U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the Fiscal Year Ended March 31, 2005
                           Commission File No. 0-23339

                            US GLOBAL NANOSPACE, INC.
                      ------------------------------------
                 (Name of small business issuer in its charter)

          Delaware                                                13-3720542
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                      2533 North Carson Street, Suite 5107
                            Carson City, Nevada 89706
                    (Address of principal executive offices)

                     Issuer's telephone number: 775-841-3246

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
                                                Common Stock, $.01 par value

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X|; No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best or registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|

Issuer's revenues for its most recent fiscal year: $716,201

Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days: $3,851,492
as of July 7, 2005.

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 and 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Not applicable

At July 7, 2005, a total of 114,185,178 shares of registrant's common stock were
outstanding.

Transitional Small Business Disclosure Format (check one): Yes |_|; No |X|

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                                TABLE OF CONTENTS

PART I
                                                                            Page

Item 1.   Description of Business                                              3

Item 2.   Description of Property                                              9

Item 3.   Legal Proceedings                                                    9

Item 4.   Submission of Matters to a Vote of Security Holders                  9

PART II

Item 5.   Market for Common Equity and Related Stockholder Matters             9

Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                           10

Item 7.   Financial Statements                                                16

Item 8.   Changes In and Disagreements with Accountants on Accounting and
          Financial Disclosure                                                17

Item 8a.  Controls and Procedures                                             17

Item 8b.  Other Information                                                   17

PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act                   17

Item 10.  Executive Compensation                                              19

Item 11.  Security Ownership of  Certain Beneficial Owners and Management
          and Related Stockholder Matters                                     19

Item 12.  Certain Relationships and Related Transactions                      20

Item 13.  Exhibits                                                            20

Item 14.  Principal Accountant Fees and Services                              23


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<PAGE>

PART I

ITEM 1. DESCRIPTION OF BUSINESS

CORPORATE HISTORY

      US Global Nanospace, Inc. (referred to in this report as "USGN", "the
Company", "we", "us" or "our") is a development stage company with expertise in
the emerging field of nanotechnology. Through March 31, 2005, the end of our
fiscal year, our operations included research and development of our products
and intellectual property, designing and building prototype materials, and
forming strategic partner alliances for licensing, manufacturing, and marketing
our products.

      We were originally incorporated in the Province of British Columbia in
1984 as First West Canada Capital Corporation, or FWCC. On December 20, 1993,
FWCC became a Wyoming corporation. On December 23, 1993, FWCC merged into its
wholly owned subsidiary, FWCC Merger Corp., which was incorporated in the state
of Delaware.

      On November 4, 1992, Caring Products International, Inc. was incorporated
under the laws of the state of Delaware. On December 30, 1993, Caring Products
merged with and into FWCC Merger Corp., and FWCC Merger Corp. became the
surviving corporation. The name of the surviving entity was changed to Caring
Products International, Inc.

      On September 26, 2002, Caring Products International, Inc. changed its
name to US Global Aerospace, Inc.

      As Caring Products International, Inc., USGN and its subsidiaries designed
a line of proprietary urinary incontinence products with disposable liners that
were sold under the Rejoice brand name in the U.S., Canada and Europe. Due to a
lack of funding necessary to support full retail distribution in chain stores
and hospitals, we closed our marketing offices and liquidated our remaining
inventory. We discontinued all operations related to the production, marketing
and sale of our incontinence products during the fiscal year ended March 31,
2001.

      On March 30, 2001, we consummated a private placement of 90,000 shares of
our common stock to Raymond Bills, a previously unaffiliated accredited
investor. Mr. Bills paid $250,000 in consideration for the issuance. After
giving effect to the transaction and including 30,563 previously issued and
outstanding shares of common stock, Mr. Bills was the beneficial owner of
approximately 75% of our issued and outstanding common stock. In connection with
the transaction, Mr. Bills joined our board of directors. Concurrently, four of
the five members of the board resigned. Ian Rice also joined the board of
directors, serving as its chairman.

      On May 17, 2002, we completed a share exchange with USDR Global Aerospace,
Ltd., a Delaware corporation ("USDRGA"), and the USDRGA stockholders. At the
closing, we issued an aggregate of 20,000,000 unregistered, restricted shares of
our pre-split common stock to the USDRGA stockholders in exchange for all of the
issued and outstanding shares of capital stock of USDRGA, consisting of an
aggregate of 5,000,000 unregistered, restricted pre-split shares of common
stock. The four to one exchange ratio was determined by taking into account the
fair market value of USDRGA, which included an evaluation of the assets and
liabilities and management expertise of USDRGA. USDRGA stockholders John
Robinson and Gerald Wiener exchanged their shares of USDRGA common stock for
12,000,000 and 8,000,000 pre-split shares of our common stock, respectively. At
the closing of the share exchange, Robinson and Wiener owned approximately 48%
and 32% of our issued and outstanding pre-split shares of common stock,
respectively, and USDRGA became our wholly owned subsidiary.

      Effective on the closing date, our two officers and directors, Raymond
Bills and Ian Rice, resigned as officers and appointed:

            John Robinson, the Chairman and Chief Executive Officer of USDRGA,
            as our Chairman of the Board and Chief Executive Officer;

            Gerald Wiener, the President and Chief Operating Officer of USDRGA,
            as our President;

            Gaddy Wells, the Secretary of USDRGA, as our Secretary; and

            Julie Seaman, the Treasurer and Chief Financial Officer of USDRGA,
            as our Treasurer.


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<PAGE>

      In addition, subject to and effective upon compliance with Rule 14f-1
under the Securities Exchange Act of 1934, Rice and Bills resigned as our
directors and appointed Robinson, Wiener, Wells and Seaman as our new board of
directors. Effective June 14, 2002, Mr. Wells resigned his positions as an
officer and future director of USGN, as well as his positions as an officer and
director of USDGRA, as a result of issues regarding potential conflicts of
interest. Effective June 17, 2002, Ms. Seaman was appointed as Secretary of
USGN, in addition to being Treasurer and a director of USGN. Effective July 29,
2002, Mr. Wiener resigned as a director and as President of USGN, and as the
President and Chief Operating Officer of USDRGA. As of the date of this report,
the officers and directors of USGN are as follows: John Robinson, Chief
Executive Officer and Chairman of the Board, and Julie Seaman, Chief Financial
Officer, Secretary and Treasurer.

      Effective December 31, 2002, USGN filed a Certificate of Ownership with
the Secretary of State of Delaware effecting the merger of USDRGA with and into
USGN, and USGN assumed all the assets and liabilities of USDRGA.

      On February 13, 2003, our Board of Directors approved a 3 for 1 forward
split of our common stock for shareholders of record as of February 24, 2003.
The 3 for 1 stock split became effective on March 5, 2003. Unless otherwise
specified, all references to the number of shares and per share data in this
report give effect to this stock split.

      Effective July 21, 2003, US Global Aerospace, Inc. changed its name to US
Global Nanospace, Inc.

      On January 14, 2004, our Board of Directors approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to increase the
authorized common stock from 100,000,000 to 300,000,000 shares and to increase
the authorized preferred stock from 1,000,000 to 10,000,000 shares.

OUR BUSINESS

      US Global Nanospace, Inc. is a development stage company that specializes
in identifying, developing, and commercializing advanced products the core
technologies of which are primarily nanoscience derived. Our products include
optimized polymer and organic materials and nanofibers, advanced filtration
systems for air, water, and cigarettes, biological and chemical decontaminants,
and blast mitigation and fire protection materials. We are currently focusing
our efforts on licensing and marketing the products that we have developed for
defense, security, and health and safety applications. Our target customers for
these materials, formulas, and processes include agencies or organizations under
the direct control of the federal government of the United States, domestic and
foreign businesses and foreign government agencies or organizations, to the
extent permitted by applicable law or regulations.

OUR PRODUCTS

      Our products include the following:

GARDS -GUARDIAN ANTIBALLISTIC REPLACEMENT DOOR SKINS

      The Guardian Antiballistic Replacement Door Skin (GARDS) for the AM
General High Mobility Multipurpose Wheeled Vehicle ("HMMWV", commonly pronounced
Hum-Vee) are lightweight and flexible antiballistic panels designed to protect
vehicle occupants in elevated-threat locations.

      GARDS are designed to be attached in the field to the interior of the
existing HMMWV doorframe, upgrading threat level protection to NIJ Level IIIA or
higher, providing for an increase in protection from small arms fire,
projectiles, fragmentation and shrapnel when compared to the original equipment
fabric doors. GARDS are designed to be installed in fifteen minutes. They weigh
as little as six pounds per panel, require no maintenance and as the original
door structure and canvas cover remain intact, are intended to be unnoticeable
from the outside of the vehicle. GARDS' strength, durability and low weight is a
result of US Global's G-Lam anti-ballistic material. G-Lam is created with a
process that results in mechanical properties that, to our knowledge, are far
superior to common anti-ballistic composite materials. GARDS are designed to
provide maximum protection against specific ballistic threats, fragmentation and
shrapnel. G-Lam is also designed to be impervious to petroleum distillates and
maintain performance at temperatures in excess of 400 degrees Fahrenheit.

RADOME AND RADOMEX IMPACT RESISTANT AIRCRAFT RADOME

      We have developed radomes, a protective fairing typically found on
aircraft that is used to protect radar antenna, that are designed to allow
efficient radar signal transmission. A fairing is a structure whose primary
function is to produce a smooth outline and to reduce drag as on an airplane.
This product is available in limited quantities. We are currently supplying this
standard composite radome for the Bell 212/412 and the Agusta AB212/412 series


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<PAGE>

military and commercial helicopters to Agusta Aerospace and Bell Helicopter. In
addition, we have developed materials suitable for producing an impact
resistant\ballistic resistant radome, or RadomeX. RadomeX is designed to provide
variable threat ballistic protection to the flight crew, the radar equipment and
the aircraft while allowing the radar to operate. RadomeX products are currently
under development, and we anticipate further development of RadomeX in the
foreseeable future.

SAV-A GUNNER (SAG) HMMWV TURRET

      The S.A.G. Turret has been designed as a durable, lightweight shielded
turret offering protection against specific ballistic threats, fragmentation and
shrapnel for the HMMWV.

      The S.A.G. Turret weighs approximately 160 pounds and offer rapid
rotational capability. The S.A.G. Turret is approximately 4 feet in diameter, is
designed to interface precisely with military HMMWV rotating turret rings and is
designed to be installed by two people in less than one hour using common hand
tools. USGN's proprietary G-Lam material used in the turret is designed to be
impervious to petroleum distillates and to maintain performance at temperatures
in excess of 400 degrees Fahrenheit.

BLAST-X EXPLOSION MITIGATION MATERIAL

      Blast-X is a lightweight blast mitigation material that may be
manufactured in various mediums, including flat panels, conformable panels, and
cast shapes. Blast-X integrates blast mitigation and containment technologies
into a single unit or system of products that are designed to reduce risk to
persons and property, preserve forensic evidence, increase safety in work
environments, and prevent sympathetic detonation in munitions containers.
Sympathetic detonation is the detonation of one explosive item by exploding
another explosive item adjacent to it.

      Blast-X is comprised of two distinct components; a mitigation medium to
attenuate explosive shock waves, reduce initial shock pressure levels and
minimize fire as it interacts with the heat and pressure of the blast
environment; and a back panel made of USGN's G-Lam anti-ballistic/anti-fragment
material to contain blast fragments and debris.

      Blast-Cast is a castable blast mitigation product designed for munitions
containers, munitions storage facilities, and any application where blast
mitigation and more specifically sympathetic detonations are a concern.
Blast-Cast is a custom manufactured solution molded in myriad forms per customer
specifications.

      The components in Blast-X can also be used separately or spaced, depending
on the definition of threat while considering new construction or retrofits. The
blast mitigation portion of Blast-X is more appropriately placed as near as
possible to the blast source; while the fragment barrier portion can be placed
closer to the areas that are to be protected (e.g. occupied rooms and critical
equipment).

ALL-CLEAR

      All-Clear is designed for the neutralization of chemical and biological
weapons and contaminants. All-Clear utilizes a nano-encapsulation (a method of
creating and utilizing extremely small protective capsules/casings to enhance
and stabilize enzyme reactivity) enzyme developed by The Edgewood Chemical
Biological Center formerly Soldier and Biological Chemical Command. The
nano-encapsulation process provides for enhanced efficacy and long shelf life.
All-Clear was designed for military decontamination applications, as well as for
use by fire/emergency personnel, law enforcement agencies, or other first
responders to terrorist, hazardous materials (HAZMAT), or other emergency
incidents.

      We believe the advantages of All-Clear Chem/Bio Decon Foam include the use
of fast acting benign ingredients, non-hazardous residuals, non-oxidizing
action, no flight restrictions, and expandability for new applications. To our
knowledge, All-Clear is the first environmental and surface friendly
decontaminant that is highly effective in eliminating chemical and biological
warfare agents, such as Sarin and Anthrax. The foam is developed to neutralize
agents without the harmful effects that most chlorine and oxidizing
decontamination agents have on sensitive apparatus like landing gear and brake
assemblies. Unlike other decontamination products that rely on chemical
reactions to oxidize agents, this two-part product uses an enzyme to selectively
destroy nerve agents and a biocide mixture to sterilize biological agents,
including anthrax spores.

      The foam's active ingredients are not rapidly depleted by reaction with
other materials, such as dirt and grease, resulting in a long-lasting product.
The foam can be dispensed using commonly available fire-fighting equipment in
addition to numerous readily available commercial applicators.


                                       5
<PAGE>

      The worldwide market for decontamination solutions is emerging and is
expected to become significant as government agencies and emergency services
establish contingency plans and preparedness for chemical or biological attack.

      We intend to expand the commercial market for All-Clear beyond terrorist
response to include treating industrial and infectious waste and the
decontamination of aircraft and vehicles arriving from quarantine areas, as well
as agricultural applications such as treating livestock areas to destroy and
prevent the spread of infectious diseases in animals.

      All-Clear has been developed pursuant to the agreement with Kidde Fire
Fighting, Inc. and is being marketed internationally to foreign governments,
militaries and companies and has been presented to the U.S. Department of
Homeland Security and the U.S. Department of Defense. Before it can be marketed
and sold in the United States other than to the U.S. Department of Defense, an
application for registration of the product must be submitted to the EPA
specifically necessitating registration either as a sterilant or as a newly
proposed anthrax inactivation formula. All efficacy and toxicity testing has
been completed and the application will be submitted to the EPA by the end of
July 2005. Once the application is formally submitted, we believe that it could
take at least eight months to receive approval of the labeling for use on the
product and final EPA registration. All-Clear has successfully passed the Boeing
Series D6-17487, Revision P, corrosion test for use of foam on aircraft
exteriors. This was required to prove non-corrosive capability and is key for
Air Forces and commercial airlines worldwide. Internationally, All-Clear is
currently being evaluated by the Canadian DOD and several European, Asian and
Middle Eastern countries.

NANOFILTERCX

      NanofilterCX is designed to offer a high-efficiency mechanical filtration
means for reduction of cigarette smoke toxins. We believe it features
cost-effective pricing in comparison to current common cigarette filters,
feasible integration into the manufacturing process, consistent smoking action
and taste, and a reduction of smoke toxin levels. This ability to filter toxins
without negatively affecting flow or requiring excessive air dilution results
from the slip-flow effect of the biodegradable nanofiber filter medium. This
effect increases flow across the filter fiber surface to provide for higher
diffusion, interception and retention of smoke toxins and dangerous particulate
matter. Other filter products in the category of Less Harmful Cigarettes (LHCs)
or Reduced-Risk Cigarettes are anticipated to be chemical-based and may require
lengthy government approvals to evaluate any residual ingestion effects of the
chemical additives. Due to its purely mechanical filtering action, NanofilterCX
is designed to eliminate such residual ingested effect to the smoker.

