##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 (Mark One)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended November 30, 2005.
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the transition period from to
 Commission File Number [ 000-49944 ]
 OFFSHORE SYSTEMS INTERNATIONAL LTD.
  British Columbia, Canada
 107  930 West 1st Street
North Vancouver, British Columbia, Canada V7P 3N4
 None
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, Without Par Value
    
    Toronto Stock ExchangeO.T.C. Bulletin Board.
 None
  
    
    30,367,309 shares of Common Stock, no par value,
    
    30,262 shares of Class A Preference Shares Series A Convertible, no par value
    
    341,240 shares of Class B Series 2 Preference Shares, par value of CAD$50.00
  o þ
  o þ
   þ o
  o o þ
  o þ
  o þ
   þ o




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##### 



TABLE OF CONTENTS
 Page #PART IItem 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1Item 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1Item 3.
    
    KEY INFORMATION
    
    
    1Item 4.
    
    INFORMATION ON THE COMPANY
    
    
    12Item 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    21Item 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    41Item 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    51Item 8.
    
    FINANCIAL INFORMATION
    
    
    54Item 9.
    
    THE OFFER AND LISTING
    
    
    55Item 10.
    
    ADDITIONAL INFORMATION
    
    
    57Item 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    68Item 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    70PART IIItem 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    71Item 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    71Item 15.
    
    CONTROLS AND PROCEDURES
    
    
    71Item 16.
    
    [RESERVED]
    
    
    71Item 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    71Item 16B.
    
    CODE OF ETHICS
    
    
    71Item 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    72Item 16D.
    
    EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    72Item 16E.
    
    PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
    
    
    72PART IIIItem 17.
    
    FINANCIAL STATEMENTS
    
    
    73Item 18.
    
    FINANCIAL STATEMENTS
    
    
    73Item 19.
    
    EXHIBITS
    
    
    74CHI Systems Inc. Share Purchase AgreementList of SubsidiariesSection 302 CertificationsSection 906 Certifications




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##### 



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected financial data.
   Offshore Systems International Ltd.
Selected Consolidated Financial Information
Consolidated Statement of Earnings (Loss) and Deficit Data
 For the years ended November 30,2005
    
    2004
    
    2003
    
    2002
    
    2001Revenue
    
    $
    13,427,440
    
    
    $
    13,451,303
    
    
    $
    11,520,793
    
    
    $
    13,814,133
    
    
    $
    7,909,713Direct costs
    
    $
    6,932,421
    
    
    $
    5,669,324
    
    
    $
    5,159,068
    
    
    $
    7,100,751
    
    
    $
    3,333,358Gross profit
    
    $
    6,495,019
    
    
    $
    7,781,979
    
    
    $
    6,361,725
    
    
    $
    6,713,382
    
    
    $
    4,576,355Expenses
    
    $
    8,874,553
    
    
    $
    7,492,004
    
    
    $
    6,149,808
    
    
    $
    5,667,650
    
    
    $
    4,205,916Earnings (loss) from continuing operations before proceeds on
settlement of claim and income taxes
    
    $
    (2,379,534
    )
    
    $
    289,975
    
    
    $
    211,917
    
    
    $
    1,045,732
    
    
    $
    370,439Proceeds on settlement of claim
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (221,978
    )
    
    $
    Income tax expense (recovery)
    
    $
    1,031,660
    
    
    $
    41,958
    
    
    $
    (140,099
    )
    
    $
    (426,416
    )
    
    $
    (227,300
    )Earnings (loss) from continuing operations
    
    $
    (3,411,194
    )
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126
    
    
    $
    597,739Net earnings (loss) for the period
    
    $
    (3,411,194
    )
    
    $
    248,017
    
    
    $
    352,016
    
    
    $
    1,694,126
    
    
    $
    597,739Net earnings (loss) attributable to common shareholders
    
    $
    (10,249,981
    )
    
    $
    (58,873
    )
    
    $
    (565,826
    )
    
    $
    1,694,126
    
    
    $
    597,739Earnings (loss) per share
    
    $
    (0.37
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.03Diluted earnings (loss) per share
    
    $
    (0.37
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.03Weighted average number of Common Shares outstanding  basic
    
    
    27,989,832
    
    
    
    27,147,246
    
    
    
    25,977,123
    
    
    
    25,288,725
    
    
    
    23,842,549Weighted average number of Common Shares outstanding  diluted
    
    
    27,989,832
    
    
    
    29,856,412
    
    
    
    28,183,501
    
    
    
    27,285,617
    
    
    
    25,476,614
 Page 1




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##### 



Offshore Systems International Ltd.
Selected Consolidated Financial Information
Consolidated Balance Sheet Data
 As at November 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Working capital
    
    $
    17,808,110
    
    
    $
    8,287,798
    
    
    $
    8,071,926
    
    
    $
    4,464,623
    
    
    $
    2,812,407Total assets
    
    $
    24,771,781
    
    
    $
    12,310,738
    
    
    $
    11,728,257
    
    
    $
    10,795,577
    
    
    $
    7,353,509Total liabilities
    
    $
    4,734,688
    
    
    $
    2,676,227
    
    
    $
    2,493,294
    
    
    $
    4,729,579
    
    
    $
    3,581,389Net assets
    
    $
    19,806,287
    
    
    $
    9,634,511
    
    
    $
    9,234,963
    
    
    $
    6,065,998
    
    
    $
    3,772,120Capital stock
    
    $
    34,275,362
    
    
    $
    22,241,614
    
    
    $
    21,715,693
    
    
    $
    19,258,997
    
    
    $
    18,554,063Outstanding Common Shares
    
    
    30,367,309
    
    
    
    27,488,074
    
    
    
    26,807,475
    
    
    
    26,043,243
    
    
    
    24,694,549Outstanding Class A Preference Shares Series A Convertible
    
    
    30,262
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    41,296
    
    
    
    58,326Outstanding Class B Preference Shares Series 1 Convertible
    
    
    
    
    
    
    57,711
    
    
    
    61,244
    
    
    
    
    
    
    
    Outstanding Class B Preference Shares Series 2 Convertible
    
    
    341,240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Currency and Exchange Rates
     Year ended November 30, 2001
    
    
    1.5441Year ended November 30, 2002
    
    
    1.5713Year ended November 30, 2003
    
    
    1.4156Year ended November 30, 2004
    
    
    1.3102Year ended November 30, 2005
    
    
    1.2115
 Page 2




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##### 



High Rate
    
    Low RateNovember 2005
    
    
    1.1960
    
    
    
    1.1656December 2005
    
    
    1.1736
    
    
    
    1.1507January 2006
    
    
    1.1726
    
    
    
    1.1436February 2006
    
    
    1.1577
    
    
    
    1.1379March 2006
    
    
    1.1722
    
    
    
    1.1320April 2006
    
    
    1.1718
    
    
    
    1.1203
  B . Capitalization and indebtedness .
  C. Reasons for the offer and use of proceeds .
  Page 3




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##### 



D. Risk factors.
  The Company depends heavily on its government contracts, which are only partially funded, subject
to termination, heavily regulated and audited. The termination of one or more of these contracts
could have a negative impact on the Companys operations. The contract termination clauses are
generally in 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.
   
    
    changes in procurement policies;
 
    
    changes in the structure and management of government departments;
 
    
    budget considerations;
 
    
    changing concepts of national defense;
 
    
    political developments domestically and abroad; and
 
    
    increased protectionism.
  The Company derives a significant amount of revenue from only a few international customers. The
Company depends on governments for a significant portion of its sales, and the loss of any of these
relationships or a shift in any of these governments funding could have severe consequences on the
Companys financial condition.
  The Company is subject to various government audits, which may result in unfavorable assessments or
penalties to the Company.
  Page 4




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##### 



The Company derives significant revenue from contracts awarded through a competitive bidding
process, which can impose substantial costs upon it, and the Company will fail to maintain its
current and projected revenue if it fails to compete effectively.
  
    
    the need to bid on engagements in advance of the completion of their design, which may result in unforeseen
difficulties in executing the engagement and cost overruns;
 
    
    the substantial cost and managerial time and effort that the Company spends to prepare bids and proposals for contracts
that may not be awarded to them;
 
    
    the need to accurately estimate the resources and costs that will be required to service any contract the Company is
awarded;
 
    
    the expense and delay that may arise if the Companys competitors protest or challenge contract awards made to them
pursuant to competitive bidding, and the risk that any such protest or challenge could result in the resubmission of
bids on modified specifications, or in termination, reduction, or modification of the awarded contract; and
 
    
    the opportunity cost of not bidding on and winning other contracts the Company might otherwise pursue.
  The Companys product lines are not broadly diversified.
  The Company derives a significant portion of its revenues from international sales and is subject
to the risks of doing business in foreign countries.
  
    
    changes in regulatory requirements;
 
    
    domestic and foreign government policies, including requirements to expend a portion of program funds locally and
governmental industrial co-operation requirements;
 
    
    fluctuations in foreign currency exchange rates;
 
    
    the complexity and necessity of dealing with foreign representatives and consultants;
 
    
    imposition of tariffs or embargoes, export controls and other trade restrictions; and
 Page 5




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##### 




    
    compliance with a variety of foreign laws.
  The Companys revenues and costs are affected by fluctuations in the rate of exchange between the
Canadian dollar, which is its reporting currency, the U.S. dollar, the Australian dollar, the
Danish kroner and the euro.
  The Company has established teaming relationships and strategic partnerships with international
corporations to pursue major international government procurements, and the Companys reputation
and results of operations could be adversely affected by the Companys inability to control those
operations.
  
    
    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.
  The Company may not be able to meet the delivery terms or budgeted costs of its firm fixed price
contracts.
  The Company may lose sales, or sales may be delayed, because of the long sales and implementation
cycles for its products and services.
  Page 6




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##### 



Competition within the Companys markets may reduce its procurement of future contracts and its
sales.
  The Companys ability to procure contracts and gain sales in foreign markets may be negatively
impacted by increasing protectionism of foreign governments.
  The Companys future success will depend on its ability to develop new technologies that achieve
market acceptance.
  
    
    identify emerging technological trends in the Companys market;
 
    
    develop and maintain competitive products;
 
    
    enhance the Companys products by adding innovative features that differentiate its products from the competition
 
    
    manufacture and bring products to market quickly at cost-effective prices.
  The Company depends on the recruitment and retention of qualified personnel, and its failure to
attract and retain such personnel could seriously harm its business.
  Page 7




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##### 



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 depends on foreign sub-contract labour in its mapping operations to maintain a
competitive position in the mapping marketplace.
  
    
    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;
 
    
    labour pool characteristics such as work ethic, education, skill level and attrition; and
 
    
    the infrastructure of both the sub-contractors home country and the sub-contractor.
  The Company may be unable to protect its intellectual property rights, which could affect its
ability to compete.
  The Companys operations depend on component availability and its key suppliers to manufacture and
deliver its products and services.
  The unpredictability of the Companys results may harm or contribute to the volatility of the
trading price of its common stock.
 Page 8




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##### 




    
    the volume and timing of product orders received and delivered;
 
    
    levels of product demand;
 
    
    government and corporate spending patterns;
 
    
    the timing of contract receipt and funding and the resulting impact on our working capital position;
 
    
    the Companys ability and the ability of its key suppliers to respond to changes in customer orders;
 
    
    the timing of the Companys new product introductions and its competitors new product introductions;
 
    
    the cost and availability of components and subsystems;
 
    
    price erosion;
 
    
    the adoption of new technologies and industry standards;
 
    
    competitive factors, including pricing, availability and demand for competing products;
 
    
    fluctuations in foreign currency exchange rates; and
 
    
    regulatory developments.
 Sales of a significant number of shares of our common stock by existing shareholders could cause
the market price of our common stock to decline.
  The Company may pursue strategic relationships, investments and acquisitions. The Company may not
be able to successfully manage its operations if it fails to successfully integrate the acquired
technologies and/or businesses.
  
    
    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.
  
    
    issues related to product transition (such as development, distribution and customer support);
 
    
    the substantial management time devoted to such activities;
 
    
    the potential disruption of the Companys ongoing business;
 
    
    undisclosed liabilities;
 
    
    failure to realize anticipated benefits (such as synergies and cost savings);
 
    
    the difficulty of integrating previously distinct businesses into one business unit; and
 
    
    technological uncertainty regarding the current and future functionality of the product.
 The Company may require additional capital, in which case it may need to raise additional funds
from lenders and equity markets in the future.
 Page 9




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##### 



The Companys business could be adversely affected if it fails to manage its growth effectively.
  
    
    improve its financial and management controls, reporting systems and procedures;
 
    
    add and integrate new senior management personnel;
 
    
    improve its licensing models and procedures;
 
    
    hire, train and retain qualified employees;
 
    
    maintain sufficient working capital
 
    
    control expenses;
 
    
    diversify channel sales strategies; and
 
    
    invest in its internal networking infrastructure and facilities.
  Third parties may claim that the Company infringes their proprietary rights.
   The Company may not be able to protect its proprietary information.
  Page 10




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##### 



The Companys products may contain significant defects, which may result in liability and/or
decreased sales.
  The Companys products depend on third-party software products and the Companys reputation and the
results of operations could be adversely affected by its inability to control their operations.
  
    
    remain in business;
 
    
    support the Companys product lines;
 
    
    maintain viable and functional product lines; and
 
    
    make their product lines available to the Company on commercially acceptable terms.
  The Companys products may not be compatible with various operating systems and therefore the
Company may not be able to sell its products to potential customers.
  Page 11




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##### 



Item 4. Information on the Company
 A. History and development of the Company.
 The Company
 Company Act The Company Act Business Corporations Act
 a)
    
    by increasing the number of authorized Common Shares from 100,000,000
to an unlimited number;b)
    
    to create a new series of 10,000,000 shares designated as Class B
Series 2 Preference Shares;c)
    
    to create a new class of shares designated as an unlimited number of
Class C Preference Shares which may be issued in series; andd)
    
    to replace the Companys Articles with new Articles.
 st
 Registered Agents
 th
 History
     Page 12




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##### 



Business Development
     Recent Financing and Acquisition
  Page 13




---



##### 



B. Business overview
 Business Units
    Page 14




---



##### 



Principal Products and Services
  Electronic Chart Precise Integrated Navigation System (ECPINS®)
       Projects
  Page 15




---



##### 



Mapping
  Common Operational Picture (COP) Products
    §
    
    COP- TDS: a tactical display server that provides track, target and tactical
information such as mission and operational data; and§
    
    COP-WDS: an open GIS WMS compliant web map server.
  Seasonality
  Major Customers
  Geographic Markets
  Page 16




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##### 



Sources and Availability of Components
  Sales, Marketing and Distribution
    
    
    DGI Europe 2006 from January 25 to 27, 2005  London, United Kingdom
    
    West 2005 from February 1-3, 2005  San Diego, California
    
    Sea-Air-Space 2005 from March 22 to 24, 2005  Washington, D.C.
    
    MACC Show 2005 from May 17 to 20, 2005  Norfolk, Virginia
    
    International trials at the Coalition Warrior Interoperability Demonstration (CWID) from
June 13 to 23, 2005.
    
    Undersea Defense Technology, Europe 2005 conference from June 21 to 23, 2005 
Amsterdam, the Netherlands.
    
    Trafalgar 200 from June 27 to 29, 2005  London, United Kingdom
    
    Defense System and Equipment International Exhibition & Conference from September 13 to
16, 2005  London, United Kingdom.
 Competition
 Electronic Chart Precise Navigation Systems (ECPINS)
   Common Operational Picture Products (COP-IDS)
  Page 17




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##### 



Mapping
    Trademarks and Intellectual Property Rights
   Government Regulations
  Research and Product Development
  Page 18




---



##### 



Plan of Operation
  C. Organizational structure.
  
