##### Table of Contents



SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB [X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [  ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required) Commission File No. 000-24551 COMPOSITE SOLUTIONS, INC. 
  Florida
    
    65-0790758State or other jurisdiction of
    
    I.R.S. Employerincorporation or organization
    
    Identification No.
 3252 Holiday Court, Suite 206, La Jolla, California
    
    92037Address of principal executive office
    
    Zip Code
 Issuers telephone number: (858) 459-4843 Former name and address, if changed since last report Check whether the issuer has (1) filed all reports required by Section 13 or
15(d) of the Exchange Act during the past 12 months, and (2) been subject to
such filing requirements for the past ninety (90) days. Yes
[X]  No  [  ] As of June 30, 2004, 23,510,569 shares of Common Stock were outstanding. 1




---



PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements. The following consolidated financial statements contain information
regarding the Companys balance sheet, profit & loss, stockholders equity, and
cash flow for the quarters ended June 30, 2004 and 2003. INDEX TO FINANCIAL STATEMENTS Balance SheetsStatements of OperationsStatements of Changes in Stockholders Equity (Deficit)Statements of Cash FlowsNotes to Financial StatementsEXHIBIT 31EXHIBIT 32
  2




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##### Table of Contents



COMPOSITE SOLUTIONS, INC AND SUBSIDIARIES
(A Development Stage Company) 
 Consolidated Balance Sheets
 June 30,
    
    September 30,2004
    
    2003(Unaudited)
    
    (Audited)ASSETSCurrent assetsCash
    
    $
    1,418
    
    
    $
    49,495Accounts receivable, net of allowance for doubtful
accounts of $0
    
    
    19,875
    
    
    
    Inventories
    
    
    7,724
    
    
    
    Costs in excess of billings
    
    
    1,963
    
    
    
    6,832Prepaid expenses
    
    
    17,083
    
    
    
    416Other current assets
    
    
    2,488
    
    
    
    Total current assets
    
    
    50,551
    
    
    
    56,743Property, plant and equipment, net
    
    
    1,821
    
    
    
    649Other assetsDeposits
    
    
    10,050
    
    
    
    10,071Intangible assets, net
    
    
    552,077
    
    
    
    427,684Goodwill
    
    
    418,956
    
    
    
    418,956Total assets
    
    $
    1,033,455
    
    
    $
    914,103LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT)Current liabilitiesAccounts payable
    
    $
    216,468
    
    
    $
    266,775Billings in excess of costs
    
    
    93,396
    
    
    
    131,169Line of credit
    
    
    
    
    
    
    51,887Employee and director payable
    
    
    181,492
    
    
    
    62,415Related party payable
    
    
    160,034
    
    
    
    132,205Current portion of long-term debt
    
    
    25,036
    
    
    
    Related party notes payable
    
    
    339,550
    
    
    
    46,376Accrued expenses
    
    
    266,091
    
    
    
    181,817Accrued losses on future contracts
    
    
    4,513
    
    
    
    3,013Income taxes payable
    
    
    14,521
    
    
    
    24,881Total current liabilities
    
    
    1,301,101
    
    
    
    900,538Long term debtNote payable, less current portion
    
    
    10,964
    
    
    
    Total liabilities
    
    
    1,312,065
    
    
    
    900,538Stockholders equity (deficit)Preferred stock; $0.0001 par value; 10,000,000
shares authorized; 0 shares issued and outstanding
    
    
    
    
    
    
    Common stock; $0.0001 par value; 50,000,000
shares authorized; 23,510,569 and 21,670,555
shares issued and outstanding
    
    
    2,350
    
    
    
    2,166Additional paid in capital
    
    
    5,677,323
    
    
    
    5,120,957Accumulated deficit
    
    
    (5,958,283
    )
    
    
    (5,109,558
    )Total
stockholders equity (deficit)
    
    
    (278,610
    )
    
    
    13,565Total liabilities and stockholders equity
    
    $
    1,033,455
    
    
    $
    914,103
 See accompanying notes. 3




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##### Table of Contents



COMPOSITE SOLUTIONS, INC AND SUBSIDIARIES
(A Development Stage Company) 
 Consolidated Statements of Operations
 October 20, 1997(Inception)Three Months Ended
    
    Nine Months Ended
    
    toJune 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003
    
    2004Contract revenue
    
    $
    19,630
    
    
    $
    192,213
    
    
    $
    975,576
    
    
    $
    320,225
    
    
    $
    1,711,131Cost of salesSalaries and consulting fees

    
    
    
    
    
    
    40,842
    
    
    
    19,925
    
    
    
    175,816
    
    
    
    476,900Consulting fees  related party
    
    
    
    
    
    
    61,056
    
    
    
    226,541
    
    
    
    61,056
    
    
    
    436,179Materials
    
    
    7,890
    
    
    
    4,360
    
    
    
    325,306
    
    
    
    7,955
    
    
    
    351,007Materials  related party
    
    
    2,740
    
    
    
    38,240
    
    
    
    178,798
    
    
    
    38,240
    
    
    
    255,585Cost of sales
    
    
    10,630
    
    
    
    144,498
    
    
    
    750,570
    
    
    
    283,067
    
    
    
    1,519,671Gross profit
    
    
    9,000
    
    
    
    47,715
    
    
    
    225,006
    
    
    
    37,158
    
    
    
    191,460ExpensesConsulting fees
    
    
    22,010
    
    
    
    109,559
    
    
    
    35,000
    
    
    
    287,330
    
    
    
    663,354Consulting fees  related party
    
    
    45,000
    
    
    
    44,055
    
    
    
    184,793
    
    
    
    223,485
    
    
    
    1,224,809Depreciation and amortization
    
    
    14,660
    
    
    
    12,386
    
    
    
    39,955
    
    
    
    38,504
    
    
    
    418,085General and administrative expenses
    
    
    89,606
    
    
    
    32,243
    
    
    
    193,080
    
    
    
    151,380
    
    
    
    1,287,260Organizational expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    514Professional fees  other
    
    
    19,644
    
    
    
    12,693
    
    
    
    70,276
    
    
    
    53,636
    
    
    
    480,825Professional fees  related party
    
    
    7,082
    
    
    
    2,891
    
    
    
    20,165
    
    
    
    8,548
    
    
    
    30,180Salaries
    
    
    77,170
    
    
    
