Exhibit 99.1  2004 Annual ReportMANAGEMENTS REPORT  To the
Shareholders of Hydrogenics Corporation  The accompanying consolidated
financial statements and all information in this annual report are the
responsibility of management. The consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
and include certain estimates that reflect managements best judgments. The
significant accounting policies which management believes are appropriate for
the Company are described in Notes 2 and 3 to the consolidated financial
statements. Financial information contained throughout this annual report is
consistent with these financial statements.  Management has established
and maintains a system of internal control that provides reasonable assurance
that all transactions are accurately recorded, that the financial statements
realistically report the Companys operating and financial results, and that
the Companys assets are safeguarded.  The board of directors,
through its Audit committee, ensures that management fulfils its
responsibilities for financial reporting and systems of internal control. The
Audit Committee, which is comprised solely of outside directors, meets
regularly with financial management and external auditors to review accounting,
auditing and financial matters. The Audit Committee reports its findings to the
Board of Directors for consideration when approving the consolidated financial
statements for issuance to the shareholders.  The consolidated financial
statements have been audited by PricewaterhouseCoopers LLP, the independent
auditors, in accordance with generally accepted auditing standards in Canada on
behalf of the shareholders. The independent auditors have full and unrestricted
access to the Audit Committee.  /s/
  Pierre Rivard
  
  /s/
  Gary BrandtPierre
  Rivard
  Gary
  BrandtPresident and CEO
  Chief Financial OfficerMarch 2, 2005Mississauga, Ontario  1


Hydrogenics CorporationAUDITORS
  REPORT  Auditors
Report to the Shareholders of Hydrogenics Corporation We have audited the
consolidated balance sheets of Hydrogenics Corporation as at December 31,
2004 and 2003 and the consolidated statements of operations and deficit and
cash flows for each of the years in the three-year period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.  We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards
require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  In our opinion, these
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2004 and 2003 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2004 in accordance with Canadian
generally accepted accounting principles.   /s/ Pricewaterhousecoopers
  LLPChartered AccountantsMarch 2, 2005Toronto, Canada  Comments by
Auditors on Canada  United States Reporting Difference To the
Shareholders of Hydrogenics Corporation In the United States,
reporting standards for auditors require the addition of an explanatory
paragraph (following the opinion paragraph) when there are changes in
accounting principles that have a material effect on the comparability of the
Companys financial statements such as the change effective January 1,
2003 in accounting for stock-based compensation as described in Note 2 to the consolidated
financial statements. Our report to the shareholders dated March 2, 2005
is expressed in accordance with Canadian reporting standards which do not
permit a reference to such changes when the changes are adequately disclosed in
the financial statements.   /s/ Pricewaterhousecoopers
  LLPChartered AccountantsMarch 2, 2005Toronto, Canada  2


2004 Annual Report CONSOLIDATED BALANCE SHEETS  As
at December 31, 2004 and December 31, 2003 (thousands
of U.S. dollars)  2004
  
  2003AssetsCurrent
  assetsCash
  
  $
  3,209
  
  $
  1,964Short-term
  investments
  
  85,853
  
  44,744Accounts
  receivable(Note
  4,14)
  
  5,223
  
  7,784Grants
  receivable
  
  2,437
  
  506Inventories(Note 5)
  
  4,324
  
  4,603Prepaid
  expenses
  
  1,400
  
  823102,446
  
  60,424Deposits
  
  108
  
  106Deferred
  charges(Note 2)
  
  1,030
  
  795Property,
  plant and equipment(Note 6)
  
  5,286
  
  5,552Future tax
  assets(Note 13)
  
  
  
  3,258Intangible
  assets(Note 7)
  
  3,878
  
  16,084Goodwill(Note 20)
  
  5,113
  
  5,219$
  117,861
  
  $
  91,438LiabilitiesCurrent
  liabilitiesAccounts
  payable and accrued liabilities(Note 8, 14)
  
  $
  6,421
  
  $
  6,168Unearned
  revenue
  
  1,537
  
  213Income taxes
  payable
  
  214
  
  2128,172
  
  6,593Long-term
  debt(Note 9)
  
  302
  
  619Deferred
  research and development grants
  
  174
  
  Future
  tax liabilities(Note 13)
  
  
  
  3,2588,648
  
  10,470Shareholders
  Equity(Note
  10, 11)Share
  capital and other equity
  
  194,159
  
  132,375Deficit
  
  (80,900
  )
  (47,361
  )Foreign
  currency translation adjustment
  
  (4,046
  )
  (4,046
  )109,213
  
  80,968$
  117,861
  
  $
  91,438  Commitments and contingencies(Note 12) The accompanying notes form an integral part of these
consolidated financial statements.  Approved by the Board of
Directors:   /s/Norman Seagram
  
  /s/Pierre RivardNorman
  Seagram,
  Pierre
  RivardChairman
  President, CEO  3


Hydrogenics
Corporation CONSOLIDATED
STATEMENTS OF OPERATIONS AND DEFICIT  For
the years ended December 31, 2004, 2003 and 2002 (thousands
of U.S. dollars, except for share and per share amounts)  2004
  
  2003
  
  2002Revenues
  
  $
  16,656
  
  $
  26,660
  
  $
  15,840Cost of
  revenues
  
  12,396
  
  18,042
  
  10,7034,260
  
  8,618
  
  5,137Operating
  expensesSelling,
  general and administrative
  
  12,992
  
  12,361
  
  6,658Stock-based
  compensation expense(Note 11)
  
  1,313
  
  684
  
  Research and
  development
  
  13,781
  
  9,245
  
  4,235Research and
  development grants
  
  (4,712
  )
  (2,207
  )
  (474
  )Depreciation
  of property, plant and equipment
  
  2,517
  
  2,247
  
  1,278Amortization
  of intangible assets(Note 7)
  
  8,510
  
  12,933
  
  15,223Impairment
  of intangible assets(Note 7)
  
  3,693
  
  
  
  Integration
  costs (recovery)(Note
  21)
  
  (77
  )
  1,243
  
  38,017
  
  36,506
  
  26,920Loss
  from operations
  
  (33,757
  )
  (27,888
  )
  (21,783
  )Other
  income (expenses)Provincial
  capital tax
  
  (260
  )
  (53
  )
  (190
  )Interest,
  net
  
  895
  
  657
  
  1,121Foreign
  currency gains (losses)
  
  (333
  )
  5,383
  
  495302
  
  5,987
  
  1,426Loss
  before income taxes
  
  (33,455
  )
  (21,901
  )
  (20,357
  )Current
  income tax expense(Note 13)
  
  84
  
  190
  
  254Net loss
  for the year
  
  (33,539
  )
  (22,091
  )
  (20,611
  )Deficit
   Beginning of year
  
  (47,361
  )
  (25,270
  )
  (4,659
  )Deficit
   End of year
  
  (80,900
  )
  (47,361
  )
  (25,270
  )Net loss
  per shareBasic and
  diluted(Note 17)
  
  (0.53
  )
  (0.42
  )
  (0.43
  )Shares used
  in calculating basic and diluted net loss per share
  
