Legend Power Systems Inc. MANAGEMENT S DISCUSSION AND ANALYSIS For the six months ended March 31, 2011

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1 This management discussion and analysis ( MD&A ) focuses on key statistics from the consolidated financial statements and pertains to known risks and uncertainties relating to Legend Power Systems Inc. ( Legend ). This discussion should not be considered all-inclusive, as it excludes changes that may occur in general economic, political and environmental conditions. This discussion also includes various forward-looking statements regarding Legend and its future activities and financial results. These statements are based on certain assumptions that are considered reasonable by management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties and actual results could differ materially from those indicated by such forward-looking statements. This discussion and analysis of the financial condition and results of operations for the period ended March 31, 2011 should be read in conjunction with the unaudited financial statements and related notes of Legend as at March 31, Management s discussion and analysis is presented as of May 10, All dollar amounts contained within the management s discussion and analysis refer to Canadian dollars unless otherwise noted. CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS The MD&A contains certain forward looking statements that involve risks and uncertainties such as statements of Legend s plans, objectives, strategies, expectations, and intentions. The words may, would, could, will, intend, plan, believe, estimate, expect and similar expressions, as they relate to Legend, or its management, are intended to identify such forward looking statements. Many factors could cause Legend s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward looking statements, including those factors discussed below and in filings made with the Canadian securities regulatory authorities. Should one or more of these risk factors or uncertainties materialize, or should assumptions underlying the forward looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Legend does not intend, and does not assume any obligation to update these forward looking statements. OVERALL PERFORMANCE Legend Power Systems Inc. and its wholly owned subsidiaries, B.C. Ltd., Legend Power Systems Corp. and LPSI (Barbados) Limited (collectively, the Company or Legend ) is an electrical energy conservation company that manufactures and markets a patented device designed to provide energy savings through voltage optimization to commercial and industrial customers. Many customers receive higher voltage levels than required at certain points of the grid from electrical utilities due to line loss across the feeder length. Higher than nominal voltage can affect the lifespan of electrical equipment and result in higher monthly utility bills. Legend s Electrical Harmonizer and Automatic Voltage Regulator (collectively Electrical Harmonizer-AVR ) eliminates inefficiencies by delivering the optimal level of voltage that a user needs. By delivering the optimal voltage to the user, Legend s Electrical Harmonizer- AVR helps customers reduce their electricity bills and maintenance costs while increasing the life of electrical equipment. Page 1 of 16

2 SELECTED ANNUAL INFORMATION The Company s consolidated financial statements for the period ended March 31, 2011 have been prepared in accordance with Canadian Generally Accepted Accounting Principles ( GAAP ) using the same basis of presentation and accounting policies as used on the Company's annual financial statements for the year ended September 30, The reporting currency is Canadian dollars. Years ended September Revenue 690,212 24, ,764 Income (loss) before other items (2,382,795) (2,371,259) (3,767,173) Net loss and comprehensive loss (2,294,753) (2,298,150) (3,674,860) Per share basic and diluted (0.15) (0.09) (0.08) Total assets 2,941,479 5,022,321 2,124,057 Long term liabilities 694, , ,000 RESULTS OF OPERATIONS The unaudited consolidated financial statements for the period ended March 31, 2011 and 2010 (the "Financial Statements") are incorporated by reference herein and form an integral part of this Management s Discussion and Analysis. The Financial Statements can be found at Revenues Revenues for the six months ended March 31, 2011 (the Period ) were $109,492 compared to $12,042 for the same period in 2010 (the Prior Period ). The revenues in this period were from revenue sharing charges and sales of two Harmonizer-AVR systems. Orders for three more systems are in hand and should be installed shortly. Cost of Sales Cost of sales for the Period was $58,077 (53.0%) compared to $5,505 (45.7%) for the Prior Period. Cost of sales consisted primarily of Harmonizer-AVR components, installation costs and other costs for monitoring and testing existing installations. Expenses Expenses for the Period decreased by 13.8% to $1,441,457 compared to $1,672,122 for the Prior Period. Expenses include the cost of research and development of the Company s technology and related products, identifying and developing potential markets for the Company s products and other related activities. The decreased expenditure reflects the curtailment of the marketing and investor relations programs and reduction of financing fees. Major expenditure categories include: Page 2 of 16

