Exhibit 99.2  MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND
RESULTS OF OPERATIONS  The following sets out
managements discussion and analysis of our financial position and results of
operations for the years ended December 31, 2004, 2003 and 2002 as at March 2,
2005. You should read the following discussion in conjunction with the audited
consolidated comparative financial statements and the accompanying notes
appearing elsewhere in this report. All financial information is reported in U.S.
dollars unless otherwise specified. Our consolidated financial statements are
prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP). Canadian GAAP differs in some respects from U.S. GAAP and the
principal differences that applyto us are disclosed in Note 23 of our consolidated financial statements.  This report contains
forward-looking statements, including statements regarding the future success
of our business and technology strategies, andfuture market opportunities. These statements
are neither promises nor guarantees, but involve known and unknown risks and
uncertainties that may cause our
actual results, levels of activity, performance, or achievements to be
materially different from any future results, levels of activity, performance, or achievements expressed in or
implied by these forward-looking statements. These risks include risks related
to our revenue growth, operating
results, industry and products, as well as other factors discussed below and
elsewhere in this report. Readers should not place undue reliance on any such forward-looking
statements, which speak only as of the date they were made. We disclaim any
obligation to publicly update or
revise any such statements to reflect any change in our expectations or in
events, conditions, or circumstances on which any such statements may be based, or that may affect
the likelihood that actual results will differ from those set forth in the
forward-looking statements.  Overview We are a leading global developer
of hydrogen and fuel cell products. We have a diversified product portfolio of
fuel cell power products,hydrogen
generation systems and fuel cell test stations. We are pursuing a balanced
business plan with commercial revenue today from sales of: (i) our hydrogen generation systems to the
on-site industrial hydrogen market; (ii) our fuel cell test stations to
developers of fuel cells, fuel cell
subcomponents and materials; and (iii) our fuel cell power products and
hydrogen refueling stations to the early-adopter demonstration markets and emerging commercial markets for
power and transportation applications. We believe that our product portfolio
approach will:   provide margin-contributing revenue;  position us well for significant growth opportunities
in a variety of hydrogen energy applications; help insulate us against
exposure to any single technology, market or adoption rate;  enhance our competitive position;  support more consistent and predictable financial
results over the long-term; and  provide a level of mass and scale.  Acquisition
of Stuart Energy Systems Corporation On November 10, 2004, we
announced that we had entered into an agreement to acquire all of the issued
and outstanding shares of Stuart EnergySystems Corporation (Stuart Energy) at an exchange ratio of 0.74
Hydrogenics shares for each Stuart Energy share. On January 6, 2005, we announced that we had successfully acquired
control of Stuart Energy. In February 2005, we announced that we had acquired
all of the issued and outstanding
Stuart Energy shares. In connection with this acquisition, we issued
approximately 27 million of our common shares, representing approximately 42% of our outstanding common
shares prior to the acquisition. For accounting purposes, the acquisition of
Stuart Energy has been reflected
as a subsequent event in our December 31, 2004 financial statements. The
transaction will be accounted for as a purchase transaction in the first quarter of 2005, and we will
consolidate the operations of Stuart Energy from January 6, 2005, the date of
acquisition.  The acquisition of Stuart
Energy represents a key milestone in the execution of our strategic plan. We
continue to reduce our exposure to any single product, single market or single
adoption rate. The combination has created a diversified product portfolio of
fuel cell power products, hydrogen generation stations and fuel cell test
stations. We now have greater scale with greater revenue diversity which should
lead to more predictable results for our shareholders notwithstanding the
cycles of any one of our businesses. The combined company has an expanded roster
of blue-chip partners and customers, including Air Liquide, Air Products, BOC,
Cheung Kong Infrastructure, ChevronTexaco, Ford, GM, John Deere, Linde, Shell
Hydrogen and Toyota, as well as a global network of sales agents and global
customer service capabilities. We believe that our ability to market a broader
and more diverse product portfolio through expanded global sales and
distribution channels provides us with a competitive advantage against
competitors that do not enjoy such scale.  Our combined and
complementary product portfolio allows us to offer a turn-key hydrogen
application and hydrogen fueling solution to target customers. As an illustrative
example, we can offer bundled solutions for fuel cell powered forklifts and
hydrogen refueling infrastructure. Our combined technology portfolio includes
expertise in PEM fuel cells, alkaline and PEM electrolysis, systems
integration, codes and standards and fuel cell test stands, as well as access
to hydrogen internal combustion engine technology.  A significant factor in
acquiring Stuart Energy was the opportunity to reduce our risk profile and
accelerate our pathway to commercial sustainability.  The acquisition and integration offers
significant cost synergies through rationalization of staff, facilities,
infrastructure and public company costs. 
We expect annualized cost savings as a result of the combination to be
approximately $8 million. On January 21, 2005, we announced that we have implemented
the initial phase of our integration and synergies plan, including an immediate
reduction of 15% of our combined workforce and rationalization of our
facilities. The workforce reduction primarily affected employees from both
Mississauga, Ontario operations. We have also added financial strength with the
acquisition of Stuart Energy. As at January 31, 2005, we had approximately $114
million in cash and investments.  We expect the increased
market capitalization and market float to lead to increased trading liquidity
for our shareholders and provide our investors with a diversified exposure to
the hydrogen economy.  1


HYDROGENICS
BUSINESS Following our acquisition of
Stuart Energy in January 2005, we divided our business into two segments: (i)
fuel cell power products and onsite hydrogen generation systems, or Hydrogenics
Power and Generation; and (ii) fuel cell test and diagnostic stations, or
Hydrogenics Test.  Our corporate group structure
includes the following wholly-owned subsidiaries: Greenlight Power
Technologies, Inc. (incorporated under the federal laws of Canada), EnKat GmbH
(incorporated under the laws of Germany), Hydrogenics Japan Inc. (incorporated under
the laws of the Province of Ontario), Hydrogenics USA, Inc. (incorporated under
the laws of the State of Delaware), Stuart Energy Systems Corporation (incorporated
under the federal laws of Canada) and Stuart Energy Europe N.V.).  The description of our
business that follows reflects the acquisition of Stuart Energy and our
operations as of March 2, 2005.  HYDROGENICS
POWER AND GENERATION We believe that our customers
will increasingly prefer strategic suppliers that are positioned to offer them
integrated or bundled hydrogen and fuel cell solutions to meet their needs and
create value for them. We have structured our Hydrogenics Power and Generation
business toeffectively
respond to customer inquiries for fuel cell power products and hydrogen generation
systems, as well as turn-key, bundled solutions.  Our Hydrogenics Power and
Generation business unit employs approximately 240 people, including
approximately 180 people in ourMississauga, Ontario facility and approximately 60 people in our Oevel,
Belgium facility, where we manufacture and assemble our hydrogen generation systems based on alkaline water
electrolysis.  Power We are developing a
comprehensive portfolio of proton exchange membrane, or PEM, fuel cell power
products. We have developed and are marketing scalable PEM fuel cell power
modules that allow plug and play integration into our own fuel cell products
or those of original equipment manufacturers (OEMs). The low pressure
configuration of our power module architecture results in fewer moving parts,
greatersystem simplicity,
higher efficiency, lower cost, enhanced reliability, quieter operation and
increased versatility when compared to the high pressure systems offered by other fuel cell companies. Our goal is to
apply our power module architecture across a wide range of applications with
early market appeal. We also plan to achieve commercialization through
strategic partners that have established market channels.  We are also developing PEM
fuel cell system products for specific end-use markets. To date, our fuel cell
systems cover a range of portable, mobile and stationary power applications in
the 7 kW to 65 kW range. The diversity of our technology portfolio allows us to
design and manufacture fuel cell systems with integrated hydrogen refueling
capabilities.  We believe that we are well
positioned to commercialize PEM fuel cell power products as a result of: (i)
the breadth of our product portfolio; (ii) thecosts, performance and attributes of our
products relative to competitive products; (iii) our intellectual property
portfolio; (iv) our early market position in select early-adopter projects; (v) our strategic partners; (vi) our
skilled employee base; (vii) our global market reach; and (viii) our financial
strength.  Our power products business
also provides systems integration and engineering services to key customers and
strategic partners. System integration services entail working with our clients
to integrate their proprietary component into a fully functional fuel cell
system. These services includeengineering, design, prototyping, testing, contract manufacturing and
project management.  Generation With the acquisition of
Stuart Energy, we are now a leading global provider of on-site, packaged
hydrogen generation systems. We believe that we are the only hydrogen products
company in the world with leading proprietary technology in both alkaline water
electrolysis and PEMwater
electrolysis, together with access to reforming technologies through our
strategic alliances program.  Our product line of hydrogen
generation systems includes integrated solutions for on-site hydrogen
production, compression, storage, fuel dispensing and distributed power
generation. Our hydrogen generation product line is designed to meet a growing
and diverse set of requirements for the industrial, power generation and
transportation fueling markets. We integrate our proprietary, industry-leading
hydrogen generation systems with select components from our strategic partners
to provide integrated hydrogen solutions.  We have a strong competitive
position for on-site, electrolysis-based hydrogen generation systems in the
industrial market. In this market, wehave 57 years of experience, strong brand recognition and a large global
installation base. We have hundreds of units operating in a variety of demanding operating conditions globally.
The industrial market for on-site hydrogen generation offers us a growing
source of margingenerating revenue
that provides a source of funding for our market development initiatives in the
hydrogen power and transportation markets. In addition, by packaging the same
core hydrogen generation technology into our targeted industrial market and
hydrogen refueling station
market, we can minimize our technology and product development costs and
achieve benefits of increased scale. We believe that our activities and market leadership position in
our targeted industrial market also provides a strong competitive position for
us in the hydrogen refueling
station markets.  HYDROGENICS TEST We are a leading global
provider of PEM fuel cell test stations. Our test and diagnostic equipment is
used to develop and optimize the performance of fuel celltechnology by simulating, monitoring and
controlling the effect of power load, temperature, pressure, humidity and
potential contaminants on a fuel cell and  2


to measure the effect of
changes in these variables on fuel cell performance. Automotive companies,
energy companies, fuel cell developers, component suppliers and others are
currently spending significant capital on the development and improvement of
their own fuel cell programs. Test stands have become critical tools for fuel
cell technology developers, allowing fuel cell stacks to operate as part of a
fully integrated power system. Our test equipment and diagnostic products
currently range from basic component and stack research products to full system
and production grade test stations and diagnostic products. We believe that our
test stations and diagnostic products will become an important element to many
of these programs as broad commercial markets for fuel cells continue to
develop. Building on the experience gained in designing, manufacturing and
selling over 450 fuel cell test stations to approximately 60 customers in North
America, Asia and Europe, we have developed an extensive portfolio of test
equipment and diagnostic products. Since our acquisition of Greenlight Power
Technologies, Inc. (Greenlight) in January 2003, we have marketed our PEM fuel
cell test stations under our Greenlight brand.  Revenue from our test
equipment business has fluctuated historically and is expected to continue to
fluctuate significantly from period to period. In 2004, product technology
related issues combined with soft market conditions for test equipment
negatively impacted our test equipment revenue. The underperformance of our
test business was also affected by weak execution of our integration program.
To improve the performance of our test equipment business, we implemented
changes in management and staffing levels, product design and businessprocesses in 2004. Our expectations for growth
over the next three years for the test equipment business have been
substantially curtailed in our
strategic plan. This resulted in an impairment charge of $3.7 million in 2004,
related to the intangible assets established at the time of the acquisition of Greenlight. Our test
business continues to be a global leader of PEM fuel cell test stands. We are
closely tracking industry trends
and our performance to ensure that our strategy objectives for this business
are met.  In addition to selling test
equipment to third parties, we have over 30 test stations installed in our
facilities that we use to provide testing services to keycustomers and strategic partners and to
support our own research and development program for our PEM fuel cell power
products.  Currently, our fuel cell test
and diagnostic business unit is based in Burnaby, British Columbia, and employs
approximately 75 full-time people in Canada,Germany and Japan.  Accounting
Policies and Estimates  REVENUES We generate revenues through
the sale of fuel cell power products, hydrogen generation equipment and test
and diagnostic equipment. We also generate revenues by providing our customers
systems integration, engineering and testing services. Revenues related to the
sale of our products are recognized when there is persuasive evidence of an
arrangement, the fee is fixed or determinable, goods have been delivered, and
collection isreasonably
assured. Where customer acceptance clauses are considered to be substantive,
revenue is recognized only after customer acceptance is received. Revenues relating to systems
integration, engineering and testing services are recognized as services are
rendered. For contracts with multiple
deliverables, we allocate revenue to each element of the contract based on
objective evidence of the fair value of the element.  Where we have long-term
contracts with a customer, revenues are recognized under the
percentage-of-completion method whereby revenues and profits are recognized on
a pro-rata basis in relation to contract costs incurred. As an illustrative
example, we would recognize revenue under the percentage of completion method
in connection with a contract for a customized product with a completion cycle
spanning several quarters.  From time to time, we have
entered and may enter into sales-type lease arrangements with our customers in
the provision of our products. For these arrangements, revenues are recognized
when there is persuasive evidence of an arrangement, the fee is fixed or
determinable, goods have been delivered, and collection is reasonably assured.  We have two reportable
segments: test and power products. Test revenues include revenues related to
the manufacturing and sale of test equipment, upgrades to test equipment and
in-house testing of customer supplied components. Power products revenues
include revenues related to systems integration, fuel cell stacks, power
modules, auxiliary power unit (APU) modules, hydrogen generation equipment and engineering
services. Historically, power products revenues from engineering services were
derived primarily from a long-term contract with General Motors, pursuant to
which we provided technician and support services to General Motors in
connection with its fuel cell program.  This
contract ended on July 31, 2004.  Where we complete research
and development (R&D) work that is partially funded by government agencies,
on a direct or indirect basis, we record R&D grants as a recovery of
R&D expenses.  Cost of
Revenues. Cost of revenues consists
primarily of materials and direct labour relating to engineering, design and
production. The cost of providing engineeringservices, although heavily oriented towards
R&D activities, is matched with corresponding revenues and included in cost
of revenues.  Gross
Profit. We calculate gross profit by
deducting the cost of revenues from revenues. Positive gross profit, combined
with R&D grants received from governmentor commercial sources, are the primary sources
of funding for our market and product development activities.  OPERATING
EXPENSES  Selling,
General and Administrative (SG&A). SG&A expenses consist
primarily of wages, salaries and benefits relating to our sales, marketing and
corporate staff, professional fees, travel,  3


