##### 



Exhibit 99.1
  TO THE SHAREHOLDERS OF HYDROGENICS CORPORATION
     Daryl Wilson
President and Chief Executive Officer
    
    -s- Daryl Wilson
    
    Lawrence Davis
Chief Financial Officer
    
    -s- Lawrence DavisMarch 20 , 2007
    
    Mississauga, Ontario
 MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
        Daryl Wilson
President and Chief Executive Officer
    
    -s- Daryl Wilson
    
    Lawrence Davis
Chief Financial Officer
    
    -s- Lawrence DavisMarch 20 , 2007
    
    Mississauga, Ontario




---



##### 



INDEPENDENT AUDITORS REPORT
 To the Shareholders of Hydrogenics Corporation:
  Consolidated financial statements
    Internal control over financial reporting
     PricewaterhouseCoopers LLP




---



##### 



2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    5,937
    
    
    $
    5,394Short-term investments
    
    
    54,350
    
    
    
    80,396Accounts receivable (note 5)
    
    
    9,740
    
    
    
    7,733Grants receivable
    
    
    1,901
    
    
    
    1,909Inventories (note 6)
    
    
    12,718
    
    
    
    8,685Prepaid expenses
    
    
    1,539
    
    
    
    2,35386,185
    
    
    
    106,470Property, plant and equipment(note 7)
    
    
    5,435
    
    
    
    5,682Intangible assets(note 8)
    
    
    500
    
    
    
    33,972Goodwill(note 4)
    
    
    5,025
    
    
    
    68,505Other non-current assets
    
    
    28
    
    
    
    28$
    97,173
    
    
    $
    214,657LIABILITIESCurrent liabilitiesAccounts payable and accrued liabilities (notes 9 and 17)
    
    $
    21,380
    
    
    $
    14,918Unearned revenue
    
    
    8,809
    
    
    
    3,77230,189
    
    
    
    18,690Long-term debt(note 10)
    
    
    94
    
    
    
    325Deferred research and development grants
    
    
    133
    
    
    
    13530,416
    
    
    
    19,150Shareholders Equity(notes 11 and 12)Share capital and other equity
    
    
    321,094
    
    
    
    318,804Deficit
    
    
    (249,033
    )
    
    
    (118,274
    )Foreign currency translation adjustment
    
    
    (5,304
    )
    
    
    (5,023
    )66,757
    
    
    
    195,507$
    97,173
    
    
    $
    214,657
   Norman Seagram
    
    Pierre RivardLead Director
    
    Executive Chairman-s- Norman Seagram
    
    -s- Pierre Rivard




---



##### 



AccumulatedotherCommon shares
    
    
    
    
    
    
    Contributed
    
    
    
    
    
    
    comprehensive
    
    
    Total shareholdersNumber
    
    
    Amount
    
    
    Warrants
    
    
    surplus
    
    
    Deficit
    
    
    loss
    
    
    equityBalance at Dec. 31, 2003
    
    
    53,108,647
    
    
    $
    126,881
    
    
    $
    4,722
    
    
    $
    772
    
    
    $
    (47,361
    )
    
    $
    (4,046
    )
    
    $
    80,968Comprehensive loss:Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,539
    )
    
    
    
    
    
    
    (33,539
    )Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,539
    )Issuance of common shares
    
    
    11,373,608
    
    
    
    60,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,126Issuance of common shares
on exercise of options
    
    
    144,734
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275Stock-based consulting
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    70Employee Stock-based
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,313
    
    
    
    
    
    
    
    
    
    
    
    1,313Balance at Dec. 31, 2004
    
    
    64,626,989
    
    
    $
    187,282
    
    
    $
    4,722
    
    
    $
    2,155
    
    
    $
    (80,900
    )
    
    $
    (4,046
    )
    
    $
    109,213Comprehensive loss:Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,374
    )
    
    
    
    
    
    
    (37,374
    )Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (977
    )
    
    
    (977
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,351
    )Issuance of common shares
and options granted on the
acquisition of Stuart
Energy
    
    
    26,999,103
    
    
    
    119,526
    
    
    
    
    
    
    
    3,382
    
    
    
    
    
    
    
    
    
    
    
    122,908Repurchase and cancellation
of warrants
    
    
    
    
    
    
    
    
    
    
    (4,722
    )
    
    
    3,972
    
    
    
    
    
    
    
    
    
    
    
    (750
    )Issuance of common shares
on exercise of options
    
    
    53,578
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Stock-based consulting
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    76Employee Stock-based
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,262
    
    
    
    
    
    
    
    
    
    
    
