**Exhibit99.3**

 

# **BALLARD POWER SYSTEMS INC.**

 

# **ANNUAL INFORMATION FORM**

 

# **MARCH 10, 2005**

 

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**TABLE OFCONTENTS**

 
| BALLARD                                               |   |
|-------------------------------------------------------|--------|
| Our  Corporate History and Corporate Structure        |   |
| Principal  Subsidiaries and Alliances                 | 2      |
| Recent  Developments                                  | 3      |
| Vehicular  Alliance                                   | 3      |
| Cdn. $55 Million Call  Agreement                      | 3      |
| OUR  BUSINESS                                         | 4      |
| Strategy                                              | 4      |
| Our Markets and Products                              | 4      |
| Market and Regulatory  Overview                       | 4      |
| Product  Overview                                     | 7      |
| Transportation Markets                                | 8      |
| Power Generation Markets                              | 10     |
| Material  Products                                    | 12     |
| Revenues from Market  Segments                        | 13     |
| Strategic  Alliances                                  | 14     |
| Vehicular  Alliance – Overview and History       | 14     |
| Vehicular  Alliance – Proposed Changes           | 19     |
| Stationary Power Alliance                             | 20     |
| Joint  Development Agreements and Related Investments | 20     |
| Chrysalix                                             | 22     |
| Research and Product  Development                     | 22     |
| PEM Fuel  Cells                                       | 22     |
| Fuel  Cell Systems                                    | 24     |
| Electric  Drive Systems and Power Electronics         | 24     |
| Carbon Products                                       |   |
| Technology  Partnerships Canada (“TPC”)     | 25     |
| Intellectual Property                                 | 26     |
| Manufacturing                                         | 26     |
| Facilities                                            | 27     |
| Competition                                           | 28     |
| Transportation -  PEM Fuel Cell Engines               | 29     |
| Transportation  - Electric Drive Systems              | 30     |
| Power Generation -  Continuous Power                  | 30     |
| Power Generation -  Back-up Power                     | 31     |
| Power Generation -  Power Electronics                 | 31     |
| Fuel  Cells                                           | 31     |
| How Fuel Cells Work                                   | 31     |
| Fuel Cell Systems                                     | 32     |
| PEM Fuel Cell Power Trains                            | 33     |
| HUMAN RESOURCES                                       | 33     |
| SHARE CAPITAL  AND MARKET FOR SECURITIES              | 33     |
| Class A Share and Class  B Share                      | 34     |

 

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| Share Incentive Plans                                            | 36 |
|------------------------------------------------------------------|----|
| Share Option Plans                                               | 36 |
| Share Distribution Plan                                          | 37 |
| Deferred Share Unit Plans                                        | 38 |
| Restricted Share Unit Plan                                       | 39 |
| BPS/BGS Share Exchange Plan                                      | 39 |
| DIVIDEND RECORD AND POLICY                                       | 39 |
| DIRECTORS AND OFFICERS                                           | 39 |
| Board of Directors                                               | 39 |
| Board Composition                                                | 43 |
| Corporate Governance                                             | 43 |
| Board Committees                                                 | 44 |
| Audit Committee                                                  | 44 |
| Management  Development, Nominating & Compensation Committee | 46 |
| Corporate Governance  Committee                                  | 46 |
| Executive Officers                                               | 47 |
| Shareholdings  of Directors and Senior Officers                  | 48 |
| Transfer agent and  registrar                                    | 48 |
| RISK FACTORS                                                     | 48 |
| ADDITIONAL INFORMATION                                           | 57 |
| GLOSSARY                                                         | 58 |

 

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***This AnnualInformation Form contains forward-looking statements reflecting Ballard’scurrent expectations as contemplated under Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended.  Investors arecautioned that all forward-looking statements involve risks and uncertainties,including, without limitation, our ability to develop commercially viable PEMfuel cell products, product development delays, changing environmental regulations,our ability to attract and retain business partners, future levels ofgovernment funding, competition from several sources, including other fuel cellmanufacturers, other advanced power technologies and existing powertechnologies, evolving markets for generating electricity and power fortransportation vehicles, and our ability to access the capital required toexecute our business plan.  These factorsshould be carefully considered and readers should not place undue reliance onBallard’s forward-looking statements.  Inaddition to the disclosure contained in this Annual Information Form, investorsare encouraged to review the Management’s Discussion and Analysis section inBallard’s 2004 Annual Report for an additional discussion of factors that couldaffect Ballard’s future performance.***

 

# **BALLARD**

 

In this Annual Information Form, the “Corporation”refers to Ballard Power Systems Inc. and “Ballard”,  “we”, “us” and “our” refer to the Corporationand, as applicable, its subsidiaries. Certain other terms used herein are defined in the attachedGlossary.  All dollar amounts are in U.S.dollars unless otherwise indicated.

 

Our principal business is the design, development,manufacture and commercialization of power products based on proton exchange membrane(“PEM”) technology for a variety of applications.  A PEM fuel cell is an environmentally cleanelectrochemical device which combines hydrogen fuel (which can also be obtainedfrom natural gas, petroleum or methanol or from water through electrolysis)with oxygen (from air), to produce electricity. It produces electricity efficiently and continuously (as long as fuel issupplied) without combustion, with water and heat as the main by-products whenhydrogen is used as the fuel source.  See“Fuel Cells - How Fuel Cells Work”. Ballard® fuel cells feature high fuel efficiency, lowoperating temperature, low noise and vibration, compact size, quick response tochanges in electrical demand, modular design and environmental cleanliness.

 

We operate in three market segments: 

 

•                  Transportation (which includes our light-dutyand heavy-duty fuel cell products and electric drive systems); 

 

•                  Power Generation (which includes our portableand stationary PEM fuel cell products and power electronics); and 

 

•                  Material Products (which includes carbonfiber products primarily for automotive transmissions and gas diffusion layersfor PEM fuel cells).  

 

## **Our Corporate History and Corporate Structure**

 

The Corporation’s predecessor was founded in 1979under the name Ballard Research Inc. to conduct research and development onhigh-energy lithium batteries.  In

 

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thecourse of investigating environmentally clean energy systems with commercialpotential, we began to develop PEM fuel cells. The Corporation was formed on May 30, 1989 by the amalgamation of agroup of affiliated companies under the Canada Business Corporations Act (the “CBCA”).  We have been developing PEM fuel cells andPEM fuel cell systems since 1983 and this has been our primary business since1989.  See “Directors and Officers –Executive Officers” for details of our organizational structure.

 

## Principal Subsidiaries and Alliances

 

We have four principal subsidiaries:

 

•                  Ballard Power Systems AG (“BPS AG”), a Germancorporation which develops PEM fuel cell engines; 

 

•                  Ballard Power Systems Corporation (“BPSC”), aDelaware corporation which develops electric drive systems and powerelectronics;

 

•                  Ballard Material Products Inc. (“BMP”), aDelaware corporation which develops and manufactures carbon fiber products foruse in the automotive and fuel cell markets; and

 

•                  Ballard Generation Systems Inc. (“BGS”), aCanadian federal corporation which was originally formed to develop andcommercialize PEM fuel cell stationary products.  BGS holds a 49% interest in each of AlstomBallard GmbH (“Alstom Ballard”) and Ebara Ballard Corporation (“Ebara Ballard”).

 

The following chart shows, as at February 28,2005, our principal subsidiaries, our share ownership in each subsidiary andtheir respective jurisdictions of incorporation:

 

 

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Notes:

 

(1)          Does not includeownership of 7,613,212 of our common shares that are to be issued toDaimlerChrysler AG (“DaimlerChrysler”) on the completion of our obligation topurchase DaimlerChrysler’s 49.9% interest in BPS AG pursuant to the terms ofthe Forward Exchange Agreement dated October 2, 2001 between Ballard andDaimlerChrysler.  Assuming the issue ofthese shares to DaimlerChrysler, as of February 28, 2005 DaimlerChrysler and Ford Motor Company (“Ford”)would own 22.7% and 18.5%, respectively, of our common shares.  However, the closing of the Forward ExchangeAgreement has been extended pending the completion of our sale of BPS AG toDaimlerChrysler and Ford (see “Recent Developments – Vehicular Alliance”).

 

(2)          BGS holds a 49% interest in each of EbaraBallard and Alstom Ballard.  Theremaining 51% interest in Ebara Ballard is held by Ebara Corporation (“Ebara”),and the remaining 51% interest in Alstom Ballard is held by ALSTOM S.A. (“ALSTOM”).

 

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Ourhead office is located at 4343 North Fraser Way, Burnaby, British Columbia, V5J5J9 and our registered office is located at 1700-666 Burrard Street, Vancouver,British Columbia, V6C 2X8.

 

## **RecentDevelopments**

 

### ***Vehicular Alliance***

 

In the transportation market, we formed a strategicalliance in 1997 with DaimlerChrysler for the development and commercializationof PEM fuel cells, PEM fuel cell engines and electric drive systems for use incars, buses and trucks, and expanded the alliance in 1998 to include Ford (the “VehicularAlliance”).  DaimlerChrysler and Fordcurrently hold 17.9% and 19.6%, respectively of our outstanding shares.  Together with DaimlerChrysler and Ford, weformed XCELLSIS GmbH (“XCELLSIS”) (now BPS AG), to develop and commercializePEM fuel cell engines for cars, buses and trucks, and Ecostar Electric DriveSystems L.L.C. (“Ecostar”) (now BPSC), to develop and commercialize electricdrive systems and power electronics.  In November 2001,we acquired DaimlerChrysler’s and Ford’s interests in XCELLSIS andEcostar.  See “Strategic Alliances –Vehicular Alliance” for details of this transaction and the terms of ourVehicular Alliance.  

 

On July 8, 2004, we entered into a non-bindingMemorandum of Understanding (“MOU”) with DaimlerChrysler and Ford, under whichit is contemplated that DaimlerChrysler and Ford will acquire our 50.1%interest in BPS AG.  In exchange,DaimlerChrysler and Ford will return to us nine million of our common sharesthat they currently own, which will then be cancelled.  In addition, the existing forward saleagreement, related to the purchase by us of the remaining 49.9% interest of BPSAG from DaimlerChrysler in exchange for the issuance of 7.6 million of ourcommon shares will be effectively cancelled, resulting in 100% ownership of BPSAG by DaimlerChrysler and Ford.  As theterms of the existing forward sale agreement required the purchase by us of theremaining 49.9% interest in BPS AG to be completed by November 15, 2004,the forward sale agreement has been extended and we expect that it willcontinue to be extended until BPS AG is sold.  For further details regarding this transaction, see “Vehicular Alliance– Proposed Changes”.  We expect thistransaction to close around mid-year.

 

### ***Cdn. $55 Million Call Agreement***

###  

As part of certain fundingcommitments of DaimlerChrysler and Ford which we announced in December 2002,DaimlerChrysler and Ford agreed in principle to eliminate the existingrequirement to link their follow-on equity investments of Cdn. $55 millionto a larger public equity offering, and to provide that funding upon ourrequest at any time after December 31, 2003.  The Cdn. $55 million funding (the “EquityFinancing Commitment”) is comprised of Cdn. $30 million from DaimlerChryslerand Cdn. $25 million from Ford.  In December 2003,we signed a formal call agreement (the “Call Agreement”) pursuant to which wehad the right to call on all or a portion of the Cdn. $55 million at any timein exchange for the issuance of our common shares to DaimlerChrysler and Fordat the then prevailing market price. 

 

At the time we signed theMOU, we conditionally exercised our rights to require DaimlerChrysler and Fordto invest the Cdn. $55 million under the Call Agreement at the then current marketprice which was Cdn. $12.34.  Under thisconditional exercise notice, the price of Cdn. $12.34 was secured until yearend.  Prior to year end, we delivered anotice to DaimlerChrysler and Ford making this exercise notice unconditional totake advantage of the secured price.  In January 2005,DaimlerChrysler and Ford completed their

 

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investment of Cdn. $55 million under the CallAgreement in exchange for the issuance to them of 4,457,545 of our common shares.  

 

# **OURBUSINESS**

 

We are recognized as the world leader in PEM fuelcell development.  We are focused on thedesign, development and manufacture of PEM fuel cell products for a variety ofapplications.  We believe our position inthe PEM fuel cell industry is the result of innovation in technology andproduct development, strong market focus, the development of strategicrelationships with industry leaders, employee commitment and a conservativeapproach to financial management.  Wehave a significant intellectual property portfolio.  Our goal is to be the leading supplier ofhigh quality, competitively priced PEM fuel cell products in our respectivemarkets.  By doing so, we intend to setthe industry standard for our products.

 

## **Strategy**

 

During 2004, we undertook a comprehensive review ofour product portfolio and the markets in which we participate.  As a result of this review, we are focused onmarkets that are characterized by large volume potential, where the social,economic and environmental advantages of fuel cell adoption are supported by government incentives, fundingand/or regulatory action.  We believe thetwo markets that best fit this description today are the global transportationmarket and the residential co-generation market in Japan.  

 

We are focused on our core competency – fuel cellstack design, development and manufacturing. Our resources are primarily concentrated on automotive applications.However, secondary markets of interest such as co-generation and backup powerwill also be pursued as appropriate.  Webelieve that this strategy offers shareholders the greatest value bypositioning us to compete effectively in the largest and most attractive fuelcell markets and by extending our cash reserves.   We will also develop, manufacture and marketcomponents, subsystems and derivative products that are based on technologiesdeveloped in our fuel cell business, including power electronics, electricdrive systems and carbon fiber products.

 

## **OurMarkets and Products**

##  

### ***Market and Regulatory Overview***

###  

Energy security, climate change and air qualitycontinued to be focus areas for government policy in 2004.  We expect governments to continue to play apositive role in supporting research and development, enabling market accessfor products and working collaboratively with industry to overcome barriers tocommercialization.   Through the variousprograms which governments have been implementing, they have supported productdemonstrations, established supportive regulatory regimes, purchased fuel cellproducts and supported continued research and development for fuel cells,hydrogen and related technologies. Another key area of government involvement that has been and will remaincritical to enabling commercialization is the support for the development andharmonization of codes, standards and permitting requirements for vehicles,infrastructure and buildings.

 

More specifically, in the United States, theadministration of President George W. Bush began funding and implementing theannounced $1.7 billion hydrogen and fuel cell initiative (to run for afive-year period from 2004 to 2008).  Theinitiative supports the Administration’s Freedom CAR and Hydrogen FuelInitiative and is largely being delivered

 

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throughthe US Department of Energy (“DOE”). Several competitive solicitation awards were announced in 2004 withBallard benefitting from three awards. Two of the awards were part of the DOE’s significant ($380M) TechnologyValidation award to demonstrate fuel cell vehicles.  Both Ford and DaimlerChrysler were awardedfunds to demonstrate their fleets in the United States and we will be theexclusive fuel cell supplier for these fleets. The third award we received was a $1.55 million contract to conductresearch and development into high voltage DC-DC converters. 

 

The State of California is also leading the way inadvancing the goal of hydrogen infrastructure proliferation with GovernorSchwarzenegger’s Hydrogen Highway initiative. The goal of the Hydrogen Highway’s implementation team in 2004 was tocomplete the development of a blueprint plan.   We participated in several meetings to provide input to the developmentof this plan and also worked closely with the California Fuel Cell Partnership(“CaFCP”) to develop its input.  As thepre-eminent fuel cell and hydrogen light duty vehicle demonstration in theworld, we anticipate the CaFCP will continue to play a vital role in theroll-out of the Hydrogen Highway over the next several years. The CaFCP hasalso committed to support the implementation of the Hydrogen Highway initiativethrough its current programs and additional activities as required (followingannouncement of the Governors’ plan in early 2005).  

 

We anticipate that the Zero Emission Vehicle (“ZEV”)regulations of the California Air Resources Board (“CARB”) will continue todrive technology development and the future market for fuel cell vehicles.  We anticipate the next major development inthe ZEV regulations will be CARB’s fuel cell technology review to be conductedin late 2006 or 2007.  A significantdevelopment in late 2003 and early 2004 was the State legislature passing a lawrequiring CARB to develop a plan to regulate and reduce the emission of greenhouse gases (“GHG”) from vehicles starting in 2009.  In response to the legislature, CARBdeveloped a plan and proposed suggested pathways for manufacturers topotentially address the GHG emission requirement.  In response, the large auto manufacturersfiled a lawsuit to block the regulations claiming the proposed regulationstargeted fuel efficiency and fuel economy (both of which are federallyregulated).  The matter is now before thecourts.  If GHG regulations remain inplace following the lawsuit and come into effect in 2009, it is anticipatedthat other states (mainly the Northeastern states in the U.S.) will followCalifornia’s lead and enact similar regulations.  The Canadian government is also consideringimplementing the proposed GHG regulations 

 

In Canada, the Canadian government began to roll-outnew funding (in existing programs) utilizing the Cdn $215 million in funding itannounced in October 2003 to support the acceleration of fuel cell andhydrogen technology development and demonstration.  This funding helped establish the HydrogenHighway in British Columbia and the Hydrogen Village in Toronto, Ontario.  The government also confirmed funding for asmall fleet of five Ford fuel cell vehicles to be operated as part of theHydrogen Highway initiative in Vancouver, B.C.

 

In Japan, a variety of government programssupporting vehicle demonstrations, stationary power generation and fuelinfrastructure development continued in 2004. Under the Millennium Program, we continue to work closely with EbaraCorporation, through our associate company, Ebara Ballard, to develop a 1 kWcombined heat and power stationary fuel cell generator for residentialuse.  Ebara Ballard was selected toadvance to the next phase of development with both Tokyo Gas and Osaka Gas tocommercialize its 1 kW stationary fuel cell generator in Japan.  Ebara Ballard is also working with Toho Gasto develop and commercialize a similar product. 

 

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The European Union (“EU”) further developed itsEuropean Hydrogen and Fuel Cell Technology Platform and the accompanyingEuropean strategy and implementation plan to coordinate and accelerate fuelcell commercialization in Europe.  No newfunding was announced in 2004 but a new program is anticipated in 2005 as partof the EU’s 7th framework initiative.

 

Internationally, the International Partnership on aHydrogen Economy (“IPHE”) began to take shape as government members met invarious sub groups to create a plan for this new international alliance.  It is anticipated, based on the action plandeveloped in Beijing in May 2004, that the IPHE will play a crucial role inharmonizing codes and standards, developing an integrated global hydrogenroadmap, promoting the sharing of data amongst demonstrations, promoting thesharing of information amongst government programs and developing an agreedupon communication and outreach package.  

 

With regards to other jurisdictions of interest, theChinese government continues to focus more attention on hydrogen and fuel cellsas solutions to China’s pressing energy supply demands as well as itsincreasingly stifling air quality challenges. While the most visible support for the technology is the fuel cell busdemonstration the Chinese government is jointly funding with the United NationsDevelopment Program (“UNDP”) (3 Citaro fuel cell buses in Beijing powered byBallard fuel cells), it is also committing funding to various researchinstitutes and universities to develop fuel cell materials, stacks, systems andvehicles. 

 

***FuelInfrastructure Programs.*** Through our involvement in organizations such as the CaFCP, theCanadian Transportation Fuel Cell Alliance (the “CTFCA”) and involvement ininitiatives such as the California Hydrogen Highway and European Fuel Cell BusProject (See “Transportation Markets – Buses”), we are collaborating toencourage the establishment of an appropriate fuel distribution infrastructurefor fuel cell vehicles.  

 

The CaFCP, headquartered in Sacramento, California,is a unique collaboration of automotive manufacturers, energy companies,technology companies and government agencies, focused on undertaking the stepsnecessary to successfully introduce commercial fuel cell vehicles inCalifornia.  Co-founded by Ballard in1999, the CaFCP is exploring the paths to commercializing fuel cell vehicles byexamining such issues as fuel infrastructure requirements, fuel purity,interconnection standards, vehicle, building and fuel safety, codes andstandards and public education and outreach. In addition to Ballard, the current members of the partnership includeautomakers DaimlerChrysler, Ford, General Motors Corp. (“GM”), Honda MotorCompany (“Honda”), Hyundai, Nissan Motor Co. Ltd. (“Nissan”), Toyota MotorCompany (“Toyota”) and Volkswagen AG (“Volkswagen”), fuel providersChevronTexaco Inc. (“ChevronTexaco”), Shell Oil Company, BP PLC and Exxon MobilCorporation (“Exxon Mobil”), the U.S. DOE, Transportation and Defense, theEnvironmental Protection Agency, the CARB, the South Coast Air QualityManagement District, the California Energy Commission and UTC Fuel Cells, aswell as a number of associate partners. The overarching goal of the CaFCP in 2005 will be to serve as a forumfor developing and disseminating information for use both internally among membersand externally by government, stakeholder organizations and the public, asappropriate.  The CaFCP intends toaccomplish this goal through its technical, implementation and communicationsprograms.

 

The CaFCP continues to actively pursue industrycollaboration to develop infrastructure, codes and standards and thedemonstration of fuel cell vehicles.  Specific vehicular goals in 2005 include having auto companies placefuel cell passenger cars into fleet service in California (targeting up to 300by 2007) and transit companies operating up to seven fuel cell buses in regulartransit service.  Government and energycompanies will

 

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supportthese deployments through infrastructure development and other support.  Key technical programs will focus on vehicleinteroperability, fuelling station accessibility and training firstresponders.     

 

In Canada, the CTFCA is a Cdn. $33 million (over 5years) initiative funded by the Government of Canada for the development anddemonstration of fuelling infrastructure in Canada.  Several projects were announced in 2004including the Hydrogen Highway in British Columbia and the Hydrogen Village inToronto.******     

 

### ***Product Overview***

###  

We have developed a number of portable andstationary PEM fuel cell power generation systems and PEM fuel cell engines fortransit buses and automobiles.  We alsodesign, develop and manufacture a number of key subsystems and components.  These subsystems and components can be usedin a variety of PEM fuel cell and non-fuel cell applications.  The nature of our products are such that thetiming of commercialization of many of our products will largely be influencedby the market roll-out plans of our customers as well as the development of ahydrogen infrastructure.  The followingtable lists the key PEM fuel cell and non-fuel cell products we currentlyproduce or have under development or testing. 

 
| **Market**       | ** ** | **Product**                                                         | ** ** | **Application**                                          | ** ** | **Status**                                                                                                                                          |
|------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| Transportation   |       | Light-duty PEM fuel cell engine(1)                                  |       | Automobiles and hybrid buses                             |       | Sales of prototypes for testing and fleet demonstration programs                                                                                    |
|             |       |                                                                |       |                                                     |       |                                                                                                                                                |
|             |       | Heavy-duty PEM fuel cell engine(1)                                  |       | Transit buses                                            |       | In fleet demonstration and testing programs in 10 European cities;  Perth, Australia; Beijing, China and California                                 |
|             |       |                                                                |       |                                                     |       |                                                                                                                                                |
|             |       | Mark 900 series fuel cell modules                                   |       | Automobiles                                              |       | Fleet demonstration commenced by Honda in December 2002.  Prototypes supplied for testing and evaluation to various automobile  manufacturers. |
|             |       |                                                                |       |                                                     |       |                                                                                                                                                |
|             |       | Mark 1100 series fuel cell module (next generation)                 |       | Automobiles                                              |       | Under development                                                                                                                                   |
|             |       |                                                                |       |                                                     |       |                                                                                                                                                |
|             |       | Electric drive systems                                              |       | Airport ground support equipment and industrial vehicles |       | Commercial sales                                                                                                                                    |
|             |       |                                                                |       |                                                     |       |                                                                                                                                                |
|             |       |                                                                |       | Fuel cell vehicles                                       |       | In demonstration and testing programs                                                                                                               |
|             |       |                                                                |       |                                                     |       |                                                                                                                                                |
| Power Generation |       | 1 kW natural gas combined heat and power generator` (PEM fuel cell) |       | Residential power – continuous use (Japan)          |       | Limited commercial sales                                                                                                                            |

 

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| **Market**        | ** ** | **Product**                                      | ** ** | **Application**                    | ** ** | **Status**                                                          |
|-------------------|------------|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------|
|              |       | 75 kW Power Converter (Power electronics)        |       | Photovoltaic                       |       | Commercial sales                                                    |
|              |       |                                             |       |                               |       |                                                                |
|              |       | 30 kW Power Converter (Power electronics)        |       | Photovoltaic                       |       | Commercial sales                                                    |
|              |       |                                             |       |                               |       |                                                                |
|              |       | Nexa® RM series (PEM fuel cell)             |       | Backup and standby power           |       | In demonstration and testing programs                               |
|              |       |                                             |       |                               |       |                                                                |
|              |       | 1.2 kW Nexa® power module (PEM fuel cell)   |       | Portable and standby power         |       | Commercial sales                                                    |
|              |       |                                             |       |                               |       |                                                                |
|              |       | Mk 900 series short stacks                       |       | Various                            |       | Prototypes supplied for testing and evaluation to various customers |
|              |       |                                             |       |                               |       |                                                                |
|              |       | AirGenTM fuel cell generator (PEM fuel cell) |       | Portable and standby power         |       | Commercial sales for industrial and educational applications        |
|              |       |                                             |       |                               |       |                                                                |
| Material Products |       | Carbon friction materials                        |       | Automobile automatic transmissions |       | Commercial sales                                                    |
|              |       |                                             |       |                               |       |                                                                |
|              |       | Gas diffusion layers                             |       | Fuel cells                         |       | Commercial sales                                                    |

 

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(1)Upon completion of thesale of BPS AG, expected to be mid-year, our product portfolio will no longerinclude entire light-duty and heavy-duty PEM fuel cell engines.  We will focus on supplying automotive fuelcell modules to Original Equipment Manufacturers (“OEMs”) for incorporationinto their fuel cell systems.

