**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-KSB**

 

| **ý****    ANNUAL REPORT PURSUANT TO SECTION 13  or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**              |
|------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                     |
| **For the Fiscal Year Ended  September 30, 2003**                                                                                   |
|                                                                                                                                     |
| **or**                                                                                                                                   |
|                                                                                                                                     |
| **o****    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.**

(Name of Small Business Issuer in its Charter)

 

| **Florida**                                                   |   | **65-0790758**                         |
|---------------------------------------------------------------|--------|----------------------------------------|
| State or other jurisdiction  of incorporation or organization |   | I.R.S. Employer  Identification Number |
|                                                          |   |                                   |
| **3252 Holiday Court, Suite 206 La Jolla, CA**      |   | **92037**                              |
| Address of principal  executive office                        |   | Zip Code                               |
|                                                          |   |                                   |
| Issuer’s telephone number:  **(858) 459-4843** |

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT

 

**CommonStock, $0.0001 Par Value**

(Title of Class)

 

Check whether the issuer has (i) filed all reports required bySection 13 or 15(d) of the Exchange Act during the past 12 months, and(ii) been subject to such filing requirements for the past ninety (90)days.  Yes  ý  No o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of regulation S-B not contained in this form, and no disclosure willbe contained, to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of the Form 10-KSB or anyamendment to this Form 10-KSB. o

 

The Company’s revenues for the fiscal year ended September 30,2003 were $426,021.

 

As of September 30, 2003, 21,670,555 shares of Common Stock wereoutstanding and the aggregate market value of the Common Stock (based on thelatest sale price on the Nasdaq OTC Bulletin Board on September 30, 2002)held by non-affiliates (18,086,313 shares) was $3,074,673.

 

Transitional Small BusinessDisclosure Format (check one):                            Yes o                                      No ý

 

 

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**PartI**

**Item 1. Description of Business**

 

**General Overview**

** **

Composite Solutions, Inc. (CSI) is adevelopment stage company licensing and distributing proprietary compositematerials technology, engineering services, and special applications for use inthe civil engineering and civil construction markets. CSI’s technologyrepresents a revolutionary breakthrough for the construction industry. Thistechnology uses the same type of composite materials found in the B-2 Bomberand other lightweight, high-strength/performance military hardware. Thesecomposite materials consist of advanced fiber reinforced polymers (FRPs).Examples include ultra high-strength carbon or aramid fibers in a thermoset(e.g., epoxy) matrix. Such fibers are 10-15 times stronger than constructionsteel and 5 times lighter. When used in concert with traditional buildingmaterial systems, this marriage of new and conventional systems leads to adramatic enhancement of the latter, and to superior structural performance witha minimization of cost.

 

CSI’s new technology material/composite systems fallinto the following main categories: 1) Composite Overlays for structuralretrofits and 2) the Carbon Shell System (CSS) for new construction andinfrastructure renewal; and 3) Specialty Systems for force protection.

 

The Composite Overlay is a “structural skin” whichmay be continuous or segmented. The former is created by saturating fabricwoven out of carbon, aramid (e.g., kevlar) or other aerospace-quality fiberwith an epoxy-type resin. The latter takes the form of pre-manufactured FRPstrips. The specific composition and application of these overlays isengineered by CSI to specific strength, stiffness, and ductility specificationsbased on the characteristics of the subject structure and use loads. Thespecified composite solution is then bonded (“wallpapered”) to a structuralsurface to provide significantly increased ductility and/or strength. Theoverlay technique has been found to be extremely effective for seismicretrofits, structural upgrades, structural repairs, and blast hardening.Typically only a few layers of a 1mm overlay are needed for such applications.

 

The CSS is a lightweight, high-strengthplant-manufactured advanced carbon fiber-reinforced polymer (CFRP) shell (tube)of circular or non-circular cross-section. In new construction of buildings,bridges and other structures, the shell is typically filled with concrete; inthis application it serves both as a stay-in-place form and reinforcement. As aresult, this system substantially reduces the need for reinforcing steel andthe use of heavy lifting equipment, which constitutes a significant part ofsystem building costs. The CSS can be used for structural elements such ascolumns, beams and girders for buildings and bridges and for pilings forharbors and docks.

 

In new construction of infrastructure systems, theCSS can be used for oil, gas, and water pipelines. Advantages over conventionalmaterial in such applications include durability (no corrosion) and thermalstability (no thermal expansion). For infrastructure renewal, the CSS isemployed as a structural liner for pipelines that have deteriorated due to ageor environmental conditions. An example application is the repair of largediameter (2-4m), pre-stressed concrete cylindrical pipes (PCCPs) that carryhigh pressure, high flow water from its source to urban areas.

 

The Specialty Systems include FRP-based ballisticpanels and other technologies for force protection.

 

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The effectiveness and integrity of the Company’scomposite overlay technologies and the CSS has been extensively validated byfull-scale laboratory tests at The Charles Lee Powell Structural ResearchLaboratories (“Powell Laboratories”) located at The University of California,San Diego (“UCSD”). These tests included both reinforced and un-reinforcedwall specimens that ranged from single-story walls to a full-scale five-storybuilding as well as columns ranging from single columns to full-scale bridgebents.  The Powell Laboratories are one of the few such facilities in theworld with the capability to execute full-scale tests and have performedextensive tests relating to the retrofit, and upgrading of structural elementssuch as walls, columns and floor slabs.

 

For blast retrofits, the composite overlaytechnology has been validated in U.S. Government field tests. These tests rangefrom structural components to a full-scale building.

 

**Business Areas**

 

CSI is marketing its new material systems andtechnologies in four primary areas. These are: 1) Force Protection/HomelandSecurity; 2) Seismic Retrofits and Structural Upgrades; 3) InfrastructureRenewal; and 4) New Construction.

 

The CSI technologies and product lines for the ForceProtection/Homeland Security area include: 1) Carbon Fiber Reinforced Polymer(CFRP) and Aramid Fiber Reinforced Polymer (AFRP)- based blast retrofitmethodologies, material systems, and data for civil, marine and aircraftstructures; 2) CFRP-based Carbon Shell System (CSS) for blast hardening of newstructures; 3) Window Catcher Systems for occupant protection against blastgenerated glass fragments; and 4) AFRP- based Composite Ballistic Systems forthe mitigation of projectiles from firearms and debris from blast loads.

 

The CSI technologies and product lines for theSeismic Retrofits and Structural Upgrades include CFRP material systems, databases, design methodologies, and design software for civil structures such asbuildings and bridges.

 

CSI’s efforts in the area of Infrastructure Renewalare currently focused on the rehabilitation of water transmission lines in theform of large diameter pre-stressed concrete cylindrical pipes (PCCPs). Thetechnologies and product lines here include CFRP- based structural linerdesigns and material systems, cost metrics and installation methodologies. Theassociated product lines include design methodologies, data bases, anddistribution of CFRP forms.

 

CSI’s products for the area of New Construction includethe distribution of CFRP stay-in-place structural forms, design methodologiesfor the use of such forms, and data bases on performance.

 

**Marketing and Sales**

 

CSI has commenced operations in all four areasduring 2002/2003. A summary of events follows:

 

Structural Upgrades/Infrastructure Renewal - The Company completed a design/build projectin Seoul, Korea in May, 2003. For this effort, which concerned a structuralupgrade of a parking structure, CSI provided design/engineering services, CFRPmaterial systems, application training, and quality control.

 

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The Company completed a CFRP material sales contractto a customer in Seoul, Korea in September 2003.

 

The Company signed a CFRP material sales contractwith a customer in Seoul, Korea subsequent to the current reporting period.This project, which was initiated in November 2003 and was completed onJanuary 6, 2004, involves a large (12.5 miles) order of CFRP strips plusepoxy adhesives, to be used in the structural renewal/upgrade of a bridgeviaduct in Seoul. The project includes testing of the material system for theapplication environment and conditions. The significant revenues from thiseffort will appear in the next Quarterly Report.

 

The Company continues to provide testing as part ofan agreement with a large market international general contractor. Weanticipate moving forward with additional business derived from thisrelationship once testing has been completed.

 

Force Protection/Homeland Security– A teaming agreement has been executed with a large defense contractor toutilize the Company’s services in the areas of vulnerability assessment, threatreduction and the use of FRP composite technologies for blast and ballisticremediation in an anti-terrorism/force protection environment. On June 5,2003 an exclusive contract with said defense contractor was signed for theseservices. Commencement of work is awaiting Task Orders from a certain USgovernment agency.

 

Seismic Retrofits –A Teaming Agreement was executed on June 30, 2003 with a large marketnational general contractor. This Agreement is focused on developing asynergistic relationship using the Company’s FRP composite design andengineering capabilities and market presence to pursue opportunities in thehospital, commercial, and military/federal marketplace.

 

A contract has been signed with a national healthcare group for the seismic retrofit of a hospital in California via theapplication of FRP composite overlays. Work on this project has commenced andis currently in the design/engineering/validation testing phase.

 

A seismic retrofit was completed in 2003 on aresidence (Ambassador Richard Sklar) in northern California. This project wasdesign/build and included design, engineering, material system, andapplication.

 

A seismic retrofit is underway on a church insouthern California. This is a historic structure; CSI’s FRP compositetechnology will preserve the original architecture. This project is currentlyin the design/engineering phase.

 

On August 4, 2003 CSI signed a contract(design/build) for the seismic retrofit of a commercial building in San Diego,California. This project included engineering services, CFRP material systems,and applications. Completion of this effort was subsequent (January, 2004) tothe current reporting period.

 

New Construction –New opportunities are being developed, on an international basis, with respectto the utilization of the Carbon Shell System (CSS) for building andtransportation systems. In connection with this effort, a FRP composite bridgein Seoul, Korea is under consideration by a Korean customer. Under this effort,CSI would provide design/engineering services, material and component systems,construction training and supervision, and quality control.

 

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**Item 2. Description of Property**

 

The Company offices are located at 3252Holiday Court, Suite 206, La Jolla, CA 92037. The leased office space ofapproximately 1572 sq. ft. is within walking distance to UCSD. The leaseobligation is for three years with monthly payments of approximately $4,165,subject to periodic adjustments for inflation.

 

**Item 3. Legal Proceedings**

 

Neither the Company nor its subsidiary is thesubject of any material pending legal proceeding.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

None.

 

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**Part II**

** **

**Item 5. Market for Company’s Common Equity and Related Stockholders Matters**

 

The shares of the Company’s Common Stock aretraded on the OTC Bulletin Board (Symbol “KIPS”). The following table setsforth, for the periods indicated, the high and low closing bid prices for theCompany’s Common Stock, as reported by the National Quotation Bureau, for the quarterspresented.  Bid prices representinter-dealer quotations without adjustments for markups, markdowns, andcommissions.

 

Quarterly Common Stock Price Range (High Low)

 
| Fiscal year ended September 30, 2002: |   |   |   |
|--------------------------------------------|--------|--------|--------|
| 1st Quarter                                |   | $      | 0.18   |   | $ | 0.15 |   |
| 2nd Quarter                                |   | $      | 0.39   |   | $ | 0.27 |   |
| 3rd Quarter                                |   | $      | 0.20   |   | $ | 0.11 |   |
| 4th Quarter                                |   | $      | 0.12   |   | $ | 0.09 |   |
|                                       |   |   |   |   |   |
| Fiscal year ended September 30, 2003: |   |   |   |
| 1st Quarter                                |   | $      | 0.23   |   | $ | 0.14 |   |
| 2nd Quarter                                |   | $      | 0.22   |   | $ | 0.10 |   |
| 3rd Quarter                                |   | $      | 0.16   |   | $ | 0.07 |   |
| 4th Quarter                                |   | $      | 0.24   |   | $ | 0.08 |   |

 

 

As of September 30, 2003, there were21,670,555 shares of Common Stock outstanding, and there were approximately 96shareholders of the Company’s Common Stock.

 

The Company has not paid any dividends sinceits inception and has no current plans to pay dividends on the Common Stock inthe foreseeable future. The Company intends to reinvest future earnings in thedevelopment and expansion of its business. Any future determination to paydividends will depend upon the Company’s results of operations, financial conditionand capital requirements and such other factors deemed relevant by theCompany’s Board of Directors.

