##### 



Exhibit 99.1
 MANAGEMENTS REPORT
 TO THE SHAREHOLDERS OF HYDROGENICS CORPORATION
     -s- Pierre Rivard
    
    -s- Lawrence DavisPierre Rivard
    
    Lawrence DavisPresident and Chief Executive Officer
    
    Chief Financial Officer




---



##### 



AUDITORS REPORT
 AUDITORS REPORT TO THE SHAREHOLDERS OF HYDROGENICS CORPORATION
    
 Chartered Accountants




---



##### 



CONSOLIDATED BALANCE SHEETS
 As at December 31, 2005 and December 31, 2004(thousands of U.S. dollars)
    
    2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    5,394
    
    
    $
    26,209Short-term investments
    
    
    80,396
    
    
    
    62,853Accounts receivable (note 5)
    
    
    7,733
    
    
    
    5,223Grants receivable
    
    
    1,909
    
    
    
    2,437Inventories (note 6)
    
    
    8,685
    
    
    
    4,324Prepaid expenses
    
    
    2,353
    
    
    
    1,400106,470
    
    
    
    102,446Deferred charges(note 2)
    
    
    
    
    
    
    1,030Property, plant and equipment(note 7)
    
    
    5,682
    
    
    
    5,286Intangible assets(note 8)
    
    
    33,972
    
    
    
    3,878Goodwill(note 4)
    
    
    68,505
    
    
    
    5,113Other non-current assets
    
    
    28
    
    
    
    108$
    214,657
    
    
    $
    117,861LIABILITIESCurrent liabilitiesAccounts payable and accrued liabilities (notes 9 and 17)
    
    $
    14,918
    
    
    $
    6,635Unearned revenue
    
    
    3,772
    
    
    
    1,53718,690
    
    
    
    8,172Long-term debt(note 10)
    
    
    325
    
    
    
    302Deferred research and product development grants
    
    
    135
    
    
    
    17419,150
    
    
    
    8,648Shareholders equity(notes 11 and 12)Share capital and other equity
    
    
    318,804
    
    
    
    194,159Deficit
    
    
    (118,274
    )
    
    
    (80,900
    )Foreign currency translation adjustment
    
    
    (5,023
    )
    
    
    (4,046
    )195,507
    
    
    
    109,213$
    214,657
    
    
    $
    117,861
   -s- Norman Seagram
    
    -s- Pierre RivardNorman Seagram,
    
    Pierre RivardChairman
    
    President, CEO, Director




---



##### 



CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
 For the years ended December 31, 2005, 2004 and 2003(thousands of U.S. dollars, except for share and per share amounts)
    
    2005
    
    
    2004
    
    
    2003Revenues
    
    $
    37,191
    
    
    $
    16,656
    
    
    $
    26,660Cost of revenues
    
    
    33,881
    
    
    
    12,396
    
    
    
    18,0423,310
    
    
    
    4,260
    
    
    
    8,618Operating expensesSelling, general and administrative
    
    
    22,354
    
    
    
    12,992
    
    
    
    12,361Stock-based compensation expense (note 12)
    
    
    2,262
    
    
    
    1,313
    
    
    
    684Research and product development (note 13)
    
    
    7,745
    
    
    
    9,069
    
    
    
    7,038Amortization of property, plant and equipment
    
    
    1,365
    
    
    
    2,517
    
    
    
    2,247Amortization of intangible assets (note 8)
    
    
    8,429
    
    
    
    8,510
    
    
    
    12,933Impairment of intangible assets (note 8)
    
    
    
    
    
    
    3,693
    
    
    
    Integration costs (recovery) (note 23)
    
    
    1,123
    
    
    
    (77
    )
    
    
    1,24343,278
    
    
    
    38,017
    
    
    
    36,506Loss from operations
    
    
    (39,968
    )
    
    
    (33,757
    )
    
    
    (27,888
    )Other income (expenses)Provincial capital tax
    
    
    (91
    )
    
    
    (260
    )
    
    
    (53
    )Interest, net
    
    
    2,936
    
    
    
    895
    
    
    
    657Foreign currency gains (losses)
    
    
    (251
    )
    
    
    (333
    )
    
    
    5,3832,594
    
    
    
    302
    
    
    
    5,987Loss before income taxes
    
    
    (37,374
    )
    
    
    (33,455
    )
    
    
    (21,901
    )Current income tax expense(note 18)
    
    
    
    
    
    
    84
    
    
    
    190Net loss for the year
    
    
    (37,374
    )
    