  63,542,811
  
  52,993,167
  
  48,437,813  The accompanying notes form
an integral part of these consolidated financial statements.  4


2004 Annual Report CONSOLIDATED
STATEMENTS OF CASH FLOWS  For
the years ended December 31, 2004, 2003 and 2002 (thousands
of U.S. dollars)  2004
  
  2003
  
  2002Cash
  provided by (used in)Operating
  activitiesNet loss for
  the year
  
  $
  (33,539
  )
  $
  (22,091
  )
  $
  (20,611
  )Items not
  affecting cashDepreciation
  of property, plant and equipment
  
  2,517
  
  2,247
  
  1,278Amortization
  of intangible assets
  
  8,510
  
  12,933
  
  15,223Impairment
  of intangible assets
  
  3,693
  
  
  
  Unrealized
  foreign exchange gains
  
  (238
  )
  (830
  )
  (271
  )Imputed
  interest on long-term debt
  
  58
  
  99
  
  47Non-cash
  consulting fees
  
  70
  
  59
  
  29Stock-based
  compensation
  
  1,313
  
  684
  
  Net change
  in non-cash working capital(Note 18)
  
  2,058
  
  (574
  )
  378(15,558
  )
  (7,473
  )
  (3,927
  )Investing
  activitiesDecrease
  (increase) in short-term investments
  
  (41,109
  )
  14,822
  
  5,414Purchase of
  property, plant and equipment
  
  (2,292
  )
  (2,118
  )
  (1,541
  )Business
  acquisition costs(Note
  20)
  
  (1,030
  )
  
  
  Business
  acquisitions, net of cash acquired
  
  106
  
  (3,301
  )
  (633
  )(44,325
  )
  9,403
  
  3,240Financing
  activitiesRepayment of
  long-term debt
  
  (242
  )
  (238
  )
  (150
  )Decrease
  (increase) in deferred charges
  
  795
  
  (795
  )
  Deferred
  research and development grant
  
  174
  
  
  
  Common
  shares issued, net of issuance costs
  
  60,401
  
  122
  
  19361,128
  
  (911
  )
  43Increase
  (decrease) in cash during the year
  
  1,245
  
  1,019
  
  (644
  )Effect
  of exchange rate changes on cash
  
  
  
  (49
  )
  (1
  )Cash 
  Beginning of year
  
  1,964
  
  994
  
  1,639Cash 
  End of year
  
  3,209
  
  1,964
  
  994Supplemental
  DisclosureInterest
  paid
  
  38
  
  70
  
  7Income taxes
  paid
  
  39
  
  211
  
  43  The accompanying notes form
an integral part of these consolidated financial statements.  5


Hydrogenics
Corporation NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS Thousands of U.S. dollars,
except share and per share amounts  1.Description of business  Hydrogenics Corporation (the Company)
designs, develops, manufactures and sells proton-exchange membrane, or PEM,
fuel cell automated test stations, fuel cell power products, Hydrogen
generation equipment and provides engineering and other services. The Company
is based in Canada, and its principal customers include automotive companies,
fuel cell developers and component suppliers primarily located in the United States,
Europe and Asia.  2.Summary of significant accounting policies  BASIS OF
PRESENTATION These consolidated financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles (Canadian GAAP), which, in the case of the Company,
conform in all material respects with accounting principles generally accepted
in the United States, except as outlined in Note 23.  PRINCIPLES
OF CONSOLIDATION The consolidated financial
statements include the accounts of the Company and its subsidiaries which are
wholly-owned. All inter-company transactions and balances have been eliminated
on consolidation.  REVENUE
RECOGNITION Revenues from the sale of
fuel cell test stations and fuel cell power products are recognized when there
is persuasive evidence of an arrangement, goods have been delivered, the fee is
fixed or determinable, and collection is reasonably assured. When customer
acceptance clauses are considered to be substantive, recognition of revenue is
deferred until customer acceptance is received. For contracts with multiple
deliverables, the Company allocates revenue to each element of the contract
based on objective evidence of the fair value of the element.  Revenues from long-term
contracts are determined under the percentage-of-completion method whereby
revenues are recognized on a pro-rata basis in relation to contract costs
incurred. Costs and estimated profit on contracts in progress in excess of
amounts billed are reflected as unbilled revenues. Cash received in advance of
revenue being recognized on contracts is classified as unearned revenue.  Equipment leases that
transfer substantially all of the benefits and risks of ownership to customers
are classified as sales-type leases as a result of meeting the criteria established
by the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3065,
Leases. Revenues associated with sales-type leases are recognized when there
is persuasive evidence of an arrangement, goods have been delivered, the fee is
fixed or determinable, and collection is reasonably assured.  Revenues relating to
engineering and testing services are recognized as services are rendered.  PRODUCT
WARRANTIES The Company typically
provides a warranty for parts and/or labour for up to one year or certain
operating specifications such as hours of operation. Warranty cost provisions
are based on managements best estimates of such costs, taking into account the
specific arrangements of the transaction and past history.  GRANTS AND
INVESTMENT TAX CREDITS Grants to fund various
research activities are received from Canadian government agencies. These
grants are recorded as either a liability, or a credit to expenses in the
statement of operations, when earned, based on the terms and conditions of the agreements
under which the assistance is provided to the Company. A liability is recorded
when repayment of the obligation is considered probable. Research and
development arrangements that obligate the Company to repay the funds
regardless of the outcome or commercialization of the research and development
are recognized as liabilities.  Investment tax credits
related to qualifying research and development expenditures are recorded as
either a credit to expenses in the statement of operations or a reduction of
the cost of applicable property, plant and equipment depending on the nature of
the expenditures which gave rise to the credits. Investment tax credits are
recognized in the period in which the credits are earned and realization is
reasonably assured.  SHORT-TERM
INVESTMENTS Short-term investments
consist of interest bearing securities with original terms to maturity of less
than one year and are carried at the lower of amortized cost and market value.
The Company has the intention and the ability to hold these securities to
maturity.  INVENTORIES Raw materials are valued at
the lower of cost, determined on a first-in first-out basis, and replacement
cost. Finished goods and work-in-progress are carried at the lower of cost and
net realizable value.  PROPERTY,
PLANT AND EQUIPMENT Property, plant and equipment
are carried at cost less accumulated depreciation. Property, plant and
equipment are depreciated from the date of acquisition or, in respect of
internally constructed test equipment, from the time an asset is substantially
completed and ready for use. The cost of internally constructed assets includes
materials, labour and directly attributable overhead costs.  6


Depreciation is computed
using the declining balance method as follows:  Test
  equipment
  
  30% per
  annumFurniture
  and equipment
  
  20% per
  annumComputer
  hardware and software
  
  30% per
  annumAutomobiles
  
  30% per
  annum  Leasehold improvements are
depreciated on a straight-line basis over the term of the lease.  GOODWILL AND
INTANGIBLE ASSETS  Goodwill
and intangibles with indefinite useful lives Goodwill represents the
excess of purchase price over the fair value of identifiable assets acquired in
a purchase business combination. 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.  Intangibles
with finite useful lives The Companys intangible
assets are all considered to have finite useful lives and are amortized based
on their estimated useful lives as follows:  Intellectual
  property
  