     Page 19




---



##### 



D. Property, plants and equipment.
 Human Resources and Facilities
     As at November 30, 2005AccumulatedCost
    
    
    depreciation
    
    
    NetEquipment
    
    $
    4,174,286
    
    
    $
    3,235,158
    
    
    $
    939,128Vehicle
    
    
    10,771
    
    
    
    1,240
    
    
    
    9,531Furniture and fixtures
    
    
    139,946
    
    
    
    106,993
    
    
    
    32,953Leasehold improvements
    
    
    234,175
    
    
    
    200,730
    
    
    
    33,445$
    4,559,178
    
    
    $
    3,544,121
    
    
    $
    1,015,057
 As at November 30, 2004AccumulatedCost
    
    
    depreciation
    
    
    NetEquipment
    
    $
    3,910,980
    
    
    $
    3,038,921
    
    
    $
    872,059Furniture and fixtures
    
    
    131,095
    
    
    
    94,705
    
    
    
    36,390Leasehold improvements
    
    
    222,737
    
    
    
    193,084
    
    
    
    29,653$
    4,264,812
    
    
    $
    3,326,710
    
    
    $
    938,102
 Environmental Protection Requirements
  Page 20




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##### 



Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
 Forward-Looking Statements
   A. Operating results
   Overview
   Critical Accounting Policies
 Page 21




---



##### 



Revenue recognition
        Unbilled revenue
  Unearned revenue
 Page 22




---



##### 



Accounts Receivable
  Unbilled accounts receivable
  Inventory
  Deferred Income Taxes
  Stock-Based Compensation and Other Stock-Based Payments
   Page 23




---



##### 



Impact of Recent Accounting Pronouncements
    Page 24




---



##### 



Results of Operations  November 30, 2005 compared to November 30, 2004
  Years ended November 302005
    
    
    2004Revenues:Software
    
    
    42.2
    %
    
    
    41.5
    %Systems and system components
    
    
    29.0
    %
    
    
    32.2
    %Geomatics
    
    
    26.3
    %
    
    
    22.2
    %Other
    
    
    2.5
    %
    
    
    4.2
    %100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    51.6
    %
    
    
    42.1
    %Gross profit
    
    
    48.4
    %
    
    
    57.9
    %ExpensesGeneral and administrative
    
    
    35.5
    %
    
    
    24.6
    %Research and development
    
    
    15.1
    %
    
    
    15.6
    %Sales and marketing
    
    
    21.3
    %
    
    
    23.5
    %Depreciation and amortization
    
    
    2.2
    %
    
    
    1.7
    %Interest
    
    
    (1.2
    %)
    
    
    0.0
    %Foreign exchange loss
    
    
    0.9
    %
    
    
    0.3
    %Technology Partnerships Canada royalty
    
    
    2.2
    %
    
    
    0.9
    %Technology Partnerships Canada contribution
    
    
    (9.9
    %)
    
    
    (10.9
    %)66.1
    %
    
    
    55.7
    %Earnings (loss) from operations
    
    
    (17.7
    %)
    
    
    2.2
    %Income tax expense (recovery)
    
    
    7.7
    %
    
    
    (0.3
    %)Earnings (loss)
    
    
    (25.4
    %)
    
    
    1.9
    %
 Revenues
    Page 25




---



##### 



Segment Results
     Year ended November 30, 2005Navigation
    
    
    Applications
    
    
    Mapcon
    
    
    TotalSystemsSoftware
    
    $
    3,529,076
    
    
    $
    369,347
    
    
    $
    
    
    
    $
    3,898,423Systems and system components
    
    
    5,665,590
    
    
    
    
    
    
    
    
    
    
    
    5,665,590Geomatics
    
    
    
    
    
    
    
    
    
    
    3,535,907
    
    
    
    3,535,907Other
    
    
    313,394
    
    
    
    
    
    
    
    14,126
    
    
    
    327,520Total revenues
    
    $
    9,508,060
    
    
    $
    369,347
    
    
    $
    3,550,033
    
    
    $
    13,427,440
 Year ended November 30, 2004NavigationSystems
    
    
    Applications
    
    
    Mapcon
    
    
    TotalSoftware
    
    $
    5,496,118
    
    
    $
    80,422
    
    
    $
    
    
    
    $
    5,576,540Systems and system components
    
    
    4,217,883
    
    
    
    110,857
    
    
    
    
    
    
    
    4,328,740Geomatics
    
    
    
    
    
    
    
    
    
    
    2,979,728
    
    
    
    2,979,728Other
    
    
    518,670
    
    
    
    
    
    
    
    47,625
    
    
    
    566,295Total revenues
    
    $
    10,232,671
    
    
    $
    91,279
    
    
    $
    3,027,353
    
    
    $
    13,451,303
 Page 26




---



##### 



Gross Profit
  Ò
 Segment Results
    General and Administrative Expenses
  Research and Development Expenses
   Page 27




---



##### 



Sales and Marketing Expenses
  Depreciation and Amortization
  Interest
  Foreign Exchange
    Page 28




---



##### 



Technology Partnerships Canada
      Income Taxes
   Page 29




---



##### 



Backlog
     Page 30




---



##### 



Results of Operations  November 30, 2004 compared to November 30, 2003
  Year endeds November 302004
    
    
    2003Revenues:Software
    
    
    41.5
    %
    
    
    9.0
    %Systems and system components
    
    
    32.2
    %
    
    
    53.9
    %Geomatics
    
    
    22.2
    %
    
    
    30.9
    %Other
    
    
    4.2
    %
    
    
    6.2
    %100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    42.1
    %
    
    
    44.8
    %Gross profit
    
    
    57.9
    %
    
    
    55.2
    %ExpensesGeneral and administrative
    
    
    24.6
    %
    
    
    21.7
    %Research and development
    
    
    15.6
    %
    
    
    13.4
    %Sales and marketing
    
    
    23.5
    %
    
    
    17.4
    %Depreciation and amortization
    
    
    1.7
    %
    
    
    2.1
    %Interest
    
    
    0.0
    %
    
    
    0.0
    %Foreign exchange loss
    
    
    0.3
    %
    
    
    1.6
    %Technology Partnerships Canada royalty
    
    
    0.9
    %
    
    
    0.4
    %Technology Partnerships Canada contribution
    
    
    (10.9
    %)
    
    
    (3.3
    %)55.7
    %
    
    
    53.4
    %Earnings from operations
    
    
    2.2
    %
    
    
    1.8
    %Income tax expense (recovery)
    
    
    0.3
    %
    
    
    (1.2
    %)Earnings
    
    
    1.9
    %
    
    
    3.0
    %
 Revenues
     Page 31




---



##### 



Ò
 Ò
 Segment Results
     Year ended November 30, 2004
    

SystemsNavigation
    
    
    Applications
    
    
    Geomatics
    
    
    TotalSoftware
    
    $
    5,496,118
    
    
    $
    80,422
    
    
    $
    
    
    
    $
    5,576,540Systems and system components
    
    
    4,217,883
    
    
    
    110,857
    
    
    
    
    
    
    
    4,328,740Geomatics
    
    
    
    
    
    
    
    
    
    
    2,979,728
    
    
    
    2,979,728Other
    
    
    518,670
    
    
    
    
    
    
    
    47,625
    
    
    
    566,295Total revenues
    
    
    10,232,671
    
    
    
    191,279
    
    
    
    3,027,353
    
    
    
    13,451,303
 Page 32




---



##### 



Year ended November 30, 2003
    
    NavigationSystems
    
    
    Applications
    
    
    Geomatics
    
    
    TotalSoftware
    
    $
    1,036,417
    
    
    $
    
    
    
    $
    
    
    
    $
    1,036,417Systems and system components
    
    
    6,208,464
    
    
    
    
    
    
    
    
    
    
    
    6,208,464Geomatics
    
    
    
    
    
    
    
    
    
    
    3,560,440
    
    
    
    3,560,440Other
    
    
    682,285
    
    
    
    
    
    
    
    33,187
    
    
    
    715,472Total revenues
    
    
    7,927,166
    
    
    
    
    
    
    
    3,593,627
    
    
    
    11,520,793
 Gross Profit
   Ò
 Segment Results
 Ò
   General and Administrative Expenses
  Page 33




---



##### 



Research and Development Expenses
   Sales and Marketing Expenses
  Depreciation and Amortization
  Interest
  Foreign Exchange
   Page 34




---



##### 




  Technology Partnerships Canada
      Income Taxes
  Page 35




---



##### 



Backlog
     B. Liquidity and capital resources
 Years ended November 30, 2005 and 2004
    Page 36




---



##### 



Years ended November 30, 2004 and 2003
    Page 37




---



##### 



C. Research and development, patents and licenses, etc.
  D. Trend information.
  Year ended November 30, 2004Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    4,029,760
    
    
    $
    2,773,835
    
    
    $
    2,951,571
    
    
    $
    3,696,137Gross profit
    
    $
    2,568,773
    
    
    $
    1,775,003
    
    
    $
    1,469,554
    
    
    $
    1,968,649Above as a percentage of revenue
    
    
    63.7
    %
    
    
    64.0
    %
    
    
    49.8
    %
    
    
    53.3
    %Net earnings (loss)
    
    $
    239,910
    
    
    $
    380,088
    
    
    $
    (455,922
    )
    
    $
    (227,940
    )Above as a percentage of revenue
    
    
    6.7
    %
    
    
    13.7
    %
    
    
    (15.4
    %)
    
    
    (6.2
    %)Earnings (loss) per share  basic
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )Earnings (loss) per share  diluted
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )
 Page 38




---



##### 



Year ended November 30, 2005Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    2,259,863
    
    
    $
    1,881,685
    
    
    $
    3,195,036
    
    
    $
    6,090,856Gross profit
    
    $
    1,232,108
    
    
    $
    370,351
    
    
    $
    1,763,266
    
    
    $
    3,129,293Above as a percentage of revenue
    
    
    54.5
    %
    
    
    19.7
    %
    
    
    55.2
    %
    
    
    51.4
    %Net loss
    
    $
    (219,591
    )
    
    $
    (1,697,767
    )
    
    $
    (438,996
    )
    
    $
    (1,054,840
    )Above as a percentage of revenue
    
    
    (9.7
    %)
    
    
    (90.2
    %)
    
    
    (13.7
    %)
    
    
    (17.3
    %)Loss per share  basic
    
    $
    (0.01
    )
    
    $
    (0.25
    )
    
    $
    (0.05
    )
    
    $
    (0.06
    )Loss per share  diluted
    
    $
    (0.01
    )
    
    $
    (0.25
    )
    
    $
    (0.10
    )
    
    $
    (0.10
    )
 Sales Contracts 
 Product mix 
 Strategic acquisitions
 Customers 
 Foreign Exchange
 Accounting Pronouncement
 Page 39




---



##### 



E.
    
    Off-balance sheet arrangements
 Derivatives
   Guarantees
  F. Tabular disclosure of contractual obligations.
  Payments due by periodTotal
    
    
    Less than 1 year
    
    
    1 to 3 years
    
    
    3 to 5 years
    
    
    More than 5 yearsLong-term debt obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    $
    684,723
    
    
    $
    324,426
    
    
    $
    289,329
    
    
    $
    70,968
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    684,723
    
    
    $
    324,426
    
    
    $
    289,329
    
    
    $
    70,968
    
    
    
    
 st
 G. Safe Harbor
  Page 40




---



##### 



Item 6. Directors, Senior Management and Employees
 A. Directors and senior management.
  Number andPercentage ofVoting SharesBeneficially Ownedor Controlled byDirectors andName and
    
    Principal Occupation
    
    
    
    Officers at AprilOffice Held
    
    For Past Five Years
    
    Director Since
    
    30/06(a)RAYMOND JOHNSTON
Director,
Chair of the Board,
Québec, Canada
    
    1999 to present: President,
of Chamber of Maritime Commerce, an
entity which promotes the
interests of the commercial
marine industry in Canada.
    
    11/14/00
(and from 12/94 to
9/98)
    
    269,000 common
shares (includes
215,000 options to
purchase common
shares)
0.8% of common
sharesHELMUT F. LOBMEIER
Director
British Columbia, Canada
    
    2001 to present: Retired
1979 to 2001: Co-owner PSL
Steel Ltd., and Independent
Businessman
    
    4/26/90
    
    946,695 common
shares (includes
215,000 options to
purchase common
shares)
2.7% of common
sharesCAPT. WALTER P. PURIO
Director
Texas, United States
    
    2000 to present: Independent
Marine Consultant1993 to 2000: President,
P and H Marine Associates, Inc.1985 to present: Shipmaster-
Oceans, General Dynamics,
American Overseas Marine
Corporation
    
    1/14/99
    
    348,000 common
shares (includes
215,000 options to
purchase common
shares)
1.0% of common
sharesE. BRINTON COXE
Director
Connecticut, United States
    
    1999 to present: Chair of
E.B. Coxe & Co., LLC a company which
specializes in finding, funding,
and managing small cap companies
and providing consulting
services to investment funds.1999 to present: Strategic
partner of SDS Capital Partners,
LLC, which is a group of
investment funds.
    
    7/20/04
    
    730,197 common
shares (includes
203,750
options to
purchase common
shares, warrants to
purchase 408,800
common shares, and
2,000 Class B
Series 2 Preference
shares convertible
into 117,647 common
shares
2.0% of common
shares
 Page 41




---



##### 



Number andPercentage ofVoting SharesBeneficially Ownedor Controlled byDirectors andName and
    
    Principal Occupation
    
    
    
    Officers at AprilOffice Held
    
    For Past Five Years
    
    Director Since
    
    30/06(a)GERALD J. SHIELDS
Director
British Columbia, Canada
    
    July 2005 to present: Lawyer
engaged in private practice with
the firm of Clark Wilson LLP
1998 to July 2005: Lawyer
engaged in private practice with
the firm of Godinho Sinclair
Shields
    
    4/08/05
    
    265,000 common
shares (includes
215,000 options to
purchase common
shares)
0.7% of common
sharesKENNETH H. KIRKPATRICK
Director
President and Chief Executive Officer
British Columbia, Canada
    
    November 2005 to present :
President and Chief Executive
OfficerFebruary 2005 to November 2005 :
Chief Operating OfficerMay 2001 to February 2005 : Vice
President, OperationsDecember 1997 to May 2001: Vice
President & Chief Operating
Officer, Triathlon Ltd.
subsidiary of MacDonald
Dettwiler & Associates
    
    11/07/05
    
    405,500 common shares (includes
350,000 options to
purchase common shares)
1.1% of common
sharesJOSEPH A. STROUD
Director
Virginia, United States
    
    2005 to present: Partner at
General Management Partners, LLC
1997 to present:
Partner/Consultant at 
J.F. Lehman Equity Investors I, LLP
    
    03/15/06
    
    98,750 common
shares (includes
48,750 options to
purchase common
shares)
0.3% of common
sharesDONALD W. YOUNG
Director
British Columbia, Canada
    
    2005 to present: Retired1979 to 2005: Partner at KPMG LLP
    
    03/15/06
    
    48,750 common
shares (includes
48,750 options to
purchase common
shares)
0.1% of common
sharesANDREW CARNIEL
Vice President Corporate Development
British Columbia, Canada
    
    November 2005 to present: Vice
President, Corporate Development
May 2001 to November 2005: Vice
President, Business Development
and Corporate Secretary
May 1998 to May 2001: Director
of Operations, Offshore Systems
Ltd.
    
    N/A
    
    350,000 common
shares (includes
250,000 options to
purchase common
shares)
1.0% of common
shares
 Page 42




---



##### 



Number andPercentage ofVoting SharesBeneficially Ownedor Controlled byDirectors andName and
    
    Principal Occupation
    
    
    
    Officers at AprilOffice Held
    
    For Past Five Years
    
    Director Since
    
    30/06(a)JOHN T. SENTJENS
Vice President Finance and Corporate
Secretary 
British Columbia, Canada
    
    November 2005 to present: Vice
President Finance and Corporate
Secretary
August 2001 to November 2005:
Corporate Controller
November 1999 to August 2001:
Controller, Triathlon Ltd.
subsidiary of MacDonald
Dettwiler & Associates Ltd.
    
    N/A
    
    280,000 common
shares (includes
250,000 options to
purchase common
shares)
0.8% of common
shares
 
 (a)
    
    As used in the table above, beneficial ownership means the sole or shared power to vote
or direct the voting or to dispose or direct the disposition of any security. For purposes of
this table, a person is deemed to have beneficial ownership of any securities that such person
has a right to acquire within 60 days of April 30, 2006 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.
   B. Compensation.
  Page 43




---



##### 



Listing of Directors Geographically
 Canadian Directors
    
    Raymond W. Johnston (Chair)Kenneth H. KirkpatrickHelmut F. LobmeierGerald J. ShieldsDonald W. Young (1)U.S. Directors
    
    Capt. Walter P. PurioE. Brinton CoxeJoseph A. Stroud (1)
 
 NOTE:(1)
    
    Messrs. Young and Stroud were appointed to the Board of Directors on March 15, 2006
and elected at the Companys Annual General Meeting on April 12, 2006.  Annual CompensationOther AnnualSalary
    
    
    Bonus
    
    
    CompensationName
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)Kenneth H. Kirkpatrick
    
    
    2005
    
    
    
    156,461
    
    
    
    22,000
    
    
    
    6,154President & CEO. (1)
    
    
    2004
    
    
    
    138,269
    
    
    
    10,000
    
    
    
    5,3852003
    
    
    
    129,135
    
    
    
Nil
   
    
    
    15,000John T. Sentjens
    
    
    2005
    
    
    
    108,230
    
    
    
    15,000
    
    
    
NilVice President Finance
    
    
    2004
    
    
    
    97,923
    
    
    
    7,500
    
    
    
Nil2003
    
    
    
    86,636
    
    
    
Nil

    
    
NilAndrew Carniel
    
    
    2005
    
    
    
    140,000
    
    
    
    7,500
    
    
    NilVice President Corporate Development
    
    
    2004
    
    
    
    138,269
    
    
    
    10,000
    
    
    
    1,6792003
    
    
    
    129,135
    
    
    Nil    
    
    NilWayne Hoyle
    
    
    2005
    
    
    
    105,092
    
    
    Nil    
    
    
    63,671Director of Sales (2)
    
    
    2004
    
    
    
    89,009
    
    
    Nil    
    
    
    96.4772003
    
    
    
    78,000
    
    
    Nil    
    
    
    42,575John A. Jacobson
    
    
    2005
    
    
    
    189,230
    
    
    Nil    
    
    
    222,177
    (4)Former President & CEO. (3)
    
    
    2004
    
    
    
    196,539
    
    
    
    15,000
    
    
    Nil2003
    
    
    
    179,135
    
    
    Nil    
    
    
    15,231
 
 NOTES:(1)
    
    Mr. Kirkpatrick was promoted from COO to President and CEO on November 7, 2005.(2)
    
    Mr. Hoyles remuneration arrangement includes compensation paid under a commission
arrangement tied to the closing of sales. The above figures included variable compensation
paid to him under this arrangement of $63,671 (FY2005), $96,477 (FY2004), and $42,575
(FY2003).(3)
    
    Mr. Jacobsons tenure as President and CEO ended November 7, 2005(4)
    
    Other annual compensation of Mr. Jacobson includes severance payments of $200,000
arising from termination of Mr. Jacobsons employment contract and $22,177 of vacation pay. Page 44




---



##### 



Kenneth Kirkpatrick
 John Sentjens
 Andrew Carniel
 Wayne Hoyle
 Page 45




---



##### 



Common ShareOptionsGranted

    
    Exercise

    
    Vesting

    
    ExpiryDIRECTORS NAME
    
    FY2005
    

    Price
    

    Date
    

    DateRaymond W. Johnston  Chair and Director
    
    
    45,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 2010100,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 2010Kenneth H. Kirkpatrick  President & CEO,
and Director (1)
    
    
    45,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 201010,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 2010100,000
    
    
    
    0.99
    
    
    October 25, 2005
    
    October 25, 2010133,333
    
    
    
    0.87
    
    
    November 23, 2005
    
    November 23, 2010Helmut F. Lobmeier  Director
    
    
    45,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 2010100,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 2010Captain Walter Purio  Director
    
    
    45,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12. 2010100,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 2010E. Brinton Coxe  Director
    
    
    45,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 2010100,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 2010100,000
    
    
    
    0.91
    
    
    November 14, 2005
    
    November 13, 2010Gerald J. Shields  Director
    
    
    45,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 2010100,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 2010Joseph A. Stroud  Director (2)
    
    
    
    
    
    
    
    
    

    

    
    Donald W. Young  Director (2)
    
    
    
    
    
    
    
    
    
    
    
    
 Common ShareOptionsGranted

    
    Exercise

    
    Vesting

    
    ExpiryOFFICERS NAME
    
    FY2005
    

    Price
    

    Date
    

    DateAndrew Carniel, Vice President Corporate Development
    
    
    45,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 201050,000
    
    
    
    0.99
    
    
    October 25, 2005
    
    October 25, 201050,000
    
    
    
    0.91
    
    
    November 14, 2005
    
    November 13, 201043,333
    
    
    
