Railpower Reports 2006 Fourth Quarter and Year End Financial Results



    TSX Symbol: P

    MONTREAL, March 30 /CNW/ - Railpower Technologies Corp. ("Railpower" or
the "Company") (TSX: P), a leader in specialized energy technology systems for
the transportation industry, today reported its financial results for the
three and twelve-month periods ended December 31, 2006. (All dollar amounts
are in $CDN unless stated otherwise.)

    
    2006 Highlights
        -  Produced 38 units and delivered 28 during the year
        -  Obtained Tier 2, U.S. Environmental Protection Agency ("EPA")
           certification for the RP-series three-engine road switcher
           locomotive and delivered 15 road switchers to the customer sites
        -  Reached an agreement with a customer to amicably terminate the
           contract for the procurement of 35 yard Green Goat locomotives
           which resulted in a reversal to the provision for future contract
           losses of $18.7 million
        -  Commenced design of a prototype hybrid diesel electric power unit
           for use in TSI Terminal Systems Inc.'s rubber tyred gantry ("RTG")
           cranes commonly used in major ports
        -  First European hybrid yard switcher completed in Sweden, by
           Swedish Train Technology
        -  Subsequent to quarter end, completed equity financing raising
           gross proceed of $34.5 million
        -  Recorded a net loss for the year of $41.5 million compared to
           $59.9 million in 2005
        -  Recognized a contract loss in the amount of $16.0 million for its
           largest current order. The loss is due to additional labor hours,
           higher warranty costs due to the extension of the warranty period
           granted in November 2006 and penalties on expected late
           deliveries.
    

    "During 2006, our management team commenced the implementation of a
turnaround strategy. We recruited senior engineering and finance talent to
address our core internal functions, costing and reporting processes were put
into place in all our departments and new procurement and manufacturing
process were developed," said José Mathieu, President and CEO of Railpower.
"In terms of product developments, we completed a new and improved third
generation yard switcher, we launched the production of our RP-series
multi-genset road switcher and we recently completed a battery-dominant hybrid
power plant for installation on RTG cranes."
    "Looking ahead, we will continue to improve our procurement and
manufacturing processes, focus on increasing the market penetration of our 
RP-series road switchers and build up a family of road switchers based on this
initial model. We will also further develop our hybrid technology for
derivative applications, such as RTG cranes. We have a tremendous market
opportunity to address and by continuing to execute on our focused business
plan, we believe we are well positioned to succeed."

    Financial Results

    For the fourth quarter of 2006, revenue increased to $11.3 million,
compared to $10.0 million in the fourth quarter of 2005. The Company's
increased revenue in the fourth quarter resulted from the delivery of
11 units, compared to delivery of 12 in the fourth quarter a year ago, at a
higher selling price. For the year ended December 31, 2006, revenue increased
to $25.6 million, compared to $20.2 million in the same period a year ago.
Increased revenue in the year resulted from the delivery of 28 units compared
to 24 in 2005. As at December 31, 2006, the Company had firm orders for 105
locomotives and three cranes compared to an order book of 163 locomotives at
the end of 2005.
    Cost of goods sold ("COGS") in the fourth quarter totaled $19.2 million
compared to $15.6 million in the fourth quarter of 2005. For the year ended
December 31, 2006, COGS totaled $40.7 million compared to $30.2 million for
the year ended December 31, 2005. The increase in COGS in the year resulted
primarily from the write-down of inventory to its net realizable value, the
increase in manufacturing overhead and a provision for obsolescence of raw
material.
    Operating expenses, including engineering and research and development
("R&D"), general and administrative ("G&A"), selling and service related
expenses, for the fourth quarter of 2006 totaled $6.7 million, compared to
operating expenses of $7.5 million for the fourth quarter of 2005. Operating
expenses for the year ended December 31, 2006 totaled $28.8 million, compared
to operating expenses of $22.3 million for the year ended December 31, 2005.
The increase in operating expenses during 2006 resulted from higher levels of
activity, the completion of an inspection program for the Green Goats, the
development of IT processes and systems and increased engineering and R&D
expenses related to the completion of the third generation yard switcher
(GG20B) as well as design and validation of the RP-series road switcher and
the development of the first hybrid crane.
    Net loss for the fourth quarter of 2006 was $5.8 million, or ($0.11) per
share, compared to a net loss of $40.5 million, or ($0.91) per share in the
same period a year ago. The Company's decreased net loss in the current
quarter is primarily attributable to the decrease in the provision for future
contract losses. Net loss for the year ended December 31, 2006 was $41.5
million, or ($0.76) per share compared to a net loss of $59.9 million, or
($1.36) per share in 2005.
    As at December 31, 2006, the Company had cash and cash equivalents of
$1.1 million, compared to $76.8 million as at December 31, 2005. The Company's
decreased cash position as at December 31, 2006 reflects significantly higher
levels of inventory related to work-in-process manufacturing and increases in
accounts receivable, offset by a reversal to the provision for future contract
losses of $18.7 million related to termination of a contract for 35 Green Goat
yard locomotives. The Company has since significantly improved its cash
position. Cost-cutting and cash preservations measures were put into place,
and subsequent to year end, in February 2007, a public equity offering raising
gross proceeds of $34.5 million was completed.
    Railpower's consolidated financial statements and Management's Discussion
and Analysis ('MD&A') as at December 31, 2006, were prepared in accordance
with Canadian generally accepted accounting principles and are presented in
Canadian dollars, except where indicated otherwise. The full statements and
MD&A will be filed on SEDAR (www.sedar.com) and, be available via Railpower's
website (www.railpower.com) later today.

    Outlook
    Moving into 2007, the Company will focus its efforts on increasing the
market penetration of the RP-series road switcher. Railpower is currently in
discussions with several Class I railroads which have expressed an interest in
testing our RP-series demonstration units. Proposals have been submitted for
approximately 120 units to Class I railroads, as well as with some industrial
and overseas potential customers.
    The Company will also look to advance its strategy of penetrating
derivative markets for its hybrid technology. This technology is highly
suitable for the power and energy requirements of RTG cranes used for moving
shipping containers in major ports. Terminal Systems Inc, has agreed to test
Railpower's hybrid diesel electric power unit for use in their RTG cranes.
Three hybrid power plants are currently being developed, and the 1st one will
be installed by TSI on their cranes in the first half of 2007.
    In terms of manufacturing, Railpower expects to continue its delivery
schedule of three units per week, ramping up to five units per week, in order
to fulfill its largest current order by the end of June 2007. The Company is
exploring the possibility of operating its own manufacturing facility. This
facility would provide a shorter production cycle and would reduce working
capital requirements. However, the Company will keep some assembly capacity in
the United States.
    Upon completion of the current orders, the Company believes that it has
the necessary cash to pursue its sales and marketing activities, to continue
the development of its product lines, to improve the processes and systems and
to keep its core resources.

    Notice of Conference Call and Webcast
    José Mathieu, President and CEO of Railpower, will host a conference call
today at 9:00 am (EST) to review the financial results. All interested parties
are invited to participate. A live audio webcast of the call will be available
at www.railpower.com or www.newswire.ca. A taped replay of the conference call
will also be available until Friday, April 6, 2007 by calling 416-640-1917 or
1-877-289-8525 reference number 21219970 followed by the number sign.

