##### Table of Contents



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 THESECURITIES EXCHANGE ACT OF 1934ORx
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended November 30, 2003.ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from         to        .
 Commission File Number [        ] OFFSHORE SYSTEMS INTERNATIONAL LTD.  Offshore Systems International Ltd.
(Translation of Registrants name into English) 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, 2003: 26,807,475 shares of Common
Stock, no par value, 30,296 shares of Class A Preference Shares Convertible,
no par value and 61,244 shares of Class B Preferred 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. x    Yes    o    No Indicate by check mark which financial statement item the registrant has elected to follow.         o    Item 17    x    Item 18




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TABLE OF CONTENTS Page #PART IItem 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT ANDADVISORS
    
    
    1Item 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1Item 3.
    
    KEY INFORMATION
    
    
    1Item 4.
    
    INFORMATION ON THE COMPANY
    
    
    10Item 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    18Item 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    32Item 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    38Item 8.
    
    FINANCIAL INFORMATION
    
    
    40Item 9.
    
    THE OFFER AND LISTING
    
    
    41Item 10.
    
    ADDITIONAL INFORMATION
    
    
    43Item 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK
    
    
    49Item 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    49PART IIItem 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    49Item 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    49Item 15.
    
    CONTROLS AND PROCEDURES
    
    
    50Item 16.
    
    [RESERVED]
    
    
    50Item 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    50Item 16B.
    
    CODE OF ETHICS
    
    
    50Item 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    50Item 16D.
    
    EXEMPTIONS FROM LISTING STANDARDS FOR AUDITCOMMITTEES
    
    
    51Item 16E.
    
    PURCHASES OF EQUITY SECURITIES BY ISSUER AND
AFFILIATED PURCHASERS
    
    
    51PART IIIItem 17.
    
    FINANCIAL STATEMENTS
    
    
    51Item 18.
    
    FINANCIAL STATEMENTS
    
    
    52Item 19.
    
    EXHIBITS
    
    
    53Contract 265-004-002 With Nautronix Ltd.List of Subsidiaries and JurisdictionsCode of EthicsSection 302 CertificationsSection 906 Certifications




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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 November 30,
2000, 2001, 2002 and 2003 and for the years ended November 30, 2000, 2001, 2002
and 2003 has been derived from the Companys audited Consolidated Financial
Statements and was prepared in accordance with U.S. generally accepted
accounting principles (GAAP). The selected consolidated financial data as of
November 30, 1999 and for the year ended November 30, 1999 has been derived
from unaudited historical consolidated financial information, prepared by
management from the audited historical financial statements. These statements
were prepared in accordance with Canadian GAAP for those dates and periods and
adjusted by management for material differences between Canadian and U.S. GAAP.
The information should be read in conjunction with the Consolidated Financial
Statements and Notes and Item 5. Operating and Financial Review and Prospects
appearing elsewhere in this annual report. The Companys Consolidated Financial Statements are stated in Canadian
Dollars (CDN$ or $). Offshore Systems International Ltd.Selected Consolidated Financial InformationConsolidated Statement of Earnings and Deficit DataFor the year ended November 30,2003
    
    2002
    
    2001
    
    2000
    
    1999Revenue
    
    $
    11,520,793
    
    
    $
    13,814,133
    
    
    $
    7,909,713
    
    
    $
    5,651,665
    
    
    $
    7,291,619Direct costs
    
    $
    5,159,068
    
    
    $
    7,100,751
    
    
    $
    3,333,358
    
    
    $
    1,364,053
    
    
    $
    4,010,649Gross profit
    
    $
    6,361,725
    
    
    $
    6,713,382
    
    
    $
    4,576,355
    
    
    $
    4,287,612
    
    
    $
    3,280,970Expenses
    
    $
    6,149,808
    
    
    $
    5,667,650
    
    
    $
    4,205,916
    
    
    $
    4,122,027
    
    
    $
    5,503,620Earnings (loss) from continuing operations before
proceeds on settlement of claim and income taxes
    
    $
    211,917
    
    
    $
    1,045,732
    
    
    $
    370,439
    
    
    $
    165,585
    
    
    $
    (2,222,650
    )Proceeds on settlement of claim
    
    $
    
    
    
    $
    (221,978
    )
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes (recovery)
    
    $
    (140,099
    )
    
    $
    (426,416
    )
    
    $
    (227,300
    )
    
    $
    
    
    
    $
    Earnings (loss) from continuing operations
    
    $
    352,016
    
    
    $
    1,694,126
    
    
    $
    597,739
    
    
    $
    165,585
    
    
    $
    (2,222,650
    )Earnings (loss) from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (316,673
    )
    
    $
    141,732
 Page 1




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Offshore Systems International Ltd.Selected Consolidated Financial InformationConsolidated Statement of Earnings and Deficit DataFor the year ended November 30,2003
    
    2002
    
    2001
    
    2000
    
    1999(continued)
Net Earnings (loss) for the period
    
    $
    352,016
    
    
    $
    1,694,126
    
    
    $
    597,739
    
    
    $
    (151,088
    )
    
    $
    (2,080,918
    )Earnings (loss) per share from continuing operations
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    (0.11
    )Earnings (loss) per share
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    (0.11
    )Diluted earnings (loss) per share from continuing
operations
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    (0.11
    )Diluted earnings (loss) per share
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    (0.11
    )Weighted average number of Common Shares outstanding
 basic
    
    
    25,977,123
    
    
    
    25,288,725
    
    
    
    23,842,549
    
    
    
    23,050,201
    
    
    
    22,672,628Weighted average number of Common Shares outstanding
 diluted
    
    
    27,142,492
    
    
    
    27,285,617
    
    
    
    25,476,614
    
    
    
    24,526,875
    
    
    
    22,672,628
  Offshore Systems International Ltd.Selected Consolidated Financial InformationConsolidated Balance Sheet DataAs at November 30,2003
    
    2002
    
    2001
    
    2000
    
    1999Working capital
    
    $
    8,071,926
    
    
    $
    4,464,623
    
    
    $
    2,812,407
    
    
    $
    1,871,000
    
    
    $
    1,153,711Total assets
    
    $
    11,728,257
    
    
    $
    10,795,577
    
    
    $
    7,353,509
    
    
    $
    4,713,296
    
    
    $
    7,673,785Total liabilities
    
    $
    2,493,294
    
    
    $
    4,729,579
    
    
    $
    3,581,389
    
    
    $
    1,913,235
    
    
    $
    5,676,438Net assets
    
    $
    9,234,963
    
    
    $
    6,065,998
    
    
    $
    3,772,120
    
    
    $
    2,800,061
    
    
    $
    1,997,347Capital Stock
    
    $
    21,715,693
    
    
    $
    19,258,997
    
    
    $
    18,554,063
    
    
    $
    17,842,869
    
    
    $
    17,243,855Outstanding Common Shares
    
    
    26,807,475
    
    
    
    26,043,243
    
    
    
    24,694,549
    
    
    
    23,540,975
    
    
    
    22,672,628Outstanding Class A Preference Shares Series A
Convertible
    
    
    30,262
    
    
    
    41,296
    
    
    
    58,326
    
    
    
    74,702
    
    
    
    74,702Outstanding Class B Preference Shares Series 1
Convertible
    
    
    61,244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The Company declared and paid dividends during the fiscal year 2003 on
outstanding Class B Preference Shares Series 1 Convertible in the amount of
$53,484 (US$40,915). The Company has not declared and paid any other dividends
during the periods indicated. Page 2




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Currency and Exchange Rates Canadian Dollar Value for 1 US$ (as published by the Federal Reserve Bank
of New York) On May 21, 2004, 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. = $ 1.3734 Canadian. 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, 1999
    
    
    
    
    
    
    1.4905Year Ended November 30, 2000
    
    
    
    
    
    
    1.4834Year Ended November 30, 2001
    
    
    
    
    
    
    1.5441Year Ended November 30, 2002
    
    
    
    
    
    
    1.5713Year Ended November 30, 2003
    
    
    
    
    
    
    1.4156High Rate
    
    Low RateNovember 2003
    
    
    1.3362
    
    
    
    1.2973December 2003
    
    
    1.3405
    
    
    
    1.2923January  2004
    
    
    1.3340
    
    
    
    1.2690February 2004
    
    
    1.3442
    
    
    
    1.3108March 2004
    
    
    1.3480
    
    
    
    1.3080April 2004
    
    
    1.3711
    
    
    
    1.3095
 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 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
favor 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 can give no
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 government may be affected by: 
    changes in procurement policies;
    budget considerations;
    changing concepts of national defense; and
    political developments abroad. 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
customers. The Company depends on national and international 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 27%, 20% and 18% of the Companys revenue in the year ended
November 30, 2003 were from the U.S. Coast Guard, Canadian Navy and Royal
Danish Navy, respectively. 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 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. The Company derives a significant portion of its revenues from
international sales and is subject to the risks of doing business in foreign
countries. Page 4




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In the financial year ended November 30, 2003, approximately 71% of the
Companys revenues were from international customers, including governmental
customers: 44% from the United States and 27% from other international
countries. 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 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 and inflation rates;
    the complexity and necessity of using 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, and
the U.S. dollar. Exposure to exchange rate fluctuations exists because a significant
portion of the Companys trade receivable and revenue transactions and, to a
lesser extent, the Companys sub contract payable and direct cost transactions
are in U.S. dollars. In fiscal 2003, approximately 63% of the Companys revenue
and 12% of its expenses were transacted in U.S. dollars. The Company expects
that U.S. dollar sales will continue to account for a significant 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. The Company has established teaming relationships and strategic
partnerships with international corporations to pursue major international
government procurements, and its reputation and results of operations could be
adversely affected by the Companys inability to control their operations. The Company relies on agreements with international corporations to assist
it in pursuing contracts for 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. Competition within the Companys markets may reduce its procurement of future
contracts and its sales. The defense industry in which the Company operates is highly competitive.
The Companys competitors range from smaller companies, which are primarily
targeting the pleasure boat market, to large diversified corporations in the
radar/marine equipment segment of the industry. The Companys target market for
its principal products is the international military community. Some of the
Companys competitors may have more extensive or more specialized engineering,
manufacturing and marketing capabilities than the Company. There can be no
assurance that the Company can continue to compete effectively with these
companies. Page 5




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The Companys future success will depend on its ability to develop new
technologies that achieve market acceptance. The defense market is characterized by rapidly changing technologies and
evolving industry standards. Accordingly, the Companys future performance
depends on a number of factors, including the Companys ability to 
    identify emerging technological trends in its market;
    develop and maintain competitive products;
    enhance the Companys products by adding innovative features that
differentiate its products from those of its competitors; and
    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, there can be no assurance that the market for the Companys products
will develop or continue to expand as it 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. If the Companys competitors
develop new technology or products, the Companys existing technology and
products might become obsolete. If the Company fails in its new product
development efforts or its products fail to achieve market acceptance more
rapidly than its competitors, the Companys 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 highly 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 labor in its geomatics and
systems operations to maintain a competitive position in the geomatics and
systems marketplaces. The Companys geomatics and systems operations are highly dependent upon
labor resources located outside North America. While the Company enters into
sub-contract agreements with these suppliers, it cannot be sure that the labor
resources will be available when required and at the levels required.
Accordingly, maintaining the Companys competitiveness will depend on a number
of factors, including: Page 6




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
    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 labor resources made available to the Company;
    labor 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 systems operations in the future. The Company may be unable to adequately 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 these patents 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. The Company depends on component availability and its key suppliers to
manufacture and deliver its products and services. The Companys operations are highly dependent on the delivery of materials
by outside suppliers in a timely manner. While the Company enters into purchase
agreements with a few of its suppliers, it 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, the Company may
not have readily available alternatives. The Companys inability to fill its
supply needs would jeopardize the Companys ability to satisfactorily complete
its contractual obligations 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 securities. 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. The value of the Companys securities 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 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; Page 7




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
    fluctuations in foreign currency exchange rates; and
    regulatory developments. The Company may pursue strategic relationships, investments and
acquisitions. The Company may not be able to successfully manage its operations
if its 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) and
    the difficulty of integrating previously distinct businesses into one business unit. 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 cash flows, the Company
may choose to raise additional financing. In addition, the Company may choose
to raise additional financing in order to capitalize on potential opportunities
in the marketplace that may accelerate its growth objectives. 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
arrange additional financing, if needed, on terms satisfactory to the Company.
If additional financing 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, which could cause
the market price of its stock to fall. 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 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; Page 8




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
    improve its licensing models and procedures;
    hire, train and retain qualified employees;
    control expenses;
    diversify channel sales strategies; and
    invest in the Companys 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 it 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 the Companys attention from its core business,
require the Company to stop selling or delay shipping, or cause the redesign of
its product. In addition, the Company may be required to pay monetary amounts
as damages, for royalty or licensing arrangements, or to satisfy
indemnification obligations that it has with some of its customers. 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 its
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 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. End-user 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 it is Page 9




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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 versions of products, or if
customers were dissatisfied with product functionality or performance, it 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 rely on third party software products and its
reputation and results of operations could be adversely affected by the
Companys inability to control their operations. 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 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. 
 Item 4. Information on the Company A.History and development of the Company. The Company The Company was incorporated in Canada under British Columbias Company
Acton June 10, 1987, under the name Kappa Resource Corporation. On April
23, 1990, the Memorandum of the Corporation was altered to designate 10,000,000
of the 100,000,000 authorized Class A Preference Shares as Class A
Preference Shares Series A Convertible and to change the name of the Company to
Offshore Systems International Ltd. The Company currently operates
commercially under this name as well. The address of the Companys principal
place of business is 107  930 West 1st Street, North Vancouver, British
Columbia, Canada V7P 3N4, and its telephone number at that address is
604-904-4600. Subsidiaries The Company presently has four 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 and Offshore Survey and Positioning Services Ltd. (OSPS),
incorporated under the Company Actof British Columbia on November 16, 1977.
The Companys electronic chart display business activities are carried on
through OSL. Its production, sale and marketing of digital navigational charts
are conducted through the combined operations of OGL and OGI. OSPS is currently
inactive, has no material assets and has not been wound up. OSPS has been
inactive since 1990. 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 Page 10




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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. During the last three years, there have been no immovables and no major capital
expenditures or divestitures. No such major capital expenditures or
divestitures are currently planned. History The Company was founded in 1977 (as Offshore Survey & Positioning Services
Ltd.), initially providing positioning systems to oil companies. By the early
1980s, 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 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 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 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s
sales and financial performance steadily returned as the Company zeroed in on
military and government opportunities with their sophisticated requirements.
The Company has now 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 and the U.S.
Navy George Washington Battle Group. 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 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 Lockheed Martin in the
U.S., Lockheed Martin and Kelvin Hughes in the UK, Nautronix Ltd. in Australia,
and Furuno in Denmark. During 2002, the Company entered the land-based mapping field, utilizing
the skills and experience gained in production and distribution of marine
charts. Together, these businesses formed a Geomatics business unit, which has
achieved significant contract wins in the fiscal year 2003, its first full year
of operations. 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. Page 11