    0.87
    
    
    November 23, 2005
    
    November 23, 2010John T. Sentjens, Vice President Finance and
Corporate Secretary
    
    
    30,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 20105,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 201050,000
    
    
    
    0.99
    
    
    October 25, 2005
    
    October 25, 201050,000
    
    
    
    0.91
    
    
    November 14, 2005
    
    November 13, 201087,000
    
    
    
    0.87
    
    
    November 23, 2005
    
    November 23, 2010John A. Jacobson, Former President & CEO(3)
    
    
    60,000
    
    
    
    0.88
    
    
    April 12, 2005
    
    April 12, 2010120,000
    
    
    
    0.99
    
    
    July 28, 2005
    
    July 28, 2010
 
 Notes:(1)
    
    Mr. Kirkpatrick was promoted from COO to President and CEO on November 7, 2005.(2)
    
    Messrs. Young and Stroud were appointed to the Board of Directors on March 15, 2006
and elected at the Companys Annual General Meeting on April 12, 2006.(3)
    
    Mr. Jacobsons tenure as President and CEO ended on November 7, 2005. Page 46




---



##### 



Board practices
  Name
    
    Period ServedRaymond Johnston (Chair)
    
    since November 2000Kenneth H. Kirkpatrick
    
    since November 2005Helmut F. Lobmeier
    
    since April 1990Walter P. Purio
    
    since January 1999E. Brinton Coxe
    
    since July 2004Gerald J. Shields
    
    since April 2005Joseph A. Stroud
    
    since March 2006Donald W. Young
    
    since March 2006
   Duties and Obligations of the Board of Directors
   (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;
 Page 47




---



##### 



(c)
    
    engaging in succession planning, including appointing, training and monitoring senior
management (which includes ensuring that objectives are in place against which managements
performance can be measured), establishing and maintaining programs to train and develop
management, providing for the orderly succession of management, and assessing the performance
and contribution of the Chief Executive Officer of the Company against mutually established
objectives; and
 (d)
    
    ensuring that the Company has a policy in place to enable it to communicate effectively with
its shareholders, other stakeholders and the general public, effectively interpreting the
operations of the Company to shareholders, accommodating feedback from shareholders, and
ensuring that there are effective controls and information systems in place for the Board of
Directors to discharge its responsibilities, such as an audit system which can inform the
Board of Directors about the integrity of the data and the compliance of the financial
information with appropriate accounting principles.
 Committees of the Board of Directors
  Audit Committee
   (a)
    
    reviewing and monitoring the audit functions, risk-management systems, management information
systems, accounting policies, disaster recovery plans, and financial exposure of the Company
and undertaking ongoing efforts to identify risks and appropriate safeguards;
 (b)
    
    reviewing the Companys financial statements prepared by management and meeting with the
Companys external auditors to discuss the results of annual audits;
 (c)
    
    recommending for approval to the Board all public disclosure information such as financial
statements, quarterly reports, financial news releases, annual information forms, management
discussions and analyses, and prospectuses;
 (d)
    
    directly appointing, compensating, retaining and overseeing the work of the Companys
external auditors, who report directly to the Audit Committee;
 (e)
    
    establishing procedures for (i) the receipt, retention and treatment of complaints received
by the Company regarding accounting, internal accounting controls or auditing matters and (ii)
the confidential, anonymous submission by employees of the Company of concerns regarding
questionable accounting and auditing matters;
 (f)
    
    engaging independent counsel and other advisors, as it deems necessary to carry out its
duties; and
  Human Resource and Compensation Committee
   Page 48




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##### 



Executive Committee
   (a)
    
    recommending to the Board corporate procedures in order to address the issues of corporate
governance within the organization;
  (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.
 (e)
    
    approving the engagement of individual directors and outside advisors at the Companys
expense at appropriate circumstances.
 (f)
    
    overseeing the Companys activities in the area of investor relations and relations with the
capital markets.
 D. Employees
   Year ended November 30
    
    Canada
    
    U.S.
    
    Denmark
    
    Australia
    
    Total2005
    
    
    76
    
    
    
    12
    
    
    
    
    
    
    
    1
    
    
    
    892004
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    702003
    
    
    56
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    57
  E. Share ownership
   Page 49




---



##### 



Page 50




---



##### 



Item 7. Major Shareholders and Related Party Transactions
 A. Major shareholders.
  Common Shares Beneficially Owned (uponconversion of Class B Series 2Class B Series 2 Preference Shares
    
    Preference Shares )Name of Shareholders
    
    #
    
    %
    
    #
    
    %North Sound Legacy International Ltd.North Sound Legacy Institutional Fund LLC
    
    
    79,320
    (1)
    
    
    25.0
    %
    
    
    7,973,204
    (1)
    
    
    21.7
    %North Sound Legacy Fund LLCSF Capital Partners Ltd.
    
    
    48,600
    
    
    
    15.3
    %
    
    
    4,287,664
    (2)
    
    
    11.5
    %Crestview Capital Master, LLC
    
    
    30,400
    
    
    
    9.6
    %
    
    
    2,681,995
    (3)
    
    
    7.5
    %SDS Capital Group SPC, Ltd.
    
    
    18,500
    
    
    
    5.8
    %
    
    
    2,371,169
    (4)
    
    
    6.7
    %Basso Multi-Strategy Holding Fund Ltd.Basso Private Opportunity Holding Fund Ltd.
    
    
    24,300
    (5)
    
    
    7.7
    %
    
    
    2,143,831
    (5)
    
    
    6.3
    %Millennium Partners, LP
    
    
    24,300
    
    
    
    7.7
    %
    
    
2,143,831
    (6)
    
    
6.3
    %Shannon River Partners II, LP
    
    
    24,300
    (7)
    
    
    7.7
    %
    
    
    2,143,831
    (7)
    
    
    6.3
    %Shannon River Partners, LP
 Class A Series APreference SharesConvertible#
    
    %John Visnapu
    
    
    16,376
    
    
    
    54.1
    %G.A. Lachapelle
    
    
    3,275
    
    
    
    10.8
    %Dennis Kong
    
    
    3,275
    
    
    
    10.8
    %Daniel Jacobson*
    
    
    3,275
    
    
    
    10.8
    %
 
 *
    
    - unrelated to John Jacobson, former President and CEO of the Company.(1)
    
    Consist of 47,040 Class B Series 2 Preference Shares convertible into 2,767,059
Common Shares and Warrants to purchase 1,382,976 Common Shares held by North Sound Legacy
International Ltd.; 29,420 Class B Series 2 Preference Shares convertible into 1,730,588 Common
Shares and Warrants to purchase 864,948 Common Shares held by North Sound Legacy Institutional Fund
LLC, a related group; and 2,860 Class B Series 2 Preference Shares convertible into 168,235 Common
Shares and Warrants to purchase 84,084 Common Shares held by North Sound Legacy Fund LLC, a related
group.(2)
    
    Consist of 48,600 Class B Series 2 Preference Shares convertible into 2,858,824
Common Shares and Warrants to purchase 1,428,840 Common Shares. Page 51




---



##### 



(3)
    
    Consist of 30,400 Class B Series 2 Preference Shares convertible into 1,788,235
Common Shares and Warrants to purchase 893,760 Common Shares.(4)
    
    Consist of 18,500 Class B Series 2 Preference Shares convertible into 1,088,235
Common Shares and Warrants to purchase 864,948 Common Shares.(5)
    
    Consist of 18,700 Class B Series 2 Preference Shares convertible into 1,100,000
Common Shares and Warrants to purchase 549,780 Common Shares held by Basso Multi-Strategy Holding
Fund Ltd. and 5,600 Class B Series 2 Preference Shares convertible into 329,412 Common Shares and
Warrants to purchase 164,640 Common Shares held by Basso Private Opportunity Holding Fund, a
related group.(6)
    
    Consist of 24,300 Class B Series 2 Preference Shares convertible into 1,429,412
Common Shares and Warrants to purchase 714,420 Common Shares.(7)
    
    Consist of 14,300 Class B Series 2 Preference Shares convertible into 841,176
Common Shares and Warrants to purchase 420,420 Common Shares held by Shannon River Partners II, LP
and 10,000 Class B Series 2 Preference Shares convertible into 588,235 Common Shares and Warrants
to purchase 294,000 Common Shares held by Shannon River Partners, LP, a related group.  ,
 B. Related party transactions.
   Page 52




---



##### 



C.
    
    Interests of experts and counsel.
 .
 Page 53




---



##### 



Item 8. Financial Information
 A.
    
    Consolidated statements and other financial information.
   FY2005
    
    
    FY2004
    
    
    FY2003$
    
    
    $
    
    
    $Europe
    
    
    4,939,931
    
    
    
    4,332,392
    
    
    
    2,094,063United States
    
    
    2,907,793
    
    
    
    2,872,860
    
    
    
    5,103,062Canada
    
    
    2,914,744
    
    
    
    1,427,288
    
    
    
    3,296,257Australia/New Zealand
    
    
    2,593,635
    
    
    
    4,818,763
    
    
    
    1,021,844Other
    
    
    71,337
    
    
    
    
    
    
    
    5,567Total revenues
    
    
    13,427,440
    
    
    
    13,451,303
    
    
    
    11,520,793
 .
  
    
    The Company and four employees became the objects of a lawsuit by Triathlon Ltd., a
subsidiary of MacDonald, Dettwiler and Associates Ltd., related to the use of confidential
information and breach of fiduciary duty. The Company believes the suit poses limited
financial risk. The Companys current C.E.O. and President and the Vice President Finance were
officers of Triathlon Ltd. prior to their employment with the Company. This suit remains
unresolved.
  B.
    
    Significant changes.
  Page 54




---



##### 



Item 9. The Offer and Listing
 A.
    
    Offer and listing details.
   
    
    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 C$)
    
    OTCBB (in US$)High
    
    Low
    
    High
    
    LowYearFiscal year ended November 30, 2001(*)
    
    $
    1.25
    
    
    $
    0.36
    
    
    
    
    
    
    
    Fiscal year ended November 30, 2002(**)
    
    $
    1.95
    
    
    $
    0.90
    
    
    $
    0.80
    
    
    $
    0.60Fiscal year ended November 30, 2003
    
    $
    1.35
    
    
    $
    0.76
    
    
    $
    0.95
    
    
    $
    0.60Fiscal year ended November 30, 2004
    
    $
    1.50
    
    
    $
    0.76
    
    
    $
    1.30
    
    
    $
    0.62Fiscal year ended November 30, 2005
    
    $
    1.14
    
    
    $
    0.70
    
    
    $
    0.96
    
    
    $
    0.53Year Ending November 30, 2004First Quarter
    
    $
    1.50
    
    
    $
    0.91
    
    
    $
    1.30
    
    
    $
    0.74Second Quarter
    
    $
    1.42
    
    
    $
    1.02
    
    
    $
    1.12
    
    
    $
    0.76Third Quarter
    
    $
    1.14
    
    
    $
    0.80
    
    
    $
    0.94
    
    
    $
    0.67Fourth Quarter
    
    $
    1.15
    
    
    $
    0.76
    
    
    $
    0.99
    
    
    $
    0.62
 Page 55




---



##### 



Price per shareTSX (in C$)
    
    OTCBB (in US$)High
    
    Low
    
    High
    
    LowYear Ending November 30, 2005First Quarter
    
    $
    0.90
    
    
    $
    0.70
    
    
    $
    0.78
    
    
    $
    0.60Second Quarter
    
    $
    0.94
    
    
    $
    0.67
    
    
    $
    0.80
    
    
    $
    0.53Third Quarter
    
    $
    1.14
    
    
    $
    0.70
    
    
    $
    0.95
    
    
    $
    0.53Fourth Quarter
    
    $
    1.11
    
    
    $
    0.75
    
    
    $
    0.96
    
    
    $
    0.70Year Ending November 30, 2006First Quarter
    
    $
    0.94
    
    
    $
    0.65
    
    
    $
    0.85
    
    
    $
    0.61Most Recent Six MonthsNovember 2005
    
    $
    0.94
    
    
    $
    0.77
    
    
    $
    0.84
    
    
    $
    0.71December 2005
    
    $
    0.90
    
    
    $
    0.74
    
    
    $
    0.85
    
    
    $
    0.65January 2006
    
    $
    0.82
    
    
    $
    0.65
    
    
    $
    0.68
    
    
    $
    0.58February 2006
    
    $
    0.94
    
    
    $
    0.70
    
    
    $
    0.73
    
    
    $
    0.61March 2006
    
    $
    0.86
    
    
    $
    0.73
    
    
    $
    0.75
    
    
    $
    0.65April 2006
    
    $
    0.85
    
    
    $
    0.68
    
    
    $
    0.74
    
    
    $
    0.60
 
 * 
    
    information not available for OTCBB**
    
 information available for October and November 2002 only B.
    
    Plan of distribution.
  C.
    
    Markets.
  D.
    
    Selling shareholders.
  E.
    
    Dilution.
  F.
    
    Expenses of the issue.
  Page 56




---



##### 



Item 10. Additional Information
 A.
    
    Share capital.
  B.
    
    Memorandum and articles of association.
  Directors Powers and Conflicts of Interest
   Borrowing Powers
 2/3
 Page 57




---



##### 



Directors
      Rights Attached to Shares
  
    
    an unlimited number of Common Shares without par value
    
    100,000,000 Class A Preference Shares without value, issuable in series
    
    100,000,000 Class B Preference Shares with a par value of $50 each, issuable in series, and
    
    an unlimited number of Class C Preference Shares without par value issuable in series.
  a)
    
    Unlimited number of Common Shares without par value  Each Common Share carries the right to
one vote at any general meeting of shareholders of the Company. Cumulative voting is not
permitted or required. Dividends are payable on the Common Shares at the discretion of the
Board of Directors. The holders of the Common Shares are not liable to further capital calls
on such shares by the Company. In the event of the liquidation, dissolution or winding-up of
the Company or any distribution of its assets for the purpose of winding up its affairs, after
the payment of any dividends which have been declared but had not been paid, the Common Shares
rank subordinate to the Class A Preference Shares, the Class B Preference Shares and the Class
C Preference Shares with respect to the amount paid up capital together with any fixed premium
with respect of such Class A Preference Shares and Class B Preference Shares. Thereafter, the
Class A Preference Shares, Class B Preference Shares and Class C Preference Shares are not
entitled to any further distributions and the holders of the Common Shares shall be entitled
to the distribution of all residual amounts. The Common Shares are not redeemable at the
option of the Company or the holders. Except as expressly provided by any special rights and
restrictions which the directors may create, define or attach to any series of Class A
Preference Shares, Class B Preference Shares or Class C Preference Shares (described below),
the directors of the Company may, in their discretion, declare dividends with respect to the
Common Shares only or with
 Page 58




---



##### 



respect to any other class or series of shares. To date, the Class A Series A Preference
Shares Convertible, the Class B Series 1 Preference Shares and the Class B Series 2
Preference are the only Preference Shares which have been issued with a priority for payment
of dividends over the Common Shares. There are no sinking fund provisions respecting the
Common Shares.b)
    
    100,000,000 Class A Preference Shares without par value  These shares may be issued in one
or more series. The directors have the power to alter the Notice of Articles and Articles of
the Company from time to time to fix the number of shares in, and to determine the rights,
privileges and restrictions attached to each series of Class A Preference Shares, including
voting rights; however, no one series of Class A Preference Shares may be issued with a right
to payment of dividends or a return of capital on a winding-up or dissolution of the Company
in priority to any other series of Class A Preference Shares. In addition, if the right to
cumulative dividends is attached to a series of Class A Preference Shares issued by the
Company, and such dividends are not paid in full, the shares of all series of the Class A
Preference Shares are entitled to participate ratably in respect of accumulated dividends in
accordance with the amounts that would be payable on those shares if all the accumulated
dividends were paid in full. In the event of the liquidation, dissolution, or winding-up of
the Company or any distribution of its assets for the purpose of winding up its affairs, after
the payment of any dividends which have been declared but unpaid, the holders of the Class A
Preference Shares and the Class B Preference Shares shall be entitled pari passu to be paid
such amount as the special rights and restrictions attaching to such shares shall provide and,
in the absence of any express provision with respect to such payments, the amount of paid up
capital on such shares, out of the assets of the Company in preference to and in priority over
any payment or distribution of any capital asset or monies to the holders of the Common Shares
of the Company. After such payment, the holders of the Class A Preference Shares, and Class B
Preference Shares and Class C Preference Shares shall not be entitled to share in any other
distribution of the property or assets of the Company. Once a series of Class A Preference
Shares is designated by the Board of Directors, the rights, privileges and conditions attached
to such series of Class A Preference Shares may be altered or amended only by way of a special
resolution passed by a majority of not less than 662/3% of the votes cast by
holders of voting shares at a meeting of the holders of that series of Class A Preference
Shares.To date, only one series of shares has been designated by the Board of Directors out of the
Class A Preference Shares, namely, 10,000,000 shares which have been designated as Class A
Preference Shares Series A Convertible without par value the (Series A Convertible
Shares). Each Series A Convertible Share entitles the holder to one vote either in person
or by proxy at any general meeting of the shareholders of the Company. Each Series A
Convertible Share may be converted at the option of the holder into one Common Share at any
time. In each calendar year, the holders of the Series A Convertible Shares shall be
entitled to receive, in priority to the Common Shares, non-cumulative dividends at a rate
not exceeding $0.01 per Series A Convertible Share, when, as and if so declared by the Board
of Directors, in its discretion, out of the net profits and surplus of the Company properly
applicable to the payment of dividends. The Series A Convertible Shares are not subject to
any right of redemption at the option of the holder or the Company. In the event of the
liquidation, dissolution, or winding-up of the Company or any distribution of its assets for
the purpose of winding up its affairs, after the payment of any dividends which have been
declared or accrued but unpaid, the holders of the Series A Convertible Shares shall be
entitled to be paid the amount of paid up capital on such shares, out of the assets of the
Company in preference to and in priority over any payment or distribution of any capital
asset or monies to the holders of the Common Shares of the Company, but in subordination to
payment of the paid up capital plus any accrued but unpaid dividends on the Class B
Preference Shares. After such payment, the holders of the Series A Convertible Shares shall
not be entitled to share in any other distribution of the property or assets of the Company.
There are no sinking fund provisions for any further capital calls on such shares. All
issued and outstanding Series A Convertible Shares are fully paid.c)
    