    About Railpower
    Railpower (TSX: P), (www.railpower.com) is engaged in the development,
construction, marketing and sales of specialized, patented, environmentally
friendly technology systems for the transportation and related industries.
Railpower's technologies significantly reduce fuel usage, operating and
maintenance costs, and emissions. While Railpower's origins are in the
transportation industry, its technologies have broad potential and
applications in other markets and industries. Railpower is headquartered in
Montreal, Quebec. Its U.S. office is located in Erie, Pennsylvania.

    Caution regarding forward-looking statements

    Certain statements contained in this release contain forward-looking
statements. When used in this document, the words "may", "would", "could",
"will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and
similar expressions may be used to identify forward-looking statements. Those
statements reflect our current views with respect to future events or
conditions, including prospective results of operations, financial position,
predictions of future actions, plans or strategies. Certain material factors
and assumptions were applied in drawing our conclusions and making those
forward-looking statements. By their nature, those statements reflect
management's current views, beliefs and assumptions and are subject to certain
risks and uncertainties, known and unknown, including, without limitation,
product development or manufacturing delays, changing environmental
regulations, the ability to attract and retain business partners, the
acceptance of our existing and new products, future levels of government
funding, the need to obtain and maintain proprietary rights over our
technology, competition from other technologies, the ability to access the
capital required for research, product development, operations and marketing,
the need to generate positive cash flow in the foreseeable future, changes in
energy prices and currency levels. Many factors could cause our actual
results, performance or achievements to be materially different from any
future results, performance or achievements that may be expressed or implied
by these forward-looking statements. Should one or more of these risks or
uncertainties materialize, or should the assumptions underlying our
projections or forward-looking statements prove incorrect, our actual results
may vary materially from those described in this report as intended, planned,
anticipated, believed, estimated, or expected. We do not intend and do not
assume any obligation to update these forward-looking statements whether as a
result of new information, plans, events or otherwise.

    
    RAILPOWER TECHNOLOGIES CORP.
    Consolidated Balance Sheets
    (Expressed in Canadian dollars)

    -------------------------------------------------------------------------
                                                December 31,    December 31,
                                                       2006            2005
    -------------------------------------------------------------------------
    Assets
    Current assets
      Cash and cash equivalents (note 4)       $   1,130,011   $  76,829,474
      Restricted investments (note 5)              2,053,604       4,713,189
      Accounts receivable (note 6)                 9,922,401       6,282,433
      Deposits to suppliers                          108,927          58,534
      Inventory (note 7)                          62,019,205      13,849,922
      Prepaid expenses                               934,082         536,783
      -----------------------------------------------------------------------
                                                  76,168,230     102,270,335

    Plant and equipment (note 8)                   1,662,244       1,229,914
    Lease, demonstration and service units
     (note 9)                                      5,921,854       3,638,482
    Patents (note 10)                                487,514         365,760
    Deferred development costs                             -         805,984
    -------------------------------------------------------------------------
                                               $  84,239,842   $ 108,310,475
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity
    Current liabilities
      Accounts payable and accrued liabilities    16,841,284      11,179,140
      Advanced billing (note 11)                  23,417,068               -
      Term loan (note 12)                          2,745,974       3,086,796
      Provision for warranties (note 13)           4,991,293       5,102,518
      Provision for contract losses (note 14)      8,586,486      23,018,371
      -----------------------------------------------------------------------
                                                  56,582,105      42,386,825

    Shareholders' equity
      Share capital (note 15)                    146,081,902     145,454,777
      Contributed surplus (note 15)                4,442,257       1,862,772
      Deficit                                   (122,866,422)    (81,393,899)
      -----------------------------------------------------------------------
                                                  27,657,737      65,923,650
                                               $  84,239,842   $ 108,310,475
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Risks and uncertainties (note 2)
    Contractual obligations and commitments (note 18)
    Contingencies (notes 9 and 22)
    Subsequent events (note 23)

    The accompanying notes are an integral part of the consolidated financial
    statements.


    RAILPOWER TECHNOLOGIES CORP.
    Consolidated Statements of Operations and Deficit
    (Expressed in Canadian dollars)


    -------------------------------------------------------------------------
                                                   Year ended December 31
                                              -------------------------------
                                                        2006            2005
    -------------------------------------------------------------------------

    Sales                                      $  25,647,651   $  20,177,261

    Cost of goods sold                           (40,710,428)    (30,182,615)
    Provision for contract losses                  3,805,684     (23,018,371)
    Amortization of plant and equipment and
     lease and service units                        (707,389)       (554,082)
    Amortization and write-down of patents
     and deferred development costs               (1,192,564)        (10,724)
    Amortization of government grants                 77,733          63,807
    Warranty expenses                             (1,350,499)     (5,103,117)
    -------------------------------------------------------------------------
                                                 (14,429,812)    (38,627,841)

    Selling expenses                              (1,378,453)     (1,610,687)
    Service expenses                              (4,660,911)     (3,163,929)
    Engineering and research & development
     expenses                                    (10,939,734)     (9,081,278)
    General and administrative expenses          (11,850,940)     (8,450,824)
    -------------------------------------------------------------------------
    Operating loss                               (43,259,850)    (60,934,559)


    Interest income                                1,608,659       1,267,567
    Foreign exchange gain (loss)                     434,901         (39,024)
    Interest expense                                (256,233)       (205,464)
    -------------------------------------------------------------------------

    Loss for the year                            (41,472,523)    (59,911,480)

    Deficit, beginning of year                   (81,393,899)    (21,482,419)
    -------------------------------------------------------------------------

    Deficit, end of year                       $(122,866,422)  $ (81,393,899)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net loss per weighted average common share;
    basic and diluted                          $       (0.76)  $       (1.36)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number of common shares
     outstanding; basic and diluted               54,870,835      44,191,631
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of the consolidated financial
    statements.


    RAILPOWER TECHNOLOGIES corp.
    Consolidated Statements of Cash Flows
    (Expressed in Canadian dollars)


    -------------------------------------------------------------------------
                                                   Year ended December 31
                                              -------------------------------
                                                        2006            2005
    -------------------------------------------------------------------------
    Cash flows from operating activities
      Loss for the year                        $ (41,472,523)  $ (59,911,480)
      Items not involving cash
        Amortization of plant and equipment
         and lease and service units                 707,389         554,082
        Amortization and write-down of patents
         and deferred development costs            1,192,564          10,724
        Amortization of government grants            (77,733)        (63,807)
        Stock-based compensation                   2,666,522       1,545,438
        Gain on sale of equipment                          -         (37,214)
      Changes in working capital and other items
        Increase in accounts receivable           (3,997,452)     (5,659,628)
        Increase in deposits to suppliers            (50,393)        (58,534)
        Increase in inventory                    (47,403,453)     (4,292,196)
        Increase in prepaid expenses                (397,299)       (324,527)
        Increase in accounts payable and
         accrued liabilities                       5,662,144       6,138,907
        Increase in advance billing               23,417,068               -
        Decrease in customer deposits                      -        (315,465)
        Increase (decrease) in provision for
         warranties                                 (111,225)      5,078,468
        Increase (decrease) in provision for
         contract losses                         (14,431,885)     23,018,371
    -------------------------------------------------------------------------
    Net cash used in operating activities        (74,296,276)    (34,316,861)
    -------------------------------------------------------------------------

    Cash flows from investing activities
      Decrease (increase) in restricted
       investments                                 2,659,585        (475,067)
      Expenditures on patents                       (146,754)       (159,305)
      Expenditures on plant and equipment           (998,384)       (674,524)
      Investment in lease, demonstration and
       service units                              (3,112,804)     (3,918,876)
      Proceeds on sale of fixed assets                     -         666,361
      Investment in deferred development costs      (361,580)       (792,439)
    -------------------------------------------------------------------------
    Net cash used in investing activities         (1,959,937)     (5,353,850)
    -------------------------------------------------------------------------

    Cash flows from financing activities
      Issuance of long-term debt                           -       2,358,720
      Repayment of long-term debt                   (340,822)       (443,874)
      Government grants                              357,484       1,775,498
      Issuance of common stock for cash, net
       of share issue costs                          540,088      58,896,857
    -------------------------------------------------------------------------
    Net cash provided by financing activities        556,750      62,587,201
    -------------------------------------------------------------------------

    Net increase (decrease) in cash and cash
     equivalents                                 (75,699,463)     22,916,490

    Cash and cash equivalents, beginning of year  76,829,474      53,912,984

    Cash and cash equivalents, end of year
     (note 4)                                  $   1,130,011   $  76,829,474
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary information
      Interest paid                            $     234,021   $     205,464
      Income taxes paid                        $           -   $      10,379

    The accompanying notes are an integral part of the consolidated financial
    statements.


