Table ofContents

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F/A**

 

**AMENDMENT NO.****1**

**(MarkOne)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                    |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2008** |
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |
| ** ** | ** **                                                                                                                                            |
| **OR**     |
| ** ** | ** **                                                                                                                                            |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                            |

 

Commissionfile number: 000-31815

 
| **HYDROGENICS CORPORATION -**

**CORPORATION HYDROGÉNIQUE**                                                                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                                     |
|                                                                                                                                                       |
| **Canada**                                                                                                                                                 |
| (Jurisdiction of incorporation or organization)                                                                                                            |
|                                                                                                                                                       |
| **5985 McLaughlin Road**

**Mississauga, Ontario**

**Canada L5R 1B8**

**(905) 361-3660**                                                                 |
| (Address of principal executive office)                                                                                                                    |
|                                                                                                                                                       |
| **Lawrence Davis, Chief Financial Officer**

**5985 McLaughlin Road**

**Mississauga, Ontario**

**Canada L5R 1B8**

**(905) 361-3660 Fax (905) 361-3626** |
| (Name, Telephone, Email and/or Facsimile number and Address of  Company Contact Person)                                                                    |

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.

 

**None**

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.

 

**Common Shares**

 

----

Table ofContents

 

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 

**None**

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.
| At  December 31, 2008, 92,405,666 common shares were issued and outstanding |   |
|-----------------------------------------------------------------------------|--------|
|                                                                        |   |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

o Yes   x No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes   x No

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes   o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).

o Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.

 

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S. GAAP o |   | International Financial Reporting Standards as issued  by the International Accounting Standards Board o |   | Other x |
|-------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

o Item 17   x Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

----

Table ofContents

 

**EXPLANATORYNOTE**

 

Hydrogenics Corporation (the “Registrant” or the“Company”) filed its Annual Report on Form 20-F for the year ended December 31,2008 (the “Annual Report”) with the U.S. Securities and Exchange Commission on June 30,2009.

 

This Amendment No. 1 to theAnnual Report (the "Amendment") is filed to revise (1) "Item 19.Exhibits" of the Annual Report to correct an inadvertent misdating withrespect to the reference for Exhibit 99.1 under Item 19 of the Annual Report,(2) the consolidated financial statements for the year ended December 31, 2008and the notes thereto to correct a clerical error made to note 23 therein, and(3) Exhibits 12.1, 12.2, 13.1 and 13.2, which contain the requiredcertifications of the Chief Executive Officer and Chief Financial Officer ofthe Registrant, to reflect this Amendment and to amend Exhibit 13.2 to correctan inadvertent error.  This Amendmentalso includes a new Exhibit 15.1, which contains the consent ofPricewaterhouseCoopers LLP with respect to this Amendment.

 

This Amendment consists of acover page, this Explanatory Note, Item 19, the signature page, theconsolidated financial statements for the year ended December 31, 2008 and thenotes thereto, and Exhibits 12.1, 12.2, 13.1, 13.2 and 15.1.

 

Other than as expressly set forth herein, thisAmendment does not, and does not purport to, amend or restate any otherinformation contained in the Annual Report nor does this Amendment reflect anyevents that have occurred after the Annual Report was filed.

 

----

Table of Contents

 

**HYDROGENICSCORPORATION**

 

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 
| ** **                                                             | **Page**   |
|------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** |
| Management’s  Report on Internal Control Over Financial Reporting | F-2        |
|                                                                   |       |
| Independent Auditors’ Report                                      | F-3        |
|                                                                   |       |
| Consolidated Balance Sheets                                            | F-6        |
|                                                                   |       |
| Consolidated Statements of  Operations                                 | F-7        |
|                                                                   |       |
| Consolidated Statements of  Cash Flows                                 | F-8        |
|                                                                   |       |
| Consolidated Statement of  Shareholders’ Equity                   | F-9        |
|                                                                   |       |
| Notes to Consolidated  Financial Statements                            | F-10       |

 

F-1

----

Table of Contents

 

**MANAGEMENT’SREPORT ON INTERNAL**

**CONTROL OVER FINANCIAL REPORTING**

 

Management of HydrogenicsCorporation (the “Corporation”) is responsible for establishing and maintainingadequate internal control over financial reporting. Internal control overfinancial reporting is a process designed by, or under the supervision of, thePresident and Chief Executive Officer and the Chief Financial Officer and iseffected by the Board of Directors, management and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withCanadian generally accepted accounting principles. It includes those policiesand procedures that:

 

·                  provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Corporation’s assets that could have a material effect on the Corporation’sfinancial statements.

 

·                   pertain to the maintenance of records thataccurately and fairly reflect, in reasonable detail, the transactions relatedto and dispositions of the Corporation’s assets;

 

·                  provide reasonable assurance that transactionsare recorded as necessary to permit preparation of consolidated financialstatements in accordance with Canadian generally accepted accounting principles,and that the Corporation’s receipts and expenditures are made only inaccordance with authorizations of management and the Corporation’s directors; and,due to its inherent limitations, internal control over financial reporting maynot prevent or detect misstatements. Also, projections of any evaluation of theeffectiveness of internal control over financial reporting to future periodsare subject to the risk that the controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Management assessed theeffectiveness of the Corporation’s internal control over financial reporting asat December 31, 2008, based on the criteria set forth in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”). Based on this assessment, management concludedthat, as at December 31, 2008, the Corporation’s internal control overfinancial reporting was effective.

 

Hydrogenics’ internal controlover financial reporting as at December 31, 2008, has been audited by PricewaterhouseCoopersLLP, independent auditors, who also audited the Corporation’s consolidatedfinancial statements for the year ended December 31, 2008. As stated inthe Independent Auditors’ Report to the Shareholders of the Corporation, PricewaterhouseCoopersLLP, express an unqualified opinion on the effectiveness of the Corporation’sinternal control over financial reporting.

 
| ****                                   | ** ** | ****                         |
|----------------------------------------|------------|------------------------------|
| **Daryl  Wilson**                      | ** ** | **Lawrence  Davis**          |
| President and Chief  Executive Officer |       | **Chief  Financial Officer** |
|                                   |       |                         |
| March 24, 2009                    |       |                         |
| Mississauga, Ontario                   |       |                         |

 

F-2

----

Table of Contents

 

**INDEPENDENT AUDITORS’ REPORT**

 

**To theShareholders of Hydrogenics Corporation**

 

We have completed integratedaudits of Hydrogenics Corporation’s 2008, 2007, and 2006 consolidated financialstatements and of its internal control over financial reporting as at December 31,2008. Our opinions, based on our audits, are presented below.

 

**Consolidatedfinancial statements**

 

We have audited theaccompanying consolidated balance sheets of Hydrogenics Corporation as at December 31,2008 and December 31, 2007, and the related consolidated statements ofoperations and deficit, shareholder’s equity and cash flows for each of theyears in the three year period ended December 31, 2008. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits ofthe Company’s financial statements in accordance with Canadian generallyaccepted auditing standards and the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform an audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. A financial statement audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as at December 31,2008 and December 31, 2007 and the results of its operations and its cashflows for each of the years in the three year period ended December 31, 2008in accordance with Canadian generally accepted accounting principles.

 

**Internalcontrol over financial reporting**

 

We have also auditedHydrogenics Corporation’s internal control over financial reporting as at December 31,2008, based on criteria established in *InternalControl - Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in Management’s Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the effectiveness ofthe Company’s internal control over financial reporting based on our audit.

 

We conducted our audit ofinternal control over financial reporting in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considernecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that: (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

F-3

----

Table of Contents

 

In our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as at December 31, 2008 based on criteria established inInternal Control —Integrated Framework issued by the COSO.

 

Chartered Accountants, LicensedPublic Accountants

 

**March 24, 2009**

Toronto, Ontario

 

**Comments byIndependent Auditor on Canada — US Reporting Difference**

 

In the United States, reportingstandards for auditors require the addition of an explanatory paragraph (followingthe opinion paragraph) when the financial statements are affected by conditionsand events that cast substantial doubt on the company’s ability to continue asa going concern, such as those described in Note 1 to the 2008 consolidatedfinancial statements of Hydrogenics Corporation. Our report to the shareholderson the consolidated financial statements dated March 24, 2009 is expressedin accordance with Canadian reporting standards which do not permit a referenceto such events and conditions in the auditors’ report when these are adequatelydisclosed in the financial statements.

 

Chartered Accountants, LicensedPublic Accountants

 

**March 24, 2009**

Toronto, Ontario

 

F-4

----

Tableof Contents

 

**CONSOLIDATEDFINANCIAL STATEMENTS**

 

**TABLE OFCONTENTS**

 
| #          |       | **Note**                                                                       |       | **Description**                                                                                                                                             |       | **Page**   |
|------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|       | ** ** | ** **                                                                     | ** ** | ** **                                                                                                                                                  | ** ** | ** ** |
| 1          |       | **Description  of Business and Going Concern**                                 |       | Summary of Business and  Going Concern.                                                                                                                     |       | F-10       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 2          |       | **Summary  of Significant Accounting Policies**                                |       | Summary review of  accounting principles and the methods used in their application by the  Corporation.                                                     |       | F-10       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 3          |       | **New  Accounting Standards**                                                  |       | Summary review of  generally accepted accounting principle developments that do, will or may,  affect the Corporation.                                      |       | F-14       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 4          |       | **Risk  Managemnet Arising from Financial Instruments**                        |       | Summary review of the  Corporation’s exposure to risks arising from financial instruments.                                                             |       | F-16       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 5          |       | **Business  Streamlining Innitiatives and Wind up of Test Equipment Business** |       | Summary review of the  Corporation’s business streamlining activities and decision to Wind up our  Test Equipment Business.                            |       | F-18       |
| ** ** |       |                                                                           |       |                                                                                                                                                        |       |       |
| 6          |       | **Goodwill  and Impariment Charges**                                           |       | Summary review of the  Corporation’s 2005 acquisition of Stuart Energy Systems Corporation and  Greenlight Power Technologies, Inc.               |       | F-19       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 7          |       | **Accounts  Receivable**                                                       |       | Summary schedule of  accounts receivable.                                                                                                                   |       | F-19       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 8          |       | **Inventory**                                                                  |       | Summary schedule of items  comprising inventory.                                                                                                            |       | F-19       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 9          |       | **Property,  Plant and Equipment**                                             |       | Summary schedule of items  comprising property, plant & equipment.                                                                                 |       | F-20       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 10         |       | **Intangible  Assets**                                                         |       | Summary schedule of  intangible assets and related disclosures.                                                                                             |       | F-20       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 11         |       | **Accounts  Payable and Accrued Liabilities**                                  |       | Summary schedule of items  comprising accounts payable and accrued liabilities.                                                                             |       | F-21       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 12         |       | **Long-term  Debt**                                                            |       | Summary schedule of  long-term debt and related disclosures.                                                                                                |       | F-21       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 13         |       | **Employee  Stock-Based Compensation**                                         |       | Summary schedules and  review of compensation arising from share options awards, deferred share  units and restricted share units.                          |       | F-22       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 14         |       | **Research  and Product Development**                                          |       | Summary schedule of items  comprising research and product development expenses and funding.                                                                |       | F-23       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 15         |       | **Commitments**                                                                |       | Summary review of  commitments and lease obligations.                                                                                                       |       | F-24       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 16         |       | **Contingencies**                                                              |       | Summary review of  contingent liabilties and guarantees.                                                                                                    |       | F-24       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 17         |       | **Lines of  Credit**                                                           |       | Summary review of bank  facilities.                                                                                                                         |       | F-25       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 18         |       | **RelatedParty  Transactions**                                                 |       | Summary review of  transactions with non arm’s length parties                                                                                          |       | F-25       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 19         |       | **Income  Taxes**                                                              |       | Summary reconciliations of  statutory rate income tax expense to provisions for income taxes and analyses  of future income taxes.                          |       | F-25       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 20         |       | **Net Loss  Per Share**                                                        |       | Summary of per share  calculation methods.                                                                                                                  |       | F-26       |
|       | ** ** | ** **                                                                     | ** ** |                                                                                                                                                        |       |       |
| 21         |       | **Changes  in Non-Cash Working Capital**                                       |       | Summary of the changes in  components of the net change in non-cash working capital.                                                                        |       | F-27       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 22         |       | **Segmented  Financial Information**                                           |       | Summary disclosure of  segmented information regularly reported to the Corporation’s Chief Operating  Decision Maker.                                  |       | F-27       |
|       |       |                                                                           |       |                                                                                                                                                        |       |       |
| 23         |       | **Differences  between Canadian and United States Accounting Principles**      |       | Summary schedules and  review of differences between Canadian and United States generally accepted  accounting principles as they apply to the Corporation. |       | F-30       |

 