    17,420
    
    
    
    375,260
    
    
    
    58,760
    
    
    
    1,669,969Provision for future contract losses
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    26,497
    
    
    
    4,513Impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237,248Total expenses
    
    
    275,172
    
    
    
    231,247
    
    
    
    920,029
    
    
    
    848,140
    
    
    
    6,016,757Income (loss) from operations
    
    
    (266,172
    )
    
    
    (183,532
    )
    
    
    (695,023
    )
    
    
    (810,982
    )
    
    
    (5,825,297
    )Other income (expense)Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,363Interest income  forgiveness of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,825Other Income
    
    
    
    
    
    
    85,000
    
    
    
    4,033
    
    
    
    85,000
    
    
    
    100,091Gain on forgiveness of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,261Other expenses
    
    
    (858
    )
    
    
    (2,156
    )
    
    
    (3,581
    )
    
    
    (13,730
    )
    
    
    (25,900
    )Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190
    )Interest expense
    
    
    (105,350
    )
    
    
    (2,591
    )
    
    
    (149,154
    )
    
    
    (29,458
    )
    
    
    (295,901
    )Loss on forgiveness of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,021
    )Total other income (expense)
    
    
    (106,208
    )
    
    
    80,253
    
    
    
    (148,702
    )
    
    
    41,812
    
    
    
    (198,472
    )Income (loss) before provision for income taxes
    
    
    (372,380
    )
    
    
    (103,279
    )
    
    
    (843,725
    )
    
    
    (769,170
    )
    
    
    (6,023,769
    )Provision for income taxes
    
    
    800
    
    
    
    
    
    
    
    5,000
    
    
    
    21,681
    
    
    
    39,809Income (loss) from continuing operations
    
    
    (373,180
    )
    
    
    (103,279
    )
    
    
    (848,725
    )
    
    
    (790,851
    )
    
    
    (6,063,578
    )Discontinued operationsIncome from discontinued operations (including
gain on sale of subsidiary in the amount of $177,755)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,295Net income (loss)
    
    $
    (373,180
    )
    
    $
    (103,279
    )
    
    $
    (848,725
    )
    
    $
    (790,851
    )
    
    $
    (5,958,283
    )Income (loss) per common share basic and dilutedNet income (loss) from continuing operations
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.35
    )Income from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.01Income (loss) per share basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.35
    )Weighted average number of shares basic and diluted
    
    
    23,510,569
    
    
    
    19,641,382
    
    
    
    22,621,965
    
    
    
    19,917,238
    
    
    
    17,184,579
 See accompanying notes. 4




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##### Table of Contents



COMPOSITE SOLUTIONS, INC. AND SUBSIDIARIES
(A Development Stage Company) 
 Consolidated
Statements of Changes in Stockholders Equity (Deficit)
 Common Stock
    
    
    
    
    
    
    
    
    
    TotalAdditional
    
    Accumulated
    
    StockholdersShares
    
    Amount
    
    Paid in Capital
    
    Deficit
    
    Equity (Deficit)Balance, October 20, 1997 (inception)
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Common stock issued in exchange for services
    
    
    15,233,910
    
    
    
    1,521
    
    
    
    (2,120
    )
    
    
    
    
    
    
    (599
    )Common stock issued for cash
    
    
    5,962,500
    
    
    
    599
    
    
    
    18,335
    
    
    
    
    
    
    
    18,934Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,193
    )
    
    
    (12,193
    )Balance, September 30, 1998
    
    
    21,196,410
    
    
    
    2,120
    
    
    
    16,215
    
    
    
    (12,193
    )
    
    
    6,142Common stock contributed
    
    
    (7,896,410
    )
    
    
    (790
    )
    
    
    790
    
    
    
    
    
    
    
    Pre-acquisition income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47Common stock issued in acquisition
    
    
    1,000,000
    
    
    
    100
    
    
    
    47
    
    
    
    (47
    )
    
    
    100Common stock issued for payment of note payable
    
    
    200,000
    
    
    
    20
    
    
    
    999,980
    
    
    
    
    
    
    
    1,000,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (574,850
    )
    
    
    (574,850
    )Balance, September 30, 1999
    
    
    14,500,000
    
    
    
    1,450
    
    
    
    1,017,032
    
    
    
    (587,043
    )
    
    
    431,439Common stock surrendered
    
    
    (4,300,000
    )
    
    
    (430
    )
    
    
    430
    
    
    
    
    
    
    
    Common stock issued for cash
    
    
    668,333
    
    
    
    67
    
    
    
    759,933
    
    
    
    
    
    
    
    760,000Common stock issued in acquisitions
    
    
    1,103,371
    
    
    
    110
    
    
    
    808,668
    
    
    
    
    
    
    
    808,778Common stock issued for finders fee
    
    
    100,000
    
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    Common stock issued in exchange for services
    
    
    300,000
    
    
    
    30
    
    
    
    173,970
    
    
    
    
    
    
    
    174,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,090,715
    )
    
    
    (1,090,715
    )Balance, September 30, 2000
    
    
    12,371,704
    
    
    
    1,237
    
    
    
    2,760,023
    
    
    
    (1,677,758
    )
    
    
    1,083,502Common stock surrendered
    
    
    (150,000
    )
    
    
    (15
    )
    
    
    (93,735
    )
    
    
    
    
    
    
    (93,750
    )Common stock issued for cash
    
    

    725,000
    
    
    
    73
    
    
    
    244,927
    
    
    
    
    
    
    
    245,000Common stock issued in exchange for services
    
    
    1,061,760
    
    
    
    106
    
    
    
    128,227
    
    
    
    
    
    
    
    128,333Common stock issued for finders fee
    
    
    200,000
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,367,322
    )
    
    
    (1,367,322
    )Balance, September 30, 2001
    
    
    14,208,464
    
    
    
    1,421
    
    
    
    3,039,422
    
    
    
    (3,045,080
    )
    
    
    (4,237
    )Common stock issued for cash
    
    
    2,339,047
    
    
    
    234
    
    
    
    227,266
    
    
    
    
    
    
    
    227,500Common stock issued for compensation
    
    
    1,183,149
    
    
    
    118
    
    
    
    206,391
    
    
    
    
    
    
    
    206,509Common stock issued in exchange for services
    
    
    514,034
    
    
    
    51
    
    
    
    91,568
    
    
    
    
    