insurance and facilities
costs.  Stock-based
Compensation. For stock options granted to
employees on or after January 1, 2003, the estimated fair value of stock awards
granted to employees as of the date of grant is recognized as compensation
expense over the period in which the related employee services are rendered.
For stock options granted to non-employees on or after January 1, 2002, the
estimated fair value of stock awards granted to non-employees is recognized as expense
over the period in which the related goods or services are rendered.  Research
and Development (R&D). R&D expenses consist of
materials, labor costs and benefits, legal fees for the protection of
intellectual property and overhead attributable toR&D activity.  R&D
Grants. R&D grants are accounted
for as a reduction of our R&D expense in our consolidated statements of
operations, and are not included inrevenues. R&D grants include government funding and monies received
under contracts from commercial sources. A significant portion of these R&D
grants result in product deliveries and or technology demonstrations. The value
of grants received can fluctuate significantly from period-to-period as contracts wind down and
new contracts commence at varying schedules.  Amortization
of Intangible Assets. The amortization of
intangible assets relates to the intangible assets that we purchased from
General Motors in October 2001, as well as theintangible assets acquired as a result of our
acquisition of Greenlight on January 7, 2003.  CRITICAL
ACCOUNTING ESTIMATES Our accounting policies are
described in Note 2 of our consolidated financial statements. Set out below is
a discussion of the application of critical accounting policies and estimates
that require management to make assumptions about matters that are uncertain at
the time the accounting estimate is made, and for which differences in estimate
could have a material impact on the financial statements. Areas where the
application of accounting policies requires us to make significant estimates
include allowances for potentially uncollectible accountsreceivable, warranty provisions, provision for
obsolete inventory, valuation allowances for future income tax assets, useful
lives of intangible assets, fair value of goodwill, fair value of stock options
granted, provisions for costs to complete contracts in progress and estimates
of fair values related to
business acquisitions.  Allowance
for Doubtful Accounts. We record an allowance
against accounts receivable for accounts which are potentially uncollectible.
The allowance is based onmanagements
best estimates of collectibility, taking into account the specific
circumstances of each transaction and knowledge about the particular customer.  Warranty
Provisions. We typically provide a
warranty for parts and/or labour for up to one year, or based on certain
operating specifications such as hours of operation. Future warranty cost
provisions are based on managements best estimates of such costs, taking into
account specific arrangements of each transaction and past history.  Provision
for Obsolete Inventory. We record a provision against
inventory when we determine its potential future use in the production of
commercial products or in our R&D efforts is unlikely. Due to the nature of
our operations, which include significant R&D activities and prototype
projects, management activelymonitors raw materials inventory to ensure it is used in operations in a
timely manner. However, as products or R&D efforts and priorities change, and the use of certain raw materials
inventory becomes doubtful, a provision is taken against the carrying value of
this inventory. When it is
determined that the inventory has no future use in our operations and it has no
resale value it, is written off.  Valuation
Allowances for Future Income Tax Assets. We record a valuation
allowance to reflect uncertainties associated with the realization of future
income tax assets. The valuation allowance is based on managements best
estimates as to the certainty of realization.  Goodwill
and Intangible assets. Goodwill and intangible
assets with indefinite lives are not amortized but are subject to fair value
impairment tests on at least an annual basis and, additionally, whenever events
and changes in circumstances indicate that the carrying value might not be
recoverable. Impairment of goodwill is tested at the reporting unit level by
comparing the reporting units carrying amount, including goodwill, to the fair
value of the reporting unit. The fair values of the reporting units are
estimated using a combination of the income or discounted cash flows approach
and the market approach, which utilizes comparable companies data. If the
carrying amount of the reporting unit exceeds its fair value, then a second
step is performed to measure the amount of impairment loss, measured as the
amount by which the carrying value of the reporting units goodwill exceeds its
fair value, if any. Any impairment loss measured as the amount by which the
carrying value of the reporting units goodwill exceeds its fair value, would
be expensed in the consolidated statements of operations. The impairment test
for intangibles with indefinite useful lives consists of a comparison of the
fair value of the intangible asset with its carrying amount. When the carrying
amount of the intangible asset exceeds its fair value, an impairment loss is
recognized for the difference.  4


Stock-Based
Compensation. Effective January 1, 2003, on
a prospective basis, we adopted the new recommendations of the CICA with
respect to stock options granted after thatdate. This standard requires that compensation
expense be recorded on the grant of options to employees. Options are valued
using the Black- Scholes
option-pricing model. The resulting value of the options is recorded as
contributed surplus over the vesting period of the options. For stock options issued from January 1, 2002 through
December 31, 2002, we applied the settlement method of accounting, which
permitted us to not record compensation
costs on the granting of stock options to employees. The pro forma disclosures
of the impact on loss and loss per share of recording stock options granted during this period at
their fair value are disclosed in Note 11.  Under U.S. GAAP, for stock
based compensation, we measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award and recognizes the cost over the period during which an employee
is required to provide service in exchange for the award.  Estimates
of Costs to Complete Contracts. Where we have long-term contracts
with a customer, revenues and expenses are recognized under the
percentage-of-completion method.This method requires management to estimate
the costs to completion, so that revenues and profits can be recognized on a
pro-rata basis in relation to contract costs incurred.  Foreign
Currency Translation. The U.S. dollar is our
functional currency. Monetary assets and liabilities denominated in currencies
other than U.S. dollars are translated at the rate of exchange at the end of
each period. Non-monetary assets are translated at historical rates of
exchange. Revenues and expenses denominated in currencies other than the U.S.
dollar are translated into U.S. dollars at the rate of exchange on the date of
the transaction, except for depreciation and amortization which are translated
at historical rates. Translation gains and losses primarily arise from the
translation of Canadian dollar denominated monetary assets and liabilities,
with both realized and unrealized gains and losses being included in the results
of operations.  The operations of EnKAT GmbH
(EnKAT), our German subsidiary, are considered interdependent with our
operations, and accordingly, its accounts are translated into U.S. dollars
using the temporal method. Under this method, monetary assets and liabilities
are translated using the year-end exchange rate, and non-monetary items are
translated using historic rates of exchange. Revenues and expenses of EnKAT are
translated at the average exchange rate for the year, except for depreciation
and amortization, which are translated at historic rates of exchange. Resultant
gains and losses are included in the results of operations.  Recently
Issued Accounting Standards Our accounting policies are
described in Notes 2 and 3 of the consolidated financial statements for the
year ended December 31, 2004. In connection with these statements we have
adopted the following changes to our accounting policies:  (A) CANADIAN
STANDARDS  Asset
retirement obligations. Effective January 1, 2004, we
adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section
3110 Asset Retirement Obligations. This standard requires recognition of a
liability at its fair value for the obligation associated with the retirement
of a tangible long-livedasset.
A corresponding asset retirement cost would be added to the carrying amount of
the related asset and amortized to expense over the useful life of the asset. The initial adoption of this guidance did
not have an impact on our financial statements.  Hedging
relationships. Effective January 1, 2004, we
adopted CICA AcG-13, Hedging Relationships and Abstract No. 128 of the
Emerging Issues Committee, Accounting for Trading, Speculative or Non-Hedging
Derivative Financial Instruments (EIC 128). AcG-13 provides detailed guidance
for the identification, documentation, designation and effectiveness of hedges
and also the discontinuance of hedge accounting. EIC 128 requires that any
derivative financial instruments not designated within an AcG-13 compliant
hedging relationship be measured at fair value with changes infair value recorded in income. The initial
adoption of this guidance did not have an impact on our financial statements.  Generally
accepted accounting principles and general standards of financial statement
presentation. Effective January 1, 2004, we
adopted the CICA Handbook Section 1100, Generally Accepted Accounting
Principles. The section provides guidance on sources to consult when selecting
accounting principles and determining appropriate disclosures when a matter is
not dealt with explicitly in the primary sources of GAAP. The initial adoption
of this guidance did not have an impact on our financial statements.  Variable
interest entities. The CICA has issued a
guideline on the consolidation of variable interest entities (VIEs). This
guideline is effective January 1, 2005 andrequires us to identify VIEs in which we have
an interest, determine whether we are the primary beneficiary of such entities
and, if so, to consolidate the
VIE. A VIE is an entity in which:   the
equity is not sufficient to permit that entity to finance its activities
without external support; or  equity investors lack either voting control,
an obligation to absorb expected losses or the right to receive expected
residual returns.  A primary beneficiary is an
enterprise that will absorb a majority of a VIEs expected losses, receive a
majority of its expected residual returns, or both.  5


We adopted this guideline
effective January 1, 2004, the adoption of which, had no impact on our
financial position, results of operations orcash flows.  Liabilities
and equity. We will adopt the CICAs new
accounting pronouncements on the classification of financial instruments as
liabilities or equity on January 1, 2005. The CICA amended its disclosure
requirements surrounding the presentation of financial instruments that may be
settled in cash or by an issuers own equity instruments, at the issuers
discretion, as liabilities. This amendment is effective for periods beginning
on or after November 1, 2004 with early adoption encouraged. The adoption of
this new guidance will not impact our financial position, results of operations
or cash flows.  (B) U.S.
STANDARDS  Inventory
costs. In November 2004, the FASB
issued SFAS No. 151, Inventory Costs  an amendment of ARB No. 43. SFAS No.
151 requires abnormal idle facility expenses, freight, handling costs, and
wasted material (spoilage) costs to be recognized as current-period charges. It
also requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS No.
151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this new guideline will not have
an impact on our financial position, results of operations or cash flows.  Business
Acquisitions  STUART
ENERGY SYSTEMS CORPORATION As discussed above, on
January 6, 2005 we successfully aquired control of Stuart Energy Systems
Corporation (Stuart Energy). In February,2005, we completed the aquasition of the remaining shares of Stuart
Energy such that Stuart Energy is now a wholly-owned subsidiary. We de-listed the Stuart Energy common shares from
the Toronto Stock Exchange, effective February 18, 2005.  For accounting purposes, this
transaction has been reflected as a subsequent event in our December 31, 2004
financial statements (see Note 22 in the financial statements). The transaction
will be accounted for as a purchase transaction in the first quarter of 2005,
and the Company will consolidate the operations of Stuart Energy from January
6, 2005, the date of the acquisition.  The purchase price was $122.9
million exclusive of expenses of $1.8 million relating to the acquisition.
Consideration consisted of theissuance and reserve of 26,999,399 of our common shares. The preliminary
allocation of the purchase price to assets and liabilities acquired is as follows (in millions):  Net current assets
  
  19.5Net non-current assets
  
  2.7Intangible assets
  
  32.6Goodwill
  
  69.9$
  124.7  At the date of the
aquisition, Stuart Energy had confirmed orders under sales and long-term sales
contracts of approximately $15.6 million. At the date of acquisition, Stuart
Energys finished goods and work in process inventories will be recorded at
fair value, which represents a $1.4 million increase from Stuart Energys
carrying value of inventory at the date of acquisition. These inventories are
scheduled to be shipped within the first two quarters of 2005.  Cost of goods sold in 2005
will be impacted by a $1.4 million increase over costs that would have been
reported had inventories been valued at Stuart Energys historical cost. This
will negatively impact gross margins and earnings in 2005. As a result of this
acquisition, we also assumed material contractual obligations as at January 6,
2005. These obligations are expected to have the following impact on our cash
flows for the periods indicated:  Operating
  Year
  
  Operating
  Leases
  
  Obligations$
  (000s)
  
  $
  (000s)2005
  
  1,987
  
  5,1842006
  
  2,001
  
  2007
  
  1,053
  
  2008
  
  719
  
  2009 and thereafter
  
  1,985
  
  $
  7,745
  
  $
  5,184 For further information on the Stuart Energy
acquisition see Note 22 in the financial statements.  6


GREENLIGHT
POWER TECHNOLOGIES, INC. On January 7, 2003, we
acquired all the issued and outstanding shares of Greenlight Power Technologies
Inc. (Greenlight) based in Burnaby, British Columbia, Canada. Greenlight
designs and manufactures fuel cell test systems. The purchase price was $19.0
million, exclusive of expenses of $1.1 million related to the acquisition.
Consideration consisted of cash of $2.3 million and the issuance of 4,164,093
of our common shares with an aggregate value of $16.8 million at the
acquisition date. The allocation of the purchase price to the assets acquired
and liabilities assumed was as follows:  $ millionsCurrent assets
  
  
  
  $
  3.0Property, plant and equipment
  
  
  
  2.1Future tax assets
  
  
  
  5.4Intangible assets Order backlog (1)
  
  0.5Customer relationships (2)
  
  5.0Computer software (3)
  
  1.9Patentable technology (2)
  
  6.1
  
  13.5Goodwill
  
  
  
  5.2Current liabilities
  
  
  
  (3.5
  )Long-term debt
  
  
  
  (0.2
  )Future tax liabilities
  
  
  
  (5.4
  )Total Purchase Price
  
  
  
  $
  20.1  
 (1) Being amortized on a straight-line basis over 1 year. (2) Being amortized on a straight-line basis over 3 years. (3) Being amortized on a straight-line basis over 2 years.  In 2003, the fuel cell test
station manufacturing operation of Hydrogenics was combined with Greenlight,
and were centralized in Burnaby, British Columbia.  In the fourth quarter of
2004, we approved and adopted a three year strategic plan which incorporated a
revised outlook for our test business. This revised outlook factored in: (i)
the technology transition from contact humidification to steam humidification;
and (ii) reduced near-term capital level commitments from certain customers.
This assessment and revised outlook for the test business resulted in an
impairment charge of $3.7 million in the fourth quarter of 2004 related to the
intangible assets for patentable technology and customer relationships that
were established at the time of the acquisition of Greenlight. As of December
31, 2004, the carrying value of goodwill, all of which relates to our fuel cell
test station business, is $5.1 million. Our updated three year forecast for revenue
growth from this business has been significantly curtailed from our previous
strategic plan. Given these developments we reduced our headcount in this
business by 15% in 2004. We have determined that, at this time, the fair value
of the test station business continues to exceed its carrying value, and that
there is no impairment of goodwill.  EnKat GMBH On May 1, 2002, we acquired
all the issued and outstanding shares of EnKat Gmbh (Enkat), based in
Gelsenkirchen, Germany. The total purchase price was $0.6 million. EnKAT
designs and manufactures test systems for fuel cells, reformers and
electrochemical engines. Part of the purchase included management services
contracts for five years with each of the two principals of the acquired
company. The fair value of these contracts on the date of acquisition was $0.6
million, which is being amortized on a declining basis at an annual rate of
50%. As at December 31, 2004, the balance of intangible assets related to the
EnKat acquisition is nil.  SELECTED
FINANCIAL INFORMATION (000s except for per share amounts)
  