3 Product development - consists primarily of costs relating to the design of the Company's products and to the development and testing of prototypes, not including salaries. These costs for the Period amounted to $39,886 compared to $37,383 for the Prior Period and related mainly to the ongoing development and testing of the AVR. Advertising and promotion - represents the marketing and direct sales expenses associated with the Company's products. Costs for the Period decreased to $28,686 compared to $144,966 for the Prior Period reflecting the curtailment of certain segments of the marketing plan. Consulting services - consist of expenses related to external consultants for accountants (not including audit fees), information technology providers, technical consultants and financial consultants. Consulting expense for the Period amounted to $50,864 compared to $54,581 for the Prior Period. Directors fees of $44,807 were incurred for the period ended March 31, 2011 ($31,667 for the prior period), for their attendance at board meetings and for chairing various committees of the board. Legal and professional fees - amounted during the Period to $66,913 compared to $80,719 for the Prior Period, resulting from expenditure on legal fees, audit fees and Patent maintenance legal fees. Salaries - increased slightly for the Period to $768,271 compared to $754,471 for the Prior Period reflecting the make-up of the new management team. Investor relations consists of costs related to engagement of external investor relations firms. Compared to an expense of $70,631 during the Prior Period, this period reflected a net credit of $6,503 resulting from a cessation and refund of previously charged expenses and from the temporary curtailment of external investor relations consulting fees. Stock based compensation - is attributable to grants of stock options to employees and directors that are being expensed over the vesting period of the option. Section 3870 of the CICA Handbook "Stock-based Compensation and Other Stock-based Payments" requires the fair-value based method be applied to stock options issued to employees and directors and applies to awards granted on or after January 1, Stock based compensation expense booked for the Period was $81,984 compared to $7,964 in the Prior Period. Summarized Quarterly Results Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar Revenue 6,020 6,021 6,021 6,021 81, ,445 6, ,021 Loss before other items Net loss Per share basic and diluted (512,064) (1,391,316) (690,675) (974,910) (912,363) (1,189,225) (694,646) (695,396) (507,038) (1,391,349) (688,436) (928,486) (864,216) (1,193,722) (751,783) (690,521) (0.02) (0.05) (0.02) (0.02) (0.02) (0.03) (0.01) (0.01) There are no seasonal effects or other trends in the Company s business over the quarters presented. The changes are a function of the Company's transition from product development to product sales. Page 3 of 16

4 LIQUIDITY As at March 31, 2011, the Company had cash of $1,602,771 (September 30, 2010: $17,367), total assets of $3,385,283 (September 30, 2010: $2,124,057) and current liabilities of $464,734 (September 30, 2010: $749,972). As at March 31, 2011, the Company had working capital of $1,812,585 (September 30, 2010: $108,402). As at March 31, 2011, the Company had about nine months worth of cash in hand based on the current burn rate. However, based on sales forecasts, the augmented cash position is expected to allow the Company to continue as a going concern. On March 24, 2010, the Company signed with a bank a $ 1.0 million conditional revolving demand facility. In addition, the Company signed a financing agreement for the bank to provide lease financing to qualified customers purchasing the Electrical Harmonizer-AVR. Under the terms of the lease agreement, the bank has agreed to provide up to $300,000 in aggregate to qualified customers with capital leases for up to 100 per cent of the cost of Electrical Harmonizer-AVRs net of rebates and grants for lease terms ranging from 24 to 60 months. As at March 31, 2011, this bank line had not been utilized. CONTRACTUAL OBLIGATIONS (i) The Company leases office premises in Burnaby, B.C., under an operating lease that expires on September 30, The Company is obligated to make the following minimum annual lease payments under its operating lease: September 30, 2011 $ 97,997 September 30, ,323 September 30, ,323 September 30, ,652 September 30, 2015 $ 200, ,947 The lease annual payments are subject to changes or increases in additional rent, generally described as the Company s portion of the landlord s common area charges and property taxes. (ii) Under an operating lease for premises in California, the following annual lease payments are due until February 28, 2013 (stated in US$): September 30, 2011 $ 61,320 September 30, ,640 September 30, 2013 $ 51, ,060 Page 4 of 16