 

**Item 6. Management’s Discussion and Analysis**

**** ****

****Critical Accounting Policies and Estimates****

 

We describe our significant accounting policies inthe notes to our financial statements included in our Annual Report on Form10-KSB.  However, in response to the SEC’s Release No. FR-60, “CautionaryAdvice Regarding Disclosure About Critical Accounting Policy,” issuedDecember 12, 2001, we have identified the policies we believe are mostcritical to an understanding of our financial statements. The most criticalaccounting policies are related to the following areas: revenue recognition,accounting for equity securities issued in exchange for services and in settlementof liabilities, intangible assets, and impairment of long-lived assets. Since application of these accounting policies involves the exercise ofjudgment and use of estimates, actual results could differ from thoseestimates.  There have been no material changes in our critical accountingpolicies that impacted our financial condition or results of operations for2002.

 

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Revenue Recognition - Revenue from the sale of product isrecognized when materials are shipped from stock.  Revenues derived fromcontracts are accounted for on the percentage-of-completion method ofaccounting.

 

Revenue is recognized based on a ratio of the actualcost of work performed to a current estimate of the total cost to complete arespective contract.

 

Expected profits realized on contracts are based onthe difference between estimates of total contract revenues and costs ofcompletion.  These estimates are reviewed and revised periodicallythroughout the contract term, and adjustments to profits resulting from suchrevisions are recorded in the accounting period in which the revisions aremade.  Profits are recognized as the contract phase of the work iscompleted.  Losses on contracts are recorded in full as they are identified.

 

Accounting for Equity Securities Issued in Exchangefor Services and In Settlement of Liabilities**-** The Company measures the value oftransactions in which equity instruments are issued for services or insettlement of liabilities at the fair value of the common stock issued inaccordance with SFAS No. 123.  The fair value is measured at the dateservice is complete (EITF 96-18).

 

In the case of settlement of liabilities, the fairvalue is measured at the date the settlement agreement is reached, whichapproximates the date the equity instrument is issued.  Differencesbetween liabilities, as originally recorded and the fair value of equityinstruments issued in settlement of liabilities are recorded as an adjustmentto expenses.

 

Intangible Assets**-**Other assets include intangibles such aslicensed technology, computer software and goodwill.   InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 142, *Goodwill and Other IntangibleAssets. *SFAS No. 142 establishes new guidelines for accountingfor goodwill and other intangible assets.  The Company implemented theprovisions of SFAS No. 142 on October 1, 2001.  Since adoption,existing goodwill and certain intangibles with indefinite useful lives are nolonger amortized but instead are assessed for impairment at leastannually.  Other intangible assets are recorded at historical cost lessamortization on the straight line method based on estimated useful lives. Periods of amortization are evaluated continually to determine whether laterevents and circumstances warrant revised estimated useful lives.

 

Impairment of Long-Lived Assets**-**Long-lived assets and intangible assetssubject to amortization are reviewed for impairment in accordance with SFAS No.121, *Impairment of Long-Lived Assets andLong-Lived Assets to Be Disposed Of.  *In accordance withSFAS No. 121, an impairment loss is recognized whenever events or changes incircumstances indicate that the carrying amount of the asset may not berecovered, based upon an estimate of future cash flows.  An impairmentloss is then recognized whenever the carrying amount of the asset exceeds itsfair value.  After an impairment loss is recognized, the adjusted carryingamount of the asset becomes its new basis.

 

**Results of Operations**

 

The following is a discussion of the financialcondition and results of operations for the year ended September 30, 2003and 2002.  This discussion should be read in conjunction with ourconsolidated financial statements and the notes related thereto.

 

Revenue- For the fiscal year ended September 30, 2003 the Companyrecorded revenues of $426,021, compared to revenues of $227,439 during thefiscal year ended September 30, 2002. This increase

 

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reflects the initiation of sales operations in twoof our primary four market areas during the reporting fiscal year: 1) SeismicRetrofit/Structural Upgrades and 2) Infrastructure Renewal. This trend isexpected to increase significantly during the new fiscal year.

 

Cost of Sales - The cost of sales for the fiscal year endedSeptember 30, 2003 was $383,186; as compared to cost of sales of $339,228for the fiscal year ended September 30, 2002.

 

Gross Profit: -The gross profit for the fiscal year endedSeptember 30, 2003 was $42,835: as compared to a loss of ($111,789) forthe fiscal year ended September 30, 2002. This is due to the increase incontract revenue and an improved profit margin.

 

Net Loss - For the fiscal year ended September 30, 2003, the Companyrecorded a net operating loss of $897,736 ($0.04 per share) from continuingoperations, compared to a net loss of $1,166,742 ($0.07 per share) during thefiscal year ended September 30, 2002. It is noted that a significantportion of the accounts payable and accrued wages that contributed to this losswere “eliminated” via re-capitalization (see financial statements and“reduction of liabilities” below).

 

**Reduction ofLiabilities and Re-capitalization**

** **

A reduction in the Company’s liabilitiesoccurred during the fiscal year ended September 30, 2003. This debtreduction was accomplished by re-capitalizing the Company with consultant anddirector accounts payable and employee accrued wages in the amount of$1,028,366. This action reduced the total liabilities from $1,592,590 as of thefiscal year ended September 30, 2002 to $900,538 as of the fiscal yearended September 30, 2003. Additional re-capitalization of accounts payableis under negotiation, which may or may not occur in the future. These willconsist of further re-capitalization of accounts payable and accrued wages. Inaddition, negotiations with creditors are anticipated to result in theconversion of certain payables to equity.

 

As a result of the aforementioned reductionof liabilities, the total shareholders equity increased to $13,565 atSeptember 30, 2003; this compared to a deficit of $639,669 atSeptember 30, 2002.

 

**Liquidity and Capital Resources**

** **

The Company had total assets of $914,103 as ofSeptember 30, 2003, including intangible assets of $427,684, and goodwillof $418,956, as compared to the total assets of $952,921, including intangibleassets of $469,554 and goodwill of $418,956 as of September 30, 2002.

 

Although the Company’s revenues have significantlyincreased during the fiscal year ending September 30, 2003 (see “Resultsof Operation” above), the Company has been operating with insufficient capital.As a consequence, it has not met all of its financial obligations. In an effortto remedy this situation, the Company has sold its common stock to generateadditional capital.

 

The Company’s cash position is anticipated toimprove significantly as billings on new contracts (see “Marketing and Sales”above) are executed. Nevertheless, the Company is pursuing outside investmentto augment increased revenue generation and the furtherance of key strategicrelationships and teaming arrangements in the construction and military/federalmarkets.

 

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**Related Party Debt Obligations**

 

The following payment obligations are due torelated parties. These amounts are included in accounts payable as well asother current liabilities.

 
| **2003**                             |   | **Relation**          |   |    |
|--------------------------------------|--------|-----------------------|--------|---------|
| **Blanchard,  Krasner & French** |   | Stockholder           |   | 9,305   |   |
| **Gilbert  Hegemier**                |   | Officer               |   | 53,750  |   |
| **Smaha  & Daley**               |   | Stockholder           |   | 23,375  |   |
| **UC  Regents-UCSD**                 |   | Stockholder           |   | 85,253  |   |
| **Total  Accounts Payable**          |   | **171,683**           |   |
|                                 |   |                  |   |    |   |
| **Accrued  Wages**                   |   | Employee/Stockholders |   | 141,730 |   |
| **Loan  Interest - Officer**         |   | Officer               |   | 26,053  |   |
| **Loan  P&I**                    |   | Employee/Stockholder  |   | 43,409  |   |
| **Loan  P&I**                    |   | Stockholder           |   | 10,252  |   |
| **Total Current  Liabilities**       |   | **221,444**           |   |

 

The accounts payable and current liabilities above are past due,however, these creditors have deferred payment without specific terms.

 

**Management Team**

 

Our management team will be greatly enhanced by the addition of a new Presidentand CEO. This individual who will join CSI in January, is a highly experiencedSenior Vice President at a large defense contracting firm. Details will beprovided in the next quarterly report.

 

**Cautionary Statement RegardingForward-Looking Statements**

 

This report contains “forward-looking” statements.  The Company isincluding this statement for the express purpose of availing itself ofprotections of the safe harbor provided by the Private Securities LitigationAct of 1995 with respect to all such forward-looking statements.  Examplesof forward-looking statements include, but are not limited to: (a) projectionsof revenues, capital expenditures, growth, prospects, dividends, capitalstructure and other financial matters; (b) statements of plans objectives ofthe Company or its management or Board of Directors; (c) statements of futureeconomic performance; (d) statements of assumptions underlying other statementsand 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.

 

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The Company’s ability to predict projected results or the effect ofcertain events on the Company’s operating results is inherentlyuncertain.  Therefore, the Company wishes to caution each reader of thisreport to carefully consider the following factors, any or all of which have inthe past and could in the future affect the ability of the Company to achieveits anticipated results and could cause actual results to differ materiallythan those discussed herein: (1) ability to attract and retain customers topurchase its products and services, (2) ability to commercialize and marketproducts (3) results of research and development, (4) technological advances bythird parties and competition, (5) future capital needs of the Company, (6)history of operating losses, (7) dependence upon key personnel, and (8) generaleconomic and business conditions.  The Company expressly disclaims anyobligation or undertaking to release publicly any updates or revisions to anyforward—looking statement contained herein to reflect any change in theCompany’s expectations with regard thereto or any change in events, conditionsor circumstances on which any such statement is based.

 

**Risks**

 

Need for Additional Capital**-**The Company’s future is subject tosubstantial risks and uncertainties. The Company has operated at a loss for itsentire history and there can be no assurance of ever achieving profitability.The Company had a net loss of $5,109,558 for the period October 20, 1997(Inception) to September 30, 2003.  Current liabilities exceedcurrent assets by $843,795.  Our future capital requirements will dependour ability to successfully market our composite materials technology. Our recurring operating losses and growing working capital needs will requireadditional capital to support operations and there can be no assurance thatworking capital will become available, if at all.

 

The occurrence of any of the aforementioned events could adverselyaffect our ability to meet our business plans.

 

Limited Public Market for Common Stock **-**There currently is a very limited publicmarket for the Company’s common stock and no assurance can be given that alarge public market will develop in the future. The Company’s common stock maybe thinly traded, if at all, even if the Company achieves full operation andhas 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 ExistingShareholders Could Reduce the Price of Our Common Stock**-**The market price of our common stockcould decline as a result of sales by our existing shareholders of shares ofcommon stock in the market.  Likewise, the perception that these salescould 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 securitiesin the future.

 

Unless We Can Establish Significant Sales ofOur Current Products, Our Potential Revenues May Be Significantly Reduced**-**We expect the licensing and distributionof our composite materials technology, and related engineering services willaccount for a majority, if not all, of our future revenue.  Continued andexpanded market acceptance of composite overlays and carbon fiber-reinforcedpolymer shells in construction of infrastructure systems and infrastructurerenewal is, therefore, critical to our future success and to our ability togenerate revenues.  Failure to achieve market acceptance of our compositematerials technology would significantly harm our business. Our future financialperformance will depend in significant part on the continued market acceptanceof our composite materials technology, and on the development, introduction andmarket acceptance of any future products.  There can be no assurance thatwe will be successful in marketing our composite materials technology or anyfuture products and any failure to do so would significantly harm our business.

 

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The Loss of Our Key Technical IndividualsWould Have an Adverse Impact on Future Development and Could Impair Our Abilityto Succeed**-**Ourperformance is substantially dependent on the technical expertise of Gilbert A.Hegemier, Ph.D. and our ability to hire and retain personnel with similartechnical expertise. The loss of any of Gilbert A. Hegemier, Ph.D. could have amaterially adverse effect on our business, development, financial condition,and operating results.  We do not maintain “key person” life insurance onany of our directors or senior executive officers and we do not have lifeinsurance on Gilbert A. Hegemier, Ph.D.

 

We Do Not Expect to Declare or Pay AnyDividends**-**Wehave not declared or paid any dividends on our common stock since ourinception, and we do not anticipate paying any such dividends for the foreseeablefuture.

 

Because of Our Limited Operating History, ItIs Difficult to Predict Our Future Revenues - As aresult of our limited operating history and the new technology, which we seekto introduce into the markets in which we compete, we are unable to accuratelyforecast our revenues.  Our current and future expense levels are basedlargely on our plan of operation.  Revenues and operating resultsgenerally depend on our ability to develop a base of customers andbusinesses.  We may be unable to adjust spending in a timely manner tocompensate for any unexpected revenue shortfall.  Accordingly, anysignificant shortfall in estimated revenues in relation to our plannedexpenditures would have an immediate adverse effect on our business, prospects,financial condition and results of operations.