 

### ***Transportation Markets***

###  

The internal combustion engine in transportationapplications is a major source of air pollution and greenhouse gas emissions.  As a result, stringent government regulationsrequiring vehicle emission reductions and increases in efficiency have beenenacted or proposed on both a national and regional level in the United States,Canada and many other industrialized nations.

 

We believe the automotive market presents the mostcompelling case for introduction of fuel cell technology because of the globalchallenges – air quality, energy security, long-term energy supply and globalclimate change – which fuel cells are uniquely positioned to address.  Development of automotive fuel celltechnology continues to gain momentum, driven not just by the social, economicand environmental benefits, but also by the competition for technology leadershipamong the world’s top automakers. Together with our customers, we have put morefuel cell-powered demonstration vehicles on the road than any other fuel celldeveloper.  Last year alone, cars, busesand vans powered by our fuel cell engines accumulated almost one millionkilometers of on-road experience.  Thedata accumulated from these trials is proving instrumental in the developmentof our next generation fuel cell technology.

 

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As a result of regulations and initiatives in theUnited States and the performance characteristics of PEM fuel cells, we havefocused initially on two areas of the transportation market: automobiles andbuses.  

 

***Automobiles. ***In October 2001, we introduced our Mark 902 fuel cell module,which is based on the architecture of the Mark 900 series fuel cells firstintroduced to the market in January 2000. The Mark 902 fuel cell module is the fourth generation of our automotivePEM fuel cells.  We first demonstratedthat we could produce a PEM fuel cell that met automotive OEMs’ goals forvolume, weight and power in 1995 with the introduction of the Mark 700 seriesfuel cells.  The Mark 900 series fuelcells enhanced the power density of the Mark 700 series fuel cells within adesign that used lower cost materials and volume-manufacturing processes.  The Mark 902 fuel cell module continues thedesign trend of the Mark 900 series fuel cells with a lower cost design that isfurther optimized for volume-manufacturing, as well as having improved powerdensity and scalability.  The Mark 902fuel cell module can be used both in transportation and power generationapplications, and is scalable from approximately 3 kW to 300 kW.  We are currently developing technicalspecifications and program plans with DaimlerChrysler and Ford for the nextgeneration automotive fuel cell module.

 

In October 2002, DaimlerChrysler unveiled itsnewest generation fuel cell vehicle, the Mercedes-Benz A-class F-Cell, poweredusing a Ballard® fuel cell power train.  DaimlerChrysler has placed this vehicle withcustomers in Europe, Japan, Singapore and the United States as part of a60-vehicle global fleet demonstration program. During 2004, DaimlerChrysler delivered a Mercedes Benz F-Cell using aBallard® fuel cell power train to German Chancellor GerhardSchroeder for his office motor pool and another to the South Coast Air QualityManagement District in California.  Inaddition, United Parcel Service has launched three Dodge Sprinter delivery vanspowered with our fuel cells in California and Michigan.  

 

In September 2004, Ford unveiled the first of30 Ford Focus production vehicles powered using a Ballard® fuel cellpowertrain for customer use under the U.S. DOE demonstration program.   Five of these Ford Focus vehicles will beplaced in Vancouver under lease for demonstration. 

 

In June 2004, the Japan Automobile ResearchInstitute ordered our light duty fuel cell engine and related technology fortesting and evaluation purposes.  Theinformation collected will be used for benchmarking purposes and will assist inadvancing standardization activities in Japan. 

 

In addition to our partners in the VehicularAlliance, we have supplied, and plan to continue to supply, Ballard®fuel cells to a number of automobile manufacturers for testing and evaluation,including Honda, Nissan and Volkswagen, among others.  In December 2002, we signed an agreementwith Honda for the supply of up to 32 of our Mark 902 fuel cell modules andsupport services to support Honda’s fuel cell vehicle customer demonstration programsin the United States and Japan.  Wecompleted delivery of these modules in 2004. 

 

In August 2004, we announced a $3.6 millionfollow-on contract with a major global automaker covering expanded technologybenchmarking and evaluation activities. As part of this agreement, the automaker evaluated the performance andcapabilities of our current and advanced fuel cell technologies.  This contract builds on the experience gainedby the automaker from its initial purchase of our fuel cell products in 2003.

 

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***Buses.**** *We have developed a 205 kW heavy-duty PEM fuel cell engine that isfueled by hydrogen.  We have suppliedDaimlerChrysler with 30 of these engines to support its European Fuel Cell BusProject.  Under this project,DaimlerChrysler’s subsidiary, EvoBus, delivered 30 fuel cell buses to transitauthorities in 10 European cities (Amsterdam, Barcelona, Hamburg, London,Luxembourg, Madrid, Porto, Reykjavik, Stockholm and Stuttgart) for use intransit service.  The buses are part of atwo-year program that is designed to introduce PEM fuel cell buses to theEuropean market and allow the participating transit agencies to understandtheir use, operation and maintenance requirements.  In December 2003, we delivered anadditional three heavy-duty PEM fuel cell engines to Evobus for incorporationinto fuel cell buses for use in Perth, Australia as part of a demonstrationprogram.  These buses commenced regularrevenue service in September 2004. We also delivered three heavy-duty PEM fuel cell engines to Gillig forincorporation into buses to be delivered to Santa Clara Valley TransitAuthority in early 2004.  These busesentered revenue service in early March 2005.

 

In July 2004, we announced that we will providethree heavy-duty PEM fuel cell engines to DaimlerChrysler for integration intobuses for a project funded by China’s Ministry of Science & Technology, theGlobal Environmental Facility and the UNDP. These three buses will operate in Beijing as part of a two yeardemonstration program, beginning in late 2005.

 

In order to better leverage our core technologydevelopment and in response to changes in market dynamics, we plan to supportfuture bus projects with hybridized versions of our light duty fuel cellmodules.  Building on our announcedhybrid bus project with the MAN Nutzfahrzeuge Group, a leading internationalmanufacturer of commercial vehicles, we are in discussion with a number ofparties on additional hybrid bus development and demonstration projects.  We do not plan to undertake any additionaldevelopment of our current generation 205 kW heavy-duty PEM fuel cellengine.  

 

***Electric DriveSystems. ***An electric drive system converts rawelectrical power provided by a power source, such as a PEM fuel cell engine ora battery, into mechanical energy for vehicle propulsion. Our electric drivesystems have application in both fuel cell powered and battery powered on-roadand off-road vehicles.  We are currently marketingour electric drive systems for use in PEM fuel cell powered vehicles as well asnon-fuel cell electric vehicles such as airport ground support equipment.

 

We have supplied electric drive systems toDaimlerChrysler, Ford, Mazda Motor Corporation (“Mazda”) and Nissan fordevelopment and testing in their PEM fuel cell-powered vehicles.  

 

In addition to our automotive designs, we havedeveloped a new 80 Volt AC electric drive system specifically for airportground support equipment applications. Working with major U.S. airlines, we have developed this product to beconsistent with the standard electric drive architecture used for medium-dutyapplications.  We expect that as theairline industry recovers, our strong relationship with OEMs will position uswell to be a leader in the supply of electric drive systems for airport groundsupport equipment.

 

### ***Power Generation Markets***

###  

We develop, manufacture and market a variety ofportable and stationary fuel cell power generation and related products rangingfrom 1 kW portable fuel cell power products to power electronics, in order tomeet demands in a number of market segments. The co-generation market in Japanfits well within our strategic criteria of large volume potential, strongdriving forces for adoption and significant government funding and regulatory

 

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support.  We believe that in the medium and long term,the most effective path for us to penetrate other power generation markets,such as the global back-up power markets is to leverage our low cost automotivefuel cell technology.  In the near term,we will work with OEMs and systems integrators to address niche applications inthe back-up power market and conduct a small number of field trials to developapplications experience and market understanding.

 

***1 kW ResidentialPower Generator. ***We are working with Ebara Ballard to developa 1 kW natural gas-fueled co-generation stationary PEM fuel cell powergenerator targeted at the Japanese residential market.  The unit will supply up to 1 kW ofelectricity, as well as heat and hot water, while the utility grid will satisfythe electrical demand over 1 kW.  In January 2003,Ebara Ballard unveiled the first generation of its pre-commercial generator(third generation prototype), with a total system efficiency of 92% and 17%less in volume than the previous second generation prototype unit.  Ebara Ballard is working with Japan’s threelargest natural gas companies, Tokyo Gas, Osaka Gas and Toho Gas tocommercialize this product.  We beganshipments of fuel cell stacks at the end of 2004 to support Tokyo Gas’s limitedcommercial launch and the Japanese government’s monitoring program.  To date, more than 60 Ballard-poweredgenerators have been demonstrated and tested in Japan.  

 

In Japan, one of the objectives of thegovernment-sponsored Millennium Project is the successful commercialization ofstationary fuel cell systems.  TheMillennium Project establishes clear technological targets, with severalcorporations competing to bring a 1 kW product to market in the nearfuture.  The government is offeringsignificant consumer subsidies to the companies that can successfully deliver a1 kW product that meets the government’s performance expectations tomarket.  We are participating in theproject through Ebara Ballard.

 

***Nexa®Power Module.***  We launched our first commercial fuel cellproduct, the 1.2 kW Nexa® power module, in September 2001. The Nexa® power module is designed for integration by OEMsinto a wide variety of industrial and consumer end-use productapplications.  The power module consistsof PEM fuel cells integrated with other key system components into a singleunit.  

 

We have supplied over six hundred Nexa®power modules to customers in 22 countries, primarily to OEMs and education andresearch institutions.  Through thesesales, many customers are learning about the operating advantages of fuel cellsand, in the case of OEMs, how our fuel cells could enrich their productportfolios.  

 

During 2003, Ebara Ballard launched the FC Box, an 850watt fuel cell power generator incorporating our Nexa® power module,which was the first commercially available PEM fuel cell power generator to besold in Japan.  This hydrogen-fueledportable power generator is designed for a variety of uses, including backuppower, power for construction, manufacturing and communications and remotepower supply.   

 

***AirGenTM Fuel CellGenerator.***Wecontinue to offer the AirGenTM fuel cell generator to customers for industrialand educational purposes, in order to build awareness and promote the study offuel cell technology in schools. However, we have decided to suspend further development of our AirGenTMfuel cell generator as the development costs to integrate a metal hydride fuelsolution are not justified given the relatively small market potential of theproduct line and the high product cost at this time.    

 

***Nexa®RM Series.*** In August 2003, we introduced the Nexa®RM Series, a hydrogen fuelled stationary fuel cell power generator to meet theneeds of the backup

 

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powermarkets.  The Nexa® RM Seriesis based on the Nexa® power module, and its power output is scalablein 1 kW increments to meet individual customer requirements.  We have delivered Nexa® RM systemsfor utility and server room UPS and telecommunications field trials.  The Nexa® RM Series has beendesigned for industry-standard 19-inch rack mounting and can be sitedindoors.  It can also be sited outdoors,thereby freeing up valuable indoor floor space. The system includes electrical connections, an exhaust system and safetyfeatures along with redundancy capability for specific marketrequirements.  MGE UPS Systems (“MGE”) isworking with us in the distribution and servicing of the Nexa® RMSeries.

 

MGE has launched its Evolution UPS product line,which incorporates our Nexa® RM Series fuel cell modules.  In addition, MGE announced in April 2004a further product, the Pulsar EX RT, which also incorporates our Nexa®RM Series fuel cell modules.  The PulsarEX RT is an extended runtime online UPS targeting mission critical applicationsrequiring long duration backup power.

 

During 2004, we began field trials of our Nexa® RM Series. While price points inthe backup power markets are higher than those required for high volumeautomotive commercialization, we believe that penetration of fuel cells intothese markets will be challenging due to the need to achieve a cost that iscompetitive to incumbent battery technologies and the lack of broader support(e.g. customer or government funding, macroeconomic drivers) for thistechnology transition.  While the initialback-up power generation market is likely to be limited in size and slow todevelop over the next five years, we believe that our power generation marketopportunities will expand dramatically as our fuel cell technology progressestowards automotive cost and performance targets.

 

***Mk900 ShortStacks.*** In 2004, we began supplying selected customerswith scaled down versions of our Mk900 series automotive modules for use in avariety of applications, including industrial vehicles and high altitudevehicles.  We will continue to providethese products to customers with demonstrated fuel cell systems development andintegration expertise in these and other markets.

 

***Power Electronicsfor Stationary Power Generation. ***We have adapted the power electronicstechnology incorporated in our electric drive systems for fuel cell vehiclesfor use in stationary power generation applications.  Our power electronics include powerinverters, DC to DC converters, power modules, low voltage controls, andsoftware that allow operation in grid parallel or grid independent modes andprovide a variety of safety and power quality functions.  In 2002, we started to market our powerelectronics for micro gas turbine applications and we have since thensuccessfully released a UL1741 certified 75 kW and 30 kW power converterproduct for the photovoltaic (solar) market.

 

The EcostarTM power converter is able to accept awide range of input power in both DC and AC forms, and to convert this power tomake it fully compatible with the electric grid.  Using the EcostarTM power converter as aplatform, we are able to modify it for other applications.  Although the product has been adapted for usein a variety of applications including flywheel, battery and grid simulation,we are focussing the power converter for photovoltaic (solar) applications.  Other potential applications include windturbines and fuel cells.  We aredirecting our marketing and sales efforts primarily in California, which hasthe most significant level of government support for solar power installations.  

 

### ***Material Products***

###  

We develop, manufacture and sell carbon fiberproducts for automotive applications, through our Material Products Division,which is a Tier 1 supplier to the automotive industry.

 

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Theprimary carbon fiber products we produce are for automatic transmissions, aswell as gas diffusion layers (“GDL”) for use in PEM fuel cells.  The GDL is a key component of the membraneelectrode assembly (“MEA”) and plays an important role in the overallperformance and cost of a fuel cell.  Itis responsible for carrying the reactant gases to the electrocatalyst layers,and assists in the removal of water by-product. In addition to playing a key role in water management, the GDL alsoprovides a pathway for electrical conductivity and for effective heat removalfrom the MEA.

 

Carbon fiber products are used to make lightweightcomposite materials for applications that require high temperature resistance,high strength, controlled conductivity and flow and excellent friction and wearproperties.  Our carbon fiber productsare also used in off-road and heavy-duty truck brakes and in precision dragsystems for high performance fishing reels. 

 

We are currently supplying an automotivemanufacturer, under a five-year contract extension awarded in 2001, with carbonfriction material for automotive transmissions. Over the term of our supply contract extension, valued at more than U.S.$50 million, our carbon materials are being used in over 5 million automatictransmissions for North American vehicles annually.

 

During 2002, we introduced a new family of carbonfiber paper products under the AvCarbTM trademark for GDL applications.  AvCarbTM carbon fiber papers are designed tobe cost effective and to provide higher operating performance in PEM fuelcells.  The first two members of thefamily are AvCarbTM P-50 and AvCarbTM P-50T, which includes a tefloncoating.  Both are manufactured using aproprietary continuous carbonization process under ISO 9001 and QS-9000 qualitysystems.  They are available incontinuous rolls, and designed to enable MEAs to be manufactured using highspeed automated assembly techniques.

 

### ***Revenues from Market Segments***

###  

Our business operates in three market segments,Transportation, Power Generation and Material Products.  The following chart shows the percentage oftotal revenues derived from each segment and the portion of revenues from eachsegment which arise from sales to investees and sales to other customers, forthe years 2003 and 2004. 

 

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| ** **                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Revenues  from Transportation**                             |       |     |       |     |       |
| Percentage  of total revenues                                 |       | 78.6     | %          | 86.0     | %          |
| Portion  representing sales to customers other than investees |       | 78.6     | %          | 86.0     | %          |
| Portion  representing sales to investees                      |       | Nil      |       | Nil      |       |
|                                                          |       |     |       |     |       |
| **Revenues  from Power Generation**                           |       |     |       |     |       |
| Percentage  of total revenues                                 |       | 5.5      | %          | 2.8      | %          |
| Portion  representing sales to customers other than investees |       | 3.5      | %          | 1.2      | %          |
| Portion  representing sales to investees                      |       | 2.0      | %          | 1.6      | %          |
|                                                          |       |     |       |     |       |
| **Revenues  from Material Products**                          |       |     |       |     |       |
| Percentage  of total revenues                                 |       | 15.9     | %          | 11.2     | %          |
| Portion  representing sales to customers other than investees |       | 15.9     | %          | 11.2     | %          |
| Portion  representing sales to investees                      |       | Nil      |       | Nil      |       |

 

## **StrategicAlliances**

 

### ***Vehicular Alliance – Overview andHistory***

 

We have entered into the Vehicular Alliance withDaimlerChrysler and Ford for the development and commercialization of PEM fuelcells, PEM fuel cell engines and electric drive systems for use in vehicles.Under the Vehicular Alliance,

 

•                       We are responsible for the research,development, commercialization, manufacture, marketing, sale and service of PEMfuel cells, vehicular PEM fuel cell systems, electric drive systems and theintegration of PEM fuel cells, PEM fuel cell engines and electric drive systemsto form complete vehicular fuel cell power trains;

 

•                       We can sell PEM fuel cells, PEM fuel cellengines and electric drive systems for any applications, including forvehicles, to customers other than DaimlerChrysler and Ford;

 

•                       Subject to certain limited exceptions,DaimlerChrysler and Ford cannot compete with us in the research, development,production, distribution, sale or service of PEM fuel cells or vehicular PEMfuel cell systems, and, in the case of Ford, electric drive systems forvehicles; and

 

•                       Subject to certain limited exceptions,DaimlerChrysler and Ford must purchase vehicular PEM fuel cells and vehicularPEM fuel cell systems from us and Ford must also purchase fuel cell electricdrive components and systems from us.

 

***Acquisition ofXCELLSIS and Ecostar. ***On November 30, 2001, we acquired, orreceived the right to acquire, from DaimlerChrysler and Ford all of theirinterests in XCELLSIS (now BPS AG) and Ecostar (now BPSC) (the “Transaction”).  Before the

 

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Transaction,each of XCELLSIS and Ecostar was jointly owned by us, DaimlerChrysler andFord.  Under the Transaction, we

 

•                       acquired from DaimlerChrysler, a 1.6%interest in XCELLSIS and its 17.0% interest in Ecostar in exchange for1,792,059 of our common shares, 

 

•                       entered into a contract to acquire fromDaimlerChrysler the remaining 49.9% interest in XCELLSIS on or before November 15,2004 (which has been extended), pursuant to which DaimlerChrysler will transfersuch interest to us in exchange for 7,613,212 of our common shares, and

 

•                       acquired from Ford, its 21.8% interest inXCELLSIS and its 62.1% interest in Ecostar in exchange for 8,998,252 of ourcommon shares.

 

Withmajority control of BPS AG, we are entitled to appoint all the members of thegoverning bodies of BPS AG and its management and are able to establish thebusiness strategy for BPS AG.  For thepurposes of determining its rights under the Vehicular Alliance,DaimlerChrysler is treated as if it owns all of our common shares to be issuedto it on the transfer of the remaining BPS AG shares to us.  As part of the Transaction, we also enteredinto a new vehicular alliance agreement with DaimlerChrysler and Ford, whichreplaced the previous alliance agreement entered into in 1998.

 

As part of the Transaction, DaimlerChrysler and Fordalso invested a total of Cdn. $55 million (U.S. $34.5 million) in us at closingby way of a private placement, under which DaimlerChrysler purchased anadditional 1,103,549 of our common shares for Cdn. $30 million (U.S. $18.8million) and Ford purchased an additional 919,624 of our common shares for Cdn.$25 million (U.S. $15.7 million). DaimlerChrysler and Ford had also agreed to invest an amount up to anaggregate Cdn. $55 million in us if and when we undertook any equity offeringsbefore November 30, 2004.  However,DaimlerChrysler and Ford subsequently agreed to eliminate the existingrequirement to link this equity investment to a larger equity offering, and toprovide this funding upon our request at any time after December 31,2003.  In January 2005, DaimlerChryslerand Ford invested Cdn.$55 million in us in exchange for the issuance to them of4,457,545 of our common shares, as discussed under “Recent Developments”.

 

DaimlerChrysler and Ford continue to appointdirectors in accordance with their respective percentage ownership of ourcommon shares.  The number of directorsthat may be appointed by each of DaimlerChrysler and Ford may decrease if thereis a decline in their respective percentage ownership of our outstanding commonshares.  DaimlerChrysler and Ford may notvote their common shares in us in connection with the election of directors,except for the provision of a proxy to vote in favour of the election ofdirectors nominated by our management. Currently, each of DaimlerChrysler and Ford may appoint twodirectors.  See “Directors and Officers”.

 

***Summary of theVehicular Alliance. ***The following is a summary of the key termsand conditions of our current Vehicular Alliance.  As discussed under “Vehicular Alliance –Proposed Changes” we are in discussions with DaimlerChrysler and Ford regardingthe sale of our interest in BPS AG, which will involve an amendment of a numberof rights and obligations under the Vehicular Alliance.

 

The term of the Vehicular Alliance continues until2021, and is subject to early termination by DaimlerChrysler or Ford only inthe event of a fundamental breach of the agreement by us.  If DaimlerChrysler or Ford commits afundamental breach, either non-breaching party may cause the breaching party toexit the Vehicular Alliance, in which case

 

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itsrights (but not its obligations or restrictions) are terminated and theVehicular Alliance continues between the non-breaching parties.  In the event of a take-over bid of Ballard bya third party, DaimlerChrysler and Ford may tender into the bid and exit theVehicular Alliance.

 

DaimlerChrysler and Ford have agreed that they willnot compete with us during the term of the Vehicular Alliance with respect tothe development and sale of PEM fuel cells and vehicular PEM fuel cellsystems.  Ford has also agreed to notcompete with us with respect to electric drive systems for vehicularapplications, and DaimlerChrysler has also agreed to not compete with us withrespect to electric drive systems (or components thereof) that DaimlerChryslermay in the future agree to purchase exclusively from us.  These non-competition obligations continueeven if DaimlerChrysler or Ford exit or are removed from the Vehicular Allianceby reason of its fundamental breach. However, if we commit a fundamental breach and DaimlerChrysler or Fordelects to terminate the Vehicular Alliance, or a third party makes a take-overbid to which DaimlerChrysler or Ford tenders all of its common shares in us,DaimlerChrysler and Ford may be relieved of these restrictions.

 

As an exception to the non-competition provisions,DaimlerChrysler and Ford may conduct research independently on PEM fuel cells,vehicular PEM fuel cell systems and, in the case of Ford, electric drive systems.  All results of this independent research mustbe made available to us and we have the right to acquire any intellectualproperty resulting from it at cost.  Thedeveloping party cannot commercially exploit the results of the independentresearch in areas governed by the non-competition obligations.

