Operations 
During the fourth quarter 2004, FCT engineers optimized the fuel and air flow distributions in the cell stack of the second generation unit. Cell temperature is critical to the electrical output, and uneven fuel and air flow had previously resulted in a non-uniform temperature distribution in the cell stack, which caused the system’s performance to be suboptimal. The source of the problem has been identified and corrected, resulting in improved performance as reported below. 

Faced with existing customer demand and delays in delivery of the second generation systems, management made a decision during October to ship some improved first generation systems to avoid losing customers whose funding may be subject to deadlines. FCT ordered two generators from Siemens Westinghouse Power Corporation (SWPC) and began construction of the Balance of Plant modules in order to make delivery of these systems early in 2005. 

In December 2004, SWPC used a previously delivered FCT Balance of Plant (BOP) to test their Atmospheric Plasma Spray (APS) cells at their Pittsburg plant. The APS cells represent a lower cost method for producing the cell stacks, and initial results from these tests on stack life and performance were very impressive. SWPC will continue testing their performance and expect that APS cells will be sufficiently tested by late 2005, at which time FCT will incorporate them into the second generation 5 kW Solid Oxide Fuel Cell (SOFC) systems. 

FCT and SWPC continued to build their relationship as evidenced by the signing of a Memorandum of Understanding (MOU) In November 2004. The MOU extends the existing Joint Development Agreement (JDA) by allowing for further collaborative expansion of introductory markets and the formation of selected global business alliances that can be beneficial to the deployment of SOFC systems for a variety of markets. The MOU also positions FCT to focus on a broader range of products (4 – 75 kW), utilizing Siemens Westinghouse cell stacks and generator components. Both companies will enter markets they deem to be most advantageous with the intention of leveraging one another’s expertise and networks whenever possible. 

Over the course of the year, FCT has been testing tube bundles of a smaller size from TOTO Ltd., a ceramics manufacturing company headquartered in Kitakyusyu-City, Japan with excellent results. These cell bundles are being considered for the development of a 2kW class system, for which preliminary design has commenced. The footprint required of such a system demands smaller sized tubes, thus precluding use of SWPC’s tube bundles in their current form. We have had numerous enquiries from companies that are interested in sales and distribution agreements for a product of this size targeted at European and Japanese markets; we are currently actively engaged in discussions with a market leader in Europe. 

FCT is also engaged in discussions to develop larger SOFC systems for Pollution Abatement applications such as the Volatile Organic Compound (VOC) abatement system installed at Ford Motor Company’s plant in Dearborn, Michigan. As part of the original “Fumes to Fuel” program, Ford installed a proof-of-concept 5kW SOFC system and reformer supplied by FCT that used the paint fumes from the plant’s paint shop to generate electricity and heat. Because of its small size, however, the unit could utilize only a fraction of the fumes produced. A 50kW unit is well suited for most industrial applications and FCT has been in discussions with several firms about the possibility of joint development of such a system. Ford has recently reiterated its commitment to advancing the development of VOC abatement systems using fuel cells and is establishing a new Center for Fuel Cell Development at its Oakville plant, and FCT has met with Ford to discuss its participation in this program. 

In November 2004, National Bank Financial Inc. exercised 200,000 Compensation Options received by it as consideration for acting as agents of FCT in the November 2002 private placement of Common Shares and Warrants. FCT issued 200,000 Common Shares at a price of $0.46 per share, bringing the total number of shares outstanding to 48,940,000. The proceeds will be used to fund commercialization initiatives such as further product development, production expansion, marketing, and general working capital requirements. On November 28, 2004 all unexercised Compensation Options that were issued to agents by FCT as part of its November 2002 financing expired. 

Subsequent Events 
On January 12th, 2005, FCT and TOTO Ltd. signed an MOU under the terms of which FCT will design and build a 2kW class SOFC system for residential markets using tubular cell stacks supplied by TOTO. The MOU also provides for the supply to FCT of TOTO’s small-size SOFC tubes that will allow FCT to pursue its product diversification strategy and meet demand for a smaller 2kW class system from markets in Japan and Europe in particular. 

As of the end of January, the second generation system has been tested for over 1600 hours. The last test, which was ongoing as of January 28th, had run for more than 400 hours with a peak cell stack power of approximately 5kW. 

Earnings 
FCT’s earnings before interest, taxes, depreciation and amortization (EBITDA) in the fourth quarter ended December 31, 2004 was negative $1,024,671 compared to an EBITDA of negative $725,093 for the same quarter 2003. For the complete year ended December 31, 2004 the EBITDA was negative $3,693,433 and negative $2,777,819 for the same period 2003. 

