##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F (Mark One) o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended November 30, 2004.ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from          to          .
 Commission File Number [ 000-49944 ] OFFSHORE SYSTEMS INTERNATIONAL LTD.  British Columbia, Canada
(Jurisdiction of incorporation or organization) 107  930 West 1st Street

North Vancouver, British Columbia, Canada V7P 3N4
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None. Securities registered or to be registered pursuant to Section 12(g) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock, Without Par Value
    
    Toronto Stock ExchangeO.T.C. Bulletin Board.
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None. Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of November 30, 2004: 27,488,074 shares of Common Stock, no par value, 30,262 shares of
Class A Preference Shares Convertible, no par value and 57,711 shares of Class B Preference Shares
Convertible, par value of CAD$50.00 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No Indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 þ Item 18




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TABLE OF CONTENTS Page #PART IItem 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1Item 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1Item 3.
    
    KEY INFORMATION
    
    
    1Item 4.
    
    INFORMATION ON THE COMPANY
    
    
    12Item 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    20Item 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    38Item 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    48Item 8.
    
    FINANCIAL INFORMATION
    
    
    51Item 9.
    
    THE OFFER AND LISTING
    
    
    52Item 10.
    
    ADDITIONAL INFORMATION
    
    
    53Item 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    65Item 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    66PART IIItem 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    67Item 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    67Item 15.
    
    CONTROLS AND PROCEDURES
    
    
    67Item 16.
    
    [RESERVED]
    
    
    67Item 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    67Item 16B.
    
    CODE OF ETHICS
    
    
    67Item 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    68Item 16D.
    
    EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    68Item 16E.
    
    PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
    
    
    68PART IIIItem 17.
    
    FINANCIAL STATEMENTS
    
    
    69Item 18.
    
    FINANCIAL STATEMENTS
    
    
    69Item 19.
    
    EXHIBITS
    
    
    70Articles of the CompanyTPC Agreement Dated April 26, 2004CE Unterberg, Towbin, LLC ContractE Brinton Coxe ContractSubscription AgreementLetter of Intent to Aquire MapconList of Subsidiaries and JurisdictionsSection 302 Certification - CEO and CFOSection 906 Certification - CEO and CFO




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PART I 
 Item 1. Identity of Directors, Senior Management and Advisers Not applicable. 
 Item 2. Offer Statistics and Expected Timetable Not applicable. 
 Item 3. Key Information A.Selected financial data. The following selected consolidated financial data as of and for the years ended November 30,
2004, 2003, 2002, 2001 and 2000 has been derived from the Companys audited consolidated financial
statements and was prepared in accordance with generally accepted accounting principles in the
United States. The selected consolidated financial data should be read in conjunction with the
information contained in Item 5.  Operating and Financial Review and Prospects, and the
consolidated financial statements and notes to consolidated financial statements contained in Item
18, Financial Statements. The Companys audited consolidated financial statements are stated in Canadian Dollars (CDN$ or $). Offshore Systems International Ltd.
Selected Consolidated Financial Information
Consolidated Statement of Earnings and Deficit Data For the year ended November 30,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Revenue
    
    $
    13,451,303
    
    
    $
    11,520,793
    
    
    $
    13,814,133
    
    
    $
    7,909,713
    
    
    $
    5,651,665Direct costs
    
    $
    5,669,324
    
    
    $
    5,159,068
    
    
    $
    7,100,751
    
    
    $
    3,333,358
    
    
    $
    1,364,053Gross profit
    
    $
    7,781,979
    
    
    $
    6,361,725
    
    
    $
    6,713,382
    
    
    $
    4,576,355
    
    
    $
    4,287,612Expenses
    
    $
    7,492,004
    
    
    $
    6,149,808
    
    
    $
    5,667,650
    
    
    $
    4,205,916
    
    
    $
    4,122,027Earnings from continuing operations before proceeds on
settlement of claim and income taxes
    
    $
    289,975
    
    
    $
    211,917
    
    
    $
    1,045,732
    
    
    $
    370,439
    
    
    $
    165,585Proceeds on settlement of claim
    
    $
    
    
    
    $
    
    
    
    $
    (221,978
    )
    
    $
    
    
    
    $
    Income tax expense (recovery)
    
    $
    41,958
    
    
    $
    (140,099
    )
    
    $
    (426,416
    )
    
    $
    (227,300
    )
    
    $
    Earnings from continuing operations
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126
    
    
    $
    597,739
    
    
    $
    165,585Loss from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (316,673
    )Net earnings (loss) for the period
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126
    
    
    $
    597,739
    
    
    $
    (151,088
    )Net earnings (loss) attributable to common shareholders
    
    $
    (58,873
    )
    
    $
    (565,826
    )
    
    $
    1,694,126
    
    
    $
    597,739
    
    
    $
    (151,088
    )Earnings (loss) per share from continuing operations
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.01Earnings (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    (0.01
    )Diluted earnings (loss) per share from continuing operations
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.01Diluted earnings (loss) per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    (0.01
    )
 Page 1




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Offshore Systems International Ltd.
Selected Consolidated Financial Information
Consolidated Statement of Earnings and Deficit Data For the year ended November 30,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Weighted average number of Common Shares outstanding  basic
    
    
    27,230,561
    
    
    
    25,977,123
    
    
    
    25,288,725
    
    
    
    23,842,549
    
    
    
    23,050,201Weighted average number of Common Shares outstanding  diluted
    
    
    29,856,412
    
    
    
    28,183,501
    
    
    
    27,285,617
    
    
    
    25,476,614
    
    
    
    24,526,875
 Offshore Systems International Ltd.
Selected Consolidated Financial Information
Consolidated Balance Sheet Data As at November 30,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Working capital
    
    $
    8,287,798
    
    
    $
    8,071,926
    
    
    $
    4,464,623
    
    
    $
    2,812,407
    
    
    $
    1,871,000Total assets
    
    $
    12,310,738
    
    
    $
    11,728,257
    
    
    $
    10,795,577
    
    
    $
    7,353,509
    
    
    $
    4,713,296Total liabilities
    
    $
    2,676,227
    
    
    $
    2,493,294
    
    
    $
    4,729,579
    
    
    $
    3,581,389
    
    
    $
    1,913,235Net assets
    
    $
    9,634,511
    
    
    $
    9,234,963
    
    
    $
    6,065,998
    
    
    $
    3,772,120
    
    
    $
    2,800,061Capital Stock
    
    $
    22,234,114
    
    
    $
    21,715,693
    
    
    $
    19,258,997
    
    
    $
    18,554,063
    
    
    $
    17,842,869Outstanding Common Shares
    
    
    27,488,074
    
    
    
    26,807,475
    
    
    
    26,043,243
    
    
    
    24,694,549
    
    
    
    23,540,975Outstanding Class A Preference Shares Series A Convertible
    
    
    30,262
    
    
    
    30,262
    
    
    
    41,296
    
    
    
    58,326
    
    
    
    74,702Outstanding Class B Preference Shares Series 1 Convertible
    
    
    57,711
    
    
    
    61,244
    
    
    
    
    
    
    
    
    
    
    
    
 For the year ending November 30, 2004, the Company declared dividends of $4.50 (US$3.78) per
share on the outstanding Class B Preference Shares Series 1 Convertible. As at November 30, 2004,
$86,566 of the declared dividends remain unpaid. The Company has not declared and paid any other
dividends during the periods indicated. Currency and Exchange Rates Canadian Dollar Value for 1 US$ (as published by the Federal Reserve Bank of New York) On May 18, 2005, the noon buying rate in New York City for cable transfer in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York was $1.00 U.S. = 1.2618 All exchange rate calculations below are based on the noon buying rate in New York City for cable
transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New
York. The average exchange rates for each of the past 5 fiscal years were calculated using the average of
the exchange rates in effect on the last day of each month during the period indicated. Year Ended November 30, 2000
    
    
    1.4834Year Ended November 30, 2001
    
    
    1.5441Year Ended November 30, 2002
    
    
    1.5713Year Ended November 30, 2003
    
    
    1.4156Year Ended November 30, 2004
    
    
    1.3102
 Page 2




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High Rate
    
    Low RateNovember 2004
    
    
    1.2263
    
    
    
    1.1775December 2004
    
    
    1.2401
    
    
    
    1.1856January 2005
    
    
    1.2422
    
    
    
    1.1982February 2005
    
    
    1.2562
    
    
    
    1.2294March 2005
    
    
    1.2463
    
    
    
    1.2017April 2005
    
    
    1.2568
    
    
    
    1.2146
 All dollar amounts set forth herein, are in Canadian dollars, except where otherwise indicated. B. Capitalization and indebtedness. Not applicable. C.Reasons for the offer and use of proceeds. Not applicable. Page 3




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D.Risk factors. An investment in the Companys Common Shares should be considered highly speculative. In
addition to other information in this Form 20-F  Annual Report, you should carefully consider the
following factors when evaluating the Company and its business. The Company depends heavily on its government contracts, which are only partially funded, subject
to termination, heavily regulated and audited. The termination of one or more of these contracts
could have a negative impact on the Companys operations. The contract termination clauses are
generally in favour of the Government Agencies. Typically the termination clause for convenience is
30 days or less with the condition that all costs to that date are paid by the Government Agencies. The termination of funding for a government program would result in a loss of anticipated future
revenues attributable to that program. That could have a negative impact on the Companys
operations. Also, the Company cannot give assurance that it would be able to procure new government
contracts to offset the revenues lost as a result of any termination of its contracts. As the
Companys revenues are dependent on its procurement, performance and payment under its contracts,
the loss of one or more critical contracts could have a negative impact on the Companys financial
condition. In addition, sales to the governments the Company works with may be affected by:  
    changes in procurement policies;
    changes in the structure and management of government departments;
    budget considerations;
    changing concepts of national defence;
    political developments domestically and abroad; and
    increased protectionism. The influence of any of these factors, which are largely beyond the Companys control, could also
negatively impact its financial condition. The Company derives a significant amount of revenue from only a few international customers. The
Company depends on governments for a significant portion of its sales, and the loss of any of these
relationships or a shift in any of these governments funding could have severe consequences on the
Companys financial condition. Approximately 69% of the Companys revenue for fiscal 2004 was from the U.S. Coast Guard, the Royal
Navy of the United Kingdom, the Royal Australian Navy, the Royal New Zealand Navy and the
Portuguese Navy. For fiscal 2003 approximately 65% of the Companys revenue was from the U.S. Coast
Guard, the Canadian Navy and the Royal Danish Navy. Approximately 87% of the Companys revenue for
fiscal 2004 was from national and international governments compared to 91% for fiscal 2003.
Therefore, any significant disruption or deterioration of any of the Companys relationships with
these entities governments would significantly reduce its revenues. These governments may choose
to use other competing corporations for their navigational equipment. In addition, a shift in
government spending to other programs in which the Company is not involved could have severe
consequences for its results of operations. The Companys product lines are not broadly diversified. The Company derives and expects to derive a substantial majority of its revenue from navigational
software, systems and equipment sales. If customers do not purchase the Companys products as a
result of competition, technological change, budget constraints or other factors, the Company does
not have other product categories that it could rely on to make up any shortfall in sales. As a
result, the Companys revenue could decrease and its business and operating results would be
adversely affected. Page 4




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The Company derives a significant portion of its revenues from international sales and is subject
to the risks of doing business in foreign countries. In the fiscal year ended November 30, 2004, approximately 89% of the Companys revenues were from
international customers, including governmental customers: 21% from the U.S. and 68% from other
international countries. For the fiscal year ended November 30, 2003, approximately 71% of the
Companys revenues were from international customers, including governmental customers: 44% from
the U.S. and 27% from other international countries. The Company has focussed its expansion efforts
for the future on the American, European and Australasian markets. As a result, the Company expects
that international sales will continue to account for a significant portion of its revenues for the
foreseeable future. As a result, the Company is subject to the risks of doing business
internationally, including those risks related to:  
    changes in regulatory requirements;
    domestic and foreign government policies, including requirements to expend a portion of program funds locally and
governmental industrial co-operation requirements;
    fluctuations in foreign currency exchange rates;
    the complexity and necessity of dealing with foreign representatives and consultants;
    imposition of tariffs or embargoes, export controls and other trade restrictions; and
    compliance with a variety of foreign laws. While the presence of these factors and the impact of these factors are difficult to predict, any
one or more of them could adversely affect the Companys operations in the future. The Companys revenues and costs are affected by fluctuations in the rate of exchange between the
Canadian dollar, which is its reporting currency, the U.S. dollar, the Australian Dollar and the
Euro. Exposure to exchange rate fluctuations exists because a significant portion of the Companys trade
receivable and revenue transactions are in U.S. dollars, Australian dollars and Euros. In addition,
certain of the Companys subcontract payable and direct cost transactions are in U.S. dollars. For
the fiscal year ended November 30, 2004, approximately 25% of the Companys revenue and 10% of its
expenses were transacted in U.S. dollars. During the same period, approximately 11% and 5% of the
Companys revenue was transacted in Australian dollars and Euros respectively. For the fiscal year
ended November 30, 2003, approximately 63% of the Companys revenues and 12% of its expenses were
transacted in U.S. dollars. During the same period, the Company did not have material transactions
in Australian dollars or Euros. The Company expects that U.S. dollar, Australian dollar and Euro
sales will continue to account for a material portion of its revenues for the foreseeable future.
As a result, exchange rate fluctuations may affect the Companys revenue and earnings growth
materially in the future. In order to reduce the impact of U.S. to Canadian dollar, Australian to
Canadian dollar and Euro to Canadian Dollar exchange rate fluctuations, the Company utilizes its
foreign exchange forward contract facility. As at November 30, 2004, the Company has entered into
foreign exchange forward contracts in the amount of U.S. $851,196, Australian $3,678,061 and
383,310. As at November 30, 2003, the Company had entered into foreign exchange forward contracts
in the amount of U.S. $1,343,705, Australian $0, and 0. The Company has established teaming relationships and strategic partnerships with international
corporations to pursue major international government procurements, and the Companys reputation
and results of operations could be adversely affected by the Companys inability to control those
operations. The Company relies on agreements with international corporations to assist it in pursuing contracts
for major government procurements. These international corporations often assist the Company with
systems integration, complimentary products and services, and local domain knowledge necessary to
successfully pursue major government procurements. The Company does not have assurance that these
third parties will:  
    remain in business;
    maintain the financial stability required to fulfill the requirements of these international procurements; and
    continue to consider the Companys products in their business priorities. There can be no assurance that the Company would be able to pursue and secure major international
government procurements without these third parties. Page 5




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The Company may not be able to meet the delivery terms or budgeted costs of its firm fixed price
contracts. A majority of the Companys contracts are firm fixed price contracts. There is a risk in every firm
fixed price contract that the Company will be unable to deliver to the customer within the time
specified or at a cost to the Company which is less than the contract price. In the absence of any
amendments to the original firm fixed price contract to increase the price of the contract or
extend the delivery times, customers may be in a position to terminate the contract, demand
repayment or impose penalties on the Company. A significant cost overrun or delay in delivery to
the customer could adversely affect the Companys business and operating results. The Company may lose sales, or sales may be delayed, because of the long sales and implementation
cycles for its products and services. The Companys customers have typically invested substantial time, money and other resources and
have many people involved in the decision to license the Companys software products and purchase
its hardware products and services. As a result, the Company may wait up to two or three years
after the first contact with a customer for that customer to enter into a purchase agreement while
the customer seeks internal approvals for the purchase of the Companys products and/or services.
During this long sales cycle, events may occur that affect the size or timing of the purchase or
even cause the order to be cancelled. Even if a purchase agreement is signed, the time period required to deploy the Companys products
varies significantly from one customer to the next. Implementing the Companys products can
sometimes take several months or even a few years depending on the customers needs. It may be
difficult to deploy the Companys products if the customer has complicated deployment requirements.
If a customer utilizes a third party to deploy the Companys products, we cannot guarantee that the
Companys products will be deployed successfully. As a result, the Companys revenue could decrease and its business and operating results would be
adversely affected. Competition within the Companys markets may reduce its procurement of future contracts and its
sales. The defence industry in which the Company operates is highly competitive. The Companys competitors
range from companies, which are primarily targeting the pleasure boat market, to diversified
corporations in the radar/marine equipment segment of the industry. Some of the Companys
competitors may have more extensive or more specialized engineering, manufacturing and marketing
capabilities. There can be no assurance that the Company can continue to compete effectively with
these companies. The Companys ability to procure contracts and gain sales in foreign markets may be negatively
impacted by increasing protectionism of foreign governments. Some foreign governments have come under increased pressure to protect their domestic economy and
national security. Economic and security concerns have resulted in increasing protectionism that
excludes foreign market participants from successfully procuring contracts and gaining sales in
foreign markets. As a result, the Companys revenue could decrease and its business and operating
results would be adversely affected. The Companys future success will depend on its ability to develop new technologies that achieve
market acceptance. The defence market is characterized by rapidly changing technologies and evolving industry
standards. Accordingly, the Companys future performance depends on a number of factors, including
its ability to:  
    identify emerging technological trends in the Companys market;
    develop and maintain competitive products;
    enhance the Companys products by adding innovative features that differentiate its products from the competition
    manufacture and bring products to market quickly at cost-effective prices. The Company believes that, in order to remain competitive in the future, it will need to continue
to develop new products, which will require the investment of significant financial resources in
new product development. In addition, Page 6




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there can be no assurance that the market for the Companys products will develop or continue to
expand as the Company currently anticipates. The failure of the Companys technology to gain market
acceptance could significantly reduce its revenues and harm its business. Furthermore, the Company
cannot be sure that its competitors will not develop competing technology, which gains market
acceptance in advance of the Companys products. The possibility that the Companys competitors
might develop new technology or products might cause the Companys existing technology and products
to become obsolete. If the Company fails in its new product development efforts or its products
fail to achieve market acceptance more rapidly than the Companys competitors, its revenues will
decline and its business, financial condition and results of operations will be negatively
affected. The Company depends on the recruitment and retention of qualified personnel, and its failure to
attract and retain such personnel could seriously harm its business. Due to the specialized nature of the Companys business, its future performance is significantly
dependent upon the continued services of its key engineering personnel and executive officers. The
Companys prospects depend upon its ability to attract and retain qualified engineering,
manufacturing, marketing, sales and management personnel for its operations. Competition for
personnel is intense, and the Company may not be successful in attracting or retaining qualified
personnel. The Companys failure to compete for these personnel could seriously harm its business,
results of operations and financial condition. The Company does not have fixed-term employment agreements with its officers and key employees and
the loss of any officer or key employee could seriously harm the Companys business. The Company
has not entered into fixed-term employment agreements with its officers and key employees. The
Companys success depends upon the abilities and experience of its officers and key employees.
Competition for highly skilled management, engineering, technical and other key employees is
intense. The loss of officers and key employees could seriously disrupt the Companys operations
and impair its ability to compete. The Company depends on offshore sub-contract labour in its geomatics and navigation systems
operations to maintain a competitive position in the geomatics and navigation systems marketplaces. The Companys geomatics and navigation systems operations are dependent upon labour resources
located outside North America. While the Company enters into sub-contract agreements with these
suppliers, it cannot be sure that the labour resources will be available when required and at the
levels required. Accordingly, maintaining the Companys competitiveness will depend upon a number
of factors, including:  
    the geopolitical uncertainties specific to the home country of each sub-contractor;
    the cultural compatibility between Canada and the home country of each sub-contractor;
    the English language proficiency of the labour resources made available to the Company;
    labour pool characteristics such as work ethic, education, skill level and attrition; and
    the infrastructure of both the sub-contractors home country and the sub-contractor. While the presence of these factors and the impact of these factors are difficult to predict, any
one or more of them could adversely affect the Companys geomatics and navigation systems
operations in the future. The Company may be unable to protect its intellectual property rights, which could affect its
ability to compete. Protecting the Companys intellectual property rights is critical to its ability to compete and
succeed as a company. The Company has trademark and copyright registrations, which are necessary
and contribute significantly to the preservation of its competitive position in the market. There
can be no assurance that any of the trademarks, copyrights and other intellectual property will not
be challenged, invalidated or circumvented by third parties. In the future, the Company may not be
able to obtain necessary licenses on commercially reasonable terms. The Company enters into
confidentiality and invention assignment agreements with its employees, and enters into
nondisclosure agreements with its suppliers and customers, as appropriate, so as to limit access to
and disclosure of the Companys proprietary information. These measures may not suffice to deter
misappropriation or independent third party development of similar technologies. Page 7




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The Companys operations depend on component availability and its key suppliers to manufacture and
deliver its products and services. The Companys operations are highly dependent on the timely delivery of materials by outside
suppliers. While the Company enters into purchase agreements with a few of its suppliers, the
Company cannot be sure that materials, components, and subsystems will be available in the
quantities required, if at all. If any of the suppliers fail to meet the Companys needs, it may
not have readily available alternatives. The Companys inability to fill its supply needs would
jeopardize its ability to satisfactorily complete the Companys obligations under its contracts on
a timely basis. This might result in reduced sales, contractually imposed penalties for delay in
delivery, termination of one or more of these contracts or damage to the Companys reputation and
relationships with its customers. All of these events could have a negative effect on the Companys
financial condition. The unpredictability of the Companys results may harm or contribute to the volatility of the
trading price of its common stock. The Companys operating results may vary significantly over time for a variety of reasons, many of
which are outside its control and any of which may harm its business. For example, the Companys
net earnings decreased from $1,694,126 in fiscal 2002 to $352,016 in fiscal 2003 and further
decreased to $248,017 because of the timing, level, and duration of customer orders, relative mix
of contracts and customer product delivery requirements. Volatility in the market price of the
Companys common stock may prevent investors from being able to sell their common stock at or above
the price such investors paid for their shares or at any price at all. The value of the Companys
common stock may fluctuate as a result of considerations that are difficult to forecast, such as:  
    the volume and timing of product orders received and delivered;
    levels of product demand;
    government and corporate spending patterns;
    the timing of contract receipt and funding;
    the Companys ability and the ability of its key suppliers to respond to changes in customer orders;
    the timing of the Companys new product introductions and its competitors new product introductions;
    the cost and availability of components and subsystems;
    price erosion;
    the adoption of new technologies and industry standards;
    competitive factors, including pricing, availability and demand for competing products;
    fluctuations in foreign currency exchange rates; and
    regulatory developments. Sales of a significant number of shares of our common stock by existing shareholders could cause
the market price of our common stock to decline. If the Companys shareholders sell substantial amounts of the Companys common stock, including
shares issued upon the exercise of outstanding options, the market price of the Companys common
stock may decline. These sales also might make it more difficult for the Company to sell equity or
equity-related securities in the future at a time and price that the Company deems appropriate. The
Company is unable to predict the effect that sales may have on then prevailing market price of its
common stock. Changes in stock option accounting rules may adversely impact our operating results prepared in
accordance with generally accepted accounting principles. Technology companies like the Company have a history of using broad based employee stock option
programs to hire, incentivize and retain its workforce in a competitive marketplace. Statement of
Financial Accounting Standards No. 123,  Accounting for Stock-Based Compensation, allows
companies the choice of either using a fair value method of accounting for options which would
result in expense recognition for all options granted, or using an intrinsic value method, as
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25) with a pro forma disclosure of the impact on net income (loss) of using the
fair value option expense recognition method. The Company has elected to apply APB 25 and
accordingly, it did not recognize any expense with Page 8




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respect to employee stock options as long as such options are granted at exercise prices equal to
the fair value of its common stock on the date of the grant. In December 2004, the Financial Accounting Standards Board (FASB) issued statement 123R,
Share-Based Payment, which requires all companies to measure compensation cost for all
share-based payments, including employee stock options, at fair value. This statement is effective
for the Company beginning after December 1, 2005. The Company is currently evaluating the effect
that the adoption of Statement 123R will have on its financial position and results of operations,
and it is possible that the Companys adoption of this standard may adversely affect its operating
results in the future periods. The Company may pursue strategic relationships, investments and acquisitions. The Company may not
be able to successfully manage its operations if it fails to successfully integrate the acquired
technologies and/or businesses. As part of the Companys business strategy, it may expand its product offerings to include
application software products that are complementary to the Companys existing products. This
strategy may involve technology licensing agreements, joint development agreements, investments or
acquisitions of other businesses that offer complementary products. The risks that the Company may
encounter in acquiring or licensing technology from third parties include the following:  
    difficulty in integrating the third party product with its products;
    undiscovered software errors in the third party product;
    difficulties in selling the third party product;
    difficulties in providing satisfactory support for the third party product;
    potential infringement claims from the use of the third party product; and
    discontinuation of third party product lines. The risks commonly encountered in the investment in or acquisition of businesses would accompany
any future investments or acquisitions by the Company. Such risks may include the following:  
    issues related to product transition (such as development, distribution and customer support);
    the substantial management time devoted to such activities;
    the potential disruption of the Companys ongoing business;
    undisclosed liabilities;
    failure to realize anticipated benefits (such as synergies and cost savings);
    the difficulty of integrating previously distinct businesses into one business unit; and
    technological uncertainty regarding the current and future functionality of the product. The Company may require additional capital, in which case it may need to raise additional funds
from lenders and equity markets in the future. If the Companys expenditures exceed its incoming cashflows, the Company may be required to raise
additional capital. In addition, the Company may choose to pursue additional financing in order to
capitalize on potential opportunities in the marketplace that may accelerate its growth objectives.
For instance, the Company raised $3,004,200 in capital in fiscal 2003 to support expansion
activities in its operations and a further $19,500,000 in the current fiscal year 2005 to support
acquisition opportunities. The Companys ability to arrange such financing in the future will
depend in part on the prevailing capital market conditions as well as on its business performance.
There can be no assurance that the Company will be successful in its efforts to raise additional
funds, if needed, on terms satisfactory to it. If additional capital is raised by the issuance of
shares, shareholders may experience dilution to their equity interest in the Company. The Companys business could be adversely affected if it fails to manage its growth effectively. If the Company fails to manage its growth effectively, the Companys business and operating results
could be adversely affected. The Company expects to continue to grow its operations domestically
and internationally, and to hire additional employees. The growth in the Companys operations and
staff has placed, and will continue to place, a significant strain on its management systems and
resources. If the Company fails to manage its future anticipated Page 9




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growth, the Company may experience higher operating expenses, and it may be unable to meet the
expectations of investors with respect to future operating results. To manage this growth the
Company must, among other things, continue to:  
    improve its financial and management controls, reporting systems and procedures;
    add and integrate new senior management personnel;
    improve its licensing models and procedures;
    hire, train and retain qualified employees;
    control expenses;
    diversify channel sales strategies; and
    invest in its internal networking infrastructure and facilities. The Company has committed funds to obtaining additional systems and facilities to accommodate its
current and future anticipated growth. To the extent that this anticipated growth does not occur or
occurs more slowly than the Company anticipates, it may not be able to reduce expenses to the same
degree. If the Company incurs operating expenses out of proportion to revenue in any given quarter,
its operating results may be adversely impacted. Third parties may claim that the Company infringes their proprietary rights. The Company potentially may receive claims that it has infringed the intellectual property rights
of others. As the number of products in the software industry increases and the functionality of
these products further overlap, the Company may become increasingly subject to infringement claims,
including patent, trademark and copyright infringement claims. In addition, former employers of the
Companys former, current or future employees may assert claims that such employees have improperly
disclosed to the Company the confidential or proprietary information of these former employers. Any
such claim, with or without merit, could be time-consuming to defend, result in costly litigation,
divert managements attention from the Companys core business, require it to stop selling or delay
shipping, or cause the redesign of its product or products. In addition, the Company may be
required to pay monetary amounts as damages, for royalty or licensing arrangements, or to satisfy
indemnification obligations. The Company licenses and uses software from third parties in its business. These third party
software licenses may not continue to be available to the Company on acceptable terms. Also, these
third parties may from time to time receive claims that they have infringed the intellectual
property rights of others, including patent and copyright infringement claims, which may affect the
Companys ability to continue licensing this software. The Companys inability to use any of this
third party software could result in shipment delays or other disruptions in its business, which
could materially and adversely affect the Companys operating results. The Company may not be able to protect its proprietary information. The Company relies on a combination of copyright, trademark and trade secret laws, confidentiality
procedures, contractual provisions and other measures to protect its proprietary information. All

of these measures afford only limited protection. These measures may be invalidated, circumvented
or challenged, and others may develop technologies or processes that are similar or superior to the
Companys technology. Despite the Companys efforts to protect its proprietary rights, unauthorized
parties may attempt to copy the Companys products or to obtain or use information that the Company
regards as proprietary. The Companys products may contain significant defects, which may result in liability and/or
decreased sales. Software products frequently contain bugs, errors or failures, especially when first introduced or
when new versions are released. Despite the Companys efforts to test its products, the Company
might experience significant errors or failures in its products, or they might not work with other
hardware or software as expected. This could delay the development or release of new products or
new versions of products, or could adversely affect market acceptance of the Companys products.
Customers use the Companys products for applications that are critical to their businesses, and
they have a greater sensitivity to product defects than the market for other software products
generally. The Companys customers may claim that the Company is responsible for damages to the
extent they are harmed by the failure of any of the Companys products. If the Company were to
experience significant delays in the release of new products or new Page 10




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versions of products, or if customers were dissatisfied with product functionality or performance,
the Company could lose revenue or be subject to liability for service or warranty costs. Should
this occur, the Companys business and operating results could be adversely affected. The Companys products incorporate third party software products. As a result, the Companys
effectiveness and results of operations could be adversely affected by its inability to control the
operations of third party suppliers. The Companys products incorporate and use software products developed by other entities. The
Company does not have assurance that such third parties will:  
    remain in business;
    support the Companys product lines;
    maintain viable and functional product lines; and
    make their product lines available to the Company on commercially acceptable terms. Any significant interruption in the supply of such third-party technology could have a materially
adverse effect on the Companys business, results of operation, cash flows and financial condition. The Companys products may not be compatible with various operating systems and therefore the
Company may not be able to sell its products to potential customers. The Companys products are used in combination with various operating systems. The Companys future
success depends on our ability to continue to support widely-used operating systems. The Companys
applications run on Microsoft operating systems. Therefore, the Companys ability to increase sales
depends on the continued acceptance of Microsoft operating system products. If the Company is
unable to develop and market products that support Microsofts operating platforms or develop and
market products that support other operating systems on a timely and cost effective basis, its
business and operating results could be adversely affected. The Company is subject to various government audits, which may result in unfavorable assessments or
penalties to the Company. The Company is occasionally subject to compliance audits from government bodies and agencies
relating to its Technology Partnership Canada (TPC) funding agreements, corporate income tax
filings or federal, state, provincial and municipal government contracts for the procurement of the
Companys products and services. The Company was audited in 2004 by Industry Canada in relation to
its TPC funding agreements and as part of a broader Industry Canada review of TPC funding
agreements. This compliance audit was focused on ensuring the funding submissions by the Company
meet the terms and conditions of its TPC funding agreement. The Company believes that it is in
compliance with the terms of its TPC agreements but has not received any notification from Industry
Canada regarding its audit conclusions. There can be no assurance that the compliance audit will
result in a favorable assessment for the Company or that penalties will not be imposed on the
Company for non-compliance. Page 11




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Item 4. Information on the Company A.History and development of the Company. The Company Offshore Systems International Ltd. was incorporated under the Company Act(British Columbia) on
June 10, 1987 under the name Kappa Resource Corporation. On April 23, 1990, the Memorandum of
the Company was altered to change the name of the Company to Offshore Systems International Ltd.
and the Memorandum and Articles of the Company were amended to designate 10,000,000 of the
100,000,000 authorized Class A Preference Shares as Class A Preference Shares Series A Convertible.
On February 4, 2003, the Memorandum and Articles were further amended to designate 10,000,000 of
the 100,000,000 authorized Class B Preference Shares as Class B Series 1 Preference Shares. In
March of 2004, the Government of British Columbia repealed The Company Act(British Columbia) and
replaced it with The Business Corporations Actof British Columbia (the BCBCA). As required by the
BCBCA, the Company filed an application for transition and was issued a Notice of Articles on May
15, 2004, the Company is now organized under the BCBCA. The Notice of Articles replaced the
Companys Memorandum. On April 11, 2005 the Company filed a Notice of Alteration to amend its
Notice of Articles and Articles by creating a new series of Class B Preference shares designated as
Class B Series 2 preference shares, and by creating a new class of preference shares known as Class
C preference shares (which are described below in Item 10b  Additional Information  Memorandum
and articles of association). On that date the Company also replaced its original Articles with
revised Articles which conform with the BCBCA. Under the BCBCA, the Company has an indefinite life. The Companys registered and records office is located at Suite 1020  510 Burrard Street,
Vancouver, British Columbia, Canada, V6C 3A8; tel: (604) 688-3800 and the Companys head office is
located at Suite 107  930 West 1st Street, North Vancouver, British Columbia, Canada,
V7P 3N4; tel: (604) 904-4600. Registered Agents The Companys registered agent in Canada is Computershare Trust Company of Canada, located at
4th Floor, 510 Burrard Street, Vancouver, British Columbia, Canada V6C 3B9. The Company
has a registered agent for service in Washington State for the United States subsidiary, OSI
Geomatics Inc. Such agent, G&D, Inc., is located at 1420 Fifth Avenue in Seattle, Washington. History The Company was founded in 1977 (as Offshore Survey & Positioning Services Ltd.), initially
providing positioning systems to oil companies. By the early 1980s, the Company had pioneered the
first chart display system for the marine market. Throughout the decade, the Company continued to
lead the electronic charting industry, first by introducing its own line of electronic charts and
then by developing newer innovative electronic charting systems. The Company became a public company in 1990 when it was listed on the Vancouver Stock Exchange (now
named the TSX Venture Exchange) through a reverse take-over transaction of Kappa Resource
Corporation. The Company was listed on the Toronto Stock Exchange (TSX, symbol: OSI) in 1994. The first release of the flagship product, ECPINS®, was in 1991. Canada Steamship Lines was the
first to standardize a fleet-wide installation of the system. Since then, other commercial
customers such as Upper Lakes Group, Algoma Central Marine, U.S.S. Great Lakes Fleet Inc., American
Steamship Company, and Oglebay Norton Company have chosen ECPINS®. The Company was ready for the transition from development focused to commercialization in the
mid-late 1990s. The third-generation ECPINS® product had seen some success with both military and
commercial customers, and the fourth generation product development was nearing completion. In 1998, the Company strengthened the management team, and aligned the companys product mix, sales
force and product development focus. The Company focused in on military and government
opportunities with their sophisticated Page 12