    
    
    91,619Common stock issued for interest due on notes payable
    
    
    47,350
    
    
    
    5
    
    
    
    5,677
    
    
    
    
    
    
    
    5,682Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,166,742
    )
    
    
    (1,166,742
    )Balance, September 30, 2002
    
    
    18,292,044
    
    
    
    1,829
    
    
    
    3,570,324
    
    
    
    (4,211,822
    )
    
    
    (639,669
    )Common stock issued for cash
    
    
    2,404,696
    
    
    
    240
    
    
    
    365,060
    
    
    
    
    
    
    
    365,300Common stock issued to settle accounts payable
    
    
    582,024
    
    
    
    58
    
    
    
    70,325
    
    
    
    
    
    
    
    70,383Common stock issued for services
    
    
    400,000
    
    
    
    40
    
    
    
    58,960
    
    
    
    
    
    
    
    59,000Common stock issued through exercise of options
    
    
    71,428
    
    
    
    7
    
    
    
    4,993
    
    
    
    
    
    
    
    5,000Common stock issued for interest due on notes payable
    
    
    90,363
    
    
    
    9
    
    
    
    14,412
    
    
    
    
    
    
    
    14,421Common stock issued for compensation
    
    
    50,000
    
    
    
    5
    
    
    
    8,495
    
    
    
    
    
    
    
    8,500Common stock surrendered
    
    
    (220,000
    )
    
    
    (22
    )
    
    
    22
    
    
    
    
    
    
    
    Recapitalization of accounts payable and accrued wages
    
    
    
    
    
    
    
    
    
    
    1,028,366
    
    
    
    
    
    
    
    1,028,366Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (897,736
    )
    
    
    (897,736
    )Balance, September 30, 2003
    
    
    21,670,555
    
    
    
    2,166
    
    
    
    5,120,957
    
    
    
    (5,109,558
    )
    
    
    13,565Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,588
    
    
    
    75,588Balance, December 31, 2003
    
    
    21,670,555
    
    
    
    2,166
    
    
    
    5,120,957
    
    
    
    (5,033,970
    )
    
    
    89,153Common stock issued for compensation
    
    
    1,000,000
    
    
    
    100
    
    
    
    219,900
    
    
    
    
    
    
    
    220,000Common stock issued for interest due on notes payable
    
    
    5,014
    
    
    
    1
    
    
    
    500
    
    
    
    
    
    
    
    501Common stock issued for accounts payable
    
    
    377,788
    
    
    
    38
    
    
    
    108,172
    
    
    
    
    
    
    
    108,210Common stock issued for past due royalty late fees
    
    
    44,733
    
    
    
    4
    
    
    
    13,186
    
    
    
    
    
    
    
    13,190Common stock issued for new license fees
    
    
    287,479
    
    
    
    29
    
    
    
    82,571
    
    
    
    
    
    
    
    82,600Common stock issued for warrant exercise
    
    
    125,000
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    13Warrants issued in debt financing
    
    
    
    
    
    
    
    
    
    
    93,293
    
    
    
    
    
    
    
    93,293Warrants issued for consulting
    
    
    
    
    
    
    
    
    
    
    38,744
    
    
    
    
    
    
    
    38,744Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (551,133
    )
    
    
    (551,133
    )Balance, March 31, 2004
    
    
    23,510,569
    
    
    
    2,350
    
    
    
    5,677,323
    
    
    
    (5,585,103
    )
    
    
    94,570Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (373,180
    )
    
    
    (373,180
    )Balance, June 30, 2004
    
    
    23,510,569
    
    
    $
    2,350
    
    
    $
    5,677,323
    
    
    $
    (5,958,283
    )
    
    $
    (278,610
    )
 See accompanying notes. 5




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##### Table of Contents



COMPOSITE SOLUTIONS, INC AND SUBSIDIARIES
(A Development Stage Company) 
 Consolidated Statements of Cash Flows
 October 20, 1997(Inception)Three Months Ended
    
    Nine Months Ended
    
    toJune 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003
    
    2004Cash flows from operating activitiesNet loss
    
    $
    (373,180
    )
    
    $
    (103,279
    )
    
    $
    (848,725
    )
    
    $
    (790,851
    )
    
    $
    (5,958,283
    )Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    14,661
    
    
    
    12,386
    
    
    
    39,955
    
    
    
    38,504
    
    
    
    418,085Amortization of discount on note payable
    
    
    96,665
    
    
    
    
    
    
    
    120,467
    
    
    
    
    
    
    
    120,467Common stock issued in exchange for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,000
    
    
    
    361,180Common stock issued for interest due
    

    
    
    
    
    
    
    
    
    
    13,691
    
    
    
    13,546
    
    
    
    31,506Common stock issued for compensation
    
    
    
    
    
    
    
    
    
    
    220,000
    
    
    
    8,500
    
    
    
    529,516Warrants issued for consulting
    
    
    
    
    
    
    
    
    
    
    38,744
    
    
    
    
    
    
    
    38,744Forgiveness of accounts payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,400
    )Pre-acquisition income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,267Gain on disposal of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177,755
    )Impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237,248Provision for future contract losses
    
    
    
    
    
    
    (26,497
    )
    
    
    1,500
    
    
    
    
    
    
    
    4,513(Increase) decrease in operating assetsAccounts receivable
    
    
    
    
    
    
    
    
    
    
    (19,875
    )
    
    
    
    
    
    
    (19,875
    )Related party receivable
    
    
    
    
    
    
    16,081
    
    
    
    
    
    
    
    
    
    
    
    (22,021
    )Costs in excess of billings
    
    
    
    
    
    
    
    
    
    
    4,869
    
    
    
    (2,000
    )
    
    
    (1,963
    )Inventory
    
    
    (7,724
    )
    
    
    
    
    
    
    (7,724
    )
    
    
    
    
    
    
    (7,724
    )Prepaid expenses and other assets
    
    
    5,010
    
    
    
    14,563
    
    
    
    (19,155
    )
    
    
    (10,171
    )
    
    
    (19,571
    )Deposit
    
    
    
    
    
    
    37
    
    
    
    21
    
    
    
    
    
    
    
    (10,050
    )Increase (decrease) in operating liabilitiesAccounts payable
    
    
    (3,932
    )
    
    
    202,404
    
    
    
    (4,108
    )
    
    
    202,572
    
    
    
