|                                               | 2011                                  |    
|Employee future benefit plan expense           | $                                     | (37
|Investment
      income                        |                                       | 77 
|Foreign exchange gain (loss)                   |                                       | 38 
|Other income                                   |                                       | -  
|Finance and other income
      (loss)          | $                                     | 78 

Page 12 of 38

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|(Expressed in thousands of
      U.S. dollars) | Years ended December 31, |    
|---------------------------------------------- | ------------------------ | ---
|                                               | 2011                     |    
|Employee future benefit plan expense           | $                        | (37
|Investment
      income                        |                          | 303
|Foreign exchange gain (loss)                   |                          | (71
|Other income                                   |                          | -  
|Finance and other income
      (loss)          | $                        | 195

Employee future benefit plan
expense for the three months and year ended December 31, 2011 were $0.1 million,
respectively, compared to an expense of and $0.1 million, respectively, for the
corresponding periods of 2010. Employee future benefit plan expense primarily
represents the excess of interest cost over the expected return on plan assets
on a curtailed defined benefit pension plan for our current and former United
States employees.

Investment income approximated
between $0.1 million and $0.3 million, respectively, for the three months and
years ended December 31, 2011 and 2010 and was earned on our cash, cash
equivalents and short-term investments.

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 position. At December 31, 2011, our Canadian dollar-denominated assets
(cash, cash equivalents and short-term investments approximated our Canadian
dollar-denominated liabilities (capital lease obligations, warranty obligations
and accounts payable and accrued liabilities), resulting in an insignificant
foreign exchange loss in 2011. During 2011, we increased our Canadian dollar
denominated cash reserves to better balance our overall balance sheet exposure
to currency fluctuations. The foreign exchange loss in 2010 of $0.5 million
resulted primarily from the impact of a strengthening Canadian dollar on our
Canadian dollar-denominated net liability position at that time. At December 31,
2010, our Canadian dollar-denominated liabilities (capital lease obligations,
warranty obligations and accounts payable and accrued liabilities) exceeded our
Canadian dollar-denominated assets (cash and short-term investments).

Finance
expensefor the three months and
year ended December 31, 2011 was $0.5 million and $1.4 million, respectively,
compared to $0.3 million and $0.9 million, respectively, for the corresponding
periods of 2010. Finance expense relates primarily to the sale and leaseback of
our head office building in Burnaby, British Columbia which was completed on
March 9, 2010. Due to the long term nature of the lease, the leaseback of the
building qualifies as a finance (or capital) lease.

Gain on sale of property,
plant and equipmentfor the year
ended December 31, 2011 was $0.7 million and relates primarily to a gain on sale
of property, plant and equipment to Mercedes-Benz Canada Inc. in conjunction
with the sub-lease of 21,000 square feet of surplus production space in Burnaby,
B.C, effective in August 2011.

Page 13 of 38

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Gain on sale of
assetsfor the year ended December 31,
2010was $8.1 million, and consists of a gain of $4.8 million related to the
monetization of the Share Purchase Agreement with Ford, and a gain of $3.3
million on the land component of the sale and leaseback of our head office
building in Burnaby, B.C. in March, 2010.

The $4.8 million gain resulted from the
extinguishment of the contingent payment related to the 2009 monetization of our
rights under the Share Purchase Agreement with Ford relating to our 19.9% equity
investment in AFCC. This Share Purchase Agreement has been fully monetized for
$42.0 million, comprising an initial cash payment of $37.0 million received in
2009 and a subsequent contingent cash payment of $5.0 million received in
2010.

The $3.3 million gain on the land
component of the sale and leaseback of our head office building in 2010 was
retroactively recorded on our conversion to IFRS. Under former Canadian GAAP,
sale and leaseback gains are deferred and amortized over the term of the lease
when the leaseback is classified as an operating lease. Under IFRS, such gains
are recognized immediately if the sale and leaseback transaction results in an
operating lease, and is undertaken at fair value. As the land component of our
March 2010 sale and leaseback of our head office building was determined to be
an operating lease and therefore met this IFRS criteria for immediate gain
recognition, the unamortized portion of the deferred gain of $3.3 million
attributed to the land leaseback has been recognized in 2010 net income on
application of IFRS, and the related deferred gain of $3.3 million previously
recorded under Canadian GAAP has been derecognized in the presented 2010
comparative financial information. The $6.2 million remaining balance of the
$9.5 million deferred gain initially recorded under former Canadian GAAP on the
closing of this transaction in 2010 relates solely to the building component of
the sale and leaseback transaction. This $6.2 million building component did not
meet the above operating lease criteria as it was determined to be a Finance (or
capital) lease under IFRS and therefore remains recorded as a deferred gain
($5.7 million deferred gain as of December 31, 2011) which is being recognized
to income under IFRS on a straight-line basis over the term of the 15-year
lease.

Impairment loss on property,
plant and equipmentfor the three months
and year ended December 31, 2011 was $1.7 million and consists primarily of an
impairment charge related to a write-down of manufacturing equipment.

Net loss attributed to
non-controlling interestsfor the three
months and year ended December 31, 2011 was $0.3 million and $2.7 million,
respectively, compared to $0.3 million and $3.9 million, respectively, for the
corresponding periods of 2010. Amounts represent the non-controlling interest of
Dantherm A/S and Danfoss A/S in the losses of Dantherm Power as a result of
their 48% total equity interest. The improved performance in 2011 at Dantherm
Power is primarily a result of lower operating costs in 2011 as a result of our
continued cost reduction efforts which included a leadership restructuring in
the first quarter of 2011 and a 25% workforce reduction initiated in the third
quarter of 2010. These benefits were partially offset by a restructuring charge
recorded in the first quarter of 2011 related to the above noted Dantherm Power
leadership restructuring.

Page 14 of 38

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SUMMARY OF QUARTERLY RESULTS

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,
|----------------------------------------------------------------------- |  | ----------------
|which are
      expressed in thousands)                                 |  |                 
|                                                                        |  | Dec
      31,   
|                                                                        |  | 2011            
|Revenues                                                                |  | $               
|Net income
      (loss) attributable to Ballard                         |  | $               
|Net income (loss) per share attributable to                             |  | $               
|Ballard, basic and
      diluted                                        |  |                 
|Weighted average common shares
      outstanding                        |  |                 
|                                                                        | 
|                                                                        |  | Dec 31,         
|                                                                        |  | 2010            
|Revenues                                                                |  | $               
|Net income (loss) attributable to Ballard                               |  | $               
|Net income (loss) per share attributable to                             |  | $               
|Ballard, basic and
      diluted                                        |  |                 
|Weighted average common shares
      outstanding                        |  |                 

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:

- Revenues:
  Variations in fuel cell revenues reflect the timing of our customers fuel
  cell vehicle, bus and fuel cell product deployments. Variations in fuel cell
  revenues also reflect the timing of work performed and the achievements of
  milestones under long-term fixed price contracts.
- Operating
  expenditures: Operating expenses were
  negatively impacted by restructuring charges of $0.4 million in the third
  quarter of 2011 as a result of a corporate leadership restructuring,
  restructuring charges of $1.0 million in the first quarter of 2011 as a result
  of a leadership restructuring in Dantherm Power, and by restructuring charges
  of $0.3 million in the third quarter of 2010 as a result of a 25% workforce
  reduction at Dantherm Power. Restructuring charges are recognized in general
  and administrative expense.