    
    (33,539
    )
    
    
    (22,091
    )Deficit  Beginning of year
    
    
    (80,900
    )
    
    
    (47,361
    )
    
    
    (25,270
    )Deficit  End of year
    
    $
    (118,274
    )
    
    $
    (80,900
    )
    
    $
    (47,361
    )Net loss per shareBasic and diluted (note 20)
    
    
    (0.41
    )
    
    
    (0.53
    )
    
    
    (0.42
    )Shares used in calculating basic and diluted net loss per share
    
    
    91,226,912
    
    
    
    63,542,811
    
    
    
    52,993,167




---



##### 



CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the years ended December 31, 2005, 2004 and 2003(thousands of U.S. dollars, except for share and per share amounts)
    
    2005
    
    
    2004
    
    
    2003CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN):Operating activitiesNet loss for the year
    
    $
    (37,374
    )
    
    $
    (33,539
    )
    
    $
    (22,091
    )Items not affecting cashAmortization of property, plant and equipment
    
    
    2,267
    
    
    
    2,517
    
    
    
    2,247Amortization of intangible assets
    
    
    8,429
    
    
    
    8,510
    
    
    
    12,933Impairment of intangible assets
    
    
    
    
    
    
    3,693
    
    
    
    Unrealized foreign exchange (gains) losses
    
    
    210
    
    
    
    (238
    )
    
    
    (830
    )Imputed interest on long-term debt
    
    
    21
    
    
    
    58
    
    
    
    99Non-cash consulting fees
    
    
    76
    
    
    
    70
    
    
    
    59Stock-based compensation
    
    
    2,262
    
    
    
    1,313
    
    
    
    684Net change in non-cash working capital (note 21)
    
    
    (5,012
    )
    
    
    2,058
    
    
    
    (574
    )(29,121
    )
    
    
    (15,558
    )
    
    
    (7,473
    )Investing activitiesDecrease (increase) in short-term investments
    
    
    9,052
    
    
    
    (24,790
    )
    
    
    21,503Purchase of property, plant and equipment
    
    
    (333
    )
    
    
    (2,292
    )
    
    
    (2,118
    )Business acquisitions, net of cash acquired (note 4)
    
    
    (343
    )
    
    
    (924
    )
    
    
    (3,301
    )8,376
    
    
    
    (28,006
    )
    
    
    16,084Financing activitiesRepayment of long-term debt
    
    
    (180
    )
    
    
    (242
    )
    
    
    (238
    )Decrease (increase) in deferred charges
    
    
    
    
    
    
    795
    
    
    
    (795
    )Deferred research and product development grant
    
    
    (39
    )
    
    
    174
    
    
    
    Common shares issued, net of issuance costs
    
    
    149
    
    
    
    60,401
    
    
    
    122(70
    )
    
    
    61,128
    
    
    
    (911
    )Increase (decrease) in cash and cash equivalents during the year
    
    
    (20,815
    )
    
    
    17,564
    
    
    
    7,700Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (49
    )Cash and cash equivalents  Beginning of year
    
    
    26,209
    
    
    
    8,645
    
    
    
    994Cash and cash equivalents  End of year
    
    $
    5,394
    
    
    $
    26,209
    
    
    $
    8,645Supplemental disclosureInterest paid
    
    $
    36
    
    
    $
    38
    
    
    $
    70Income taxes paid
    
    
    1
    
    
    
    39
    
    
    
    211




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.
 DESCRIPTION OF BUSINESS
  NOTE
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
  PRINCIPLES OF CONSOLIDATION
  USE OF ESTIMATES
   CASH AND CASH EQUIVALENTS
  SHORT-TERM INVESTMENTS
  INVENTORIES
  PROPERTY, PLANT AND EQUIPMENT
   Test equipment
    
    30% per annumComputer hardware and software
    
    30% per annumFurniture and equipment
    
    20% per annumAutomobiles
    
    30% per annum




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 GOODWILL AND INTANGIBLE ASSETS
 Goodwill
  Intangible assets with finite useful lives
  Intellectual property
    
    50% per annum declining balanceManagement services contracts
    
    50% per annum declining balanceProduct technology
    
    4 -7 years straight-lineCustomer relationships
    
    8 years straight-lineTrade names
    
    3 years straight-lineISO certifications
    
    1 year straight-line
   DEFERRED CHARGES
  REVENUE RECOGNITION
      PRODUCT WARRANTIES