    1,423,425Employee and director payable
    
    
    63,610
    
    
    
    318,556
    
    
    
    119,077
    
    
    
    462,681
    
    
    
    181,492Billings in excess of costs
    
    
    
    
    
    
    (17,210
    )
    
    
    (37,773
    )
    
    
    27,477
    
    
    
    93,396Related party payable
    
    
    6,535
    
    
    
    (233,052
    )
    
    
    27,829
    
    
    
    (133,600
    )
    
    
    164,547Accrued expenses
    
    
    67,399
    
    
    
    (90,119
    )
    
    
    83,293
    
    
    
    (16,444
    )
    
    
    312,783Income taxes payable
    
    
    (1,821
    )
    
    
    (4,896
    )
    
    
    (10,360
    )
    
    
    14,385
    
    
    
    14,521Net cash provided by (used in) operating activities
    
    
    (132,777
    )
    
    
    88,974
    
    
    
    (278,274
    )
    
    
    (126,401
    )
    
    
    (2,195,715
    )Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (1,820
    )
    
    
    
    
    
    
    (1,820
    )
    
    
    
    
    
    
    (31,480
    )Acquisition of intangible assets
    
    
    (3,826
    )
    
    
    (1,604
    )
    
    
    (19,090
    )
    
    
    (5,946
    )
    
    
    (646,867
    )Loans made to related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,000
    )Repayments of loans to related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Acquisition of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (500,000
    )Cash of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,999
    )Cash of acquired subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,261Net cash used in investing activities
    
    
    (5,646
    )
    
    
    (1,604
    )
    
    
    (20,910
    )
    
    
    (5,946
    )
    
    
    (1,181,085
    )Cash flows from financing activitiesIncrease (decrease) in line of credit
    
    
    
    
    
    
    
    
    
    
    (1,153
    )
    
    
    (200
    )
    
    
    Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,064,500Payment of notes payable
    
    
    (5,931
    )
    
    
    
    
    
    
    (13,753
    )
    
    
    2,016
    
    
    
    (94,253
    )Proceeds from notes payable to related parties
    
    
    
    
    
    
    2,016
    
    
    
    266,000
    
    
    
    
    
    
    
    550,181Payments of notes payable to related parties
    
    
    
    
    
    
    (86,008
    )
    
    
    
    
    
    
    (184,535
    )
    
    
    (247,669
    )Proceeds from convertible debenture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000Proceeds from issuance of common stock, net
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    278,300
    
    
    
    1,613,513Net cash provided by (used in) financing activities
    
    
    (5,931
    )
    
    
    (83,992
    )
    
    
    251,107
    
    
    
    95,581
    
    
    
    3,386,272Net increase (decrease) in cash
    
    
    (144,354
    )
    
    
    3,378
    
    
    
    (48,077
    )
    
    
    (36,766
    )
    
    
    1,418Cash, beginning of period
    
    
    145,772
    
    
    
    10,377
    
    
    
    49,495
    
    
    
    50,521
    
    
    
    Cash, end of period
    
    $
    1,418
    
    
    $
    13,755
    
    
    $
    1,418
    
    
    $
    13,755
    
    
    $
    1,418Supplementary disclosuresInterest paid
    
    $
    9,139
    
    
    $
    8,035
    
    
    $
    53,714
    
    
    $
    8,035
    
    
    $
    79,799Income taxes paid
    
    $
    4,261
    
    
    $
    
    
    
    $
    15,444
    
    
    $
    
    
    
    $
    26,172Non-cash financing and investing activitiesNote payable paid through issuance of common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,000,000Note payable paid through exercise of option
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,000Investment in subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    796,732Common stock acquired in sale of subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    93,7508% debenture released in sale of subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    500,000Note payable released in sale of subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    64,500Inter-company receivable released in sale of subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    22,021Accrued interest released in sale of subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28,867Forgiveness of interest on note payable
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,825Common stock issued to settle accounts payable
    
    $
    
    
    
    $
    
    
    
    $
    108,210
    
    
    $
    
    
    
    $
    178,593Recapitalization of accounts payable and accrued wages
    
    $
    
    
    
    $
    1,028,366
    
    
    $
    
    
    
    $
    1,028,366
    
    
    $
    1,028,366Line of credit converted into note payable
    
    $
    
    
    
    $
    
    
    
    $
    49,752
    
    
    $
    
    
    
    $
    49,752Common stock issued for intagible asset
    
    $
    
    
    
    $
    
    
    
    $
    82,600
    
    
    $
    
    
    
    $
    82,600Warrants issued for discount on note payable
    
    $
    
    
    
    $
    
    
    
    $
    93,293
    
    
    $
    
    
    
    $
    93,293
 See accompanying notes. 6




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##### Table of Contents



Composite Solutions, Inc. and Subsidiaries
(A Development Stage Company) 
 Notes to Consolidated Financial Statements
 Note 1- Summary of Significant Accounting Policies  The CompanyComposite Solutions, Inc. (the Company), formerly JS Business Works,
Inc., was incorporated in the state of Florida on October 20, 1997. The
Company has two wholly owned subsidiaries: Composite Solutions, Inc.,
incorporated in the state of Nevada on December 8, 1998 and Trans-Science
Corporation, incorporated in the state of California on September 15,
1980. A third wholly owned subsidiary, Penultimo, Inc. dba Anchor
Reinforcements, incorporated in the state of California on January 13,
1992, was sold on March 31, 2001. The Company is also a general partner
in CSI Construction Services, an inactive majority owned partnership.
Composite Solutions, Inc. and subsidiaries were organized to develop,
manufacture and market high technology products and processes in key
areas of existing and new construction.The Company is in the development stage and its efforts through June 30,
2004 have been principally devoted to raising additional capital and
negotiating with potential key personnel and leasing facilities. There
is no assurance that any benefit will result from such activities. The
Company will continue to incur expenses and losses as it pursues its
development efforts.Basis of PresentationThe consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.Unaudited Financial StatementsThe accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial information and according to regulatory
requirements of Article 10 of Regulation S-X for form 10-QSB.
Accordingly, the unaudited financial statements do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States and should be read in conjunction with Form
10-KSB for the fiscal year ended September 30, 2003.Use of EstimatesThe presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the periods presented. Actual results may differ significantly
from those estimates. 7