  50% per
  annum declining balanceManagement
  services contracts
  
  50% per
  annum declining balanceCustomer
  relationships
  
  3 years
  straight-lineComputer
  software
  
  2 years
  straight-linePatentable
  technology
  
  3 years
  straight-line  Management reviews the
amortization methods and useful life estimates for these intangibles annually.  LONG-LIVED
ASSETS Effective January 1,
2003, the Company adopted the recommendations of CICA with respect to the
accounting for the impairment of long-lived assets. This standard requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets are grouped at the lowest level for which
identifiable cash flows are largely independent, when testing for and measuring
impairment. Under the standard, a two-step process is used to assess the
impairment of long-lived assets held for use, with the first step determining
when impairment is recognized and the second step measuring the amount of the
impairment. Impairment losses are recognized when the carrying amount of the
long-lived assets exceed the sum of undiscounted cash flows expected to result
from their use and eventual disposition and are measured as the amounts by
which the long-lived assets carrying amounts exceed their fair value.  DEPOSITS Amounts paid as security
deposits, which are due for repayment more than one year in the future, are
recorded as deposits.  DEFERRED CHARGES Direct and incremental
transaction costs incurred in connection with the acquisition of Stuart Energy
Systems Corporation (Note 22) incurred during 2004 have been deferred as a
non-current asset on the consolidated balance sheet until the completion of the
transaction, at which time the costs will be added to the purchase price. For
2003, deferred charges were related to the issuance of share capital and were
subsequently netted against the proceeds of the offering.  RESEARCH AND
DEVELOPMENT COSTS Research costs incurred by
the Company are expensed as incurred. Costs incurred in applying for patents
and licences are expensed as incurred. Product development costs are expensed
as incurred until the product or process is clearly defined and the associated
costs can be identified, technical feasibility is reached, there is an
intention to produce or market the product, the future market is clearly
defined and adequate resources exist or are expected to be available to
complete the project. To date, no product development costs have been
capitalized.  7


FOREIGN
CURRENCY TRANSLATION Monetary assets and
liabilities denominated in currencies other than the U.S. dollar are translated
at the rate of exchange in effect at the end of the year. Non-monetary assets
are translated at historic rates of exchange. Revenues and expense items
denominated in currencies other than the U.S. dollar are translated into U.S.
dollars at the average rate of exchange for the year, except for depreciation
and amortization which are translated at historic rates. Resultant gains and
losses are included in the results of operations.  The operations of the Companys
German subsidiary are considered integrated with those of the parent company,
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 this
subsidiary 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.  STOCK-BASED
COMPENSATION Effective January 1,
2003, on a prospective basis, the Company adopted the new recommendations of
the CICA with respect to stock options granted after that date. The new
standard requires that compensation expense be recorded on the grant of options
to employees. Options are valued using the Black-Scholes option-pricing model
and 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, the Company applied the
settlement method of accounting, which permitted the Company 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.  INCOME TAXES Income taxes are recorded
using the liability method. Future income tax amounts arise due to temporary
differences between the accounting and income tax basis of the Companys assets
and liabilities. Future income tax assets and liabilities are measured using
substantively enacted income tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect on
future income tax assets and liabilities of a change in income tax rates is
recognized in the period that includes the date of substantive enactment.
Future income tax assets are recognized to the extent that realization of such
benefits is considered to be more likely than not.  USE OF
ESTIMATES The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates made by the Company include allowances
for potentially uncollectible accounts receivable, warranty provisions,
provisions 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.  NET EARNINGS
(LOSS) PER SHARE Basic net earnings (loss) per
share is calculated based on the weighted average number of common shares
outstanding for the year. Diluted net earnings (loss) per share is calculated
using the daily weighted average number of common shares that would have been
outstanding during the year had all potential common shares been issued at the
beginning of the year or when the underlying options or warrants were granted,
if later. The treasury stock method is used to determine the incremental number
of shares that would have been outstanding had the Company used proceeds from
the exercise of options and warrants to acquire common shares.  3.New accounting standards  (I) CANADIAN
STANDARDS  Asset
retirement obligations Effective January 1,
2004, the Company adopted 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-lived asset. 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 the Companys financial statements.  Hedging
relationships Effective January 1,
2004, the Company 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 in
fair value recorded in income. The initial adoption of this guidance did not
have an impact on the Companys financial statements.  8


Canadian
generally accepted accounting principles and general standards of financial
statement presentation Effective January 1,
2004, the Company 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 the
Companys 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 and requires the Company to
identify VIEs in which the Company has an interest, determine whether the
Company is 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.  The Company adopted this
guideline effective January 1, 2004, the adoption of which, had no impact
on the Companys financial position, results of operations or cash flows.  LIABILITIES
AND EQUITY The Company 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 have an impact on the Companys
financial position, results of operations or cash flows.  (II) U.S.
STANDARDS  Stock-based
compensation In December 2004, the
Financial Accounting Standards Board (FASB) issued revised Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment  an
Amendment of FASB Statement Nos. 123 and 95. SFAS 123(R) establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services or incurs liabilities in exchange for goods
or services that are based on the fair value of the entitys equity
instruments, focusing primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS No. 123(R)
requires public entities to 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 (with limited exceptions) and recognize the cost over the period
during which an employee is required to provide service in exchange for the
award. The new standard is required to be adopted by July 1, 2005. The
Company previously adopted the accounting required by this guidance effective January 1,
2003.  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 the Companys financial position, results of operations or
cash flows.  4.Accounts receivable  2004
  
  2003Trade
  accounts receivable
  
  $
  4,830
  
  $
  7,029Less:
  Allowance for doubtful accounts
  
  (156
  )
  (69
  )Goods and
  services tax
  
  254
  
  496Refundable
  investment tax credits
  
  295
  
  328$
  5,223
  
  $
  7,784  5.Inventories  Raw material
  
  $
  2,456
  
  $
  1,988Work-in-progress
  
  1,678
  
  2,200Finished
  goods
  
  190
  
  415$
  4,324
  
  $
  4,603  9


6.Property, plant and equipment  2004
  
  2003COSTTest
  equipment
  
  $
  6,193
  
  $
  4,185Furniture
  and equipment
  
  1,462
  
  1,642Computer
  hardware and software
  
  2,130
  
  1,854Leasehold
  improvements
  
  2,062
  
  2,042Automobiles
  
  15
  
  15$
  11,862
  
  $
  9,738ACCUMULATED
  DEPRECIATIONTest
  equipment
  
  $
  2,651
  
  $
  1,526Furniture
  and equipment
  
  675
  
  640Computer
  hardware and software
  
  1,264
  
  950Leasehold
  improvements
  
  1,975
  
  1,060Automobiles
  
  11
  
  10$
  6,576
  
  $
  4,186NET BOOK
  VALUETest
  equipment
  
  $
  3,542
  
  $
  2,659Furniture
  and equipment
  
  787
  
  1,002Computer
  hardware and software
  
  866
  
  904Leasehold
  improvements
  
  87
  
  982Automobiles
  
  4
  
  5$
  5,286
  
  $
  5,552  Test equipment under construction, as at December 31, 2004, not
yet subject to depreciation amounted to $115 (2003  $753).  The net book value of equipment under capital lease as at December 31,
2004 is $131 (2003  $171).  7. Intangible assets As at December 31, 2004 and 2003, the carrying value of intangible
assets is as follows:  2004
  