---



##### 

\

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 RESEARCH AND PRODUCT DEVELOPMENT COSTS
   STOCK-BASED COMPENSATION
   INCOME TAXES
  FOREIGN CURRENCY TRANSLATION
    NET EARNINGS (LOSS) PER SHARE




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
3.  NEW ACCOUNTING STANDARDS
 (I) CANADIAN STANDARDS
 Liabilities and equity
  Financial instruments
  Comprehensive income
  Equity
  (II) U.S. STANDARDS
 Inventory costs
  Share-based payments




---



##### 



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4.
 BUSINESS ACQUISITIONS
 ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 2005
  Cash, cash equivalents and short-term investments
    
    $
    27,615Other current assets
    
    
    11,222Property, plant and equipment
    
    
    2,664Intangible assets
    
    
    38,500Goodwill
    
    
    63,936Other non-current assets
    
    
    64Current liabilities
    
    
    (18,649
    )$
    125,352
   Amount at
    
    
    Estimatedacquisition date
    
    
    useful lifeProduct technology
    
    $
    30,300
    
    
    4  7 yearsCustomer relationships
    
    
    7,600
    
    
    8 yearsTrade names
    
    
    500
    
    
    3 yearsISO certificates
    
    
    100
    
    
    1 year$
    38,500
    Severance
    
    
    Facilities
    
    
    Other
    
    
    TotalInitial estimated restructuring costs of Stuart Energy
    
    $
    3,806
    
    
    $
    2,509
    
    
    $
    300
    
    
    $
    6,615Cash payments
    
    
    (3,806
    )
    
    
    (1,523
    )
    
    
    (300
    )
    
    
    (5,629
    )Restructuring liabilities as at December 31, 2005
    
    $
    
    
    
    $
    986
    
    
    $
    
    
    
    $
    986




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ACQUISITION DURING THE YEAR ENDED DECEMBER 31, 2003
   Current assets
    
    $
    2,970Property, plant and equipment
    
    
    2,120Intangible assets
    
    
    13,505Goodwill
    
    
    5,219Future income tax asset
    
    
    5,393Current liabilities
    
    
    (3,549
    )Long-term debt
    
    
    (202
    )Future tax liabilities
    
    
    (5,393
    )$
    20,063
  Amount at
    
    
    Estimatedacquisition date
    
    
    useful lifeOrder backlog
    
    $
    541
    
    
    1 yearCustomer relationships
    
    
    5,045
    
    
    3 yearsComputer software
    
    
    1,886
    
    
    2 yearsPatentable technology
    
    
    6,033
    
    
    3 years$
    13,505
   NOTE 5.
 ACCOUNTS RECEIVABLE
 2005
    
    
    2004Trade accounts receivable
    
    $
    7,199
    
    
    $
    4,830Less: Allowance for doubtful accounts
    
    
    (31
    )
    
    
    (156
    )Goods and services tax
    
    
    565
    
    
    
    254Refundable investment tax credits
    
    
    
    
    
    
    295$
    7,733
    
    
    $
    5,223
 NOTE 6.
 INVENTORIES
 2005
    
    
    2004Raw materials
    
    $
    4,202
    
    
    $
    2,456Work-in-progress
    
    
    4,377
    
    
    
    1,678Finished goods
    
    
    106
    
    
    
    190$
    8,685
    
    
    $
    4,324




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7.
 PROPERTY, PLANT AND EQUIPMENT
  Accumulated
    
    
    Net bookCost
    
    
    Amortization
    
    
    valueTest equipment
    
    $
    5,670
    
    
    $
    3,486
    
    
    $
    2,184Furniture and equipment
    
    
    3,128
    
    
    
    1,983
    
    
    
    1,145Computer hardware and software
    
    
    3,904
    
    
    
    1,966
    
    
    
    1,938Leasehold improvements
    
    
    872
    
    
    
    471
    
    
    
    401Automobiles
    
    
    48
    
    
    
    34
    
    
    
    14$
    13,622
    
    
    $
    7,940
    
    
    $
    5,682
  Accumulated
    
    
    Net bookCost
    
    
    Amortization
    
    
    valueTest equipment
    
    $
    6,193
    
    
    $
    2,651
    
    
    $
    3,542Furniture and equipment
    
    
    1,462
    
    
    
    675
    
    
    
    787Computer hardware and software
    
    
    4,016
    
    
    
    3,150
    
    
    
    866Leasehold improvements
    
    
    2,062
    
    
    
    1,975
    
    
    
    87Automobiles
    
    
    15
    
    
    
    11
    
    
    