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During fiscal years 2002, 2003 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. B.Business overview. General Development of the Business The Companys principal business is the ownership and management of three
operating subsidiaries, namely, Offshore Systems Ltd., OSI Geomatics Ltd.
(formerly Offshore Charts Ltd.) and OSI Geomatics Inc. (formerly Offshore
Systems International Inc.). Offshore Systems Ltd. develops, produces and sells marine electronic chart
display instruments and related products for precise positioning and navigation
of ships. Two subsidiaries, OSI Geomatics Inc. and OSI Geomatics Ltd., develop
and provide analysis, production, and distribution of geo-spatial data for
electronic display. The combined operations of OSI Geomatics Ltd. and OSI
Geomatics Inc. are referred to as OSI Geomatics (OSIG). The principal product of the OSL subsidiary is ECPINS® for use in the
shipping industry. ECPINS® reads navigation position inputs from the ships
position, velocity, and heading sensors, such as the speed log, the gyrocompass
and the Differential Global Positioning System receiver, and displays the
ships position continuously on a computer screen against the background of an
electronic chart. The ECPINS® product line includes an optional radar overlay
display system, which enables a navigator using the system to track other ships
and objects. With this option, ECPINS® combines the collision avoidance
capabilities of radar with the grounding avoidance capabilities of electronic
nautical charts. In 2001, OSL completed the introduction of the Windows NT
based ECPINS®-M Military System and introduced ECPINS® for the commercial
market, which replaced the ECPINS® NG Series. With a growing market demand for high-end ECPINS® systems for military
customers, OSL offers systems solutions and services to government customers,
including the Canadian Navy, the Canadian Coast Guard, the United States Coast
Guard, the Royal Danish Navy, the Australian Navy and Royal Navy of the United
Kingdom. These customers have unique requirements requiring a systems solution,
which usually involves bundling the ECPINS® products with systems
customization, training and installation. These customers often have
non-recurring engineering needs that are met by OSLs engineering capabilities. On
February 25, 2003, the Company announced the launch of a new product  COP-IDS®, a client server application that allows customers to integrate
Company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 Army, Air Force and other military and para-military
applications as well. OSIG produces and sells electronic chart data to national chart agencies
and Hydrographic Offices worldwide. OSIG also provides chart services to the
United States Coast Guard and land mapping services to local, regional and
federal governments. The Company recognizes revenues from the three subsidiaries in four
sources: Systems and System Components, Software, Geomatics, and Other. Systems
and system components revenues are derived from sales of navigation systems
solutions and components of navigation systems solutions. Software revenues are
derived from the sale of ECPINS® software. Geomatics revenues are generated
from hydrographic chart Page 12




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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, training and consulting. The following table presents revenues for the past three fiscal years
ended November 30 by source: 2003
    
    2002
    
    2001Systems and system components
    
    
    6,208,464
    
    
    
    9,707,393
    
    
    
    5,874,568Geomatics
    
    
    3,560,440
    
    
    
    2,347,464
    
    
    
    1,073,157Software
    
    
    1,036,417
    
    
    
    970,323
    
    
    
    617,373Other
    
    
    715,472
    
    
    
    788,953
    
    
    
    344,615Total Revenue
    
    
    11,520,793
    
    
    
    13,814,133
    
    
    
    7,909,713
 The Company purchases computer components and other electronic hardware
for assembly into its navigation systems. These goods are available from
multiple suppliers and prices are subject to the normal trade practices for the
industry. No raw materials are used in the Companys products. Principal Products During the last three (3) years, the principal products sold by the
Company are as follows: Electronic Chart Precise Integrated Navigation System (ECPINS®) ECPINS®, introduced in 1991, is a real time electronic chart display and
information system. 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. In August of 2000, OSL launched the latest version of the ECPINS®-M, a new
product specifically designed for the military market, and ECPINS® 3000 series
through 5000 series products for the commercial market. All current ECPINS®
models run on an Intel x86 computer (PC) with Microsoft Windows NT 4.0 and
Windows XP Professional operating systems. 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
capability, all at lower price points than the original ECPINS® product. The
three models are known as the ECPINS® 3000, 4000, and 5000. Geomatics OSIG provides analysis, production and distribution of electronic nautical
chart and land mapping data. 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. Page 13




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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. New Product In February 2003, the Company announced the launch of COP-IDS®, a client
server application that allows customers to integrate OSI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. Major Customers The Companys government customers continue to play a significant role in
the success of the ECPINS® product line. Sales to the Canadian Navy, United
States Coast Guard and Royal Danish Navy accounted for 65% of the Companys
2003 consolidated revenue: U.S. Coast Guard 27%, Canadian Navy 20% and Royal
Danish Navy 18%. No other customer represented more than 10% of sales during
this reporting period. The remaining 35% of the Companys 2003 consolidated
revenue were generated through sales to commercial and other military
customers. The Company does not depend on any major supplier. The Companys business does not vary seasonally. Geographic Markets Approximately 29%, 44%, and 27% of the Companys revenues in fiscal year
2003 were from Canada, the United States and other international customers,
respectively. Approximately 24%, 53%, and 23% of its revenues in fiscal year
2002 were from Canada, the United States and other international customers,
respectively. Approximately 35%, 52% and 13% of its revenues in fiscal year
2001 were from Canada, the United States and other international customers,
respectively. (PIE CHARTS) Trademarks and Intellectual Property Rights The Company has registered its trademark 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. Page 14




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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 these trademarks, copyrights
and other intellectual properties 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, which may adversely affect the Company. Sales, Marketing and Distribution The Companys distribution strategy 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 five consecutive open procurement
competitions. During its fiscal year 2003, the Company had 14 employees engaged in sales
and marketing products and three principal distributors for its products. Sales
were made to customers including the United States, Canadian and Royal Danish
Navies and the United States and Canadian Coast Guards, as well as commercial
shipping companies in the Great Lakes Region. The Company also attends selected major international trade shows and
conferences. During its fiscal year ended November 30, 2003, the Company showed
ECPINS®-M and/or ECPINS® at the following trade shows: AFCEA/USNI West 2003  San Diego
Surface Navy Association National Symposium 2003  Crystal City, VA
CANSEC 2003  Ottawa The Company attends other selected major international trade shows and
conferences with its partners. During the fiscal year, the Company attended the
Defense Systems & Equipment International tradeshow in London, UK with its
partners Kelvin Hughes, Terma A/S and Nautronix Limited. Competition Competition for OSLs ECPINS® products comes from companies who 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 SAM Elektronik GmbH from Germany, Kongsberg Maritime
AS and Maritime Information Systems AS from Norway, Kelvin Hughes Limited and
Transas Marine Ltd. from the United Kingdom and Sperry Marine, a division of
Northrop Grumman Corporation, from the United States. 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 Page 15




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companies existing product or products could evolve into solutions that
could compete with ECPINS®. In fact, 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. Competition for OSLs COP-IDS® products would come from companies who sell
other similar systems based on electronic chart and land map technology.
Currently, the principal competitor for COP-IDS® is from a product developed by
Sperry Marine, a division of Northrop Grumman Corporation,  Command and
Control Personal Computer (C2PC) The addition of the COP-IDS® solution into
the market may prompt other companies to develop and market a competing
product. Companies that may elect to do this would be defense and commercial
contractors who currently offer products that compete with the Companys
ECPINS® products or companies such as Intergraph Corporation and ESRI in the
U.S. that offer similar land-based information products. 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., each of which is from
the U.S., and the Mapping Group of MacDonald Dettwiler & Associates Ltd.s
Geographic Information Products Division, Intermap Technologies Corporation,
Hauts-Monts International Inc. and SNC - LAVALIN Environment Inc. each of which
is from 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 consists of 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. and GeoNet Technologies Inc. of
Canada, Transas Dataco Ltd. of the United Kingdom, 3001 Inc. of the U.S.
through their association with IIC Technologies Inc. of India, and Infotech
Enterprises Limited of India. 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. Plan of Operation The Company does not expect any material changes in its plan of operations
in the fiscal year 2004. Page 16




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C.Organizational structure. The Company has four wholly owned subsidiaries: Offshore Systems Ltd.,
incorporated in Canada under the Company Actof British Columbia; Offshore
Systems International, Inc., incorporated in the U.S. under the laws of
Washington State; Offshore Charts Ltd., incorporated in Canada under the
Business Corporations Actof the Yukon Territory and Offshore Survey and
Positioning Services Ltd., incorporated in Canada under the Company Actof
British Columbia (inactive). (CHART) D.Property, plants and equipment. Human Resources and Facilities As at November 30, 2003, the Company had 57 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 and
Production. Two other employees operate from leased offices located in Toronto and
Ottawa, Ontario, Canada, and two consultants operate from Portland, Oregon and
San Diego, California, United States. The Company uses these offices for sales
and marketing purposes. There are no present plans to construct, expand, or improve facilities. 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. Page 17




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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, changing foreign exchange rates and actions by government
authorities, uncertainties associated with legal proceedings and negotiations,
industry supply levels, competitive pricing pressures and misjudgments 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 Overview The Companys financial statements are prepared in accordance with
generally accepted accounting principles in the United States 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. The following discussion and analysis provides a review of activities and
results of operations of the Company for the fiscal year ended November 30,
2003 (FY2003) in comparison with those for the fiscal year ended November 30,
2002 (FY2002) and for the fiscal year ended November 30, 2002 in comparison
with those for the fiscal year ended November 30, 2001 (FY2001). This
discussion should be read in conjunction with the Companys 2003 and 2002
Audited Financial Statements. The Company had an unstable operating history until FY2000 making an
evaluation of the Company and its prospects complex and challenging. The
Companys prospects must be evaluated keeping in mind the risks, expenses and
difficulties encountered by companies seeking to introduce new products into
rapidly evolving niche markets with a limited number of competitors, only a few
of which are well financed. To address these risks and uncertainties, the
Company must, among other things, successfully market its existing products and
technologies, complete and introduce products under development in a timely
manner, continue to upgrade and commercialize its technologies, attract, retain
and motivate qualified personnel, manage rapid growth and establish strategic
alliances with large multi-national corporations. There can be no assurance
that the Company will successfully address all of these challenges. Page 18




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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, among other factors, price
competition, manufacturing effectiveness and efficiency, the ability to manage
inventory and capital assets effectively, foreign exchange fluctuations, the
timing of expenditures in anticipation of increased sales, customer product
delivery requirements and shortages of components or labor. Most of the Companys sales are in U.S. dollars. In addition, a
significant portion of costs are paid in U.S. dollars or in Canadian dollars
linked to the exchange rate of the U.S. dollar. These transactions are recorded
in the Companys financial statements in Canadian dollars using the appropriate
exchange rates required under U.S. GAAP. During the fiscal year 2003, the value of the U.S. dollar decreased
relative to the Canadian dollar and the rate of inflation in Canada was lower
than the rate in the United States. During the fiscal year 2002, the value of
the U.S. dollar decreased relative to the Canadian dollar and the rate of
inflation in Canada exceeded the rate in the United States. In the fiscal year
2001, the value of the U.S. dollar increased relative to the Canadian dollar,
and the rate of inflation in Canada was lower than the rate in the United
States. The annual rate of inflation in Canada in the fiscal year 2002 was
4.40% and decreased to 1.60% in the fiscal year 2003. The Canadian dollar was
devalued against the U.S. dollar approximately 2.40% in the fiscal year 2001,
increased in value by approximately 0.40% in the fiscal year 2002 and increased
in value by approximately 17.15% in the fiscal year 2003. The Company cannot
predict whether the change in valuation of the Canadian dollar against the U.S.
dollar will or will not exceed the rate of inflation in the future and whether
these conditions will have a material adverse effect on the Company. The representative dollar exchange rate for converting the Canadian dollar
to U.S. dollars, as reported by the Federal Reserve Bank of New York, was
$1.2973 Canadian dollars for one U.S. dollar on November 30, 2003. The
representative dollar exchange rate for converting the Canadian dollar to U.S.
dollars, as reported by the Federal Reserve Bank of New York, was $1.5658
Canadian dollars for one U.S. dollar on November 30, 2002 and 1.5717 Canadian
dollars for one U.S. dollar on November 30, 2001. The representative average
dollar exchange rate for converting the Canadian dollar to U.S. dollars, as
reported by the Federal Reserve Bank of New York, was $1.4156 Canadian dollars
for one U.S. dollar for the fiscal year 2003. The representative average dollar
exchange rate for converting the Canadian dollar to U.S. dollars, as reported
by the Federal Reserve Bank of New York, was $1.5713 Canadian dollars for one
U.S. dollar for the fiscal year 2002 and $1.5441 Canadian dollars for one U.S.
dollar for the fiscal year 2001. In order to reduce the impact of exchange rate fluctuations between the
U.S. and Canadian Dollar, the Company has used the forward exchange contract
facility described in B. Liquidity and capital resources. The Company used
the forward exchange contract facility to set the exchange rate between the
U.S. and Canadian Dollar for specific transactions at a specific, agreed upon
rate, thereby removing any unexpected foreign exchange gain or loss that might
occur on those transactions. 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. The Company has accumulated losses from continuing operations up to the
fiscal year ended November 30, 1999 and as at November 30, 2003, had an
accumulated deficit in shareholders equity of $14,046,108. In FY2003, the
Company recorded $11,520,793 in revenue, driven by contracts executed by the
Company during the year with the United States Coast Guard, the Royal Danish
Navy and the Canadian Navy. In addition, cash and cash equivalents strengthened
to $3,837,555 with positive cash flow from operations for the past four years. Page 19




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Critical Accounting Policies The Company prepares its consolidated financial statements in accordance
with U.S. GAAP, and makes 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. 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 determines
that a contract will generate a loss for the Company, the Company will estimate
that loss and provide for the total expected loss on the contract. 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 and assessing any temporary differences
resulting from the 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 to the extent a net
deferred tax asset or liability exists. 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 asset
balance. A valuation allowance is provided for in the Companys financial
statements, based on the Companys estimates of taxable income in the
jurisdictions 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. Inventory The Company values its inventory at the lower of cost, determined on an
average cost basis, 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. 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 when making estimates of the uncollectability of the
Companys accounts receivable. If the Page 20




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Company determines that the financial condition of any of its customers
deteriorates, increases in the allowance may be made. Results of Operations
 Years ended November 30, 2003 and 2002 For the fiscal year ended November 30, 2003, the Company had net earnings
of $352,016. After adjusting for the dividends on the Class B Preference
Share Series 1, earnings per share was $(0.02) per share on a basic and diluted
basis. 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
    
    
    3.1
    %
    
    
    12.3
    %
 Revenues The Companys core revenue stream is derived from four sources: Systems
and System Components, Software, Geomatics, and Other which includes System
Repairs and Servicing, Training and Consulting. The Companys principal
developed and manufactured product, the Electronic Chart Precise Integrated
Navigation System (ECPINS®), delivers the majority of the revenue. Page 21