    RAILPOWER TECHNOLOGIES CORP.
    Consolidated Balance Sheets
    (Expressed in Canadian dollars)

    -------------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
    -------------------------------------------------------------------------
    Assets
    Current assets
      Cash and cash equivalents (note 4)       $   1,130,011   $  76,829,474
      Restricted investments (note 5)              2,053,604       4,713,189
      Accounts receivable (note 6)                 9,922,401       6,282,433
      Deposits to suppliers                          108,927          58,534
      Inventory (note 7)                          62,019,205      13,849,922
      Prepaid expenses                               934,082         536,783
      -----------------------------------------------------------------------
                                                  76,168,230     102,270,335

    Plant and equipment (note 8)                   1,662,244       1,229,914
    Lease, demonstration and service units
     (note 9)                                      5,921,854       3,638,482
    Patents (note 10)                                487,514         365,760
    Deferred development costs                             -         805,984
    -------------------------------------------------------------------------
                                               $  84,239,842   $ 108,310,475
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity
    Current liabilities
      Accounts payable and accrued liabilities    16,841,284      11,179,140
      Advanced billing (note 11)                  23,417,068               -
      Term loan (note 12)                          2,745,974       3,086,796
      Provision for warranties (note 13)           4,991,293       5,102,518
      Provision for contract losses (note 14)      8,586,486      23,018,371
      -----------------------------------------------------------------------
                                                  56,582,105      42,386,825

    Shareholders' equity
      Share capital (note 15)                    146,081,902     145,454,777
      Contributed surplus (note 15)                4,442,257       1,862,772
      Deficit                                   (122,866,422)    (81,393,899)
      -----------------------------------------------------------------------
                                                  27,657,737      65,923,650

                                               $  84,239,842   $ 108,310,475
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Risks and uncertainties (note 2)
    Contractual obligations and commitments (note 18)
    Contingencies (notes 9 and 22)
    Subsequent events (note 23)

    The accompanying notes are an integral part of the consolidated financial
    statements.

    Approved by the Board:


    ------------------------, Director    ------------------------, Director


    RAILPOWER TECHNOLOGIES CORP.
    Consolidated Statements of Operations and Deficit
    (Expressed in Canadian dollars)


    -------------------------------------------------------------------------
                                                   Year ended December 31
                                              -------------------------------
                                                        2006            2005
    -------------------------------------------------------------------------
    Sales                                      $  25,647,651   $  20,177,261

    Cost of goods sold                           (40,710,428)    (30,182,615)
    Provision for contract losses                  3,805,684     (23,018,371)
    Amortization of plant and equipment and
     lease and service units                        (707,389)       (554,082)
    Amortization and write-down of patents
     and deferred development costs               (1,192,564)        (10,724)
    Amortization of government grants                 77,733          63,807
    Warranty expenses                             (1,350,499)     (5,103,117)
    -------------------------------------------------------------------------
                                                 (14,429,812)    (38,627,841)

    Selling expenses                              (1,378,453)     (1,610,687)
    Service expenses                              (4,660,911)     (3,163,929)
    Engineering and research & development
     expenses                                    (10,939,734)     (9,081,278)
    General and administrative expenses          (11,850,940)     (8,450,824)
    -------------------------------------------------------------------------
    Operating loss                               (43,259,850)    (60,934,559)


    Interest income                                1,608,659       1,267,567
    Foreign exchange gain (loss)                     434,901         (39,024)
    Interest expense                                (256,233)       (205,464)
    -------------------------------------------------------------------------

    Loss for the year                            (41,472,523)    (59,911,480)

    Deficit, beginning of year                   (81,393,899)    (21,482,419)
    -------------------------------------------------------------------------

    Deficit, end of year                       $(122,866,422)  $ (81,393,899)
    -------------------------------------------------------------------------

    Net loss per weighted average common share;
    basic and diluted                          $       (0.76)  $       (1.36)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number of common
     shares outstanding; basic and diluted        54,870,835      44,191,631
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of the consolidated financial
    statements.


    RAILPOWER TECHNOLOGIES CORP.
    Consolidated Statements of Cash Flows
    (Expressed in Canadian dollars)

    -------------------------------------------------------------------------
                                                   Year ended December 31
                                              -------------------------------
                                                        2006            2005
    -------------------------------------------------------------------------
    Cash flows from operating activities
      Loss for the year                        $ (41,472,523)  $ (59,911,480)
      Items not involving cash
        Amortization of plant and equipment
         and lease and service units                 707,389         554,082
        Amortization and write-down of patents
         and deferred development costs            1,192,564          10,724
        Amortization of government grants            (77,733)        (63,807)
        Stock-based compensation                   2,666,522       1,545,438
        Gain on sale of equipment                          -         (37,214)
      Changes in working capital and other items
        Increase in accounts receivable           (3,997,452)     (5,659,628)
        Increase in deposits to suppliers            (50,393)        (58,534)
        Increase in inventory                    (47,403,453)     (4,292,196)
        Increase in prepaid expenses                (397,299)       (324,527)
        Increase in accounts payable and accrued
         liabilities                               5,662,144       6,138,907
        Increase in advance billing               23,417,068               -
        Decrease in customer deposits                      -        (315,465)
        Increase (decrease) in provision
         for warranties                             (111,225)      5,078,468
        Increase (decrease) in provision for
         contract losses                         (14,431,885)     23,018,371
    -------------------------------------------------------------------------
    Net cash used in operating activities        (74,296,276)    (34,316,861)
    -------------------------------------------------------------------------

    Cash flows from investing activities
      Decrease (increase) in restricted
       investments                                 2,659,585        (475,067)
      Expenditures on patents                       (146,754)       (159,305)
      Expenditures on plant and equipment           (998,384)       (674,524)
      Investment in lease, demonstration and
       service units                              (3,112,804)     (3,918,876)
      Proceeds on sale of fixed assets                     -         666,361
      Investment in deferred development costs      (361,580)       (792,439)
    -------------------------------------------------------------------------
    Net cash used in investing activities         (1,959,937)     (5,353,850)
    -------------------------------------------------------------------------

    Cash flows from financing activities
      Issuance of long-term debt                           -       2,358,720
      Repayment of long-term debt                   (340,822)       (443,874)
      Government grants                              357,484       1,775,498
      Issuance of common stock for cash, net
       of share issue costs                          540,088      58,896,857
    -------------------------------------------------------------------------
    Net cash provided by financing activities        556,750      62,587,201
    -------------------------------------------------------------------------

    Net increase (decrease) in cash and
     cash equivalents                            (75,699,463)     22,916,490

    Cash and cash equivalents, beginning of year  76,829,474      53,912,984
    -------------------------------------------------------------------------

    Cash and cash equivalents, end of year
     (note 4)                                  $   1,130,011   $  76,829,474
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary information
      Interest paid                            $     234,021   $     205,464
      Income taxes paid                        $           -   $      10,379


    The accompanying notes are an integral part of the consolidated financial
    statements.