Operating expenses were negatively impacted in the fourth quarter of 2010
due an acceleration of depreciation expense of $2.3 million for equipment that
was considered no longer in use or impaired. The $2.3 million depreciation
charge was recognized in product development expense ($1.5 million) and general
and administrative expense ($0.8 million).

Operating expenses also
include the impact of changes in the value of the Canadian dollar, versus the
U.S. dollar, on our Canadian dollar denominated expenditures.

- Gain on sale of assets:The net loss for the first quarter of 2010 was positively
  impacted by a gain on the sale of the land component of the sale and leaseback
  of our head office building of $3.3 million. The net loss for the third
  quarter of 2010 was positively impacted by a gain on the stub period
  monetization of the Share Purchase Agreement with Ford of $4.8 million.

Page 15 of 38

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- Impairment loss on property, plant and
  equipment: The net loss for the fourth
  quarter of 2011 was negatively impacted by an impairment charge of $1.7
  million related to the write-down of manufacturing equipment never put into
  use.

CASH FLOWS

Cash, cash equivalents and short-term
investments were $46.2 million (or $41.6 million net of Operating Facility draws
of $4.6 million) at December 31, 2011, compared to $74.4 million at the end of
2010. The decrease of ($28.2) million in 2011 was driven by a net loss
(excluding non-cash items) of ($26.5) million, working capital requirements of
($6.7) million and capital expenditures (net of proceeds on sale and leaseback
of capital equipment) of ($2.2) million. These outflows were partially offset by
cash proceeds of $1.7 million from the sale of property, plant and equipment to
MBC in advance of the sub-lease of 21,000 square feet of surplus production
space in Burnaby, B.C., by convertible debt financing of $1.7 million to
Dantherm Power by the non-controlling partners, and by the above noted net cash
advances on our Operating Facility of $4.6 million.

For the three months ended December 31,
2011 and 2010, working capital requirements resulted in cash inflows of $8.7
million and $7.0 million, respectively. In the fourth quarter of 2011, net cash
inflows of $8.7 million were driven by lower accounts receivable of $3.3 million
due primarily to the timing of collections of our fuel cell product and service
revenues, lower inventory of $1.9 million as we consumed previously built-up
inventory in order to fulfill the higher product shipments in the fourth
quarter, and higher deferred revenue and cost recovery of $2.0 million as we
received the next tranches of SDTC government funding for our distributed
generation and bus projects in advance of incurring the related research and
product development expenditures. Working capital inflows in the fourth quarter
of 2010 of $7.0 million were driven by lower inventory of $4.0 million as we
consumed previously built-up inventory in order to fulfill the higher product
shipments in the fourth quarter, and higher deferred revenue and cost recovery
of $2.1 million as a result of the receipt of customer payments and government
funding awards in advance of work performed.

For the year ended December 31, 2011,
working capital requirements resulted in cash outflows of ($6.7) million,
compared to inflows of $3.5 million for 2010. In 2011, net cash outflows of
($6.7) million were driven by higher accounts receivable of ($4.3) million due
primarily to the timing of collections of our fuel cell product and service
revenues, higher inventory of ($1.3) million due primarily to the buildup of
inventory to support expected higher product shipments 2012, and by lower
accounts payable and accrued liabilities of ($1.7) million due primarily to the
timing of supplier payments. In 2010, net cash inflows of $3.5 million were
driven by increased accounts payable and accrued liabilities of $2.9 million due
primarily to higher 2010 accrued annual employee bonuses as compared to 2009,
combined with higher payables to suppliers as a result of our increased
inventory and production levels. In addition, net cash inflows in 2010 benefited
from lower prepaid expenses of $1.3 million as a result of lower insurance and
information technology license renewal costs and higher deferred revenue and
cost recovery of $1.0 million as a result of the receipt
of customer payments and government funding awards in advance of work performed.
These 2010 inflows were partially offset by cash outflows as a result of
increased inventory of ($2.4) million due to the buildup of inventory to support
expected future fuel cell shipments in 2011.

Page 16 of 38

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Investing activities resulted in cash
outflows of ($15.5) million and ($3.8) million, respectively, for the three
months and year ended December 31, 2011, compared to cash inflows of $9.8
million and $38.3 million, respectively, for the corresponding periods in 2010.
Changes in short-term investments resulted in cash outflows of ($15.6) million
and ($3.4) million, respectively, for the three months and year ended December
31, 2011, compared to cash inflows of $10.7 million and $17.7 million,
respectively, for the corresponding periods of 2010. 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.

Other Investing activities in 2011 also
include proceeds of $1.7 million received from MBC on the closing of the
facilities sub-lease agreement, proceeds on sale and leaseback of capital
equipment of $1.9 million, and capital expenditures of ($4.1) million primarily
for manufacturing equipment in order to build production capacity. Other
investing activities in 2010 include net proceeds received on the closing of the
head office building sale and leaseback transaction of $19.9 million, net
proceeds of $4.8 million on the extinguishment of the contingent payment related
to the 2009 monetization of the Share Purchase Agreement with Ford less the
payment of accrued costs of ($1.4) million related to the initial monetization
which closed in December 2009, and net cash received of $0.9 million on the
acquisition of Dantherm Power, partially offset by capital expenditures of
($3.5) million.

Financing activities resulted in cash
outflows of ($3.1) million and cash inflows of $5.1 million, respectively, for
the three months and year ended December 31, 2011, compared to cash outflows of
($0.6) million and ($0.4) million, respectively, for the corresponding periods
of 2010. Financing activities in the fourth quarter of 2011 primarily represent
net repayments against our Operating Facility of ($2.7) million, whereas
financing activities in 2011 primarily represent total advances, net of
repayments, of $4.6 million on our Operating Facility. The Operating Facility is
used to assist with the financing of working capital requirements. Financing
activities in 2011 also include proceeds on convertible debenture financing from
the Dantherm Power non-controlling interests to Dantherm Power of $1.7 million
for the year. These financing inflows in 2011 were partially offset by finance
lease payments of ($0.8) million and treasury stock purchases of ($0.3) million
under our market purchase restricted share unit plan. Financing activities in
2010 primarily represent the minority partner cash contribution to Dantherm
Power for the second tranche investment of 5.0 million Danish Kroner, or $0.9
million in August 2010, less capital lease payments of ($0.8) million and
treasury stock purchases of ($0.6) million.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2011, we had total
Liquidity of $41.6 million. We measure Liquidity as our net cash reserves,
consisting of the sum of our cash, cash equivalents and short-term investments of $46.2 million, net of amounts drawn on our $10
million Canadian demand revolving facility (Operating Facility) of $4.6
million. The Operating Facility is used to assist in financing our short term
working capital requirements and is secured by a hypothecation of our cash, cash
equivalents and short-term investments.