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Certain systems revenues were recognized using the percentage of
completion method, in conformity with the AICPA SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. System
components revenues were recognized when significant risks and rewards of
ownership were transferred, which is generally when the components were
delivered. Certain other systems revenues and all software revenues were
accounted for following the AICPA SOP 97-2, Software Revenue Recognition, as
amended by SOP 98-4 and 98-9. The Company recorded these revenues when
persuasive evidence of an arrangement (as defined in the AICPA SOP 97-2)
existed, the software product had been shipped, there were no significant
uncertainties surrounding product acceptance, the fees were fixed and
determinable and collection was considered probable. Systems revenues that were
not recognized under SOP 81-1 or SOP 97-2 were recognized in accordance with
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 101 (SAB 101). Geomatics revenues from the sale of products were
recognized when significant risks and rewards of ownership were transferred,
which was generally when the products were delivered. Certain geomatics
services revenues were recognized in the period the services were performed.
Certain other geomatics services revenues were recognized using the percentage
of completion method, in conformity with the AICPA SOP 81-1. Other revenues
were recognized in the period the services were performed. The Company may provide post-contract support as part of its software
licensing arrangements depending on the specific requirements of each contract.
Depending on the nature of the post-contract support, revenue from
post-contract support would be recorded in up to three revenue sources: Systems
and system components, Software and Other. Consolidated revenue for the year was $11,520,793, compared with
$13,814,133 for FY2002, a decrease of 17%. 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. Segment Results Systems Revenue from the systems segment for FY2003 was $7,927,166,
compared to $11,466,668 for FY2002, a decrease of $3,539,502 or 31%. 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. Geomatics Revenue from the geomatics segment for FY2003 was $3,593,627
compared to $2,347,465 for FY2002, an increase of $1,246,162 or 53%. 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. 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. Page 22




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Gross Profit The Companys gross profit decreased $351,657 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 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. 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 general administrative expenses,
net of interest and other income. G&A decreased $130,374 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 Research and development (R&D) expenses consist mainly of salaries and
benefits of software and hardware engineering personnel, sub-contractor costs
and related overhead and facilities expenses. The Company continued to invest
in new product development in 2003. The Company believes that in order to
maintain its technological capabilities, it must continue to enhance existing
products and introduce new high quality products that challenge and redefine
the industry standards. As a result, FY2003 spending on R&D increased $31,995
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 recently released COP-IDS® product and the continuing
development of the ECPINS® product. Until March 31, 2003, the Company had the ability to claim up to
$4,000,177 of TPCs repayable contribution to help pay for its R&D expenses.
During FY2003, the Company incurred costs of $376,880 and claimed the full
$376,880. 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. During
FY2003, the Company also paid or accrued royalties to TPC. 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 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. S&M expenses increased $238,569, or
14%, in FY2003 to $2,000,238 (17.4% of revenue) from $1,761,669 (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 23




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Depreciation Total depreciation increased slightly to $241,295 from $171,424 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. 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. Because
this claim was settled prior to FY2003, and no other lawsuits were settled in
FY2003, there were no such proceeds in FY2003. Income Taxes Based on the information available at the time of the issue of the annual
audited financial statements, 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 future tax
asset of $168,807 for the year ended November 30, 2003. In accordance with U.S.
GAAP, the Company provided a valuation allowance of $3,758,072 against the
total future tax asset as it is not considered more likely than not that the
remaining future 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. Net Earnings Consolidated net earnings for the year were $352,016, or 3.1% of revenue,
compared to $1,694,126 for FY2002, or 12.3% of revenue. 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. Option backlog
as at November 30, 2003 was $2.4 million compared to $2.4 million 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. Page 24




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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. Results of Operations  Years ended November 30, 2002 and 2001 For the fiscal year ended November 30, 2002, the Company had net earnings
of $1,694,126, or $0.06 per share on a fully diluted basis. The table below presents, for the periods indicated, selected financial data of
the Company expressed as a percentage of total revenues: Year ended November 302002
    
    2001Revenues:Systems and system components
    
    
    70.3
    %
    
    
    74.3
    %Geomatics
    
    
    17.0
    %
    
    
    13.5
    %Software
    
    
    7.0
    %
    
    
    7.8
    %Other
    
    
    5.7
    %
    
    
    4.4
    %100.0
    %
    
    
    100.0
    %Direct Costs
    
    
    51.4
    %
    
    
    42.7
    %Gross Profit
    
    
    48.6
    %
    
    
    57.3
    %ExpensesGeneral and administrative
    
    
    19.0
    %
    
    
    25.6
    %Research and development
    
    
    11.0
    %
    
    
    15.2
    %Sales and marketing
    
    
    12.8
    %
    
    
    14.4
    %Depreciation
    
    
    1.2
    %
    
    
    2.5
    %Interest
    
    
    0.0
    %
    
    
    0.7
    %Foreign exchange gain
    
    
    (0.2
    %)
    
    
    (1.1
    %)Technology Partnerships Canada royalty
    
    
    3.4
    %
    
    
    5.0
    %Technology Partnerships Canada contribution
    
    
    (6.2
    %)
    
    
    (9.7
    %)41.0
    %
    
    
    52.6
    %Earnings from operations
    
    
    7.6
    %
    
    
    4.7
    %Proceeds on settlement of claim
    
    
    1.6
    %
    
    
    0.0
    %Earnings before tax recovery
    
    
    9.2
    %
    
    
    4.7
    %Income tax recovery
    
    
    3.1
    %
    
    
    2.9
    %Earnings for the year
    
    
    12.3
    %
    
    
    7.6
    %
 Page 25




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Revenues Consolidated revenue for the year was $13,814,133, compared with
$7,909,713 for FY2001, an increase of 75%. In FY2002, the Company increased
revenue levels from its FY2001 customer base. The main customers for the
Companys products and services were the US Coast Guard (USCG), Canadian
Coast Guard (CCG), Canadian Department of National Defense (DND), Royal
Danish Navy (RDN) and the US Navy (USN). Sales from these markets accounted
for 91% of the 2002 consolidated revenue and 90% of the 2001 consolidated
revenue. Segment Results Systems- Revenue from the Systems segment for FY2002 was $11,466,668,
compared to $6,836,556 for FY2001, an increase of 68%. In FY2002, the existing
customer base generated the additional revenues. Revenue from the USCG, the
Canadian Coast Guard, the Canadian Department of National Defense, the Royal
Danish Navy and the U.S. Navy provided 94% of the segments FY2002 revenues. Geomatics Revenue from the Geomatics segment for FY2002 was $2,347,465
compared to $1,073,157 for FY2001, an increase of 119%. In FY2002, most of the
increased revenue resulted from the Companys expansion into the land mapping
market, although some increases in revenues stemmed from the existing customer
base. Gross Profit The Companys gross profit increased $2,180,718 to $6,713,382 in FY2002
from $4,532,664 in FY2001. Gross profit percentage decreased to 48.6% in
FY2002 from 57.3% in FY2001. This decrease was attributable to a major project
that included a large proportion of third-party systems. If the effect of this
project were eliminated, the gross profit percentage for FY2002 would have been
55.0%. The FY2002 and FY2001 numbers are different than those provided in the
Form 20-F for FY2002 because of a reclassification to conform to the
presentation adopted for FY2003. 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 general administrative expenses.
G&A increased by $602,090 in FY2002 to $2,628,395 from $2,026,305 in FY2001.
The increase is the result of additions to the Companys management team, the
addition of US-based investor relations support and one-time professional fees
relating to the Companys initial SEC registration and legal matters relating
to the settlement of lawsuits as disclosed in the annual financial statements.
As a percentage of revenue, G&A decreased to 19.0% in FY2002 from 25.6% in
FY2001. 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
and related overhead and facilities expenses. The Company continued to invest
in new product development in 2002. The Company believes that in order to
maintain its technological advantage, it must continue to fine-tune existing
products and introduce new high quality products that challenge and redefine
the industry standards. As a result, FY2002 spending on R&D increased to
$1,516,528 or 11.0% of revenue, compared to $1,206,974 or 15.2% of revenue in
FY2001. Page 26




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Until March 31, 2003, the Company had the ability to claim up to
$4,000,177 of TPCs repayable contribution to help pay for its R&D expenses.
During FY2002, the Company incurred costs of $863,851 and claimed the full
$863,851. The Company recorded this contribution as a reduction of expenses on
its statement of earnings. As of November 30, 2002, the Company had claimed a
total of $3,623,295 of TPCs repayable contribution. During FY2002, the
Company also paid or accrued royalties to TPC. As of November 30, 2002, the
Company had paid $354,159 in royalties and had accrued $712,097 in royalties
for payment after November 30, 2002. 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. S&M expenses increased $620,010, or
54.3%, in FY2002 to $1,761,669 (12.8% of revenue) from $1,141,659 (14.4% of
revenue) in FY2001. The increase in expenses was the result of the Companys
increased level of business development activity relating to its expansion
efforts in the United States and into European and Asia-Pacific markets. These
expansion efforts required the Company to hire five additional S&M staff. The
expansion effort targets the military agencies of Canadas NATO and other
allies to increase the profile of the Company and its products. Depreciation Depreciation decreased slightly to $171,424 from $195,267 in FY2001. The
decrease reflects the effect of plant and equipment, and intangible asset
additions during FY2002. The FY2002 and FY2001 numbers are different than those
provided in the Form 20-F for FY2002 because of a reclassification to conform
to the presentation adopted for FY2003. Interest Interest expenses decreased to $3,582 from $55,380 in FY2001 because the
Company did not utilize its credit facility during FY2002. Earnings from Operations Earnings from operations for FY2002 were $1,045,732, or 7.6% of revenue,
compared to $370,439 for FY2001, or 4.7% of revenue. Earnings from operations
increased as the result of the general increase 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. Because
this claim was still pending in FY2001, and no other lawsuits had been settled
in FY2001, there were no such proceeds in FY2001. Income Taxes Based on the information available at the time of the issue of the annual
audited financial statements, the Company estimated that it will have
sufficient taxable earnings in future years to utilize a portion of the
Companys $4,855,787 Canadian non-capital losses carried forward. As a result
of this assessment, the Company recognized a future tax asset of $426,416 for
the year ended November 30, 2002. In accordance with US GAAP, the Company
provided a valuation allowance of $2,985,840 against the total future tax asset
as it is not considered more likely than not that the remaining future tax
asset will be Page 27




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##### Table of Contents



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. Net Earnings Consolidated net earnings for the year were $1,694,126, or 12.3% of
revenue, compared to $597,739 for FY2001, or 7.6% of revenue. Backlog Order backlog as at November 30, 2002, was $3.7 million compared to $8.4
million one year earlier. The high backlog balance as at November 30, 2001 was
the result of two substantially incomplete major contracts, one with the Royal
Danish Navy and the other with the Canadian Department of National Defense
awarded to the Company in the last half of FY2001. As described with respect to
the November 30, 2003 financial statements, the Company included the full value
of these contracts in backlog as no evidence exists that the contracts would be
terminated. B. Liquidity and capital resources Years ended November 30, 2003 and 2002 The Company concluded the 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
billings in excess of revenues. The Company has credit facilities 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. No borrowings against the
operating line were outstanding as at November 30, 2003. The Company has issued
standby letters of credit totaling US$127,000. The Company has 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 totaling US$3,298,705. Forward exchange
contracts totaling US$2,305,000 matured during the fiscal year 2003. The
Company utilizes 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 $553,528, compared with $1,587,170 in the
fiscal year ended November 30, 2002, a decrease of $1,033,642. The reduction
reflected the decreased profitability of the Company for the fiscal year 2003.
Changes in non-cash working capital items were a usage of cash of $2,442,756
for FY2003 compared to $357,400 for the previous year. Changes occurred in most
non-cash working capital items between the two fiscal years  all within the
normal business activities of the Company. The two largest changes in non-cash
working capital were to Accounts payable and accrued liabilities and Billing in
excess of revenues. Both of these decreases reflect the regular 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. Page 28




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Cash used in investing activities in FY2003 totaled $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 and cash equivalents amounted to $593,507 in FY2003,
compared with a net cash position increase of $1,206,423 in FY2002. The net increase in cash and cash equivalents amounted to $1,206,423 in
FY2002, compared with a net cash position increase of $1,275,302 in FY2001. 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
February 2003 (see Item 8.B of this document) will be sufficient to fund
currently anticipated working capital, planned capital spending and debt
service requirements for the next twelve months. 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, 2002 and 2001 The Company concluded fiscal year 2002 with a strong balance sheet and
cash position. At November 30, 2002, the Company had current assets of
$8,821,485, current liabilities of $4,356,862 and a cash position of
$3,244,048. Working capital increased $1,652,216 to $4,464,623 at November 30,
2002 from $2,813,407 a year earlier. The Company had credit facilities
consisting of an operating line, standby letters of credit, and forward
exchange contract facilities. No borrowings against the operating line were
outstanding as at November 30, 2002. The Company issued standby letters of
credit totaling US$859,900. The Company utilized the standby letters of credit
to back certain performance obligations with its customers. The Company entered
into forward exchange contracts in the amount of US$350,000. The Company
utilized its forward exchange contract facility to reduce the level of exposure
to exchange rate movements between the U.S. dollar and Canadian dollar. Fiscal year ended November 30, 2002 operating cash flow, before changes in
non-cash working capital items, was $1,587,170, compared with $705,647 in the
fiscal year ended November 30, 2001, an increase of $881,523. The improvement
reflected the increased profitability of the Company for the fiscal year 2002.
Changes in non-cash working capital items were a usage of cash of $357,400 for
FY2002 compared to providing cash of $484,172 for the previous year. As
described with respect to the November 30, 2003 financial statements, changes
occurred in most non-cash working capital items between the two fiscal years -
all within the normal business activities of the Company. The two largest
changes in non-cash working capital were to Accounts receivable, and Accounts
payable and accrued liabilities. Both of these increases reflect the increased
business activities of the Company. Net cash provided by financing activities amounted to $568,252 in FY2002,
compared to $291,120 in FY2001. The improvement of $277,132 was largely the
result of the issue of Common Shares through the employee stock option plans. Cash used in investing activities totaled $591,599, compared with $205,637 in
FY2001. The increase reflects the equipment and software upgrades purchased in
the systems line of business and additional equipment and software to support
the new initiatives in the geomatics line of business. C. Research and development, patents and licenses, etc. See Item 5. Operating results  Research and Development Expenses. Page 29




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##### Table of Contents



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 the fiscal years 2002 and 2003: Fiscal Year 2002 (unaudited)Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    
    3,278,877
   
    
    3,833,229
    
    
    2,671,754
    
    
    4,030,273Gross profit
    
    
    1,634,275
   
    
    1,669,263
   
    
    1,543,950
    
    
    1,865,894Above as a percentage of revenue
    
    
    49.8%
    
    
    43.5%
    
    
    57.8%
    
    
    46.3%Net income before proceeds on
settlement of claim and income tax recovery
    
    
    203,928
   
    
    239,053
   
    
    253,906
   
    
    348,845Above as a percentage of revenue
    
    
    6.2%
    
    
    6.2%
    
    
    9.5%
    
    
    8.7%Net income
    
    
    301,918
   
    
    296,053
    
    
    566,618
    
    
    529,537Above as a percentage of revenue
    
    
    9.2%
    
    
    7.7%
    
    
    21.2%
    
    
    13.1%Earnings per share  diluted
    
    
    0.01
   
    
    0.01
    
    
    0.02
    
    
    0.02
 Fiscal Year 2002 (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 income before proceeds on settlement
of claim and income tax recovery
    
    
    239,910
    
    
    143,824
    
    
    (347,135)
    
    
    175,318Above as a percentage of revenue
    
    
    6.7%
    
    
    4.9%
    
    
    (15.3)
    
    
    6.4%Net income
    
    
    239,910
    
    
    143,824
    
    
    (347,135)
    
    
    315,417Above as a percentage of revenue
    
    
    6.7%
    
    
    4.9%
    
    
    (15.3%)
    