    RAILPOWER TECHNOLOGIES CORP.
    Notes to Consolidated Financial Statements
    (Expressed in Canadian dollars)
    -------------------------------------------------------------------------

    1.  The Company

        Railpower Technologies Corp. (the "Company") is a public company
        listed on the Toronto Stock Exchange ("TSX") formed under the Canada
        Business Corporations Act on June 30, 2001.

        The Company is engaged in the development, construction, marketing
        and sales of specialized energy technology systems for transportation
        and power generation.

        A subsidiary, Railpower Hybrid Technologies Corp., was incorporated
        under the laws of the State of Washington in January 2004 and has its
        principal office in Erie, Pennsylvania.

    2.  Risks and uncertainties

        (a)   Use of estimate

        The preparation of financial statements in conformity with Canadian
        generally accepted accounting principles ("GAAP") requires management
        to make estimates and assumptions that affect the reported amounts of
        assets and liabilities and disclosure of contingent assets and
        liabilities at the dates of the consolidated financial statements and
        the reported amounts of revenues and expenses during the reporting
        periods. These estimates and assumptions are based on management's
        historical experience, knowledge of current events and conditions and
        activities that the Company may undertake in the future. Significant
        estimates include, but are not limited to:

        -  the key economic assumptions used to determine the projected cash
           flows used in supporting the going concern assumption;
        -  the provision for contract losses;
        -  the provision for warranty;
        -  the allowance for doubtful accounts;
        -  the allowance for inventory obsolescence and its net realizable
           value;
        -  the estimated useful lives of assets;
        -  the valuation allowances for deferred income tax assets;
        -  the accrual of contingencies.

        The most significant estimates affect inventory valuation, provisions
        for warranties and provisions for contract losses. These depend upon
        subjective or complex judgments about matters that are uncertain and
        both internal and external conditions that are evolving. Changes in
        those estimates could materially impact the consolidated financial
        statements. They are also subject to uncertainties both internal and
        external to the Company, some of which stemming from the dependencies
        described in note 2 (b). Management reviews these estimates on an
        on-going basis. Adjustments, if any, will be reflected in operations
        in the period the uncertainty is resolved.

        (b)   Dependencies

        Customers

        Due to the nature of the North American railroad industry, the
        Company depends on large orders from a small number of customers. Its
        largest customers are the seven Class I railroads and locomotive
        leasing companies in North America. It may also receive orders from
        smaller railroads but the size of these orders will be significantly
        smaller than those placed by Class I railroads. Currently, the
        Company is dependent on one significant customer. Sales to this
        customer accounted for 64% of total sales of 2006. In addition, a
        significant portion of the inventory is related to fulfilling the
        commitment to this customer, as described in note 14(4).

        Contract manufacturers and suppliers

        In order to fulfill its obligation towards this significant customer,
        the Company is also dependant of two contract manufacturers to
        assemble the locomotives and on a limited number of key suppliers.
        Prolonged disruptions in the assembly of locomotives and or delays in
        the supply of quality materials could have a material adverse effect
        on the Company's operating results and financial condition as it
        would affect its ability to fulfill its commitment to this customer
        in relation to timing, quality, quantity and cost. As a result, the
        Company would be subject to significant penalties from this customer.

        (c)   Measurement uncertainty

        As disclosed in note 2(a), the preparation of financial statements in
        conformity with GAAP requires management to make estimates and
        assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at
        the dates of the consolidated financial statements and the reported
        amounts of revenues and expenses during the reporting periods.
        Certain risks and factors could materially affect the degree of
        uncertainty associated with the measurement of many amounts in the
        financial statements. Adequacy of the Company's provisions for
        warranties and for contract losses are items subject to significant
        measurement uncertainty as explained below:

        Warranty

        The Company began commercial production and delivery of Green Goat
        locomotives in 2005 and Road Switcher locomotives in 2006. As with
        any new product, it is possible that the long term use of our
        locomotives in actual working conditions may expose some weaknesses,
        failures or shortcomings in our designs, specifications,
        manufacturing techniques, components or systems. As the Company's
        products are sold with a limited warranty, it may experience warranty
        repair costs in excess of our current expectations. It is also
        possible that problems arise with respect to a significant component
        or give rise to a safety or liability issue for which it may need to
        consider a redesign, re-specification or recall. The Company provides
        for the estimate of warranty cost based on contract terms, historical
        warranty loss experience and future expectations and is periodically
        adjusted for recent actual experience. Because warranty estimates are
        forecasts that are based on the best available information, future
        claims costs may differ from the amount provided for. The Company
        adjusts initial provisions for warranties as changes in the future
        obligation become reasonably estimatable.

        Provisions for contract losses

        In estimating the loss on contract, all related known and estimatable
        costs are considered including those related to direct overhead,
        warranties, and penalties. As the company is in its early stages of
        production, overhead rates were based on an estimate of normal
        subcontractor man hours required for production. Judgment is involved
        in differentiating between actual production man hours and man hours
        incurred for evolving design and production needs. Furthermore,
        penalties were estimated based on the current production delivery
        schedule. As the Company is dependant on key suppliers and contract
        manufacturers, delays in procurement and production may result in the
        delivery schedule not being met and penalties being incurred.
        Management continuously monitors its ability to meet the required
        deadlines and includes potential contract penalties when it becomes
        reasonable to estimate that the delivery schedule will not be met.

    3.  Significant accounting policies

        These consolidated financial statements are expressed in Canadian
        dollars and have been prepared in accordance with GAAP using the
        significant accounting policies described below.

        (a)   Principles of consolidation

              The consolidated financial statements include the accounts of
              the Company and its wholly owned subsidiary, Railpower Hybrid
              Technologies Corp., from its date of formation. All
              intercompany balances and transactions are eliminated on
              consolidation.

        (b)   Cash and cash equivalents

              Cash and cash equivalents are defined to include cash and
              highly liquid short-term investments with original maturities
              of three months or less and are presented at cost.

        (c)   Inventory

              Raw materials inventory is stated at the lower of average cost
              and replacement cost. Inventory of work-in-process and finished
              goods are stated at the lower of average cost, determined on a
              specific identification basis, and net realizable value.
              Locomotives which are complete but not yet in possession of the
              customer are classified as finished goods. Kits for the
              conversion of locomotives to hybrid or multi engines
              configuration situated at customers' sites for which delivery
              is substantially complete and locomotives which have been
              delivered to the customer are classified as finished goods at
              customer's site (note 7) until revenue recognition criteria
              have been met.

        (d)   Plant and equipment

              Equipment is recorded at cost and amortized on a declining-
              balance basis at a rate of 30% per year.

              Leasehold improvements are recorded at cost and amortized on a
              straight-line basis over the term of the lease.

        (e)   Lease, demonstration and service units

              Lease, demonstration and service locomotives are recorded at
              the lower of cost and net realizable value and are amortized
              over their estimated useful life (22 years) on a straight line
              basis.