5 SHARE CAPITAL Authorized: 100,000,000 common shares without par value Issued and outstanding: # shares Amount $ Balances at September 30, ,725,838 $ 25,553,190 Brokered Private Placement of units, October 2009 (b) (i) 1,363, ,600 Broker shares issued, October 2009 (b) (ii) 68,160 34,080 Less: Share issue costs for private placement (b) (i) - (137,334) Less: Share issue costs for broker shares issued (b) (ii) - (34,080) Less: Fair value of warrants issued for private placement (b) (iii) - (181,000) Less: Fair value of broker warrants issued (b) (iv) - (40,621) Less: Share issue costs (b) (v) - (3,577) Balances at September 30, ,157,198 $ 25,872,258 Brokered Private Placement of units, November 2010 (a) (i) 22,350,332 3,352,550 Less: Share issue costs for private placement (a) (ii) - (379,420) Less: Fair value of warrants issued for private placement (a) (iii) - (2,051,420) Less: Fair value of broker warrants issued (a) (iv) - (202,911) Less: Share issue costs (a) (v) - (66,346) Balances at March 31, ,507,530 $ 26,524,711 a) During the period ended March 31, 2011, the following transactions occurred: (i) (ii) (iii) In November 2010, the Company completed a brokered private placement in which it issued a total of 22,350,332 units at $ 0.15 per unit for aggregate gross proceeds of $ 3,352,550. Each whole unit consists of one common share and one common share purchase warrant. Each warrant will entitle the holder to purchase one share at a price of $ 0.25 per share until November 4, The Company is entitled to accelerate the expiry date of the warrants to the date that is 30 days following the date the Company gives written notice to the warrant holders that the trading price of the shares has been greater than $0.45 for any 20 consecutive trading days. In connection with the brokered private placement, the Company paid the agent cash commission and expenses of $ 287,420, and consulting fees of $ 92, ,350,332 warrants were attached to the units sold in November The value of the warrants using the relative fair value method was $ 2,051,420. The warrants were valued based on the following assumptions: dividend yield 0%, riskfree rate 1.4%, expected volatility 90% and expected life of 2 years. (iv) In connection with the brokered private placement in November 2010, the Company issued broker warrants to acquire 1,696,133 shares. Each warrant entitles the holder to purchase one share at a price of $0.15 per share until November 4, The fair value assigned to the 1,696,133 warrants was $ 202,911. The warrants were valued based on the following assumptions: dividend yield 0%, riskfree rate 1.4%, expected volatility 90% and expected life of 2 years. (v) Total other issue costs were $66,346. Page 5 of 16

6 b) During the year ended September 30, 2010, the following transactions occurred: (i) In October 2009, the Company completed a brokered private-placement in which it issued a total of 1,363,200 units at $ 0.50 per unit for aggregate gross proceeds of $ 681,600. Each whole unit consists of one common share and one-half of one common share purchase warrant. Each warrant will entitle the holder to purchase one share at a price of $ 0.60 per share until April 26, Total number of whole warrants issued in the October 2009 brokered private placement was equal to 681,600. In connection with the brokered private placement, the Company paid cash commission of $ 10,896, a management finder s fee of $ 26,580, consulting fee of $ 4,540 and a finder s fee of $50,000. Total other share issue costs on the brokered private placement were $ 45,318. (ii) (iii) In connection with the brokered private placements in October 2009, the Company issued 68,160 broker shares. The fair value assigned to the 68,160 shares was $34,080 or $ 0.50 per share. 681,600 warrants were attached to units sold in October The value of the warrants using the relative fair value method was $ 181,000. The warrants were valued based on the following assumptions: dividend yield 0%, riskfree rate 2.774%, expected volatility 90% and expected life of 1.5 years. (iv) In connection with the brokered private placements in October 2009, the Company issued broker warrants to acquire 136,320 shares. Each warrant entitles the holder to purchase one share at a price of $0.50 per share until April 26, The fair value assigned to the 136,300 warrants was $ 40,621. The warrants were valued based on the following assumptions: dividend yield 0%, riskfree rate 2.774%, expected volatility 90% and expected life of 1.5 years. (v) Total other issue costs were $3,577. c) On July 2, 2008, as part of the RTO agreement, 12,623,641 of the issued common shares, which were founder shares, were deposited in escrow, of which 7,958,601 common shares were to be released on a prescribed time schedule and the remaining 4,665,040 common shares were to be released on specific performance such as achievement of sales targets and/or financing targets, subject to a prescribed time schedule. On January 2, 2011, an additional 795,860 common shares were released from escrow leaving a balance as at March 31, 2011, of 10,236,061 common shares still held in escrow. Of these, 5,571,021 will be released in semi-annual fractions of 795,860 before September 30, Of the remaining 4,665,040 common shares, 1,399,512 will be released in April 2011 (see note 20), and the balance of 3,265,528 of common shares will be released in semi-annual fractions of 466,504 before September 30, Page 6 of 16