 

Many of DaimlerChrysler and Ford’s rights are linkedto maintaining ownership of certain of our common shares owned by them (the “BallardBase Shares”).  Ballard Base Shares foreach of DaimlerChrysler and Ford are our common shares owned by them on November 30,2001 (other than 2,023,173 of our common shares they acquired pursuant to aprivate placement completed on November 30, 2001 as part of theTransaction) plus (a) any Ballard Base Share of DaimlerChrysler or Fordpurchased by and transferred to the other of them, and (b) any of our commonshares derived from, or issued as a stock dividend on, Ballard BaseShares.  The common sharesDaimlerChrysler and Ford received upon the closing of the Call Agreement arenot considered to be Ballard Base Shares. DaimlerChrysler’s Ballard Base Shares include our common shares to beissued to DaimlerChrysler on the transfer of the remaining BPS AG shares to us.

 

Until November 30, 2007, DaimlerChrysler andFord may not transfer any of their Ballard Base Shares other than to each otheror in the event of a take-over bid by a third party.  Further, DaimlerChrysler and Ford may notuntil November 30, 2007 transfer any of our other common shares they own(non-Ballard Base Shares) without our consent, which consent may not beunreasonably withheld.  NeitherDaimlerChrysler nor Ford may dispose of any of its Ballard Base Shares unlessit first offers to sell such shares to the other and gives us notice of itsintention to sell such shares.

 

Under the current Vehicular Alliance, except incertain limited circumstances, we have the exclusive right to supplyDaimlerChrysler and Ford with vehicular PEM fuel cell and vehicular PEM fuelcell systems and, in the case of Ford, electric drive systems for electricvehicles other than hybrid vehicles.  Wehave the first right to supply Ford with electric drive systems forhybrid-powered vehicles.  DaimlerChrysleris not obligated to purchase electric drive systems (or components thereof)from us.  All sales of products by us toDaimlerChrysler or Ford must be made at arm’s length prices and terms, but inno case on less favourable terms and conditions than sales to any other arm’s-lengthparty, taking into account cost, quality, quantity, delivery, performance andother relevant factors.

 

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Under the Vehicular Alliance, certain decisions ofour board of directors are subject to voting provisions (the “Limited VotingProvisions”) which require approval by a majority of the directors whichinclude at least one of the directors appointed by DaimlerChrysler orFord.  If any director appointed byDaimlerChrysler or Ford is absent or abstains, a simple majority will suffice,which majority need not include one of the directors appointed byDaimlerChrysler or Ford.  See “ShareCapital – Class A Share and Class B Share” for details regarding the LimitedVoting Provisions.

 

Many of the decisions that are subject to theLimited Voting Provisions, such as the sale of substantially all of our assets,an amalgamation, or a change in our authorized share capital, would, in anyevent under applicable corporate law, require the approval of our shareholdersby way of a special two-thirds majority vote. As long as DaimlerChrysler and Ford own in the aggregate more thanone-third of our outstanding common shares, we could not proceed with anytransaction requiring a two-thirds majority vote if both DaimlerChrysler andFord were to vote against such transaction, even if the Limited VotingProvisions did not exist.

 

Provided DaimlerChrysler and Ford retain ownershipof their Ballard Base Shares, they may, if they both agree, require the removalof one or more of our Chief Technology Officer (or other officer to whom thepersons responsible for research and development report), our Vice-President,Corporate Strategy & Development (or other officer to whom the personsresponsible for intellectual property report) and our Vice-President,Transportation.  We no longer have anexecutive officer in the position of Vice-President, Transportation.

 

Under the Vehicular Alliance, DaimlerChrysler andFord are able to earn lead times ranging from six to nine months forpre-commercial vehicular PEM fuel cell products upon their commitment topurchase specific volumes of those products from us.  These lead time provisions do not preclude usfrom developing pre-commercial products for, or selling those products to,other automotive manufacturers that fund separate development programs for suchproducts.  These lead time provisions donot apply to any product once commercial sales of such product commence.

 

Under the Vehicular Alliance, each of the partiesand its subsidiaries is entitled to royalty-bearing licenses to technology developedby the other parties in certain circumstances, including the following:

 

•                       DaimlerChrysler may obtain a royalty-bearinglicense to our vehicular PEM fuel cell and vehicular PEM fuel cell systemstechnology after November 30, 2007 and may only obtain a license tospecific electric drive technology if it has purchased the applicable electricdrive products exclusively from us over a specified period of time and hascommitted to continue to do so.

 

•                       Ford may obtain a royalty-bearing license toour vehicular PEM fuel cell and vehicular PEM fuel cell and fuel cell systemstechnology: (i) if Ford has exclusively purchased from us all vehicularPEM fuel cell systems required by it for its commercial production of fuelcell-powered vehicles and it continues to own its Ballard Base Shares;(ii) after 2011 if Ford has not achieved commercial production of fuelcell-powered vehicles despite its reasonable efforts to do so and it continuesto own its Ballard Base Shares at the time the request for the license is made;or (iii) after November 30, 2007 and after we have achieved regularseries production of vehicular PEM fuel cells for commercial sales and areunable or unwilling to supply Ford with such products.  Ford may request a royalty-bearing license toour electric drive technology after November 30, 2007.

 

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•                       We have limited rights to obtain licenses forvehicular fuel tanks from DaimlerChrysler and Ford and for certain electricdrive systems or components from DaimlerChrysler.

 

Each of the licenses to be granted toDaimlerChrysler and Ford includes only those improvements which are made by usduring the term of the Vehicular Alliance. In addition, if DaimlerChrysler and Ford make improvements to technologyto which they have a license, such improvements must be licensed back to us ona royalty-free basis.  The licenses toDaimlerChrysler and Ford will be perpetual, world-wide, non-exclusive,non-transferable and royalty-bearing.  Ifthe relevant parties cannot agree on the terms and conditions of a license,including the license form and royalty amount, such terms and conditions may besettled by arbitration, and the royalty amount will be based on the amount thatwould be negotiated by parties at arm’s length.

 

Under the Vehicular Alliance, if we undertake anequity offering, DaimlerChrysler and Ford have rights to maintain a certainpercentage ownership interest in us.  Ifeither of DaimlerChrysler or Ford does not fully exercise its purchase rightswhen entitled to do so, the other of them may purchase additional common sharesin us provided the combined ownership interest of DaimlerChrysler and Fordfollowing such purchase does not exceed 42.5%. These rights can be exercised concurrently with each equity offering or,in certain limited circumstances, within 60 days after completion of theoffering.

 

Under the Vehicular Alliance, neitherDaimlerChrysler nor Ford may purchase any additional common shares in us if,following such purchase, their combined ownership of our outstanding commonshares would exceed 42.5% except:

 

•                  before November 30, 2005,

 

•                  if DaimlerChrysler or Ford, or both, make atake-over bid that, if fully accepted, would result in them owning all of ouroutstanding common shares; or

 

•                  if a take-over bid is made by a third party,DaimlerChrysler or Ford, or both, may make a competing take-over bid for atleast the number of our common shares that such third party offered to purchaseunder its take-over bid;

 

•                  afterNovember 30, 2005 but before November 30, 2007, DaimlerChrysler orFord, or both, may make a take-over bid that, if fully accepted, would resultin them owning, in the aggregate, at least two-thirds of all of our outstandingcommon shares; 

 

•                  after November 30, 2007, DaimlerChrysleror Ford, or both, may make a take-over bid that results in

 

•                  if DaimlerChrysler and Ford jointly make thebid, them acquiring not less than the greater of:

 

a)              20% of all of our outstanding common shares;and

 

b)             the number of our common shares so that theyown more than 50% of all of our outstanding common shares; or

 

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•                  under certain circumstances, if only one ofDaimlerChrysler or Ford holds its Ballard Base Shares, that party acquiringmore than 10% of all of our outstanding common shares through a take-over bid;and

 

•                  DaimlerChryslerand Ford are permitted to purchase our common shares under the Call Agreementso long as their combined ownership in us is no more than 45% of ouroutstanding common shares after such purchase.

 

### ***Vehicular Alliance – Proposed Changes***

###  

On July 8, 2004, we entered into a non-bindingMOU with DaimlerChrysler and Ford, under which it is contemplated thatDaimlerChrysler and Ford will acquire our 50.1% interest in BPS AG. Inexchange, DaimlerChrysler and Ford will return to us nine million of our commonshares that they currently own, which will then be cancelled. In addition, theexisting forward sale agreement, related to the purchase by us of the remaining49.9% interest of BPS AG from DaimlerChrysler in exchange for the issuance of7.6 million common shares of Ballard to DaimlerChrysler, will be effectivelycancelled, resulting in 100% ownership of BPS AG by DaimlerChrysler and Ford.As the terms of the existing forward sale agreement require the purchase by usof the remaining 49.9% interest in BPS AG to be completed by November 15,2004, the agreement has been extended and we expect it will continue to beextended until BPS AG is sold.

 

Negotiations to complete the transactionscontemplated by the MOU have taken longer than initially expected due to thecomplexity of the transactions and the time required to settle a number ofissues related to the transactions. While the MOU has expired, the parties arecontinuing to negotiate the detailed terms and conditions of the transaction ina manner generally consistent with the MOU, with the exception that the scopeof the transaction may also include a reallocation of the responsibility forthe development of electric drives for hybrid vehicles.  Currently, we have a right of first offer tosupply Ford with electric drives for their hybrid vehicles, and Ford may notcompete with us in the research, development, commercialization, manufacture,marketing, sale and service of electric drives for hybrid vehicles.  Ford has proposed that the terms of theVehicular Alliance regarding electric hybrid e-drives be removed, in exchangefor consideration which is currently being negotiated but which likely willinvolve Ford returning to us an additional number of our common shares.  We expect to complete the transaction aroundmid-year, subject to further approvals by our board of directors, by ourshareholders and any required approvals of regulatory authorities in Canada,the United States and Germany.

 

Upon completion of the sale of BPS AG, we willcontinue to be responsible for the research, development and manufacture offuel cells for DaimlerChrysler and Ford and DaimlerChrysler and Ford willjointly be responsible for the research, development and manufacture of thevehicular fuel cell support system (balance-of-plant). Under the terms of theMOU, DaimlerChrysler and Ford will also provide us up to $58 million in futurefunding for our development of the next generation vehicular fuel cell and thenext generation electric drive system for fuel cell vehicles, subject toachieving predefined milestones.

 

Following the close of the transaction,DaimlerChrysler’s ownership in us is expected to increase from 17.9% to 18.7%,and Ford’s ownership in us is expected to decrease from 19.6% to 13.9%.DaimlerChrysler’s and Ford’s representation on our board of directors isexpected to remain unchanged.

 

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### ***Stationary Power Alliance***

 

In the power generation market, we formed astrategic alliance in 1996 (the “Stationary Power Alliance”) with a predecessorof FirstEnergy Corp. (“FirstEnergy”), GPU Inc. through our subsidiary, BGS, andexpanded the alliance in 1998 to include ALSTOM and Ebara.   FirstEnergy is an Ohio-based utility companythat merged with GPU Inc. in 2001. FirstEnergy subsidiaries and affiliates are involved in the generation,transmission and distribution of electricity; exploration and production of oiland natural gas; transmission and marketing of natural gas; and energymanagement and other energy-related services. ALSTOM, based in Paris, France designs, manufactures, supplies andinstalls equipment, systems and solutions for the power generation andtransmission industries, as well as the rail transportation industry.  Ebara, based in Tokyo, Japan, is a majordeveloper, manufacturer and distributor of fluid machinery and systems,precision machinery and environmental engineering systems and is a leader inzero emission technology. As part of the Stationary Power Alliance, togetherwith ALSTOM, we formed Alstom Ballard and together with Ebara, we formed EbaraBallard. 

 

Over the past three years, we simplified ourrelationships with each of FirstEnergy, ALSTOM and Ebara under the StationaryPower Alliance to increase the focus on the marketing and distribution aspectsof the commercialization of our stationary fuel cell products. 

 

In August 2001, we signed an agreement toacquire the interest of FirstEnergy in BGS in exchange for the issuance of ourcommon shares to FirstEnergy.  Inexchange for FirstEnergy’s 13.3% ownership interest in BGS, we issued 1,366,063of our common shares to FirstEnergy.  Aspart of this transaction, we also appointed FirstEnergy as a non-exclusivedistributor of our PEM fuel cell stationary power generators in the NorthCentral and Northeastern United States. The purchase of FirstEnergy’s shares in BGS closed in May 2003 afterFirstEnergy received regulatory approval to proceed with the transaction.  In December 2001, we acquired EBARA’s10.6% interest in BGS in exchange for the issuance to EBARA of 1,233,566million of our common shares.  EbaraBallard continues to have exclusive rights to manufacture, market, distribute,sell and service our PEM stationary power generators in Japan.  This exclusive license also includes anobligation of Ebara Ballard to purchase fuel cells exclusively from us andcertain non-competition obligations between the parties.  We will also continue to collaborate withEBARA through Ebara Ballard, on products targeted for the particular needs ofthe Japanese market.

 

In December 2002, we acquired the interest ofALSTOM Canada Inc. in BGS, in exchange for 2,500,000 of our common shares.  ALSTOM has agreed to a four-year hold periodon 1,900,000 of the common shares issued. As part of this purchase, we have also amended our licensing anddistribution arrangements with ALSTOM. In place of Alstom Ballard’s exclusive distribution and manufacturingrights for Europe, ALSTOM has been granted a non-exclusive worldwide (exceptfor Japan) right to distribute our PEM fuel cell stationary power generationproducts.

 

As a result of the acquisition of the minorityshareholders’ interests in BGS described above, we now own 100% of BGS.

 

## **Joint Development Agreements and Related Investments**

##  

To expand our strength in the fuel cell industry wehave established external relationships to further advance our productdevelopment efforts.  We are alwayslooking for opportunities to improve the speed of commercialization of ourproducts and to enhance our intellectual property position.  In addition, we strive to add to ourmanufacturing base,

 

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acceleratecost reduction, add value to our product offerings and access new markets forour products.  We have developed severalrelationships over recent years to advance this strategy.

 

In June 2002, we entered into an exclusivejoint development with Ebara to develop pilot scale manufacturing processes andequipment for our proprietary BAM® grafted proton exchangemembrane.  This agreement combines Ebara’score processing and manufacturing capabilities with our expertise in membranedevelopment.  The agreement provides foran 18-month development period during which activities are jointly funded bythe parties.  During this period, Ebarawill construct and demonstrate its pilot-scale manufacturing capabilities forour membrane and we will validate the performance of the membrane manufacturedby Ebara though demonstration in our fuel cell systems.  We have extended the term of this agreementto March 2005.  The development workis progressing according to the extended plan. We are currently negotiating with Ebara for a further extension of 12months to take advantage of further opportunities for cost reduction.  

 

In January 2001, we entered into an exclusiveagreement with Victrex PLC to develop and manufacture ionomers for use in ourproton exchange membranes.  Under thisagreement, we agreed to work together to develop the manufacturing processesfor our proprietary BAM® Ionomer and collaborate on the developmentof Victrex’s proprietary ionomer.  Anionomer is a proton-conducting polymer which is a key element of the protonexchange membrane.  We are currentlyevaluating with Victrex the progress and future of the joint developmentprogram to ensure that resources and efforts are allocated appropriately.

 

In June 2001, we entered into a jointdevelopment and supply agreement with Graftech Inc. (now called AlternativeEnergy Technology Inc. (“AET”)), a wholly-owned subsidiary of UCARInternational Inc. (now called Graftech International Ltd.), for thedevelopment of graphitic materials and components for use in fuel cells,including flow field plates.  This jointdevelopment agreement, which is effective until 2011, expands on an initialcollaboration we established with AET in 1999 regarding the use of flexiblegraphite materials in flow field plates for PEM fuel cells.  We also extended our previous supplyagreement with AET to 2015, whereby AET will be our exclusive manufacturer andsupplier of natural graphite-based material for our fuel cells, includingGRAFCELLTM advanced flexible graphite for use in flow field plates of our Mark900 series fuel cell modules.  We alsobecame an investor in AET, by investing U.S. $5 million for a 2.5% ownershipinterest, to support fuel cell development and commercialization.

 

We continue to work with Ebara, Ebara Ballard andOsaka Gas under a collaboration agreement for the development of a 1 kW naturalgas combined heat and stationary power generator for residential use inJapan.  In July 2002, BGS, Ebara andEbara Ballard signed a further two-year collaboration agreement with Osaka Gasto further develop this product.  We arecurrently in discussions with Osaka Gas with respect to further developmentwork under a new collaboration agreement. BGS and Ebara Ballard also signed a license agreement which providedeach of them with rights to license Osaka Gas’s fuel processing technologyworldwide for PEM fuel cell systems under 10kW. 

 

We also continue to work with Ebara, Ebara Ballardand Tokyo Gas to develop a residential 1 kW combined heat and stationary PEMfuel cell power generator for use in Japan. In August 2003, we entered into a collaboration agreement, whichhas now been extended to March 31, 2006, with Toho Gas, Japan’s thirdlargest natural gas supplier, for the development of a similar PEM fuel cellpower generator.  See “Our Markets andProducts -  Power Generation Markets – 1kW Residential Power Generator”.

 

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### ***Chrysalix***

 

In 2001, we formed Chrysalix Energy LimitedPartnership (“Chrysalix”) with Shell Hydrogen and Westcoast Energy (now DukeEnergy)  to promote and fund early stagecompanies with high growth potential in fuel cells and related systems,hydrogen infrastructure, maintenance and support services.  Since its inception, BOC, BASF VentureCapital GmbH, Mitsubishi Canada Ltd. and Boeing have also joined as limited partners,and Duke Energy has exited the partnership. Chrysalix operates independently of us and our partners and offers toits client companies support in the form of technical knowledge, expertservices and management.  We made afurther investment of $1.1 million during 2004 and have to date invested atotal of approximately $2.5 million.

 

## **Research and Product Development**

 

Our research and product development strategy is todevelop critical proprietary technology to support our technology and productroadmap, with respect to key components, subsystems, systems and processes forPEM fuel cell products, including (a) PEM fuel cells, (b) PEM fuel cellsystems, (c) electric drive systems, (d) power electronics and (e) carbonfiber products.  Cost reduction, durability,reliability and other attributes such as freeze-start capability arefundamental requirements for our products to be successful in their respectivemarkets.  To meet customer requirementsand deliver shareholder value, we operate under a technology and productportfolio management process that is based on industry best practices,increasing the focus and speed of our research and product developmentexecution to put products into the hands of our customers.  To achieve our cost reduction goals, we haveconcentrated on reducing material costs (including membrane, catalyst, GDLs andflowfield plates) and designing PEM fuel cell components, fuel cell stacks,subsystems and systems that utilize high-yielding, high volume manufacturingprocesses while continuing to meet the performance and reliability requirementsfor the targeted application.  We havealso formed relationships with development partners to develop specificcomponents and technologies for integration into PEM fuel cell products.  In conjunction with our technology managementprocess, we are continually evaluating these relationships and where necessary,will amend and evolve our existing external relationships to reflect ourincreased focus on our core, near-term technology, without sacrifice tolonger-term technology development.

 

We continue to maintain a research and developmentagreement with DaimlerChrysler’s internal research department that governs theactivities of, and any intellectual property arising from, fully and jointlyfunded programs on PEM fuel cells.  Thisagreement is intended to accelerate research and development activities andensure work is coordinated and focused on achieving commercialization of PEMfuel cell products for automotive applications.

 

At the end of 2004, we made a significantbreakthrough in fuel cell technology with the accomplishment of a technology ‘hat-trick’which comprised a 30% reduction in precious metal content of the fuel cellstack, coupled with demonstrations of enhanced performance during freeze-startoperation (from –20oC) and extended durability of over 2000 hours,using a dynamic cycle focused on next generation system operation.

 

### ***PEM Fuel Cells***

 

***Membranes****.*  TheBallard® fuel cell uses commercially available proton exchangemembranes that presently represent a substantial cost component.  We actively benchmark commercially availablemembranes and focus, with key partners, on the development of novel polymersand the fabrication of a series of improved membranes for PEM fuel cell

 

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applicationsto achieve performance that is equivalent to, or better than, commerciallyavailable materials, but at lower cost. We have developed a series of membranes that have demonstrated longevityappropriate for use in commercial applications. In addition, we are working with other suppliers of ionomers, polymers,and membranes to further reduce cost and improve performance.  We have also had patents issued to uscovering key chemical compositions and applications of the membrane.  Over the past several years, our otherachievements in this area include significant reductions in cost, increasedpower density, development of manufacturing processes, achieving pilot-scale manufacturingcapacity for the polymer used in the membrane, development of a pilot processfor the manufacture of the membrane, and the expansion of the evaluation anduse of the membrane across our line of product applications.   We have entered into a joint developmentagreement with Ebara to develop a pilot scale continuous manufacturing processfor our proprietary BAM® grafted proton exchange membrane.  Under this joint development agreement, wewill validate the performance specifications of the membrane throughdemonstration in our fuel cell systems.

 

***Gas DiffusionLayers****.*  GDL is a significant component of a PEM fuelcell, allowing the uniform diffusion of hydrogen and air towards theelectrocatalyst.  The quality of the GDLplays an important role in the overall performance and cost of a fuel cell. Wehave significant internal capability to develop, design and manufacturelow-cost, continuous GDLs.  Thiscapability, in combination with our competence in membrane, bipolar platedesign, electrocatalyst layers and sealing technologies, further establishesour ability to provide solutions to increase power density, enhance durabilityand reliability and reduce the cost of our fuel cell products.  We develop and manufacture GDLs for use infuel cell products.  These products aremarketed to other fuel cell and MEA developers for use in their products.  These materials are available in continuousrolls, both as standard non-woven GDLs as wells as teflonated GDLs.  We continue to improve upon our GDL designsand manufacturing processes to further enhance performance and reduce cost.

 

In addition, through our exclusive collaborationwith AET, novel GDL structures have been developed and incorporated intoengineering hardware prototype products to facilitate water managementprocesses and thereby extend the operational capability of these PEM fuel celldesigns.

 

***MembraneElectrode Assembly.***  We are focused on the (a) evaluation of newprocessing methods, materials and technologies in an endeavour to reduce thecost, improve the performance and increase the reliability, durability andfreeze-start capability of our MEAs, and (b) benchmarking of commerciallyavailable catalyst-coated membranes (“CCMs”) and MEAs.  One of the key reliability indicators iscell-to-cell-variability and we have made a significant effort to reduce thisvariability across the different product platforms in collaboration with ourmanufacturing efforts, thereby achieving gains in performance and asimplification of the MEA technology.  Akey factor affecting freeze-start capability is the water distribution withinMEAs.  Through careful manipulation ofMEA design parameters we continue to make key advances in the area of sub-zerofuel cell stack operation.  Our strategyis to use the best CCM or MEA technology available, as determined on aproduct-by-product basis, to ensure that our customers receive the bestperforming, most reliable, and cost-effective PEM fuel cell products.

 

***Catalysts.**** *We have a long-term supply agreement with Johnson Matthey PLC (“JohnsonMatthey”) for catalysts used in PEM fuel cells. In addition, we are working with Johnson Matthey on improved catalystsfor enhanced activity and durability. This work has led to the submission and issue of several keypatents.  In addition, we continue tobenchmark other catalyst materials to ensure that we have access to the best,most cost-effective components for our PEM fuel cell products.

 

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***Fuel Cell Plates****.*  Wehave developed proprietary fuel cell plate and flowfield technology forimproved performance and cost reduction. We continue to work with AET tofurther enhance the performance of its materials, while improving manufacturingprocesses to drive cost reduction.  Wealso continue with benchmarking activities in this area to ensure that we havethe best available components for our products.

 

In addition, leveraging the research capabilities ofDaimlerChrysler, Ballard has evaluated and continues to develop, through jointactivities, the possibilities of customized metal bipolar plate materials toincrease power density and reduce costs.

 

### ***Fuel Cell Systems***

###  

***Fuel Cell SystemDesign****.*  We design PEM fuel cell engines andsystems.  We utilize modular designs forour PEM fuel cell engines in order to maximize the use of common components andsubsystems, to simplify manufacturing and to maximize cost reduction across ourproducts.  Certain components such as airsupply subsystems and cooling subsystems are developed in close collaborationwith our qualified suppliers.