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requirements. Since then, the Company has equipped a number of Coast Guard and Navy fleets with new
generations of ECPINS® software, including the U.S. Coast Guard, Canadian Coast Guard, Canadian
Navy, Royal Danish Navy, Royal New Zealand Navy, Royal Australian Navy, Royal Navy of the United
Kingdom and the U.S. Navy George Washington Battle Group. Business Development In 2001, the Company became a listed supplier under the U.S. General Services Administration,
reducing the reporting burden associated with U.S. procurements. The Company also secured its first
international fleet sale during 2001 to the Royal Danish Navy. During 2002, the Company entered the land-based mapping field, utilizing the skills and experience
gained in the production and distribution of marine charts. The Company formed the Geomatics
business unit, which has achieved significant contract wins in fiscal 2003, its first full year of
operations and fiscal 2004. In February 2003, the Company launched a new product, COP-IDS®, for the situational awareness
market, targeting Command and Control, mission planning, navigation and mobile asset management
applications. During the past few years, the strategy of forging relationships with partners in order to pursue
lucrative international procurements has proven to be very successful and has positioned the
Company as a leader in situational awareness technologies. The Companys teaming partners include
CAE Inc. in Canada, Lockheed Martin and General Dynamics in the U.S., Kelvin Hughes in the U.K.,
Nautronix Ltd. in Australia, and Terma in Denmark. Recent Financing and Acquisition In April 2005, the Company completed a private placement in the aggregate amount of $19,500,000
through the sale of 19,500 units, with each unit comprised of 20 voting Class B Preference Shares
Series 2 (Preference Shares) and 588 share purchase warrants (warrants). The issue price was
$1,000.01 per unit. Compensation in consideration of the provision of advisory services totalling
$815,908 and an additional 350,000 warrants was paid in connection with this private placement to
E. Brinton Coxe, a director of the Company. The cash compensation of $815,908 paid to Mr. Coxe
includes an adjustment in the amount of $15,908 to reflect exchange rate changes between the U.S.
dollar and Canadian Dollar. Finders fees of $1,001,362 and an additional 579,064 warrants were
paid to the investment bankers, C.E. Unterberg, Towbin. The Preference Shares entitle the holders
to receive a fixed preferential cumulative 7% dividend payable semi-annually. Each Preference share
is convertible at the option of the holder at any time into 58.82 of the Companys common shares,
calculated by dividing the issue price of $50.00 for each Preference share by the conversion price
of $0.85. Each warrant entitles the holder to purchase one of the Companys common shares at the
exercise price of $0.85 for a period of five years. The proceeds of the private placement financing will be used to pursue acquisitions, to increase
available cash for operations, and to redeem 57,711 issued and outstanding Class B Preference
Shares Series 1 held by two institutional investors at a cost of approximately $2,900,000. In April 2005, the Company completed the acquisition of all the outstanding shares of Mapcon
Mapping Consultants Inc. (Mapcon) of Salt Lake City, Utah for U.S.$1,000,000, subject to final
closing adjustments. Mapcon is a land mapping company in the U.S. geomatics (digital map and
electronic chart data production) market. A copy of the Companys letter of intent to acquire
Mapcon is filed with this form 20-F and is listed as exhibit 4.10 under Item 19  Exhibits. During fiscal years 2002, 2003, 2004 and the current fiscal year, the Company has not received any
public takeover offers from third parties or given any public takeover offers with respect to other
companies other than the Mapcon acquisition previously described. In addition, there have been no immovables and no major capital expenditures or divestitures in the
fiscal years 2002, 2003, 2004 and current fiscal year. Page 13




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B.Business overview Business Units The Company develops and provides display systems and data for defense, government and commercial
customers. The company conducts its operations through three business units. The Companys Navigation Systems business unit develops, produces and sells marine electronic chart
display instruments for precise positioning and navigation of ships and related products and
services. The majority of the Companys revenue is derived from this business unit. The Navigation
Systems business unit is part of the Companys Offshore Systems Ltd. (OSL) subsidiary. For the year
ending November 30, 2004, revenues from the Navigation Systems business unit amounted to
$10,232,671 or 76.1% of total revenues. The Companys Geomatics business unit develops and provide analysis, production, and distribution
of geo-spatial data products for military and commercial customers around the world. The Geomatics
business unit operates through the Companys subsidiaries, OSI Geomatics Ltd. and OSI Geomatics
Inc. (referred in aggregate as OSI Geomatics or OSIG). In April 2005, the Company expanded its
Geomatics business unit by acquiring Mapcon Mapping Consultants Inc. of Salt Lake City, Utah. For
the year ending November 30, 2004, revenues from the Geomatics business unit amounted to $3,027,353
or 22.5% of total revenues. The Companys Applications business unit started in fiscal 2004 and develops situational awareness
products and services for command and control systems in the military, government agencies and
system integrators. The Applications business unit operates as a division of the Companys OSL
subsidiary. For the year ending November 30, 2004, revenues from the Applications business unit
amounted to $191,279 or 1.4% of total revenues. Principal Products and Services During the last three years, the principal products and services sold by the Companys business
units were as follows: Navigation Systems Business Unit Electronic Chart Precise Integrated Navigation System (ECPINS®) The principal product of the Navigation Systems business unit is ECPINS®, which was introduced in
1991, as a real time electronic chart display and information system for use in the commercial
shipping industry and in military defence. ECPINS® analyzes critical information such as the ships
heading, speed and position, and displays the ships position in real time on an electronic chart,
as well as tracking other vessels with its optional radar overlay and Universal Automatic
Identification System interfaces. In addition, ECPINS® has the ability to display unsafe water
depth (soundings) and to project an anti-grounding sector ahead of the ship for any selected time
interval which will trigger alarms if the vessel is approaching shoals, reefs or other hazards.
ECPINS® combines the collision avoidance capabilities of radar with the grounding avoidance
capabilities of electronic nautical charts. With a growing market demand for high-end ECPINS® systems for military customers, OSL offers
systems solutions and services to various government customers. These customers have unique
requirements requiring a systems solution, which usually involves the bundling of ECPINS® products
with systems customization, training and installation. These customers often have non-recurring
engineering needs that are met by OSLs engineering capabilities. In August of 2000, OSL
launched the latest version of ECPINS®, ECPINS®-M, a new product specifically
created for the military, para-military and government markets, and ECPINS® 3000 series through
5000 series products for the commercial market. All current ECPINS® models run on an Intel x86
computer (PC) with a Microsoft Windows NT 4.0 operating system. ECPINS-M®, was designed to
incorporate OSLs high performance seamless and simultaneous chart display with the specific
navigational demands of the military market. ECPINS® commercial products have three separate
product series with functions ranging from basic entry-level to complex instruments with radar
overlay display Page 14




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capability, all at lower price points than the original ECPINS® product. The three models are known
as the ECPINS® 3000, 4000, and 5000. Projects OSL, from time to time, accepts contracts for the development of additional features and
capabilities for incorporation into ECPINS®. These projects often become specialized products
specific to the customer. Geomatics Business Unit Geomatics OSIG provides analysis, production and distribution of electronic nautical chart and land mapping
data to customers in Canada and the U.S. These services are provided on a contract basis to
government and commercial organizations such as hydrographic offices, regional and local
governments, military agencies and shipping companies. OSIG also sells electronic navigation charts
from various national hydrographic offices and its own intellectual property inventory to
commercial and government customers. Applications Business Unit Common Operational Picture (COP) Products In February 2003, the Company launched COP-IDS®, a client server application that allows customers
to integrate OSLs mapping and imagery display technology into existing Command and Control (C2)
systems rapidly and cost effectively. COP-IDS® stands for Common Operational Picture  Image
Display Server and it is designed to meet the emerging requirements for international fleets to be
able to operate from and share common tactical data in the field. COP-IDS® allows the Companys
customers to share data across C2 systems, regardless of the systems in use. COP-IDS® is a C2
product that addresses the needs of not only navy applications but also army, air force, special
forces and coalition forces operations. Seasonality The Companys business does not experience seasonality in its sales and operations. Major Customers The Companys government customers continue to play a significant role in the success of the
ECPINS® product line. Sales in fiscal 2004 to the Royal Australian Navy, Royal Navy of the United
Kingdom and United States Coast Guard accounted for 26%, 24% and 8% respectively. No other customer
represented more than 10% of sales during this reporting period. The remaining 42% of the Companys
2004 consolidated revenue were generated through sales to commercial and other military customers. Geographic Markets Approximately 36%, 32%, and 21% of the Companys consolidated revenues for fiscal 2004 were from
customers from Australia/New Zealand, Europe and the United States, respectively. Approximately
29%, 44%, and 27% of the Companys consolidated revenues in fiscal year 2003 were from Canada, the
United States and other international customers, respectively. Approximately 24%, 53%, and 23% of
its consolidated revenues in fiscal year 2002 were from Canada, the United States and other
international customers, respectively. Sources and Availability of Components The Company purchases computer components and other electronic hardware for assembly into its
systems. These goods are available from multiple suppliers, and prices are subject to the normal
trade practices for the industry. The Company does not depend on any major supplier. No raw
materials are used in the Companys products. Page 15




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Sales, Marketing and Distribution The Companys three business units use a common distribution strategy which relies on a combination
of direct sales and indirect sales through teaming relationships, strategic partnerships and
distributorships to obtain major orders from both new and existing customers. The Companys direct
sales force focuses on the domestic markets and its indirect sales channels focus on the
international and global markets for the Companys products and services. This strategy has
resulted in the Companys navigation systems business winning six open procurement competitions. During fiscal 2004, the Companys three business units had combined 15 employees engaged in sales
and marketing products and three distributors for its navigation systems products. The distribution
of sales ranged from naval customers, including the Royal Navy of the United Kingdom, the Royal
Australian Navy, the Royal New Zealand Navy and the Portuguese Navy, to commercial shipping
companies. The Company also attends selected major international trade shows and conferences. During its
fiscal year ended April 30, 2005, the Companys business units attended shows and conferences as
follows: Navigation Systems Business Unit The Companys Navigation Systems business unit showed ECPINS®-M and/or ECPINS® at the following
trade shows: Pacific Maritime Expo, February 2004  Sydney, AustraliaMACC Show, June 2004 Norfolk  VAUDT (Underseas Technology), October 2004  Honolulu, Hawaii
 Applications Business Unit The Companys Applications business unit showed software applications and tools for situational
awareness at the following trade shows: CDIA , February 2004  Ottawa, OntarioJoint Warrior Interoperability Demonstration (JWID), June 2004  Ottawa, OntarioIntl Coast Guard Industry Days, September 2004  Washington, DCUDT (Underseas Technology), October 2004  Honolulu, HawaiiDGI (Defence Geospatial Intelligence Conference), January 2005  London, England
 Competition Navigation Systems Business Unit Competition for OSLs ECPINS® products comes from companies that sell other integrated navigational
systems based on electronic chart technology. These systems exist in a wide variety of formats,
each offering features and benefits for differing applications. A potential group of competitors comes from the radar/marine equipment segment of the industry and
generally consists of large corporations, including Raytheon Marine GmbH and STN Atlas Elektronik
GmbH from Germany, Kongsberg Maritime AS from Norway, Kelvin Hughes Limited from the United
Kingdom, Sperry Marine a division of Northrop Grumman Corporation from the United States and
Transas Marine Ltd. from the United Kingdom. All of these companies offer competing products. Another category of potential competitors is comprised of companies that primarily target the
pleasure boat market. While the Company currently does not market or intend to market its ECPINS®
products into the pleasure boat market, these companies may extend their operations to compete with
the Company in the navigational systems market. Through extensive research and development, these
companies existing product or products could evolve into solutions that could compete with
ECPINS®. Some of these companies entered the pleasure boat market a few years ago and may have
hundreds of systems in use, any of which could be developed further to compete with ECPINS®. The
companies in this group include: C-Map, Laserplot Inc., Electronic Marine Systems and Maptech. Page 16




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Geomatics Business Unit Competition for OSIGs products and services comes from two groups of organizations. The first and larger group consists of organizations that are largely focused on providing
photogrammetric and mapping services and products. This group is dominated by a few large and
medium sized firms and over 300 small firms. The small firms may also provide services to the large
and medium sized firms on a sub-contract basis. Organizations that fall in the group of large and
medium sized firms include Woolpert LLC, BAE Systems/ADR Inc., HJW GeoSpatial, Inc., Surdex
Corporation, 3DI LLC, Aerial Services Inc., Merrick & Company, EarthData, Photo Science, Inc. and
3001 Inc., all of the U.S., the Mapping Group of MacDonald Detwiller & Associates Ltd.s
Geographic Information Products Division, Intermap Technologies Corporation, Hauts-Monts
International Inc. and SNC  LAVALIN Environment Inc. all of Canada. Firms outside of Canada and
the U.S. that fall into this group are Institut Géographique National of France, Hansa Luftbild AG
of Germany, Trabajos Catastrales, S.A. of Spain, Geocart S.A. of Spain, Cartographic Institute of
Cataluña (ICC) of Spain and Sistemas de Información Geográfica S.A. de C.V. of Mexico. The second group are those organizations focused on providing analysis, production and distribution
of electronic nautical chart data. This group is dominated by the government hydrographic offices
of approximately 30 countries which have historically provided the majority of the worlds nautical
charts. Many of these hydrographic offices now sub-contract a portion of their nautical chart
production to private companies. Private sector competition is limited to a handful of companies.
Companies in this group include: C-Map of Norway and the U.S., Nautical Data International Inc. of
Canada, Transas Dataco Ltd. of United Kingdom, 3001 Inc. of the U.S. through their association with
IIC Technologies Inc. of India, Infotech Enterprises Limited of India and GeoNet Technologies Inc.
of Canada. Applications Business Unit Competition for OSLs COP-IDS® products would come from companies that sell other similar systems
based on electronic chart and land map technology. Currently, the principal competitor for COP-IDS®
is a product developed by Northrop Grumman known as the Command and Control Personal Computer
(C2PC) The addition of the COP-IDS® solution into the market may prompt other companies to develop
and market competing products. Companies that may elect to do this would be defence and commercial
contractors who currently offer products that compete with our ECPINS® products, and companies such
as Intergraph Corporation and ESRI in the U.S. that offer similar land-based information products. Trademarks and Intellectual Property Rights The Company has registered trademarks for ECPINS® and COP-IDS® in Canada and the United States.
The Company either owns or licenses the rights to all intellectual properties used in its products. The Companys trademark and copyright protection contributes to the preservation of its competitive
position in the market. There can be no assurance that any of these will not be challenged,
invalidated or circumvented by third parties. In the future, the Company may not be able to obtain
necessary licenses on commercially reasonable terms. The Company enters into confidentiality and
invention assignment agreements with our employees, and nondisclosure agreements with our suppliers
and customers, as appropriate, so as to limit access to and disclosure of our proprietary
information. These measures may not suffice to deter misappropriation or independent third party
development of similar technologies, which may adversely affect the Company. Page 17




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Government Regulations To managements knowledge, there are no known government regulations that would adversely affect
the Companys business. Certain government required standards are normally a part of industry
knowledge, and as such, would be understood and acted upon by the Company in the normal course of
doing business. The Company has monitored and continues to monitor the relevant government
standards and regulations to mitigate its risk exposure to changes or additions to those government
standards and regulations. Research and Product Development The Company believes that in order to maintain its technological capabilities, it must continue to
develop existing products and introduce new high quality products that challenge and redefine the
industry standards. The Company continued to invest in new product development in 2004 and believes
it to be a critical component of its future success. Plan of Operation The Company expects to expand its operations and increase market share by pursuing potential
strategic acquisitions in the 2005 fiscal year. The Company expects any future acquisitions to
either extend its product line, increase the value of its existing products, or accelerate the
Companys entry into new Geomatics or Applications market segments. At the date of this filing, the
Company has not entered into any letters of intent with potential acquisition targets. C.Organizational structure. The Company presently has five wholly owned subsidiaries: Offshore Systems Ltd. (OSL),
incorporated under the Company Actof British Columbia on February 18, 1990; OSI Geomatics Inc.
(OGI) (formerly Offshore Systems International Inc), incorporated under the laws of Washington
State on September 15, 1992; OSI Geomatics Ltd. (OGL) (formerly Offshore Charts Ltd.), incorporated
under the Business Corporations Actof Yukon Territory on March 20, 1998, Offshore Survey and
Positioning Services Ltd. (OSPS), incorporated under the Company Actof British Columbia on
November 16, 1977 and Mapcon Mapping Consultants, incorporated under the laws of the State of Utah
on August 6, 1987, and acquired by the Company on April 8, 2005. The Companys Navigation Systems
and Applications business unit activities are carried on through OSL. Its Geomatics business unit
activities are conducted through the combined operations of OGL, OGI and Mapcon Mapping Consultants
Inc., which was acquired in April 2005. OSPS has been inactive since 1990 and, has no material
assets; however, it has not been wound up. (FLOW CHART) Page 18




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D.Property, plants and equipment. Human Resources and Facilities As at November 30, 2004, the Company had 69 employees based at its facilities located in North
Vancouver, British Columbia. The Company leases 18,206 square feet and uses the property for its
Headquarters, Sales & Marketing, Research & Development, Software Development, Service Production
and Administration. One employee operates from a clients premise located in Australia. One other employee operates
from an office located in Ottawa, Ontario, Canada. These offices are used for sales and marketing
purposes by the Company. In April 2005, the Company added 12 employees from the acquisition of Mapcon Mapping Consultants
Inc. The 12 employees operate from leased facilities in Salt Lake City, Utah At November 30, 2004 and 2003, all of the Companys plant and equipment were located in Canada.
There are no present plans to construct, expand, or improve facilities. 2004AccumulatedCost
    
    
    depreciation
    
    
    NetEquipment
    
    $
    3,910,980
    
    
    $
    3,038,921
    
    
    $
    872,059Furniture and fixtures
    
    
    131,095
    
    
    
    94,705
    
    
    
    36,390Leasehold improvements
    
    
    222,737
    
    
    
    193,084
    
    
    
    29,653$
    4,264,812
    
    
    $
    3,326,710
    
    
    $
    938,102
 2003AccumulatedCost
    
    
    depreciation
    
    
    NetEquipment
    
    $
    3,772,026
    
    
    $
    2,838,400
    
    
    $
    933,626Furniture and fixtures
    
    
    126,534
    
    
    
    86,378
    
    
    
    40,156Leasehold improvements
    
    
    222,737
    
    
    
    185,673
    
    
    
    37,064$
    4,121,297
    
    
    $
    3,110,451
    
    
    $
    1,010,846
 Environmental Protection Requirements Environmental protection requirements do not have any material adverse financial or operational
effect on the capital expenditures, earnings or competitive position of the Company. Environmental
protection requirements also do not affect the Companys utilization of its property or products.
Furthermore, there have been no environmental issues that affect the Companys utilization of
assets in the current year and past three fiscal years. Page 19




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Item 5. Operating and Financial Review and Prospects Forward-Looking Statements Statements in this report, or any document filed by the Company with the different governing
authorities, by or on behalf of the Company, to the extent not directly and exclusively based on
historical events, constitute forward-looking statements within the meaning of the United States
Private Securities Litigation Reforms Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements
represent the Companys intentions, plans, expectations, and beliefs, and no assurance can be given
that the results described in such statements will be achieved. Forward-looking statements include, without limitation, statements evaluating market and general
economic conditions in the following sections, and statements regarding future-oriented revenues,
costs and expenditures. Investors are cautioned not to place undue reliance on these
forward-looking statements, which reflect managements analysis only as of the date thereof. These
forward-looking statements are subject to certain risks and uncertainties that could cause actual
results to differ materially. Such risks and uncertainties with respect to the Company include the
effects of general economic conditions, industry supply levels, actions by government authorities,
uncertainties associated with legal proceedings and negotiations, foreign exchange rates,
competitive pricing pressures and misjudgements in the course of preparing forward-looking
statements. The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. A. Operating results The Companys annual and quarterly operating results are primarily affected by the level,
timing and duration of customer orders, relative mix of value added products and services, and
fluctuations in materials costs. The Companys operating results are also affected by factors such
as price competition, manufacturing effectiveness and efficiency, the ability to manage inventory
and capital assets effectively, the timing of expenditures in anticipation of increased sales,
customer product delivery requirements and shortages of components or labor. Economic factors such
as foreign exchange fluctuations, government and corporate spending patterns and regulatory
developments may also affect the Companys operating results, which may impact the volatility of
the trading price of its common stock. The following discussion and analysis provides a review of activities and results of operations of
the Company for the fiscal year ended November 30, 2004 (FY2004) in comparison with those for the
fiscal year ended November 30, 2003 (FY2003) and for the fiscal year ended November 30, 2003 in
comparison with those for the fiscal year ended November 30, 2002 (FY2002). This discussion should
be read in conjunction with the Companys 2004 and 2003 audited consolidated financial statements. Overview For FY2004, the Company had net earnings of $248,017, or 1.9% of revenue, compared to earnings of
$352,016, or 3.0% of revenue for FY2003. After adjusting for the dividends on the Class B
Preference Share Series 1, basic earnings per share for FY2004 was $0.00 per share and loss of
$0.01 per share on a diluted basis, compared to FY2003 loss per share of $0.02 on a basic and
diluted basis. The Companys results for FY2004 were largely driven by the Companys revenue growth, increased
sales and marketing expenses, the increasing costs of regulatory compliance and financial
assistance received from Technology Partnerships Canada (TPC). The Company was selected for major
fleet contracts with the Royal Navy of the United Kingdom, as part of a teaming arrangement with
Lockheed Martin UK, Kelvin Hughes Ltd. and with the Royal Australian Navy, as part of the teaming
arrangement with Nautronix Ltd. and Scientific Management Associates. In addition, the Royal New
Zealand Navy exercised contract options with delivery occurring during the third quarter. On April
26, 2004, the Company signed a second agreement with TPC that provides the Company with financial
assistance to fund research and development activities. This assistance reduces the operating
expenditures of the Company. Page 20




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To Managements knowledge, there are no known governmental, economic, fiscal, monetary or political
policies or factors that have materially affected, or could materially affect, directly or
indirectly, the Companys operations or investments by the Companys U.S. shareholders.
Inflationary factors have not had a material impact on the Companys operating results for FY2004
or FY2003. Critical Accounting Policies The Companys consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States (U.S. GAAP) and are presented in Canadian dollars unless
otherwise indicated. All references in this report to financial information concerning the Company
refer to such information in accordance with U.S. GAAP and all dollar amounts in this report are in
Canadian dollars unless otherwise indicated. U.S. GAAP requires the Company to make estimates and
assumptions that affect its reported amounts of assets, liabilities, revenue and expenses, and the
related disclosure of contingent liabilities. The Company bases its estimates on historical
experience and other assumptions that it believes are reasonable in the circumstances. Actual
results may differ from these estimates. During FY2004, the Company did not adopt any new
accounting policy that would have a material impact on the consolidated financial statements, nor
did it make changes to existing accounting policies. The following critical accounting policies
affect the Companys more significant estimates and assumptions used in preparing its consolidated
financial statements: Revenue The Company is required to estimate the costs to complete certain systems and geomatics services
contracts. These estimates are made after taking into consideration factors such as overall
contract value, contract profitability and the timing of revenue recognition. Revenues from these
contracts are recognized using the percentage of completion method in conformity with the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, which measures the
percentage of costs incurred of the total estimated costs to complete for each contract. If the
actual results differ from the estimates included in the financial statements, or if the Company
adjusts its estimates in future periods, the Company may need to adjust the stated revenues for
these projects. If the Company anticipates that a contract or a contract segment will generate a
loss, the Company estimates that loss and records the total expected loss on the contract or
contract segment. Unearned revenues are amounts that have been billed to the customer but have not
been recognized in revenue. Accounts Receivable The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any
of its customers are unable to make required payments. Management specifically analyses the age of
outstanding customer balances, historical bad debts, customer credit-worthiness and changes in
customer payment terms on an ongoing basis and when making estimates of the uncollectability of the
Companys accounts receivable. If the Company determines that the financial condition of any of its
customers deteriorates, increases in the allowance may be made. The vast majority of the Companys
customers are national government departments and, as a result, the Company believes its exposure
to credit risk is low. Unbilled accounts receivable Included in accounts receivable are unbilled amounts where revenue is recognized on long-term
contracts based on percentage of completion exceeding the amount billed to the customer in
accordance with the milestone terms of the contract. The Company believes that unbilled accounts
receivable will be invoiced and collected and reviews all balances for collectability on a
quarterly basis. Inventory Materials and components are stated at the lower of cost and replacement value as determined by the
first-in first-out method. Work-in-process and manufactured parts are stated at the cost of
materials and direct labour applied to the product and the applicable share of overhead. Finished
goods are stated at the lower of cost and net realizable value. Page 21




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The Company assesses the need for inventory write-downs based on its assessment of estimated net
realizable value using assumptions about future demand and market conditions. If market conditions
differ from those originally estimated by the Company, an additional inventory write-down may be
required. Deferred Income Taxes The Company is required to estimate its income taxes in each of the jurisdictions in which it
operates. This process involves estimating the Companys actual current tax exposure, together with
assessing temporary differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities that may be included on
the Companys consolidated balance sheet. The Company recognizes deferred income tax assets to the
extent that their realizations are considered more likely than not and provides a valuation
allowance against any remaining balance. The valuation allowance is based on the Companys
estimates of taxable income by jurisdiction in which it operates and the period over which its
deferred tax assets will be recoverable. In the event that actual results differ from these
estimates, or the Company adjusts these estimates in future periods, the Company may need to adjust
the valuation allowance. Although we believe that our tax estimates are reasonable, the ultimate
tax determination involves significant judgement that is subject to audit by tax authorities in the
ordinary course of business. Stock-Based Compensation and Other Stock-Based Payments The Company accounts for stock based compensation in accordance with the intrinsic value method of
the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and has adopted only the disclosure provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, to present the fair value of grants
under the Companys existing stock-based compensation plans to employees. APB No. 25 requires
compensation cost for stock-based employee compensation plans to be recognized over the vesting
period based on the difference, if any, between the quoted market price of the Companys stock as
of the grant date and the amount an employee must pay to acquire the stock. All options are granted
with an exercise price equal to the market value of the stock on the date of grant. Accordingly, no
compensation has been recognized for grants made under the stock option plan. For stock options granted to non-employees, the Company follows the requirements of SFAS No. 123
and related interpretations. Costs are measured at the estimated fair value of the consideration
received or the estimated fair value of the options issued, whichever is more reliably measurable.
The fair value of the stock options was estimated using the Black-Scholes option pricing model,
using weighted-average assumptions for the following: dividend yield, volatility rate, risk-free
interest rate and expected average life. The value of the options issued for consideration other
than employee services is determined on the earlier of a performance commitment or completion of
performance by the provider of goods or services. Impact of Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory
Costs an amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and spoilage should be recognized as current-period
charges and requires the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after
June 15, 2005. The Company is currently evaluating the impact of SFAS No. 151 on its consolidated
financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R),
which replaces SFAS No. 123 and supercedes APB Opinion No. 25. SFAS No. 123R requires all,
share-based payments to employees, including grants of employee stock options, to be recognized in
the consolidated financial statements based on their fair values using either a
modified-prospective or modified-retrospective transition method beginning with the first interim
or annual period after December 1, 2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS No. 123 no longer will be an alternative to financial statement
recognition. Accordingly, the Company is required to adopt SFAS No. 123R beginning December 1,
2005, and recognize compensation expense for all share-based payments based on grant-date fair
value, including those granted, modified or settled prior to December 1, 2005, that were previously
disclosed on a pro-forma basis. The Company is evaluating the Page 22




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impact of SFAS No. 123R and expects that the adoption of SFAS No. 123R may have a material impact
on the consolidated statements of earnings and earnings per share depending on the future stock
options granted by the Company. In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of
APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153). The amendments made by
SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153
is to be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS No.
153 on its consolidated financial statements. Results of Operations  November 30, 2004 compared to November 30, 2003 The table below presents, for the periods indicated, selected financial data of the Company
expressed as a percentage of total revenues: Year ended November 302004
    
    
    2003Revenues:Software
    
    
    41.5
    %
    
    
    9.0
    %Systems and system components
    
    
    32.2
    %
    
    
    53.9
    %Geomatics
    
    
    22.2
    %
    
    
    30.9
    %Other
    
    
    4.2
    %
    
    
    6.2
    %100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    42.1
    %
    
    
    44.8
    %Gross Profit
    
    
    57.9
    %
    
    
    55.2
    %ExpensesGeneral and administrative
    
    
    24.6
    %
    
    
    21.7
    %Research and development
    
    
    15.6
    %
    
    
    13.4
    %Sales and marketing
    
    
    23.5
    %
    
    
    17.4
    %Depreciation and amortization
    
    
    1.7
    %
    
    
    2.1
    %Interest
    
    
    0.0
    %
    
    
    0.0
    %Foreign exchange loss (gain)
    
    
    0.3
    %
    
    
    1.6
    %Technology Partnerships Canada royalty
    
    
    0.9
    %
    
    
    0.4
    %Technology Partnerships Canada contribution
    
    
    (10.9
    %)
    
    
    (3.3
    %)55.7
    %
    
    
    53.4
    %Earnings from operations
    
    
    2.2
    %
    
    
    1.8
    %Income tax expense (recovery)
    
    
    0.3
    %
    
    
    (1.2
    %)Earnings for the year
    
    
    1.9
    %
    
    
    3.0
    %
 Revenues The Companys revenues from the three business units is derived from four sources: Systems and
system components, Software, Geomatics, and Other. Systems and system components revenues are
derived from sales of system solutions and components of system solutions. Software revenues are
derived from the sale of ECPINS® and COP-IDS® Page 23




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software. Geomatics revenues are generated from
hydrographic chart and land-based mapping services, and from the sales of geo-spatial data for
electronic display. Other revenue includes revenue derived from system repairs, system servicing,
system installation, training and consulting. Consolidated revenue for FY2004 was $13,451,303, compared with $11,520,793 for FY2003, resulting in
an increase of $1,930,510 or 16.8%. The Companys revenues are primarily affected by the level,
timing and duration of customer orders, relative mix of contracts and customer product delivery
requirements. The Company depends heavily on government contracts and derives a significant amount of revenue
from a few customers, which may result in varying revenue and margins. During the FY2004, the
Company continued and expanded its business development initiatives with prospective and existing
customers. Some of the activities did not result in closing orders during this period because of
the long sales cycles, but may yield orders in the future. The main customers for the Companys products and services were the Royal Navy of the United
Kingdom through Lockheed-Martin UK, the Royal Australian Navy through Nautronix Ltd., the U.S.
Coast Guard, the Royal New Zealand Navy and the Portuguese Navy through SICOMSistemas de
Comunições, Lda, of Lisbon, Portugal. Revenue from these customers accounted for 69% of the
consolidated revenue for FY2004. For FY2003, the main customers for the Companys products and
services were the U.S. Coast Guard, Canadian Coast Guard, Canadian Department of National Defence,
Royal Danish Navy and the U.S. Navy. Revenue from these customers accounted for 70% of the
consolidated revenue for FY2003. Approximately 87% of the Companys revenue for the FY2004 was from
national and international governments compared to 91% for FY2003. A significant change in the Companys revenue mix occurred during the last fiscal quarter of 2003
and the six months ended May 31, 2004. Revenues during this period shifted from Systems and system
components to Software. The revenue shift was the result of a change in the nature of contracts the
Company entered into during the last fiscal quarter of 2003 and the first two fiscal quarters of
2004 where, in order to ensure its success in pursuing certain contracts, the Company elected to
sell off-the-shelf or customized versions of its ECPINS® software. Prior to this, the Company
focused on the delivery of ECPINSÒ electronic chart navigation systems which included both
its ECPINS® software and specialized hardware. During the third and fourth fiscal quarters of 2004 the Companys revenue mix returned to its
historical makeup where the Companys contracts focused on the delivery of ECPINSÒ electronic
chart navigation systems which are reported as Systems and systems component revenue. Segment Results Revenue from the Navigation Systems business unit for FY2004 was $10,232,671 compared to $7,927,166
for FY2003, an increase of $2,305,505 or 29.1%. The increase in revenue in FY2004 over FY2003 is
attributable to contracts from the Royal Navy of the United Kingdom and the Royal Australian Navy
that were awarded to the Company in late FY2003 and early FY2004. Revenue from the Geomatics business unit for FY2004 was $3,027,353 compared to $3,593,627 for
FY2003, a decrease of $566,274 or 15.8%. The business unit revenue levels decreased in the current
fiscal year compared with that of the previous fiscal year as the result of supplier delays
experienced by the Company in receiving the contracted services to satisfy customer needs and
increased difficulty in penetrating the U.S. geomatics market. Revenue from the Applications business unit was $191,279 for FY2004, its first year of operations.
The Applications business unit develops software applications and tools for situational awareness
and provides products and services to military forces, government agencies and systems integrators to enable improved situational
awareness. The sales cycle into government customers for Applications products can be upwards of
three years. The Applications business units initial product is Common Operational Picture 
Image Display Server (COP-IDS®). In all three business units, the Company continues to invest significant corporate, sales and
marketing resources in identifying and pursuing new opportunities and contracts, both in its
existing customer base and with new prospective customers. The following tables present revenues
from sales to customers outside the consolidated entity for the past two fiscal years ended
November 30 by source: Page 24




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##### 



2004NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalSoftware
    
    $
    5,496,118
    
    
    $
    80,422
    
    
    $
    
    
    