    2,262Balance at Dec. 31, 2005
    
    
    91,679,670
    
    
    $
    306,957
    
    
    $
    
    
    
    $
    11,847
    
    
    $
    (118,274
    )
    
    $
    (5,023
    )
    
    $
    195,507Comprehensive loss:Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130,759
    )
    
    
    
    
    
    
    (130,759
    )Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (281
    )
    
    
    (281
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131,040
    )Issuance of common shares
on exercise of options
    
    
    236,796
    
    
    
    419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419Stock-based consulting
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    39Employee Stock-based
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,832
    
    
    
    
    
    
    
    
    
    
    
    1,832Balance at Dec. 31, 2006
    
    
    91,916,466
    
    
    $
    307,376
    
    
    $
    
    
    
    $
    13,718
    
    
    $
    (249,033
    )
    
    $
    (5,304
    )
    
    $
    66,757




---



##### 



2006
    
    
    2005
    
    
    2004Revenues
    
    $
    30,059
    
    
    $
    37,191
    
    
    $
    16,656Cost of revenues
    
    
    29,360
    
    
    
    33,881
    
    
    
    12,396699
    
    
    
    3,310
    
    
    
    4,260Operating expensesSelling, general and administrative
    
    
    27,891
    
    
    
    24,616
    
    
    
    14,305Research and product development (note 13)
    
    
    9,379
    
    
    
    7,745
    
    
    
    9,069Amortization of property, plant and equipment
    
    
    1,285
    
    
    
    1,365
    
    
    
    2,517Amortization of intangible assets
    
    
    7,139
    
    
    
    8,429
    
    
    
    8,510Impairment of intangible assets and goodwill (notes 4 and 8)
    
    
    90,834
    
    
    
    
    
    
    
    3,693Integration costs (recovery) (note 23)
    
    
    
    
    
    
    1,123
    
    
    
    (77
    )136,528
    
    
    
    43,278
    
    
    
    38,017Loss from operations
    
    
    (135,829
    )
    
    
    (39,968
    )
    
    
    (33,757
    )Other income (expenses)Sale of asset
    
    
    477
    
    
    
    
    
    
    
    Provincial capital tax
    
    
    (42
    )
    
    
    (91
    )
    
    
    (260
    )Interest, net
    
    
    3,551
    
    
    
    2,936
    
    
    
    895Foreign currency gains (losses)
    
    
    904
    
    
    
    (251
    )
    
    
    (333
    )4,890
    
    
    
    2,594
    
    
    
    302Loss before income taxes
    
    
    (130,939
    )
    
    
    (37,374
    )
    
    
    (33,455
    )Current income tax expense (recovery)(note 18)
    
    
    (180
    )
    
    
    
    
    
    
    84Net loss for the year
    
    
    (130,759
    )
    
    
    (37,374
    )
    
    
    (33,539
    )Deficit
 - Beginning of year
    
    
    (118,274
    )
    
    
    (80,900
    )
    
    
    (47,361
    )Deficit - End of year
    
    $
    (249,033
    )
    
    $
    (118,274
    )
    
    $
    (80,900
    )Net loss per shareBasic and diluted (note 20)
    
    $
    (1.42
    )
    
    $
    (0.41
    )
    
    $
    (0.53
    )Shares used in calculating basic and diluted net loss per share
    
    
    91,816,049
    
    
    
    91,226,912
    
    
    
    63,542,811




---



##### 



2006
    
    
    2005
    
    
    2004CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN):Operating activitiesNet loss for the year
    
    $
    (130,759
    )
    
    $
    (37,374
    )
    
    $
    (33,539
    )Items not affecting cashAmortization of property, plant and equipment
    
    
    1,948
    
    
    
    2,267
    
    
    
    2,517Amortization of intangible assets
    
    
    7,139
    
    
    
    8,429
    
    
    
    8,510Impairment of intangible assets and goodwill
    
    
    90,834
    
    
    
    
    
    
    
    3,693Unrealized foreign exchange (gains) losses
    
    
    (74
    )
    
    
    210
    
    
    
    (238
    )Imputed interest on long-term debt
    
    
    1
    
    
    
    21
    
    
    
    58Non-cash consulting fees
    
    
    39
    
    
    
    76
    
    
    
    70Stock-based compensation
    
    
    1,832
    
    
    
    2,262
    
    
    
    1,313Sale of asset
    
    
    (477
    )
    
    
    
    
    
    
    Net change in non-cash working capital (note 21)
    
    
    5,029
    
    
    
    (5,012
    )
    
    
    2,058(24,488
    )
    