  2003COSTIntellectual
  property(Note
  10)
  
  $
  33,629
  
  $
  33,629Patentable
  technology(Note
  20)
  
  
  
  6,033Customer
  relationships(Note
  20)
  
  
  
  5,045Software(Note 20)
  
  1,886
  
  1,886Management services
  contracts(Note
  20)
  
  565
  
  565$
  36,080
  
  $
  47,158ACCUMULATED
  AMORTIZATIONIntellectual
  property
  
  $
  29,845
  
  $
  26,061Patentable
  technology
  
  
  
  2,011Customer
  relationships
  
  
  
  1,682Software
  
  1,886
  
  943Management
  services contracts
  
  471
  
  377$
  32,202
  
  $
  31,074NET BOOK
  VALUEIntellectual
  property
  
  $
  3,784
  
  $
  7,568Patentable
  technology
  
  
  
  4,022Customer
  relationships
  
  
  
  3,363Software
  
  
  
  943Management
  services contracts
  
  94
  
  188$
  3,878
  
  $
  16,084  During 2004,
the Company has revised its projections with regard to anticipated near term
capital level commitments from certain customers as well as the mix of
technologies that may be marketed in the future. Accordingly, the Company has
written off the carrying value of $3,693 for patentable technologies and
customer relationships associated with the Greenlight acquisition in 2003.  10


8.Accounts payable and accrued liabilities  2004
  
  2003Trade
  accounts payable
  
  $
  1,012
  
  $
  2,016Supplier
  accruals
  
  1,811
  
  1,023Accrued
  payroll costs
  
  1,211
  
  1,093Warranty
  accrual
  
  766
  
  845Accrued
  professional fees
  
  535
  
  746Excise taxes
  payable
  
  403
  
  Current
  portion of long-term debt(Note 9)
  
  319
  
  156Provincial
  capital tax payable (recoverable)
  
  128
  
  (16
  )Other
  
  236
  
  305$
  6,421
  
  $
  6,168  Information regarding the
changes in the Companys aggregate product warranty liabilities is as follows
for the year ended December 31, 2004:  Balance, December 31,
  2003
  
  $
  845Accruals for
  warranties issued during the year
  
  528Settlements
  made during the year
  
  (607
  )Balance, December 31,
  2004
  
  $
  766  9.Long-term debt  From time to time, the
Company receives repayable grant financing from government agencies for
research and development activities. At December 31, 2004, the outstanding
amount of such repayable financing is $482 (or CDN$581) (2003  $478 or
CDN$618). This amount is unsecured, denominated in Canadian dollars and
repayable over a four-year period commencing April 1, 2005. The amount
repayable in each quarter is 1.3% of the Companys gross revenues for the
preceding quarter. Based on the maximum amount repayable being 150% of the
principal, the Company has charged to expense imputed interest of $32 in 2004
(2003  $52; 2002  $20) at an effective rate of 10% per annum.  During 2002, the Company
acquired certain intellectual property in exchange for an unsecured
non-interest bearing term loan of $420 denominated in U.S. dollars. The loan is
repayable over four years. At December 31, 2004, the outstanding amount of
the loan is $113 (2003  $197). The Company has charged to expense imputed
interest of $16 in 2004 (2003  $24) at an effective rate of 10% per annum.  The Company assumed various
equipment leases accounted for as capital leases. At December 31, 2004,
the outstanding amount payable, net of future payments representing interest,
is $26. The Company has charged to expense interest of $11 in 2004 on these
capital leases at an effective weighted average interest rate of approximately
11% per annum.  The present value of future
debt repayments is as follows:   2005
  
  $
  3262006
  
  3132007
  
  9648Less:
  Imputed interest
  
  27621Less:
  Current portion
  
  319$
  302  11


10.Shareholders Equity Changes
in shareholders equity for 2002, 2003 and 2004 are as follows:  Warrants
  
  Contributed
  Surplus
  
  Deficit
  
  Foreign
  Currency
  Translation
  Adjustment
  
  Total
  Shareholders,
  EquityCommon sharesNumber
  
  AmountBalance at Dec. 31, 2001
  
  47,918,446
  
  $
  109,804
  
  $
  4,722
  
  $
  
  
  $
  (4,659
  )
  $
  (4,046
  )
  $
  105,821Issuance of common shares on exercise of options
  
  877,675
  
  193
  
  
  
  
  
  
  
  
  
  193Stock-based consulting expense
  
  
  
  
  
  
  
  29
  
  
  
  
  
  29Net loss
  
  
  
  
  
  
  
  
  
  (20,611
  )
  
  
  (20,611
  )Balance at Dec.31, 2002
  
  48,796,121
  
  109,997
  
  4,722
  
  29
  
  (25,270
  )
  (4,046
  )
  85,432Issuance of common shares on acquisition of
  Greenlight Power Technologies, Inc. (Note 20)
  
  4,164,093
  
  16,762
  
  
  
  
  
  
  
  
  
  16,762Issuance of common shares on exercise of options
  
  148,433
  
  122
  
  
  
  
  
  
  
  
  
  122Stock-based consulting expense
  
  
  
  
  
  
  
  59
  
  
  
  
  
  59Stock-based compensation expense
  
  
  
  
  
  
  
  684
  
  
  
  
  
  684Net loss
  
  
  
  $
  
  
  $
  
  
  $
  
  
  $
  (22,091
  )
  $
  
  
  $
  (22,091
  )Balance at Dec. 31, 2003
  
  53,108,647
  
  $
  126,881
  
  $
  4,722
  
  $
  772
  
  $
  (47,361
  )
  $
  (4,046
  )
  $
  80,968Issuance of common shares
  
  11,373,608
  
  60,126
  
  
  
  
  
  
  
  
  
  60,126Issuance of common shares on exercise of options
  
  144,734
  
  275
  
  
  
  
  
  
  
  
  
  275Stock-based consulting expense
  
  
  
  
  
  
  
  70
  
  
  
  
  
  70Stock-based compensation expense
  
  
  
  
  
  
  
  1,313
  
  
  
  
  
  1,313Net loss
  
  
  
  
  
  
  
  
  
  (33,539
  )
  
  
  (33,539
  )Balance at Dec. 31, 2004
  
  64,626,989
  
  $
  187,282
  
  $
  4,722
  
  $
  2,155
  
  $
  (80,900
  )
  $
  (4,046
  )
  $
  109,213  The authorized capital stock
of the Company consists of an unlimited number of common shares and an
unlimited number of preferred shares issuable in series.  During 2002, the Company
issued 50,000 stock options in exchange for consulting services from an outside
supplier. Each option is exercisable for one common share of the Company at a
price of CDN $12.00 per share. These options are for a term of 10 years from
the date of grant and vest quarterly over four years. The fair value of the
stock options was determined using the Black-Scholes option pricing model
applied at the grant date with a risk-free rate of 5.12%, an expected life of 4
years, a volatility factor of 77% and no dividends.  12