 

We Expect to Experience Significant Fluctuations inOur Future Annual Operating Results - Factors that may adversely affect our annual operating resultsinclude but are not limited to:

•  our ability to obtain market acceptance of our composite materialstechnology;

•  our ability to attract and retain customers and maintain customersatisfaction;

•  our ability to attract new personnel in a timely and effective manner;

•  the amount and timing of operating costs and capital expendituresrelating to expansion of our business, operations and infrastructure;

•  governmental regulation;

•  general economic conditions.

 

We Will Have to Expend Substantial Funds onAdvertising, Sales and Marketing in the Future**-**We have not incurred significantadvertising, sales and marketing expenses to date.  To increase awarenessfor our composite materials technology, we expect to spend significantly moreon advertising, sales and marketing in the future.  If our marketingstrategy is unsuccessful, we may not be able to recover these expenses or evengenerate any revenues.  We will be required to develop a marketing andsales campaign that will effectively demonstrate the advantages of our,services and products.  To date, our experience with respect to marketingour products and services is very limited.  We may also elect to enterinto agreements or relationships with third parties regarding the promotion ormarketing of our composite materials technology.  There can be no assurancethat we will be able to establish adequate sales and marketing capabilities,that we will be able to enter into marketing agreements or relationships withthird parties on financially acceptable terms, or that any third parties withwhom we enter into such arrangements will be successful in marketing andpromoting our composite materials technology, or other products and servicesoffered by us.

 

Our Future Revenues are Dependent on theAcceptance of the Products and Services that We Offer **-**Our future revenues and our ability togenerate profits in the future are substantially dependent upon the widespreadacceptance and use of our composite materials technology.  There can be noassurance that our composite materials technology will become widely acceptedor that a sufficiently broad base of new construction or infrastructure renewalwill use our composite materials technology.

 

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There May Be the Possibility of VolatileShare Prices**-**Thetrading price of our common shares may be subject to wide fluctuations. Tradingprices of the common shares may fluctuate in response to a number of factors,many of which are beyond our control. In addition, the stock market in generalhas experienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of such companies.Broad market and industry factors may adversely affect the market price of thecommon shares, regardless of our operating performance.

 

**Item 7. Financial Statements**

 

See the Consolidated Financial Statements andrelated Report of Independent Certified Public Accountants included herewith aspages F-1 through F-29.

 

**Item 8. Change in and Disagreement with Accountants on Accounting and FinancialDisclosure**

 

None

 

**Part III**

 

**Item 9. Directors, Executive Officers, Promoters and Control Persons**

 

The Directors and Executive Officers of theCompany during the fiscal year ended September 30, 2003 were as follows:

 

Dr. Gilbert A. Hegemier, Chairman of theBoard of Directors since June 1999.

 

**Gilbert A. Hegemier,Ph.D.**  Dr.Hegemier is one of the developers of the composite overlay technology and hasserved as the Company’s Chairman since June 1999.  Dr. Hegemier also served as President of CSINevada from December 1998 through June 1999.  Dr. Hegemier has served as a professor atthe University of California, San Diego since 1968, where he currently servesas a Professor of Structural Engineering and also serves as Co-Director of ThePowell Structural Systems Laboratory. Since 1980, Dr. Hegemier has also served as President and CEO ofTrans-Science Corporation where he directed research and development work inshock wave simulation programs and advanced material models for the Departmentof Defense in a wide range of technical areas.

 

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**Item 10. Executive Compensation**

 

The following table sets forth informationconcerning compensation of the **former**Chief Executive Officers of the Company and other Directors and ExecutiveOfficers who received total annual compensation in excess of $100,000 for thefiscal years ended September 30, 2003, 2002 and 2001: **Please refer to the Management Discussion regardingthe re-capitalization of consulting fees that were due to Dr. Gilbert Hegemier.**

 
| **Name**              |   | **Position**                                      |   | **Fiscal  Year** |   | **Salary  ($)** |   | **Consulting Fee  ($)** |
|-----------------------|--------|---------------------------------------------------|--------|------------------|--------|-----------------|--------|-------------------------|
| Dr.Gilbert A Hegemier |   | Chairman & Consultant                         |   | 2003             |   |            |   | 53,750(accrued)         |
|                  |   |                                              |   | 2003             |   |            |   | 198,000(re-cap)         |
|                  |   |                                              |   | 2002             |   |            |   | 296,413(re-cap)         |
|                  |   |                                              |   | 2001             |   |            |   | 199,000(re-cap)         |
|                  |   |                                              |   |             |   |            |   |                    |
| Dr. Michael Perlman   |   | Former CEO, President,  Director & Consultant |   | 2001             |   |            |   | 30,000(accrued)         |
|                  |   |                                              |   |             |   |            |   |                    |
| Mark Olson            |   | Former COO, President,  Director & Consultant |   | 2001             |   |            |   | 34,800                  |

 

**Item 11. Security Ownership of Certain Beneficial Owners and Management**

 

Currently, Dr. Gilbert A. Hegemier is thesole Director of the Company. He holds 3,584,242 shares of the Company’s CommonStock, which represents approximately 16% beneficial ownership of the Company.

 

**Item 12. Certain Relationships and Related Transactions**

 

**Transactions with Dr. Gilbert A. Hegemier andAffiliates**

 

Dr. Hegemier is a full-time professor andstaff member with the University of California, San Diego, Department ofEngineering, as well as Co-Director of The Powell Structural Systems Laboratory,which is the University’s testing laboratory for materials and technologiessimilar to the Company’s products.  Inthat position, he is responsible to the University and all entities dealingwith it to be open, fair and even handed in his research, testing and publicinformation.  He cannot providepreference to the Company or its clientele, even though he is the largestsingle stockholder and principal of the Company.

 

In January 1999, the Company acquiredcertain intangible assets from Trans-Science Corporation (TSC), a company withcommon stockholders through July 7, 2000. Also in January 1999, TSC sold, assigned and transferred all of itsrights, title and interest in the Earthquake Retrofit Design Software to theCompany.

 

On February 24, 2000 the Company issuedan unsecured promissory note to borrow up to $75,000 from Dr. Hegemier.  The note bears an interest rate of 7% perannum.  During the periodJuly 20,2000 to November 21, 2000, Dr. Hegemier advanced the Company$31,996, which was repaid.

 

On January 8, 2001 the Company enteredinto a promissory note with Dr. Hegemier in the amount of $159,439 with aninterest rate of 12% per annum.  As ofSeptember 30, 2003 and 2002, there was a principal balance of $0 and$13,856, respectively.

 

13

----

 

On April 20, 2001 the Company enteredinto a promissory note with Dr. Hegemier in the amount of $56,965 with aninterest rate of 12% per annum. As of September 30, 2003 and 2002, therewas a principal balance of $0 and $56,965 respectively.

 

On June 5, 2002 the Company entered intoa promissory note with Dr. Hegemier in the amount of $26,584 with an interestrate of 12% per annum. As of September 30, 2003 and 2002, there was aprincipal balance of $0 and $26,400 respectively.

** **

**Item 13. Exhibits and Reports on Form 8-K**

 

**(a)****                                  Exhibits**

 
| **Exhibit  Number** |   | **Description**                                          |
|---------------------|--------|----------------------------------------------------------|
|                |   |                                                     |
| 3.1                 |   | 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.  SD96-103)(2)      |
| 10.2                |   | License Agreement with UCSD (Case No.  SD96-040)(2)      |
| 10.3                |   | Share Exchange Agreement(3)                              |
| 10.4                |   | Share Exchange Agreement with and  Acquisition of TSC(4) |
| 10.5                |   | Acquisition of Penultimo, Inc.(5)                        |
| 10.6                |   | Global Strategic Alliance Agreement with  Prime (6) |
| 31                  |   | Sarbanes-Oxley Section 302  Certification           |
| 32                  |   | Sarbanes-Oxley Section 906  Certification           |

 

----

(1)                                  Incorporatedby reference to the referenced document filed as an exhibit to the Company’sRegistration Statement on Form 10SB12G/A, Commission File No. 000-24551, filedon October 20, 1998.

 

(2)                                  Incorporatedby reference to the referenced document filed as an exhibit to the Company’sAnnual Report on Form 10-KSB, Commission File No. 000-24551, filed onJanuary 13, 2000.

 

(3)                                  Incorporatedby reference to the referenced document filed as an exhibit to the Company’sCurrent Report on Form 8-K, Commission File No. 000-24551, filed onJuly 14, 2000 and August 31, 2000.

 

(4)                                  Incorporatedby reference to the referenced documents related to the Acquisition of TSC andfiled on Form 8-K, Commission File No. 000-24551, on June 26, 2000 andJuly 25, 2000.

 

(5)                                  Incorporatedby reference to the referenced document related to the Acquisition ofPenultimo, Inc. and filed on Form 8-K, Commission File No. 000-24551, on September 15,2000 and amended on September 18, 2000.

 

(6)                                  Incorporatedby reference to the referenced document filed as an exhibit to the Company’sAnnual Report on Form 10-KSB, Commission File No. 000-24551, filed onJanuary 13, 2001.

 

**(b).**                               **Reports on Form 8-K.**

 

None.

 

14

----

 

**Signatures**

 

In accordance with Section 13 or 15(d)of the Securities Exchange Act the Company has caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| Date: January 14, 2004 |                      |                          |
|-----------------------------|---------------------------|-------------------------------|
|                        |                      |                          |
|                        | Composite Solutions, Inc. |
|                        |                      |                          |
|                        |                      |                          |
|                        | By:                       | /s/ Gilbert A. Hegemier       |   |
|                        |                      | Gilbert A. Hegemier, Chairman |

 

 

Pursuant to the requirements of theSecurities Exchange Act, of 1934 this report has been signed below by thefollowing person on behalf of the Company and in the capacity and on the dateindicated.

 
| **Signature**           |   | **Capacity** |                  | **Date** |
|-------------------------|--------|--------------|-----------------------|----------|
|                    |   |         |                  |     |
| /s/ Gilbert A. Hegemier |   |         | Chairman of the Board |     | January 14, 2004 |
| Gilbert A. Hegemier     |   |         |                  |     |
|                         |        |              |                       |          |  |

 

15

----

 

 

PREDECESSOR AUDITOR

 

INDEPENDENT AUDITORS’ REPORT

 

The Board of Directors and Stockholders,Composite Solutions, Inc.f/k/a JS Business Works, Inc.(ADevelopment Stage Enterprise)San Diego, California

 

We have audited the accompanying consolidated balance sheets ofComposite Solutions, Inc., f/k/a JS Business Works, Inc., a development stageenterprise, as of September 30, 1999 and 1998 and the related consolidatedstatements of operations, stockholders’ equity and cash flows for the yearsthen ended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based upon our audits.