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##### Table of Contents



Composite Solutions, Inc. and Subsidiaries
(A Development Stage Company)Notes to Consolidated Financial Statements  Reclassifications  Certain prior period amounts have been reclassified to conform to the
June 30, 2004 presentation. These changes had no impact on previously
reported consolidated results of operations or stockholders equity. Note 2  Note Payable  Note payable at June 30, 2004 and September 30, 2003 were as follows: 2004
    
    2003In November 2003 the Company converted their
existing line of credit in the amount of $49,752
into an installment loan. The loan is payable in
24 monthly installments of $2,262 including
interest (8.5% per annum)
    
    $
    36,000
    
    
    $
    Less current portion
    
    
    (25,036
    )
    
    
    $
    10,964
    
    
    $
    
  The maturities of long-term debt for each of the succeeding five years
subsequent to June 30, 2004 are as follows: Twelve MonthsEndingJune 30,2005
    
    $
    25,0362006
    
    
    10,964Thereafter
    
    
    $
    36,000
 Note 3 - Commitments  The Company and subsidiaries had leased office space under a
non-cancelable operating lease which expired June 30, 2004. The Company
is currently in the process of negotiating a new lease at the same
location.  Rental expense was $12,496 and $12,774 for the three months ended June
30, 2004 and 2003, respectively and $37,489 and $36,009 for the six
months ended June 30, 2004 and 2003, respectively and was $336,476 for
the period October 27, 1997 (inception) to June 30, 2004. 8




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##### Table of Contents



Composite Solutions, Inc. and Subsidiaries
(A Development Stage Company)Notes to Consolidated Financial Statements Note 4  -  Earnings Per Share  At June 30, 2004 and 2003, respectively there were 200,000 and 271,428
weighted average number of options and 500,000 and 0 weighted average
number of warrants to purchase shares of common stock not included in the
calculation of diluted earnings per share for the three months then
ended, and there were 200,000 and 271,428 weighted average number of
options and 219,434 and 0 weighted average number of warrants to purchase
shares of common stock not included in the calculation of diluted
earnings per share for the six months then ended. The options and
warrants were not included in diluted earnings per share because they
would have been antidilutive. Note 5  -  Inventory  At June 30, 2004 the Company owned $7,724 in inventory which consisted of
made to order epoxy held at an off-site production facility. This
inventory has been purchased with the intent to sell through construction
projects in the near term. Note 6  -  Related Party Transactions  Related Party Payable, Consulting Fees, Materials, and Professional FeesThe Company has and expects to continue to have transactions, including
advances and notes payable, with its officers, directors, stockholders,
and their affiliates.Related Party Notes PayableOn January 8, 2001, the Company entered into a promissory note with an
officer in the amount of $159,439 and again with the same officer on
April 20, 2001 and June 5, 2002 in the amount of $56,965 and $26,584,
respectively. Terms of the note required principal to be advanced in
various amounts, interest to accrue at 12%, and payment of principal and
interest nine months from the date of latest advance. As of June 30, 2004
and September 30, 2003, there was no principal balance outstanding,
however there was accrued interest due in the amount of $0 and $26,053,
respectively.On April 23, 2001, the Company issued a promissory note payable to an
employee in the amount of $41,945. The principal is to be advanced to the
Company in various amounts and is to be repaid nine months from the date
of the latest advance. As of June 30, 2004 and September 30, 2003, there
was a past due principal balance outstanding in the amount of $33,376 and
accrued interest in the amount of $13,061 and $10,033, respectively.On January 17, 2002, the Company issued a promissory note payable to a
stockholder in the amount of $10,000, plus interest at a rate of 10% per
annum. Accrued interest is to be paid in the Companys common stock each
quarter. The note was originally due on January 17, 2003 and has been
extended to January 17, 2005 under the same terms. As of June 30, 2004 9




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##### Table of Contents



Composite Solutions, Inc. and Subsidiaries
(A Development Stage Company)Notes to Consolidated Financial Statements  and September 30, 2003, principal in the amount of $10,000 was
outstanding. As of June 30, 2004 the Company has accrued a liability to
issue 5,010 shares of common stock valued at $501.On June 17, 2002, the Company issued a promissory note payable to a
stockholder in the amount of $3,000, plus interest at a rate of 10% per
annum. The note was due on July 17, 2002. As of June 30, 2004 and
September 30, 2003, there was a principal balance outstanding in the
amount of $3,000 and accrued interest in the amount of $620 and $395,
respectively. The note is past due.

On March 8, 2004, the Company issued a promissory note payable in the
amount of $300,000, plus interest at a rate of 12% per annum. An officer
and stockholder is participating in $50,000 of this loan amount. The
note is due on the earlier of July 9, 2004 or upon a minimum of $500,000
of debt or equity financing by the Company and is personally guaranteed
by a stockholder. Warrants were issued to purchase 300,000 and 200,000
shares of common stock with exercise prices at 75% or 100% of the
Companys next offering of equity or convertible debt securities,
respectively or $.25 per share, whichever is less. The warrants were
valued at $93,293 and are recorded as a discount to the debt. The note
provided net proceeds in the amount of $266,000, net of debt issue costs
of $34,000. The net carrying amount of the debt at June 30, 2004 was
$290,686, the amount due at maturity, adjusted for unamortized discount
and cost of issuance. The loan was paid off on July 27, 2004 through
proceeds from financing noted in subsequent event footnote 10.AgreementsThe Company has several consulting agreements with stockholders and
officers for management, marketing and technical services which are
applied between cost of goods sold and expenses as appropriate.
Consulting fees were $45,000 and $105,111 for the three months ended June
30, 2004 and 2003, respectively and $411,334 and $284,541 for the six
months ended June 30, 2004 and 2003, respectively. Consulting fees for
the period October 20, 1977 (Inception) to June 30, 2004 were $1,660,988.
The balance payable at June 30,
2004 and September 30, 2003 was $233,626 and $69,118, respectively.Stock-based CompensationIn January 2004 the Company hired a new president and chief executive
officer and issued 1,000,000 shares of common stock valued at $220,000
for compensation.Intangible AssetsIntangible assets include a license agreement with UCSD, a stockholder,
for a license under patent rights to make, use, sell, offer for sale,
import licensed products, to practice licensed methods, and to use
certain technology. The original nonexclusive license agreement dated 10