Page 17 of 38

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We also have a $3.3 million Canadian
capital leasing facility (Leasing Facility) which is used to finance the
acquisition and / or lease of operating equipment and is secured by a
hypothecation of our cash, cash equivalents and short-term investments. At
December 31, 2011, $3.2 million was outstanding on the Leasing
Facility.

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, the further development of our sales and marketing,
product distribution and service capabilities, and working capital requirements
to grow our business.

At this stage of our development, we
may record net cash 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, combined with increased
investments in working capital as we grow our business. 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 success in managing 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 forecasted cash used by
operating activities at all times.

2012 BUSINESS OUTLOOK

As a result of the increase in our
year-end 12-month order book to $45.3 million, the continued improvements in our
financial results over the past two years combined with signs of increasing
overall market momentum, we have a strong outlook for 2012, with expectations
for:

- Revenue of approximately $100 million;
  and
- Adjusted EBITDA of approximately
  breakeven.

Consistent with the past couple of years, we expect a
majority of our 2012 revenue to be realized in the second half of the year. Our
business revenue outlook for 2012 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 2012,
sales orders received for units and services to be delivered in 2012, and an
estimate with respect to the generation of new sales in each of our markets. Our
2012 business revenue outlook is also supported by our 12-month order book of
$45.3 million at December 31, 2011 ($35.0 million at December 31, 2010). The
primary risk factor that could cause us to miss our target revenue guidance for
2012 are delays from forecast in terms of closing and shipping expected sales
orders, primarily in our Brazilian and European bus markets and in our backup
power markets.

Page 18 of 38

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The key drivers for this expected
improvement in Adjusted EBITDA for 2012 are expected increases in gross margins
driven primarily by aggressive product cost reduction efforts combined with the
above noted overall increase in expected revenues and a shift in product mix to
higher margin fuel cell buses, supported by continued operating expense
optimization and a resulting reduction in Cash Operating Costs (see Supplemental
Non-GAAP Measures section) from 2011. Consistent with the expectation that a
majority of our 2012 revenue will fall in the last half of the year, Adjusted
EBITDA is expected to be materially improved in the last half of 2012, as
compared to the first half of 2012. Our Adjusted EBITDA outlook for 2012 is
based on our internal Adjusted EBITDA forecast and takes into account our
forecasted gross margin related to the above revenue forecast, the costs of our
current and forecasted Cash Operating Costs, and assumes an average U.S. dollar
exchange rate of 1.00 in relation to the Canadian dollar. The primary risk
factor that could cause us to miss our target Adjusted EBITDA outlook for 2012
are lower than expected gross margins due to (i) lower revenues from forecast
due to unexpected delays in terms of closing and shipping expected sales orders;
(ii) shifts in product sales mix negatively impacting projected gross margin as
a percentage of revenues; or (iii) delays in the timing of our projected product
cost reductions. In addition, Adjusted EBITDA could also be negatively impacted
by increases in Cash Operating Costs as a result of (i) increased product
development costs due to unexpected delays in new product introductions or by
lower than anticipated government cost recoveries; or (ii) negative foreign
exchange impacts as a result of a higher than expected Canadian dollar. A 1%
increase in the Canadian dollar, relative to the U.S. dollar, negatively impacts
Adjusted EBITDA and Cash Operating Costs by approximately $0.4 million to $0.5
million.

Similar to prior years and consistent
with our revenue and Adjusted EBITDA performance expectations for the year and
the resulting impacts on gross margin and working capital, we expect cash used
in operating activities in 2012 to be materially higher in the first and second
quarters of 2012, as compared to the third and fourth quarters of 2012. Cash
used in operating activities in the first two quarters of 2012 is expected to be
negatively impacted by the buildup of inventory to support higher product
shipments in the third and fourth quarters, the payment of accrued 2011 annual
employee bonuses, and by the timing of revenues and the related customer
collections which are also skewed towards the last half of the year.

Finally, we will continue our focus on
maintaining a strong liquidity position. We ended 2011
with cash, cash equivalents and short-term investments of $46.2 million (or
$41.6 million net of Operating Facility draws of $4.6 million). We believe that
with continued focus on improving gross margin performance, managing our Cash
Operating Costs and our working capital requirements, we have sufficient
liquidity to reach profitability without the need for additional public market
financing. However, we may choose to access additional capital under
circumstances advantageous to the Company.

Page 19 of 38

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OFF-BALANCE SHEET ARRANGEMENTS &
CONTRACTUAL OBLIGATIONS

Periodically, we use forward foreign
exchange and forward platinum purchase contracts to manage our exposure to
currency rate fluctuations and 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 either (i) recorded in our statement of
comprehensive income if formally designated and qualified under hedge accounting
criteria; or (ii) recorded in our statement of operations if either not
designated, or not qualified, under hedge accounting criteria.

At December 31, 2011, we had
outstanding foreign exchange currency contracts (qualified under hedge
accounting criteria) to purchase a total of Canadian $7.0 million at an average
rate of $1.02 Canadian per $1.00 United States, resulting in an unrealized gain
of $0.1 million recorded in other comprehensive income. In addition, we had
outstanding platinum forward purchase contracts (not qualified under hedge
accounting criteria) to purchase 1,750 troy ounces of platinum at an average
rate of $1,550 per troy ounce, resulting in an unrealized loss of $0.3 million
recorded in cost of product and service revenues.

At December 31, 2010, 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.

We have committed to make future
capital contributions of $0.1 million in Chrysalix, in which we have a limited
partnership interest.

At December 31, 2011 we had the
following contractual obligations and commercial commitments:

|(Expressed in thousands of U.S.
      dollars) |  | Payments due by
      period,
|---------------------------------------------- |  | -----------------------------
|Contractual
      Obligations                  |  | Total                        
|                                               |  |                              
|Operating leases                               |  | $                            
|Capital
      leases                           |  |                              
|Asset retirement
    obligations               |  |                              
|Total contractual
obligations                  |  | $                            

In addition to the contractual purchase
obligations above, we have outstanding commitments $0.9 million related
primarily to purchases of capital assets as at December 31, 2011. Capital
expenditures pertain to our regular operations and are expected to be funded
through cash on hand.