      In addition to the direct benefit to smokers of reducing toxins,
NanofilterCX is anticipated to be manufactured from a variety of polymers to
optimize biodegradability. The NanofilterCX is still under development and we
have not sold any to date.

NANOFILTER PATHOGEN/ALLERGEN AIR FILTER PURIFICATION SYSTEMS

      The core of USGN's NanoFilter technology was initially developed for NASA
for use during extended crewed space flight applications lasting in excess of
120 days, to provide ultra-fine particulate matter air filtration and
purification.

      The Nanofilter is comprised of advanced polymeric nanofiber combined with
a patented particle stimulation mechanism. The result is an optimized porous
nanofilter media that is enveloped with an electronic field causing the airborne
particulate matter to move in a churning motion perpendicular to the airflow
direction without ionization, thus significatly enhancing the London/Van der
Waals force interaction (a type of particle attraction), resulting in a
super-efficient air filtration and purification system to effectively capture
bacteria, viruses, smoke, dust, odorants, and other sub-micron sized particulate
matter.

      Unlike traditional filter technology that rely on more restrictive filter
elements and reduced flow rates in order to catch smaller particles, nanofilter
technology provides nearly unrestricted air-flow, minimal pressure drop, and a
substantial increase in energy efficiency. Applications for this technology
currently exist in industrial, commercial, and residential buildings, as well as
mass transit vehicles. The Nanofilters are still under development and we have
not sold any to date.

DISTRIBUTION/MANUFACTURING

      We do not manufacture or distribute our products on a commercial scale,
nor do we intend to manufacture or distribute our products in the foreseeable
future on a commercial scale. We work with industry-leading companies described
below to facilitate the development and marketing strategy of our technologies
and products.


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<PAGE>

      Kidde Fire Fighting, Inc.

      Under the Development and License Agreement between the Company and Kidde
Fire Fighting, Inc. dated as of August 13, 2004, we agreed with Kidde to
develop, produce, market and commercialize decontaminant foam products. This
agreement required Kidde to pay us a license fee in the amount of $100,000 and a
fee in the amount of $100,000 in consideration for the assignment of the
trademark, All-Clear. These fees were paid in two equal installments. As
required by the agreement, the first installment was paid in August 2004 and the
second installment was paid in November 2004. Pursuant to the agreement, we are
responsible for formulating existing products and Kidde is responsible for
developing manufacturing processes relating to the existing products. The term
of the agreement began on August 13, 2004 and will continue until the later of
10 years or the date on which the manufacture, use or sale of any product
developed pursuant to the agreement would no longer infringe a valid claim of
patent rights (if any exist) held by us, alone, or with Kidde. If a competitor
develops a similar product that eliminates the possibility that the product we
developed can compete with such product, the agreement would be mutually
terminated over a six month period. The All-Clear product has been developed and
tested and is being marketed internationally to foreign governments, militaries
and companies and has been presented to the U.S. Department of Homeland Security
and the U.S. Department of Defense. Before it can be marketed and sold in the
United States other than to the U.S. Department of Defense, an application for
registration of the product must be submitted to the EPA specifically
necessitating registration either as a sterilant or as a newly proposed anthrax
inactivation formula. All efficacy and toxicity testing has been completed and
the application will be submitted to the EPA by the end of July 2005. Once the
application is formally submitted, we believe that it could take at least eight
months to receive approval of the labeling for use on the product and final EPA
registration. All-Clear has successfully passed the Boeing Series D6-17487,
Revision P, corrosion test for use of foam on aircraft exteriors. This was
required to prove non-corrosive capability and is key for Air Forces and
commercial airlines worldwide. Internationally, All-Clear is currently being
evaluated by the Canadian DOD and several European, Asian and Middle Eastern
countries. If Kidde is able to successfully market the product, we would earn
royalties on the number of products sold in a Kidde fiscal year, as defined in
the agreement. The royalties are computed on the number of products sold and do
not include reductions for expenses associated with the production, marketing
and sale of the product.

      Vitusa Products, Inc.

      On June 25, 2004, we entered into a distribution agreement with Vitusa
Products, Inc. pursuant to which we granted Vitusa a worldwide, non-exclusive
right to distribute our NanofilterCX material for use in tobacco filtration. The
agreement does not provide minimum purchase requirements. The term of the
agreement is until December 31, 2004 and thereafter automatically renews for
additional one-year terms, unless one of the parties terminates the agreement
with at least a 45-day prior written notice of termination. Pursuant to the
agreement, we may require Vitusa to meet sales goals if we provide 30-day prior
written notice to Vitusa of such goals and Vitusa has not rejected the goals in
writing delivered to us.

      In addition, we are in the process of negotiating licensing, manufacturing
or distribution arrangements with other international companies or independent
contractors that have the infrastructure to manufacture, distribute or sell our
products or technology on a commercial scale worldwide. We are also in the
process of negotiating directly with government agencies and private sector
companies for the sale or licensing of our products.

      We will continue to use consultants knowledgeable in the industries we
target to market and obtain orders.

COMPETITION

      Nanotechnology is an emerging industry. We believe that the global number
of development-stage companies involved in the development of nanomaterials will
continue to grow and they may represent competitive risks in the future. Some of
these development stage companies, especially in other countries, are receiving
significant government assistance.

      We face current and potential competition from companies that develop
products for similar uses, as well as the in-house capabilities of several of
our potential customers, such as the military. Many of these competitors are
larger, more diversified and better capitalized than we are. Competitive
companies pose risks to us because they may have substantially greater financial
and technical resources, larger research and development staffs, and greater
manufacturing, marketing and distribution capabilities.

      We have a continuing need for skilled and professional individuals for the
research and development of our products. The demand for individuals with
specialized engineering and technical skills is high and we anticipate that it
will remain so for the foreseeable future. In our attempt to compete with other
companies with similar hiring needs, we may incur increased labor, recruiting or
training costs so as to have access to the required skills.

SOURCES AND AVAILABILITY OF RAW MATERIALS AND NAMES OF PRINCIPAL SUPPLIERS

      The raw materials used to produce our products are easily obtained from
multiple sources at competitive prices. If any of these supply sources becomes
unavailable, we believe that we would be able to secure alternate supply sources
within a short period of time and with minimal or no disruption.


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<PAGE>

INTELLECTUAL PROPERTY

      If we consider it to be advantageous, we may apply for patents as our
products are developed, or we may enter into license agreements for technologies
that we believe are synergistic to our products, or that expand the range of our
products. At this time, we do not believe that our business would be materially
affected by the expiration of any patents, if they are issued.

      On June 3, 2005, we filed a joint provisional patent application with
Kidde directed to a new decontaminant product jointly developed by us and Kidde.
We previously entered into a license agreement with TIAX, LLC on an exclusive
basis for technology related to a decontamination system we hoped would be
usable for our All-Clear product. By letter dated May 27, 2005, TIAX notified us
that TIAX believed that we were in default under this agreement for failure to
pay $192,914 TIAX alleged was due under the agreement. Under the terms of the
agreement, the agreement terminates upon 30 days written notice of default if
the default is not cured to the satisfaction of TIAX within the 30-day notice
period. On June 27, 2005, we responded to TIAX, stating that we disagreed with
TIAX's assessment of the amounts due TIAX under this agreement. We also informed
TIAX that the decontaminant product being marketed by Kidde had been jointly
developed by us and Kidde, and that we did not believe that this new product was
subject to our agreement with TIAX. We made a counter-proposal to TIAX, offering
to pay TIAX 25% of royalties received by us from Kidde. On July 19, 2005, TIAX
rejected our counter-proposal to modify the payment terms of the agreement and
notified us that TIAX will exercise its right to terminate the agreement, unless
we pay $196,344 in full by August 18, 2005. Of this $196,344, we have received
invoices from TIAX in an aggregate amount of approximately $165,000 that we have
entered as accounts payable in our financial statements for the fiscal year
ended March 31, 2005, although we dispute this amount. Upon receipt of this
notice from TIAX that the alleged default had not been cured, we are taking the
position that the agreement has already terminated as of June 28, 2005. It is
our understanding that TIAX disagrees with this position. It is possible that
this dispute may result in litigation initiated by TIAX. We believe that the
product that Kidde is producing under license from us comprises a new formula
that is the intellectual property of the Company and Kidde.

      We have applied for registration of two marks, ALL-CLEAR (word mark) and
ALL-CLEAR (design mark) with the United States Patent and Trademark office.
Under the Development and License Agreement between the Company and Kidde Fire
Fighting, Inc. dated as of August 13, 2004, we have assigned our interest in
both of these registration applications to Kidde. On June 14, 2005, a Notice of
Allowance for the All-Clear word mark was received from the United States Patent
and Trademark Office and we expect the registration to be completed in the near
future. The All-Clear design mark application is pending and to date, we have
not received a Notice of Allowance for this trademark.

      The discoveries or technologies covered by the patent applications may not
have commercial value. Also, if patents are issued, they may not provide
commercially meaningful protection against competitors. Other parties may be
able to design around the issued patents or independently develop technology,
having effects similar or identical to our technology. In addition, the scope of
the patent applications is subject to uncertainty and competitors or other
parties may obtain similar patents of uncertain scope. For example, other
parties may discover uses for chemical and/or biological decontamination systems
or technology different from the uses covered in our patent applications, and
these other uses may be separately patentable.

GOVERNMENT REGULATION

      The development of our products may be subject to government regulation.
For example, the use of our All-Clear product as a biological decontamination
product is regulated by the U.S. Environmental Protection Agency and requires
EPA approval prior to sale and marketing in the U.S., except possibly for sales
to the U.S. Department of Defense. The EPA estimates that it may take up to
eight months to obtain approval from submittal of the application. If All-Clear
is used as a hospital disinfectant or sterilizer or for other biological
contaminants, the registration process with the EPA is estimated to take 120
days from submittal of the application. The efficacy and toxicity testing of
All-Clear has been completed and the application will be submitted to the EPA by
the end of July 2005.


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<PAGE>

      Sales of our potential products internationally may be governed by the
International Traffic in Arms Regulations, the Export Administration
Regulations, the Patriot Act and the Bioterrorism Safety Act. Although these
laws and regulations do not restrict those present foreign sales programs, there
can be no assurance that future changes to these regulatory regimes will not
affect or limit our foreign sales.

RESEARCH AND DEVELOPMENT

      Research and development is a critical component of our business and is
ongoing. We spent $526,746 on research and development during the last fiscal
year and $1,264,867 during the fiscal year ended March 31, 2004. Our research
and development costs will continue to be substantial.

EMPLOYEES

      We currently have 2 full-time employees. Depending on the project, we also
retain the services of between 12 and 17 consultants.

ITEM 2. DESCRIPTION OF PROPERTY

      Our corporate office is located in Carson City, Nevada. However, because
the majority of our existing research and technical support people reside in
Texas, we lease approximately 39,000 square feet of industrial space on 2.4
acres, located at 1016 Harris Road, Arlington, Texas, at a gross rental rate of
$11,000 per month, which is market rate. The lease term ends on May 31, 2006.
The property is in satisfactory condition for USGN's operations. USGN expects
that the property will be adequate for its needs for the lease term.

ITEM 3. LEGAL PROCEEDINGS

      On January 3, 2005, we received a Wells Notice from the U.S. Securities
and Exchange Commission. The Wells Notice notified us that the SEC staff
intended to recommend that the SEC bring a civil action against us and our
officers and directors for alleged violations of U.S. securities laws. The SEC's
concerns principally regard certain prior public statements made by us regarding
the marketability of our products. We have been in ongoing dialog with the SEC,
and have prepared and submitted initial and supplemental Wells Submissions in
response to the Wells Notice. The SEC has also recently issued subpoenas to us
seeking information and testimony regarding the technology incorporated into our
products, which we are in the process of supplying. Notwithstanding receipt of
the Wells Notice and the information and testimony currently being sought, we
have cooperated and continue to cooperate with the SEC, and are actively seeking
a negotiated settlement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

      Our common stock has traded on the NASD OTC Bulletin Board under the
symbol USGA since October 4, 2002. From July 12, 2001 to October 4, 2002, our
common stock traded on the NASD OTC Bulletin Board under the symbol CPRD. From
June 21, 1999 to July 12, 2001 our common stock traded on the OTC Bulletin Board
under the symbol BDYR. From December 15, 1997 through June 20, 1999, our common
stock traded on the Nasdaq SmallCap Market under the symbol BDRY. Previously,
our common stock traded on the OTC Bulletin Board under the symbol CGPD from
November 21, 1997 through December 14, 1997, under the symbol CGPDD from October
21, 1997 through November 20, 1997 and under the symbol CGPD from August 14,
1997 through October 20, 1997. We voluntarily delisted our common shares from
the Vancouver Stock Exchange in January 1998, and from the British Columbia
Stock Exchange on June 17, 2002. We also voluntarily delisted our common shares
from the Berlin Bremen Stock Exchange on May 26, 2004, after discovering we were
listed without our consent or approval.

      The table below sets forth the range of high and low bid quotes of our
common stock for each quarter for the last two fiscal years as reported by Yahoo
Finance. The bid prices represent inter-dealer quotations, without adjustments
for retail mark-ups, markdowns or commissions and may not necessarily represent
actual transactions.


                                       9
<PAGE>

                                         PERIOD               HIGH         LOW
                                         --------------      ------      ------

      Fiscal Year Ended March 31, 2005   First Quarter       $0.760      $0.250
                                         Second Quarter      $0.430      $0.170
                                         Third Quarter       $0.350      $0.140
                                         Fourth Quarter      $0.250      $0.100

      Fiscal Year Ended March 31, 2004   First Quarter       $0.031      $0.005
                                         Second Quarter      $0.510      $0.130
                                         Third Quarter       $1.390      $0.120
                                         Fourth Quarter      $3.050      $0.610

HOLDERS

      There were approximately 146 stockholders of record of common stock as of
July 7, 2005.

DIVIDENDS

      We have never declared or paid cash dividends on our common stock, and our
present policy is not to pay cash dividends on our common stock. Any payment of
cash dividends in the future will be wholly dependent upon our earnings,
financial condition, capital requirements and other factors deemed relevant by
our board of directors. It is not likely that cash dividends will be paid in the
foreseeable future.

SALE OF UNREGISTERED SHARES

      During the last fiscal year we sold securities that were not registered
under the Securities Act of 1933. The following transactions were not reported
in our previously filed quarterly reports. The transactions are as follows:

      On January 25, 2005 we issued 1,000,000 shares of common stock to Western
Security Holding Co. Ltd., an affiliate of Western Security Bank, for an
aggregate cash purchase price of $150,000, equaling 85% of the fair market value
per share on the date of issuance. The 1,000,000 shares were issued to Western
Security Holding Co. Ltd. who qualified as an accredited investor, as that term
is defined in the Securities Act of 1933. We relied on the exemption provided by
section 4(2) of the Securities Act of 1933, as amended, to issue the stock in
this transaction. The following conditions were all met with respect to this
issuance: (1) we did not advertise this issuance in any public medium or forum,
(2) we did not solicit any investors with respect to this issuance, (3) we did
not publicize any portion of the purchase or sale of the shares issued, (4) none
of the shares issued were offered in conjunction with any public offering, and
(5) neither we nor the investor paid any fees to any finder or broker-dealer in
conjunction with this issuance.