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##### Table of Contents



Composite Solutions, Inc. and Subsidiaries
(A Development Stage Company)Notes to Consolidated Financial Statements  August 4, 1999 was cancelled on February 26, 2004 when the Company
entered into an exclusive license agreement with UCSD. Under the terms
of the new license agreement, the Company continues the original license
exclusively, in exchange for 287,479 shares of common stock valued at
$82,600. The new
license agreement terminates on the expiration date of the longest-lived
patent rights. In addition, the Company is obligated to pay for one-half
of all past and future patent costs. Under the terms of the new
agreement, the Company must pay to the licensor a royalty of 2.0% on net
sales of the licensed products or a minimum royalty up to $50,000 and a
royalty, the higher of 2.0% on net sales of sublicensed products or 50%
of royalties received from the sublicensor. Royalties begin in the
calendar year licensed product is first sold.Future minimum royalty payments are contingent upon the first date of
sale of licensed product and are due on or before February 28 of each
year are as follows: Twelve MonthsEndingFebruary 28,1st Year of Sale
    
    $
    15,0002nd Year of Sale
    
    
    25,0003rd Year of Sale
    
    
    35,0004th Year of Sale
    
    
    50,0005th Year of Sale
    
    
    50,000Thereafter
    
    
    500,000$
    675,000
  In connection with the new license agreement the Company issued 377,788
shares of common stock valued at $108,210 in exchange for royalties under
the original license agreement, included in accounts payable. The
Company also issued 44,733 shares of
common stock valued at $13,190 in exchange for late fees charged for past
due royalty payments. Note 7  Concentrations of Credit Risk  The Company maintains some of its cash in bank deposit accounts, which
may be uninsured or exceed the federally insured limits. No losses have
been experienced related to such accounts. The Company believes it places
its cash with quality financial institutions and is not exposed to any
significant concentrations of credit risk on cash.  For the nine months ended June 30, 2004 and 2003, and for the period
October 20, 1997 (inception) to June 30, 2004, one customer located in
Korea accounted for approximately 93%, 30% and 63% of consolidated sales,
respectively. At June 30, 2004, this customer accounted for all of the
Companys accounts receivable. 11




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##### Table of Contents



Composite Solutions, Inc. and Subsidiaries
(A Development Stage Company)Notes to Consolidated Financial Statements Note 8  Going Concern  The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Companys
financial position and operating results raise substantial doubt about
the Companys ability to continue as a going concern, as reflected by
losses of $5,958,283 accumulated from October 20, 1997 (inception) to
June 30, 2004. In addition, the Companys current liabilities exceed
current assets by $1,250,550 at June 30, 2004. The ability of the Company
to continue as a going concern is dependent upon
commencing operations, developing sales and obtaining additional capital
and financing. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue
as a going concern.The Company is currently seeking additional capital to allow it to
continue its planned operations. Management believes the Companys sales
and marketing efforts will partially reduce the impact of accumulated
losses and the negative working capital. In addition, the Company
continues its efforts to re-capitalize accounts payable into
stockholders equity and negotiate reductions in other accounts payable.
The Companys management believes these efforts will substantially reduce
current liabilities. Note 9  Warrants  On February 1, 2004 the Company issued a warrant to purchase 125,000
shares of common stock with an exercise price of $0.0001 to a consultant
valued at $38,744. On February 26, 2004 the warrant was exercised for
cash in the amount of $13. On March 8, 2004 the Company issued warrants
to purchase 300,000 and 200,000 shares of common stock with
exercise prices at 75% or 100% of the Companys next offering of equity
or convertible debt securities, respectively or $.25 per share, whichever
is less. The warrants were valued at $93,293 and are recorded as a
discount to the promissory note payable described in Note 6. Note 10  Subsequent event  On July 26, 2004 the Company issued a promissory note payable in the
amount of $550,000, plus interest at a rate of 12% per annum to an
officer and stockholder of the company. The note is due on November 23,
2004. Warrants were issued to purchase 550,000 and 366,667 shares of
common stock with exercise prices at 75% or 100%, of the Companys next
offering of equity or convertible debt securities, respectively or $.25
per share, whichever is less. The warrants are valued at $58,751 and
will be recorded as a discount to the debt. The note provides net
proceeds in the amount of $514,250, net of debt issuance costs of
$35,750. Proceeds from this loan were used on July 27, 2004 to fulfill
payment on the $300,000 promissory note due July 9, 2004 as noted in
footnote 6. 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis General Overview Composite Solutions, Inc. (CSI or the Company) licenses and distributes
composite materials technology, engineering services, and special applications
for use in the civil engineering and civil construction markets. The Companys
core capabilities are centered on new applications of composite materials for
structural engineering applications. The composite materials consist of
advanced fiber reinforced polymers (FRPs). Examples include ultra high-strength
carbon or aramid fibers in a thermoset (e.g., epoxy) matrix. When used in
concert with traditional building material systems, these provide superior
structural performance at competitive costs. The effectiveness and integrity of the Companys composite technologies has
been extensively validated by full-scale laboratory tests at The Charles Lee
Powell Structural Research Laboratories (Powell Laboratories) located at The
University of California, San Diego (UCSD). These tests included both
reinforced and un-reinforced wall specimens that ranged from single-story walls
to a full-scale five-story building as well as columns ranging from single
columns to full-scale bridge bents. The Powell Laboratories are one of the few
such facilities in the world with the capability to execute full-scale tests
and have performed extensive tests relating to the retrofit, and upgrading of
structural elements such as walls, columns and floor slabs. For blast
retrofits, the composite overlay technology has been validated in U.S.
Government field tests. These tests range from structural components to a
full-scale building. The Company has organized its new technology offerings into four product areas:
1) Retroshield, composite material overlays for strengthening structures
against earthquake hazard or other loading conditions that exceed the current
capability of the structure; 2) Blastshield, composite material overlays to
protect structures against blast or ballistic threats; 3) Composite Shell
Systemor CSSfor new building/bridge columns and girders with a fraction of
the rebar in conventional reinforced concrete; and 4) Hybrid FRP Pipefor
rehabilitating or replacing aging large-diameter pipelines. There is a small,
but growing, market awareness and acceptance of the use of FRP techniques for
the structural problems addressed by Retroshield, so the Company considers
this to be an early-adopter stage product. The other three products represent
new approaches to important problems with large potential markets, but
additional time and effort is needed to build market awareness and acceptance. Business Areas The Company is marketing its new material systems and technology offerings in
four primary areas. These are: 1) Force Protection/Homeland Security; 2)
Seismic Retrofits and Structural Upgrades; 3) Infrastructure Renewal; and 4)
New Construction. In each area the CSI product lines include design services,
FRP material systems, data bases, design methodologies, and design software for
civil structures such as buildings, bridges, roadways, and pipelines. 13