        (f)   Patents

              Patents are initially recorded at cost and are amortized on a
              specific identification straight-line basis over the life of
              the individual patents, which is generally 20 years. Patents
              are reviewed on a regular basis to ensure that they still have
              value for the Company.

        (g)   Warranty

              A provision for warranty cost is initially recorded when
              revenue for the underlying locomotive is recognized to reflect
              an estimate of the Company's costs to fulfill its warranty
              obligations on the locomotive, including battery packs,
              contained in the contract of sale. Expenditures to repair
              customers' locomotives during the warranty period are charged
              as incurred against the warranty accrual. Periodically, the
              Company reassesses the adequacy of its warranty accrual against
              its expenditure experience and identified claim issues and
              adjusts the provision to reflect the expectations of future
              costs to fulfill its warranty obligations.

        (h)   Foreign currency translation

              The measurement and reporting currency of the Company is the
              Canadian dollar. Transactions of the Company that are
              denominated in foreign currencies are recorded in Canadian
              dollars at exchange rates in effect at the related transaction
              date. Monetary assets and liabilities denominated in foreign
              currencies are adjusted to reflect exchange rates at the
              balance sheet date. Non-monetary assets, including related
              amortization, are translated at historical rates. Exchange
              gains and losses arising on the translation of monetary assets
              and liabilities are included in the statement of operations for
              the period.

        (i)   Revenue recognition

              The Company's sales are mainly derived from the sales of
              locomotives and locomotive kits. The Company accounts for its
              locomotive and locomotive kit sales contracts on the percentage
              of completion basis by the output method with each locomotive
              or locomotive kit under a contract considered an output. Under
              this method, sales revenue is recognized upon delivery of the
              completed locomotive or the completed locomotive kit to the
              customer, when substantially all contract conditions are met,
              no uncertainties surrounding product acceptance and no rights
              of return exist, the related revenue is fixed or determinable,
              collectibility is reasonably assured and the customer takes
              title and assumes the majority of risks and rewards of
              ownership. The Company assesses the expectations of
              profitability of its contracts periodically. When there is
              reasonable certainty of an overall loss on a given contract,
              that estimated loss is recognized in full in the accounts. This
              results in the Company accounting for each output unit in a
              contract on a zero profit basis prospectively. In estimating
              the loss on contract, all related disbursements are considered
              including those related to warranties, penalties and direct
              overhead. Provisions for contract losses are shown separately
              as liabilities on the balance sheet, if significant, except in
              circumstances in which related costs are accumulated on the
              balance sheet, in which case the provisions are deducted from
              the related accumulated costs in inventory. In addition, as
              units are delivered, the portion of the contract loss related
              to warranties is reclassified to the provision for warranties
              on the balance sheet. Any subsequent adjustments to the
              contract loss are recognized when reasonably estimable.

              Customer deposits or payments received in advance of meeting
              the revenue recognition criteria are classified within current
              liabilities in the consolidated financial statements under
              advanced billing.

        (j)   Research and development

              Research costs are expensed in the period in which they are
              incurred. Development costs are expensed in the period incurred
              unless such costs meet stringent criteria for deferral and
              amortization under GAAP primarily related to product
              definition, technical feasibility and marketability.

              The capitalized deferred development costs are amortized
              against future sales of the products developed, except for
              costs related to specific agreements reached with partners
              to develop new markets or industries where these costs are
              amortized over the term of the agreements on a straight-line
              basis.

        (k)   Stock-based compensation plan

              Effective October 1, 2003, the Company adopted the fair-value
              based method of accounting for stock-based compensation on a
              prospective basis, for all awards of shares and stock options
              granted on or after October 1, 2003 to employees and directors
              and on or after October 1, 2002 for options granted to non-
              employees. The resulting compensation expense is charged to
              earnings over the vesting period on a straight-line basis
              except for awards to non-employees whereby the compensation
              expense is recognized as the goods or services are received.
              Stock-based compensation expense is added to contributed
              surplus when recognized and transferred to share capital upon
              issuance of common shares. Proceeds received on the exercise of
              stock options are included in share capital. Prior to
              October 1, 2003, options granted to employees and directors
              were accounted for using the intrinsic value method of
              accounting for stock-based compensation. The Company discloses
              the pro-forma effect of accounting for all stock options
              awarded to employees subsequent to September 30, 2002 by the
              fair value method in note 15(e) to the consolidated financial
              statements.

        (l)   Government grants

              The Company receives incentive grants towards the cost of
              certain of its activities from governments. Grants received
              that relate to expenses of a given period reduce those expenses
              when received. Grants received towards the capital cost of the
              Company's lease and service units reduce the capital cost of
              the related locomotives. As a result, the capital costs and the
              grants of the locomotives are amortized over the useful life of
              the locomotives. The amortization of the grants for which the
              grants are received with the amortization is classified as a
              reduction of depreciation and amortization expense.

        (m)   Income taxes

              Income taxes are accounted for under the asset and liability
              method. Under this method, future tax assets and liabilities
              are recognized for the future tax consequences attributable to
              differences between the financial statement carrying amounts of
              existing assets and liabilities and their respective tax bases
              and operating loss and tax credit carry forwards. Future tax
              assets and liabilities are measured using enacted or
              substantively enacted income tax rates and laws expected to
              apply to taxable income in the years in which those temporary
              differences are expected to be recovered or settled. The effect
              on future tax assets and liabilities of a change in tax rates
              is recognized in income in the year that substantive enactment
              date occurs. To the extent that realization of a future tax
              asset is not considered to be more likely than not, a valuation
              allowance is recorded.

        (n)   Earnings (loss) per share

              Basic earnings (loss) per share is calculated using the
              weighted average number of common shares outstanding. The
              Company uses the treasury stock method to calculate diluted
              earnings per share. However, diluted loss per share does not
              differ from basic loss per share as the effect of all
              outstanding options and warrants would be anti-dilutive to
              basic loss per share and result in a lower loss per share.

        (o)   Comparative figures

              Certain comparative figures have been reclassified to conform
              with the financial statement presentation adopted for the
              current year.

    4.  Cash and cash equivalents

        The major components of cash and cash equivalents are as follows:

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Cash                                   $   1,130,011   $     676,124
        Bank term deposits                                 -      76,153,350
        ---------------------------------------------------------------------
                                               $   1,130,011   $  76,829,474
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


    5.  Restricted investments

        As at December 31, 2006, the Company has invested a total of $424,000
        ($591,589 in 2005) in one (two at December 31, 2005) Guaranteed
        Investment Certificate ("GIC") expiring on November 19, 2007
        (September 27, 2006 and November 8, 2006 in 2005). The GIC is
        redeemable prior to maturity and is yielding 2.8% at December 31,
        2006 (2.8% at December 31, 2005). The GIC is held as security by the
        financial institution as collateral against a letter of credit
        outstanding in favor of a supplier. An additional amount of
        $1,629,604 (US$ 1,398,322) (US$ 1,400,000 in 2005) is held as
        collateral by a financial institution against the long-term debt and
        corporate credit card lines.

        As at December 31, 2005, additional amounts of $1,721,240 (US
        $1,480,000) and $837,360 (US $720,000) were invested in a financial
        institution commercial paper and were held as security by this
        financial institution as collateral against a letter of credit with a
        supplier. The deposits had yields of 4.32% and 4.25% and maturity
        dates of May 5, 2006 and April 4, 2006, respectively.