    $
    5,576,540Systems and system components
    
    
    4,217,883
    
    
    
    110,857
    
    
    
    
    
    
    
    4,328,740Geomatics
    
    
    
    
    
    
    
    
    
    
    2,979,728
    
    
    
    2,979,728Other
    
    
    518,670
    
    
    
    
    
    
    
    47,625
    
    
    
    566,295Total Revenue
    
    
    10,232,671
    
    
    
    191,279
    
    
    
    3,027,353
    
    
    
    13,451,303
 2003NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalSoftware
    
    $
    1,036,417
    
    
    $
    
    
    
    $
    
    
    
    $
    1,036,417Systems and system components
    
    
    6,208,464
    
    
    
    
    
    
    
    
    
    
    
    6,208,464Geomatics
    
    
    
    
    
    
    
    
    
    
    3,560,440
    
    
    
    3,560,440Other
    
    
    682,285
    
    
    
    
    
    
    
    33,187
    
    
    
    715,472Total Revenue
    
    
    7,927,166
    
    
    
    
    
    
    
    3,593,627
    
    
    
    11,520,793
 Gross Profit For FY2004, the Companys gross profit increased by $1,420,254 or 22.3% to $7,781,979 from
$6,361,725 for FY2003. Gross profit percentage increased to 57.9% from 55.2% when comparing FY2004
to FY2003. A significant change in the Companys revenue mix occurred during the last fiscal quarter of 2003
and the six months ended May 31, 2004. Revenues during this period shifted to Software from Systems
and system components and resulted in the Company reporting higher gross profit percentage. The
revenue shift was the result of a change in the nature of contracts the Company entered into during
the last fiscal quarter of 2003 and the first two fiscal quarters of 2004. These contracts required
the Company to deliver off-the-shelf or customized versions of its ECPINS® software. During the third and fourth fiscal quarters of 2004 the Companys revenue mix returned to its
historical makeup where the Companys contracts focused on the delivery of ECPINSÒ electronic
chart navigation systems. Segment Results Gross profit from the Navigation Systems business unit for FY2004 was $6,561,870 compared to
$4,797,613 for FY2003, an increase of $1,764,257 or 36.8%. Gross profit percentage increased to
64.1% from 60.5% period over period. The increase was attributable to the increased software
revenue for the six months ended May 31, 2004 and resulted in the Navigation Systems business unit
reporting gross margin percentages that were higher than those reported historically. During the
third and fourth fiscal quarters of 2004, the Companys revenue mix returned to its historical
makeup which has the Companys contracts focused on the delivery of ECPINSÒ electronic chart
navigation systems. Gross profit from the Geomatics business unit for FY2004 was $1,048,591 compared to $1,564,112 for
FY2003, a decrease of $515,521 or 33.0%. Gross profit percentage decreased to 34.6% from 43.5%
period over period. The decrease is the result of the competitive nature of the geomatics market
where customers are very price sensitive and the increasing protectionism the Geomatics business
unit has encountered entering the U.S. geomatics market. The Company plans to implement changes in
the strategies to improve its market position in the U.S. Gross profit for the Companys new Applications business unit was $171,518 for FY2004, its first
year of operations. Gross profit percentage for FY2004 was 89.7% and reflected the contract mix
that included more applications software contracts than applications systems contracts. Page 25




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General and Administrative Expenses General and administrative (G&A) expenses consist mainly of salaries and benefits of management and
administrative personnel, professional fees, public company expenses, related facility costs and
other general administrative expenses, net of interest and other income. For FY2004, G&A increased
by $804,391 or 32% to $3,302,412 from $2,498,021 for FY2003. As a percentage of revenue, G&A
increased to 24.6% from 21.7% period over period. The increase is the result of increased
professional fees, salaries, directors fees and directors and officers insurance, and decreased
interest income that resulted from lower cash reserves during the periods. The Company anticipates
that as a result of recently introduced regulations in Canada and the U.S., the Company will
continue to experience increases in costs primarily relating to professional fees. Research and Development Expenses Research and development (R&D) expenses consist mainly of salaries and benefits of software and
hardware engineering personnel, sub-contractor costs, facilities expenses and related expenses. The
Company expenses research and development costs in the period incurred unless, in the opinion of
management, certain development costs meet the deferral criteria under U.S. GAAP, in which case
development expenditures are capitalized and amortized over the estimated life of the related
products. The Company has not capitalized any development costs for FY2004 or FY2003. For FY2004, R&D costs increased by $556,283 or 35.9% to $2,104,806 or 15.6% of revenue, compared to
$1,548,523 or 13.4% of revenue for FY2003. The increase in spending is the result of additional
salaries and benefits for new staff to support the additional R&D activities related to the
development of the recently released COP-IDS® product and the continuing development of the ECPINS®
product. The increase in R&D costs for FY2004 does not reflect approximately $282,000 that was
charged to cost of sales to support the software customization required to meet the needs of
specific customers. For FY2003, R&D costs charged to cost of sales to support the software
customization required to meet the needs of specific customers was approximately $114,000. In November of 1999, the Company entered into an agreement with Technology Partnerships Canada
(TPC) whereby TPC granted financial assistance to the Company to fund research and development
activities to March 31, 2003. As at November 30, 2003, the Company had received the maximum
eligible contribution of $4,000,177. Under the terms of the agreement, the Company is required to
pay TPC a royalty based on the revenue of its subsidiary Offshore Systems Ltd. To November 30,
2004, the Company has paid royalties of $929,303 (2003  $745,911) and accrued for future payment
of royalties of $311,851 (2003  $370,819). Royalty payments will continue until the cumulative
royalties paid or payable to November 30, 2008 are at least $7,810,230 or until November 30, 2014. In April of 2004, the Company entered into an agreement with TPC whereby TPC granted financial
assistance to the Company to fund research and development activities to March 31, 2007. The
maximum eligible contribution is $3,768,391. As at November 30, 2004, the Company has claimed for
$1,471,414 of eligible assistance under the TPC program. The Company will receive the remaining
contributions over the remaining term. Also, under the terms of the agreement, the Company is
required to pay TPC a royalty based on the revenue of its subsidiary Offshore Systems Ltd.
commencing January 2006. Royalty payments will continue until the cumulative royalties paid or
payable to December 31, 2013 are at least $6,079,176 or until December 31, 2017. There were no
royalties paid or payable in connection with this agreement for fiscal 2004. Sales and Marketing Expenses Sales and marketing (S&M) expenses consist primarily of compensation of sales and marketing
personnel, as well as expenses associated with advertising, trade shows, facilities and other
expenses related to the sales and marketing of the Companys products and services For FY2004, S&M
expenses increased by $1,160,121 or 58.0%, to $3,160,359 or 23.5% of revenue from $2,000,238 or
17.4% of revenue in FY2003. The increase in expenses was the result of the Companys additional S&M
staff hired to pursue new business opportunities. The Company has increased its level of business
development activity relating to its expansion efforts into American, European and Australasian
markets. The expansion effort targets new and existing customers in the military agencies of
Canada, U.S., European NATO and Page 26




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##### 



other allies of Canada to increase the profile of the Company and its products through the
establishment of marketing agreements with companies local to the targeted regions and to broaden
the Companys customer base and thereby reducing its dependence on the Companys current few
international customers. Some of these activities may not result in closing orders during the
current year but may yield orders in subsequent fiscal years. The Company expects a continued
increase in S&M expenditures for the ongoing pursuit of these opportunities. Depreciation and Amortization Total depreciation and amortization increased by $2,585 or 0.7% to $362,564 or 1.7% of revenues for
FY2004 from $359,979 or 2.1% of revenues for FY2003. The increase reflects the acquisitions in the
period and mix of property, plant and equipment in FY2004. Interest Interest expense decreased to $2,045 for FY2004 from $2,824 for FY2003. The Company did not utilize
its operating line credit facility of $1,000,000 during FY2004. Foreign Exchange Foreign exchange loss for FY2004 decreased by $113,623 or 74.8% to $38,338 from $151,961 for
FY2003. The decrease in fiscal 2004 was the result of the Company having established a policy
during the first quarter of FY2003 to hedge against foreign exchange exposure. Based on the FY2004 operations, the Company estimates that a U.S. $0.01 increase in the exchange
rate of the U.S. dollar relative to the Canadian dollar would have an annualized impact of reducing
earnings before income taxes by approximately $25,000. An Australian $0.01 increase in the exchange
rate of the Australian dollar relative to the Canadian dollar would have an annualized impact of
reducing earnings before income taxes by approximately $12,000. An increase of 0.01 in the
exchange rate of the Euro relative to the Canadian dollar would have an annualized impact of
reducing earnings before income taxes by approximately $10,000. The Company uses foreign exchange forward contracts to hedge transactions denominated in U.S.
dollars, Australian dollars and Euros. The purpose of the Companys hedging activities is to reduce
the level of exposure to exchange rate movements. The fair value of derivative instruments
generally reflects the estimated amounts that the Company would receive or pay to settle the
contracts at November 30, 2004. The requirement to record derivatives at their fair market value
has not had a material impact on the Companys consolidated financial statements. Income Taxes The Company estimated that it will have sufficient taxable earnings in future years to utilize a
portion of the Companys $3,079,232 Canadian and $315,342 U.S. non-capital losses carried forward
and other tax balances. As a result of this assessment, the Company has recognized a deferred tax
recovery of $479,446 for FY2004 compared to a deferred tax recovery of $363,484 for FY2003. In
accordance with U.S. GAAP, the Company provided a valuation allowance of $3,842,899 in FY2004
compared with $3,758,072 in FY2003 against the total deferred tax asset as it is not considered
more likely than not that the remaining deferred tax asset will be recovered. The Company
continues to evaluate its taxable position quarterly and considers factors such as estimated
taxable income, the history of losses for tax purposes and the growth of the Company, among others. For FY2004, the Company recorded current tax expense of $521,404, which is the tax expense that the
Company would have incurred had the Company not had available losses carried forward from prior
years. This compares to a current tax expense for the prior fiscal year of $223,385. Page 27




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##### 



Backlog Total backlog as at November 30, 2004 was $21.1 million compared to $3.3 million at November 30,
2003. Total backlog is the total of the firm and option backlogs. Firm backlog consists of firm,
fixed, signed orders issued to the Company and executable by the Company subsequent to the balance
sheet date. Firm backlog as at November 30, 2004 was at $8.4 million compared to $0.9 million at
November 30, 2003. Option backlog consists of unexercised contract options at the balance sheet
date and indefinite-quantity contracts executable by the Company subsequent to the balance sheet
date. Option backlog as at November 30, 2004 was at $12.7 million compared to $2.4 million at
November 30, 2003. There is no guarantee or certainty that the Companys customers will elect to
exercise their contract option backlog. Should the Companys customers elect to exercise contract
options or place orders against indefinite-quantity contracts, the option backlog converts to firm
backlog, which then may convert to revenue as contract execution occurs. Total backlog, firm
backlog and option backlog are non-GAAP measures that do not have a standardized meaning and are
likely not comparable to similar measures presented by other issuers. These measures also do not
have a comparable GAAP measure. The timing of the awarding of major contracts to the Company can significantly impact the Companys
total backlog position and revenue for the period. Historically, major contracts that have been
awarded to the Company have taken up to three years to finalize with the contracting process
involving lengthy discussions and negotiations with several groups of people within the prospective
customers organization. The Company has continually pursued, and will continue to pursue, major
contracts with a lengthy sales cycle and, as a result, there could be large variations in its total
backlog position and revenue from one fiscal quarter to another. The increased firm backlog and
option balances at November 30, 2004 as compared to November 30, 2003 were the result of the
Company and its partners winning the Royal Navy of the United Kingdom tender and additional
contract awards from the Royal Australian Navy. Because governments approve budget expenditures on an annual basis, multi-year contracts with
government agencies have a termination-for-convenience clause that allows contracts to be
terminated by the contracting government agency should future budget funding not be approved.
Historically, the termination-for-convenience clause has not been exercised by any Company
customer. The Company has included the full value of these government contracts in total backlog. Page 28




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##### 



Results of Operations  November 30, 2003 compared to November 30, 2002 Overview For FY2003, the Company had earnings of $352,016, or 3.0% of revenue, compared to earnings of
$1,694,126, or 12.3% of revenue for the FY2002. After adjusting for the dividends on the Class B
Preference Share Series 1, loss per share for FY2003 was $0.02 on a basic and diluted basis,
compared to FY2002 basic earnings per share of $0.07 and $0.06 per share on a diluted basis. The lower revenue in FY2003 as compared to FY2002 was largely attributable to the substantial
completion in fiscal 2002 of the Canadian Department of National Defence contract awarded to the
Company in fiscal 2001, the Marinette Marine Corp. contracts to provide ECDIS systems for the U.S.
Coast Guard Juniper class buoy tenders, and the substantial completion of the Danish Navy contract
in early fiscal 2003. The table below presents, for the periods indicated, selected financial data of the Company
expressed as a percentage of total revenues: Year ended November 302003
    
    
    2002Revenues:Systems and system components
    
    
    53.9
    %
    
    
    70.3
    %Geomatics
    
    
    30.9
    %
    
    
    17.0
    %Software
    
    
    9.0
    %
    
    
    7.0
    %Other
    
    
    6.2
    %
    
    
    5.7
    %100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    44.8
    %
    
    
    51.4
    %Gross Profit
    
    
    55.2
    %
    
    
    48.6
    %ExpensesGeneral and administrative
    
    
    21.7
    %
    
    
    19.0
    %Research and development
    
    
    13.4
    %
    
    
    11.0
    %Sales and marketing
    
    
    17.4
    %
    
    
    12.8
    %Depreciation
    
    
    2.1
    %
    
    
    1.2
    %Interest
    
    
    0.0
    %
    
    
    0.0
    %Foreign exchange loss (gain)
    
    
    1.6
    %
    
    
    (0.2
    %)Technology Partnerships Canada royalty
    
    
    0.4
    %
    
    
    3.4
    %Technology Partnerships Canada contribution
    
    
    (3.3
    %)
    
    
    (6.3
    %)53.4
    %
    
    
    41.0
    %Earnings from operations
    
    
    1.8
    %
    
    
    7.6
    %Proceeds on settlement of claim
    
    
    0.0
    %
    
    
    1.6
    %Earnings before tax recovery
    
    
    1.8
    %
    
    
    9.2
    %Income tax recovery
    
    
    1.2
    %
    
    
    3.1
    %Earnings for the year
    
    
    3.0
    %
    
    
    12.3
    %
 Page 29




---



##### 



Revenues Consolidated revenue for FY 2003 was $11,520,793, compared with $13,814,133 for FY2002, a decrease
of $2,293,340 or 16.6%. The Companys revenues are primarily affected by the level, timing and
duration of customer orders and customer product delivery requirements. The Company depends heavily
on government contracts and derives a significant amount of revenue from a few customers, which may
result in varying revenue and margins. During FY2003, the Company continued and expanded its
business development initiatives with prospective and existing customers. Some of these activities
did not result in closing orders during the year but may yield orders in subsequent fiscal years.
The main customers for the Companys products and services were the U.S. Coast Guard, Canadian
Coast Guard, Canadian Department of National Defense, Royal Danish Navy and the U.S. Navy. Revenue
from these customers accounted for 70% of the consolidated revenue for FY2003 compared to 90% of
the consolidated revenue for FY2002. Furthermore, approximately 91% of the Companys revenue for
the FY2003 was from national and international governments compared to 98% for FY2002. Segment Results Revenue from the Navigations systems business unit for FY2003 decreased to $7,927,166 from
$11,466,669 for FY2002, for a decrease of $3,539,503 or 30.8%. This decrease was largely
attributable to the substantial completion in fiscal year 2002 of the Canadian Department of
National Defense contract awarded to the Company in FY2001, the Marinette Marine Corp. contracts to
provide ECDIS systems for the U.S. Coast Guard Juniper class buoy tenders, and the substantial
completion of the Danish Navy contract during FY2003. Revenue from the Geomatics business unit for FY2003 was $3,593,627 compared to $2,347,464 for
FY2002, an increase of $1,246,163 or 53.1%. In FY2003, most of the increased revenue resulted from
the Companys expansion into the land mapping market in the fourth quarter of FY2002, although some
increases in revenues stemmed from the existing customer base in the nautical chart market. The Applications business unit began operation in FY2004. Consequently, there were no revenues in
FY2003 or FY2002. In both operating segments, the Company continues to invest significant corporate, sales and
marketing resources in identifying and pursuing new opportunities and contracts, both in its
existing customer base and with new prospective customers. The following tables present revenues
from sales to customers outside the consolidated entity for FY2003 and FY2002 by source: 2003NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalSoftware
    
    $
    1,036,417
    
    
    $
    
    
    
    $
    
    
    
    $
    1,036,417Systems and system components
    
    
    6,208,464
    
    
    
    
    
    
    
    
    
    
    
    6,208,464Geomatics
    
    
    
    
    
    
    
    
    
    
    3,560,440
    
    
    
    3,560,440Other
    
    
    682,285
    
    
    
    
    
    
    
    33,187
    
    
    
    715,472Total Revenue
    
    
    7,927,166
    
    
    
    
    
    
    
    3,593,627
    
    
    
    11,520,793
 2002NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalSoftware
    
    $
    970,323
    
    
    $
    
    
    
    $
    
    
    
    $
    970,323Systems and system components
    
    
    9,707,393
    
    
    
    
    
    
    
    
    
    
    
    9,707,393Geomatics
    
    
    
    
    
    
    
    
    
    
    2,347,464
    
    
    
    2,347,464Other
    
    
    788,953
    
    
    
    
    
    
    
    
    
    
    
    788,953Total Revenue
    
    
    11,466,669
    
    
    
    
    
    
    
    2,347,464
    
    
    
    13,814,133
 Page 30




---



##### 



Gross Profit The Companys gross profit decreased by $351,657 or 5.2% to $6,361,725 in FY2003 from $6,713,382 in
FY2002. Gross profit percentage increased to 55.2% in FY2003 from 48.2% in FY2002. The decrease in
gross profit was due to lower revenues in FY2003 compared to FY2002. The gross profit percentage
increase was attributable to a major project that included a large proportion of third-party
systems at low gross profit margins in FY2002. Segment Results Gross profit from the Navigation Systems business unit for FY2003 was $4,797,613 compared to
$5,896,638 for FY2002, a decrease of $1,099,025 or 18.6%. Gross profit percentage increased to
60.5% from 51.4% period over period. The decrease in gross profit and increase in gross profit
percentage is attributable to the completion of the Canadian Department of National Defense
contract which included a large proportion of third-party systems at low gross profit margins in
FY2002. Gross profit from the Geomatics business unit for FY2003 was $1,564,112, compared to $816,744 for
FY2002, an increase of $747,368 or 91.5%. Gross profit percentage increased to 43.5% in FY2003 from
34.8% in FY2002. The increase in gross profit and gross profit percentage is due to the Companys
expansion into the land mapping market. The Applications business unit began operation in FY2004. Consequently, there were no gross profit
earned in FY2003 or FY2002. General and Administrative Expenses G&A expenses decreased by $130,374 or 5.0% in FY2003 to $2,498,021 from $2,628,395 in FY2002. As a
percentage of revenue, G&A increased to 21.7% in FY2003 from 19.0% in FY2002. The Company continues
to protect its Intellectual Property and its ability to conduct its businesses in an unrestricted
manner through the appropriate avenues. These activities may result in increased G&A expenses in
future periods. Research and Development Expenses FY2003 spending on R&D increased by $31,995 or 2.1% to $1,548,523 or 13.4% of revenue, compared to
$1,516,528 or 10.9% of revenue in FY2002. The increased spending is the result of additional
salaries and benefits for new staff to support the additional R&D activities related to the
development of the COP-IDS® product and the continuing development of the ECPINS® product. During FY2003, the Company incurred costs of $376,880 and claimed the full $376,880 under its
November 1999 TPC funding agreement. The Company recorded this contribution as a reduction of
expenses on its statement of earnings. As of November 30, 2003, the Company had claimed a full
amount eligible of $4,000,177 of TPCs repayable contribution. As of November 30, 2003, the Company
had paid $745,911 in royalties and had accrued $574,833 in royalties for payment after November 30,
2003. Sales and Marketing Expenses S&M expenses increased by $238,569 or 13.5% in FY2003 to $2,000,238 or 17.4% of revenue, from
$1,761,669 or 12.7% of revenue in FY2002. The increase in expenses was the result of the Companys
increased level of business development activity relating to its expansion efforts into American,
European and Australasia markets. These expansion efforts required the Company to hire additional
S&M staff to pursue specific opportunities in these regions. The expansion effort targets the
military agencies of Canada, NATO and other allies of Canada to increase the profile of the Company
and its products through the establishment of marketing agreements with companies local to the
targeted regions. Some of these activities did not result in closing orders during the year but may
yield orders in subsequent fiscal years. Page 31




---



##### 



Depreciation Total depreciation increased in FY2003 by $69,871 or 40.8% to $241,295 or 2.1% of revenue from
$171,424 or 1.2% of revenue in FY2002. The increase reflects the dollar value and mix of fixed
assets in the Company for FY2003. Interest Interest expenses decreased to $2,824 from $3,582 in FY2002 because the Company did not utilize its
credit facility during FY2003. Earnings from Operations Earnings from operations for FY2003 were $211,917, or 1.8% of revenue, compared to $1,045,732 for
FY2002, or 7.6% of revenue, for a decrease of $833,815 or 79.7%. Earnings from operations
decreased as the result of the general decrease in business volumes. Proceeds on Settlement of Claim Proceeds from settlement of claim for FY2002 were $221,978. This amount is the gross amount of a
settlement of a lawsuit in favor of the Company. Income Taxes At November 30, 2003, the Company estimated that it will have sufficient taxable earnings in future
years to utilize a portion of the Companys $4,502,648 Canadian and $451,030 U.S. non-capital
losses carried forward. As a result of this assessment, the Company recognized a deferred tax asset
of $168,807 for FY2003. In accordance with U.S. GAAP, the Company provided a valuation allowance of
$3,758,072 compared to $2,985,840 in FY2002 against the total deferred tax asset as it is not
considered more likely than not that the remaining deferred tax asset will be recovered. The
Company continues to evaluate its taxable position quarterly and considers factors such as
estimated taxable income, the history of losses for tax purposes and the growth of the Company,
among others. Backlog Total backlog as at November 30, 2003 was $3.3 million compared to $6.1 million at November 30,
2002. Total backlog is the total of the firm and option backlogs. Firm backlog consists of firm,
fixed, signed orders issued to the Company and executable by the Company subsequent to the balance
sheet date. Firm backlog as at November 30, 2003 was at $0.9 million compared to $3.7 million as at
November 30, 2002. Option backlog consists of unexercised contract options at the balance sheet
date and indefinite-quantity contracts executable by the Company subsequent to the balance sheet
date. At November 30, 2003, option backlog was $2.4 million, which is the same as option backlog
at November 30, 2002. Subsequent to November 30, 2003, the Company booked an additional $4.0
million in firm, fixed, signed orders that will be executed in FY2004 and an additional $14.5
million of option backlog to be executed during and after FY2004. The timing of the awarding of major contracts to the Company can significantly impact the Companys
total backlog position. Historically, major contracts that have been awarded to the Company have
taken up to three years to finalize, with the contracting process involving lengthy discussions and
negotiations with several groups of people within the prospective customers organization. The
Company has continually pursued and will continue to pursue major contracts and, as a result, there
could be large variations in its total backlog position from one fiscal year to another. Because governments approve budget expenditures on an annual basis, multi-year contracts with
government agencies have a termination-for-convenience clause that allows the contract to be
terminated should future budget funding not be approved. The Company has included the full value of
these contracts in backlog as no evidence exists that the contracts would be terminated. Page 32




---



##### 



B. Liquidity and capital resources Years ended November 30, 2004 and 2003 The Company strives to maintain cash-contributing profitable operations that provide an adequate
liquidity and capital resource base for growth. At November 30, 2004, the Company had current assets of $10,964,025, current liabilities of
$2,676,227 and a cash position of $251,037. Working capital increased $215,872 to $8,287,798 at
November 30, 2004 from $8,071,926 at November 30, 2003 primarily due to a combination of an
increase in accounts receivable and a decrease in cash. The Company has credit facilities with a Canadian chartered bank consisting of an operating line,
standby letters of credit and forward exchange contract facilities. The credit facilities permit
the Company to borrow funds directly for general corporate purposes (including acquisitions) at
floating rates. The operating line bears interest at the chartered banks prime lending rate plus
0.5% with interest payable monthly. The standby letters of credit are denominated in U.S. dollars
and bear interest at the rate of 1.25% per annum. Funds drawn on the operating line and the standby
letters of credit are repayable on demand. At November 30, 2004, the Company had an operating line
of $1,000,000 available with a Canadian chartered bank collateralized by accounts receivable and
inventory. There were no outstanding borrowings against the operating line at this date. This line
was further extended to $2,000,000 pursuant to a renewed credit facility signed in February 2005.
As of November 30, 2004, the Company has issued standby letters of credit totalling U.S. $127,000
and Australian $283,886. The Company has utilized the standby letters of credit to support
performance obligations to its customers to complete its contractual requirements. In the event the
Company is unable to meet its performance obligations, funds from the letter of credit would be
provided to the Company to fulfill its contractual requirements. The Company has also entered into
foreign exchange forward contracts in the amount of U.S. $851,196, Australian $3,678,061 and
383,310. The Company utilizes its forward exchange contract facility to reduce its exposure to
exchange rate movements. Cash flows from operating activities before changes in non-cash working capital items for FY2004,
were $690,939 compared with $586,238 for FY2003, an increase of $104,701. The increase in cash flow
for FY2004 was the result of the Companys decreased earnings for FY2004 being offset by the effect
of increases to cash flow provided by the non-cash items stock based compensation and future tax
assets, as compared to FY2003. Changes in non-cash working capital items for FY2004 were a usage of cash of $4,118,532 compared to
usage of cash of $2,475,466 for FY2003. This change was due to an increase of $4,518,642 in
accounts receivable, which is the result of milestone billing terms that exist in certain
contracts. The changes in non-cash working capital items between these two periods are all within
the normal business activities of the Company. Net cash provided by financing activities for FY2004 amounted to $199,931 compared to net cash
provided of $2,773,899 for FY2003. Preferred share issue costs used funds of $20,115 for FY2004
compared to the issuance of warrants and Class B Preference Shares net of issue costs having
provided funds of $2,726,995 for FY2003. The issuance of common shares provided funds of $398,479
for FY2004 compared to having provided funds of $606,069 for FY2003. The payment of dividends on
the Class B Preference Shares used funds of $178,433 for FY2004 compared to a usage of funds of
$53,484 for FY2003. During the period January 16, 2003 to January 15, 2004, the Company purchased
455,000 of its common shares under a normal course issuer bid at an average cost of $1.11 per share
for an aggregate consideration of $505,681. The premium on the purchase and cancellation of the
common shares under the normal course issuer bid was charged to the deficit. Cash used in investing activities totalled $358,856 for FY2004 compared with $291,164 for FY2003.
The increase is reflective of the acquisitions of property, plant and equipment commensurate with
the Companys plans to obtain additional systems and facilities to accommodate its current and
future anticipated growth. As a result of the above mentioned changes, the net decrease in cash amounted to $3,586,518 for
fiscal 2004 compared to an increase of $593,507 for fiscal 2003. The Company believes that cash flow from operating activities, together with cash on hand,
borrowings available under its revolving credit facilities and the additional funds provided by the
private placement completed in April 2005 (see Item 4A  History and development of the Company
and Item 8B  Significant changes of this document) will be Page 33




---



##### 



sufficient to fund currently anticipated working capital, planned capital spending and debt service
requirements for the next twelve months. While the Companys cash flows have historically been
sufficient to support operations, recent expansion and acquisition activities have required the
Company to raise additional capital externally. Additional resources may be necessary for the
Company to finance its growth initiatives in the future. There can be no assurance that thereafter
resources will be adequate and that additional financing will be available to the Company. The
Company has not identified any further potential sources of long-term liquidity. Years ended November 30, 2003 and 2002 The Company concluded the 2003 fiscal year with a positive cash position. At November 30, 2003, the
Company had current assets of $10,377,836, current liabilities of $2,305,910 and a cash position of
$3,837,555. Working capital increased $3,607,303 to $8,071,926 at November 30, 2003 from $4,464,623
a year earlier, primarily through an increase in accounts receivable and a decrease in unearned
revenue. The Company had credit facilities consisting of an operating line, standby letters of credit, and
forward exchange contract facilities. The credit facilities permitted the Company to borrow funds
directly for general corporate purposes (including acquisitions) at floating rates. No borrowings
against the operating line were outstanding as at November 30, 2003. The Company had issued standby
letters of credit totalling US$127,000. The Company had utilized the standby letters of credit to
back certain performance obligations with its customers. At November 30, 2003, the Company had
outstanding forward exchange contracts in the amount of US$1,343,705. During FY2003, the Company
entered into forward exchange contracts totalling US$3,298,705. Forward exchange contracts
totalling US$2,305,000 matured during the FY2003. The Company utilized its forward exchange
contract facility to reduce the level of exposure to currency exchange rate movements. Fiscal year ended November 30, 2003 operating cash flow, before changes in non-cash working capital
items, was $586,238, compared with $1,587,170 in FY2002, a decrease of $1,000,932. The reduction
reflected the decreased profitability of the Company for FY2003. Changes in non-cash working
capital items were a usage of cash of $2,475,466 for FY2003 compared to $357,400 for the previous
year. The increase in the usage of cash was due to an increase of $1,590,247 in unearned revenues
and $660,990 in accounts receivable, which are the result of milestone billing terms that exist in
certain contracts. These changes in non-cash working capital items between the two fiscal years are
all within the normal business activities of the Company. Net cash provided by financing activities amounted to $2,773,899 in FY2003, compared to $568,252 in
FY2002. The improvement of $2,205,647 was largely the result of the issue of Class B Preference
Shares Series 1 Convertible and share purchase warrants. Cash used in investing activities in FY2003 totalled $291,164, compared with $591,599 in FY2002.
The decrease is reflective of the decrease in property, plant and equipment acquisitions. The net increase in cash amounted to $593,507 in FY2003, compared with a net cash position increase
of $1,206,423 in FY2002. C. Research and development, patents and licenses, etc. Details of the Companys research and development expenditures and TPC agreement can be found
under Item 5A Operating Results  Results of Operations  Research and Development Expenses. D. Trend information. The Companys annual and quarterly operating results are primarily affected by the level,
timing and duration of customer orders, relative mix of value added products and services and
fluctuations in materials costs. The tables below present, for the periods indicated, selected
quarterly unaudited financial data of the Company for FY2004 and FY2003: Page 34




---



##### 



Fiscal Year 2003 (unaudited)Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Revenue
    
    
    3,563,175
    
    
    
    2,958,027
    
    
    
    2,275,152
    
    
    
    2,724,439Gross profit
    
    
    1,860,487
    
    
    
    1,694,246
    
    
    
    1,176,210
    
    
    
    1,630,782Above as a percentage of revenue
    
    
    52.2%
    
    
    
    57.3%
    
    
    
    51.7%
    
    
    
    59.9%Net earnings (loss)
    
    
    239,910
    
    
    
    143,824
    
    
    
    (347,135)
    
    
    
    315,417Above as a percentage of revenue
    
    
    6.7%
    
    
    
    4.9%
    
    
    
    (15.3%)
    
    
    
    11.6%Earnings
(loss) per share -  basic
    
    
    0.01
    
    
    
    0.01
    
    
    
    (0.01)
    
    
    
    0.01Earnings
(loss) per share -  diluted
    
    
    0.01
    
    
    
    0.01
    
    
    
    (0.01)
    
    
    
    0.01
 Fiscal Year 2004 (unaudited)Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Revenue
    
    
    4,029,760
    
    
    
    2,773,835
    
    
    
    2,951,571
    
    
    
    3,696,137Gross profit
    
    
    2,568,773
    
    
    
    1,775,003
    
    
    
    1,469,554
    
    
    
    1,968,649Above as a percentage of revenue
    
    
    63.7%
    
    
    
    64.0%
    
    
    
    49.8%
    
    
    
    53.3%Net earnings (loss)
    
    
    551,791
    
    
    
    380,088
    
    
    
    (455,922)
    
    
    
    (227,940)Above as a percentage of revenue
    
    
    13.7%
    
    
    
    13.7%
    
    
    
    (15.4%)
    
    
    
    (6.2%)Earnings
(loss) per share -  basic
    
    
    0.02
    
    
    
    0.01
    
    
    
    (0.02)
    
    
    
    (0.01)Earnings
(loss) per share -  diluted
    
    
    0.00
    
    
    
    (0.01)
    
    
    
    (0.03)
    
    
    
    (0.02)
 Sales Contracts The timing and duration of major contracts awarded to the Company largely dictate
trends in the Companys revenue stream. The Company depends heavily on government contracts and
derives a significant amount of revenue from a few customers, which may result in varying revenue,
gross profit and earnings. Government award of major contracts depends on many factors such as the
procurement policies, structure and management of government departments, budget considerations,
domestic and foreign political developments, and protectionism. Product mix The relative mix of value added products and services, and fluctuations in materials
costs in the contracts that have been awarded to the Company may affect the revenue and net income
of the Company. Contracts that include a large proportion of third-party systems or software will
provide a lower return to the Company as, generally, these costs are flowed through to the customer
with little to no mark-up by the Company. On the other hand, contracts for ECPINS® software or
systems contracts that have a large software component provide a high return to the Company as the
costs associated with this type of contract are relatively minor. For the 2005 fiscal year, the
Company expects increased sales of the Companys COP-IDS® products will impact the mix of revenue,
gross profit and earnings earned by the Company. Strategic acquisitions The Company may expand its operations and business by acquiring additional
businesses, products or technologies. There can be no assurance that acquired businesses, products
or technologies, if any, will achieve the anticipated revenues and income growth. Acquisitions
could also result in potentially dilutive issuances of equity securities. The failure of the
Company to manage its acquisitions strategy successfully could have a material adverse effect on
the Companys businesses, earnings and financial condition. The Company expects to expand its
operations and increase market share by pursuing potential strategic acquisitions in the 2005
fiscal year. The Company expects any future acquisitions to either extend its product line,
increase the value of its existing products, or accelerate the Companys entry into new Geomatics
or Applications market segments. At the date of this filing, the Company has not entered into any
letters of intent with potential acquisition targets. Customers Another trend that affects the profitability of the Company is the lengthy sales cycle
required to establish new customers in the Navigation Systems line of business. In some cases, the
sales effort to win a contract with a new Page 35