Page 20 of 38

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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 $7.4 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, 2011, 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 minority interest partners
in Dantherm Power. 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 at fair value. Related party
transactions and balances are as follows:

|(Expressed in thousands of U.S.
      dollars) |  | Years Ended December 31,
|---------------------------------------------- |  | ------------------------
|Transactions with related
      parties        |  | 2011                    
|Revenues                                       |  | $                       
|Purchases                                      |  |                         
|Key management personnel
      compensation    |  |                         
|                                               |  |                         
|                                               |  | As at December 31,      
|(Expressed in
      thousands of U.S. dollars) |  |                         
|Balances with related
      parties            |  | 2011                    
|Accounts payable and accrued liabilities       |  | $                       
|Convertible debenture
payable                  |  | $                       
|                                              
|OUTSTANDING SHARE
      DATA                   |  |                         
|                                               |  |                         
|                                              
|As at February 21,
    2012                    |  |                         
|Common share outstanding                       |  |                         
|Options outstanding                            |  |                         

INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)

Effective January 1, 2011 Canadian
publicly listed entities are required to prepare their financial statements in
accordance with IFRS. Due to the requirement to present comparative financial
information in accordance with IFRS, the effective transition date is January 1, 2010. The year ended December 31, 2011 is
our first reporting period under IFRS.

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Our consolidated financial statements
for the year ended December 31, 2011 are our first annual financial statements
that comply with IFRS. As 2011 is our first year of reporting under IFRS,IFRS 1 First-time Adoption of
IFRSis applicable. In accordance with IFRS
1, we have applied IFRS retrospectively as of January 1, 2010, for comparative
purposes as if IFRS had always been in effect, subject to certain mandatory
exceptions and optional exemptions applicable to us, discussed below.

Senior management and the Audit
Committee have approved the Companys IFRS accounting policies which were
initially presented in our unaudited interim consolidated condensed financial
statements for the three months ended March 31, 2011. Our final IFRS accounting
policies are detailed in note 3 to our annual consolidated financial statements.
Our final IFRS accounting policies include a change in accounting policy (see
below) from what was initially disclosed in our first quarter of 2011 MD&A
relating to a change in how we will account for employee future benefit
expenses.

TRANSITIONAL ELECTIONS (under IFRS 1
First Time Adoption)

The following summary provides details
of the opening statement of financial position transitional provisions which
were adopted effective January 1, 2010.

- Share Based Payments:IFRS 2, Share Based
  Payment: As allowed, we did not restate
  share-based payment balances in relation to fully vested awards of share-based
  payments prior to January 1, 2010.
- Property, plant and equipment
  (PP&E): No transitional elections
  were taken. The Company has elected to retain assets at historical cost upon
  transition rather than taking the allowed election to recognize assets at fair
  value.
- Business Combinations: The Company did not retrospectively restate any business
  combinations; IFRS 3 has been applied prospectively to acquisitions after
  January 1, 2010.
- Cumulative Translation
  Adjustments: All cumulative translation
  adjustments and associated gains and losses have been reset to zero as at
  the date of transition, with all historic amounts transferred from accumulated
  other comprehensive loss to retained earnings.
- Employee Future Benefits(additional Transitional
  Election from those disclosed in our first quarter of 2011
  MD&A): We elected to apply the optional
  election inIFRS 1 and recognized all
  cumulative unrecognized actuarial gains and losses through retained earnings
  as at the date of transition.

IFRS OPENING STATEMENT OF FINANCIAL
POSITION

Note 27 to our consolidated financial
statements summarize the quantitative impact on the consolidated statement of
financial position of our transition to IFRS at January 1, 2010.

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ADDITIONAL IMPACTS ON OUR IFRS 2010
FINANCIAL STATEMENTS

In addition to the above noted impacts
on our consolidated statement of financial position at January 1, 2010, the
following matters have impacted our 2010 consolidated financial statements as a
result of our conversion to IFRS:

- Accelerated recognition of sale and leaseback
  gains: Under former Canadian GAAP, sale and
  leaseback gains were deferred and amortized over the term of the lease when
  the leaseback was classified as an operating lease. Under IFRS, such gains may
  be recognized upfront if the sale and leaseback transaction results in an
  operating lease, and is undertaken at fair value. As the land component of our
  March 2010 sale and leaseback of our head office building met this criteria,
  the unamortized portion of the deferred gain under former Canadian GAAP of
  $3.3 million attributed to the land leaseback has been fully recognized in our
  net income for the year ended December 31, 2010 under IFRS.
- Foreign Currency Translation of Subsidiary
  (Dantherm Power): Under IFRS, the
  functional currency of the subsidiary determines the translation methodology.
  As Dantherm Powers functional currency has been assessed as the Danish Kroner
  under IFRS, Dantherm Power is consolidated under IFRS using the current rate
  method. Under former Canadian GAAP, Dantherm Power was translated using the
  temporal method.
- Actuarial gains and losses on Employee Future
  Benefit Plans (additional impact from those disclosed in our first quarter of
  2011 MD&A):Under IFRS, actuarial gains
  and losses arising from defined benefit plans and post-retirement benefit
  plans may be recorded immediately in either net income or other comprehensive
  income. Under former Canadian GAAP, our accounting policy was to recognize
  actuarial gains and losses in net income. On adoption of IFRS, we have elected
  to recognize actuarial gains and losses in other comprehensive income. As a
  result, net actuarial gains expensed under former Canadian GAAP in Finance and
  Other Income of $0.1 million for the year ended December 31, 2010 has been
  reclassified to other comprehensive income under IFRS.

IFRS ACCOUNTING POLICY
IMPACTS

In addition to the transitional and
other impacts described above, there are several accounting policy selections
that have impacted the Company on a go-forward basis. This is not an exhaustive
list, but it provides an indication of the main accounting policy choices which
applied to the Company under IFRS effective January 1, 2011, with comparatives
presented for 2010:

- Share-based payments: All share-based payments are
  valued at fair value under IFRS using an option pricing model. The Company has
  selected the Black Scholes option pricing model. This is consistent with the
  Companys historic accounting policy under former Canadian GAAP. However,
  under IFRS, the valuation of stock options and restricted share unit (RSU)
  awards requires individual tranche based valuations for those option and RSU
  plans with graded vesting, while former Canadian GAAP allows a single
  valuation for all tranches. Therefore, under IFRS each installment of option
  and RSU award will be treated as a separate option or
  RSU grant, and the fair value of each installment will be amortized over each
  installments vesting period instead of recognizing the entire award on a
  straight-line basis over the term of the grant. The impact of this change on
  net income for the periods presented has not been
  significant.