    100,000,000 Class B Preference Shares with a par value of $50.00 each  These shares may be
issued in one or more series. The directors have the power to alter the Notice of Articles
and Articles of the Company from time to time to fix the number of shares in, and to determine
the rights, privileges and restrictions attached to each series of Class B Preference Shares,
including voting rights; however, no one series of Class B Preference Shares may be issued
with rights to payment of dividends or a return of capital on a winding-up or dissolution of
the Company in priority to any other series of Class B Preference Shares. In addition, if the
right to cumulative dividends is attached to a series of Class B Preference Shares issued by
the Company, and such
 Page 59




---



##### 



dividends are not paid in full, the shares of all series of Class B Preference Shares are
entitled to participate ratably in respect of accumulated dividends in accordance with the
amounts that would be payable on those shares if all the accumulated dividends were paid in
full. In the event of the liquidation, dissolution, or winding-up of the Company or any
distribution of its assets for the purpose of winding up its affairs, after the payment of
any dividends which have been declared but unpaid, the holders of the Class A Preference
Shares described above and the Class B Preference Shares shall be entitled pari passu to be
paid such amount as the special rights and restrictions attached to such shares shall
provide and, in the absence of any express provision with respect to such payments, the
amount of paid up capital on such shares, out of the assets of the Company in preference to
and priority over any payment or distribution of any capital asset or monies to the holders
of the Common Shares of the Company. After such payment, the holders of the Class A
Preference Shares and Class B Preference Shares shall not be entitled to share in any other
distribution of the property or assets of the Company. Once a series of Class B Preference
Shares is designated by the Board of Directors, the rights, privileges and conditions
attached to such series of Class B Preference Shares may be altered or amended only by a
special resolution passed by a majority of not less than 662/3% of the votes cast
by holders of voting shares at a meeting of the holders of that series of Class B Preference
Shares.To date, two series of shares have been designated by the Board of Directors out of the
Class B Preference Shares as follows:
 (i)
    
    10,000,000 million shares which have been designated as Class B Series 1
Preference Shares with a par value of $50.00 each (Series 1 Preference Shares).
Each Series 1 Preference Share entitles the holder to one vote either in person or by
proxy at any general meeting of the shareholders of the Company. Each Series 1
Preference Share may be converted at the option of the holder into 45.5 Common Shares
at any time. The Company has the right to require the shareholders of the Class B
Series 1 Preference Shares to convert each such share into 45.5 Common Shares if (i) at
any time after 13 months following the issuance of the Series 1 Preference Share, the
closing trade price of the Companys Common Shares exceeds $2 for at least 20
consecutive trading days, or (ii) at any time, the Company completes a firm public
underwritten offering of its Common Shares for more than US$40,000,000 at a price per
Common Share greater than $2.20. The holders of the Class B Series 1 Preference Shares
shall be entitled to receive in each calendar year when, as and if declared by the
Board of Directors, in its discretion, cumulative dividends at a rate of $3.00 per
Series 1 Preference Share, out of the net profits and surplus of the Company properly
applicable to the payment of dividends, in priority to the payment of any dividend on
the Common Shares or Class A Preference Shares. The Class B Series 1 Preference Shares
are redeemable at the option of the Company at any time after the fifth anniversary of
the issuance date for an amount equal to the original issuance price plus all accrued
but unpaid dividends on such shares. The Class B Series 1 Preference Shares are not
subject to any right of redemption at the option of the holder. In the event of the
liquidation, dissolution, or winding-up of the Company or any distribution of its
assets for the purpose of winding up its affairs, the holders of the Class B Series 1
Preference Shares shall be entitled to be paid the amount of paid up capital plus all
accrued but unpaid dividends on such shares, out of the assets of the Company in
preference to and in priority over any payment or distribution of any capital asset or
monies to the holders of the Common Shares or Class A Preference Shares. After such
payment, the holders of the Class B Series 1 Preference Shares shall not be entitled to
share in any other distribution of the property or assets of the Company. There are no
sinking fund provisions for any further capital calls on such shares. All issued and
outstanding Class B Series 1 Preference Shares are fully paid; and(ii)
    
    10,000,000 million shares which have been designated as Class B Series 2
Preference Shares with a par value of $50.00 each (Series 2 Preference Shares). Each
Series 2 Preference Share entitles the holder to one vote either in person or by proxy
at any general meeting of the shareholders of the Company. Each Series 2 Preference
Share may be converted at the option of the holder into 58.82 Common Shares at any
time. The Company has the right to require the shareholders of the Class B Series 2
Preference Shares to convert each such share into 58.82 Common Shares if (i) at any
time after 12 months following the issuance of the Series 2 Preference Share, the
closing trade price of the Companys Common Shares exceeds CDN$2.13 for at least 20
consecutive trading days, or (ii) at any
 Page 60




---



##### 



time, the Company completes a firm commitment public underwritten offering of its
Common Shares for more than CDN$40,000,000 at a price per Common Share greater than
$1.70. The holders of the Class B Series 2 Preference Shares shall be entitled to
receive in each calendar year when, as and if declared by the Board of Directors, in
its discretion, cumulative dividends at a rate of 7% of the amount of paid up capital
on each Class B Series 2 Preference Share, out of the net profits and surplus of the
Company properly applicable to the payment of dividends, in priority to the payment
of any dividend on the Common Shares, Class A Preference Shares. The Class B Series
2 Preference Shares are redeemable at the option of the Company at any time after the
third anniversary of the issuance date for an amount equal to the original issuance
price plus all accrued but unpaid dividends on such shares. The Class B Series 2
Preference Shares are not subject to any right of redemption at the option of the
holder. In the event of the liquidation, dissolution, or winding-up of the Company
or any distribution of its assets for the purpose of winding up its affairs, the
holders of the Class B Series 2 Preference Shares shall be entitled to be paid the
amount of paid up capital plus all accrued but unpaid dividends on such shares, out
of the assets of the Company in preference to and in priority over any payment or
distribution of any capital asset or monies to the holders of the Common Shares or
class of shares ranking junior to the Class B Class B Series 2 Preference Shares.
After such payment, the holders of the Class B Series 2 Preference Shares shall not
be entitled to share in any other distribution of the property or assets of the
Company. There are no sinking fund provisions for any further capital calls on such
shares. All issued and outstanding Class B Series 2 Preference Shares are fully
paid.
 (d)
    
    An unlimited number of Class C Preference shares without par value -These shares may be
issued in one or more series. The directors have the power to alter the Notice of Articles and
Articles from time to time to fix the number of shares in, and to determine the rights,
privileges and restrictions attached to each series of Class C Preference shares, including
voting rights; however, no one series of Class C shares may be issued with rights to payment
of dividends or a return of capital on a winding-up or dissolution of the Company in priority
to any other series of the Class C Preference shares. In addition, if the right to cumulative
dividends is attached to a series of Class C Preference shares issued by the Company, and such
dividends are not paid in full, the shares of all series of the Class C Preference shares are
entitled to participate ratably in respect of accumulated dividends in accordance with the
amounts that would be payable on those shares if all the accumulated dividends were paid in
full. The holders of Class C Preference Shares shall be entitled, on the liquidation or
dissolution of the Company, whether voluntary or involuntary, or on any other distribution of
its assets among its shareholders for the purpose of winding up its affairs, to receive,
before any distribution is made to the holders of common shares or any other shares of the
Company ranking junior to the Class C Preference Shares with respect to repayment of capital
on the liquidation or dissolution of the Company, whether voluntary or involuntary, or on any
other distribution of its assets among its shareholders for the purpose of winding up its
affairs, the amount paid up with respect to each Preferred share held by them, together with
the fixed premium (if any) thereon, all accrued and unpaid cumulative dividends (if any and if
preferential) thereon, which for such purpose shall be calculated as if such dividends were
accruing on a day-to-day basis up to the date of such distribution, whether or not earned or
declared, and all declared and unpaid non-cumulative dividends (if any and if preferential)
thereon. After payment to the holders of Class C Preference Shares of the amounts so payable
to them, they shall not, as such, be entitled to share in any further distribution of the
property or assets of the Company except as specifically provided in the special rights and
restrictions attached to any particular series. Once a series of Class C shares is designated
by the Board of Directors of the Company, the rights, privileges and conditions attached to
such series of Class C Preference shares may be altered or amended only by way of a special
resolution passed by a majority of not less than 662/3% of the votes cast by
holders of voting shares at a meeting of the holders of that series of Class C Preference
shares. To date, none of the Class C Preference shares have been issued in any series, nor has
any such series been designated by the Board of Directors.
 Alteration of the Rights of Shareholders
 2/3
 Page 61




---



##### 



Shareholders Meetings
              Page 62




---



##### 



C.
    
    Material Contracts.
        Page 63




---



##### 



D.
    
    Exchange controls.
  E.
    
    Income Taxation.
  U.S. Holder of Common Shares
  Page 64




---



##### 




    
    for purposes of the Income Tax Act (Canada) (ITA) and the Canada-United States
Income Tax Convention (1980), as amended by the protocol signed on July 29, 1997,
(Treaty) are residents of the U.S., not Limited Liability Corporations (LLC) and have
never been residents of Canada;
    
    for purposes of the U.S. Internal Revenue Code of 1986 (Code) are U.S. persons;
    
    deal at arms length with the Company;
    
    will hold the Common Shares as capital property for purposes of the ITA;
    
    will hold the Common Shares as capital assets for purposes of the Code;
    
    do not and will not hold the Common Shares in carrying on a business in Canada;
    
    will not perform independent personal services from a fixed base situated in Canada; and
    
    are not or will not be subject to special provisions of Canadian or U.S. federal
income tax law, including, without limiting the generality of the foregoing, financial
institutions, real estate investment trusts, shareholders that have a functional
currency other than the U.S. dollar, shareholders that own shares through a partnership
or other pass-through entity, shareholders that hold shares as part of a straddle,
hedge or conversion transaction, tax-exempt organizations, qualified retirement plans,
insurance companies, shareholders who acquired their shares through the exercise of
employee stock options or otherwise as compensation and mutual fund companies.
  
    
    the ITA and the Income Tax Regulations (Canada) (Regulations);
    
    published proposals to amend the ITA and the Regulations;
    
    published administrative positions and practices of the Canada Revenue Agency (CRA);
    
    the Code, as amended;
    
    Treasury Regulations;
    
    published Internal Revenue Service (IRS) rulings;
    
    published administrative positions of the IRS;
    
    published jurisprudence that is considered applicable; and
    
    the Treaty.
   Canadian Federal Income Tax Consequences
 Disposition of Common Shares
  Page 65




---



##### 



Dividend Distributions on Shares of the Company
  United States Federal Income Tax Consequences
  Disposition of Common Shares
  Dividend Distributions on Shares of the Company
   Foreign Tax Credit
  Page 66




---



##### 



Passive Foreign Investment Company Rules
  
    
    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.
   
    
    the excess distributions (generally any distributions received by
a shareholder of a PFIC in any taxable year that are greater than
125% of the average annual distributions received by such
shareholder in the three preceding taxable years or the
shareholders holding period for the shares, if shorter) or gain
would be allocated on a pro rata basis over a U.S. Holder of
Common Shares holding period for the shares;
    
    the amount allocated to the current taxable year and any taxable
year prior to the first taxable year in which the Company is a
PFIC would be treated as ordinary income in the current taxable
year; and
    
    the amount allocated to each of the other taxable years would be
subject to the highest rate of tax on ordinary income in effect
for that year and to an interest charge based on the value of the
tax deferred during the period during which the shares are owned.
     Controlled Foreign Corporation Rules
  Page 67




---



##### 



F.
    
    Dividends and paying agents.
  G.
    
    Statement by experts.
  H.
    
    Documents on display.
    I.
    
    Subsidiary information.
  
 Item 11. Quantitative and Qualitative Disclosure about Market Risk
 Foreign Exchange Risk
   Page 68




---



##### 



 
  Interest rate risk
  Credit Risk
  Page 69




---



##### 



Item 12. Description of Securities Other than Equity Securities
  Page 70




---



##### 



Part II
 
 Item 13. Defaults, Dividends Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15. Controls and Procedures
    
 Item 16. [Reserved]
  
 Item 16A. Audit committee financial expert
  
 Item 16B. Code of ethics
 www.osil.com
 Page 71




---



##### 



Item 16C. Principal Accountant Fees and Services
 .
  Years ended November 30
    
    2005
    
    
    2004Audit fees
    
    $
    212,634
    
    
    $
    68,161Audit-related fees
    
    
    100,609
    
    
    
    74,133Tax fees
    
    
    147,170
    
    
    
    107,660All other fees
    
    
    3,039
    
    
    
    Total
    
    $
    463,452
    
    
    $
    249,954
      
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by Issuer and Affiliated Purchasers
  Page 72




---



##### 



Part III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  Financial Statement Schedules
  F1
    
    Independent Auditors Report  November 30, 2005F2
    
    Consolidated Balance Sheets as of November 30, 2005 and 2004F3
    
    Consolidated Statements of Earnings (Loss) for the years ended
November 30, 2005, 2004 and 2003F4
    
    Consolidated Statements of Stockholders Equity and Accumulated
Deficit for the years ended November 30, 2005, 2004 and 2003F5
    
    Consolidated Statements of Cash Flow for the years ended
November 30, 2005, 2004 and 2003F6
    
    Notes to the Consolidated Financial Statements  November 30, 2005, 2004 and 2003
 Page 73




---



##### 



Item 19. Exhibits
 Exhibit Number
    
    Description1.1(4)
    
    Articles pursuant to The Business Corporations Act of British Columbia4.1(1)
    
    Contract  No. X0132 between Naval Materiel Command, Denmark and Offshore Systems
Ltd. dated August 20, 2001.4.2(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(2)
    
    Contract No. GS-35F-0211L between the United States Coast Guard and Offshore
Systems Ltd. dated June 14, 2002.4.4(3)
    
    Contract No. 265-004-002 between the Nautronix Ltd. and Offshore Systems Ltd.
dated March 18, 2004.4.5(1)
    
    Shareholders Rights Plan.4.6 (4)
    
    Agreement, dated April 26, 2004, between the Company and Technology
Partnerships Canada4.7(4)
    
    Contract between C.E. Unterberg, Towbin, LLC and Offshore Systems International
Ltd. dated March 8, 2005.4.8(4)
    
    Contract between Mr. E. Brinton Coxe and Offshore Systems International Ltd.
dated March 8, 2005.4.9(4)
    
    Subscription agreement.4.10(4)
    
    Letter of Intent to acquire Mapcon Mapping Consultants Inc.4.11
    
    CHI Systems Inc. Purchase Agreement8.1
    
    List of Subsidiaries and Jurisdictions.11.1(3)
    
    Code of Ethics12.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Previously filed with the Companys Form 20-F, dated as of July 24, 2002 and
incorporated by reference herein.(2)
    
    Previously filed with the Companys Form 20-F/A, dated as of September 10, 2002 and
incorporated by reference herein.(3)
    
    Previously filed with the Companys Form 20-F, dated as of May 27, 2004 and
incorporated by reference herein.(4)
    
    Previously filed with the Companys Form 20-F, dated as of May 30, 2005 and
incorporated by reference herein. Page 74




---



##### 



SIGNATURES
  OFFSHORE SYSTEMS INTERNATIONAL LTD.Dated: May 26, 2006
    
    By:
    
    /s/ Ken KirkpatrickKenneth H. KirkpatrickPresident & CEO
 Page 75




---



##### 



Exhibits Attached
 Exhibit Number
    
    Description4.11
    
    CHI Systems Inc. Share Purchase Agreement8.1
    
    List of Subsidiaries and Jurisdictions.12.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 Page 76




---



##### 



Offshore Systems International Ltd.
 Consolidated Financial Statements
November 30, 2005
(expressed in Canadian dollars)




---



##### 



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 Offshore Systems International Ltd.
 Offshore Systems
International Ltd.
   (Ernst & Young LLP)Vancouver, Canada,February 17, 2006.
    
    Chartered Accountants
 Page 78F1




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Balance SheetsAs at November 30, 2005 and 2004(Incorporated under the laws of the Province of British Columbia)(expressed in Canadian dollars)
 2005
    
    
    2004Assets(note 11)Current assetsCash and cash equivalents
    
    $
    9,599,801
    
    
    $
    251,037Restricted cash (note 4)
    
    
    221,264
    
    
    
    Accounts receivable (note 6)
    
    
    11,002,470
    
    
    
    9,140,478Inventory (note 7)
    
    
    1,094,634
    
    
    
    649,427Prepaid expenses and deposits
    
    
    624,629
    
    
    
    142,752Deferred income taxes (note 16)
    
    
    
    
    
    
    780,33125,542,798
    
    
    
    10,964,025Plant and equipment(note 8)
    
    
    1,015,057
    
    
    
    938,102Intangible and other assets(note 9)
    
    
    732,912
    
    
    
    408,611Goodwill(note 5)
    
    
    481,014
    
    
    
    $
    24,771,781
    
    
    $
    12,310,738LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities (note 10)
    
    $
    3,919,534
    
    
    $
    2,596,362Income taxes payable
    
    
    284,833
    
    
    
    Unearned revenue
    
    
    530,321
    
    
    
    79,8654,734,688
    
    
    
    2,676,227Deferred income taxes(note 16)
    
    
    230,806
    
    
    
    4,965,494
    
    
    
    2,676,227Stockholders EquityCapital stockAuthorized (note 12(a))Issued and outstanding30,262 Class A preference shares  Series A (2004  30,262) (note 12(c))
    
    
    30,262
    
    
    
    30,262nil Class B preference shares  Series 1 (2004  57,711) (note 12(d)(i))
    
    
    
    
    
    
    2,163,621341,240 Class B preference shares  Series 2 (2004  nil) (note 12(d)(ii)
    
    
    11,412,208
    
    
    
    30,367,309 common shares (2004  27,488,074) (note 12(b))
    
    
    22,832,892
    
    
    
    20,047,73134,275,362
    
    
    
    22,241,614Warrants(note 12(e))
    
    
    5,207,234
    
    
    
    661,575Additional paid-in capital
    
    
    4,743,012
    
    
    
    928,169Accumulated Deficit
    
    
    (24,446,827
    )
    
    
    (14,196,847
    )Accumulated other comprehensive income
    
    
    27,506
    
    
    
    19,806,287
    
    
    
    9,634,511$
    24,771,781
    
    
    $
    12,310,738Commitments and contingencies(note 14)Subsequent events(note 17)
 Approved by the Board of Directors
 /s/
Raymond Johnston
    
    
    
    /s/ Helmut
LobmeierDirector
    
    
    
    Director
 Page 79See accompanying notes to consolidated financial statements.
    