Basic loss per share for a period is calculated using the weighted daily average number of Common Shares outstanding during that period. The weighted daily average number of shares outstanding was 48,694,973 for the fourth quarter 2004 and the basic net loss per share was $0.02. The weighted daily average number of shares outstanding for the same period 2003 was 41,817,159 and the basic net loss per share was $0.02. For the year ending December 31, 2004, net loss per share was $0.08 and $0.07 for the twelve months ended December 31, 2003. 

Expenses 
Total expenses were $1,283,150 in the fourth quarter 2004, compared to $1,257,232 for the same quarter 2003, an increase of 2%. Research and development expenses and general and administrative expenses accounted for 48% and 41% of this quarter’s expenses respectively. The 19% increase in general and administrative expenses is primarily due to increased infrastructure costs associated with the new production facility. 

Total expenses for the twelve-months ended December 31 were $4,967,904 and $5,732,670 in 2004 and 2003 respectively. This 13% decrease in overall expenses is the result of a 30% decrease in research and development spending of $981,250. The high research and development expenses in 2003 reflect the development costs of the first generation units and are also in part due to the work done on the development of the next generation 5kW system. There was an increase of 21% in general and administrative expenses, which was due to increased infrastructure costs associated with the new production facility, and sales and marketing expenses increased by 9% year-over-year as FCT attended more trade shows and conferences to raise its profile and increase customer contact. 

Under the fair value based method, compensation costs of stock options are measured at fair value at the date the option grant is awarded and is expensed over the award’s vesting period. This quarter stock based compensation expenses totaled $10,259 compared with $53,585 for the quarter ending December 31, 2003. For the twelve months ended December 31, 2004, stock based compensation expenses totaled $108,575 compared with $191,850 for the same period in 2003. 

Balance Sheet 
Cash and cash equivalents continued as FCT’s single largest balance sheet item, with a balance of $4,053,086 at the end of the fourth quarter 2004, compared to $7,441,128 one year ago at the end of fourth quarter 2003. At the end of the fourth quarter, inventories were down by 6% from the previous quarter and the working capital decreased to 6.2 from the working capital ratio of 7.1 at the end of the third quarter 2004, reflecting the lower cash balance and inventories. Year-over-year inventory has increased 203% due to components and parts that were purchased to meet the production schedule for the second generation systems. 

Capital expenditures during the fourth quarter were greater than the same quarter last year, $11,478 compared to $9,218 in the fourth quarter 2003, but year-over-year capital expenditure has dropped by 14% to $119,469. 

Liquidity and Capital Resources 
Net cash utilization during the quarter ended December 31, 2004 increased to $322,277 per month from $244,512 per month during the fourth quarter 2003, representing an increase of 32%. 

For the twelve months ended December 31, 2004, the cash utilization rate has averaged $296,904 compared to $220,894 in 2003. Year-over-year, this represents an increase in net cash spending of approximately 34%. The low cash utilization in 2003 was primarily due to revenues from sales of the first generation units. 

About FCT 
Over the past decade, FCT has designed and built custom fuel cell power systems to the technically demanding requirements of world renowned customers. Since 2000, FCT has brought that exacting quality of work to the development of stationary SOFCs. Fuel cell systems are the future of power generation because of their environmental benefits and high efficiency. Certain types of fuel cells can operate on a variety of fuels, including fossil fuels, renewable fuels such as methanol and ethanol, and hydrogen, facilitating a transition between fossil fuels and hydrogen. FCT’s solid oxide fuel cells (SOFCs) are designed to operate on a variety of readily available fuels and provide a highly efficient, environmentally friendly method to produce on-site electricity and heat that can be used in a variety of remote, residential, commercial and industrial applications. 

Forward-looking Statements and Risk Factors 
Certain statements in this quarterly report may constitute “forward-looking” statements. Words such as “may, would, could, will, intend, plan, anticipate, believe, estimate, expect”, and similar expressions as they relate to FCT or its management, indicate forward-looking statements when used in this quarterly report. Forward-looking statements are based on management’s current expectations, beliefs, intentions, or strategies for the future. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could influence outcomes include changes in general economic, financial, or business conditions that adversely affect the business or markets in which FCT operates; FCT’s ability to attract and retain customers and business partners; and, dependence on third party suppliers. FCT expects investors to review the section in our 2003 Annual Report at page 13 under Management’s Discussion and Analysis, and entitled “Business Risks and Uncertainties – The FCT Outlook” for a broader discussion of factors that could influence outcomes and FCT’s future performance.