      From July 2004 through March 2005, we issued a total of 121,787 shares
having a total value of $25,288, to attorneys for legal services. From September
2004 through January 2005, we issued a total of 135,128 shares having a total
value of $24,960, to individuals for business consulting services. We relied on
the exemption provided by section 4(2) of the Securities Act of 1933, as
amended, to issue the stock in these transactions. The recipients of these
shares represented their intention to acquire the shares for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients either received adequate information about the
Company or had access, through relationships, to such information.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLAN

      Set forth in the table below is information regarding awards made through
compensation plans or arrangements through March 31, 2005, the most recently
completed fiscal year.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                                   Number of securities
                                                                                   remaining available for
                                                                                   future issuance under
                              Number of securities to    Weighted average          equity compensation
                              be issued upon exercise    exercise price of         plans (excluding
                              of outstanding options,    outstanding options,      securities reflected in
Plan Category                 warrants and rights        warrants and rights       column 2)
----------------------------------------------------------------------------------------------------------
<S>                                        <C>                    <C>                  <C>
Equity Compensation Plans
Approved by Security Holders               0(1)                   N/A                  3,371,131(1)
----------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Not Approved by Security
Holders                                    N/A                    N/A                        N/A
----------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of March 31, 2005, no options, warrants or rights were granted under the
US Global Nanospace, Inc. Amended and Restated 2002 Stock Plan, however, we have
awarded 26,628,869 shares of common stock to officers, employees and consultants
in exchange for services rendered to us. Therefore, as of March 31, 2005 there
was available for future issuance under the US Global Nanospace, Inc. Amended
and Restated 2002 Stock Plan 3,371,131 shares of common stock.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      This section and other parts of this report on Form 10-KSB by the Company
contains forward-looking statements. These are statements regarding financial
and operating performance and results and other statements that are not
historical facts. The words "expect," "project," "estimate," "believe,"
"anticipate," "intend," "plan," "forecast," and similar expressions are intended
to identify forward-looking statements. Certain important risks could cause
results to differ materially from those anticipated by some of the
forward-looking statements. Some, but not all, of the risks that could cause
actual results to differ from those suggested by the forward-looking statements
include, among other things:

      o     our ability to successfully market the products we have developed
            and to continue to develop products with demonstrated competitive
            advantages for the defense and health and safety markets;

      o     whether or not our products are able to compete successfully with
            products of other suppliers and whether or not some or all of our
            products are rendered obsolete by newer products;

      o     the implementation of any government regulation that could make it
            more difficult or more costly to bring our products to market;

      o     our ability to obtain financing as and when we need it; and

other factors, all of which are difficult to predict and many of which are
beyond our control.

      You are cautioned not to place undue reliance on these forward-looking
statements, which relate only to events as of the date on which the statements
are made. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
You should refer to and carefully review the information in future documents we
file with the Securities and Exchange Commission.

      Management's discussion and analysis of results of operations and
financial condition are based upon our financial statements. These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles require management to make
certain estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on going basis, we evaluate our estimates based on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

OVERVIEW

      We are a development stage company with expertise in the emerging field of
nanotechnology. We specialize in identifying, developing, and commercializing
advanced products, the core technologies of which are primarily nanoscience
derived. These products include complex polymer materials, polymer nanofiber
materials, nanofiber filter materials, biological and chemical decontaminants,
and blast mitigation materials. We are currently focusing our efforts on


                                       10
<PAGE>

licensing and marketing the products that we have developed for defense and
health and safety applications. Our target customers for these materials,
formulas, and processes include agencies or organizations under the direct
control of the federal government of the United States, domestic and foreign
businesses and foreign government agencies or organizations, to the extent
permitted by applicable law or regulation.

      Since our inception on March 20, 2002, we have been unprofitable. We have
incurred net losses of $18,181,774 since inception through March 31, 2005. As a
development stage company, our limited history of operations makes prediction of
future operating results difficult. We believe that period-to-period comparisons
of our operating results should not be relied on as predictive of our future
results.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      Management's discussion and analysis of results of operations and
financial condition are based upon USGN's financial statements. These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles require management to make
certain estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

In consultation with our Board of Directors, we have identified the following
accounting principles that we believe are key to an understanding of our
financial statements and require our more significant judgments and estimates
used in the preparation of our financial statements.

Revenue Recognition. We recognize revenues in accordance with SEC Staff
Accounting Bulletin (SAB) No. 101, and as amended by SAB No. 104. Revenues are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, or services have been rendered, the price is fixed and determinable
and collectibility is reasonably assured. During the fiscal year ended March 31,
2005, our revenues were primarily derived from product sales and commercial
collaborations. Revenue for product sales is recognized at the time of delivery
of the product. Revenue under contracts based on a fixed fee is recognized based
on conditions being met. Revenue under contracts based on royalty fees is
recognized when the amounts are earned and determinable, which is generally when
cash payment is received. However, since we are not able to forecast product
sales by licensees, royalty payments that are based on product sales by the
licensees are not determinable until the licensee has completed their
computation of the royalties due and/or remitted their cash payment. Should
information on licensee product sales become available so as to enable us to
recognize royalty revenue on an accrual basis, materially different revenues and
results of operations could occur.

PLAN OF OPERATION

      We are a development stage enterprise as defined under Statement of
Financial Accounting Standards ("SFAS") No. 7. We are a nanotechnology company
that specializes in identifying, developing, and commercializing advanced
products the core technologies of which are primarily nanoscience derived. These
products include complex polymer materials, polymer nanofiber materials,
nanofiber filter materials, biological and chemical decontaminants, and blast
mitigation materials. We are currently focusing our efforts on licensing and
marketing the products that we have developed for defense and health and safety
applications. Our target customers for these materials, formulas, and processes
include agencies or organizations under the direct control of the federal
government of the United States, domestic and foreign businesses and foreign
government agencies or organizations, to the extent permitted by applicable law
or regulation. Operating revenues have been generated in the amount of $716,201
for the year ended March 31, 2005. During the year ended March 31, 2003, we
obtained loans from a bank for amounts up to $1,650,000. In addition, we have
received $2,929,105 in loans since inception from third parties, existing
shareholders and directors. During the year ended March 31, 2004, we recorded
revenues for the first time that were primarily derived from sales of G-lam
panels and radomes. In the fiscal year ended March 31, 2005, we recorded
revenues generated under the Kidde Agreement with respect to our All-Clear
product, and revenues derived from our other products that included our
S.A.G.(TM) turret, GARDS panels, blast mitigation materials and radomes. We
anticipate continuing to generate revenue from sales of these products or
technologies. At this time, we cannot predict when we will generate revenues
from our other products that are in early stages of development. We do not
manufacture or distribute our products on a commercial scale. We are in the
process of negotiating licensing, manufacturing or distribution arrangements
with other international companies or independent contractors that have the
infrastructure to manufacture, distribute or sell its products on a commercial
scale worldwide. We are also in the process of negotiating directly with
government agencies and private sector companies for the sale or licensing of
our products. In addition, our officers and employees have been deferring their
salaries and the employees accepted shares of our common stock in lieu of cash.
During the next 12 months, if we cannot generate sufficient funds to operate our
business from sales or licenses of our products, we will be required to seek
financing from our largest shareholder, who has provided financing and a loan
guarantee for us in the past. The shareholder is under no obligation to provide
such funds. We may also consider selling debt or equity securities. There is no
guarantee that we will obtain funds sufficient to continue our operations during
the next 12 months.


                                       11
<PAGE>

      Our capital requirements, particularly as they relate to product research
and development, have been and will continue to be significant. Our future cash
requirements and the adequacy of available funds will depend on many factors,
including the pace at which we are able to launch our products, whether or not a
market develops for our products and, if a market develops, the pace at which it
develops, and the pace at which the technology involved in making our products
changes.

      To date, we have funded our operations through loans in the amount of
$1,650,000 from a bank, loans in the amount of $2,929,105 from unrelated third
parties, existing shareholders and directors, and revenues totaling $856,550.
During the next 12 months, if we fail to earn revenues in an amount sufficient
to fund our operations, we intend to raise capital through an offering of our
securities or from additional loans. We cannot guarantee that financing will be
available to us, on acceptable terms or at all. If we do not earn revenues
sufficient to support our business and we fail to obtain other financing, either
through an offering of our securities or by obtaining additional loans, we may
be unable to maintain our operations.

RESULTS OF OPERATIONS

      Our revenues from operations for the year ended March 31, 2005 were
$716,201 as compared to revenues of $140,349 for the period ended March 31,
2004. This significant increase in revenues is attributable to revenues
generated under the agreement with Kidde Fire Fighting, pursuant to which we
received a one-time license fee of $100,000 and a one-time trademark fee of
$100,000 in two installments that were paid in August 2004 and November 2004. To
date, we have earned no royalties from this agreement. The increase in our
revenues is also attributable to revenues derived from our other products that
include our S.A.G. turret, GARDS panels, blast mitigation materials and radomes.

      Our cost of revenues from operations for the year ended March 31, 2005
were $381,554 as compared to cost of revenues of $26,728 from the period ended
March 31, 2004. The cost of revenues includes the cost of raw materials,
packaging supplies, shipping charges, royalties, commissions, direct and
indirect labor and other indirect manufacturing costs.

      The gross margin percentage during the year ended March 31, 2005 of 47%
decreased from the comparable fiscal year ended March 31, 2004 of 81%. This
decrease is attributable to the fact that in some cases during the year ended
March 31, 2005, we have had to rely on outside vendors and contractors to supply
us materials and services at fixed costs on products that the company had
produced on its own in the previous year at a lower cost, and the fact that we
developed new products with higher production costs than the products we
produced in the previous year. We anticipate higher production costs to continue
in the foreseeable future.

      During the year ended March 31, 2005 we spent $526,746 on research and
development as compared to $1,264,867 for research and development during the
year ended March 31, 2004. Our research and development costs declined because
many of our products are developed and we focused on marketing, selling and
licensing our existing products. We anticipate our research and development
costs will continue to be significant as we continue to develop our products.

      During the year ended March 31, 2005 we incurred $1,178,503 in expenses
related to general and administrative non-cash compensation as compared to
$3,695,264 related to general and administrative non-cash compensation during
the year ended March 31, 2004. Of this amount from the year ended March 31,
2004, $3,204,383 was non-cash general and administrative expense for deferred
compensation and services related to the issuance of 7,308,215 shares of common
stock pursuant to consulting agreements we entered into during the fiscal year
2002. We had continued to recognize such non-cash expense, having a total value
of $6,560,317, over a two-year period. At June 30, 2004, that two-year period
had ended. During the year ended March 31, 2005, we paid our consultants and
employees with our common stock in order to conserve cash.

      During the year ended March 31, 2005 other general and administrative
expenses totaled $2,369,458 as compared to other operating expense of $2,213,172
for the year ended March 31, 2004. Of this amount for the year ended March 31,
2005, $644,187 is expense related to legal fees. In addition, general and
administrative expenses consist of salaries, facility rental and utilities
expense. We anticipate these costs will continue to be significant until
resolution of the SEC Wells Notice (as described in Item 3) has been reached. We
anticipate that general and administrative expenses will continue to be
significant as we continue our licensing and marketing efforts, and incur other
increased costs associated with operating as a public company.


                                       12
<PAGE>

      We had an operating loss of $3,740,060 for the year ended March 31, 2005,
as opposed to an operating loss of $7,059,682 for the year ended March 31, 2004.
We had a net loss of $3,842,078 for the year ended March 31, 2005, as compared
to a net loss of $7,285,341 for the year ended March 31, 2004. This decrease in
the operating loss and net loss is primarily attributable to the reduction in
research and development costs and the completion of recognizing non-cash
general and administrative expenses for deferred compensation and services
related to the consulting agreements entered into during the fiscal year ended
March 31, 2002.

      Other income (expense) for the year ended March 31, 2005 was made up of
$47,907 in other income we received from storage of equipment from third
parties. Also included was interest expense for the year ended March 31, 2005
totaling $149,925 as compared to interest expense totaling $526,328 for the year
ended March 31, 2004. Interest expense decreased because we reduced the
principal on our bank note by $844,232, and the interest rate on this note was
lowered.

      During the next 12 months we intend to continue upgrading our current
products and developing new products and methods of using our existing products.
For the year ended March 31, 2005 our research and development expenses totaled
$526,746. We anticipate that our research and development expenses will continue
to be significant.

Liquidity and Capital Resources

      At March 31, 2005 we had cash on hand of $53,547. Since our inception, we
have incurred significant losses, and as of March 31, 2005 we had an accumulated
deficit of $18,181,774. We have not achieved profitability and anticipate that
we will continue to incur net losses through the following six-month period. We
expect that our research and development and general and administrative expenses
will continue to be significant, and as a result we will need to generate
significant revenue to achieve profitability.

      From our inception through year ended March 31, 2005, we have financed our
operations in the amount of $1,650,000 from a bank, loans in an amount of
$2,929,105 from third parties, existing shareholders and directors and $764,108
of revenues and other income. Our primary source of cash during the year ended
March 31, 2005 were loans totaling $434,660, revenues totaling $716,201 and
other income totaling $47,907. As of March 31, 2005, we had outstanding balances
under loan agreements of $1,138,216, consisting of $111,970 under a loan
agreement with USDR Aerospace, Ltd., $198,196 under a loan agreement with
USDR(NV), Inc., $19,148 under a loan agreement with an existing shareholder, and
$805,768 principal balance and accrued interest of $3,134 under a loan agreement
with a bank. The bank loan is secured by our assets and personally guaranteed by
our Chairman and Chief Executive Officer, and matures in May 2008. We have no
borrowing capacity under this bank loan.

      The Chairman and Chief Executive Officer of USGN controls USDR Aerospace,
Ltd. ("Aerospace"), which has licensed its intellectual property to USGN. Since
inception (March 20, 2002), based on actual costs, Aerospace has provided
property and services to us totaling approximately $2.9 million for which, as of
March 31, 2005, we owed Aerospace $299,233.

      Net cash used in operating activities for the year ended March 31, 2005
was $154,091 as compared to $761,923 in the year ended March 31, 2004. The
primary uses of cash for the fiscal year ended March 31, 2005 consisted of
general operating costs, cost of revenues, product research and development
expenses, and reducing bank notes payable.

      In order to conserve our cash, our officers and employees have been
deferring their salaries, and during the year ended March 31, 2005, the
employees accepted shares of our common stock in lieu of cash.

      We do not manufacture or distribute our products on a commercial scale.
Under the Kidde agreement, Kidde Firefighting, Inc. is responsible for all of
the costs of manufacturing, marketing and distribution of our All-Clear product.
In addition, we are in the process of negotiating certain licensing,
manufacturing or distribution arrangements with other international companies or
independent contractors that have the infrastructure to manufacture, distribute
or sell our products on a commercial scale worldwide. We are also in the process
of negotiating directly with certain government agencies and private sector
companies for the sale or licensing of our products. We cannot be certain,
however, that sales or licensing of our products will ever generate enough
revenues to fund our business. During the next 12 months, if we cannot generate
sufficient funds to operate our business from product sales or licenses, we will
be required to seek financing from our largest shareholder, who has provided
financing and a loan guarantee for the us in the past. The shareholder is under
no obligation to provide such funds. We may also consider selling debt or equity
securities. We cannot be certain that we will be successful in obtaining
financing if we need it. If we cannot obtain financing when we need it, we may
be unable to maintain our operations.


                                       13
<PAGE>

      During the year ended March 31, 2005, in order to conserve cash, we issued
our common stock to satisfy notes payable totaling $1,385,440, accounts payable
totaling $682,371, and wages totaling $784,734.

      The use of nanotechnology is a novel and unproven business model, which
may or may not be successful and will ultimately depend on demand for such
products and cost-effectiveness of manufacturing. We anticipate that any
business model we develop will be subject to change. At this time it is
impossible for us to predict the degree to which demand for our products will
evolve or whether any potential market will be large enough to provide any
meaningful revenue or profit for us.

NEW ACCOUNTING PRONOUNCEMENTS

      In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, "Inventory Costs", which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151
will have a material impact on our financial statements.