    F2




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Statements of Earnings (Loss)For the years ended November 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 2005
    
    
    2004
    
    
    2003RevenueSystems and system components
    
    $
    5,665,590
    
    
    $
    4,328,740
    
    
    $
    6,208,464Software
    
    
    3,898,423
    
    
    
    5,576,540
    
    
    
    1,036,417Geomatics
    
    
    3,535,907
    
    
    
    2,979,728
    
    
    
    3,560,440Other
    
    
    327,520
    
    
    
    566,295
    
    
    
    715,47213,427,440
    
    
    
    13,451,303
    
    
    
    11,520,793Cost of sales
    
    
    6,932,421
    
    
    
    5,669,324
    
    
    
    5,159,068Gross profit
    
    
    6,495,019
    
    
    
    7,781,979
    
    
    
    6,361,725ExpensesGeneral and administrative
    
    
    4,763,190
    
    
    
    3,330,119
    
    
    
    2,498,021Research and development
    
    
    2,023,180
    
    
    
    2,104,806
    
    
    
    1,548,523Sales and marketing
    
    
    2,864,282
    
    
    
    3,160,359
    
    
    
    2,000,238Depreciation and amortization
    
    
    300,286
    
    
    
    231,033
    
    
    
    241,295Interest expense
    
    
    28,537
    
    
    
    2,045
    
    
    
    2,824Interest income
    
    
    (187,751
    )
    
    
    (27,707
    )
    
    
    Foreign exchange loss
    
    
    122,310
    
    
    
    38,338
    
    
    
    185,314Technology Partnerships Canada royalty (note 13)
    
    
    298,289
    
    
    
    124,425
    
    
    
    50,473Technology Partnerships Canada contribution (note 13)
    
    
    (1,337,770
    )
    
    
    (1,471,414
    )
    
    
    (376,880
    )8,874,553
    
    
    
    7,492,004
    
    
    
    6,149,808Net earnings (loss) before income taxes
    
    
    (2,379,534
    )
    
    
    289,975
    
    
    
    211,917Income tax expense (recovery)(note 16)Deferred income tax expense (recovery)
    
    
    858,407
    
    
    
    (479,446
    )
    
    
    (363,484
    )Current income tax expense (recovery)
    
    
    173,253
    
    
    
    521,404
    
    
    
    223,3851,031,660
    
    
    
    41,958
    
    
    
    (140,099
    )Net earnings (loss)
    
    $
    (3,411,194
    )
    
    $
    248,017
    
    
    $
    352,016Net earnings (loss) attributable to common shareholders
    
    $
    (10,249,981
    )
    
    $
    (58,873
    )
    
    $
    (565,826
    )Earnings per share(note 12(g))Basic
    
    $
    (0.37
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.37
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted average number of common shares outstanding
(note 12(g))Basic
    
    
    27,989,832
    
    
    
    27,147,246
    
    
    
    25,977,123Diluted
    
    
    27,989,832
    
    
    
    29,856,412
    
    
    
    27,142,492Dividends declared per shareClass B preference shares  Series 1
    
    $
    2.76
    
    
    $
    4.50
    
    
    $
    0.87Class B preference shares  Series 2
    
    $
    4.02
    
    
    $
    0.00
    
    
    $
    0.00
 Page 80See accompanying notes to consolidated financial statements.
    
    F3




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Statements of Stockholders Equity and Accumulated DeficitFor the years ended November 30, 2005, 2004 and 2003(expressed in Canadian dollars)
 2005
    
    
    2004
    
    
    2003#
    
    
    $
    
    
    #
    
    
    $
    
    
    #
    
    
    $Class A preference sharesBalance at the beginning of the year
    
    
    30,262
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    41,296
    
    
    
    41,296Class A preference shares converted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,034
    )
    
    
    (11,034
    )Balance at the end of the year
    
    
    30,262
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    30,262
    
    
    
    30,262Class B preference sharesBalance at the beginning of the year
    
    
    57,711
    
    
    
    2,163,621
    
    
    
    61,244
    
    
    
    2,169,127
    
    
    
    
    
    
    
    Issue of Class B preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,244
    
    
    
    2,065,420Beneficial conversion feature on Class B preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (668,785
    )Accretion of discount on Class B preference shares Series 1
    
    
    
    
    
    
    424,111
    
    
    
    
    
    
    
    133,757
    
    
    
    
    
    
    
    103,707Accretion of beneficial conversion feature on Class B preference
shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668,785Share issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,115
    )
    
    
    
    
    
    
    Repurchase of Class B preference shares Series 1
    
    
    (57,711
    )
    
    
    (2,587,732
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of Class B preference shares Series 2
    
    
    390,000
    
    
    
    12,503,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Beneficial conversion feature on Class B preference shares Series 2
    
    
    
    
    
    
    (4,796,649
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accretion of discount on Class B preference shares Series 2
    
    
    
    
    
    
    524,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accretion of beneficial conversion feature on Class B preference
shares Series 2
    
    
    
    
    
    
    4,796,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class B preference shares converted
    
    
    (48,760
    )
    
    
    (1,615,932
    )
    
    
    (3,533
    )
    
    
    (119,148
    )
    
    
    
    
    
    
    Balance at the end of the year
    
    
    341,240
    
    
    
    11,412,208
    
    
    
    57,711
    
    
    
    2,163,621
    
    
    
    61,244
    
    
    
    2,169,127Common SharesBalance at the beginning of the year
    
    
    27,488,074
    
    
    
    20,047,731
    
    
    
    26,807,475
    
    
    
    19,516,304
    
    
    
    26,043,243
    
    
    
    19,217,701Class A preference shares converted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,034
    
    
    
    11,034Class B preference shares converted
    
    
    
    
    
    
    
    
    
    
    160,752
    
    
    
    119,148
    
    
    
    
    
    
    
    Class B preference shares Series 2 converted
    
    
    2,868,235
    
    
    
    2,776,781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (455,000
    )
    
    
    (318,500
    )Common stock purchased and cancelled
    
    
    11,000
    
    
    
    8,380
    
    
    
    519,847
    
    
    
    412,279
    
    
    
    1,208,198
    
    
    
    606,069Balance at the end of the year
    
    
    30,367,309
    
    
    
    22,832,892
    
    
    
    27,488,074
    
    
    
    20,047,731
    
    
    
    26,807,475
    
    
    
    19,516,304WarrantsBalance at the beginning of the year
    
    
    1,393,301
    
    
    
    661,575
    
    
    
    1,393,301
    
    
    
    661,575
    
    
    
    
    
    
    
    Issue of warrants  net of issue costs
    
    
    12,395,064
    
    
    
    4,545,659
    
    
    
    
    
    
    
    
    
    
    
    1,393,301
    
    
    
    661,575Balance at the end of the year
    
    
    13,788,365
    
    
    
    5,207,234
    
    
    
    1,393,301
    
    
    
    661,575
    
    
    
    1,393,301
    
    
    
    661,575Additional paid-in capitalBalance at the beginning of the year
    
    
    
    
    
    
    928,169
    
    
    
    
    
    
    
    903,803
    
    
    
    
    
    
    
    191,968Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,800
    )
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    286,683
    
    
    
    
    
    
    
    38,166
    
    
    
    
    
    
    
    43,050Repurchase of Class B preference shares Series 1
    
    
    
    
    
    
    (668,785
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Beneficial conversion feature on Class B preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668,785Beneficial conversion feature on Class B preference shares Series 2
    
    
    
    
    
    
    4,796,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class B preference Series 2 converted
    
    
    
    
    
    
    (599,704
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at the end of the year
    
    
    
    
    
    
    4,743,012
    
    
    
    
    
    
    
    928,169
    
    
    
    
    
    
    
    903,803Accumulated deficitBalance at the beginning of the year
    
    
    
    
    
    
    (14,196,847
    )
    
    
    
    
    
    
    (14,046,108
    )
    
    
    
    
    
    
    (13,384,967
    )Accretion of discount on Class B preference shares Series 1
    
    
    
    
    
    
    (424,111
    )
    
    
    
    
    
    
    (133,757
    )
    
    
    
    
    
    
    (103,707
    )Repurchase of Class B preference shares Series 1
    
    
    
    
    
    
    370,967
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accretion of beneficial conversion feature on Class B preference
shares Series 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (668,785
    )Accretion of beneficial conversion feature on Class B preference
shares Series 2
    
    
    
    
    
    
    (4,796,649
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock purchased and cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (187,181
    )Accretion of discount on Class B preference shares Series 2
    
    
    
    
    
    
    (524,283
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class B preference Series 2 converted
    
    
    
    
    
    
    (561,145
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends on Class B preference shares Series 1
    
    
    
    
    
    
    (62,785
    )
    
    
    
    
    
    
    (264,999
    )
    
    
    
    
    
    
    (53,484
    )Dividends on Class B preference shares Series 2
    
    
    
    
    
    
    (840,780
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings(loss) for the year
    
    
    
    
    
    
    (3,411,194
    )
    
    
    
    
    
    
    248,017
    
    
    
    
    
    
    
    352,016Balance at the end of the year
    
    
    
    
    
    
    (24,446,827
    )
    
    
    
    
    
    
    (14,196,847
    )
    
    
    
    
    
    
    (14,046,108
    )Accumulated other comprehensive incomeBalance at the beginning of the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    27,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at the end of the year
    
    
    
    
    
    
    27,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    
    
    
    
    19,806,287
    
    
    
    
    
    
    
    9,634,511
    
    
    
    
    
    
    
    9,234,963
 Page 81See accompanying notes to consolidated financial statements.
    
    F4




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPConsolidated Statements of Cash FlowsFor the years ended November 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 2005
    
    
    2004
    
    
    2003Cash flows used in operating activitiesEarnings (loss) for the year
    
    $
    (3,411,194
    )
    
    $
    248,017
    
    
    $
    352,016Items not affecting cashDepreciation and amortization
    
    
    493,179
    
    
    
    362,564
    
    
    
    359,979Loss on disposal of equipment
    
    
    4,203
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    846,495
    
    
    
    42,192
    
    
    
    (168,807
    )Stock-based compensation
    
    
    286,683
    
    
    
    38,166
    
    
    
    43,050(1,780,634
    )
    
    
    690,939
    
    
    
    586,238Changes in non-cash working capital itemsAccounts receivable
    
    
    (1,293,518
    )
    
    
    (4,518,642
    )
    
    
    (660,990
    )Inventory
    
    
    (445,207
    )
    
    
    16,076
    
    
    
    619,463Prepaid expenses and deposits
    
    
    (481,877
    )
    
    
    287,667
    
    
    
    (197,654
    )Accounts payable and accrued liabilities
    
    
    1,271,525
    
    
    
    383,735
    
    
    
    (460,705
    )Income taxes payable
    
    
    158,293
    
    
    
    
    
    
    
    Unearned revenue
    
    
    423,581
    
    
    
    33,958
    
    
    
    (1,590,247
    )Rent payable
    
    
    
    
    
    
    (133,942
    )
    
    
    Long-term royalties
    
    
    
    
    
    
    (187,384
    )
    
    
    (185,333
    )(367,203
    )
    
    
    (4,118,532
    )
    
    
    (2,475,466
    )(2,147,837
    )
    
    
    (3,427,593
    )
    
    
    (1,889,228
    )Cash flows from financing activitiesIssue of common shares
    
    
    8,380
    
    
    
    398,479
    
    
    
    606,069Issue of Class B preference shares  Series 1 and warrants
    
    
    
    
    
    
    
    
    
    
    3,004,200Issue of Class B preference shares  Series 2 and warrants
    
    
    19,500,195
    
    
    
    
    
    
    
    Class B preference share issue cost
    
    
    (2,450,679
    )
    
    
    (20,115
    )
    
    
    (277,205
    )Class B preference share dividend paid
    
    
    (903,566
    )
    
    
    (178,433
    )
    
    
    (53,484
    )Share repurchases  Class B preference shares  Series 1
    
    
    (2,885,550
    )
    
    
    
    
    
    
    Common share repurchases
    
    
    
    
    
    
    
    
    
    
    (505,681
    )13,268,780
    
    
    
    199,931
    
    
    
    2,773,899Cash flows used in investing activitiesPurchase of Mapcon Mapping Consultants Inc., net of
cash acquired (note 5)
    
    
    (1,236,624
    )
    
    
    
    
    
    
    Increase in restricted cash
    
    
    (221,264
    )Additions to plant and equipment
    
    
    (250,870
    )
    
    
    (143,515
    )
    
    
    (218,172
    )Additions to intangibles and other assets
    
    
    (68,717
    )
    
    
    (215,341
    )
    
    
    (72,992
    )Net cash used in investing activities
    
    
    (1,777,475
    )
    
    
    (358,856
    )
    
    
    (291,164
    )Exchange impact on acquired cash balances
    
    
    5,296
    
    
    
    
    
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    9,348,764
    
    
    
    (3,586,518
    )
    
    
    593,507Cash and cash equivalents  beginning of year
    
    
    251,037
    
    
    
    3,837,555
    
    
    
    3,244,048Cash and cash equivalents  end of year
    
    $
    9,599,801
    
    
    $
    251,037
    
    
    $
    3,837,555
 Refer to note 19 for supplemental cash flow informationPage 82See accompanying notes to consolidated financial statements.
    
    F5




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 1
    
    Nature of operationsOffshore Systems International Ltd. (OSI) designs, develops, and markets software and
systems for enhancing situational awareness in command, control, and intelligence applications.
Our principal product is the proprietary ECPINS® line of electronic chart navigation systems
for commercial and military customers. Collectively, OSI and its subsidiaries are referred to
as the Company. OSI conducts its operations through three business units. The Companys
Navigation Systems business unit develops and produces geographic information display systems
and software. The Companys Applications business unit develops situational awareness products
for command and control systems. The Companys Mapcon business unit (formally the Geomatics
business unit) provides digital land map and electronic nautical chart production services, and
produces and distributes electronic nautical chart data.2
    
    Accounting changes
 a) Changes in accounting policies relating to the adoption of U.S. GAAP
  Stock-based compensation
   Beneficial conversion feature and accretion of discount on preference shares issued with
attached warrants
   Page 83F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 Derivative financial instruments
  b) Recent pronouncements
   3
    
    Summary of significant accounting policies
 a) Principles of consolidation
  b) Foreign currency translation
    Page 84F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
  c) Use of estimates
  d) Cash and cash equivalents
  e) Accounts receivable
  f) Inventory
  g) Plant and equipment
  Method
    
    PercentageEquipment
    
    Declining balance
    
    
    20  25Vehicles
    
    Declining balance
    
    
    30Furniture and fixtures
    
    Straight line
    
    
    20Leasehold improvements
    
    Straight line
    
    
    20
  Page 85F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 h) Intangibles and other assets
  Method
    
    PercentageComputer software
    
    Declining balance
    
    
    33Licenses and patents
    
    Declining balance
    
    
    10Customer relationships
    
    Straight line
    
    
    10  25Customer contract
    
    Straight line
    
    
    75
  i) Income taxes
  j) Revenue recognition
       Page 86F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
  k) Unbilled revenue
  l) Unearned revenue
  m) Research and development
  n) Government assistance
  o) Stock-based compensation
   Page 87F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 p)
    
    Earnings per share
 Basic earnings per share are computed using the weighted average number of common shares
outstanding during the year. The treasury stock method is used for the calculation of diluted
earnings per share. Under the treasury stock method, the weighted average number of common
 shares outstanding for the calculation of diluted earnings per share assumes that the proceeds
to be received on the exercise of dilutive stock options and warrants are applied to repurchase
common shares at the average market price for the period. Stock options and warrants are
dilutive when the average market price of the common shares during the period exceeds the
exercise price of the options and warrants.
 q)
    
    Guarantees
 The Company guarantees that its software and hardware products will operate substantially in
conformity with product documentation and that the physical media will be free from defect. The
specific terms and conditions of the warranties are generally one year but may vary depending
on the country in which the products are sold. The Company accrues for known warranty issues if
a loss is probable and can be reasonably estimated, and accrues for estimated incurred but
unidentified warranty issues based on historical activity. To date, the Company has had no
material warranty claims.
 r)
    
    Derivative financial instruments
 Derivative financial instruments are utilized by the Company in the management of its foreign
currency exposure to reduce its exposure to fluctuations in foreign exchange on certain
committed and anticipated transactions. The Company formally documents the relationships
between derivative financial instruments and hedged items, as well as the risk management
objective and strategy. The Company assesses, on an ongoing basis, whether the derivative
financial instruments continue to be effective in offsetting changes in fair values or cash
flows of the hedged transactions.Foreign exchange translation gains and losses on foreign currency denominated derivative
financial instruments used to hedge anticipated or committed foreign currency exposures are
recognized as an adjustment to the related operating costs, revenue or capital expenditures
when the hedged transaction is recorded. Derivatives that are not subject to hedge accounting
are recorded on the balance sheet with the changes in fair value being recorded in the
statement of earnings each period. For the fiscal year 2005, all derivative financial
instruments met the criteria for hedge accounting.
 s)
    
    Goodwill
 Acquisitions are accounted for using the purchase method whereby acquired assets and
liabilities are recorded at fair value as of the date of acquisition. The excess of purchase
price over such fair value is recorded as goodwill. The Company evaluates, on at least an
annual basis, the carrying amounts of goodwill to determine whether events or circumstances
indicate that such carrying amounts may no longer be recoverable. To accomplish this, the
Company compares the fair value of the acquired reporting unit to the carrying amount. If the
carrying value of the reporting unit were to exceed its fair value, the Company would perform
the second step of the impairment test. In the second step, the Company would compare the fair
value of the reporting unit goodwill to the carrying amount and any excess would be written
down.4
    
    Restricted cashRestricted cash consists of cash pledged with a bank as collateral for bid bonds. The
restricted cash is held in an interest-bearing bank account.5
    