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##### 



customer can be as long as three years. This results in the Company incurring sales and marketing
costs in the current fiscal year that will generate sales two or three years in the future. For the
2005 fiscal year, the Company is focussing its sales and marketing efforts on the naval operations
of countries and allies of the North Atlantic Treaty Organization (NATO). The Company expects to
establish new customer relationships as a result of these efforts. Foreign Exchange The Company sells the majority of its products in foreign currencies such as the
U.S. dollar, Euro, and Australian dollar while incurring costs, in varying proportions, in Canadian
dollars, U.S. dollars and other currencies. Fluctuations in these currencies may impact the
Companys level of revenues and net income. The Company uses foreign exchange contracts to reduce
the potential negative effects of fluctuating foreign exchange rates. Accounting Pronouncement See Item 5A  Impact of Recent Accounting Pronouncements for a
discussion of recent accounting pronouncements that may affect the Companys consolidated earnings
and earnings per share. E. Off-balance sheet arrangements Derivatives In order to reduce the potential negative effects of a fluctuating Canadian dollar, the Company has
entered into forward foreign exchange contracts to stabilize anticipated future net cash inflows
denominated in U.S. dollars, Australian dollars and Euros. At November 30, 2004, the Company had
foreign exchange forward contracts maturing in the following year to sell U.S. $851,196 (2003 
U.S. $1,343,705), Australian $3,678,061 (2003  $nil), and 383,310 (2003  $nil). The exchange
rates set in the forward exchange contracts ranged between 1.1870 to 1.1942 for U.S. $1.00, 0.9005
to 0.9576 for Australian dollar $1.00, and 1.5777 for 1.000. The contracts mature between December
2004 and May 2005. The fair value of derivative instruments generally reflects the estimated amounts that the Company
would receive or pay to settle the contracts at November 30, 2004. The requirement to record
derivatives at their fair market value has not had a material impact on the Companys consolidated
financial statements. Guarantees The Company utilizes letters of credit to back performance obligations to complete its contractual
requirements with its customers. The letters of credit are repayable on demand after certain
conditions have been met. At November 30, 2004, the Company has issued standby letters of credit
totalling U.S $127,000 and Australian $283,886. Page 36




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##### 



F. Tabular disclosure of contractual obligations. The table below presents, for the periods indicated, the Companys contractual obligations at
November 30, 2004: Payments due by periodLess than 1
    
    
    1 to 3
    
    
    
    
    
    
    More thanTotal
    
    
    year
    
    
    years
    
    
    3 to 5 years
    
    
    5 yearsLong-term Debt Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    $
    725,140
    
    
    $
    276,041
    
    
    $
    445,434
    
    
    $
    3,665
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-term Liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    725,140
    
    
    $
    276,041
    
    
    $
    445,434
    
    
    $
    3,665
    
    
    
    
 There are no contractual provisions related to these obligations that create an additional
obligation, increase or accelerate the payment of the obligations or otherwise affect the timing of
amount of the Companys obligations. The operating lease obligations mainly consist of the leased
property for the Companys head office located at Suite 107  930 West 1st Street, North
Vancouver, British Columbia, Canada, V7P 3N4. G. Safe Harbour This document and other documents filed by the Company with the SEC contain certain
forward-looking statements with respect to the business of the Company, including prospective
financing arrangements. These forward-looking statements are subject to certain risks and
uncertainties, including those mentioned above, which may cause actual results to differ
significantly from these forward-looking statements. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking statements, which may be to
reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated
events. Page 37




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##### 



Item 6. Directors, Senior Management and Employees A. Directors and senior management. The following are the directors and officers of the Company, their residence, their principal
business activities within and outside the Company within the past five years, and the periods
during which each has served in such capacity. Number andPercentage of VotingShares BeneficiallyOwned or Controlledby Directors andName and
    
    
    Principal Occupation
    
    
    
    
    
    Officers at AprilOffice Held
    
    
    For Past Five Years
    
    
    Director Since
    
    
    30/05(a)RAYMOND JOHNSTON
Director,
Chairman,
Montréal, Québec, Canada
    
    
    12/99 to present: President, of Chamber
of Maritime Commerce5/92 to 6/99: CEO, Canada Steamship Lines
    
    
    11/14/00
(and from 12/94 to
9/98)
    
    
    241,500 common shares (1)0.87% of common sharesJOHN A. JACOBSON
Director
President &
Chief Executive Officer,
Vancouver, British Columbia, Canada
    
    
    3/98 to present: President & Chief
Executive Officer of the Company
    
    
    3/19/98
    
    
    606,667 common shares (2)2.19% of common sharesTONY PEZZOTTI(*)
Director
Burnaby, British Columbia, Canada
    
    
    Previous Co-owner of PSL Steel Ltd.,
Independent Businessman
    
    
    4/26/90
    
    
    718,733 common shares (3)2.60% of common sharesHELMUT F. LOBMEIER
Director
Maple Ridge, British Columbia, Canada
    
    
    Previous Co-owner PSL Steel Ltd.,
Independent Businessman
    
    
    4/26/90
    
    
    796,951 common shares (4)2.88% of common sharesCAPT.
WALTER P. PURIO
Director
Houston, Texas, United States
    
    
    2000 to present: Independent Marine
Consultant
    
    
    1/14/99
    
    
    298,000 common shares (5)1.08% of common shares1993 to 2000: President, P and H Marine
Associates, Inc.1985 to present: Shipmaster- Oceans,General Dynamics, American Overseas
Marine CorporationPETER W. ROBERTS(*)
Director
West Vancouver, British Columbia,
Canada
    
    
    03/04 to Present: Retired3/05 to Present: Member Board of
Directors of MDSI Mobile Data Solutions
Inc.
    
    
    9/16/03
    
    
    65,000 common shares (6)0.24% of common shares8/04 to Present: Member Board of
Directors of Spectrum Signal Processing,
Inc.03/99 to 03/04: Chief Financial Officer
and Secretary of Sierra Wireless, Inc.
 Page 38




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##### 



Number andPercentage of VotingShares BeneficiallyOwned or Controlledby Directors andName and
    
    
    Principal Occupation
    
    
    
    
    
    Officers at AprilOffice Held
    
    
    For Past Five Years
    
    
    Director Since
    
    
    30/05(a)BRIAN E. WALSH (**)
Director
Rye, New York, United States
    
    
    1997 to Present: Co-Founder of and Fund
Manager with Qvan Capital (formerly
Veritas Capital Management)02/99 to Present: Strategic partner of
SDS Capital Partners, LLC, which is a
group of investment funds.
    
    
    12/18/01
    
    
    422,500 common shares (7)1.53% of common sharesE. BRINTON COXE
Director
Greenwich, Connecticut, United States
    
    
    02/99 to Present: Chairman of E.B. Coxe
& Co., LLC a company which specializes
in finding, funding, and managing small
cap companies and providing consulting
services to investment funds.02/99 to Present: Strategic partner of
SDS Capital Partners, LLC, which is a
group of investment funds.
    
    
    7/20/04
    
    
    605,197 common shares (8)2.20% of common sharesGERALD J. SHIELDS
Director
West Vancouver, British Columbia,
Canada
    
    
    Lawyer engaged in private practice with
the firm of Strategic Business Lawyers
(formerly known as Godinho Sinclair
Shields)
    
    
    4/08/05
    
    
    170,000 common shares (9)
0.62% of common sharesANDREW A. CARNIEL
Vice President Business Development
Coquitlam, British Columbia, Canada
    
    
    5/01 to present: Vice President,
Business Development, OSL.5/98 to 5/01: Director of Operations, OSL
    
    
    N/A
    
    
    252,334 common shares (10)
0.91% of common sharesKENNETH
H. KIRKPATRICK
Chief Operating OfficerCoquitlam, British Columbia, Canada
    
    
    2/05 to present: Chief Operating Officer
5/01 to 2/05: Vice President, Operations
12/97 to 5/01: Vice President & Chief
Operating Officer, Triathlon Ltd.
subsidiary of MacDonald Dettwiler &
Associates
    
    
    N/A
    
    
    243,334 common shares (11)
0.88% of common sharesJOHN T. SENTJENS
Corporate Controller
Vancouver, British Columbia, Canada
    
    
    8/01 to present: Corporate Controller11/99 to 8/01: Controller, Triathlon
Ltd. subsidiary of MacDonald Dettwiler
& Associates Ltd.4/98 to 11/99: Controller, Fulcrum
Technologies, a subsidiary of PC- Docs
Group
    
    
    N/A
    
    
    119,000 common shares (12)
0.43% of common shares
   (a)
    
    As used in the table above, beneficial ownership means the sole or shared power to vote
or direct the voting or to dispose or direct the disposition of any security. For purposes of
this table, a person is deemed to have beneficial ownership of any securities that such person
has a right to acquire within 60 days of April 30, 2005 through the exercise of any option or
warrant. Any security that any person named below has the right to acquire within 60 days is
deemed outstanding for the purpose of calculating the ownership of such person, but is not
deemed to be outstanding for the purpose of calculating the ownership percentage of any other
person. Page 39




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##### 



(*) Tony Pezzotti and Peter W. Roberts did not stand for re-election to the Companys Board of
Directors at the Annual General Meeting of the Shareholders held April 8, 2005 and they are no
longer members of the Board of Directors. (**) Brian Walsh was a director up to the Annual General Meeting of the Shareholders held April 22,
2004, and did not stand for re-election and is no longer a member of the Board of Directors. The directors and officers of the Company do not own any Class A Preference Shares Series A
Convertible or Class B Preference Shares Series 1 Convertible. (1)
    
    Includes options to purchase 187,500 Common Shares(2)
    
    Includes options to purchase 241,667 Common Shares(3)
    
    Includes options to purchase 165,000 Common Shares(4)
    
    Includes options to purchase 165,000 Common Shares(5)
    
    Includes options to purchase 165,000 Common Shares(6)
    
    Includes options to purchase 65,000 Common Shares(7)
    
    Includes options to purchase 90,000 Common Shares(8)
    
    Includes options to purchase 78,750 Common Shares, Warrants to purchase 408,800
Common Shares, and 2,000 Class B Preference Shares Series 2 convertible into 117,647 Common
Shares(9)
    
    Includes options to purchase 120,000 Common Shares(10)
    
    Includes options to purchase 175,834 Common Shares(11)
    
    Includes options to purchase 175,834 Common Shares(12)
    
    Includes options to purchase 89,000 Common Shares
 On April 8, 2005, the Company completed a private placement of 19,500 units, each comprised of 20
voting Class B Preference Shares Series 2 (Preference Shares) and 588 share purchase warrants
(warrants). The issue price was CDN$1,000.01 per unit. Mr. E. Brinton Coxe, a Director of the
Company, assisted the Company in structuring and arranging the financing. In consideration for his
services, the Company paid Mr. Coxe an advisory services fee in the amount of $815,908 and
additionally issued to Mr. Coxe 350,000 common share purchase warrants which have the same terms
and conditions as the warrants issued to the institutions which assisted in placing the financing.
The cash compensation of $815,908 paid to Mr. Coxe for the provision of advisory services includes
an adjustment in the amount of $15,908 to reflect exchange rate changes between the U.S. dollar and
Canadian Dollar. Mr. Coxe has also participated in the financing by purchasing 100 units
personally. B.Compensation. Pursuant to the 1994, 1996, and 1998 Option Plan, the Directors including the Chairman of the Board
received an annual entitlement for FY2004 of 45,000 Common Share options. Mr. E. Brinton Coxe who
joined the board July 20, 2004 received 33,750 Common Share options. During the year ended November
30, 2004, each member of the Board of Directors of the Company who was not an employee of the
Company was entitled to receive $1,500 for each Board meeting attended in person, and $1,000 for
each Board meeting which was held by means of telephone conference call if of significant length or
involving significant preparation. The Directors as a group were paid an aggregate of
approximately CDN$66,350 for attending or participating in these meetings. In addition, the
Chairman of the Board was paid an annual retainer of $30,000. Each of the remaining Directors were
paid an annual retainer of $15,000. The Audit Committee Chair was paid an annual retainer of $5,000
and the Human Resources and Compensation Committee Chair was paid an annual retainer $3,500. Each
member of the Audit Committee was entitled to receive $1,000 for each Audit Committee meeting
attended and each member of the Human Resources and Compensation Committee was entitled to receive
$1,000 for each Human Resources and Compensation Committee meeting attended. Members of the Audit
Committee were paid a total of $17,500 for attending or participating in a total of four Audit
Committee meetings. Members of the Human Resources and Compensation Committee were paid a total of
$14,200 for attending or participating in a total of four Human Resources and Compensation
Committee meetings. Page 40




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##### 



Listing of Directors GeographicallyCanadian Directors
    
    
    Raymond W. Johnston (Chairman)John A. JacobsonTony Pezzotti (*)Helmut F. LobmeierPeter W. Roberts (*)Gerald J. ShieldsU.S. Directors
    
    
    Capt. Walter P. PurioE. Brinton CoxeBrian E. Walsh (**)
    (**) Brian Walsh was a director up to the Annual General Meeting of the Shareholders held April 22,
2004, and did not stand for re-election and is no longer a member of the Board of Directors. The table below presents, for the years indicated, the total compensation accrued or paid to senior
management: Annual CompensationOther AnnualSalary
    
    
    
    Bonus
    
    
    
    CompensationName
    
    
    Year
    
    
    
    ($)
    
    
    
    ($)
    
    
    
    ($)John A. Jacobson
    
    
    
    2004
    
    
    
    
    196,539
    
    
    
    
    15,000
    
    
    
    
    0President & C.E.O.
    
    
    
    2003
    
    
    
    
    179,135
    
    
    
    
    0
    
    
    
    
    15,2312002
    
    
    
    
    172,115
    
    
    
    
    70,000
    
    
    
    
    0John T. Sentjens
    
    
    
    2004
    
    
    
    
    97,923
    
    
    
    
    7,500
    
    
    
    NilCorporate Controller
    
    
    
    2003
    
    
    
    
    86,636
    
    
    
    Nil
    

    
    
    Nil2002
    
    
    
    
    78,077
    
    
    
    
    12,000
    
    
    
    NilAndrew A. Carniel
    
    
    
    2004
    
    
    
    
    138,269
    
    
    
    
    10,000
    
    
    
    
    1,679V.P. Business
    
    
    
    2003
    
    
    
    
    129,135
    
    
    
    
    0
    
    
    
    
    0Development
    
    
    
    2002
    
    
    
    
    122,115
    
    
    
    
    35,000
    
    
    
    
    0Kenneth H. Kirkpatrick
    
    
    
    2004
    
    
    
    
    138,269
    
    
    
    
    10,000
    
    
    
    
    5,385Chief Operating Officer
    
    
    
    2003
    
    
    
    
    129,135
    
    
    
    
    0
    
    
    
    
    15,0002002
    
    
    
    
    124,038
    
    
    
    
    35,000
    
    
    
    
    0Wayne Hoyle
    
    
    
    2004
    
    
    
    
    185,486
    
    
    
    
    0
    
    
    
    
    0Director of Sales (1)
    
    
    
    2003
    
    
    
    
    120,575
    
    
    
    
    0
    
    
    
    
    02002
    
    
    
    
    155,035
    
    
    
    
    0
    
    
    
    
    0
    The amount and timing of management bonuses are at the discretion of the Board of Directors.
Except for eligibility to participate in a plan offered to all employees whereby the Company will
pay a maximum of 4% of the employees base salary earned during the year to a designated registered
retirement savings plan provided that the employee matches such payment, no pension, retirement or
similar benefits are given to senior management, or officers of the Company. Page 41




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##### 



The following is a summary of the material terms and conditions of the employment contracts between
the Company and members of senior management: John A. Jacobson serves as President and Chief Executive Officer of the Company pursuant to an
employment contract dated March 2, 1998, as amended. The contract is for no fixed term. The
contract may be terminated by the Company at any time for cause, and at any time without cause upon
payment of 12 months base salary. Mr. Jacobsons current base salary under the contract is
$200,000. He is also eligible to receive stock options as well as cash bonuses at the discretion of
the Board of Directors, based on the Companys performance. In addition, Mr. Jacobson is eligible
to participate in a plan offered to all employees whereby the Company will pay a maximum of 4% of
his base salary earned during the year to a designated registered retirement savings plan provided
that he matches such payment. The employment contract includes provisions in favour of the Company
related to the confidentiality, proprietary rights and intellectual property, and non-competition
and non-solicitation of employees and customers of the Company. Andrew Carniel serves as Vice-President, Business Development pursuant to an employment contract
dated August 18, 1998, as amended. The employment contract is for no fixed term. The contract may
be terminated by the Company at any time for cause, and at any time without cause upon notice in
writing of two months plus one additional month for each year of service to a maximum of twelve
months, or payment of severance equal to base salary for the notice period in lieu of notice. Mr.
Carniels current base salary under the contract is $140,000. He is also eligible to receive stock
options as well as cash bonuses at the discretion of the Board of Directors, based on the Companys
performance. In addition, Mr. Carniel is eligible to participate in a plan offered to all
employees whereby the Company will pay a maximum of 4% of his base salary earned during the year to
a designated registered retirement savings plan provided that he matches such payment. The
employment contract also includes provisions in favour of the Company related to the
confidentiality, proprietary rights and intellectual property, and non-competition and
non-solicitation of employees and customers of the Company. Kenneth Kirkpatrick provides his services as Chief Operating Officer pursuant to an employment
contract dated May 3, 2001, as amended. The employment contract is for no fixed term. The
contract may be terminated by the Company at any time for cause, and at any time without cause upon
12 months notice or payment of 12 months base salary in lieu of notice. Mr. Kirkpatricks
current base salary under the contract is $140,000. He is also eligible to receive stock options
as well as cash bonuses at the discretion of the Board of Directors, based on the Companys
performance. In addition, Mr. Kirkpatrick is eligible to participate in a plan offered to all
employees whereby the Company will pay a maximum of 4% of his base salary earned during the year to
a designated registered retirement savings plan provided that he matches such payment. The
employment contract also includes provisions in favour of the Company related to the
confidentiality, proprietary rights and intellectual property, and non-competition and
non-solicitation of employees and customers of the Company. John Sentjens provides his services as Corporate Controller pursuant to an employment contract
dated July 26, 2001, as amended. The employment contract is for no fixed term. The contract may
be terminated by the Company at any time for cause, and at any time without cause upon 3 months
notice or payment of 3 months base salary in lieu of notice. Mr. Sentjens current base salary
under the contract is $100,000. He is also eligible to receive stock options as well as cash
bonuses at the discretion of the Board of Directors, based on the Companys performance. In
addition, Mr. Sentjens is eligible to participate in a plan offered to all employees whereby the
Company will pay a maximum of 4% of his base salary earned during the year to a designated
registered retirement savings plan provided that he matches such payment. The employment contract
also includes provisions in favour of the Company related to the confidentiality, proprietary
rights and intellectual property, and non-competition and non-solicitation of employees and
customers of the Company. Wayne Hoyle serves as Director of Sales for the Navigation Systems business unit pursuant to an
employment contract dated February 24, 2000, as amended. The employment contract is for no fixed
term. The contract may be terminated by the Company at any time for cause, and at any time without
cause upon 3 months notice plus one additional month for each year of service to a maximum of
twelve months, or payment of severance equal to base salary for the notice period in lieu of
notice. Mr. Hoyles current base salary under the contract is $105,000. He is also eligible to
receive cash commissions on the gross sales of the Navigation Systems business unit. In addition,
Mr. Hoyle is eligible to participate in a plan offered to all employees whereby the Company will
pay a maximum of 4% of his base salary earned during the year to a designated registered retirement
savings plan provided that he matches such payment. The Page 42




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##### 



employment contract also includes provisions in favour of the Company related to the
confidentiality, proprietary rights and intellectual property, and non-competition and
non-solicitation of employees and customers of the Company. The following tables present the Common Share options granted to Directors and Officers from
December 1, 2003 to November 30, 2004. CommonShareOptionsGranted
    
    
    
    Exercise
    
    
    
    Vesting
    
    
    
    ExpiryDIRECTORS NAME
    
    
    2004
    
    
    
    Price
    
    
    
    Date
    
    
    
    DateRaymond W. Johnston  Chairman and Director
    
    
    
    15,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2004
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2005
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2006
    
    
    Apr. 22, 2007John A. Jacobson  President & CEO, and Director
    
    
    
    20,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2004
    
    
    Apr. 22, 200720,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2005
    
    
    Apr. 22, 200720,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2006
    
    
    Apr. 22, 2007Tony Pezzotti  Director (*)
    
    
    
    15,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2004
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2005
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2006
    
    
    Apr. 22, 2007Helmut F. Lobmeier  Director
    
    
    
    15,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2004
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2005
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2006
    
    
    Apr. 22, 2007Peter W. Roberts  Director (*)
    
    
    
    15,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2004
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2005
    
    
    Apr. 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    Apr. 22, 2006
    
    
    Apr. 22, 2007E. Brinton Coxe  Director
    
    
    
    33,750
    
    
    
    $
    1.01
    
    
    
    July 19, 2004
    
    
    July. 19, 2007
    CommonShareOptionsGranted
    
    
    
    Exercise
    
    
    
    Vesting
    
    
    
    ExpiryOFFICERS NAME
    
    
    2004
    
    
    
    Price
    
    
    
    Date
    
    
    
    DateAndrew A. Carniel, Vice President Business
Development and Corporate Secretary
    
    
    
    15,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2004
    
    
    April 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2005
    
    
    April 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2006
    
    
    April 22, 2007Kenneth H. Kirkpatrick, Chief Operating Officer
    
    
    
    15,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2004
    
    
    April 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2005
    
    
    April 22, 200715,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2006
    
    
    April 22, 2007John T. Sentjens, Corporate Controller
    
    
    
    6,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2004
    
    
    April 22, 20076,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2005
    
    
    April 22, 20076,000
    
    
    
    $
    1.13
    
    
    
    April 22, 2006
    
    
    April 22, 2007
 Page 43




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##### 



C. Board practices Directors are elected annually to the Board at the Annual General Meeting of the Company. As of
April 30, 2005, the directors on the Board and the period during which they have served on the
Board are as follows:  Name
    
    Period ServedRaymond Johnston (Chairman)
    
    since November 2000John A. Jacobson
    
    since March 1998Helmut F. Lobmeier
    
    since April 1990Walter P. Purio
    
    since January 1999E. Brinton Coxe
    
    since July 2004Gerald J. Shields
    
    since April 2005
 All Directors will hold office until the next Annual General Meeting of the Shareholders of the
Company. No Director has a service contract with the Company or its subsidiaries providing for benefits upon
termination of its directorship. John Jacobson, however, does have an employment contract with the
Company regarding his employment as President and Chief Executive Officer. Duties and Obligations of the Board of Directors The Companys Board of Directors and senior management considers good corporate governance to be
central to the effective, efficient and prudent operation of the Company. One key element of sound
corporate governance emphasized by the Company is having a Board of Directors, which is relatively
independent of management. The Toronto Stock Exchange Guidelines describe an unrelated director
as a director who is independent of management and is free from any interest and any business or
other relationship which could, or could reasonably be perceived to, materially interfere with the
directors ability to act with a view to the best interests of the Company, other than interests
and relationships arising from shareholdings. In determining whether a director is an unrelated
director, the Board considers, for example, whether the director has a relationship that could, or
could be perceived to, interfere with the directors ability to objectively assess the performance
of management. To that end, as at November 30, 2004, the Board of Directors was composed of seven
persons: John Jacobson, Raymond Johnston, Tony Pezzotti, Helmut Lobmeier, Capt. Walter Purio, Peter
Roberts, and E. Brinton Coxe. All of the Directors other than Messrs. Jacobson and Coxe are
considered by the Board to be unrelated directors. On this basis, John Jacobson, by reason of his
office as President and Chief Executive Officer, is considered a related director. E. Brinton Coxe
was an unrelated director when initially appointed to the Board, but became a related director as a
result of having entered into an agreement with the Company which is described below in Item 7B 
Related party transactions. At the Annual General Meeting held April 8, 2005, Mr. Gerald J.
Shields was appointed to the board and is a related director as a result of legal services provided
to the Company by the law firm in which he has an interest. The related party transactions between
Mr. Shields and the Company are described below in Item 7B  Related party transactions. After
the Annual General Meeting held April 8, 2005, the Board of Directors was composed of six
Directors, three of the Companys six Directors are unrelated directors, while only one member of
management (being John Jacobson, the President and CEO), serves on the Board. The separation of the
position of Chairman from the position of President and Chief Executive Officer further ensures
that the Board maintains its independence from management. The Companys approach to corporate
governance is described below. This approach is documented in the Companys corporate policy
handbook. The general duty of the Board of Directors of the Company is to oversee the management of the
business and affairs of the Company. In particular, the Board of Directors is responsible for the
following matters:  (a)
    adopting a strategic planning process for the Company which establishes the Companys
long-term goals and strategies, and monitoring the success of the Companys management in
achieving those goals and implementing the strategy; Page 44




---



##### 



(b)
    identifying the principal risks with respect to all aspects of the Companys business,
ensuring that there are systems in place to effectively monitor and manage such risks with a
view to the long-term viability of the Company, and achieving a proper balance between the
risks incurred and the potential return to the Companys members;(c)
    engaging in succession planning, including appointing, training and monitoring senior
management (which includes ensuring that objectives are in place against which managements
performance can be measured), establishing and maintaining programs to train and develop
management, providing for the orderly succession of management, and assessing the performance
and contribution of the Chief Executive Officer of the Company against mutually established
objectives; and(d)
    ensuring that the Company has a policy in place to enable it to communicate effectively with
its shareholders, other stakeholders and the general public, effectively interpreting the
operations of the Company to shareholders, accommodating feedback from shareholders, and
ensuring that there are effective controls and information systems in place for the Board of
Directors to discharge its responsibilities, such as an audit system which can inform the
Board of Directors about the integrity of the data and the compliance of the financial
information with appropriate accounting principles. Committees of the Board of Directors The Board has established four standing committees: the Audit Committee, the Human Resources and
Compensation Committee, the Executive Committee and the Corporate Finance and Development
Committee. Each of the committees has specific authority to retain external advisors, as
appropriate (at the expense of the Company), upon notice to the Chairman of the Board. Audit Committee The members of the Companys Audit Committee as at November 30, 2004 were Helmut Lobmeier, Walter
Purio, and Peter Roberts (Chairman), all of whom are unrelated directors. Subsequent to the Annual
General Meeting of April 8, 2005, the members of the Companys Audit Committee are Helmut Lobmeier
(Acting Chairman) and Walter Purio. On May 11, 2005, E. Brinton Coxe was appointed to the Audit
Committee. The Audit Committees responsibilities include:  (a)
    reviewing and monitoring the audit functions, risk-management systems, management information
systems, accounting policies, disaster recovery plans, and financial exposure of the Company
and undertaking ongoing efforts to identify risks and appropriate safeguards;(b)
    reviewing the Companys financial statements prepared by management and meeting with the
Companys external auditors to discuss the results of annual audits;(c)
    recommending for approval to the Board all public disclosure information such as financial
statements, quarterly reports, financial news releases, annual information forms, management
discussions and analyses, and prospectuses;(d)
    directly appointing, compensating, retaining and overseeing the work of the Companys
external auditors, who report directly to the Audit Committee;(e)
    establishing procedures for (i) the receipt, retention and treatment of complaints received
by the Company regarding accounting, internal accounting controls or auditing matters and (ii)
the confidential, anonymous submission by employees of the Company of concerns regarding
questionable accounting and auditing matters;(f)
    engaging independent counsel and other advisors, as it deems necessary to carry out its
duties; and(g)
    approving all related party transactions. Human Resource and Compensation Committee The members of the Companys Human Resources and Compensation Committee as at November 30, 2004
were Helmut Lobmeier (Chairman), Walter P. Purio and Raymond Johnston, all of whom are unrelated
directors. The members comprising the Companys Human Resources and Compensation Committee was not
changed subsequent to the Annual General Meeting of April 8, 2005. Page 45




---



##### 



The Compensation Committee reviews and recommends to the Board for approval the remuneration of
senior management and directors. To fulfil this responsibility, the Compensation Committee
considers a positions responsibilities, risks, time commitment and comparative remuneration. The
Board meets annually without the related directors to receive the Compensation Committees report
concerning recommendations for any adjustment to senior managements compensation. Executive Committee The members of the Companys Executive Committee are Raymond Johnston (Chairman), who is an
unrelated director, and E. Brinton Coxe and John Jacobson, who is President and CEO, who are both
related directors. The Executive Committees responsibilities include:  (a)
    recommending to the Board corporate procedures in order to address the issues of corporate
governance within the organization;(b)
    defining the limits of managements responsibilities;(c)
    identifying new directors for nomination to the Board and assessing existing directors on an
ongoing basis; and(d)
    overseeing the implementation of the business plan for the Companys subsidiaries in terms of
operating capital and related expenditures as approved by the Board as a whole. Corporate Finance and Development Committee The Corporate Finance and Development Committee was appointed by the Board on February 10, 2005 to
spearhead initiatives and provide direction and guidance to the Board respecting matters related to
corporate finance, development and acquisitions. The current members of the Committee are John
Jacobson and E. Brinton Coxe, who are both related directors. D. Employees At April 8, 2005, there were a total of 15 employees working for OSI Geomatics Ltd., 56
working for Offshore Systems Ltd and 12 employees working for Mapcon Mapping Consultants Inc. The
Company has no labor unions and does not employ a significant number of temporary employees. The increase in the number of employees at April 8, 2005 compared to November 30, 2003 is the
result of the Company requiring additional engineering staff to support development plans, an
increased level of administrative staff to support contract and reporting requirements and the
acquisition of Mapcon. The following table presents the geographic distribution of the Companys employees for the past
three years: Canada
    
    
    
    U.S.
    
    
    
    Denmark
    
    
    
    Australia
    
    
    
    TotalNovember 30, 2004
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    70November 30, 2003
    
    
    
    56
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    57November 30, 2002
    
    
    
    62
    
    
    
    
    1
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    64
 E. Share ownership. Information as to share and option information for directors and officers are discussed above
in Item 6. A. Directors and Senior Management and in Item 6B. Compensation. The Company has established three stock option plans under which options to purchase the Companys
common shares Page 46




---



##### 



may be granted at the discretion of the Board of Directors to Directors, officers and employees of
the Company and to any other person or company permitted by the applicable regulatory authorities
to purchase unissued common shares. The number of common shares available for issuance under the
Companys stock option plans is 10,930,732, of which 4,375,494 are available for issuance at April
30, 2005. The exercise price of options granted pursuant to the plans may not be less than the
market price of the common shares at the time of grant. The plans provide that options may be
granted with vesting periods and expiry dates at the discretion of the Board of Directors. Options
granted to directors and officers vest over periods ranging from immediately to three years and
options granted to employees vest immediately to one year after the date granted. On April 22, 2004, the Company granted 463,000 stock options to directors and selected employees of
the Company. These stock options were granted at a price of $1.13 per stock option. On April 12,
2005, the Company granted 569,000 stock options to directors and selected employees of the Company
at a price of $0.88 per stock option. On April 28, 2005, the Company granted 200,000 stock options
to a third party contractor at a price of $0.75 per stock option. Arrangements and decisions with
respect to the issuance and granting of stock options to the Companys key employees are made at
the discretion of the Board. Page 47




---



##### 



Item 7. Major Shareholders and Related Party Transactions A. Major shareholders. The following table sets forth, as of April 30, 2005, each person known to the Company to
beneficially own more than 5% of the Companys Common Shares or more than 5% of the Companys Class
A Preference Shares Series A Convertible, or more than 5% of the Companys Class B Preference
Shares Series 2 Convertible. As used in this table, beneficial ownership means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition of any security. For
purposes of this table, a person is deemed to have beneficial ownership of any securities that such
person has a right to acquire within 60 days of April 30, 2005 through the exercise of any option

or warrant. Any security that any person named below has the right to acquire within 60 days is
deemed outstanding for the purpose of calculating the ownership of such person, but is not deemed
to be outstanding for the purpose of calculating the ownership percentage of any other person. The
amounts and percentages are based upon 27,488,074 Common Shares, 30,262 Class A Preference Shares
Series A Convertible and 390,000 Class B Preference Shares Series 2 Convertible outstanding as of
April 30, 2005. Number of Shares
    
    
    Percentage of ClassName of Shareholders
    
    Beneficially Owned
    
    
    Beneficially OwnedCommon SharesNorth Sound Legacy International Ltd.
    
    
    6,997,890
    (1)
    
    
    20.3
    %North Sound Legacy Institutional Fund LLCNorth Sound Legacy Fund LLCSF Capital Partners Ltd.
    
    
    4,287,664
    (2)
    
    
    13.5
    %Howson Tattersall Investment Counsel Limited
    
    
    2,811,200
    
    
    
    10.2
    %SDS Capital Group SPC, Ltd.
    
    
    2,756,288
    (3)
    
    
    9.2
    %Crestview Capital Master, LLC
    
    
    2,681,995
    (4)
    
    
    8.9
    %Basso Multi-Strategy Holding Fund Ltd.
    