F-5

----

Tableof Contents

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 
| **HYDROGENICS CORPORATION**     |
|---------------------------------|
| **CONSOLIDATED BALANCE SHEETS** |
| (in  thousands of US dollars)   |

 
| ** **                                                  | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------|------------|----------|------------|------------|------------|
| **ASSETS**                                                  |       |     |       |       |       |
| **Current assets**                                          |       |     |       |       |       |
| Cash and cash equivalents                                   |       | $        | 21,601     |       | $          | 15,460 |   |
| Restricted cash                                             |       | 1,130    |       | —     |       |
| Short-term investments                                      |       | —   |       | 15,032     |       |
| Accounts receivable (note 7)                                |       | 3,974    |       | 12,713     |       |
| Grants receivable                                           |       | 505      |       | 850        |       |
| Inventories (note 8)                                        |       | 10,101   |       | 12,659     |       |
| Prepaid expenses                                            |       | 1,161    |       | 1,077      |       |
|                                                        |       | 38,472   |       | 57,791     |       |
| **Property, plant and equipment**(note  9)                  |       | 4,082    |       | 4,847      |       |
| **Intangible assets**(note  10)                             |       | —   |       | 249        |       |
| **Goodwill**(note 6)                                        |       | 5,025    |       | 5,025      |       |
| **Other non-current assets**                                |       | —   |       | 28         |       |
|                                                        |       | $        | 47,579     |       | $          | 67,940 |   |
| **LIABILITIES**                                             |       |     |       |       |       |
| **Current liabilities**                                     |       |     |       |       |       |
| Accounts payable and accrued liabilities  (notes 11 and 18) |       | $        | 17,298     |       | $          | 18,166 |   |
| Unearned revenue                                            |       | 4,785    |       | 9,042      |       |
|                                                        |       | 22,083   |       | 27,208     |       |
| **Long-term debt**(note  12)                                |       | —   |       | 11         |       |
| **Deferred research and development grants**                |       | 13       |       | 337        |       |
|                                                        |       | 22,096   |       | 27,556     |       |
| **Shareholders’ Equity**                               |       |     |       |       |       |
| Common shares                                               |       | 307,000  |       | 306,872    |       |
| Contributed surplus                                         |       | 16,300   |       | 15,606     |       |
| Deficit                                                     |       | (291,420 | )          | (277,101   | )          |
| Accumulated other comprehensive loss                        |       | (6,397   | )          | (4,993     | )          |
| Total deficit and accumulated other  comprehensive loss     |       | (297,817 | )          | (282,094   | )          |
|                                                        |       | 25,483   |       | 40,384     |       |
| ** **                                                  | ** ** | **$**    | **47,579** | ** ** | **$**      | **67,940** |   |

 

Going concern (note 1)

Commitments and contingencies(notes 15 and 16)

The accompanying notes froman integral part of these Consolidated Financial Statements.

 
|                         |   |                         |
|-------------------------|--------|-------------------------|
| Norman Seagram          |   | Douglas Alexander       |
| Chairman                |   | Director                |
| Hydrogenics Corporation |   | Hydrogenics Corporation |

 

F-6

----

Table of Contents

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**HYDROGENICSCORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands of US dollars,except for share and per share amounts)

 
| ** **                                                       | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Revenues**                                                     |       | $          | 39,340     |       | $          | 37,990     |       | $ | 30,059 |   |
| **Cost of revenues**                                             |       | 31,446     |       | 33,601     |       | 29,360     |       |
|                                                             |       | 7,894      |       | 4,389      |       | 699        |       |
| **Operating expenses**                                           |       |       |       |       |       |       |       |
| Selling, general and administrative                              |       | 15,022     |       | 24,006     |       | 27,891     |       |
| Research and product development (note 14)                       |       | 7,296      |       | 9,690      |       | 9,379      |       |
| Windup of test equipment business (note 5)                       |       | —     |       | 2,016      |       | —     |       |
| Amortization of property, plant and  equipment                   |       | 855        |       | 903        |       | 1,285      |       |
| Amortization of intangible assets                                |       | 249        |       | 251        |       | 7,139      |       |
| Impairment of intangible assets and  goodwill (notes 6 and 10)   |       | —     |       | —     |       | 90,834     |       |
|                                                             |       | 23,422     |       | 36,866     |       | 136,528    |       |
|                                                             |       |       |       |       |       |       |       |
| **Loss from operations**                                         |       | (15,528    | )          | (32,477    | )          | (135,829   | )          |
| **Other income**  (expenses)                                     |       |       |       |       |       |       |       |
| Gain on sale of assets                                           |       | 44         |       | —     |       | 477        |       |
| Loss on disposal of property, plant and  equipment (note 5)      |       | —     |       | (308       | )          | —     |       |
| Provincial capital tax                                           |       | 170        |       | (127       | )          | (42        | )          |
| Interest, net                                                    |       | 923        |       | 2,249      |       | 3,551      |       |
| Foreign currency gains                                           |       | 188        |       | 2,617      |       | 904        |       |
|                                                             |       | 1,325      |       | 4,431      |       | 4,890      |       |
|                                                             |       |       |       |       |       |       |       |
| **Loss before income taxes**                                     |       | (14,203    | )          | (28,046    | )          | (130,939   | )          |
| **Current income tax expense**  (recovery) (note 19)             |       | 116        |       | 22         |       | (180       | )          |
| **Net loss for the year**                                        |       | $          | (14,319    | )          | $          | (28,068    | )          | $ | (130,759 | ) |
| ** **                                                       |       |       |       |       |       |       |       |
| **Net loss per share**                                           |       |       |       |       |       |       |       |
| Basic and diluted (note 20)                                      |       | $          | (0.16      | )          | $          | (0.31      | )          | $ | (1.42 | ) |
| Shares used in calculating basic and diluted  net loss per share |       | 92,080,656 |       | 91,797,911 |       | 91,816,049 |       |

 

The accompanying notes form anintegral part of these Consolidated Financial Statements.

 

F-7

----

Table of Contents

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**HYDROGENICSCORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands of US dollars)

 
| ** **                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **CASH AND CASH EQUIVALENTS PROVIDED BY (USED  IN):**                   |       |     |       |     |       |     |       |
| **Operating activities**                                                |       |     |       |     |       |     |       |
| Net loss for the year                                                   |       | $        | (14,319    | )        | $          | (28,068  | )          | $ | (130,759 | ) |
| Items not affecting cash                                                |       |     |       |     |       |     |       |
| Amortization of property, plant and  equipment                          |       | 1,106    |       | 1,611    |       | 1,948    |       |
| Amortization of intangible assets                                       |       | 249      |       | 251      |       | 7,139    |       |
| Impairment of intangible assets and  goodwill                           |       | —   |       | —   |       | 90,834   |       |
| Unrealized foreign exchange (gains) losses                              |       | 695      |       | 29       |       | (74      | )          |
| Imputed interest on long-term debt                                      |       | —   |       | —   |       | 1        |       |
| Non-cash consulting fees                                                |       | —   |       | —   |       | 39       |       |
| Stock-based compensation                                                |       | 694      |       | 1,553    |       | 1,832    |       |
| Gain on Sale of assets                                                  |       | (44      | )          | —   |       | (477     | )          |
| Loss on disposal of property, plant and  equipment                      |       | —   |       | 308      |       | —   |       |
| Net change in non-cash working capital  (note 21)                       |       | 4,817    |       | (4,100   | )          | 5,029    |       |
|                                                                    |       | (6,802   | )          | (28,416  | )          | (24,488  | )          |
| **Investing activities**                                                |       |     |       |     |       |     |       |
| Decrease (increase) in short-term  investments                          |       | 15,032   |       | 39,318   |       | 26,046   |       |
| Increase in restricted cash                                             |       | (1,130   | )          | —   |       | —   |       |
| Purchase of property, plant and equipment                               |       | (885     | )          | (1,331   | )          | (1,701   | )          |
| Proceeds from sale of assets                                            |       | 44       |       | —   |       | 477      |       |
|                                                                    |       | 13,061   |       | 37,987   |       | 24,822   |       |
| **Financing activities**                                                |       |     |       |     |       |     |       |
| Repayment of long-term debt                                             |       | (11      | )          | (83      | )          | (193     | )          |
| Deferred research and development grant                                 |       | (235     | )          | 204      |       | (17      | )          |
| Common shares issued, (purchased and  cancelled), net of issuance costs |       | 128      |       | (169     | )          | 419      |       |
|                                                                    |       | (118     | )          | (48      | )          | 209      |       |
| **Increase (decrease) in cash and cash equivalents  during the year**   |       | 6,141    |       | 9,523    |       | 543      |       |
| **Cash and cash equivalents - Beginning of  year**                      |       | 15,460   |       | 5,937    |       | 5,394    |       |
| **Cash and cash equivalents - End of year**                             |       | $        | 21,601     |     | $          | 15,460   |       | $ | 5,937 |   |
| **Supplemental disclosure**                                             |       |     |       |     |       |     |       |
| Interest paid                                                           |       | $        | 17         |     | $          | 52       |       | $ | 80 |   |
| Income taxes paid                                                       |       | 118      |       | 63       |       | —   |       |

 

The accompanying notes form anintegral part of these Consolidated Financial Statements.

 

F-8

----

Table of Contents

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**HYDROGENICSCORPORATION**

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

(in thousands of US dollars, exceptfor share and per share amounts)

 
| ** **                                        | ** ** | ** **            | ** ** | ** **      | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------|------------|-------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **            | ** ** | ** **      | ** ** | ** **  | ** ** | ** **        | ** ** | **other**              | ** ** | **Total**  | ** ** |
| ** **                                        | ** ** | **Common share** | ** ** | **Contributed** | ** ** | ** **  | ** ** | **comprehensive** | ** ** | **shareholders’** | ** ** |
| ** **                                        | ** ** | **Number**            | ** ** | **Amount**      | ** ** | **surplus** | ** ** | **Deficit**       | ** ** | **loss**               | ** ** | **equity** | ** ** |
| **Balance at Dec. 31, 2005**                 |       | 91,679,670            |       | $               | 306,957    |        | $          | 11,847            |       | $                      | (118,274   | )          | $          | (5,023 | ) | $ | 195,507 |   |
| Comprehensive 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             |       |        |       |              |       |                   |       | 419        |       |
| Stock-based consulting expense                    |       | —                |       | —          |       | 39          |       | —            |       | —                 |       | 39         |       |
| Employee Stock-based compensation expense         |       | —                |       | —          |       | 1,832       |       | —            |       | —                 |       | 1,832      |       |
| **Balance at Dec. 31, 2006**                 |       | 91,916,466            |       | $               | 307,376    |        | $          | 13,718            |       | $                      | (249,033   | )          | $          | (5,304 | ) | $ | 66,757 |   |
| Comprehensive loss:                               |       |                  |       |            |       |        |       |              |       |                   |       |       |       |
| Net loss for the year                             |       | —                |       | —          |       | —      |       | (28,068           | )          | —                 |       | (28,068    | )          |
| Foreign currency translation adjustments          |       | —                |       | —          |       | —      |       | —            |       | 311                    |       | 311        |       |
| **Comprehensive loss**                            |       |                  |       |            |       |        |       |              |       |                   |       | (27,757    | )          |
| Shares returned to treasury                       |       | (150,775              | )          | (504            | )          | 335         |       | —            |       | —                 |       | 169        |       |
| Employee Stock-based compensation expense         |       | —                |       | —          |       | 1,553       |       | —            |       | —                 |       | 1,553      |       |
| **Balance at Dec. 31, 2007**                 |       | 91,765,691            |       | $               | 306,872    |        | $          | 15,606            |       | $                      | (277,101   | )          | $          | (4,993 | ) | $ | 40,384 |   |
| Comprehensive loss:                               |       |                  |       |            |       |        |       |              |       |                   |       |       |       |
| Net loss for the year                             |       | —                |       | —          |       | —      |       | (14,319           | )          | —                 |       | (14,319    | )          |
| Foreign currency translation adjustments          |       | —                |       | —          |       | —      |       | —            |       | (1,404                 | )          | (1,404     | )          |
| **Comprehensive loss**                            |       |                  |       |            |       |        |       |              |       |                   |       | (15,723    | )          |
| Issuance of common shares on exercise of  options |       | 639,980               |       | 128             |       | —      |       | —            |       | —                 |       | 128        |       |
| Adjustment for partial shares                     |       | (5                    | )          | —          |       | —      |       | —            |       | —                 |       | —     |       |
| Employee Stock-based compensation expense         |       | —                |       | —          |       | 694         |       | —            |       | —                 |       | 694        |       |
| **Balance at Dec. 31, 2008**                 |       | 92,405,666            |       | $               | 307,000    |        | $          | 16,300            |       | $                      | (291,420   | )          | $          | (6,397 | ) | $ | 25,483 |   |

 

The authorized capital stock ofthe Corporation consists of an unlimited number of common shares and anunlimited number of preferred shares in series.

 

The accompanying notes form anintegral part of these Consolidated Financial Statements.

 

F-9

----

Tableof Contents

 

**NOTES TO CONSOLIDATED****FINANCIAL STATEMENTS**

 

**NOTE 1 -DESCRIPTION OF BUSINESS AND GOING CONCERN**

 

Hydrogenics Corporation(“Hydrogenics” or the “Corporation”), together with its subsidiaries, designs,develops and manufactures hydrogen generation products based on waterelectrolysis technology and fuel cell products based on proton exchangemembrane, or PEM, technology.

 

While the accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and liquidation of liabilitiesduring the normal course of operations, there are material uncertaintiesrelated to certain adverse conditions and events that cast significant doubt onthe validity of this assumption. The Corporation has not yet realizedconsistent profitable operations and continues to use cash to fund itsoperations. The Corporation’s ability to continue as a going concern is dependenton the successful execution of its business plan which involves: (i) securingadditional financing to fund its operations; (ii) advancing productdesigns for efficiency, durability, cost reduction and entry into complimentarymarkets; (iii) increasing market penetration and sales; (iv) activelymanaging its liquidity; and (v) retaining and engaging staff. At present, thesuccess of these initiatives cannot be assured due to the materialuncertainties attributed to the Corporation’s ability to obtain financing andmeet its revenue targets. Given the condition of the global economy and thecondition of the current global credit markets, markets for the Corporation’sproducts may develop more slowly than anticipated, current and potentialcustomers may delay, reduce or cancel purchases and revenues would therefore beless than anticipated. Also the Corporation may not be able to raise additionalcapital, or do so on acceptable terms. These material uncertainties are furtherdescribed in the three risk factors in “Item 3. Key Information — Risk Factors —Selected Risk Factors Related to Our Financial Condition as of December 31,2008” in the annual report on Form 20-F. The consolidated financial statementsdo not include any adjustments or disclosures that may result from theCorporation’s inability to continue as a going concern. If the going concern assumptionwere not appropriate for these consolidated financial statements, adjustmentsmay be necessary in the carrying values of assets and liabilities and thereported expenses and balance sheet classifications, such adjustments could bematerial.