    
    11.6%Earnings per share  diluted
    
    
    0.01
    
    
    0.01
    
    
    (0.01)
    
    
    0.01
 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.
Major contracts that were awarded to the Company during and prior to this two
year period were with the Danish Navy in the third quarter of FY2001, the
Canadian Navy at the end of the fourth quarter of 2001 and the U.S. Coast Guard
during the third quarter of FY2002. The duration of the Danish Navy contract Page 30




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##### Table of Contents



extends into FY2003 and impacted the Companys revenues until then. The
terms of the Canadian Navy contract required that delivery of the ECPINS®
systems be substantially complete by the second quarter of FY2002 and final
completion by the second quarter of FY2003. The U.S. Coast Guard contract
required completion during the second quarter of FY2003. These contracts were
appended to the Companys Form 20-F Initial Registration and Form 20-F Initial
Registration  Amendment No. 1. Subsequent to FY2003, two additional major
contracts were awarded to the Company. In the first quarter of fiscal 2004, the
Company signed a contract with Lockheed Martin UK Limited  Integrated Systems
for the supply and delivery of vessel licenses, support and maintenance to the
Royal Navy of the United Kingdom for ECPINS® software. In the second quarter of
fiscal 2004, the Company signed a contract with Nautronix Ltd. for the supply
and delivery of vessel licenses, systems hardware, and warranty services to the
Royal Australian Navy for ECPINS® systems. The relative mix of value added products and services, and fluctuations in
materials costs in the contracts that have been awarded to the Company during
the fiscal years 2002 and 2003 affect the net income before proceeds on
settlement of claim and income tax recovery, 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 markup 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. Another trend that affects the profitability of the Company is the lengthy
sales cycle required to establish new customers in the Systems line of
business. In some cases, the sales effort to win a contract with a new 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. Starting in FY2001 and continuing in FY2002 and
FY2003, the Company has increased its sales and marketing spending to expand
its market in Asia-Pacific and Europe. Two results from this increased spending
were contracts awarded to the Company in the early part of the fiscal year
2004, contracts for the delivery of ECPINS® software to the Royal Australian
Navy and the Royal Navy of the United Kingdom. Further results from this
increased spending will likely be additional contracts from new customers
obtained during FY2004 and in future fiscal years. 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 in the current year to stabilize anticipated future net cash inflows
denominated in U.S. dollars. During FY2003, the Company entered into forward
exchange contracts totaling US$3,298,705. Forward exchange contracts totaling
US$2,305,000 matured during the fiscal year 2003. At November 30, 2003, the Company had outstanding forward exchange
contracts in the amount of US$1,343,705. These forward foreign exchange
contracts mature between March and May 2004 with an exchange rate ranging
between $1.3047 to $1.4029 for US$1. The fair value of these derivative
instruments at November 30, 2003 is a liability of $82,097. The Company plans
to continue to utilizes forward exchange contracts to reduce the level of
exposure to currency exchange rate movements. F. Tabular disclosure of contractual obligations. The table below presents, for the periods indicated, the Companys
contractual obligations at November 30, 2003: Page 31




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##### Table of Contents



Payments due by periodTotal
    
    
    Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More than1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term Debt Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    $
    997,312
    
    
    $
    274,828
    
    
    $
    538,886
    
    
    $
    183,598
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-term Liabilities
    
    $
    187,384
    
    
    $
    187,384
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,184,696
    
    
    $
    462,212
    
    
    $
    538,886
    
    
    $
    183,598
    
    
    
    
 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. 
 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.  Name and
    
    Principal Occupation
    
    Director
    
    Number and PercentageOffice Held
    
    For Past Five Years
    
    Since
    
    of Securities Owned orControlled by Directorsand Officers at February28/04RAYMOND JOHNSTON
    
    12/99 to present: President, of
    
    11/14/00
    
    34,000 common sharesDirector,
    
    Chamber of Maritime Commerce
    
    (and from
    
    0.13% of common sharesChairman,
    
    
    
    12/94 toMontréal, Québec, Canada
    
    5/92 to 6/99: CEO, Canada
    
    9/98)Steamship LinesJOHN A. JACOBSON
    
    3/98 to present:  President & Chief
    
    3/19/98
    
    415,000 common sharesDirector
    
    Executive Officer of the Company
    
    
    
    1.55% of common sharesPresident &
Chief Executive Officer,
Vancouver, British Columbia,
CanadaTONY PEZZOTTI
    
    Previous Co-owner of PSL Steel Ltd.,
    
    4/26/90
    
    553,733 common sharesDirector
    
    Independent Businessman
    
    
    
    2.06% of common sharesBurnaby, British Columbia, CanadaHELMUT F. LOBMEIER
    
    Previous Co-owner PSL Steel Ltd.,
    
    4/26/90
    
    731,951 common sharesDirector
    
    Independent Businessman
    
    
    
    2.73% of common sharesMaple Ridge, British Columbia,
Canada
 Page 32




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##### Table of Contents



Name and
    
    Principal Occupation
    
    Director
    
    Number and PercentageOffice Held
    
    For Past Five Years
    
    Since
    
    of Securities Owned orControlled by Directorsand Officers at February28/04CAPT. WALTER P. PURIO
    
    2000 to present: Independent Marine
    
    1/4/99
    
    155,000 common sharesDirector
    
    Consultant
    
    
    
    0.58% of common sharesHouston, Texas, United States1993 to 2000: President P and HMarine Associates, Inc.1985 to present: Shipmaster-Oceans, General Dynamics,American Overseas MarineCorporationBRIAN E. WALSH(*)
    
    1997 to present: Co-Founder of and
    
    12/18/01
    
    332,500 common sharesDirector
    
    Fund Manager with Qvan Capital
    
    
    
    1.24% of common sharesRye, New York, United States
    
    (formerly Veritas CapitalManagement)PETER W. ROBERTS
    
    02/99 to 03/04: Chief Financial Officer
    
    9/16/03
    
    0 common sharesDirector
    
    and Secretary of Sierra Wireless, Inc.
    
    
    
    0.00% of common sharesWest Vancouver, British Columbia,
CanadaANDREW A. CARNIEL
    
    7/99 to present: Vice President,
    
    N/A
    
    176,500 common sharesCorporate Secretary/
    
    Business Development, OSL, and
    
    
    
    0.66% of common sharesVice President Business Development
    
    Corporate Secretary OSILCoquitlam, British Columbia, Canada
    
    5/98 to 5/01: Director of Operations,OSLKENNETH KIRKPATRICK
    
    5/01 to present: Vice President,
    
    N/A
    
    67,500 common sharesVice President Operations
    
    Operations
    
    
    
    0.25% of common sharesRichmond, British Columbia,Canada
    
    12/97 to 5/01: Vice President & ChiefOperating Officer, Triathlon Ltd.subsidiary of MacDonald Dettwiler &AssociatesJOHN T. SENTJENS
    
    8/01 to present:  Corporate Controller
    
    N/A
    
    14,000 common sharesCorporate Controller
    
    
    
    
    
    0.05% of common sharesVancouver, British Columbia,
    
    11/99 to 8/01: Controller, TriathlonCanada
    
    Ltd.  subsidiary of MacDonaldDettwiler & Associates Ltd.4/98 to 11/99: Controller, FulcrumTechnologies, a subsidiary of PC-Docs Group (*) Brian E. Walsh did not to stand for re-election to the Companys Board
of Directors at the Annual General Meeting of the Shareholders held April 22,
2004 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. Page 33




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##### Table of Contents



B.Compensation. Pursuant to the 1994, 1996, and 1998 Option Plan, the Directors receive an
annual entitlement for FY2003 of 90,000 Common Share options for each Director
and 112,500 Common Shares options for the Chairman of the Board. For FY2003,
each Canadian Director is entitled to $1,500 and each U.S. Director is entitled
to US$1,500 for each Board meeting attended in person. Also, each Canadian
Director is entitled to $1,000 and each U.S. Director is entitled to US$1,000
for each Board meeting attended by means of telephone conference. In addition,
the Chairman of the Board was paid an annual retainer of $12,000 for FY2003.  Listing of Directors GeographicallyCanadian Directors
    
    
    
    Raymond W. Johnston (Chairman)John A. JacobsonTony PezzottiHelmut F. LobmeierPeter W. RobertsU.S. Directors
    
    
    
    Capt. Walter P. PurioBrian E. Walsh The table below presents, for the years indicated, the total compensation
accrued or paid to senior management:  Annual CompensationName
    
    Year
    
    Salary
    
    Bonus
    
    Other Annual($)
    
    ($)
    
    Compensation($)John A. Jacobson
    
    
    2003
    
    
    179,135
    
    0
    
    
    15,231President & C.E.O.
    
    
    2002
    
    
    172,115
    
    70,000
    
    
    02001
    
    
    160,000
    
    40,000
    
    
    0Andrew Carniel
    
    
    2003
    
    
    129,135
    
    0
    
    
    0V.P. Business
    
    
    2002
    
    
    122,115
    
    35,000
    
    
    0Development
    
    
    2001
    
    
    120,000
    
    25,000
    
    
    0Kenneth Kirkpatrick
    
    
    2003
    
    
    129,135
    
    0
    
    
    15,000V.P. Operations
    
    
    2002
    
    
    124,038
    
    35,000
    
    
    02001
    
    
    *70,000
    
    15,000
    
    
    0
 The amount and timing of management bonuses are at the discretion of the
Board of Directors. No pension, retirement or similar benefits are given to
senior management, or officers of the Company. John Jacobson, however, has an
employment contract with the Company regarding his employment as President and
Chief Executive Officer. The following tables present the Common Share options granted to Directors
and Officers for the fiscal year December 1, 2002 to November 30, 2003 Page 34




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##### Table of Contents



DIRECTORS NAME
    
    Common Share
    
    Exercise
    
    Vesting
    
    ExpiryOptions
    
    Price
    
    Date
    
    DateGranted2003Raymond W. Johnston  Chairman and Director
    
    
    112,500
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 2005John A. Jacobson  President & CEO, and Director
    
    
    30,000
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 200530,000
    
    
    $
    1.01
    
    
    Dec 13, 2003
    
    Nov 30, 200530,000
    
    
    $
    1.01
    
    
    Nov 30, 2004
    
    Nov 30, 2005Tony Pezzotti  Director
    
    
    90,000
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 2005Helmut F. Lobmeier  Director
    
    
    90,000
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 2005Peter W. Roberts  Director
    
    
    35,000
    
    
    $
    1.03
    
    
    Sept 11, 2003
    
    Sept 11, 2006Capt. Walter P. Purio  Director
    
    
    90,000
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 2005Brian E. Walsh  Director (*)
    
    
    90,000
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 2005  (*) Brian E. Walsh did not to stand for re-election to the Companys Board
of Directors at the Annual General Meeting of the Shareholders held April 22,
2004 and is no longer a member of the Board of Directors. OFFICERS NAME
    
    Common Share
    
    Exercise
    
    Vesting
    
    ExpiryOptions
    
    Price
    
    Date
    
    DateGranted2003Andrew Carniel, Vice President Business
    
    
    22,500
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 2005Development and Corporate Secretary
    
    
    22,500
    
    
    $
    1.01
    
    
    Dec 13, 2003
    
    Nov 30, 200522,500
    
    
    $
    1.01
    
    
    Nov 30, 2004
    
    Nov 30, 2005Kenneth Kirkpatrick, Vice President Operations
    
    
    22,500
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 200522,500
    
    
    $
    1.01
    
    
    Dec 13, 2003
    
    Nov 30, 200522,500
    
    
    $
    1.01
    
    
    Nov 30, 2004
    
    Nov 30, 2005John Sentjens, Controller
    
    
    9,000
    
    
    $
    1.01
    
    
    Dec 13, 2002
    
    Nov 30, 20059,000
    
    
    $
    1.01
    
    
    Dec 13, 2003
    
    Nov 30, 20059,000
    
    
    $
    1.01
    
    
    Nov 30, 2004
    
    Nov 30, 2005 C. Board practices Directors are elected annually to the Board at the Annual General Meeting
of the Company. No Director has a service contract with the Company or its
subsidiaries. As of April 30, 2004, 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 1998Tony Pezzotti
    
    since April 1990Helmut F. Lobmeier
    
    since April 1990Walter P. Purio
    
    since January 1999Peter W. Roberts
    
    since September 2003 All Directors will hold office until the next Annual General Meeting of
the Shareholders of the Company. Page 35




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##### Table of Contents



No director has a service contract with the Company or its subsidiaries.
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, 2003, six of the Companys seven directors are outside
directors, while only one member of management (being John Jacobson, the
President and CEO), serves on the Board. After the Annual General Meeting held
April 22, 2004, the Board of Directors was composed of six directors, five of
the Companys six directors are outside 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;(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. Page 36




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##### Table of Contents



Committees of the Board of Directors The Board has established three standing committees: the Audit Committee, the
Compensation Committee and the Executive 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, 2003 were
Helmut Lobmeier (Chairman), Tony Pezzotti, Walter Purio, and Peter Roberts, all
of whom are unrelated directors. Subsequent to the Annual General Meeting of
April 22, 2004, the members of the Companys Audit Committee are Peter Roberts
(Chairman), Helmut Lobmeier and Walter Purio. 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; and(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. Compensation Committee The members of the Companys Compensation Committee as at November 30, 2003
were Tony Pezzotti (Chairman), Walter P. Purio and Brian E. Walsh, all of whom
are unrelated directors. Subsequent to the Annual General Meeting of April 22,
2004, the members of the Companys Compensation Committee are Helmut Lobmeier
(Chairman), Walter Purio and Raymond Johnston. The Compensation Committee reviews and recommends to the Board for approval the
remuneration of senior management and directors. To fulfill 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) and Helmut F. Lobmeier, who are unrelated directors, and John A.
Jacobson, who is President and CEO. 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. Page 37




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##### Table of Contents



D. Employees At March 31, 2004, there were a total of 15 employees working for OSI Geomatics
Ltd. and 50 working for Offshore Systems Ltd. The Company has no labor unions
and no temporary staff. The following table presents the geographic distribution of the Companys
employees for the past three years:  Canada
    
    U.S.
    
    Denmark
    
    TotalNovember 30, 2003
    
    
    56
    
    
    
    
    
    
    
    1
    
    
    
    57November 30, 2002
    
    
    62
    
    
    
    1
    
    
    
    1
    
    
    
    64November 30, 2001
    
    
    51
    
    
    
    1
    
    
    
    
    
    
    
    50
 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 6. B. Compensation. Stock options are granted to the
Companys key employees at the discretion of the Board of
Directors. 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. 
 Item 7. Major Shareholders and Related Party Transactions A. Major shareholders. The following table sets forth, as of April 30, 2004, 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 1
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, 2004 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 27,071,679 Common Shares, 30,262 Class A
Preference Shares Series A Convertible and 57,711 Class B Preference Shares
Series 1 Convertible outstanding as of April 30,2004. Page 38




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Title of Class of Securities
    
    Name of Shareholders
    
    Number of
    
    Percentage ofShares
    
    ClassBeneficially
    
    BeneficiallyOwned
    
    OwnedCommon
    
    None
    
    None
    
    NoneClass A Preference Series AConvertible
    
    John Visnapu
    
    
    16,376
    
    
    
    54.1
    %Class A Preference Series AConvertible
    
    G.A. Lachapelle
    
    
    3,275
    
    
    
    10.8
    %Class A Preference Series AConvertible
    
    Dennis Kong
    
    
    3,275
    
    
    
    10.8
    %Class A Preference Series AConvertible
    
    Daniel Jacobson*
    
    
    3,275
    
    
    
    10.8
    %Class B Preference Series 1Convertible
    
    SDS Merchant Fund, LP
    
    
    14,840
    
    
    
    25.7
    %Class B Preference Series 1Convertible
    
    DMG Legacy InstitutionalFund LLC
    
    
    19,935
    
    
    
    34.5
    %Class B Preference Series 1Convertible
    
    DMG LegacyInternational Ltd.