 

***Monitoring andControl Systems****.*  We have designed and manufactured monitoringand control systems for PEM fuel cell systems that provide users with pushbutton automatic operation and incorporate appropriate safety features.  These systems allow the PEM fuel cell to meetthe desired functions of our customer. These systems also automatically record performance data and flowmonitoring information, which we then use for PEM fuel cell testing and systemdesign.  To test PEM fuel cells, we havedesigned and fabricated specialized instrumentation and test equipment that isnot commercially available.

 

We also conduct research and development on fuelcell voltage monitoring sensing systems. We are planning future design generations to include intelligent sensingfeatures such as cell voltage prediction and fault tolerance strategies.

 

### ***Electric Drive Systems and PowerElectronics***

###  

Our goal is to achieve the most economic andefficient transfer of energy from a range of power sources, for both vehiclepropulsion and distributed power generation, and to do so at reduced cost.Advanced technology developments in this area are concentrated in the areas ofpower semiconductor packaging technology, power inverters and high-efficiencyelectric motor technology.

 

Our advanced system design methods complement thesetechnologies by understanding both the dependent and independent variablestogether with the constraints that determine optimal performance of electricdrive systems.  These include (a)dependent variables, such as the peak current required for torque and speedperformance, system weight, and software control, (b) independent variables,such as voltage variation from the power source and coolant temperaturefluctuations, and (c) constraints, such as vehicle packaging and environmentalconditions.

 

We have achieved significant design advances thatwill provide higher energy transfer efficiency for advanced powertrains.  These include the use of computational fluiddynamics for new cooling jacket designs, improved motor control software thatwill eliminate components, and improved power inverter designs that willprovide higher power densities while attaining both size and costreduction.  These efforts are resultingin new drive systems with reduced system power requirements and lower systemlosses, resulting in higher efficiency energy transfer.

 

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We operate a Class 10,000 cleanroom facility in ourDearborn facility to produce customized integrated power semiconductors forpower conversion.  In this area we haveachieved research goals that demonstrate cost reduction, increased powerdensity and energy efficiency, while reducing electrical noise production fromimprovements in the architecture.  Futurework will concentrate on designs to meet high temperature component operationdemanded by our customers while achieving improvement in reliability throughmaterial selection and testing.

 

### ***Material Products***

###  

We are actively developing woven and non-wovencarbon-based substrate materials for fuel cells and other commercialapplications.  The design of these newmaterials allows higher performance in systems and lower cost.  In addition to the carbon fiber materialswhich we are producing for use as GDLs in PEM fuel cells, we are alsodeveloping highly engineered friction materials for use in automotive drivetrains, allowing automatic transmissions to operate more smoothly and vehiclesto achieve better fuel economy.

 

During 2002, we added a new coating line to ourmanufacturing capabilities.  The newmachine precision coats and cures paper and cloth substrate material at hightemperatures, and brings in-house a previously sub-contracted process.

 

During 2003, we continued to add to our capabilitieswith the demonstration of a unique continuous chemical vapor depositionprocessing line which is capable of producing quality rolls of carbon-carbonreinforced composite materials for high energy absorption friction applicationsas well as high performance fuel cell components.

 

### ***TechnologyPartnerships Canada (“TPC”)***

###  

Under the Utilities Development Program with thegovernments of Canada and British Columbia, and through an agreement enteredinto in October 1997, the Government of Canada, through TPC, hascontributed Cdn. $29.4 million (the “Contribution”) to us for the developmentof Ballard® fuel cells and PEM fuel cell stationary powergenerators.  The Contribution representedapproximately 32% of the cost of a three-year program conducted by us todevelop PEM fuel cell stationary power generators.  In consideration for the Contribution, theGovernment of Canada received certain of our common share purchase warrants andan entitlement to a royalty of 4% of gross world-wide sales of fuel cell basedstationary power products utilizing our technology, to a maximum of Cdn. $35.6million as of December 31, 2004.

 

This royalty on fuel cellbased stationary fuel cell products becomes payable commencing at the later of:

 

•                  January 1,2001; and

 

•                  theearlier of:

 

•                  January 1of the year we report a net profit after tax in our audited financialstatements; and

 

•                  fiveyears following the commencement of sales of fuel cell based stationaryproducts.

 

During 2004, we made payments totalling Cdn.$2,320,000 to TPC, representing 32% of proceeds on disposition of equipmentoriginally acquired as part of our 250 kW PEM

 

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fuelcell stationary power generator demonstration program.  These payments reduced the total amountpayable to TPC.

 

## **Intellectual Property**

 

Our intellectual property strategy is to identifyand protect key intellectual property developed by us, and to use and assertsuch intellectual property to our competitive advantage.  We believe such a strategy will assist us tobe first to market with superior technology and to sustain a long-termcompetitive advantage in our target markets.

 

We use patents as the primary means of protectingour technological advances and innovations. We have filed patents on all aspects of the technology we aredeveloping, and we believe that the depth and breadth of our patent portfoliois highly exceptional in the PEM fuel cell industry.  The portfolio includes patents related to ourPEM fuel cell designs, fuel processing, electric drive systems, powerelectronics, inverters, components, materials, manufacturing processes,operating techniques and systems.  Ourintellectual property program also includes a strong competitor monitoringelement.  We actively monitor the patentposition, technical developments and market activities of our competitors.

 

As of February 28, 2005, we had obtainedapproximately 374****U.S. andapproximately 684 non-U.S. granted patents. The non-U.S. patents include patents registered in various countries inEurope and Japan.  In addition, as of February 28,2005, we had approximately 180 published U.S. and approximately 1100 publishednon-U.S. patent applications, and we held exclusive and non-exclusive licenserights to additional intellectual property from a number of third parties.  Our patents will expire between 2009 and2025.

 

We will continue to take a strategic approach to thedevelopment and maintenance of the patent portfolio, ensuring that our patentportfolio is carefully aligned with our business strategy.  We have begun to streamline our patentportfolio (for example, with respect to our direct methanol fuel cell and fuelprocessing intellectual property) in line with recent corporate initiatives tostreamline programs.  We will continue toeliminate some patents from our portfolio, at the same time as addingsignificant numbers of new key patents particularly based on our continuedfocus on leading-edge fuel cell technology development.  We have adopted a more flexible approach withrespect to our non-alliance automotive customers that could involve licensingsome of our core technology in the context of a long term strategicrelationship.  We will also look atstrategies to realise value from intellectual property that is not core to ourbusiness.  Our patent portfolio continuesto be one of our most important assets, which we intend to use to protect ourlead in the market and to support our business objectives.

 

## **Manufacturing**

 

We must develop high-volume manufacturingcapabilities in order to achieve commercialization of our PEM fuel cellproducts.  Our initial commercialmanufacturing facility, Plant 1, is located at our corporate headquarters inBurnaby, British Columbia, and is designed to provide the manufacturingcapacity necessary to meet expected customer demand through our initial marketintroduction phase for our transportation and power generation products.  We expect demand for our PEM fuel cells toincrease following the commercial introduction of fuel cell products, and torequire increased manufacturing capacity. We will either build that capacity to meet the increased demand oroutsource some or all of the manufacturing requirements.  In some circumstances, we may choose tolicense part or all of the manufacturing for a particular PEM fuel cellapplication or customer on a royalty-bearing basis.

 

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In Burnaby, we currently have an IntegratedManagement System (IMS) registered to ISO/TS 16949,  ISO 9001, ISO 14001, and OHSAS 18001standards.  These registrations reflectour approach to achieving best business system practices in the areas ofQuality, Environment, Health and Safety. We have also developed expertise in the testing of all aspects of PEMfuel cells and their components.  Forease of manufacture, product development and design take place concurrently toensure that new designs can be more rapidly introduced in prototype form.  We subcontract some process steps orassemblies to minimize investment in equipment, particularly in the case ofprocesses that will eventually be replaced by new manufacturing methods ormaterials, and non-core technology processes. We are developing relationships with key suppliers to ensure that, as wemove from laboratory-scale manufacturing to full-scale high-volumemanufacturing, we will have a timely supply of key materials.  Additionally, we have established relationshipswith key material suppliers to enhance the quality and suitability of materialssupplied and to assist in the development of our PEM fuel cell products.  An important aspect of our Vehicular Allianceis our partners’ contribution of advanced, low cost and high-volumemanufacturing expertise.  We havedeveloped, and will continue to develop with DaimlerChrysler and Ford,appropriate manufacturing processes for PEM fuel cells.

 

Many of the components we use to manufacture our PEMfuel cell products are unique and may require long lead times to order.  Certain components used in our PEM fuel cellproducts have been developed to our specifications under development and supplycontracts. These development and supply agreements provide that the intellectualproperty created by the design of these components is owned exclusively by us,jointly by us and the supplier, or solely by the supplier, depending uponwhether we have assumed any of the development costs.

 

In Dearborn, we have in-house capability to dolow-volume final assembly and testing of our electric drive systems and powerelectronics products.  Our electric drivesystems are produced using materials and components that are available from avariety of international sources.  Ourelectric drive and power electronics assembly facility is QS 9000, ISO 9001 andISO 14001 registered. We also currently have prototype manufacturing capabilityfor PEM fuel cell engines in Nabern, Germany.

 

Our facility in Lowell, Massachusetts, where weproduce our carbon fiber products, is also ISO 9001 and QS 9000registered.  The experience of ouroperations in Lowell as a Tier 1 automotive supplier will be valuable to us aswe move into commercial production in our other manufacturing centers and as weleverage our established quality and manufacturing practices.

 

With respect to our current level of manufacturing,we have not faced any material problems with our sources of supply.

 

## **Facilities**

 

We currently have the following principalfacilities:

 

•                  a116,797 square foot (10,850 square meter) facility in Burnaby, BritishColumbia, owned by us, that houses our PEM fuel cell development and ourlaboratory-scale manufacturing facilities;

 

•                  aleased 112,000 square foot (10,398 square meter) facility in Burnaby, BritishColumbia that houses our corporate headquarters, Plant 1 and certain of ourexecutive and administrative offices;

 

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•                  aleased 138,000 square foot (12,800 square meter) facility in Kirchheim/Nabern,Germany that is used for PEM fuel cell engine development, assembly andtesting;

 

•                   a 137,000 square foot (12,728 square meter) facility in Lowell,Massachusetts, owned by us, that is used for the development and manufacture ofcarbon materials;

 

•                  twoleased facilities totaling 67,200 square feet (6,243 square meters) inDearborn, Michigan that are used for the development, assembly and testing ofelectric drive systems and power electronics.

 

We believe that these facilities are sufficient tomeet our current manufacturing, product development and testing needs. As ourbusiness expands beyond the initial introduction of our products into fullcommercial production, we will either need to construct additional, largerscale, higher volume manufacturing facilities or outsource some of ourmanufacturing requirements.

 

We are committed to developing and manufacturingproducts and operating all of our facilities in full compliance with allapplicable local, regional, national and international environment, health andsafety regulatory standards.  Our commitmentis reflected in our corporate Quality, Safety and Environmental Policy andGuiding Principles and our underlying programs and initiatives.  We have completed a detailed environmentalassessment of our operations in Burnaby and Dearborn.  In turn, we have developed policies,procedures, and work instructions to manage environmental matters includingair, water and waste management and reduction/minimization, transportation ofdangerous goods, environmental impact and hazard assessment, and internal and externalrecycling programs.  In addition, wecontinue our participation in external environmental initiatives such as theSociety of Automotive Engineers (“SAE”) working group for the development ofpreferred practices for the recycling of fuel cell systems.  This preferred practice was published in2003.

 

## **Competition**

 

Due to the wide range of possible applications forPEM fuel cells and the significant size of potential markets, the number ofcompanies developing and marketing fuel cells and related components has grownover the past 5 years, despite recent industry consolidation.  Such industry growth not only increasespublic awareness of the benefits of fuel cells, but also helps increasegovernment support of fuel cell commercialization and builds a supply base forfuel cell components and enabling technologies.

 

Competition for our products comes from existingpower technologies, improvements to existing technologies, and new alternativetechnologies.  Each of our target marketsis currently served by manufacturers that offer proven and widely acceptedtechnologies and have established customers and suppliers.  In each of our target markets, there are alsocompetitors developing alternative power technologies.

 

A number of corporations, national laboratories, anduniversities in North America, Europe, and Asia are working on PEM fuel celltechnology.  Some of these organizationshave financial, technological, and personnel resources greater than ours andcould be significant competitors. However, we believe that our technology is more advanced than thetechnology demonstrated by potential PEM fuel cell competitors and we plan tomaintain our lead by diligently protecting patents, improving PEM fuel celldesigns, using less and

 

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lowercost materials, developing volume manufacturing processes, and formingstrategic relationships with suppliers and leading companies within our targetmarkets.

 

Many companies in North America, Europe and Asia aredeveloping PEM fuel cells and PEM fuel cell systems.  Some of the companies involved in PEM fuelcell development include, Fuji Electric, GM, Honda, Hydrogenics, IdaTech,Matsushita Electric Industrial, Mitsubishi Electric, Mitsubishi HeavyIndustries, Motorola, Nissan, Nuvera, Plug Power, Proton Energy Systems,ReliOn, Sanyo, Siemens, Toshiba, Toyota, and UTC Fuel Cells.  Companies with programs for fuel cells otherthan PEM fuel cells include, Acumentrics, Fuel Cell Technologies, FuelCellEnergy, Fuji Electric, General Electric, Hitachi Corporation, Kyocera,Mitsubishi Materials Corporation, NEC, SiemensWestinghouse, Toshiba, and UTCFuel Cells.  Some of the companies thatdevelop or plan to develop MEAs, or MEA components, include 3M, BASF, Dow,DuPont, Ion Power, Johnson Matthey, Umicore, and W.L. Gore & Associates.

 

### ***Transportation- PEM Fuel Cell Engines***

 

Our primary focus is the development of PEM fuelcell technology capable of replacing the internal combustion engine (“ICE”) intransportation applications.  In thismarket, we expect advanced ICEs, battery / ICE hybrids, and advanced batteriesto be the principal competitors to PEM fuel cell engines.

 

***ExistingTechnology. ***Almost all motorized vehicles sold today arepowered by ICEs.  PEM fuel cell engineshave a number of advantages over ICEs, including the ability to operate withoutharmful emissions and with higher efficiency. In addition, PEM fuel cell engines operate with very little noise andvibration, have fewer moving parts, and can provide equivalent or betterperformance.  However, ICEs currentlyhave widespread consumer acceptance and are produced at commercially viableprices.  Further, automotivemanufacturers and fuel companies have invested heavily in the use of ICEs andthe accompanying fuelling infrastructure.

 

Automotive manufacturers and others are devotingsignificant resources to the continued development of efficient, low pollutingICEs, leading to significant advances in both gasoline and diesel fuelled ICEtechnology.  Current ICEs pollute farless than past ICEs and vehicles powered by certain low polluting ICEs mayreceive partial ZEV credit under California regulations.

 

***PEM Fuel Cells.***Our primary competition for PEM fuel celltechnology for the transportation market comes from automotive manufacturerssuch as GM, Honda, and Toyota, and UTC Fuel Cells, which supply fuel cellsystems to automotive manufacturers. These companies have devoted significant resources to PEM fuel celltechnology development and have demonstrated PEM fuel cell prototypevehicles.  Over the last few years, wehave seen the competition between automotive companies intensify, with severalcompanies introducing their demonstration fuel cell vehicles earlier thananticipated.  We may also facecompetition from companies selling PEM fuel cell components.

 

***Other EmergingTechnology. ***Among the emerging technologies in thetransportation market, PEM fuel cell engines face competition primarily frombattery / ICE hybrids and, to a lesser extent, batteries.  Vehicles using these technologies have beenproduced and sold by major automotive manufacturers.

 

Research and development in battery technology isbeing conducted to improve performance, reduce weight, lower cost, and decreaserecharging time.  Advanced batteriesdeveloped to date cannot provide an electric vehicle with the performance andconsumer

 

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convenienceof an ICE powered vehicle.  PEM fuelcells can however complement the use of batteries in combined battery / fuelcell-powered systems.

 

The number of battery / ICE hybrid vehicles on themarket, or planned for market, has gone through considerable growth in the pastyear.  Several automotive manufacturersalready offer commercial products and others plan to offer commercial productsin the next few years.  Althoughbattery-powered vehicles can meet the strict requirements for ZEVs, battery /ICE hybrids cannot, though they may receive partial credit.  Ultimately, we view the development of hybridvehicles as a complementary bridging technology for fuel cell vehicles, givensome of the common technology requirements.

 

### ***Transportation- Electric Drive Systems***

 

The principal application for electric drivetechnology is traction power for vehicles. With the growth in fuel cell, battery, and hybrid automotive andindustrial vehicle offerings, the demand for electric drive technologycontinues to grow.  However, given thenature of this technology, and its need to be incorporated into overall vehicledesign, it is unlikely that electric drive train technology will be developedand produced on a large scale without the co-operation and backing of anautomotive manufacturer.

 

Our competitors in the automotive electric drivemarket include automotive manufacturers such as Honda and Toyota, as well asother companies such as Aisin Seiki, Azure Dynamics, Hitachi and MannesmannSachs.  In the airport ground supportequipment market, competitors include Curtis Instruments, Inmotion, and ZAPI.

 

### ***PowerGeneration - Continuous Power***

 

In the continuous power generation market, we arecurrently focusing on small stationary systems, with the initial productoffering being a 1 kW natural gas fuelled PEM fuel cell combined heat and powergenerator targeted at the Japanese residential market.  We believe that PEM fuel cells have acompetitive advantage over existing and emerging technologies in the small andmid-sized continuous power generation market, where noise, vibration, emission,permitting, and variable operating requirements have to be met.  PEM fuel cells also offer operating costadvantages over some existing technologies in its target markets.  We also believe that PEM fuel cell technologycan be superior to alternative fuel cell technologies in its target markets, interms of electrical efficiency, lifetime, responsiveness to load changes, andcost.  For applications that operate athigher base loads, higher temperature fuel cells, such as molten carbonate andsolid oxide fuel cells, are more appropriate than PEM fuel cell technology.

 

***ExistingTechnology. *** EbaraBallard’s 1 kW stationary PEM fuel cell generator competes primarily againstICE based systems, the electrical grid, and standard hot water heaters.

 

***PEM FuelCells. ***There are a number of companies activelyinvolved in the manufacture of PEM fuel cells for the small to mid-sizedcontinuous power generation market. These companies include Matsushita Electric Industrial, Mitsubishi HeavyIndustries, Nuvera, Plug Power, Sanyo, Toshiba, Toyota, and UTC Fuel Cells.

 

***Emerging Technology. ***Emerging technologies for the small to mid-sized continuous powergeneration market in Japan include advanced ICE based systems and solid oxidefuel cells.  Competitors using ordeveloping these technologies include Honda in the case of advanced ICE basedsystems and Acumentrics, Kyocera, Mitsubishi Materials, and SiemensWestinghousein the case of solid oxide fuel cells.

 

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### ***PowerGeneration - Back-up Power***

 

For the back-up power generation market, we providePEM fuel cell stack technology for portable and stationary applications.

 

***ExistingTechnology. ***The back-up power generation market iscurrently dominated by ICEs and batteries. We believe that PEM fuel cell systems are superior to ICEs in manyapplications, because of their ability to operate quietly, without pollutionand vibration, as well as their potential for significantly higherreliability.  We believe that PEM fuelcell systems are superior to batteries, because of their ability to provideextended run time without frequent or lengthy recharging, as well as theirability to offer lower life cycle costs, given that batteries require periodicreplacement.

 

***PEM FuelCells. ***Companies developing PEM fuel cell systemsfor back-up power generation applications include, Hydrogenics, IdaTech, PlugPower, Proton Energy Systems, and ReliOn.  We seek to gain competitive advantage through stack designs that providesuperior performance, efficiency, durability, and cost.

 

***EmergingTechnology. ***Advanced battery technology continues to makemodest progress in the back-up power generation market in areas that ICEscannot be used due to their reliability, emissions, vibration, and/or noiseprofiles.  However, advanced batterytechnologies still require lengthy recharging and in many cases cannot meetdesired run times without requiring substantial space, issues addressed by PEMfuel cell technology.

 

### ***PowerGeneration - Power Electronics***

 

We continue to focus our efforts on largergrid-interconnected photovoltaic products for the North American market.  Competitors in this market include, Xantrex,SMA America, and SatCon.  We believe ourcompetitive advantage comes from superior performance leveraged from work inthe automotive and alternative energy sectors.

 

## **Fuel Cells**

 

### ***How Fuel Cells Work***

 

A fuel cell is an electrochemical device thatproduces electricity from hydrogen and oxygen without combustion.  Hydrogen fuel, which can be obtained frommethanol, natural gas, kerosene, petroleum or water (through electrolysis), andoxygen from the air, are combined in a fuel cell to produce electricity, withusable heat and water vapour as the by-products.  This is the reverse of the process ofelectrolysis by which water can be split into hydrogen and oxygen by passing anelectric current through the water.  Afuel cell, by the nature of its operating principles, is efficient, extractingmore electricity from a fuel than combustion based technologies.  Internal combustion engines operate byconverting fuel into heat, heat into mechanical energy and mechanical energyinto electric power.  The efficiency ofthis multi-step conversion process is affected by heat and frictionlosses.  By contrast, fuel cells convertfuel directly into electricity, thus minimising energy losses and reductions inoperating efficiency.  In addition,because fuel cells do not use combustion, they do not produce the airpollutants which are by-products of combustion. Unlike a battery, a fuel cell does not require recharging.  It will provide power as long as fuel issupplied.

 

The following diagram illustrates how a Ballard®fuel cell produces electricity.  The coreof the Ballard® fuel cell consists of two electrodes, the anode andthe cathode, separated by a polymer membrane electrolyte.  Between the polymer and each electrode is

 

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athin layer of platinum catalyst. Hydrogen fuel dissociates into free electrons and protons (positivehydrogen ions) in the presence of the platinum catalyst at the anode.  The free electrons are conducted in the formof usable electric current through an external circuit.  The protons migrate through the membraneelectrolyte to the cathode.  At thecathode, oxygen from air, electrons from the external circuit and the protonscombine to form water and heat.  Themembrane and two electrodes are sandwiched between two flowfield plates thatfunnel the hydrogen and air to the electrodes and form a single PEM fuel cell.  Single fuel cells can be combined into a fuelcell stack, with the number of fuel cells in the stack determining the amountof voltage and the surface area of the cells determining the current.  Fuel cells are modular and can be designed toprovide the required voltage and power the customer requires.

 

 

### ***Fuel Cell Systems***

###  

To generate usable electrical power, a complete fuelcell system, like a complete automobile engine or power generator, includessubsystems for the fuel supply, air supply, cooling and control.  In addition, for certain applications, a fuelcell system may require an inverter and/or power conditioner to convert thedirect current produced by the fuel cell into the alternating current requiredby some electrical equipment and transmission systems.

 

If hydrogen is not the raw fuel, it can be obtainedby reforming, in a device called a fuel processor, where hydrocarbon fuels suchas methanol, natural gas, kerosene or petroleum are converted into a gasmixture principally containing hydrogen and carbon dioxide.  While methanol is the easiest fuel to reformand requires less complex systems, it is not widely available in the currentfuel distribution infrastructure other than as an industrial commodity.  Natural gas can also be easily reformed, yetit is not easily stored in vehicles or widely available in the current fueldistribution infrastructure for automobiles, but can be used in stationaryapplications.  Gasoline is widelyavailable, and easy to store, but it is difficult to reform and requires very complexsystems that reduce efficiencies and increase the pollutants produced by thefuel processor.  Additionally, thegasoline used in a PEM fuel cell powered vehicle will have to be cleaner thanthe gasoline used in today’s vehicles and may require significant changes inthe refining process.

 

The following diagram illustrates the mainsubsystems which may be present in a fuel cell system.

 

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### ***PEM Fuel Cell Power Trains***

###  

A PEM fuel cell power train combines a PEM fuel cellengine and an electric drive that converts electrical power into mechanicalenergy that is transmitted to the axle that drives the wheels.  The PEM fuel cell power train provides thesame functions in a PEM fuel cell vehicle as those provided by an engine andtransmission in an ICE powered vehicle.