      In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 153, "Exchanges of "Nonmonetary Assets", which eliminates the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 will be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. We do not
believe the adoption of SFAS No. 153 will have a material impact on our
financial statements.

      In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123R, which eliminates the ability to account for share-based
compensation transactions using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and generally would require instead that such transactions be accounted for
using a fair-value-based method. This statement is effective for the Company as
of the first interim period or fiscal year beginning after December 15, 2005.
Management is currently assessing the effect of SFAS No. 123(R) on the Company's
financial statement.

FACTORS AFFECTING BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION

      An investment in our securities is very speculative and involves a high
degree of risk. You should carefully consider the following risk factors, along
with the other matters referred to in this Annual Report, before you decide to
buy our securities. If you decide to buy our securities, you should be able to
afford a complete loss of your investment.

RISKS ASSOCIATED WITH OUR BUSINESS

WE ARE A DEVELOPMENT STAGE COMPANY AND HAVE HAD LIMITED OPERATIONS TO DATE,
THEREFORE YOU HAVE NO BASIS ON WHICH TO DETERMINE IF OUR BUSINESS CAN BE
SUCCESSFUL. IF WE ARE NOT SUCCESSFUL, YOUR SECURITIES MAY BECOME WORTHLESS.

      Current management acquired control of USGN on May 17, 2002. We are a
development stage company and, to date, we have had limited operations. During
the fiscal year ended March 31, 2005 we had a net loss of $3,842,078. Our
accumulated deficit since inception through March 31, 2005 was $18,181,774.

SOME OF OUR PRODUCTS ARE STILL BEING DEVELOPED AND, AS YET, THEY ARE UNPROVEN,
THEREFORE, WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL. IF WE ARE NOT
SUCCESSFUL, THE SECURITIES YOU ACQUIRE MAY BECOME WORTHLESS.

      Our current business model depends on generating revenue through sales of
our products or licensing of our technology. Some of these products are in
varying stages of development and testing. If we cannot successfully develop and
prove our products, we will not become profitable.

THE SUCCESS OF OUR BUSINESS REQUIRES CONTINUED FUNDING. IF WE DO NOT RECEIVE
ADEQUATE FUNDING, THE SECURITIES YOU ACQUIRE MAY BECOME WORTHLESS.

      Our ability to continue in existence and to develop our business depends
upon our ability to obtain funding for our operations. If we do not receive
adequate funding, it is unlikely that we could continue our business.


                                       14
<PAGE>

WE HAVE RECEIVED A WELLS NOTICE AND SUBPOENAS FOR INFORMATION AND TESTIMONY FROM
THE SEC FOR CERTAIN PRIOR PUBLIC STATEMENTS. WE CANNOT PREDICT THE OUTCOME OF
THIS MATTER. IT COULD RESULT IN A CIVIL ACTION INVOLVING, AMONG OTHER THINGS,
MONETARY RELIEF FROM US OR OUR OFFICERS AND DIRECTORS. ANY SUCH DEVELOPMENT
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS, AND
FINANCIAL CONDITION.

      On January 3, 2005, we received a Wells Notice from the staff of the U.S.
Securities and Exchange Commission. The Wells Notice notified us that the SEC
staff intended to recommend that the SEC bring a civil action against us and our
officers and directors for alleged violations of SEC laws. The SEC's concerns
principally regard certain prior public statements made by us regarding the
marketability of our products. We have been in ongoing dialog with the SEC, and
have prepared and submitted initial and supplemental Wells Submissions in
response to the Wells Notice. The SEC has also recently issued subpoenas to us
seeking information and testimony regarding the technology incorporated into our
products, which we are in the process of supplying. Notwithstanding receipt of
the Wells Notice and the information and testimony currently being sought, we
have cooperated and continue to cooperate with the SEC, and are actively seeking
a negotiated settlement. However, we cannot predict the outcome of this matter,
or when a negotiated resolution, if any, may be reached and the likely terms of
such a resolution.

      Any civil action or any negotiated resolution may involve, among other
things, equitable relief, including material penalties, which could have a
material adverse effect on our business, results of operations and financial
condition.

THE SUCCESS OF OUR BUSINESS REQUIRES ACCEPTANCE OF OUR PRODUCTS IN THE
MARKETPLACE. IF A DEMAND FOR OUR PRODUCTS DOES NOT DEVELOP, OUR BUSINESS WILL BE
UNSUCCESSFUL AND YOU MAY LOSE YOUR ENTIRE INVESTMENT.

      The use of nanotechnology is a novel and unproven business model, which
may or may not be successful and will ultimately depend on demand for our
products. Our ability to grow and sustain our business is dependent upon our
ability to gain significant acceptance of our products, primarily in the defense
security and health and safety markets. Without significant acceptance in these
markets, we will not be able to achieve and sustain profitable operations and
your securities will likely become worthless. At this time it is impossible for
us to predict the degree to which demand for our products will evolve or whether
any potential market will be large enough to provide any meaningful revenue or
profit for us.

WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN NEW BUSINESSES. OUR
FAILURE TO PLAN OR FORECAST ACCURATELY COULD HAVE A MATERIAL ADVERSE IMPACT ON
OUR DEVELOPMENT, WHICH MAY CAUSE THE VALUE OF YOUR SECURITIES TO DECLINE
SUBSTANTIALLY OR BECOME WORTHLESS.

      We are subject to the risks and uncertainties inherent in new businesses,
including the following:

      o     Our projected capital needs may be inaccurate, and we may not have
            enough money to develop our products and bring them to market;

      o     We may experience unanticipated development or marketing expenses,
            which may make it more difficult to develop our products and bring
            them to market;

      o     Even if we are able to develop our products and bring them to
            market, we may not earn enough revenue from the sales of our
            products to cover the costs of operating our business.

      If, because of our failure to plan or project accurately, we are
unsuccessful in our efforts to develop our products or if the products we
provide do not produce revenues as we project, we are not likely to ever become
profitable and we may be required to curtail some or all of our operations.

WE WILL CONTINUE TO NEED MONEY TO FUND FUTURE OPERATIONS. IF WE DO NOT RECEIVE
ADEQUATE FINANCING WE WOULD BE UNABLE TO CONTINUE OUR OPERATIONS AND YOUR
SECURITIES WOULD BECOME WORTHLESS.

      Until we are able to generate significant revenues from the sale of our
products, we will require financing for our operations. We cannot assure you
that funds will be available to us on favorable terms, or at all. To the extent
that money is raised through the sale of our securities, the issuance of those
securities could result in dilution to our shareholders. Unavailability of funds
could have a material adverse effect on our ability to continue our operations.


                                       15
<PAGE>

OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE NEGATIVELY
IMPACTED IF DEMAND FOR OUR PRODUCTS IS LESS THAN WE ANTICIPATE. AS A RESULT, THE
VALUE OF YOUR SECURITIES MAY DECLINE.

      Our growth depends on our ability to successfully develop and market our
products. The development and marketing of our products is dependent on a number
of factors, including our ability to:

      o     recruit and maintain a base of qualified scientists and engineers;

      o     initiate, develop and sustain corporate and government
            relationships;

      o     attract, integrate and retain qualified marketing and sales
            representatives; and

      o     accurately assess the demands of the market.

      Demand for our products or technology might be less than we anticipate, or
we may not be successful in recruiting and maintaining the representatives we
need to develop and sell our products. In either case, our business, operating
results and financial condition could be negatively impacted.

WE ARE DEPENDENT ON PROPRIETARY TECHNOLOGY, WHICH WE MAY NOT BE ABLE TO
ADEQUATELY PROTECT. ADDITIONALLY, THIRD PARTIES MAY ALLEGE THAT WE INFRINGE ON
THEIR INTELLECTUAL PROPERTY. IF WE WERE TO BECOME INVOLVED IN LITIGATION, IT
WOULD BE COSTLY AND WOULD DIVERT MANAGEMENT'S ATTENTION FROM OUR BUSINESS
OPERATIONS. THIS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND ON THE VALUE
OF YOUR SECURITIES.

      We rely on a combination of trade secret and patent laws, nondisclosure
and other contractual and technical measures to protect our proprietary rights
in our products. However, we cannot assure you that these provisions will be
adequate to protect our proprietary rights. In addition, the laws of certain
foreign countries do not protect intellectual property rights to the same extent
as the laws of the United States. Although we believe that our intellectual
property rights do not infringe upon the proprietary rights of third parties, a
competitor may claim that we have infringed on its products. Any litigation
relating to our intellectual property could result in substantial expense to us
and result in significantly diverting our technical and management personnel
from their routine activities. This could have an adverse effect on our
business.

ITEM 7. FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                     <C>
Report of Independent Registered Public Accounting Firm                              F-1

Balance Sheet as of March 31, 2005                                                   F-2

Statements of Operations for the years ended March 31, 2005 and 2004
     and for the period from inception through March 31, 2005                        F-3

Statement of Stockholders' Deficit for the period from inception through
     March 31, 2005                                                                F-4 - F-8

Statements of Cash Flows for the years ended March 31, 2005 and 2004
     and for the period from inception through March 31, 2005                        F-9

Notes to Financial Statements                                                     F-10 - F-16
</TABLE>


                                       16
<PAGE>

                REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

The Board of Directors and Stockholders
US Global Nanospace, Inc.

We have audited the accompanying balance sheet of US Global Nanospace, Inc. (the
Company), a development stage company, as of March 31, 2005, and the related
statements of operations, stockholders' deficit, and cash flows for the years
ended March 31, 2005 and 2004. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audits included consideration of internal
controls over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of US Global Nanospace, Inc. as of
March 31, 2005, and the results of its operations and its cash flows for the
years ended March 31, 2005 and 2004, in conformity with accounting principles
generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $3,842,078 for the year ended March 31, 2005,
and, as of that date, the Company's total liabilities exceeded its total assets
by $2,670,595. These factors, among others, as discussed in note 3 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ Grobstein, Horwath & Company LLP

Sherman Oaks, California
July 6, 2005


                                      F-1
<PAGE>

                            US GLOBAL NANOSPACE, INC.
                          (A development stage company)
                                  BALANCE SHEET
                                 March 31, 2005

<TABLE>
<S>                                                                   <C>
ASSETS

CURRENT ASSETS
   Cash                                                               $     53,547
   Accounts receivable                                                     120,502
   Other receivables                                                        82,579
   Inventory                                                                 1,729
                                                                      ------------
   Total current assets                                                    258,357
                                                                      ------------
NONCURRENT ASSETS
  Deposits                                                                  11,000
                                                                      ------------

   Total assets                                                       $    269,357
                                                                      ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
   Current maturities of bank note payable                            $    237,606
   Accounts payable                                                        683,302
   Accrued salaries and expenses                                           787,547
   Accrued interest                                                         24,219
   Related party payable                                                   330,887
   Loans payable                                                           308,229
                                                                      ------------

   Total current liabilities                                             2,371,790
                                                                      ------------
BANK NOTE PAYABLE, less current portion                                    568,162
                                                                      ------------
COMMITMENTS                                                                     --

STOCKHOLDERS' DEFICIT
  Preferred stock authorized, 10,000,000 shares $0.01 par value,
      none issued or outstanding                                                --
  Common stock authorized, 300,000,000 shares $0.001 par value,
      105,752,751 issued and outstanding                                   104,794
  Additional paid-in capital                                            15,413,845
  Deferred compensation and services                                        (7,460)
  Accumulated development stage deficit                                (18,181,774)
                                                                      ------------

Total stockholders' deficit                                             (2,670,595)
                                                                      ------------

   Total liabilities and stockholders' deficit                        $    269,357
                                                                      ============
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-2
<PAGE>

                            US GLOBAL NANOSPACE, INC.
                          (A development stage company)
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                          Cumulative
                                                                                     results of operations
                                                                                      from March 20, 2002
                                                Year ended           Year ended       (date of inception)
                                                 March 31,            March 31,        through March 31,
                                                   2005                 2004                 2005
                                              --------------       --------------       --------------
<S>                                           <C>                  <C>                  <C>
REVENUES                                      $      716,201       $      140,349       $      856,550
COST OF REVENUES                                     381,554               26,728              408,282
                                              --------------       --------------       --------------

  Gross Profit                                       334,647              113,621              448,268
                                              --------------       --------------       --------------
OPERATING EXPENSES
   Research and development
     Non-cash compensation and
       services                                       52,045                   --               52,045
     Other research and development                  474,701            1,264,867            3,375,256
   General and administrative
      Non-cash compensation and
        services                                   1,178,503            3,695,264            7,962,094
      Other general administrative                 2,369,458            2,213,172            7,388,321
                                              --------------       --------------       --------------

      Total operating expenses                     4,074,707            7,173,303           18,777,716
                                              --------------       --------------       --------------

      Operating loss                              (3,740,060)          (7,059,682)         (18,329,448)
                                              --------------       --------------       --------------
OTHER INCOME (EXPENSE)
    Debt restructure                                      --              300,669              918,573
    Other income                                      47,907                   --               57,952
    Interest expense                                (149,925)            (526,328)            (828,851)
                                              --------------       --------------       --------------

     Total other income (expense)                   (102,018)            (225,659)             147,674
                                              --------------       --------------       --------------

    NET LOSS                                  $   (3,842,078)      $   (7,285,341)      $  (18,181,774)
                                              ==============       ==============       ==============

    Net loss per share, basic and
      diluted                                 $        (0.04)      $        (0.09)      $        (0.05)

    Basic and diluted weighted average
      number of common shares                     94,864,858           83,145,742           82,169,954
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-3
<PAGE>

                            US GLOBAL NANOSPACE, INC.
                          (A development stage company)
                       STATEMENT OF STOCKHOLDERS' DEFICIT
             From inception (March 20, 2002) through March 31, 2005

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                    Common                  Additional    Deferred       Development       Total
                                                    Stock                     Paid-in   Compensation        Stage      Stockholders'
                                                    Shares       Amount       Capital   and Services       Deficit        Deficit
                                                 ------------   --------   -----------   -----------    ------------    -----------
<S>                                               <C>           <C>        <C>           <C>            <C>             <C>
Balance at inception (March 20, 2002)                      --   $     --   $        --   $        --    $         --    $        --

Issuance of common stock on March 20, 2002
To founder for cash                                15,000,000      5,000            --            --              --          5,000

Exchange of common stock of USDR Global
Aerospace, Ltd. for CPI common stock              (15,000,000)    (5,000)           --            --              --         (5,000)

Issuance of CPI common stock in conjunction
with share exchange with USDR Global
Aerospace, Ltd.                                    60,362,157     60,362       (55,362)           --              --          5,000

Net loss for the period                                    --         --            --            --          (8,052)        (8,052)
                                                 ------------   --------   -----------   -----------    ------------    -----------

Balance at March 31, 2002                          60,362,157     60,362       (55,362)           --          (8,052)        (3,052)

Issuance of common stock on May 16, 2002
in conjunction with consulting agreements           5,437,500      5,438     6,338,312    (6,343,750)             --             --

Net assets acquired in share exchange agreement
on May 17, 2002                                            --         --           446            --              --            446

Issuance of common stock on July 23, 2002
in consideration for legal services                   210,486        210       140,114            --              --        140,324

Issuance of common stock on August 22, 2002
in consideration for legal and consulting             211,638        212        75,272            --              --         75,484

Issuance of common stock on September 17, 2002
in consideration for legal services                   349,212        349        55,525            --              --         55,874

Issuance of common stock on September 24, 2002
in consideration for consulting services            1,687,500      1,688       307,687      (309,375)             --             --

Issuance of common stock on September 25, 2002
in consideration for legal services                   635,889        636       126,542            --              --        127,178

Issuance of common stock on September 30, 2002
in consideration for professional services            150,000        150        29,850            --              --         30,000

Issuance of common stock on October 23, 2002,
in consideration for professional services             45,000         45         6,105            --              --          6,150