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- Property, Plant and Equipment
  (PP&E): Under IFRS, PP&E may be
  accounted for using either a cost or revaluation model. We have elected to use
  the cost model under IFRS for all classes of property, plant and equipment. As
  this is consistent with our historic accounting policy under former Canadian
  GAAP, this election has not impacted our PP&E balances.
- Impairment of Assets: If there is an indication that an asset may be impaired, an
  impairment test must be performed. Under former Canadian GAAP, this is a
  two-step impairment test in which (i) undiscounted future cash flows are
  compared to the carrying value; and (ii) if those undiscounted cash flows are
  less than the carrying value, the asset is written down to fair value. Under
  IFRS, an entity is required to assess, at the end of each reporting period,
  whether there is any indication that an asset may be impaired. If indicators
  of impairment exist, the entity shall estimate the recoverable amount of the
  asset by performing a onestep impairment test, which requires a comparison of
  the carrying value of the asset to the higher of (i) value in use; and (ii)
  fair value less costs to sell.Value in use is defined as the
  present value of future cash flows expected to be derived from the asset in
  its current state. Fair value less costs to sell, is defined as the estimated
  price that would be received on the sale of the asset in an orderly
  transaction between market participants, calculated at the measurement date.
  In addition, IFRS requires PP&E, goodwill and intangibles to be assessed
  for impairment at the cash-generating unit (CGU) level, rather than the
  reporting unit level considered by former Canadian GAAP.

As a result of this
difference, in principle, impairment write downs may be more likely under IFRS
than are currently identified and recorded under former Canadian GAAP. The
extent of any new write downs, however, may be partially offset by the
requirement underIAS 36 Impairment of Assets,to reverse any previous impairment losses
where circumstances have changed such that the impairments have been reduced.
Canadian GAAP prohibits reversal of impairment losses. We have concluded that
the adoption of these standards has not resulted in a change to the carrying
value of our PP&E, Goodwill and Intangible Assets on transition to IFRS
being January 1, 2010.

- Business Combinations:Under IFRS, we account for all business combinations from
  January 1, 2010 onwards in accordance withIFRS 3 Business Combinations. Given
  that we adopted former Canadian CICA Handbook Section 1582 as of January 1,
  2010 which is substantially converged with IFRS 3, we do not have any GAAP
  difference relating to the acquisition of Dantherm Power.
- Provisions:Under former Canadian GAAP, a provision is required to be recorded in
  the financial statements when required payment is considered likely and can
  be reasonably estimated. The threshold for recognition of provisions under
  IFRS is lower than that under former Canadian GAAP as provisions must be
  recognized if required payment is probable.
  Therefore, in principle, it is possible that there may be some provisions
  which would meet the recognition criteria under IFRS that were not recognized
  under former Canadian GAAP. Other differences between IFRS and former Canadian
  GAAP exist in relation to the measurement of provisions, such as the
  methodology for determining the best estimate where there is a range of
  equally possible outcomes (IFRS uses the mid-point of the range, whereas
  Canadian GAAP use the low end of the range), and the requirement under IFRS
  for provisions to be discounted where material. We have reviewed our positions
  and have concluded that there is no adjustment to our financial statements on
  transition to IFRS arising from the application of IFRS provisions recognition
  and measurement guidance.

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- Functional Presentation:Under IFRS, operating expenses must be presented on either
  a functional or nature of expenditure basis. Under former Canadian GAAP,
  operating expenses could be presented using a mix of both function and nature
  of expenditure basis. We have elected to use the functional classification
  basis for the presentation of operating expenses. As a result, depreciation
  and amortization expense, restructuring expense, and acquisition costs, which
  were individually presented in the Statement of Operations under former
  Canadian GAAP, have been reallocated to research and product development,
  sales and marketing, and general and administrative expense under
  IFRS.
- Employee Future Benefits (additional accounting
  policy impact from those disclosed in our first quarter of 2011 MD&A):Under IFRS, actuarial gains and losses
  arising from defined benefit plans and post-retirement benefit plans may be
  recorded in either net income or other comprehensive income. Under former
  Canadian GAAP, our accounting policy was to recognize actuarial gains and
  losses in net income. On adoption of IFRS, we have elected to recognize
  actuarial gains and losses in other comprehensive income. The effect of
  actuarial gains and losses arising from defined benefit plans and
  post-retirement benefit plans will no longer affect net income under our IFRS
  accounting policy choice. The effects of actuarial gains and losses will
  instead be recognized immediately in equity, rather than being recognized
  immediately in net income.

IFRS OTHER IMPACTS

In addition to the above noted impacts
to our financial statements and accounting policies, we have also reviewed the
impact of our conversion to IFRS on our information technology and data systems,
internal controls over financial reporting, business processes, contractual
arrangements and compensation arrangements and have made the appropriate
adjustments to transition from former Canadian GAAP to IFRS.

CRITICAL ACCOUNTING POLICIES,
ESTIMATES AND JUDGMENT APPLIED

Our consolidated financial statements
are prepared in accordance with International Financial Reporting Standards,
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 3 to the annual
consolidated financial statements.

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REVENUE RECOGNITION

Revenues are generated primarily from
product sales and services in our Fuel Cell Products, Contract Automotive and
Material Products 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 recognized when (i) significant risks and rewards
of ownership of the goods has been transferred to the buyer; (ii) we retain
neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold; (iii) the amount of revenue
can be measured reliably; (iv) it is probable that the economic benefits
associated with the sale will accrue to us; and (v) the costs incurred, or to be
incurred, in respect of the transaction can be measured reliably. 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.

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.

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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 three months and year ended December 31, 2011 and 2010, there
were no material adjustments to revenues relating to revenue recognized in a
prior period.

ASSET IMPAIRMENT

The carrying amounts of our
non-financial assets other than inventories are reviewed at each reporting date
to determine whether there is any indication of impairment. If any such
indication exists, then the assets recoverable amount is estimated. For
goodwill and intangible assets that have indefinite useful lives, the
recoverable amount is estimated annually.

The recoverable amount of an asset
or cash-generating unit is the greater of its value in use and its fair value
less costs to sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks
specific to the asset. In assessing fair value less costs to sell, the price
that would be received on the sale of an asset in an orderly transaction between
market participants at the measurement date is estimated. For the purposes of
impairment testing, assets that cannot be tested individually are grouped
together into the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other groups
of assets. Cash-generating units to which goodwill has been allocated reflects
the lowest level at which goodwill is monitored for internal reporting purposes.
Many of the factors used in assessing fair value are outside the control of
management and it is reasonably likely that assumptions and estimates will
change from period to period. These changes may result in future impairments.
For example, our revenue growth rate could be lower than projected due to
economic, industry or competitive factors, or the discount rate used in our
value in use model could increase due to a change in market interest rates. In
addition, future goodwill impairment charges may be necessary if our market
capitalization decreased due to a decline in the trading price of our common
stock, which could negatively impact the fair value of our operating segments.