    
    2,143,832
    (5)
    
    
    7.2
    %Basso Private Opportunity Holding Fund Ltd.Millennium Partners, LP
    
    
    2,143,832
    (6)
    
    
    7.2
    %Shannon River Partners II, LP
    
    
    2,143,832
    (7)
    
    
    7.2
    %Shannon River Partners, LPGibralt Capital Corporation
    
    
    1,764,471
    (8)
    
    
    6.0
    %Class A Preference Series A ConvertibleJohn Visnapu
    
    
    16,376
    
    
    
    54.1
    %G.A. Lachapelle
    
    
    3,275
    
    
    
    10.8
    %Dennis Kong
    
    
    3,275
    
    
    
    10.8
    %Daniel Jacobson*
    
    
    3,275
    
    
    
    10.8
    %Class B Preference Series 2 ConvertibleNorth Sound Legacy International Ltd.
    
    
    79,320
    (9)
    
    
    20.3
    %North Sound Legacy Institutional Fund LLCNorth Sound Legacy Fund LLCSF Capital Partners Ltd.
    
    
    48,600
    
    
    
    12.5
    %Crestview Capital Master, LLC
    
    
    30,400
    
    
    
    7.8
    %SDS Capital Group SPC, Ltd.
    
    
    29,420
    
    
    
    7.5
    %Basso Multi-Strategy Holding Fund Ltd.
    
    
    24,300
    (10)
    
    
    6.2
    %Basso Private Opportunity Holding Fund Ltd.Millennium Partners, LP
    
    
    24,300
    
    
    
    6.2
    %Shannon River Partners II, LP
    
    
    24,300
    (11)
    
    
    6.2
    %Shannon River Partners, LPGibralt Capital Corporation
    
    
    20,000
    
    
    
    5.1
    %
   *- unrelated to John Jacobson, President and CEO of the Company. Page 48




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##### 



(1) Consist of 47,040 Class B Preference Shares Series 2 convertible into 2,767,059
Common Shares and Warrants to purchase 1,382,976 Common Shares held by North Sound Legacy
International Ltd.; 29,420 Class B Preference Shares Series 2 convertible into 1,730,588 Common
Shares and Warrants to purchase 864,948 Common Shares held by North Sound Legacy Institutional Fund
LLC, a related group; and 2,860 Class B Preference Shares Series 2 convertible into 168,235 Common
Shares and Warrants to purchase 84,084 Common Shares held by North Sound Legacy Fund LLC, a related
group. (2)Consist of 48,600 Class B Preference Shares Series 2 convertible into 2,858,824
Common Shares and Warrants to purchase 1,428,840 Common Shares. (3)Consist of 160,752 Common Shares, 29,420 Class B Preference Shares Series 2
convertible into 1,730,588 Common Shares and Warrants to purchase 864,948 Common Shares. (4)Consist of 30,400 Class B Preference Shares Series 2 convertible into 1,788,235
Common Shares and Warrants to purchase 893,760 Common Shares. (5)Consist of 18,700 Class B Preference Shares Series 2 convertible into 1,100,000
Common Shares and Warrants to purchase 549,780 Common Shares held by Basso Multi-Strategy Holding
Fund Ltd. and 5,600 Class B Preference Shares Series 2 convertible into 329,412 Common Shares and
Warrants to purchase 164,640 Common Shares held by Basso Private Opportunity Holding Fund, a
related group. (6)Consist of 24,300 Class B Preference Shares Series 2 convertible into 1,429,412
Common Shares and Warrants to purchase 714,420 Common Shares. (7)Consist of 14,300 Class B Preference Shares Series 2 convertible into 841,176
Common Shares and Warrants to purchase 420,420 Common Shares held by Shannon River Partners II, LP
and 10,000 Class B Preference Shares Series 2 convertible into 588,235 Common Shares and Warrants
to purchase 294,000 Common Shares held by Shannon River Partners, LP, a related group. (8)Consist of 20,000 Class B Preference Shares Series 2 convertible into 1,176,471
Common Shares and Warrants to purchase 588,000 Common Shares. (9) Consist of 47,040 Class B Preference Shares Series 2 Convertible held by North
Sound Legacy International Ltd.; 29,420 Class B Preference Shares Series 2 Convertible held by
North Sound Legacy Institutional Fund LLC, a related group; and 2,860 Class B Preference Shares
Series 2 Convertible held by North Sound Legacy Fund LLC, a related group. (10)Consist of 18,700 Class B Preference Shares Series 2 Convertible held by Basso
Multi-Strategy Holding Fund Ltd. and 5,600 Class B Preference Shares Series 2 Convertible held by
Basso Private Opportunity Holding Fund, a related group. (11)Consist of 14,300 Class B Preference Shares Series 2 Convertible held by Shannon
River Partners II, LP and 10,000 Class B Preference Shares Series 2 Convertible held by Shannon
River Partners, LP, a related group. The Company is neither directly nor indirectly owned or controlled by another corporation, a
foreign government or any other natural or legal persons severally and jointly. There are no
arrangements known to the Company, which may result in a change of control of the Company. The shareholders of the Class A Preference Shares Series A Convertible listed above became the
beneficial owners of those shares during the fiscal year 1990. The shareholders of the Class B
Preference Shares Series 2 Convertible became the beneficial owners of those shares during FY2005.
The Companys major shareholders do not have different voting rights than any other shareholder. As
of April 30, 2005,1,399,112 Common Shares, or 3.1% of the outstanding Common Shares and 293,580
Class B Preference Shares Series 2 Convertible, or 75.3% of the outstanding Class B Preference
Shares Series 2 Convertible, are held by 40 U.S. shareholders. No Class A Preference Shares Series
A Convertible are held by U.S. shareholders. Page 49




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##### 



B. Related party transactions. During the last two fiscal years ended 2004 and 2003, the Company did not enter into any
transactions with its management, members of its Board of Directors or major shareholders.
Subsequent to the 2004 fiscal year end, E. Brinton Coxe, a member of the Companys Board of
Directors, became a related party by virtue of the fact that the Company has paid him compensation
of $815,908 and 350,000 common share purchase warrants in consideration of the provision of
advisory services in connection with the private placement completed April 8, 2005 (the
financing) discussed below under Item 8B.  Significant changes. The cash compensation of
$815,908 paid to Mr. Coxe includes an adjustment in the amount of $15,908 to reflect exchange rate
changes between the U.S. dollar and Canadian Dollar. Mr. Coxe has also participated in the
financing by purchasing 100 units personally. Mr. Coxe declared his interest in the financing and
related transactions and abstained from voting on all resolutions of the Companys Board with
respect to the financing, including resolutions approving his compensation, all stages of the
review and approval process. Mr. Coxe also excused himself from all Board meetings at which the
financing was considered so that the remaining members of the Board could discuss freely the
financing and all matters related thereto, including the compensation of Mr. Coxe. Prior to this
related party transaction, there have been no related party transactions since the beginning of
FY2003. Also subsequent to the 2004 fiscal year end, Gerald J. Shields, elected to the Companys
Board of Directors on April 8, 2005, became a related party by virtue of the provision of legal
services to the Company by a law firm in which Mr. Shields has an interest. During FY2004 fees
billed to the Company by this firm were under $60,000. It is anticipated that fees billed to the
Company by this firm will exceed $60,000 for FY2005. The Companys policy for transactions with affiliates is that they must be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties. In the case of transactions involving a director, any of the Companys directors who, in any way,
whether directly or indirectly, has an interest in a proposed contract or transaction with the
Company, must disclose the nature and extent of such interest to the Companys Board and must
abstain from voting on whether to approve the proposed contract or transaction. If such director
fails to obtain such Board Approval, he or she must account to the Company for any profit made as a
consequence of the Company entering into the contract or transaction, unless the contract was fair
and reasonable to the Company at the time it was entered into, and unless after full disclosure of
the nature and extent of his or her interest, the contract or transaction is approved by the
Companys shareholders by a resolution passed by a majority of not less than 75% of the votes cast
at a duly convened shareholders meeting. In addition, if a Company director and officer holds any
office or possesses any property whereby, whether directly or indirectly, he or she may have duties
or interests that conflict with his or her duties or interests as a director or officer, such
director or officer must disclose that fact and the nature and extent of the conflict. In the case
of a director, this disclosure must be made at a Board meeting. In the case of transactions
involving an officer, the disclosure must be made in writing to the Companys President. Since the
Companys President is required by law to be a director, his or her disclosure must be made at a
Board meeting. C. Interests of experts and counsel. Not applicable. Page 50




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##### 



Item 8. Financial Information A. Consolidated statements and other financial information. Please see Item 18. Financial Statements for a list of the financial statements filed as
part of this annual report. In FY2004, the Companys export revenues totalled $12,024,015,  89% of the total revenue of
$13,451,303. In FY2003, the Companys export revenues totalled $8,224,536,  71% of the total
revenue of $11,520,793. In FY2002, the Companys export revenues totalled $10,498,623,  76% of
the total revenue of $13,814,133. The Company has neither declared nor paid dividends on any of its outstanding Common Shares or
Class A Preference Shares Series A Convertible, and does not intend to do so in the foreseeable
future. The Company has declared and paid dividends on the Class B Preference Shares Series 1
Convertible in accordance with the rights attached to those shares up to their redemption which
occurred in April 11, 2005.The Company will declare and pay dividends on the Class B Preference
Shares Series 2 Convertible in accordance with the rights attached to those shares and will
continue to declare and pay dividends in accordance with those rights. With the exception of the
Class B Preference Shares Series 2 Convertible dividends, the Company intends to retain any future
earnings to finance the expansion of its business. Any future determination to pay additional
dividends will be at the discretion of the Board of Directors of the Company and will be dependent
upon the Companys earnings, capital requirements and financial position, as well as any other
factors deemed relevant by the Board of Directors. During FY2002, the Company settled a lawsuit against the following defendants: Yokogawa Denshikiki,
a Japanese corporation, AG Marine, Inc., a U.S. corporation, and Devon Liles and Janet Liles, both
U.S. citizens. The Companys legal claim was based on the wrongful termination of a product
distribution agreement. This suit was settled in favor of the Company and the proceeds have been
recorded in the Companys 2002 financial statements. The Company currently has one legal suit pending.  
    The Company and four employees became the objects of a lawsuit by Triathlon Ltd., a
subsidiary of MacDonald, Dettwiler and Associates Ltd., related to the use of confidential
information and breach of fiduciary duty. The Company believes the suit poses limited
financial risk. The Companys current Vice President of Operations and the Corporate
Controller were officers of Triathlon Ltd. prior to their employment with the Company. This
suit remains unresolved. The Company was audited in FY2004 by Industry Canada in relation to its TPC funding agreements.
This compliance audit was focused on ensuring the funding submissions by the Company meets the
terms and conditions of its TPC funding agreement. The Company believes that it is in compliance
with the terms of its TPC agreements but has not received any notification from Industry Canada
regarding its audit conclusions. There can be no assurance that the compliance audit will result in
a favorable assessment for the Company or that penalties will not be imposed on the Company for
non-compliance. B. Significant changes. In April 2005, the Company completed a private placement in the aggregate amount of
$19,500,000 through the sale of 19,500 units, with each unit comprised of 20 voting Class B
Preference Shares Series 2 (Preference Shares) and 588 share purchase warrants (warrants). The
issue price was $1,000.01 per unit. Finders fees totalling $1,817,279 and an additional 929,064
warrants were paid in connection with this private placement. The Preference Shares entitle the
holders to receive a fixed preferential cumulative 7% dividend payable semi-annually. Each
preference share is convertible at the option of the holder at any time into 58.82 of the Companys
common shares, calculated by dividing the issue price of $50.00 for each preference share by the
conversion price of $0.85. Each warrant entitles the holder to purchase one of the Companys common
shares at the exercise price of $0.85 for a period of five years. The proceeds of the financing
will be used to pursue acquisitions, to increase available cash for operations, and to redeem
57,711 issued and outstanding Class B Preference Shares Series 1 held by two institutional
investors at a cost of approximately $2,900,000. Page 51




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##### 



In April 2005, the Company completed the acquisition of all the outstanding shares of Mapcon
Mapping Consultants Inc. (Mapcon) of Salt Lake City, Utah for U.S.$1,000,000, subject to final
closing adjustments. Mapcon is a land mapping company in the U.S. geomatics (digital map and
electronic chart data production) market. 
 Item 9. The Offer and Listing A. Offer and listing details. The issued and outstanding Common Shares of the Company (27,488,074 shares as of November 30,
2004) are listed and posted for trading on The TSX and OTCBB under the trading symbols TSX: OSI
and OTCBB: OFSYF. The Companys Common Shares are registered shares. The following is a summary of the trading history (in Canadian dollars) of the Common Shares of the
Company on the Toronto Stock Exchange and the Over The Counter Bulletin Board for:  
    the annual high and low market prices for the five most recent full financial years;
    the quarterly high and low market prices for the two most recent full financial years and any subsequent period; and
    the high and low monthly market prices for the most recent six months. Price per shareTSX (in CAN$)
    
    
    OTCBB (in US$)High
    
    
    Low
    
    
    High
    
    
    LowYearFiscal year ended November 30, 2000(*)
    
    $
    1.84
    
    
    $
    0.39
    
    
    
    
    
    
    
    Fiscal year ended November 30, 2001(*)
    
    $
    1.25
    
    
    $
    0.36
    
    
    
    
    
    
    
    Fiscal year ended November 30, 2002(**)
    
    $
    1.95
    
    
    $
    0.90
    
    
    $
    0.80
    
    
    $
    0.60Fiscal year ended November 30, 2003
    
    $
    1.35
    
    
    $
    0.76
    
    
    $
    0.95
    
    
    $
    0.60Fiscal year ended November 30, 2004
    
    $
    1.50
    
    
    $
    0.76
    
    
    $
    1.30
    
    
    $
    0.62QuarterYear Ending November 30, 2003First Quarter
    
    $
    1.22
    
    
    $
    0.98
    
    
    $
    0.84
    
    
    $
    0.65Second Quarter
    
    $
    1.24
    
    
    $
    1.03
    
    
    $
    0.95
    
    
    $
    0.60Third Quarter
    
    $
    1.35
    
    
    $
    1.03
    
    
    $
    0.90
    
    
    $
    0.70Fourth Quarter
    
    $
    1.14
    
    
    $
    0.76
    
    
    $
    0.77
    
    
    $
    0.62Year Ending November 30, 2004First Quarter
    
    $
    1.50
    
    
    $
    0.91
    
    
    $
    1.30
    
    
    $
    0.74Second Quarter
    
    $
    1.42
    
    
    $
    1.02
    
    
    $
    1.12
    
    
    $
    0.76Third Quarter
    
    $
    1.14
    
    
    $
    0.80
    
    
    $
    0.94
    
    
    $
    0.67Fourth Quarter
    
    $
    1.15
    
    
    $
    0.76
    
    
    $
    0.99
    
    
    $
    0.62Year Ending November 30, 2005First Quarter
    
    $
    0.90
    
    
    $
    0.70
    
    
    $
    0.78
    
    
    $
    0.60Most Recent Six MonthsNovember 2004
    
    $
    0.95
    
    
    $
    0.76
    
    
    $
    0.82
    
    
    $
    0.62December 2004
    
    $
    0.89
    
    
    $
    0.80
    
    
    $
    0.67
    
    
    $
    0.60January 2005
    
    $
    0.90
    
    
    $
    0.81
    
    
    $
    0.78
    
    
    $
    0.65February 2005
    
    $
    0.89
    
    
    $
    0.70
    
    
    $
    0.73
    
    
    $
    0.60March 2005
    
    $
    0.93
    
    
    $
    0.82
    
    
    $
    0.80
    
    
    $
    0.60April 2005
    
    $
    0.94
    
    
    $
    0.67
    
    
    $
    0.76
    
    
    $
    0.53
   *- information not available for OTCBB**- information available for October and November 2002 only Page 52




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B. Plan of distribution. Not applicable. C. Markets. The Companys Common Shares are quoted for trading on the OTCBB exchange under the symbol
OFSYF and listed in Canada on the TSX under the symbol OSI. D. Selling shareholders. Not applicable. E. Dilution. Not applicable. F. Expenses of the issue. Not applicable. 
 Item 10. Additional Information A. Share capital. Not applicable. B. Memorandum and articles of association. The Company was incorporated and organized as Kappa Resource Corporation under the Company Act
of British Columbia under Certificate of Incorporation Number 328114 in 1987. In 1990, the Company
changed its name to Offshore Systems International Ltd.. In March of 2004 the Government of
British Columbia repealed the Company Act and replaced it with the British Columbia Business
Corporations Act (the BCBCA). In May of 2004 the Company filed an application for transition and
was issued a Notice of Articles under the BCBCA. The Company is now organized under the BCBCA. The
Companys incorporation number has been changed to 0328114. The BCBCA provides that a company has
the capacity and the rights, power and privileges of an individual of full capacity, provided that
a company must not carry on any business or exercise any powers that it is restricted by its
Articles from carrying on or exercising. The Companys Articles do not contain any such
restrictions. Directors Powers and Conflicts of Interest Section 16.4 of the Companys Articles stipulates that a director who holds any office or possesses
any property, right or interest that could result, directly or indirectly, in the creation of a
duty or interest that materially conflicts with his or her duty or interest as a director must
disclose the nature and extent of the conflict to the board of directors as required by the BCBCA.
Section 16.1 of the Articles of the Company stipulate that a director who holds a material
interest, directly or indirectly, in a contract or transaction into which the Company has entered
or proposes to enter is not entitled to vote on any directors resolution to approve that contract
or transaction, unless all the directors have a direct or indirect material interest in that
contract or transaction, in which case any or all of those directors may vote on such resolutions.
In that circumstance, the directors must properly disclose such interests and have the transaction
approved Page 53




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by special resolution of shareholders, failing which they may be liable to account for any profits
from such contract or transaction. The Companys Articles further stipulate that every director who has a material an interest in a
transaction must account to the Company for any profit made as a consequence of the Company
entering into the contract, unless such director discloses his or her interest and abstains from
voting on the approval of the proposed contract or transaction and except as otherwise provided in
the BCBCA. Section 16.3 of The Companys Articles stipulates that a director who is interested in a
proposed contract or transaction with the Company may be counted in the quorum of the meeting at
which the transaction is considered. The directors have the power, in the absence of an independent
quorum, to vote compensation to themselves in their capacities as directors, but not in their
capacities as officers, employees or in any other capacity. Neither the BCBCA nor the Companys
Notice of Articles and Articles contain any provision respecting the retirement or non-retirement
of directors under an age limit requirement. Section 13.4 of the Companys Articles provides that a
director is not required to own any shares of the Company in order to serve as a director. Borrowing Powers Section 8 of the Companys Articles provides that the directors may from time to time at their
discretion authorize the Company to borrow any sum of money for the purposes of the Company and may
secure the repayment of that sum in such manner and upon such terms and conditions as they think
fit, including through the issuance of debentures, bonds or other debt obligations of the Company
and the granting of security on the Companys assets. The provisions of the Articles setting out
the borrowing powers of the Board may be varied only by an amendment approved by way of special
resolution of not less than 66 2/3% of the holders of voting shares of the Company
represented in person or by proxy at any general meeting of the Company. Directors The Companys Articles stipulate that the number of directors shall be the greater of three and the
number that may be determined from time to time by an ordinary resolution of the shareholders
passed at a duly convened general meeting. The number of directors of the Company is currently
fixed at six. Upon the termination of each annual general meeting, all the directors are deemed to retire. At
every annual general meeting, the shareholders must fill up the vacated offices by electing a like
number of directors and, whenever the number of retiring directors is less than the maximum number
required by or determined pursuant to the Articles, they may elect a further number of directors.
The total number of directors elected shall not exceed the maximum required by the Articles. If the shareholders remove any director before the expiration of his or her period of office and
appoint another person in his or her place, that person so appointed shall hold office only during
the remainder of the time that the director in whose place he or she is appointed would have held
the office if he or she had not been removed. The directors, or any committee of directors, may take any action required or permitted to be taken
by them and may exercise any of the authorities, powers and discretions for the time being vested
in or exercisable by them by way of a resolution either passed at a meeting at which a quorum is
present or consented to in writing under the applicable section of the BCBCA. Section 19 of the Companys Articles stipulates that the directors may, from time to time, appoint
such officers, if any, as the directors determine and the directors may, at any time terminate any
such appointment. The directors are also empowered to determine the functions and duties of such
officer. One person may hold more than one position as an officer of the Company. Any person
appointed as the chair of the board or as the managing director must be a director. Any other
officer need not be a director. All appointments of officers are to be made on such terms and
conditions and that the remuneration that the directors think fit. All or any of these select
directors shall hold office until their successors are elected. Vacancies occurring from time to
time in these offices may be filled by the directors from among their shareholders. Page 54




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Rights Attached to Shares The Company has the following authorized capital stock:  
    an unlimited number of common shares without par value
    100,000,000 Class A preference shares without value, issuable in series
    100,000,000 Class B preference shares with a par value of $50 each, issuable in series, and
    an unlimited number of Class C preference shares without par value issuable in series. The following is a description of the rights, preferences, and restrictions attached to each class
of the Companys shares:  a)
    Unlimited number of Common Shares without par value  Each Common Share carries the right to
one vote at any general meeting of shareholders of the Company. Cumulative voting is not
permitted or required. Dividends are payable on the Common Shares at the discretion of the
Board of Directors. The holders of the Common Shares are not liable to further capital calls
on such shares by the Company. In the event of the liquidation, dissolution or winding-up of
the Company or any distribution of its assets for the purpose of winding up its affairs, after
the payment of any dividends which have been declared but had not been paid, the Common Shares
rank subordinate to the Class A Preference Shares, the Class B Preference Shares and the Class
C Preference Shares with respect to the amount paid up capital together with any fixed premium
with respect of such Class A Preference Shares and Class B Preference Shares. Thereafter, the
Class A Preference Shares, Class B Preference Shares and Class C Preference Shares are not
entitled to any further distributions and the holders of the Common Shares shall be entitled
to the distribution of all residual amounts. The Common Shares are not redeemable at the
option of the Company or the holders. Except as expressly provided by any special rights and
restrictions which the directors may create, define or attach to any series of Class A
Preference Shares, Class B Preference Shares or Class C Preference Shares (described below),
the directors of the Company may, in their discretion, declare dividends with respect to the
Common Shares only or with respect to any other class or series of shares. To date, the Class
A Preference Shares Series A Convertible, the Class B Series 1 Preference Shares and the Class
B Series 2 Preference are the only Preference Shares which have been issued with a priority
for payment of dividends over the Common Shares. There are no sinking fund provisions
respecting the Common Shares.b)
    100,000,000 Class A Preference Shares without par value  These shares may be issued in one
or more series. The directors have the power to alter the Notice of Articles and Articles of
the Company from time to time to fix the number of shares in, and to determine the rights,
privileges and restrictions attached to each series of Class A Preference Shares, including
voting rights; however, no one series of Class A Preference Shares may be issued with a right
to payment of dividends or a return of capital on a winding-up or dissolution of the Company
in priority to any other series of Class A Preference Shares. In addition, if the right to
cumulative dividends is attached to a series of Class A Preference Shares issued by the
Company, and such dividends are not paid in full, the shares of all series of the Class A
Preference Shares are entitled to participate ratably in respect of accumulated dividends in
accordance with the amounts that would be payable on those shares if all the accumulated
dividends were paid in full. In the event of the liquidation, dissolution, or winding-up of
the Company or any distribution of its assets for the purpose of winding up its affairs, after
the payment of any dividends which have been declared but unpaid, the holders of the Class A
Preference Shares and the Class B Preference Shares shall be entitled pari passu to be paid
such amount as the special rights and restrictions attaching to such shares shall provide and,
in the absence of any express provision with respect to such payments, the amount of paid up
capital on such shares, out of the assets of the Company in preference to and in priority over
any payment or distribution of any capital asset or monies to the holders of the Common Shares
of the Company. After such payment, the holders of the Class A Preference Shares, and Class B
Preference Shares and Class C Preference Shares shall not be entitled to share in any other
distribution of the property or assets of the Company. Once a series of Class A Preference
Shares is designated by the Board of Directors, the rights, privileges and conditions attached
to such series of Class A Preference Shares may be altered or amended only by way of a special
resolution passed by a majority of not less than 662/3% of the votes cast by
holders of voting shares at a meeting of the holders of that series of Class A Preference
Shares.To date, only one series of shares has been designated by the Board of Directors out of the
Class A Preference Shares, namely, 10,000,000 shares which have been designated as Class A
Preference Shares Series A Page 55




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Convertible without par value the (Series A Convertible Shares). Each Series A
Convertible Share entitles the holder to one vote either in person or by proxy at any
general meeting of the shareholders of the Company. Each Series A Convertible Share may be
converted at the option of the holder into one Common Share at any time. In each calendar
year, the holders of the Series A Convertible Shares shall be entitled to receive, in
priority to the Common Shares, non-cumulative dividends at a rate not exceeding $0.01 per
Series A Convertible Share, when, as and if so declared by the Board of Directors, in its
discretion, out of the net profits and surplus of the Company properly applicable to the
payment of dividends. The Series A Convertible Shares are not subject to any right of
redemption at the option of the holder or the Company. In the event of the liquidation,
dissolution, or winding-up of the Company or any distribution of its assets for the purpose
of winding up its affairs, after the payment of any dividends which have been declared or
accrued but unpaid, the holders of the Series A Convertible Shares shall be entitled to be
paid the amount of paid up capital on such shares, out of the assets of the Company in
preference to and in priority over any payment or distribution of any capital asset or
monies to the holders of the Common Shares of the Company, but in subordination to payment
of the paid up capital plus any accrued but unpaid dividends on the Class B Preference
Shares. After such payment, the holders of the Series A Convertible Shares shall not be
entitled to share in any other distribution of the property or assets of the Company. There
are no sinking fund provisions for any further capital calls on such shares. All issued and
outstanding Series A Convertible Shares are fully paid.c)
    100,000,000 Class B Preference Shares with a
par value of $50.00 each -  These shares may be
issued in one or more series. The directors have the power to alter the Notice of Articles
and Articles of the Company from time to time to fix the number of shares in, and to determine
the rights, privileges and restrictions attached to each series of Class B Preference Shares,
including voting rights; however, no one series of Class B Preference Shares may be issued
with rights to payment of dividends or a return of capital on a winding-up or dissolution of
the Company in priority to any other series of Class B Preference Shares. In addition, if the
right to cumulative dividends is attached to a series of Class B Preference Shares issued by
the Company, and such dividends are not paid in full, the shares of all series of Class B
Preference Shares are entitled to participate ratably in respect of accumulated dividends in
accordance with the amounts that would be payable on those shares if all the accumulated
dividends were paid in full. In the event of the liquidation, dissolution, or winding-up of
the Company or any distribution of its assets for the purpose of winding up its affairs, after
the payment of any dividends which have been declared but unpaid, the holders of the Class A
Preference Shares described above and the Class B Preference Shares shall be entitled pari
passu to be paid such amount as the special rights and restrictions attached to such shares
shall provide and, in the absence of any express provision with respect to such payments, the
amount of paid up capital on such shares, out of the assets of the Company in preference to
and priority over any payment or distribution of any capital asset or monies to the holders of
the Common Shares of the Company. After such payment, the holders of the Class A Preference
Shares and Class B Preference Shares shall not be entitled to share in any other distribution
of the property or assets of the Company. Once a series of Class B Preference Shares is
designated by the Board of Directors, the rights, privileges and conditions attached to such
series of Class B Preference Shares may be altered or amended only by a special resolution
passed by a majority of not less
 than 662/3% of the votes cast by holders of voting shares at a meeting of the holders of that series of Class B Preference Shares.To date, two series of shares have been designated by the Board of Directors out of the
Class B Preference Shares as follows:  (i)
    10,000,000 million shares which have been designated as Class B Series 1
Preference Shares with a par value of $50.00 each the (Class B Series 1 Preference
Shares). Each Series 1 Preference Share entitles the holder to one vote either in
person or by proxy at any general meeting of the shareholders of the Company. Each
Series 1 Preference Share may be converted at the option of the holder into 45.5 Common
Shares at any time. The Company has the right to require the shareholders of the Class
B Series 1 Preference Shares to convert each such share into 45.5 Common Shares if (i)
at any time after 13 months following the issuance of the Series 1 Preference Share,
the closing trade price of the Companys Common Shares exceeds $2 for at least 20
consecutive trading days, or (ii) at any time, the Company completes a firm public
underwritten offering of its Common Shares for more than US$40,000,000 at a price per
Common Share greater than $2.20. The holders of the Class B Series 1 Preference Shares
shall be entitled to receive in each calendar year when, as and if declared by the Page 56




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Board of Directors, in its discretion, cumulative dividends at a rate of 6% per annum
on the original purchase price of each Class B Series 1 Preference Share, out of the
net profits and surplus of the Company properly applicable to the payment of
dividends. The Class B Series 1 Preference Shares are redeemable at the option of
the Company at any time after the fifth anniversary of the issuance date for an
amount equal to the original issuance price plus all accrued but unpaid dividends on
such shares. The Class B Series 1 Preference Shares are not subject to any right of
redemption at the option of the holder. In the event of the liquidation,
dissolution, or winding-up of the Company or any distribution of its assets for the
purpose of winding up its affairs, the holders of the Class B Series 1 Preference
Shares shall be entitled to be paid the amount of paid up capital plus all accrued
but unpaid dividends on such shares, out of the assets of the Company in preference
to and in priority over any payment or distribution of any capital asset or monies to
the holders of the Common Shares or Class A Preference Shares. After such payment,
the holders of the Class B Series 1 Preference Shares shall not be entitled to share
in any other distribution of the property or assets of the Company. There are no
sinking fund provisions for any further capital calls on such shares. All issued and
outstanding Class B Series 1 Preference Shares are fully paid; and(ii)
    10,000,000 million shares which have been designated as Class B Series 2
Preference Shares with a par value of $50.00 each the (Class B Series 2 Preference
Shares). Each Series 2 Preference Share entitles the holder to one vote either in
person or by proxy at any general meeting of the shareholders of the Company. Each
Series 2 Preference Share may be converted at the option of the holder into 58.82
Common Shares at any time. The Company has the right to require the shareholders of
the Class B Series 2 Preference Shares to convert each such share into 58.82 Common
Shares if (i) at any time after 12 months following the issuance of the Series 2
Preference Share, the closing trade price of the Companys Common Shares exceeds
CDN$2.13 for at least 20 consecutive trading days, or (ii) at any time, the Company
completes a firm commitment public underwritten offering of its Common Shares for more
than CDN$40,000,000 at a price per Common Share greater than $1.70. The holders of the
Class B Series 2 Preference Shares shall be entitled to receive in each calendar year
when, as and if declared by the Board of Directors, in its discretion, cumulative
dividends at a rate of 7% per annum on the original purchase price of each Class B
Series 2 Preference Share, out of the net profits and surplus of the Company properly
applicable to the payment of dividends. The Class B Series 2 Preference Shares are
redeemable at the option of the Company at any time after the third anniversary of the
issuance date for an amount equal to the original issuance price plus all accrued but
unpaid dividends on such shares. The Class B Series 2 Preference Shares are not
subject to any right of redemption at the option of the holder. In the event of the
liquidation, dissolution, or winding-up of the Company or any distribution of its
assets for the purpose of winding up its affairs, the holders of the Class B Series 2
Preference Shares shall be entitled to be paid the amount of paid up capital plus all
accrued but unpaid dividends on such shares, out of the assets of the Company in
preference to and in priority over any payment or distribution of any capital asset or
monies to the holders of the Common Shares or class of shares ranking junior to the
Class B Class B Series 2 Preference Shares. After such payment, the holders of the
Class B Series 2 Preference Shares shall not be entitled to share in any other
distribution of the property or assets of the Company. There are no sinking fund
provisions for any further capital calls on such shares. All issued and outstanding
Class B Series 2 Preference Shares are fully paid.  (d)
    An unlimited number of Class C Preference shares without par value -These shares may be
issued in one or more series. The directors have the power to alter the Notice of Articles and
Articles from time to time to fix the number of shares in, and to determine the rights,
privileges and restrictions attached to each series of Class C Preference shares, including
voting rights; however, no one series of Class C shares may be issued with rights to payment
of dividends or a return of capital on a winding-up or dissolution of the Company in priority
to any other series of the Class C Preference shares. In addition, if the right to cumulative
dividends is attached to a series of Class C Preference shares issued by the Company, and such
dividends are not paid in full, the shares of all series of the Class C Preference shares are
entitled to participate ratably in respect of accumulated dividends in accordance with the
amounts that would be payable on those shares if all the accumulated dividends were paid in
full. The holders of Class C Preference Shares shall be entitled, on the liquidation or
dissolution of the Company, whether voluntary or involuntary, or on any other distribution of
its assets among its shareholders for Page 57