 

**NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation**

 

The accompanying consolidatedfinancial statements of Hydrogenics and its subsidiaries have been prepared inaccordance with Canadian generally accepted accounting principles (“CanadianGAAP”) which, in the case of the Corporation, conform in all material respectswith accounting principles generally accepted in the United States (“U. S. GAAP”),except as outlined in note 23.

 

**Principlesof Consolidation**

 

The consolidated financialstatements include the accounts of the Corporation and its subsidiaries, whichare wholly owned. All intercompany transactions and balances have beeneliminated on consolidation.

 

**Use ofEstimates**

 

The preparation ofconsolidated financial statements in accordance with Canadian GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the year. Actual results coulddiffer from those estimates.

 

Significant estimates made bythe Corporation include allowances for the fair value of goodwill, warrantyprovisions, stock-based compensation, potentially uncollectible accountsreceivable, provisions for inventory which is carried in excess of netrealizable value, and provisions for costs to complete contracts in progressand valuation allowances for future income tax assets.

 

**Cash andCash Equivalents**

 

Cash and cash equivalentsconsist of cash on deposit and highly liquid short-term interest bearingsecurities with maturities at the date of purchase of less than 90 days. Cashand cash equivalents are designated as held-for-trading and carried at fairvalue. Changes in fair value are recorded in earnings.

 

F-10

----

Tableof Contents

 

**NOTES TOCONSOLIDATED****FINANCIALSTATEMENTS**

 

**RestrictedCash**

 

Restricted cash consists ofcash on deposit and highly liquid short-term interest bearing securities withmaturities at the date of purchase of less than 90 days and are carried atamortized cost using the effective interest rate method. These instruments areheld as partial security for standby letters of credit and letters of guarantee.Restricted cash is designated as held-for-trading and carried at fair value. Changesin fair value are recorded in earnings.

 

**Short-termInvestments**

 

Short-term investmentsconsisted of interest bearing securities with original terms to maturity ofless than one year and are classified as held-to-maturity. As a result, short-terminvestments were carried at amortized cost using the effective interest ratemethod. The Corporation had the intention and the ability to hold thesesecurities to maturity. Transaction costs were recognized in net loss whenincurred.

 

**Inventories**

 

Raw materials, work-in-progressand finished goods are valued at the lower of cost, determined on a first-infirst-out basis, and net realizable value. Inventory costs include the cost ofmaterial, labour, variable overhead and an allocation of fixed manufacturingoverhead including amortization based on normal production volumes.

 

**Property, Plantand Equipment**

 

Property, plant and equipmentare recorded at cost less accumulated amortization. Property, plant andequipment are amortized from the date of acquisition or, in respect ofinternally constructed assets, from the time an asset is substantiallycompleted and ready for use. The cost of internally constructed assets includesmaterials, labour and directly attributable overhead costs. Amortization iscomputed using the declining balance method as follows:

 
| Test equipment                 |   | 30% per annum |   |
|--------------------------------|--------|---------------|--------|
| Computer hardware and software |   | 30% per annum |   |
| Furniture and equipment        |   | 20% per annum |   |
| Automobiles                    |   | 30% per annum |   |

 

Leaseholdimprovements are amortized on a straight-line basis over the term of the lease.

 

The Corporation reviews therecoverability of the carrying amount of property, plant and equipment whenevents or circumstances indicate that the carrying amounts may not berecoverable. This evaluation is based on projections of future undiscounted netcash flows. The total of these projected net cash flows is referred to as the “netrecoverable amount.” If the net recoverable amount is less than the carryingvalue, the asset is written down to fair value.

 

**Goodwilland Intangible Assets**

** **

**Goodwill**

 

Goodwill represents theexcess of purchase price over the fair value of identifiable assets acquired ina business combination accounted for using the purchase method of accounting. Goodwillis not amortized but is subject to fair value impairment tests on at least anannual basis and, additionally, whenever events and changes in circumstancesindicate that the carrying value might not be recoverable. Impairment ofgoodwill is tested at the reporting unit level by comparing the reporting unit’scarrying amount, including goodwill, to the fair value of the reporting unit. Thefair values of the reporting units are estimated using a combination of theincome or discounted cash flows approach and the market approach, which utilizescomparable companies’ data. If the carrying amount of the reporting unitexceeds its fair value, then a second step is performed to determine the amountof impairment loss, measured as the amount by which the carrying value of thereporting unit’s goodwill exceeds its fair value, if any. Any impairment losswould be expensed in the consolidated statements of operations.

 

F-11

----

Tableof Contents

 

**NOTES TOCONSOLIDATED****FINANCIALSTATEMENTS**

 

**Intangibleassets with finite useful lives**

 

The Corporation’s intangibleassets are all considered to have finite useful lives and are amortized basedon their estimated useful lives as follows:

 
| Intellectual property         |   | 50% per annum declining balance |   |
|-------------------------------|--------|---------------------------------|--------|
| Management services contracts |   | 50% per annum declining balance |   |
| Product technology            |   | 4 - 7 years straight-line       |   |
| Customer relationships        |   | 8 years straight-line           |   |
| Trade names                   |   | 3 years straight-line           |   |
| ISO certifications            |   | 1 year straight-line            |   |

 

Management reviews theamortization methods and useful life estimates for these intangible assetsannually.

 

The Corporation reviews thecarrying amount of intangible assets with finite lives when events or circumstancesindicate that the carrying amount may not be recoverable. This evaluation isbased on projections of future undiscounted net cash flows. The total of theseprojected net cash flows is referred to as the “net recoverable amount.” If thenet recoverable amount is less than carrying value, the asset is written downto fair value.

 

**RevenueRecognition**

 

Revenues from the sale ofequipment are recognized when there is persuasive evidence of an arrangement, goodshave been delivered, the amount is fixed or determinable, and collection isreasonably assured. When customer acceptance clauses are considered to besubstantive, recognition of revenue is deferred until customer acceptance isreceived. If delivery has not occurred, the Corporation will recognize revenueprovided that all other criteria are met and the risks of ownership have passedto the customer, the customer has a fixed commitment to purchase the goods, thecustomer requests that the delivery not occur until a later date, there is afixed schedule for delivery of the goods, the Corporation has not retained anyspecific performance obligations such that the earnings process is not complete,the ordered goods have been segregated from our inventory and is not subject tobeing used to fill other orders and the product is complete and ready forshipment.

 

Revenues from long-termcontracts are determined under the percentage-of-completion method wherebyrevenues are recognized on a pro-rata basis in relation to contract costsincurred. Costs and estimated profit on contracts-in-progress in excess ofamounts billed are reflected as unbilled revenues. Losses, if any, arerecognized immediately.

 

Equipment leases thattransfer substantially all of the benefits and risks of ownership to customersare classified as sales-type leases in accordance with The Canadian Instituteof Chartered Accountants (“CICA”) Handbook Section 3065, “Leases.”

 

Revenues relating toengineering and testing services are recognized as services are rendered. Cashreceived in advance of revenue being recognized on contracts is classified asunearned revenue.

 

The Corporation also entersinto transactions that represent multiple-element arrangements, which mayinclude any combination of equipment and service. These multiple-element arrangementsare assessed to determine whether they can be separated into more than one unitof accounting or element for the purpose of revenue recognition. When theappropriate criteria for separating revenue into more than one unit ofaccounting is met and there is objective evidence of the fair value for allunits of accounting or elements in an arrangement, the arrangementconsideration is allocated to the separate units of accounting or elementsbased on each unit’s relative value. This objective evidence of fair value isestablished through prices charged for each revenue element when that elementis sold separately. The revenue recognition policies described above are thenapplied to each unit of accounting.

 

**ProductWarranties**

 

The Corporation typicallyprovides a warranty for parts and/or labour for up to one year or based oncertain operating specifications such as hours of operation. Warranty costprovisions are based on management’s best estimates of such costs, taking intoaccount the specific arrangements of the transaction, past history and expectedfuture performance of products.

 

F-12

----

Tableof Contents

 

**NOTES TOCONSOLIDATED****FINANCIALSTATEMENTS**

 

**ResearchAnd Product Development Costs**

 

Research costs and costsincurred in applying for patents and licenses are expensed as incurred. Productdevelopment costs are expensed as incurred until the product or process isclearly defined and the associated costs can be identified, technicalfeasibility is reached, there is an intention to produce or market the product,the future market is clearly defined and adequate resources exist or areexpected to be available to complete the project. To date, no productdevelopment costs have been capitalized.

 

Funding for research andproduct development includes government and non-government research and productdevelopment support. Research and product development support is recognized asthe applicable costs are incurred unless it is for reimbursement of an asset, inwhich case it is accounted for as a reduction in the cost of the applicableasset.

 

**Stock-BasedCompensation**

 

The Corporation hasstock-based compensation plans, which are described in note 13. The Corporationestimates the fair value of stock-based compensation to employees and directorsand expenses the fair value over the estimated vesting period of the stockoptions with the off-set being recorded in contributed surplus. Any considerationpaid by employees or directors on the exercise of stock options or purchase ofstock is credited to share capital together along with any previouslyrecognized compensation expense. If shares or stock options are repurchasedfrom employees or directors, the excess of the consideration paid over thecarrying amount of the shares or stock options cancelled is charged to deficit.Forfeitures of stock-based compensation awards are accounted for in the periodin which the forfeiture occurs.

 

**Deferred ShareUnits**

 

The fair value of theCorporation’s deferred share units is charged to selling, general andadministrative expenses using the graded vesting method. Since the deferredshare units will be settled in cash, the intrinsic value of the vested shareunits is revalued each quarter until the settlement date. The Corporation hasset up a liability in the consolidated balance sheets, included within accountspayable and accrued liabilities, for the total intrinsic value of the vesteddeferred share units. Forfeitures of deferred share units are accounted for inthe period in which the forfeiture occurs.

 

**RestrictedShare Unit Plan**

 

The intrinsic value of theCorporation’s restricted share units are charged to selling, general andadministrative expenses using the graded vesting method. Since the restrictedshare units will be settled in cash, the intrinsic value of the vested shareunits is revalued each quarter until the settlement date. The Corporation hasset up a liability in the consolidated balance sheets, included within accountspayable and accrued liabilities, for the total intrinsic value of the vestedrestricted share units. Forfeitures of restricted share units are accounted forin the period in which the forfeiture occurs.

 

**IncomeTaxes**

 

Income taxes are recordedusing the liability method. Future income tax amounts arise due to temporarydifferences between the accounting and income tax basis of the Corporation’sassets and liabilities and the unused tax losses of the Corporation. Futureincome tax assets and liabilities are measured using substantively enactedincome tax rates in effect for the year in which those temporary differencesare expected to be recovered or settled. The effect on future income tax assetsand liabilities of a change in income tax rates and laws is recognized in theperiod that includes the date of substantive enactment. Future income taxassets are recognized to the extent that realization of such benefits isconsidered to be more likely than not.

 

**ForeignCurrency Translation**

 

Monetary assets andliabilities denominated in currencies other than the functional currency aretranslated at the rate of exchange in effect at the end of the period. Non-monetaryassets and liabilities are translated at historical rates of exchange. Revenueand expense items denominated in currencies other than the functional currencyare translated into functional currency at the average rate of exchange for theperiod, except for amortization, which is translated at historical rates. Resultantgains and losses are included in the results of operations.

 

Assets and liabilities of theCorporation’s Belgian subsidiary are considered to be self-sustaining and aretranslated into US dollars at the period-end exchange rates, and the results ofits operations are translated at the average rate of exchange for the period. Theresulting translation adjustments are accumulated in a separate component ofshareholders’ equity.

 

F-13

----

Tableof Contents

 

**NOTES TOCONSOLIDATED****FINANCIALSTATEMENTS**

 

The operations of theCorporation’s other subsidiaries are considered integrated with those of theCorporation and, accordingly, their accounts are translated into US dollarsusing the temporal method. Under this method, monetary assets and liabilitiesare translated using the period-end exchange rate, and non-monetary items aretranslated using historical rates of exchange. Revenues and expenses of thissubsidiary are translated at the average exchange rate for the period, exceptfor amortization, which is translated at historical rates of exchange.Resultant gains and losses are included in the results of operations.

 

**Net LossPer Share**

 

Basic net loss per share iscalculated based on the weighted average number of common shares outstandingfor the year. Diluted net loss per share is calculated using the daily weightedaverage number of common shares that would have been outstanding during theyear had all potential common shares been issued at the beginning of the yearor when the underlying options or warrants were granted, if later unlessanti-dilutive. The treasury stock method is used to determine the incrementalnumber of shares that would have been outstanding had the Corporation usedproceeds from the exercise of options and warrants to acquire common shares.

 

**FinancialInstruments**

 

All financial instruments aremeasured at fair value on initial recognition. After initial recognition, financialinstruments are measured at their fair values, except for financial assetsclassified as held to maturity or loans and receivables and other financialliabilities, which are measured at amortized cost.