    
    (29,121
    )
    
    
    (15,558
    )Investing activitiesDecrease (increase) in short-term investments
    
    
    26,046
    
    
    
    9,052
    
    
    
    (24,790
    )Purchase of property, plant and equipment
    
    
    (1,701
    )
    
    
    (333
    )
    
    
    (2,292
    )Business acquisitions, net of cash acquired (note 4)
    
    
    
    
    
    
    (343
    )
    
    
    (924
    )Proceeds from sale of asset
    
    
    477
    
    
    
    
    
    
    
    24,822
    
    
    
    8,376
    
    
    
    (28,006
    )Financing activitiesRepayment of long-term debt
    
    
    (193
    )
    
    
    (180
    )
    
    
    (242
    )Decrease in deferred charges
    
    
    
    
    
    
    
    
    
    
    795Deferred research and development grant
    
    
    (17
    )
    
    
    (39
    )
    
    
    174Common shares issued, net of issuance costs
    
    
    419
    
    
    
    149
    
    
    
    60,401209
    
    
    
    (70
    )
    
    
    61,128Increase (decrease) in cash and cash equivalents during the year
    
    
    543
    
    
    
    (20,815
    )
    
    
    17,564Cash and
cash equivalents - Beginning of year
    
    
    5,394
    
    
    
    26,209
    
    
    
    8,645Cash and
cash equivalents - End of year
    
    $
    5,937
    
    
    $
    5,394
    
    
    $
    26,209Supplemental disclosureInterest paid
    
    $
    80
    
    
    $
    36
    
    
    $
    38Income taxes paid
    
    
    
    
    
    
    1
    
    
    
    39




---



##### 



NOTE 1.   DESCRIPTION OF BUSINESS
  NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis Of Presentation
  Principles Of Consolidation
  Use Of Estimates
   Cash And Cash Equivalents
  Short-Term Investments
  Inventories
  Property, Plant And Equipment
   Test equipment
    
    30% per annumComputer hardware and software
    
    30% per annumFurniture and equipment
    
    20% per annumAutomobiles
    
    30% per annum
   Goodwill And Intangible Assets
 Goodwill




---



##### 



Intangible assets with finite useful lives
  Intellectual property
    
    50% per annum declining balanceManagement services contracts
    
    50% per annum declining balanceProduct technology
    
    4 -7 years straight-lineCustomer relationships
    
    8 years straight-lineTrade names
    
    3 years straight-lineISO certifications
    
    1 year straight-line
   Deferred Charges
  Revenue Recognition
      Product Warranties
  Research And Product Development Costs




---



##### 



Stock-Based Compensation
   Deferred Share Units
  Income Taxes
  Foreign Currency Translation
    Net Earnings (Loss) Per Share
  NOTE 3.   NEW ACCOUNTING STANDARDS
 (I) Canadian Standards
 Financial Instruments, Comprehensive Income, and Hedges




---



##### 



Equity
  §
    
    a presentational reclassification of amounts previously recorded
in Cumulative translation adjustment to Accumulated other
comprehensive loss.;
 §
    
    short-term investments are now carried at amortized cost. The
Corporation has the intention and the ability to hold these
securities to maturity. Interest earned is recognized using the
effective interest rate method when there is objective evidence
that the short term investments are impaired and there is a
decline in fair value below amortized cost, other than temporary,
the amount of the loss is recognized immediately in the
consolidated statements of operations.
 (II) U.S. Standards
  Inventory costs
  Share-based payments
  Accounting for uncertainty in income taxes
  NOTE 4.  BUSINESS ACQUISITIONS
 Acquisitions During The Year Ended December 31, 2005
  Cash, cash equivalents and short-term investments
    
    $
    27,615Other current assets
    
    
    11,222Property, plant and equipment
    
    
    2,664Intangible assets
    
    
    38,500Goodwill
    
    
    63,936Other non-current assets
    
    
    64Current liabilities
    
    
    (18,649
    )$
    125,352




---



##### 



Amount atacquisition dateProduct technology
    
    $
    30,300Customer relationships
    
    
    7,600Trade names
    
    
    500ISO certificates
    
    
    100$
    38,500
    Severance
    
    
    Facilities
    
    
    Other
    
    
    TotalInitial estimated restructuring costs of Stuart Energy
    
    $
    3,806
    
    
    $
    2,509
    
    
    $
    300
    
    
    $
    6,615Cash payments  2005
    
    
    (3,806
    )
    
    
    (1,523
    )
    
    
    (300
    )
    
    
    (5,629
    )Restructuring liabilities as at December 31, 2005
    
    $
    
    
    