 

We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of CompositeSolutions, Inc. as of September 30, 1999 and 1998 and the results of theiroperations and cash flows for the years then ended, in conformity withgenerally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 7 to thefinancial statements, the Company has experienced losses since inception. TheCompany’s financial position and operating results raise substantial doubtabout its ability to continue as a going concern. Management’s plans in regardto these matters are also described in Note 7. The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

 
|                   | /s/ Durland & Company, CPAs, P.A. |
|------------------------|---------------------------------------|
| Palm Beach, Florida    |
| December 17, 1999 |

 

F-1

----

 

INDEPENDENTAUDITORS’ REPORT

 

To the Board of Directors and Stockholders

Composite Solutions, Inc. and Subsidiaries

 

We have audited the accompanyingconsolidated balance sheets of Composite Solutions, Inc. (a development stagecompany) and Subsidiaries as of****September 30, 2003 and2002, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for the yearsthen ended. These consolidated financial statements are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.  Theconsolidated financial statements of Composite Solutions, Inc. and Subsidiariesas of September 30, 1999 and 1998, and for the period October 20,1997 (inception) to September 30, 1999 were audited by other auditorswhose report dated December 17, 1999, expressed an unqualified opinion onthose statements.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion the financialstatements referred to in the first paragraph present fairly, in all materialrespects, the financial position of Composite Solutions, Inc. and Subsidiariesas of****September 30,2003 and 2002, and the results ofits operations and its cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern.As discussed in Note 14 to the consolidated financial statements, the Companyhas experienced recurring losses since inception and negative cash flows whichraise substantial doubt about its ability to continue as a going concern.Management’s plans in regard to these matters are also described in Note 14.The consolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

 

/s/ PETERSON &CO., LLP

 

San Diego, California

January 15, 2004

 

F-2

----

 

**COMPOSITE SOLUTIONS, INC. AND SUBSIDIARIES**

(A DevelopmentStage Company)

 

**FINANCIAL STATEMENTS**

 

September 30, 2003 and 2002

 

F-3

----

 

COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES

(A Development Stage Company)

Consolidated Balance Sheets

September 30, 2003 and2002

 
|                                                                                                                                                                       |   | **2003**   |       | **2002**   |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|------------|
| **ASSETS**                                                                                                                                                                 |   |       | ** ** |       | ** ** |
| **Current Assets**                                                                                                                                                         |   |       |       |       |       |
| Cash                                                                                                                                                                       |   | $          | 49,495     |       | $          | 50,521 |   |
| Costs in excess of billings                                                                                                                                                |   | 6,832      |       | —     |       |
| Prepaid expenses                                                                                                                                                           |   | 416        |       | 182        |       |
| Total current assets                                                                                                                                                       |   | 56,743     |       | 50,703     |       |
|                                                                                                                                                                       |   |       |       |       |       |
| **Property, plant and equipment, net**                                                                                                                                     |   | 649        |       | 3,637      |       |
|                                                                                                                                                                       |   |       |       |       |       |
| **Other assets**                                                                                                                                                           |   |       |       |       |       |
| Deposits                                                                                                                                                                   |   | 10,071     |       | 10,071     |       |
| Intangible assets, net                                                                                                                                                     |   | 427,684    |       | 469,554    |       |
| Goodwill                                                                                                                                                                   |   | 418,956    |       | 418,956    |       |
| Total assets                                                                                                                                                               |   | $          | 914,103    |       | $          | 952,921 |   |
|                                                                                                                                                                       |   |       |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                              |   |       | ** ** |       | ** ** |
| **Current liabilities**                                                                                                                                                    |   |       |       |       |       |
| Accounts payable                                                                                                                                                           |   | $          | 266,775    |       | $          | 373,635 |   |
| Billings in excess of costs                                                                                                                                                |   | 131,169    |       | 44,431     |       |
| Line of credit                                                                                                                                                             |   | 51,887     |       | 51,534     |       |
| Employee and director payable                                                                                                                                              |   | 62,415     |       | 500,435    |       |
| Related party payable                                                                                                                                                      |   | 132,205    |       | 85,677     |       |
| Note payable                                                                                                                                                               |   | —     |       | 80,500     |       |
| Related party notes payable                                                                                                                                                |   | 46,376     |       | 149,782    |       |
| Accrued expenses                                                                                                                                                           |   | 181,817    |       | 300,996    |       |
| Accrued losses on future contracts                                                                                                                                         |   | 3,013      |       | —     |       |
| Income taxes payable                                                                                                                                                       |   | 24,881     |       | 5,600      |       |
| Total Current liabilities                                                                                                                                                  |   | 900,538    |       | 1,592,590  |       |
|                                                                                                                                                                       |   |       |       |       |       |
| **Stockholders’ equity**                                                                                                                                              |   |       |       |       |       |
| 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; 21,670,555 and 18,292,044 shares issued and outstanding at  September 30, 2003 and 2002, respectively |   | 2,166      |       | 1,829      |       |
| Additional paid in capital                                                                                                                                                 |   | 5,120,957  |       | 3,570,324  |       |
| Accumulated deficit                                                                                                                                                        |   | (5,109,558 | )          | (4,211,822 | )          |
| Total stockholder’s equity                                                                                                                                            |   | 13,565     |       | (639,669   | )          |
| Total liabilities and stockholders’ equity                                                                                                                            |   | $          | 914,103    |       | $          | 952,921 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-4

----

 

COMPOSITE SOLUTION, INC. ANDSUBSIDIARIES

(A Development Stage Company)

Consolidated Statements ofOperation

For the Years EndedSeptember 30, 2003 and 2002

and For the PeriodOctober 20, 1997 (Inception) to September 30, 2003

 
|                                                                                                  |   | **2003**   |     | **2002**   |    | **October 20, 1997  (Inception)  to  September 30,  2003** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------|----------|------------|---------|----------------------------------------------------------------------|--------|
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Revenues**                                                                                          |   |       |     |       |    |                                                                 |   |
| Contract revenue                                                                                      |   | 365,082    |     | $          | 186,589 |                                                                 | $      | 633,766 |   |
| Materials                                                                                             |   | 60,939     |     | 40,850     |    | 101,789                                                              |   |
| Total revenue                                                                                         |   | 426,021    |     | 227,439    |    | 735,555                                                              |   |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Cost of sales**                                                                                     |   |       |     |       |    |                                                                 |   |
| Salaries and consulting fees                                                                          |   | 266,004    |     | 201,482    |    | 514,173                                                              |   |
| Consulting fees - related party                                                                       |   | 42,940     |     | 109,500    |    | 152,440                                                              |   |
| Materials                                                                                             |   | 74,242     |     | 28,246     |    | 102,488                                                              |   |
| Cost of sales                                                                                         |   | 383,186    |     | 339,228    |    | 769,101                                                              |   |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| Gross profit                                                                                          |   | 42,835     |     | (111,789   | )       | (33,546                                                              | )      |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Expenses**                                                                                          |   |       |     |       |    |                                                                 |   |
| Consulting fees                                                                                       |   | 299,915    |     | 72,601     |    | 640,939                                                              |   |
| Consulting fees - related party                                                                       |   | 264,650    |     | 227,302    |    | 1,027,431                                                            |   |
| Depreciation and amortization                                                                         |   | 50,803     |     | 54,803     |    | 378,130                                                              |   |
| General and administrative expenses                                                                   |   | 193,113    |     | 140,725    |    | 1,094,180                                                            |   |
| Organizational expenses                                                                               |   | —     |     | —     |    | 514                                                                  |   |
| Professional fees - other                                                                             |   | 65,643     |     | 91,823     |    | 410,549                                                              |   |
| Professional fees - related party                                                                     |   | 10,015     |     | —     |    | 10,015                                                               |   |
| Salaries                                                                                              |   | 69,680     |     | 322,892    |    | 1,294,709                                                            |   |
| Provision for future contract losses                                                                  |   | 3,013      |     | —     |    | 3,013                                                                |   |
| Impairment loss                                                                                       |   | —     |     | 92,476     |    | 237,248                                                              |   |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| Total expenses                                                                                        |   | 956,832    |     | 1,002,622  |    | 5,096,728                                                            |   |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| Loss from operations                                                                                  |   | (913,997   | )        | (1,114,411 | )       | (5,130,274                                                           | )      |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Other income (expense)**                                                                            |   |       |     |       |    |                                                                 |   |
| Interest income                                                                                       |   | —     |     | —     |    | 8,363                                                                |   |
| Interest income - forgiveness of debt                                                                 |   | —     |     | —     |    | 17,825                                                               |   |
| Other income                                                                                          |   | 85,258     |     | 10,800     |    | 96,058                                                               |   |
| Gain on forgiveness of debt                                                                           |   | —     |     | —     |    | 8,261                                                                |   |
| Other expenses                                                                                        |   | (14,538    | )        | (17,346    | )       | (22,319                                                              | )      |
| Loss on disposal of assets                                                                            |   | —     |     | —     |    | (190                                                                 | )      |
| Interest expense                                                                                      |   | (32,778    | )        | (42,785    | )       | (146,747                                                             | )      |
| Loss on forgiveness of debt                                                                           |   | —     |     | —     |    | (11,021                                                              | )      |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| Total other income (expense)                                                                          |   | 37,942     |     | (49,331    | )       | (49,770                                                              | )      |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| Loss before provision for income taxes                                                                |   | (876,055   | )        | (1,163,742 | )       | (5,180,044                                                           | )      |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| Provision for income taxes                                                                            |   | 21,681     |     | 3,000      |    | 34,809                                                               |   |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Loss from continuing operations**                                                                   |   | (897,736   | )        | (1,166,742 | )       | (5,214,853                                                           | )      |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Discontinued operations**                                                                           |   |       |     |       |    |                                                                 |   |
| Income from discontinued operations  (including gain on sale of subsidiary in the amount of $177,755) |   | —     |     | —     |    | 105,295                                                              |   |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Net loss**                                                                                          |   | $          | (897,736 | )          | $       | (1,166,742                                                           | )      | $ | (5,109,558 | ) |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| **Loss per common share, basic and diluted**                                                          |   |       |     |       |    |                                                                 |   |
| Net loss from continuing operations                                                                   |   | $          | (0.04    | )          | $       | (0.07                                                                | )      | $ | (0.32 | ) |
| Income from discontinued operations                                                                   |   | $          | —   |       | $       | —                                                               |   | $ | 0.01 |   |
| Net loss                                                                                              |   | $          | (0.04    | )          | $       | (0.07                                                                | )      | $ | (0.31 | ) |
|                                                                                                  |   |       |     |       |    |                                                                 |   |
| Weighted average number of shares, basic  and diluted                                                 |   | 20,172,538 |     | 17,549,692 |    | 16,498,332                                                           |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-5

----

 

COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES

(A Development Stage Company)

Consolidated Statements ofChanges in Stockholders’ Equity

 
|                                                    |   | **Common Stock** |       | **Additional** |       | **Deficit  Accumulated  During the  Development** |       | **Total  Stockholders’** |       |
|---------------------------------------------------------|--------|------------------|------------|----------------|------------|---------------------------------------------------|------------|-------------------------------|------------|
|                                                    |   | **Shares**       |       | **Amount**     |       | **Paid in Capital**                               |       | **Stage**                     |       | **Equity** |   |
|                                                    |   |             | ** ** |           | ** ** |                                              | ** ** |                          | ** ** |   | ** ** |
| **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                                            |       | —                        |       | 18,934 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Net loss                                                |   |             |       |           |       |                                              |       | (12,193                       | )          | (12,193 | ) |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| **Balance, September 30, 1998**                    |   | 21,196,410       |       | 2,120          |       | 16,215                                            |       | (12,193                       | )          | 6,142 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Common stock contributed                                |   | (7,896,410       | )          | (790           | )          | 790                                               |       | —                        |       | — |   |
| Pre-acquisition income                                  |   | —           |       | —         |       | —                                            |       | 47                            |       | 47 |   |
| Common stock issued in acquisition                      |   | 1,000,000        |       | 100            |       | 47                                                |       | (47                           | )          | 100 |   |
| Common stock issued for payment of note  payable        |   | 200,000          |       | 20             |       | 999,980                                           |       | —                        |       | 1,000,000 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Net loss                                                |   |             |       |           |       |                                              |       | (574,850                      | )          | (574,850 | ) |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| **Balance, September 30, 1999**                    |   | 14,500,000       |       | 1,450          |       | 1,017,032                                         |       | (587,043                      | )          | 431,439 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Common stock surrendered                                |   | (4,300,000       | )          | (430           | )          | 430                                               |       |                          |       | — |   |
| Common stock issued for cash                            |   | 668,333          |       | 67             |       | 759,933                                           |       |                          |       | 760,000 |   |
| Common stock issued in acquisitions                     |   | 1,103,371        |       | 110            |       | 808,668                                           |       |                          |       | 808,778 |   |
| Common stock issued for finder’s fee               |   | 100,000          |       | 10             |       | (10                                               | )          |                          |       | — |   |
| Common stock issued in exchange for  services           |   | 300,000          |       | 30             |       | 173,970                                           |       |                          |       | 174,000 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Net loss                                                |   |             |       |           |       |                                              |       | (1,090,715                    | )          | (1,090,715 | ) |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| **Balance, September 30, 2000**                    |   | 12,371,704       |       | 1,237          |       | 2,760,023                                         |       | (1,677,758                    | )          | 1,083,502 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Common stock surrendered                                |   | (150,000         | )          | (15            | )          | (93,735                                           | )          |                          |       | (93,750 | ) |
| Common stock issued for cash                            |   | 725,000          |       | 73             |       | 244,927                                           |       |                          |       | 245,000 |   |
| Common stock issued in exchange for  services           |   | 1,061,760        |       | 106            |       | 128,227                                           |       |                          |       | 128,333 |   |
| Common 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                                           |       |                          |       | 227,500 |   |
| Common stock issued for compensation                    |   | 1,183,149        |       | 118            |       | 206,391                                           |       |                          |       | 206,509 |   |
| Common stock issued in exchange for  services           |   | 514,034          |       | 51             |       | 91,568                                            |       |                          |       | 91,619 |   |
| Common stock issued for interest due                    |   | 47,350           |       | 5              |       | 5,677                                             |       |                          |       | 5,682 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Net 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                                           |       |                          |       | 365,300 |   |
| Common stock issued to settle accounts  payable         |   | 582,024          |       | 58             |       | 70,325                                            |       |                          |       | 70,383 |   |
| Common stock issued for services                        |   | 400,000          |       | 40             |       | 58,960                                            |       |                          |       | 59,000 |   |
| Common stock issued through exercise of  options        |   | 71,428           |       | 7              |       | 4,993                                             |       |                          |       | 5,000 |   |
| Common stock issued for interest due                    |   | 90,363           |       | 9              |       | 14,412                                            |       |                          |       | 14,421 |   |
| Common stock issued for compensation                    |   | 50,000           |       | 5              |       | 8,495                                             |       |                          |       | 8,500 |   |
| Common stock surrendered                                |   | (220,000         | )          | (22            | )          | 22                                                |       |                          |       | — |   |
| Recapitalization of accounts payable and  accrued wages |   |             |       |           |       | 1,028,366                                         |       |                          |       | 1,028,366 |   |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| Net loss                                                |   |             |       |           |       |                                              |       | (897,736                      | )          | (897,736 | ) |
|                                                    |   |             |       |           |       |                                              |       |                          |       |   |   |
| **Balance, September 30, 2003**                    |   | 21,670,555       |       | $              | 2,166      |                                              | $          | 5,120,957                     |       | $ | (5,109,558 | ) | $ | 13,565 |   |

 

The accompanying notes are an integralpart of these financial statements.