Issuance of common stock on November 11, 2002,
in consideration for legal services                   549,999        550        54,450            --              --         55,000

Issuance of common stock on November 19, 2002,
in settlement of outstanding notes payable          4,163,928      4,164       648,185            --              --        652,349

Issuance of common stock on November 19, 2002,
in consideration for professional services             87,996         88        13,698            --              --         13,786

Issuance of common stock on December 27, 2002,
in consideration for legal services                   468,381        468        65,105            --              --         65,573

Issuance of common stock on January 1, 2003,
in consideration for consulting services              122,502        123        20,377            --              --         20,500

Issuance of common stock on January 16, 2003,
in consideration for consulting services              453,948        454        57,046            --              --         57,500

Issuance of common stock on February 1, 2003,
in settlement of outstanding notes payable             30,000         30         4,170            --              --          4,200
</TABLE>


                                      F-4
<PAGE>

<TABLE>
<S>                                               <C>           <C>        <C>           <C>            <C>             <C>
Issuance of common stock on February 3, 2003,
in settlement of outstanding notes payable            323,121        323        48,145            --              --         48,468

Issuance of common stock on March 5, 2003,
in consideration for legal services                   316,418        316        40,818            --              --         41,134

Issuance of common stock on March 5, 2003,
in consideration for services                         183,215        183        23,635       (23,818)             --             --

Amortization of deferred compensation and
services                                                   --         --            --     2,956,191              --      2,956,191

Net loss for the year                                      --         --            --            --      (7,046,303)    (7,046,303)
                                                 ------------   --------    ----------   -----------    ------------    -----------

Balance at March 31, 2003                          75,788,890   $ 75,789   $ 8,000,120   $(3,720,752)   $ (7,054,355)   $(2,699,198)

Issuance of common stock on April 10, 2003 in
consideration for wages at $0.10 per share          2,794,684      2,795       276,674                                      279,469

Issuance of common stock on May 13, 2003 in
consideration for accounts payable at $0.06 per
share                                                 583,334        583        34,417                                       35,000

Issuance of common stock on June 23, 2003 in
consideration for services at $0.06 per share          60,000         60         3,540                                        3,600

Issuance of common stock on July 8, 2003 in
consideration for accounts payable at $0.20 per
share                                                 388,622        389        77,335                                       77,724

Issuance of common stock on July 9, 2003 in
consideration for accounts payable at $0.22 per
share                                                 136,364        136        29,864                                       30,000

Issuance of common stock on July 9, 2003 in
consideration for accounts payable at $0.22 per
share                                                 500,000        500       109,500                                      110,000

Issuance of common stock on July 14, 2003 in
consideration for services at $0.06 per share          20,000         20         1,180                                        1,200

Issuance of common stock on July 18, 2003 in
consideration for wages at $0.40 per share            860,343        860       343,277                                      344,137

Issuance of common stock on July 23, 2003 in
consideration for services at $0.34 per share          20,000         20         6,780                                        6,800

Issuance of common stock on July 25, 2003 in
consideration for wages at $0.29 per share          1,000,000      1,000       249,000                                      250,000

Redemption of common stock on July 28, 2003 in
consideration for wages at $0.40 per share            (13,647)       (14)       (5,445)                                      (5,459)

Issuance of common stock on July 30, 2003 in
consideration for services at $0.34 per share          60,000         60        20,340                                       20,400

Issuance of common stock on August 23, 2003
in consideration for services at $0.23 per share       20,000         20         4,580                                        4,600

Issuance of common stock on September 22,
2003 in consideration for services at $0.22 per        60,000         60        13,140                                       13,200
share

Issuance of common stock on September 22,
2003 in consideration for services at $0.23 per        65,218         65        14,935                                       15,000
share

Issuance of common stock on September 23, 2003
in consideration for accounts payable at 0.23 per     327,134        327        74,914                                       75,241
share

Issuance of common stock on October 1, 2003 in
consideration for wages at $0.17 per share          3,390,138      3,390       572,933                                      576,323

Redemption of common stock on October 14, 2003
in consideration for wages at $0.17 per share         (71,120)       (71)      (12,019)                                     (12,090)

Issuance of common stock on October 22, 2003 in
consideration for accounts payable at $0.17 per
share                                                 187,879        188        30,812                                       31,000
</TABLE>


                                      F-5
<PAGE>

<TABLE>
<S>                                               <C>           <C>        <C>           <C>            <C>             <C>
Issuance of common stock on October 23, 2003 in
consideration for services at $0.16 per share          20,000         20         3,180                                        3,200

Issuance of common stock on October 27, 2003 in
consideration for services at $0.16 per share          60,000         60         9,540                                        9,600

Issuance of common stock on November 18, 2003 in
consideration for services at $0.21 per share          20,000         20         4,180                                        4,200

Issuance of common stock on November 21, 2003 in
consideration for accounts payable at $0.55 per
share                                                  32,521         33        17,853                                       17,886

Issuance of common stock on November 24, 2003 in
consideration for services at $0.46 per share          20,000         20         9,180                                        9,200

Cancellation of common stock on December 3, 2003
originally issued for services at $0.18 per
share                                                (843,750)      (844)     (115,782)      116,626                             --

Issuance of common stock on December 15, 2003 in
consideration for wages at $1.06 per share          1,328,070      1,328     1,406,426                                    1,407,754

Issuance of common stock on December 18, 2003 in
consideration for services at $0.805 per share         15,000         15        12,060                                       12,075

Issuance of common stock on March 16, 2004 in
consideration for wages at $0.66 per share            504,132        504       332,223                                      332,727

Issuance of common stock on March 31, 2004 in
consideration for accounts payable at $0.69 per
share                                                  95,304         95        65,664                                       65,759

Amortization of deferred compensation and
services                                                                                   3,204,383                      3,204,383

Net loss for the period                                                                                   (7,285,341)    (7,285,341)
                                                 ------------   --------    ----------   -----------    ------------    -----------
Balance at March 31, 2004                          87,429,116   $ 87,428   $11,590,401   $  (399,743)   $(14,339,696)   $(3,061,610)

Issuance of common stock on April 7, 2004 in
consideration for wages at $0.70 per share             35,392         35        24,739                                       24,774

Issuance of common stock on April 15, 2004 in
consideration for services at $0.67 per share          90,000         90        60,210                                       60,300

Issuance of common stock on April 23, 2004 in
consideration for notes payable at $0.33 per
share                                               1,147,950       1148       377,675                                      378,823

Issuance of common stock on May 5, 2004 in
consideration for wages at $0.38 per share            485,761        486       184,103                                      184,589

Issuance of common stock on July 27, 2004 in
consideration for accounts payable  at $0.28 per
share                                                  71,430         71        19,929                                       20,000

Issuance of common stock on August 3, 2004 in
consideration for notes payable at $0.29 per
share                                               3,471,094      3,471     1,003,146                                    1,006,617

Issuance of common stock on August 3, 2004
in consideration for accounts payable at $0.29
per share                                             174,745        175        50,501                                       50,676

Issuance of common stock on August 16, 2004 in
consideration for accounts payable at $0.24 per
share                                                 395,834        396        94,604                                       95,000

Issuance of common stock on September 17, 2004
in consideration for wages at $0.20 per share       1,169,199      1,169       232,671                                      233,840

Issuance of common stock on September 17, 2004
in consideration for services at $0.20 per share      109,472        109        21,785                                       21,894

Issuance of common stock on September 28, 2004
in consideration for accounts payable at $0.17
per share                                             444,216        445        75,072                                       75,517

Issuance of common stock on October 6, 2004 in
consideration for accounts payable at $0.18 per
share                                                 250,000        250        44,750                                       45,000
</TABLE>


                                      F-6
<PAGE>

<TABLE>
<S>                                               <C>           <C>        <C>           <C>            <C>             <C>
Issuance of common stock on October 18, 2004 in
consideration for accounts payable at $0.14 per
share                                                 939,535        940       130,595                                      131,535

Issuance of common stock on October 19, 2004 in
consideration for wages at $0.24 per share             44,380         44        10,607                                       10,651

Issuance of common stock on October 21, 2004 in
consideration for services at $0.28 per share         267,858        268        74,732                                       75,000

Issuance of common stock on October 22, 2004 in
consideration for wages at $0.25 per share            933,156        933       232,356                                      233,289

Issuance of common stock on October 28, 2004 in
consideration for services at $0.23 per share          64,855         65        14,856                                       14,921

Issuance of common stock on November 1, 2004 in
consideration for services at $0.23 per share         250,000        250        57,250                                       57,500

Issuance of common stock on November 23, 2004 in
consideration for services at $0.20 per share          63,950         64        12,726       (10,658)                         2,132

Issuance of common stock on November 23, 2004 in
consideration for accounts payable at $0.20 per
share                                                  11,050         11         2,199                                        2,210

Issuance of common stock on December 1, 2004 in
consideration for services at $0.191 per share         39,267         39         7,461                                        7,500

Issuance of common stock on December 31, 2004 in
consideration for services at $0.805 per share         20,000         20        16,080                                       16,100

Issuance of common stock on January 3, 2005 in
consideration for services at $0.245 per share        561,225        561       136,939                                      137,500

Issuance of common stock on January 10, 2005 in
consideration for accounts payable at $0.185 per
share                                                 132,560        133        24,391                                       24,524

Issuance of common stock on January 17, 2005 in
consideration for services at $0.20 per share          62,500         62        12,438                                       12,500

Issuance of common stock on January 21, 2005 in
consideration for accounts payable at $0.19 per
share                                                 497,946        498        94,112                                       94,610

Issuance of common stock on January 25, 2005 in
consideration for services at $0.19 per share       1,169,552      1,170       221,045                                      222,215

Issuance of common stock on January 25, 2005 in
consideration for cash at $0.15 per share           1,000,000      1,000       149,000                                      150,000

Issuance of common stock on January 27, 2005 in
consideration for services at $0.185 per share        109,825        110        20,208                                       20,318

Issuance of common stock on January 31, 2005 in
consideration for accounts payable at $0.19 per
share                                                  45,290         45         8,560                                        8,605

Issuance of common stock on February 1, 2005 in
consideration for services at $0.19 per share         315,788        316        59,684                                       60,000

Issuance of common stock on February 4, 2005 in
consideration for services at $0.18 per share         222,225        222        39,778                                       40,000

Issuance of common stock on February 10, 2005 in
consideration for services at $0.17 per share          37,860         38         6,398                                        6,436

Issuance of common stock on February 23, 2005 in
consideration for services at $0.17 per share          39,541         40         6,682                                        6,722

Issuance of common stock on March 2, 2005 in
consideration for services at $0.12 per share       1,159,671      1,159       138,001                                      139,160

Issuance of common stock on March 24, 2005 in
consideration for services at $0.10 per share         250,000        250        24,750                                       25,000
</TABLE>


                                      F-7
<PAGE>

<TABLE>
<S>                                               <C>           <C>        <C>           <C>            <C>             <C>
Issuance of common stock on March 28, 2005 in
consideration for accounts payable at $0.105 per
share                                               1,282,802      1,283       133,411                                      134,694

Issuance of common stock on March 30, 2005
as collateral for accounts payable                    957,706         --            --                                           --

Amortization of deferred compensation and
services                                                                                     402,941                        402,941

Net loss for the period                                                                                   (3,842,078)    (3,842,078)
                                                  ---------------------------------------------------------------------------------

Balance at March 31, 2005                         105,752,751   $104,794   $15,413,845   $    (7,460)   $(18,181,774)   $(2,670,595)
                                                  =================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-8
<PAGE>

                            US GLOBAL NANOSPACE, INC.
                          (A development stage company)
                             STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                  Cumulative
                                                                                                            results of operations
                                                                                                             from March 20, 2002
                                                                       Year Ended           Year Ended       (date of inception)
                                                                     March 31, 2005       March 31, 2004   through March 31, 2005
                                                                     ---------------      ---------------  ----------------------
<S>                                                                  <C>                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
       Net loss                                                      $    (3,842,078)     $    (7,285,341)     $   (18,181,774)
       Adjustments to reconcile net loss to net
         cash used in operating activities
              Common stock issued for services                             1,230,548            3,695,264            8,014,139
              Forgiveness of loans and accounts payable                           --             (300,669)            (918,573)
      Changes in operating assets and liabilities:
                  Accounts receivable                                       (109,097)             (11,405)            (120,502)
                  Other receivables                                          (11,301)             (71,278)             (82,579)
                  Inventory                                                    2,966               (4,695)              (1,729)
                  Deposits                                                     2,485              (13,485)             (11,000)
                  Accounts payable                                         1,107,000              335,042            2,367,231
                  Accrued salaries and expense                             1,447,123            2,612,233            4,357,336
                  Accrued interest                                            18,263              282,411              420,211
                                                                     ---------------      ---------------      ---------------
                     Net cash used in operating activities                  (154,091)            (761,923)          (4,157,240)
                                                                     ---------------      ---------------      ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
          Cash acquired in conjunction with share
               exchange agreement                                                 --                   --                2,946
                                                                     ---------------      ---------------      ---------------

                     Net cash provided by investing activities                    --                   --                2,946
                                                                     ---------------      ---------------      ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
         Proceeds from bank note payable                                          --                   --            1,650,000
         Payments on bank note payable                                      (419,232)            (425,000)            (844,232)
         Proceeds from loans payable                                         434,660            1,214,445            2,929,105
         Payments on loans payable                                                --              (12,919)             (12,919)
         Increase in related party payable                                    23,773                  595              330,887
         Proceeds from issuance of common stock                              150,000                   --              155,000
                                                                     ---------------      ---------------      ---------------

                      Net cash provided by financing activities              189,201              777,121            4,207,841
                                                                     ---------------      ---------------      ---------------

Net increase in cash                                                          35,110               15,198               53,547

Cash at beginning of period                                                   18,437                3,239                   --
                                                                     ---------------      ---------------      ---------------
Cash at end of period
                                                                     $        53,547      $        18,437      $        53,547
                                                                     ===============      ===============      ===============

SUPPLEMENTAL CASH FLOW INFORMATION AND
  NON-CASH INVESTING AND FINANCING ACTIVITIES
          Cash paid for:
                    Interest                                         $       111,153      $       234,119      $       390,299
                                                                     ===============      ===============      ===============

                    Income Taxes                                     $         3,045      $        10,243      $        13,288
                                                                     ===============      ===============      ===============
         Accounts payable acquired in conjunction with share
           exchange agreement                                        $            --      $            --      $        (2,500)
                                                                     ===============      ===============      ===============


         Common stock issued in exchange for accounts payable        $       682,371      $       442,611      $     1,685,549
                                                                     ===============      ===============      ===============

         Common stock issued in exchange for loans payable
              and accrued interest                                   $     1,385,440      $            --      $     2,086,257
                                                                     ===============      ===============      ===============

         Common stock issued in exchange for wages                   $       784,734      $     2,785,055      $     3,569,789
                                                                     ===============      ===============      ===============
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-9
<PAGE>

                            US GLOBAL NANOSPACE, INC.
                         (A development stage company)

                         NOTES TO FINANCIAL STATEMENTS
                                 MARCH 31, 2005

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

USDR Global Aerospace, Ltd. (USDRGA), a development stage company, was
incorporated in the state of Delaware on March 20, 2002. USDRGA entered into a
share exchange agreement with US Global Nanospace, Inc. (USGN or the Company)
(formerly known as Caring Products International, Inc.) on May 17, 2002, which
resulted in the exchange of one share of the Company's common stock for four
shares of USGN. As a result of the transaction, the Company became a wholly
owned subsidiary of USGN. Effective September 26, 2002, the Company changed its
name from Caring Products International, Inc. to US Global Aerospace, Inc. On
December 31, 2002, the Company completed a merger of its wholly owned
subsidiary, USDR Global Aerospace, Ltd. with and into the Company. US Global
Aerospace, Inc. was the resulting company from the mergers. Effective July 21,
2003, the Company changed its name from US Global Aerospace, Inc. to US Global
Nanospace, Inc.