    $
    986
    
    
    $
    
    
    
    $
    986Cash payments  2006
    
    $
    
    
    
    
    (986
    )
    
    $
    
    
    
    
    (986
    )Restructuring liabilities as at December 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
     Goodwill of the OnSite Generation reporting unit
    
    $
    59,388Intangible assets of the OnSite Generation reporting
unit
    
    
    26,333Goodwill of the Test Systems reporting unit
    
    
    5,113Total
    
    $
    90,834




---



##### 



NOTE 5.   ACCOUNTS RECEIVABLE
 2006
    
    
    2005Trade accounts receivable
    
    $
    9,248
    
    
    $
    7,199Less: Allowance for doubtful accounts
    
    
    (325
    )
    
    
    (31
    )Goods and services tax
    
    
    817
    
    
    
    565$
    9,740
    
    
    $
    7,733
 NOTE 6.  INVENTORIES
 2006
    
    
    2005Raw materials
    
    $
    5,866
    
    
    $
    4,202Work-in-progress
    
    
    6,322
    
    
    
    4,377Finished goods
    
    
    530
    
    
    
    106$
    12,718
    
    
    $
    8,685
 NOTE 7.  PROPERTY, PLANT AND EQUIPMENT
  Accumulated
    
    
    Net bookCost
    
    
    amortization
    
    
    ValueTest equipment
    
    $
    6,016
    
    
    $
    3,881
    
    
    $
    2,135Furniture and equipment
    
    
    3,518
    
    
    
    2,047
    
    
    
    1,471Computer hardware and
software
    
    
    3,627
    
    
    
    2,156
    
    
    
    1,471Leasehold improvements
    
    
    1,023
    
    
    
    673
    
    
    
    350Automobiles
    
    
    51
    
    
    
    43
    
    
    
    8$
    14,235
    
    
    $
    8,800
    
    
    $
    5,435
  Accumulated
    
    
    Net bookCost
    
    
    amortization
    
    
    valueTest equipment
    
    $
    5,670
    
    
    $
    3,486
    
    
    $
    2,184Furniture and equipment
    
    
    3,128
    
    
    
    1,983
    
    
    
    1,145Computer hardware and
software
    
    
    3,904
    
    
    
    1,966
    
    
    
    1,938Leasehold improvements
    
    
    872
    
    
    
    471
    
    
    
    401Automobiles
    
    
    48
    
    
    
    34
    
    
    
    14$
    13,622
    
    
    $
    7,940
    
    
    $
    5,682
   NOTE 8.  INTANGIBLE ASSETS
  Accumulatedamortization and
    
    
    Net bookCost
    
    
    impairment charge
    
    
    valueIntellectual property
    
    $
    33,629
    
    
    $
    33,629
    
    
    $
    -Management services
contracts
    
    
    565
    
    
    
    565
    
    
    
    -Product technology
    
    
    30,300
    
    
    
    29,800
    
    
    
    500Customer relationships
    
    
    7,600
    
    
    
    7,600
    
    
    
    -Trade names
    
    
    500
    
    
    
    500
    
    
    
    -ISO certifications
    
    
    100
    
    
    
    100
    
    
    
    -$
    72,694
    
    
    $
    72,194
    
    
    $
    500




---



##### 



AccumulatedCost
    
    
    amortization
    
    
    Net book valueIntellectual property
    
    $
    33,629
    
    
    $
    31,737
    
    
    $
    1,892Management services
contracts
    
    
    565
    
    
    
    518
    
    
    
    47Product technology
    
    
    30,300
    
    
    
    5,250
    
    
    
    25,050Customer relationships
    
    
    7,600
    
    
    
    950
    
    
    
    6,650Trade names
    
    
    500
    
    
    
    167
    
    
    
    333ISO certifications
    
    
    100
    
    
    
    100
    
    
    
    -$
    72,694
    
    
    $
    38,722
    
    
    $
    33,972
 NOTE 9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 2006
    
    
    2005Trade accounts payable
    
    $
    7,021
    
    
    $
    3,063Warranty liability accruals
    
    
    5,077
    
    
    
    2,733Accrued payroll costs
    
    
    2,256
    
    
    
    1,593Facility accruals
    
    
    2,322
    
    
    
    3,360Supplier accruals
    
    
    1,704
    
    
    
    2,552Severance and related compensation payments
    
    
    1,373
    
    
    
    Accrued professional fees
    
    
    1,025
    
    
    
    808Current portion of long-term debt (note 10)
    
    
    194
    
    
    