An impairment loss is recognized
if the carrying amount of an asset or its cash-generating unit exceeds its
estimated recoverable amount. Impairment losses are recognized in net loss.
Impairment losses recognized in respect of the cash-generating units are
allocated first to reduce the carrying amount of any goodwill allocated to the
units, and then to reduce the carrying amounts of the other assets in the unit
on a pro-rata basis.

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An impairment loss in respect of
goodwill is not reversed. In respect of other assets, impairment losses
recognized in prior periods are assessed at each reporting date for any
indications that the loss has decreased or no longer exists. An impairment loss
is reversed only to the extent that the assets carrying amount does not exceed
the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized.

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. Under IFRS, the annual review
of goodwill requires a comparison of the carrying value of the asset to the
higher of (i) value in use; and (ii) fair value less costs to
sell.Value in use is defined as the present value of future cash flows
expected to be derived from the asset in its current state. As of December 31,
2011, of our consolidated goodwill balance of $48.1 million, we had allocated
$46.3 million to our core Fuel Cell Products segment, and $1.8 million to our
Material Products segment. Based on the impairment test performed as at December
31, 2011, we have concluded that no goodwill impairment charge was required on
any of our segments for the year ended December 31, 2011. Details of our
goodwill impairment tests are as follows:

- One of the methods used to assess the
  recoverable amount of the goodwill in our core Fuel Cells Products segment is
  a fair value, less costs to sale, test. Our fair value test is in effect a
  modified market capitalization assessment, whereby we calculate the fair value
  of the Fuel Cell Products segment by first calculating the value of the
  Company at December 31, 2011 based on the average closing share price in the
  month of December, add a reasonable estimated control premium of 25% to 30% to
  determine the Companys enterprise value on a controlling basis, and then
  deduct the fair value of our Materials Product and Contract Automotive
  segments from this enterprise value, to arrive at the fair value of the Fuel
  Cell Products segment. As a result of this assessment, we have determined that
  the fair value of the Fuel Cell Products segment (with goodwill of $46.3
  million) exceeds its carrying value by approximately 15% to 20% as of December
  31, 2011.
- In addition to this fair value test, we also
  performed a value in use test on our Fuel Cell Products segment that compared
  the carrying value of the segment to the present value of future cash flows
  expected to be derived from the segment. The principal factors used in this
  discounted cash flow analysis requiring judgment are the projected results of
  operations, the discount rate based on the weighted average cost of capital
  (WACC), and terminal value assumptions for each reporting unit. Our value in
  use test was based on a WACC of 17.5% to 20%; an average estimated compound
  annual growth rate of approximately 40% from 2011 to 2016; and a terminal year
  EBITDA multiplied by a terminal value multiplier of 4.0. Our value in use
  assessment resulted in a significantly higher value than as determined under
  the fair value, less costs to sell, assessment.
- The fair value of our Material Products
  segment (with goodwill of $1.8 million), determined using an estimated market
  value as a multiple of revenues, is substantially in excess of its carrying
  value as of December 31, 2011.

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As a result of our quarterly
review of the carrying amounts of our non-financial assets (other than
inventories) to determine whether there is any indication of impairment, we
recorded an impairment charge of $1.7 million for the three months and year
ended December 31, 2011 related to a write-down of manufacturing
equipment.

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 three months and year ended December 31, 2011,
we recorded provisions to accrued warranty liabilities of $1.0million and $1.9
million, respectively, for new product sales, compared to $0.8 million and $2.4
million, respectively, for the three months and year ended December 31,
2010.

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 three months
and year ended December 31, 2011 were adjusted downwards by a net amount of $0.5
million and $1.7 million, respectively, compared to a net adjustment downwards
of $1.5 million and $1.6 million, respectively for the three months and year
ended December 31, 2010. The adjustments to reduce accrued warranty liabilities
were primarily due to contractual expirations, reductions in estimated costs to
repair, and improved lifetimes and reliability 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 three months and year ended December 31, 2011, inventory provisions
(recoveries) of $0.3million and $0.6million, respectively, were recorded as
a charge to cost of product and service revenues, compared to ($0.2) million and
$0.5 million, respectively, for the three months and year ended December 31,
2010.

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EMPLOYEE FUTURE BENEFITS

The present value of our defined
benefit obligation is determined by discounting the estimated future cash
outflows using interest rates of high-quality corporate bonds that have terms to
maturity approximating the terms of the related pension liability. Determination
of benefit expense requires assumptions such as the discount rate to measure
obligations, expected plan investment performance, expected healthcare cost
trend rate, and retirement ages of employees. Actual results will differ from
the recorded amounts based on these estimates and assumptions. During the years
ended December 31, 2011 and 2010, actuarial gains (losses) of ($2.9) million and
$0.1 million, respectively, were recognized in other comprehensive income (loss)
as a result of differences between expected and actual expense.

INCOME TAXES

We use the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the deferred income tax consequences attributable to
differences between the financial statement carrying values of assets and
liabilities and their respective income tax bases (temporary differences) and
for loss carry-forwards. The resulting changes in the net deferred tax asset or
liability are included in income.

Deferred tax assets and
liabilities are measured using enacted, or substantially enacted, tax rates
expected to apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. The effect on deferred income tax
assets and liabilities, of a change in tax rates, is included in income in the
period that includes the substantive enactment date. Deferred income tax assets
are reviewed at each reporting period and are reduced to the extent that it is
no longer probable that the related tax benefit will be realized. As of December
31, 2011 and 2010, we have not recorded any deferred income tax assets on our
consolidated statement of financial position.

FUTURE IFRS ACCOUNTING
STANDARDS

The following is an overview of
accounting standard changes that we will be required to adopt in future years.
Except as otherwise noted below for IFRS 9, IAS 32 and amendments to IFRS 7, the
standards are effective for our annual periods beginning on or after January 1,
2013, with earlier application permitted. We do not expect to adopt any of these
standards before their effective dates. We continue to evaluate the impact of
these standards on our consolidated statement of operations and financial
position.

IFRS 9  FINANCIAL INSTRUMENTS

IFRS 9 introduces new requirements
for the classification and measurement of financial assets. IFRS 9 requires all
recognized financial assets that are within the scope of IAS 39 Financial
Instruments: Recognition and Measurement to be subsequently measured at
amortized cost or fair value. Specifically, financial assets that are held
within a business model whose objective is to collect the contractual cash
flows, and that have contractual cash flows that are solely payments of
principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other financial assets including equity investments are measured at their fair values at the end of subsequent accounting periods.