7 WARRANTS A summary of the number of common shares reserved pursuant to the Company s outstanding warrants at March 31, 2011 is as follows: March 31, 2011 Weighted Average Number Exercise Price Balance, beginning of period 6,174,720 $ 0.58 Issued 24,046, Expired (5,356,800) 0.58 Balance, end of period 24,864,385 $ 0.25 September 30, 2010 Weighted Average Number Exercise Price Balance, beginning of period 5,356,800 $ 0.58 Issued 817, Balance, end of period 6,174,720 $ 0.58 The following table summarizes information of the number of common shares reserved pursuant to the warrants outstanding and exercisable at March 31, 2011: Number Exercise Price Expiry Date 681, April 26, , April 26, ,350, November 4, ,696, November 4, ,864,385 STOCK OPTIONS The Company has adopted a stock option plan (the Plan ) in accordance with the policies of the TSX Venture Exchange for the benefit of directors, officers, employees and consultants of the Company whereby the maximum of 10% of the issued and outstanding common shares of the Company are reserved for issuance pursuant to the exercise of stock options to be granted under the Plan. Options granted under the Plan vest over various time periods from the grant date to five years at the discretion of the Board of Directors. Exercise prices on options granted under the Plan are determined by reference to the market value on the date of grant. During the period, the Company granted 2,550,000 stock options to its directors, employees and consultants and 590,000 stock options expired. The fair value of stock options granted to directors, employees and consultants is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used for the stock options vested during the period: Page 7 of 16

8 Risk-free interest rate: 1.4% - 2.8%, Estimated volatility: 90%, Expected life: 5 years, Expected dividend yield: 0% (2010: Risk-free interest rate: 2.7% - 3.2%, Estimated volatility: 90%, Expected life: 5 years, Expected dividend yield: 0%) Option-pricing models require the use of estimates and assumptions including the expected volatility. Changes in the underlying assumptions can materially affect the fair value estimates and therefore existing models do not necessarily provide a reliable measure of the fair value of the Company s stock options. A summary of the Company s stock options at March 31, 2011, and the changes during the period, is as follows: Weighted Average Number Exercise Price Balance, September 30, ,185,850 $ 1.39 Granted during the year 1,684, Expired (373,630) 1.10 Balance, September 30, ,496,420 $ 1.00 Granted during the period 2,550, Expired (590,000) 1.06 Balance, March 31, ,456,420 $ 0.65 The following table summarizes stock options outstanding and exercisable at March 31, 2011: Number Outstanding Number Exercisable Exercise Price Expiry Date 212, ,020 $ 0.48 June 8, ,340,200 1,340,200 $ 1.50 October 30, , ,000 $ 1.50 August 10, ,025, ,000 $ 0.49 October 25, ,000 - $ 0.21 November 3, ,150,000 - $ 0.21 February 10, ,000 - $ 0.55 May 4, ,200 - $ 0.49 May 13, ,456,420 2,622,220 CORPORATE GOVERNANCE This management s discussion and analysis in addition to the related interim financial statements have been reviewed and approved by the Company s Audit Committee and Board of Directors. COMMITMENTS The Company has an employment agreement and a change of control agreement in place with the Chairman & CEO of the Company and also an employment agreement with the President & COO of the Company that contain severance provisions (further information may be found in the Company s Information Circular on SEDAR at Page 8 of 16