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the purpose of winding up its affairs, to receive, before any distribution is made to the
holders of common shares or any other shares of the Company ranking junior to the Class C
Preference Shares with respect to repayment of capital on the liquidation or dissolution of
the Company, whether voluntary or involuntary, or on any other distribution of its assets
among its shareholders for the purpose of winding up its affairs, the amount paid up with
respect to each Preferred share held by them, together with the fixed premium (if any)
thereon, all accrued and unpaid cumulative dividends (if any and if preferential) thereon,
which for such purpose shall be calculated as if such dividends were accruing on a day-to-day
basis up to the date of such distribution, whether or not earned or declared, and all declared
and unpaid non-cumulative dividends (if any and if preferential) thereon. After payment to the
holders of Class C Preference Shares of the amounts so payable to them, they shall not, as
such, be entitled to share in any further distribution of the property or assets of the
Company except as specifically provided in the special rights and restrictions attached to any
particular series. Once a series of Class C shares is designated by the Board of Directors of
the Company, the rights, privileges and conditions attached to such series of Class C
Preference shares may be altered or amended only by way of a special resolution passed by a
majority of not less than 662/3% of the votes cast by holders of voting shares at a
meeting of the holders of that series of Class C Preference shares. To date, none of the Class
C Preference shares have been issued in any series, nor has any such series been designated by
the Board of Directors. Alteration of the Rights of Shareholders No rights, privileges or restrictions attached to any class or series of shares of the Company may
be altered except with the approval by special resolution passed by the holders of not less than
662/3% of the votes represented in person or by proxy at a duly convened general meeting
of the holders of that class or series of shares. There are no limitations in the Companys charter on the rights of non-resident or foreign owners
to hold Common Shares of the Company. Shareholders Meetings The British Columbia BCBCA requires the directors of the Company to call an annual general meeting
of shareholders at least once every calendar year and not later than thirteen months after the last
annual general meeting. Every general meeting, other than an annual general meeting, shall be
called a special meeting. The directors may, whenever they think fit, convene a special general
meeting. Notice of a meeting must specify the place, the day, and the hour of meeting, and, in case of
special business, the general nature of that business. The accidental omission to give notice of
any meeting to, or the non-receipt of any notice by any of the shareholders entitled to receive
notice do not invalidate any proceedings at that meeting. The following business at a general meeting is deemed to be special business: a) all business at a special general meeting; and b) all business that is transacted at an annual general meeting, with the exception of
consideration of the financial statement and report of the directors and auditors, the election of
directors, the appointment of the auditors and such other business as section 11.1 of the Companys
Articles stipulates, ought to be transacted at an annual general meeting, or any business which is
brought under consideration by the report of the directors should be issued with the notice
convening the meeting. Section 11.6 of the Companys Articles stipulate that no business, other than the election of a
chairman and the adjournment or termination of the meeting, shall be conducted at any general
meeting unless a quorum of shareholders entitled to vote is present at the commencement of the
meeting, but such quorum need not be present throughout the meeting. A quorum is one shareholder
present in person or by proxy or, if it is a corporation, partnership, trust or other
non-individual legal entity, represented in accordance with the BCBCA, holding not less than one
voting share of the Company. If within half an hour from the time appointed for a meeting, a quorum
is not present, in the case of a general meeting requisitioned by shareholders, the meeting is
dissolved, and in the case of any other meeting of shareholders, the meeting stands adjourned to
the same day in the next week at the same time and place. Page 58




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The Articles stipulate that the Chairman of the Board, or in his absence, the President of the
Company, or in his absence one of the directors present shall preside as chairman of every general
meeting. The chairman of a general meeting may with the consent of any meeting at which a quorum is present,
and shall, if so directed by the meeting, adjourn the meeting from time to time and from place to
place. No business shall be transacted at any adjournment meeting other than the business left
unfinished at the meeting from which the adjournment took place. Unless the directors otherwise determine, the instrument appointing a proxyholder and the power of
attorney or other authority, if any, under which it is signed or a notarized, certified copy
thereof shall be deposited at a place specified for that purpose in the notice convening the
meeting, not less than forty-eight hours before the time for holding the meeting at which the
proxyholder proposes to vote. Notice of every general meeting should be sent to: a) every shareholder holding a share or shares carrying the right to vote at such meetings on the
record date or, if no record date was established by the directors, on the date of mailing such
notice; and b) every person upon whom the ownership of a share devolves by reason of his being a legal personal
representative or a trustee in bankruptcy of a shareholder where the shareholder, but for his death
or bankruptcy, would be entitled to vote. No other person is entitled to receive notice of general meetings. A copy of the Articles has been filed with this form 20-F and is listed as exhibit 1.1 under Item
19  Exhibits. C. Material Contracts. The Company has entered into five material contracts in the ordinary course of business during
the two years preceding publication of this annual report. On November 29, 2001, the Company, through its subsidiary OSL, entered into a contract with Public
Works and Government Services Canada (PWGSC) for the supply and delivery of Shipboard Integrated
Navigation and Display Systems (SHINNADS) Upgrade for the Canadian Department of Defense. The total
contract price will be between $4,243,266 and $4,538,266. The contract is subject to the General
Condition document DSS-MAS 9601 dated May 12, 2000, which contains a termination for convenience
clause (Clause 9601 27), that allows PWGSC to terminate the contract, in whole or in part, at any
time by giving the Company written notice. As of April 30, 2005, the Company had completed 99.8% of
the contract and has a related account receivable of $313,624. The remainder of the contract will
be completed in FY2005. As of May 18, 2005,no evidence exists that PWGSC has any intentions of

terminating this contract. On June 14, 2002, the Company, through its subsidiary OSL, entered into a contract with the United
States Coast Guard for the supply and delivery of vessel licenses for ECPINS®-M software and VME to
PC hardware upgrade kits. The total contract price is US$1,353,574. The contract requires that
the supply and delivery of vessel licenses for ECPINS®-M software be within 60 days of receipt of
order with final acceptance by the USCG in March 2003 and the supply and delivery of the VME to PC
hardware upgrade kits be within 60 days of receipt of order. As of April 30, 2005, the Company had
completed 100% of the contract and has a related account receivable of U.S. $102,000. Copies of these contracts are incorporated by reference to Item 19  Exhibits of the Companys
Form 20-F  Initial Registration and Form 20-F/A  Initial Registration  Amendment No. 1 filed
with the SEC on September 10, 2002. On February 29, 2004, the Company, through its subsidiary OSL, entered into a contract with
Lockheed Martin UK Limited  Integrated Systems for the supply and delivery of vessel licenses to
the Royal Navy of the United Kingdom for ECPINS® software. The total contract price will be between
$8,133,704 and $17,145,919. The contract is currently in progress and as of April 30, 2005, the
Company has completed 81% of the software portion of the contract and 2% of Page 59




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the 30 year long term maintenance portion of the contract. The contract obligates the Company to
provide the supply and delivery of vessel licenses for ECPINS® software between February 29, 2004
and December 17, 2033 and support services for a 30-year period. The contract contains classified
information and the United Kingdom Government has determined that any loss, misuse, or unauthorized
access, disclosure or modification could adversely affect national security of the United Kingdom.
In the U.S., this contract must be safeguarded in accordance with Department of Defense National
Industrial Security Program Operating Manual (NISPOM), DoD 5220.22-M dated January 1995 and,
therefore, a copy of this contract cannot be disclosed with this Form 20-F  Annual Report. On March 18, 2004, the Company, through its subsidiary OSL, entered into a contract with Nautronix
Ltd. for the supply and delivery of ECPINS® software, hardware, training and warranty services to
the Royal Australian Navy. The total contract price will be between AUD$4,450,000 and
AUD$7,950,000. The contract is currently in progress and as of April 30, 2005, the Company has
completed 69% of the base contract of AUD$4,450,000. In addition the customer has exercised options
of AUD$320,286 which are 100% complete and have been recognized in revenue. The contract obligates
the Company to provide the supply and delivery of a Defense Enterprise Wide License for ECPINS®
software, specialized hardware and training between March 18, 2004 and March 4, 2019 and warranty
services for a 15-year period. This information has been previously reported and is incorporated
by reference to the Companys Form 20-F  Annual Report for the fiscal year ended November 30, 2003
under Item 10  Additional Information. The Company has entered into five material contracts other than in the ordinary course of business
immediately prior to the two years preceding this annual report. The Shareholder Rights Plan Agreement (Rights Plan) dated April 19, 2001, between the Company and
Computershare Trust Company of Canada established the Companys Rights Plan. On April 22, 2004, the
Companys shareholders approved by ordinary resolution, the continued existence of the Rights Plan
for an additional three year period. This information has been previously reported and is
incorporated by reference to the Companys Form 20-F  Annual Report for the fiscal year ended
November 30, 2002 under Item 10  Additional Information. On April 26, 2004, the Company entered into an agreement with Technology Partnerships Canada (TPC)
whereby TPC granted financial assistance to the Company for the purpose of funding research and
development activities to be completed on or before March 31, 2007. The maximum eligible
contribution by TPC is $3,768,391. As at November 30, 2004, the Company has claimed for $1,471,414
of assistance under the agreement. These amounts have been applied to reduce expenses in the
consolidated statements of earnings. In addition, the Company is required to pay a royalty of 1.4%
on annual gross Navigation Systems and Applications revenue for the period January 1, 2006 to
December 31, 2008 and a royalty of 2.5% on annual gross Navigation Systems and Applications revenue
for the period January 1, 2009 to December 31, 2013. Royalty payments will continue until the
cumulative royalties paid or payable to December 31, 2013 are at least $6,079,176 or until December
31, 2017. A copy of this contract is filed with this form 20-F and is listed as exhibit 4.6 under
Item 19  Exhibits. On March 8, 2005, the Company entered into a contract with C.E. Unterberg, Towbin, LLC, a Delaware
limited liability company (CEUT) whereby CEUT was engaged to provide financial advisory and
investment banking services to the Company. CEUT was retained to act as the Companys exclusive
financial advisor with respect to the best efforts private placement transaction of up to 19,500
units for an aggregate total of CDN$19,500,000 (US$16,000,000). Each unit is comprised of 20 voting
Class B Preference Shares Series 2 (Preference Shares) and 588 share purchase warrants (warrants).
As compensation for the services rendered by CEUT, the Company paid CEUT a cash fee equal to
$1,001,362, In addition, the Company issued 579,064 warrants to CEUT in connection with the private
placement. A copy of this contract is filed with this Form 20-F and is listed as exhibit 4.7 under
Item 19  Exhibits. On March 8, 2005, the Company entered into a contract with Mr. E. Brinton Coxe for his provision of
advisory services to the Company in connection with the private placement of Class B Preference
Shares Series 2 and share purchase warrants. In consideration of the provision of his advisory
services to the Company, the Company paid Mr. Coxe a fee of $815,908; and issued to him 350,000
share purchase warrants. A copy of this contract is filed with this Form 20-F and is listed as
exhibit 4.8 under Item 19  Exhibits. In March and April of 2005, the Company entered into a number of subscription agreements with
various institutional investors in connection with the private placement of Class B Preference
Shares Series 2 and share purchase warrants. On April 11, 2005, the Company completed the private
placement in the aggregate amount of $19,500,000 through the Page 60




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sale of 19,500 units, with each unit comprised of 20 voting Class B Preference Shares Series 2 and
588 share purchase warrants. The issue price was $1,000.01 per unit. Each Class B preference share
is convertible at the option of the holder at any time into 58.82 of the Companys common shares,
calculated by dividing the issue price of $50.00 for each preference share by the conversion price
of $0.85. Each warrant entitles the holder to purchase one of the Companys common shares at the
exercise price of $0.85 with the next five years from the date of the closing. A copy of this
contract is filed with this Form 20-F and is listed as exhibit 4.9 under Item 19  Exhibits. D. Exchange controls. There is no law or governmental decree or regulation in Canada that restricts the export or
import of capital or affects the remittance of dividends, interest or other payments to a
non-resident holder of Common Shares, other than withholding tax requirements. See Income
Taxation below. E. Income Taxation. The following summary of the material Canadian federal and U.S. federal income tax
considerations generally applicable in respect of the holding or disposing of Common Shares is
provided by the Company. This summary does not address all possible income tax consequences
relating to an investment in the Common Shares of the Company. There may be provincial,
territorial, state and local income taxes applicable to a potential shareholder, depending on the
shareholders particular circumstances, which are not addressed in this summary, as well as estate
tax and other non-income taxes applicable to a potential shareholder. The tax consequences to any
particular holder, including a U.S Holder of Common Shares (defined below) will vary according to
the status of that holder as an individual, trust, corporation, or member of a partnership, the
jurisdiction in which the holder is subject to taxation, the place where the holder is resident and
generally, according to the holders particular circumstances. U.S. Holder of Common Shares References to a U.S. Holder of Common Shares in this section includes a citizen or individual
resident of the U.S., a corporation created or organized in the U.S., a trust or estate of which
its income is includable in its gross income for U.S. federal income tax purposes without regard to
its source, if (i) a court within the U.S. is able to exercise primary supervision over the
administration of the trust and (ii) one or more U.S. trustees have the authority to control all
substantial decisions of the trust, who are holders of Common Shares and who:  
    for purposes of the Income Tax Act (Canada) (ITA) and the Canada-United States
Income Tax Convention (1980), as amended by the protocol signed on July 29, 1997,
(Treaty) are residents of the U.S. and have never been residents of Canada;
    for purposes of the U.S. Internal Revenue Code of 1986 (Code) are U.S. persons;
    deal at arms length with the Company;
    will hold the Common Shares as capital property for purposes of the ITA;
    will hold the Common Shares as capital assets for purposes of the Code;
    do not and will not hold the Common Shares in carrying on a business in Canada;
    will not perform independent personal services from a fixed base situated in Canada; and
    are not or will not be subject to special provisions of Canadian or U.S. federal
income tax law, including, without limiting the generality of the foregoing, financial
institutions, real estate investment trusts, shareholders that have a functional
currency other than the U.S. dollar, shareholders that own shares through a partnership
or other pass-through entity, shareholders that hold shares as part of a straddle,
hedge or conversion transaction, tax-exempt organizations, qualified retirement plans,
insurance companies, shareholders who acquired their shares through the exercise of
employee stock options or otherwise as compensation and mutual fund companies. The following summary of Canadian federal and U.S. federal income tax considerations generally
applicable to a U.S. Holder of Common Shares of the Company is based on the following, as at the
time of this statement: Page 61




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
    the ITA and the Income Tax Regulations (Canada) (Regulations);
    published proposals to amend the ITA and the Regulations;
    published administrative positions and practices of the Canada Revenue Agency (CRA);
    the Code;
    Treasury Regulations;
    published Internal Revenue Service (IRS) rulings;
    published administrative positions of the IRS;
    published jurisprudence that is considered applicable; and
    the Treaty All of the foregoing are subject to material or adverse change, on a prospective or retroactive
basis, at any time. Neither the estate tax laws of Canada or the U.S., nor the tax laws of the
various provinces or territories of Canada and the tax laws of the various state and local
jurisdictions of the U.S. are considered in this summary. This summary is not exhaustive of all possible income tax consequences. The following discussion
is for general information only and is not intended to be, nor should it be construed to be, legal
or tax advice to any holder or prospective holder of Common Shares of the Company and no opinion or
representation with respect to any such holder or prospective holder with respect to the income tax
consequences to any such holder or prospective holder is made. Accordingly, holders and
prospective holders of Common Shares of the Company should consult their own tax advisors about the
Canadian federal and provincial and U.S. federal, state, local, and foreign income, estate and
other tax consequences of purchasing, owning and disposing of Common Shares of the Company. Canadian Federal Income Tax Consequences Disposition of Common Shares A U.S. Holder of Common Shares will not be subject to tax in Canada under the ITA on capital gains
realized on the disposition of such Common Shares unless the shares are taxable Canadian
property. Such Common Shares will be taxable Canadian property if, in general, at any time during
the sixty month period immediately preceding the disposition, 25% or more of the Companys issued
shares of any class were owned by such holder, or by such holder and persons with whom such holder
did not deal at arms length. If the Companys shares are taxable Canadian property to a U.S.
Holder of Common Shares, 50% of any resulting capital gain realized on the disposition of such
shares may be subject to tax in Canada. However, the Treaty provides that gains realized by a U.S.
Holder of Common Shares on the disposition of shares of a Canadian corporation will be exempt from
federal tax in Canada unless the value of the Canadian corporation is derived principally from real
property situated in Canada. Dividend Distributions on Shares of the Company Dividends paid on the Companys Common Shares held by a U.S. Holder of Common Shares will be
subject to Canadian non-resident withholding tax. The Company is required to withhold taxes at
source. Under the Treaty, a withholding rate of 5% is applicable to corporations resident in the
United States, who do not have a permanent establishment in Canada in respect of which the
dividends are effectively connected and who are beneficial owners of at least 10% of the voting
shares of the Company, and are not a Limited Liability Company (LLC). Under the Treaty, a
withholding rate of 15% is applicable in all other cases. Page 62




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United States Federal Income Tax Consequences The U.S. federal income tax consequences related to the disposition and ownership of Common Shares,
subject to the Passive Foreign Investment Company and Controlled Foreign Corporation Rules
contained in the Code, are generally as follows: Disposition of Common Shares On a disposition of Common Shares a U.S. Holder of Common Shares generally will recognize a gain or
loss. The gain or loss will be equal to the difference between the amount realized on the sale and
the U.S. Holder of Common Shares adjusted tax basis in those shares. Any such gain or loss will be
a long-term capital gain or loss if the shareholder has held the shares for more than one year.
Otherwise the gain or loss will be a short-term capital gain or loss. The gain or loss will
generally be a U.S. source gain or loss. Dividend Distributions on Shares of the Company Dividend distributions (including constructive dividends) paid by the Company will be required to
be included in the income of a U.S. Holder of Common Shares to the extent of the Companys current
or accumulated earnings and profits (E&P) attributable to the distribution without reduction for
any Canadian withholding tax withheld from such distributions. Dividends paid in years prior to
2009 will be taxable as capital gains if the Company constitutes as a qualified foreign
corporation at the time the dividends are paid. In this regard, no assurance can be given that the
Company currently constitutes a qualified foreign corporation or that it will constitute one at the
time of any dividend payment. Even if a dividend payment is in fact not converted to U.S. dollars
on the date of distribution, the amount of any cash distribution paid in Canadian dollars to a U.S.
Holder will be equal to the U.S. dollar value of the Canadian dollars on the date of distribution
based on the exchange rate on such date. To the extent distributions paid by the Company on the
Common Shares exceed the Companys current or accumulated E&P, they will be treated first as a
return of capital up to a shareholders adjusted tax basis in the shares and then as capital gain
from the sale or exchange of the shares. Any gain or loss resulting from currency exchange
fluctuations during the period from the date a dividend is included in income to the date such
payment is converted into U.S. dollars generally will be treated as ordinary income or loss. Dividends paid by the Company on the Common Shares generally will not be eligible for the
dividends received deduction provided to corporations receiving dividends from certain U.S.
corporations. The dividends may be subject to a backup withholding tax unless the U.S. Holder of
Common Shares furnishes the Company with a duly completed and signed Form W-9 (or otherwise
establishes its exemption from such tax). The U.S. Holder of Common Shares will be allowed a refund
or a credit equal to any amount withheld under the U.S. backup withholding tax rules against the
U.S. Holders U.S. federal income tax liability, provided the Holder furnishes the required
information to the IRS. Foreign Tax Credit A U.S. Holder of Common Shares will generally be entitled to a foreign tax credit or deduction in
an amount equal to the Canadian tax withheld. Dividends paid by the Company generally will
constitute foreign source dividend income and passive income for purposes of the foreign tax
credit, which could reduce the amount of foreign tax credits available to shareholders. There are
significant and complex limitations that apply to the credit. The U.S. holders of Common Shares
should consult their own tax advisors in this regard. Passive Foreign Investment Company Rules Special U.S. tax rules apply to a shareholder of a Passive Foreign Investment Company (PFIC). The
Company could be classified as a PFIC if, after the application of certain look through rules,
for any taxable year, either:  
    75% or more of the Companys gross income for the taxable year is passive income,
which includes interest, dividends and certain rents and royalties; or
    the average quarterly percentage, by fair market value of the Companys assets that
produce or are held for the production of passive income is 50% or more of the fair
market value of all of the Companys assets. Page 63




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To the extent the Company owns at least 25% by value of the shares of another corporation, the
Company is treated for purposes of the PFIC tests as owning the Companys proportionate share of
the assets of such corporation, and as receiving directly the Companys proportionate share of the
income of such corporation. Distributions which constitute excess distributions from a PFIC and dispositions of shares of a
PFIC are subject to the following special rules in the hands of a U.S. Holder:  
    the excess distributions (generally any distributions received by
a shareholder of a PFIC in any taxable year that are greater than
125% of the average annual distributions received by such
shareholder in the three preceding taxable years or the
shareholders holding period for the shares, if shorter) or gain
would be allocated on a pro rata basis over a U.S. Holder of
Common Shares holding period for the shares;
    the amount allocated to the current taxable year and any taxable
year prior to the first taxable year in which the Company is a
PFIC would be treated as ordinary income in the current taxable
year; and
    the amount allocated to each of the other taxable years would be
subject to the highest rate of tax on ordinary income in effect
for that year and to an interest charge based on the value of the
tax deferred during the period during which the shares are owned. U.S. Holders who actually or constructively own shares in a PFIC may be eligible to make certain
elections which require them to include income for the PFIC on an annual basis. For any tax year in which the Company is determined to be a PFIC, U.S. Holders may elect to treat
their Common Shares as an interest in a qualified electing fund (QEF Election), in which case the
U.S. Holders would be required to include in income currently their proportionate share of the
Companys ordinary earnings and long-term capital gains in years in which the Company is a PFIC
regardless of whether distributions of such earnings and gains are actually distributed to such
U.S. Holders. Any gain subsequently recognized upon the sale of their Common Shares by such U.S.
Holders generally would be taxed as capital gain. If a U.S. Holder makes a QEF Election, the
Company will seek to provide the Holder with the information that it will need in order to
effectuate that election. As an alternative to a QEF Election, a U.S. Holder generally may be able to avoid the imposition of
the special tax and interest charge described above by electing to mark to market the Common Shares
(Mark-to-Market Election) recognizing as ordinary income or loss for each taxable year, subject to
certain limitations, the difference as of the close of the taxable year between the fair market
value of the U.S. Holders Common Shares and the adjusted tax basis of such Common Shares. Losses
would be allowed only to the extent of the net mark-to-market gain previously included by the U.S.
Holder under the election in prior taxable years. Controlled Foreign Corporation Rules Generally, if more than 50% of the voting power or total value of all classes of the Companys
shares is owned, directly or indirectly, by U.S. shareholders, who individually own 10% or more of
the total combined voting power of all classes of the Companys shares, the Company could be
treated as a controlled foreign corporation (CFC) under Subpart F of the Code. This classification
would require such 10% or greater shareholders to include in income their pro rata shares of the
Companys Subpart F Income, as defined in the Code. In addition, a gain from the sale or exchange
of shares by a U.S. Holder of Common Shares who is or was a 10% or greater shareholder at any time
during the five year period ending with the sale or exchange will be deemed ordinary dividend
income to the extent that the Companys E&P attributable to the shares sold or exchanged that were
accumulated during the period that the shares were held by such U.S. Holder while the Company was a
CFC. Any U.S. Holder owning directly or indirectly (by attribution) 10% or more of the total
combined voting power of all classes of the Companys shares should consult their own tax advisors Page 64




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F. Dividends and paying agents. Not applicable. G. Statement by experts. Not applicable. H. Documents on display. You may read and copy any of the Companys reports and other information at, and obtain copies
upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. In addition, the SEC maintains a web site that
contains reports, proxy and information statements and other information regarding registrants that
file electronically with the SEC at http://www.sec.gov. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is required to file reports and other information with the securities commission in all
provinces of Canada. You are invited to read and copy any reports, statements or other
information, other than confidential filings, that the Company files with the provincial securities
commissions. These filings are also electronically available from the Canadian System for
Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent
of the SECs electronic document gathering and retrieval system. The Company will provide, without charge to each person, including any beneficial owner, on the
written or oral request of such person, a copy of any or all documents referred to above which have
been or may be incorporated by reference in this report (not including exhibits to such
incorporated information that are not specifically incorporated by reference into such
information). Requests for such copies should be directed to the Companys principal executive
offices at 107  930 West 1st Street, North Vancouver, British Columbia, Canada V7P 3N4. I. Subsidiary information. For more information on the Companys subsidiaries, see Item 4. Information on the
CompanyOrganizational structure and refer to exhibit 8.1 to this annual report. 
 Item 11. Quantitative and Qualitative Disclosure About Market Risk Foreign Exchange Risk The Company is exposed to cash flow and translation risk due to changes in the Canadian dollar
exchange rates to the U.S. dollar, the Australian dollar and Euro. Exposure to exchange rate fluctuations are due to the translation of the significant portion of the
Companys trade receivables and revenues and, to a lesser extent, the Companys sub contract
payables and direct costs. Because the Companys reporting currency is Canadian dollars, the U.S.
dollar, Australian dollar and Euro transactions and balances must be translated into Canadian
dollars for financial statement reporting purposes. A reduction in the value of the Canadian
dollar relative to the U.S. dollar, Australian dollar and Euro therefore results in lower trade
receivable, revenue, trade payable and expense amounts when these foreign denominated transactions
and balances are translated to Canadian dollars. See Item 3.D. Key Information  Risk Factors for
further explanation of the impact of inflation and the fluctuation of currencies. In order to reduce the impact of U.S. to Canadian dollar, Australian to Canadian dollar and Euro to
Canadian Dollar exchange rate fluctuations, the Company has used the forward exchange contract
facility described in Item 5E Off Page 65




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Balance Sheet Arrangements The Company used the forward exchange contract facility to set the
exchange rate between the U.S. and Canadian dollar, the Australian to Canadian dollar and the Euro
to Canadian dollar for specific transactions at a specific agreed upon rate, thereby mitigating any
foreign exchange gain or loss that might occur on those transactions. The Company uses the forward
exchange contract facility only for known or reasonably certain future U.S., Australian dollar and
Euro transactions. However, there can be no assurance that these strategies will substantially
reduce the potential adverse effect of exchange rate fluctuations on the Companys business,
financial condition or results of operations. Based on the FY2004 operations, the Company estimates that a U.S. $0.01 increase in the exchange
rate of the U.S. dollar relative to the Canadian dollar would have an annualized impact of reducing
earnings before income taxes by approximately $25,000. An Australian $0.01 increase in the exchange
rate of the Australian dollar relative to the Canadian dollar would have an annualized impact of
reducing earnings before income taxes by approximately $12,000. An increase of 0.01 in the
exchange rate of the Euro relative to the Canadian dollar would have an annualized impact of
reducing earnings before income taxes by approximately $10,000. As at November 30, 2004, the Company had the following foreign exchange forward contracts: Weighted Average
    
    
    NotionalType of contract
    
    
    Maturity Date
    
    
    Exchange Rate
    
    
    Amount
    
    
    Fair valueForward foreign exchange contracts:Australian dollar sales option
    
    

December 2004
to May 2005
    
    
    
    0.9300
    
    
    
    AUD $3,678,061
    
    
    $
    13,178U.S. dollar sales
    
    

December 2004
to February 2005
    
    
    
    1.1892
    
    
    
    USD $851,196
    
    
    
    8,088Euro  forward sales contract
    
    
    January 2005
    
    
    
    1.5777
    
    
    
    383,310
    
    
    
    268Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,534
 For discussion on these contracts, please see Note 14 of the Companys November 30, 2004 audited
consolidated financial statements. Interest rate risk The Company is exposed to interest rate risk relating to any debt pursuant to a revolving credit
facility of $2,000,000. The Company does not currently draw on this facility and does not expect to
draw on this facility. The Company is also exposed to interest rate risk relating to cash balances.
The Companys policy is to deposit surplus cash in treasury accounts at a major Canadian chartered
bank. These accounts earn interest at rates applicable for 30-day treasury bills. Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are
primarily accounts receivable. The Company performs on-going credit evaluations of its customers
financial condition and requires letters of credit or other guarantees whenever deemed necessary. 
 Item 12. Description of Securities Other than Equity Securities Not applicable. Page 66




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Part II 
 Item 13. Defaults, Dividends Arrearages and Delinquencies Not applicable. 
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds The Company has not materially modified the instruments defining the rights of the holders of
any of its securities. The Company has not withdrawn or substituted a material amount of the
assets securing any class of its securities. The trustees or paying agents for the Companys
securities have not changed during the last financial year. 
 Item 15. Controls And Procedures The Companys President and Chief Executive Officer, and Corporate Controller, after
evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in 17
CFR 240.13a-15(e) within 90 days of the date of this Form 20-F, have concluded that, as of such
date, the Companys disclosure controls and procedures were effective to ensure that material
information relating to the Company was made known to them by others within the Company
particularly during the period in which this Form 20-F was being prepared. The integrity of financial process is the responsibility of the Companys management. Management
maintains systems of internal control designed to provide assurance that transactions as
authorized, assets are safeguarded and reliable financial information is produced. There were no significant changes in the Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date the Companys President and Chief
Executive Officer, and Corporate Controller completed their evaluation, nor were there any
significant deficiencies or material weaknesses in the Companys internal controls requiring
corrective actions. 
 Item 16. [Reserved] Not applicable. 
 Item 16A. Audit committee financial expert As of May 25, 2005, the Board does not have an audit committee financial expert, as defined by
the SEC, on its Audit Committee. The Board has retained an international executive search firm to
assist the Company in recruiting a director with such financial and accounting expertise to serve
on the Audit Committee. The search, however, has not yet identified an individual who both meets
the SECs requirements and will accept an appointment to the Companys Board and Audit Committee. 
 Item 16B. Code of ethics The Company has adopted a Code of Ethics that applies to its chief executive officer,
president, chief financial officer, controller and persons performing similar functions regardless
of their titles. It also applies to persons listed in this annual report who hold those offices in
any of the Companys subsidiaries, or are persons performing similar functions. The Companys Code
of Ethics had been previously reported and is incorporated by reference to the Companys Form 20-F
- Annual Report for the fiscal year ended November 30, 2003 filed on May 27, 2004. The Companys
Code of Ethics has also been posted on the Companys website:
www.osil.com. Page 67




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The Company also undertakes in this Form 20-F Annual Report filed with the Commission to provide to
any person without charge, upon request, a copy of its Code of Ethics. Any such request may be made
by contacting the Company at the address or telephone number shown in Item 4 Information on the
Company of this Form 20-F. 
 Item 16C. Principal Accountant Fees and Services Ernst & Young LLP was recommended for appointment as the Companys independent auditor for the
fiscal year ended November 30, 2004 by the Audit Committee and the Board of Directors in February
2004 and appointed the Companys independent auditor by the shareholders of the Company at the
Companys Annual General Meeting of April 22, 2004.PricewaterhouseCoopers LLP acted as the
Companys independent auditor for the fiscal years ended November 30, 2002 and 2001. The chart below sets forth the total amount billed to the Company by the Companys independent
auditors for services performed in the years 2004 and 2003, and breaks down these amounts by
category of service: Years ended November 302004
    
    
    2003$
    
    
    $Audit Fees
    
    
    68,161
    
    
    
    102,195Audit-Related Fees
    
    
    74,133
    
    
    
    9,822Tax Fees
    
    
    107,660
    
    
    
    30,523All Other Fees
    
    
    0
    
    
    
    23,815Total
    
    
    249,954
    
    
    
    166,355
 Audit Fees are the aggregate fees billed by the Companys independent auditor for the audit of the
Companys consolidated annual financial statements and attestation services that are provided in
connection with statutory and regulatory filings or engagements. Audit-Related Fees are fees charged by the Companys independent auditor for assurance and related
services that are reasonably related to the performance of the audit or review of the Companys
financial statements and are not reported under Audit Fees. This category comprises fees billed for
independent accountant review of the interim financial statements and Management Discussion and
Analysis, as well as advisory services associated with the Companys financial reporting. Tax Fees are fees for professional services rendered by the Companys independent auditor for tax
compliance, tax advice on actual or contemplated transactions. The Company has introduced procedures for the review and pre-approval of any services performed by
Ernst & Young LLP. The procedures require that all proposed engagements of Ernst & Young LLP for
audit and non-audit services are submitted to the audit committee for approval prior to the
beginning of any such services. During 2004, the audit committee approved 100% of the audit and tax services and related fees. 
 Item 16D. Exemptions from the Listing Standards for Audit Committees Not applicable at the time of filing this Form 20-F. The Company will be subject to the
disclosure requirements of this section commencing its fiscal year ended November 30, 2005. 
 Item 16E. Purchases of Equity Securities by Issuer and Affiliated Purchasers Not applicable at the time of filing this Form 20-F. The Company will be subject to the
disclosure requirements of this section commencing its fiscal year ended November 30, 2005. Page 68




---



##### 



Part III 
 Item 17. Financial Statements See Item 18. Financial Statements for a list of the Financial Statements filed as part of
this annual report. 
 Item 18. Financial Statements The following financial statements are filed as part of this annual report, together with the
report of the independent auditors: Financial Statement Schedules Other than as set forth below, all schedules have been omitted as the required information is
either not applicable or presented in the financial statements or notes thereto. F1
    
    Independent Auditors Report  November 30, 2004F2
    
    Consolidated Balance Sheets as of November 30, 2004 and 2003F3
    
    Consolidated Statements of Earnings & Comprehensive income for the years ended
November 30, 2004, 2003 and 2002F4
    
    Consolidated Statements of Shareholders Equity for the years ended
November 30, 2004, 2003 and 2002F5
    
    Consolidated Statements of Cash Flow for the years ended
November 30, 2004, 2003 and 2002F6
    
    Notes to the Consolidated Financial Statements  November 30, 2004,
2003 and 2002
 Page 69




---



##### 



Item 19. Exhibits Exhibit Number
    
    Description1.1
    
    Articles pursuant to The Business Corporations Act of British Columbia4.1*
    
    Contract  No. X0132 between Naval Materiel Command, Denmark and Offshore Systems Ltd. dated August 20, 2001.4.2**
    
    Contract-No. W8472-OICJ 26/001/QC between Public Works and Government Services Canada and
Offshore Systems Ltd. dated November 29, 2001.4.3**
    
    Contract No. GS-35F-0211L between the United States Coast Guard and Offshore Systems Ltd.
dated June 14, 2002.4.4***
    
    Contract No. 265-004-002 between the Nautronix Ltd. and Offshore Systems Ltd. dated March
18, 2004.4.5*
    
    Shareholders Rights Plan.4.6
    
    Agreement, dated April 26, 2004, between the Company and Technology Partnerships Canada4.7
    
    Contract between C.E. Unterberg, Towbin, LLC and Offshore Systems International Ltd. dated
March 8, 2005.4.8
    
    Contract between Mr. E. Brinton Coxe and Offshore Systems International Ltd. dated March 8, 2005.4.9
    
    Subscription agreement.4.10
    
    Letter of Intent to acquire Mapcon Mapping Consultants Inc.8.1
    
    List of Subsidiaries and Jurisdictions.11.1***
    
    Code of Ethics12.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 * Previously filed with the Companys Form 20-F, dated as of July 24, 2002 and incorporated by
reference herein. ** Previously filed with the Companys Form 20-F/A, dated as of September 10, 2002 and incorporated
by reference herein. *** Previously filed with the Companys Form 20-F, dated as of May 27, 2004 and incorporated by
reference herein. Page 70




---



##### 



SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this registration statement on
its behalf. OFFSHORE SYSTEMS INTERNATIONAL LTD.Dated: May 30, 2005
    
    
    
    By:
    
    /s/ John A. JacobsonJohn A. JacobsonPresident & CEO
 Page 71




---



##### 



Exhibits Exhibit Number
    
    Description1.1
    
    Articles pursuant to The Business Corporations Act of British Columbia4.6
    
    Agreement, dated April 26, 2004, between the Company and Technology Partnerships Canada4.7
    
    Contract between C.E. Unterberg, Towbin, LLC and Offshore Systems International Ltd. dated
March 8, 2005.4.8
    
    Contract between Mr. E. Brinton Coxe and Offshore Systems International Ltd. dated March 8, 2005.4.9
    
    Subscription agreement4.10
    
    Letter of Intent to acquire Mapcon Mapping Consultants Inc.8.1
    
    List of Subsidiaries and Jurisdictions.12.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 Page 72




---



##### 



Offshore Systems International Ltd. Consolidated Financial Statements
November 30, 2004
(expressed in Canadian dollars)
(Prepared in accordance with United States Generally Accepted Accounting Principles) Page 73




---



##### 



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and
Shareholders ofOffshore Systems International Ltd. We have audited the
consolidated balance sheets of Offshore Systems International
Ltd. as at November 30, 2004 and 2003 and the consolidated
statements of earnings and comprehensive income, stockholders
equity and cash flows for each of the years in the two-year period
ended November 30, 2004. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not
engaged to perform an audit of the Companys internal control
over financial reporting. An audit includes consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion. In our opinion, these
consolidated financial statements present fairly, in all material
respects, the financial position of Offshore Systems International
Ltd. as at November 30, 2004 and 2003 and the results of its
operations and its cash flows for each of the years in the two-year
period ended November 30, 2004 in accordance with
United States generally accepted accounting principles. On January 24, 2005, we
reported separately to the shareholders of Offshore Systems
International Ltd. on the consolidated financial statements for the
same periods, prepared in accordance with Canadian generally accepted
accounting principles. The consolidated financial
statements for the year ended November 30, 2002 was audited by
other auditors who expressed an opinion without reservation on those
statements in their report dated January 17, 2003.  Vancouver, Canada,
    
    /s/ Ernst & Young LLPApril 29, 2005.
    