    4$
    13,748
    
    
    $
    8,462
    
    
    $
    5,286
   NOTE 8.
 INTANGIBLE ASSETS
  Accumulated
    
    
    Net bookCost
    
    
    Amortization
    
    
    valueIntellectual property (note 11)
    
    $
    33,629
    
    
    $
    31,737
    
    
    $
    1,892Management services contracts
    
    
    565
    
    
    
    518
    
    
    
    47Product technology
    
    
    30,300
    
    
    
    5,250
    
    
    
    25,050Customer relationships
    
    
    7,600
    
    
    
    950
    
    
    
    6,650Trade names
    
    
    500
    
    
    
    167
    
    
    
    333ISO certifications
    
    
    100
    
    
    
    100
    
    
    
    $
    72,694
    
    
    $
    38,722
    
    
    $
    33,972
  Accumulated
    
    
    Net bookCost
    
    
    Amortization
    
    
    valueIntellectual property (note 11)
    
    $
    33,629
    
    
    $
    29,845
    
    
    $
    3,784Management services contracts
    
    
    565
    
    
    
    471
    
    
    
    94Product technology
    
    
    
    
    
    
    
    
    
    
    Customer relationships
    
    
    
    
    
    
    
    
    
    
    Trade names
    
    
    
    
    
    
    
    
    
    
    ISO certifications
    
    
    
    
    
    
    
    
    
    
    $
    34,194
    
    
    $
    30,316
    
    
    $
    3,878




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 2005
    
    
    2004Facility accruals
    
    $
    3,360
    
    
    $
    Trade accounts payable
    
    
    3,063
    
    
    
    1,012Warranty liability accruals
    
    
    2,733
    
    
    
    766Supplier accruals
    
    
    2,552
    
    
    
    1,811Accrued payroll costs
    
    
    1,593
    
    
    
    1,211Accrued professional fees
    
    
    808
    
    
    
    535Provincial capital tax payable
    
    
    57
    
    
    
    128Excise taxes payable
    
    
    220
    
    
    
    403Current portion of long-term debt (note 10)
    
    
    151
    
    
    
    319Other
    
    
    381
    
    
    
    450$
    14,918
    
    
    $
    6,635
  Balance, December 31, 2004
    
    $
    766Accruals for warranties issued during the year
    
    
    3,296Settlements made during the year
    
    
    (1,329
    )Balance, December 31, 2005
    
    $
    2,733
 NOTE
10.  LONG-TERM DEBT
     2006
    
    $
    1752007
    
    
    1512008
    
    
    171497Less: Imputed interest
    
    
    (21
    )476Less: Current portion
    
    
    (151
    )$
    325




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11.  SHAREHOLDERS EQUITY
  ForeignCurrency
    
    
    TotalCommon Shares
    
    
    
    
    
    
    Contributed
    
    
    
    
    
    
    Translation
    
    
    ShareholdersNumber
    
    
    Amount
    
    
    Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    Adjustment
    
    
    EquityBalance at December 31, 2002
    
    
    48,796,121
    
    
    $
    109,997
    
    
    $
    4,722
    
    
    $
    29
    
    
    $
    (25,270
    )
    
    $
    (4,046
    )
    
    $
    85,432Issuance of common shares
on acquisition of Greenlight
    
    
    4,164,093
    
    
    
    16,762
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,762Issuance of common shares
on exercise of options
    
    
    148,433
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122Stock-based consulting expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    59Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    684
    
    
    
    
    
    
    
    
    
    
    
    684Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,091
    )
    
    
    
    
    
    
    (22,091
    )Balance at December 31, 2003
    
    
    53,108,647
    
    
    
    126,881
    
    
    
    4,722
    
    
    
    772
    
    
    
    (47,361
    )
    
    
    (4,046
    )
    
    
    80,968Issuance of common shares
    
    
    11,373,608
    
    
    
    60,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,126Issuance of common shares
on exercise of options
    
    
    144,734
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275Stock-based consulting expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    70Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,313
    
    
    
    
    
    
    
    
    
    
    
    1,313Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,539
    )
    
    
    
    
    
    
    (33,539
    )Balance at December 31, 2004
    
    
    64,626,989
    
    
    
    187,282
    
    
    
    4,722
    
    
    
    2,155
    
    
    
    (80,900
    )
    
    
    (4,046
    )
    
    
    109,213Issuance of common shares and
options granted on the acquisition
of Stuart Energy (note 4)
    
    
    26,999,103
    
    
    
    119,526
    
    
    
    
    
    
    
    3,382
    
    
    
    
    
    
    
    
    
    
    