On October 16, 2001, the Company issued 11,364,006 common shares and
2,470,436 common share purchase warrants with an aggregate value of $33,629
(net of issuance costs of $277) in exchange for perpetual royalty-free
intellectual property rights for certain fuel cell stack technology. Each
common share purchase warrant is exercisable upon release from escrow for one
common share of the Company at a price of $4.00 per share. The fair value of
common share purchase warrants issued amounted to $4,722, net of issuance
costs, and was determined using a Black-Scholes option pricing model with a
risk-free rate of 3.9%, a 5-year term and a volatility factor of 108%. The
common share purchase warrants were placed in escrow on October 16, 2001 and are
automatically released from escrow at a rate of 61,761 warrants per month over
40 months and expire on October 16, 2006.  11.Employee stock-based
compensation  During 2000, the Company adopted an employee stock option plan. During
2003 the number of common shares that may be issued under the stock option plan
was increased from 4,641,000 to 8,141,000. As at December 31, 2004, 2,214,222
common shares had been issued through exercises of stock options under this
plan. Through subsequent exercises of stock options under this plan, up to
5,926,778 additional common shares are available to be issued. Of the 5,926,778
available stock options, 3,818,566 have been issued and were outstanding at
December 31, 2004.  All options are for a term of 10 years from the date of grant and vest
over four years unless otherwise determined by the board of directors. Prior to
January 1, 2003, under Canadian GAAP, no compensation expense had been recorded
with respect to options granted to employees. Effective January 1, 2003, stock
options granted to employees are recognized in earnings under Canadian GAAP as
compensation expense based on the estimated fair value at the date of the
grant. A summary of the Companys employee stock option plan activity is as
follows:  Issued and
  outstanding
  options for
  common shares
  
  Weighted
  average
  exercise
  priceCDN$Balance December 31, 2001
  
  3,105,595
  
  $
  2.15Options granted in 2002
  
  396,900
  
  6.46Options exercised in 2002
  
  (877,675
  )
  0.35Balance December 31, 2002
  
  2,624,820
  
  3.37Options granted in 2003
  
  886,793
  
  5.91Options exercised in 2003
  
  (148,433
  )
  1.13Options forfeited on termination in 2003
  
  (56,712
  )
  6.03Balance December 31, 2003
  
  3,306,468
  
  4.13Options granted in 2004
  
  828,808
  
  6.58Options exercised in 2004
  
  (144,734
  )
  2.52Options forfeited on termination in 2004
  
  (171,976
  )
  6.47Balance December 31, 2004
  
  3,818,566
  
  $
  4.62  Options for
  common shares
  
  Weighted
  Average
  exercise
  priceCDN$Exercisable at December 31, 2002
  
  1,652,874
  
  $
  1.87Exercisable at December 31, 2003
  
  1,886,739
  
  2.72Exercisable at December 31, 2004
  
  2,290,232
  
  $
  3.55  13


The following table
summarizes information about the Companys share options outstanding as at
December 31, 2004:  Exercise price
  
  Number
  outstanding at
  December 31,
  2004
  
  Weighted
  average
  remaining
  contractual life
  
  Weighted
  average
  share price
  
  Number
  exercisable at
  December 31,
  2004
  
  Weighted
  average
  share priceCDN$
  
  
  
  
  
  CDN$
  
  
  
  CDN$0.04 to
  0.05
  
  287,500
  
  5.07
  
  0.05
  
  287,500
  
  0.050.06 to
  0.29
  
  599,000
  
  5.07
  
  0.29
  
  599,000
  
  0.291.00 to
  2.00
  
  215,750
  
  5.21
  
  1.08
  
  215,750
  
  1.082.01 to
  4.00
  
  372,000
  
  6.69
  
  3.68
  
  269,916
  
  3.654.01 to
  10.00
  
  2,193,316
  
  8.27
  
  6.41
  
  786,128
  
  6.5710.01 to
  18.12
  
  151,000
  
  6.31
  
  11.81
  
  131,938
  
  11.783,818,566
  
  
  
  
  
  2,290,232  All options granted after November 1, 2000, the date of the Companys initial
public offering, have an exercise price equal to the closing share price on the
Toronto Stock Exchange the day prior to the grant.  Stock options granted to employees during 2004 are valued using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 3.50% (2003  3.50% to 4.86%), expected life of 4 years,
expected volatility of 52.05% (2003  48% to 77%) and no dividends. The fair
value of the stock options granted during 2004 was $2,319 (2003  $2,013) (weighted
average $2.17 (CDN$2.80) per share)(2003 $2.27 (CDN$3.15) per share) and the
related expense recognized in the consolidated statement of operations for the
year ended December 31, 2004 was $1,313 ($0.02 per share on a basic and diluted
basis).  Had the Company determined compensation expense based on the fair value
method described in CICA Handbook Section 3870 Stock-Based Compensation and
Other Stock-Based Payments for options granted during the year ended December
31, 2002, the pro forma net loss and pro forma basic and diluted net loss per
share would be as follows:  2004
  
  2003
  
  2002(unaudited)
  
  Basic and
  diluted net
  loss per share
  
  (unaudited)
  
  Basic and
  diluted net
  loss per share
  
  (unaudited)
  
  Basic and
  diluted
  loss per shareNet loss for the year
  
  $
  (33,539
  )
  $
  (0.53
  )
  $
  (22,091
  )
  $
  (0.42
  )
  $
  (20,611
  )
  $
  (0.43
  )Additional stock-based compensation expense
  
  $
  (195
  )
  
  
  $
  (403
  )
  (0.01
  )
  $
  (295
  )
  Pro-forma net loss for the year
  
  $
  (33,734
  )
  (0.53
  )
  $
  (22,494
  )
  $
  (0.43
  )
  $
  (20,906
  )
  $
  (0.43
  )  12.Commitments and contingencies  The Company incurred rental expenses of $1,162 under operating leases in
2004 (2003  $1,220; 2002  $886). The Company has future minimum lease
payments under operating leases relating to premises and office equipment as
follows:  2005
  
  $
  8892006
  
  3552007
  
  3232008
  
  3562009
  
  356$
  2,279  The Company has entered into repayable contribution and other research
and development arrangements with various Canadian governmental ministries and
public sector enterprises. Under these arrangements, the Company was eligible
to receive up to a cumulative amount of $5,500 (2003  $4,292; 2002  $3,194)
toward agreed upon research and development project costs. The utilized amount
of the advances as at December 31, 2004 was $5,031 (2003  $4,292; 2002 
$2,194). In return, these funding parties have a right to receive as
repayments, 1.3% to 4% of gross revenue received by the Company as a result of
the commercial exploitation of the associated technology. To date, $335 in
revenues from these technologies has been recognized and a repayable amount of
$8 has been reflected in the accounts. 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.  14