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Critical Accounting Policies and Estimates There are no recent accounting pronouncements that have had, or are expected to
have, a material effect on the Companys financial statements. Results of Operations In the following paragraphs we discuss the results of operations for the third
quarter (ended June 30, 2004) of the Companys current fiscal year relative to
the third quarter of the previous fiscal year. We also show the results for the
Company from its inception, Revenue- Contract revenue for the three months ended June 30, 2004 was $19,630,
substantially less than the revenue of $192,213 for the three months ended June
30, 2003. The revenue for the first nine months of the current fiscal year was
$975,576, substantially greater than the annual revenue in the amount of
$426,021 and $227,439 reported in Form 10-KSB for the years ended September 30,
2003 and 2002, respectively. Most (93%) of the revenue for the nine months
ended June 30, 2004 is from sales of the Companys Retroshield system under
terms of an exclusive license agreement with Composite Solutions, Korea (CSK).
CSK has installed Retroshield in four projects in Korea. The $19,630 in
revenue for the most recent quarter is from a CSK Retroshield demonstration
project done under contract to one of the largest potential clients in Korea.
The low revenue for the most recent quarter is due to delays in closing several
large projects in Korea. Also, during the most recent quarter the Company has
focused on sharpening its product offerings and strategy for a more aggressive
approach to the U.S. market. Cost of Sales - The cost of sales for the three months ended June 30, 2004 is
dominated by materials sales consistent with the Companys primary focus on
sales of material systems. Gross Profit -The gross profit for the three months ended June 30, 2004 is
$9,000, or 46% of contract revenue. For the nine months ended June 30, 2004
gross profit is $225,006, or 23% of contract revenue. These amounts compare to
a 25% for the 3 months and 12% gross profit for the nine months last year. Net Income - The Company posted a loss of $373,180 for the three months ended
June 30, 2004 and a total loss of $848,725 for the nine months ended June 30,
2004. Included in the expense entries is a $220,000 non-cash charge taken in
January 2004 for 1,000,000 shares of common stock awarded to the new president
and chief executive officer to provide an appropriate ownership incentive. Also
included in the expense entries for the nine months ended June 30, 2004 is
$254,000 in compensation to senior management (Professor Hegemier and Dr.
Bache) with payment being deferred pending improved operational performance. Stockholders Equity At June 30, 2004, the Company had current assets of $50,551 and current
liabilities of $1,301,101, for a difference of $1,250,550, compared to $843,795
working capital deficit (current assets  current 14




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liabilities) at September 30, 2003. The shareholders equity is a negative
278,610 at June 30, 2004 compared to $13,565 at September 30, 2003. Liquidity and Capital Resources For the nine months ended June 30, 2004 net cash used in operating activities
was $278,274 compared to $126,401 for the nine months ended June 30, 2003. Although the Companys revenues have improved over the nine months ended June
30, 2004 the Company has been operating with insufficient capital. As a
consequence, the difference between current assets and current liabilities, a
deficit of $1,250,550 is large compared to revenue and gross profit. To remedy
this situation, the Company is considering sale of common stock to generate
additional capital. Additional outside investment will also provide the capital
needed for marketing and other activities needed for increased revenue growth. Related Party Debt Obligations The following payment obligations are due to related parties. These amounts are
included in accounts payable as well as other current liabilities. RelationEmployee and director payableGilbert Hegemier
    
    Officer
    
    
    174,681Thomas Bache
    
    Officer
    
    
    1,206Jang Lee
    
    Employee
    
    
    5,566Other
    
    Employee
    
    
    39Total
    
    
    
    $
    181,492Related party payableBlanchard Krasner & French
    
    Stockholder
    
    
    18,528Smaha & Daley
    
    Stockholder
    
    
    18,716UC Regents
    
    Stockholder
    
    
    64,931Composite Designs
    
    Stockholder
    
    
    41,177Other
    
    Stockholder
    
    
    15,604Other
    
    Affiliate
    
    
    1,078Total
    
    
    
    $
    160,034Accrued expenses & related party notes payableAccrued wages
    
    Employee/Stockholder
    
    
    245,799Loan P&I
    
    Stockholder
    
    
    46,437Loan P&I
    
    Stockholder
    
    
    10,501Loan P&I
    
    Stockholder
    
    
    293,735Loan P&I
    
    Stockholder
    
    
    3,620Total
    
    
    
    $
    600,092
 15




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Management Team As reported under Results of Operations, the Company has a growing business
base. To lead continued growth and reach sustained profitability, the Company
has hired Dr. Thomas Bache to serve as President and CEO. Dr. Bache is an
experienced manager (most recently Senior Vice President and Group Manager at
SAIC, a $6.5Billion per year corporation) with a strong foundation in composite
materials technology (he completed his PhD at UCSD with a thesis on the dynamic
response of composite materials). Cautionary Statement Regarding Forward-Looking Statements This report contains forward-looking statements. The Company is including
this statement for the express purpose of availing itself of protections of the
safe harbor provided by the Private Securities Litigation Act of 1995 with
respect to all such forward-looking statements. Examples of forward-looking
statements include, but are not limited to: (a) projections of revenues,
capital expenditures, growth, prospects, dividends, capital structure and other
financial matters; (b) statements of plans objectives of the Company or its
management or Board of Directors; (c) statements of future economic
performance; (d) statements of assumptions underlying other statements and
statements about the Company and its business relating to the future; and (e)
any statements using the words expects, intends, anticipates, may,
plans, projects and estimates, and analogous or similar expressions. The Companys ability to predict projected results or the effect of certain
events on the Companys operating results is inherently uncertain. Therefore,
the Company wishes to caution each reader of this report to carefully consider
the following factors, any or all of which have in the past and could in the
future affect the ability of the Company to achieve its anticipated results and
could cause actual results to differ materially than those discussed herein:
(1) ability to attract and retain customers to purchase its products and
services, (2) ability to commercialize and market products (3) results of
research and development, (4) technological advances by third parties and
competition, (5) future capital needs of the Company, (6) history of operating
losses, (7) dependence upon key personnel, and (8) general economic and
business conditions. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forwardlooking
statement contained herein to reflect any change in the Companys expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based. Risks Need for Additional Capital -The Companys future is subject to substantial
risks and uncertainties. During the nine months ended June 30, 2004 the
Companys revenue has improved substantially ($975,576, or $655,351 more than
for the nine months ended June 30, 2003), but the Company posted a substantial
loss from operations, primarily due to investment in full-time management
dedicated to moving the Company forward. There is no assurance of growth in
revenue and gross profit to the levels needed for sustained profitable
operation. The Company had a net loss of $5,958,283 for the period October 20,
1997 (Inception) to June 30, 2004. Current liabilities exceed 16