    
    
    20,792
    
    
    
    36.0
    %
 *
    
    - unrelated to John Jacobson, President and CEO of the Company.
 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 1 became
the beneficial owners of those shares during FY2003. The Companys major
shareholders do not have different voting rights than any other shareholder. As
of April 30, 2004, 1,383,512 Common Shares, or 5.1% of the outstanding Common
Shares, and 57,711 Class B Preference Shares Series 1, or 100% of the
outstanding Class B Preference Shares Series 1, are held by 22 U.S.
shareholders. No Class A Preference Shares Series A Convertible are held by
U.S. shareholders. B. Related party transactions. There have been no related party transactions since the beginning of
FY2003. 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 Page 39




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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. 
 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 the fiscal year 2003, the Companys export revenues totaled
$11,487,618,  98% of the total revenue of $11,520,793. In the fiscal year
2002, the Companys export revenues totaled $10,553,270,  76% of the total
revenue of $13,814,133. In the fiscal year 2001, the Companys export revenues
totaled $5,154,560,  65% of the total revenue of $7,909,713. 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 outstanding Class B Preference Shares
Series 1 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 1 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 the fiscal year 2002, 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 three 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. Page 40




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##### Table of Contents




    
    During FY2003, the Company withdrew its claim against IIC
Technologies Inc. (IIC), a U.S. subsidiary of the Indian company, IIC
Technologies Private Limited and two former employees of the Company.
The suit had claimed that IIC and the two former employees engaged
in intentional interference with contractual relations with a venture
partner. IIC did not file any counter claims. The Company believes
this suit does not pose financial risk to the Company. B. Significant changes. In January 2004, the Company announced that its Navigation Systems unit
has been selected for a major fleet-wide contract with the Royal Navy. The
Company, as part of a successful teaming arrangement with Lockheed Martin UK
and Kelvin Hughes Ltd., will begin to deliver ECPINS® software to the Royal
Navy fleet in mid-2004. The initial purchases total approximately $3 million.
The total contract value to the Company, including long-term support, options
for auxiliary licenses and software development is approximately $17.5 million. In March 2004, the Company announced that its teaming partner, Nautronix
Ltd., has signed the final prime contract to supply the Royal Australian Navy
with a fleet installation of the Companys ECPINS® electronic chart navigation
systems. The total contract value to the Company, including options for
additional systems, is approximately $8 million. In April 2004, Technology Partnerships Canada (TPC), an agency of Industry
Canada, announced that it will be making a strategic investment in the Company
of $3.76 million as part of a research and development initiative dedicated to
improving geographical display capabilities in defense and navigation systems. 
 Item 9. The Offer and Listing A. Offer and listing details. The issued and outstanding Common Shares of the Company (26,807,475 shares
as of November 30, 2003) 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, 1999(*)
    
    $
    0.65
    
    
    $
    0.25
    
    
    
    
    
    
    
    Fiscal 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
    
    
    $
    0.60
 Page 41




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Price per shareTSX (in CAN$)
    
    
    
    OTCBB (in US$)High
    
    
    Low
    
    
    High
    
    
    LowQuarterYear Ending November 30, 2002First Quarter(*)
    
    $
    1.65
    
    
    $
    1.10
    
    
    
    
    
    
    
    Second Quarter(*)
    
    $
    1.53
    
    
    $
    1.14
    
    
    
    
    
    
    
    Third Quarter(*)
    
    $
    1.95
    
    
    $
    0.99
    
    
    
    
    
    
    
    Fourth Quarter(**)
    
    $
    1.45
    
    
    $
    0.90
    
    
    $
    0.80
    
    
    $
    0.60Year 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
    
    
    $
    0.74Most Recent Six MonthsNovember 2003
    
    $
    1.09
    
    
    $
    0.83
    
    
    $
    0.77
    
    
    $
    0.67December 2003
    
    $
    1.05
    
    
    $
    0.91
    
    
    $
    0.80
    
    
    $
    0.74January 2004
    
    $
    1.50
    
    
    $
    1.03
    
    
    $
    1.30
    
    
    $
    0.80February 2004
    
    $
    1.42
    
    
    $
    1.09
    
    
    $
    1.12
    
    
    $
    0.86March 2004
    
    $
    1.42
    
    
    $
    1.15
    
    
    $
    1.09
    
    
    $
    0.93April 2004
    
    $
    1.34
    
    
    $
    1.02
    
    
    $
    1.07
    
    
    $
    0.81
 *
    
    - information not available**
    
    - information available for October and November 2002 only
 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. Page 42




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Item 10. Additional Information A. Share capital. Not applicable. B. Memorandum and articles of association. The information called for under this item has not changed in the past
year and has been previously reported. This information is incorporated by
reference to the Companys Form 20-F  Annual Report for the fiscal year ended
November 30, 2002. 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 August 20, 2001, the Company, through its subsidiary OSL, entered into
a contract with Naval Materiel Command (NMC), Denmark for the supply,
installation and testing of Electronic Chart Display and Information Systems
(ECDIS), Automatic Radar Plotting Aids (ARPA), Navigation Computers (NC) and
Voyage Data Recorders (VDR) to the Royal Danish Navy. The total contract price
is US$2,975,681. The contract contains a termination for convenience clause
(Clause 16.1), that allows NMC to terminate the contract, in whole or in part,
at any time by giving the Company 30 days written notice. As of February 28,
2004, the Company had completed 100% of the contract and final payments to the
Company will be made in FY2004 . As of May 14, 2004, no evidence exists that
NMC has any intentions of terminating this contract. 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 February 28, 2004, the Company had completed 99% of the
contract. The remainder of the contract will be completed in FY2004. As of May
14, 2004, 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. Copies of these contracts are included in Item 19  Exhibits of the
Companys Form 20-F  Initial Registration and Form 20-F/A  Initial
Registration  Amendment No. 1. 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 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 Page 43




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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 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. A copy of this contract is included in Item 19  Exhibits of this Form
20-F  Annual Report. The Company has entered into one material contract other than in the
ordinary course of business immediately prior to the two years preceding this
annual report. The Shareholder Rights Plan Agreement, dated April 19, 2001,
between the Company and Computershare Trust Company of Canada established the
Companys Rights Plan. 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. 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 Taxation below. E. 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 tax consequences relating to an investment in the Common
Shares of the Company. There may be provincial, territorial, state and local
taxes applicable to a potential shareholder, depending on the shareholders
particular circumstances, which are not addressed in this summary. 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 include
individuals, corporations, trusts or estates who are holders of Common Shares
and who:  
    
    for purposes of the Income Tax Act (Canada) (the ITA) and the
Canada-United States Income Tax Convention (1980), as amended by the
protocol signed on July 29, 1997, (the 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 (the 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; Page 44




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##### Table of Contents




    
    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:  
    
    the ITA and the Income Tax Regulations (Canada) (the Regulations);
    
    published proposals to amend the ITA and the Regulations;
    
    published administrative positions and practices of the Canada Revenue Agency (the 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. 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 not 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 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 Page 45




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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. Under the Treaty, a withholding
rate of 15% is applicable in all other cases. 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 Foreign Personal Holding Company
Rules, 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. However, a gain realized on the disposition of Common Shares may
be treated as ordinary income if the Company was a collapsible corporation
within the meaning of the Code. 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. Even if such
payment is in fact not converted to U.S. dollars the amount of any cash
distribution paid in Canadian dollars 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. 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. These dividends generally
may be subject to backup withholding tax, unless a U.S. Holder of Common Shares
furnishes the Company with a duly completed and signed Form W-9. 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 of Common Shares U.S. federal income tax liability, provided the
shareholder 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 Page 46




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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. Foreign Personal Holding Company Rules Special U.S. tax rules apply to a shareholder of a foreign personal
holding company (FPHC). The Company would be classified as a FPHC in any
taxable year if both of the following tests are satisfied:  
    
    at least 60% of the Companys gross income consists of foreign
personal holding company income, which generally includes passive
income such as dividends, interest, royalties, gains from shares and
commodity transactions and rents; and
    
    more than 50% of the total voting power of all classes of
voting shares or the total value of outstanding shares is owned
directly or indirectly by five or fewer individuals who are U.S.
citizens or residents. 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. 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 Common Shares of a PFIC are subject to the following special
rules:  
    
    the excess distributions (generally any distributions received by a
U.S. Holder of Common Shares on the shares in any taxable year that
are greater than 125% of the average annual distributions received by
such U.S. Holder of Common Shares in the three preceding taxable
years, or the U.S. Holder of Common Share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 of Common Shares 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. Page 47




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##### Table of Contents



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. 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. Page 48




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Item 11. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to cash flow and translation risk due to changes in
the Canadian/United States dollar exchange rate and interest rate fluctuations. The information below about the foreign exchange and interest rate
sensitivity constitutes a forward looking statement. The Companys foreign
exchange rate and interest exposure is due to the changing exchange rate
between the Canadian and United States dollar and fluctuations in interest
rates in Canada. 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
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 therefore results in lower trade
receivable, revenue, trade payable and expense amounts when U.S. dollar
transactions and balances are translated to Canadian dollars. As at November 30, 2003, the Company estimates that a CAN $0.01 decrease
in the value of the Canadian dollar relative to the United States dollar would
have an annualized impact of reducing earnings from operations before taxes
approximately $42,000. 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 exchange rate
fluctuations, the Company has used the forward exchange contract facility
described in B. Liquidity and capital resources. The Company used the
forward exchange contract facility to set the exchange rate between the U.S.
and Canadian dollar for specific transactions at a specific agreed upon rate,
thereby removing 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. dollar transactions. The Company is exposed to interest rate risk relating to any debt pursuant
to a revolving credit facility. 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. The Company does not otherwise believe the disclosure required by Item 11
of this annual report to be material to the Company. 
 Item 12. Description of Securities Other than Equity Securities Not applicable. 
 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 Page 49




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##### Table of Contents



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 All of the members of the Audit Committee are financially literate and the
Companys Board of Directors has determined that Peter W. Roberts, Chairman of
the Audit Committee meets the requirements of an audit committee financial
expert as defined in Item 16A of Form 20-F. 
 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 is attached as Exhibit 11.1 to this annual report.
The Companys Code of Ethics has also been posted on the Companys website:
www.osil.com. 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 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, 2003 by the Audit
Committee and the Board of Directors in February 2003 and appointed the
Companys independent auditor by the shareholders of the Company at the
Companys Annual General Meeting of April 17, 2003. PricewaterhouseCoopers LLP
acted as the Companys independent auditor for the fiscal years ended November
30, 2002 and 2001. Page 50




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The chart below sets forth the total amount billed the Company by the Companys
independent auditors for services performed in the years 2003 and 2002, and
breaks down these amounts by category of service: Years ended November 302003
    
    2002$
    
    $Audit Fees
    
    102,195
    
    198,994Audit-Related Fees
    
    9,822
    
    12,625Tax Fees
    
    30,523
    
    60,214All Other Fees
    
    23,815
    
    56,370Total
    
    166,355
    
    328,203
 Audit Fees are the aggregate fees billed by the Companys independent
auditor for the audit of the Companys consolidated annual financial
statements, reviews of interim 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 2003, 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. 
 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. Page 51




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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, 2003F2
    
    Consolidated Balance Sheets as of November 30, 2003 and 2002F3
    
    Consolidated Statements of Earnings & Deficit for the years ended
November 30, 2003, 2002 and 2001F4
    
    Consolidated Statements of Shareholders Equity for the years ended
November 30, 2003, 2002 and 2001F5
    
    Consolidated Statements of Cash Flow for the years ended
November 30, 2003, 2002 and 2001F6
    
    Notes to the Consolidated Financial Statements  November 30, 2003,
2002 and 2001
 Page 52




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##### Table of Contents



Item 19. Exhibits Exhibit Number
    
    Description1.1*
    
    Memorandum of Association of Offshore Systems International Ltd.1.2*
    
    By-Laws of Offshore Systems International Ltd.4.1*
    
    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.8.1
    
    List of Subsidiaries and Jurisdictions.11.1
    
    Code of Ethics12.1
    
    Certifications required by Rule 13a-14(a) or Rule 15d-14(a)13.1
    
    Section 906 Certifications
  *
    
    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. Page 53




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##### Table of Contents



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 25, 2004
    By:

/s/ John A. JacobsonJohn A. JacobsonPresident & CEO Page 54




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Offshore Systems International Ltd. Consolidated Financial Statements(Prepared in accordance with United StatesGenerally Accepted Accounting Principles)November 30, 2003(expressed in Canadian dollars) Page 55




---



##### Table of Contents



AUDITORS REPORT To the Shareholders ofOffshore Systems International Ltd. We have audited the consolidated balance sheets of Offshore Systems
International Ltd.as at November 30, 2003 and the consolidated statements of
earnings and deficit, shareholders equity and cash flows for the year ended
November 30, 2003. These financial statements are the responsibility of the
companys management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at November 30,
2003 and the results of its operations and its cash flows for year ended
November 30, 2003 in accordance with generally accepted accounting principles
in the United States. On January 16, 2004, we reported separately, in accordance with Canadian
generally accepted auditing standards, to the shareholders of Offshore Systems
International Ltd. on consolidated financial statements for the period ended
November 30, 2003, prepared in accordance with Canadian generally accepted
accounting principles. The consolidated financial statements as at November 30, 2002 and for the years
ended November 30, 2002 and 2001 were audited by other auditors who expressed
an opinion without reservation on those statements in their report dated
January 17, 2003. /s/ Ernst & Young LLPVancouver, Canada,
May 14, 2004.
    