  12 months
  ended
  Dec. 31, 2004
  
  12 months
  ended
  Dec. 31, 2003
  
  12 months
  ended
  Dec. 31, 2002Revenue
  
  $
  16,656
  
  $
  26,660
  
  $
  15,840Net Loss
  
  $
  (33,539
  )
  $
  (22,091
  )
  $
  (20,611
  )Basic and Fully Diluted Net Loss Per Share
  
  $
  (0.53
  )
  $
  (0.42
  )
  $
  (0.43
  )Weighted Average Number of Common Shares
  Outstanding
  
  63,542,811
  
  52,993,167
  
  48,437,813Total Assets
  
  $
  117,861
  
  $
  91,438
  
  $
  90,677Cash and Short-Term Investments
  
  $
  89,062
  
  $
  46,708
  
  $
  60,051  7


RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 Revenuesdecreased by $10.0 million, or 37%, to $16.7
million for the year ended December 31, 2004 compared with $26.7 million in
2003. The decrease in revenues for the year was primarily attributable to a
decrease in test revenues of $9.6 million, or 46%, to $11.1 million, or 66% of
total revenues in 2004 compared with $20.7 million, or 77% of total revenues in
2003. Product technology related issues and a soft market for test equipment
negatively impacted revenues in 2004. The underperformance of our test business
was also affected by weak execution of our integration program.  Revenue from power products
of $5.6 million in 2004 was down by $0.4 million compared with $6.0 million in
2003. Engineering services revenue, which is a component of our power products
revenue, was $1.8 million in 2004, a decrease of $1.9 million compared with
revenue of $3.7 million in 2003. Excluding engineering services revenues from
GM, which ended July 31, 2004, power products revenues increased by $1.5
million or 65% to $3.8 million in 2004 compared with $2.3 million in 2003.  We expect to record certain
billings related to the production and shipment of power products as R&D
grants, including instances where we provide services or products as a
sub-contractor to a customer who is the recipient of government grants. As
described above, R&D grants are offset against R&D expenses.  Following the acquisition of
Greenlight in 2003, and the subsequent transfer of our test division to
Burnaby, our Mississauga facility was primarily dedicated to our emerging power
products business. Since that time, we have expended a significant effort on
power products development. A substantial portion of these efforts is
subsidized through R&D grants, as opposed to revenue-generating systems
integration projects on behalf of customers.  In 2004, North American
revenues for test and power products, excluding engineering service revenues,
decreased by $6.7 million, or 48%, to $7.2 million compared with $13.9 million
in 2003. North American engineering services revenue declined $1.9 million, or
51%, to $1.8 million compared with revenue of $3.7 million in 2003, as this
contract expired in third quarter 2004. European revenues in 2004 were $3.1
million, flat compared with $3.1 million in 2003. Asian revenues decreased by
$1.4 million, or 23%, to $4.6 million compared with $6.0 million in 2003.
Japanese customers contributed the largest share of the Asian revenues, due in
part to our sales and service office presence in Japan.  Geographic Revenue Breakdown by Region ($
millions) 2004
  
  %
  
  2003
  
  %North America  (excluding Engineering
  services)
  
  7.2
  
  43
  
  13.9
  
  52North America  Engineering services
  
  1.8
  
  11
  
  3.7
  
  14Europe
  
  3.1
  
  19
  
  3.1
  
  12Asia
  
  4.6
  
  27
  
  6.0
  
  2216.7
  
  100
  
  26.7
  
  100  The majority
of our revenues are concentrated with relatively few customers. Our four
largest customers contributed 68% and 60% of our revenues in 2004 and 2003,
respectively. Excluding our engineering services contract with General Motors,
our four largest customers contributed 57% percent of total revenues in 2004
compared with 46% percent in 2003. Consistent with prior years, the composition
of our four largest customers changed again in 2004. In 2004, two of our top
four customers by revenue were new, and the revenues from these new customers
were derived from test equipment and fuel cell power product sales.  Overall
revenues from General Motors for 2004 decreased $3.7 million, or 42%, to $5.2
million, or 31%, of our total revenues. In 2003, GM revenues of $8.9 million
represented 33% of our total revenues.  Cost of
revenues decreased by $5.6 million, or 31%, to $12.4
million in 2004 compared with $18.0 million in 2003. The year-over year
decrease is primarily related to the decrease in revenues for the period. Cost
of revenues will also fluctuate from period to period based on the mix of
products and services sold in the period. Cost of revenues includes an
inventory write-off of $0.3 million in 2004 related to slow moving test
equipment raw materials. In 2003, the cost of revenues also included a $0.4
million inventory write-off resulting from the integration of Greenlight.  Gross
profits decreased by $4.3 million, or 50%, to $4.3
million in 2004, compared with $8.6 million in 2003. The decrease in gross
profits is primarily attributable to the decrease in revenues for the period.
Gross profits, as a percentage of revenues, were 26% in 2004, compared with 32%
in 2003. Gross profit as a percentage of revenues will fluctuate based on the
mix of products or services sold in a period, the power range of equipment, as
well as the proportion of R&D activity in relation to revenues.  Increased gross profits due to
revenue growth and consistent or improving gross margins, as a percentage of
revenues, are important to our commercial sustainability. Gross profit combined
with grants received for R&D projects are used as the primary source of
funding for our market and product development activities. Gross profits for
2004 of $4.3 million combined with government grants of $4.7 million, totaled
$9.0 million representing a decrease of 17%, or $1.8 million, from $10.8
million in 2003. Although government grants are not recorded as revenues, when
combined with gross profits, they provide an indication of the level of
activity being undertaken in return for cash.  8 
  SG&A
expensesincreased by
$0.6 million, or 5%, to $13.0 million for 2004, compared with $12.4 million in
2003. The entire increase in SG&A expenses can be attributed to the
year-over-year strengthening of the Canadian dollar, which had an impact of
$0.9 million on full year SG&A expenses.  In 2003, we had non-recurring
legal expenses of $1.0 million related to our defense of a patent infringement
law suit.  Employee
stock-based compensation expenseof $1.3 million was recorded in 2004, an increase of $0.6 million, or
92%, from $0.7 million in 2003. In calculating this expense, we made
significant estimates and assumptions in determining the estimated fair value
of the options granted. Stock options were valued using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
3.50%, expected life of 4 years, expected volatility of 52.05%, and no
dividends. For the year ended December 31, 2004, a total of 828,808 stock
options were granted to employees representing approximately 1% of the weighted
average number of shares outstanding. Approximately 82% of our employees
received stock options in 2004 and approximately 24% of the options granted
went to the five highest paid executives. Excluding the effect of any future
stock options granted, the projected stock-based compensation expense related
to the options granted in 2004 is as follows:  Year
  
  $ millions2005
  
  0.82006
  
  0.32007
  
  0.1$
  1.2   R&D
expensesincreased by
$4.6 million, or 50%, to $13.8 million in 2004, compared with $9.2 million in
2003. The increase in R&D is primarily attributable to an increase in
funded R&D and demonstration projects for which we must bear a significant
portion of the costs. As we are typically required to contribute to the cost of
demonstration projects, we are highly selective about the demonstration
projects that we accept. We carefully screen cost-share projects, looking at
whether such projects are already part of our product development and
demonstration plan and whether there are significant strategic implications. We
believe that certain demonstration projects that are sponsored by government
and industry participants are important because they typically: (i) provide
opportunities to showcase the capabilities of our fuel cell power products and
hydrogen refueling stations; (ii) provide important technical and/or market
feedback; (iii) educate future stakeholders; and (iv) result in the
identification of potential customers and/or strategic partners. Currently, we
are participating in, or plan to participate in, a number of
government-sponsored demonstration projects.  R&D
grantsincreased by
$2.5 million, or 114%, to $4.7 million in 2004, compared with $2.2 million in
2003. This increase reflects the impact of new programs which we received
funding for during 2004. R&D grants are accounted for as a reduction of
expense in our consolidated statements of operations and are not included in
revenues. However, R&D grants when combined with gross profits decreased by
$1.8 million, or 17%, to $9.0 million in 2004 compared with $10.8 million in
2003.  Depreciation
of property, plant and equipmentincreased by $0.3 million, or 14%, to $2.5 million in 2004, compared
with $2.2 million in 2003.  Amortization
of intangible assetsdecreased
by $4.4 million, or 34%, to $8.5 million in 2004 compared with $12.9 million in
2003. The decrease is primarily the result of the reduction in amortization of
the intangibles acquired from General Motors which are being amortized on a
declining balance basis. The corresponding impact on loss per share related to
the non-cash amortization of intangible assets for 2004 was $0.13 per share
compared with $0.24 share in 2003.  Assuming no additional
intangible asset purchases or value impairment, the projected amortization charge
for the next five years will be:  Year
  
  $ millions2005
  
  1.92006
  
  1.02007
  
  0.52008
  
  0.32009
  
  0.1  Impairment
of intangible assetsamounted
to $3.7 million during the year. This is as a result of an impairment charge in
the fourth quarter of 2004 for the remaining value of the intangible assets
related to patentable technology and customer relationships that were recorded
as assets on January 7, 2003 related to the acquisition of Greenlight. In the
fourth quarter of 2004, we approved and adopted a new three-year strategic plan
which incorporated a revised outlook for our test business. This revised
outlook factored in: (i) the technology transition from contact humidification
to steam humidification; and (ii) reduced near-term capital level commitments
from certain customers.  Integration
costsrelated to the
Greenlight acquisition were a credit of $0.1 million in 2004 compared with $1.2
million in 2003. During 2004, goodwill was reduced by $0.1 due to the reversal
of a relocation accrual established on the acquisition of Greenlight. The
integration costs reflect incurred but non-recurring expenses relating to
integrating Greenlight. The integration of Greenlight was completed in 2003.  9


Provincial
capital tax expenseincreased
by $0.2 million to $0.3 million in 2004, compared with $0.1 million in 2003.
The increase results from holding greater net assets subject to capital tax at
year end in 2004 compared with 2003.  Interest
income, net of bank
charges and interest paid, increased by $0.2 million, or 29%, to $0.9 million
in 2004, compared with $0.7 million in 2003. The increase is primarily
attributable to an increase in short-term investments in 2004.  Foreign
currencylosses in
2004 were $0.3 million which is a decrease of $5.7 million from the $5.4
million gain recorded in 2003. In 2003, the foreign currency gains resulted
from holding Canadian dollar denominated short-term investments when the
Canadian dollar strengthened considerably against the U.S. dollar. As at
December 31, 2004, no short-term investments were held in Canadian funds,
compared with 34% of short-term investments being held in Canadian funds as at
December 31, 2003.  Income tax
expensedecreased by
$0.1 million, or 50%, to $0.1 million in 2004, compared with $0.2 million in
2003. The expense is attributable to the federal large corporation tax, which
is based on our taxable capital. Similar to the provincial capital tax, changes
in this expense are partially dependent on the eligibility of certain
short-term investments being deducted from net assets to arrive at our tax
base.  Our tax loss carry forwards
at December 31, 2004 are $58.8 million. However, due to past historical losses,
as of December 31, 2004, we have provided a valuation allowance against the
full amount of the tax loss carry forwards.  Net lossincreased by $11.4 million, or 52%, to $33.5
million in 2004, compared with a net loss of $22.1 million in 2003. The
increase in the loss is a result of: (i) a decrease of $5.7 million in foreign
currency gains; (ii) a decrease of $4.3 million in gross profits associated
primarily with the decline in revenues; (iii) a $3.7 million write-off related
to an impairment of intangible assets; (iv) an increase of $2.0 million in net
R&D expenses; (v) a $0.6 million increase in stock-based compensation
expense; and (vi) an increase of $0.6 million in selling, general and
administrative expenses. These items were partially offset by: (i) a $4.4
million decrease in non-cash amortization of intangible assets; and (ii) a $1.3
million decrease in integration costs.  Of the 2004 net loss, $13.8
million was directly attributable to our test business segment, $9.8 million to
the power products segment, and the remainder of $9.9 million to corporate
activities. Excluding the effect of amortization and depreciation expense and
the write-off for impairment of intangible assets, the test segment would have
had a net loss of $3.3 million for 2004, and the power products segment loss would
have been $5.6 million. The test segment is further advanced in its product
life cycle, producing commercial products today, albeit in limited quantities.
The power products segment is in the early stages of development as evidenced
by the more significant level of R&D activity relative to current revenue
levels.  Basic and diluted net loss
per share increased by $0.11, or 26%, to $0.53 in 2004 compared with $0.42 in
2003.  Under U.S. GAAP, the net loss
for 2004 was $33.6 million, or $0.53 per share basic and diluted, compared with
$22.2 million, or $0.42 per share in 2003. The only difference from the net
loss for Canadian GAAP is an adjustment for stock-based compensation under APB
Opinion No. 25. Under U.S. GAAP, for stock based compensation granted prior to
January 1, 2003, we use the intrinsic value method of APB Opinion No. 25 and
options issued under the plan are deemed to be compensatory to the extent that
the fair value of the stock exceeds the exercise price at the date of grant.
The compensation cost is recognized over the vesting period.  Full time headcount at the
end of 2004 was 215 employees compared with 250 at December 31, 2003. Headcount
decreased by 58 in Q3 2004 with the termination of the GM engineering services
contract. Upon our acquisition of Stuart Energy on January 6, 2005, our
combined headcount was approximately 375. This headcount was subsequently
reduced to approximately 325 on January 21, 2005.  Shares
Outstanding For the year ended December
31, 2004, the weighted average number of shares used in calculating the loss
per share was 63.5 million. The number of common shares outstanding at December
31, 2004 was 64.6 million. For the year ended December 31, 2003, the weighted
average number of shares used in calculating the loss per share was 53.0
million. The number of common shares outstanding at December 31, 2003 was 53.1
million. After completion of the Stuart Energy transaction, there are
approximately 91.6 million shares outstanding as of March 1, 2005.  Options granted under our
stock option plan and share purchase warrants outstanding have not been
included in the calculation of the diluted loss per share as the effect would
be anti-dilutive.  Stock options outstanding
were 3.8 million as at December 31, 2004, of which 2.3 million were
exercisable. There were 2.5 million share purchase warrants outstanding, of
which 2.3 million have been released from escrow.  Since April 2002, our three
founders, (Pierre Rivard, Joseph Cargnelli and Boyd Taylor), have elected to
diversify their personal holdings by selling a percentage of their direct
holdings in our stock. These sales are from personal direct shareholdings and
do not result from the exercise of stock options. Our founders elected to not
participate in our stock option plan, and do not hold any stock options at this
time. Accordingly, as they sell stock, there is no corresponding dilution, but
rather increased liquidity in our public float. These selling programs are in
full compliance with applicable securities legislation and have been disclosed
on a quarterly basis. In selling these shares, the founders have entered into
irrevocable contracts to sell shares over an extended period of time on a
non-discretionary basis. One of our founders, Boyd Taylor, retired as a
director and officer of our Company in January 2005. Our two other founders,
Pierre Rivard and Joseph Cargnelli, continue  10