9 RISKS AND UNCERTAINTIES Lack of Revenues and Dividends Legend anticipates that with growing sales it should meet its operating costs. Since the date of incorporation, Legend has accumulated losses, and while Legend does not expect such losses to continue, there can be no assurance that such losses will not continue. Financing The ability of Legend to arrange any further financing will depend in part on the prevailing capital market conditions as well as the business performance of Legend. There can be no assurance that Legend will be successful in its efforts to arrange additional financing. Legend may not be successful in generating sufficient cash from operations or in raising capital in sufficient amounts on acceptable terms to implement its entire business plan. The failure to generate sufficient cash flows or to raise sufficient funds may require Legend to delay or abandon some or all of its plans or otherwise forego market opportunities and may make it difficult for Legend to respond to competitive pressures, any of which could have a material adverse effect on Legend s business, results of operations and financial condition. Limited Operating History Legend commenced sales operations in October 2008 and, as a result, its business model is still going through changes. The ability of Legend to sustain revenue and income in this new market segment is unproven, and the Company s limited operating history makes an evaluation of Legend s performance and its prospects difficult. Legend s performance and its prospects must be considered in light of the risks, expenses and difficulties encountered by companies in the relatively new field of energy efficiency. To address these risks, among other things, Legend must sell the Electrical Harmonizer-AVR and build its brand name effectively, grow its infrastructure to accommodate customers, respond to competitive developments and retain and motivate qualified personnel. Exchange Rate Fluctuations A portion of Legend s business may be done in U.S. dollars and Japanese Yen. Therefore, changes in the exchange rate between the Canadian dollar and other currencies may have an adverse effect on Legend s business, financial condition, future prospects and results of operations. One Product Company The success of Legend will be largely dependent upon sales of its Electrical Harmonizer-AVR. However, other avenues of revenue that will continue to be viable, among others, are the sale of its AVR, consulting services on energy audit and power quality improvement, franchising, licensing and development of residential products. Dependence Upon New Markets; Uncertainty of Acceptance of Product Offerings The market acceptance of the Electrical Harmonizer-AVR in North America remains to be proven and Legend s future growth will depend upon successful marketing of the Electrical Harmonizer-AVR. If the market targeted by Legend fails to develop, develops more slowly than expected, is successfully and significantly penetrated by competitors or if the Electrical Harmonizer-AVR does not achieve broad market acceptance, Legend s business, results of operations and financial conditions would be materially and adversely affected. Page 9 of 16

10 Potential Fluctuations in Results of Operations Legend does not have an operating history sufficient to assess whether significant fluctuations in operations on a quarterly and an annual basis will occur. Results of operations may vary due in part to factors which are outside of Legend s control. These factors may include: demand for, and market acceptance of Legend s products; introduction of products by competitors; reliable continuity of service; reliable supply of materials to Legend; customer retention; currency fluctuations; changes in the pricing policies of suppliers; and timing and magnitude of expenditures on advertising and promotion. Competition There are a number of products currently being marketed which reduce the cost of electricity in one or more of the ways in which the Electrical Harmonizer-AVR reduces such costs. However, Legend believes that none of them have all of the capability and features of the Electrical Harmonizer-AVR. While Legend believes that there are few competitors today that are focusing on the same target market, the Company expects that it will face additional competition from existing competitors and new market entrants in the future. Legend may not have the resources, expertise or other competitive factors to compete successfully in the future. Many of Legend s competitors may have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than Legend. As a result, certain of these competitors may be able to develop and expand their marketing and installation capabilities more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisition and other opportunities more readily, devote greater resources to the marketing and sale of their products and services and adopt more aggressive pricing policies. Any adverse general economic or business conditions could also impact demand for Legend s products and services. Management of Growth The Legend business plan involves expansion of its customer base and technologies coupled with additional funding resources and a broader range of employees. This growth will place a significant strain on Legend s financial, management, operational and other resources. Legend s management, personnel, systems, procedures and controls may not be adequate to support Legend s existing and future operations. If Legend s executives are unable to manage growth effectively, the Company s business, results of operations and financial condition could be materially adversely affected. Dependence on Key Personnel Legend s success depends in significant part upon the continued services of its key technical, sales and senior management personnel. Any officer or employee of Legend can terminate his or her relationship with the Company at any time. There is no assurance Legend can maintain the services of those Page 10 of 16