    Chartered Accountants
 Page 56




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##### Table of Contents



Offshore
Systems International Ltd.
Consolidated Balance Sheets
As at November 30, 2003 and 2002
    
    U.S. GAAP(expressed in Canadian dollars)
 2003
    
    
    2002$
    
    
    $AssetsCurrent assetsCash and cash equivalents
    
    
    3,837,555
    
    
    
    3,244,048Accounts receivable (note 3)
    
    
    4,621,836
    
    
    
    3,960,846Inventory (note 4)
    
    
    665,503
    
    
    
    1,284,966Prepaid expenses and deposits
    
    
    430,419
    
    
    
    232,765Deferred income taxes (note 12)
    
    
    822,523
    
    
    
    98,86010,377,836
    
    
    
    8,821,485Deferred income taxes(note 12)
    
    
    
    
    
    
    554,856Plant and equipment(note 5)
    
    
    1,010,846
    
    
    
    1,020,731Intangible and other assets(note 6)
    
    
    339,575
    
    
    
    398,50511,728,257
    
    
    
    10,795,577LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities (note 7)
    
    
    2,126,061
    
    
    
    2,586,766Unearned revenue
    
    
    45,907
    
    
    
    1,636,154Rent payable
    
    
    133,942
    
    
    
    133,9422,305,910
    
    
    
    4,356,862Accrued long-term royalties(note 10)
    
    
    187,384
    
    
    
    372,7172,493,294
    
    
    
    4,729,579Commitments and contingencies(note 11)Shareholders 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, 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 - 41,296, note 9(b))
    
    
    30,262
    
    
    
    41,29661,244 Class B preference shares  Series 1
(2002 - nil, note 9(c))
    
    
    2,169,127
    
    
    
    26,807,475 common shares (2002 - 26,043,243)
    
    
    19,516,304
    
    
    
    19,217,70121,715,693
    
    
    
    19,258,997Warrants(note 9(c))
    
    
    661,575
    
    
    
    Additional paid-in capital
    
    
    903,803
    
    
    
    191,968Deficit
    
    
    (14,046,108
    )
    
    
    (13,384,967
    )9,234,963
    
    
    
    6,065,99811,728,257
    
    
    
    10,795,577Subsequent events(note 17)
 Approved by the Board of Directors  /s/ Helmut Lobmeier
    Director


/s/ Tony Pezzotti
    Director
 F2 The accompanying notes are an integral part of these consolidated financial statements Page 57




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##### Table of Contents



Offshore
Systems International Ltd.
Consolidated Statements of Earnings and
Deficit
For the years ended November 30,
2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
 2003
    
    
    2002
    
    
    2001$
    
    
    $
    
    
    $RevenueSystems and system components
    
    
    6,208,464
    
    
    
    9,707,393
    
    
    
    5,874,568Geomatics
    
    
    3,560,440
    
    
    
    2,347,464
    
    
    
    1,073,157Software
    
    
    1,036,417
    
    
    
    970,323
    
    
    
    617,373Other
    
    
    715,472
    
    
    
    788,953
    
    
    
    344,61511,520,793
    
    
    
    13,814,133
    
    
    
    7,909,713Cost of sales
    
    
    5,159,068
    
    
    
    7,100,751
    
    
    
    3,377,049Gross profit
    
    
    6,361,725
    
    
    
    6,713,382
    
    
    
    4,532,664ExpensesGeneral and administrative
    
    
    2,498,021
    
    
    
    2,628,395
    
    
    
    2,026,305Research and development
    
    
    1,548,523
    
    
    
    1,516,528
    
    
    
    1,206,974Sales and marketing
    
    
    2,000,238
    
    
    
    1,761,669
    
    
    
    1,141,659Depreciation
    
    
    241,295
    
    
    
    171,424
    
    
    
    195,267Interest
    
    
    2,824
    
    
    
    3,582
    
    
    
    55,380Foreign exchange loss (gain)
    
    
    185,314
    
    
    
    (26,286
    )
    
    
    (86,493
    )Technology Partnerships Canada royalty (note 10)
    
    
    50,473
    
    
    
    476,189
    
    
    
    391,951Technology Partnerships Canada contribution (note 10)
    
    
    (376,880
    )
    
    
    (863,851
    )
    
    
    (768,818
    )6,149,808
    
    
    
    5,667,650
    
    
    
    4,162,225Earnings from operations
    
    
    211,917
    
    
    
    1,045,732
    
    
    
    370,439Proceeds on settlement of claim
    
    
    
    
    
    
    221,978
    
    
    
    Earnings before income tax recovery
    
    
    211,917
    
    
    
    1,267,710
    
    
    
    370,439Deferred income tax recovery(note 12)Future income tax recovery
    
    
    363,484
    
    
    
    1,127,421
    
    
    
    437,210Current income tax expense
    
    
    (223,385
    )
    
    
    (701,005
    )
    
    
    (209,910
    )140,099
    
    
    
    426,416
    
    
    
    227,300Net earnings for the year
    
    
    352,016
    
    
    
    1,694,126
    
    
    
    597,739Class B preference share dividend paid
    
    
    (53,484
    )
    
    
    
    
    
    
    Class B preference share dividend accreted
    
    
    (772,492
    )
    
    
    
    
    
    
    Premium on purchase and cancellation of common shares
    
    
    (187,181
    )
    
    
    
    
    
    
    Deficit  Beginning of year
    
    
    (13,384,967
    )
    
    
    (15,079,093
    )
    
    
    (15,676,832
    )Deficit  End of year
    
    
    (14,046,108
    )
    
    
    (13,384,967
    )
    
    
    (15,079,093
    )Earnings per share(note 9(e))Basic net earnings (loss) per share
    
    
    (0.02
    )
    
    
    0.07
    
    
    
    0.03Diluted net earnings (loss) per share
    
    
    (0.02
    )
    
    
    0.06
    
    
    
    0.02Weighted average number of common shares outstandingBasic
    
    
    25,977,123
    
    
    
    25,288,725
    
    
    
    23,842,549Diluted
    
    
    27,142,492
    
    
    
    27,285,617
    
    
    
    25,476,614
 F3 The accompanying notes are an integral part of these consolidated financial statements Page 58




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Offshore Systems International Ltd.
Consolidated Statement of
Shareholders Equity
For the years ended November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
 Class A Preference
    
    Class B PreferenceCommon Shares
    
    Shares
    
    Shares
    
    Warrants
    
    Additionalpaid-inNumber
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    capital
    
    
    Deficit
    
    
    Total$
    
    
    
    
    
    $
    
    
    
    
    
    $
    
    
    
    
    
    $
    
    
    $
    
    
    $
    
    
    $Balance  November 30, 2000
    
    
    23,540,975
    
    
    
    17,768,167
    
    
    
    74,702
    
    
    
    74,702
    
    
    
    
    
    
    
    
    
    
    
    125,000
    
    
    
    27,250
    
    
    
    495,974
    
    
    
    (15,676,832
    )
    
    
    2,689,261Issue of common sharesClass A preference shares converted
    
    
    16,376
    
    
    
    16,376
    
    
    
    (16,376
    )
    
    
    (16,376
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    1,137,198
    
    
    
    711,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (295,074
    )
    
    
    
    
    
    
    416,615Share issue costs
    
    
    
    
    
    
    (495
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (495
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,000
    
    
    
    
    
    
    
    69,00024,694,549
    
    
    
    18,495,737
    
    
    
    58,326
    
    
    
    58,326
    
    
    
    
    
    
    
    
    
    
    
    125,000
    
    
    
    27,250
    
    
    
    269,900
    
    
    
    (15,676,832
    )
    
    
    3,285,181Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    597,739
    
    
    
    597,739Balance  November 30, 2001
    
    
    24,694,549
    
    
    
    18,495,737
    
    
    
    58,326
    
    
    
    58,326
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    31,50026,043,243
    
    
    
    19,217,701
    
    
    
    41,296
    
    
    
    41,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,968
    
    
    
    (15,079,093
    )
    
    
    4,482,672Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,694,126
    
    
    
    1,694,126Balance  November 30, 2002
    
    
    26,043,243
    
    
    
    19,217,701
    
    
    
    41,296
    
    
    
    41,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    1,392,846
    
    
    
    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 A preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,484
    )
    
    
    (53,484
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,050
    
    
    
    
    
    
    
    43,05026,043,243
    
    
    
    19,516,304
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    61,244
    
    
    
    2,169,127
    
    
    
    1,392,846
    
    
    
    661,575
    
    
    
    903,803
    
    
    
    (14,398,124
    )
    
    
    8,882,947Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,016
    
    
    
    352,016Balance  November 30, 2003
    
    
    26,043,243
    
    
    
    19,516,304
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    61,244
    
    
    
    2,169,127
    
    
    
    1,392,846
    
    
    
    661,575
    
    
    
    903,803
    
    
    
    (14,046,108
    )
    
    
    9,234,963
 F4 The accompanying notes are an integral part of these consolidated financial statements Page 59




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##### Table of Contents



Offshore
Systems International Ltd.
Consolidated Statement of Cash Flows
For the years ended November 30,
2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
 2003
    
    
    2002
    
    
    2001$
    
    
    $
    
    
    $Cash flows from operating activitiesNet earnings for the year
    
    
    352,016
    
    
    
    1,694,126
    
    
    
    597,739Items not affecting cashDepreciation
    
    
    359,979
    
    
    
    303,407
    
    
    
    238,958Deferred income taxes
    
    
    (168,807
    )
    
    
    (426,416
    )
    
    
    (227,300
    )Accretion of note payable discount
    
    
    
    
    
    
    
    
    
    
    27,250Stock-based compensation
    
    
    43,050
    
    
    
    31,500
    
    
    
    69,000Gain on disposal of plant and equipment
    
    
    
    
    
    
    (15,447
    )
    
    
    Changes in non-cash working capital itemsAccounts receivable
    
    
    (660,990
    )
    
    
    (1,103,476
    )
    
    
    (1,517,723
    )Inventory
    
    
    619,463
    
    
    
    (414,612
    )
    
    
    533,087Prepaid expenses and deposits
    
    
    (197,654
    )
    
    
    12,498
    
    
    
    (186,296
    )Accounts payable and accrued liabilities
    
    
    (460,705
    )
    
    
    1,167,657
    
    
    
    (170,468
    )Unearned revenue
    
    
    (1,590,247
    )
    
    
    (114,276
    )
    
    
    1,652,887Accrued royalties
    
    
    (185,333
    )
    
    
    132,534
    
    
    
    193,546Rent payable
    
    
    
    
    
    
    (37,725
    )
    
    
    (20,861
    )(1,889,228
    )
    
    
    1,229,770
    
    
    
    1,189,819Cash flows from financing activitiesIssue of common shares
    
    
    606,069
    
    
    
    568,252
    
    
    
    416,120Issue of Class B preference shares  Series 1 and
warrants, net of issue costs
    
    
    2,726,995
    
    
    
    
    
    
    
    Class B preference share dividend paid
    
    
    (53,484
    )
    
    
    
    
    
    
    Common share repurchases
    
    
    (505,681
    )
    
    
    
    
    
    
    Repayment of note payable
    
    
    
    
    
    
    
    
    
    
    (125,000
    )2,773,899
    
    
    
    568,252
    
    
    
    291,120Cash flows from investing activitiesAdditions to plant and equipment
    
    
    (218,172
    )
    
    
    (326,141
    )
    
    
    (128,128
    )Additions to other assets
    
    
    (72,992
    )
    
    
    (345,458
    )
    
    
    (77,509
    )Proceeds from disposal of plant and equipment
    
    
    
    
    
    
    80,000
    
    
    
    (291,164
    )
    
    
    (591,599
    )
    
    
    (205,637
    )Increase in cash and cash equivalents
    
    
    593,507
    
    
    
    1,206,423
    
    
    
    1,275,302Cash and cash equivalents  Beginning of year
    
    
    3,244,048
    
    
    
    2,037,625
    
    
    
    762,323Cash and cash equivalents  End of year
    
    
    3,837,555
    
    
    
    3,244,048
    
    
    
    2,037,625
 Refer to note 15 for supplemental cash flow information F5 The accompanying notes are an integral part of these consolidated financial statements Page 60




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##### Table of Contents



Offshore
Systems International Ltd.
Notes to Consolidated Financial
Statements
November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
  1Nature of operationsOffshore Systems International Ltd. (OSIL) develops and markets military and
commercial electronic navigation aids and produces geomatics products and
services. Collectively, OSIL and its subsidiaries are referred to as the
Company. The Companys systems line of business develops and produces
electronic marine navigation aids. The Companys geomatics line of business
produces land mapping and nautical charting products and services. Beginning
in the Companys 2004 fiscal year, the systems line of business will be
relabeled to navigation systems and the Company will introduce a new line of
business named applications. The applications line of business will develop
software applications and tools for situational awareness.2Summary of significant accounting policiesAccounting principlesThese 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 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. Accordingly, monetary items are
translated into Canadian dollars at the rates in effect at the balance sheet
dates. Non-monetary items are translated at historical rates. Translation
gains and losses are included in earnings.The Company purchases foreign exchange forward contracts to hedge sales to
customers denominated in United States dollars 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 denominated sales are recognized as an adjustment of
revenues when the sale is recorded. The Company does not utilize derivative
financial instruments for trading or speculative purposes.Foreign currency denominated monetary assets and liabilities of Canadian
operations are remeasured into Canadian dollars at rates of exchange in
effect at the balance sheet date, and revenues and expenses at average rates
of exchange during the year. Exchange gains and losses arising on
translation are included in earnings. F6 (1) Page 61




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##### Table of Contents



Offshore
Systems International Ltd.
Notes to Consolidated Financial
Statements
November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
  Use of estimatesThe preparation of financial statements requires management to make
estimates and assumptions that affect the amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and the revenues and expenses for the years reported.
Actual results may differ from these estimates.Cash and cash equivalentsCash and cash equivalents consist of cash and deposit instruments with an
initial maturity of three months or less.InventoryRaw materials and parts are stated at the lower of cost and replacement
value. Work-in-process and manufactured parts are stated at the cost of
materials and direct labor applied to the product and the applicable share
of overhead. Finished goods are stated at the lower of cost and net
realizable value. Cost is determined on an average cost basis.Plant and equipmentPlant 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
  Impairment loss is recognized when the undiscounted cashflows 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.Other depreciable assetsOther depreciable assets are recorded at cost. Depreciation is provided
using the declining balance method based on the assets estimated useful
lives as follows: %Computer software
    
    
    33Licenses and patents
    
    
    10
  Income taxesThe 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 and laws
expected to be in effect when the differences are F6 (2) Page 62




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##### Table of Contents



Offshore
Systems International Ltd.
Notes to Consolidated Financial
Statements
November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
  expected to reverse. 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.Revenue recognitionCertain revenue from projects for navigation systems 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 revenue and revenue from navigation software are
accounted for following 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 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.Systems revenue under bill-and-hold arrangements, whereby revenue has been
recognized but the goods have not been shipped, is recognized when the
customer has substantial business purpose for ordering the goods on a
bill-and-hold basis and the Company does not retain any specific performance
obligations such that the earnings are not complete. Goods held under such
arrangements are segregated, ready for shipment and not subject to fill
other orders. The customers are charged additional fees for storage and
other associated costs until shipment occurs.Revenue from the sale of geomatics products is recorded at the time of
delivery.Certain revenue from the sale of geomatics services is recognized as the
services are provided. Revenue from projects for certain other geomatics
services is recognized using the percentage of completion method, in
conformity with the AICPA 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. 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.Revenue from systems components is recognized at the time delivery of the
systems components to the customer has occurred and title has passed or as
the services are provided. F6 (3) Page 63




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##### Table of Contents



Offshore
Systems International Ltd.
Notes to Consolidated Financial
Statements
November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
  Revenue from system repairs and servicing, as well as training and
consulting revenue, is recorded as the services are provided.Unearned revenueUnearned revenue represents unearned income associated with agreements for
the sale of navigation systems and charts subscription agreements where
significant vendor obligations remain or payments are received in advance of
revenue recognition.Research and developmentDevelopment 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.
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. Research costs are expensed in the period incurred.Government assistanceGovernment assistance is recorded in the accounts when there is reasonable
assurance that the Company has complied with, and will continue to comply
with, all conditions necessary to obtain the grants. 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 recognized as an expense in the period in which conditions
arise that cause the government assistance to be repayable.Stock-based compensationFor the employee stock option plans, the Company has elected to follow
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and present pro forma information that is required by
SFAS No. 123, Accounting for Stock-Based Compensation. 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.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.Accounting for derivativesEffective December 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its subsequent amendments
and interpretations. The adoption of SFAS No. 133 did not F6 (4) Page 64