    122,908Repurchase and cancellation
of warrants
    
    
    
    
    
    
    
    
    
    
    (4,722
    )
    
    
    3,972
    
    
    
    
    
    
    
    
    
    
    
    (750
    )Issuance of common shares
on exercise of options
    
    
    53,578
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Stock-based consulting expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    76Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,262
    
    
    
    
    
    
    
    
    
    
    
    2,262Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (977
    )
    
    
    (977
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,374
    )
    
    
    
    
    
    
    (37,374
    )Balance at December 31, 2005
    
    
    91,679,670
    
    
    $
    306,957
    
    
    $
    
    
    
    $
    11,847
    
    
    $
    (118,274
    )
    
    $
    (5,023
    )
    
    $
    195,507




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12.  EMPLOYEE STOCK-BASED COMPENSATION
 STOCK OPTION PLAN
   2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Number of
    
    
    exercise
    
    
    Number of
    
    
    exerciseshares
    
    
    price (CDN$)
    
    
    shares
    
    
    price (CDN$)
    
    
    shares
    
    
    price (CDN$)Outstanding, beginning of year
    
    
    3,818,566
    
    
    
    4.62
    
    
    
    3,306,468
    
    
    
    4.13
    
    
    
    2,624,820
    
    
    
    3.37Granted
    
    
    3,650,804
    
    
    
    6.24
    
    
    
    828,808
    
    
    
    6.58
    
    
    
    886,793
    
    
    
    5.91Exercised
    
    
    (53,578
    )
    
    
    3.37
    
    
    
    (144,734
    )
    
    
    2.52
    
    
    
    (148,433
    )
    
    
    1.13Forfeited on terminations
    
    
    (1,172,039
    )
    
    
    6.54
    
    
    
    (171,976
    )
    
    
    6.47
    
    
    
    (56,712
    )
    
    
    6.03Outstanding, end of year
    
    
    6,243,753
    
    
    
    5.22
    
    
    
    3,818,566
    
    
    
    4.62
    
    
    
    3,306,468
    
    
    
    4.13Options exercisable, end of year
    
    
    4,242,575
    
    
    
    5.21
    
    
    
    2,290,232
    
    
    
    3.55
    
    
    
    1,886,739
    
    
    
    2.72
  Number
    
    Weighted
    
    Weighted
    
    Number
    
    Weightedoutstanding at
    
    average
    
    average
    
    exercise at
    
    averageExercise price
    
    December 31,
    
    remaining
    
    share price
    
    December 31,
    
    share priceCDN$
    
    2005
    
    contractual life
    
    CDN$
    
    2005
    
    CDN$0.01-0.29

    
 
    
    891,680
    
    
    
    4.06
    
    
    
    0.21
    
    
    
    891,680
    
    
    
    0.210.30-4.00

    
   
    
    583,290
    
    
    
    5.18
    
    
    
    2.82
    
    
    
    583,290
    
    
    
    2.824.01-5.00

    
 
    
    1,471,512
    
    
    
    5.91
    
    
    
    4.54
    
    
    
    539,251
    
    
    
    4.655.01-6.00
    
 
    
    1,140,635
    
    
    
    8.11
    
    
    
    5.66
    
    
    
    447,372
    
    
    
    5.916.01-8.00
    
 
    
    1,102,256
    
    
    
    6.65
    
    
    
    6.85
    
    
    
    740,198
    
    
    
    7.008.01-18.12
    
 
    
    1,054,380
    
    
    
    5.43
    
    
    
    9.56
    
    
    
    1,040,784
    
    
    
    9.546,243,753
    
    
    
    6.03
    
    
    
    5.22
    
    
    
    4,242,575
    
    
    
    5.21




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005
    
    
    2004
    
    
    2003(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)Basic and
    
    
    
    
    
    
    Basic and
    
    
    
    
    
    
    Basic anddiluted
    
    
    
    
    
    
    diluted
    
    
    
    
    
    
    dilutednet loss
    
    
    
    
    
    
    net loss
    
    
    
    
    
    
    net lossper share
    
    
    
    
    
    
    per share
    
    
    
    
    
    
    per shareNet loss for the year
    
    $
    (37,374
    )
    
    $
    (0.41
    )
    
    $
    (33,539
    )
    
    $
    (0.53
    )
    
    $
    (22,091
    )
    
    $
    (0.42
    )Additional stock-based
compensation expense
    
    
    (80
    )
    
    
    
    
    
    
    (195
    )
    
    
    
    
    
    
    (403
    )
    