11 individuals or other qualified personnel required to operate its business. Failure to do so could have a material adverse affect on Legend and its prospects. Legend maintains key-man insurance of $750,000 on its CEO such that proceeds from a life insurance policy payable to the Company would be adequate to cover the costs of recruiting a replacement CEO as well as costs resulting from the disruption to the Company s business. Legend s future success will also depend on its ability to attract, train, retain and motivate highly qualified technical, marketing, sales and management personnel. Competition for such personnel is intense, and Legend may not be able to attract and retain key personnel. The loss of the services of one or more of Legend s key employees or Legend s failure to attract additional qualified personnel could have a material adverse effect on the Company s business, results of operations and financial condition. Suppliers The business failure of suppliers or any adverse impact upon them such as shortages of materials, labor strife or unrest, inability to obtain transportation for the manufactured units may adversely affect Legend s ability to meet its financial objectives. Reliance on suppliers also subjects Legend to the risks of shortage of components, the possibility of defective parts produced by others, and increases in component costs, all of which may adversely affect the Company s profitability. If Legend commences manufacturing operations, it will require quality components to be supplied by third parties. Failure of such third party suppliers to meet component delivery schedules may disrupt production schedules at Legend. Installation It is anticipated that most Harmonizer-AVR installations will be done not by Legend s employees but by local qualified electrical contractors. The ability to install the Electrical Harmonizer-AVR in a timely fashion will be dependent on the availability of such contractors. While there is a Canadian Electrical Code that sets minimum standards that apply to the installation of the Electrical Harmonizer-AVR, there can be variations in the cost of installation. These variations could be the result of local type of and use of buildings and differing wage rates. Government Regulation Canadian Provincial and Federal statutes concerning electrical safety require Legend s products to be approved listed products. All products manufactured, sold and installed by Legend are subject to safety certification procedures by approved safety bodies, and are listed products. Insurance A defect in the products manufactured by Legend or in the installation process could result in serious personal injury, property damage, and lost hours of operation and revenue. Although Legend carries general liability insurance of $5,000,000, it is not fully insured against all risks, nor are all such risks fully insurable. Product Liability A malfunction of Legend s products could result in tort or warranty claims. Even where a claim is without merit, the costs of defending could be substantial in terms of actual monetary expense as well as diversion of managerial attention. Any liability for damages resulting from malfunctions of Legend s products or other costs incurred to remedy the problem, such as product recalls, could be substantial and could increase Legend s expenses and prevent Legend from growing its business. In addition, a well publicized actual or perceived problem could adversely affect market perception of Legend s products. Page 11 of 16