 

F-6

----

 

COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES

(A Development Stage Company)

Consolidated Statements of CashFlow

 
|                                                                         |   | **2003** |       | **2002** |   | **October 20, 1997  (Inception)  to  September 30,  2003** |   |
|------------------------------------------------------------------------------|--------|----------|------------|----------|--------|----------------------------------------------------------------------|--------|
|                                                                         |   |     |       |     |   |                                                                 |   |
| **Cash flows from operating activities**                                     |   |     |       |     |   |                                                                 |   |
| Net loss                                                                     |   | $        | (897,736   | )        | $      | (1,166,742                                                           | )      | $ | (5,109,558 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |     |       |     |   |                                                                 |   |
| Depreciation and amortization                                                |   | 50,803   |       | 54,803   |   | 374,103                                                              |   |
| Loss on disposal of assets                                                   |   | —   |       | —   |   | 190                                                                  |   |
| Common stock issued in exchange for  services                                |   | 59,000   |       | 91,619   |   | 361,180                                                              |   |
| Common stock issued for interest due                                         |   | 14,421   |       | 5,682    |   | 20,103                                                               |   |
| Common stock issued for compensation                                         |   | 8,500    |       | 206,509  |   | 309,516                                                              |   |
| Forgiveness of accounts payable                                              |   | —   |       | —   |   | (3,400                                                               | )      |
| Pre-acquisition income                                                       |   | —   |       | —   |   | 47                                                                   |   |
| Loss from discontinued operations                                            |   | —   |       | —   |   | 93,267                                                               |   |
| Gain on disposal of subsidiary                                               |   | —   |       | —   |   | (177,755                                                             | )      |
| Impairment loss                                                              |   | —   |       | 92,476   |   | 237,248                                                              |   |
| Provision for future contract losses                                         |   | 3,013    |       | —   |   | 3,013                                                                |   |
| (Increase) decrease in operating assets                                      |   |     |       |     |   |                                                                 |   |
| Accounts receivable                                                          |   | —   |       | —   |   | 17,493                                                               |   |
| Related party receivable                                                     |   | —   |       | —   |   | (22,021                                                              | )      |
| Costs in excess of billings                                                  |   | (6,832   | )          | —   |   | (6,832                                                               | )      |
| Inventory                                                                    |   | —   |       | —   |   | (2,055                                                               | )      |
| Prepaid expenses and other assets                                            |   | (234     | )          | 616      |   | (216                                                                 | )      |
| Employee advances                                                            |   | —   |       | 271      |   | —                                                               |   |
| Deposit                                                                      |   | —   |       | 3,122    |   | (10,375                                                              | )      |
| Increase (decrease) in operating  liabilities                                |   |     |       |     |   |                                                                 |   |
| Accounts payable                                                             |   | 206,234  |       | 116,858  |   | 1,268,874                                                            |   |
| Employee and director payable                                                |   | 255,393  |       | 294,557  |   | 255,393                                                              |   |
| Billings in excess of costs                                                  |   | 86,738   |       | 44,431   |   | 131,169                                                              |   |
| Related party payable                                                        |   | 46,528   |       | 72,372   |   | 46,528                                                               |   |
| Accrued expenses                                                             |   | (26,936  | )          | 129,092  |   | 263,787                                                              |   |
| Income taxes payable                                                         |   | 19,281   |       | 2,400    |   | 28,833                                                               |   |
| Net cash used in operating activities                                        |   | (181,827 | )          | (51,934  | )      | (1,921,468                                                           | )      |
|                                                                         |   |     |       |     |   |                                                                 |   |
| **Cash flows from investing activities**                                     |   |     |       |     |   |                                                                 |   |
| Purchase of property, plant and equipment                                    |   | —   |       | —   |   | (29,660                                                              | )      |
| Acquisition of intangible assets                                             |   | (5,946   | )          | (21,724  | )      | (631,804                                                             | )      |
| Loans made to related party                                                  |   | —   |       | —   |   | (10,000                                                              | )      |
| Repayments of loans to related party                                         |   | —   |       | —   |   | 10,000                                                               |   |
| Acquisition of subsidiary                                                    |   | —   |       | —   |   | (500,000                                                             | )      |
| Cash of discontinued operations                                              |   | —   |       | —   |   | (19,999                                                              | )      |
| Cash of acquired subsidiaries                                                |   | —   |       | —   |   | 17,261                                                               |   |
| Net cash used in investing activities                                        |   | (5,946   | )          | (21,724  | )      | (1,164,202                                                           | )      |
|                                                                         |   |     |       |     |   |                                                                 |   |
| **Cash flows from financing activities**                                     |   |     |       |     |   |                                                                 |   |
| Increase (decrease) in line of credit                                        |   | 353      |       | 138      |   | 1,153                                                                |   |
| Proceeds from notes payable                                                  |   | —   |       | —   |   | 1,064,500                                                            |   |
| Payment of notes payable                                                     |   | (80,500  | )          |     |   | (80,500                                                              | )      |
| Proceeds from note payable to related  parties                               |   | 2,016    |       | 37,900   |   | 284,181                                                              |   |
| Payments on note payable to related parties                                  |   | (100,422 | )          | (145,563 | )      | (247,669                                                             | )      |
| Proceeds from convertible debenture                                          |   | —   |       | —   |   | 500,000                                                              |   |
| Proceeds from issuance of common stock, net                                  |   | 365,300  |       | 227,500  |   | 1,613,500                                                            |   |
| Net cash provided by financing activities                                    |   | 186,747  |       | 119,975  |   | 3,135,165                                                            |   |
|                                                                         |   |     |       |     |   |                                                                 |   |
| Net increase (decrease) in cash                                              |   | (1,026   | )          | 46,317   |   | 49,495                                                               |   |
| Cash, beginning of period                                                    |   | 50,521   |       | 4,204    |   | —                                                               |   |
| Cash, end of period                                                          |   | $        | 49,495     |     | $      | 50,521                                                               |   | $ | 49,495 |   |
|                                                                         |   |     |       |     |   |                                                                 |   |
| **Supplementary disclosures**                                                |   |     |       |     |   |                                                                 |   |
| Interest paid                                                                |   | $        | 23,734     |     | $      | 180                                                                  |   | $ | 26,085 |   |
| Income taxes paid                                                            |   | $        | 2,400      |     | $      | 600                                                                  |   | $ | 10,728 |   |
|                                                                         |   |     |       |     |   |                                                                 |   |
| **Non-cash financing and investing activities**                              |   |     |       |     |   |                                                                 |   |
| Note payable paid through issuance of  common stock                          |   | $        | —     |     | $      | —                                                               |   | $ | 1,000,000 |   |
| Note payable paid through exercise of  option                                |   | $        | 5,000      |     |   |                                                                 | $      | 5,000 |   |
| Investment in subsidiary                                                     |   | $        | —     |     | $      | —                                                               |   | $ | 796,732 |   |
| Interest on note payable                                                     |   | $        | —     |     | $      | —                                                               |   | $ | 17,825 |   |
| Forgiveness of interest on note payable                                      |   | $        | —     |     | $      | —                                                               |   | $ | (17,825 | ) |
| Inter-company receivable released in sale  of subsidiary                     |   | $        | —     |     | $      | —                                                               |   | $ | 22,021 |   |
| Common stock acquired in sale of subsidiary                                  |   | $        | —     |     | $      | —                                                               |   | $ | (93,750 | ) |
| 8% debenture released in sale of subsidiary                                  |   | $        | —     |     | $      | —                                                               |   | $ | (500,000 | ) |
| Note payable released in sale of subsidiary                                  |   | $        | —     |     | $      | —                                                               |   | $ | (64,500 | ) |
| Accrued interest released in sale of  subsidiary                             |   | $        | —     |     | $      | —                                                               |   | $ | (28,867 | ) |
| Common stock issued to settle accounts  payable                              |   | $        | —     |     | $      | —                                                               |   | $ | 70,383 |   |
| Recapitalization of accounts payable and  accrued wages                      |   | $        | (1,028,366 | )        | $      | —                                                               |   | $ | (1,028,366 | ) |

 

The accompanying notes are anintegral part of these financial statements.

 

F-7

----

 

**COMPOSITESOLUTIONS, INC. AND SUBSIDIARIES**

(A Development Stage Company)

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**The Company**

 

Composite Solutions, Inc. (the “Company”),was incorporated in the state of Florida on October 20, 1997.  The Company has two wholly ownedsubsidiaries: Composite Solutions, Inc., incorporated in the state of Nevada onDecember 8, 1998 and Trans-Science Corporation, incorporated in the stateof California on September 15, 1980. A third wholly owned subsidiary, Penultimo, Inc. dba AnchorReinforcements, incorporated in the state of California on January 13,1992, was sold on March 31, 2001.  Composite Solutions, Inc. and subsidiaries were organized to develop,manufacture and market high technology products and processes in key areas ofexisting and new construction.

 

The Company is in the development stage andits efforts through September 30,2003 have been principally devoted to raising additional capital andrecruiting potential key personnel.  Thereis no assurance that any benefit will result from such activities.  The Company will continue to incur expensesand losses as it pursues its development efforts.

 

**Basis of Presentation**

 

The consolidated financial statements includethe accounts of the Company and its wholly owned subsidiaries.  All significant inter-company transactionshave been eliminated in consolidation.

 

**Cashand Cash Equivalents**

 

For purposes of the statements of cash flows,the Company considers cash instruments with original maturities of less thanthree months to be cash equivalents.

 

**Start-up Costs**

 

Costs of start-up activities, includingorganization costs, are expensed as incurred, in accordance with Statement ofPosition (SOP) 98-5.

 

**Advertising**

 

Advertising costs are charged to expense asincurred.

 

F-8

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**Property,Plant and Equipment**

 

Property, plant and equipment are recorded atcost less depreciation. Depreciation is accounted for on the straight-line andaccelerated methods based on the estimated useful lives of the related assets.** **Betterments and large renewals,which extend the life of an asset, are capitalized whereas, repairs andmaintenance, which do not increase the useful lives of property and equipmentare charged to operations as incurred.

 

**IntangibleAssets**

 

Other assets include intangibles such aslicensed technology, computer software and goodwill.   In June 2001, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 142, *Goodwill andOther Intangible Assets. *SFASNo. 142 establishes new guidelines for accounting for goodwill and otherintangible assets.  The Companyimplemented the provisions of SFAS No. 142 on October 1, 2001.  Since adoption, existing goodwill andcertain intangibles with indefinite useful lives are no longer amortized butinstead are assessed for impairment at least annually.  Other intangible assets are recorded athistorical cost less amortization on the straight line method based on estimateduseful lives.  Periods of amortizationare evaluated continually to determine whether later events and circumstanceswarrant revised estimated useful lives.