    Chartered Accountants
  Page 74
    

F1




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Balance SheetsAs at November 30, 2004 and 2003(Incorporated under the laws of the Province of British Columbia)(expressed in Canadian dollars)
 2004
    
    
    2003Assets(note 8)Current assetsCash
    
    $
    251,037
    
    
    $
    3,837,555Accounts receivable (note 3)
    
    
    9,140,478
    
    
    
    4,621,836Inventory (note 4)
    
    
    649,427
    
    
    
    665,503Prepaid expenses and deposits
    
    
    142,752
    
    
    
    430,419Deferred income taxes (note 12)
    
    
    780,331
    
    
    
    822,52310,964,025
    
    
    
    10,377,836Plant and equipment(note 5)
    
    
    938,102
    
    
    
    1,010,846Intangible and other assets(note 6)
    
    
    408,611
    
    
    
    339,575$
    12,310,738
    
    
    $
    11,728,257LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities (note 7)
    
    $
    2,596,362
    
    
    $
    2,126,061Unearned revenue
    
    
    79,865
    
    
    
    45,907Rent payable
    
    
    
    
    
    
    133,9422,676,227
    
    
    
    2,305,910Accrued long-term royalties(note 10)
    
    
    
    
    
    
    187,3842,676,227
    
    
    
    2,493,294Stockholders EquityCapital stock(note 9)Authorized100,000,000 Class A preference shares without par value, issuable in
series, of which 10,000,000 shares are designated Series A voting,
non-cumulative retractable convertible at a 1:1 ratio, 1% preference
shares100,000,000 Class B preference shares with a par value of $50 each,
issuable in series of which 10,000,000 are designated series 1 voting
cumulative convertible shares at a ratio of 1:45.5, 6% preference shares100,000,000 common shares without par valueIssued and outstanding30,262 Class A preference shares  Series A (2002  30,262) (note 9(b))
    
    
    30,262
    
    
    
    30,26257,711 Class B preference shares  Series 1 (2003  61,244) (note 9(c))
    
    
    2,163,621
    
    
    
    2,169,12727,488,074 common shares (2003  26,807,475)
    
    
    20,047,731
    
    
    
    19,516,30422,241,614
    
    
    
    21,715,693Warrants(note 9(c))
    
    
    661,575
    
    
    
    661,575Additional paid-in capital
    
    
    928,169
    
    
    
    903,803Deficit
    
    
    (14,196,847
    )
    
    
    (14,046,108
    )9,634,511
    
    
    
    9,234,963$
    12,310,738
    
    
    $
    11,728,257Commitments and contingencies(note 11)Subsequent events(note 16)
 Approved by the Board of Directors /s/ Helmut Lobmeier
    
    Director
    
    /s/ John A. Jacobson
    
    Director
 See accompanying notes to consolidated financial statements. Page 75
    

F2




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Statements of Earnings and Comprehensive IncomeFor the years ended November 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 2004
    
    
    2003
    
    
    2002RevenueSoftware
    
    $
    5,576,540
    
    
    $
    1,036,417
    
    
    $
    970,323Systems and system components
    
    
    4,328,740
    
    
    
    6,208,464
    
    
    
    9,707,393Geomatics
    
    
    2,979,728
    
    
    
    3,560,440
    
    
    
    2,347,464Other
    
    
    566,295
    
    
    
    715,472
    
    
    
    788,95313,451,303
    
    
    
    11,520,793
    
    
    
    13,814,133Cost of sales
    
    
    5,669,324
    
    
    
    5,159,068
    
    
    
    7,100,751Gross profit
    
    
    7,781,979
    
    
    
    6,361,725
    
    
    
    6,713,382ExpensesGeneral and administrative
    
    
    3,302,412
    
    
    
    2,498,021
    
    
    
    2,628,395Research and development
    
    
    2,104,806
    
    
    
    1,548,523
    
    
    
    1,516,528Sales and marketing
    
    
    3,160,359
    
    
    
    2,000,238
    
    
    
    1,761,669Depreciation and amortization
    
    
    231,033
    
    
    
    241,295
    
    
    
    171,424Interest
    
    
    2,045
    
    
    
    2,824
    
    
    
    3,582Foreign exchange loss (gain)
    
    
    38,338
    
    
    
    185,314
    
    
    
    (26,286
    )Technology Partnerships Canada royalty (note 10)
    
    
    124,425
    
    
    
    50,473
    
    
    
    476,189Technology Partnerships Canada contribution (note 10)
    
    
    (1,471,414
    )
    
    
    (376,880
    )
    
    
    (863,851
    )7,492,004
    
    
    
    6,149,808
    
    
    
    5,667,650Earnings from operations
    
    
    289,975
    
    
    
    211,917
    
    
    
    1,045,732Proceeds on settlement of claim
    
    
    
    
    
    
    
    
    
    
    221,978Earnings before income tax recovery
    
    
    289,975
    
    
    
    211,917
    
    
    
    1,267,710Income tax expense (recovery)(note 12)Deferred income tax recovery
    
    
    (479,446
    )
    
    
    (363,484
    )
    
    
    (1,127,421
    )Current income tax expense
    
    
    521,404
    
    
    
    223,385
    
    
    
    701,00541,958
    
    
    
    (140,099
    )
    
    
    (426,416
    )Net earnings and comprehensive income
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126Net earnings (loss) attributable to common shareholders
    
    $
    (58,873
    )
    
    $
    (565,826
    )
    
    $
    1,694,126Earnings per share(note 9(e))Basic net earnings (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    0.07Diluted net earnings (loss) per share
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    0.06Weighted average number of common shares outstandingBasic
    
    
    27,230,561
    
    
    
    25,977,123
    
    
    
    25,288,725Diluted
    
    
    29,856,412
    
    
    
    27,142,492
    
    
    
    27,285,617Dividends declared per shareClass B preference shares
    
    $
    4.50
    
    
    $
    0.87
    
    
    $
    
 See accompanying notes to consolidated financial statements. Page 76
    

F3




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Statements of Stockholders EquityFor the years ended November 30, 2004, 2003 and 2002(expressed in Canadian dollars)
 Class A Preference
    
    
    Class B Preference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalShares
    
    
    Shares
    
    
    Common Shares
    
    
    Warrants
    
    
    paid-in
    
    
    
    
    
    
    StockholdersNumber
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    capital
    
    
    Deficit
    
    
    EquityBalance  November 30, 2001
    
    
    58,326
    
    
    $
    58,326
    
    
    
    
    
    
    $
    
    
    
    
    24,694,549
    
    
    $
    18,495,737
    
    
    
    125,000
    
    
    $
    27,250
    
    
    $
    269,900
    
    
    $
    (15,079,093
    )
    
    $
    3,772,120Issue of common sharesClass A preference shares converted
    
    
    (17,030
    )
    
    
    (17,030
    )
    
    
    
    
    
    
    
    
    
    
    17,030
    
    
    
    17,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,206,664
    
    
    
    605,184
    
    
    
    
    
    
    
    
    
    
    
    (109,432
    )
    
    
    
    
    
    
    495,752Exercise of share purchase warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000
    
    
    
    99,750
    
    
    
    (125,000
    )
    
    
    (27,250
    )
    
    
    
    
    
    
    
    
    
    
    72,500Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,500
    
    
    
    
    
    
    
    31,500Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,694,126
    
    
    
    1,694,126Balance  November 30, 2002
    
    
    41,296
    
    
    $
    41,296
    
    
    
    
    
    
    $
    
    
    
    
    26,043,243
    
    
    $
    19,217,701
    
    
    
    
    
    
    $
    
    
    
    $
    191,968
    
    
    $
    (13,384,967
    )
    
    $
    6,065,998Issue of common sharesClass A preference shares converted
    
    
    (11,034
    )
    
    
    (11,034
    )
    
    
    
    
    
    
    
    
    
    
    11,034
    
    
    
    11,034
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,208,198
    
    
    
    606,069
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606,069Issue of Class B preference shares
Series 1 and warrants
    
    
    
    
    
    
    
    
    
    
    61,244
    
    
    
    2,065,420
    
    
    
    
    
    
    
    
    
    
    
    1,393,301
    
    
    
    661,575
    
    
    
    
    
    
    
    
    
    
    
    2,726,995Beneficial conversion feature on
Class B preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (668,785
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668,785
    
    
    
    
    
    
    
    Accretion of discount on Class B
preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,707
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,707
    )
    
    
    Accretion of beneficial conversion
feature on Class B preference shares
Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (668,785
    )
    
    
    Common stock purchased and cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (455,000
    )
    
    
    (318,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (187,181
    )
    
    
    (505,681
    )Dividends on Class B preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,484
    )
    
    
    (53,484
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,050
    
    
    
    
    
    
    
    43,050Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,016
    
    
    
    352,016Balance  November 30, 2003
    
    
    30,262
    
    
    $
    30,262
    
    
    
    61,244
    
    
    $
    2,169,127
    
    
    
    26,807,475
    
    
    $
    19,516,304
    
    
    
    1,393,301
    
    
    $
    661,575
    
    
    $
    903,803
    
    
    $
    (14,046,108
    )
    
    $
    9,234,963
 See accompanying notes to consolidated financial statements. Page 77
    

F4




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Statements of Stockholders EquityFor
the years ended November 30, 2004, 2003 and 2002(expressed in Canadian dollars)
 Class A Preference
    
    
    Class B Preference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalShares
    
    
    Shares
    
    
    Common Shares
    
    
    Warrants
    
    
    paid-in
    
    
    
    
    
    
    StockholdersNumber
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    capital
    
    
    Deficit
    
    
    EquityBalance  November 30, 2003
    
    
    30,262
    
    
    $
    30,262
    
    
    
    61,244
    
    
    $
    2,169,127
    
    
    
    26,807,475
    
    
    $
    19,516,304
    
    
    
    1,393,301
    
    
    $
    661,575
    
    
    $
    903,803
    
    
    $
    (14,046,108
    )
    
    $
    9,234,963Issue of common sharesClass B preference shares converted
    
    
    
    
    
    
    
    
    
    
    (3,533
    )
    
    
    (119,148
    )
    
    
    160,752
    
    
    
    119,148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    519,847
    
    
    
    412,279
    
    
    
    
    
    
    
    
    
    
    
    (13,800
    )
    
    
    
    
    
    
    398,479Share issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,115
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,115
    )Accretion of discount on Class B
preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133,757
    )
    
    
    Dividends on Class B preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (264,999
    )
    
    
    (264,999
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    38,166
    
    
    
    
    
    
    
    38,166Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,017
    
    
    
    248,017Balance  November 30, 2004
    
    
    30,262
    
    
    $
    30,262
    
    
    
    57,711
    
    
    $
    2,163,621
    
    
    
    27,488,074
    
    
    $
    20,047,731
    
    
    
    1,393,301
    
    
    $
    661,575
    
    
    $
    928,169
    
    
    $
    (14,196,847
    )
    
    $
    9,634,511
 See accompanying notes to consolidated financial statements. Page 78
    

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Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Statements of Cash FlowsFor the years ended November 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 2004
    
    
    2003
    
    
    2002Cash flows from operating activitiesNet earnings for the year
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126Items not affecting cashDepreciation and amortization
    
    
    362,564
    
    
    
    359,979
    
    
    
    303,407Deferred income taxes
    
    
    42,192
    
    
    
    (168,807
    )
    
    
    (426,416
    )Stock-based compensation
    
    
    38,166
    
    
    
    43,050
    
    
    
    31,500Gain on disposal of plant and equipment
    
    
    
    
    
    
    
    
    
    
    (15,447
    )Changes in non-cash working capital itemsAccounts receivable
    
    
    (4,518,642
    )
    
    
    (660,990
    )
    
    
    (1,103,476
    )Inventory
    
    
    16,076
    
    
    
    619,463
    
    
    
    (414,612
    )Prepaid expenses and deposits
    
    
    287,667
    
    
    
    (197,654
    )
    
    
    12,498Accounts payable and accrued liabilities
    
    
    383,735
    
    
    
    (460,705
    )
    
    
    1,167,657Unearned revenue
    
    
    33,958
    
    
    
    (1,590,247
    )
    
    
    (114,276
    )Rent payable
    
    
    (133,942
    )
    
    
    
    
    
    
    132,534Accrued long-term royalties
    
    
    (187,384
    )
    
    
    (185,333
    )
    
    
    (37,725
    )Net cash provided by (used in) operating activities
    
    
    (3,427,593
    )
    
    
    (1,889,228
    )
    
    
    1,229,770Cash flows from financing activitiesIssue of common shares
    
    
    398,479
    
    
    
    606,069
    
    
    
    568,252Issue of Class B preference shares  Series 1 and warrants
    
    
    
    
    
    
    3,004,200
    
    
    
    Class B preference share issue cost
    
    
    (20,115
    )
    
    
    (277,205
    )
    
    
    Class B preference share dividend paid
    
    
    (178,433
    )
    
    
    (53,484
    )
    
    
    Common share repurchases
    
    
    
    
    
    
    (505,681
    )
    
    
    Net cash provided by financing activities
    
    
    199,931
    
    
    
    2,773,899
    
    
    
    568,252Cash flows from investing activitiesAdditions to plant and equipment
    
    
    (143,515
    )
    


    
    (218,172
    )
    
    
    (326,141
    )Additions to intangibles and other assets
    
    
    (215,341
    )
    
    
    (72,992
    )
    
    
    (345,458
    )Proceeds from disposal of plant and equipment
    
    
    
    
    
    
    
    
    
    
    80,000Net cash used in investing activities
    
    
    (358,856
    )
    
    
    (291,164
    )
    
    
    (591,599
    )Increase (decrease) in cash
    
    
    (3,586,518
    )
    
    
    593,507
    
    
    
    1,206,423Cash  Beginning of year
    
    
    3,837,555
    
    
    
    3,244,048
    
    
    
    2,037,625Cash  End of year
    
    $
    251,037
    
    
    $
    3,837,555
    
    
    $
    3,244,048
 Refer to note 15 for supplemental cash flow information See accompanying notes to consolidated financial statements. Page 79
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
  1
    Nature of operationsOffshore Systems International Ltd. (OSIL) develops and provides display systems and data
for defense, government and commercial customers. Collectively, OSIL and its subsidiaries are
referred to as the Company. OSIL conducts its operations through three business units. The
Companys Navigation Systems business unit develops and produces moving geographic information
display systems and software and provides a majority of the Companys revenue. The Companys
Applications business unit develops situational awareness products for command and control
systems. The Companys Geomatics business unit provides digital land map and electronic
nautical chart production services, and produces and distributes electronic nautical chart
data.2
    Summary of significant accounting policiesThese consolidated financial statements and accompanying notes are prepared in accordance
with generally accepted accounting principles in the United States.Principles of consolidationThese consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material intercompany transactions and balances have been eliminated on
consolidation.Foreign currency translationIn prior years, the functional currency of the Companys U.S. based subsidiary, which formerly
provided sales, support and distribution services for a number of third party manufacturers of
navigation aids and marine technologies, was the U.S. dollar. During the fiscal year ended
November 30, 2002, the nature of the entitys operations changed such that it services the
Companys U.S. market of the geomatics business line and the functional currency is now the
Canadian dollar. The operations of the Companys U.S. based subsidiary are now considered
integrated (financially and operationally dependent on OSIL) and are translated to Canadian
dollars using current rates of exchange for monetary assets and liabilities. Historical rates
of exchange are used for non-monetary assets and liabilities and average rates for the period
are used for revenues and expenses except for amortization, which is translated at exchange
rates used in the translation of the related asset accounts. Gains or losses resulting from
these translation adjustments are included in income.Transactions completed in foreign currencies are recorded in Canadian dollars at the rates
prevailing at the time of the transactions. Monetary assets and liabilities denominated in
foreign currencies are recorded in the consolidated financial statements in equivalent Canadian
dollars at the rate of exchange prevailing at the balance sheet date.The Company purchases foreign exchange forward contracts to hedge sales to customers
denominated in U.S. dollars, Australian dollars and Euros () and the related accounts
receivable. Foreign exchange translation gains and losses on foreign currency denominated
derivative financial instruments used to hedge anticipated U.S. dollar, Australian dollar, and
Euro denominated sales are recognized as an adjustment of the revenues when the sale is
recorded. The Company does not utilize derivative financial instruments for trading or
speculative purposes.Use of estimatesThe preparation of these consolidated financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates and assumptions
which affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and revenues and
expenses for the years reported. Actual results could differ from these estimates. Page 80
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Cash and cash equivalents Cash and cash equivalents consist of cash and deposit instruments with an initial maturity of
three months or less. Accounts receivable The Company maintains an allowance for doubtful accounts against its accounts receivable for
estimated losses that may arise if any of its customers are unable to make required payments.
Management specifically analyzes the age of outstanding customer balances, historical bad
debts, customer credit-worthiness and changes in customer payment terms when making estimates
of the uncollectability of the Companys accounts receivable. If the Company determines that
the financial condition of any of its customers deteriorates, increases in the allowance may be
made. Unbilled accounts receivable Unbilled accounts receivable is revenue that has been recognized using the percentage of
completion method of accounting less amounts billed to the customer in accordance with the
milestone terms of the contract. Unbilled accounts receivable is reduced when customers are
invoiced and the respective accounts receivable is recorded. Inventory Materials and components are stated at the lower of cost and replacement value as determined by
the first-in first-out method. Work-in-process and manufactured parts are stated at the cost of
materials and direct labour applied to the product and the applicable share of overhead.
Finished goods are stated at the lower of cost and net realizable value. The Company assesses
the need for inventory write-downs based on its assessment of estimated net realizable value
using assumptions about future demand and market conditions. If market conditions differ from
those originally estimated by the Company, an additional inventory write-down may be required. Plant and equipment Plant and equipment are recorded at cost. Depreciation is provided using the declining balance
method based on the assets estimated useful lives as follows: %Equipment
    
    
    20  25Furniture and fixtures
    
    
    20Leasehold improvements
    
    
    20
 An impairment loss is recognized when the undiscounted cash flows expected from use and
eventual disposition of the asset are less than the carrying amount of the asset. An impairment
charge is recorded to reduce the carrying value of the asset to its fair value. Intangibles and other assets Intangibles and other assets are recorded at cost. Amortization is provided using the declining
balance method based on the assets estimated useful lives as follows: %Computer software
    
    
    33Licenses and patents
    
    
    10
 Unearned revenue Page 81
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Unearned revenue represent amounts that have been billed to the customer but have not been
recognized in revenue. Income taxes The Company accounts for income taxes using the liability method of tax allocation. Under the
liability method, deferred income tax assets and liabilities are determined based on
differences between their financial reporting and tax bases and are measured using enacted tax
rates. The Company provides a valuation allowance against deferred tax assets to the extent
that the Company does not consider them to be more likely than not of being realized. Warranty costs and financial guarantees The Company warrants that its software and hardware products will operate substantially in
conformity with product documentation and that the physical media will be free from defect. The
specific terms and conditions of the warranties are generally one year but may vary depending
on the country in which the products are sold. The Company accrues for known warranty issues if
a loss is probable and can be reasonably estimated, and accrues for estimated incurred but
unidentified warranty issues based on historical activity. To date, the Company has had no
material warranty claims. The Company utilizes letters of credit to back certain performance obligations with its
customers. The letters of credit are repayable on demand after certain conditions have been
met. Revenue recognition Revenue from the sale of products and services is recognized once a sale arrangement exists,
delivery has occurred, the revenue is determinable and collectability is reasonably assured,
which is upon the later of shipment or when title passes to the customer, depending on the
contractual terms, in a manner consistent with the SECs Staff Accounting Bulletin No. 104
Revenue Recognition (which supercedes SAB No. 101, Revenue Recognition in Financial
Statements). Revenue from certain projects for Navigation Systems, Applications and Geomatics is recognized
using the percentage of completion method, in conformity with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, whereby revenue and
profit in the period are based on the ratio of costs incurred to total estimated costs of the
project for each segment of the project. Costs include all direct costs including materials,
labor and subcontracting costs and certain indirect costs related to contracts. A provision is
made for the entire amount of future estimated losses, if any, on contracts in progress. The
Company issues invoices related to these projects based on the achievement of milestones during
the project or other contractual terms. Differences between the timing of billings, based on
contract milestones or other contractual terms, and the recognition of revenue, based on the
percentage of completion method, are recognized as either unbilled accounts receivable or
deferred revenue. Certain other Systems and system components revenue and Navigation Systems and Applications
Software revenue are accounted in accordance with the AICPA SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and 98-9. Revenue is recognized at the time of delivery of
the system to the customer or the delivery of the software and software locks to the customer
if persuasive evidence exists of an agreement with the customer, the price is fixed and
determinable, collection is probable, and there are no ongoing obligations of the Company to
provide future services with the exception of warranties and maintenance. Page 82
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Navigation Systems revenue under bill-and-hold arrangements, whereby revenue has been
recognized but the goods have not been shipped, is recognized when risks of ownership have been
passed on to the customer, there is a signed contract with the customer, the customer has
substantial business purpose for ordering the goods on a bill-and-hold basis, a fixed delivery
schedule has been established with the customer and the Company does not retain any specific
performance obligations such that the earnings process is not complete. Goods held under such
arrangements are segregated, ready for shipment and not subject to being used to fill other
orders. The customers are charged additional fees for storage and other associated costs until
shipment occurs. Certain revenue from the sale of Geomatics services is recognized as the services are provided.
Revenue from the sale of Geomatics products is recorded at the time of delivery. Revenue from
systems components and other revenues are recorded at the time of delivery or as the services
are provided. Maintenance and technical support revenues are recognized ratably based on the terms of their
respective contract agreements, generally one to four years. Revenue from contracts with multiple-element arrangements is recognized in accordance with
Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. Revenue is recognized based on the division of the multiple deliverables into
separate units of accounting and arrangement consideration is allocated among separate units
based on their relative fair values. A delivered element is considered a separate unit of
accounting if it has value to the customer on a standalone basis, there is objective and
reliable evidence of the fair value of the fair value of undelivered elements in the
arrangement, and delivery or performance of undelivered elements is considered probable and
substantially under the Companys control. Contracts with government agencies may contain provisions to terminate the contract in favour
of the government agency. These provisions generally require all costs incurred by the Company
to date to be reimbursed by the government agency. Research and development Research costs are expensed in the period incurred. Development costs incurred internally in
creating computer software to be sold, licensed, or otherwise marketed are expensed as incurred
unless they meet generally accepted accounting criteria for deferral and amortization pursuant
to Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed. Software development costs
incurred prior to technical feasibility that do not meet these criteria are expensed as
incurred. To date, the period between achieving technological feasibility, which the Company
has defined as the establishment of a working model, which typically occurs when beta testing
commences, and the general availability of such software has been short and development costs
qualifying for capitalization have been insignificant. Government assistance Government assistance is recorded when there is reasonable assurance that the Company has
complied with, and will continue to comply with, all conditions necessary to obtain the
government assistance. Government assistance towards current research expenditures is recorded
as a reduction of expenses in the consolidated statement of earnings. The liability to repay
government assistance is recognised as an expense in the period in which conditions arise that
cause the government assistance to be repayable. Page 83
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Stock-based compensation The Company accounts for stock based compensation in accordance with the intrinsic value method
of the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and has adopted only the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to present the fair value of grants under the Companys existing
stock-based compensation plans to employees. APB No. 25 requires compensation cost for
stock-based employee compensation plans to be recognized over the vesting period based on the
difference, if any, between the quoted market price of the Companys stock as of the grant date
and the amount an employee must pay to acquire the stock. All options are granted with an
exercise price equal to the market value of the stock on the date of grant. Accordingly, no
compensation has been recognized for grants made under the stock option plan. For stock options granted to non-employees, the Company follows the requirements of SFAS No.
123 and related interpretations. Costs are measured at the estimated fair value of the
consideration received or the estimated fair value of the options issued, whichever is more
reliably measurable. The value of the options issued for consideration other than employee
services is determined on the earlier of a performance commitment or completion of performance
by the provider of goods or services. Page 84
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Derivative Financial Instruments Derivative financial instruments are utilized by the Company in the management of its foreign
currency exposure to reduce its exposure to fluctuations in foreign exchange on certain
committed and anticipated transactions. The Company accounts for these derivative financial
instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company records derivative instruments in the consolidated balance sheet as
either an asset or liability measured at its fair value. Changes in the derivatives fair value
are recognized currently in earnings unless specific hedge accounting criteria are met. If the
derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the
derivative are either offset against the fair value of assets, liabilities or firm commitments
through income, or recognized in other comprehensive income until the hedged item is recognized

in income. The ineffective portion of a derivatives change in fair value is immediately
recognized into income. The Company formally documents, designates and assesses the
effectiveness of transactions that receive hedge accounting treatment. Additionally, certain of the Companys purchase and sales contracts with international entities
are not denominated in the functional currency of either the Company, the customer or the
supplier, but rather the U.S. dollar. In accordance with SFAS No. 133, these contracts have
been accounted for as embedded derivatives and the resulting foreign currency rate contracts
are separated from the host contracts. Under SFAS No. 133, derivatives are recorded on the
balance sheet at fair value. Changes in derivative fair values are recognized in earnings. Earnings per share Basic earnings per share are computed using the weighted average number of common shares
outstanding during the year. The treasury stock method is used for the calculation of diluted
earnings per share. Under the treasury stock method, the weighted
average number of common shares outstanding for the calculation of diluted earnings per share assumes that the proceeds
to be received on the exercise of dilutive stock options and warrants are applied to repurchase
common shares at the average market price for the period. Stock options and warrants are
dilutive when the average market price of the common shares during the period exceeds the
exercise price of the options and warrants. Comprehensive Income Under FAS No. 130, Reporting Comprehensive Income, the Company is required to report
comprehensive income (loss), which includes the Companys net earnings (loss) as well as
changes in equity from other non-owner sources. As of November 30, 2004, the Company does not
have any significant comprehensive income in its consolidated financial statements. Comparative figures Certain of the prior year figures have been reclassified to conform with the current years
financial statement presentation. Additional details have been provided on the consolidated
statements of earnings and comprehensive income, and cash flows to disclose the impact of
certain transactions. Page 84
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Recent accounting pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151,
Inventory Costs an amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal
years beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS No.
151 on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R), which replaces SFAS No. 123,Accounting for Stock-Based Compensation, (SFAS No. 123)
and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R
requires all share-based payments to be recognized in the consolidated financial statements
based on their values using either a modified-prospective or modified-retrospective transition
method beginning with the first interim or annual period after December 1, 2005, with early
adoption encouraged. The standard no longer permits pro-forma disclosure or prospective
recognition. Accordingly, the Company is required to adopt SFAS No. 123R beginning December 1,
2005, and recognize compensation expense for all share-based payments based on grant-date fair
value, including those granted, modified or settled prior to December 1, 2005, that were
previously disclosed on a pro-forma basis. The Company is currently evaluating the impact of
SFAS No. 123R on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an amendment
of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153). The
amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive assets and
replace it with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 is to be applied prospectively and is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company is currently evaluating the impact of SFAS No. 153 on its consolidated financial
statements.  3
    Accounts receivable 2004
    
    
    2003Trade
    
    $
    4,679,207
    
    
    $
    1,705,184Unbilled accounts receivable
    
    
    4,116,828
    
    
    
    2,854,942Technology Partnerships Canada contribution (note 10)
    
    
    257,266
    
    
    
    Other
    
    
    111,234
    
    
    
    75,209Allowance for doubtful accounts
    
    
    (24,057
    )
    
    
    (13,499
    )$
    9,140,478
    
    
    $
    4,621,836
 As at November 30, 2004, government contract receivables were $4,435,616 (2003  $1,554,548)
and unbilled government contract receivables were $3,601,202 (2003  $2,769,702). Page 86
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
  4
    Inventory 2004
    
    
    2003Materials and components
    
    $
    638,127
    
    
    $
    620,429Finished goods
    
    
    11,300
    
    
    
    45,074$
    649,427
    
    
    $
    665,503
  5
    Plant and equipment 2004AccumulatedCost
    
    
    depreciation
    
    
    NetEquipment
    
    $
    3,910,980
    
    
    $
    3,038,921
    
    
    $
    872,059Furniture and fixtures
    
    
    131,095
    
    
    
    94,705
    
    
    
    36,390Leasehold improvements
    
    
    222,737
    
    
    
    193,084
    
    
    
    29,653$
    4,264,812
    
    
    $
    3,326,710
    
    
    $
    938,102
 2003AccumulatedCost
    
    
    depreciation
    
    
    NetEquipment
    
    $
    3,772,026
    
    
    $
    2,838,400
    
    
    $
    933,626Furniture and fixtures
    
    
    126,534
    
    
    
    86,378
    
    
    
    40,156Leasehold improvements
    
    
    222,737
    
    
    
    185,673
    
    
    
    37,064$
    4,121,297
    
    
    $
    3,110,451
    
    
    $
    1,010,846
  6
    Intangible and other assets 2004AccumulatedCost
    
    
    amortization
    
    
    NetComputer software
    
    $
    936,591
    
    
    $
    546,190
    
    
    $
    390,401Licenses and patents
    
    
    57,267
    
    
    
    39,057
    
    
    
    18,210$
    993,858
    
    
    $
    585,247
    
    
    $
    408,611
 Page 87
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 2003AccumulatedCost
    
    
    amortization
    
    
    NetComputer software
    
    $
    721,250
    
    
    $
    401,909
    
    
    $
    319,341Licenses and patents
    
    
    57,267
    
    
    
    37,033
    
    
    
    20,234$
    778,517
    
    
    $
    438,942
    
    
    $
    339,575
  7
    Accounts payable and accrued liabilities 2004
    
    
    2003Trade
    
    $
    1,343,129
    
    
    $
    1,171,353Accrued liabilities
    
    
    282,227
    
    
    
    362,681Accrued employee costs
    
    
    572,589
    
    
    
    408,592Accrued royalties (note 10)
    
    
    311,851
    
    
    
    183,435Class B preference shares dividends declared and unpaid (note 9 (c))
    
    
    86,566
    
    
    