    151Provincial capital tax payable
    
    
    57
    
    
    
    57Excise taxes payable
    
    
    
    
    
    
    220Other
    
    
    351
    
    
    
    381$
    21,380
    
    
    $
    14,918
   Balance, December 31, 2005
    
    $
    2,733Accruals for warranties issued during the year
    
    
    5,343Settlements made during the year
    
    
    (2,999
    )Balance, December 31, 2006
    
    $
    5,077
 NOTE 10.  LONG-TERM DEBT




---



##### 



2007
    
    $
    1942008
    
    
    104298Less: Imputed interest
    
    
    (10
    )288Less: Current portion
    
    
    (194
    )$
    94
 NOTE 11.  SHAREHOLDERS EQUITY
  NOTE 12.  EMPLOYEE STOCK-BASED COMPENSATION
 Stock Option Plan
   2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedWeighted
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageaverage
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseNumber of
    
    
    exercise price
    
    
    Number of
    
    
    price
    
    
    Number of
    
    
    priceshares
    
    
    (CDN$)
    
    
    shares
    
    
    (CDN$)
    
    
    shares
    
    
    (CDN$)Outstanding, beginning of year
    
    
    6,243,753
    
    
    
    5.22
    
    
    
    3,818,566
    
    
    
    4.62
    
    
    
    3,306,468
    
    
    
    4.13Granted
    
    
    1,470,400
    
    
    
    3.16
    
    
    
    3,650,804
    
    
    
    6.24
    
    
    
    828,808
    
    
    
    6.58Exercised
    
    
    (236,500
    )
    
    
    2.01
    
    
    
    (53,578
    )
    
    
    3.37
    
    
    
    (144,734
    )
    
    
    2.52Forfeited
    
    
    (584,300
    )
    
    
    5.73
    
    
    
    (1,172,039
    )
    
    
    6.54
    
    
    
    (171,976
    )
    
    
    6.47Outstanding, end of year
    
    
    6,893,353
    
    
    
    4.85
    
    
    
    6,243,753
    
    
    
    5.22
    
    
    
    3,818,566
    
    
    
    4.62Options exercisable, end of year
    
    
    4,518,681
    
    
    
    5.32
    
    
    
    4,242,575
    
    
    
    5.21
    
    
    
    2,290,232
    
    
    
    3.55
  Number
    
    
    Weighted
    
    
    Weighted
    
    
    Number
    
    
    Weightedoutstanding at
    
    
    average
    
    
    average
    
    
    exercisable at
    
    
    averageExercise price
    
    December 31
    
    
    remaining
    
    
    share price
    
    
    December 31
    
    
    share priceCDN$
    
    2006
    
    
    contractual life
    
    
    CDN$
    
    
    2006
    
    
    CDN$0.01 - 0.29
    
    
    291,940
    
    
    
    3.03
    
    
    
    0.05
    
    
    
    291,940
    
    
    
    0.050.30 - 4.00
    
    
    2,252,740
    
    
    
    6.99
    
    
    
    2.32
    
    
    
    953,290
    
    
    
    1.424.01 - 5.00
    
    
    1,391,750
    
    
    
    5.26
    
    
    
    4.55
    
    
    
    784,411
    
    
    
    4.585.01 - 6.00
    
    
    970,649
    
    
    
    7.07
    
    
    
    5.66
    
    
    
    693,826
    
    
    
    5.756.01 - 8.00
    
    
    978,644
    
    
    
    5.58
    
    
    
    6.84
    
    
    
    787,584
    
    
    
    6.918.01 - 18.12
    
    
    1,007,630
    
    
    
    4.43
    
    
    
    9.57
    
    
    
    1,007,630
    
    
    
    9.576,893,353
    
    
    
    5.91
    
    
    
    4.85
    
    
    
    4,518,681
    
    
    
    5.32




---



##### 



2006
    
    
    2005
    
    
    2004Basic and
    
    
    
    
    
    
    Basic and
    
    
    
    
    
    
    Basic anddiluted net
    
    
    
    
    
    
    diluted net
    
    
    
    
    
    
    diluted netloss per
    
    
    
    
    
    
    loss per
    
    
    
    
    
    
    loss pershare
    
    
    
    
    
    
    share
    
    
    
    
    
    
    shareNet loss for the year
    
    $
    (130,759
    )
    
    $
    (1.42
    )
    
    $
    (37,374
    )
    
    $
    (0.41
    )
    
    $
    (33,539
    )
    
    $
    (0.53
    )Additional stock-based
compensation expense
    
    
    (9
    )
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    (195
    )
    