to be officers of the
Company. Pierre Rivard our President and CEO, is also a director of the
Company. Joseph Cargnelli is our Chief Technology Officer. The selling programs
for these two founders are expected to continue in 2005.  RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 Revenuesincreased by $10.9 million, or 68%, to $26.7
million for the year ended December 31, 2003 compared with $15.8 million in
2002. The increase in revenues for the year was primarily attributable to an
increase in test revenues of $15.1 million, or 269%, to $20.7 million, or 77%
of total revenues in 2003 compared with $5.6 million, or 35% of total revenues
in 2002. The launch of our new FCATS product models in 2002 resulted in a
record backlog of confirmed orders for test equipment sales entering into 2003.
This backlog combined with the acquisition of Greenlight accounted for the most
of the increase in test revenues. Greenlights revenues in the year prior to
acquisition were at a level of approximately $3.7 million. We believe that the
acquisition of Greenlight, our principal competitor in the fuel cell test
business, enabled us to solidify our position in the fuel cell testing
business, while creating additional capacity and aligning dedicated resources
to our emerging fuel cell power products business. Test equipment revenues are
expected to continue to fluctuate significantly from period to period.  The increase in test revenues
were partially offset by a decline in revenues from power products which
totaled $6.0 million in 2003 compared with $10.2 million for 2002. Due to the
early development stage of fuel cell markets we expect power products revenues
to fluctuate significantly from period to period. The decline in power products
revenue was due primarily to a reduction in engineering services revenue and a
decline in system integration revenue. Engineering services, a component of
power products revenue, decreased by $2.1 million to $3.7 million in 2003
compared with $5.8 million in 2002. Engineering services revenue decreased due
to a reduction in services provided to General Motors upon renewal of the
General Motors engineering services contract in March 2003.  Following the acquisition of
Greenlight, and the subsequent transfer of the test division to Burnaby, the
Mississauga location was primarily dedicated to the emerging power products business.
During 2003, a significant effort was expended on product development, as
opposed to revenue-generating system integration projects on behalf of
customers. A substantial portion of these efforts was subsidized through
government R&D grants which are not recorded as revenues.  North American revenues for
test and power products, excluding engineering service revenues, increased by
$6.7 million, or 93%, to $13.9 million compared with $7.2 million in 2002.
These gains were somewhat offset by a decline of $2.1 million, or 36%, to $3.7
million in North American engineering services revenues, compared with $5.8
million in 2002. European sales represented 12% of total sales in both 2003 and
2002. Asian revenues increased by $5.0 million, or 500%, to $6.0 million
compared with $1.0 million in 2002. Japanese customers contributed the largest
share of the growth in Asian revenues, due in part to our sales and service
office presence in Japan.  Geographic
Revenue Breakdown by Region ($ millions)  2003
  
  %
  
  2002
  
  %North America  (excluding Engineering
  services)
  
  13.9
  
  52
  
  7.2
  
  45North America  Engineering services
  
  3.7
  
  14
  
  5.7
  
  37Europe
  
  3.1
  
  12
  
  1.9
  
  12Asia
  
  6.0
  
  22
  
  1.0
  
  626.7
  
  100
  
  15.8
  
  100  The majority of our revenues
is concentrated with relatively few customers. Our four largest customers
contributed 60% and 81% of our revenues in 2003 and 2002, respectively.
Excluding our engineering services contract with General Motors, our four
largest customers contributed 46% percent of total revenues in 2003 compared
with 44% percent in 2002. Consistent with prior years, the composition of our
four largest customers changed again in 2003. In 2003, two of our top four
customers by revenue were new and the revenues from these new customers were
derived from test equipment sales.  Overall revenues from General
Motors for 2003 decreased $0.7 million to $8.9 million, or 33% of our total
revenues, for the year compared with $9.6 million, or 61% of total revenues for
2002.  Cost of revenuesincreased by $7.3
million, or 68%, to $18.0 million in 2003 compared with $10.7 million in 2002.
The year-over year increase is primarily related to the increase in revenues
for the period. Cost of revenues in 2003 also included a $0.4 million inventory
provision resulting from the integration of Greenlight.  Gross
profitsincreased by
$3.5 million, or 68%, to $8.6 million in 2003 compared with $5.1 million in
2002. The increase in gross profits is primarily attributable to the increase
in revenues for the period. Gross margins as a percentage of revenues were
unchanged, with margins of 32% in 2003 and 2002. Gross margin as a percentage
of revenues will fluctuate based on the mix of products or services sold in a
period, the power range of equipment, as well as the proportion of R&D
activity in relation to revenues.  Increased gross profits due
to revenue growth and consistent gross margins, as a percentage of revenues,
are important to our commercial sustainability. Gross profit combined with
grants received for R&D projects are used as the primary source of funding
for our market and product development activities. Gross profits for 2003, of
$8.6 million combined with government grants of $2.2 million, totaled $10.8
million representing and increase of 93%, or $5.2 million, compared with $5.6
million in 2002. Although government grants are not recorded as revenues, when
combined with gross profits, they provide an indication of the level of
activity being undertaken in return for cash.  11


SG&A
expensesincreased by
$5.7 million, or 86%, to $12.4 million for 2003, compared with $6.7 million in
2002. The increase in SG&A expenses is primarily attributable to the
acquisition of Greenlight, increased wages and salaries relating to our sales,
marketing and corporate staff, increased insurance costs, higher legal costs,
the negative currency exchange effect of the strengthening of the Canadian
dollar during the year, and expanded business activities as we grow our
marketing efforts. Non-recurring legal expenses aggregating $1.5 million were
incurred in 2003 and 2002 in defence of a patent infringement law suit, of
which $1.0 million was incurred in 2003. Excluding the effects of the
non-recurring legal costs, SG&A expenses would have been $11.4 million for
2003 compared with $6.2 million in 2002. Although $0.5 million was recovered
from the plaintiff in the patent infringement law suit, in the form of a
promissory note received during the third quarter, no corresponding reduction
was taken to SG&A expenses. The recovery is being accounted for as a
contingent gain, to be booked as a reduction to SG&A in the future when we
receive the cash.  Employee
stock-based compensation expenseof $0.7 million was recognized in 2003, with no corresponding amount
included in prior year results of operations. In calculating this expense, we
made significant estimates and assumptions in determining the estimated fair
value of the options granted. Stock options were valued using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
3.50 percent to 4.86 percent, expected life of 4 years, expected volatility of
between 48 and 77 percent, and no dividends. For the year ended December 31,
2003, a total of 886,793 stock options were granted to employees representing
approximately 2% of the weighted average number of shares outstanding.
Approximately 77 percent of our employees received stock options in 2003.
Excluding the effect of any future stock options granted, the projected
stock-based compensation expense related to the options granted in 2003 is as
follows:  Year
  
  $ millions2004
  
  0.82005
  
  0.32006
  
  0.2$
  1.3  R&D
expensesincreased by
$5.0 million, or 118%, to $9.2 million in 2003, compared with $4.2 million in
2002. The increase in R&D is primarily attributable to increased R&D
expenditures related to our emerging power products business including
development activity related to our 10 kW power module and hydrogen generation
initiatives, as well as the negative currency exchange effect of the
strengthening of the Canadian dollar during the year. Specific R&D
activities during 2003 included the NRCan bus project, the development of our
10 kW power module, the HySTAT demonstration project for the City of Toronto,
the development of our electrolyzer, vehicle-to-grid research and development
initiatives, and re-fueling initiatives.  R&D
grantsincreased by
$1.7 million, or 368%, to $2.2 million in 2003, compared with $0.5 million in
2002. This increase reflects the impact of new programs which received funding
during 2003, including the NRCan bus project and the HySTAT demonstration
project for the City of Toronto. R&D grants are accounted for as a
reduction of expense in our consolidated statements of operations and are not
included in revenues. However, R&D grants when combined with gross profits
increased by $5.2 million, or 93%, to $10.8 million in 2003 compared with $5.6
million in 2002.  Depreciation
of property, plant and equipmentincreased by $0.9 million, or 76%, to $2.2 million in 2003, compared
with $1.3 million in 2002. The majority of the increase is attributable to
higher levels of property, plant and equipment primarily associated with the
acquisition of Greenlight.  Amortization
of intangible assetsdecreased
by $2.3 million, or 15%, to $12.9 million in 2003 compared with $15.2 million
in 2002. The decrease is primarily the result of the reduction in amortization
of the intangibles acquired from General Motors which are being amortized on a
declining balance basis, partially offset by the amortization of the
intangibles acquired on the Greenlight acquisition. The corresponding impact on
loss per share related to the non-cash amortization of intangible assets for 2003
was $0.24 per share.  Integration
costsrelated to the
Greenlight acquisition were $1.2 million in 2003 without a corresponding amount
in 2002. The integration costs reflect incurred but non-recurring expenses
relating to integrating Greenlight. These costs consist of relocation of
employees, involuntary terminations, and direct travel costs incurred as
resources were aligned and duplication of expenses eliminated. The integration
is complete and we do not expect to incur any further integration costs relating
to the Greenlight acquisition.  Provincial
capital tax expensedecreased
by a nominal amount to $0.1 million in 2003 compared with $0.2 million in 2002.
The decrease results from holding fewer net assets subject to capital tax at
year end in 2003 compared with 2002.  Interest
income,net of bank
charges and interest paid, decreased by $0.4 million, or 42%, to $0.7 million
in 2003, compared with $1.1 million in 2002. The decrease is primarily
attributable to a reduction in short-term investments in 2003, as well as,
lower interest rates.  Foreign
currencygains
increased by $4.9 million to $5.4 million for 2003 compared with gains of $0.5
million in 2002. The foreign currency gains result primarily from the holding
of Canadian dollar denominated short-term investments and the strengthening of
the Canadian dollar against the U.S. dollar throughout 2003. As at December 31,
2003, 34% of short-term investments were held in Canadian funds, compared with
54% of short-term investments as at December 31, 2002.  12


Income taxexpense was $0.2 million in 2003 compared with
$0.3 million in 2002. The expense is attributable to the ederal large
corporation tax, which is based on our taxable capital. Similar to the provincial
capital tax, changes in this expense are partially dependent on the eligibility
of certain short-term investments being deducted from net assets to arrive at
our tax base.  Our tax loss carry forwards
at December 31, 2003 are $29.9 million. However, due to past historical losses,
as of December 31, 2003 we have provided a valuation allowance against the full
amount of the tax loss carry forwards.  Net lossincreased by $1.5 million, or 7%, to $22.1
million in 2003 compared with a net loss of $20.6 million in 2002. The increase
is primarily attributable to an increase of $5.7 million in SG&A expenses,
integration costs of $1.2 million, stock-based compensation of $0.7 million and
increased net R&D costs of $3.3 million, partially offset by increased gross
profits of $3.5 million, increased net foreign currency gains of $4.9 million
and a net decrease in combined depreciation and amortization of $1.4 million.
The increases in SG&A expenses and R&D were largely due to the combined
impact of the negative currency effect of the strengthening in the Canadian
dollar during the year and increased expenses related to the integration of
Greenlight.  Of the 2003 net loss, $4.1
million was directly attributable to the test segment, $13.5 million to the
power products segment and the remainder of $4.5 million were attributable to
corporate activities. Excluding the effect of amortization and depreciation
expense, the test segment would have had a net profit of $2.4 million for 2003,
and the power products segment loss would have been $4.8 million. The test
segment is further advanced in its product life cycle, producing commercial
products today, albeit in limited quantities. The power products segment is
just emerging as evidenced by the more significant level of R&D activity
relative to current revenue levels.  Basic and diluted net loss
per share decreased by $0.01, or 2%, to $0.42 in 2003 compared with $0.43 in
2002.  Under U.S. GAAP, the net loss
for 2003 was $22.2 million, or $0.42 per share basic and diluted, compared with
$21.1 million, or $0.43 in 2002. The only difference from the net loss for
Canadian GAAP is an adjustment for stock-based compensation under APB Opinion
No. 25. Under U.S. GAAP, for stock based compensation granted prior to January
1, 2003, we use the intrinsic value method of APB Opinion No. 25 and options
issued under the plan are deemed to be compensatory to the extent that the fair
value of the stock exceeds the exercise price at the date of grant. The
compensation cost is recognized over the vesting period.  Our EBITDA loss for the year
ended December 31, 2003 includes the impact of approximately $3.5 million in
increased expenses related to the appreciation of the Canadian dollar during
2003, as well as $1.0 million of non-recurring SG&A expenses related to our
successful defense of a patent infringement lawsuit. Our decision to hold a
significant portion of short-term investments in Canadian dollars contributed a
foreign currency gain of $5.4 million in 2003, which offsets the approximate $3.5
million impact the rising Canadian dollar had on year-to-date expenses and
EBITDA.  Management defines EBITDA as
earnings (loss) before net interest income, income taxes, depreciation of
property, plant and equipment and amortization of intangibles assets. EBITDA is
presented because it is widely accepted performance indicator of a companys
ability to generate sufficient cash to meet its liabilities as they come due
although it should be noted that, under Canadian GAAP, this indicator is not a
measure of liquidity or of financial performance. EBITDA, as presented above,
is not a specifically defined term and may not be comparable to similarly
titled measures reported by other companies. While providing useful
information, EBITDA should not be considered in isolation or as an alternative
to net income or cash flows as determined under Canadian GAAP.  Shares
Outstanding For the year ended December
31, 2003, the weighted average number of shares used in calculating the loss
per share was 53.0 million. The number of common shares outstanding at December
31, 2003 was 53.1 million. For the year ended December 31, 2002, the weighted
average number of shares used in calculating the loss per share was 48.4
million. The number of common shares outstanding at December 31, 2002 was 48.8
million.  Options granted under our
stock option plan and share purchase warrants outstanding have not been
included in the calculation of the diluted loss per share as the effect would
be anti-dilutive.  Stock options outstanding
were 3.3 million as at December 31, 2003, of which 1.9 million were
exercisable. There were 2.5 million share purchase warrants outstanding, of
which 1.6 million have been released from escrow.  QUARTERLY
RESULTS OF OPERATIONS The following tables show the
unaudited consolidated statements of operations for the past eight quarters
ending December 31, 2004. The information has been obtained from our quarterly
unaudited financial statements which have been prepared in accordance with
Canadian GAAP and, in the opinion of management, have been prepared using
accounting policies consistent with the audited financial statements and
include all adjustments necessary for the fair presentation of the results of
the interim periods. We expect our operating results to vary significantly from
quarter to quarter and they should not be relied upon to predict future
performance.  13