 

**NOTE 3 – NEWACCOUNTING STANDARDS**

 

The Corporation has adoptedthe following changes to its accounting policies:

 

**(i)    Canadianstandards**

 

CICA Handbook Section 1535,“Capital Disclosures,” Section 3862 “Financial Instruments - Disclosures,”and Section 3863, “Financial Instruments - Presentation.” Section 1535establishes disclosure requirements about an entity’s capital and how it ismanaged. The purpose is to enable users of the financial statements to evaluateobjectives, policies and processes for managing capital. Sections 3862 and 3863replaced Section 3861, “Financial Instruments — Disclosure andPresentation,” revising and enhancing disclosure requirements while carryingforward its presentation requirements. These new sections place increasedemphasis on disclosure about the nature and extent of risks arising fromfinancial instruments and how the entity manages those risks. These sectionsapply to interim and annual financial statements relating to fiscal yearsbeginning on or after October 1, 2007. The Corporation has adopted thisnew guidance effective January 1, 2008. These standards changed thedisclosure provided by the Corporation.

 

In May 2007, the CICAissued Handbook Section 3031, “Inventories,” which replaced the existing Section 3030“Inventories.” The standard introduced changes to the measurement anddisclosure of inventory. This standard is effective for interim and annualperiods related to fiscal years beginning on or after January 1, 2008 withearlier application encouraged. The Corporation adopted this new guidanceeffective January 1, 2008. This standard did not have a material impact onits consolidated financial position, results of operations or cash flows; however,the Corporation now carries inventory at the lower of cost and net realizablevalue. Previously, the Corporation carried inventory at the lower of cost andreplacement cost.

 

In May 2007, theCanadian Accounting Standards Board (“AcSB”) amended Section 1400, “GeneralStandards of Financial Statement Presentation,” to change the guidance relatedto management’s responsibility to assess the ability of the entity to continueas a going concern. Management is required to make an assessment of an entity’sability to continue as a going concern and should take into account allavailable information about the future, which is at least, but is not limitedto, 12 months from the balance sheet date. Disclosure is required of materialuncertainties related to events or conditions that may cast significant doubtupon the entity’s ability to continue as a going concern. The Corporationadopted this new guidance effective January 1, 2008.

 

In January 2008, theCICA issued CICA Emerging Issues Committee (“EIC”) EIC-169 “Embedded ForeignCurrency Derivatives” (“EIC-169”). Guidance in EIC-169 should be appliedretrospectively to embedded foreign currency derivatives in host contracts thatare not financial instruments accounted for in accordance with Section 3855in financial statements issued for interim and annual periods ending on orafter March 15, 2008. This new EIC assists in the interpretation of thephrase “routinely denominated” as used in Section 3855 and also assists indetermining which factors can be used to determine whether a contract for thepurchase or sale of a non-financial item such as a commodity is routinelydenominated in a particular currency in commercial transactions around

 

F-14

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

the world. The Corporationadopted this standard effective January 1, 2008. The adoption of thisstandard did not have a materialimpact on the Corporation’s consolidated financial position, results ofoperations or cash flows.

 

**(ii)    USstandards**

 

The following changes onlyapply to note 23 of the consolidated financial statements.

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS157”). SFAS 157 establishes a framework for measuring the fair value of assetsand liabilities. This framework is intended to provide increased consistency inhow fair value determinations are made under various existing accountingstandards that permit, or in some cases require, estimates of fair market value.SFAS 157 also expands financial statement disclosure requirements about acorporation’s use of fair value measurements, including the effect of suchmeasures on earnings. This standard is effective for fiscal years beginningafter November 15, 2007. The Corporation adopted this new guidanceeffective January 1, 2008. This standard did not change the Corporation’sconsolidated financial position, results of operations or cash flows. Fornon-financial assets and non-financial liabilities, the standard is effectivefor financial statements issued for fiscal years beginning after November 15,2008. The Corporation plans to adopt this guidance effective January 1, 2009.The Corporation is currently assessing the effect this standard may have on theCorporation’s results of operations and consolidated financial position.

 

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities - Including an Amendment of FASB Statement No. 115”(“SFAS 159”). SFAS 159 is expected to expand the use of fair value accountingbut does not affect existing standards which require certain assets orliabilities to be carried at fair value. The objective of SFAS 159 is toimprove financial reporting by providing companies the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. Under SFAS 159, a Corporation may choose, at specified electiondates, to measure eligible items at fair value and report unrealized gains andlosses on items for which the fair value option has been elected in earnings ateach subsequent reporting date. SFAS 159, for financial assets and financialliabilities, is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The Corporation adopted this newguidance effective January 1, 2008. This standard did not have a materialaffect on the Corporation’s consolidated financial position, results ofoperations or cash flows.

 

**NewAccounting Standards**

 

The following changes will beadopted in the future.

 

**(i)      Canadianstandards**

 

In February 2008, theCICA issued Handbook Section 3064 “Goodwill and Intangible Assets,” whichreplaced existing Sections 3062 “Goodwill and Other Intangible Assets” and 3450“Research and Development Costs.” The new standard introduced changes torecognition, measurement and disclosure of goodwill and intangible assets. Theprovisions relating to the definition and initial recognition of intangibleassets are equivalent to the corresponding provisions of InternationalFinancial Reporting Standard IAS 38, “Intangible Assets.” The new standard alsoprovides guidance for the recognition of internally developed intangible assets,including assets developed from research and development activities, ensuringconsistent treatment of all intangible assets, whether separately acquired orinternally developed. Section 3064 applies to interim and annual financialstatements relating to fiscal years beginning on or after October 1, 2008with earlier adoption encouraged. The Corporation anticipates adopting this newguidance effective January 1, 2009. The Corporation is currently assessingthe effect this standard may have on the Corporation’s results of operationsand consolidated financial position.

 

In January 2009, theCICA issued Handbook Sections 1582 “Business Combinations”, 1601 “ConsolidatedFinancial Statements” and 1602 “Non-controlling interests”. These sectionsreplace the former CICA 1581, Business Combinations and CICA 1600, ConsolidatedFinancial Statements and establish a new section for accounting for anon-controlling interest in a subsidiary. CICA 1582 is effective for businesscombinations for which the acquisition date is on/after the beginning of thefirst annual reporting period beginning on/after January 1, 2011. CICA1601 and CICA 1602 apply to interim and annual consolidated financialstatements relating to years beginning on/after January 1, 2011. TheCorporation is currently assessing the effect these standards may have on theCorporation’s results of operations and consolidated financial position.

 

F-15

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**(iii)   USstandards**

 

The following changes willonly apply to note 23 of the consolidated financial statements.

 

In December 2007, theFASB issued Statement SFAS No. 141 (revised 2007), “BusinessCombinations,” which replacesSFAS No 141. The standard retains the purchase method of accounting foracquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized inthe purchase accounting. It also changes the recognition of assets acquired and liabilities assumedarising from contingencies, requires the capitalization of in-process researchand development at fair value,and requires the expensing of acquisition-related costs as incurred. SFAS No. 141Ris effective for the Corporationbeginning January 1, 2009 and will apply prospectively to businesscombinations completed on or after that date.

 

**NOTE 4 -RISK MANAGEMENT ARISING FROM FINANCIAL INSTRUMENTS**

 

For the year ended December 31,2008, the Corporation adopted the requirements of CICA Handbook Section 3862,“Financial Instruments - Disclosures,” which apply to fiscal years beginning onor after October 1, 2007. This section requires disclosures relating to: (i) thesignificance of financial instruments for financial position and performance; and(ii) the nature and extent of the Corporation’s exposure to risks arisingfrom financial instruments, including credit risk, liquidity risk, foreigncurrency risk and interest rate risk, and how the Corporation manages thoserisks.

 

Under Canadian GAAP, financialinstruments are classified into one of the following categories: (i) held-for-trading;(ii) held-to-maturity; (iii) available for sale; (iv) loans andreceivables; (v) and other financial liabilities. The following tablesummarizes information regarding the carrying value of the Corporation’sfinancial instruments:

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Held for trading (i)             |       | $        | 22,731     |     | $          | 15,460 |   |
| Held to maturity (ii)            |       | —   |       | 15,032   |       |
| Loans and receivables (iii)      |       | 4,479    |       | 13,563   |       |
| Other financial liabilities (iv) |       | 17,298   |       | 18,166   |       |
|                                  |            |          |            |          |            |  |  |

 

----

| (i)   |   | Includes cash and cash  equivalents and restricted cash                                  |
|-------|--------|------------------------------------------------------------------------------------------|
| (ii)  |   | Short-term investments                                                                   |
| (iii) |   | Includes accounts  receivable                                                            |
| (iv)  |   | Includes financial  liabilities included within accounts payable and accrued liabilities |

 

**Liquidity**

 

The Corporation has sustainedlosses and negative cash flows from operations since its inception. At December 31,2008, the Corporation had approximately $22,731 of cash and cash equivalentsand restricted cash. The Corporation’s approach to managing liquidity risk is toensure that it will have sufficient liquidity to meet liabilities when due. TheCorporation achieves this by maintaining sufficient cash and cash equivalentsand short-term investments. The Corporation monitors its financial position ona monthly basis and updates its expected use of cash resources based on thelatest available data.

 

There are uncertaintiesrelated to the timing and use of the Corporation’s cash resources. Note 1. Descriptionof Business and Going Concern, discloses the risks surrounding the timing andthe use of the Corporation’s cash resources.

 

**Credit risk**

 

Credit risk arises from thepotential that a counterparty will fail to perform its obligations. TheCorporation is exposed to credit risk from customers. At December 31, 2008,the Corporation’s two largest customers accounted for 18% (12% at December 31,2007) and 7% (5% at December 31, 2007) of revenues, respectively. In orderto minimize the risk of loss for trade receivables, the Corporation’s extensionof credit to customers involves a review and approval by senior management aswell as progress payments as contracts are executed. The majority of theCorporation’s sales are invoiced with payment terms between 30 and 60 days. TheCorporation’s objective is to minimize its exposure to credit risk fromcustomers in order to prevent losses on financial assets by performing regularmonitoring of overdue balances and provides allowance for potentiallyuncollectible accounts receivable.

 

F-16

----

Tableof Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

The Corporation reviews itstrade receivable accounts regularly and writes down their carrying values totheir expected realizable values by making an allowance for doubtfulreceivables as soon as the account is determined not to be fully collectible. Thisis done using management’s evaluation of the situation on a customer bycustomer basis. The Corporation’s assessment of outstanding receivables fromcustomers is primarily based on the Corporation’s assessment of the creditworthiness of the customer. The allowance is charged against earnings. Shortfallsin collections are applied against this provision. Estimates for the allowancefor doubtful debts are determined by a customer-by-customer evaluation ofcollectability at each balance sheet reporting date take into account theamounts that are past due and any available relevant information on thecustomers’ liquidity and going concern problems.

 

The Corporation’s tradereceivables have a carrying value of $3,661 as at December 31, 2008, representingthe maximum exposure to credit risk of those financial assets, exclusive of theallowance for doubtful accounts. Normal credit terms for amounts due fromcustomers call for payment within 30 to 60 days. An insignificant amount ofthese receivables were past due as at December 31, 2008.

 

The Corporation’s exposure tocredit risk for trade receivables by geographic area as at December 31, 2008was as follows:

 
| Europe        |   | 46  | % |
|---------------|--------|-----|---|
| United States |   | 13  | % |
| Asia          |   | 32  | % |
| Rest of world |   | 9   | % |
|          |   | 100 | % |

 

The activity of the allowance for doubtful accounts for the period isas follows:

 
| ** **                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Allowance for doubtful accounts — beginning  of period |       | $        | 351        |     | $          | 320 |   |
| Bad debt expense                                            |       | 126      |       | 191      |       |
| Write-off of bad debts                                      |       | (249     | )          | (160     | )          |
| Allowance for doubtful accounts — end of  period       |       | $        | 228        |     | $          | 351 |   |

 

The Corporation may also havecredit risk relating to cash and cash equivalents and restricted cash, which itmanages by dealing with large chartered Belgian, Canadian and German banks andinvesting in highly liquid investments. The Corporation’s objective is tominimize its exposure to credit risk in order to prevent losses on financialassets by placing its investments in lower risk bank acceptances of theseChartered banks. The Corporation’s cash and cash equivalents and restrictedcash carrying value is $22,731, representing the maximum exposure to creditrisk of these financial assets. Approximately 82% of the Corporation’s cash andrestricted cash at December 31, 2008 were held by four financialinstitutions. The Corporation’s exposure to credit risk relating to cash andcash equivalents and short-term investments, segmented by geographic area as atDecember 31, 2008, was as follows:

 
| Canada  |   | 37  | % |
|---------|--------|-----|---|
| Belgium |   | 54  | % |
| Germany |   | 9   | % |
|    |   | 100 | % |

 

**Foreigncurrency risk**

 

Foreign currency risk arisesbecause of fluctuations in exchange rates. The Corporation conducts asignificant portion of its business activities in foreign currencies, primarilyCanadian dollars and the euro. The Corporation’s objective in managing itsforeign currency risk is to minimize its net exposures to foreign currency cashflows by converting foreign denominated financial assets into the applicablefunctional currency of the subsidiary to the extent practical to match theobligations of its financial liabilities. Financial assets and financialliabilities denominated in foreign currencies will be affected by changes inthe exchange rate between

 

F-17

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

the US dollar and theseforeign currencies. The Corporation recognized foreign exchange gains in theyear ended December 31,2008 of $188 compared to foreign exchange gains of $2,617 in the yearended December 31, 2007.

 

If a shift in foreignexchange rates of 10% were to occur, the exchange gain or loss on the netfinancial assets could be plus or minus$1,704. This amount would be recorded in the consolidated statements ofoperations.

 

**Interestrate risk**

 

Interest rate risk arisesbecause of the fluctuation in market interest rates. The Corporation’s objectivein managing interest rate risk is to maximize the return on its cash and cashequivalents and restricted cash. The Corporation is subject to interest raterisk on its cash and cash equivalents and short-term investments; however, theCorporation does not have any long-term debt and hence is not subject tointerest rate risk from borrowings. If a shift in interest rates of 10% were tooccur, the impact on cash and cash equivalents, restricted cash, and short-terminvestments and the related net loss for the period could be plus or minus$100.