    
    Pro forma net loss for the
year
    
    $
    (130,768
    )
    
    $
    (1.42
    )
    
    $
    (37,454
    )
    
    $
    (0.41
    )
    
    $
    (33,734
    )
    
    $
    (0.53
    )
 Deferred Share Unit Plan
   NOTE 13.  RESEARCH AND PRODUCT DEVELOPMENT
  2006
    
    
    2005
    
    
    2004Research and product development expenses
    
    $
    12,024
    
    
    $
    10,733
    
    
    $
    13,781Research and product development funding
    
    
    (2,645
    )
    
    
    (2,988
    )
    
    
    (4,712
    )Total research and product development expenses
    
    $
    9,379
    
    
    $
    7,745
    
    
    $
    9,069
 NOTE 14.  COMMITMENTS
  2007
    
    $
    1,3142008
    
    
    1,2512009
    
    
    1,0772010
    
    
    5102011
    
    
    26$
    4,178




---



##### 



NOTE 15.  CONTINGENCIES
    NOTE 16.  LINES OF CREDIT
   NOTE 17.  RELATED PARTY TRANSACTIONS
  NOTE 18.  INCOME TAXES
  2007
    
    $
    1,2272008
    
    
    26,0622009
    
    
    34,7312010
    
    
    13,2512013
    
    
    20,7622014
    
    
    29,0462015
    
    
    23,2382026
    
    
    18,651No expiry
    
    
    43,129$
    210,097




---



##### 



2006
    
    
    2005AssetsNon-capital losses
    
    $
    69,258
    
    
    $
    64,913Scientific research and experimental development expenses
    
    
    8,761
    
    
    
    9,544Property, plant and equipment and intellectual property
    
    
    14,463
    
    
    
    12,409Investment tax credits
    
    
    6,622
    
    
    
    6,363Warranty and other provisions
    
    
    1,127
    
    
    
    1,825Share issue costs
    
    
    (252
    )
    
    
    (140
    )Valuation allowance
    
    
    (99,979
    )
    
    
    (94,914
    )Net future income tax asset
    
    $
    
    
    
    $
    
   2006
    
    
    2005
    
    
    2004Loss before income taxes
    
    $
    (130,939
    )
    
    $
    (37,374
    )
    
    $
    (33,455
    )Statutory income tax rate
    
    
    32.96
    %
    
    
    35.93
    %
    
    
    35.99
    %Income tax recovery at statutory rate
    
    
    (43,157
    )
    
    
    (13,428
    )
    
    
    (12,040
    )Non-deductible expenses
    
    
    497
    
    
    
    1,383
    
    
    
    2,456Other permanent and temporary differences
    
    
    (359
    )
    
    
    182
    
    
    
    (44
    )Large corporations tax
    
    
    
    
    
    
    
    
    
    
    84Adjustment to future income tax assets
    
    
    
    
    
    
    
    
    
    
    (2,528
    )Effect of income tax rate changes on future income taxes
    
    
    6,635
    
    
    
    
    
    
    
    Currency effect of difference in U.S. dollar financial reporting
compared with CDN dollar income tax reporting
    
    
    1,410
    
    
    
    (1,172
    )
    
    
    (4,837
    )Non-deductible amortization of intangible assets
    
    
    
    
    
    
    3,028
    
    
    
    3,258Foreign exchange gain on CDN dollar denominated future income taxes
    
    
    (34
    )
    
    
    (3,036
    )
    
    
    (1,817
    )Change in valuation allowance related to the current year
    
    
    5,065
    
    
    
    13,043
    
    
    
    15,552Write-down of intangible assets and goodwill
    
    
    29,943
    
    
    
    
    
    
    
    Other
    
    
    (180
    )
    
    
    
    
    
    
    Income tax expense (recovery)
    
    $
    (180
    )
    
    $
    
    
    
    $
    84
 NOTE 19.  FINANCIAL INSTRUMENTS




---



##### 



NOTE 20.  NET LOSS PER SHARE
  NOTE 21.  CONSOLIDATED STATEMENTS OF CASH FLOWS
  2006
    
    
    2005
    
    
    2004Decrease (increase) in current assetsAccounts receivable
    
    $
    (2,305
    )
    
    $
    (478
    )
    
    $
    2,677Grants receivable
    
    
    (64
    )
    
    
    639
    
    
    
    (1,800
    )Inventories
    
    
    (4,033
    )
    
    
    3,521
    
    
    
    320Prepaid expenses and other current assets
    
    
    814
    
    
    
    (200
    )
    
    
    (579
    )Increase (decrease) in current liabilitiesAccounts payable and accrued liabilities
    