The Company has entered into indemnification agreements with its 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 the
Company from making a reasonable estimate of the maximum potential amount it
could be required to pay to counterparties. The Company has 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, the Company may provide
indemnification agreements, other than those listed above, to counterparties
that would require the Company 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 the Company from making a reasonable estimate of the maximum potential
amount it 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 the Company in
United States federal court (Southern District, Texas), alleging patent
infringement. In 2003, the Company successfully defended itself in the lawsuit.
The Company was awarded a partial recovery of the $1.5 million incurred in
legal fees from the plaintiff. As settlement, the plaintiff has issued a
promissory note to the Company in the amount of $500 of which $50 was received
during 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.  13.Income taxes  As at December 31, 2004, the Company has available income tax loss
carry-forwards of $58,846 that may be used to reduce taxable income in future
years, expiring as follows:  2007
  
  $
  1,1872008
  
  4,9812009
  
  5,1292010
  
  20,0122011
  
  27,537$
  58,846  As at December 31, 2004, the Company has unclaimed scientific research
and experimental development expenditures of $13,075 that can be used to offset
future income over an indefinite period.  The Company also has non-refundable investment tax credits amounting to
approximately $3,150 that can be used to reduce future federal income taxes
payable, expiring in 2010, 2011 and 2012.  The Company has recorded a valuation allowance to reflect uncertainties
associated with the realization of all future income tax assets.  Components of the Companys net future income tax asset, which are
primarily all arising in Canada, are:  2004
  
  2003ASSETSNon-capital losses
  
  $
  21,573
  
  $
  14,269Scientific research and experimental
  development expenses
  
  4,825
  
  2,710Investment tax credits
  
  2,359
  
  1,313Warranty and other provisions
  
  319
  
  333Property, plant and equipment and
  intellectual property
  
  7,180
  
  6,361Share issue costs
  
  540
  
  740Loss (gain) related to foreign exchange
  
  2,351
  
  1,127Valuation allowance
  
  (39,147
  )
  (23,595
  )
  
  3,258LIABILITYPurchased intangible assets on business
  acquisition(Note
  20)
  
  
  
  (3,258
  )Net Future income tax asset
  
  
  
    15


The
Companys computation of income tax expense is as follows:  2004
  
  2003
  
  2002Loss before income taxes
  
  $
  (33,455
  )
  $
  (21,901
  )
  $
  (20,357
  )Statutory income tax rate
  
  35.99
  %
  36.62
  %
  33.12
  %Income tax recovery at statutory rate
  
  (12,040
  )
  (8,020
  )
  (6,742
  )Non-deductible expenses
  
  2,456
  
  2,795
  
  1,034Other permanent differences
  
  (44
  )
  161
  
  (160
  )Large corporations tax
  
  84
  
  190
  
  254Future income tax assets of acquired
  company
  
  
  
  (1,217
  )
  Adjustment to future income tax assets
  
  (2,528
  )
  (864
  )
  Effect of income tax rate changes on future
  income taxes
  
  
  
  (2,481
  )
  584Currency effect of difference in U.S.
  dollar financial reporting compared with CDN dollar income tax reporting
  
  (4,837
  )
  (5,595
  )
  Non-deductible amortization of intangibles
  
  3,258
  
  2,135
  
  Foreign exchange gain on CDN dollar
  denominated future income taxes
  
  (1,817
  )
  (1,937
  )
  Change in valuation allowance
  
  15,552
  
  15,023
  
  5,284Income tax expense
  
  $
  84
  
  $
  190
  
  $
  254  14.Related party transactions  In the normal course of operations, the Company sells certain products
and performs services to a related party that owns a significant number of its
common shares. Revenues from this related party totalled $5,230 in 2004 (2003 
$8,901; 2002  $9,622). At December 31, 2004, the Company has accounts
receivable due from this related party of $1,972 (2003  $1,764; 2002  $3,647)  In the normal course of operations, the Company subcontracts certain
manufacturing functions to a company owned by a relative of one of the
principal shareholders of the Company. Billings by this related company for
manufacturing functions totalled $1,768 in 2004 (2003  $2,110; 2002  $999).
At December 31, 2004, the Company has an accounts payable balance due to this
related party of $126 (2003  $230; 2002  $140).  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.  15.Financial instruments  At December 31, 2004, 2003 and 2002, the fair values of cash, short-term
investments, accounts receivable, grants receivable and accounts payable and
accrued liabilities approximate their respective carrying values because of the
short-term nature of these instruments.  The carrying value of non-interest bearing loans payable approximates
the fair value because interest is imputed at a rate available to the Company
for long-term borrowings and is included in the long-term debt balance.  Canadian dollar denominated amounts included in short-term investments
at December 31, 2004 amount to $nil (2003  $15,046; 2002  $32,046) (or CDN$
nil; 2003  CDN$19,444; 2002  CDN$50,633). All short-term investments are
deposited with highly rated financial institutions within Canada.  A substantial portion of the Companys accounts receivable is owing from
a limited number of customers located globally (Note 19). The Company performs
ongoing credit evaluations on its customers financial condition and generally
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts receivable based on managements assessment of expected
collectibility and past history.  16.Lines of credit  The Company has an operating line of credit available up to $2,908 (CDN$3,500)
in total (2003 $3,869 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 facility is 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.  17.Net loss per share  Net loss per share is calculated using the weighted average number of
common shares outstanding for the year of 63,542,811 shares in 2004 (2003 
52,993,167; 2002  48,437,813). No effect has been given to the potential
exercise of stock options and warrants in the calculation of diluted net
earnings (loss) per share as the effect would be anti-dilutive.  16


18.Consolidated statements of
cash flows  Components
of the net change in non-cash working capital are as follows:  2004
  
  2003
  
  2002Decrease (increase) in current assetsAccounts receivable
  
  $
  2,677
  
  $
  57
  
  $
  (1,383
  )Grants receivable
  
  (1,800
  )
  96
  
  343Inventories
  
  320
  
  1,684
  
  (1,586
  )Prepaid expenses
  
  (579
  )
  (436
  )
  (147
  )Increase (decrease) in current liabilitiesAccounts payable and accrued liabilities
  
  114
  
  (619
  )
  2,501Unearned revenue
  
  1,324
  
  (1,424
  )
  520Income taxes payable
  
  2
  
  68
  
  131$
  2,058
  
  $
  (574
  )
  $
  378  19.Segmented financial
information  Commencing with the business acquisition of Greenlight in 2003 as
described in Note 20, the Companys management organizes and analyzes the
Company based on two reportable segments: Test and Power products.  Test includes the manufacturing and sale of test equipment, upgrades to
test equipment and in-house testing of customer supplied components.  Power products include the design, development, manufacture, and sale of
fuel cell stacks, power modules, auxiliary power modules and related
engineering services. Engineering services are derived from a customer contract
where the Company provides technician and support services at the customers
facility.  Other activities include the provision of corporate activities such as
treasury functions, corporate accounting, insurance and administration.  Prior to the acquisition of Greenlight on January 7, 2003, and the
resultant changes in the financial information utilized by management for
decision-making, the Companys operations were considered to constitute a
single reportable segment.  Financial information by reportable segment for the year ended December
31, 2004 and 2003 is as follows:  Year ended December 31, 2004
  