 

# **HUMAN RESOURCES**

 

As at December 31, 2004, we had a total ofapproximately 976 employees (and as at February 28, 2005, approximately955 employees) in Canada, U.S. and Germany, representing such diversedisciplines as electrochemistry, polymer chemistry, chemical, mechanical,electronic and electrical engineering, manufacturing, marketing, businessdevelopment, finance, human resources, information technology and businessmanagement.  Our employees are notrepresented by any labour union (although non-management employees of BPS AGare represented by a Works’ Council). Each employee must agree to confidentiality provisions as part of theterms of his or her employment.  Amajority of our employees own our common shares or options to purchase ourcommon shares.

 

# **SHARECAPITAL AND MARKET FOR SECURITIES**

 

Our authorized share capital consists of anunlimited number of common shares, an unlimited number of preferred shares, oneClass A share and one Class B share.  Asat February 28, 2005, our issued share capital consisted of 123,259,358common shares, one Class A share, and one Class B share.  Our common shares are listed and trade on theToronto Stock Exchange (“TSX”) under the symbol BLD and on the Nasdaq NationalMarket under the symbol BLDP.

 

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The following table shows the monthly tradingactivity for our common shares on the TSX and Nasdaq during 2004:

 
| ** ** | ** ** | **TSX**                     | ** ** | **NASDAQ**         | ** ** |
|------------|------------|-----------------------------|------------|--------------------|------------|
| ** ** | ** ** | **Price  range (in  Cdn.)** | ** ** | **Volume  traded** | ** ** | **Price  range (in  U.S.)** | ** ** | **Volume  traded** | ** ** |
| January    |       | $14.75 – $17.44        |       | 3,833,088          |       | $11.15–$13.50 |   | 9,653,400 |   |
| February   |       | $13.50 – $15.89        |       | 2,968,000          |       | $10.10 – $12.05 |   | 7,661,200 |   |
| March      |       | $12.03 – $14.24        |       | 3,625,099          |       | $8.99 – $10.74 |   | 8,959,600 |   |
| April      |       | $12.36 – $16.15        |       | 6,153,320          |       | $9.43 – $12.05 |   | 22,910,400 |   |
| May        |       | $12.12 – $15.00        |       | 3,153,400          |       | $8.75 – $10.93 |   | 10,997,600 |   |
| June       |       | $12.15 – $14.00        |       | 4,641,890          |       | $8.90 – $10.38 |   | 12,251,800 |   |
| July       |       | $7.81 – $12.50         |       | 5,508,195          |       | $5.92 – $9.50 |   | 18,961,500 |   |
| August     |       | $7.46 – $9.20          |       | 3,677,960          |       | $5.70 – $7.37 |   | 17,714,300 |   |
| September  |       | $7.81 – $10.50         |       | 3,666,180          |       | $5.90 – $8.29 |   | 18,867,400 |   |
| October    |       | $9.12 – $10.75         |       | 4,180,575          |       | $7.20 – $8.59 |   | 18,908,400 |   |
| November   |       | $7.75 – $10.25         |       | 2,733,234          |       | $6.55 – $8.38 |   | 11,992,600 |   |
| December   |       | $7.06 – $8.95          |       | 3,066,084          |       | $5.85 – $7.25 |   | 16,885,800 |   |

 

The holders of our common shares are entitled to onevote for each share held on all matters to be voted on by such shareholdersand, subject to the rights and priorities of the holders of preferred shares,are entitled to receive such dividends as may be declared by our board ofdirectors out of funds legally available therefor and to receive our remainingproperty, after satisfaction of all outstanding liabilities, on liquidation,winding-up or dissolution.

 

Our preferred shares are issuable in series and ourboard of directors is entitled to determine the designation, preferences,rights, conditions, restrictions, limitations and prohibitions to be attachedto each series of such shares.  Currentlythere are no preferred shares outstanding.

 

## **Class A Share and Class B Share**

##  

Our Class A share and our Class B shareare held by DBF Pref Share Holdings Inc. (“DBF”), a corporation owned byBallard (50%), DaimlerChrysler (25%) and Ford (25%).  The rights attached to these shares permitDaimlerChrysler and Ford to exercise their rights to appoint directors to ourboard and permit DaimlerChrysler and Ford appointees to our board to exerciserights pursuant to the Limited Voting Provisions.

 

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The Limited Voting Provisions provide that certaindecisions of our board of directors may not be undertaken without approval by anumber of directors equal to one director more than a majority of the directorswho are entitled to vote and who do vote on such decision, including at leastone of the directors appointed by DaimlerChrysler or Ford.  As a result, the decisions of our board ofdirectors which are subject to the Limited Voting Provisions cannot beundertaken if all DaimlerChrysler and Ford appointees to our board of directorsattend the meeting and vote against the matter under consideration.  If any director appointed by DaimlerChrysleror Ford is absent or abstains, a simple majority will suffice to effect adecision, which majority need not include any of the directors appointed byDaimlerChrysler or Ford.

 

The decisions of the board that are subject to theLimited Voting Provisions are as follows:

 

(a)          the reduction in the size of our board of directors below 12 directors;

 

(b)         the sale of substantially all of our business, or the assets, propertyor intellectual property owned by us or our subsidiaries;

 

(c)          any mortgage, grant of security interest, pledge or encumbrance on allor substantially all of the assets, property or intellectual property of us andour subsidiaries;

 

(d)         any amalgamation, arrangement or statutory reorganization of us withanother entity other than a subsidiary of ours;

 

(e)          any amendment or restatement of our articles or those amendments to ourby-laws that are inconsistent with the terms of an agreement to whichDaimlerChrysler, Ford, DBF and Ballard are parties dated the date of theissuance of the Class A and Class B Shares;

 

(f)            the voluntary commencement of bankruptcy orsimilar proceedings by us or any of our subsidiaries;

 

(g)         a reduction in our stated capital;

 

(h)         any change in our name;

 

(i)             a consolidation (reverse split) of our commonshares;

 

(j)             the approval of our annual business plan orbudget and any changes thereto, and the approval of, or any material change to,our strategic plan;

 

(k)          any capital investment (or sale) by us or a wholly-owned subsidiary ofours that are not included in an approved budget if the amount of suchinvestment (or sale) together with all other such unbudgeted investments (orsales) made in the same calendar year would exceed the greater of (i) Cdn. $15million before January 1, 2008, and Cdn. $30 million after December 31,2007, and (ii) the lesser of 25% of our total capital budget (including thoseof our wholly-owned subsidiaries) for such calendar year and Cdn. $100 million;

 

(l)             any investment by way of cash, property orsecurities (or sale of an investment) by us or any of our wholly-ownedsubsidiaries in another person (other than a wholly-owned subsidiary of ours)or a sale of a wholly-owned subsidiary, other

 

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than investments (or sales) provided for in anapproved budget, that exceeds the greater of (i) Cdn. $25 million, and (ii) thelesser of 25% of our total budget for investments in persons (other thanwholly-owned subsidiaries) for such calendar year and Cdn. $100 million; and

 

(m)       other than as provided in an approved business plan or budget andsubject to the requirements dealing with capital investment (or sale) or otherinvestments (or sale) described above, (i) the borrowing of money, granting ofsecurity, guarantying of liabilities and obligations of another person (otherthan liabilities or obligations of wholly-owned subsidiaries) in excess of Cdn.$50 million in any calendar year, or (ii) the incurrence of liabilities andother obligations, other than in the ordinary course of business, in excess ofCdn. $25 million in any calendar year.

 

The Limited Voting Provisions will cease to apply toDaimlerChrysler and Ford collectively if they do not own in the aggregate atleast (a) one-third of our outstanding common shares, not including shares weissue in connection with an acquisition or investment in a third party that issubject to the Limited Voting Provisions, and (b) 20% of all of our outstandingcommon shares. In addition, the Limited Voting Provisions will cease to applyto DaimlerChrysler and Ford collectively if either of them (a) sells theirBallard Base Shares to a third party, (b) no longer owns a sufficient number ofour common shares to elect a director, or (c) fails to elect a director whenentitled to do so.

 

If the Limited Voting Provisions cease to apply toDaimlerChrysler and Ford collectively, it will be possible for the LimitedVoting Provisions to apply to either of them individually if eitherDaimlerChrysler or Ford first owns at least 37.92% of our outstanding commonshares or all of the Ballard Base Shares of the other party, and then retainsownership of their Ballard Base Shares and at least (a) one-third of ouroutstanding common shares, not including shares we issue in connection with anacquisition or investment in a third party that is subject to the LimitedVoting Provisions, and (b) 20% of all of our outstanding common shares.

 

## **Share Incentive Plans**

 

Our share incentive plans include share optionplans, share distribution plans, deferred share unit plans and a restrictedshare unit plan.

 

### ***Share Option Plans***

 

During 2003, we changed our compensation philosophyin relation to option grants for directors, officers and employees.  We ceased the practice of granting options toour directors, and have significantly reduced the number of options beinggranted to our officers and employees.

 

The key provisions of our 2002 share option plan(the “2002 Option Plan”) are as follows:

 

•                  All grants of options under our option plansare made by our board of directors, on the recommendation of our ChiefExecutive Officer and the Management Development, Nominating & CompensationCommittee.  All of the Corporation’s  officers, employees and consultants arecurrently eligible to participate in the 2002 Option Plan.

 

36

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•                  The exercise price of an option is determinedby our board and is to be the closing price per share of our common shares onthe TSX on the last trading day before the day the option is granted.

 

•                  Options may have a term of up to 10 yearsfrom the date of grant, and unless otherwise determined by our board ofdirectors, vest in equal amounts on the first, second and third anniversariesof the date of grant.  Vesting of optionsmay be accelerated in certain cases.  Our2000 share option plan provides that if an “accelerated vesting event” occurs,any outstanding option may be exercised at any time before its expiry.  Under the 2002 Option Plan, if an “acceleratedvesting event” occurs, any outstanding option may be exercised at any timebefore the 60th day after such event.  Under both plans, an accelerated vestingevent occurs when

 

(a)          a person makes a take-over bid that could result in that personacquiring at least two-thirds of our voting shares,

 

(b)         any person or persons acting in concert acquire at least two-thirds ofour voting shares,

 

(c)          a person purchases all or substantially all of our assets, or

 

(d)         we join in any business combination that results in our shareholdersowning one-third or less of the voting shares of the combined entity.

 

•                  The number of common shares reserved forissue to any person under all of our stock option plans may not exceed 5% ofthe Outstanding Issue (as defined in the plans).

 

•                  No options may be repriced after they aregranted.

 

•                  Generally, an optionee has between 30 to 90days to exercise an option after the last day on which the optionee ceased tobe a director or the officer or employee ceased to work for us, as the case maybe, except in the case of death, retirement or disability.

 

•                  The number of our common shares subject to anoption, the exercise price per share and the total number of our common sharesthat may be made subject to an option or issued under the option plans will beadjusted in the event of any subdivision or consolidation of our common sharesor any dividend payable in our common shares and in the event of certain otherreorganizations or other events affecting our common shares, as determined byour board of directors.

 

### ***Share Distribution Plan***

 

The key provisions of our 2003 share distributionplan (the “2003 Share Distribution Plan”) are as follows:

 

•                  Our 2003 Share Distribution Plan permits ourcommon shares to be issued, without cash consideration, to our employees,officers and directors.  All issuances ofshares under our 2003 Share Distribution Plan are made by our board ofdirectors, on the recommendation of the Chief Executive Officer and theManagement Development, Nominating & Compensation Committee.  The purpose of grants under this plan is to:

 

37

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(a)          recognize the past contributions of the recipients to us and toencourage their future contribution to us, in accordance with our bonus plans;

 

(b)         satisfy the annual retainer for directors (including redemption ofdeferred share units issued pursuant to the deferred share unit plan which wehave of established for our directors);

 

(c)          enable us to attract key employees by issuing shares as a signingbonus;

 

(d)         enable us to settle contractual amounts payable as a result ofterminations or statutory severance payments owing to employees which wouldotherwise be payable in cash;

 

(e)          satisfy redemptions of deferred share units issued pursuant to thedeferred share unit plan which we have established for our directors andexecutive officers; and

 

(f)            satisfy redemptions of restricted share unitsissued pursuant to the restricted share unit plan which we have established forour employees.

 

•                  The issue price of the shares granted underthe 2003 Share Distribution Plan must not be less than the last closing priceper share for our common shares on the TSX or NASDAQ on the date that our boardof directors approves the issuance, or at a price otherwise determined by ourboard of directors.

 

•                  The number of our common shares that may beissued under our share incentive plans

 

(a)          to our insiders, may not exceed 10% of the Outstanding Issue (asdefined in the plans) at that time, and

 

(b)         to any one insider and his or her associates, within a one-year period,may not exceed 5% of the Outstanding Issue (as defined in the plans) at thattime.

 

•                  The aggregate number of common shares thatmay be issued under the plan to the board of directors cannot exceed 200,000common shares.

 

### ***Deferred Share Unit Plans***

 

We have implemented a deferred share unit plan forour independent directors (the “Directors’ DSU Plan”)  and a deferred share unit plan for ourexecutive officers (the “Executive Officers’ DSU Plan”).

 

A deferred share unit is a notional common sharehaving the same value as one of our common shares at the time of grant.  The deferred share unit, however, would notbe redeemed until such time as the director leaves the board or the executiveofficer leaves us and its value on redemption would be based on the value ofour common shares at that time.  TheDirectors’ DSU Plan and the Executive Officers’ DSU Plan provide the financialequivalent of an ongoing equity interest in us through our directors’ andexecutive officers’ periods of service to us. Our 2003 Share Distribution Plan or any successor plans will be used tosatisfy the redemption of deferred share units issued pursuant to the Directors’DSU Plan and the Executive Officers’ DSU Plan and any issuance of common sharesto satisfy the Directors’ annual retainer.

 

38

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Under the Directors’ DSU Plan, each unrelatedoutside director elects annually the proportion of his or her annual retainerthat he or she wishes to receive in deferred share units or our common shares.Under the Executive Officers’ DSU Plan, deferred share units are granted to ourexecutive officers in partial or full payment of their annual bonuses, whichotherwise is paid in our common shares. Each executive officer elects the proportion of his or her annual bonusthat he or she wishes to receive in deferred share units or our common shares.

 

### ***Restricted Share Unit Plan***

 

During 2004, we implemented a restricted share unit(“RSU”) plan for our employees to recognize their contributions and to providean incentive which aligns their interests with those of our shareholders.   The vesting of RSUs issued from this planoccurs three years from the date of issuance, subject to the achievement of anyperformance criteria which may be set by our board of directors.  Each RSU is convertible into one commonshare, which will be issued from our 2003 Share Distribution Plan or anysuccessor plans.

 

### ***BPS/BGS Share Exchange Plan***

 

We established the BPS/BGS Share Exchange Plan toprovide our officers and employees who were employees of BGS with a right toexchange the shares of BGS they may acquire on the exercise of BGS options forour common shares.  The number of ourcommon shares they will receive is determined according to an exchange ratiounder which they will receive common shares as if they had received an optionfrom us at the time of, and instead of, the option they received from BGS.  The exchange ratio is based upon the ratiobetween the exercise price of the BGS share option that was granted and theclosing price of our common shares on the date the BGS share option wasgranted.

 

The exchange mechanism set out in the BPS/BGS ShareExchange Plan was amended in 2003.  Underthe amended plan, outstanding BGS options will be exchanged for options topurchase that number of our common shares that would have been acquired underthe prior exchange mechanism.  There wasno change in the exchange ratio or the number of our common shares issuable.

 

# **DIVIDENDRECORD AND POLICY**

 

To date, we have not paid any dividends on ourshares and, since it is anticipated that all available cash will be needed toimplement our business plans, we have no plans to pay dividends in theimmediate future.

 

# **DIRECTORSAND OFFICERS**

 

## **Board of Directors**

 

The following chart sets out the name andmunicipality of residence of each of our directors as at February 28,2005, each such person’s principal occupation during the past five years, theperiod of time each has served as a director or officer and shares and deferredshare units beneficially owned or controlled by each of them.  The term of office of each director expiresat the conclusion of our next annual shareholders’ meeting.  Mr. Charles Baillie has informed us thathe will not be standing for re-election at our 2005 Annual Shareholders’ Meeting,for personal reasons.

 

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| **Name and  Municipality of  Residence****(1)**    | ** ** | **Principal  Occupation****(1)**                                                                                                                                                                                                                                                           | ** ** | **Period  has  served as  a  Director** | ** ** | **Shares  Beneficially  Owned or  Controlled****(1)** | ** ** | **Deferred  Share Units  Owned or  Controlled****(6)** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                               |       |                                                                                                                                                                                                                                                                                       |       |                                    |       |                                                  |       |                                                   |       |
| John Sheridan  Toronto, Ontario                    |       | Corporate Director. Formerly, President and Chief Operating Officer,  Bell Canada (*telecommunication service  company*) (October 2001 - 2003); Vice-Chairman, Bell Canada  (1999-2001)                                                                                               |       | Since 2001                              |       | 1,294                                                 |       | 22,369                                                 |       |
|                                               |       |                                                                                                                                                                                                                                                                                       |       |                                    |       |                                                  |       |                                                   |       |
| Charles Baillie  Toronto, Ontario                  |       | Retired. Formerly, Chairman, Toronto-Dominion Bank *(financial services)* (1998 - 2003); Chairman  and Chief Executive Officer, Toronto-Dominion Bank (1998 - 2002)                                                                                                                        |       | Since 2002                              |       | 4,378                                                 |       | 8,894                                                  |       |
|                                               |       |                                                                                                                                                                                                                                                                                       |       |                                    |       |                                                  |       |                                                   |       |
| Ian Bourne  Calgary, Alberta                       |       | Executive Vice President and Chief Financial Officer of TransAlta  Corporation (since 1998)                                                                                                                                                                                                |       | Since 2003                              |       | 1,824                                                 |       | 8,219                                                  |       |
|                                               |       |                                                                                                                                                                                                                                                                                       |       |                                    |       |                                                  |       |                                                   |       |
| Dennis Campbell  West Vancouver,  British Columbia |       | President and Chief Executive Officer of the Corporation (since March 2003).  Formerly, President and Chief Operating Officer of the Corporation (July 2002  - March 2003); President and Chief Executive Officer, Home Care  Industries *(filter manufacturer)*(2000-2002) |       | Since 2003                              |       | 28,505                                                |       | 56,333                                                 |       |
|                                               |       |                                                                                                                                                                                                                                                                                       |       |                                    |       |                                                  |       |                                                   |       |
| Ed Kilroy  Toronto, Ontario                        |       | President and Chief Executive Officer, Symcor (since January 2005).  Formerly, President, IBM Canada Ltd. *(information  technology)*(2001-2004); General Manager, e-Commerce Solutions, IBM  Canada Ltd. *(information technology)*  (1999-2001)                                     |       | Since 2002                              |       | 824                                                   |       | 7,309                                                  |       |

 

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| **Name and  Municipality of  Residence****(1)**                 | ** ** | **Principal  Occupation****(1)**                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Period  has  served as  a  Director** | ** ** | **Shares  Beneficially  Owned or  Controlled****(1)** | ** ** | **Deferred  Share Units  Owned or  Controlled****(6)** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                    |       |                                                  |       |                                                   |       |
| Denise Morrison  Cherry Hill, New  Jersey                       |       | President of Global Sales and Chief Customer Officer, Campbell Soup  Company *(food and beverage)*(since  2003). Formerly, Executive Vice-President and General Manager, Snacks  Division, Kraft Foods Inc. *(food and  beverage);*Executive Vice-President, General Manager, Confections  Division of Kraft Foods Inc. (2001); Senior Vice-President, General Manager  Sales and DTS, Nabisco Foods Inc. *(food  & beverage)* (1998-2000) |       | Since 2002                              |       | 2,765                                                 |       | 9,721                                                  |       |
|                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                    |       |                                                  |       |                                                   |       |
| David Prystash(3)Novi, Michigan                                 |       | Global Product Development Controller, Ford *(automotive manufacturer).* Formerly,  Executive Director of Pre-Owned and Remarketing Strategy, Ford (2003-2004);  Controller, North America Product Programs, Ford (2001-2003); Director,  Corporate Business Development, Ford (2000-2001).                                                                                                                                                    |       | Since 2004                              |       | 24,181,198                                            | (4)        | Nil                                                    |       |
|                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                    |       |                                                  |       |                                                   |       |
| Dr. Gerhard  Schmidt(3)Dearborn,  Michigan                      |       | Vice-President, Research, Ford (*automotive  manufacturer)*. Formerly, Senior Vice-President, Powertrain  Development, BMW AG (1996-2000)                                                                                                                                                                                                                                                                                                      |       | Since 2001                              |       | 24,181,198                                            | (4)        | Nil                                                    |       |
|                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                    |       |                                                  |       |                                                   |       |
| Dr. –Ing. Hans-  Joachim Schöpf(2)Stuttgart,  Germany |       | Retired. Formerly, Executive Vice-President, Development &  Engineering, Mercedes Car Group, DaimlerChrysler (*automotive manufacturer)*(1999-2004).                                                                                                                                                                                                                                                                                       |       | Since 2001                              |       | 22,085,992                                            | (5)        | Nil                                                    |       |

 

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| **Name and  Municipality of  Residence****(1)**       | ** ** | **Principal  Occupation****(1)**                                                                                                                                                                                                                                                                                                       | ** ** | **Period  has  served as  a  Director** | ** ** | **Shares  Beneficially  Owned or  Controlled****(1)** | ** ** | **Deferred  Share Units  Owned or  Controlled****(6)** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                  |       |                                                                                                                                                                                                                                                                                                                                   |       |                                    |       |                                                  |       |                                                   |       |
| Mark Suwyn  Brentwood,  Tennessee                     |       | Retired. Formerly Chairman and Chief Executive Officer,  Louisana-Pacific Corporation *(building  products)*(since 1996).                                                                                                                                                                                                              |       | Since 2003                              |       | 1,130                                                 |       | 9,283                                                  |       |
|                                                  |       |                                                                                                                                                                                                                                                                                                                                   |       |                                    |       |                                                  |       |                                                   |       |
| Dr. –Ing.  Thomas Weber(2)Stuttgart,  Germany    |       | Head of Research and Technology and Member of the Board of Management  of DaimlerChrysler *(automotive manufacturer)*,  responsible for Research and Technology (since 2003); Formerly, Head of the  Rastatt passenger car plant and spokesperson for the Mercedes-Benz A-Class  model series management, DaimlerChrysler (1999-2002). |       | Since 2004                              |       | 22,085,992                                            | (5)        | Nil                                                    |       |
|                                                  |       |                                                                                                                                                                                                                                                                                                                                   |       |                                    |       |                                                  |       |                                                   |       |
| Douglas  Whitehead  West Vancouver,  British Columbia |       | President & Chief Executive Officer, Finning International Inc. (*heavy equipment reseller*) Formerly,  President & Chief Operating Officer, Finning International Inc.  (1999-2000); President & Chief Executive Officer, Fletcher Challenge  Canada Ltd. (1992-1998)                                                     |       | Since 1998                              |       | 4,383                                                 |       | 8,570                                                  |       |

 

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Notes:

(1)                    The information as to municipality ofresidence, principal occupation, business or employment of, and sharesbeneficially owned or controlled by, a director is not within the knowledge ofour management and has been furnished by the director.

(2)                    Appointed by DaimlerChrysler in accordancewith the terms of the Vehicular Alliance. See “Strategic Alliances – Vehicular Alliance”.

(3)                    Appointed by Ford in accordance with the termsof the Vehicular Alliance.  See “StrategicAlliances – Vehicular Alliance”.

(4)                    This director holds none of our common sharespersonally, but represents Ford, which holds 24,181,198 of our commonshares.

(5)                    This director holds none of our common sharespersonally, but represents DaimlerChrysler, which holds 22,085,992 of our common shares.

(6)                    Rounded to the nearest whole number.

 

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## **Board Composition**

 

The majority of our directors are independent andour board of directors is chaired by an independent director.  “Independence” is judged in accordance withthe provisions of the United States*Sarbanes-Oxley Act of 2002*(“Sarbanes-Oxley”*)*, and as determined by the TSX and theNational Association of Securities Dealers Automated Quotation (“NASDAQ”).  As discussed under “Strategic Alliances –Vehicular Alliance” DaimlerChrysler and Ford each have rights to appoint twodirectors to our board.  These directorsare considered to be non-independent directors and will abstain from voting incases where they are under a conflict of interest relating to a transactioninvolving their respective companies.