 

**Fair value**

 

The carrying value of cashand cash equivalents, restricted cash, accounts receivable, and accountspayable and accrued liabilities approximates their fair value given theirshort-term nature.

 

**Managementof capital**

 

The Corporation’s objectivein managing capital is to ensure sufficient liquidity to pursue its growthstrategy, fund research and product development, undertake selectiveacquisitions, while at the same time taking a conservative approach towardfinancial leverage and management of financial risk.

 

The Corporation’s capital iscomposed of share capital, contributed surplus, accumulated deficit and foreigncurrency translation adjustments included within accumulated othercomprehensive income (loss). The total capital as at December 31, 2008 is$25, 483. The Corporation’s primary uses of capital are to finance operatingcash flow, increases in non-cash working capital and capital expenditures. TheCorporation currently funds these requirements from internally generated cashflows and cash raised through past share issuances. The Corporation’sobjectives when managing capital are to ensure the Corporation will continue tohave enough liquidity so that it can provide its products and services to itscustomers and returns to its shareholders.

 

TheCorporation governs its capital on the basis of the adequacy of its cashresources to fund its business plan. In order to maximize its ability tofinance the Corporation’s ongoing growth, the Corporation does not currentlypay a dividend to holders of its common shares.

 

**NOTE 5 — BUSINESSSTREAMLINING INITIATIVES AND WIND UP OF TEST EQUIPMENT BUSINESS**

 

On March 20, 2007 and November 6,2007, the Corporation’s Board of Directors approved a restructuring andstreamlining of the Corporation’s operations in order to reduce its overallcost structure. In March 2007, the Corporation recorded a $2,100 chargefor severance and related expenses, which are included in selling, general andadministrative expenses. The major part of this charge pertained to the PowerSystems business segment.

 

In November 2007, theCorporation recorded an additional $1,990 charge for severance and relatedexpenses for these initiatives, which are included in selling, general andadministrative expenses as at December 31, 2007. These amounts werecharged to the business segments as follows: $846 for Power Systems; $142 forOnSite Generation; and $1,002 for Corporate and Other business segments. As at December 31,2008, the Corporation had paid $1,981 in respect of these charges. Theremaining balance of $9 at December 31, 2008 is anticipated to be paid in2009.

 

On November 7, 2007, theCorporation announced plans to wind up its fuel cell test products design, developmentand manufacturing business, due to lower than planned gross margin and growthprospects and not achieving certain operating targets. During the year ended December 31,2007, the Corporation incurred $2,016 in respect of severance and relatedexpenses, and the writeoff of inventory. Of the $2,016 recorded during the yearended December 31, 2007, no severance and related expenses remain unpaidat December 31, 2008.

 

F-18

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 6 -GOODWILL AND IMPAIRMENT CHARGES**

 

The Goodwill of $5,025relates to the OnSite Generation business acquisition in fiscal 2005.

 

During 2006, the Corporationperformed a comprehensive assessment of its business and operating plans. As aresult of theseassessments,and a resulting change in strategy, management revised its previous estimatesof the growth and development of its OnSite Generation business. In addition, management also determined thatthe revenues of the Test System business would be lower than previously anticipated as a resultof slower adoption of fuel cell technology in end user markets. Due to thesignificance of these changes,management performed an evaluation of the recoverability of the long-livedassets of the OnSite Generation andTest Systems segments and completed fair value impairment tests of the goodwillrelated to the OnSite Generation and Test Systems reporting units as at September 30, 2006, in addition toits annual impairment test at December 31, 2006.  

 

Based on the results of theseassessments, the Corporation recorded the following impairment charges in 2006:

 
| Goodwill of the OnSite Generation reporting  unit          |   | $      | 59,388 |   |
|------------------------------------------------------------|--------|--------|--------|--------|
| Intangible assets of the OnSite Generation  reporting unit |   | 26,333 |   |
| Goodwill of the Test Systems reporting unit                |   | 5,113  |   |
| **Total**                                                  |   | $      | 90,834 |   |

 

The fair value used in theimpairment charge calculations was determined using the Corporation’s bestestimates of future cash flows and considered the weighted average cost ofcapital for comparable companies.

 

The remaining identifiableintangible assets related to the Corporation’s OnSite Generation businesscomprised product technology, which continued to be amortized over its remaininguseful life.

 

**NOTE 7 -ACCOUNTS RECEIVABLE**

 
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Trade accounts receivable                             |       | $        | 3,661      |     | $          | 12,683 |   |
| Less: Allowance for doubtful accounts                 |       | (228     | )          | (351     | )          |
| Goods and services tax                                |       | 541      |       | 381      |       |
| Allowance for doubtful accounts – end of  period |       | $        | 3,974      |     | $          | 12,713 |   |

 

**NOTE 8 -INVENTORIES**

 
| ** **       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Raw materials    |       | $        | 4,938      |     | $          | 5,070 |   |
| Work-in-progress |       | 5,004    |       | 6,768    |       |
| Finished goods   |       | 159      |       | 821      |       |
|             |       | $        | 10,101     |     | $          | 12,659 |   |

 

During the year-ended December 31,2008, the Corporation recorded write-downs of approximately $1,298 (December 31,2007 – $811). During the period, approximately $29,851 of inventory wasexpensed in cost of sales (December 31, 2007 - $29,725).

 

F-19

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 9 -PROPERTY, PLANT AND EQUIPMENT**

 

As at December 31, 2008,the net book value of property, plant and equipment is as follows:

 
| ** **                     | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** **                   | ** ** |
|--------------------------------|------------|------------|------------|------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **Net book Value** | ** ** |
| Test equipment                 |       | $          | 6,250      |             | $          | 5,336                        |       | $ | 914 |   |
| Furniture and equipment        |       | 4,679      |       | 2,471            |       | 2,208                        |       |
| Computer hardware and software |       | 2,619      |       | 1,874            |       | 745                          |       |
| Leasehold improvements         |       | 1,000      |       | 799              |       | 201                          |       |
| Automobiles                    |       | 43         |       | 29               |       | 14                           |       |
|                           |       | $          | 14,591     |             | $          | 10,509                       |       | $ | 4,082 |   |

 

As at December 31, 2007,the net book value of property, plant and equipment is as follows:

 
| ** **                     | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** **                   | ** ** |
|--------------------------------|------------|------------|------------|------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **Net book Value** | ** ** |
| Test equipment                 |       | $          | 6,030      |             | $          | 4,544                        |       | $ | 1,486 |   |
| Furniture and equipment        |       | 4,192      |       | 2,141            |       | 2,051                        |       |
| Computer hardware and software |       | 2,829      |       | 1,870            |       | 959                          |       |
| Leasehold improvements         |       | 1,066      |       | 739              |       | 327                          |       |
| Automobiles                    |       | 69         |       | 45               |       | 24                           |       |
|                           |       | $          | 14,186     |             | $          | 9,339                        |       | $ | 4,847 |   |

 

Test equipment and furnitureand equipment under construction, as at December 31, 2008, not yet subjectto amortization amounted to $28 (2007 - $419). The net book value of equipmentunder capital lease as at December 31, 2008 was $33 (2007 - $49).

 

**NOTE 10 -INTANGIBLE ASSETS**

 

As at December 31, 2008,the carrying value of intangible assets is as follows:

 
| ** **         | ** ** | ** ** | ** ** | **Accumulated**         | ** ** | ** **                   | ** ** |
|--------------------|------------|------------|------------|-------------------------|------------|------------------------------|------------|
| ** **         | ** ** | ** ** | ** ** | **amortization**        | ** ** | ** **                   | ** ** |
| ** **         | ** ** | ** ** | ** ** | **and impairment** | ** ** | ** **                   | ** ** |
| ** **         | ** ** | **Cost**   | ** ** | **charge**              | ** ** | **Net book Value** | ** ** |
| Product technology |       | $          | 30,300     |                    | $          | 30,300                       |       | $ | — |   |
|                    |            |            |            |                         |            |                              |            |  |  |  |

 

As at December 31, 2007,the carrying value of intangible assets is as follows:

 
| ** **         | ** ** | ** ** | ** ** | **Accumulated**         | ** ** | ** **                   | ** ** |
|--------------------|------------|------------|------------|-------------------------|------------|------------------------------|------------|
| ** **         | ** ** | ** ** | ** ** | **amortization**        | ** ** | ** **                   | ** ** |
| ** **         | ** ** | ** ** | ** ** | **and impairment** | ** ** | ** **                   | ** ** |
| ** **         | ** ** | **Cost**   | ** ** | **charge**              | ** ** | **Net book Value** | ** ** |
| Product technology |       | $          | 30,300     |                    | $          | 30,051                       |       | $ | 249 |   |
|                    |            |            |            |                         |            |                              |            |  |  |  |

 

F-20

----

Tableof Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 11 -ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Trade accounts payable                      |       | $        | 4,506      |     | $          | 3,748 |   |
| Warranty liability accruals                 |       | 3,717    |       | 3,592    |       |
| Supplier accruals                           |       | 3,165    |       | 1,829    |       |
| Accrued payroll costs                       |       | 2,067    |       | 1,734    |       |
| Facility accruals                           |       | 1,400    |       | 1,975    |       |
| Severance and related compensation payments |       | 1,693    |       | 4,136    |       |
| Accrued professional fees                   |       | 433      |       | 487      |       |
| Provincial capital tax payable              |       | 25       |       | 195      |       |
| Current portion of long-term debt (note 11) |       | 10       |       | 16       |       |
| Other                                       |       | 282      |       | 454      |       |
|                                        |       | $        | 17,298     |     | $          | 18,166 |   |

 

Included within severance andrelated compensation payments is a post-retirement benefit obligation for$1,050. The liability is a defined benefit plan to be paid to a beneficiary. TheCorporation has valued the obligation based on estimates of future cash flows. Thekey assumptions used in this valuation are annual payments ($100) the expectedlife of the beneficiaries (approximately 11.5 years) and the discount rate (4%).The amount expensed in 2008 is $340.

 

Total severance and relatedexpenses included in Selling, General and Administration for 2008 was $nil (2007— $4,090).

 

Information regarding thechanges in the Corporation’s aggregate product warranty liabilities is asfollows for the year ended December 31, 2008:

 
| Balance, December 31, 2007                 |   | $      | 3,592  |   |
|-------------------------------------------------|--------|--------|--------|--------|
| Accruals for warranties issued during the  year |   | 2,332  |   |
| Settlements made during the year                |   | (1,499 | )      |
| Reversals of accruals during the year           |   | (708   | )      |
| Balance, December 31, 2008                 |   | $      | 3,717  |   |

 

**NOTE 12 -LONG-TERM DEBT**

 

The Corporation has variousequipment leases accounted for as capital leases. At December 31, 2008, theoutstanding amount payable, net of future payments representing interest, is$10 (2007 - $27). The Corporation has charged to expense interest of $1 in 2008(2007 - $2) on these capital leases at an effective weighted average interestrate of approximately 11% per annum.

 

The present value of futuredebt repayments is as follows:

 
| 2009                  |   | $   | 10     |   |
|-----------------------|--------|-----|--------|--------|
| Less: Current portion |   | (10 | )      |
|                  |   | $   | — |   |

 

F-21

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 13 - EMPLOYEESTOCK-BASED COMPENSATION**

 

**StockOption Plan**

 

During 2000, the Corporationadopted an employee stock option plan. As at December 31, 2008, the numberof common shares that may be issued under the stock option plan was 12,000,000.As at December 31, 2008, 3,144,340 common shares had been issued throughthe exercise of stock options under this plan. Up to 8,855,660 additionalcommon shares are available to be issued in connection with the exercise ofstock options. Of the 8,855,660 available common shares, 6,129,779 have beenissued as stock options that were outstanding at December 31, 2008. Alloptions are for a term of ten years from the date of grant and vest over fouryears unless otherwise determined by the Board of Directors.