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
  result in any
transitional adjustments. The Company manages its foreign exposure on
anticipated net cash inflows on U.S. dollars through the use of forward
foreign exchange contracts. 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 shareBasic 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.Comparative figuresCertain of the prior year figures have been reclassified to conform with the
current years financial statement presentation.Recent accounting pronouncementsIn December 2003, the SEC issued Staff Accounting Bulletin (SAB) 104,
which supersedes SAB 101, Revenue Recognition in Financial Statements. The
primary purpose of SAB 104 is to rescind the accounting guidance contained
in SAB 101 related to multiple element revenue arrangements, which was
superseded as a result of the issuance of Emerging Issues Task Force
(EITF) Issue No. 00-21. In November 2002, EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF
Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF Issue No. 00-21 applied to
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company adopted EITF 00-21 and SAB 104 and there was no effect on
the Companys consolidated financial statements.In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. FAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. The Company has adopted FAS No.
150 and there was no effect on the Companys consolidated financial
statements.In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under FAS No. 133. FAS No.149 is to be applied prospectively for
certain contracts entered into or modified after June 30, 2003. F6 (5) Page 65




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##### Table of Contents



Offshore
Systems International Ltd.
Notes to Consolidated Financial
Statements
November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
  The Company has adopted FAS No. 149 and there was no effect on the Companys
consolidated financial statements.In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), which requires the consolidation
of a variable interest entity by the primary beneficiary. FIN 46 also
requires additional disclosure by both the primary beneficiary and
enterprises that hold a significant variable interest in a variable interest
entity. FIN 46 is applicable to variable interest entities created after
January 31, 2003. Entities created prior to February 1, 2003 must be
consolidated effective December 31, 2003. The Company does not have any
variable interest entities and therefore there is no impact on the Companys
consolidated financial statements.In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 expands on
previously issued accounting guidance and requires additional disclosure by
a guarantor to recognize, at the inception of a guarantee, a liability for
the fair value of an obligation assumed by issuing a guarantee. The
provision for initial recognition and measurement of the liability is
applied on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has adopted FIN 45 and there was no effect on
the Companys consolidated financial statements.3Accounts receivable 2003
    
    2002$
    
    $Trade
    
    
    1,705,184
    
    
    
    2,787,128Unbilled accounts receivable
    
    
    2,854,942
    
    
    
    872,128Holdbacks
    
    
    
    
    
    
    Technology Partnerships Canada contribution (note 10)
    
    
    
    
    
    
    157,708Other
    
    
    75,209
    
    
    
    153,272Allowance for doubtful accounts
    
    
    (13,499
    )
    
    
    (9,390
    )4,621,836
    
    
    
    3,960,846
  As at November 30, 2003, government contract receivables were $1,554,548
(2002 - $2,620,929) and unbilled government contract receivables were
$2,769,702 (2001 - $827,946).4Inventory 2003
    
    2002$
    
    $Materials and components
    
    
    620,429
    
    
    
    1,216,879Finished goods
    
    
    45,074
    
    
    
    68,087665,503
    
    
    
    1,284,966
 F6 (6) Page 66




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##### Table of Contents



Offshore
Systems International Ltd.
Notes to Consolidated Financial
Statements
November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
  5Plant and equipment 2003AccumulatedCost
    
    depreciation
    
    Net$
    
    $
    
    $Equipment
    
    
    3,772,026
    
    
    
    2,838,400
    
    
    
    933,626Furniture and fixtures
    
    
    126,534
    
    
    
    86,378
    
    
    
    40,156Leasehold improvements
    
    
    222,737
    
    
    
    185,673
    
    
    
    37,0644,121,297
    
    
    
    3,110,451
    
    
    
    1,010,846
 2002AccumulatedCost
    
    depreciation
    
    Net$
    
    $
    
    $Equipment
    
    
    3,557,622
    
    
    
    2,629,162
    
    
    
    928,460Furniture and fixtures
    
    
    123,331
    
    
    
    76,771
    
    
    
    46,560Leasehold improvements
    
    
    222,196
    
    
    
    176,485
    
    
    
    45,7113,903,149
    
    
    
    2,882,418
    
    
    
    1,020,731
  Chart acquisitions and development costs are expensed as incurred.6Intangible and other assets 2003AccumulatedCost
    
    depreciation
    
    Net$
    
    $
    
    $Amortizable
intangiblesComputer software
    
    
    721,250
        
    
    401,909
    
    
    
    319,341Licenses and patents
    
    
    57,267
    
    
    
    37,033
    
    
    
    20,234778,517
    
    
    
    438,942
    
    
    
    339,575Embedded derivative
    
    
    
    
    
    
    
    
    
    
    339,575
 F6 (7) Page 67




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##### Table of Contents



Offshore
Systems International Ltd.
Notes to Consolidated Financial
Statements
November 30, 2003, 2002 and 2001
    
    U.S. GAAP(expressed in Canadian dollars)
 2002AccumulatedCost
    
    depreciation
    
    Net$
    
    $
    
    $Amortizable intangiblesComputer software
    
    
    630,036
    
    
    
    272,235
    
    
    
    357,801Licenses and patents
    
    
    57,267
    
    
    
    34,785
    
    
    
    22,482687,303
    
    
    
    307,020
    
    
    
    380,283Embedded derivative
    
    
    
    
    
    
    
    
    
    
    18,222398,505
  The fair value of the derivative instrument is determined by reference to
the spot market foreign currency rates at the balance sheet date.7Accounts payable and accrued liabilities 2003
    
    2002$
    
    $Trade
    
    
    1,275,182
    
    
    
    1,320,754Accrued liabilities
    
    
    70,484
    
    
    
    243,868Accrued employee costs
    
    
    387,449
    
    
    
    475,201Accrued royalties (note 10)
    
    
    183,435
    
    
    
    339,380Accrued professional fees
    
    
    98,711
    
    
    
    89,394Derivative instrument
    
    
    
    
    
    
    7,3692,015,261
    
    
    
    2,475,966
  8Credit facilitiesIn November 2003, the Company renewed certain credit facilities with a
Canadian chartered bank. The credit facilities consist of an operating line,
a forward exchange contract facility and standby letters of credit. The
credit facilities are secured by a general assignment of book debts, a
general security agreement and a guarantee, also secured by general security
agreements, from each of OSL, OSI Geomatics Ltd., and OSI Geomatics Inc. In
addition, the Company is required to meet certain covenants as outlined in
the credit facilities agreement. F6 (8) Page 68




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  The operating line, which is to be used to finance the Companys accounts
receivable and inventory, bears interest at the chartered banks prime
lending rate plus 1.25% with interest payable monthly. Funds drawn on the
operating line are repayable on demand. The Company has not drawn on the
operating line facility. The maximum amount available to the Company under
the operating line is $1,000,000.As at November 30, 2003, the Company had drawn on its foreign exchange
contract facility in the amount of US$1,343,705. The maximum amount
available to the Company under the forward exchange contract facility is
US$2,000,000.As of November 30, 2003, letters of credit, relating principally to customer
contracts, amounting to US$127,000 have been issued. The standby letters of
credit are denominated in U.S. dollars and bear interest at rates between 1%
and 2% per annum. The Company utilizes letters of credit as security for
certain performance obligations with its customers. These standby letters of
credit have been insured through Export Development Canada. Funds drawn on
the standby letters of credit are repayable on demand.9Capital stock(a) Authorized100,000,000 common shares without par value
     100,000,000 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, 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 SharesOn April 27, 1990, 2,914,654 Class A Preference Shares Series A were issued
to the former shareholders of OSL, a Canadian controlled private company at
that time, as part of the reverse takeover transaction of OSIL. Subsequent
to April 27, 1990, these Preference Shares were amended to allow conversion
to Common Shares of OSIL. As at November 30, 2003, 30,262 Class A Preference
Shares Series A remain outstanding (2002 - 42,296).(c) Class B Preference SharesThe 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. 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 $277,205. The gross proceeds were allocated
between the Preference Shares and warrants based on their relative fair
value at the date of issuance. The fair value of the Preference Share has
been estimated based on the fair value of the underlying common stock. The
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 F6 (9) Page 69




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  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 form the allocation of the gross proceeds is
accreted over the five-year life of the warrants. This resulted in an
accretion of $103,707 for the fiscal year 2003.(d) Stock option plansThe 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. During
2002, the shareholders approved an increase in the number of Common Shares
authorized for grant under the Companys stock option plans to 10,930,732.
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 vest
immediately and options granted to employees vest one-third immediately,
one-third in one year and one-third in two years after the date granted.Stock-based compensation recorded in the financial statements is as follows: 2003
    
    2002
    
    2001$
    
    $
    
    $General and administrative
    
    
    43,050
    
    
    
    31,500
    
    
    
    69,000Research and development
    
    
    
    
    
    
    
    
    
    
    Sales and marketing
    
    
    
    
    
    
    
    
    
    
    43,050
    
    
    
    31,500
    
    
    
    69,000
  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: 2003
    
    2002
    
    2001$
    
    $
    
    $Net earnings for the year
    
    
    352,016
    
    
    
    1,694,126
    
    
    
    597,739Additional compensation expense
    
    
    (517,891
    )
    
    
    (389,149
    )
    
    
    (716,322
    )Pro forma net earnings (loss) for the year
    
    
    (165,875
    )
    
    
    1,304,977
    
    
    
    (118,583
    )Pro forma basic and diluted earnings
(loss) per share
    
    
    (0.01
    )
    
    
    0.05
    
    
    
    0.00
 F6 (10) Page 70




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  The pro forma compensation expense reflected above has been estimated using
the Black-Scholes option pricing model. Assumptions used in the pricing
model included: (i) risk free interest rate between 2.6% and 2.9% (2002 -
2.1% and 2.6%, 2001 - 3.1% and 5.5%); (ii) expected volatility between 45%
and 114% (2002 - 50% and 73%, 2001 - 75% and 202%); (iii) an estimated
average life of 1 to 5 years (2002 - 3 to 5 years, 2001 - 3 years); and (iv)
an expected dividend yield of 0% (2002 and 2001 - 0%).The weighted average fair value of the options granted during the year ended
November 30, 2003 was $0.45 per option (2002 - $0.48, 2001 - $0.36).A summary of the status of the Companys stock option plans at November 30
is as follows: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseNumber of
    
    price
    
    Number of
    
    price
    
    Number of
    
    priceshares
    
    $
    
    shares
    
    $
    
    shares
    
    $Outstanding
 Beginning
of year
    
    
    3,130,047
    
    
    
    0.83
    
    
    
    3,497,496
    
    
    
    0.59
    
    
    
    3,237,450
    
    
    
    0.54Granted
    
    
    1,290,601
    
    
    
    1.07
    
    
    
    865,000
    
    
    
    1.19
    
    
    
    2,535,346
    
    
    
    0.59Exercised
    
    
    (1,208,198
    )
    
    
    0.50
    
    
    
    (1,206,664
    )
    
    
    0.41
    
    
    
    (1,137,198
    )
    
    
    0.35Forfeited
    
    
    (122,404
    )
    
    
    0.96
    
    
    
    (15,897
    )
    
    
    0.96
    
    
    
    (297,028
    )
    
    
    0.57Expired
    
    
    (200,000
    )
    
    
    1.50
    
    
    
    (9,888
    )
    
    
    0.28
    
    
    
    (841,074
    )
    
    
    0.45Outstanding  End of year
    
    
    2,890,046
    
    
    
    1.02
    
    
    
    3,130,047
    
    
    
    0.83
    
    
    
    3,497,496
    
    
    
    0.59Exercisable  End of year
    
    
    2,319,800
    
    
    
    0.99
    
    
    
    3,130,047
    
    
    
    0.83
    
    
    
    2,665,418
    
    
    
    0.60
  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
 F6 (11) Page 71




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  A summary of the Companys stock options outstanding and exercisable at
November 30, 2002 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$
    
    2002
    
    (years)
    
    $
    
    2002
    
    $0.40 - 0.60
    
    
    1,133,138
    
    
    
    1.02
    
    
    
    0.45
    
    
    
    1,133,138
    
    
    
    0.450.61 - 0.90
    
    
    695,250
    
    
    
    1.51
    
    
    
    0.76
    
    
    
    695,250
    
    
    
    0.760.91 - 1.35
    
    
    1,031,409
    
    
    
    2.23
    
    
    
    1.12
    
    
    
    1,031,409
    
    
    
    1.121.36 - 1.50
    
    
    270,250
    
    
    
    1.38
    
    
    
    1.48
    
    
    
    270,250
    
    
    
    1.480.40 - 1.50
    
    
    3,130,047
    
    
    
    1.56
    
    
    
    0.83
    
    
    
    3,130,047
    
    
    
    0.83
  Shareholder Rights PlanOn 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, and was also
approved by the shareholders of the Company by ordinary resolution at the
annual general meeting of the Company held on May 28, 2001.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 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. F6 
(12) Page 72




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  (e) Earnings per share 2003
    
    
    2002
    
    
    2001$
    
    
    $
    
    
    $Basic earnings per shareNet earnings
    
    
    352,016
    
    
    
    1,694,126
    
    
    
    597,739Less: Class B preferred share dividends
    
    
    917,842
    
    
    
    
    
    
    
    Net earnings available to common shareholders
    
    
    (565,826
    )
    
    
    1,694,126
    
    
    
    597,739Weighted average number of common shares
outstanding
    
    
    25,977,123
    
    
    
    25,288,725
    
    
    
    23,842,549Basic earnings (loss) per share
    
    
    (0.02
    )
    
    
    0.07
    
    
    
    0.03Diluted earnings per shareNet earnings
    
    
    352,016
    
    
    
    1,694,126
    
    
    
    597,739Less: Class B preferred share dividends
    
    
    917,842
    
    
    
    
    
    
    
    Net earnings available to common shareholders
    
    
    (565,826
    )
    
    
    1,694,126
    
    
    
    597,739Weighted average number of common shares
outstanding
    
    
    25,977,123
    
    
    
    25,288,725
    
    
    
    23,842,549Dilutive effect of stock options
    
    
    1,135,107
    
    
    
    1,955,596
    
    
    
    1,496,146Dilutive effect of Class A preference shares
    
    
    30,262
    
    
    
    41,296
    
    
    
    58,326Dilutive effect of Class B preference
shares (*1)
    
    
    
    
    
    
    
    
    
    
    Dilutive effect of warrants
    
    
    
    
    
    
    
    
    
    
    79,593Adjusted weighted average number of common
shares outstanding
    
    
    27,142,492
    
    
    
    27,285,617
    
    
    
    25,476,614Diluted earnings (loss) per share
    
    
    (0.02
    )
    
    
    0.06
    
    
    
    0.02
  (*1)
The Class B preference shares  Series 1 are antidilutive for the
purposes of calculating diluted earnings per share for twelve months ended
November 30, 2003.(f) Normal course issuer bidIn 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 to November 30, 2003, the Company purchased
455,000 of its Common Shares under the normal course issuer bid at an
average cost of $1.11 per share for an aggregate consideration of F6 (13) Page 73