 

We conduct an annual review of the other corporateboards on which our directors sit and have determined that currently there areno board interlocks that exist with respect to our directors.  The board has also established a guidelinefor the maximum number of corporate boards on which a director should sit.  This guideline has been set at five corporateboards.

 

## **Corporate Governance**

 

Our board of directors and senior managementconsider good corporate governance to be central to our effective and efficientoperation.  We have been monitoringcorporate governance initiatives as they have developed and benchmarking thecorporate governance activities of other leading corporations regularly toensure that we are in compliance with applicable requirements and followingbest corporate governance practices at all times.  We have adopted Corporate Governance Guidelinesthat provide for director qualification standards, director responsibilities,the form and amount of director compensation, director orientation andcontinuing education, management succession planning and annual performanceevaluation of the board.  A copy of theCorporate Governance Guidelines can be found on our website at www.ballard.com.  The board and the individual directorsoperate under a formal board mandate and terms of reference for individualdirectors, both of which can be found on our website.  We also have a Code of Ethics which appliesto our board, officers and employees.  Acopy of our Code of Ethics can be found on our website.  We have reviewed and improved our internalcontrol and disclosure procedures and are satisfied that they are sufficient toenable our Chief Executive Officer and Chief Financial Officer to certify ourannual reports filed with or submitted to the U.S. Securities and ExchangeCommission and to certify our interim and annual reports filed with Canadian securitiesauthorities.

 

We have established a formal director orientationand ongoing education program.  Eachdirector receives an orientation to us upon joining our board.  Such orientation consists of site visits,presentations regarding our business and products, and a reference manual whichcontains various reference documents and information.  Continuing education is offered by way ofongoing circulation of informative materials aimed at topical subject matters,as well as guest speakers who are invited to speak at board meetings on varioustopics.  In the past, we have invitedoutside guest speakers to speak to our board about the fuel cell industry,corporate governance and risk management and, internal managementrepresentatives to speak about various functions relating to our technology andbusiness.  The educational presentationswhich are made by internal management provide an opportunity for the boardmembers to meet and interact with members of our management team.

 

We have set up an e-mail process for shareholders tocommunicate with the board, through the Chairman of the Board.  Shareholders who wish to send a message tothe Chairman of the Board can find the details of this process on our websiteat

 

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www.ballard.com.  ** **In addition, shareholder feedbackwhich is received by us is provided to the board of directors through asemi-annual report.

 

The directors conduct an annual performanceevaluation of the board, board committees, and the Chairman of the Boardthrough a process overseen by the Corporate Governance Committee andfacilitated by an external, independent corporate governance consultant.  Evaluation questionnaires are completed anddelivered to the consultant who then compiles and presents a summary report forthe Corporate Governance Committee.  TheCorporate Governance Committee works with management to improve board processesand to address concerns raised in the evaluation questionnaires, and reports tothe full board on the evaluation results and proposed action items.  In addition, each director is asked tocomplete a peer evaluation questionnaire on a regular basis, the results ofwhich are compiled by the external corporate governance consultant andforwarded to the Chairman of the Board, who then reviews the questionnaires andmeets with each director to conduct an individual director performanceevaluation.

 

We believe that we comply with all applicable NASDAQcorporate governance rules and the TSX corporate governance guidelines.

 

## **Board Committees**

 

Our board of directors has established threestanding committees: the Audit Committee; the Management Development,Nominating & Compensation Committee and the Corporate GovernanceCommittee.  Each of these committees hasbeen delegated certain responsibilities, performs certain advisory functionsand either makes certain decisions or makes recommendations to the fullboard.  Each of the committee chairsreports on the activities of the committee to the full board following eachcommittee meeting.  Each of the boardcommittees holds in-camera sessions at the end of each committee meeting.  Each board committee operates under a mandatethat is approved by the board of directors which sets out the responsibilitiesof the committee.  A copy of eachcommittee’s mandate is posted on our website at www.ballard.com.  The mandates of each of the committees arereviewed annually and each committee’s performance is assessed annually througha process overseen by the Corporate Governance Committee.

 

### ***Audit Committee***

 

The Audit Committee is constituted in accordancewith SEC rules and assists the board of directors in fulfilling itsresponsibilities by reviewing financial information, the systems of corporatecontrols and the audit process.  TheAudit Committee is responsible for overseeing the audit process and ensuringthat our financial statements are fairly presented in accordance with generallyaccepted accounting principles.  TheAudit Committee meets with our financial officers and our internal and externalauditors to review matters affecting financial reporting, the system ofinternal accounting and financial controls and procedures and the auditprocedures and audit plans.  The AuditCommittee reviews our significant financial risks, the appointment of financialsenior executives and annually reviews our insurance coverage, tax loss carryforwards, pension and health care liabilities and off-balance sheettransactions.  The Audit Committee has atleast one member, Ian Bourne, who qualifies as an audit committee financialexpert under applicable securities regulations. All of the members of the Audit Committee are independent directors andare financially literate.

 

The Audit Committee is responsible for appointingour external auditors, monitoring the external auditors’ qualifications andindependence, and determining the appropriate level of remuneration for theexternal auditors.  The external auditorsreport directly to the

 

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AuditCommittee.  The Audit Committee and boardof directors each have the authority to terminate the external auditors’engagement.  The Audit Committee alsoapproves in advance, on a case-by-case basis, any services to be provided bythe external auditors which are not related to the audit.  The following table shows the fees paid toKPMG in 2004 and 2003 for audit and non-audit related work, all of which wasapproved by the Audit Committee:

 
| **Expressed in U.S. dollars** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Audit fees                    |       | $        | 342,930    |     | $          | 507,685 |   |
| Audit-related  fees           |       | $        | 62,621     |     | $          | 28,140 |   |
| Tax fees                      |       | $        | 109,602    |     | $          | 240,062 |   |
| All other  fees               |       | Nil      |       | Nil      |       |

 

In addition, the Audit Committee is mandated toreview all financial disclosure contained in prospectuses, annual reports,annual information forms, management proxy circulars, and other similardocuments.  The Audit Committee also isresponsible for ensuring that the internal audit function is being effectivelycarried out.  The Audit Committee alsoreviews and approves in advance related party transactions on a case-by-casebasis.  The committee is currentlycomposed of Ian Bourne (Chairman), Denise Morrison, and Douglas Whitehead. Inaddition to each committee member’s general business experience, the educationand experience of each member that is relevant to the performance of his or herresponsibilties as a member of the Audit Commtitee are set forth below.

 

Mr. Bourne is TransAlta’s Executive Vice-Presidentand Chief Financial Officer.  He isresponsible for all financial policy, planning and reporting, as well as tax,treasury and risk management planning and implementation.  Prior to TransAlta, Mr. Bourne was SeniorVice-President and Chief Financial Officer of Canada Post Corporation.  Mr. Bourne was also with General Electric for21 years, where he held several key positions including European Treasurer,Chief Financial Officer for GE Canada, and Chief Financial Officer for GEMedical Systems Europe.  Mr. Bourne has aBachelor of Commerce degree from Mount Allison University.

 

Ms. Morrison is Senior Vice President,President ofGlobal Sales and Chief Customer Officer of Campbell Soup Company, where she hasresponsibility for Campbell’s sales of $7.1 billion. She is also a member ofthe Corporate Leadership Group. Prior to joining Campbell, Ms. Morrison wasExecutive Vice-President and General Manager of Kraft Foods’ Snacks andConfections divisions, and was a member of the Kraft Foods North AmericaOperating Committee.  Ms. Morrison hasalso held various executive positions in Nabisco Inc., Nestle USA, and Procter& Gamble with responsibility for sales, marketing and generalmanagement.  Ms. Morrison is also amember of the board of directors of The Goodyear Tire & RubberCompany.  Ms. Morrison holds a B.S.degree in Economics and Psychology from Boston College, graduating Magne CumLaude.

 

Douglas Whitehead is the President and ChiefExecutive Officer of Finning International Inc. He joined Finning International in January 1999 as President andChief Operating Officer, and was elected to the company’s board of directors onApril 23, 1999.  He was appointedChief Executive Officer of the company in April 2000.  Mr. Whitehead is

 

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alsoa director of Terasen Inc., Belkorp Industries, and The Conference Board ofCanada.  He is a member of the CanadianCouncil of Chief Executives, the Board of Governors for the Business Council ofBritish Columbia, the B.C. Progress Board and the Board of Governors of theUniversity of British Columbia.  Mr.Whitehead holds a Bachelor of Applied Science in Civil Engineering from theUniversity of British Columbia and a M.B.A. from the University of WesternOntario.

 

The Audit Committee’s mandate is attached atAppendix A, as required by Multilateral Instrument 52-110 under Canadiansecurities laws.

 

### ***ManagementDevelopment, Nominating & Compensation Committee***

 

The Management Development, Nominating &Compensation Committee is responsible for considering and authorizing terms ofemployment of executive officers, matters of compensation, approving sharecompensation plans, reviewing awards under share incentive plans, and providingadvice on our organizational and compensation structures in the variousjurisdictions in which we operate.

 

In addition to approving the compensation of ourexecutive officers, the committee also regularly reviews and sets the minimumshare ownership requirement for executive officers.  The committee is also responsible forensuring appropriate senior management succession planning, recruitment,development, training and evaluation.  Inparticular, the committee annually reviews the performance objectives of ourChief Executive Officer and is responsible for conducting his annualperformance evaluation.  Any compensationconsultants engaged by us, at the direction of the committee, report directlyto the committee and the committee has the authority to appoint suchconsultants, determine their level of remuneration and oversee and terminatetheir services.

 

In fulfilling its nominating function, the committeeseeks out and recommends nominees for election to the board of directors,annually reviews the board succession plan and annually reviews the compositionof director talents and skills against board requirements to identify any gaps.

 

The committee is currently composed of CharlesBaillie (Chairman), Ed Kilroy and Mark Suwyn, all of whom are independentdirectors.

 

### ***CorporateGovernance Committee***

 

Our Corporate Governance Committee is responsiblefor recommending to the board of directors the size of the board and membershipon board committees, monitoring corporate governance issues, assessing boardand director performance, determining the compensation of the board ofdirectors, conducting succession planning for the Chair of the Board, andoverseeing a director education program.

 

The Corporate Governance Committee has takenresponsibility for monitoring the developments in the U.S. and Canada relatingto corporate governance to ensure that we are following best corporategovernance practices.

 

The Corporate Governance Committee is responsiblefor ensuring a formal process to evaluate the performance of the board, boardcommittees, individual directors, and the Chair of the Board, and ensuring thatappropriate actions are taken, based on the results of the evaluation, toimprove board effectiveness.  In 2004,the board implemented the practice of director peer evaluations to assess theperformance of individual directors.

 

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The committee is currently composed of DouglasWhitehead (Chairman), Charles Baillie, Ian Bourne, David Prystash and Dr.Thomas Weber.  All of the members of thecommittee are independent of management and a majority of the members areindependent of DaimlerChrysler and Ford.

 

## **Executive Officers**

 

As at February 28, 2005, we had seven executiveofficers.  The name and municipality ofresidence of each executive officer, the offices held by each officer and eachofficer’s principal occupation during the last five years is as follows:

 
| **Name and Municipality  of Residence** | ** ** | **Position**                                                                  | ** ** | **Principal  Occupation**                                                                                                                                                                                                                                                   | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                    |       |                                                                          |       |                                                                                                                                                                                                                                                                        |       |
| Dennis Campbell  West Vancouver, B.C.   |       | President and Chief Executive Officer                                         |       | Executive of the Corporation. Formerly, President and Chief Executive  Officer, Home Care Industries (2000-2002).                                                                                                                                                           |       |
|                                    |       |                                                                          |       |                                                                                                                                                                                                                                                                        |       |
| Lee Craft  Vancouver, B.C.              |       | Vice President, Operations                                                    |       | Executive of the Corporation. Formerly, Vice-President and Director,  Manufacturing Operations, Motorola Computer Group (2000-2002).                                                                                                                                        |       |
|                                    |       |                                                                          |       |                                                                                                                                                                                                                                                                        |       |
| Christopher Guzy  Burnaby, B.C.         |       | Chief Technology Officer                                                      |       | Executive of the Corporation. Formerly General Manager, Global  Product Company, GE Healthcare (2003 – 2005); General Manager, Global  Technology Operation, GE Healthcare (2001-2003);Global General Manager,  Linear Flourescent Technology, GE Lighting (2000-2001) |       |
|                                    |       |                                                                          |       |                                                                                                                                                                                                                                                                        |       |
| Noordin Nanji  West Vancouver, B.C.     |       | Vice President, Marketing & Business Development and Corporate  Secretary |       | Executive of the Corporation.                                                                                                                                                                                                                                               |       |
|                                    |       |                                                                          |       |                                                                                                                                                                                                                                                                        |       |
| David Smith  West Vancouver, B.C.       |       | Chief Financial Officer                                                       |       | Executive of the Corporation. Formerly, Vice President, Corporate  Relations, Placer Dome Inc. (1999-2000).                                                                                                                                                                 |       |

 

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| **Name and Municipality  of Residence** | ** ** | **Position**                               | ** ** | **Principal  Occupation**                                                                                                                                                                                                                           | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                    |       |                                       |       |                                                                                                                                                                                                                                                |       |
| Peter Stickler  Vancouver, B.C.         |       | Vice President, Human Resources            |       | Executive of the Corporation. Formerly, human resources consultant  (2002); Director, Organizational Effectiveness, Ford (2001-2002); Director,  Human Resources Business Operations, Ford North America (2000-2001).                               |       |
|                                    |       |                                       |       |                                                                                                                                                                                                                                                |       |
| Charles Stone  West Vancouver, BC       |       | Vice President, Research & Development |       | Executive of the Corporation. Formerly, Vice President, Advanced  Materials of the Corporation (2001-2002); Vice President, Membrane  Development of the Corporation (2001); Director, Membrane Development of the  Corporation (1998 – 2001). |       |

 

## **Shareholdingsof Directors and Senior Officers**

 

As at March 1, 2005, our directors and seniorofficers, as a group, beneficially owned, directly or indirectly, or exercisedcontrol or direction over, 114,544 of our common shares, being .09% of ouroutstanding common shares.

 

# **TRANSFERAGENT AND REGISTRAR**

 

Our transfer agent and registrar is ComputershareTrust Company of Canada, 100 University Avenue, 9th Floor, Toronto,Ontario, M5J 2Y1.

 

# **RISK FACTORS**

 

An investment in our common shares involvesrisk.  Investors should carefullyconsider the risks described below and the other information contained in, andincorporated into, this Annual Information Form, including “Management’sDiscussion and Analysis” and our financial statements for the year ended December 31,2004.  The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks and uncertainties, including those that we do not knowabout now or that we currently deem immaterial, also may adversely affect ourbusiness.

 

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**We may not complete the sale ofour interest in BPS AG to DaimlerChrysler and Ford**

 

We are negotiating a transaction with DaimlerChrysler andFord under which it is contemplated that we will sell to them our 50.1%interest in BPS AG, so that upon completion of the sale they will own 100% ofBPS AG.  Although we expect to completethis transaction by mid-year, there is no guarantee that we will successfullynegotiate and complete this transaction.  If we cannot do so, we may retain the fuel cell systems business anddevelop the next generation fuel cell engine and electric drive system.  It is also possible that DaimlerChrysler andFord may not provide funding for the development of this next generation fuelcell engine and electric drive system, which could have a material adverseeffect on our results of operation and impact our ability to execute ourbusiness plan.  If we do not receivefunding for developing the next generation fuel cell engine and electric drivesystem from our Alliance partners, then we may have to narrow the scope of ourdevelopment activities, which may impact our commercialization timeframes.

 

**We may not be able to achievecommercialization of our products on the timetable we anticipate, or at all.**

 

We cannot guarantee that we will be able to developcommercially viable PEM fuel cell products, power electronics or electric drivesystems on the timetable we anticipate, or at all. The commercialization of ourPEM fuel cell products, power electronics and electric drive systems requires substantialtechnological advances to improve the efficiency, functionality, durability,reliability, cost and performance of these products and to develop commercialvolume manufacturing processes for these products. We cannot guarantee that wewill be able to internally develop the technology necessary forcommercialization of our PEM fuel cell products, PEM fuel cells, powerelectronics and electric drive systems, or that we will be able to acquire orlicense the required technology from third parties. Developing the technologyfor high-volume commercialization requires substantial capital, and we cannotassure you that we will be able to generate or secure sufficient funding onterms acceptable to us to pursue our high-volume commercialization plans. In addition,before we release any product to market, we subject it to numerous field tests.These field tests may encounter problems and delays for a number of reasons,many of which are beyond our control.  Ifthese field tests reveal technical defects or reveal that our products do notmeet performance goals, including useful life, reliability, and durability, ourcommercialization schedule could be delayed, and potential purchasers maydecline to purchase our systems and products.

 

We may become subject to product liability lawsuits whichcould result in significant expense to us, adversely affecting our resourcesand the development of sales of our products and thereby delaying thecommercialization of our products.

 

The commercialization of our PEM fuel cell products, powerelectronics and electric drive systems also depends upon our ability tosignificantly reduce the costs of these systems and products, since they arecurrently substantially more expensive than systems and products based onexisting technologies, such as the ICE. We cannot assure you that we will be able to sufficiently reduce thecost of these products without reducing their performance, reliability anddurability, which would adversely affect consumers’ willingness to buy ourproducts.

 

**We have incurred, and expect tocontinue to incur, substantial losses.**

 

We have incurred substantial losses since we were founded,and we expect our losses and cash expenditures to continue over the nextseveral years.  If we are unable to

 

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successfully implement our business plan, our cashrequirements may increase and we may find it difficult to raise additionalfunding.

 

**We cannot assure you that wewill be able to successfully execute our Business Plan.**

 

The execution of our business plan poses many challenges andis based on a number of assumptions.  Wecannot assure you that we will be able to successfully execute our businessplan.  Narrowing the scope of ourdevelopment activities may not accelerate product commercialization.  In addition, we cannot guarantee that we willbe able to leverage our relationships with suppliers for the development of ourtechnology.  If we experience significantcost overruns on any of our programs, or if our business plan is more costlythan we anticipate, certain research and development activities may be delayedor eliminated, resulting in changes or delays to our commercialization plans,or we may be compelled to secure additional funding (which may or may not beavailable) to execute our business plan. We cannot predict with certainty our future revenues or results from ouroperations, and the benefits of our business plan are based on revenueassumptions.  If the assumptions on whichour revenue or expenditure forecasts are based change, the benefits of ourbusiness plan may change as well.  Inaddition, we regularly review acquisition opportunities and may considerexpanding our business beyond what is currently contemplated in our businessplan.  Depending on the financingrequirements of a potential acquisition or new product opportunity, we may berequired to raise additional capital through the issuance of equity ordebt.  If we are unable to raiseadditional capital on acceptable terms, we may be unable to pursue a potentialacquisition or new product opportunity.

 

**Potential fluctuations in ourfinancial and business results makes forecasting difficult and may restrict ouraccess to funding for our commercialization plan.**

 

We expect our revenues and operating results to varysignificantly from quarter to quarter. As a result, quarter to quarter comparisons of our revenues andoperating results are not meaningful. Due to our stage of development, it is difficult to predict our futurerevenues or results of operations accurately. We are also subject to normal operating risks such as credit risks andforeign currency risks.  It is likelythat in one or more future quarters our operating results will fall below theexpectations of investors and securities analysts.  In addition, investors and security analystsmay misunderstand our business decisions or have expectations that areinconsistent with our business plan. This may result in our business activities not meeting theirexpectations.  Not meeting investor andsecurity analyst expectations may materially and adversely impact the tradingprice of our common shares, and increase the cost and restrict our ability tosecure required funding to pursue our commercialization plans.

 

**A mass market for our productsmay never develop or may take longer to develop than we anticipate.**

 

Our PEM fuel cell products, power generators, powerelectronics and electric drive systems represent emerging markets, and we donot know whether end-users will want to use them.  The development of a mass market for our PEMfuel cell products, power electronics and electric drive systems may beaffected by many factors, some of which are beyond our control, including theemergence of newer, more competitive technologies and products, the future costof fuels used by our systems, regulatory requirements, consumer

 

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perceptions of the safety of our products and related fuels,and consumer reluctance to buy a new product.

 

If a mass market fails to develop or develops more slowlythan we anticipate, we may be unable to recover the losses we will haveincurred in the development of our products and may never achieveprofitability.  In addition, we cannotguarantee that we will continue to develop, manufacture or market our productsif sales levels do not support the continuation of the product.

 

**DaimlerChrysler’s and Ford’sfunding for our next generation light-duty fuel cell development program issubject to commercial and technical deliverables and is subject to furthernegotiation and the completion of a definitive agreement among Ballard,DaimlerChrysler and Ford.**

 

DaimlerChrysler’s and Ford’s funding for our next generationlight-duty fuel cell development program is still subject to negotiation andthe completion of a definitive agreement which will contain conditionsregarding the achievement of commercial and technical deliverables.  If we, DaimlerChrysler and Ford cannot agreeon the specific terms for this funding, then DaimlerChrysler and Ford mayrefuse to provide such funding.  Inaddition, further negotiation among DaimlerChrysler, Ford and us with respectto this funding may result in additional restrictions on, or obligations of,Ballard or a variation in the amount of such funding from what has previouslybeen discussed.

 

**We have limited experiencemanufacturing PEM fuel cell products, power electronics and electric drivesystems on a commercial basis.**

 

To date, we have focused primarily on research anddevelopment and have limited experience manufacturing PEM fuel cell products,power electronics or electric drive systems on a commercial basis.  To meet the quality, price, engineering,design and production standards or production volumes required to successfullymass market our systems and products, we will have to produce our PEM fuel cellproducts, power electronics and electric drive systems through high volumeautomated processes.  These large scale,automated processes will require significant advances in manufacturing technology.  We do not know whether or when we will beable to develop the manufacturing technology necessary to achieve efficient,high-volume, low-cost manufacturing capability and processes.  Moreover, developing these processes willrequire substantial capital, and we do not know whether we will be able tosecure sufficient funding on terms acceptable to us to complete theirdevelopment.  Our failure to develop suchmanufacturing processes and capabilities could have a material adverse effecton our business and financial results.

 

**We are dependent on third partysuppliers for the supply of key materials and components for our products.**

 

We have established relationships with third partysuppliers, on whom we rely to provide materials and components for our products.  A supplier’s failure to supply materials orcomponents in a timely manner, or to supply materials and components that meetour quality, quantity or cost requirements, or our inability to obtainsubstitute sources for these materials and components in a timely manner or onterms acceptable to us, could harm our ability to manufacture ourproducts.  To the extent that theprocesses which our suppliers use to manufacture the materials and componentsare proprietary, we may be unable to obtain comparable materials or componentsfrom alternative suppliers, and that could adversely affect our ability toproduce viable PEM fuel cell products, power electronics and electric drivesystems or significantly raise our cost of producing such products.  In addition,

 

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platinum is a key component of our PEM fuel cells.  Platinum is a scarce natural resource, and weare dependent upon a sufficient supply of this commodity.  While we do not anticipate significant nearor long term shortages in the supply of platinum, such shortages couldadversely affect our ability to produce commercially viable PEM fuel cellproducts, or significantly raise our cost of producing such products.

 

**We are dependent upon OEMs topurchase certain of our products.**

 

To be commercially useful, many of our PEM fuel cellproducts, power electronics and electric drive systems must be integrated intoproducts manufactured by OEMs.  We canoffer no guarantee that OEMs will manufacture appropriate products or, if theydo manufacture such products, that they will choose to use our PEM fuel cellproducts, power electronics or electric drive systems.  Any integration, design, manufacturing ormarketing problems encountered by OEMs could adversely affect the market forour PEM fuel cell products, power electronics and electric drive systems andour financial results.