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Requirements for financial
liabilities were added in October 2010 and they largely carried forward existing
requirements in IAS 39, Financial Instruments  Recognition and Measurement,
except that fair value changes due to credit risk for liabilities designated at
fair value through profit and loss would generally be recorded in other
comprehensive income. IFRS 9 is effective for annual periods beginning on or
after January 1, 2015.

IFRS 10  CONSOLIDATION

IFRS 10 requires an entity to
consolidate an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those
returns through its power over the investee. Under existing IFRS, consolidation
is required when an entity has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. IFRS 10
replaces SIC-12 Consolidation  Special Purpose Entities and parts of IAS 27
Consolidated and Separate Financial Statements.

IFRS 11  JOINT ARRANGEMENTS

IFRS 11 requires a venturer to
classify its interest in a joint arrangement as a joint venture or joint
operation. Joint ventures will be accounted for using the equity method of
accounting whereas for a joint operation the venturer will recognize its share
of the assets, liabilities, revenue and expenses of the joint operation. Under
existing IFRS, entities have the choice to proportionately consolidate or equity
account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in
Joint Ventures, and SIC-13, Jointly Controlled Entities  Non-monetary
Contributions by Venturers.

IFRS 12  DISCLOSURE OF INTERESTS
IN OTHER ENTITIES

IFRS 12 establishes disclosure
requirements for interests in other entities, such as joint arrangements,
associates, special purpose vehicles and off balance sheet vehicles. The
standard carries forward existing disclosures and also introduces significant
additional disclosure requirements that address the nature of, and risks
associated with, an entitys interests in other entities.

IFRS 13  FAIR VALUE MEASUREMENT

Under existing IFRS, guidance on
measuring and disclosing fair value is dispersed among the specific standards
requiring fair value measurements. IFRS 13 is a more comprehensive standard for
fair value measurement and disclosure requirements for use across all IFRS
standards. The new standard clarifies that fair value is the price that would be
received to sell an asset, or paid to transfer a liability in an orderly
transaction between market participants, at the measurement date. It also
establishes disclosures about fair value measurement.

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AMENDMENTS TO IAS 19  EMPLOYEE
BENEFITS

The amendments to IAS 19 make
significant changes to the recognition and measurement of defined benefit
pension expense and termination benefits, and to enhance the disclosures for all
employee benefits. Actuarial gains and losses are renamed remeasurements and
will be recognized immediately in other comprehensive income (OCI).
Remeasurements recognized in OCI will not be recycled through profit or loss in
subsequent periods. The amendments also accelerate the recognition of past
service costs whereby they are recognized in the period of a plan amendment. The
annual expense for a funded benefit plan will be computed based on the
application of the discount rate to the net defined benefit asset or liability.
The amendments to IAS 19 will also impact the presentation of pension expense as
benefit cost will be split between (i) the cost of benefits accrued in the
current period (service cost) and benefit changes (past-service cost,
settlements and curtailments); and (ii) finance expense or income.

A number of other amendments have
been made to recognition, measurement and classification, including those
re-defining short-term and other long-term benefits guidance on the treatment of
taxes related to benefit plans, guidance on risk/cost sharing factors and
expanded disclosures.

Our current accounting policy for
employee benefits for the presentation of pension expense and the immediate
recognition of actuarial gains and losses in OCI is consistent with the
requirements in the new standard, however, additional disclosures and the
computation of annual expense based on the application of the discount rate to
the net defined benefit asset or liability will be required in relation to the
revised standard.

AMENDMENTS TO IAS 1  FINANCIAL
STATEMENT PRESENTATION

The amendments to IAS 1 require
entities to separate items presented in OCI into two groups based on whether or
not they may be recycled to profit or loss in the future. Items that will not be
recycled, such as remeasurements resulting from the amendments to IAS 19, will
be presented separately from items that may be recycled in the future, such as
deferred gains and losses on cash flow hedges. Entities that choose to present
OCI items before tax will be required to show the amount of tax related to the
two groups separately.

AMENDMENTS TO OTHER STANDARDS

In addition, there have been
amendments to existing standards, including IFRS 7 Financial Instruments:
Disclosure, IAS 27, Separate Financial Statements, IAS 28, Investments in
Associates and Joint Ventures, and IAS 32, Financial Instruments: Presentation.
IFRS 7 amendments require disclosure about the effects of offsetting financial
assets and financial liabilities and related arrangements on an entitys
financial position. IAS 27 addresses accounting for subsidiaries, jointly
controlled entities and associates in non-consolidated financial statements. IAS
28 has been amended to include joint ventures in its scope and to address the
changes in IFRS 10  13. IAS 32 addresses inconsistencies when applying the
offsetting requirements, and is effective for annual periods beginning on or
after January 1, 2014.

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SUPPLEMENTAL NON-GAAP MEASURES

In addition to providing measures
prepared in accordance with GAAP, we present certain supplemental non-GAAP
measures. These measures are Cash Operating Costs, EBITDA and Adjusted EBITDA,
and Normalized Net Loss. These non-GAAP measures do not have any standardized
meaning prescribed by GAAP and therefore are unlikely to be comparable to
similar measures presented by other companies. We believe these measures are
useful in evaluating the operating performance and liquidity of the Companys
ongoing business. These measures should be considered in addition to, and not as
a substitute for, net income, cash flows and other measures of financial
performance and liquidity reported in accordance with GAAP.

Cash Operating
Costs

This supplemental non-GAAP measure
is provided to assist readers in determining our operating costs on a cash
basis. We believe this measure is useful in assessing performance and
highlighting trends on an overall basis. We also believe Cash Operating Costs is
frequently used by securities analysts and investors when comparing our results
with those of other companies. Cash Operating Costs differs from the most
comparable GAAP measure, operating expenses, primarily because it does not
include stock-based compensation expense, depreciation and amortization,
restructuring charges and acquisition costs.