On June 2, 2004, the Board of Directors approved an amendment to the 2002 Stock
Plan to increase the shares of common stock included in the 2002 Stock Plan from
15,000,0000 shares to 30,000,000 shares. The amendment also changed the name of
the 2002 Stock Plan from "US Global Aerospace, Inc." to "US Global Nanospace,
Inc.", and changed paragraph 7.2 of the 2002 Stock Plan so that the calculation
of the purchase price of stock awards may be the same for all recipients of such
awards.

USGN is a development stage company with expertise in the emerging field of
nanotechnology. Activities to date include conducting research and development
of our products and developing intellectual property, designing and building
prototype materials, and forming strategic partner alliances for the licensing,
manufacturing, and marketing of our products. Revenues to date have been derived
from licensing fees and product sales to a limited number of customers and are
ancillery to the primary objective of the business.

A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.

NET LOSS PER SHARE

Basic loss per share is based on the weighted average number of shares
outstanding during each period and income available to common shareholders. Loss
per share assuming dilution is based on the assumption that outstanding stock
options and warrants were exercised. The weighted average shares for computing
basic loss per share were 94,864,858, 83,145,742, and 82,169,954 for
the years ended March 31, 2005 and 2004, and from inception (March 20, 2002)
through March 31, 2005, respectively. At March 31, 2005, all options and
warrants have expired and there were no shares of potentially issuable common
stock. Because of the net loss for the years ended March 31, 2005 and 2004, and
from inception (March 20, 2002) through March 31, 2005, potentially issuable
common stock was not included in the calculation of diluted loss per share as
their inclusion would be anti-dilutive.

STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan, which is described more fully
in Note 12, that is accounted for under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations in accounting for its plans. No options were granted under the
plan for the years ended March 31, 2005 and 2004, and since inception (March 20,
2002) through March 31, 2005. Options that were granted under a stock option
plan of the Company prior to its merger with USDR Global Aerospace, Ltd. have
expired. Accordingly, no compensation expense would have been recognized under
the recognition provisions of Financial Accounting Standards Board (FASB)
Statement No. 123, "Accounting for Stock-Based Compensation", during the years
ended March 31, 2005 and 2004 and since inception (March 20, 2002). In December
2004, the FASB issued SFAS No. 123R, which eliminates the ability to account for
share-based compensation transactions using the intrinsic value method under APB
Opinion No. 25, and generally would require instead that such transactions be
accounted for using a fair-value based method. Accordingly, the Company
recognizes the fair value impact of the compensation granted to employees and
consultants as a charge to net income in the period that the services associated
with the compensation are incurred. This statement is effective for the Company
as of the first interim period of fiscal year beginning after December 15, 2005.
Management is currently assessing the effect of SFAS No. 123R on the Company's
financial statement.


                                      F-10
<PAGE>

REVENUE RECOGNITION

We recognize revenues in accordance with SEC Staff Accounting Bulletin (SAB) No.
101, and as amended by SAB No. 104. Revenues are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, or services have been
rendered, the price is fixed and determinable and collectibility is reasonably
assured. During the fiscal year ended March 31, 2005, our revenues primarily
derived from product sales and commercial collaborations. Revenue for product
sales is recognized at the time of delivery of the product. Revenue under
contracts based on a fixed fee is recognized based on conditions being met.
Revenue under contracts based on royalty fees is recognized when the amounts are
earned and determinable, which is generally when cash payment is received.
However, since we are not able to forecast product sales by licenses, royalty
payments that are based on product sales by the licensees are not determinable
until the licensee has completed their computation of the royalties due and/or
remitted their cash payment. Should information on licensee product sales become
available so as to enable us to recognize royalty revenue on an accrual basis,
materially different revenues and results of operations could occur.

PRODUCT WARRANTIES

We provide product warranties in conjunction with certain product sales. These
warranties cover factors such as non-conformance to specifications and defects
in material and design. Future estimated costs related to these warranties will
be recorded in the period in which the related product sales occur. To date, we
have not incurred any such costs and have not provided a warranty liability
account.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

ADVERTISING AND MARKETING

Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs for the years ended March 31, 2005 and 2004 were $465,336 and
$44,969, respectively.

INVENTORIES

Inventories consist of finished goods and are stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109), resulting in current and deferred
income tax expenses. Current income tax expense approximates taxes to be paid or
refunded for the current period. Deferred income tax expense results from
changes in deferred tax assets and liabilities represent decreases or increases
in taxes expected to be paid in the future because future reversals of temporary
differences in the bases of assets and liabilities as measured by tax laws and
their bases as reported in the financial statements.

Deferred tax assets have also have been recognized for net operating loss
carryforwards and tax credit carryforwards. Valuation allowances are then
recorded to reduce deferred tax assets to the amounts management concludes are
more likely than not to be realized.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable. The Company's accounts
receivable are from a limited number of corporations and governmental entities.
The Company performs ongoing evaluations of its customers. An allowance for
doubtful accounts has not been provided as the Company considers all accounts
receivable to be fully collectible.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

RECLASSIFICATIONS

Certain reclassifications were made to previously reported amounts in the
accompanying financial statements and notes to make them consistent with the
current year presentation. In the March 31, 2004 10-KSB statements of cash
flows, we included an increase in other receivables of $71,278 and an increase
in deposits of $13,485 in investing activities. These amounts are now classified
as operating activities.

NOTE 2. BASIS OF PRESENTATION

The share exchange transaction resulted in the owners and management of USDRGA
having effective operating control of the combined entity. Under accounting
principles generally accepted in the United States of America, the share
exchange is considered to be a capital transaction in substance, rather than a
business combination. That is, the share exchange is equivalent to the issuance
of stock by USDRGA for the net monetary assets of US Global Nanospace, Inc.
(USGN fka Caring Products International) accompanied by a recapitalization, and
is accounted for as a change in capital structure. Accordingly, the accounting
for the share exchange is identical to that resulting from a reverse
acquisition, except that no goodwill is recorded. Under reverse takeover
accounting, the post-reverse-acquisition financial statements of the "legal
acquirer" USGN, are those of the "legal acquiree" (USDRGA), (i.e. the accounting
acquirer).

Accordingly, the financial statements of USGN as of and for the years ended
March 31, 2005 and 2004, and since inception (March 20, 2002), are the
historical financial statements of USDRGA. All references to common stock have
been retroactively restated to reflect the share exchange and recapitalization
of the Company. In conjunction with the share exchange and recapitalization, the
Company recorded net assets of USGN totaling $446, which included cash of $2,946
and payables of $2,500.

NOTE 3. MANAGEMENT PLANS

The Company is a development stage enterprise as defined under Statement of
Financial Accounting Standards ("SFAS") No. 7. The Company is a nanotechnology
company that specializes in identifying, developing, and commercializing
advanced products the core technologies of which are primarily nanoscience
derived. These products include complex polymer materials, polymer nanofiber
materials, nanofiber filter materials, biological and chemical decontaminants,
and blast mitigation materials. Currently, most of the Company's products are
being developed for defense and health and safety applications. Operating
revenues have been generated in the amount of $716,201 for the year ended March
31, 2005. During the year ended March 31, 2003, the Company obtained loans from
a bank for amounts up to $1,650,000. In addition, the Company has received
$2,929,105 in loans since inception from third parties, existing shareholders
and directors. The Company does not manufacture or distribute its products on a
commercial


                                      F-11
<PAGE>

scale. Under the Development and License Agreement between the Company and Kidde
Firefighting, Inc. dated as of August 13, 2004, Kidde Firefighting, Inc. is
responsible for all of the costs of manufacturing, marketing and distribution of
the Company's All-Clear product. In addition, the Company is in the process of
negotiating certain licensing, manufacturing or distribution arrangements with
other international companies or independent contractors that have the
infrastructure to manufacture, distribute or sell its products on a commercial
scale worldwide. The Company is also in the process of negotiating directly with
government agencies and private sector companies for the sale or licensing of
its products. In addition, officers of the Company and certain employees have
been deferring their salaries and the employees accepted shares of the Company's
common stock in lieu of cash. During the next 12 months, if the Company cannot
generate sufficient funds to operate its business from sales or licensees of its
products, it will be required to seek financing from its largest shareholder,
who has provided financing and a loan guarantee for the Company in the past. The
shareholder is under no obligation to provide such funds. The Company may also
consider selling debt or equity securities. There is no guarantee that the
Company will obtain funds sufficient to continue its operations during the next
12 months.

NOTE 4. INTELLECTUAL PROPERTY ASSIGNMENT AND ROYALTY AGREEMENT

On May 14, 2002, USDR Aerospace, Ltd. ("Aerospace"), a related party, entered
into an agreement with the Company to assign certain of its intellectual
property to the Company for consideration of $10, and a promise to pay a royalty
of 3.5% on all of the Company's sales until Aerospace has received a total of
$15 million and a royalty of 1% of all of the Company's sales thereafter until
all patent rights of the intellectual property have expired. For the year ended
March 31, 2005, the Company incurred a total of $31,653 in royalties from this
agreement that were owed as of March 31, 2005.

NOTE 5. RELATED PARTY PAYABLE

The Chairman and CEO of the Company controls Aerospace, which has licensed the
intellectual property to the Company as described in Note 5, under which we owe
Aerospace $31,653 in royalties as of March 31, 2005. Aerospace has provided
employees and product development services to the Company. Since inception
(March 20, 2002), Aerospace has provided such services, based on actual costs,
totaling approximately $2.9 million for which the Company currently owes
Aerospace $299,233 as of March 31, 2005. Aerospace has also provided
manufacturing and office equipment to support operations. As of January 1, 2003,
Aerospace substantially discontinued all of its operations and the Company hired
certain individuals previously employed by Aerospace.

NOTE 6. LOANS PAYABLE

On April 18, 2003, the Company entered into a loan agreement with Aerospace for
amounts up to $100,000. The loan bears interest at 10% per annum and matured on
June 30, 2004. On June 30, 2004, the loan was amended to include amounts up to
$200,000, and to extend the maturity date to December 31, 2004. On December 30,
2004, the maturity date was extended to February 28, 2005. The Company owes
Aerospace $111,970, including accrued interest, as of March 31, 2005 under this
agreement and on May 11, 2005, Aerospace accepted restricted common stock in
exchange for this loan.

On April 11, 2003 and April 18, 2003, the Company entered into two loans
totaling $16,000 from an existing shareholder. The loans bear interest at 10%
per annum and matured on April 30, 2004. The Company owes the shareholder
$19,148, including accrued interest, as of March 31, 2005. The shareholder has
agreed to extend the loans, date to be determined.

On April 29, 2003, April 30, 2003 and May 9, 2003, the Company entered into
three loans totaling $35,000 from Directors. The loans bear interest at 10% per
annum and matured on June 30, 2004. On August 3, 2004, the Directors accepted
restricted common stock in exchange for these loans. On August 7, 2003, the
Company entered into a loan agreement with a Director for amounts up to
$150,000, and on December 19, 2003, the loan was amended to include amounts up
to $500,000. The loan bears interest at 10% per annum and matured on June 30,
2004. The Company owed the Director $563,944, including accrued interest, under
this loan agreement and on August 3, 2004, the Director accepted restricted
common stock in exchange for this loan. On October 3, 2003, the Company entered
into a loan agreement with a Director for amounts up to $100,000. The loan bears
interest at 10% per annum and matured on June 30, 2004. The Company owed the
Director $133,998, including accrued interest, under this agreement and on
August 3, 2004, the Director accepted restricted common stock in exchange for
this loan.


                                      F-12
<PAGE>

The Chairman and CEO of the Company has continued to provide cash to support the
Company's operations. The Chairman and CEO of the Company also controls
USDR(NV), Inc. ("USDR"). On June 6, 2003, the Company entered into a loan
agreement with USDR for amounts up to $125,000. On June 11, 2004, the loan was
amended to include amounts up to $500,000. The loan bears interest at 10% per
annum and matured on December 31, 2004. On December 30, 2004, the loan was
amended to extend the maturity date to February 28, 2005. The Company owes USDR
$198,196, including accrued interest, as of March 31, 2005 under this agreement
and on May 11, 2005, USDR accepted restricted common stock in exchange for this
loan.

On January 8, 2004, January 9, 2004 and January 27, 2004, the Company entered
into three loans totaling $292,934 from existing shareholders. The loans bear
interest at 10% per annum and matured on June 30, 2004. The Company owed the
shareholders $308,676 including accrued interest, under these agreements and on
August 3, 2004, the shareholders accepted restricted common stock in exchange
for these loans.

NOTE 7. BANK NOTE PAYABLE

The Company previously had lines of credit with a bank for amounts up to
$1,650,000. The lines of credit have been consolidated into one loan, which
bears interest at 10% per annum and matures on May 15, 2008. The terms require
principal and interest payments of $25,400 due monthly, beginning October 15,
2004, and one final principal and interest payment of $11,779 due on May 15,
2008. The bank is a subsidiary of a holding company, Western Security Holding
Co. Ltd., which is a shareholder of the Company. The loan is secured by the
assets of the Company and guaranteed by the Company's Chairman and CEO. As of
March 31, 2005, the Company had an outstanding principal balance of $805,768 and
accrued interest totaled $3,134.

Maturities of long-term debt are as follows:

      Years ending March 31,

          2006             $ 237,606
          2007               258,921
          2008               286,414
          2009                22,827
                           ---------
                           $ 805,768
                           =========

NOTE 8. CONSULTING AGREEMENTS

During fiscal year 2002, the Company entered into various consulting agreements
for services in exchange for 7,308,215 shares of the Company's common stock,
which were issued under the 2001 Employee Stock Compensation Plan. The shares
were issued and recorded at their fair market value totaling $6,560,317 as
deferred compensation and services. The deferred compensation and services had
been recognized over the period of the consulting agreements of two years. At
June 30, 2004, that two-year period had ended. For the year ended March 31,
2005, the Company recognized $399,743, and for the year ended March 31, 2004 the
Company recognized $3,204,383 of non-cash expense relating to these agreements.

On November 23, 2004, the Company entered into a consulting agreement for
services in exchange for 75,000 shares of the Company's common stock, which were
issued under the Amended and Restated 2002 Stock Plan. The shares were issued
and recorded at their fair market value totaling $15,000 as deferred
compensation and services. The deferred compensation and services is being
recognized over the period of the consulting agreement of one year. For the year
ended March 31, 2005, the Company recognized $4,264 of non-cash expense relating
to this agreement.

During fiscal year 2005, the Company entered into various consulting agreements
for services in exchange for 1,917,585 shares of the Company's common stock,
which were issued under the Amended and Restated 2002 Stock Plan. The shares had
a combined award valuation of $307,597, equaling 85% of the fair market value
per share on the date of grant of the award. The company recognized an
additional $51,648 as additional non-cash expense for the difference between the
fair value of the stock and the total amount due.

NOTE 9. COMMITMENTS

On April 28, 2003, the Company entered into an operating lease for its office
space and research facilities expiring in May 2006. The Company's Chief
Financial Officer and director guaranteed the payment and performance of the
lease. The following is a schedule by years of future minimum lease payments
under operating the lease.