  Year ended December 31, 2003Test
  
  Power
  products
  
  Other
  
  Total
  
  Test
  
  Power
  products
  
  Other
  
  TotalRevenue from external customers
  
  $
  11,045
  
  $
  5,611
  
  $
  
  
  $
  16,656
  
  $
  20,652
  
  $
  6,008
  
  $
  
  
  $
  26,660Amortization of intangible assets
  
  4,726
  
  3,784
  
  
  
  8,510
  
  5,364
  
  7,569
  
  
  
  12,933Impairment of intangible assets
  
  3,693
  
  
  
  
  
  3,693
  
  
  
  
  
  
  
  Depreciation of property plant and equipment
  
  2,105
  
  412
  
  
  
  2,517
  
  1,182
  
  1,065
  
  
  
  2,247Interest income
  
  
  
  
  
  985
  
  985
  
  
  
  
  
  863
  
  863Interest expense
  
  
  
  
  
  90
  
  90
  
  
  
  
  
  206
  
  206Income tax expense
  
  
  
  
  
  84
  
  84
  
  
  
  
  
  190
  
  190Segment loss(i)
  
  $
  (13,846
  )
  $
  (9,833
  )
  $
  (9,860
  )
  $
  (33,539
  )
  $
  (4,118
  )
  $
  (13,463
  )
  $
  (24,510
  )
  $
  (22,091
  )  
 (i)Segment
loss includes directly attributable selling, general and administration costs,
product research and development costs net of associated grants, depreciation
of property, plant and equipment, and amortization and impairment of intangible
assets.  17


Year Ended December 31, 2003Test
  
  Power
  products
  
  Other
  
  TotalPurchase of intangible assets during the
  year
  
  $
  13,505
  
  $
  
  
  $
  
  
  $
  13,505Purchase of goodwill during the year
  
  $
  5,219
  
  $
  
  
  $
  
  
  $
  5,219  As at December 31, 2004, intangible assets and goodwill relating to the
Companys Test segment are $93 and $5,113 (2003 $8,516 and $5,219)
respectively. Intangible assets and goodwill relating to the Companys Power
products segment are $3,785 and $nil as at December 31, 2004 (2003 $7,568 and
$nil), respectively. The Company currently does not allocate its remaining
assets among its reportable segments. Substantially all the Companys
long-lived assets are located in Canada. The Companys goodwill relates to
Canadian operations. There were no purchases of goodwill or intangible assets
during 2004.  Revenues and cost of revenues are derived from products and services as
follows:  2004
  
  2003
  
  2002RevenuesProducts
  
  $
  13,390
  
  $
  19,736
  
  $
  7,794Services
  
  3,266
  
  6,924
  
  8,04616,656
  
  26,660
  
  15,840Cost of revenuesProducts
  
  $
  10,523
  
  $
  14,491
  
  $
  4,906Services
  
  1,873
  
  3,551
  
  5,797$
  12,396
  
  $
  18,042
  
  $
  10,703  The distribution of revenue determined by
location of customers is as follows:  2004
  
  2003
  
  2002United States
  
  $
  8,659
  
  $
  15,987
  
  $
  12,715Japan
  
  3,552
  
  5,048
  
  703France
  
  2,300
  
  119
  
  352China
  
  563
  
  411
  
  170Germany
  
  537
  
  1,806
  
  471Korea
  
  435
  
  245
  
  Canada
  
  308
  
  1,586
  
  211United Kingdom
  
  188
  
  140
  
  1,108Rest of world
  
  114
  
  1,318
  
  110$
  16,656
  
  $
  26,660
  
  $
  15,840  The Companys largest customers comprise the
following percentages of total revenue:  2004
  
  2003
  
  2002First
  
  31
  %
  33
  %
  61
  %Second
  
  15
  
  9
  
  7Third
  
  14
  
  9
  
  7Fourth
  
  8
  
  9
  
  6Others
  
  32
  
  40
  
  19100
  
  100
  
  100  18


20.Business acquisitions  ACQUISITION DURING THE YEAR ENDED DECEMBER 31, 2003  On January 7, 2003, the Company acquired all the issued and outstanding
common shares of Greenlight Power Technologies Inc. (Greenlight). Greenlight,
based in Burnaby, British Columbia, designs and manufactures test systems for
fuel cells, reformers and electrochemical engines. The purchase price was
$19,044 (CDN$29,472) exclusive of expenses of $1,019 relating to the
acquisition. Consideration consisted of cash of $2,282 and the issuance of
4,164,093 common shares of the Company with an aggregate value of $16,762. The
value of the 4,164,093 common shares was determined based on the average market
price of the Companys common shares over the three-day period before and after
the terms of the acquisition were agreed to and announced.  The allocation of the purchase price to the assets and liabilities
acquired was as follows:  Current
  assets
  
  $
  2,970Property, plant and equipment
  
  2,120Intangible assets
  
  13,505Goodwill
  
  5,219Future income tax asset
  
  5,393Current liabilities
  
  (3,549
  )Long-term debt
  
  (202
  )Future tax liabilities
  
  (5,393
  )$
  20,063  Intangible assets acquired pursuant to the acquisition of Greenlight are
being amortized on a straight line basis over their estimated useful lives as
follows:  Amount at
  acquisition
  date
  
  Estimated
  useful lifeOrder backlog
  
  $
  541
  
  1 yearCustomer relationships
  
  5,045
  
  3 yearsComputer software
  
  1,886
  
  2 yearsPatentable technology
  
  6,033
  
  3 years$
  13,505  This acquisition was accounted for by the purchase method and the
Company has consolidated the operations of Greenlight from the date of
acquisition.  During 2004 goodwill was reduced by $106 due to the reversal of a
relocation accrual established on the acquisition of Greenlight.  ACQUISITION DURING THE YEAR ENDED DECEMBER 31, 2002:  On May 1, 2002, the Company acquired all the issued and outstanding
common shares of EnKAT. EnKAT, based in Gelsenkirchen, Germany, designs and
manufactures test systems for fuel cells, reformers and electrochemical
engines. The purchase price was $645, which includes cash paid of $277,
repayment of debt on acquisition of $281 and transaction costs of $87. The
purchase price allocated to the assets acquired and the liabilities assumed on
the basis of their respective estimated fair market values on the acquisition
date was:  Current
  assets
  
  $
  86Property, plant and equipment
  
  30Intangible assets
  
  565Current liabilities
  
  (36
  )$
  645  As part of the acquisition, the Company obtained management services
contracts for five years for each of the two principals of EnKAT. The fair
value of these contracts has been included in intangible assets and is being
amortized on a declining balance basis at an annual rate of 50%.  This acquisition was accounted for by the purchase method. The results
of operations of the Company include the results of EnKAT commencing on May 1,
2002.  19