    AcquisitionOn April 8, 2005, the Company acquired all of the issued and outstanding shares of Mapcon
Mapping Consultants Inc. (Mapcon Mapping) of Salt Lake City, Utah for cash consideration of
$1,347,382 (US$1,113,907). The acquisition was effective April 1, 2005. Mapcon Mapping is a
privately held land mapping company in the U.S. digital and electronic
 Page 88 F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 geomatics data production market. The results of Mapcon Mappings operations have been included
in the consolidated financial statements commencing April 1, 2005.The following table summarizes the fair value of the assets acquired and liabilities assumed by
the Company at April 1, 2005, the date of acquisition. The acquisition was accounted for using
the purchase method whereby assets acquired and liabilities assumed were recorded at their fair
values at April 1, 2005. The excess of the purchase price over the fair market value was
recorded as goodwill. The allocation of the purchase price is preliminary and the final
allocation may be subject to refinement in the next four months. The purchase price is subject
to certain adjustments related to working capital and the achievement of a minimum level of
sales bookings against a specific contract.
 AssetsCurrent assets
    
    $
    819,568Equipment
    
    
    208,791Deferred tax assets  current
    
    
    185,247Intangible assets
    
    
    350,784Goodwill
    
    
    484,966Total assets acquired
    
    
    2,049,356LiabilitiesCurrent liabilities not including deferred tax liabilities
    
    
    198,166Deferred tax liabilities  current
    
    
    271,168Deferred tax liabilities  long term
    
    
    73,184Total liabilities assumed
    
    $
    542,518Net assets acquired (cash consideration)
    
    $
    1,347,382Direct acquisition costs incurred by the Company
    
    
    159,456Total acquisition costs
    
    
    1,506,838Less fair value of net identifiable assets acquired
    
    
    1,021,872Goodwill
    
    $
    484,966Cash of acquired operations
    
    $
    270,214
 The fair values of the assets acquired, including goodwill, and liabilities assumed in the
acquisition have been pushed down to Mapcon Mapping resulting in foreign currency revaluation
at each reporting date.
 Page 89 F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 The following table presents details of the purchased intangible assets:
 Estimated useful life
    
    
    AmountCustomer contract
    
    16 months
    
    $
    157,248Customer relationships
    
    4 to 10 years
    
    
    193,536Total intangible assets
    
    
    
    
    
    $
    350,784
 The pro forma Offshore Systems International Ltd. consolidated operating results assuming the
acquisition of Mapcon Mapping had occurred as of December 1, 2003, are as follows:
 Years ended November 30
    
    2005
    
    
    2004Revenue
    
    $
    13,988,950
    
    
    $
    14,548,698Earnings (loss)
    
    $
    (3,007,839
    )
    
    $
    397,632Earnings (loss) per share  basic
    
    $
    (0.35
    )
    
    $
    0.00Earnings (loss) per share  diluted
    
    $
    (0.35
    )
    
    $
    0.00
 6
    
    Accounts receivable
 November 30
    
    2005
    
    
    2004Trade
    
    $
    7,265,224
    
    
    $
    4,679,207Unbilled accounts receivable
    
    
    2,993,588
    
    
    
    4,116,828Technology Partnerships Canada contribution (note 13)
    
    
    729,909
    
    
    
    257,266Other
    
    
    56,072
    
    
    
    111,234Allowance for doubtful accounts
    
    
    (42,323
    )
    
    
    (24,057
    )$
    11,002,470
    
    
    $
    9,140,478
 As at November 30, 2005, government contract receivables were $5,978,619 (2004  $4,435,616)
and unbilled government contract receivables were $2,259,275 (2004  $3,601,202).7
    
    Inventory
 November 30
    
    2005
    
    
    2004Materials and components
    
    $
    1,094,634
    
    
    $
    638,127Finished goods
    
    
    
    
    
    
    11,300$
    1,094,634
    
    
    $
    649,427
 Page 90 F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 8
    
    Plant and equipment
 November 30, 2005
    
    Cost
    
    
    Accumulateddepreciation
    
    
    NetEquipment
    
    $
    4,174,286
    
    
    $
    3,235,158
    
    
    $
    939,128Vehicle
    
    
    10,771
    
    
    
    1,240
    
    
    
    9,531Furniture and fixtures
    
    
    139,946
    
    
    
    106,993
    
    
    
    32,953Leasehold improvements
    
    
    234,175
    
    
    
    200,730
    
    
    
    33,445$
    4,559,178
    
    
    $
    3,544,121
    
    
    $
    1,015,057
 November 30, 2004
    
    Cost
    
    
    Accumulateddepreciation
    
    
    NetEquipment
    
    $
    3,910,980
    
    
    $
    3,038,921
    
    
    $
    872,059Furniture and fixtures
    
    
    131,095
    
    
    
    94,705
    
    
    
    36,390Leasehold improvements
    
    
    222,737
    
    
    
    193,084
    
    
    
    29,653$
    4,264,812
    
    
    $
    3,326,710
    
    
    $
    938,102
 9
    
    Intangible and other assets
 November 30, 2005

    
    Cost
    
    

Accumulatedamortization
    
    
    NetComputer software
    
    $
    1,191,543
    
    
    $
    721,273
    
    
    $
    470,270Customer contract
    
    
    154,395
    
    
    
    78,406
    
    
    
    75,989Customer relationships
    
    
    189,598
    
    
    
    19,335
    
    
    
    170,263Licenses and patents
    
    
    57,267
    
    
    
    40,877
    
    
    
    16,390$
    1,592,803
    
    
    $
    859,891
    
    
    $
    732,912
 November 30, 2004

    
    Cost
    
    
    Accumulatedamortization
    
    
    NetComputer software
    
    $
    936,591
    
    
    $
    546,190
    
    
    $
    390,401Licenses and patents
    
    
    57,267
    
    
    
    39,057
    
    
    
    18,210$
    993,858
    
    
    $
    585,247
    
    
    $
    408,611
 Page 91 F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
  Years ended November 302006
    
    $
    261,3082007
    
    
    133,9422008
    
    
    99,4832009
    
    
    65,7712010
    
    
    44,9542011 and after
    
    
    127,455
 10
    
    Accounts payable and accrued liabilities
 November 30
    
    2005
    
    
    2004Trade
    
    $
    2,210,994
    
    
    $
    1,343,129Accrued liabilities
    
    
    377,162
    
    
    
    282,227Accrued employee compensation
    
    
    635,638
    
    
    
    444,365Accrued employee benefits and payroll deductions
    
    
    398,319
    
    
    
    128,224Accrued royalties (note 13)
    
    
    297,421
    
    
    
    311,851Class B preference shares dividends declared and unpaid
    
    
    
    
    
    
    86,566$
    3,919,534
    
    
    $
    2,596,362
 11
    
    Credit facilitiesIn March 2005, the Company renewed certain credit facilities with a Canadian chartered
bank, which consist of an operating line, a foreign exchange forward contract facility and
standby letters of credit. The operating line bears interest at the chartered banks prime
lending rate plus 0.5% with interest payable monthly. The prime lending rate at November 30,
2005 was 4.75% (2004  4.25%). The standby letters of credit are denominated in U.S. dollars
and bear interest at rates between 1% and 2% per annum. Funds drawn on the operating line and
the standby letters of credit are repayable on demand. As of November 30, 2005, letters of
credit, relating principally to customer contracts, amounting to Australian $283,886 (2004 
$283,886) have been issued. The Company utilizes letters of credit to back certain performance
obligations with its customers.The maximum amount(s) available to the Company under the operating line is $2,000,000 and under
the foreign exchange forward contract facility are US$2,000,000 (2004 -US$2,000,000) and
Australian $nil (2004  Australian $3,678,061). The credit facilities are collateralized by a
general assignment of book debts, a general security agreement and general security agreements,
from each of Offshore Systems Ltd., Mapcon Mapping Ltd and Mapcon Mapping Inc. In addition, the
Company is required to meet certain covenants as outlined in the credit facilities agreement.
As at November 30, 2005, the Company had not drawn on its foreign exchange contract facility.12
    
    Capital stock
 a)
    
    Authorized
 
 
 Page 92 F6




---



##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
  
  b)
    
    Issued and outstanding common shares
 2005
    
    
    2004Number of
    
    
    
    
    
    
    Number ofCommon
    
    
    
    
    
    
    Commonshares
    
    
    Amount
    
    
    shares
    
    
    AmountBalance  beginning of year
    
    
    27,488,074
    
    
    $
    20,047,731
    
    
    
    26,807,475
    
    
    $
    19,530,104Issued during the year:Exercise of stock options
    
    
    11,000
    
    
    
    8,380
    
    
    
    519,847
    
    
    
    398,479Class B preference shares Series 2
converted
    
    
    2,868,235
    
    
    
    2,776,781
    
    
    
    160,752
    
    
    
    119,148Balance  end of year
    
    
    30,367,309
    
    
    $
    22,832,892
    
    
    
    27,488,074
    
    
    $
    20,047,731
 c)
    
    Class A preference shares
 The Company has 30,262 (November 30, 2004  30,262) Class A preference shares outstanding that
have a nominal value for financial statement purposes. These Class A preference shares are
being held in escrow but are no longer subject to any escrow restrictions and may be converted
at any time into common shares of the Company, by notice in writing from the holders.
 d)
    
    Class B preference shares
 2005
    
    
    2004Number of
    
    
    
    
    
    
    Number ofClass B
    
    
    
    
    
    
    Class Bpreference
    
    
    
    
    
    
    preferenceshares
    
    
    Amount
    
    
    shares
    
    
    AmountSeries 1Balance  beginning of year
    
    
    57,711
    
    
    $
    2,163,621
    
    
    
    61,244
    
    
    $
    2,065,420Issued/redeemed during the year:Share issue costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,115
    )Class B preference shares converted
    
    
    
    
    
    
    
    
    
    
    (3,533
    )
    
    
    (119,148
    )Accretion of discount  Series 1
    
    
    
    
    
    
    424,111
    
    
    
    
    
    
    
    237,464Repurchased
    
    
    (57,711
    )
    
    
    (2,587,732
    )
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    57,711
    
    
    $
    2,163,621Series 2Balance  beginning of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issued/redeemed during the year:Issued
    
    
    390,000
    
    
    $
    14,954,731
    
    
    
    
    
    
    $
    Share issue costs
    
    
    
    
    
    
    (2,450,874
    )
    
    
    
    
    
    
    Accretion of discount  Series 2
    
    
    
    
    
    
    524,283
    
    
    
    
    
    
    
    Converted to common
    
    
    48,760
    
    
    
    (1,615,932
    )
    
    
    
    
    
    
    341,240
    
    
    $
    11,412,208
    
    
    
    
    
    
    $
    Balance Class B  end of year
    
    
    341,240
    
    
    $
    11,412,208
    
    
    
    57,711
    
    
    $
    2,163,621
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 (i)
    
    Series 1
 The Company completed a private placement on February 13, 2003 consisting of 61,244 units
for total gross proceeds of $3,004,200. Each unit consists of one Class B Series 1
preference share 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
$297,320.The gross proceeds of $3,004,200 were allocated between the preference shares and warrants
based on their relative fair value at the date of issuance. The $2,342,625 fair value of the
preference shares has been estimated based on the fair value of the underlying common
 shares. The $661,575 fair value of the warrants has been estimated using the Black-Scholes
option pricing model. Assumptions used in the pricing model included: (i) risk free interest
rate of 2.7%, (ii) expected volatility of 66%, (iii) an estimated life of 5 years and (iv)
an expected dividend rate of 0%. During the fiscal year 2003, the Company has recorded a
beneficial conversion feature of $668,785 in dividends calculated on the effective
conversion price of the preference shares to common shares based on the proceeds allocated
to the preference shares. The conversion feature of the preference shares vested immediately
and the Company recorded the accretion of the full amount of the beneficial conversion
feature. The preference share discount that resulted from the allocation of the gross
proceeds is accreted over the five-year life of the warrants.On April 11, 2005, 57,711 Class B Series 1 preference shares were repurchased by the Company
at their par value of $50 per share for aggregate cash consideration of $2,885,550. The
unamortized discount in the amount of $390,672 as of the repurchase date was amortized and
accreted to the Class B series 1 preference shares and the beneficial conversion feature of
$668,785 was deducted from additional paid in capital. The repurchase resulted in a
decrease of $370,967 to deficit. As a result of the repurchase of all remaining preference B
Series 1 shares, the remaining un-accreted balance of the discount has been accreted to
accumulated deficit in the amount of $424,111 for fiscal 2005 (2004  $133,757). During
fiscal 2004, 3,533 Class B Series 1 preference shares were converted into common shares.
 (ii)
    
    Series 2
 On April 11, 2005, the Company completed a private placement consisting of 19,500 units for
total gross proceeds of $19,500,195. The issue price was $1,000.01 per unit. Each unit
consist of 20 voting Class B preference shares Series 2 (preference shares) and 588 share
purchase warrants (warrants). The Preference Shares entitle the holders to receive a fixed
preferential cumulative 7% dividend payable semi-annually. Each preference share is
convertible at the option of the holder at any time into 58.8235 of the Companys common
 shares, calculated by dividing the issue price of $50.00 for each Preference Share by the
conversion price of $0.85. Each warrant entitles the holder to purchase one of the Companys
common shares at the exercise price of $0.85 for a period of five years. Fees for advisory,
investment banking and legal and other professional services in connection with this private
placement were paid in the amount of $2,418,363 and 929,064 warrants were issued to an
investment bank and related party (note 15) in connection with the private placement. The
fair value of the finders fee warrants was estimated to be $0.47 per warrant, using the
Black-Scholes option pricing model, and has been recognized as a share issue cost.The gross proceeds of $19,500,195 were allocated between the preference shares and warrants
based on their relative fair value at the date of issuance. The $20,161,770 fair value of
the preference shares has been estimated based on the fair value of the underlying common
 shares. The $5,207,039 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 interest
rate of 2.88%, (ii) expected volatility of 59%, (iii) an estimated life of five years and
(iv) an expected dividend rate of 0%. The Company has recorded a beneficial conversion
feature of $4,796,649 as a reduction to the net earnings available to common shareholders
calculated on the effective conversion price of the preference shares to common shares based
on the proceeds allocated to the preference shares. The conversion feature of the preference
 shares vested immediately and the Company recorded the accretion of the full amount of the
beneficial conversion feature. The preference share discount that resulted from the
allocation of the gross proceeds is accreted over the five-year life of the warrants. This
resulted in an accretion of $524,283 to accumulated deficit for year ended November 30,
2005.
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 Each Series 2 preference share entitles the holder to one vote either in person or by proxy
at any general meeting of the shareholders of the Company. The Company has the right to
require the shareholders of the preference shares to convert each such share into 58.8235
common shares if (i) at any time after 13 months following the issuance of the preference
 shares, the closing trade price of the Companys common shares exceeds $2.13 for at least 20
consecutive trading days, or (ii) at any time, the Company completes a firm public
underwritten offering of its common shares for more than $40,000,000 at a price per common
share greater than $1.70. The preference shares are redeemable at the option of the Company
at any time after the third anniversary of the issuance date for an amount equal to the
original issuance price plus a premium of 20% of the original issue price. The preference
 shares are not subject to any right of redemption at the option of the holder.During the fiscal year 2005, 48,760 Series 2 preference shares were converted into 2,868,235
common shares with an aggregate fair market value of $2,776,782. The Class B preference
 shares  Series 2 were reduced by, $1,615,932, the carrying value of the shares converted,
and the beneficial conversion feature attributed to the converted shares resulted in a
deduction of $599,704 from additional paid in capital. The conversion resulted in an
increase of $561,145 to deficit.
 e)
    
    Warrants
 2005
    
    
    2004Number of
    
    
    
    
    
    
    Number ofwarrants
    
    
    Amount
    
    
    warrants
    
    
    AmountBalance  beginning of year
    
    
    1,393,301
    
    
    $
    661,575
    
    
    
    1,393,301
    
    
    $
    661,575Issued/redeemed during the
year:Issued
    
    
    12,395,064
    
    
    
    4,545,659
    
    
    
    
    
    
    
    Balance  end of year
    
    
    13,788,365
    
    
    $
    5,207,234
    
    
    
    1,393,301
    
    
    $
    661,575
 f)
    
    Stock option plans
 The Company has established three stock option plans under which stock options to purchase
common shares may be granted to directors, officers and employees of the Company and to any
other person or Company permitted by the applicable regulatory authorities to purchase
unissued common shares. The number of common shares authorized for grant under the Companys
stock option plans is 10,930,732, of which 4,364,494 are available for future granting. Of
the 4,364,494 common shares available for issuance, 3,674,417 have been awarded through
stock option grants by the Board of Directors. The exercise price of stock 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 stock options may be granted with vesting periods and
expiry dates at the discretion of the board of directors. Stock options granted to directors
and management vest over periods ranging from immediately to three years and options granted
to employees vest one year after the date granted.
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 A summary of the status of the Companys stock option plans at November 30 is as follows:
 2005
    
    
    2004Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weightedshares
    
    
    average
    
    
    shares
    
    
    averageexercise price
    
    
    
    
    
    
    exercise priceOutstanding  beginning of year
    
    
    2,254,047
    
    
    $
    1.11
    
    
    
    2,890,046
    
    
    $
    1.02Granted
    
    
    3,054,666
    
    
    
    0.92
    
    
    
    496,750
    
    
    
    1.12Exercised
    
    
    (11,000
    )
    
    
    0.76
    
    
    
    (519,847
    )
    
    
    0.42Forfeited
    
    
    (18,384
    )
    
    
    0.93
    
    
    
    (22,725
    )
    
    
    0.74Surrendered
    
    
    (632,784
    )
    
    
    1.02
    
    
    
    
    
    
    
    0.00Expired
    
    
    (972,128
    )
    
    
    1.14
    
    
    
    (590,177
    )
    
    
    1.06Outstanding  end of year
    
    
    3,674,417
    
    
    $
    0.96
    
    
    
    2,254,047
    
    
    $
    1.11Exercisable  end of year
    
    
    3,378,417
    
    
    $
    0.95
    
    
    
    2,108,047
    
    
    $
    1.10
 A summary of the Companys stock options outstanding and exercisable at November 30, 2005 is as
follows:
 Options outstanding
    
    
    Options exercisableWeightedNumber
    
    
    average
    
    
    Weighted
    
    
    Number
    
    
    Weightedoutstanding at
    
    
    remaining
    
    
    average
    
    
    exercisable at
    
    
    averageRange of
    
    November 30,
    
    
    contractual
    
    
    exercise
    
    
    November 30,
    
    
    exerciseexercise prices
    
    2005
    
    
    life
    
    
    price
    
    
    2005
    
    
    price$
    
    
    
    
    
    (years)
    
    
    $
    
    
    
    
    
    
    $0.75  1.12
    
    
    3,101,416
    
    
    
    4.19
    
    
    
    0.92
    
    
    
    2,951,416
    
    
    