 

A summary of the Corporation’semployee stock option plan activity is as follows:

 
| ** **                       | ** ** | **2008**           | ** ** | **2007**     | ** ** | **2006**           | ** ** |
|----------------------------------|------------|--------------------|------------|--------------|------------|--------------------|------------|
| ** **                       | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | ** **         | ** ** | **average**  | ** ** | ** **         | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                       | ** ** | ** **         | ** ** | **exercise** | ** ** | ** **         | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                       | ** ** | **Number**         | ** ** | **price**    | ** ** | **Number**         | ** ** | **price** | ** ** | **Number** | ** ** | **price** | ** ** |
| ** **                       | ** ** | **of shares** | ** ** | **(CAN$)**   | ** ** | **of shares** | ** ** | **(CAN$)** | ** ** | **of shares** | ** ** | **(CAN$)** | ** ** |
| Outstanding, beginning of year   |       | 6,932,303          |       | 4.05         |       | 6,893,353          |       | 4.85 |   | 6,243,753 |   | 5.22 |   |
| Granted                          |       | 1,300,004          |       | 0.58         |       | 1,644,960          |       | 1.17 |   | 1,470,400 |   | 3.16 |   |
| Exercised                        |       | (639,980           | )          | 0.20         |       | —             |       | — |   | (236,500 | ) | 2.01 |   |
| Forfeited                        |       | (1,374,858         | )          | 4.17         |       | (1,250,810         | )          | 4.72 |   | (584,300 | ) | 5.73 |   |
| Expired                          |       | (87,690            | )          | 7.36         |       | (355,200           | )          | 5.65 |   | — |   | — |   |
| Outstanding, end of year         |       | 6,129,779          |       | 3.64         |       | 6,932,303          |       | 4.05 |   | 6,893,353 |   | 4.85 |   |
| Options exercisable, end of year |       | 4,043,830          |       | 4.96         |       | 4,333,740          |       | 4.47 |   | 4,518,681 |   | 5.32 |   |

 

The following tablesummarizes information about the Corporation’s share options outstanding as at December 31,2008:

 

All options granted after November 1,2000, the date of the Corporation’s initial public offering, have an exerciseprice equal to the closing share price on the Toronto Stock Exchange the dayprior to the grant.

 
| ** **                        | ** ** | **Number**              | ** ** | **Weighted**              | ** ** | **Weighted**         | ** ** | **Number**              | ** ** | **Weighted**         | ** ** |
|-----------------------------------|------------|-------------------------|------------|---------------------------|------------|----------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **outstanding at** | ** ** | **average**               | ** ** | **average**          | ** ** | **exercisable at** | ** ** | **average**          | ** ** |
| ** **                        | ** ** | **December 31**    | ** ** | **remaining**             | ** ** | **share price** | ** ** | **December 31,**   | ** ** | **share price** | ** ** |
| **Exercise price CAN$** | ** ** | **2008**                | ** ** | **contractual life** | ** ** | **(CAN$)**           | ** ** | **2008**                | ** ** | **(CAN$)**           | ** ** |
| 0.01 - 0.29                       |       | 144,000                 |       | 1.07                      |       | 0.29                 |       | 144,000                 |       | 0.29                 |       |
| 0.30 - 1.00                       |       | 1,230,599               |       | 9.19                      |       | 0.58                 |       | 0                       |       | 0                    |       |
| 1.01 - 2.00                       |       | 1,652,375               |       | 7.55                      |       | 1.22                 |       | 1,044,186               |       | 7.15                 |       |
| 2.01 - 4.00                       |       | 631,050                 |       | 6.96                      |       | 3.22                 |       | 412,906                 |       | 6.28                 |       |
| 4.01 - 5.00                       |       | 597,800                 |       | 4.82                      |       | 4.47                 |       | 576,595                 |       | 4.47                 |       |
| 5.01 - 6.00                       |       | 516,008                 |       | 5.11                      |       | 5.70                 |       | 508,196                 |       | 5.70                 |       |
| 6.01 - 8.00                       |       | 288,617                 |       | 5.26                      |       | 6.60                 |       | 288,617                 |       | 6.60                 |       |
| 8.01 - 18.15                      |       | 1,069,330               |       | 2.56                      |       | 9.36                 |       | 1,069,330               |       | 9.36                 |       |
|                              |       | 6,129,779               |       | 6.21                      |       | 3.64                 |       | 4,043,830               |       | 4.96                 |       |

 

F-22

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Stock options granted toemployees during 2008 and 2007 are valued using the Black-Scholes optionpricing model with the following assumptions: risk-free interest rate 3.46% (2007— 4.11%), average expected life of four years, expected volatility 64% (2007 — 56%)and no dividends. The fair value of the stock options granted during 2008 was$387 (2007 - $773) (weighted average $0.30 per share) (2007 - $0.47) and therelated expense recognized in the consolidated statement of operations for theyear ended December 31, 2008 was $694 ($0.01 per share on a basic anddiluted basis) (2007 - $1,553, 2006 - $1,832).

 

**DeferredShare Unit Plan**

 

In 2004, the Board ofDirectors authorized a deferred share unit plan (“DSU Plan”) for directors. Pursuantto the DSU Plan, non-employee directors are entitled to receive all or anyportion of their annual cash retainer and meeting fees in the form of deferredshare units (“DSUs”) instead of cash. In addition, the Board of Directors may, atits discretion, make annual awards to non-employees of DSUs as, or in lieu of, non-cashcompensation. As a result of the implementation of the DSU Plan, directors arenot eligible to receive additional awards of stock options. A DSU is a unit, equivalentin value to a common share of the Corporation, credited by means of abookkeeping entry in the books of the Corporation, to an account in the name ofthe non-employee director. Each DSU entitles the participant to receive a cashpayment or common shares, at the option of the Corporation, upon termination ofdirectorship in an amount calculated with reference to the trading price of aHydrogenics common share on the Toronto Stock Exchange on the date oftermination. Compensation cost for DSUs granted under the DSU Plan is recordedas an expense with a corresponding increase in accrued liabilities and ismeasured at intrinsic value. Changes in intrinsic value between the grant dateand the measurement date result in a change in the measure of compensationcost.

 

During the year ended December 31,2008, 336,755 (2007- 335,420) DSUs were issued with immediate vesting on thedate of issuance. As at December 31, 2008, 750,103 (2007- 443,418) DSUswere outstanding under the DSU Plan. As a result, the Corporation recognized acompensation expense (recovery) of $(170) for the year ended December 31, 2008(2007 - $281; 2006 - $315) as a result of the reduction in the intrinsic valueof the DSUs between the grant date and the measurement date.

 

**RestrictedShare Unit Plan**

 

In 2008, the Board ofDirectors authorized a restricted share unit (“RSU Plan”) for senior executives.Pursuant to the RSU Plan, senior executives may be granted a portion of theirlong term incentive plan in the form of restricted share units (“RSUs”) insteadof stock options.

 

A RSU is a unit, equivalentin value to a common share of the Corporation, credited by means of abookkeeping entry in the books of the Corporation, to an account in the name ofthe senior executive. Each RSU entitles the participant to receive a cashpayment no later than December 31 of the third calendar year following theyear in respect of which the RSUs were granted. Compensation cost for RSUsgranted under the RSU Plan is recorded as an expense with a correspondingincrease in accrued liabilities and is measured at intrinsic value. Changes inintrinsic value between the grant date and the measurement date result in achange in the measure of compensation cost.

 

During the year ended December 31,2008, 1,287,500 (2007 — nil) RSUs were awarded with vesting over a three yearperiod. As at December 31, 2008, 1,287,500 (2007 - nil) RSUs wereoutstanding under the RSU Plan. As a result, the Corporation recognized acompensation expense of $113 for the year ended December 31, 2008 (2007 -$nil, 2006 - $nil).

 

**NOTE 14 -RESEARCH AND PRODUCT DEVELOPMENT**

 

Research and productdevelopment expenses are recorded net of third party program funding receivedor receivable. For 2008, 2007 and 2006, research and product developmentexpenses and program funding, which have been received or are receivable asfollows:

 
| ** **                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Research and product development expenses        |       | $        | 8,716      |     | $          | 10,346   |       | $ | 12,024 |   |
| Research and product development funding         |       | (1,420   | )          | (656     | )          | (2,645   | )          |
| Total research and product development  expenses |       | $        | 7,296      |     | $          | 9,690    |       | $ | 9,379 |   |

 

F-23

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 15 -COMMITMENTS**

 

The Corporation incurredrental expenses of $1,856 under operating leases in 2008 (2007 - $1,823; 2006 -$1,120). The Corporation has future minimum lease payments under operatingleases relating to premises and office equipment as follows:

 
| 2009       |   | $     | 1,556     |   |
|------------|--------|-------|-----------|--------|
| 2010       |   | 970   |      |
| 2011       |   | 544   |      |
| 2012       |   | 422   |      |
| 2013       |   | 391   |      |
| Thereafter |   | 229   |      |
| ** ** |   | **$** | **4,112** |   |

 

The Corporation has enteredinto repayable contribution and other research and development arrangementswith various Canadian governmental ministries and public sector enterprises. Underthese arrangements, the Corporation is eligible to receive up to $10,927 (2007- $13,430; 2006 - $12,051) toward agreed upon research and development projectcosts. The amount received or receivable as at December 31, 2008 was$10,927 (2007 - $13,430; 2006 - $11,594). These arrangements will expire instages ending on March 31, 2016 or when total amounts repaid reach theutilized amount of the advance, depending on the terms of the individualcontracts.

 

**NOTE 16 -CONTINGENCIES**

 

As at December 31, 2008,the Corporation has outstanding standby letters of credit and letters ofguarantee issued by several financial institutions, which total $2,306 (December 31,2007 - $5,213) with expiry dates extending to October 2011. TheCorporation has restricted cash totaling $1,130 as partial security for thesestandby letters of credit and letters of guarantee. These instruments relateprimarily to obligations in connection with the terms and conditions of theCorporation’s sales contracts. The standby letters of credit and letters ofguarantee may be drawn upon by the customer if the Corporation fails to performits obligations under the sales contracts and the Corporation would be liableto the financial institution for the amount of the standby letter of credit orletter of guarantee in the event that the instruments are drawn.

 

In 1998, Stuart Energy, now awholly-owned subsidiary of the Corporation, entered into an agreement withTechnologies Partnerships Canada (“TPC”), a program of Ministry of Industry ofthe Government of Canada to develop and demonstrate Hydrogen Fleet FuelAppliances. This agreement was amended in 2003 to expand the scope of work andresulted in Stuart Energy receiving a total of $5,600 of funding from TPC. Pursuantto the amended TPC agreement, Stuart Energy undertook to repay $14,200 (the “RepayableLoan Amount”). The amended agreement requires Stuart Energy to commence makingroyalty payments on the earlier of Stuart Energy reaching a minimum of CAD$90,000 in annual gross business revenues or April 1, 2007. In accordancewith the terms of the agreement, Stuart Energy is required to commence paymentsto TPC at 0.53% of its annual gross business revenues for a period of 12 yearsor until the Repayable Loan Amount is fully repaid. To date, the Corporationhas recognized $42,800 million in revenues and recorded a repayable amount of$227.

 

The Corporation has enteredinto indemnification agreements with its current and former directors andofficers to indemnify them, to the extent permitted by law, against any and allcharges, costs, expenses, amounts paid in settlement and damages incurred bythe directors and officers as a result of any lawsuit or any other judicial, administrativeor investigative proceeding in which the directors and officers are sued as aresult of their service. These indemnification claims will be subject to anystatutory or other legal limitation period. The nature of the indemnificationagreements prevents the Corporation from making a reasonable estimate of themaximum potential amount it could be required to pay to counterparties. TheCorporation has purchased directors’ and officers’ liability insurance. TheCorporation is unaware of any actions with respect to these agreements. Noamount has been recorded in the consolidated financial statements with respectto these indemnification agreements.

 

In the normal course ofoperations, the Corporation may provide indemnification agreements, other thanthose noted above, to counterparties that would require the Corporation tocompensate them for costs incurred as a result of changes in laws andregulations or as a result of litigation claims or statutory sanctions that maybe suffered by the counterparty as a

 

F-24

----

Tableof Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

consequence of thetransaction. The terms of these indemnification agreements will vary based onthe contract. The natureofthe indemnification agreements prevents the Corporation from making areasonable estimate of the maximum potential amount it could be required to pay to counterparties. The Corporation isunaware of any actions pursuant to these agreements. No amount has been recorded in theconsolidated financial statements with respect to these indemnificationagreements.  

 

**NOTE 17 -LINES OF CREDIT**

 

The Corporation has operatinglines of credit available up to $11,535 in total (2007—$13,788). As of December 31,2008 and 2007, the Corporation has no indebtedness on these lines of credit. Theoperating facilities are denominated in Canadian dollars and bear interest atthe Royal Bank of Canada prime rate plus 0.5% and EURIBOR, respectively. Thefacility is due on demand and collateralized by a general security agreementover all assets. The Corporation’s lines of credit available are reduced by theamount of outstanding standby letters of credit and letters of guarantee, ifany issued from time to time by several financial institutions.

 

**NOTE 18 -RELATED PARTY TRANSACTIONS**

 

In the normal course ofoperations, the Corporation subcontracts certain manufacturing functions to acorporation owned by a relative of one of the principal shareholders of theCorporation. Billings by this related corporation for material totalled $220 in2008 (2007 - $823; 2006 - $968). At December 31, 2008, the Corporation hasan accounts payable balance due to this related party of $34 (2007 - $58; 2006- $1). All related party transactions have been recorded at the exchange amount,which is the consideration paid or received as established and agreed to by therelated parties. The cost of these transactions reflect price and terms whichare in accordance with normal trade practices.

 

**NOTE 19 -INCOME TAXES**

 

As at December 31, 2008,the Corporation has available income tax loss carryforwards of $222,719 thatmay be used to reduce taxable income in future years, expiring as follows:

 
| 2009      |   | $      | 33,049  |   |
|-----------|--------|--------|---------|--------|
| 2010      |   | 15,128 |    |
| 2013      |   | 19,757 |    |
| 2014      |   | 35,335 |    |
| 2015      |   | 21,545 |    |
| 2026      |   | 18,716 |    |
| 2027      |   | 22,701 |    |
| 2028      |   | 11,375 |    |
| No expiry |   | 45,113 |    |
|      |   | $      | 222,719 |   |

 

As at December 31, 2008,the Corporation has unclaimed scientific research and experimental developmentexpenditures of $27,355 (2007 - $30,108) that can be used to offset futureincome over an indefinite period. The Corporation also has non-refundableinvestment tax credits amounting to approximately $6,775 (2007 - $7,690) thatcan be used to reduce future federal income taxes payable, expiring between2020 and 2026.

 

F-25

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

Components of theCorporation’s net future income tax asset, which are primarily arising inCanada, are:

 
| ** **                                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                 |       |     |       |     |       |
| Non-capital losses                                         |       | $        | 66,844     |     | $          | 87,122 |   |
| Scientific research and experimental  development expenses |       | 7,835    |       | 8,731    |       |
| Property, plant and equipment and  intellectual property   |       | 12,321   |       | 15,140   |       |
| Investment tax credits                                     |       | 5,759    |       | 6,536    |       |
| Warranty and other provisions                              |       | 533      |       | 937      |       |
| Share issue costs                                          |       | (201     | )          | (145     | )          |
| Valuation allowance                                        |       | (93,091  | )          | (118,321 | )          |
| Net future income tax asset                                |       | $        | —     |     | $          | — |   |

 

The Corporation has recordeda valuation allowance to reflect uncertainties associated with the realizationof all future income tax assets.