    6.      Accounts receivable

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------
        Trade                                  $   7,285,358   $   5,332,773
        Sales taxes                                2,617,291         883,794
        Interest and other                            19,752          65,866
        ---------------------------------------------------------------------
                                               $   9,922,401   $   6,282,433
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


    7.  Inventory

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Raw materials                          $  13,331,717   $   9,541,863
        Work in process                           36,466,563       1,763,500
        Finished goods at plant or in transit      7,590,537       2,013,154
        Finished goods at customer's site          4,630,388         531,405
        ---------------------------------------------------------------------
                                               $  62,019,205   $  13,849,922
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company entered into a sale agreement at the end of September
        2006 with regard to a service unit. Consequently, the locomotive was
        transferred at its net carrying value in the finished goods at
        customer's site.

    8.  Plant and equipment

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Equipment                              $   2,597,432   $   1,804,138
          Accumulated amortization                (1,032,173)       (595,544)
        ---------------------------------------------------------------------
                                                   1,565,259       1,208,594

        Leasehold improvements                       152,154         119,608
          Accumulated amortization                   (55,169)        (98,288)
        ---------------------------------------------------------------------
                                                      96,985          21,320

        ---------------------------------------------------------------------
                                               $   1,662,244   $   1,229,914
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During 2006, the Company transferred a locomotive (net cost of
        $87,923) previously used as a utility unit from the equipment to the
        lease, demonstration and service units.

    9.  Lease, demonstration and service units

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Lease and service units                $   3,891,181   $   3,798,723
          Accumulated amortization                  (316,301)       (160,241)
        ---------------------------------------------------------------------
                                                   3,574,880       3,638,482

        Demonstration units under construction     2,346,974               -
        ---------------------------------------------------------------------
                                               $   5,921,854   $   3,638,482
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        As mentioned in note 8, one locomotive was transferred during 2006
        from the equipment to the lease, demonstration and service units.

        The Company received in 2005 two grants for total amount of
        $1,775,498 from the State of California to help the Company reduce
        the capital cost of two lease and service units. These grants are not
        repayable, in whole or in part, unless the Company violates the terms
        and conditions of the individual agreements. As at December 31, 2006,
        no such violations have occurred. These locomotives are leased for
        five years at less than market rates to railroads operating in
        California, reflecting the contribution by the State to the cost of
        the asset. At the conclusion of the five year leases, the locomotives
        are available for lease or sale by the Company at market rates
        prevailing at that time.

    10. Patents

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Patents                                $     540,903   $     394,149
          Accumulated amortization                   (53,389)        (28,389)
        ---------------------------------------------------------------------
                                               $     487,514   $     365,760
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11. Advanced billing

        Certain sale contracts allow the Company to bill or partially bill
        the customers for the sale of locomotives or locomotive kits before
        delivery and acceptance. In addition, during the fourth quarter of
        2006, management has reached an agreement with a major customer to
        accelerate payment terms on certain units, therefore significantly
        increasing the number of locomotives and kits being billed in advance
        of the delivery and acceptance process.

        These amounts are recorded under advanced billing on the balance
        sheet until the locomotives or the kits are delivered and accepted by
        the customers and revenue is recognized. At that time, the related
        advanced billing is applied to the customer's receivable balance.

    12. Term loan

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------
        Term loan                              $   2,745,974   $   3,086,796
        Current portion                           (2,745,974)     (3,086,796)
        ---------------------------------------------------------------------
                                               $           -   $           -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        In late 2004, the Company entered into a lending agreement with a
        financial institution under which the financial institution provided
        a three year term loan of an aggregate of US$2,925,000. This loan is
        payable on a monthly basis by installments of US$27,083 plus
        interest, bears interest at LIBOR plus 3.75% (effective rates of
        9.11% and 7.85% as at December 31, 2006 and 2005, respectively), is
        secured against six of the Company's lease and service locomotives
        and will mature in December 2007. At December 31, 2006 and 2005, the
        loan is also secured against a compensating balance of US dollars
        held in financial institution short term investment account (note 5).
        The Company does not comply with certain financial covenants in its
        loan agreement for the year ended December 31, 2006, but has obtained
        a waiver from the financial institution up to the maturity date,
        being December 31, 2007.

    13. Provision for warranties

        As explained in note 3 (g), management reassesses on a regular basis
        the adequacy of the provision for warranties. The following table
        outlines the variations in the provision for the year:

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Balance at the beginning of the year   $   5,102,518   $      24,050

        Reversal of battery replacement
         provision                                (1,105,545)              -

        Additional increases in provision          2,456,044       5,078,468
        ---------------------------------------------------------------------
                                                   1,350,499       5,078,468

        Reclassification of warranty provision
         from provision for contract losses
         for units delivered (note 14)               572,815               -

        Actual costs incurred during the year     (2,066,332)              -

        Foreign exchange rate impact on
         provision                                    31,793
        ---------------------------------------------------------------------

        Balance at the end of the year          $  4,991,293   $   5,102,518
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    14. Provision for contract losses

        As explained in note 3 (i), management reviews on a regular basis the
        expected profitability on its contracts. The following table outlines
        the variations in the provision for the year:

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Balance at the beginning of the year   $  23,018,371   $           -

        Reversal of provision after
         cancellation of a contract(1)           (18,751,516)              -

        Reversal of battery replacement
         provision(2)                             (3,839,169)              -

        Increase in provision for completed
         contracts                                10,221,965               -

        Increase in provision for contracts
         in progress, net of provision of
         $6,572,972 applied against the
         inventory                                 8,563,036      23,018,371
        ---------------------------------------------------------------------
                                                  (3,805,684)     23,018,371

        Actual costs and penalities incurred
         during the year for units delivered     (10,065,660)              -

        Reclassification of warranty component
         to warranty provision for units
         delivered (note 13)                        (572,815)              -

        Foreign exchange rate impact on
         provision                                    12,274               -
        ---------------------------------------------------------------------

        Balance at the end of the
         year(3)(4)                            $   8,586,486   $  23,018,371
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    (1) In the course of the year, management came to an agreement with a
        major customer to terminate a contract for which the Company expected
        to incur significant losses. As a result, the provision for future
        contact losses was decreased by $18,751,516 (including a provision
        for warranties of $3,008,331), gross of a penalty of $1,139,400.

    (2) As at December 31, 2005, the provision for future contract losses
        included a provision for possible battery life issues on units not
        yet sold. During the year, the Company reviewed the expected costs
        related to this matter and decreased the provision for future
        contract losses by $3,839,169.

    (3) Included in the provision for contract losses is $5,640,580 for
        warranty components ($7,076,563 in 2005) which will be transferred to
        warranty provision upon delivery of the units.

    (4) The provision for losses is largely related to a significant customer
        for which all locomotives must be shipped from the plants by June 15,
        2007. There is a risk that the projected delivery schedule will not
        be met and significant additional penalties incurred. In addition,
        the customer may have no further obligation to accept the locomotives
        delivered after this date. No provision has been made for this
        contingency as the Company's production schedule currently permits it
        to respect its obligation (note 2).