21.Integration costs Integration
costs relate to reorganization and alignment activities associated with
acquired businesses.  Integration
costs include the following:  Incurred
  during 2004
  
  Incurred
  during 2003
  
  Total amount
  expected to
  be incurredRelocation and retention charges (recovery)
  
  $
  (77
  )
  $
  487
  
  $
  410Termination benefits
  
  
  
  132
  
  132Consulting and information systems
  
  
  
  280
  
  280Travel and accommodation
  
  
  
  152
  
  152Contract cancellation fees
  
  
  
  67
  
  67Other
  
  
  
  125
  
  125$
  (77
  )
  $
  1,243
  
  $
  1,166  In addition to the integration costs summarized above, a $350 inventory
provision resulting from the integration of Greenlight was charged to cost of
revenues for the year ended December 31, 2003.  Integration activities were complete as at December 31, 2003. A reversal
of an accrual relating to integration costs of $77 was made in 2004.  All integration costs relate to the Test segment.  22.Subsequent event  On January 6, 2005, the Companys offer to acquire Stuart Energy Systems
Corporation (Stuart Energy) at an exchange ratio of 0.74 common shares of the
Company for every Stuart Energy common share closed. As on that date, the
Company had acquired 31,377,339 or 86% of the issued and outstanding shares of
Stuart Energy. In February 2005, the Company completed the aquisition of the
remaining shares of Stuart Energy such that Stuart Energy is now a wholly-owned
subsidiary. The purchase price was $122,908 exclusive of expenses of $1,843
relating to the acquisition. Consideration consisted of the issuance of
26,999,399 common shares of the Company. The value of the 26,999,399 shares was
determined based on the average market prices of the Companys common shares
over the three day period before and after the terms of the acquisition were
agreed to and announced.  The preliminary allocation of the purchase price to the assets and liabilities
acquired is as follows:  Net current
  assets
  
  $
  19,516Net non-current assets
  
  2,720Intangible assets
  
  32,580Goodwill
  
  69,935$
  124,751  This allocation is preliminary and will be finalized upon receipt of a
completed report by an independent valuator. This acquisition will be accounted
for by the purchase method. From January 6, 2005 onwards, the Company will
consolidate the operations of Stuart Energy in its financial statements.  23.Differences between Canadian
and United States accounting principles  The financial statements have been prepared in accordance Canadian GAAP,
which differ in certain respects from those principles that the Company would
have followed had its financial statements been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).  20


The reconciliation of net
loss for the year from Canadian GAAP to conform with U.S. GAAP is as follows:  2004
  
  2003
  
  2002Net loss for the year based on Canadian
  GAAP
  
  $
  (33,539
  )
  $
  (22,091
  )
  $
  (20,611
  )Additional stock-based compensation (i)
  
  (23
  )
  (153
  )
  (443
  )Loss for the year based on U.S. GAAP
  
  (33,562
  )
  (22,244
  )
  (21,054
  )Other comprehensive loss Foreign currency
  translation (ii)
  
  
  
  
  
  (
  )Comprehensive loss based on U.S. GAAP
  
  (33,562
  )
  (22,244
  )
  (21,054
  )Basic and fully diluted loss per share
  based on U.S. GAAP
  
  (0.53
  )
  (0.42
  )
  (0.43
  )Weighted average number of shares used in
  calculating loss per share
  
  63,542,811
  
  52,993,167
  
  48,437,813Shareholders equity based on Canadian GAAP
  
  $
  109,213
  
  $
  80,968
  
  $
  85,432Shareholders equity based on U.S. GAAP
  
  $
  109,213
  
  $
  80,968
  
  $
  85,432  
 (i) Stock-based compensation  Under Canadian GAAP, no compensation expense has been recognized with
respect to employee stock options granted prior to January 1, 2003. Effective
January 1, 2003, for both Canadian and U.S. GAAP, the Company has chosen to
recognize the estimated fair value of stock-based compensation granted to
employees on or after January 1, 2003 as compensation expense.  Under U.S. GAAP, for stock-based compensation granted prior to January
1, 2003, the Company uses 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. The compensation
cost not yet recognized is presented as a deferred stock-based compensation
charge, with a corresponding amount included in stock options outstanding, both
of which form part of shareholders equity. At December 31, 2004, U.S. GAAP
equity balances for deferred stock-based compensation and stock options
outstanding are $nil and $5,519 (2003 $23 and $5,519) respectively.  Had the Company determined compensation expense based on the fair value
method as prescribed in SFAS No. 123, Accounting for Stock-Based Compensation,
for the years ended December 31, 2002, the U.S. GAAP pro forma net loss and pro
forma basic and diluted net loss per share would be as follows:  2002
  Basic and
  diluted net
  loss per shareNet loss for the year under U.S. GAAP
  
  $
  (21,054
  )
  $
  (0.43
  )Stock-based compensation expense under APB
  No. 25
  
  443
  
  Stock-based compensation expense under SFAS
  No. 123
  
  $
  (2,025
  )
  $
  (0.04
  )Pro-forma net loss for the year
  
  $
  (22,636
  )
  $
  (0.47
  )  21


For the purposes of these disclosures, stock options are valued using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 4.50% to 5.39%, expected life of four
to ten years, expected volatility of between 77% and 113%, and no dividends.  The condensed statements of
operations and cash flows for the years ended December 31, under U.S. GAAP, are
as follows:  2004
  
  2003
  
  2002Revenues
  
  $
  16,656
  
  $
  26,660
  
  $
  15,840Cost of revenues
  
  12,396
  
  18,042
  
  10,703Operating expenses
  
  38,040
  
  36,659
  
  27,363Loss from operations
  
  (33,780
  )
  (28,041
  )
  (22,226
  )Net loss for the year
  
  (33,662
  )
  (22,244
  )
  (21,054
  )Cash used in operating activities
  
  $
  (15,558
  )
  $
  (7,473
  )
  $
  (3,927
  )Cash provided by (used in) investing
  activities
  
  (44,325
  )
  9,403
  
  3,240Cash provided by (used in) financing
  activities
  
  61,128
  
  (911
  )
  43  
 (ii) Comprehensive loss  U.S. GAAP requires disclosure of comprehensive loss, which comprises net
loss and other comprehensive income (loss). The Company did not have any
comprehensive income (loss) items in 2004. Under Canadian GAAP, there is no
standard for reporting comprehensive loss.  (iii) Business acquisitions  SFAS No. 141, Business Combinations, requires disclosure of certain
supplemental information on a pro forma basis for the period in which a
material business combination occurs. The following pro forma condensed
statement of operations information combines the results of operations of the
Company and of Greenlight (acquired by the Company on January 7, 2003) under
U.S. GAAP as if the acquisition occurred on January 1, 2003 and 2002,
respectively.  2003
  
  2002Revenues
  
  26,891
  
  19,509Loss before extraordinary items
  
  (22,503
  )
  (28,759
  )Net loss
  
  (22,503
  )
  (28,759
  )Basic and diluted net loss per share
  
  (0.43
  )
  (0.55
  )  22