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current assets by $1,250,550. Profitability from operations is unlikely to
generate adequate capital for the increased investment in marketing,
management, and technical staff that is required for future growth. Additional
capital is needed to support operations, and there can be no assurance that
such capital will become available. Limited Public Market for Common Stock -There currently is a very limited
public market for the Companys common stock and no assurance can be given that
a large public market will develop in the future. The Companys common stock
may be thinly traded, if at all, even if the Company achieves full operation
and has significant revenues. Our shares of common stock should be considered speculative. Prospective
investors should consider carefully all risk factors. Future Sales of Common Stock by Our Existing Shareholders Could Reduce the
Price of Our Common Stock -The market price of our common stock could decline
as a result of sales by our existing shareholders of shares of common stock in
the market. Likewise, the perception that these sales could occur may result
in the decline of the market price of our common stock. These sales also might
make it more difficult for us to sell equity securities in the future. The Loss of Our Key Technical Individuals Would Have an Adverse Impact on
Future Development and Could Impair Our Ability to Succeed -Our performance is
substantially dependent on the technical expertise of Gilbert A. Hegemier,
Ph.D. and the technical and management expertise of Thomas C. Bache, Ph.D. and
on our ability to hire and retain personnel with similar technical expertise.
The loss of any of the services of Gilbert A. Hegemier and Thomas C. Bache
could have a materially adverse effect on our business, development, financial
condition, and operating results. We do not maintain key person life
insurance on any of our directors or senior executive officers and we do not
have life insurance on Gilbert A. Hegemier, Ph.D. We Do Not Expect to Declare or Pay Any Dividends -We have not declared or paid
any dividends on our common stock since our inception, and we do not anticipate
paying any such dividends for the foreseeable future. Because of Our Limited Operating History, It Is Difficult to Predict Our Future
Revenues - As a result of our limited operating history and uncertainty about
the pace of acceptance of the new technology we seek to introduce into the
market, we are unable to accurately forecast our revenues. Our current and
future expense levels are based largely on our plan of operation. Revenues and
operating results generally depend on our ability to develop a base of
customers and businesses. We may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in estimated revenues in relation to our planned
expenditures would have an immediate adverse effect on our business, prospects,
financial condition and results of operations. Our Future Revenues are Dependent on the Acceptance of the Products and
Services that We Offer -Our future revenues and our ability to generate
profits in the future are substantially dependent upon the widespread
acceptance and use of our composite materials technology. There can be no 17




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assurance that our composite materials technology will become widely accepted
or that a sufficiently broad base of new construction or infrastructure renewal
will use our composite materials technology. We Will Have to Expend Substantial Funds on Management and Marketing in the
Future We have not incurred significant advertising, sales, and marketing
expenses to date. The Company operated without full-time dedicated management
from January 2002 through June 2004. To increase market penetration of our
composite materials technology, we have been spending significantly more on
dedicated professional management and engineering to reposition our
technologies as products targeted at specific markets. Continuing investments
in engineering and marketing are necessary for success. If our strategy is
unsuccessful, we may not be able to recover these expenses or even generate
increased revenues. To date, our experience with respect to marketing our
products and services is limited. We may also elect to enter into agreements
or relationships with third parties regarding the promotion or marketing of our
composite materials technology. There can be no assurance that we will be able
to establish adequate sales and marketing capabilities, that we will be able to
enter into marketing agreements or relationships with third parties on
financially acceptable terms, or that any third parties with whom we enter into
such arrangements will be successful in marketing and promoting our composite
materials technology, or other products and services offered by us. 18




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Part II Item 1. Legal Proceedings Neither the Company nor its subsidiary is the subject of any pending legal
proceeding. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits ExhibitNumber
    
    Description3.1
    
    Articles of Incorporation of the Company, as amended(1)3.2
    
    Bylaws of the Company, as amended(1)10.1
    
    License Agreement with UCSD (Case No. SD96-040)(2)10.2
    
    Share Exchange Agreement(3)10.3
    
    Share Exchange Agreement with and Acquisition of TSC(4)31
    
    Sarbanes-Oxley Section 302 Certification32
    
    Sarbanes-Oxley Section 906 Certification
   (1)
    
    Incorporated by reference to the referenced document filed as an
exhibit to the Companys Registration Statement on Form 10SB12G/A,
Commission File No. 000-24551, filed on October 20, 1998.(2)
    
    Incorporated by reference to the referenced document filed as an
exhibit to the Companys Annual Report on Form 10-KSB, Commission File No.
000-24551, filed on January 13, 2000.(3)
    
    Incorporated by reference to the referenced document filed as an
exhibit to the Companys Current Report on Form 8-K, Commission File No.
000-24551, filed on July 14, 2000 and August 31, 2000.(4)
    
    Incorporated by reference to the referenced documents related to
the Acquisition of TSC and filed on Form 8-K, Commission File No.
000-24551, on June 26, 2000 and July 25, 2000. (b). Reports on Form 8-K.  None. 19




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Signatures In accordance with Section 13 or 15(d) of the Securities Exchange Act the
Company has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. Date: August 13, 2004Composite Solutions, Inc.By:
    
    /s/ Thomas C. BacheThomas C. Bache, President & CEO
  Pursuant to the requirements of the Securities Exchange Act, of 1934 this
report has been
signed below by the following person on behalf of the Company and in the
capacity and on the date indicated. Signature
    
    Capacity
    
    Date/s/ Thomas C. Bache
    
    President and CEO
    
    August 13, 2004Thomas C. Bache
 20