    
    5,580
    
    
    
    (9,979
    )
    
    
    116Unearned revenue
    
    
    5,037
    
    
    
    1,485
    
    
    
    1,324$
    5,029
    
    
    $
    (5,012
    )
    
    $
    2,058
 NOTE 22.  SEGMENTED FINANCIAL INFORMATION
    Year ended December 31, 2006OnSite
    
    
    Power
    
    
    Test
    
    
    CorporateGeneration
    
    
    Systems
    
    
    Systems
    
    
    and Other
    
    
    TotalRevenue from external customers
    
    $
    12,032
    
    
    $
    6,943
    
    
    $
    11,084
    
    
    $
    
    
    
    $
    30,059Amortization of intangible assets
    
    
    5,247
    
    
    
    1,892
    
    
    
    
    
    
    
    
    
    
    
    7,139Impairment charge
    
    
    85,674
    
    
    
    
    
    
    
    5,160
    
    
    
    
    
    
    
    90,834Amortization of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,948
    
    
    
    1,948Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,607
    
    
    
    3,607Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    56Income tax recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180
    )
    
    
    (180
    )Segment loss (i)
    
    
    (105,806
    )
    
    
    (9,074
    )
    
    
    (4,881
    )
    
    
    (10,998
    )
    
    
    (130,759
    )
 Year ended December 31, 2005OnSite
    
    
    Power
    
    
    Test
    
    
    CorporateGeneration
    
    
    Systems
    
    
    Systems
    
    
    and Other
    
    
    TotalRevenue from external customers
    
    $
    21,748
    
    
    $
    3,861
    
    
    $
    11,582
    
    
    $
    
    
    
    $
    37,191Amortization of intangible assets
    
    
    6,490
    
    
    
    1,892
    
    
    
    47
    
    
    
    
    
    
    
    8,429Amortization of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,267
    
    
    
    2,267Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,972
    
    
    
    2,972Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    36Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Segment loss (i)
    
    
    (12,862
    )
    
    
    (10,933
    )
    
    
    (1,604
    )
    
    
    (11,975
    )
    
    
    (37,374
    )




---



##### 



Year ended December 31, 2004OnSite
    
    
    Power
    
    
    Test
    
    
    CorporateGeneration
    
    
    Systems
    
    
    Systems
    
    
    and Other
    
    
    TotalRevenue from external customers
    
    $
    1,505
    
    
    $
    4,106
    
    
    $
    11,045
    
    
    $
    
    
    
    $
    16,656Amortization of intangible assets
    
    
    
    
    
    
    3,784
    
    
    
    4,726
    
    
    
    
    
    
    
    8,510Amortization of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,517
    
    
    
    2,517Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    985
    
    
    
    985Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    90Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    84Segment loss (i)
    
    
    (2,306
    )
    
    
    (7,115
    )
    
    
    (11,741
    )
    
    
    (12,377
    )
    
    
    (33,539
    )
 
 (i)
    
    Segment loss includes directly attributable selling, general and administration costs, product
research and development costs net of associated grants, amortization of property, plant and
equipment and amortization of intangible assets.
      2006
    
    
    2005
    
    
    2004RevenuesProducts
    
    $
    26,653
    
    
    $
    34,470
    
    
    $
    13,390Services
    
    
    3,406
    
    
    
    2,721
    
    
    
    3,266$
    30,059
    
    
    $
    37,191
    
    
    $
    16,656
 2006
    
    
    2005
    
    
    2004Cost of revenuesProducts
    
    $
    28,114
    
    
    $
    32,953
    
    
    $
    10,523Services
    
    
    1,246
    
    
    
    928
    
    
    
    1,873$
    29,360
    
    
    $
    33,881
    
    
    $
    12,396
  2006
    
    
    2005
    
    
    2004United States
    
    $
    8,140
    
    
    $
    13,225
    
    
    $
    8,659France
    
    
    3,163
    
    
    
    130
    
    
    
    2,300Japan
    
    
    2,841
    
    
    
    1,773
    
    
    
    3,552Korea
    
    
    2,499
    
    
    
    1,823
    
    
    
    435Germany
    
    
    2,471
    
    
    
    1,557
    
    
    
    537Canada
    
    
    2,163
    
    
    
    1,263
    
    
    
    308Romania
    
    
    1,367
    
    
    
    
    
    
    
    United Kingdom
    
    
    877
    
    
    
    1,311
    
    
    
    188China
    
    
    266
    
    
    
    1,696
    
    
    
    563Russia
    
    
    68
    
    
    