    $
    2,596,362
    
    
    $
    2,126,061
  8
    Credit facilitiesIn June 2004, the Company renewed certain credit facilities with a Canadian chartered
bank, which consist of an operating line, a foreign exchange forward contract facility and
standby letters of credit. The operating line bears interest at the chartered banks prime
lending rate plus 0.5% with interest payable monthly. The prime lending rate at November 30,
2004 was 4.25% (2003  4.50%). The standby letters of credit are denominated in U.S. dollars
and bear interest at rates between 1% and 2% per annum. Funds drawn on the operating line and
the standby letters of credit are repayable on demand. As of November 30, 2004, letters of
credit, relating principally to customer contracts, amounting to U.S. $127,000 (2003  U.S.
$127,000) and Australian $283,886 (2003  $nil) have been issued. The Company utilizes letters
of credit to back certain performance obligations with its customers.The maximum amount(s) available to the Company under the operating line is $1,000,000 and under
the foreign exchange forward contract facility are U.S. $2,000,000 and Australian $3,678,061.
The credit facilities are collateralized by a general assignment of accounts receivable, a
general security agreement from the Company and its subsidiaries Offshore Systems Ltd., OSI
Geomatics Ltd and OSI Geomatics Inc. In addition, the Company is required to meet certain
covenants as outlined in the credit facilities agreement. As at November 30, 2004, the Company
had drawn on its foreign exchange contract facility in the amount of U.S. $851,196 (2003  U.S.
$1,343,705), Australian $3,678,061 (2003  $nil), and 383,310 (2003  nil). The Company
has not drawn on the operating line facility during the fiscal years ended November 30, 2004
and 2003. Page 88
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
  9
    Capital stock (a) Authorized 100,000,000 common shares without par value100,000,000 Class A preference shares without par value, issuable in series, with rights as
set by the Companys board of directors, of which 10,000,000 shares are designated
Series A preference shares, voting, retractable, convertible at a 1:1 ratio, with a
non-cumulative dividend rate of 1%100,000,000 Class B preference shares, issuable in series, with rights as set by the
Companys board of directors, with a par value of $50 each, of which 10,000,000 shares
are designated Series 1 preference shares, voting, convertible at a 1:45.5 ratio, with
a cumulative dividend rate of 6%
 (b) Class A Preference Shares The Company
has 30,262 (November 30, 2003  30,262) Class A preference shares outstanding that
have a value of $30,262. These Class A preference shares are being held in escrow but are no
longer subject to any escrow restrictions and may be converted at any time into common shares
of the Company, by notice in writing from the holders. (c) Class B Preference Shares The Company completed a private placement on February 13, 2003 consisting of 61,244 units
for total gross proceeds of $3,004,200. Each unit consists of one Class B Preference
Share Series 1 and 22.75 Common Share purchase warrants exercisable at $1.10. The
Preference Shares are voting convertible shares at a ratio of 1:45.5 and have a cumulative
dividend of 6% per annum. Declared unpaid dividends to November 30, 2004 amount to
$86,566. The Company has the right to redeem the Preference Shares after five years. The
share purchase warrants are convertible to Common Shares at a ratio of 1:1 and expire five
years after issue. The private placement incurred share issue costs of $297,320. The gross
proceeds of $3,004,200 were allocated between the Preference Shares and warrants based on
their relative fair value at the date of issuance. The $2,342,625 fair value of the
Preference Shares has been estimated based on the fair value of the underlying common
stock. The $661,575 fair value of the warrants has been estimated using the Black-Scholes
option pricing model. Assumptions used in the pricing model included: (i) risk free rate
of 2.7%, (ii) expected volatility of 66%, (iii) an estimated life of 5 years and (iv) an
expected dividend rate of 0%. The Company has recorded a beneficial conversion feature of
$668,785 calculated on the effective conversion price of the Preference Shares to Common
Shares based on the proceeds allocated to the Preference Shares. The conversion feature of
the Preference Shares vested immediately and the Company recorded the accretion of the
full amount of the beneficial conversion feature. The Preference Share discount that
resulted from the allocation of the gross proceeds is accreted over the five-year life of
the warrants. This resulted in an accretion of $133,757 (2003  $103,707, 2002  $nil) for
the fiscal year 2004. (d) Stock option plans The Company has established three stock option plans under which options to purchase
common shares may be granted to directors, officers and employees of the Company and to any
other person or Company permitted by the applicable regulatory authorities to purchase unissued
common shares. The number of common shares authorized for grant under the Companys stock
option plans is 10,930,732, of which 4,375,494 are available for granting. The exercise price
of options granted pursuant to the plans may not be less than the
market price of the common shares at the time of grant. The plans provide that options may be granted with vesting periods
and expiry dates at the discretion of the board of directors. Options granted to directors and
executives vest over periods ranging from immediately to three years and options granted to
employees vest one year after the date granted. Page 89
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 A summary of the status of the Companys stock option plans at November 30 is as follows: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseNumber of
    
    
    price
    
    
    Number of
    
    
    price
    
    
    Number of
    
    
    priceshares
    
    
    $
    
    
    shares
    
    
    $
    
    
    shares
    
    
    $Outstanding  Beginning
of year
    
    
    2,890,046
    
    
    
    1.02
    
    
    
    3,130,047
    
    
    
    0.83
    
    
    
    3,497,496
    
    
    
    0.59Granted
    
    
    496,750
    
    
    
    1.12
    
    
    
    1,290,601
    
    
    
    1.07
    
    
    
    865,000
    
    
    
    1.19Exercised
    
    
    (519,847
    )
    
    
    0.42
    
    
    
    (1,208,198
    )
    
    
    0.50
    
    
    
    (1,206,664
    )
    
    
    0.41Forfeited
    
    
    (22,725
    )
    
    
    0.74
    
    
    
    (122,404
    )
    
    
    0.96
    
    
    
    (15,897
    )
    
    
    0.96Expired
    
    
    (590,177
    )
    
    
    1.06
    
    
    
    (200,000
    )
    
    
    1.50
    
    
    
    (9,888
    )
    
    
    0.28Outstanding  End of year
    
    
    2,254,047
    
    
    
    1.11
    
    
    
    2,890,046
    
    
    
    1.02
    
    
    
    3,130,047
    
    
    
    0.83Exercisable  End of year
    
    
    2,052,047
    
    
    
    1.11
    
    
    
    2,319,800
    
    
    
    0.99
    
    
    
    3,130,047
    
    
    
    0.83
 A summary of the Companys stock options outstanding and exercisable at November 30, 2004 is as
follows: Options outstanding
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    remaining
    

    
    average
    
    
    Number
    
    
    averageRange of
    
    outstanding at
    
    
    contractual
    
    
    exercise
    
    
    exercisable at
    
    
    exerciseexercise prices
    
    November 30,
    
    
    life
    
    
    price
    
    
    November 30,
    
    
    price$
    
    2004
    
    
    (years)
    
    
    $
    
    
    2004
    
    
    $1.01  1.35
    
    
    2,194,047
    
    
    
    1.11
    
    
    
    1.10
    
    
    
    1,992,047
    
    
    
    1.091.36  1.41
    
    
    60,000
    
    
    
    0.55
    
    
    
    1.41
    
    
    
    60,000
    
    
    
    1.411.01  1.41
    
    
    2,254,047
    
    
    
    1.10
    
    
    
    1.11
    
    
    
    2,052,047
    
    
    
    1.11
 A summary of the Companys stock options outstanding and exercisable at November 30, 2003 is
as follows: Options outstanding
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    remaining
    
    
    average
    
    
    Number
    
    
    averageRange of
    
    outstanding at
    
    
    contractual
    
    
    exercise
    
    
    exercisable at
    
    
    Exerciseexercise prices
    
    November 30,
    
    
    life
    
    
    price
    
    
    November 30,
    
    
    price$
    
    2003
    
    
    (years)
    
    
    $
    
    
    2003
    
    
    $0.42 - 0.60
    
    
    140,862
    
    
    
    0.32
    
    
    
    0.48
    
    
    
    140,862
    
    
    
    0.480.61 - 0.90
    
    
    485,000
    

    
    
    0.73
    
    
    
    0.76
    
    
    
    485,000
    
    
    
    0.730.91 - 1.35
    
    
    2,093,934
    
    
    
    1.57
    
    
    
    1.02
    
    
    
    1,623,688
    
    
    
    1.081.36  2.00
    
    
    170,250
    
    
    
    0.84
    
    
    
    1.62
    
    
    
    70,250
    
    
    
    1.420.42  2.00
    
    
    2,890,046
    
    
    
    1.32
    
    
    
    1.02
    
    
    
    2,319,800
    
    
    
    0.99
 Page 90
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Stock-based compensation of $38,166 (2003  $43,050, 2002  $31,500) is recorded in the
consolidated financial statements as general and administrative expense. The weighted average
fair value of the options granted for the year ended November 30, 2004 was $0.46 per option
(2003  $0.45, 2002  $0.48). The Company applies the intrinsic value method for employee stock options granted as prescribed
in APB No. 25. Had compensation cost been determined using the fair value approach set forth in
SFAS No. 123, the Companys earnings (loss) for the year and earnings (loss) per share would
have been in accordance with the pro forma amounts indicated below: 2004
    
    
    2003
    
    
    2002Net earnings for the year
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126Additional compensation expense
    
    
    (133,276
    )
    
    
    (517,891
    )
    
    
    (389,149
    )Pro forma net earnings (loss) for the year
    
    
    114,741
    
    
    
    (165,875
    )
    
    
    1,304,977Pro forma basic and diluted earnings
(loss) per share
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    0.05
 The fair value of stock options was estimated using the Black-Scholes option pricing model
using the following weighted average assumptions by grant year: 2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    2.24
    %
    
    
    2.65
    %
    
    
    2.13
    %Volatility
    
    
    57.7
    %
    
    
    102.0
    %
    
    
    65.5
    %Estimated average option lives
    
    3.0 years
    
    2.7 years
    
    3.3 yearsDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 Page 91
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 (e) Earnings per share 2004
    
    
    2003
    
    
    2002Basic earnings per shareNet earnings
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126Less: Accretion of beneficial conversion feature
on Class B preference shares Series 1
    
    
    
    
    
    
    668,785
    
    
    
    Accretion of discount on Class B
preference shares Series 1
    
    
    133,757
    
    
    
    103,707
    
    
    
    Class B preference share dividends
    
    
    173,133
    
    
    
    145,350
    
    
    
    Net earnings (loss) available to common
shareholders
    
    $
    (58,873
    )
    
    $
    (565,826
    )
    
    $
    1,694,126Weighted average number of common shares
outstanding
    
    
    27,230,561
    
    
    
    25,977,123
    
    
    
    25,288,725Basic earnings (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    0.07Diluted earnings per shareNet earnings
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126Less: Accretion of beneficial conversion feature
on Class B preference shares Series 1
    
    
    
    
    
    
    668,785
    
    
    
    Accretion of discount on Class B
preference shares Series 1
    
    
    565,078
    
    
    
    103,707
    
    
    
    Class B preference share dividends
    
    
    
    
    
    
    145,350
    
    
    
    Net earnings (loss) available to common
shareholders
    
    $
    (317,061
    )
    
    $
    (565,826
    )
    
    $
    1,694,126Weighted average number of common shares
outstanding
    
    
    27,230,561
    
    
    
    25,977,123
    
    
    
    25,288,725Dilutive effect of stock options (*1)
    
    
    
    
    
    
    1,135,107
    
    
    
    1,955,596Dilutive effect of Class A preference shares (*1)
    
    
    
    
    
    
    30,262
    
    
    
    41,296Dilutive effect of Class B preference shares
    
    
    2,625,851
    
    
    
    
    
    
    
    Dilutive effect of warrants (*2)
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted average number of common shares
outstanding
    
    
    29,856,412
    
    
    
    27,142,492
    
    
    
    27,285,617Diluted earnings (loss) per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.06
   (*1) The stock options and the Class A preference shares  Series A were anti-dilutive for the
year ending November 30, 2004.(*2) The outstanding 1,393,301 warrants issued on February 13, 2003 were not included in the
diluted earnings per share for the years ended November 30, 2004 and 2003 because the warrant
exercise price was greater than the average market price of the common shares and therefore,
the effect would be anti-dilutive. Page 92
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 (f) Shareholder Rights Plan On April 18, 2001, the Board of Directors of the Company adopted a shareholder rights plan (the
Rights Plan). The Rights Plan was approved by the Toronto Stock Exchange in accordance with its
policies. On March 12, 2004, the Board of Directors carried a resolution regarding the
continued existence of the Rights Plan, subject to receipt of shareholder approval, for an
additional three year period. The continued existence of the Rights Plan was approved by the
shareholders of the Company by ordinary resolution at the annual general meeting of the Company
held on April 22, 2004. The objectives of the Rights Plan are to ensure, to the extent possible, that all shareholders
of the Company are treated equally and fairly in connection with any take-over offer for the
Company. Take-over offers may not always result in shareholders receiving equal or fair
treatment or full value for their investment. In addition, current Canadian securities
legislation only requires a take-over offer to remain open for 21 days. The board believes that
this period may be insufficient for the shareholders to evaluate a bid, or for the board to
pursue alternatives that could maximize shareholder value and to make informed recommendations
to shareholders. The Rights Plan is designed to discourage discriminatory or unfair take-over offers for the
Company and gives the board time, if appropriate, to pursue alternatives to maximize
shareholder value in the event of an unsolicited take-over bid for the Company. The Rights Plan
will encourage an offeror to proceed by way of a permitted bid or to approach the Board of
Directors with a view to negotiation by creating the potential for substantial dilution of the
offerors position. The permitted bid provisions of the Rights Plan are designed to ensure
that, in any take-over bid, all shareholders are treated equally, receive the maximum value for
their investment and are given adequate time to properly assess the take-over bid on a fully
informed basis. (g) Normal course issuer bid In January 2003, the Company received approval for a normal course issuer bid that entitles the
Company to repurchase up to 1,300,000 common shares for cancellation between January 16, 2003
and January 15, 2004. The purchases are made on the open market. During the period January 16,
2003 to November 30, 2003 the Company purchased 455,000 of its common shares on the open market
under the normal course issuer bid at an average cost of $1.11 per share for an aggregate
consideration of $505,681. The premium on the purchase and cancellation of the common shares
under the normal course issuer bid was $187,181 and was charged to
the deficit. No common shares were purchased under the normal course issuer bid during the period December 1, 2003 to
January 15, 2004.  10
    Technology Partnerships Canada On April 26, 2004, the Company entered into an agreement with Technology Partnerships
Canada (TPC) whereby TPC granted financial assistance to the Company for the purpose of funding
research and development activities to be completed on or before March 31, 2007. The maximum
eligible contribution by TPC is $3,768,391. As at November 30, 2004, the Company has claimed
for $1,471,414 of assistance under the agreement. These amounts have been applied to reduce
expenses in the consolidated statements of earnings. Accounts receivable at November 30, 2004
includes $257,266 of amounts receivable from TPC in connection with these claims (2003  $nil). In addition, the Company is required to pay a royalty of 1.4% on annual gross Navigation
Systems and Applications revenue for the period January 1, 2006 to December 31, 2008 and a
royalty of 2.5% on annual gross Navigation Systems and Applications revenue for the period
January 1, 2009 to December 31, 2013. Royalty payments will continue until the cumulative
royalties paid or payable to December 31, 2013 are at least $6,079,176 or until December 31,
2017. No amounts for royalty payments in connection with this agreement have been recorded in
the consolidated financial statements. Page 93
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 On November 15, 1999, the Company entered into an agreement with TPC whereby TPC granted
financial assistance to the Company for the purpose of funding research and development
activities to be completed on or before March 31, 2003. Under the agreement with TPC, the
Company was eligible to receive contributions to a maximum of $4,000,177 over the period from
December 23, 1998 to March 31, 2003. As of March 31, 2003, the Company has received the maximum
allowed under the agreement. There are no amounts recorded in accounts receivable with respect
to these claims (2003  $nil). In addition, the Company is required to pay a royalty of 3% on annual gross Navigation Systems
and Applications revenue for the period December 1, 1999 to November 30, 2008. The Company has
paid royalties of $929,303 to date (2003  $745,911) and has accrued royalties of $311,851 at
November 30, 2004 (November 30, 2003  $370,819). Royalty payments will continue until the
cumulative royalties paid or payable to November 30, 2008 are at least $7,810,230 or until
November 30, 2014. Although the Company believes that its submissions for TPC funding meet the terms and
conditions of the TPC agreements, the final determination may be subject to audit by government
authorities in the ordinary course of business. During the year ended November 30, 2004, the Company was subject to an audit by government
authorities. The results of the audit have not been communicated to the Company. The Company
has no reason to believe that the audit will have a material impact on the Companys financial
results. TPC royalties paid and accrued are as follows: 2004
    

    
    2003
    
    
    2002Royalties paid
    
    $
    183,392
    
    
    $
    391,752
    
    
    $
    213,704Accrued royaltiesShort term
    
    
    311,851
    
    
    
    183,435
    
    
    
    339,380Long term
    
    
    
    
    
    
    187,384
    
    
    
    372,717$
    311,851
    
    
    $
    370,819
    
    
    $
    712,097
 If the Company causes an event of default, as defined in the agreement, TPC can suspend or
terminate any obligation to contribute to the costs of the project or require the Company to
repay all or part of the contributions made, together with interest, from the date of demand.  11
    Commitments and contingenciesThe Company has entered into operating leases for its office premises in Canada and for
certain equipment. Minimum lease payments required under the remaining terms of the leases are
as follows: Years ending November 302005
    
    $
    276,0412006
    
    
    265,5012007
    
    
    179,9332008
    
    
    3,6652009
    
    
    $
    725,140
 Page 94
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 For the fiscal year ended November 30, 2004, the Company paid basic rent of $256,705 (2003 -
$256,705, 2002  $256,705). In addition to basic rent, the Company is required to pay a portion
of certain costs and property taxes for the above commitments. In 2004, the Company paid
$90,229 (2003  $77,719, 2002  $79,973) for these costs. In July 2002, two of the Companys subsidiaries, Offshore Systems Ltd. and OSI Geomatics Ltd.,
and four employees became subject to a lawsuit for an undisclosed amount by Triathlon Ltd., a
subsidiary of MacDonald, Dettwiler and Associates Ltd., related to use of confidential
information and breach of fiduciary duty. No amount has been accrued at November 30, 2004 in
respect of these claims because the potential liability for the claims and the amount of
damages, if any, cannot be reasonably estimated.  12
    Deferred income taxesThe Company is subject to Canadian federal and British Columbia provincial taxes in
Canada. The Company is also subject to federal income taxes in the U.S.Earnings before income taxes consisted of the following: 2004
    
    
    2003
    
    
    2002Canadian income (loss)
    
    $
    143,985
    
    
    $
    (39,345
    )
    
    $
    1,123,785U.S. income
    
    
    145,990
    
    
    
    251,262
    
    
    
    143,925$
    289,975
    
    
    $
    211,917
    
    
    $
    1,267,710
 The Company has non-capital losses for Canadian income tax purposes of approximately
$3,079,232, which are available for carry forward to reduce future years taxable income. These
income tax losses expire as follows: 2004Year ending November 302005
    
    $
    89,4182006
    
    
    2,345,4612007
    
    
    2008
    
    
    2009
    
    

    169,0052010
    
    
    2011
    
    
    475,348
 Page 95
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 The Company has net operating losses for U.S. income tax purposes of approximately $315,342,
which are available for carry forward to reduce future years taxable income of the U.S.
company. These income tax losses expire on: 2004Year ending November 302018
    
    $
    32,5062019
    
    
    2020
    
    
    253,6252021
    
    
    29,211
 The Company also has investment tax credits of approximately $977,499, which can be used to
offset future Canadian income taxes otherwise payable and expire as follows: 2004Year ending November 302005
    
    $
    117,6782006
    
    
    130,1142007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    146,4532012
    
    
    191,9312013
    
    
    199,5222014
    
    
    191,801
 The Company has capital losses for Canadian income tax purposes of approximately $354,466,
which are available for carry forward to reduce future years income from capital gains. These
capital losses carry forward indefinitely. The Company has undeducted scientific research and experimental development expenses for
Canadian income tax purposes of approximately $4,775,417, which are available for carry forward
to reduce future years income for tax purposes. These expenses carry forward indefinitely. The net deferred tax asset consists of the following: 2004
    
    
    2003Deferred tax assetsNon-capital loss carry-forwards
    
    $
    1,191,426
    

    
    $
    1,742,868Net capital loss carry-forwards
    
    
    63,130
    
    
    
    63,130Scientific research and experimental development costs
    
    
    1,701,004
    
    
    
    1,543,916Investment tax credits
    
    
    680,793
    
    
    
    569,579Plant and equipment
    
    
    895,457
    
    
    
    555,339Other
    
    
    91,420
    
    
    
    105,7634,623,230
    
    
    
    4,580,595Valuation allowance
    
    
    (3,842,899
    )
    
    
    (3,758,072
    )Net deferred tax asset
    
    $
    780,331
    
    
    $
    822,523
 Page 96
    

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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 The Company increased its valuation allowance against future income tax assets to reflect the
amount of the future tax benefit that was more likely than not to be realized. A valuation
allowance continues to be provided against future income tax assets for which the more likely
than not criteria of future realization has not been met. During the year, the future income
tax expense related to the increase of the valuation allowance was $42,192 (2003  a recovery
of $168,807). Although the Company believes that its tax estimates are reasonable, the ultimate
tax determination involves significant judgment that could become subject to audit by tax
authorities in the ordinary course of business. A reconciliation of the combined Canadian federal and provincial income tax rate with the
Companys effective income tax rate is as follows: 2004
    
    
    2003
    
    
    2002Expected statutory rate

    
    
    35.79
    %
    
    
    37.79
    %
    
    
    40.04
    %Expected provision for income taxes
    
    $
    103,782
    
    
    $
    80,083
    
    
    $
    507,591Change in tax rates applied in valuation allowance
    
    
    1,199
    
    
    
    25,235
    
    
    
    (41,915
    )Change in valuation allowance
    
    
    84,827
    
    
    
    772,232
    
    
    
    (972,234
    )Effect of foreign tax rate differences
    
    
    (8,453
    )
    
    
    9,135
    
    
    
    (39,828
    )Temporary differences arising during the year
    
    
    (189,402
    )
    
    
    (1,052,335
    )
    
    
    126,313Non-deductible expenses and other
    
    
    50,005
    
    
    
    25,551
    
    
    
    (6,343
    )Income tax expense (recovery)
    
    $
    41,958
    
    
    $
    (140,099
    )
    
    $
    (426,416
    )
  13
    Segmented informationThe Companys reportable segments are as outlined below. Accounting policies used by these
segments are the same as those described in the significant accounting policies as disclosed in
note 2. The Company defines reportable segments as components of the Company about which
separate financial information is available and which is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing performance. 2004NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalRevenue
    
    $
    10,232,671
    
    
    $
    191,279
    
    
    $
    3,027,353
    
    
    $
    13,451,303Gross profit
    
    
    6,561,870
    
    
    
    171,518
    
    
    
    1,048,591
    
    
    
    7,781,979Technology Partnerships Canada  net
    
    
    (1,184,932
    )
    
    
    (162,057
    )
    
    
    
    
    
    
    (1,346,989
    )Interest expense
    
    
    1,902
    
    
    
    
    
    
    
    143
    
    
    
    2,045Income tax expense
    
    
    22,760
    
    
    
    
    
    
    
    19,198
    
    
    
    41,958Net earnings (loss)
    
    
    1,239,069
    
    
    
    (972,476
    )
    
    
    (18,576
    )
    
    
    248,017Plant and equipment expenditures
    
    
    106,954
    
    
    
    16,140
    
    
    
    20,421
    
    
    
    143,515Intangibles and other asset expenditures
    
    
    30,516
    
    
    
    3,995
    
    
    
    180,830
    
    
    
    215,341Depreciation and amortization
    
    
    233,128
    
    
    
    2,778
    
    
    
    126,658
    
    
    
    362,564
 Page 97
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 2003NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalRevenue
    
    $
    7,927,166
    
    
    $
    
    
    
    $
    3,593,627
    
    
    $
    11,520,793Gross profit
    
    
    4,797,613
    
    
    
    
    
    
    
    1,564,112
    
    
    
    6,361,725Technology Partnerships Canada  net
    
    
    (326,407
    )
    
    
    
    
    
    
    
    
    
    
    (326,407
    )Interest expense
    
    
    624
    
    
    
    
    
    
    
    2,200
    
    
    
    2,824Income tax expense
    
    
    (2,917
    )
    
    
    
    
    
    
    (137,182
    )
    
    
    (140,099
    )Net earnings (loss)
    
    
    91,241
    
    
    
    
    
    
    
    260,775
    
    
    
    352,016Plant and equipment expenditures
    
    
    170,655
    
    
    
    
    
    
    
    47,517
    
    
    
    218,172Intangible and other asset expenditures
    
    
    12,663
    
    
    
    
    
    
    
    60,329
    
    
    
    72,992Depreciation and amortization
    
    
    255,462
    
    
    
    
    
    
    
    104,517
    
    
    
    359,979
 2002NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalRevenue
    
    $
    11,466,668
    
    
    $
    
    
    
    $
    2,347,465
    
    
    $
    13,814,133Gross profit
    
    
    5,896,638
    
    
    
    
    
    
    
    816,744
    
    
    
    6,713,382Technology Partnerships Canada  net
    
    
    (387,662
    )
    
    
    
    
    
    
    
    
    
    
    (387,662
    )Interest expense
    
    
    2,869
    
    
    
    
    
    
    
    713
    
    
    
    3,582Income tax expense
    
    
    (426,416
    )
    
    
    
    
    
    
    
    
    
    
    (426,416
    )Net earnings (loss)
    
    
    1,446,857
    
    
    
    
    
    
    
    247,269
    
    
    
    1,694,126Plant and equipment expenditures
    
    
    231,100
    
    
    
    
    
    
    
    95,041
    
    
    
    326,141Intangible and other asset expenditures
    
    
    136,189
    
    
    
    
    
    
    
    209,269
    
    
    
    345,458Depreciation and amortization
    
    
    242,362
    
    
    
    
    
    
    
    61,045
    
    
    
    303,407
 NavigationTotal assets employed
    
    Systems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalAs at November 30,2004
    
    $
    10,562,064
    
    
    $
    17,357
    
    
    $
    1,731,317
    
    
    $
    12,310,7382003
    
    
    10,103,117
    
    
    
    
    
    
    
    1,625,140
    
    
    
    11,728,257
 The Applications business unit began operations effective fiscal year 2004. Page 98
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Geographically, revenues reported are based on the location of the Companys customers.
Plant and equipment are reported based on location. At November 30, 2004 and 2003, all of the
Companys plant and equipment were located in Canada. 2004
    
    
    2003
    
    
    2002Australia/New Zealand
    
    $
    4,818,763
    
    
    $
    1,021,844
    
    
    $
    Europe
    
    
    4,332,392
    
    
    
    2,094,063
    
    
    
    3,123,998United States
    
    
    2,872,860
    
    
    
    5,103,062
    
    
    
    7,366,982Canada
    
    
    1,427,288
    
    
    
    3,296,257
    
    
    
    3,315,510Other
    
    
    
    
    
    
    5,567
    
    
    
    7,643Total
    
    $
    13,451,303
    
    
    $
    11,520,793
    
    
    $
    13,814,133
 Approximately 58% of revenue for the year ended November 30, 2004 (2003  65%, 2002  84%) is
derived from the three largest ultimate customers at 26%, 24% and 8%, respectively (2003  27%,
20%, 18%, 2002  38%, 23%, 23%). The three largest customers for 2004 were the Royal Australian Navy, the Royal Navy of the
United Kingdom and the U.S. Coast Guard. The three largest customers for 2003 were the U.S.
Coast Guard, the Canadian Navy and the Royal Danish Navy.  14
    Financial instrumentsFluctuations in foreign currency exchange ratesThe Company enters into transactions denominated in U.S. dollars, Australian dollars and Euros
and as such its revenue, expenses, monetary assets and liabilities will be affected by
fluctuations in the various currencies relative to its functional currency, the Canadian
dollar.The Company uses foreign exchange forward contracts to hedge transactions denominated in U.S.
dollars, Australian dollars and Euros. The purpose of the Companys hedging activities is to
reduce the level of exposure to exchange rate movements. At November 30, 2004, the Company had
foreign exchange forward contracts maturing in the following year to sell U.S. $851,196 (2003
 U.S. $1,343,705), Australian $3,678,061 (2003  $nil),
and 383,310 (2003  nil). The
exchange rates set in the forward exchange contracts ranged between 1.1870 to 1.1942 for U.S.
$1.00, 0.9005 to 0.9576 for Australian $1.00, and 1.5777 for 1.00 . The contracts mature
between December 2004 and May 2005.The fair value of derivative instruments generally reflects the estimated amounts that the
Company would receive or pay to settle the contracts at November 30, 2004. The requirement to
record derivatives at their fair market value has not had a material impact on the Companys
consolidated financial statements.Fair value of financial instrumentsCarrying amounts of certain of the Companys financial instruments, including cash, accounts
receivable and accounts payable approximate fair value due to their short maturities. Page 99
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 Concentration of credit risk Financial instruments that potentially subject the company to a significant concentration of
credit risk consist primarily of cash and accounts receivable which are not collateralized. The
Company limits its exposure to credit loss by placing its cash with high credit quality
financial institutions. Concentrations of credit risk with respect to accounts receivable are
considered to be limited due to the credit quality of the customers comprising the Companys
customer base. The maximum amount of credit risk exposure is limited to the carrying amounts of
these financial instruments. The Company performs ongoing credit evaluations of its customers financial condition to
determine the need for an allowance for doubtful accounts. The Company has not experienced
significant credit losses to date. The Company directly markets and supports its products internationally and currently depends on
three major ultimate customers (note 13). Credit risk related to these three customers is
minimal as these customers are government departments in stable, democratic countries.  15
    Supplemental cash flow information 2004
    
    
    2003
    
    
    2002Cash paid during the year for interest
    
    $
    2,045
    
    
    $
    2,824
    
    
    $
    3,583Cash received for interest
    
    $
    
    
    
    $
    103,564
    
    
    $
    20,192Cash paid during the year for income taxes
    
    $
    12,916
    
    
    $
    
    
    
    $
    Non-cash financing and investing activitiesInventory transferred to plant and equipment
    
    $
    
    
    
    $
    10,121
    
    
    $
    62,741
  16
    Subsequent events(a)  Credit FacilityIn February 2005, the Company renewed certain credit facilities with a Canadian chartered bank,
which consist of an operating line, a foreign exchange forward contract facility and standby
letters of credit. The operating line bears interest at the chartered banks prime lending rate
plus 0.5% with interest payable monthly. The standby letters of credit are denominated in U.S.
dollars and bear interest at the rate of 1.25% per annum. Funds drawn on the operating line and
the standby letters of credit are repayable on demand. The Company utilizes letters of credit
to back certain performance obligations with its customers. The maximum amount(s) available to
the Company under the operating line is $2,000,000 and under the foreign exchange forward
contract facility are U.S. $2,000,000 and Australian $2,750,000. The credit facilities are
collateralized by an assignment of accounts receivable, a general security agreement from the
Company and its subsidiaries Offshore Systems Ltd., OSI Geomatics Ltd and OSI Geomatics Inc. In
addition, the Company is required to meet certain covenants as outlined in the credit
facilities agreement.(b)  Agreement to acquire Mapcon Mapping Consultants Inc. Page 100
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 On February 28, 2005, the Company entered into an agreement to purchase all of the issued and
outstanding shares of Mapcon Mapping Consultants Inc. (Mapcon) of Salt Lake City, Utah.
Mapcon is a land mapping company in the U.S. geomatics (digital map and electronic chart data
production) market. Under the terms of the agreement, the Company will purchase all of the shares of Mapcon from
its shareholders for cash of U.S.$1,000,000. The purchase is subject to a number of conditions,
including the execution of a definitive agreement. The definitive agreement was executed April
8, 2005 and the transaction was closed on the same day. Page 101
    

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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2004, 2003, and 2002(expressed in Canadian dollars)
 (c) Private placement The Company announced on March 8, 2005 its intention to proceed with a private placement (the
financing) of up to $19,500,000. The financing was led by SDS Capital Group SPC, Ltd. as the
principal investor. C.E. Unterberg, Towbin, a recognized United States investment bank acted as
agent to offer the securities on a best efforts basis to other institutions and accredited
investors. The proceeds of the financing will be used to pursue acquisitions, to increase
available cash for operations, and to redeem 57,711 issued and
outstanding Class B preference shares Series 1 held by two institutional investors at a cost of approximately $2,900,000. The
Company offered up to 19,500 units, each comprised of 20 voting Class B preference shares
Series 2 (preference shares) and 588 share purchase warrants (warrants). The issue price
was $1,000.01 per unit. The preference shares entitle the holders to receive a fixed
preferential cumulative 7% dividend payable semi-annually. Each preference share is convertible
at the option of the holder at any time into 58.82 of the Companys common shares, calculated
by dividing the issue price of $50.00 for each preference share by the conversion price of
$0.85. Each warrant entitles the holder to purchase one of the Companys common shares at the
exercise price of $0.85 for a period of five years. TSX policies require that the Company obtain shareholder approval for the financing.
Consequently, all subscription funds and agreements were held in escrow with an escrow agent
pending receipt of shareholder approval. The Company received shareholder approval for the
financing at its annual general meeting which was held on April 8, 2005 and the private
placement closed on April 11, 2005. During the escrow period, the purchasers received interest
on the subscription funds at the rate of 12% per annum. After shareholder approval was
obtained, the financing was closed and accrued interest paid to the purchasers. All payments of
interest was net of applicable withholding tax. Mr. E. Brinton Coxe, a director of the Company assisted the Company in structuring and
arranging the financing. In consideration for providing his services, the Company will pay Mr.
Coxe an advisory services fee in the amount of $815,908. In addition, the Company will issue to
Mr. Coxe 350,000 common share purchase warrants which will have the same terms and conditions
as the warrants to be issued to the institutions which assist in placing the financing. Mr.
Coxe has also participated in the financing by purchasing 100 units personally. Mr. Coxe
declared his interest in the proposed financing and related transactions and abstained from
voting on all resolutions of the Companys board respecting the financing, including
resolutions approving his compensation, at all stages of the review and approval process. Mr.
Coxe also excused himself from all board meetings at which the proposed financing was
considered so that the remaining members of the board could discuss freely the proposed
financing and all matters related thereto, including the proposed compensation of Mr. Coxe. After shareholder approval was obtained, the Company proceeded with the planned private
placement. The issuance of the units, related costs including the tax impact, potential changes
to the Companys current and deferred tax positions and the retirement of the existing
preference shares will be recorded in the consolidated financial statements for the six month
period ending May 30, 2005. Completion of the financing was subject to satisfaction of a number of conditions precedent,
including completion of legal documentation and due diligence satisfactory to both the Company
and the purchasers, and receipt of all necessary regulatory approvals, including TSX
acceptance. The Company has since received all necessary regulatory approval required to
complete the financing. The private placement was fully subscribed and should the holders of the 19,500 units, each
comprised of 20 voting Class B preference shares Series 2 and 588 share purchase warrants
convert these securities into the Companys common shares, there would be an increase of
34,405,800 common shares. Finders fees of $1,001,362 and an additional 579,064 warrants were
paid to the investment bankers in connection with the private placement. The offered securities have not been, nor will be, registered under the United States
Securities Act of 1933, as amended (the U.S. Securities Act), and may not be offered or sold
within the United States or to, or for the account or benefit of, U.S. persons except in
certain transactions exempt from the registration requirements of the U.S. Securities Act. Page 102
    

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