2004 Quarter ended (Unaudited)(thousand of U.S. dollars  except per share amounts)March 31
  
  June 30
  
  September
  30
  
  December
  31
  
  Total
  YearRevenues
  
  4,075
  
  3,578
  
  3,509
  
  5,494
  
  16,656Cost of revenues
  
  2,825
  
  2,546
  
  2,896
  
  4,129
  
  12,3961,250
  
  1,032
  
  613
  
  1,365
  
  4,260Operating expensesSelling, general and administrative
  
  3,213
  
  3,313
  
  3,592
  
  2,874
  
  12,992Stock-based compensation
  
  289
  
  338
  
  417
  
  269
  
  1,313Research and development
  
  2,997
  
  4,240
  
  3,158
  
  3,386
  
  13,781Research and development grants
  
  (686
  )
  (1,383
  )
  (1,672
  )
  (971
  )
  (4,712
  )Depreciation of property plant and
  equipment
  
  524
  
  639
  
  643
  
  711
  
  2,517Amortization of intangible assets
  
  2,126
  
  2,128
  
  2,128
  
  2,128
  
  8,510Impairment of intangible assets
  
  
  
  
  
  
  
  3,693
  
  3,693Integration costs
  
  
  
  
  
  
  
  (77
  )
  (77
  )8,463
  
  9,275
  
  8,266
  
  12,013
  
  38,017Loss from operations
  
  (7,213
  )
  (8,243
  )
  (7,653
  )
  (10,648
  )
  (33,757
  )Other income (expenses)Provincial capital tax
  
  (44
  )
  (43
  )
  (45
  )
  (128
  )
  (260
  )Interest, net
  
  165
  
  179
  
  277
  
  274
  
  895Foreign exchange gains (losses)
  
  (332
  )
  (333
  )
  201
  
  131
  
  (333
  )(211
  )
  (197
  )
  433
  
  277
  
  302Loss before income taxes
  
  (7,424
  )
  (8,440
  )
  (7,220
  )
  (10,371
  )
  (33,455
  )Income tax expense (recovery)
  
  27
  
  41
  
  49
  
  (33
  )
  84Loss for the period
  
  (7,451
  )
  (8,481
  )
  (7,269
  )
  (10,338
  )
  (33,539
  )Loss per shareBasic and fully diluted
  
  (0.12
  )
  (0.13
  )
  (0.11
  )
  (0.16
  )
  (0.53
  )  14


2003 Quarter ended (Unaudited)(thousand of U.S. dollars  except per share amounts)March 31
  
  June 30
  
  Sep. 30
  
  Dec. 31
  
  Total YearRevenues
  
  8,409
  
  6,841
  
  5,528
  
  5,882
  
  26,660Cost of revenues
  
  5,631
  
  4,606
  
  3,801
  
  4,004
  
  18,0422,778
  
  2,235
  
  1,727
  
  1,878
  
  8,618Operating expensesSelling, general and administrative
  
  2,395
  
  3,212
  
  3,230
  
  3,524
  
  12,361Stock-based compensation
  
  
  
  101
  
  292
  
  291
  
  684Research and development
  
  1,543
  
  3,023
  
  2,075
  
  2,604
  
  9,245Research and development grants
  
  (792
  )
  (473
  )
  (859
  )
  (83
  )
  (2,207
  )Depreciation of property plant and
  equipment
  
  523
  
  621
  
  546
  
  557
  
  2,247Amortization of intangible assets
  
  3,233
  
  3,233
  
  3,234
  
  3,233
  
  12,933Integration costs
  
  463
  
  327
  
  270
  
  183
  
  1,2437,365
  
  10,044
  
  8,788
  
  10,309
  
  36,506Loss from operations
  
  (4,587
  )
  (7,809
  )
  (7,061
  )
  (8,431
  )
  (27,888
  )Other income (expenses)Provincial capital tax
  
  (44
  )
  (48
  )
  (48
  )
  87
  
  (53
  )Interest, net
  
  184
  
  183
  
  131
  
  159
  
  657Foreign exchange gains (losses)
  
  2,050
  
  2,204
  
  134
  
  995
  
  5,3832,190
  
  2,339
  
  217
  
  1,241
  
  5,987Loss before income taxes
  
  (2,397
  )
  (5,470
  )
  (6,844
  )
  (7,190
  )
  (21,901
  )Income tax expense
  
  38
  
  40
  
  42
  
  70
  
  190Loss for the period
  
  (2,435
  )
  (5,510
  )
  (6,886
  )
  (7,260
  )
  (22,091
  )Loss per shareBasic and fully diluted
  
  (0.05
  )
  (0.10
  )
  (0.13
  )
  (0.14
  )
  (0.42
  )  
 (a)
Note: For the quarter ended September 30, 2003, inventory write-downs of $189
related to the Greenlight integration have been reclassified from integration
costs to cost of revenues, to be consistent with presentation in the annual
consolidated financial statements.  RESULTS BY
QUARTER We have experienced a
weakening in revenue over the past seven quarters primarily related to: (i)
soft market conditions for our test equipment; (ii) product technology issues
related to test equipment; (iii) the weak execution of our Greenlight integration
program; and (iv) the winding down and completion of the GM engineering
services contract in the third quarter of 2004.  Gross margins remained steady
throughout 2003 but have consistently fallen throughout 2004. This is primarily
the result of the following test segment occurrences: (i) lower sales volumes;
(ii) competitive pricing pressures; (iii) different product mix; and (iv) the
write-off of $0.3 million of raw material inventory related to design changes.  On a comparative basis, our
net loss has generally increased over each of the last eight quarters. This is
primarily the result of the factors affecting revenue and gross margins as well
as increased net R&D costs.  FOURTH
QUARTER RESULTS In the fourth quarter of
2004, our revenues decreased 7% to $5.5 million as compared with the same
quarter of the previous fiscal year. This decrease was primarily the result of
lower test equipment revenues as a result of soft market conditions and product
technology related issues.  Gross margin was $1.4 million,
down 27% from the same quarter of the previous fiscal year. This decrease was
the result of a combination of lower sales volume of test equipment,
competitive pricing pressures and the write-off of $0.3 million of test
equipment raw materials caused by design changes.  Net loss increased to $10.4
million, or $0.16 per share, from $7.3 million, or $0.14 per share, in the
comparable period in the prior year primarily as a result of an impairment of
$3.7 million related to the intangibles associated with the acquisition of
Greenlight.  15


LIQUIDITY
AND CAPITAL RESOURCES At December 31, 2004, we held
combined cash and short-term investments of $89.1 million, compared with $46.7
million at December 31, 2003. At December 31, 2004, we held cash of $3.2
million and short-term investments of $85.9 million, compared with $2.0 million
in cash and $44.7 million in short-term investments at December 31, 2003.  The total cash and short-term
investments increased by $42.4 million between December 31, 2003 and December
31, 2004. The majority of this amount was obtained on February 3, 2004, when we
completed the issuance and sale of 11,000,000 common shares at $5.75 per share
for proceeds of $59.6 million. Subsequent to this sale, the underwriters
over-allotment option was partially exercised resulting in the sale and
issuance of an additional 373,608 common shares on February 13, 2004 for
proceeds of $2.0 million. We continue to align our market and product
development efforts with current market opportunities. To the extent that our
cash flow from operations is insufficient to fund ongoing operations and
capital expenditures, we will draw on our cash and short term investment
balances.  Cash used in operating
activities for the year ended December 31, 2004 was $15.6 million, compared
with $7.5 million used in the year ended December 31, 2003 and $3.9 million
used in 2002. Non-cash working capital decreased during the year by $2.1
million due to the reduction in revenues in 2004. Non-cash working capital
increased during 2003 by $0.6 million due to the growth in accounts receivable.  The principal components of
the $2.1 million decrease in non-cash working capital during 2004 were as
follows (excluding currency exchange effects, and the effect of non-cash
working capital purchased as part of the Greenlight acquisition):  Accounts receivable decreased by $2.7 million,
due to the lower sales in 2004. Grants receivable increased of $1.8 million,
due to the increase of research and development activity during the year. Unearned revenue increased by $1.3 million,
due to the increase in amounts collected in advance of the work being
completed.  The company has an operating
line of credit available up to $2,908 (CDN$3,500) in total (2003  $3,869 or
CDN$5,000). As at December 31, 2004 and 2003 , the Company had no indebtedness
on these lines. As at December 31, 2004, $271(2003  $504) of this facility was
in use relating to an outstanding letter of guarantee. The operating facilities
are denominated in Canadian dollars and bear interest at Royal Bank of Canada
prime rate plus 0.5%. The facility is due on demand and collateralized by a
general security agreement over all assets.  Capital expenditures
increased by $0.2 million, or 10%, to $2.3 million in 2004, compared with $2.1
million in 2003, not including assets acquired through the Greenlight
acquisition. Capital expenditures primarily consisted of expenditures for
internally constructed test equipment to be used in design and development
applications. In 2003, property, plant and equipment purchases increased by
$0.6 million, or 40%, to $2.1 million, from $1.5 million in 2002, excluding the
assets acquired through the Greenlight acquistion. In addition, property, plant
and equipment of $2.1 million were acquired through the acquisition of
Greenlight in 2003. Capital expenditure plans for 2005 and subsequent years
will result in further increases in property, plant and equipment as we
continue our manufacturing and development initiatives.  The net cash expenditure for
the acquisition of Greenlight in 2003 was $3.3 million, excluding integration
costs. Additional details of this transaction have been disclosed in Note 20 of
our consolidated financial statements.  During 2004, we issued
144,734 shares for $0.3 million under our stock option plan compared with
148,433 shares issued for $0.1 million in 2003 and 877,675 shares issued for
$0.2 million in 2002.  We intend to use our funds to
meet net funding requirements for the development and commercialization of our
products including fuel cell test stations, PEM fuel cell stacks and PEM fuel
cell power generation systems for portable, stationary and mobile applications.
We also intend to use our funds to develop and manufacture hydrogen generation
products to complement our fuel cell product development initiatives, which
include PEM electrolyzer stacks, PEM electrolyzer refuelling systems and
reformer systems. Our actual funding requirements will vary depending on a
variety of factors, including our success in executing our business plan, the
progress of our research and development efforts, our relationships with our
strategic partners, our commercial sales, our ability to control working
capital and the results of our development and demonstration programs. We
believe that the net proceeds from the February 2004 share issuance, together
with our existing cash balances and cash generated from our operations, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 36 months based on our current business
plan. At this time, we have no plans for additional financing. However, if cash
generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or arrange debt financing,
which could include establishing an additional line of credit.  16


CONTRACTUAL OBLIGATIONS The following table of our material contractual obligations as of December
31, 2004, sets forth the aggregate effect that these obligations are expected
to have on our cash flows for the period indicated.  Long-term
  debt
  
  Operating
  leases
  
  Purchase
  obligationsPayments due in
  
  ($000s)
  
  ($000s)
  
  ($000s)2005
  
  326
  
  889
  
  3,9972006
  
  313
  
  355
  
  1,6922007
  
  9
  
  323
  
  1,9202008
  
  
  
  356
  
  2009 and thereafter
  
  
  
  356
  
  648
  
  2,279
  
  7,609  We believe we have or will be
able to raise sufficient capital to repay our short and long-term contractual
obligations and maintain planned levels of operations.  LONG-TERM
DEBT Our long-term debt set out in
the table above consists of liabilities of the following nature:  Repayable financing from a Canadian government
agency. Government agencies, and in particular, the Canadian government, have
provided substantial support to the development of the fuel cell sector in the
form of R&D grants, as well as repayable financing. Although this amount is
only repayable based on a percentage of our gross revenue and is therefore
success-based, we anticipate that we will have gross revenue sufficient to
generate a liability for the entire amount, being 150% of the original amount
received. Unsecured non-interest bearing term loan. In
2002, we acquired certain proprietary intellectual property related to our
vehicle-to-grid initiatives in exchange for an interest free loan. Although the
loan is non-interest bearing, we charge imputed interest on the loan to
interest expense. Capital leases of office equipment. Where
appropriate for reasons such as cash flow and changes in technology, we use
leases as an additional source of financing. In cases where substantially all
of the benefits and risks of ownership of the property are transferred to us,
the lease is treated as a capital lease and included in long-term debt.  For further information on
our long term debt, see Note 9 in the consolidated financial statements.  OPERATING
LEASES The above table represents,
as at December 31, 2004, our future minimum lease payments under leases
relating to operating premises and office equipment. These leases are accounted
for as operating leases, and payments under the leases are included in selling,
general and administrative expenses. We incurred rental expenses of $1.2
million under these operating leases in 2004 (2003 - $1.2 million; 2002 - $0.9
million).  Our executive offices are
located in Mississauga, Ontario, Canada. Our principal activities at this
facility include the manufacture and assembly of our fuel cell power products,
the manufacture and assembly of our hydrogen generation products based on PEM
water electrolysis or reforming technologies, the research and development of
our fuel cell power products and hydrogen generation products, and fuel cell
testing services.  In connection with our EnKat
acquisition in 2002, we acquired the lease on EnKats 6,000 square foot sales
and assembly facility in Gelsenkirchen, Germany. We currently use this facility
for sales and customer support for our fuel cell test equipment business and
our fuel cell power products business, along with certain limited assembly work
for our fuel cell test equipment business.  In connection with our
Greenlight acquisition in 2003, we acquired the lease on Greenlights 54,000
square foot executive office, test engineering and manufacturing facility in
Burnaby, British Columbia. We currently use this facility to develop, engineer
and manufacture our test and diagnostic products.  In connection with our Stuart
Energy acquisition in 2005; we acquired lease obligations relating to four
facilities leased by Stuart Energy, including: (i) a 135,000 square foot
executive office and manufacturing facility in Mississauga, Ontario, with an
annual lease cost of approximately $737,000 expiring in July 2006; (ii) a
21,445 square foot executive office and manufacturing facility in
Oevel-Westerlo, Belgium, with an annual lease cost of approximately $260,000
expiring in August 30, 2008; (iii) a vacant 53,240 square foot facility in
Shawinigan, Quebec, with an annual lease cost of approximately $323,000
expiring in July 2006; and (iv) a vacant facility in Grimma, Germany, with an
annual lease cost of approximately $54,000 expiring in June 30, 2012. In
connection with its acquisition of Vandenborre Technologies NV in February
2003, Stuart Energy determined to rationalize its consolidated facilities in
2003. As a result, Stuart Energy has previously taken a financial charge
relating to the Shawinigan, Quebec and Grimma, Germany facilities. We are
continuing to seek subtenants for these rationalized facilities.  17