 

TheCorporation’s computation of income tax expense is as follows:

 
| ** **                                                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Loss before income taxes                                                                                      |       | $        | (14,203    | )        | $          | (28,046  | )          | $ | (130,939 | ) |
| Statutory income tax rate                                                                                     |       | 33.50    | %          | 36.12    | %          | 32.96    | %          |
| Income tax recovery at statutory rate                                                                         |       | (4,758   | )          | (10,130  | )          | (43,157  | )          |
| Non-deductible expenses                                                                                       |       | 185      |       | 433      |       | 497      |       |
| Other permanent and temporary differences                                                                     |       | 1,018    |       | 24       |       | (359     | )          |
| Expiry of non-capital losses                                                                                  |       | 7,438    |       | —   |       | —   |       |
| Effect of income tax and rate changes on  future income taxes                                                 |       | (1,111   | )          | 10,651   |       | 6,635    |       |
| Effect foreign currency rate changes on  future income taxes                                                  |       | 21,119   |       | (15,528  | )          | —   |       |
| Currency effect of difference in US dollar  financial reporting compared with CAN dollar income tax reporting |       | 1,340    |       | (1,390   | )          | 1,410    |       |
|                                                                                                          |       |     |       |     |       |     |       |
| Foreign exchange gain on CAN dollar  denominated future income taxes                                          |       | —   |       | —   |       | (34      | )          |
| Change in valuation allowance related to  the current year                                                    |       | (25,230  | )          | 15,940   |       | 5,065    |       |
| Writedown of intangible assets and goodwill                                                                   |       | —   |       | —   |       | 29,943   |       |
| Other                                                                                                         |       | $        | 116        |     | $          | 22       |       | $ | (180 | ) |
| Income tax expense (recovery)                                                                                 |       | 116      |       | 22       |       | (180     | )          |

 

**NOTE 20 -NET LOSS PER SHARE**

 

Net loss per share iscalculated using the weighted average number of common shares outstanding forthe year of 92,080,656 shares in 2008 (2007 - 91,797,911; 2006 - 91,816,049). Noeffect has been given to the potential exercise of stock options and warrantsin the calculation of diluted net loss per share as the effect would beanti-dilutive.

 

F-26

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**NOTE 21 - CHANGES IN NON-CASH WORKING CAPITAL**

Components of the net changein non-cash working capital are as follows:

 
| ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Decrease (increase) in current assets**      |       |     |       |     |       |     |       |
| Accounts receivable                            |       | $        | 7,335      |     | $          | (2,687   | )          | $ | (2,305 | ) |
| Grants receivable                              |       | 320      |       | 1,290    |       | (64      | )          |
| Inventories                                    |       | 2,558    |       | 59       |       | (4,033   | )          |
| Prepaid expenses and other current assets      |       | (89      | )          | 507      |       | 814      |       |
|                                           |       |     |       |     |       |     |       |
| **Increase (decrease) in current liabilities** |       |     |       |     |       |     |       |
| Accounts payable and accrued liabilities       |       | (1,050   | )          | (3,486   | )          | 5,580    |       |
| Unearned revenue                               |       | (4,257   | )          | 217      |       | 5,037    |       |
|                                           |       | $        | 4,817      |     | $          | (4,100   | )          | $ | 5,029 |   |

 

**NOTE 22 -SEGMENTED FINANCIAL INFORMATION**

 

The Corporation’s reportablesegments include: (i) OnSite Generation; (ii) Power Systems; and (iii) TestSystems. Where applicable, corporate and other activities are reportedseparately as Corporate and Other. Accordingly, operating segments have changedfrom prior years and all years have been restated to reflect the neworganization.

 

OnSite Generation includesthe design, development, manufacture, and sale of hydrogen generation products.Power Systems includes the design, development, manufacture, and sale of fuelcell products. Test Systems includes the manufacturing and sale of fuel celltest products and diagnostic testing services.

 

Financial information byreportable segment for the years ended December 31, 2008, 2007 and 2006 isas follows:

 
| ** **                                     | ** ** | **Year  ended December 31, 2008** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **OnSite**                             | ** ** | **Power** | ** ** | **Test** | ** ** | **Corporate** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Generation**                         | ** ** | **Systems** | ** ** | **Systems** | ** ** | **and Other** | ** ** | **Total** | ** ** |
| Revenue from external customers                |       | $                                      | 31,207     |   | $ | 5,643 |   | $ | 2,490 |   | $ | — |   | $ | 39,340 |   |
| Amortization of intangible assets              |       | —                                 |       | — |   | — |   | 249 |   | 249 |   |
| Impairment charge                              |       | —                                 |       | — |   | — |   | — |   | — |   |
| Amortization of property, plant and  equipment |       | —                                 |       | — |   | — |   | 855 |   | 855 |   |
| Interest income                                |       | —                                 |       | — |   | — |   | 940 |   | 940 |   |
| Interest expense                               |       | —                                 |       | — |   | — |   | (17 | ) | (17 | ) |
| Income tax expense                             |       | —                                 |       | — |   | — |   | 116 |   | 116 |   |
| **Segment income (loss) (i)**                  |       | $                                      | 2,106      |   | $ | (9,757 | ) | $ | (469 | ) | $ | (6,199 | ) | $ | (14,319 | ) |

 

F-27

----

Tableof Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 
| ** **                                     | ** ** | **Year  ended December 31, 2007** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **OnSite**                             | ** ** | **Power** | ** ** | **Test** | ** ** | **Corporate** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Generation**                         | ** ** | **Systems** | ** ** | **Systems** | ** ** | **and Other** | ** ** | **Total** | ** ** |
| Revenue from external customers                |       | $                                      | 19,608     |   | $ | 6,103 |   | $ | 12,279 |   | $ | — |   | $ | 37,990 |   |
| Amortization of intangible assets              |       | —                                 |       | — |   | — |   | 251 |   | 251 |   |
| Amortization of property, plant and  equipment |       | —                                 |       | — |   | — |   | 903 |   | 903 |   |
| Interest income                                |       | —                                 |       | — |   | — |   | 2,301 |   | 2,301 |   |
| Interest expense                               |       | —                                 |       | — |   | — |   | (52 | ) | (52 | ) |
| Income tax expense                             |       | —                                 |       | — |   | — |   | 22 |   | 22 |   |
| **Segment loss (i)**                           |       | $                                      | (5,436     | ) | $ | (14,283 | ) | $ | (1,465 | ) | $ | (6,884 | **)** | **$** | (28,068 | ) |

 
| ** **                                     | ** ** | **Year  ended December 31, 2006** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **OnSite**                             | ** ** | **Power** | ** ** | **Test** | ** ** | **Corporate** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Generation**                         | ** ** | **Systems** | ** ** | **Systems** | ** ** | **and Other** | ** ** | **Total** | ** ** |
| Revenue from external customers                |       | $                                      | 12,032     |   | $ | 6,943 |   | $ | 11,084 |   | $ | — |   | $ | 30,059 |   |
| Amortization of intangible assets              |       | —                                 |       | — |   | — |   | 7,139 |   | 7,139 |   |
| Impairment charge                              |       | —                                 |       | — |   | — |   | 90,834 |   | 90,834 |   |
| Amortization of property, plant and  equipment |       | —                                 |       | — |   | — |   | 1,948 |   | 1,948 |   |
| Interest income                                |       | —                                 |       | — |   | — |   | 3,607 |   | 3,607 |   |
| Interest expense                               |       | —                                 |       | — |   | — |   | (56 | ) | (56 | ) |
| Income tax recovery                            |       | —                                 |       | — |   | — |   | (180 | ) | (180 | ) |
| **Segment income (loss) (i)**                  |       | $                                      | (14,885    | ) | $ | (7,182 | ) | $ | 279 |   | $ | (108,971 | ) | $ | (130,759 | ) |

 

----

(i) Segmentloss includes directly attributable selling, general and administration costs, productresearch and development costs net of associated grants, amortization ofproperty, plant and equipment and amortization of intangible assets.

 

The accounting policies forinter-segment transactions are the same as those described in note 2.

 

Intangible assets andgoodwill relating to the Corporation’s OnSite Generation segment as at December 31,2008 were $nil and $5,025 (2007 - $249 and $5,025), respectively. TheCorporation currently does not allocate its remaining assets among reportablesegments.

 

A significant portion of theCorporation’s intangible assets and goodwill are common across the locations. Therefore,management does not classify intangible assets and goodwill on a locationbasis.

 

F-28

----

Tableof Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Revenues and cost of revenuesderived from products and services are as follows:

 
| ** **           | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------|------------|------------|------------|------------|------------|------------|------------|
| **Revenues**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Products             |       | $          | 38,693     |       | $          | 34,486     |       | $ | 26,653 |   |
| Services             |       | 647        |       | 3,504      |       | 3,406      |       |
|                 |       | $          | 39,340     |       | $          | 37,990     |       | $ | 30,059 |   |
|                 |       |       |       |       |       |       |       |
| **Cost of revenues** |       |       |       |       |       |       |       |
| Products             |       | $          | 31,090     |       | $          | 32,402     |       | $ | 28,114 |   |
| Services             |       | 356        |       | 1,199      |       | 1,246      |       |
|                 |       | $          | 31,446     |       | $          | 33,601     |       | $ | 29,360 |   |

 

Revenues are segmented bygeography, as follows:

 
| ** **           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| Russia               |       | $        | 12,927     |     | $          | 5,629    |       | $ | 68 |   |
| United States        |       | 8,428    |       | 5,609    |       | 8,140    |       |
| Belgium              |       | 2,020    |       | —   |       | 319      |       |
| Spain                |       | 1,815    |       | 138      |       | 1,445    |       |
| Saudi Arabia         |       | 1,790    |       | —   |       | —   |       |
| Sweden               |       | 1,600    |       | 119      |       | 849      |       |
| China                |       | 1,351    |       | 1,435    |       | 266      |       |
| Korea                |       | 1,271    |       | 1,070    |       | 2,499    |       |
| France               |       | 1,144    |       | 2,633    |       | 3,163    |       |
| United Kingdom       |       | 1,076    |       | 552      |       | 877      |       |
| Brazil               |       | 712      |       | 2,017    |       | —   |       |
| Germany              |       | 655      |       | 1,395    |       | 2,471    |       |
| Poland               |       | 639      |       | —   |       | —   |       |
| Canada               |       | 534      |       | 4,378    |       | 2,163    |       |
| Japan                |       | 492      |       | 2,256    |       | 2,841    |       |
| Romania              |       | 83       |       | 277      |       | 1,367    |       |
| United Arab Emirates |       | 20       |       | 1,255    |       | —   |       |
| Argentina            |       | 8        |       | 2,010    |       | —   |       |
| Slovenia             |       | 3        |       | 1,275    |       | —   |       |
| Rest of world        |       | 2,772    |       | 5,942    |       | 3,591    |       |
|                 |       | $        | 39,340     |     | $          | 37,990   |       | $ | 30,059 |   |

 

F-29

----

Tableof Contents

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

The Corporation’s largestcustomers comprise the following percentages of revenues:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
| First      |       | 18       |       | 12       |       | 12       |       |
| Second     |       | 7        |       | 5        |       | 10       |       |
| Third      |       | 5        |       | 5        |       | 5        |       |
| Fourth     |       | 5        |       | 4        |       | 4        |       |
| Others     |       | 65       |       | 74       |       | 69       |       |
|       |       | 100      |       | 100      |       | 100      |       |

 

Property, plant and equipmentare located in the following countries:

 
| ** ** | ** ** | **2008** | ** **  | **2007** |   |
|------------|------------|----------|-------------|----------|--------|
| Canada     |       | $        |  2,100 |     | $      |  2,998 |   |
| Belgium    |       | 1,982    |        | 1,849    |   |
|       |       | $        | 4,082       |     | $      | 4,847 |   |

 

A significant portion of theCorporation’s production, testing, equipment, and facilities are common acrossthe segments. Therefore, management does not classify asset information on asegmented basis.

 

**NOTE 23 -DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES**

 

The Corporation’sconsolidated financial statements have been prepared in accordance withCanadian GAAP, which differs in certain respects from those principles that theCorporation would have followed had its consolidated financial statements beenprepared in accordance with US GAAP.