    
    (0.01
    )Pro forma net loss for the year
    
    $
    (37,454
    )
    
    $
    (0.41
    )
    
    $
    (33,734
    )
    
    $
    (0.53
    )
    
    $
    (22,494
    )
    
    $
    (0.43
    )
 DEFERRED SHARE UNIT PLAN
   NOTE 13.  RESEARCH AND PRODUCT DEVELOPMENT
  2005
    
    
    2004
    
    
    2003Research and product development expenses
    
    $
    10,733
    
    
    $
    13,781
    
    
    $
    9,245Research and product development funding
    
    
    (2,988
    )
    
    
    (4,712
    )
    
    
    (2,207
    )Total research and product development expenses
    
    $
    7,745
    
    
    $
    9,069
    
    
    $
    7,038




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
14.  COMMITMENTS
  2006
    
    $
    1,1402007
    
    
    1,1732008
    
    
    1,1422009
    
    
    9652010
    
    
    435$
    4,855
  NOTE 15.  CONTINGENCIES




---



##### 



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
16.  LINES OF CREDIT
  NOTE 17.
 RELATED PARTY TRANSACTIONS
  NOTE
18.  INCOME TAXES
  2006
    
    
    1,5672007
    
    
    6,2412008
    
    
    25,1552009
    
    
    34,7132010
    
    
    13,2452013
    
    
    20,7512014
    
    
    28,9082015
    
    
    25,148No Expiry
    
    
    37,115192,843
   2005
    
    
    2004AssetsNon-capital losses
    
    $
    69,289
    
    
    $
    21,573Scientific research and experimental development expenses
    
    
    15,082
    
    
    
    4,825Property, plant and equipment and intellectual property
    
    
    2,340
    
    
    
    7,180Investment tax credits
    
    
    8,791
    
    
    
    2,359Warranty and other provisions
    
    
    1,553
    
    
    
    319Share issue costs
    
    
    496
    
    
    
    540Loss related to foreign exchange
    
    
    2,901
    
    
    
    2,351Valuation allowance
    
    
    (100,452
    )
    
    
    (39,147
    )Net future income tax asset
    
    $
    
    
    
    $
    




---



##### 



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  2005
    
    
    2004
    
    
    2003Loss before income taxes
    
    $
    (37,374
    )
    
    $
    (33,455
    )
    
    $
    (21,901
    )Statutory income tax rate
    
    
    35.93
    %
    
    
    35.99
    %
    
    
    36.62
    %Income tax recovery at statutory rate
    
    
    (13,428
    )
    
    
    (12,040
    )
    
    
    (8,020
    )Non-deductible expenses
    
    
    1,383
    
    
    
    2,456
    
    
    
    2,795Other permanent differences
    
    
    182
    
    
    
    (44
    )
    
    
    161Large corporations tax
    
    
    
    
    
    
    84
    
    
    
    190Adjustment to future income tax assets
    
    
    
    
    
    
    (2,528
    )
    
    
    (864
    )Effect of income tax rate changes on future income taxes
    
    
    
    
    
    
    
    
    
    
    (2,481
    )Currency effect of difference in U.S. dollar financial reporting compared with
CDN dollar income tax reporting
    
    
    (1,172
    )
    
    
    (4,837
    )
    
    
    (5,595
    )Non-deductible amortization of intangible assets
    
    
    3,028
    
    
    
    3,258
    
    
    
    2,135Foreign exchange gain on CDN dollar denominated future income taxes
    
    
    (3,036
    )
    
    
    (1,817
    )
    
    
    (1,937
    )Change in valuation allowance related to the current year
    
    
    13,043
    
    
    
    15,552
    
    
    
    13,806Income tax expense
    
    $
    
    
    
    $
    84
    
    
    $
    190
 NOTE
19.  FINANCIAL INSTRUMENTS
     NOTE
20.  NET LOSS PER SHARE
  NOTE
21.  CONSOLIDATED STATEMENTS OF CASH FLOWS
  2005
    
    
    2004
    
    
    2003Decrease (increase) in current assetsAccounts receivable
    
    $
    (478
    )
    
    $
    2,677
    
    
    $
    57Grants receivable
    
    
    639
    
    
    
    (1,800
    )
    
    
    96Inventories
    
    
    3,521
    
    
    
    320
    
    
    
    1,684Prepaid expenses and other current assets
    
    
    (200
    )
    
    
    (579
    )
    
    
    (436
    )Increase (decrease) in current liabilitiesAccounts payable and accrued liabilities
    
    
    (9,979
    )
    