The following table shows a
reconciliation of operating expenses to Cash Operating Costs for the three
months and years ended December 31, 2011 and 2010:

|(Expressed in thousands of U.S. dollars)       |  | Three months ended December 31,
|---------------------------------------------- |  | -------------------------------
|Cash Operating Costs                           |  | 2011                           
|Operating Expense                              |  | $                              
|Stock-based compensation (expense) recovery    |  |                                
|Acquisition costs                              |  |                                
|Restructuring
      charges                    |  |                                
|Depreciation and
      amortization            |  |                                
|Cash Operating Costs                           |  | $                              
|                                              
|(Expressed in thousands
      of U.S. dollars) |  | Years ended December 31,       
|Cash Operating Costs                           |  | 2011                           
|Operating Expense                              |  | $                              
|Stock-based compensation expense               |  |                                
|Acquisition
    costs                          |  |                                
|Restructuring charges                          |  |                                
|Depreciation and
      amortization            |  |                                
|Cash Operating Costs                           |  | $                              

Adjusted EBITDA

These supplemental non-GAAP
measures are provided to assist readers in determining our operating performance
and ability to generate operating cash flow. We believe this measure is useful
in assessing performance and highlighting trends on an overall basis. We also
believe EBITDA and Adjusted EBITDA are frequently used by securities analysts and investors when comparing our results with those
of other companies. EBITDA differs from the most comparable GAAP measure, net
income attributable to Ballard, primarily because it does not include finance
(or interest) expense, income tax expense or recovery, depreciation of property,
plant and equipment, amortization of intangible assets, and goodwill impairment
charges. Adjusted EBITDA adjusts EBITDA for stock-based compensation expense,
transactional gains and losses, asset impairment charges, finance and other
income, and acquisition costs.

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The following table shows a
reconciliation of net income attributable to Ballard to EBITDA and Adjusted
EBITDA for the three months and years ended December 31, 2011 and 2010:

|(Expressed in thousands of U.S.
    dollars)                         |  | Three months ended December 31,
|-------------------------------------------------------------------- |  | -------------------------------
|EBITDA and Adjusted EBITDA                                           |  | 2011                           
|Net loss attributable to
      Ballard                               |  | $                              
|Depreciation and amortization                                        |  |                                
|Finance expense                                                      |  |                                
|Income
      taxes                                                   |  |                                
|EBITDA attributable to
      Ballard                                 |  | $                              
|Stock-based
      compensation                                       |  |                                
|Acquisition
      costs                                              |  |                                
|Finance and
      other (income) loss                                |  |                                
|Impairment loss
      on property, plant and equipment               |  |                                
|Loss on sale of
      assets and property, plant and
      equipment |  |                                
|Adjusted EBITDA                                                      |  | $                              
|                                                                    
|(Expressed in thousands
      of U.S. dollars)                       |  | Years ended December 31,       
|EBITDA and Adjusted EBITDA                                           |  | 2011                           
|Net loss attributable to
      Ballard                               |  | $                              
|Depreciation and amortization                                        |  |                                
|Finance expense                                                      |  |                                
|Income
      taxes                                                   |  |                                
|EBITDA attributable to
      Ballard                                 |  | $                              
|Stock-based
      compensation                                       |  |                                
|Acquisition
      costs                                              |  |                                
|Investment and
      other (income) loss                             |  |                                
|Impairment loss
      on property, plant and equipment               |  |                                
|Gain on sale of
      property, plant and equipment                  |  |                                
|Gain on sale of
      assets                                         |  |                                
|Adjusted EBITDA                                                      |  | $                              

Normalized Net Loss

This supplemental non-GAAP measure
is provided to assist readers in determining our financial performance. We
believe this measure is useful in assessing our actual performance by adjusting our actual results for one-time
transactional gains and losses and impairment losses. Normalized Net Loss
differs from the most comparable GAAP measure, net income (loss) attributable to
Ballard, primarily because it does not include transactional gains and losses
and asset impairment charges.

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The following table shows a
reconciliation of net income (loss) attributable to Ballard to Normalized Net
Loss for the three months and years ended December 31, 2011 and 2010.

|(Expressed in thousands of U.S.
      dollars)         |  | Three months ended December
    31,
|------------------------------------------------------ |  | -----------------------------------
|Normalized Net Loss                                    |  | 2011                               
|Net loss
      attributable to Ballard                 |  | $                                  
|Impairment loss on
      property, plant and equipment |  |                                    
|Normalized Net Loss                                    |  | $                                  
|Normalized Net Loss per
      share                    |  | $                                  
|                                                      
|(Expressed in thousands of U.S. dollars)               |  | Years ended
      December 31,     
|Normalized Net Loss                                    |  | 2011                               
|Net loss
      attributable to Ballard                 |  | $                                  
|Impairment loss on
      property, plant and equipment |  |                                    
|Gain on sale of
      assets                           |  |                                    
|Normalized Net
      Loss                              |  | $                                  
|Normalized Net Loss per share                          |  | $                                  

MANAGEMENTS REPORT ON
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING

Disclosure controls and
procedures

Our disclosure controls and
procedures are designed to provide reasonable assurance that relevant
information is gathered and reported to senior management, including the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely
basis so that appropriate decisions can be made regarding public disclosures.

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, 2011, 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.

Internal control over financial
reporting

The CEO and CFO, together with
other members of management, are responsible for establishing 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
IFRS.

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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, 2011.

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,
2011.

Changes in internal control
over financial reporting

During the year ended December 31,
2011, 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. Our design of
disclosure controls and procedures and internal controls over financial
reporting includes controls, policies and procedures covering Dantherm
Power.

RISKS &
UNCERTAINTIES

An investment in our common shares
involves risk. Investors should carefully consider the risks and uncertainties
described below and in our Annual Information Form. The risks and uncertainties
described below and in our Annual Information Form 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 the risks and uncertainties which
apply to our business and our operating results (which are summarized below),
please see our Annual Information Form and other filings with Canadian
(www.sedar.com) and U.S. securities regulatory authorities (www.sec.gov).

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.

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A summary of our 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 working capital requirements, 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;
- A mass market for our products may never
  develop or may take longer to develop than we anticipate;
- We may not be able to successfully execute
  our business plan;
- We have limited experience manufacturing fuel
  cell products on a commercial basis;
- Global economic conditions are beyond our
  control and may have an adverse impact on our business or on our key suppliers
  and / or customers;
- Potential fluctuations in our financial and
  business results make forecasting difficult and may restrict our access to
  funding for our commercialization plan;
- We could be adversely affected by risks
  associated with acquisitions;
- We are subject to risks inherent in
  international operations;
- Exchange rate fluctuations are beyond our
  control and may have a material adverse effect on our business, operating
  results, financial condition and profitability;
- Commodity price fluctuations are beyond our
  control and may have a material adverse effect on our business, operating
  results, financial condition and profitability;
- We are dependent upon Original Equipment
  Manufacturers and Systems Integrators to purchase certain of our
  products;
- We are dependent on third party suppliers for
  the supply of key materials and components for 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;
- 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 could be liable for environmental damages
  resulting from our research, development or manufacturing operations;
  and
- Our products use flammable fuels, which could
  subject our business to product liability claims.

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FORWARD-LOOKING STATEMENTS
DISCLAIMER

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 and
gross margins, cash flow from operations, Cash Operating Costs, EBITDA and
Adjusted EBITDA (see Non-GAAP Measures) contained in our Business 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, and working capital requirements; 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.

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.

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