    0.921.13  1.41
    
    
    573,001
    
    
    
    1.26
    
    
    
    1.14
    
    
    
    427,001
    
    
    
    1.150.75  1.41
    
    
    3,674,417
    
    
    
    3.73
    
    
    
    0.96
    
    
    
    3,378,417
    
    
    
    0.95
 A summary of the Companys stock options outstanding and exercisable at November 30, 2004 is as
follows:
 Options outstanding
    
    
    Options exercisableWeightedNumber
    
    
    average
    
    
    Weighted
    
    
    Number
    
    
    Weightedoutstanding at
    
    
    remaining
    
    
    average
    
    
    exercisable at
    
    
    averageRange of
    
    November 30,
    
    
    contractual
    
    
    exercise
    
    
    November 30,
    
    
    exerciseexercise prices
    
    2004
    
    
    life
    
    
    price
    
    
    2004
    
    
    price$
    
    
    
    
    
    (years)
    
    
    $
    
    
    
    
    
    
    $0.75  1.12
    
    
    1,026,047
    
    
    
    1.08
    
    
    
    1.01
    
    
    
    1,026,047
    
    
    
    1.011.13  1.41
    
    
    1,228,000
    
    
    
    1.12
    
    
    
    1.18
    
    
    
    1,082,000
    
    
    
    1.190.75  1.41
    
    
    2,254,047
    
    
    
    1.10
    
    
    
    1.11
    
    
    
    2,108,047
    
    
    
    1.10
 Stock-based compensationFor the year ended November 30, 2005, the Company incurred non-cash stock-based compensation
expense of $286,683, related to 900,000 stock options granted to third parties ($38,166 and
45,000 stock options for the year ended November 30, 2004). The expense was included in general
and administrative costs and was recorded in additional paid-in capital.
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 The fair value of stock options was estimated using the Black-Scholes option pricing model
using the following weighted average assumptions by grant year:
 2005
    
    
    2004Risk-free interest rate
    
    
    2.87%
    
    
    
    2.24%Volatility
    
    
    49%
    
    
    
    58%Estimated average option lives
    
    
    3.2 years
    
    
    
    3.0 yearsDividend yield
    
    
    0.0%
    
    
    
    0.0%
 Pro forma DisclosureThe 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:
 Years ended November 30
    
    2005
    
    
    2004Net earnings for the year  as reported
    
    $
    (3,411,194
    )
    
    $
    248,017Stock-based employee compensation expense
    
    
    (1,014,117
    )
    
    
    (133,276
    )Pro forma net earnings (loss) for the year
    
    $
    (4,425,311
    )
    
    $
    114,741Pro forma net earnings (loss) attributable to common shareholders
    
    $
    (11,264,098
    )
    
    $
    (192,149
    )Basic earnings (loss) per share  as reported
    
    $
    (0.37
    )
    
    $
    0.00Diluted earnings (loss) per share  as reported
    
    $
    (0.37
    )
    
    $
    (0.01
    )Pro forma basic and diluted earnings (loss) per share
    
    $
    (0.40
    )
    
    $
    (0.01
    )
 The fair value of stock options was estimated using the Black-Scholes option pricing model
using the following weighted average assumptions by grant year:
 2005
    
    2004Risk-free interest rate
    
    
    3.0
    %
    
    
    2.2
    %Volatility
    
    
    54
    %
    
    
    58
    %Estimated average option lives
    
    4.2 years
    
    3.0 yearsDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 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. On March 12, 2004, the Board of Directors carried a resolution regarding the
continued existence of the Rights Plan, subject to receipt of shareholder approval, for an
additional three year period. The continued existence of the Rights Plan was approved by the
shareholders of the Company by ordinary resolution at the annual general meeting of the Company
held on April 22, 2004.
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 The objectives of the Rights Plan are to ensure, to the extent possible, that all shareholders
of the Company are treated equally and fairly in connection with any take-over offer for the
Company. Take-over offers may not always result in shareholders receiving equal or fair
treatment or full value for their investment. In addition, current Canadian securities
legislation only requires a take-over offer to remain open for 21 days. The Board believes that
this period may be insufficient for the shareholders to evaluate a bid, or for the Board to
pursue alternatives that could maximize shareholder value and to make informed recommendations
to shareholders.The Rights Plan is designed to discourage discriminatory or unfair take-over offers for the
Company and gives the board time, if appropriate, to pursue alternatives to maximize
shareholder value in the event of an unsolicited take-over bid for the Company. The Rights Plan
will encourage an offeror to proceed by way of a permitted bid or to approach the Board of
Directors with a view to negotiation by creating the potential for substantial dilution of the
offerors position. The permitted bid provisions of the Rights Plan are designed to ensure
that, in any take-over bid, all shareholders are treated equally, receive the maximum value for
their investment and are given adequate time to properly assess the take-over bid on a fully
informed basis.
 g)
    
    Earnings per share
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Basic earnings (loss) per shareNet earnings (loss)
    
    $
    (3,411,194
    )
    
    $
    248,017
    
    
    $
    352,016Less: Accretion of discount on Class B preference shares Series 1
    
    
    (424,111
    )
    
    
    (133,757
    )
    
    
    (103,707
    )Accretion of beneficial conversion feature on Class B
preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    (668,785
    )Accretion of beneficial conversion feature on Class B
preference shares Series 2
    
    
    (4,796,649
    )
    
    
    
    
    
    
    Accretion of discount on Class B preference shares Series 2
    
    
    (524,283
    )
    
    
    
    
    
    
    Class B preference share dividends Series 1
    
    
    (62,785
    )
    
    
    (173,133
    )
    
    
    (145,350
    )Class B preference share dividends Series 2
    
    
    (840,780
    )
    
    
    
    
    
    
    Excess of conversion consideration over carrying value of
Class B preference shares series 2 and beneficial
conversion feature.
    
    
    (561,146
    )
    
    
    
    
    
    
    Add: Excess of carrying value of Class B preference shares series
1 and beneficial conversion feature over repurchase consideration
paid.
    
    
    370,967
    
    
    
    
    
    
    
    Loss available to common shareholders
    
    $
    (10,249,981
    )
    
    $
    (58,392
    )
    
    $
    (565,826
    )Weighted average number of common shares outstanding
    
    
    27,989,832
    
    
    
    27,147,246
    
    
    
    25,977,123Basic earnings (loss) per share
    
    $
    (0.37
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Diluted earnings (loss) per shareNet earnings (loss)
    
    
    (3,411,194
    )
    
    $
    248,017
    
    
    $
    352,016Less: Accretion of discount on Class B preference shares Series 1
    
    
    (424,111
    )
    
    
    (565,078
    )
    
    
    (103,707
    )Accretion of discount on Class B preference shares Series 2
    
    
    (524,283
    )
    
    
    
    
    
    
    Accretion of beneficial conversion feature on Class B
preference shares Series 1
    
    
    
    
    
    
    
    
    
    
    (668,785
    )Accretion of beneficial conversion feature on Class B
preference shares Series 2
    
    
    (4,796,649
    )
    
    
    
    
    
    
    Class B preference share dividends Series 1
    
    
    (62,785
    )
    
    
    
    
    
    
    (145,350
    )Class B preference share dividends Series 2
    
    
    (840,780
    )
    
    
    
    
    
    
    Excess of conversion consideration over carrying value of
Class B preference shares series 2 and beneficial
conversion feature.
    
    
    (561,146
    )
    
    
    
    
    
    
    Add: Excess of carrying value of Class B preference shares series 1
and beneficial conversion feature over repurchase consideration
paid.
    
    
    370,967
    
    
    
    
    
    
    
    Loss available to common shareholders
    
    
    (10,249,981
    )
    
    $
    (317,061
    )
    
    $
    (565,826
    )Weighted average number of common shares outstanding
    
    
    27,989,832
    
    
    
    27,230,561
    
    
    
    25,977,123Dilutive effect of Class A preference shares  Series A (*1)
    
    
    
    
    
    
    
    
    
    
    30,262Dilutive effect of Class B preference shares  Series 1
    
    
    
    
    
    
    2,625,851
    
    
    
    Dilutive effect of Class B preference shares  Series 2 (*2)
    
    
    
    
    
    
    
    
    
    
    Dilutive effect of warrants (*1)
    
    
    
    
    
    
    
    
    
    
    Dilutive effect of stock options (*1)
    
    
    
    
    
    
    
    
    
    
    1,135,107Adjusted weighted average number of common shares outstanding
    
    
    27,989,832
    
    
    
    29,856,412
    
    
    
    27,142,492Diluted loss per share
    
    
    (0.37
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
 
 (*1)
    The Class A preference shares  Series A, the outstanding warrants and stock options were
anti-dilutive for the purposes of calculating diluted earnings per share for the years ended
November 30, 2005 and 2004.(*2)
    The Class B preference shares  Series 2 were anti-dilutive for the purposes of
calculating diluted earnings per share for the year ended November 30, 2005.
 h)
    
    Normal course issuer bid
 In January 2003, the Company received approval for a normal course issuer bid that entitles the
Company to repurchase up to 1,300,000 common shares for cancellation between January 16, 2003
and January 15, 2004. The purchases are made on the open market. During the period January 16,
2003 to November 30, 2003 the Company purchased 455,000 of its common shares on the open market
under the normal course issuer bid at an average cost of $1.11 per share for an aggregate
consideration of $505,681. The premium on the purchase and cancellation of the common shares
under the normal course issuer bid was $187,181 and was charged to the deficit. No common
 shares were purchased under the normal course issuer bid during the period December 1, 2003 to
January 15, 2004.13
    
    Technology Partnerships CanadaOn April 26, 2004, the Company entered into an agreement with Technology Partnerships
Canada (TPC) whereby TPC granted financial assistance to the Company for the purpose of
funding research and development activities to be completed on or before March 31, 2007. The
maximum eligible contribution by TPC is $3,768,391. For the year ended November 30, 2005, the
Company has claimed for $1,466,054 of assistance under the agreement (2004  $1,471,414). These
amounts have
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Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 been applied to reduce expenses in the consolidated statements of earnings. Accounts receivable
at November 30, 2005 includes $729,909 of amounts receivable from TPC in connection with these
claims (2004  $257,266).In addition, the Company is required to pay a royalty of 1.4% on annual gross Navigation
Systems and Applications revenue for the period January 1, 2006 to December 31, 2008 and a
royalty of 2.5% on annual gross Navigation Systems and Applications revenue for the period
January 1, 2009 to December 31, 2013. Royalty payments will continue until the cumulative
royalties paid or payable to December 31, 2013 are at least $6,079,176 or until December 31,
2017. No amounts for royalty payments in connection with this agreement have been recorded in
the consolidated financial statements.On November 15, 1999, the Company entered into an agreement with TPC whereby TPC granted
financial assistance to the Company for the purpose of funding research and development
activities to be completed on or before March 31, 2003. Under the agreement with TPC, the
Company was eligible to receive contributions to a maximum of $4,000,177 over the period from
December 23, 1998 to March 31, 2003. As of March 31, 2003, the Company has received the maximum
allowed under the agreement. There are no amounts recorded in accounts receivable with respect
to these claims (2004  $nil).In addition, the Company is required to pay a royalty of 3% on annual gross Navigation Systems
and Applications revenue for the period December 1, 1999 to November 30, 2008. The Company has
paid royalties of $1,241,154 to date (2004  $929,303) and has accrued royalties of $297,421 at
November 30, 2005 (November 30, 2004  $311,851). Royalty payments will continue until the
cumulative royalties paid or payable to November 30, 2008 are at least $7,810,230 or until
November 30, 2014.Although the Company believes that its submissions for TPC funding meet the terms and
conditions of the TPC agreements, the final determination may be subject to audit by government
authorities in the ordinary course of business.During the year ended November 30, 2005, the Company was subject to an audit by government
authorities. The results of the cost audit did not have a financial impact on the Companys
results. The results of the compliance audit required a repayment of contributions received of
128,284 recognized in the current fiscal year as a reduction in TPC contributions. The
royalty audit is currently in process. The Company has no reason to believe that the audit
will have a material impact on the Companys financial results.TPC royalties paid and accrued are as follows:
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Royalties paid
    
    $
    311,851
    
    
    $
    183,392
    
    
    $
    391,752Accrued royalties  current
    
    $
    297,421
    
    
    $
    311,851
    
    
    $
    183,435
 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.14
    
    Commitments and contingenciesThe Company has entered into operating leases for its office premises in Canada and for
certain equipment. Minimum lease payments required under the remaining terms of the leases are
as follows:
 Years ending November 302006
    
    $
    324,4262007
    
    
    232,4312008
    
    
    56,8962009
    
    
    52,4982010
    
    
    18,470$
    684,721
 Page 100 F6




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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 For the fiscal year ended November 30, 2005, the Company paid basic rent of $256,705 (2004 -
$256,705, 2003  $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 2005, the Company paid
$120,365 (2004  $90,229, 2003  $77,719) for these costs.In July 2002, two of the Companys subsidiaries, Offshore Systems Ltd. and OSI Geomatics Ltd.,
and four employees became subject to a lawsuit for an undisclosed amount by Triathlon Ltd., a
subsidiary of MacDonald, Dettwiler and Associates Ltd., related to use of confidential
information and breach of fiduciary duty. No amount has been accrued at November 30, 2005 in
respect of these claims because the potential liability for the claims and the amount of
damages, if any, cannot be reasonably estimated.15
    
    Related Party TransactionsOn April 11, 2005, Mr. E. Brinton Coxe, a director of the Company, assisted the Company in
structuring and arranging the private placement financing (note 12(d)(ii)). In consideration
for his services, the Company paid him compensation of $815,908 and 350,000 common share
purchase warrants. Mr. Coxe has also participated in the financing by purchasing 100 units
personally. Mr. Coxe was paid an additional $145,940 for professional services provided during
the year and to be provided to April 2006. For the year ended November 30, 2005, $116,447 was
charged to expenses.On April 8, 2005, Gerald J. Shields, a related party by virtue of the provision of legal
services to the Company by two law firms in which he has an interest (Mr. Shields having moved
from his former firm to his current firm in July, 2005) was elected to the Companys Board of
Directors. Fees paid to these two law firms for services Mr. Shields provided to the Company
during the fiscal year 2005 totalled $199,196.16
    
    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 state taxes in
Utah.Earnings before income taxes consisted of the following:
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Canadian income (loss)
    
    $
    (2,758,720
    )
    
    $
    143,985
    
    
    $
    (39,345
    )U.S. income
    
    
    379,186
    
    
    
    145,990
    
    
    
    251,262$
    (2,379,534
    )
    
    $
    289,975
    
    
    $
    211,917
 Page 101 F6




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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 The Company has non-capital losses for Canadian income tax purposes of approximately
$5,084,445, which are available for carry forward to reduce future years taxable income. These
income tax losses expire as follows:
 Years ending November 302006
    
    $
    2,345,4612007
    
    
    2008
    
    
    2009
    
    
    169,0052010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    475,3482015
    
    
    2,094,631
 The Company also has investment tax credits of approximately $1,088,090, which can be used to
offset future Canadian income taxes otherwise payable and expire as follows:
 Years ending November 302006
    
    $
    130,1142007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    146,4532012
    
    
    191,9312013
    
    
    199,5222014
    
    
    191,8012015
    
    
    228,269
 The Company has capital losses for Canadian income tax purposes of approximately $354,466,
which are available for carry forward to reduce future years income from capital gains. These
capital losses carry forward indefinitely.The Company has un-deducted scientific research and experimental development expenses for
Canadian income tax purposes of approximately $5,225,417, which are available for carry forward
to reduce future years income for tax purposes. These expenses carry forward indefinitely.The net deferred tax asset consists of the following:
 November 30
    
    2005
    
    
    2004Deferred tax assetsNon-capital loss carry-forwards
    
    $
    1,734,812
    
    
    $
    1,191,426Net capital loss carry-forwards
    
    
    60,472
    
    
    
    63,130Scientific research and experimental development costs
    
    
    1,782,912
    
    
    
    1,701,004Investment tax credits
    
    
    837,487
    
    
    
    680,793Plant and equipment
    
    
    982,312
    
    
    
    895,457Other
    
    
    667,435
    
    
    
    91,4206,065,430
    
    
    
    4,623,230Valuation allowance
    
    
    (6,065,430
    )
    
    
    (3,842,899
    )Deferred tax asset
    
    $
    
    
    
    $
    780,331
 Page 102 F6




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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 The net deferred tax liability consists of the following:
 November 30
    
    2005
    
    
    2004Deferred tax liabilityChange in tax accounting method
    
    $
    93,841
    
    
    $
    Intangible assets
    
    
    88,436
    
    
    
    Plant and equipment
    
    
    48,529
    
    
    
    Deferred tax liability
    
    $
    230,806
    
    
    $
    
 The Company increased its valuation allowance against deferred income tax assets to reflect the
amount of the future tax benefit that was more likely than not to be realized. A valuation
allowance continues to be provided against deferred income tax assets for which the more likely
than not criteria of future realization has not been met. Although the Company
believes that its tax estimates are reasonable, the ultimate tax determination involves
significant judgment that could become subject to audit by tax authorities in the ordinary
course of business.A reconciliation of the combined Canadian federal and provincial income tax rate with the
Companys effective income tax rate is as follows:
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Expected statutory rate
    
    
    35.00
    %
    
    
    35.79
    %
    
    
    37.79
    %Expected provision for income taxes
    
    $
    (832,718
    )
    
    $
    103,782
    
    
    $
    80,083Change in tax rates applied in valuation allowance
    
    
    151,049
    
    
    
    1,199
    
    
    
    25,235Change in valuation allowance
    
    
    2,222,531
    
    
    
    84,827
    
    
    
    772,232Effect of foreign tax rate differences
    
    
    (3,014
    )
    
    
    (8,453
    )
    
    
    9,135Temporary differences arising during the year
    
    
    (767,981
    )
    
    
    (189,402
    )
    
    
    (1,052,335
    )Part VI.1 Tax
    
    
    101,693
    
    
    
    
    
    
    
    Non-deductible expenses and other
    
    
    160,100
    
    
    
    50,005
    
    
    
    25,551Income tax expense (recovery)
    
    $
    1,031,660
    
    
    $
    41,958
    
    
    $
    (140,099
    )
 17
    
    Segmented informationThe Companys reportable segments are as outlined below. Accounting policies used by these
segments are the same as those described in the significant accounting policies as disclosed in
note 3. The Company defines reportable segments as components of the Company about which
separate financial information is available and which is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing performance.
 NavigationYear ended November 30, 2005
    