 

A reconciliation of net lossfor the year from Canadian GAAP to conform with US GAAP is as follows:

 
| ** **                                                                              | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net loss for the year based on Canadian  GAAP                                           |       | $          | (14,319    | )          | $          | (28,068    | )          | $ | (130,759 | ) |
| Impairment charge related to intangible  assets                                         |       | —     |       | —     |       | 13,800     |       |
| Stock-based compensation (i)                                                            |       | 88         |       | —     |       | —     |       |
| Amortization of in-process research and product  development (ii)                       |       | —     |       | —     |       | 1,971      |       |
| Net loss for the year based on US GAAP                                                  |       | $          | (14,231    | )          | $          | (28,068    | )          | (114,988 | ) |
| Basic and fully diluted comprehensive net  loss per share based on US GAAP              |       | $          | (0.15      | )          | $          | (0.31      | )          | $ | (1.26 | ) |
| Weighted average number of shares used in calculating  comprehensive net loss per share |       | 92,080,656 |       | 91,797,911 |       | 91,816,049 |       |

 

A reconciliation of Shareholders’ Equity at December 31,2008 is as follows:

 
| ** **                                                                | ** ** | **2008** | ** **   | **2007** | ** ** | **2006**     | ** ** |
|---------------------------------------------------------------------------|------------|----------|--------------|----------|------------|--------------|------------|
| Shareholders’ Equity based on Canadian GAAP |       | $        |  25,483 |     | $          |  40,384 |       | $ |  66,757 |   |
| Shareholders’ Equity based on US GAAP                                |       | $        | 25,571       |     | $          | 40,384       |       | $ | 66,757 |   |

 

F-30

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

The Condensed Statements ofOperations and Cash Flows for the years ended December 31, under US GAAP, areas follows:

 
| ** **                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues                                         |       | $        | 39,340     |     | $          | 37,990   |       | $ | 30,059 |   |
| Cost of revenues                                 |       | 31,446   |       | 33,601   |       | 29,360   |       |
| Operating expenses                               |       | 23,334   |       | 36,866   |       | 120,757  |       |
| Loss from operations                             |       | (15,440  | )          | (32,477  | )          | (120,058 | )          |
| Net loss for the year                            |       | (14,231  | )          | (28,068  | )          | (114,988 | )          |
|                                             |       |     |       |     |       |     |       |
| Cash used in operating activities                |       | (6,758   | )          | (28,416  | )          | (24,488  | )          |
| Cash provided by investing activities            |       | 13,017   |       | 37,987   |       | 24,822   |       |
| Cash provided by (used in) financing  activities |       | (118     | )          | (48      | )          | 209      |       |
|                                                  |            |          |            |          |            |          |            |  |  |  |

 

(i) UnderUS GAAP, stock based compensation cost is based on the estimated number ofinstruments expected to vest which are then re-estimated at reporting dates tothe extent that subsequent information indicates that the actual number ofinstruments expected to vest is likely to differ from previous estimates. UnderCanadian GAAP, forfeitures of stock-based compensation awards, deferred shareunits and restricted share units are accounted for in the period in which theforfeiture occurs.

 

(ii) **In-process Research and Development**

 

Under US GAAP, in-processresearch and development acquired in a business combination is written off atthe time of acquisition. Under Canadian GAAP, in-process research anddevelopment is capitalized and amortized over the estimated useful life. In-processresearch and development is included in product technology.

 

A reconciliation ofadditional disclosures to conform with US GAAP is as follows:

 

**Consolidatedstatements of cash flows**

 

The consolidated statementsof cash flows have been prepared in accordance with International AccountingStandard 7, ‘Cash flow statements.’ As a result, a reconciliation to US GAAP isnot required.

 

**Businessacqusitions**

 

Stuart Energy SystemsCorporation (“Stuart Energy”) was acquired on January 6, 2005. Theacquisition provided the foundation for the Corporation’s hydrogen generationbusiness and complemented the Corporation’s other Onsite Hydrogen Generationofferings based on PEM electrolysis and natural gas reforming. The intangibleassets acquired pursuant to the Stuart Energy acquisition and the relatedamortization periods are as follows:

 
| ** **             | ** ** | **Amount at**   | ** ** | **Estimated**   | ** ** |
|------------------------|------------|----------------------|------------|-----------------|------------|
| ** **             | ** ** | **Acquisition date** | ** ** | **useful life** | ** ** |
| Product technology     |       | $                    | 30,300     |            | 4-7 years  |   |
| Customer relationships |       | 7,600                |       | 8 years         |       |
| Trade names            |       | 500                  |       | 3 years         |       |
| ISO certificates       |       | 100                  |       | 1 year          |       |
|                   |       | $                    | 38,500     |            |       |   |

 

During 2006, the Corporationperformed a comprehensive assessment of its business and operating plansresulting in a corresponding impairment charge of $26,333. The remainingidentifiable intangible assets related to the Corporation’s OnSite Generationbusiness comprise product technology, which will continue to be amortized overits remaining useful life of five years. The goodwill acquired as part of theacquisition was included in the OnSite Generation segment and was not taxdeductible.

 

As part of the Stuart Energyacquisition, $18,400 of in-process research and development (“IPR&D”) wasacquired. The IPR&D related to improvements to Stuart Energy’s existingtechnology and was to result in the launch of new product models over the nextseveral years.

 

F-31

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Businessstreamlining initiatives and windup of test equipment business**

 

The Corporation expects toincur maximum further charges of approximately $900 after December 31, 2008relating to the windup of the test equipment business.

 

In 2007, the loss on disposalof property, plant and equipment of $308 is classified in operating expensesunder US GAAP. In addition, approximately $400 of charges related to thewrite-down of inventory in connection with the windup are classified as cost ofrevenues under US GAAP.

 

**Sharecapital**

 

The share capital of theCorporation has a nominal par value.

 

**Revenues**

 

Sales taxes collected areexcluded from revenues.

 

**Stock-basedcompensation**

 

The Corporation adopted theprovisions of FAS 123R “Share Based Payments” for US GAAP effective January 1,2006. Shares are issued from treasury upon exercise. No income tax benefit isrecorded in the consolidated statement of operations for these costs.

 

The total intrinsic value ofoptions exercised during the year ended December 31, 2008, 2007 and 2006was approximately $5, nil, and $259 respectively. As of December 31, 2008,there was approximately $325 (December 31, 2007 - $912) of unrecognizedcompensation cost related to stock option awards that is expected to berecognized as expense over a weighted average period of 2.6 years (2007 - 2.6years). The total fair value of stock options that vested during the yearsended December 31, 2008, 2007 and 2006, was approximately $1,329, $1,502and $1,521 respectively.

 

The total intrinsic value ofoptions outstanding as at December 31, 2008 was $25 (December 31, 2007- $572). The total intrinsic value of options exercisable as at December 31,2008 was $25 (December 31, 2007 - $572). The total number of options fullyvested at December 31, 2008 and expected to vest beyond December 31, 2008was 5,516,801 (December 31, 2007-6,497,901). The total intrinsic value ofthese options was $25 at December 31, 2008 ($572 - December 31, 2007)with a weighted average contractual term of 6.2 years (2007 - 6.0 years) and aweighted average exercise price of $3.64 (2007 - $4.05). The weighted averagecontractual term of the options exercisable is 5.0 years (2007 - 4.4 years).

 

The Corporation’s estimate ofan expected option term is based on the exercise behavior of our employees. Theestimated stock price volatility was derived based upon the Corporation’sactual historic stock prices over the past four years, which represents theCorporation’s best estimate of expected volatility. The risk free interest ratefor periods within the contractual life of the award is based on the interestrates of government bonds with similar contractual lives.

 

Deferred share units (“DSUs”)granted to non-employee directors during 2008, 2007, and 2006, are valued usingthe Black-Scholes option pricing model with assumptions materially consistentwith those used to value stock options. In 2008, 2007 and 2006, 336,755, 335,420,and 94,224 DSUs were granted. In 2008, 18,461 DSUs were exercised (2007 -98,049).

 

**IncomeTaxes**

 

The components of loss beforeincome taxes for the years ended December 31, 2008, 2007 and 2006 are asfollows:

 

**Loss before income taxes**

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Canada     |       | $        | (14,471    | )        | $          | (24,834  | )          | $ | (118,137 | ) |
| Foreign    |       | 268      |       | (3,212   | )          | (12,802  | )          |
| Total      |       | $        | (14,203    | )        | $          | (28,046  | )          | $ | (130,939 | ) |

 

F-32

----

Tableof Contents

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Thesignificant components of the income tax benefit for the years ended December 31,2008, 2007 and 2006 are as follows:

 

**Current taxes**

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Canada     |       | $        | —     |     | $          | —   |       | $ | (180 | ) |
| Foreign    |       | 116      |       | 22       |       | —   |       |
| Total      |       | $        | 116        |     | $          | 22       |       | $ | (180 | ) |

 

**Future income taxes**

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Canada     |       | $        | —     |     | $          | —   |       | $ | — |   |
| Foreign    |       | $        | —     |     | $          | —   |       | $ | — |   |
| Total      |       | $        | —     |     | $          | —   |       | $ | — |   |

 

The Corporation adopted theprovisions of FIN 48, “Accounting for Uncertainty in Income Taxes anInterpretation of FASB Statement No. 109,” on January 1, 2007. At December 31,2008, the Corporation does not have any uncertain tax filing positions. As aresult, the Corporation has included all of its tax benefits in its disclosureof future income tax assets. There are no significant changes to thisassessment of uncertain tax filing positions anticipated within the next 12months.

 

The Corporation recognizesaccrued interest and penalties related to unrecognized tax benefits as acomponent of income tax expense. This accounting policy did not change as aresult of the adoption of FIN 48. During the year ended December 31, 2008,the Corporation recognized $nil in interest and penalties (2007-$nil). TheCorproation had $nil of interest and penalties accrued at December 31, 2008(December 31, 2007- nil).

 

The Corporation files incometax returns in the Canadian federal jurisdiction and various provincial andforeign jurisdictions. In the normal course of business, the Corporation issubject to examination by taxing authorities. Open tax years in Canada rangefrom 2003 to 2008. Open tax years in foreign jurisdictions range from 2006 to2008. However, upon examination in subsequent years, if net operating losscarry forwards and tax credit carry forwards are utilized, the Canadian andforeign jurisdictions can reduce net operating loss carry forwards and taxcredit carry forwards utilized in the year being examined if they do not agreewith the carry forward amount. As of December 31, 2008, the Corporationwas not under audit in Canada or non-Canadian taxing jurisdiction.

 

F-33

----

Table of Contents

 

**ITEM 19.               EXHIBITS**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.1        |       | Articles of the Company  (incorporated by reference from Exhibit 1.1 to the Company’s Annual  Report on Form 20-F, File No. 000-31815, filed with the Securities  and Exchange Commission on June 30, 2009)*                                                                                                                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.2        |       | By-laws of the Company  dated May 7, 2008(incorporated  by reference from Exhibit 1.2 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1        |       | Form of share  certificate (incorporated by reference from Exhibit 2.1 to the Company’s  Annual Report on Form 20-F, File No. 000-31815, filed with the  Securities and Exchange Commission on June 30, 2009)*                                                                                                                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1        |       | Stock Option Plan dated  June 22, 2009(incorporated  by reference from Exhibit 4.1 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2        |       | Restricted Share Unit Plan  dated June 22, 2009(incorporated  by reference from Exhibit 4.2 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3        |       | Deferred Share Unit Plan  dated June 22, 2009(incorporated  by reference from Exhibit 4.3 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4        |       | Lease, dated June 23,  2000 (as amended by a Lease Extension Agreement dated February 10,  2005), by and between Orlando Corporation and the Company (incorporated by  reference from Exhibit 4.4 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.5        |       | Support Agreement dated  June 11, 2009, among the Company, the Trustees of Algonquin Power Income  Fund and 7188501 Canada Inc. (incorporated by reference from Exhibit 4.5  to the Company’s Annual Report on Form 20-F, File No. 000-31815,  filed with the Securities and Exchange Commission on June 30, 2009)*                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.6        |       | Expense Reimbursement  Agreement dated June 11, 2009, among Algonquin Power Management Inc.,  the Company and 7188501 Canada Inc. (incorporated by reference from  Exhibit 4.6 to the Company’s Annual Report on Form 20-F, File  No. 000-31815, filed with the Securities and Exchange Commission on  June 30, 2009)*                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.7        |       | APMI Guarantee dated  June 11, 2009, among Algonquin Power Management Inc., the Company and  7188501 Canada Inc. (incorporated by reference from Exhibit 4.7 to the  Company’s Annual Report on Form 20-F, File No. 000-31815, filed  with the Securities and Exchange Commission on June 30, 2009)*                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.8        |       | Algonquin Power Guarantee  dated June 11, 2009, among Algonquin Power Income Fund, Algonquin Power  Management Inc., the Company and 7188501 Canada Inc. (incorporated by  reference from Exhibit 4.8 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 8.1        |       | List of Significant  Subsidiaries(incorporated  by reference from Exhibit 8.1 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 12.1       |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002**                                                                                                                                                                                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 12.2       |       | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002**                                                                                                                                                                                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 13.1       |       | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**                                                                                                                                                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 13.2       |       | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**                                                                                                                                                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 15.1       |       | Consent of  PricewaterhouseCoopers LLP**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.1       |       | Unaudited Interim  Consolidated Financial Statements for the three months ended March 31,  2009, and the Management’s Discussion and Analysis of Financial Condition and  Results of Operations for the three months ended March 31, 2009  (incorporated by reference from Exhibits 99.1 and 99.2, respectively, to the  Company’s Report of Foreign Private Issuer on Form 6-K, File  No. 000-31815, filed with the Securities and Exchange Commission on  May 13, 2009)* |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.2       |       | Notice of Special Meeting  and Management Proxy Circular dated June 25, 2009 (incorporated by  reference from Exhibit 99.2 to the Company’s Annual Report on  Form 20-F, File No. 000-31815, filed with the Securities and  Exchange Commission on June 30, 2009)*                                                                                                                                                                                                              |

 

----

*              Previously filed.

**           Filed herewith.

 

----

Tableof Contents

 

**SIGNATURE**

 

The Registrant herebycertifies that it meets all of the requirements for filing on Form 20-F/Aand that it has duly caused and authorized the undersigned to sign thisamendment on its behalf.

 

 
|                         | **HYDROGENICS  CORPORATION** |
|------------------------------|------------------------------|
|                         |                         |   |
| Dated: August 12,  2009 | By:                          | /s/ Lawrence Davis |
|                         |                         |   |
|                         |                         | Name: | Lawrence Davis |
|                         |                         |   |   |
|                         |                         | Title: | Chief Financial Officer |

 

----