    
    116
    
    
    
    (551
    )Unearned revenue
    
    
    1,485
    
    
    
    1,324
    
    
    
    (1,424
    )$
    (5,012
    )
    
    $
    2,058
    
    
    $
    (574
    )




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 22.  SEGMENTED FINANCIAL INFORMATION
    Year Ended December 31, 2005Onsite
    
    
    Power
    
    
    Test
    
    
    CorporateGeneration
    
    
    Systems
    
    
    Systems
    
    
    & Other
    
    
    TotalRevenue from external customers
    
    $
    21,748
    
    
    $
    3,861
    
    
    $
    11,582
    
    
    $
    
    
    
    $
    37,191Amortization of intangible assets
    
    
    6,490
    
    
    
    1,892
    
    
    
    47
    
    
    
    
    
    
    
    8,429Amortization of property, plant and equipment
    
    
    363
    
    
    
    1,212
    
    
    
    692
    
    
    
    
    
    
    
    2,267Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,972
    
    
    
    2,972Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    36Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Segment loss (i)
    
    
    (13,225
    )
    
    
    (12,145
    )
    
    
    (2,296
    )
    
    
    (9,708
    )
    
    
    (37,374
    )
 Year Ended December 31, 2004OnSite
    
    
    Power
    
    
    Test
    
    
    CorporateGeneration
    
    
    Systems
    
    
    Systems
    
    
    & Other
    
    
    TotalRevenue from external customers
    
    $
    1,505
    
    
    $
    4,106
    
    
    $
    11,045
    
    
    $
    
    
    
    $
    16,656Amortization of intangible assets
    
    
    
    
    
    
    3,784
    
    
    
    4,726
    
    
    
    
    
    
    
    8,510Amortization of property, plant and equipment
    
    
    
    
    
    
    412
    
    
    
    2,105
    
    
    
    
    
    
    
    2,517Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    985
    
    
    
    985Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    90Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    84Segment loss (i)
    
    
    (2,306
    )
    
    
    (7,527
    )
    
    
    (13,846
    )
    
    
    (9,860
    )
    
    
    (33,539
    )
 Year Ended December 31, 2003OnSite
    
    
    Power
    
    
    Test
    
    
    CorporateGeneration
    
    
    Systems
    
    
    Systems
    
    
    & Other
    
    
    TotalRevenue from external customers
    
    $
    
    
    
    $
    6,008
    
    
    $
    20,652
    
    
    $
    
    
    
    $
    26,660Amortization of intangible assets
    
    
    
    
    
    
    7,569
    
    
    
    5,364
    
    
    
    
    
    
    
    12,933Amortization of property, plant and equipment
    
    
    
    
    
    
    1,065
    
    
    
    1,182
    
    
    
    
    
    
    
    2,247Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    863
    
    
    
    863Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206
    
    
    
    206Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    190Segment loss (i)
    
    
    
    
    
    
    (13,463
    )
    
    
    (4,118
    )
    
    
    (4,510
    )
    
    
    (22,091
    )
 
 (i)
    
    Segment loss includes directly attributable selling, general and
administration costs, product research and development costs net of
associated grants, amortization of property, plant and equipment and
amortization of intangible assets.




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2005
    
    
    2004
    
    
    2003RevenuesProducts
    
    $
    34,470
    
    
    $
    13,390
    
    
    $
    19,736Services
    
    
    2,721
    
    
    
    3,266
    
    
    
    6,924$
    37,191
    
    
    $
    16,656
    
    
    $
    26,660
 2005
    
    
    2004
    
    
    2003Cost of revenuesProducts
    
    $
    32,953
    
    
    $
    10,523
    
    
    $
    14,491Services
    
    
    928
    
    
    
    1,873
    
    
    
    3,551$
    33,881
    
    
    $
    12,396
    
    
    $
    18,042
  2005
    
    
    2004
    
    
    2003United States
    
    $
    13,225
    
    
    $
    8,659
    
    
    $
    15,987Vietnam
    
    
    2,321
    
    
    
    
    
    
    
    Algeria
    
    
    1,992
    
    
    
    
    
    
    
    Russia
    
    
    1,963
    
    
    
    
    
    
    
    Korea
    
    
    1,823
    
    
    
    435
    
    
    
    245Japan
    
    
    1,773
    
    
    
    3,552
    
    
    
    5,048China
    
    
    1,696
    
    
    
    563
    
    
    
    411Germany
    
    
    1,557
    
    
    
    537
    
    
    
    1,806United Kingdom
    
    
    1,311
    
    
    