 

**We are dependent on vehiclemanufacturers to purchase certain of our PEM fuel cell products, and electricdrive systems.**

 

Our ability to penetrate the transportation market iscritical to our future growth.  Althoughwe have developed applications for our technologies in the power generationmarkets, these markets are much smaller than the transportation market.  For us to achieve our business plan, oursystems and products must be accepted and purchased by car, bus and othervehicle manufacturers.  While manyvehicle manufacturers, especially DaimlerChrysler and Ford, have expressedinterest in our PEM fuel cell products and electric drive systems, we cannotguarantee that this interest will continue or be acted on.  Each of these manufacturers has a stronginvestment in and commitment to the use of the ICE and also has invested inalternative technologies that may compete with our PEM fuel cell products andelectric drive systems.

 

The integration of new technologies into productionautomobiles is a lengthy process.  Thelength of this process will affect any demand for our PEM fuel cell productsand electric drive systems by automakers and, consequently, our financialposition.

 

**We are dependent on ourrelationships with our partners in the Vehicular Alliance.**

 

While, subject to certain limitations, DaimlerChrysler mustbuy exclusively from us all vehicular PEM fuel cells and vehicular PEM fuelcell systems which it requires and Ford must buy exclusively from us allvehicular PEM fuel cells, vehicular PEM fuel cell systems and electric drivesystems for fuel cell vehicles which it requires, there is no assurance thateither of them will require or ever buy any PEM fuel cells, PEM fuel cellsystems or electric drive products in the future.  In addition, after the twelfth anniversary ofthe current agreement which governs the Vehicular Alliance, or after DaimlerChrysler,Ford or a competitor achieves commercial production of such products orsystems, and if we cannot meet their reasonable commercial product quantity andperformance requirements, each of DaimlerChrysler or Ford is permitted to buysuch products or systems from any of our competitors.

 

DaimlerChrysler has the right to request licenses, for usein its vehicles, of our vehicular PEM fuel cell intellectual property andvehicular PEM fuel cell systems intellectual property as of November 30,2007.  Ford has the right to requestlicenses, for use in its vehicles, of our vehicular PEM fuel cell intellectualproperty and vehicular PEM fuel cell systems intellectual property if Fordsatisfies certain product purchase obligations and does

 

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not achieve commercial production of PEM fuel cell-poweredvehicles before December 31, 2011. Ford also has the right to request a license, for use in its vehicles,of all of our electric drive intellectual property as of November 30,2007.  Depending upon the amount of thefee and royalty to be paid to us, a decision by either or both ofDaimlerChrysler and Ford to manufacture under a license could have a materialadverse effect on our business and financial results as they would no longer berequired to purchase that product or system from us.

 

**Fuel for PEM fuel cell vehiclesmay not be available or may cost too much, causing limited or reduced sales ofour products.**

 

PEM fuel cell powered vehicles run on a different fuel thanthe currently available gasoline. Gasoline requires the development of additional technologies for its usewith PEM fuel cells.  The construction ofa system to deliver hydrogen, or a suitable fuel containing hydrogen, requiressignificant investment by third parties. There is no guarantee that an adequate fuel distribution infrastructurewill be built.  We are relying on thirdparties, most of whom are heavily committed to the existing gasolineinfrastructure, to build such an infrastructure.  If a fuel distribution infrastructure is built,the fuel delivered through it, both due to the cost of the delivery system andthe cost of the fuel itself, may have a higher price than drivers are willingto pay.  If drivers are unable to obtainfuel conveniently and affordably, a mass market for vehicles powered by PEMfuel cells is unlikely to develop.

 

Advances in technology or vehicle design must occur beforesufficient quantities of hydrogen can be affordably stored aboard vehicles toprovide comparable range to that of an internal combustion engine.  Consumers may be unwilling to use hydrogendue to the popular perception that it is dangerous.  Using today’s technology, if a fuel otherthan pure hydrogen is adopted, PEM fuel cell powered vehicles will only receivea partial credit as ZEVs and PEM fuel cell powered vehicles will requireonboard fuel processors.

 

**Regulatory changes could hurtthe market for our products.**

 

Changes in existing government regulations and the emergenceof new regulations with respect to PEM fuel cell products, power electronicsand electric drive systems may hurt the market for our products.  Environmental laws and regulations in theU.S.  (particularly in California) andother countries have driven interest in vehicular PEM fuel cell systems andelectric drive systems; and the deregulation of the electric utility industryin Japan and elsewhere has created market opportunities for our PEM fuel cellproducts in the stationary power generation market.  We cannot guarantee that these laws andpolicies will not change.  Changes inthese laws and other laws and policies or the failure of these laws andpolicies to become more widespread could result in manufacturers abandoningtheir interest in PEM fuel cell products, power electronics and electric drivesystems or favouring alternative technologies. In addition, as PEM fuel cell products, power electronics and electricdrive systems are introduced into our target markets, the U.S. and othergovernments may impose burdensome requirements and restrictions on the use ofPEM fuel cells or the batteries used in some electric drive systems that couldreduce or eliminate demand for some or all of our products.

 

**Our relationship withDaimlerChrysler and Ford could restrict our ability to control our business.**

 

As a result of DaimlerChrysler’s and Ford’s substantialownership interests in us and our agreements with them, they have specialrights with respect to the operation of our business.  Because DaimlerChrysler and Ford collectivelyown over one-third of our outstanding common shares, they can collectivelyblock any corporate action requiring a

 

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two-thirds majority vote, such as the creation of a newclass of shares, our amalgamation with another company or a sale of all or substantiallyall of our assets.

 

Under the Vehicular Alliance, DaimlerChrysler and Ford,acting jointly, can also require the removal of our Chief Technology Officer(or other officer to whom the persons responsible for research and developmentreport), our Vice President, Corporate Strategy & Development (or otherofficer to whom the persons responsible for intellectual property report) andour Vice-President, Transportation.  Inaddition, as long as DaimlerChrysler and Ford maintain certain ownership levelsin us, certain decisions of our board of directors, such as approval of ourannual budget and approval of our annual business plan, must be approved by amajority of the directors which includes at least one of the directorsappointed by DaimlerChrysler and Ford. By exercising these rights, DaimlerChrysler and Ford may prevent us fromtaking certain actions, such as a change in our business plans, a strategicacquisition or disposal of certain assets of, or equity in, our subsidiaries,even if such action would be in the best interests of certain of our othershareholders.

 

**We depend on our intellectualproperty and our failure to protect that intellectual property could adverselyaffect our future growth and success.**

 

Failure to protect our existing intellectual property rightscould seriously harm our business and prospects because we believe thatdeveloping new systems and products that are unique to us is critical to oursuccess.  We rely on patent, tradesecret, trademark and copyright law to protect our intellectual property.  However, some of our intellectual property isnot covered by any patent or patent application, and the patents that we dohave expire between 2009 and 2025.  Wecannot assure that our present or future issued patents will protect ourtechnological leadership or that our patent portfolio will continue to grow atthe same rate as it has in the past. Moreover, our patent position is subject to complex factual and legalissues that may give rise to uncertainty as to the validity, scope andenforceability of a particular patent. Accordingly, there is no assurance that:

 

•      anyof the patents owned by us or other patents that third parties license to uswill not be invalidated, circumvented, challenged, rendered unenforceable, orlicensed to others; or

 

•      anyof our pending or future patent applications will be issued with the breadth ofclaim coverage sought by us, if issued at all.

 

In addition, effective patent, trademark, copyright andtrade secret protection may be unavailable, limited or not applied for incertain countries.

 

We also seek to protect our proprietary intellectualproperty, including intellectual property that may not be patented orpatentable, in part by confidentiality agreements and, if applicable, inventors’rights agreements with our strategic partners and employees.  We can provide no assurance that theseagreements will not be breached, that we will have adequate remedies for anybreach or that such persons or institutions will not assert rights tointellectual property arising out of these relationships.

 

Certain of our intellectual property has been licensed to uson a non-exclusive basis from third parties who may also license suchintellectual property to others, including our competitors.  If necessary or desirable, we may seekfurther licenses under the patents or other intellectual property rights ofothers.  However, we can give noassurances that we will obtain such licenses or that the terms of any offeredlicenses will be acceptable to us.  Thefailure to obtain a license from a third party for intellectual property we usecould cause

 

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us to incur substantial liabilities and to suspend themanufacture or shipment of products or our use of processes requiring the useof such intellectual property.

 

**We may be involved inintellectual property litigation that causes us to incur significant expensesor prevents us from selling our products.**

 

We may become subject to lawsuits in which it is allegedthat we have infringed the intellectual property rights of others or commencelawsuits against others who we believe are infringing upon our rights.  Our involvement in intellectual propertylitigation could result in significant expense to us, adversely affecting thedevelopment of sales of the challenged product or intellectual property anddiverting the efforts of our technical and management personnel, whether or notsuch litigation is resolved in our favour. In the event of an adverse outcome as a defendant in any suchlitigation, we may, among other things, be required to:

 

•      paysubstantial damages;

 

•      ceasethe development, manufacture, use, sale or importation of products thatinfringe upon other patented intellectual property;

 

•      expendsignificant resources to develop or acquire non-infringing intellectualproperty;

 

•      discontinueprocesses incorporating infringing technology; or

 

•      obtainlicenses to the infringing intellectual property.

 

We can provide no assurance that we would be successful insuch development or acquisition or that such licenses would be available uponreasonable terms.  Any such development,acquisition or license could require the expenditure of substantial time andother resources and could have a material adverse effect on our business andfinancial results.

 

**We currently face and willcontinue to face significant competition.**

 

As PEM fuel cell products, power electronics and electricdrive systems have the potential to replace existing power products,competition for our products will come from current power technologies, fromimprovements to current power technologies and from new alternative powertechnologies, including other types of fuel cells.  Each of our target markets is currently servicedby existing manufacturers with existing customers and suppliers.  These manufacturers use proven and widelyaccepted technologies such as ICEs  andturbines as well as coal, oil and nuclear powered generators.

 

Additionally, there are competitors working on developingtechnologies other than PEM fuel cells (such as other types of fuel cells,advanced batteries and hybrid battery/ICEs) in each of our targetedmarkets.  Some of these technologies areas capable of fulfilling existing and proposed regulatory requirements as thePEM fuel cell.  For example, vehiclespowered by batteries can meet the ZEV requirements imposed by California andcertain U.S. north-eastern states, and vehicles powered by certain low emissionICEs and hybrid battery/ ICEs can receive partial credit toward the ZEV requirement.

 

Within each of the PEM fuel cell product, power electronicsand electric drive system markets, we also have a large number ofcompetitors.  Across the United States,Canada, Europe and Japan, corporations, national laboratories and universitiesare actively engaged

 

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in the development and manufacture of PEM fuel cell productsand components, power electronics and electric drive systems.  Each of these competitors has the potentialto capture market share in each of our target markets.

 

Many of our competitors have substantial financialresources, customer bases, manufacturing, marketing and sales capabilities, andbusinesses or other resources which give them significant competitiveadvantages over us.

 

**We could lose or fail toattract the personnel necessary to run our business.**

 

Our success depends in large part on our ability to attractand retain key management, engineering, scientific, manufacturing and operatingpersonnel.  As we develop additionalmanufacturing capabilities and expand the scope of our operations, we willrequire more skilled personnel. Recruiting personnel for the PEM fuel cell, power electronics andelectric drive industries is highly competitive.  We cannot guarantee that we will be able tocontinue to attract and retain qualified executive, managerial and technicalpersonnel needed for our business.  Ourfailure to attract or retain qualified personnel could have a material adverseeffect on our business.

 

**Certain provisions of ourarticles of incorporation and the Vehicular Alliance could have effects thatconflict with the interests of our shareholders.**

 

Certain provisions of our articles of incorporation couldmake it more difficult for a third party to acquire control of us, even if suchchange in control would be beneficial to our shareholders.  For example, our articles of incorporationpermit our board of directors to issue series of preferred shares without theneed for shareholder approval.  Inaddition, certain provisions of the Vehicular Alliance, together withDaimlerChrysler and Ford’s ownership of us, may discourage third parties fromattempting to acquire control of us. Other provisions, including the standstill provisions, may discourageDaimlerChrysler and/or Ford from acquiring control of us.  These provisions may not be in our othershareholders’ best interests.

 

**We could be liable forenvironmental damages resulting from our research, development or manufacturingoperations.**

 

Our business exposes us to the risk of harmful substancesescaping into the environment, resulting in personal injury or loss of life,damage to or destruction of property and natural resource damage.  Depending on the nature of the claim, ourcurrent insurance policies may not adequately reimburse us for costs incurredin settling environmental damage claims, and in some instances, we may not bereimbursed at all.  Our business issubject to numerous laws and regulations that govern environmental protectionand human health and safety.  These lawsand regulations have changed frequently in the past and it is reasonable toexpect additional and more stringent changes in the future.  Our operations may not comply with futurelaws and regulations, and we may be required to make significant unanticipatedcapital and operating expenditures.  Ifwe fail to comply with applicable environmental laws and regulations,governmental authorities may seek to impose fines and penalties on us or torevoke or deny the issuance or renewal of operating permits and private partiesmay seek damages from us.  Under thosecircumstances, we might be required to curtail or cease operations, conductsite remediation or other corrective action, or pay substantial damage claims.

 

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**Our products use inherentlydangerous, flammable fuels, which could subject our business to productliability claims.**

 

Our business exposes us to potential product liabilityclaims that are inherent in hydrogen and products that use hydrogen.  Hydrogen is a flammable gas and therefore apotentially dangerous product.  Anyaccidents involving our products or other hydrogen-based products couldmaterially impede widespread market acceptance and demand for our PEM fuel cellproducts.  In addition, we may be heldresponsible for damages beyond the scope of our insurance coverage.  We also cannot predict whether we will beable to maintain our insurance coverage on acceptable terms.

 

**Until we acquire 100% of BPSAG, we will be prohibited from taking certain actions with respect to BPS AGwithout the consent of DaimlerChrysler.**

 

Until DaimlerChrysler transfers its remaining 49.9% interestin BPS AG to us, we will be unable to take certain actions with respect to BPSAG without the consent of DaimlerChrysler. For example, without such consent, we may be unable to sellsubstantially all the assets of, or any material asset of, BPS AG or merge BPSAG with another company.

 

# **ADDITIONAL INFORMATION**

# ** **

Additional information regarding us may be found on SEDAR atwww.sedar.com.  In particular, additionalinformation regarding directors’ and officers’ remuneration and indebtedness,principal holders of our securities and securities authorized for issuanceunder equity compensation plans is contained in our information circular forour most recent annual meeting of security holders that involved the electionof directors.  Additional financialinformation is provided in our financial statements and MD&A for the mostrecently completed financial year.

 

Copies of this Annual Information Form and the documentsincorporated by reference therein, our comparative financial statements(including the auditors’ report) for the year ended December 31, 2004,each interim financial statement issued after December 31, 2004, our managementproxy circular and our Annual Report may be obtained upon request from ourCorporate Secretary, 4343 North Fraser Way, Burnaby, British Columbia, V5J 5J9.

 

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# **GLOSSARY**

# ** **

In this Annual Information Form, the followingterms have the meanings set forth herein:

 
| **Anode**                      |   | the negative electrode in a fuel cell.  In a PEM fuel cell, the anode is a catalyzed structure which converts  hydrogen fuel into electrons that are released to the external circuit and positively  charged hydrogen ions (protons), which are drawn into the electrolyte.                                                                                                                    |
|--------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Ballard®****fuel cell** |   | the PEM fuel cell developed by Ballard.                                                                                                                                                                                                                                                                                                                                                         |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Catalyst**                   |   | a material, such as platinum, which  promotes or increases the rate of a chemical reaction without itself  undergoing any permanent chemical change.                                                                                                                                                                                                                                            |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Cathode**                    |   | the positive electrode in a fuel cell.  In a PEM fuel cell, the cathode is a catalyzed structure which converts  oxygen, usually from the air, electrons received from the external circuit  and protons from the electrolyte into water.                                                                                                                                                       |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Current**                    |   | the movement of electrical charge  (electrons or ions) through a circuit.                                                                                                                                                                                                                                                                                                                       |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Efficiency**                 |   | the proportion of energy contained in a  fuel which is converted by an energy conversion device into useful work, such  as electricity. In a fuel cell, efficiency describes the amount of chemical  energy from the fuel which is converted into electrical energy as a result of  the electrochemical process of combining hydrogen and oxygen gases to form  water.                          |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Electrochemical**            |   | refers to a process or a device in  which chemical reactions take place at electrodes, resulting in the transfer  of electrons to or from the reactants which, in a fuel cell, are hydrogen and  oxygen gases.                                                                                                                                                                                  |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Electrode**                  |   | an electrically conductive structure in  an electrochemical device which transfers electrons to or from reactant atoms  or molecules.                                                                                                                                                                                                                                                           |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Electrolyte**                |   | the medium in a fuel cell which  provides the ion transport mechanism between the anode and cathode necessary  to sustain the electrochemical process. In a PEM fuel cell, the electrolyte  allows the transport of positively charged hydrogen ions (protons) from the  anode, where they are produced, to the cathode where they react with oxygen  molecules and electrons to produce water. |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Electron**                   |   | the negatively charged component of an  atom and the unit of negative electrical charge.                                                                                                                                                                                                                                                                                                        |
| ** **                     |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| **Fuel cell**                  |   | an electrochemical device which,  without combustion, converts                                                                                                                                                                                                                                                                                                                                  |

 

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| ** **                                             |   | the chemical energy of a fuel, usually  hydrogen or a hydrogen-containing mixture, and oxygen, usually from the air,  directly into electricity.                                                                                                                                       |
|--------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Fuel  processor**                                    |   | a device which converts a hydrocarbon  fuel, such as methanol, natural gas or petroleum, into a mixture of hydrogen  and other gases.                                                                                                                                                  |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Ion**                                                |   | an atom or a molecule that has acquired  an electrical charge by the loss or gain of electrons.                                                                                                                                                                                        |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Kilowatt  (“kW”)**                         |   | 1,000 Watts, which is equivalent to  approximately 1.34 horsepower.                                                                                                                                                                                                                    |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Membrane  electrode assembly (“MEA”)**     |   | the core of a PEM fuel cell, consisting  of two electrodes, the anode and cathode, bonded on either side of the proton  exchange membrane electrolyte to form a single structure.                                                                                                      |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Megawatt  (“MW”)**                         |   | 1,000,000 Watts.                                                                                                                                                                                                                                                                       |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Original  equipment manufacturer (“OEM”)** |   | an original equipment manufacturer of  products.                                                                                                                                                                                                                                       |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Power density**                                      |   | the ratio of power output to weight or  volume.                                                                                                                                                                                                                                        |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Proton**                                             |   | the positively charged component of the  nucleus of an atom. The positively charged hydrogen ion which remains when an  electron is removed from a hydrogen atom is a proton. The proton’s positive  charge is equal in magnitude to that of the electron’s negative charge. |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Proton exchange membrane (“PEM”)**         |   | a solid polymer membrane (a thin  plastic film) which serves as the electrolyte in a PEM fuel cell.                                                                                                                                                                                    |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Watt**                                               |   | a basic measure of electrical power.                                                                                                                                                                                                                                                   |
| ** **                                             |   |                                                                                                                                                                                                                                                                                   |
| **Zero-emission  vehicle**                             |   | a vehicle as defined by regulations set  by the California Air Resources Board that does not produce any air  pollutants such as carbon monoxide, oxides of nitrogen, unburned hydrocarbons  and particulates, but may produce carbon dioxide.                                         |

 

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# **APPENDIX A**

# ** **

## **Audit Committee Mandate**

## ** **

# **Purpose**

 

The purpose of the Audit Committee (the “Committee”)is to assist the board of directors in fulfilling its oversightresponsibilities by reviewing the financial information, which will be providedto the shareholders and the public, the systems of corporate controls, whichmanagement and the board of directors have established, and overseeing theaudit process.  The Committee also ismandated to review and approve all related party transactions, as furtherdescribed below under “Duties and Responsibilities”, other than those relatedparty transactions in respect of which the board has delegated review to aspecial committee of independent directors.

 

More specifically the purpose of the Committeeis to satisfy itself that:

 

A)   theCorporation’s annual financial statements are fairly presented in accordancewith generally accepted accounting principles and to recommend approval of theannual financial statements to the board;

 

B)    thefinancial information contained in the Corporation’s quarterly financialstatements, Annual Report to Shareholders and other financial publications suchas Management’s Discussion and Analysis, the Annual Information Form,Management Proxy Circular and information contained in any prospectus iscomplete and accurate in all material respects and to recommend to the boardapproval of these materials other than the quarterly financial statements whichdo not require full board approval;

 

C)    theCorporation has appropriate systems of internal control over the safeguardingof assets and financial reporting to ensure compliance with legal andregulatory requirements and to manage financial and asset related risks;

 

D)    theexternal audit function has been effectively carried out and that any matterwhich the external auditors wish to bring to the attention of the Committee orboard of directors has been addressed. The Committee is also responsible forappointing (subject to approval by the shareholders at the Corporation’s annualmeeting of shareholders) and overseeing the external auditors, monitoring theexternal auditors’ qualifications and independence, pre-approving allsubstantive audit services and non-audit services performed by the externalauditors, and determining the appropriate level of remuneration for theexternal auditors. The external auditors will report directly to the AuditCommittee, and the Audit Committee and board of directors each have theauthority to terminate the external auditors’ engagement;

 

E)    managementhas established and is maintaining processes to assure compliance by theCorporation with all applicable laws, regulations and corporate policies;

 

F)    theinternal audit function is being effectively carried out and that the Committeeis meeting with the internal auditor (or persons responsible for the function)as necessary;

 

G)    therelated party transactions being reviewed by the Committee are in the bestinterests of the Corporation; and

 

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H)    ithas engaged any necessary independent counsel or other advisors in fulfillingits duties and responsibilities, as set forth in this Mandate.

 

In this Mandate, the “Corporation” means BallardPower Systems Inc. and a “director” means a board member.

 

# **Composition and Eligibility**

# ** **

A)   Followingeach annual meeting of shareholders of the Corporation, the board will electfrom its members not less than three directors to serve on the Committee.  Each member of the Committee must meet theindependence and expertise requirements for audit committees imposed by anylisting standards of NASDAQ or the Toronto Stock Exchange, any applicablestatutes, or applicable rules or regulations of the U.S. Securities ExchangeCommission or Canadian regulatory authorities.

 

B)    Anymember may be removed or replaced at any time by the board and will cease to bea member upon ceasing to be a director of the Corporation.  Each member will hold office until the closeof the next annual meeting of shareholders of the Corporation or until themember resigns or is replaced whichever occurs first.

 

C)    TheCommittee will appoint the Committee Chair.

 

D)    Ifthe Chair is not present at any meeting of the Committee, one of the members ofthe Committee who is present at the meeting shall be chosen by the Committee topreside at the meeting.

 

E)    Amajority of Committee members constitute a quorum.

 

F)    TheCommittee will appoint its own Secretary.

 

G)    Allmembers of the Committee must have working familiarity with basic finance andaccounting practices, and be able to read and understand fundamental financialstatements, including a balance sheet, income statement and cash flow statementat the time of their appointment.

 

H)    Atleast one member of the Committee must be an audit committee “financial expert”as defined by the applicable rules set out by the U.S. Securities and ExchangeCommission (the “SEC”) or any other regulatory authority.  The financial expert must have all of thefollowing five attributes:

 

(i)    anunderstanding of GAAP or the generally accepted accounting principles used bythe issuer in preparing its primary financial statements filed with the SEC;

 

(ii)   theability to assess the general application of such principles in connection withthe accounting for estimates, accruals and reserves;

 

(iii)  experiencepreparing, auditing, analyzing or evaluating financial statements that presenta breadth and level of complexity of accounting issues that are generallycomparable to the breadth and complexity of issues that can reasonably beexpected to be raised by the Corporation’s financial statements, or experienceactively supervising one or more person engaged in such activities;

 

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(iv)  anunderstanding  of internal controls andprocedures for financial reporting; and

 

(v)   anunderstanding of audit committee functions.

 

The financial expert must have acquired therequisite attributes through any one or more of the following methods:

 

(i)    educationand experience as a principal financial officer, principal accounting officer,controller, public accountant or auditor or experience in one or more positionsthat involve the performance of similar functions;

 

(ii)   experienceactively supervising a principal financial officer, principal accountingofficer, controller, public accountant, auditor or person performing similarfunctions;

 

(iii)  experienceoverseeing or assessing the performance of companies or public accountants withrespect to the preparation, auditing or evaluation of financial statements; or

 

(iv)  otherrelevant experience, based on the determination by the board of directors as tothe specific experience which satisfies this requirement.