12 This could result in a decline in demand for Legend s products, which would reduce its revenue and harm its business. DIVIDENDS During the most recently completed financial period, no dividends were paid on the common shares issued and outstanding. It is not expected that dividends will be paid on the common shares in the foreseeable future as it is Legend s current policy to retain earnings to finance expansion and to otherwise be used for the Legend s business, unless profits far exceed such requirements. Future payment of dividends will be dependent upon Legend s financial condition, financial requirements to fund future growth, and other factors the Board of Directors may consider appropriate in the circumstances. Until Legend pays dividends, which it may never do, shareholders will not be able to receive a return on their common shares unless they sell them. RAPID GROWTH Internal growth is a principal component of Legend's strategy, and the Company anticipates undergoing a period of expansion in its business. If Legend fails to sustain or effectively manage such growth, its operating results will fluctuate and suffer. Legend's growth depends on its ability to accomplish a number of things, including identifying and developing new geographic markets, developing new products and market acceptance for them, increasing Legend's manufacturing and outsourcing capacity, maintaining current customer and distributor relationships and developing new ones, and successfully managing expansion and arranging the necessary financing. Any growth Legend achieves may require additional personnel and may increase the scope of both its operating and financial systems and the geographic area of its operations. This will increase its operating complexity and may place significant strain on its management and other resources. Legend may not be able to attract and retain qualified personnel, and its current operating and financial systems and controls may not be adequate to support such growth. The Company's ability to improve its systems and controls may be limited by increased costs, technological challenges or lack of qualified personnel. In addition, Legend's past results may not be indicative of the Company's future prospects or ability to penetrate new markets, which may have different competitive conditions and demographic characteristics than current markets. Failure to effectively manage the budgeting, forecasting and other process control issues arising from growth could materially and adversely affect Legend's business, financial condition and results of operations. In addition, Legend's expense levels are based, in part, on expected future revenues and the Company is limited in its ability to reduce expenses quickly if for any reason its purchase orders do not meet expectations in a particular quarter or year. Legend may also grow through investment in or acquisition of complementary businesses. In connection with any investment or acquisition Legend makes, however, there may be liabilities that the Company fails to discover or that it is unable to discover and for which Legend, as successor owner, may be responsible. In addition, acquisitions often result in difficulties in integration, which may place significant strain on management and other resources and disrupt business operations. ADOPTION OF NEW ACCOUNTING STANDARDS: Future Accounting Policies Business Combinations, Consolidated Financial Statements and Non-Controlling Interests The CICA issued three new accounting standards in January 2009: Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements, and Section 1602, Non-Controlling Page 12 of 16

13 Interests. These new standards will be effective for fiscal years beginning on or after January 1, The Company is in the process of evaluating the requirements of the new standards. Section 1582 replaces Section 1581, Business Combinations, and establishes standards for the accounting for a business combination. The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, Sections 1601 and 1602 together replace Section 1600, Consolidated Financial Statements. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1601 applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, Section 1602 establishes standards for accounting for a noncontrolling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, International Financial Reporting Standards In January 2006, the Canadian Accounting Standards Board adopted a strategic plan, which includes the decision to move financial reporting for Canadian publicly accountable enterprises to a single set of globally accepted high-quality standards, namely, International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board. The effective implementation date of the conversion from Canadian generally accepted accounting principles ( Canadian GAAP ) to IFRS is January 1, 2011, with an effective transition date of January 1, 2010 for financial statements prepared on a comparative basis. The Company is engaged in an assessment and conversion process which includes consultation with external consulting firms and expects to be ready for the conversion to IFRS. As part of the conversion process, the Company has offered IFRS specific training to senior financial reporting personnel. The Company s approach to the conversion to IFRS is as follows: i) an initial general diagnostic was completed in 2010 of its accounting policies and Canadian GAAP relevant to its financial reporting requirements to determine the key differences and options with respect to acceptable accounting standards under IFRS. ii) The implementation of the conversion process will commence with the quarter ended December 31, 2011 as required. At this point, the Company s accounting and financial reporting systems are not expected to be significantly impacted. Further, the Company has in place internal and disclosure control procedures to ensure continued effectiveness during this transition period. Based on the review undertaken and the work completed to date, the Company believes that IFRS will have limited impact on its current financial position. At the same time, IFRS will likely require more extensive disclosure and analysis of balances and transactions in the notes to the financial statements. The specific accounting areas the Company has focused its analysis on are outlined below together with the more salient issues under each area. Page 13 of 16

14 Key Area Canadian GAAP (as currently applied) IFRS Analysis and Preliminary Conclusions Capital Assets Capital assets are recorded at historical cost. Capital assets can be recorded using the cost (on transition to IFRS, the then fair value can be deemed to be the cost) or revaluation models. Capital assets will likely continue to be recorded at their historical costs due to the complexity and resources required to determine fair values on an annual basis. Depreciation is based on their useful lives after due estimation of their residual values. Depreciation must be based on the useful lives of each significant component within Capital assets. Based on an analysis of Capital assets' significant components and their useful lives, it is unlikely that changes to their useful lives and, therefore, depreciation rates and expenses will be required. Impairment of Long Lived Assets Impairment tests of its long-term assets are considered annually based on indications of impairment. Impairment tests of "cash generating units" are considered annually in the presence of indications of impairment. The Company's patents fall under this category. The previous year-end impairment tests did not result in any adjustment. Impairment tests are generally done on the basis of undiscounted future cash flows. Impairment tests are generally carried out using the discounted future cash flow. Impairment tests using discounted values could generate a greater likelihood of write downs in the future. Write-downs to net realizable values under an impairment test are permanent changes in the carrying value of assets. Write-downs to net realizable values under an impairment test can be reversed if the conditions of impairment cease to exist. Potential significant volatility in earnings could arise as a result of the difference in the treatment of write-downs. Page 14 of 16