 

**Impairmentof Long-lived Assets**

 

Long-livedassets and intangible assets subject to amortization are reviewed forimpairment in accordance with SFAS No. 121, *Impairmentof Long-Lived Assets and Long-Lived Assets to Be Disposed Of.  *In accordance with SFAS No. 121,an impairment loss is recognized whenever events or changes in circumstancesindicate that the carrying amount of the asset may not be recovered, based uponan estimate of future cash flows.  Animpairment loss is then recognized whenever the carrying amount of the assetexceeds its fair value.  After animpairment loss is recognized, the adjusted carrying amount of the asset becomesits new basis.

 

F-9

----

 

**RevenueRecognition**

 

Revenues derived from contracts are accountedfor on the percentage-of-completion method of accounting.  Revenue is recognized based on a ratio ofthe actual cost of work performed to a current estimate of the total cost tocomplete a contract.

 

Expected profits realized on contracts arebased on the difference between estimates of total contract revenues and costsof completion.  These estimates arereviewed and revised periodically throughout the contract term, and adjustmentsto profits resulting from such revisions are recorded in the accounting periodin which the revisions are made. Profits are recognized as the contract phase of the work iscompleted.  Losses on contracts arerecorded in full as they are identified.

 

Revenue from the sale of materials isrecognized when shipped.

 

**Income Taxes**

 

The Company accounts for income taxes under SFAS No.109, “Accounting for Income Taxes.” This statement requires an asset andliability approach to account for income taxes.  The Company provides deferred income taxes for temporarydifferences that will result in taxable or deductible amounts in future yearsbased on the reporting of certain costs in different periods for financial andincome tax purposes.

 

**Useof Estimates**

 

The presentation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenues and expenses duringthe periods presented.  Actual resultsmay differ significantly from those estimates.

 

F-10

----

 

**Fair Values ofFinancial Instruments**

 

Statement of Financial Accounting StandardsNo. 107, *Disclosures about Fair Value ofFinancial Instruments,*requires disclosure of fair value informationabout financial instruments, whether or not recognized in the balancesheet.  In cases where quoted marketprices are not available, fair values are based on estimates using presentvalue or other valuation techniques. Those techniques are significantly affected by the assumptions used,including the discount rate and estimates of future cash flows.  In that regard, the derived fair valueestimates cannot be substantiated by comparison to independent markets and, inmany cases, could not be realized in immediate settlement of the instruments.Statement No. 107 excludes certain financial instruments and all nonfinancialinstruments from its disclosure requirements.

 

The following methods and assumptions wereused to estimate the fair value of each class of financial instrument:

 

*Cash and cashequivalents*: The carrying amounts reported in thebalance sheet for cash and cash equivalents approximates their fair value.

 

*Accounts receivable and accounts payable*:  The carrying amounts reported in the balancesheet for accounts receivable and accounts payable approximates the fair value,of those assets and liabilities.

 

*Short-term and long-term obligations*:  The carrying amounts of the line of creditand short-term notes payable approximates the fair value of those obligations.

 

*Accrued interest receivable and accruedexpenses:* The carrying amounts of accrued interest andaccrued expenses approximate their fair value.

 

**Stock-BasedCompensation**

 

In accordance with the provisions of SFAS 123, theCompany follows the intrinsic value based method of accounting as prescribed byAPB 25, *Accountingfor Stock Issued to Employees*, for its stock-based compensation.

 

F-11

----

 

**NewAccounting Pronouncements**

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullified Emerging Issues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146requires that a liability for a cost associated with an exit or disposalactivity to be recognized when the liability is incurred. The provisions ofthis statement are effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged. The adoptionof SFAS 146 did not have a significant impact to the Company’s consolidatedfinancial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires thatupon issuance of a guarantee, the guarantor must recognize a liability for thefair value of the obligation it assumes under that guarantee. FIN 45 alsorequires additional disclosures by a guarantor in its interim and annualfinancial statements about the obligations associated with guarantees issued.The disclosure requirements are effective for financial statements of interimor annual periods ending after December 15, 2002. The recognition andmeasurement provisions are effective on a prospective basis to guaranteesissued or modified after December 31, 2002. The adoption of FIN 45 did nothave a material impact on the Company’s consolidated financial position andresults of operations.

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN46”), “Consolidation of Variable Interest Entities.” FIN 46 provides guidanceon the identification of entities for which control is achieved through meansother than through voting rights, variable interest entities, and how todetermine when and which business enterprises should consolidate variableinterest entities. This interpretation applies immediately to variable interestentities created after January 31, 2003. It applies in the first fiscalyear or interim period beginning after June 15, 2003, to variable interestentities in which an enterprise holds a variable interest that it acquiredbefore February 1, 2003. The adoption of FIN 46 did not have a materialimpact on the Company’s consolidated financial position and results of operations.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.” The statementamends and clarifies accounting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder SFAS 133. This Statement is effective for contracts entered

 

F-12

----

 

into or modified after June 30, 2003. The adoption of SFAS No. 149did not have an impact on the Company’s consolidated financial position andresults of operations.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for certainFinancial Instruments with Characteristics of Both Liabilities and Equity”.SFAS No. 150 establishes standards for classification and measurement in thestatement of financial position of certain financial instruments withcharacteristics of both liabilities and equity. It requires classification of afinancial instrument that is within its scope as a liability (or an asset insome circumstances). SFAS No. 150 is effective for financial instrumentsentered into or modified after May 31, 2003 and, otherwise, is effectiveat the beginning of the first interim period beginning after July 15,2003. The adoption of SFAS No. 150 did not have a material impact on theCompany’s consolidated financial position and results of operations.

 

**Reclassifications**

 

Certain prior year amounts have beenreclassified to conform to the September 30,2003 presentation.  These changeshad no impact on previously reported consolidated results of operations orstockholders’ equity.

 

F-13

----

 

**NOTE 2 – ACQUISITIONS**

 

On June 23, 2000 the Company enteredinto a Share Exchange Agreement with Trans-Science Corporation, a Californiacorporation and a company with a common stockholder.  On July 7, 2000 the Company completed its acquisition.  The acquisition, recorded under the purchasemethod of accounting, included the purchase of all of the outstanding shares ofcommon stock of Trans-Science Corporation in exchange for 953,371 shares of theCompany’s common stock at $0.75 per share which resulted in a purchase price of$715,028. The liabilities assumed exceeded the historical cost of the assetsacquired and the total purchase price was recorded as goodwill.

 

On August 16, 2000 the Company enteredinto a Share Exchange Agreement with Penultimo, Inc. dba AnchorReinforcements.  On August 31, 2000the Company completed the acquisition. The acquisition, recorded under the purchase method of accounting,included the purchase of all of the outstanding shares of common stock ofPenultimo, Inc. in exchange for 150,000 shares of the Company’s common stock at$0.625 per share plus $500,000 in cash which resulted in a total purchase priceof $593,750.  A portion of the purchaseprice was allocated to assets acquired and liabilities assumed based onestimated fair market value at the date of acquisition while the balance of  $291,050 was recorded as goodwill.

 

**NOTE 3 – DISCONTINUED OPERATIONS**

 

OnMarch 31, 2001 the Company entered into an Agreement to transfer all ofthe outstanding shares of Penultimo, Inc. to an individual in exchange for150,000 shares of the Company’s common stock originally valued at $93,750, therelease of certain inter-company receivables in the amount of $22,021, an 8%convertible debenture note in the amount of $500,000 plus accrued interest of$28,199, and notes payable in the amount of $64,500, plus accrued interest of$4,441.

 

F-14

----

 

**NOTE 4 – PROPERTY, PLANT AND EQUIPMENT**

 

Property, plant and equipment consist of thefollowing at September 30, 2003and 2002:

 
|                            |   | **2003** |   | **2002** |   |
|---------------------------------|--------|----------|--------|----------|--------|
|                            |   |     |   |     |   |
| Leasehold  improvements         |   | $        | 1,407  |     | $      | 1,407 |   |
| Office  furniture and equipment |   | 181,311  |   | 181,311  |   |
| Software                        |   | 13,983   |   | 13,983   |   |
|                            |   | 196,701  |   | 196,701  |   |
| Accumulated  depreciation       |   | (196,052 | )      | (193,064 | )      |
|                            |   |     |   |     |   |
| Property and  equipment, net    |   | $        | 649    |     | $      | 3,637 |   |

 

Depreciation expense for the years ended September 30, 2003 and 2002 was $2,987 and $7,918, respectively.

 

**NOTE5 - INTANGIBLE ASSETS**

 

**Goodwill**

 

On July 7, 2000 the Company acquired100% of the outstanding shares of common stock of Trans-Science Corporation, acompany with common shareholders through July 7, 2000.  The Company recorded goodwill in the amountof $751,636 representing the excess of the cost  to acquire Trans-Science Corporation over the historical cost ofthe net assets acquired.  The goodwillwas being amortized over a period of five years.  During the year ended September 30, 2001 the Companyrecognized a $144,772 impairment loss because circumstances indicated the carrying amount of this goodwill may not berecovered, based upon an estimate of future cash flows.  At September 30, 2003 and 2002 goodwillhad accumulated amortization of $187,908. Amortization expense for the period October 20, 1997 (inception) toSeptember 30, 2003 was $187,908. On October 1, 2001, the Company adopted SFAS No. 142 and sinceadoption, goodwill is no longer amortized. At September 30, 2003 and 2002 this goodwill has a net value of $418,956.

 

**Other IntangibleAssets**

 

On April 20, 1999 the Company enteredinto a license agreement with the Regents of the University of California SanDiego (UCSD) for a license under patent rights to make, use, sell, offer forsale, import licensed products, practice licensed methods, and to use certaintechnology. The agreement terminates on the later of the expiration date of thelongest-lived patent rights or the twenty-first anniversary of effectivedate.  A license fee of $40,000 was paidupon execution****of the agreement.  TheCompany also paid for one half of all past and

 

F-15

----

 

future patent costs.  The Company does not expect any future cashflow to be generated and has canceled this license agreement.  At September 30, 2002, patent rightswere impaired and a loss was recognized in the amount of $78,497.  The license was being amortized over 17years and at September 30, 2003and 2002 this license has a net value of $0.

 

On August 4, 1999 the Company enteredinto a second license agreement with UCSD for a license under patent rights tomake, use, sell, offer for sale, import licensed products, to practice licensedmethods, and to use certain technology. The agreement terminates on the laterof the expiration date of the longest-lived patent rights or the twenty-firstanniversary of the effective date. A license fee in the amount of $5,000 waspaid upon execution of the agreement. In addition, the Company is obligated to pay for one-half of all pastand future patent costs.  Under theterms of the agreement, the Company must pay to the licensor a royalty of 1.5%on net sales of the licensed products or a minimum royalty up to $50,000.  The license expires in April 2019 andis being amortized over 20 years.  At September 30, 2003 and 2002 thislicense has a net value of $91,684and $91,554, respectively.  Amortization expense for the years ended September 30, 2003 and 2002 andfor the period October 20, 1997 (inception) to September 30, 2003 was$5,816, $4,885, and $21,829, respectively.

 

At September 30,2003 and 2002 patent and royalty costs payable on the license agreementswas $82,090 and $110,108, respectively

 

In January 1999 the Company acquiredcertain assets from Trans-Science Corporation. Fire test data concerningoverlay systems in the form of technical reports prepared by an independentlaboratory in New York performed prior to the Company’s inception was purchasedfor cash in the amount of $13,979 from Trans-Science Corporation at itscost.  The Company does not expect anyfuture cash flow to be generated from this intangible asset.  At September 30, 2002 these assets wereimpaired and a loss was recognized in the amount of $13,979.

 

F-16

----

 

In January 1999 Trans-ScienceCorporation sold, assigned and transferred all of its rights, title andinterest in the Earthquake Retrofit Design Software to the Company for cash inthe amount of $330,000.   This purchaseprice is an amount significantly less than the cost incurred by Trans-ScienceCorporation.  In addition, during theyear ended September 30, 1999, the Company paid Trans-Science Corporation$90,000 for upgrade services on this software. The Software was placed in service during the year endedSeptember 30, 2002 and is being amortized over a period of ten years.  Amortization expense for the years ended September 30, 2003 and 2002 was$42,000 and $42,000, respectively.