As part of our Stuart Energy
integration and synergies plan, we developed a plan to rationalize our combined
facilities. In February 2005, we transferred all of Stuart Energys remaining
Mississauga-based employees to the Hydrogenics Mississauga facility. We are
currently in the process of attempting to sub-lease the Stuart Energy
Mississauga facility and selling certain assets that were used in that facility.  In July 2000, we opened a
sales office in Japan. This office coordinates our sales, service and marketing
efforts in the Asia-Pacific region.  We currently lease
manufacturing, research and development and general office facilities in the
primary locations set forth below:  Location
  
  Principal
  Use
  
  SquareFootage
  
  Lease
  Expiry DateMississauga,
  Ontario
  
  Corporate offices, manufacturing, research and development and
  testing services
  
  96,000
  
  August 31, 2010Burnaby,
  British Columbia
  
  Corporate offices, test station engineering and manufacturing
  
  54,000
  
  December 31, 2009Oevel-Westerlo,
  Belgium
  
  Corporate offices, manufacturing and assembling
  
  21,445
  
  August 30, 2008Gelsenkirchen,
  Germany
  
  Sales and marketing, assembly
  
  6,000
  
  November 30, 2005Tokyo, Japan
  
  Sales and marketing offices
  
  1,000
  
  May 27, 2005  We believe that our
facilities are adequate for our current operations and that we will be able to
maintain suitable space needed on commercially reasonable terms.  CONTINGENT
OFF-BALANCE SHEET ARRANGEMENTS We are continually exploring
opportunities to work with governments to provide them with innovative energy
solutions, and view these relationships as strategic partnerships in our
advancement of hydrogen fuel cell technology. As a result of the Canadian
governments commitment to the development of alternative energy sources, we
have entered into repayable contribution and other research and development
arrangements with various Canadian governmental ministries and public sector
enterprises. Under these arrangements, we have received a cumulative amount of
$9 million in funding towards agreed upon research and development project
costs. Under the agreements, the funding parties have a right to receive as
repayments, 1.3% to 4% of gross revenues which is attributable to the
commercial exploitation of the associated technology. To date, we have
recognized $0.3 million in revenues from these technologies and a repayable
amount of $174 thousand has been reflected in the accounts. At this time, the
amount of further product revenues to be recognized in future from these
technologies is uncertain, so no further liabilities for repayment have been
accrued. These arrangements will expire in stages between September 30, 2006
and March 31, 2016, or when total amounts repaid reach the utilized amount of
the advance, depending on the terms of the individual contracts. The amount of
funding available to us under similar arrangements varies from year to year,
and although we are confident that these agencies and enterprises will continue
to support the industry, there is no guarantee of the amount of future funding.  We have entered into
indemnification agreements with our current and former directors and officers
to indemnify them, to the extent permitted by law, against any and all charges,
costs, expenses, amounts paid in settlement and damages incurred by the
directors and officers as a result of any lawsuit or any other judicial,
administrative or investigative proceeding in which the directors and officers
are sued as a result of their service. These indemnification claims will be
subject to any statutory or other legal limitation period. The nature of the
indemnification agreements prevents us from making a reasonable estimate of the
maximum potential amount it could be required to pay to counter parties. We
have purchased directors and officers liability insurance. No amount has been
recorded in the financial statements with respect to these indemnification
agreements.  In the normal course of
operations, we may provide indemnification agreements, other than those listed
above, to counterparties that would require us to compensate them for costs
incurred as a result of changes in laws and regulations or as a result of
litigation claims or statutory sanctions that may be suffered by the
counterparty as a consequence of the transaction. The terms of these
indemnification agreements will vary based upon the contract. The nature of the
indemnification agreements prevents us from making a reasonable estimate of the
maximum potential amount that could be required to pay to counter parties. No
amount has been recorded in the financial statements with respect to these
indemnification agreements.  In January 2002, a legal action
was commenced against us in United States federal court (Southern District,
Texas), alleging patent infringement. In 2003 we successfully defended
ourselves in the lawsuit. We were awarded a partial recovery of the $1.5
million incurred in legal fees, from the plaintiff. As settlement, the
plaintiff issued us a promissory note in the amount of $0.5 million of which
$50 thousand was received in 2004. The note is payable in full on March 1,
2008. Interest accrues at a compounded rate of 2% per annum on the unpaid
balance. Cash settlements received are recorded as a corresponding reduction in
administrative expenses.  RELATED
PARTY TRANSACTIONS In the normal course of
operations, we sell test equipment, engineering services and testing services
to General Motors, which owns a significant number of our common shares.
Revenues from General Motors totaled $5.2 million, or 31% of total revenues in
2004, compared  18


with $8.9 million or 33% of
revenues in 2003, and $9.6 million or 61% of total revenues in 2002. At
December 31, 2004, we had accounts receivable due from General Motors in the
amount of $2.0 million.  In the normal course of
operations, we subcontract certain machining and sheet metal fabrication of parts
to a company owned by the father and uncle of Joe Cargnelli, a director, senior
officer and one of our principal shareholders. For the fiscal year ended
December 31, 2004, billings by this related company totaled $1.8 million, a
decrease of $0.3 million from the $2.1 million billed in the previous year. At
December 31, 2004, we had an accounts payable balance due to this related
company of $0.1 million. We believe that transactions with this company are on
no more favorable terms than similar transactions with unrelated third parties.  All related party
transactions have been recorded at the exchange amount, which is the
consideration paid or received as established and agreed to by the related
parties.  Additional information
regarding the company is available in our Annual Information Form (AIF) and at
the Canadian Securities website www.sedar.com.  BUSINESS
RISKS An investment in our common
shares involves risk. Investors should carefully consider the risks described
below and the other information contained in the annual information form and
our financial statements for the year ended December 31, 2004. The risks
described below are not the only ones we face. Additional risks and
uncertainties, including those that we do not know about now or that we currently
deem immaterial, may also adversely affect our business.  RISK FACTORS
RELATED TO OUR FINANCIAL CONDITION We have a limited operating
history, and because our mix of revenues in the recent past does not reflect
our current business strategy, it may be difficult to assess our business and
future prospects.  We commenced operations of
our fuel cell test business in 1996, and since that time, we have been engaged
principally in the manufacture and sale of fuel cell test and diagnostic
equipment, the provision of related engineering and testing services, and
research and development relating to fuel cell systems and subsystems. For the
year ended December 31, 2004, we derived $11.1 million, or 66%, of our revenues
from sales of fuel cell test equipment and services; $5.6 million from sales of
power products including: $1.8 million, or 11%, from the provision of
engineering services to General Motors; and $3.8 million, or 23%, from sales or
lease of fuel cell power products. For the year ended December 31, 2003, we
derived $20.7 million, or 77%, of our revenues from sales of fuel cell test
equipment and services; $6.0 million from sales of power products including:
$3.7 million, or 14%, from the provision of engineering services to General
Motors; and $2.3 million, or 9%, from sales or lease of fuel cell power
products. For the year ended December 31, 2002, we derived $5.6 million, or
35%, for our revenues from sales of fuel cell test equipment and services;
$10.3 million from sales of power products including: $5.8 million, or 37%,
from the provision of engineering services to General Motors, and $4.5 million,
or 28%, from sales or leases of fuel cell power products and related services.
Our current business strategy is to use the experience we have gained in the
fuel cell test equipment and service business to develop, manufacture and sell
fuel cell power products in larger quantities. In addition, following the
acquisition of Stuart Energy, a significant part of our business now relates to
hydrogen generation products. Because we have made limited sales of fuel cell
power products to date have and added a new revenue stream to our power
products segment, our historical operating data may be of limited value in
evaluating our future prospects.  Because we expect to continue
to incur net losses, we may not be able to implement our business strategy, and
the price of our common shares may decline.  We have not generated any
positive net income since the initial public offering of our shares in November
2000. Our current business strategy is to develop a portfolio of hydrogen and
fuel cell products with market leadership positions for each product. In so
doing, we will continue to incur significant expenditures for general
administrative activities, including sales and marketing and research and
development activities. As a result of these costs, we will need to generate
and sustain significantly higher revenues and positive gross margins to achieve
and sustain profitability. We incurred a net loss of $33.5 million for the year
ended December 31, 2004 and a net loss of $22.1 million for the year ended
December 31, 2003. Our accumulated deficit as of December 31, 2004 was $81.0
million and as of December 31, 2003 was $47.4 million. In January 2005, we
acquired Stuart Energy. Stuart Energy incurred a net loss of $16.6 million for
the nine months ended September 30, 2004 and a net loss of $26.9 million for
the year twelve months December 31, 2003. During that period, Stuart Energy
never had a profitable quarter.  We expect to incur
significant operating expenses over the next several years. As a result, we
expect to incur further losses in 2005 and for the foreseeable future, and we
may never achieve profitability. Accordingly, we may not be able to implement
our business strategy, and the price of our common shares may decline.  Our quarterly operating
results are likely to fluctuate significantly and may fail to meet the
expectations of securities analysts and investors, and cause the price of our
common shares to decline.  Our quarterly revenues and
operating results have varied significantly in the past and are likely to vary
in the future. These quarterly fluctuations in our operating performance result
from the length of time between our first contact with a customer and the
recognition of revenue from sales to that customer. Our products are
highly-engineered and expensive to produce and many are still in development
stages;  19


therefore, the length of time
between approaching a customer and delivering our products to that customer can
span quarterly periods. In many cases, a customers decision to buy our
products and services may require the customer to change its established
business practices and to conduct its business in new ways. As a result, we
must educate customers on the use and benefits of our products and services,
which can require us to commit significant time and resources without
necessarily resulting in revenues. Many potential customers may wish to enter
into test arrangements with us in order to use our products and services on a
trial basis. The success of these trials may determine whether or not the
potential customer purchases our products or services on a commercial basis.
Potential customers may also need to obtain approval at a number of management
levels and one or more regulatory approvals, which may delay a decision to
purchase our products.  The length and variability of
the sales cycles for our products make it difficult to forecast accurately the
timing and amount of specific sales and corresponding revenue recognition. The
delay or failure to complete one or more large sales transactions could
significantly reduce our revenues for a particular quarter and we may expend
substantial funds and management effort during our sales cycle with no
assurance that we will successfully sell our products. As a result, our
quarterly operating results are likely to fluctuate significantly and may fail
to meet expectations of securities analysts and investors, and the price of our
common shares may decline.  We may be unable to raise
additional capital to pursue our commercialization plans and may be forced to
discontinue product development, reduce our sales and marketing efforts or
forego attractive business opportunities.  Based on our current business
plan, we believe we have sufficient cash on hand to meet our working capital
and capital expenditure needs for the next 36 months. After that time, we may
need to raise additional funds through financing. Alternatively, we may need to
raise additional funds sooner if our estimates of revenues, costs and capital
expenditures change or are inaccurate. We may also require additional capital
to acquire or invest in complementary businesses or products or obtain the
right to use complementary technologies.  If we are unable to raise
additional capital or are unable to do so on acceptable terms, we may not be
able to respond to competitive pressures upon us or we may be prevented from
conducting all or a portion of our planned operations. In particular, the
development and commercialization of our products could be delayed or
discontinued if we are unable to fund our research and product development
activities or the development of our manufacturing capabilities. In addition,
we may be forced to reduce our sales and marketing efforts or forego attractive
business opportunities.  If we issue additional equity
securities in order to raise funds, the ownership percentage in our company of
each of our existing shareholders will be reduced.  Our revenue and future
prospects depend to a certain extent on our relationship with General Motors
and General Motors commitment to the commercialization of fuel cell markets.  Our largest shareholder and
historically our largest customer by revenue is General Motors, which owns
approximately 12% of our outstanding common shares. General Motors accounted
for 31% of our revenues for the year ended December 31, 2004, 33% for the year
ended December 31, 2003 and 61% for the year ended December 31, 2002. Revenue
from General Motors in 2004 declined, in part, due to the culmination of our
engineering services contract in the third quarter of 2004. Our revenue and
future prospects would be materially hurt if General Motors were to change its
relationship with us. There is no guarantee that our interests will continue to
be aligned with the interests of General Motors and that our relationship with
General Motors will continue in its current form. Furthermore, any change in
General Motors strategy with respect to fuel cells, whether as a result of
market, economic or competitive pressures, could also harm our business by
reducing or eliminating a substantial portion of our revenue. Such a change in
strategy could include, for example, any decision by General Motors to:  alter its commitment to fuel cell technology
in favor of other competing technologies; delay its introduction of fuel cell products
and vehicles; or increase the internal development of fuel cell
products or purchase them from another supplier.  In addition, where
intellectual property is developed pursuant to our use of technology licensed
from General Motors, we have committed to provide certain exclusive or
non-exclusive licenses in favor of General Motors and in some cases, the
intellectual property is jointly owned. As a result of such licenses, we may be
limited or precluded, as the case may be, in the exploitation of such
intellectual property rights.  We currently depend upon a
relatively limited number of customers for a majority of our revenues and a
decrease in revenue from these customers could materially adversely affect our
business, financial condition and results of operations.  To date, a relatively limited
number of customers have accounted for a majority of our revenues and we expect
they will continue to do so for the foreseeable future. Our four largest
customers, including General Motors, accounted for 67% of our revenues for the
year ended December 31, 2004, 60% for the year ended December 31, 2003 and 80%
for the year ended December 31, 2002. The identities of some of our largest
customers have changed from year to year. Our arrangements with these customers
are generally non-exclusive, have no volume commitments and are often done on a
purchase-order basis and we cannot be certain that customers that have
accounted for significant revenue in past periods will continue to purchase our
products and generate revenues. Accordingly, our revenue and results of
operations may vary from period to period. We are also subject to credit risk
associated with the concentration of our accounts receivable  20