15 Key Area Canadian GAAP (as currently applied) IFRS Analysis and Preliminary Conclusions The determination of the value of stock-based compensation for share appreciation rights and deferred share units, both cash-settled awards, will change and will likely be more volatile under a Black-Scholes model until the awards are settled. Stock-Based Compensation Stock-based compensation is determined using fairvalue models (e.g. Black- Scholes) for equitysettled awards and the intrinsic model for cashsettled awards. Stock-based compensation is determined using fair value models for all awards. However, upon settlement, cash-settled awards are adjusted to the value actually realized (intrinsic model). Income Taxes There is no exemption from recognizing a deferred income tax for the initial recognition of an asset or liability in a transaction that is not a business combination. The carrying amount of the asset or liability acquired is adjusted for the amount of the deferred income tax recognized. A deferred income tax is not recognized if it arises from the initial recognition of an asset or liability in a transaction that is not a business combination, and at the time of the transaction affects neither accounting profit or taxable profit. The Company does not expect the difference in recognition of deferred income tax to have any significant change in the future. The above comments should not be considered as a complete list of changes that may result from the transition to IFRS as the Company s analysis is still in progress and no final determinations have been made where choices of accounting policies are available. In addition, the accounting bodies responsible for issuing Canadian and IFRS accounting standards have significant ongoing projects that could impact the Company s financial statements as at September 30, 2011 and in subsequent years. The Company is continuing to monitor the development of these projects and will assess their impact in the course of its transition process to IFRS. TRANSACTIONS WITH RELATED PARTIES Unless otherwise stated, related party transactions are in the normal course of business and measured at the exchange amount, being the amount of consideration established and agreed to by the related parties. (i) During the period the Company incurred $ 15,000 (2010: $ 30,000) in consulting fees and other charges with a shareholder of the Company, of which $ Nil (2010: $ Nil) remains unpaid. Page 15 of 16

16 (ii) (iii) During the period, the Company repaid a promissory note from a related party of $ 100,000, together with interest of $6,333. Fees awarded to Directors during the period amounted to $ 44,807 (2010: $31,667), of which $27,307 (2010: $Nil) remained unpaid as at the period end. SUBSEQUENT EVENTS (i) A further 1,399,512 common shares were released from escrow on April 11, 2011, leaving a balance of 8,836,549 shares in escrow. (ii) A further 817,920 warrants expired without exercise on April 26, SHARE PRICE VOLATILITY Legend s share price has been highly volatile following its TSX-V listing on July 3, 2008 due to market conditions and may continue to experience significant fluctuation in the future. Among the factors that could affect Legend's share price are: quarterly variations in operating results; news announcements; research reports by analysts and other developments with respect to Legend's industry or competitors; changes in general market conditions; lack of liquidity in the marketplace and domestic and international economic factors unrelated to the Company's performance. The markets for equity securities of technology companies have been highly volatile recently and the market price of Legend s common shares may be subject to innovations or new products by Legend or its competitors, fluctuations in energy prices, patent or proprietary rights developments and market conditions for high technology stocks in general. In addition, stock markets in recent years have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These market fluctuations may adversely affect the market price of Legend s shares. There can be no assurance that the trading price of Legend s shares will remain at or near the current trading price. The Company s outstanding share data as at May 10, 2011: Issued and outstanding 60,507,530 Warrants 22,350,332 Broker warrants 1,696,133 Stock options outstanding 5,456,420 Fully diluted 90,010,415 ADDITIONAL INFORMATION Additional information relating to Legend may be found on SEDAR at Page 16 of 16