 

At September 30,2003 and 2002 the gross carrying amount and accumulated amortization foracquired intangible assets is as follows:

 
| **September 30,  2003**         |   | **Gross  Carrying Amount** |    | **Accumulated  Amortization** |   |
|--------------------------------------|--------|----------------------------|---------|-------------------------------|--------|
|                                 |   |                       |    |                          |   |
| License  agreements                  |   | $                          | 110,828 |                          | $      | 19,144 |   |
| Earthquake  retrofit design software |   | 420,000                    |    | 84,000                        |   |
|                                 |   | $                          | 530,828 |                          | $      | 103,144 |   |

 
| **September 30,  2002**         |   | **Gross  Carrying Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|--------------------------------------|--------|----------------------------|------------|-------------------------------|------------|
|                                 |   |                       |       |                          |       |
| License  agreements                  |   | $                          | 104,882    |                          | $          | 13,328 |   |
| Earthquake  retrofit design software |   | 420,000                    |       | 42,000                        |       |
|                                 |   | $                          | 524,882    |                          | $          | 55,328 |   |

 

Amortization expense was $47,816 and $46,885 for the years ended September 30,2003 and 2002, respectively.  Theaggregate amortization expense over the next five succeeding years is estimatedas follows:

 
| **Year  Ending  September 30,** |   |   |   |
|--------------------------------------|--------|--------|--------|
|                                 |   |   |   |
| 2004                                 |   | $      | 47,660 |   |
| 2005                                 |   | 47,660 |   |
| 2006                                 |   | 47,660 |   |
| 2007                                 |   | 47,660 |   |
| 2008                                 |   | 47,660 |   |
|                                      |        |        |        |  |

 

F-17

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**NOTE6 - STOCKHOLDERS’ EQUITY**

 

**Preferred Stock**

 

The Company has authorized the issuance often million (10,000,000) shares of preferred stock, having one hundredth of acent ($.0001) par value per share.  TheBoard of Directors of the Company has discretion to determine the rights,preferences and privileges of this preferred stock.  There are no shares of preferred stock issued and outstanding at September 30, 2003 and 2002,respectively.

 

**Common Stock**

 

The Company has authorized fifty million(50,000,000) shares of common stock, having one hundredth of a cent ($0.0001)par value per share.

 

On October 21, 1997 the Company issued1,601,000 shares to its President for the value of services rendered inconnection with the organization of the Company and in April 1998 theCompany issued 49,500 shares to its then Executive Vice President for the netvalue of services rendered valued at $(599). Also in April 1998 the Company issued 646,000 shares of commonstock for cash, net of offering costs in the amount of $18,934.  On June 25, 1999 the Company completeda 9.229876 shares for 1 share forward split. Retroactive effect to this split has been given in the accompanyingfinancial statements.

 

On June 25, 1999 the Company received7,896,410 shares contributed back to the Company. On June 30, 1999 theCompany issued 1,000,000 shares to acquire 100% of the issued and outstandingcommon stock of Composite Solutions, Inc., a Nevada corporation.  On June 30, 1999 the Company issued200,000 shares in settlement of a note payable with a principal balance of$1,000,000.

 

In December 1999, a trustee stockholdersurrendered 4,300,000 shares, which have been canceled.  During the period December 1999 toJune 2000 the Company issued 668,333 shares of common stock under aprivate placement in exchange for $760,000 in cash, net of offering costs.  On July 7, 2000 the Company issued953,371 shares of common stock valued at $715,028 in exchange for 100% of theoutstanding shares of common stock of Trans-Science Corporation.  On August 31, 2000 the Company issued150,000 shares of common stock valued at $93,750 plus $500,000 in cash inexchange for 100% of the outstanding shares of common stock of Penultimo, Inc.dba Anchor Reinforcements.  OnSeptember 15, 2000 the Company issued 100,000 shares of common stock asfinder’s fees.  On September 28,2000 the Company issued 300,000 shares of common stock valued at quoted market$174,000 in exchange for services.

 

During the period October 2000 throughDecember 2000 the Company issued 725,000 shares

 

F-18

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of common stock valued at $245,000 in privateplacement.  On March 31, 2001, astockholder surrendered 150,000 shares of common stock valued at $93,750.  Also on March 31, 2001, the Companyissued 200,000 shares of common stock as finder’s fees.  During the year ended September 30,2001, the Company issued 1,061,760 shares of common stock valued at $128,333 inexchange for services.

 

During year ended September 30, 2002,the Company issued 514,034 shares of common stock valued at $91,619 in exchangefor services, 1,183,149 shares of common stock for compensation valued at$206,509, 47,350 shares of common stock valued at $5,682 for interest due, and2,339,047 shares of common stock for cash and subscriptions paid in the amountof $227,500.

 

During the year ended September 30, 2003, the Company issued 582,024 shares ofcommon stock valued at $70,383 in exchange for accounts payable, 400,000 sharesof common stock valued at $59,000 for services, 90,363 shares of common stockvalued at $14,421 for accrued interest, 50,000 shares of common stock valued at$8,500 as compensation, 71,428 shares of common stock through the exercise ofoptions in the amount of $5,000 exchanged for the repayment of a loan, and2,404,696 shares of common stock for cash, net of offering costs in the amountof $365,300.  The Company received220,000 shares of common stock contributed back to the Company, which have beencanceled.  There are 21,670,555 and18,292,044 shares of common stock issued and outstanding at September 30,2003 and 2002, respectively.

 

The Company recapitalized accounts payableand accrued wages in the amount of $1,028,366.

 

F-19

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**StockIncentive Plan**

 

On December 1, 2000 theCompany and subsidiaries’ Board of Directors adopted the 2000 Stock IncentivePlan pursuant to which incentive stock options or nonstatutory stock options topurchase up to 1,000,000 shares of common stock may be granted to employees,directors and consultants.  Stockoptions may be exercisable up to ten years from the grant date.  Stock options vest over service periods thatrange from zero to five years.

 

A summary of stock option activity for allplans follows:

 
| **Outstanding  Options**          |   | **Shares  Available for  Grant** |   | **Options  Outstanding** |   | **Exercise Price** |   |
|-----------------------------------|--------|----------------------------------|--------|--------------------------|--------|--------------------|--------|
| Authorized                        |   | 1,000,000                        |   |                     |   |               |   |
| Granted                           |   | (391,428                         | )      | 391,428                  |   | $0.40-$0.07        |   |
| Exercised                         |   | 71,428                           |   | (71,428                  | )      | $0.07              |   |
| Canceled                          |   | 120,000                          |   | (120,000                 | )      | $0.10              |   |
| Balance,  September 30, 2003 |   | 800,000                          |   | 200,000                  |   | $0.10              |   |

 

At September 30,2003 there were 200,000 exercisable options.

 

The Company accounts for stock-based compensation using the intrinsicvalue method prescribed by Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” under which no compensation costfor stock options is recognized for the stock options awards granted at orabove fair market value.  For the yearended September 30, 2003, the Company did not recognize any compensationexpense.

 

Had compensation expense for the Company’s 2000 Stock Incentive Plan been determined based upon fair values at grantdates for awards under the plan in accordance with SFAS No. 123, “Accountingfor Stock-Based Compensation,” the Company’s net loss and loss per share wouldhave been increased to the proforma amounts indicated below.  Additional option awards are anticipated infuture years.

 
|            |   | **2003** |     | **2002** |       |
|-----------------|--------|----------|----------|----------|------------|
| Net loss        |   |     |     |     |       |
| As reported     |   | $        | (897,736 | )        | $          | (1,166,742 | ) |
| Proforma        |   | (901,004 | )        | $        | (1,173,081 | ) |
|            |   |     |     |     |       |
| Loss per  share |   |     |     |     |       |
| As reported     |   | $        | (0.04    | )        | $          | (0.07 | ) |
| Proforma        |   | $        | (0.04    | )        | $          | (0.07 | ) |

 

F-20

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The fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted-average assumptions and results:

 
|                                               |   | **2003** |   | **2002** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|
|                                               |   |     |   |     |   |
| Dividend  yield                                    |   | 0.00     | %      | 0.,00    | %      |
| Risk free  interest rate                           |   | 2.99     | %      | 2.99     | %      |
| Expected  life                                     |   | 5.92     | Yrs    | 5.92     | Yrs    |
| Expected  volatility                               |   | 16.21    | %      | 16.21    | %      |
| Estimated  fair value of options granted per share |   | $0.0354  |   | $0.0354  |   |

 

**NOTE 7 – LINE OF CREDIT**

 

The Company has a business secured open lineof credit with a bank in the amount of $50,000. The line of credit bearsinterest at the prime rate, as published in the *Wall Street Journal*, plus2.5% (7.5% at September 30, 2003). At September 30, 2003 and2002 balances due were $51,887and $51,534, respectively.

 

F-21

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**NOTE8 - COMMITMENTS**

 

The Company and subsidiary lease office spaceunder a non-cancelable operating lease. At September 30, 2003,there are future minimum payments under the lease of $37,491 which are duethrough June 30, 2004.

 

Rental expense was $48,505 and $44,352for the years ended September 30,2003 and 2002,respectively and was $298,988 for the period October 20, 1997 (inception)to September 30, 2003.

 

As noted in Note 5 - Other Intangible Assets,the Company entered into a second license agreement with UCSD on August 4,1999 under patent rights to make, use, sell, offer for sale, import licensedproducts, to practice licensed methods, and to use certain technology.  Under the terms of the agreement, theCompany must pay to the licensor a royalty of 1.5% on net sales of the licensedproducts or a minimum royalty.  For theyears ending September 30, 2003and 2002****and for the period October 20, 1997 (inception) toSeptember 30, 2003 the company paid minimum royalty associated with thislicense of $30,000, $20,000, and $60,000, respectively.

 

Future minimum royalty payments are asfollows:

 
| **Year  Ending  December 31,** |   |    |   |
|-------------------------------------|--------|---------|--------|
|                                |   |    |   |
|                                | 2003   |    | $      | 40,000 |   |
|                                | 2004   |    | 50,000 |   |
|                                | 2005   |    | 50,000 |   |
|                                | 2006   |    | 50,000 |   |
| Total  thereafter through 2018      |   | 600,000 |   |
|                                     |        |         |        |  |  |

 

F-22

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**NOTE9 – EARNINGS PER SHARE**

 

The computations of basic and dilutedearnings per share from continuing operations for the years ended September 30, 2003 and 2002 andthe period October 20, 1997 (inception) to September 30, 2003 were as follows:

 
|                                       |   | **Year Ended  September 30,** |     | **October 20, 1997  (Inception) to  September 30,  2003** |   |
|--------------------------------------------|--------|------------------------------------|----------|---------------------------------------------------------------------|--------|
| **2003**                                   |   | **2002**                           |
| **Loss per common share, basic**           |   |                               |     |                                                                |   |   |   |
|                                       |   |                               |     |                                                                |   |   |   |
| Numerator                                  |   |                               |     |                                                                |   |   |   |
| Net loss  from continuing operations       |   | $                                  | (897,736 | )                                                                   | $      | (1,166,742 | ) | $ | (5,214,853 | ) |
| (Loss)  income from discontinued operation |   | —                             |     | —                                                              |   | (72,460 | ) |
| Gain on sale  of subsidiary                |   | —                             |     | —                                                              |   | 177,755 |   |
| Net loss                                   |   | $                                  | (897,736 | )                                                                   | $      | (1,166,742 | ) | $ | (5,109,558 | ) |
|                                       |   |                               |     |                                                                |   |   |   |
| Denominator                                |   |                               |     |                                                                |   |   |   |
| Weighted-average  shares                   |   | 20,172,538                         |     | 17,549,692                                                          |   | 16,498,332 |   |

 

For theyears ended September 30, 2003 and 2002, and for the periodOctober 20, 1997 (inception) to September 30, 2003 theweighted-average shares of common stock issuable under stock options of264,579, 118,982, and 72,335, respectively were not included in the calculationof fully diluted earnings per share because their effects would have beenantidilutive. Therefore, diluted earnings per share were the same as basicearnings per share at September 30,2003 and 2002, and for the period October 20, 1997 (inception) to September 30, 2003.

 

F-23

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**NOTE10 - INCOME TAXES**

 

At September 30, 2003, the Company has anet operating loss carryforwards for tax purpose of approximately $2,200,000which expires through the year 2023. The Internal Revenue Code containsprovisions which may limit the loss carryforward available if significantchanges in stockholder ownership of the Company occur.