    188
    
    
    
    140Canada
    
    
    1,263
    
    
    
    308
    
    
    
    1,586France
    
    
    130
    
    
    
    2,300
    
    
    
    119Rest of world
    
    
    8,137
    
    
    
    114
    
    
    
    1,318$
    37,191
    
    
    $
    16,656
    
    
    $
    26,660
  2005
    
    
    2004
    
    
    2003%
    
    
    
    %
    
    
    
    %First
    
    
    11
    
    
    
    31
    
    
    
    33Second
    
    
    10
    
    
    
    15
    
    
    
    9Third
    
    
    5
    
    
    
    14
    
    
    
    9Fourth
    
    
    5
    
    
    
    8
    
    
    
    9Others
    
    
    69
    
    
    
    32
    
    
    
    40100
    
    
    
    100
    
    
    
    100
  2005
    
    
    2004Canada
    
    $
    5,032
    
    
    $
    5,286Belgium
    
    
    650
    
    
    
    $
    5,682
    
    
    $
    5,286




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 23.  INTEGRATION COSTS
   2005
    
    
    2004
    
    
    2003Relocation and retention charges (recovery)
    
    $
    
    
    
    $
    (77
    )
    
    $
    487Termination benefits
    
    
    716
    
    
    
    
    
    
    
    132Consulting and information systems
    
    
    308
    
    
    
    
    
    
    
    280Travel and accommodation
    
    
    6
    
    
    
    
    
    
    
    152Contract cancellation fees
    
    
    
    
    
    
    
    
    
    
    67Other
    
    
    93
    
    
    
    
    
    
    
    125$
    1,123
    
    
    $
    (77
    )
    
    $
    1,243
       2005
    
    
    2004
    
    
    2003Net loss for the year based on Canadian GAAP
    
    $
    (37,374
    )
    
    $
    (33,539
    )
    
    $
    (22,091
    )Additional stock-based compensation under APB No. 25 (i)
    
    
    
    
    
    
    (23
    )
    
    
    (153
    )Write-off of in-process research and product development (ii)
    
    
    (18,400
    )
    
    
    
    
    
    
    Amortization of in-process research and product development (ii)
    
    
    2,629
    
    
    
    
    
    
    
    Net loss for the year based on U.S. GAAP
    
    
    (53,145
    )
    
    
    (33,562
    )
    
    
    (22,244
    )Foreign currency translation (iii)
    
    
    977
    
    
    
    
    
    
    
    Comprehensive loss based on U.S. GAAP
    
    $
    (52,168
    )
    
    $
    (33,562
    )
    
    $
    (22,244
    )Basic and fully diluted comprehensive loss per share based on U.S. GAAP
    
    
    (0.57
    )
    
    
    (0.53
    )
    
    
    (0.42
    )Weighted average number of shares used in calculating comprehensive loss per share
    
    
    91,226,912
    
    
    
    63,542,811
    
    
    
    52,993,167
 2005
    
    
    2004
    
    
    2003Shareholders equity based on Canadian GAAP
    
    $
    195,507
    
    
    $
    109,213
    
    
    $
    80,968Shareholders equity based on U.S. GAAP
    
    $
    179,736
    
    
    $
    109,213
    
    
    $
    80,968




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005
    
    
    2004
    
    
    2003Revenues
    
    $
    37,191
    
    
    $
    16,656
    
    
    $
    26,660Cost of revenues
    
    
    33,881
    
    
    
    12,396
    
    
    
    18,042Operating expenses
    
    
    59,049
    
    
    
    38,040
    
    
    
    36,659Loss from operations
    
    
    (55,739
    )
    
    
    (33,780
    )
    
    
    (28,041
    )Net loss for the year
    
    
    (53,145
    )
    
    
    (33,562
    )
    
    
    (22,244
    )Cash used in operating activities
    
    
    (29,121
    )
    
    
    (15,558
    )
    
    
    (7,473
    )Cash provided by (used in) investing activities
    
    
    8,376
    
    
    
    (44,325
    )
    
    
    9,403Cash provided by (used in) financing activities
    
    
    (70
    )
    
    
    61,128
    
    
    
    (911
    )
 (I) STOCK-BASED COMPENSATION
  (II) IN-PROCESS RESEARCH AND DEVELOPMENT
  (III) COMPREHENSIVE LOSS
  (IV) BUSINESS ACQUISITIONS
  2004Revenues
    
    $
    33,564Net loss
    
    
    (78,405
    )Basic and diluted net loss per share
    
    
    (0.87
    )