    1,963
    
    
    
    Vietnam
    
    
    
    
    
    
    2,321
    
    
    
    Algeria
    
    
    
    
    
    
    1,992
    
    
    
    Rest of world
    
    
    6,204
    
    
    
    8,137
    
    
    
    114$
    30,059
    
    
    $
    37,191
    
    
    $
    16,656




---



##### 



2006
    
    
    2005
    
    
    2004%
    
    
    %
    
    
    %First
    
    
    12
    
    
    
    11
    
    
    
    31Second
    
    
    10
    
    
    
    10
    
    
    
    15Third
    
    
    5
    
    
    
    5
    
    
    
    14Fourth
    
    
    4
    
    
    
    5
    
    
    
    8Others
    
    
    69
    
    
    
    69
    
    
    
    32100
    
    
    
    100
    
    
    
    100
  2006
    
    
    2005Canada
    
    $
    4,341
    
    
    $
    5,032Belgium
    
    
    1,094
    
    
    
    650$
    5,435
    
    
    $
    5,682
  NOTE 23.  INTEGRATION COSTS
   2006
    
    
    2005
    
    
    2004Relocation and retention charges
(recovery)
    
    $
    
    
    
    $
    
    
    
    $
    (77
    )Termination benefits
    
    
    
    
    
    
    716Consulting and information systems
    
    
    
    
    
    
    308
    
    
    
    Travel and accommodation
    
    
    
    
    
    
    6
    
    
    
    Contract cancellation fees
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    93
    
    
    
    $
    
    
    
    $
    1,123
    
    
    $
    (77
    )
   NOTE 24.  DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES
   2006
    
    
    2005
    
    
    2004Net loss for the year based on Canadian GAAP
    
    $
    (130,759
    )
    
    $
    (37,374
    )
    
    $
    (33,539
    )Additional stock-based compensation under APB No. 25 (i)
    
    
    
    
    
    
    
    
    
    
    (23
    )Write-off of in-process research and product development (ii)
    
    
    
    
    
    
    (18,400
    )
    
    
    Impairment charge related to intangible assets
    
    
    13,800
    
    
    
    
    
    
    
    Amortization of in-process research and product development (ii)
    
    
    1,971
    
    
    
    2,629
    
    
    
    Net loss for the year based on U.S. GAAP
    
    
    (114,988
    )
    
    
    (53,145
    )
    
    
    (33,562
    )Foreign currency translation
    
    
    (281
    )
    
    
    (977
    )
    
    
    Comprehensive loss based on U.S. GAAP
    
    $
    (115,269
    )
    
    $
    (54,122
    )
    
    $
    (33,562
    )Basic and fully diluted comprehensive loss per share based on U.S. GAAP
    
    $
    (1.26
    )
    
    $
    (0.59
    )
    
    $
    (0.53
    )Weighted average number of shares used in calculating comprehensive loss per share
    
    
    91,816,049
    
    
    
    91,226,912
    
    
    
    63,542,811




---



##### 



2006
    
    
    2005
    
    
    2004Shareholders equity based on Canadian GAAP
    
    $
    66,757
    
    
    $
    195,507
    
    
    $
    109,213Shareholders equity based on U.S. GAAP
    
    $
    66,757
    
    
    $
    179,736
    
    
    $
    109,213
  2006
    
    
    2005
    
    
    2004Revenues
    
    $
    30,059
    
    
    $
    37,191
    
    
    $
    16,656Cost of revenues
    
    
    29,360
    
    
    
    33,881
    
    
    
    12,396Operating expenses
    
    
    120,757
    
    
    
    59,049
    
    
    
    38,040Loss from operations
    
    
    (120,058
    )
    
    
    (55,739
    )
    
    
    (33,780
    )Net loss for the year
    
    
    (114,988
    )
    
    
    (53,145
    )
    
    
    (33,562
    )Cash used in operating activities
    
    
    (24,488
    )
    
    
    (29,121
    )
    
    
    (15,558
    )Cash provided by (used in) investing activities
    
    
    24,822
    
    
    
    8,376
    
    
    
    (28,006
    )Cash provided by (used in) financing activities
    
    
    209
    
    
    
    (70
    )
    
    
    61,128
 (I) Stock-Based Compensation
  (Il) In-Process Research And Development
  (lll) Business Acquisitions
  2004Revenues
    
    $
    33,564Net loss
    
    
    (78,405
    )Basic and diluted net loss per share
    
    
    (0.87
    )
 NOTE 25.  COMPARATIVE INFORMATION
  NOTE 26.   SUBSEQUENT EVENT