FCT continues to pursue opportunities that will generate multiple follow on sales for its Solid Oxide Fuel Cell (SOFC) systems. In April, FCT and Siemens shared a booth at the Hannover Fair in Germany. The exhibition attracted many interested companies and generated several promising leads with major European companies. Further discussions with some of these parties have been ongoing and management expects that these will lead to sales in the third quarter of this year. FCT also confirmed sales of a unit to a European customer who will use biogas generated from slaughter house waste, and a further first generation balance of plant (BOP) to SWPC. These sales will result in an additional $0.5 million in revenue in 2005.

In the second quarter 2005, FCT shipped SOFC systems to three key customers. A system delivered to the Memphis Botanic Garden is being funded by Gas Technology Institute's (GTI) Distributed Generation Mutual Fund (DGMF) members, who are primarily gas utilities that have the potential to become major customers of FCT. A second SOFC system was delivered to the University of Liege as a step toward entering the European markets. A BOP was delivered to Siemens in June and will be used by one of their companies in Europe.

Of the systems that have been delivered this year, the first system, delivered to the Canada Centre for Housing Technology (CCHT), ran for over 1600 hours before being shutdown to replace the thermocouples with newer, more robust ones. Two systems are at site awaiting startup as the customer sites are not quite ready. Importantly, the fuel cell stack has performed extremely well in all of the systems to date and during operations has shown no measurable voltage degradation.

On April 12, 2005 FCT engaged Fraser Mackenzie Limited, CIBC World Markets Inc. and Sprott Securities Inc. as agents in connection with a proposed private placement of units. The net proceeds of the proposed offering were to be primarily used to fund commercialization of FCT's 5kW systems, including ongoing product improvements, increased production volumes and cost reduction. In May, however, in light of the poor performance of the overall market, management made a decision to postpone the offering.

Summary of Financial Results

Total revenue for the three months ended June 30, 2005 increased 11% to $417,019 compared to $374,945 for the same period in 2004. For the six months ended June 30 2005, total revenue was $1,036,198 compared to $628,053 the six months ended June 30, 2004, a 65% increase. In fact revenue up to the end of Q2 exceeded the entire 2004 year revenue. In an important contrast to 2004, where 89% of revenue in the second quarter was from research contracts, in 2005 79% of the revenue ($331,181) was from the shipment of systems. The majority of the remaining income was from research contracts.

FCT's earnings before income tax were negative $1,421,574 compared to earnings of negative $885,272 before income tax for the second quarter 2004. The increase in net loss is due to product costs and increased research and development expenses associated with Canadian Standards Association certification, development of methanol fuel capability in FCT's SOFC systems, and testing of a propane reformer. The high cost of goods sold of the SOFC system reflects the hand-built nature of the product at this point. The Company has already substantially reduced the labour required to build each system and is aggressively pursing cost reduction initiatives in the areas of the inverter, generator and electronics, and expects to realize savings of $50,000-70,000 per unit over the course of the next year. The cost of the tubes, which comprises approximately one third of the system cost, is also expected to drop over the next two years due to increased power output of new cells currently being incorporated into FCT's systems, which may result in a fewer number of cells used in the 5kW system. Siemens is also now automating production with an expected long-term reduction in cell costs of up to 50%.

Expenses in the second quarter 2005 increased 19% to $1,498,020 from $1,260,214 in the second quarter 2004. This increase is primarily due to a 34% increase in research and development spending of $819,775. General and administrative expenses rose 6% as a result of expenses related to fundraising, and sales and marketing expenses increased 12% from the same period 2004, reflecting FCT's increased sales and marketing efforts this year.

Net cash utilization during the quarter ended June 30, 2005 increased to $512,561 per month from $196,761 per month in the second quarter 2004. In the second quarter 2004 the increase in customer deposits for product to be delivered was $439,784, greatly reducing cash utilization for that quarter.

FCT's cash balance of $1,387,548 at the end of the second quarter and monthly cash utilization of $512,561 raises substantial doubt about the Company's ability to continue as a going concern. In order to continue operations beyond the third quarter the Company must obtain additional financing through the issue of shares and/or from loans, and management continues to pursue fundraising activity. At the time of preparation of this quarterly report, discussions were underway with respect to financing. FCT's cash utilization and liquidity in the past quarter were adversely affected by the delay in receipt of approximately $600,000 owed to FCT. These monies related to projects in which FCT had met the milestones but payment was delayed due to administrative issues.

About FCT

Over the past decade, FCT has designed and built custom fuel cell power systems. Fuel cell systems are the future of power generation because of their environmental benefits and high efficiency. FCT's SOFC systems 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, commercial, industrial and residential applications. FCT is now delivering to customers around the world.