 

I)     Anymember of the Committee who serves on more than three public company auditcommittees must inform the Chairman of the Board, so that the board mayconsider and discuss with such member any issues related to his or hereffectiveness and time commitment.

 

# **Meetings and Operations**

# ** **

A)   TheCommittee will meet at least four times per year.  The meetings will be scheduled to permittimely review of the interim and annual financial statements, as well as theCorporation’s other financial disclosures and related party transactions.  The Chair, CEO, CFO, Controller, internal andexternal auditors or any member of the Committee may request additionalmeetings.

 

B)    Ifall members consent, and proper notice has been given or waived, a member ormembers of the Committee may participate in a meeting of the Committee by meansof such telephonic, electronic or other communication facilities as permit allpersons participating in the meeting to communicate adequately with each other,and a member participating in such a meeting by any such means is deemed to bepresent at that meeting.

 

C)    Alldirectors who are not Committee members will be given notice of every meetingof the Committee and will be allowed to attend as observers, unless deemedinappropriate by the Committee in cases where a potential conflict of interestmay exist, such as discussions concerning related party transactions.  The CEO, CFO, Controller and internal auditorshall have direct access to the Committee and shall receive notice of and attendall meetings of the Committee, except the in-camera sessions.

 

D)    Theexternal auditors will be given notice of, and have the right to appear beforeand to be heard at, every meeting of the Committee will appear before theCommittee when requested to do so by the Committee.

 

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E)    TheCommittee is authorized to request the presence, at any meeting, of seniormanagement, legal counsel or anyone else who could contribute substantively tothe subject of the meeting.

 

F)    Theminutes of all meetings of the Committee will be provided to the board ofdirectors.

 

G)    TheCommittee will report to the board of directors at its next regular meeting allaction it has taken since the previous reports.

 

H)    Supportingschedules and information reviewed by the Committee will be available forexamination by any director upon request to the Secretary of the Committee.

 

I)     TheCommittee is empowered to investigate any activity of the Corporation and allemployees are to co-operate as requested by the Committee.  The Committee may retain outside advisorshaving special expertise to assist it in fulfilling its responsibilities, anddetermine the appropriate level of remuneration for such outside advisors.

 

J)     TheCommittee members will receive minutes of all meetings of the Corporation’sinternal Disclosure Committee.

 

K)    TheCommittee may form and delegate authority to subcommittees.  In particular, the Committee may delegate toone or more of its members the authority to pre-approve audit or permissiblenon-audit services, provided that the decisions of any member(s) to whompre-approval authority is delegated will be presented to the Committee at thenext Committee meeting.

 

# **Duties and Responsibilities**

# ** **

A)   FinancialReporting Control Systems

 

The Committee will:

 

(i)        reviewwith management any significant changes in financial risks facing theCorporation;

 

(ii)       reviewwith management procedures followed with respect to disclosure controls andprocedures;

 

(iii)      reviewthe management letter from the external auditors and the Corporation’sresponses to suggestions made;

 

(iv)      annuallyreview the Mandate of the Committee;

 

(v)       annuallyreview specific matters affecting financial reporting, including but notlimited to, the Corporation’s insurance coverage, the status of the Corporation’stax loss carry-forwards, pension and health care liabilities, and off balancesheet transactions;

 

(vi)      reviewthe appointment of the financial senior executives of the Corporation, prior torecommendation by the Management Development & Compensation Committee tothe board;

 

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(vii)     establishand maintain a set of procedures for the receipt, retention and treatment ofcomplaints received by the Corporation concerning accounting, internalaccounting controls or auditing matters and the confidential anonymoussubmission by employees of concerns regarding questionable accounting orauditing matters;

 

(viii)    discussand consider policies with respect to risk assessment and risk management,including:

 

a)     reviewand periodic approval of management’s risk philosophy and risk managementpolicies;

 

b)    reviewwith management, at least annually, of reports demonstrating compliance withrisk management policies; and

 

c)     discussingwith management, at least annually, the Corporation’s major financial riskexposures and the steps management has taken to monitor and control suchexpenses including the Corporation’s risk assessment and risk managementpolicies.

 

(ix)                    meetseparately and periodically, no less than annually, with management, withinternal auditors (or the persons responsible for the internal audit function)and with external auditors.

 

B)    InterimFinancial Statements

 

The Committee will, prior to their release,review interim (quarterly) financial statements and Management’s Discussion andAnalysis with the Corporation’s officers and external auditors and approvetheir release.  This will includesignificant transactions which have occurred in the quarter.

 

C)    AnnualFinancial Statements and Other Financial Information

 

The Committee will:

 

(i)        reviewany changes in accounting policies or financial reporting requirements that mayaffect the current year’s financial statements;

 

(ii)       obtainsummaries of significant transactions, and other complex matters whosetreatment in the annual financial statements merits advance consideration;

 

(iii)      obtaindraft annual financial statements in advance of the Committee meeting andassess, on a preliminary basis, the reasonableness of the financial statementsin light of the analyses provided by the Corporation’s officers;

 

(iv)      reviewa summary provided by the Corporation’s legal counsel of the status of anymaterial pending or threatened litigation, claims and assessments;

 

(v)       discussthe annual financial statements, Management’s Discussion and Analysis and theauditors’ report thereon, in detail with the Corporation’s officers and theexternal auditors;

 

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(vi)      reviewand recommend to the board of directors approval of all financial disclosurecontained in prospectuses, annual information forms, management proxy circularsand other similar documents;

 

(vii)     beforethe release of each quarterly report and the annual financial statements,discuss with the external auditors all matters required by SAS 61 (includingthe auditors’ responsibility under GAAP, the selection of and changes insignificant accounting policies or their application, management judgments andaccounting estimates, significant audit adjustments, the external auditors’responsibility for information other than financial statements, disagreementswith management, consultation with other accountants, and difficultiesencountered in performing the audit) and CICA Handbook section 5751 (whichgoverns the communications between the external auditors and the Committee);and

 

(viii)    providethe board of directors with a recommendation for approval of the annualfinancial statements; and

 

(ix)       discussearnings press releases and earnings guidance, as well as the release ofsignificant new financial information.

 

D)    Relationshipwith External Auditors

 

The Committee will:

 

(i)        appointthe external auditors; if there is a plan to change auditors, review all issuesrelated to the change and the steps planned for an orderly transition.  The external auditors will report directly tothe Committee, and the Committee and the board of directors each have theauthority to terminate the external auditors’ engagement.  The Committee will not appoint an externalauditor who has previously employed the Corporation’s CEO, CFO, Controller orchief accounting officer and where such person participated in any capacity inthe audit of the Corporation within the past year;

 

(ii)       annuallyreview and approve the terms of engagement and determine the remuneration ofthe external auditors;

 

(iii)      annuallyreview the  representation letters givenby management to the external auditors;

 

(iv)      monitorthe external auditors’ qualifications and independence through the activitieslisted in section (F) below, “Independence of External Auditors”;

 

(v)       reviewthe audit plan with the external auditors and approve all substantive auditservices in advance;

 

(vi)      approvein advance any services to be provided by the external auditors which are notrelated to the audit, including the fees and terms of engagement relating tosuch non-audit services for the Corporation and its subsidiaries.  Specifically, the Committee must not allowthe external auditors to provide the following services:

 

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a)     bookkeepingservices;

 

b)    financialinformation systems design and implementation;

 

c)     appraisalor valuation services, fairness opinions or contribution-in-kind reports;

 

d)    actuarialservices;

 

e)     internalaudit services which relate to the Corporation’s internal accounting controls,financial systems or financial statements;

 

f)     investmentbanking, broker, dealer or investment advisor services;

 

g)    managementand human resources services;

 

h)    legalservices and expert services unrelated to the audit (however the externalauditors may provide tax services); and

 

i)      anyother services that the Public Company Accounting Oversight Board determines byregulation, or the Corporation’s board of directors determines, to beimpermissable.

 

(vii)     reviewquarterly all fees paid to external auditors;

 

(viii)    reviewperformance against audit proposal plan;

 

(ix)       discussin private with the external auditors matters affecting the conduct of theiraudit and other corporate matters;

 

(x)        receivefrom the external auditors a report with respect to:

 

a)     allcritical accounting policies and practices;

 

b)    allalternative treatments of financial information within GAAP that have beendiscussed with management, implications of their use and the external auditors’“preferred treatment”;

 

c)     anyother material written communications between the external auditors andmanagement;

 

d)    theinternal quality-control procedures of the external auditors;

 

e)     anymaterial issues raised by the most recent internal quality-control review ofthe external auditors’ firm, or by an inquiry or investigation by governmentalor professional authorities, within the preceding five years, respecting one ormore independent audits carried out by the external auditors’ firm, and anysteps taken to deal with any such issues; and

 

f)     allrelationships between the external auditors and the Corporation as detailed in§(i) under Section F – Independence of External Auditors;

 

66

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(xi)       resolveall disagreements between management and the external auditors regardingfinancial reporting; and

 

(xii)      ensurethat the audit partners representing the external auditors meet the rotationrequirements set out by the U.S. Securities and Exchange Commission and by anyother applicable Canadian or U.S. securities regulatory authority or stockexchange.

 

E)    Treasury

 

The Committee will:

 

(i)        reviewand approve the Treasury Policy;

 

(ii)       reviewthe quarterly Treasury Report; and

 

(iii)      reviewand approve the Foreign Exchange Policy.

 

F)    Independenceof External Auditors

 

The Committee will oversee the independence ofthe Corporation’s external auditors by:

 

(i)        receivingfrom the external auditors, on a periodic basis, a formal written statementdelineating all relationships between the external auditors and the Corporationconsistent with ISBS No. 1;

 

(ii)       reviewingand actively discussing with the board of directors, if necessary, and theexternal auditors, on a periodic basis, any disclosed relationships or servicesbetween the external auditors and the Corporation or any other disclosedrelationships or services that may impact the objectivity and independence ofthe external auditors;

 

(iii)      recommending,if necessary, that the board of directors take action to satisfy itself, of theexternal auditors’ independence; and

 

(iv)      ensuringthat the Corporation does not hire as the Corporation’s CEO, CFO, Controller orchief accounting officer any person who was employed by the Corporation’sexternal auditors and who participated in any capacity in the audit of theCorporation during the one-year period preceding the initiation of the currentaudit.

 

G)    InternalAudit and Controls

 

(i)        TheCommittee will ensure that the Corporation has appropriate systems of internalcontrol over the safeguarding of assets and financial reporting to ensurecompliance with legal and regulatory requirements and to manage financial andasset related risks.

 

(ii)       TheCommittee will review quarterly the internal auditors’ report on the adequacyof the Corporation’s internal controls, policies and procedures.

 

67

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H)    RelatedParty Transactions

 

The Committee will review and approve allrelated party transactions, other than those related party transactions inrespect of which the board has delegated review to a special committee orindependent directors or those related party transactions which are previouslyapproved under the mandate of the Management Development, Nominating andCompensation Committee, including, but not limited to, executive employmentagreements and compensation matters.  Arelated party transaction is defined as a transaction in which the Corporationor any of its subsidiaries is to be a party, which involves an amount exceedingU.S. $60,000 and in which any of the following persons have a direct orindirect material interest:

 

(i)        adirector or executive officer of the Corporation;

 

(ii)       anynominee for election as a director of the Corporation;

 

(iii)      anysecurity holder of the Corporation known by the Corporation to own (of recordor beneficially) more than 5% of any class of the Corporation’s votingsecurities; and

 

(iv)      anymember of the immediate family of any of the foregoing persons.

 

In carrying out its responsibilities inreviewing and approving related party transactions, the Committee will:

 

(v)       receivedetails of all related party transactions proposed by the Corporation, otherthan those related party transactions which the board has delegated review ofto a special committee of independent directors;

 

(vi)      discusssuch related party transactions with the representatives of the relevantparties (the “Representatives”) and with the Corporation’s executive officers;

 

(vii)     reviewthe terms and conditions of each related party transaction;

 

(viii)    withrespect to the holders of Common shares, consider the effect of the relatedparty transaction on, and the fairness of the related party transaction to, suchshareholders;

 

(ix)       recommendany revisions to the structure of the related party transaction that theCommittee considers to be necessary or advisable;

 

(x)        ifa valuation or fairness opinion is required by any applicable statutes orregulations, supervise the preparation of such valuation or fairness opinion;

 

(xi)       ifapproval of the board of directors is necessary, provide a recommendation tothe board of directors with respect to the related party transaction; and

 

(xii)      Reviewa summary of completed related party transactions to ensure that suchtransactions are consistent with the terms and conditions previously approvedby the committee.

 

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As part of its review of all related partytransactions, the Committee will review all existing loans and advances to theCorporation’s executive officers or directors.

 

I)     Other

 

The Committee will:

 

(i)    performan annual review of management’s compliance with the Corporation’s code ofethics and workplace guidelines policy;

 

(ii)   performan annual review of the succession plans for the Corporation’s CFO, Controllerand Treasurer; and

 

(iii)  annuallyreview the audit of the expense reports of the Chairman of the Board ofDirectors and the CEO.

 

# **Performance Evaluation**

# ** **

J)     TheCommittee will perform an annual evaluation of its performance, having regardto the issues reviewed during the year.

 

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# **COMMITTEE TIMETABLE**

# ** **

The timetable below generally outlines the Committee’santicipated schedule of activities during the year.

 

**CommitteeTimetable**

 
| **Agenda   Items**                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **J**  | ** ** | **F**  | ** ** | **M**  | ** ** | **A**  | ** ** | **M**  | ** ** | **J**  | ** ** | **J**  | ** ** | **A**  | ** ** | **S**  | ** ** | **O**  | ** ** | **N**  | ** ** | **D**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| ***A)***            ***Financial Reporting Control Systems***                                                                                                                                                                                                                                                                |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Review  with management any significant changes in financial risks facing the  Corporation.                                                                                                                                                                                                                   |       |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |
| (ii)           Review  with management procedures followed with respect to disclosure controls and  procedures.                                                                                                                                                                                                                   |       |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |
| (iii)          Review  the management letter from the external auditor and corporation’s responses  to suggestions made.                                                                                                                                                                                                          |       |   |       |   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (iv)          Annually  review the Committee mandate.                                                                                                                                                                                                                                                                                  |       |   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (v)           Review  specific matters as required affecting financial reporting such as insurance  coverage, the status of the Corporation’s tax loss carry-forwards, pension  and health care liabilities, and off balance sheet transactions.                                                                             |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (vi)          Review  the appointment of the financial senior executives of the Corporation.                                                                                                                                                                                                                                           |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (vii) Establish  and maintain a set of procedures for the receipt, retention and treatment of  complaints received by the Corporation concerning accounting, internal  accounting controls or auditing matters and the confidential anonymous  submission by employees of concerns regarding questionable accounting or  auditing matters, and review submissions as received. |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (viii) Discuss and consider  policies with respect to risk assessment and risk management.                                                                                                                                                                                                                                                                                     |       |   |       |   |       |   |       |   |       |   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |
| (ix)           Meet  separately and periodically, no less than annually, with management, with  internal auditors (or persons responsible for the internal audit function)  and with independent auditors.                                                                                                                        |       |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |
| ***B)******  ***        ***Interim Financial Statements***                                                                                                                                                                                                                                                                             |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Review  and approval of interim financial statements and MD&A.                                                                                                                                                                                                                                            |       |   |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |

 

----

 
| **Agenda   Items**                                                                                                                                                                                                                                                                                   | ** **   | **J**      | ** ** | **F**      | ** ** | **M**      | ** ** | **A**      | ** ** | **M**      | ** ** | **J**      | ** ** | **J**      | ** ** | **A**      | ** ** | **S**      | ** ** | **O**      | ** ** | **N**      | ** ** | **D**      | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ***C)***   ***       ******Annual Financial Statements and Other  Financial Information***                                                                                                                                                              | *** *** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (i)            Review  any changes in accounting policies or financial reporting requirements that  may affect the current year’s financial statements.                                                                                  |         |       |       | ü     |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       |
| (ii)           Obtain  summaries of significant transactions, and other complex matters whose  treatment in the annual financial statements merits advance consideration.                                                                          |         |       |       | ü     |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       |
| (iii)          Obtain  draft annual financial statements in advance of the Committee meeting and  assess, on a preliminary basis, the reasonableness of the financial  statements in light of the analyses provided by the Corporation’s officers. |         |       |       | ü     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| (iv)          Review  summary provided by the Corporation’s legal counsel of the status of any  material pending or threatened litigation, claims and assessments.                                                                                 |         |       |       | ü     |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       |
| (v)           Discuss  the annual financial statements, MD&A and the auditors’ report thereon in  detail with the Corporation’s officers and the external auditors.                                                                  |         |       |       | ü     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| (vi)          Review  and recommend to the board of directors approval of all financial disclosure  contained in prospectuses, annual information forms, management proxy  circulars and other similar documents.                                       |         |       |       |       |       | ü     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| (vii) Before  the release of each quarterly report and annual financial statements, discuss  with the external auditors all matters required by SAS 61 and Handbook  section 5751.                                                                                                              |         |       |       | ü     |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       |
| (viii) Provide the board with a  recommendation for approval of the annual financial statements.                                                                                                                                                                                                     |         |       |       | ü     |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       |
| (ix)           Discuss  earnings press releases and earnings guidance as well as the release of  significant new financial information.                                                                                                            |         |       |       | ü     |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       | ü     |       |       |       |       |       |
| ***D)******  ***        ***Relationship with External Auditors***                                                                                                                                                                                       | *** *** |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| (i)            Annually  appoint (subject to shareholder approval) external auditor.                                                                                                                                                          |         |       |       |       |       | ü     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| (ii)           Annually  review and approve terms of engagement and determine remuneration of external  auditor.                                                                                                                                   |         |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       | ü     |       |
| (iii)          Review  representation letters given by management to external auditor.                                                                                                                                                                  |         |       |       | ü     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |

 

2

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| **Agenda   Items**                                                                                                                                                                                                                                                                                                                                                                | ** ** | **J**  | ** ** | **F**  | ** ** | **M**  | ** ** | **A**  | ** ** | **M**  | ** ** | **J**  | ** ** | **J**  | ** ** | **A**  | ** ** | **S**  | ** ** | **O**  | ** ** | **N**  | ** ** | **D**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| (iv)          Monitor  the external auditor’s qualifications and independence through the activities  listed in Section F.                                                                                                                                                                                                      |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (v)           Review  the audit plan with the external auditors and approve all substantive audit  services in advance.                                                                                                                                                                                                         |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       | ü |       |
| (vi)          Approve  permissible non-audit services in advance.                                                                                                                                                                                                                                                                    |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (vii)         Review  all fees paid to external auditors.                                                                                                                                                                                                                                                                                 |       |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |
| (viii)        Review  performance against audit proposal plan.                                                                                                                                                                                                                                                                                 |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (ix)  Discuss  in private with the external auditors matters affecting the conduct of their audit  and other corporate matters.                                                                                                                                                                                                                                              |       |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |
| (x)   Receive  a report from the external auditor with respect to:                                                                                                                                                                                                                                                                                                      |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (a)   all  critical accounting policies and practices;                                                                                                                                                                                                                                                                                                                  |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (b)   all  alternative treatments of financial information within GAAP that have been  discussed with management, implications of their use and the external  auditors’ “preferred treatment”;                                                                                                                                                           |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (c)   any  other material written communications between the auditor and management;                                                                                                                                                                                                                                                                                    |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (d)   the  internal quality-control procedures of the external auditors;                                                                                                                                                                                                                                                                                                |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (e)   any  material issues raised by the most recent internal quality-control review of  the external auditors’ firm, or by an inquiry or investigation by  governmental or professional authorities, within the preceding five years,  respecting one or more independent audits carried out by such firm, and any  steps taken to deal with any such issues; and |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (f)    all  relationships between the external auditors and the Corporation, as detailed  in §(i) under Section F – Independence of External Auditors.                                                                                                                                                                                                   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (xi)           Resolve  all disagreements between management and the external auditors regarding  financial reporting                                                                                                                                                                                                           |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |

 

3

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| **Agenda   Items**                                                                                                                                                                                                                                                                                                                                                                                                 | ** **   | **J**  | ** ** | **F**  | ** ** | **M**  | ** ** | **A**  | ** ** | **M**  | ** ** | **J**  | ** ** | **J**  | ** ** | **A**  | ** ** | **S**  | ** ** | **O**  | ** ** | **N**  | ** ** | **D**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| (xii)          Ensure  that the audit partners representing the internal auditors meet the rotation  requirements set out by the U.S. Securities and Exchange Commission and by  any other applicable Canadian or U.S. securities regulatory authority or  stock exchange.                                                                                            |         |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       | ü |       |
| ***E)***   ***       ******Treasury***                                                                                                                                                                                                                                                                                                                                | *** *** |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Review  and approve the Treasury Policy.                                                                                                                                                                                                                                                                                                     |         |   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (ii)           Review  the Quarterly Treasury Report.                                                                                                                                                                                                                                                                                                            |         |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |
| (iii)          Review  and approve the Foreign Exchange Policy.                                                                                                                                                                                                                                                                                                       |         |   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| ***F)***   ***       ******Independence of External Auditors***                                                                                                                                                                                                                                                                                                       | *** *** |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Receive  from the external auditors, on a periodic basis, a formal written statement  delineating all relationships between the external auditors and the  Corporation consistent with ISB No. 1.                                                                                                                                            |         |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (ii)           Review  and actively discuss with the Board of Directors, if necessary, and the  external auditors, on a periodic basis, any disclosed relationships or  services between the external auditors and the Corporation or any other  disclosed relationships or services that may impact the objectivity and  independence of the external auditors. |         |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (iii)          Recommend,  if necessary, that the Board take action to satisfy itself, of the external  auditors’ independence.                                                                                                                                                                                                                                  |         |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (iv)          Ensure  that the Corporation does not hire as the Corporation’s CEO, CFO, Controller  or chief accounting officer any person who was employed by the Corporation’s  external auditors and who participated in any capacity in the audit of the  Corporation during the one-year period preceding the initiation of the  current audit         |         |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| ***G)***   ***       ******Internal Audit and Controls***                                                                                                                                                                                                                                                                                                             | *** *** |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Ensure  that the Corporation has appropriate systems of internal control.                                                                                                                                                                                                                                                                    |         |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (ii)           Review  quarterly the internal auditors’ report on the adequacy of the internal  controls, policies and procedures.                                                                                                                                                                                                                          |         |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       |
| ***H)***   ***       ******Related Party Transactions***                                                                                                                                                                                                                                                                                                              |         |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Review  and approve the Corporation’s related party transactions over US$60,000.                                                                                                                                                                                                                                                        |         |   |       | ü |       |   |       | ü |       |   |       |   |       | ü |       |   |       |   |       | ü |       |   |       | ü |       |

 

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| **Agenda   Items**                                                                                                                                                                                                                                            | ** ** | **J**  | ** ** | **F**  | ** ** | **M**  | ** ** | **A**  | ** ** | **M**  | ** ** | **J**  | ** ** | **J**  | ** ** | **A**  | ** ** | **S**  | ** ** | **O**  | ** ** | **N**  | ** ** | **D**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| (ii)           Review  a summary of the Corporation’s related party transactions to ensure that such  transactions are consistent with the terms and conditions previously approved  by the Committee. |       |   |       |   |       |   |       |   |       |   |       |   |       | ü |       |   |       |   |       |   |       |   |       | ü |       |
| ***I)***     ***       ******Other***                                                                                                                                                                  |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Annually  review management’s compliance with the Corporation’s Code of Ethics &  Workplace Guidelines Policy.                                                            |       |   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (ii)           Annually  review the succession plans for the Corporation’s CFO, Controller and  Treasurer.                                                                                             |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       | ü |       |
| (iii)          Annually  review the audit of expense reports of the Chairman of the Board of Directors  and the CEO.                                                                                             |       |   |       |   |       | ü |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| ***J)******   ***        ***Performance Evaluation***                                                                                                                                                       |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |
| (i)            Perform  annual evaluation of its performance.                                                                                                                                          |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       |   |       | ü |       |

 

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