    15. Share capital

        (a) Authorized

              Unlimited number of voting common shares without nominal or
              par value
              Unlimited number of non-voting preferred shares without
              nominal or par value

        (b) Common shares issued

            -----------------------------------------------------------------
                                                                 Contributed
                                      Shares          Amount         surplus
            -----------------------------------------------------------------
            Balance,
             December 31, 2004    42,315,452   $  86,331,400   $     543,854

            Stock-based
             compensation                  -               -       1,545,438
            Issued on exercise
             of options              743,896       1,792,927        (226,520)
            Issued on exercise
             of warrants             435,322         766,062               -
            Issued on public
             offering             11,214,955      60,000,009               -
            Share issuance costs           -      (3,435,621)              -
            -----------------------------------------------------------------

            Balance,
             December 31, 2005    54,709,625   $ 145,454,777   $   1,862,772

            Stock-based
             compensation                  -               -       2,666,522
            Issued on exercise
             of options              285,833         627,125         (87,037)
            -----------------------------------------------------------------
            Balance,
             December 31, 2006    54,995,458   $ 146,081,902   $   4,442,257
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (c) Warrants

            -----------------------------------------------------------------

                                                                    Weighted
                                                      Number         average
                                                                    exercise
                                                 of warrants           price
            -----------------------------------------------------------------



            Balance, December 31, 2004               435,322   $        1.76

            Exercised in 2005                       (435,322)           1.76
            -----------------------------------------------------------------

            Balance, December 31, 2005 and 2006            -   $           -
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            (d) Director and employee options

            The Company's stock-based compensation plan for its directors,
            officers, consultants and employees allows a number of options
            equal to 12% of the outstanding common shares. The outstanding
            options issued under the plan vest over a period of up to
            five years.

            In September 2006, the Company repriced 1,648,567 stock options
            previously granted at exercise prices ranging from $1.90 to
            $6.65. The new exercise price was set at $1.80 which was the
            closing price of the Company's shares on the day preceding the
            repricing. As a result of the stock options repricing, the fair
            value of the options, calculated using the Black-Scholes model,
            increased by $565,015. At the time of the repricing,
            457,727 options had vested and for these, the increase in fair
            value of $146,892 was expensed. The remaining increase in the
            fair value amounting to $418,123 will be amortized on the
            remaining vesting period of the options. For these, $54,852 was
            recognized during the year. All other characteristics of the
            repriced options remain the same.

            The status of the Company's stock-based compensation plan as of
            December 31, 2006 and 2005, and changes during the years ended on
            these dates are presented below:

            -----------------------------------------------------------------
                                                                    Weighted
                                                      Number         average
                                                   of shares           price
            -----------------------------------------------------------------

            Outstanding, December 31, 2004         2,741,666   $        2.65
            Granted                                2,011,000            5.59
            Exercised                               (743,896)           2.11
            Expired/cancelled                       (349,668)           4.55
            -----------------------------------------------------------------

            Outstanding, December 31, 2005         3,659,102            4.04
            Granted                                2,107,000            2.76
            Exercised                               (285,833)           1.87
            Repriced                              (1,648,567)           4.61
            Repriced                               1,648,567            1.80
            Expired/cancelled                     (1,036,334)           4.53

            Outstanding, December 31, 2006         4,443,935   $        2.29
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            At December 31, 2006, the Company had reserved a total of
            4,443,935 common shares related to issued director and employee
            options:

            -----------------------------------------------------------------
                                  Outstanding                Exercisable
                        -----------------------------------------------------
                                               Weighted
                                                average
                                              remaining
                         Number at          contractual  Number at
            Exercise       Dec. 31, Average        life    Dec. 31,  Average
            prices            2006    price   (in years)      2006     price
            -----------------------------------------------------------------
            0.56 - 0.84     82,000  $  0.67         4.9          -   $     -
            1.00 - 1.50    586,000     1.42         1.6    400,000      1.41
            1.70 - 2.51  2,612,935     1.84         3.7    740,267      1.91
            3.20 - 4.75    473,000     3.88         4.0     56,333      4.11
            5.30 - 6.22    690,000     5.74         3.7    310,000      5.65

            -----------------------------------------------------------------

                         4,443,935  $  2.29         3.5  1,506,600   $  2.14
            -----------------------------------------------------------------

        (e) Stock option compensation expense

            As disclosed in note 3 (k), the Company uses the fair value
            method to account for all options granted on or after October 1,
            2003 and the intrinsic method for options granted to employees
            prior thereto. If the fair value method had also been used to
            account for options granted to directors, officers and employees
            during the year ended September 30, 2003, the Company's loss and
            loss per share would have been adjusted to the pro-forma amounts
            indicated below:

            -----------------------------------------------------------------
                                                      Year ended December 31,
                                              -------------------------------
                                                        2006            2005
            -----------------------------------------------------------------

            Loss as reported                   $ (41,472,523)  $ (59,911,480)
            Pro forma stock-based
             compensation expense                    (38,403)       (166,252)
            Pro forma loss                       (41,510,926)    (60,077,732)
            -----------------------------------------------------------------
            -----------------------------------------------------------------
            Pro forma basic and diluted
             loss per share                    $       (0.76)  $       (1.41)
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            The fair value of the options granted or repriced has been
            determined using the Black-Scholes option pricing formula using
            the following weighted average assumptions:

            -----------------------------------------------------------------
                                                      Year ended December 31,
                                              -------------------------------
                                                        2006            2005
            -----------------------------------------------------------------

            Risk-free interest rate                    4.01%           2.69%
            Expected life                          3.4 years         4 years
            Expected volatility                          85%             48%
            Expected dividends                             -               -
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            The total stock-based compensation expense for the years ended
            December 31, 2006 and 2005 was $2,666,522 and $1,545,438,
            respectively.

    16. Related party transactions

        There were no related party transactions during the years 2006 and
        2005.

    17. Income taxes

        Income tax recovery differs from the amount calculable by reference
        to the Canadian statutory tax rate of 32.67% (year ended December 31,
        2005 - 35.6%) as follows:

        ---------------------------------------------------------------------
                                                      Year ended December 31,
                                              -------------------------------
                                                        2006            2005
        ---------------------------------------------------------------------

        Income tax rate                               32.67%          35.60%

        Income tax recovery                    $  13,549,073   $  21,328,487
        Permanent differences                       (925,027)       (596,806)
        Adjustments to future tax assets and
         liabilities for changes in applicable
         provincial tax rates and substantively
         enacted changes in tax laws and rates    (1,131,225)              -
        Difference with foreign tax rates          2,204,598         432,932
        Other                                       (108,521)        625,335
        Variation in valuation allowance         (13,588,898)    (21,789,948)
        ---------------------------------------------------------------------

        Net income tax recovery                $           -   $           -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The tax effects of temporary differences that give rise to
        significant portions of the future tax assets are presented below:

        ---------------------------------------------------------------------
                                                 December 31,    December 31,
                                                        2006            2005
        ---------------------------------------------------------------------

        Future tax assets (liabilities):
          Net operating loss carry forwards    $  38,000,513   $  18,466,696
          Warranty and contract loss
           provisions                              5,098,421       9,882,874
          Financing fees                           1,380,837       2,178,324
          Scientific research and experimental
           development expenditures                  695,451         757,822
          Inventory                                        -          89,536
          Plant and equipment                       (192,536)       (285,829)
          Other                                     (155,109)        149,256
          -------------------------------------------------------------------
                                                  44,827,577      31,238,679

        Valuation allowance                      (44,827,577)    (31,238,679)
        ---------------------------------------------------------------------

        Net future tax assets                  $           -   $           -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The valuation allowance for future tax assets as of December 31, 2006
        is $44,827,577 (December 31, 2005 - $31,238,679). The net change in
        the total valuation allowance for the year ended December 31, 2006
        was $13,588,898 (December 31, 2005 - $21,789,948). In assessing the
        realizability of the future tax assets, management considers whether
        it is more likely than not that some portion or all of the future tax
        assets will not be realized.