                                      F-13
<PAGE>

            Years ending March 31,

                  2006                           132,000
                  2007                            22,000
                                               ---------

            Future minimum lease payments      $ 154,000
                                               =========

NOTE 10. INCOME TAXES

The Company accounts for income taxes using the liability method as prescribed
by SFAS No. 109, "Accounting for Income Taxes". The income tax benefit
reconciled to the tax computed at the statutory rate was approximately as
follows for the years ended March 31:

<TABLE>
<CAPTION>
                                                                  2005              2004
                                                              -----------       -----------
<S>                                                           <C>               <C>
      Tax benefit computed at federal statutory rate          $(1,306,000)      $(2,477,000)
       Net operating loss (NOL) carryforwards                   1,937,000                --
       Increase (decrease) in valuation allowance                (654,000)        2,559,000
       State taxes - net of federal income tax benefit           (106,000)               --
       Research and development tax credit                        (29,000)          (82,000)
      Others                                                      158,000                --
                                                              -----------       -----------
                                                              $         0       $         0
                                                              ===========       ===========
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows at March 31, 2005:

      NOL carryforwards                                      $  9,115,000
      Deferred stock compensation                               1,234,000
      Research and development tax credits                        113,000
      Other                                                        84,000
                                                             ------------
                                                               10,546,000

      Less valuation allowance                                (10,546,000)
                                                             ------------

                                                             $          0
                                                             ============

The Company has established a valuation allowance of approximately $10,546,000
to offset the deferred tax asset, due to the uncertainty of future utilization.
The Company has approximately $25.4 million and $10.8 million of federal and
state NOL carryovers as of March 31, 2005. These carryovers may be limited in
their usage to offset against future taxable income since it is likely that the
Company had gone through a Section 382 ownership change (a greater than 50%
ownership change). As such, the NOL carryovers may not be fully utilized.

NOTE 11. LICENSE AND TECHNOLOGY AGREEMENTS

On June 25, 2004, the Company and Vitusa Products, Inc. ("Vitusa") entered into
a Distribution Agreement (the "Vitusa Agreement"), pursuant to which Vitusa
acquired the non-exclusive right to distribute the Company's NanoFilterCX(TM)
cigarette filter product and any other product marketed by the Company for use
in Tobacco filtration during the term of the Vitusa Agreement. Vitusa is a
leading supplier of additives to the filter and tobacco filter manufacturing
industries. The information herein is qualified in its entirety by reference to
the Vitusa Agreement, including all annexes, exhibits and schedules attached
thereto.

On August 13, 2004 (the "Effective Date"), the Company and Kidde Fire Fighting,
Inc., a Pennsylvania corporation ("Kidde"), entered into a Development and
License Agreement (the "Agreement"), pursuant to which, among other things, we
agreed with Kidde to develop, produce, market and commercialize decontaminant
foam products. This agreement required Kidde to pay us a license fee in the
amount of $100,000 and a fee in the amount of $100,000 in consideration for the
assignment of the trademark, All-Clear. These fees were paid in two equal
installments. As required by the agreement, the first installment was paid in
August 2004 and the second installment was paid in November 2004. Pursuant to
the agreement, we are responsible for formulating existing products and Kidde is
responsible for developing manufacturing processes relating to the existing
products. The term of this agreement is for the life of the patents, which have
not been issued yet and are subject to pending patent applications, or if no


                                      F-14
<PAGE>

patents or patent applications are applicable, then the term is for 15 years. If
a competitor develops a similar product that eliminates the possibility that the
product we developed can compete with such product, the agreement would be
mutually terminated over a six month period. The All-Clear product has been
developed and tested and is being marketed internationally to foreign
governments, militaries and companies and has been presented to the U.S.
Department of Homeland Security and the U.S. Department of Defense. Before it
can be marketed and sold in the United States other than to the U.S. Department
of Defense, an application for registration of the product must be submitted to
the EPA specifically necessitating registration either as a sterilant or as a
newly proposed anthrax inactivation formula. All efficacy and toxicity testing
has been completed and the application will be submitted to the EPA by the end
of July 2005. Once the application is formally submitted, we believe that it
could take at least eight months to receive approval of the labeling for use on
the product and final EPA registration. All-Clear has successfully passed the
Boeing Series D6-17487, Revision P, corrosion test for use of foam on aircraft
exteriors. This was required to prove non-corrosive capability and is key for
Air Forces and commercial airlines worldwide. Internationally, All-Clear is
currently being evaluated by the Canadian DOD and several European, Asian and
Middle Eastern countries. If Kidde is able to successfully market the product,
we would earn royalties on the number of products sold in a Kidde fiscal year,
as defined in the agreement. The royalties are computed on the number of
products sold and do not include reductions for expenses associated with the
production, marketing and sale of the product.

NOTE 12. STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan that is accounted for under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No options were granted under the plan for the years ended
March 31, 2005 and 2004, and since inception (March 20, 2002). Options that were
granted under a stock option plan of the Company prior to its merger with USDR
Global Aerospace, Ltd. on May 17, 2002 have all expired. Accordingly, no
compensation expense would have been recognized under the recognition provisions
of FASB Statement No. 123, "Accounting for Stock-Based Compensation", during the
years ended March 31, 2005 and 2004, and since inception (March 20, 2002). In
December 2004, the FASB issued SFAS No. 123R, which eliminates the ability to
account for share-based compensation transactions using the intrinsic value
method under APB Opinion No. 25 and generally would require instead that such
transactions be accounted for using a fair-value-based method. This statement is
effective for the Company as of the first interim period or fiscal year
beginning after December 15, 2005. Management is currently assessing the effect
of SFAS No. 123R on the Company's financial statement.

On April 10, 2003, the Company adopted the Amended and Restated 2002 Stock Plan
(as amended, the "2002 Stock Plan"). Under the 2002 Stock Plan, officers,
directors, employees, consultants, advisors and others related to the Company
may be granted incentive stock options or nonqualified stock options to purchase
up to an authorized 30,000,000 shares of the Company's common stock. The options
are to be granted at not less than 85% of the fair value of the Company's common
stock on the date of the grant. The options generally vest over five years and
expire ten years from date of grant. The plan also allows for the granting of a
stock award whereby the purchase price of the stock award granted also may not
be less than 85% of the fair value of the Company's common stock. In addition
the plan allows for the granting of stock bonuses. The terms of the awards and
bonuses are to be determined by a committee appointed by the Board of Directors,
or in the absence of a committee, by the Board of Directors.

On April 7, 2004, the Company granted 35,392 shares of common stock under the
2002 Stock Plan to an employee in lieu of salary with an award valuation of
$21,058, equaling 85% of the fair market value per share on the date of grant of
the award. The Company recognized an additional $3,717 as additional non-cash
expense for the difference between the fair value of the stock and the salary
due.

On April 23, 2004 we entered into agreements resulting in the issuance of
1,147,950 shares of restricted common stock for the repayment of $378,823 in
principal related to loans advanced to us by our Directors.

On May 5, 2004, the Company granted 485,761 shares of common stock under the
2002 Stock Plan to employees in lieu of salaries with an award valuation of
$160,300, equaling 85% of the fair market value per share on the date of grant
of the award. The Company recognized an additional $24,289 as additional
non-cash expense for the difference between the fair value of the stock and the
salaries due.

On June 2, 2004, the Board of Directors approved an amendment to the 2002 Stock
Plan to increase the shares of common stock included in the 2002 Stock Plan from
15,000,0000 shares to 30,000,000 shares. The amendment also changed the name of
the 2002 Stock Plan from "US Global Aerospace, Inc." to "US Global Nanospace,
Inc.", and changed paragraph 7.2 of the 2002 Stock Plan so that the calculation
of the purchase price of stock awards may be the same for all recipients of such
awards.

On September 17, 2004, the Company granted 1,169,199 shares of common stock
under the 2002 Stock Plan to employees in lieu of salaries with an award
valuation of $198,763, equaling 85% of the fair market value per share on the
date of grant of the award. The Company recognized an additional $35,076 as
additional non-cash expense for the difference between the fair value of the
stock and the salaries due.


                                      F-15
<PAGE>

On October 19, 2004, the Company granted 44,380 shares of common stock under the
2002 Stock Plan to a previous employee in lieu of compensation with an award
valuation of $10,651, equaling 100% of the fair market value per share on the
date of grant of the award.

On October 22, 2004, the Company granted 933,156 shares of common stock under
the 2002 Stock Plan to employees in lieu of salaries with an award valuation of
$198,762, equaling 85% of the fair market value per share on the date of grant
of the award. The Company recognized $34,527 as additional non-cash expense for
the difference between the fair value of the stock and the salaries due.

The Company has accrued payroll taxes relating to the issuance of common stock
in lieu of wages in accrued salaries and expense during the fiscal year ended
March 31, 2005, and the Company recorded $82,579 in other receivables for the
employee's portion of the taxes due to the Company.

During the years ended March 31, 2005 and 2004, the Company granted a total of
5,518,855 and 1,003,097 shares of common stock to consultants in consideration
for services, having a total fair market value of $1,042,483 and $210,850,
respectively.

During the years ended March 31, 2005 and 2004, the Company granted a total of
4,145,253 and 1,563,279 shares of common stock to attorneys in consideration for
legal services, having a total fair market value of $475,839 and $301,611,
respectively.

NOTE 13. CONTINGENT LIABILITIES

Pending or Threatened Legal Proceedings

From time to time, claims are made against the Company in the ordinary course of
its business, which could result in litigation. Claims and associated litigation
are subject to inherent uncertainties and unfavorable outcomes could occur, such
as monetary damages, fines, penalties or injunctions prohibiting the Company
from selling one or more products or engaging in other activities. The
occurrence of an unfavorable outcome in any specific period could have a
material adverse affect on the Company's results of operations for that period
or future periods.

In connection with the SEC matter described in Part I, Item 3, the Company is
actively seeking a negotiated settlement. However, no settlement has yet been
mutually accepted by the parties involved. Due to the uncertainties inherent in
this matter, the Company can provide no assurance that it or its officers and
directors will settle the matter with the SEC. The Company currently is unable
to estimate with reasonable certainty the possible loss or range of loss for
this matter.

If the matter does settle and the Company's officers and directors pay certain
amounts in settlement, they may be entitled to indemnification by the Company
for such amounts. The Company's Amended and Restated Certificate of
Incorporation, as amended, provides for the indemnification of officers,
directors and agents of the Company to the fullest extent permitted by the
Delaware General Corporation Law. The Company does not maintain directors' and
officers' liability insurance.

The indemnification provision in the Company's Amended and Restated Certificate
of Incorporation may be sufficiently broad to permit indemnification of the
Company's officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act of 1933. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to our officers and directors pursuant to the foregoing provision, or
otherwise, the Company has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification for such liabilities (other than the payment by the Company for
expenses incurred or paid by the Company's officers or directors in the
successful defense of the SEC matter) is asserted by the officers or directors,
the Company intends to, unless in the opinion of the Company's legal counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether the Company's indemnification
of its officers or directors is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of the
issue by the court. The Company cannot predict at this time whether any of its
officers and directors would seek indemnification from the Company in the event
they bear any of the liability in connection with the SEC matter.

By letter dated May 27, 2005, TIAX LLC notified the Company that TIAX believed
that the Company was in default under the Patent and Technology License
Agreement dated July 25, 2003, as amended, between TIAX and the Company for
failure to pay $192,914 TIAX alleged was due under the agreement. Under the
terms of the Agreement, the Agreement terminates upon 30 days written notice of
default if the default is not cured to the satisfaction of TIAX within the
30-day notice period. On June 27, 2005, the Company responded to TIAX, stating
that it disagreed with TIAX's assessment of the amounts due TIAX under this
agreement. The Company also informed TIAX that the decontaminant product being
marketed by Kidde had been jointly developed by the Company and Kidde, and that
the Company did not believe that this new product was subject to its agreement
with TIAX. The Company has made a counter-proposal to TIAX, offering to pay TIAX
25% of royalties received by the Company from Kidde. On July 19, 2005, TIAX
rejected the Company's counter-proposal to modify the payment terms of the
agreement and notified the Company that TIAX will exercise its right to
terminate the agreement, unless the Company pays $196,344 in full by August 18,
2005. Of this $196,344, the Company has received invoices from TIAX in an
aggregate amount of approximately $165,000 that it has entered as accounts
payable in its financial statements for the fiscal year ended March 31, 2005,
although the Company disputes this amount. Upon receipt of this notice from TIAX
that the alleged default had not been cured, the Company is taking the position
that the agreement has already terminated as of June 28, 2005. It is the
Company's understanding that TIAX disagrees with this position. It is possible
that this dispute may result in litigation initiated by TIAX. The Company
believes that the product that Kidde is producing under license from the Company
comprises a new formula that is the intellectual property of the Company and
Kidde.

Other

On March 30, 2005, the Company issued to certain of its attorneys 957,706 shares
of common stock under the Amended and Restated 2002 Stock Plan as collateral to
secure an obligation to pay outstanding legal fees in the amount of $100,559.19
(the "Outstanding Obligation"). The holders of the shares have the right to sell
them at any time, subject to and in accordance with applicable law or
regulation. All the proceeds from the sale of such shares will be applied to the
Outstanding Obligation. The holders of the shares may sell only enough shares to
cover the Outstanding Obligation, or sell all the shares and apply any proceeds
in excess of the Outstanding Obligation to additional legal fees. If the holders
elect to sell only enough shares to pay the Outstanding Obligation, they may
return any excess shares to the Company for cancellation. If the proceeds from
the sale of such shares is not equal to or greater than the amount of the
Outstanding Obligation, then the holders will have the right to seek payment of
the difference in cash from the Company.

NOTE 14. RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 151, "Inventory Costs", which clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material. SFAS No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a
material impact on our financial statements.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 153, "Exchanges of "Nonmonetary Assets", which eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 will be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. We do not
believe the adoption of SFAS No. 153 will have a material impact on our
financial statements.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R, which eliminates the ability to account for share-based compensation
transactions using the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally
would require instead that such transactions be accounted for using a
fair-value-based method. This statement is effective for the Company as of the
first interim period or fiscal year beginning after December 15, 2005.
Management is currently assessing the effect of SFAS No. 123(R) on the Company's
financial statement.


                                      F-16
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      Grant Thornton LLP, the independent accountants who had been engaged by us
as the principal accountants to audit our consolidated financial statements,
resigned effective April 14, 2004.

      The report of Grant Thornton LLP on the financial statements of the
Company as of and for the years ended March 31, 2003 and period ended March 31,
2002 did not contain an adverse opinion, or a disclaimer of opinion, however the
report was modified as to the Company's ability to continue as a going concern.
The report was not qualified or modified as to audit scope or accounting
principles. During the fiscal years ended March 31, 2003 and period ended March
31, 2002 and the interim period from April 1, 2003 through the date of
resignation, the Company did not have any disagreements with Grant Thornton LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Grant Thornton LLP, would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports.

      On April 21, 2004, the Company engaged the firm of Grobstein, Horwath &
Company LLP as its new auditor. The decision to retain the services of
Grobstein, Horwath & Company LLP was approved by the Company's Board of
Directors.

      Prior to engaging Grobstein, Horwath & Company LLP, the Company had not
consulted Grobstein, Horwath & Company LLP regarding the application of
accounting principles to a specified transaction, completed or proposed, the
type of audit opinion that might be rendered on the Company's financial
statements or a reportable event, nor did the Company consult with Grobstein,
Horwath & Company LLP regarding any disagreements with its prior auditor on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the prior auditor, would have caused it to make a reference to
the subject matter of the disagreements in connection with its reports.

ITEM 8A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

      We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the year ended
March 31, 2005. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the applicable period to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in internal controls over financial reporting.

      There was no change in our internal control over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 8B. OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

DIRECTORS AND OFFICERS

      As of March 31, 2005, our officers and directors were:

NAME               AGE      TITLE

John Robinson      51       Chief Executive Officer, Chairman of the Board

Julie Seaman       45       Chief Financial officer, Treasurer, and Secretary

      There is a family relationship of marriage between the directors and
officers of USGN.