from these significant
customers. If one or more of our significant customers were to cease doing
business with us, significantly reduce or delay its purchases from us, or fail
to pay on a timely basis, our business, financial condition and results of
operations could be materially adversely affected.  Our operating results may be
subject to currency fluctuation.  Our monetary assets and
liabilities denominated in a currency other than the U.S. dollar will give rise
to a foreign currency gain or loss reflected in earnings. To the extent that
the Canadian dollar or the Euro weakens against the U.S. dollar, we may incur
net foreign exchange losses on our net monetary asset balance which is
denominated in those currencies. Such losses would be included in our financial
results and, consequently, may have an adverse effect on our share price.  As we currently have operations
based in Canada and Europe, a significant portion of our expenses are in
Canadian dollars and Euros. However, a significant part of our revenues are
currently generated in U.S. dollars and Euros, and we expect that a significant
portion of our revenues for the foreseeable future will be generated in U.S.
dollars and Euros. In addition, we may be required to finance our European
operations by exchanging Canadian dollars or U.S. dollars into Euros. The
exchange rates between the Canadian dollar, the U.S. dollar and the Euro are
subject to day-to-day fluctuations in the currency markets and these
fluctuations in market exchange rates are expected to continue in the future.
Such fluctuations affect both our consolidated revenues as well as our
consolidated costs. If the value of the U.S. dollar weakens against the
Canadian dollar or the Euro, the profit margin on our products may be reduced.
Also, changes in foreign exchange rates may affect the relative costs of
operations and prices at which we and foreign competitors sell products in the
same market. We currently have limited currency hedging through financial
instruments. We do carry a portion of our short-term investments in Canadian
dollars and Euros.  Certain external factors may
affect the value of identifiable intangible assets and goodwill, which may
require us to recognize an impairment charge.  Identifiable intangible
assets and goodwill arising from our acquisition of Greenlight in 2003 and our
acquisition of Stuart Energy in 2005 comprise a substantial portion of our
total assets. Economic, market, legal, regulatory, competitive, customer,
contractual and other factors may affect the value of identifiable intangible
assets and goodwill. If any of these factors impair the value of these assets,
accounting rules require us to reduce their carrying value and recognize an
impairment charge, which would reduce our reported assets and earnings in the
year the impairment charge is recognized.  Our insurance may not be
sufficient.  We carry insurance that we
consider adequate having regard to the nature of the risks and costs of
coverage. We may not, however, be able to obtain insurance against certain
risks or for certain products or other resources located from time to time in
certain areas of the world. We are not fully insured against all possible
risks, nor are all such risks insurable. Thus, although we maintain insurance
coverage, such coverage may not be adequate.  RISK FACTORS
RELATED TO OUR BUSINESS AND INDUSTRY  Significant markets for fuel
cell and other hydrogen energy products may never develop or may develop more
slowly than we anticipate, which would significantly harm our revenues and may
cause us to be unable to recover the losses we have incurred and expect to
incur in the development of our products.  Significant markets may never
develop for fuel cell and other hydrogen energy products or they may develop
more slowly than we anticipate. Any such delay or failure would significantly
harm our revenues and we may be unable to recover the losses we have incurred,
and expect to continue to incur in the development of our products. In such
case, we may never achieve profitability and our business could fail. Fuel cell
and other hydrogen energy products represent an emerging market, and whether or
not end-users will want to use them may be affected by many factors, some of
which are out of our control, including:  the emergence of more competitive technologies
and products, including other environmentally clean technologies and products
that could render our products obsolete; the future cost of hydrogen and other fuels
used by our fuel cell systems; the future cost of MEAs used in our fuel cell
systems; the future cost of platinum, a key metal used
in our fuel cell systems; the regulatory requirements of agencies,
including the development of uniform codes and standards for fuel cell
products, hydrogen refueling infrastructure and other hydrogen energy products; government support of fuel cell technology,
hydrogen storage technology and hydrogen refueling technology; the manufacturing and supply costs for fuel
cell components and systems; perceptions of consumers regarding the safety
of our products; the willingness of consumers to try new
technologies; the continued development and improvement of
existing power technologies; and the future cost of fuels used in existing
technologies.  21


Hydrogen may not be readily
available on a cost-effective basis, in which case we may be unable to compete
with existing power sources, and our revenues and results of operations would
be materially adversely affected.  If our customers of fuel cell
power products are not able to obtain hydrogen on a cost-effective basis, we
may be unable to compete with existing power sources, and our revenues and
results of operations would be materially adversely affected. Our fuel cell
products require oxygen and hydrogen to operate. While ambient air typically
can supply the necessary oxygen, our fuel cells rely on hydrogen being derived
from water or from fuels such as natural gas, propane, methanol and other
petroleum products. We manufacture and develop hydrogen generation systems
called electrolyzers that use electricity to separate water into its constituent
parts of hydrogen and oxygen. In addition, third parties are developing systems
to extract, or reform, hydrogen from fossil fuels. Significant growth in the
use of hydrogen-powered devices, particularly in the mobile market, may require
the development of an infrastructure to deliver the hydrogen. There is no
guarantee that such an infrastructure will be developed on a timely basis or at
all. Even if hydrogen is available for our products, if its price is such that
electricity or power produced by our systems would cost more than electricity
provided through other means, we will be unable to compete successfully.  Changes in government
policies and regulations could hurt the market for our products.  The fuel cell and hydrogen
industry is in its development phase and is not currently subject to
industry-specific government regulations in Canada or the United States
relating to matters such as design, storage, transportation and installation of
fuel cell systems and hydrogen infrastructure products. However, given that the
production of electrical energy has typically been an area of significant
government regulation, we expect that we will encounter industry- specific
government regulations in the future in the jurisdictions and markets in which
we operate. For example, regulatory approvals or permits may be required for
the design, installation and operation of stationary fuel cell systems under
federal, state and provincial regulations governing electric utilities, and
mobile fuel cell systems under federal, state and provincial emissions
regulations affecting automobile manufacturers. To the extent that there are
delays in gaining regulatory approval, our development and growth may be
constrained. Furthermore, the inability of our potential customers to obtain a
permit, or the inconvenience often associated with the permit process, could
harm demand for fuel cell and other hydrogen products and, therefore, harm our
business.  Our business will suffer if
environmental policies change and no longer encourage the development and
growth of clean power technologies. The interest by automobile manufacturers in
fuel cell technology has been driven in part by environmental laws and
regulations in California and, to a lesser extent, in New York, Massachusetts and
Maine. There can be no guarantee that these laws and regulations will not
change. Changes in these laws and regulations could result in automobile
manufacturers abandoning their interest in fuel cell powered vehicles. In
addition, if current laws and regulations in these states are not kept in force
or if further environmental laws and regulations are not adopted in these
jurisdictions as well as in other jurisdictions, demand for vehicular fuel
cells may be limited.  The market for stationary and
portable energy-related products is influenced by federal, state and provincial
governmental regulations and policies concerning the electric utility industry.
Changes in regulatory standards or public policy could deter further investment
in the research and development of alternative energy sources, including fuel
cells and fuel cell products, and could result in a significant reduction in
the potential market demand for our products. We cannot predict how changing
government regulation and policies regarding the electric utility industry will
affect the market for stationary and portable fuel cell systems.  Although the development of
alternative energy sources, and in particular fuel cells, has been identified
as a significant priority by many governments, we cannot be assured that
governments will not change their priorities or that any such change would not
materially affect our revenues and business. If governments change their laws
and regulations such that the development of alternative energy sources is no
longer required or encouraged, the demand for alternative energy sources such
as our fuel cell products may be significantly reduced or delayed and our sales
would decline.  The development of uniform
codes and standards for hydrogen-powered vehicles and related hydrogen
refueling infrastructure may not develop in a timely fashion, if at all.  Uniform codes and standards
do not currently exist for fuel cell systems, fuel cell components, H2ICEs or for the use of hydrogen as a vehicle fuel. Establishment of
appropriate codes and standards is a critical element to allow fuel cell system
developers, fuel cell component developers, H2ICE developers, hydrogen infrastructure companies and hydrogen storage
and handling companies to develop products that will be accepted in the
marketplace.  The development of hydrogen
standards is being undertaken by numerous organizations. Given the number of
organizations pursuing hydrogen codes and standards, it is not clear whether
universally accepted codes and standards will result in a timely fashion, if at
all.  We currently face and will
continue to face significant competition from other developers and
manufacturers of fuel cell power products, hydrogen generation systems and test
and diagnostic equipment. If we are unable to compete successfully, we could
experience a loss of market share and reduced gross margins for our existing
products and a failure to achieve acceptance of our proposed products.  In the commercial production
of fuel cell power products, we compete with a number of companies that
currently have fuel cell and fuel cell system development programs. We expect
that several of these competitors will be able to deliver competing products to
market before we do. While our strategy is the development of fuel cell and
hydrogen generation technologies for sale to systems integrators, governments,  22


OEMs and market channel
partners, many of our competitors are developing products specifically for use
in particular markets. These competitors may be more successful in penetrating
these specific markets than we are. In addition, an increase in the popularity
of fuel cell power in particular market channels may cause certain of our
customers to develop and produce some or all of the fuel cell technologies that
we are developing.  In our markets for hydrogen
generation systems, we compete with a number of companies that develop and
manufacture hydrogen generation products based on-site water electrolysis
and/or reforming technologies. We also compete with suppliers of hydrogen gas
that deliver hydrogen to the customers site in tube trailers, bottles or by
pipeline. In many cases, these suppliers have established delivery
infrastructure and customer relationships.  We compete with a number of
companies that manufacture fuel cell test and diagnostic equipment. In
addition, most large fuel cell developers and OEMs have some degree of internal
test station development. Because fuel cell test and diagnostic equipment
essentially acts as the balance of plant component, which regulates the type
and level of power transferred from the fuel cell or the fuel cell stack, our
customers for fuel cell test and diagnostic equipment may develop their own
internal test stations. We also sell fuel cell test and diagnostic equipment to
companies that compete with our efforts to develop and manufacture fuel cell
power products. This competition may negatively impact the sales of our fuel
cell test and diagnostic equipment to such companies.  Competition in the markets
for fuel cell power modules, hydrogen generation equipment and fuel cell test
stations are significant and will likely persist and intensify over time. We
compete directly and indirectly with a number of companies that provide products
and services that are competitive with all, some or part of our products and
related services. Many of our existing and potential competitors have greater
brand name recognition than us and their products may enjoy greater initial
market acceptance among our potential customers. In addition, many of these
competitors have significantly greater financial, technical, sales, marketing,
distribution, service and other resources than we have and may also be better
able to adapt quickly to customers changing demands and to changes in
technology.  If we are unable to
continuously improve our products and if we cannot generate effective responses
to our competitors brand power, product innovations, pricing strategies,
marketing campaigns, strategic partnerships, distribution channels, service
network and other initiatives, our ability to gain market share or market
acceptance for our products could be limited, our revenue and our profit
margins may suffer, and our ability to expand our business could be impaired
and we may never become profitable. In addition, we cannot predict that if
acquired we will maintain the market share or pricing levels that we need to
become and remain profitable.  We face competition for fuel
cell power products from developers and manufacturers of traditional power
technologies and other alternative power technologies.  Each of our target markets is
currently served by existing manufacturers with existing customers and
suppliers. These manufacturers use proven and widely accepted traditional
technologies such as internal combustion engines and turbines, as well as coal,
oil and nuclear powered generators. Additionally, there are competitors working
on developing technologies including other types of fuel cells and other
alternative power technologies, advanced batteries and hybrid battery/internal
combustion engines, which may compete for our target customers. Given that PEM
fuel cells have the potential to replace these existing power sources,
competition in our target markets will also come from these traditional power
technologies, from improvements to traditional power technologies and from new
alternative power technologies, including other types of fuel cells. Demand for
fuel cell test and diagnostic equipment is dependent on continued efforts to
commercialize hydrogen-based fuel cell power technologies.  If we are unable to
continuously improve our products and if we cannot generate effective responses
to our competitors brand power, product innovations, pricing strategies, marketing
campaigns, strategic partnerships, distribution channels, service network and
other initiatives, our ability to gain market share or market acceptance for
our products could be limited, our revenues and our profit margins may suffer,
and our ability to expand our business could be impaired and we may never
become profitable. In addition, we cannot predict that if acquired we will
maintain the market share or pricing levels that we need to become and remain
profitable.  Our strategy for the sale of
fuel cell power products depends upon developing strategic partnerships with
governments and systems integrators, OEMs, suppliers and other market channel
partners who will incorporate our products into theirs.  Other than with respect to a
limited number of specific markets, our strategy is to develop and manufacture
products and systems for sale to governments and systems integrators, OEMs,
suppliers and other market channel partners that have mature sales and
distribution networks for their products. Our success may be heavily dependent
upon our ability to establish and maintain relationships with these strategic
partners who will integrate our fuel cell products into their products and on
our ability to find partners who are willing to assume some of the developmental
and research costs and risk associated with our technologies and products. Our
performance may as a result depend on the success of other companies, and there
are no assurances of their success. We can offer no guarantee that governments
and systems integrators, OEMs, suppliers and other market channel partners will
manufacture appropriate products or, if they do manufacture such products, that
they will choose to use our products as components. The end products into which
our fuel cell technology will be incorporated will be complex appliances
comprising many components and any problems encountered by such third parties
in designing, manufacturing or marketing their products, whether or not related
to the incorporation of our fuel cell products, could delay sales of our
products and adversely affect our financial results. Our ability to sell our
products to the OEM markets depends to a significant extent upon  23