        The ultimate realization of future tax assets is dependent upon the
        generation of future taxable income during the period in which those
        temporary differences become deductible. Management considers the
        scheduled reversal of future tax liabilities, projected future
        taxable income, and tax planning strategies in making this
        assessment. Based upon the level of historical taxable income and
        projections for future taxable income over the periods which the
        future tax assets are deductible, management has provided a full
        valuation allowance for the future tax assets.

        At December 31, 2006, the Company has net operating loss carry
        forwards for income tax purposes which are available to offset future
        taxable income. These operating losses expire as follows:

        ---------------------------------------------------------------------
                                              December 31, 2006
                              -----------------------------------------------
                                   Canada            USA             Total
        ---------------------------------------------------------------------
        2007                   $      56,156   $           -   $      56,156
        2008                         606,207               -         606,207
        2009                       1,648,470               -       1,648,470
        2010                       1,170,226               -       1,170,226
        2014 and beyond           36,449,063      66,352,942     102,802,005
        ---------------------------------------------------------------------

                               $  39,930,122   $  66,352,942   $ 106,283,064
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        At December 31, 2006, the Company has investment tax credits earned
        on qualifying Scientific Research and Experimental Development
        activities which are available to offset future Canadian federal
        income taxes payable. These investment tax credits expire as follows:

        ---------------------------------------------------------------------
                                                                 December 31,
                                                                     2006
        ---------------------------------------------------------------------
        2008                                                   $       1,217
        2010                                                          57,069
        2011                                                         107,411
        2012                                                         456,467
        2013                                                         133,642
        ---------------------------------------------------------------------

                                                               $     755,806
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    18. Contractual obligations and commitments

        The following table outlines the known contractual obligations and
        commitments to make future payments for contracts such as commercial
        commitments and operating leases as at December 31, 2006:

        ---------------------------------------------------------------------
                                   Contractual commitments
              ---------------------------------------------------------------
                                                  Operating
                 Suppliers    Subcontractors        leases          Total
        ---------------------------------------------------------------------

        2007   $  38,242,719   $  12,450,424   $     490,900   $  51,184,043
        2008               -               -         410,032         410,032
        2009               -               -         266,446         266,446
        2010               -               -         164,834         164,834
        2011               -               -         161,534         161,534
        There-
         after             -               -         726,903         726,903
        ---------------------------------------------------------------------
        Total  $  38,242,719   $  12,450,424   $   2,220,649   $  52,913,792
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        At December 31, 2006, the Company had one letter of credit
        outstanding in favor of a supplier that totaled US$300,000 compared
        to US$2,500,000 at December 31, 2005.  This letter of credit was
        secured by a deposit totaling $424,000.

        The Company has not entered into any other off balance sheet
        arrangements, hedges or other financial instruments.

    19. Fair values

        The carrying values of cash and cash equivalents, restricted
        investments, accounts receivable, accounts payable and accrued
        liabilities and the term loan approximate their fair value due to the
        relatively short periods to maturity of the instruments.

    20. Geographic segmented information

        The Company operates in two geographic locations: Canada and the
        United States. As at December 31, 2006, the Company's long-lived
        assets were physically located as follows:

        ---------------------------------------------------------------------
                                      Canada   United States           Total
        ---------------------------------------------------------------------

        Plant and equipment    $     518,320   $   1,143,924   $   1,662,244
        Demonstration units                -       2,346,974       2,346,974
        Lease and service units            -       3,574,880       3,574,880
        ---------------------------------------------------------------------
        Total long-lived
         assets                $     518,320   $   7,065,778   $   7,584,098
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        At as December 31, 2005, the Company's long-lived assets were
        physically located as follows:

        ---------------------------------------------------------------------
                                      Canada   United States           Total
        ---------------------------------------------------------------------

        Lease and service
         units                 $     698,438   $   2,940,044   $   3,638,482
        Plant and equipment          198,308       1,031,606       1,229,914
        ---------------------------------------------------------------------
        Total                  $     896,746   $   3,971,650   $   4,868,396
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        For the year ended December 31, 2006 the Company's revenue by
        geographic location determined by reference to the customer location
        was as follows:

        ---------------------------------------------------------------------
                                      Canada   United States           Total
        ---------------------------------------------------------------------

        Sales                  $           -   $  25,647,651   $  25,647,651
        Interest income            1,392,036         216,623       1,608,659
        ---------------------------------------------------------------------
        Total                  $   1,392,036   $  25,864,274   $  27,256,310
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        For the year ended December 31, 2005 the Company's revenue by
        geographic location determined by reference to the customer location
        was as follows:

        ---------------------------------------------------------------------
                                      Canada   United States           Total
        ---------------------------------------------------------------------

        Sales                  $     651,630   $  19,525,631   $  20,177,261
        Interest income            1,116,292         151,275       1,267,567
        ---------------------------------------------------------------------
        Total                  $   1,767,922   $  19,676,906   $  21,444,828
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    21. Sales revenue by major customers

        For the years ended December 31, 2006 and 2005, the Company's sales
        revenue by major customers (greater than 10% of revenues) is as
        follows:

        ---------------------------------------------------------------------
                                             Year ended December 31,
                              -----------------------------------------------
                                    2006        %            2005         %
        ---------------------------------------------------------------------

        Customer A            $  16,576,354     64      $  9,463,661      47
        Customer B                2,500,065     10         3,578,413      18
        Customer C                  968,834      4         2,785,013      14
        ---------------------------------------------------------------------
        Total of major
         customers               20,045,253     78        15,827,087      79
        Other combined            5,602,398     22         4,350,174      21
        ---------------------------------------------------------------------
        Total sales           $  25,647,651    100      $ 20,177,261     100
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    22. Contingencies

        In the normal course of operations, the Company may become involved
        in various legal actions. As at December 31, 2006, the Company was
        party to one legal action for an amount of $263,000 which is being
        contested. While the final outcome with respect to the pending action
        cannot be predicted with certainty, it is management's opinion that
        its resolution will not have a material adverse effect on the
        Company's financial position, earnings or cash flows.

    23. Subsequent events

        (a) Public offering

            On February 13, 2007, the Company completed a public offering of
            34,500,000 units ("Units") at a price of $1.00 per Unit for
            aggregate gross proceeds to the Company of $34,500,000. The
            offering included the exercise in full of the underwriters' over-
            allotment option to purchase an additional 4,500,000 Units. Each
            Unit consisted of one common share in the share capital of the
            Company ("Common Share") and one-half of one Common Share
            purchase warrant. Each whole Common Share purchase warrant will
            entitle the holder thereof to purchase one Common Share at a
            price of $1.25, on or before February 12, 2010. The Company
            intends to use the net proceeds of the offering as follows:
            approximately $20.0 million for working capital purposes to: (i)
            finance the fulfillment of the Company's current orders and
            future orders, depending on the payment terms; and (ii) to
            support the level of inventory. The balance of approximately
            $12.0 million will be used for continued technology research and
            development purposes and new business development activities.

        (b) Stock options

            On February 22, 2007, the Company issued 1,680,000 additional
            stock options to its directors, officers and employees at the
            exercise price of $1.15.
    




For further information:

For further information: José Mathieu, President & CEO, Railpower
Technologies Corp., Tel: (450) 678-5277 ext.501, Toll Free: 1-866-678-5277,
Email: jmathieu@railpower.com; Eric Bouchard or Arianna Vanin, Investor
Relations, The Equicom Group Inc., Tel: (514) 844-7997 or (416) 815-0700 ext.
266, Email: ebouchard@equicomgroup.com or avanin@equicomgroup.com

Organization Profile

RAILPOWER TECHNOLOGIES CORP.

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