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  $505,681. The amount by which the cost of reacquiring the shares exceeded
the average carrying value has been charged to the deficit.10Technology Partnerships CanadaEffective December 23, 1998, the Company entered into an agreement with
Technology Partnerships Canada (TPC). TPC is a technology investment fund of
the Canadian federal government established to contribute to the achievement
of increasing economic growth, creating jobs and wealth, and supporting
sustainable development in Canada. 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. To receive the financial assistance,
the Company must submit claims to TPC for eligible costs. Eligible costs
include labor, material and other costs directly attributable to the
research and development activities. Under the agreement with TPC, the
Company is 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. During
2003, the Company incurred eligible costs of $376,880 (2002 - $863,851) and
has claimed the full amount from TPC. 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 3% to TPC on all
revenues that OSL, the Companys wholly owned subsidiary, earns from
December 1, 1999 to November 30, 2008. The royalty payments do not relate to
the ownership of the intellectual property (IP). Ownership of the IP remains
with the Company. 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.TPC royalties paid and accrued are as follows: 2003
    
    
    2002$
    
    
    $Royalties paid
    
    
    391,752
    
    
    
    213,704Accrued royaltiesShort term
    
    
    183,435
    
    
    
    339,380Long term
    
    
    187,384
    
    
    
    372,717370,819
    
    
    
    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. F6 (14) Page 74




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  11Commitments and contingenciesThe Company has entered into operating leases for its office premises in
Canada and for certain equipment. Future minimum lease payments required
under non-cancelable lease obligations are as follows: $Years ending November 302004
    
    
    
    274,8282005
    
    
    
    273,3842006
    
    
    
    265,5012007
    
    
    
    179,9332008
    
    
    
    3,665997,311
  Rent expense amounted to $256,705 in 2003 (2002 - $256,705, 2001 -
$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
2002, the Company paid $77,719 (2002 - $79,973, 2001 - $73,142) for these
costs.In July 2002, the Companys subsidiary OSL and three employees became the
objects of a lawsuit by Triathlon Ltd., a subsidiary of MacDonald, Dettwiler
and Associates Ltd., related to use of confidential information and breach
of fiduciary duty. No amount had been accrued at November 30, 2003 in
respect of this claim because it is the opinion of management that the claim
is without merit and the amount of loss, if any, cannot be reasonably
estimated.12Deferred 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. and Danish income tax.Earnings before income taxes consisted of the following: 2003
    
    
    2002
    
    
    2001$
    
    
    $
    
    
    $Canadian income (loss)
    
    
    (39,345
    )
    
    
    1,123,785
    
    
    
    370,439U.S. income
    
    
    251,262
    
    
    
    143,925
    
    
    
    211,917
    
    
    
    1,267,710
    
    
    
    370,439
  The Company has non-capital losses for Canadian income tax purposes of
approximately $4,502,648 (2002 - $4,855,787), which are available for carry
forward to reduce future years taxable income. These income tax losses
expire as follows: F6 (15) Page 75




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars) 2003
    
    
    
   2002$
    
    
    
   $Year ending November 302003
    
    
    
    
    
    
    
    172,3952004
    
    
    
    
    
    
    
    2005
    
    
    
    1,600,105
    
    
    
    1,759,5042006
    
    
    
    2,506,280
    
    
    
    2,533,0222007
    
    
    
    137,945
    
    
    
    193,6762008
    
    
    
    
    
    
    
    2009
    
    
    
    258,318
    
    
    
    197,190
  The Company has net operating losses for U.S. income tax purposes of
approximately $451,030 (2002 - $787,062), which are available for carry
forward to reduce future years taxable income of the U.S. company. These
income tax losses expire as follows: 2003
    
    
    
   2002$
    
    
    
   $Year ending November 302018
    
    
    
    138,259
    
    
    
    426,1722019
    
    
    
    
    
    
    
    2020
    
    
    
    277,141
    
    
    
    319,7782021
    
    
    
    35,630
    
    
    
    41,112
  The Company also has investment tax credits of approximately $ 782,041 (2002
 - $329,410), which can be used to offset future Canadian income taxes
otherwise payable and expire as follows: 2003
    
    
    
   2002$
    
    
    
   $Year ending November 302005
    
    
    
    117,678
    
    
    
    117,6782006
    
    
    
    130,114
    
    
    
    130,1142007
    
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    
    2010
    
    
    
    
    
    
    
    2011
    
    
    
    219,680
    
    
    
    81,6182012
    
    
    
    139,499
    
    
    
    2013
    
    
    
    175,070
    
    
    
    
  The Company has capital losses for Canadian income tax purposes of
approximately $354,466 (2002 - $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 $4,334,409 (2002
 - $2,038,365), which are available for carry forward to reduce future years
income for tax purposes. These expenses carry forward indefinitely. F6 (16) Page 76




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  The net deferred tax asset consists of the following: 2003
    
    
    2002$
    
    
    $Deferred tax assetsNon-capital loss carry-forwards
    
    
    1,742,868
    
    
    
    2,027,491Net capital loss carry-forwards
    
    
    63,130
    
    
    
    126,261Scientific research and experimental development costs
    
    
    1,543,916
    
    
    
    700,718Investment tax credits
    
    
    569,579
    
    
    
    212,074Plant and equipment
    
    
    555,339
    
    
    
    544,893Other
    
    
    105,763
    
    
    
    28,1194,580,595
    
    
    
    3,639,556Valuation allowance
    
    
    (3,758,072
    )
    
    
    (2,985,840
    )Net deferred tax asset
    
    
    822,523
    
    
    
    653,716
  The Company reduced its valuation allowance against deferred income tax
assets to reflect the amount of the deferred tax benefit that was more
likely than not to be realized. During the year, the deferred income tax
recovery related to the release of the valuation allowance was $168,807
(2002 - $426,416). The Company believes that sufficient uncertainty exists
regarding the realization of certain deferred tax assets that a valuation
allowance is required. The Company continues to evaluate and examine the
valuation allowance on a quarterly basis, and at such time future
uncertainties are resolved, the valuation allowance may be further reduced.A reconciliation of the combined Canadian federal and provincial income tax
rate with the Companys effective income tax rate is as follows: 2003
    
    
    2002
    
    
    2001$
   
    
    $
    
    
    $Expected statutory rate
    
    
    37.79
    %
    
    
    40.04
    %
    
    
    44.62
    %Expected provision for income taxes
    
    
    80,083
    
    
    
    507,591
    
    
    
    120,076Change in tax rates applied in valuation
allowance
    
    
    25,235
    
    
    
    (41,915
    )
    
    
    1,002,721Change in valuation allowance
    
    
    772,232
    
    
    
    (972,234
    )
    
    
    (1,426,355
    )Effect of foreign tax rate differences
    
    
    9,135
    
    
    
    (39,828
    )
    
    
    Temporary differences arising during the year
    
    
    (1,052,335
    )
    
    
    126,313
    
    
    
    Non-deductible expenses and other
    
    
    25,551
    
    
    
    (6,343
    )
    
    
    76,258(140,099
    )
    
    
    (426,416
    )
    
    
    (227,300
    )
  As a result of a Canadian federal tax reassessment non-capital loss carry
forwards, scientific research and experimental developmental costs and
related income tax credits have been adjusted resulting in an increase of
available deductible temporary differences of approximately $2,090,000. F6 (17) Page 77




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  13Segmented informationThe Companys reportable segments are as outlined below. Accounting policies
used by these segments are the same as those described in the summary of
significant accounting policies as disclosed in note 2. 2003Systems
    
    
    Geomatics
    
    
    Total$
    
    
    $
    
    
    $Revenue
    
    
    7,927,166
    
    
    
    3,593,627
    
    
    
    11,520,793Technology Partnerships Canada  net
    
    
    (326,407
    )
    
    
    
    
    
    
    (326,407
    )Interest expense
    
    
    624
    
    
    
    2,200
    
    
    
    2,824Income tax recovery
    
    
    (2,917
    )
    
    
    (137,182
    )
    
    
    (140,099
    )Net earnings
    
    
    91,241
    
    
    
    260,775
    
    
    
    352,016Assets employed
    
    
    10,103,117
    
    
    
    1,625,140
    
    
    
    11,728,257Plant and equipment expenditures
    
    
    170,655
    
    
    
    47,517
    
    
    
    218,172Other asset expenditures
    
    
    12,663
    
    
    
    60,329
    
    
    
    72,992Depreciation
    
    
    255,462
    
    
    
    104,517
    
    
    
    359,979
 2002Systems
    
    
    Geomatics
    
    
    Total$
    
    
    $
    
    
    $Revenue
    
    
    11,466,668
    
    
    
    2,347,465
    
    
    
    13,814,133Technology Partnerships Canada  net
    
    
    (387,662
    )
    
    
    
    
    
    
    (387,662
    )Interest expense
    
    
    2,869
    
    
    
    713
    
    
    
    3,582Income tax recovery
    
    
    (426,416
    )
    
    
    
    
    
    
    (426,416
    )Net earnings
    
    
    1,446,857
    
    
    
    247,269
    
    
    
    1,694,126Assets employed
    
    
    9,662,484
    
    
    
    1,133,093
    
    
    
    10,795,577Plant and equipment expenditures
    
    
    231,100
    
    
    
    95,041
    
    
    
    326,141Other asset expenditures
    
    
    136,189
    
    
    
    209,269
    
    
    
    345,458Depreciation
    
    
    242,362
    
    
    
    61,045
    
    
    
    303,407
 2001Systems
    
    
    Geomatics
    
    
    Total$
    
    
    $
    
    
    $Revenue
    
    
    6,836,556
    
    
    
    1,073,157
    
    
    
    7,909,713Technology Partnerships Canada  net
    
    
    (376,867
    )
    
    
    
    
    
    
    (376,867
    )Interest expense
    
    
    53,303
    
    
    
    2,077
    
    
    
    55,380Income tax recovery
    
    
    (227,300
    )
    
    
    
    
    
    
    (227,300
    )Net earnings
    
    
    590,100
    
    
    
    7,639
    
    
    
    597,739Assets employed
    
    
    7,143,990
    
    
    
    209,519
    
    
    
    7,353,509Plant and equipment expenditures
    
    
    124,216
    
    
    
    3,912
    
    
    
    128,128Other asset expenditures
    
    
    74,681
    
    
    
    2,828
    
    
    
    77,509Depreciation
    
    
    212,051
    
    
    
    26,907
    
    
    
    238,958
  Geographically, revenues reported are based on the location of the Companys
customers and include revenues from discontinued operations. Plant and
equipment are reported based on location. F6 (18) Page 78




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars) 2003UnitedCanada
    
    States
    
    Denmark
    
    Other
    
    Total$
    
    $
    
    $
    
    $
    
    $Revenue
    
    
    3,296,257
    
    
    
    5,103,062
    
    
    
    2,083,953
    
    
    
    1,037,521
    
    
    
    11,520,793Plant and equipment
    
    
    1,010,846
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,010,846
 2002UnitedCanada
    
    States
    
    Denmark
    
    Other
    
    Total$
    
    $
    
    $
    
    $
    
    $Revenue
    
    
    3,315,510
    
    
    
    7,366,982
    
    
    
    3,123,998
    
    
    
    7,643
    
    
    
    13,814,133Plant and equipment
    
    
    1,020,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,020,731
 2001UnitedCanada
    
    States
    
    Denmark
    
    Other
    
    Total$
    
    $
    
    $
    
    $
    
    $Revenue
    
    
    2,765,071
    
    
    
    4,090,320
    
    
    
    964,931
    
    
    
    89,391
    
    
    
    7,909,713Plant and equipment
    
    
    970,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    970,887
  Approximately 65% of revenue for the year ended November 30, 2003 (2002 -
84%, 2001 - 88%) is derived from three ultimate customers at 27%, 20% and
18%, respectively (2002 - 38%, 23%, 23%, 2001 - 48%, 28%, 12%).14Financial instrumentsFluctuations in foreign currency exchange ratesThe Company enters into transactions denominated in U.S. dollars and as such
its revenue, expenses, monetary assets and liabilities will be affected by
fluctuations in the U.S. dollar relative to its functional currency, the
Canadian dollar.  The company uses foreign exchange forward contracts to hedge transactions
denominated in United States dollars. The purpose of the Companys hedging
activities is to reduce the level of exposure to exchange rate movements,
most significantly in the United States. At November 30, 2003, the Company
had forward exchange contracts maturing in the following year to sell United
States dollars in the amount of US$1,343,705. The F6 (19) Page 79




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  exchange rates set in the forward exchange contracts ranged between $1.3047
to $1.4029 for US$1.00. The contracts mature between January and May 2004.The fair value of derivative financial instruments generally reflects the
estimated amounts that the Company would receive or pay to settle the
contracts at November 30, 2003. As at this date, the spot exchange rate was
1.2991 and the fair value of the above derivative financial instruments was
a liability of $82,097.15Supplemental cash flow information 2003
    
    2002
    
    2001$
    
    $
    
    $Cash paid during the year for interest
    
    
    2,824
    
    
    
    3,583
    
    
    
    55,380Cash received for interest
    
    
    103,564
    
    
    
    20,192
    
    
    
    Cash paid during the year for income taxes
    
    
    
    
    
    
    
    
    
    
    Non-cash financing and investing activitiesInventory transferred to plant and equipment
    
    
    10,121
    
    
    
    62,741
    
    
    
    48,203
  16ReclassificationsCertain balances for the year ended November 30, 2002 and 2001 have been
reclassified to conform to the presentation adopted for the current year.17Subsequent eventsOn December 1, 2003, the Company declared dividends of $1.50 per share on
the issued and outstanding Class B Series 1 Preference shares. The total
amount of the dividend declared was $91,866.On January 8, 2004, the Company announced that it had been selected for a
major fleet-wide contract with the Royal Navy of the United Kingdom. The
Company, as part of a successful teaming arrangement with Lockheed Martin UK
and Kelvin Hughes Ltd., will begin to deliver ECPINS®-M software to the
Royal Navy fleet in mid-2004. The initial purchases total approximately $3
million. The total contract value, including long term supports and options
for auxiliary systems and software development is approximately $17.5
million.On March 4, 2004, the Company announced that its teaming partner, Nautronix
Ltd., has signed the final prime contract to supply the Royal Australian
Navy with a fleet installation of OSIs ECPINS-M electronic chart navigation
system. The total contract value to OSI Navigation Systems is approximately
$8 million and the contract is organized into two phases.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. F6 (20) Page 80




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##### Table of Contents



Offshore
Systems International Ltd.Notes to Consolidated Financial
StatementsNovember 30, 2003, 2002 and 2001
    
    U.S. GAAP
 
 (expressed in Canadian dollars)  On May 6, 2004, the Company announced that Technology Partnerships Canada
(TPC), an agency of Industry Canada, will be making a strategic investment
of $3.76 million in a research and development initiative dedicated to
improving geographical display capabilities in defense and navigation
systems. The TPC investment is part of a $12.5 million multi-year project
being undertaken by OSI to advance the implementation of electronic
geography for military navigation and command and control systems. The
integration of high-performance mapping and imagery displays will contribute
to the identification of surface and underwater threats and permit safer and
faster movement of ships by enabling them to stay on course, reducing
groundings and collisions. A portion of the project will support the
advanced development of COP-IDS®. F6 (21) Page 81