our strategic partners
worldwide sales and distribution network and service capabilities. In addition,
certain of our agreements with customers and strategic partners require that we
provide for shared intellectual property rights in certain situations, and
there can be no assurance that any future strategic relationships that we enter
into will not require us to share some of our intellectual property. Any change
in the fuel cell, hydrogen or alternative fuel strategies of one of our
strategic partners could have a material adverse effect on our business and
future prospects.  In addition, in some cases,
our strategic relationships are governed by a non-binding memorandum of
understanding or a letter of intent. We cannot assure you that we will be able
to successfully negotiate and execute definitive agreements with any of these
partners, and failure to do so may effectively terminate the relevant
relationship. We also have relationships with third-party distributors who also
indirectly compete with us. For example, we have targeted industrial gas
suppliers as distributors of our hydrogen generators. Because industrial gas
suppliers currently sell hydrogen in delivered form, adoption by their
customers of our hydrogen generation products could cause them to experience
declining demand for delivered hydrogen. For this reason, industrial gas
suppliers may be reluctant to become distributors of our hydrogen generators.
In addition, our third-party distributors may require us to provide volume
price discounts and other allowances, or customize our products, either of
which could reduce the potential profitability of these relationships.  We are dependent upon third
party suppliers for key materials and components for our products. If these
suppliers become unable or unwilling to provide us with sufficient materials
and components on a timely and cost-effective basis, we may be unable to
manufacture our products cost-effectively or at all, and our revenues and gross
margins would suffer.  We rely upon third party
suppliers to provide key materials and components for our fuel cell power
products, hydrogen generation products and fuel cell test equipment. A suppliers
failure to provide materials or components in a timely manner, or to provide
materials and components that meet our quality, quantity or cost requirements,
or our inability to obtain substitute sources for these materials and
components in a timely manner or on terms acceptable to us, may harm our
ability to manufacture our products cost-effectively or at all, and our
revenues and gross margins might suffer. To the extent that we are unable to
develop and patent our own technology and manufacturing processes, and to the
extent that the processes which our suppliers use to manufacture the materials
and components are proprietary, we may be unable to obtain comparable materials
or components from alternative suppliers, and that could adversely affect our
ability to produce commercially viable products.  We will need to recruit,
train and retain key management and other qualified personnel to successfully
expand our business.  Our future success will
depend in large part upon our ability to recruit and retain experienced
research and development, engineering, manufacturing, operating, sales and
marketing, customer service and management personnel. We compete in a new
market and there are a limited number of people with the appropriate
combination of skills needed to provide the services that our customers
require. In the past, we have experienced difficulty in recruiting qualified
personnel and we expect to experience continued difficulties in personnel
recruiting. If we do not attract such personnel, we may not be able to expand
our business. In addition, new employees generally require substantial
training, which requires significant resources and management attention. Our
success also depends upon retaining our key management, research, product
development, engineering, marketing and manufacturing personnel. Even if we
invest significant resources to recruit, train and retain qualified personnel,
we may not be successful in our efforts.  We may not be able to manage
successfully the expansion of our operations.  The pace of our expansion in
facilities, staff and operations has placed significant demands on our
managerial, technical, financial and other resources. We will be required to
make significant investments in our engineering and logistics systems and our
financial and management information systems, as well as retaining, motivating
and effectively managing our employees. Our management skills and systems
currently in place may not enable us to implement our strategy or to attract
and retain skilled management, engineering and production personnel. Our
failure to manage our growth effectively or to implement our strategy in a
timely manner may significantly harm our ability to achieve profitability.  If we do not properly manage
foreign sales and operations, our business could suffer.  We expect that a substantial
portion of our future revenues will be derived from foreign sales. Our
international activities may be subject to inherent risks, including regulatory
limitations restricting or prohibiting the provision of our products and
services, unexpected changes in regulatory requirements, tariffs, customs,
duties and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
fluctuations in currency exchange rates, foreign exchange controls that
restrict or prohibit repatriation of funds, technology export and import
restrictions or prohibitions, delays from customs brokers or government
agencies, seasonal reductions in business activity and potentially adverse tax
consequences resulting from operating in multiple jurisdictions. As a result,
if we do not properly manage foreign sales and operations, our business could
suffer.  We may acquire technologies
or companies in the future, and these acquisitions could disrupt our business
and dilute our shareholders interests in us.  In January 2005, we completed
the acquisition of Stuart Energy. We cannot assure you that we will be able to
successfully complete the integration of Stuart Energy into our operations or
that the cost savings or synergies we anticipate will be fully realized. Our
failure to effectively integrate Stuart Energy into our operations or achieve
cost savings and synergies could have a material adverse effect on our business
and financial condition.  24


We may acquire additional
technologies or other companies in the future. Entering into an acquisition or
investment entails many risks, any of which could materially harm our business,
including:  diversion of managements attention from other
business concerns; failure to effectively assimilate the acquired
technology, employees or other assets of the company into our business; he loss of key employees from either our
current business or the acquired business; and assumption of significant liabilities of the
acquired company.  If we complete additional
acquisitions, we may dilute your interest in us. In addition, achieving the
expected returns and synergies from our past and future acquisitions will
depend in part upon our ability to integrate the products and services,
technologies, research and development programs, operations, sales and
marketing functions, finance, accounting and administrative functions, and
other personnel of these businesses into our business in an efficient and
effective manner. We cannot assure you that we will be able to do so or that
acquired businesses will perform at anticipated levels. If we are unable to
successfully integrate acquired businesses, our anticipated revenues may be
lower and our operational costs may be higher.  We have no experience
manufacturing our products on a large scale basis, and if we do not develop
adequate manufacturing processes and capabilities to do so in a timely manner,
we will be unable to achieve our growth and profitability objectives.  We have manufactured only a
limited number of products for prototypes and initial sales, and we have no
experience manufacturing products on a large scale. In order to produce certain
of our products at affordable prices we will have to manufacture a large volume
of such products. We do not know whether or when we will be able to develop
efficient, low-cost manufacturing capabilities and processes that will enable
us to meet the quality, price, engineering, design and production standards or
production volumes required to successfully mass market such products. Even if
we are successful in developing our manufacturing capabilities and processes,
we do not know whether we will do so in time to meet our product
commercialization schedule or to satisfy the requirements of our customers and
the market. Our failure to develop these manufacturing processes and
capabilities in a timely manner could prevent us from achieving our growth and
profitability objectives.  RISK FACTORS
RELATED TO OUR PRODUCTS AND TECHNOLOGY  We may never complete the
development of commercially viable fuel cell power products and/or commercially
viable hydrogen generation systems for new hydrogen energy applications, and if
we fail to do so, we will not be able to meet our business and growth
objectives.  We have made commercial sales
of fuel cell test and diagnostic equipment, generally on a purchase order
basis, since our inception, and have only been engaged in the development of
fuel cells, fuel cell power modules, integrated fuel cell systems and hydrogen
refueling stations for a short period of time. Because our business and
industry are still in the developmental stage, we do not know when or whether
we will successfully complete research and development of commercially viable
fuel cell power products and commercially viable hydrogen generation equipment
for new hydrogen energy applications. If we do not complete the development of
such commercially viable products, we will be unable to meet our business and
growth objectives. We expect to face unforeseen challenges, expenses and difficulties
as a developing company seeking to design, develop and manufacture new products
in each of our targeted markets. Our future success also depends upon our
ability to effectively market fuel cell products and hydrogen generation
products once developed.  We must lower the cost of our
fuel cell products and hydrogen generation products and demonstrate their
reliability, or consumers will be unlikely to purchase our products and we will
therefore not generate sufficient revenues to achieve and sustain
profitability.  Fuel cells currently cost
more than many established competing technologies, such as internal combustion
engines and batteries. The price of fuel cell products and hydrogen generation
products is dependent largely upon material and manufacturing costs. We cannot
guarantee that we will be able to lower these costs to the level where we will
be able to produce a competitive product or that any product we produce using
lower cost materials and manufacturing processes will not suffer from lower
performance, reliability and longevity. If we are unable to produce fuel cell
products and hydrogen generation products that are competitive with other
technologies in terms of price, performance, reliability and longevity,
consumers will be unlikely to buy our fuel cell and hydrogen generation
products. Accordingly, we would not be able to generate sufficient revenues
with positive gross margins to achieve and sustain profitability.  Any failures or delays in our
field tests of our products could negatively affect our customer relationships
and increase our manufacturing costs.  We regularly field test our
products and we plan to continue to conduct additional field tests in the
future. Any failures or delays in our field tests could harm our competitive
position and impair our ability to sell our products. Our field tests may
encounter problems and delays for a number of reasons, including the failure of
our technology, the failure of the technology of others, the failure to combine
these technologies properly, operator error and the failure to maintain and
service the test prototypes properly. Many of these potential problems and
delays are beyond our control. In addition, field test programs, by their
nature, may involve delays in product roll-out and modifications to product
design, as well as third party involvement. Any problem or perceived problem
with our field tests, whether originating from our technology, from our design,
or from third parties, could hurt our reputation and the reputation of our
products and limit our sales. Such failures with our field tests may negatively
affect our relationships with customers, require us to extend field testing
longer than anticipated before undertaking commercial sales, and require us to
develop further our technology to account for more failures than anticipated
prior to the field tests, thereby increasing our manufacturing costs.  25


The components of our
products may contain defects or errors that could negatively affect our
customer relationships and increase our development, service and warranty
costs.  Our products are complex and
must meet the stringent technical requirements of our customers. The software
and other components used in our fuel cell and hydrogen generation products may
contain undetected defects or errors, especially when first introduced, which
could result in the failure of our products to perform, damage to our
reputation, delayed or lost revenue, product returns, diverted development resources
and increased development, service and warranty costs.  Rapid technological advances
or the adoption of new codes and standards could impair our ability to deliver
our products in a timely manner, and as a result, our revenues would suffer.  Our success depends in large
part on our ability to keep our products current and compatible with evolving
technologies and codes and standards. Unexpected changes in technology or in
codes and standards could disrupt the development of our products and prevent us
from meeting deadlines for the delivery of products. If we are unable to keep
pace with technological advancements and adapt our products to new codes and
standards in a timely manner, our products may become uncompetitive or obsolete
and our revenues would suffer.  We depend upon intellectual
property and our failure to protect that intellectual property could adversely
affect our future growth and success.  Failure to protect our
existing intellectual property rights may reduce our ability to prevent others
from using our technology. We rely on a combination of patent, trade secret,
trademark and copyright laws to protect our intellectual property. Some of our
intellectual property is currently not covered by any patent or patent
application. Our patent protection is subject to complex factual and legal
issues that may give rise to uncertainty as to the validity, scope and
enforceability of a particular patent. Accordingly, we cannot be assured that:  any of the United States, Canadian or other
patents owned by us or third party patents that are licensed to us will not be
invalidated, circumvented, challenged, rendered unenforceable, or licensed to
others; or any of our pending or future patent
applications will be issued with the breadth of protection sought by us, if
issued at all.  In addition, effective
patent, trademark, copyright and trade secret protection may be unavailable,
limited, not applied for or unenforceable in foreign countries. Furthermore,
although we typically retain sole ownership of the intellectual property we
develop, our strategic alliance with General Motors provides for shared
intellectual property rights in certain situations. Where intellectual property
is developed pursuant to our use of technology licensed from General Motors, we
have committed to provide certain exclusive or non-exclusive licenses in favor
of General Motors, and in some cases, the intellectual property is jointly
owned. As a result of such licenses, we may be limited or precluded, as the
case may be, in the exploitation of such intellectual property rights.  We have also entered into
agreements with other customers and strategic partners that involve shared
intellectual property rights. Any development made under these agreements will
be available for future commercial use by all parties to the agreement.  We also seek to protect our
proprietary intellectual property through contracts, including, when possible,
confidentiality agreements and inventors rights agreements with our customers
and employees. We cannot assure you that the parties that enter into such
agreements with us will not breach them, that we will have adequate remedies
for any breach or that such persons or institutions will not assert rights to
intellectual property arising out of these relationships. If necessary or
desirable, we may seek licenses under the patents or other intellectual
property rights of others. However, we cannot assure you that we will obtain
such licenses or that the terms of any offered licenses will be acceptable to us.
Our failure to obtain a license from a third party for intellectual property we
use in the future could cause us to incur substantial liabilities and to
suspend the manufacture, shipment of products or our use of processes which
exploit such intellectual property.  Our involvement in
intellectual property litigation could negatively affect our business.  Our future success and
competitive position depend in part upon our ability to obtain or maintain the
proprietary intellectual property used in our principal products. Our ability
to establish and maintain such a competitive position may be achieved in part
by prosecuting claims against others who we believe are infringing our rights
and by defending claims brought by others who believe that we are infringing
their rights. Our involvement in intellectual property litigation could result
in significant expense to us, adversely affect the sales of any products
involved or the use or licensing of related intellectual property and divert
the efforts of our technical and management personnel from their principal
responsibilities, whether or not such litigation is resolved in our favor. If
we are found to infringe the intellectual property rights of others, we may,
among other things, be required to:  pay substantial damages; cease
the development, manufacture, use, sale or importation of products that
infringe upon the intellectual property rights of others; discontinue processes incorporating infringing technology; expend significant resources to develop or
acquire non-infringing intellectual property; or obtain licenses to the intellectual property
which we are found to be infringing.  26


We cannot offer any assurance
that we will prevail in any intellectual property litigation or, if we were not
to prevail in such litigation, that licenses to the intellectual property that
we are found to be infringing would be available on commercially reasonable
terms, if at all. The costs of intellectual property litigation as well as the
damages, licensing fees or royalties that we might be required to pay could
have a material adverse effect on our business and financial results.  Our products use flammable
fuels that are inherently dangerous substances and could subject us to product
liabilities.  Our results of operations
could be materially harmed by accidents involving either our products or those
of other fuel cell manufacturers, either because we face claims for damages or
because demand for fuel cells and fuel cell products could suffer and our sales
could decline. Our products use hydrogen which is typically generated from
gaseous and liquid fuels, such as propane, natural gas or methanol in a process
known as reforming. While our fuel cell products do not use these fuels in a
combustion process, natural gas, propane and other hydrocarbons are flammable
fuels that could leak and then combust if ignited by another source. In
addition, certain of our OEM partners and customers may experience significant
product liability claims. As a supplier of products and systems to these OEMs,
we face an inherent business risk of exposure to product liability claims in
the event that our products, or the equipment into which our products are
incorporated, malfunction and result in personal injury or death. We may be
named in product liability claims even if there is no evidence that our systems
or components caused the accidents. Product liability claims could result in
significant losses as a result of expenses incurred in defending claims or the
award of damages. Since our products have not yet gained widespread market
acceptance, any accidents involving our systems, those of other fuel cell
products or those used to produce hydrogen could materially impede acceptance
of our products. In addition, although our management believes that our
liability coverage is currently adequate to cover these risks, we may be held
responsible for damages beyond the scope of our insurance coverage.  27