    Systems
    
    
    Applications
    
    
    Mapcon
    
    
    TotalRevenue
    
    $
    9,508,060
    
    
    $
    369,347
    
    
    $
    3,550,033
    
    
    $
    13,427,440Gross profit
    
    
    4,923,550
    
    
    
    357,290
    
    
    
    1,214,179
    
    
    
    6,495,019Technology Partnerships Canada  net
    
    
    (1,039,481
    )
    
    
    
    
    
    
    
    
    
    
    (1,039,481
    )Interest expense
    
    
    25,882
    
    
    
    
    
    
    
    2,655
    
    
    
    28,537Income tax expense
    
    
    405,331
    
    
    
    455,224
    
    
    
    171,105
    
    
    
    1,031,660Net earnings (loss)
    
    
    (1,068,596
    )
    
    
    (1,200,131
    )
    
    
    (1,142,467
    )
    
    
    (3,411,194
    )Plant and equipment expenditures
    
    
    198,950
    
    
    
    
    
    
    
    51,920
    
    
    
    250,870Intangibles and other asset expenditures
    
    
    26,634
    
    
    
    1,214
    
    
    
    40,869
    
    
    
    68,717Depreciation and amortization
    
    
    222,368
    
    
    
    4,298
    
    
    
    266,513
    
    
    
    493,179
 Page 103 F6




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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 NavigationYear ended November 30, 2004
    
    Systems
    
    
    Applications
    
    
    Mapcon
    
    
    TotalRevenue
    
    $
    10,232,671
    
    
    $
    191,279
    
    
    $
    3,027,353
    
    
    $
    13,451,303Gross profit
    
    
    6,561,870
    
    
    
    171,518
    
    
    
    1,048,591
    
    
    
    7,781,979Technology Partnerships Canada  net
    
    
    (1,184,932
    )
    
    
    (162,057
    )
    
    
    
    
    
    
    (1,346,989
    )Interest expense
    
    
    1,902
    
    
    
    
    
    
    
    143
    
    
    
    2,045Income tax expense
    
    
    22,760
    
    
    
    
    
    
    
    19,198
    
    
    
    41,958Net earnings (loss)
    
    
    1,239,069
    
    
    
    (972,476
    )
    
    
    (18,576
    )
    
    
    248,017Plant and equipment expenditures
    
    
    106,954
    
    
    
    16,140
    
    
    
    20,421
    
    
    
    143,515Intangibles and other asset expenditures
    
    
    30,516
    
    
    
    3,995
    
    
    
    180,830
    
    
    
    215,341Depreciation and amortization
    
    
    233,128
    
    
    
    2,778
    
    
    
    126,658
    
    
    
    362,564NavigationYear ended November 30, 2003
    
    Systems
    
    
    Applications
    
    
    Mapcon
    
    
    TotalRevenue
    
    $
    7,927,166
    
    
    $
    
    
    
    $
    3,593,627
    
    
    $
    11,520,793Gross profit
    
    
    4,797,613
    
    
    
    
    
    
    
    1,564,112
    
    
    
    6,361,725Technology Partnerships Canada  net
    
    
    (326,407
    )
    
    
    
    
    
    
    
    
    
    
    (326,407
    )Interest expense
    
    
    624
    
    
    
    
    
    
    
    2,200
    
    
    
    2,824Income tax expense
    
    
    (2,917
    )
    
    
    
    
    
    
    (137,182
    )
    
    
    (140,099
    )Net earnings (loss)
    
    
    91,241
    
    
    
    
    
    
    
    260,775
    
    
    
    352,016Plant and equipment expenditures
    
    
    170,655
    
    
    
    
    
    
    
    47,517
    
    
    
    218,172Intangible and other asset expenditures
    
    
    12,663
    
    
    
    
    
    
    
    60,329
    
    
    
    72,992Depreciation and amortization
    
    
    255,462
    
    
    
    
    
    
    
    104,517
    
    
    
    359,979
 Total Assets Employed
 NavigationNovember 30
    
    Systems
    
    
    Applications
    
    
    Mapcon
    
    
    Total2005
    
    $
    20,502,483
    
    
    $
    102,669
    
    
    $
    4,345,429
    
    
    $
    24,950,5812004
    
    
    10,562,064
    
    
    
    17,357
    
    
    
    1,731,317
    
    
    
    12,310,738
 The Applications business unit began operations effective fiscal year 2004.Segment revenues by category for the year ended November 30, 2005 are as follows:
 NavigationSystems
    
    
    Applications
    
    
    Mapcon
    
    
    TotalSystems and system components
    
    
    5,665,590
    
    
    
    
    
    
    $
    
    
    
    $
    5,665,590Software
    
    
    3,529,076
    
    
    
    369,347
    
    
    
    
    
    
    
    3,898,423Geomatics
    
    
    
    
    
    
    
    
    
    
    3,535,907
    
    
    
    3,535,907Other
    
    
    313,394
    
    
    
    
    
    
    
    14,126
    
    
    
    327,520Total
    
    $
    9,508,060
    
    
    $
    369,347
    
    
    $
    3,550,033
    
    
    $
    13,427,440
 Page 104 F6




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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 Geographically, revenues reported are based on the location of the Companys customers.
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Australia/New Zealand
    
    $
    2,593,635
    
    
    $
    4,818,763
    
    
    $
    1,021,844Europe
    
    
    4,939,931
    
    
    
    4,332,392
    
    
    
    2,094,063United States
    
    
    2,907,793
    
    
    
    2,872,860
    
    
    
    5,103,062Canada
    
    
    2,914,744
    
    
    
    1,427,288
    
    
    
    3,296,257Other
    
    
    71,337
    
    
    
    
    
    
    
    5,567Total
    
    $
    13,427,440
    
    
    $
    13,451,303
    
    
    $
    11,520,793
 Approximately 40% of revenue for the year ended November 30, 2005 (2004  58%, 2003  65%) is
derived from the three largest ultimate customers at 22%, 10% and 8%, respectively (2004  26%,
24%, 8%, 2003  27%, 20%, 18%).The three largest customers for 2005 were the Royal Navy of the United Kingdom, Royal
Australian Navy, and the Canadian Navy. The three largest customers for 2004 were the Royal
Australian Navy, the Royal Navy of the United Kingdom and the U.S. Coast Guard. The three
largest customers for 2003 were the U.S. Coast Guard, the Canadian Navy and the Royal Danish
Navy.Geographically, plant and equipment are reported based on location.
 November 30
    
    2005
    
    
    2004Canada
    
    $
    954,418
    
    
    $
    938,102United States
    
    
    60,639
    
    
    
    $
    1,015,057
    
    
    $
    938,102
 18
    
    Financial instrumentsFluctuations in foreign currency exchange ratesThe Company enters into transactions denominated in U.S. dollars, Australian dollars and Euros
and as such its revenue, expenses, monetary assets and liabilities will be affected by
fluctuations in the various currencies relative to its functional currency, the Canadian
dollar.The Company uses foreign exchange forward contracts to reduce the potential adverse effect of
exchange rate fluctuations on transactions denominated in U.S. dollars, Australian dollars and
euros. At November 30, 2005, the Company had foreign exchange forward contracts maturing in
the following year to sell US$nil (2004  US$851,196), Australian $nil (2004  Australian
$3,678,061), and nil
(2004 383,310).The fair value of derivative instruments generally reflects the estimated amounts that the
Company would receive or pay to settle the contracts at November 30, 2005. The fair value of
the above derivative financial instruments was an unrecorded liability of $nil at November 30,
2005 (2004  $42,303).
 Page 105 F6




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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 19
    
    Supplemental cash flow information
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Cash paid during the year for interest
    
    $
    28,453
    
    
    $
    2,045
    
    
    $
    2,824Cash received for interest
    
    $
    
    
    
    $
    
    
    
    $
    103,564Cash paid during the year for income taxes
    
    $
    5,751
    
    
    $
    12,916
    
    
    $
    Non-cash financing and investing activitiesInventory transferred to plant and equipment
    
    $
    
    
    
    $
    
    
    
    $
    10,121
 20
    
    Reconciliation of generally accepted accounting principlesThe Company prepares its unaudited interim consolidated financial statements in accordance
with U.S. generally accepted accounting principles which, as applied in these unaudited interim
consolidated financial statements, conform in all material respects to Canadian GAAP, except
for the differences below as follows:(a) Under Canadian GAAP, for stock option awards granted by the Company after December 1, 2003,
the Company is required to recognize compensation when stock options are granted to employees
and directors under stock option plans with no cash settlement feature based on the fair value
method. As permitted by the standard, the Company had applied this change prospectively for new
awards granted on or after December 1, 2003. Under U.S. GAAP, the Company accounts for stock
based compensation to employees and directors in accordance with the intrinsic value method of
the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.(b) Under Canadian GAAP, there is not a requirement to record the beneficial conversion feature
and accretion of discount when preference shares are issued with attached warrants. For U.S.
GAAP purposes, during the fiscal years 2003 and 2005 the Company recorded beneficial conversion
features of $668,785 and $4,796,649, respectively on the issuance of Class B preference shares
Series 1 and 2, respectively as a reduction to the net earnings available to common
shareholders calculated on the effective conversion price of the preference shares to common
 shares based on the proceeds allocated to the preference shares. In both cases, the conversion
feature of the preference shares vested immediately and the Company recorded the accretion of
the full amount of the beneficial conversion feature. For both the Series 1 and Series 2 Class
B preference shares, the discount on these shares that resulted from the allocation of the
gross proceeds to the Class B preference shares and to the attached warrants is accreted over
the five-year life of the warrants. This resulted in an accretion of $424,111 and $524,283,
respectively to deficit for the year ended November 30, 2005.(c) Under Canadian GAAP, there is a requirement for derivatives outside of hedging
relationships to be recognized on the balance sheet at fair market value, however for
derivatives in hedging relationships, Canadian GAAP does not specify how such derivatives
should be recorded. As a result, under Canadian GAAP in some instances derivatives may not be
recorded on the balance sheet. Under U.S. GAAP it is required that all derivatives be recorded
as assets or liabilities, measured at fair value. Derivatives that are not hedges are adjusted
to fair value through income. If the derivative is a hedge, depending upon the nature of the
hedge, changes in the fair value of the derivative are either offset against the fair value of
assets, liabilities or firm commitments through income, or recognized in other comprehensive
income until the hedged item is recognized in income. The ineffective portion of a derivatives
change in fair value is immediately recognized into income. With respect to the ineffective
portion of derivatives changes in fair value, the Company did not have a foreign exchange gain
or loss amounts for the year ended November 30, 2005, under U.S. GAAP which has not been
recorded under Canadian GAAP.(d) Under Canadian GAAP, the Company was not required to record stock based compensation for
options granted to third parties prior to December 1, 2001. Under U.S. GAAP, the Company is
required to record stock based compensation for options granted to third parties based on the
fair value method as required by SFAS 123 retroactive for all prior periods. As a result, these
stock based compensation transactions result in differences when compared to the same balances
as previously reported under Canadian GAAP.
 Page 106 F6




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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 (e) For Canadian GAAP financial statement purposes, the Companys 30,262 (November 30, 2004 -
30,262) Class A preference shares have been presented at a nominal value. For U.S. GAAP
financial statement purposes, these shares have been presented at a value of $30,362.(f) For Canadian GAAP financial statement purposes, the Company has recorded a cumulative
translation adjustment of $11,975 which is a separate component of shareholders equity. For
U.S. GAAP purposes changes in the cumulative translation adjustment are included as a component
of accumulated other comprehensive income.(g) If Canadian GAAP were followed:
 i)
    
    the effect on the Consolidated Statements of Earnings would be:
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Earnings (loss) for the period, U.S. GAAP
    
    $
    (3,411,194
    )
    
    
    248,017
    
    
    $
    352,016Adjustment for stock based compensation (a),(d)
    
    
    (1,014,117
    )
    
    
    (133,276
    )
    
    
    Adjustment for loss on derivative (c)
    
    
    
    
    
    
    
    
    
    
    33,353Earnings (loss) for the period, Canadian GAAP
    
    $
    (4,425,311
    )
    
    
    114,741
    
    
    $
    385,369Net loss attributable to common shareholders, U.S. GAAP
    
    $
    (10,249,981
    )
    
    
    (58,873
    )
    
    $
    (565,826
    )Adjustment for stock based compensation (a),(d)
    
    
    (1,014,117
    )
    
    
    (133,276
    )
    
    
    Adjustment for discount on Class B Preference shares (b)
    
    
    948,394
    
    
    
    133,757
    
    
    
    103,707Adjustment for accretion of beneficial conversion feature (b)
    
    
    4,796,649
    
    
    
    
    
    
    
    668,785Adjustment for loss on derivative (c)
    
    
    
    
    
    
    
    
    
    
    33,353Net loss attributable to common shareholders, Canadian GAAP
    
    $
    (5,519,055
    )
    
    
    (58,392
    )
    
    $
    240,019Basic earnings (loss) per common share, Canadian GAAP
    
    $
    (0.16
    )
    
    
    0.00
    
    
    $
    0.01Diluted earnings (loss) per common share, Canadian GAAP
    
    $
    (0.20
    )
    
    
    0.00
    
    
    $
    0.01Weighted average number of common shares  basic, Canadian
GAAP
    
    
    27,989,832
    
    
    
    27,230,561
    
    
    
    25,977,123Weighted average number of common shares  diluted, Canadian
GAAP
    
    
    27,989,832
    
    
    
    29,856,412
    
    
    
    27,142,492ii)      Balance Sheet items which would differ under Canadian GAAP are as follows:November 30
    
    2005
    
    
    2004Common shares (d)
    
    $
    21,811,286
    
    
    $
    19,026,125Class A preference shares  Series A (e)
    
    
    
    
    
    
    Class B preference shares  Series 1 (b)
    
    
    
    
    
    
    1,926,157Class B preference shares  Series 2 (b)
    
    
    10,912,177
    
    
    
    Warrants (b)
    
    
    5,207,039
    
    
    
    661,575Additional paid in capital (a), (d)
    
    
    299,929
    
    
    
    214,492Accumulated Deficit (a), (b), (c), (d)
    
    
    (18,481,837
    )
    
    
    (12,193,838
    )Cumulative translation adjustment (f)
    
    
    27,506
    
    
    
    
 (h) Pro forma information  Stock based compensationThe following pro forma financial information as required by The Canadian Institute of
Chartered Accountants (CICA) Handbook section 3870, Stock-based Compensation and Other
Stock-based Payments, presents the earnings had the
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 Company recognized stock-based compensation using a fair value method for all stock awards
granted, modified or settled prior to December 1, 2003:
 Years ended November 30
    
    2005
    
    
    2004
    
    
    2003Earnings (loss) for the period, Canadian GAAP
    
    $
    (4,425,311
    )
    
    $
    114,741
    
    
    $
    385,369Add: Stock-based compensation cost
    
    
    1,300,800
    
    
    
    171,442
    
    
    
    43,050Less: Pro forma stock-based compensation cost
    
    
    (1,319,700
    )
    
    
    (196,642
    )
    
    
    (560,941
    )Pro forma income (loss)
    
    
    (4,444,211
    )
    
    
    89,541
    
    
    
    (132,522
    )Pro forma basic earnings (loss) per share
    
    
    (0.16
    )
    
    
    0.00
    
    
    
    (0.01
    )Pro forma diluted earnings (loss) per share
    
    
    (0.16
    )
    
    
    0.00
    
    
    
    (0.01
    )Weighted average number of common shares  basic
    
    
    27,989,832
    
    
    
    27,230,561
    
    
    
    25,977,123Weighted average number of common shares  diluted
    
    
    27,989,832
    
    
    
    29,856,412
    
    
    
    27,142,492
 The fair value of the stock options was estimated using the Black-Scholes option pricing model
using the following weighted average assumptions by grant year:
 2005
    
    
    2004
    
    
    2003Risk-free interest rate
    
    
    3.0
    %
    
    
    2.2
    %
    
    
    2.6
    %Volatility
    
    
    54
    %
    
    
    58
    %
    
    
    102
    %Estimated average option lives
    
    4.2 years
    
    3.0 years
    
    2.7 yearsDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 21
    
    Other InformationThe following presents the conversion of the Companys comparative financial information
from Canadian GAAP to U.S. GAAP and presents a comparison for amounts which differ between
Canadian GAAP and U.S. GAAP:
 a)
    
    Balance sheet at November 30, 2004:
 As previously
    
    
    As currentlyreported under
    
    
    reported underCanadian GAAP
    
    
    US GAAPShareholders equityCapital stockIssued and outstanding30,262 Class A preference shares  Series A
    
    
    
    
    
    
    30,26257,711 Class B preference shares  Series 1
    
    $
    1,926,157
    
    
    $
    2,163,62127,488,074 common shares
    
    
    19,026,125
    
    
    
    20,047,731$
    20,952,282
    
    
    $
    22,241,614Additional paid in capital
    
    $
    214,492
    
    
    $
    928,169Accumulated deficit
    
    $
    (12,193,838
    )
    
    $
    (14,196,847
    )
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##### 



Offshore Systems International Ltd.
    
    U.S. GAAPNotes to Consolidated Financial StatementsNovember 30, 2005, 2004, and 2003(expressed in Canadian dollars)
 b)
    
    Statement of Earnings and Accumulated Deficit for the year ended November 30, 2004
 As previously
    
    
    As currentlyreported under
    
    
    reported underCanadian GAAP
    
    
    U.S. GAAPAccumulated deficit  beginning of year
    
    $
    (12,043,580
    )
    
    $
    (14,046,108
    )Class B preference share dividend paid
    
    $
    (264,999
    )
    
    $
    (264,999
    )Class B preference share dividend accreted
    
    $
    
    
    
    $
    (133,757
    )Accumulated deficit  end of year
    
    $
    (12,193,838
    )
    
    $
    (14,196,847
    )
 22
    
    Subsequent eventOn December 14, 2005, the Company acquired CHI Systems Inc. (CHI), a United States
defence contracting company. CHI has multiple offices in the United States, is a supplier of
technology and services to the U.S. Department of Defence and key defence prime contractors.
Under the terms of the agreement, the Company paid approximately $10.4 million (approximately
US$9.0 million) for 100% of the outstanding shares of CHI, of which approximately $9.3 million
(approximately US$8.1 million) was paid in cash with the balance paid by the issuance of
1,067,975 common shares of the Company.
 Page 109 F6