 

The components of the provision for incometaxes for the years ended September 30,2003 and 2002 are as follows:

 
|                        |   | **2003** |   | **2002** |   |
|-----------------------------|--------|----------|--------|----------|--------|
| Current                     |   |     |   |     |   |
| Federal                     |   | $        | 12,921 |     | $      | — |   |
| State                       |   | 11,960   |   | 3,000    |   |
|                        |   | 24,881   |   | 3,000    |   |
| Deferred                    |   |     |   |     |   |
| Federal                     |   | —   |   | —   |   |
| State                       |   | —   |   | —   |   |
|                        |   | —   |   | —   |   |
| Provision  for income taxes |   | $        | 24,881 |     | $      | 3,000 |   |

 

The components of the net deferred tax assetswere as follows:

 
|                                         |   | **September 30,** |      |
|----------------------------------------------|--------|------------------------|-----------|
|                                         |   | **2003**               |      | **2002** |   |
| Deferred tax  assets                         |   |                   |      |   |   |
| Start-up  costs                              |   | $                      | 1,248,971 |   | $ | 1,248,971 |   |
| Organization  costs                          |   | 398                    |      | 398 |   |
| Syndication  costs                           |   | 1,168                  |      | 1,168 |   |
| Penalties                                    |   | 6,257                  |      | 29 |   |
| Impairment  loss                             |   | 62,020                 |      | 62,020 |   |
| Accrued  vacation/other accruals             |   | 2,742                  |      | 4,845 |   |
| Depreciation/amortization                    |   | —                 |      | 9,691 |   |
| Net  operating loss                          |   | 927,251                |      | 538,379 |   |
|                                         |   | 2,248,807              |      | 1,865,501 |   |
| Deferred tax  liabilities State income taxes |   | 152,734                |      | 126,188 |   |
|                                         |   | 2,096,073              |      | 1,739,313 |   |
| Less  valuation allowance                    |   | (2,096,073             | )         | (1,739,313 | ) |
| Net deferred  tax assets                     |   | $                      | —    |   | $ | — |   |

 

F-24

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**NOTE11 - RELATED PARTY TRANSACTIONS**

 

**IntangibleAssets**

 

In January 1999 the Company acquiredcertain intangible assets from Trans-Science Corporation, a company with commonstockholders.  Also inJanuary 1999, Trans-Science Corporation sold, assigned and transferred allof its rights, title and interest in the Earthquake Retrofit Design Software tothe Company for $330,000 in cash, an amount significantly less than the costincurred by Trans-Science Corporation. In addition, during the period ended September 30, 1999, theCompany paid Trans-Science Corporation $90,000 for upgrade services on thissoftware.

 

**Stock-BasedCompensation**

 

During the years ended September 30, 2003 and 2002, the Company issued 50,000 and1,183,149 shares of common stock with value of $8,500 and $206,509,respectively, to certain employees in exchange for compensation.

 

**Notes Payable**

 

On January 8, 2001, the Company enteredinto a promissory note with an officer in the amount of $159,439 and again withthe same officer on April 20, 2001 and June 5, 2002 in the amount of$56,965 and 26,584, respectively. Terms required principal to be advanced invarious amounts, accrue interest at 12%, and the principal and interest were tobe paid nine months from the date of latest advance. As of September 30, 2003 and 2002,there was a principal balance outstanding in the amount of $0 and $97,221 and accrued interest in theamount of $26,053 and $28,032,respectively.

 

On April 23, 2001, the Company issued apromissory note payable to an employee in the amount of $41,945. The principalis to be advanced to the Company in various amounts.  As of September 30,2003 and 2002, there was a principal balance outstanding in the amountof $33,376 and $33,376 and accrued interest in theamount of $10,033 and $4,442,respectively.  Principal and interest at12% are to be paid nine months from the date of the latest advance.

 

On November 20, 2001, the Companyentered into a Secured Promissory Note with Marathon Development Company, Inc.(Marathon) in the amount of $105,000, including $5,000 of interest at a rate of10% per annum.  Marathon was anon-affiliated entity at that date.  Thenote is secured by the Company’s assets and is personally guaranteed by adirector of the Company.  The note wasdue on February 20, 2002.  Inaddition, if not paid when due, the Company is to issue 10,000 shares of commonstock per month to Marathon, until the note is paid.  Accordingly, the Company issued 97,350 shares of common stockvalued at $14,182. At September 30,2003 and 2002 there was abalance due in the amount of $0and $80,500, respectively andaccrued interest in the amount of $0and $5,502, respectively

 

F-25

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On January 17, 2002, the Company issued a promissorynote payable to a stockholder in the amount of $10,000, plus interest at a rateof 10% per annum.  The accrued interestshall be paid in the Company’s common stock each quarter.  The note is due on January 17,2003.  As of September 30, 2003 and 2002, principal in the amount of $10,000 and $10,000. respectively was outstanding.  As of September 30,2003 the Companyhas accrued a liability to issue 2,520 shares of common stock valued at $252.

 

On June 17, 2002, the Company issued apromissory note payable to a stockholder in the amount of $3,000, plus interestat a rate of 10% per annum.  The note isdue on July 17, 2002.  As of September 30, 2003 and 2002,there was a principal balance outstanding in the amount of $3,000 and $3,000 and accrued interest in the amount of $395 and $95, respectively.

 

On July 23, 2002, the Company issued apromissory note payable to a stockholder in the amount of $5,000, plus interestat a rate of 8% per annum.  The note isdue on July 24, 2003. On August 26, 2003 the officer exercised anoption in the agreement to purchase CSI common stock in lieu of a cash paymentto settle $5,000 in principal and $433 in accrued interest due from theCompany.  At September 30, 2003 and 2002 there was a principal balanceoutstanding in the amount of $0 and $5,000 and accrued interest in the amountof $0 and $76, respectively.

 

In fiscal year 2001 an officer of the Companyloaned $1,185 interest free to Trans-Science Corporation to cover operatingcosts.  As of September 30, 2003 and 2002, there was a principal balanceoutstanding in the amount of $0 and $1,185,respectively.

 

**ConsultingAgreements**

 

The Company has several consulting agreementswith stockholders and officers for management, marketing and technical serviceswhich are applied between cost of goods sold and expenses as appropriate.Consulting fees for years ended September 30,2003 and 2002 were $307,590 and $336,802, respectively.  The balance payable at September 30, 2003 and 2002 was$69,118 and 506,828, respectively

 

**Representation and Advisory Agreement**

 

On March 6, 2001, the Company enteredinto a Representation and Advisory Agreement (the “Agreement”) with AF Capitaland Ace International Domaine (collectively referred as “AFA”) for corporatefinancing and investment advisory services. According to the

 

F-26

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agreement, the Company would pay anon-refundable engagement retainer of $50,000, of which $15,000 was payable onor before March 14, 2001 with the balance of $35,000 payable in full onApril 15, 2001. In addition the Agreement required the Company to makemonthly retainer of $10,000 for twelve months beginning on April 1, 2001.Total amount of such retainers shall be payable in full upon the Companyreceiving at least $2,000,000 in financing. The Company is also required to paya representation and placement fee equal to 10% of the amount of capitalraised, and warrants to purchase shares of common stock of the Company equal to15% of the number of shares of common stock and common stock equivalents issuedpursuant to the Agreement.

 

Effective July 18, 2001, the Agreementwas terminated by the Company. According to the terms of the Agreement, in the event of termination,the Company would not be liable to pay the monthly payments of $10,000 afterthe termination date.

 

On July 3, 2001 Michael Perlman,president and chief executive officer of Ace International Domaine wasappointed president and chief executive officer of the Company.  Initial compensation for prior and continuingservices in the amount of $30,000 will offset the $17,500 for the AceInternational Domaine portion of the non-refundable engagement fee.

 

On November 30, 2001, Michael Perlmanresigned from the Company.  The $30,000balance for the initial compensation remains an unpaid liability of the Companyat September 30, 2003.

 

**NOTE12 – CANCELLATION OF CONSULTING AGREEMENT**

 

OnJanuary 28, 2002 the Company entered into an agreement with a consultantto assist the Company developing market demand for compositetechnologies.  According to the terms ofthe agreement, the Company agreed to pay the consultant $10,000 per month,payable in installments of $5,000 per month, with any unpaid balance due uponspecific performance defined in the agreement.

 

On June 30, 2002 the agreement wascancelled, and the unpaid balance due in the amount of $85,000 was cancelledand recognized as other income (expenses) in the statement of operations.

 

F-27

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**NOTE13 – STRATEGIC ALLIANCE AGREEMENT**

 

On December 7, 2000 theCompany entered into a Global Alliance Agreement (the “Agreement”) with ThePrime Group (“Prime”) located in Seoul, Korea. According to the terms of the Agreement, the Company would receive a 15%equity position in The Prime Group.  ThePrime Group entered into a subscription agreement to purchase between 4,166,667and 5,000,000 shares of the Company’s common stock for cash in the amount of$2,000,000.  The first 2,500,000 sharesof common stock was to be equally issued quarterly at $0.40 per share for atotal consideration of $1,000,000.  Asecond 2,500,000 shares of common stock was to be issued at $0.40 per share ifpayment was received by May 31, 2001 or 1,666,667 was to be issued at$0.60 per share if payment was received after May 31,2001.

 

In December 2000, the Company received $250,000representing a subscription for 625,000 shares of common stock.  On January 4, 2001 the Company issued500,000 shares of common stock valued at $200,000.  On February 28, 2001 the agreement was terminated by Prime.On September 30, 2003 the Company issued the remaining 125,000 shares ofcommon stock valued at $50,000.

 

**NOTE14 – GOING CONCERN**

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern. The Company’s financial position and operating results raisesubstantial doubt about the Company’s ability to continue as a going concern,as reflected by the net loss of $897,736and $1,166,742 for the yearsended September 30, 2003 and 2002,respectively and losses of $5,109,558 accumulated from October 20, 1997(inception) to September 30, 2003.In addition the Company’s current liabilities exceed current assets by $843,795at September 30, 2003. Theability of the Company to continue as a going concern is dependent uponcommencing operations, developing sales and obtaining additional capital andfinancing. The consolidated financial statements do not include any adjustmentsthat might be necessary if the Company is unable to continue as a goingconcern.

 

The Company is currently seeking additionalcapital to allow it to begin its planned operations.  Management believes the Company’s sales and marketing effortswill partially reduce the negative impact of accumulated losses.    In addition, the Company continues itsefforts to re-capitalize accounts payable into stockholders’ equity andnegotiate reductions in other accounts payable.  The Company’s management believes these efforts willsubstantially reduce current liabilities.

 

**NOTE15 - SUBSEQUENT EVENTS**

 

In November 2003 the Company converted their existing line ofcredit comprised of outstanding principal and accrued interest of $49,752 and$450, respectively into a fully amortizing term loan.  The maturity date of the loan is November 10, 2005 andrequires monthly payments of principal and interest (8.5% per annum).

 

In January 2004 the Company hired a new President and ChiefExecutive Officer and issued 1,000,000 shares of common stock valued at$220,000 for compensation.

 

F-28

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**NOTE16 – FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The estimated fair values of the Company’sfinancial instruments are as follows:

 
|                            |   | **September 30, 2003** |   | **September 30, 2002** |   |
|---------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                            |   | **Carrying  Value**         |   | **Fair  Value**             |   | **Carrying  Value** |   | **Fair  Value** |   |
|                            |   |                        |   |                        |   |   |   |   |   |
| Cash                            |   | $                           | 49,495 |                        | $      | 49,495 |   | $ | 50,521 |   | $ | 50,521 |   |
| Accounts  payable               |   | 266,775                     |   | 266,775                     |   | 373,635 |   | 373,635 |   |
| Related  party accounts payable |   | 194,620                     |   | 194,620                     |   | 551,969 |   | 551,969 |   |
| Line of  credit                 |   | 51,887                      |   | 51,887                      |   | 51,534 |   | 51,534 |   |
| Related  party notes payable    |   | 46,376                      |   | 46,376                      |   | 149,782 |   | 149,782 |   |
| Accrued  expenses               |   | 181,817                     |   | 181,817                     |   | 300,996 |   | 300,996 |   |
|                                 |        |                             |        |                             |        |  |  |  |  |  |  |  |  |

 

F-29

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