                                       17
<PAGE>

      The size of our board of directors is currently fixed at two members.
Members of the board serve until the next annual meeting of stockholders and
until their successors are elected and qualified. Meetings of the board are held
when and as deemed necessary or appropriate. Officers are appointed by and serve
at the discretion of the board.

      John Robinson, Chief Executive Officer, Chairman of the Board of
Directors. Mr. Robinson became a director and our Chief Executive Officer in
conjunction with the share exchange that took place with USDR Global Aerospace,
Ltd. on May 17, 2002. Prior to joining USGN, Mr. Robinson served from March 1997
until May 17, 2002 as President and Chief Executive Officer to USDR, Inc. Mr.
Robinson served in the same capacities to each of USDR Inc.'s affiliates,
including USDR Aerospace, Ltd., from October 2001. From 1993 to 1996, Mr.
Robinson was President and Chief Executive Officer of United States Defense
Research, Inc., a U.S. Government contractor that manufactured precision parts
for military equipment.

      Julie Seaman, Treasurer, Secretary and director. Ms. Seaman became a
director and officer on June 17, 2002. Prior to joining USGN, Ms. Seaman served
as Treasurer and Director of Administration to USDR, Inc. from March 1997, and
held the same positions for each of USDR, Inc.'s affiliates, including USDR
Aerospace, Ltd., since October 2001. From 1993 to 1996, Ms. Seaman was Treasurer
and Director of Administration to United States Defense Research, Inc., a U.S.
Government contractor that manufactured precision parts for military equipment.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

      Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who own more than ten percent of our common stock to file
reports of ownership and change in ownership with the Securities and Exchange
Commission and the exchange on which the common stock is listed for trading.
Executive officers, directors and more than ten percent stockholders are
required by regulations promulgated under the Exchange Act to furnish us with
copies of all Section 16(a) reports filed. Based solely on our review of copies
of the Section 16(a) reports filed for the fiscal year ended March 31, 2005, we
believe that all reporting requirements applicable to our executive officers,
directors and more than ten percent stockholders were complied with for the
fiscal year ended March 31, 2005, except as follows:

John Robinson

On April 6, 2004, Mr. Robinson filed a form 4 disclosing the acquisition of
159,337 shares on March 16, 2004 ($.66/share).

On May 10, 2004, Mr. Robinson filed a form 4 disclosing the sale of 100,000
shares on May 5, 2004 ($.37/share).

On September 20, 2004, Mr. Robinson filed a form 4 to disclose the following :

o     a sale on April 14, 2004 of 100,000 shares at $.67/share;
o     a sale on August 27, 2004 of 117,337 shares at $.253/share; and
o     the acquisition (loan payment) of 2,094,150 shares at $.29/share on
      August 3, 2004.

Julie Seaman

On April 6, 2004, Ms. Seaman filed a form 4 to disclose the acquisition of
83,654 shares on March 16, 2004 ($.66/share).

On May 11, 2004, Ms. Seaman filed a form 4 to disclose the sale of 8,000 shares
on May 6, 2004 ($.39/share) and the sale of 75,654 on May 7, 2004
($.37/share). The sale on May 6, 2004 was reported late by one day because
there was a weekend in between, however, the sale on May 7, 2004 was actually
reported timely.

On September 22, 2004, Ms. Seaman filed a form 4 to disclose the following:

      a sale on March 11, 2004 of 80,000 shares at $.685/share;
      a sale on March 16, 2004 of 20,000 shares at $.64/share;
      a sale on March 17, 2004 of 25,000 shares at $.593/share;
      a sale on March 25, 2004 of 55,000 shares at $.852/share; and
      the acquisition (loan payment) of 465,902 shares at $.29/share on August
      3, 2004.

CODE OF ETHICS

      We adopted a code of ethics that applies to our Chief Executive Officer,
Chief Financial Officer and our employees on January 21, 2004. We will provide
to any person without charge, upon request, a copy of our code of ethics. A
request for a copy should be made in writing to US Global Nanospace, Inc.,
Attn.: Secretary, 2533 N. Carson St., Suite 5107, Carson City, NV 89706.


                                       18
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

The following tables and discussion set forth information with respect to all
incentive stock option plan and non-plan compensation awarded to, earned by or
paid to our Chief Executive Officer and our Chief Financial Officer for all
services rendered in all capacities to us for each of our last three completed
fiscal years.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                              LONG TERM COMPENSATION
                                                                              ----------------------
                                            ANNUAL COMPENSATION               AWARDS                         PAYOUTS
                                ------------------------------------------------------------------------------------
                                                               Other           Restricted                               All Other
                                                               Annual          Stock Awards   Securities      LTIP      Compensation
Name and Principal              Salary          Bonus          Compensation    ($)            Underlying      Payout    ($)
Position               Year     ($)             ($)            ($)                            Options/SAR     ($)
<S>                    <C>      <C>             <C>                  <C>            <C>            <C>           <C>         <C>
John Robinson          2005     $401,539(1)          0               0              0              0             0           0
CEO                    2004     $472,561(2)     $400,000(2)          0              0              0             0           0
                       2003     $125,000(3)          0               0              0              0             0           0

Julie Seaman           2005     $210,807(4)          0
CFO                    2004     $135,715(5)     $125,000(5)          0              0              0             0           0
                       2003           0              0               0              0              0             0           0
</TABLE>

(1) Mr. Robinson's salary was accrued but unpaid as of March 31, 2005.
(2) Mr. Robinson received no cash compensation during the year ended March 31,
2004. Instead, he received a total of 2,523,313 shares of the Company's common
stock as compensation (i) for ordinary services rendered to us during that
period, (ii) as a bonus for extraordinary services rendered to us during that
period, and (iii) in payment of compensation totaling $125,000 accrued but
unpaid during the year ended March 31, 2003. The stock had a total fair market
value of $872,561.
(3) Mr. Robinson's salary was accrued but unpaid as of March 31, 2003.
(4) Ms. Seaman's salary was accrued but unpaid as of March 31, 2005.
(5) Ms. Seaman received no cash compensation during the fiscal year ended March
31, 2004. Instead, she received a total of 770,338 shares of the Company's
common stock as compensation for ordinary services rendered during the fiscal
year ended March 31, 2004 and for extraordinary services rendered during the
same period. The stock had a total fair market value of $260,715.

STOCK OPTIONS

      There were no stock options granted to executive officers during the
fiscal year ended March 31, 2005 and there was no exercise of incentive stock
options during the last completed fiscal year by the executive officers.

DIRECTOR COMPENSATION

      There is no standard or individual compensation package for any of the
directors.

EMPLOYMENT CONTRACTS

      We have no employment contracts with our Chief Executive Officer, Mr. John
Robinson, or with our Chief Financial Officer, Ms. Julie Seaman.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

      The following table sets forth information as of July 7, 2005 as to each
person who is known to us to be the beneficial owner of more than 5% of our
outstanding common stock and as to the security and percentage ownership of each
executive officer and director of USGN and all of our officers and directors as
a group. Except where specifically noted, each person listed in the table has
sole voting and investment power with respect to the shares listed.


                                       19
<PAGE>

<TABLE>
<CAPTION>
                           Name and Address               Security Ownership              Percentage
      Title of                     Of                      Amount and Nature                  Of
       Class               Beneficial Owners            Of Beneficial Ownership              Class
<S>                 <C>                                         <C>                          <C>
      Common        John Robinson
                    2533 North Carson Street, #5107             53,098,175                   46.50%
                    Carson City, NV 89706
      Common        Julie Seaman
                    2533 North Carson Street #5107               1,923,135                    1.68%
                    Carson City, NV 89706
                    Officers and Directors as a group
                    (2 persons)                                 55,021,310                   48.18%
</TABLE>

      (1)   There are no shares that would be required to be reported pursuant
            to Rule 13d-3 of the Securities Exchange Act of 1934.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On May 14, 2002, USDR Aerospace, Ltd. ("Aerospace"), a related party,
entered into an agreement with the Company to assign certain of its intellectual
property to the Company for consideration of $10, and a promise to pay a royalty
of 3.5% on all of the Company's sales until Aerospace has received a total of
$15 million, and a royalty of 1% of all of the Company's sales thereafter until
all patent rights of the intellectual property have expired. For the year ended
March 31, 2005, the Company incurred a total of $31,653 in royalties from this
agreement that were owed as of March 31, 2005.

      John Robinson, our Chief Executive Officer and director, controls
Aerospace, which has licensed intellectual property to the Company. Aerospace
has provided employees and product development services to the Company. Since
inception (March 20, 2002), Aerospace has provided such services, based on
actual costs, totaling approximately $2.9 million for which the Company
currently owes Aerospace $299,233 as of March 31, 2005. As of January 1, 2003,
Aerospace substantially discontinued all of its operations and the Company hired
certain individuals previously employed by Aerospace.

      On May 11, 2005, we entered into an agreement resulting in the issuance of
1,763,572 shares of restricted common stock for the repayment of $112,869 in
principal and interest related to loans advanced to us by Aerospace.

      John Robinson, our Chief Executive Officer and director, also controls
USDR, Inc. On May 11, 2005, we entered into an agreement resulting in the
issuance of 2,971,132 shares of restricted common stock for the repayment of
$190,152 in principal and interest related to loans advanced to us by USDR, Inc.

      As of March 31, 2005, John Robinson guaranteed the Company's bank loan in
the amount of $1,225,000. The loan is due to be repaid on May 15, 2008. As of
March 31, 2005, the Company had an outstanding principal balance of $805,768 and
accrued interest totaled $3,134.

      On May 1, 2003, Julie Seaman, our Chief Financial Officer and director,
guaranteed our payment and performance of a lease entered into for our research
division.

      On April 23, 2004 we entered into agreements resulting in the issuance of
1,147,950 shares of restricted common stock for the repayment of $378,823 in
principal related to loans advanced to us by John Robinson and Julie Seaman.

      On August 8, 2004 we entered into agreements resulting in the issuance of
2,560,052 shares of restricted common stock for the repayment of $742,416 in
principal and interest related to loans and expenses advanced to us by John
Robinson and Julie Seaman.

ITEM 13. EXHIBITS

2.          Agreement and Plan of Share Exchange between Caring Products
            International, Inc. and USDR Global Aerospace, Ltd. and the
            stockholders of US Global Aerospace, Ltd. dated as of May 15, 2002
            (1)

3.1.1       Amended and Restated Certificate of Incorporation (9)

3.1.2       First Amendment to Amended and Restated Certificate of Incorporation
            (9)

3.1.3       Second Amendment to Amended and Restated Certificate of
            Incorporation (9)

3.2         Bylaws (3)

10.1        Intellectual Property Assignment and Royalty Agreement dated May 14,
            2002 between USDR Aerospace, Ltd. and USDR Global Aerospace, Ltd.
            (4)

10.2        Settlement Agreement and Mutual Release among the Company, USDR
            Global Aerospace, Ltd., USDR Aerospace, Ltd. and Richard Wall dated
            November 19, 2002. (4)


                                       20
<PAGE>

10.3        Settlement Agreement and Mutual Release among the Company, USDR
            Global Aerospace, Ltd., USDR Aerospace, Ltd., Richard A. Wall, ECON
            Investor Relations, Inc. and Dawn Van Zant dated November 19, 2002
            (4)

10.4        Settlement Agreement and Mutual Release among ERBC Holdings, Ltd.,
            the Company, USDR Global Aerospace, Ltd., USDR Aerospace, Ltd., Live
            Oak Capital, LLC, Nicholas Lattanzio, Margaret K. Curtis, Smith
            Point Capital, LTD. and Daniel T. Guilfoile dated November 20, 2002.
            (4)

10.5        Promissory Note in the amount of $14,000 dated April 11, 2003 in
            favor of Wilford Simpson (5)

10.6        Promissory Note in the amount of $2,000 dated April 18, 2003 in
            favor of Wilford Simpson (5)

10.7        Promissory Note in the amount of $100,000 dated April 18, 2003 in
            favor of USDR Aerospace, Ltd. (5)

10.8        Gross Lease Agreement dated April 28, 2003 between the Company and
            West Harris Property, Inc. (4)

10.9        Addendum E to Lease/Guarantee executed by Julie Seaman (4)

10.10       US Global Nanospace, Inc. Amended and Restated 2002 Stock Plan (7)

10.11       Commercial Guaranty between John D. Robinson and Western Security
            Bank (4)

10.12       Promissory Note in the amount of $12,000 dated April 29, 2003 in
            favor of Julie Seaman (5)

10.13       Promissory Note in the amount of $10,000 dated April 30, 2003 in
            favor of John Robinson (5)

10.14       Promissory Note in the amount of $13,000 dated May 9, 2003 in favor
            of Julie Seaman (5)

10.15       Promissory Note in the amount of $125,000 dated June 6, 2003 in
            favor of U.S.D.R. (NV), Inc. (5)

10.16       Master Agreement by and between Y2-Ultra-Filter, Inc. and the
            Company dated June 19, 2003 (6)

10.17       Promissory Note and Commercial Security Agreement between the
            Company and Western Security Bank dated June 30, 2003 (4)

10.18       Patent and Technology License Agreement dated July 24, 2003 between
            the Company and TIAX, LLC (11)

10.19       Promissory Note in the amount of $500,000 dated August 7, 2003, as
            amended on December 19, 2003, in favor of John Robinson (9)

10.20       Amendment No. 1 dated October 3, 2003 to Patent and Technology
            License Agreement between the Company and TIAX LLC (11)

10.21       Promissory Note in the amount of $100,000 dated October 3, 2003 in
            favor of Julie Seaman (9)

10.22       Promissory Note in the amount of $47,283.50 dated January 8, 2004 in
            favor of Robin Bailey (7)


                                       21
<PAGE>

10.23       Promissory Note in the amount of $50,000 dated January 9, 2004 in
            favor of Paula Boozer (7)

10.24       Promissory Note in the amount of $195,649.94 dated January 27, 2004
            in favor of Steve Squires (7)

10.25       Agreement to Convert Debt between the Company and John Robinson
            dated April 23, 2004(9)

10.26       Agreement to Convert Debt between the Company and Julie Seaman dated
            April 23, 2004 (9)

10.27       Change in Terms Agreement dated June 11, 2004 to Promissory Note in
            the amount of $500,000 in favor of U.S.D.R. (NV), Inc. (9)

10.28       +Distribution Agreement between the Company and Vitusa Products,
            Inc. dated as of June 25, 2004 (10)

10.29       Change in Terms Agreement dated June 30, 2004 to Promissory Note in
            the amount of $200,000 in favor of USDR Aerospace, Ltd. (9)

10.30       Agreement to Convert Debt between the Company and John Robinson
            dated August 3, 2004 (9)

10.31       Agreement to Convert Debt between the Company and Julie Seaman dated
            August 3, 2004 (9)

10.32       Agreement to Convert Debt between the Company and Steve Squires
            dated August 3, 2004 (9)

10.33       Agreement to Convert Debt between the Company and Paula Boozer dated
            August 3, 2004 (9)

10.34       Agreement to Convert Debt between the Company and Robin Bailey dated
            August 3, 2004 (9)

10.35       +Development and License Agreement between the Company and Kidde
            Fire Fighting Inc. dated August 13, 2004 (8)

10.36       Change in Terms Agreement between the Company and Western Security
            Bank dated September 30, 2004 (9)

10.37       Change in Terms Agreement dated October 30, 2004 to Promissory Note
            in the amount of $500,000 in favor of USDR(NV) (9)

10.38       Change in Terms Agreement dated December 30, 2004 to Promissory Note
            in the amount of $500,000 in favor of USDR(NV).(12)

10.39       Change in Terms Agreement dated December 30, 2004 to Promissory Note
            in the amount of $200,000 in favor of USDR Aerospace, Ltd.(12)

10.40       Agreement to Convert Debt dated May 11, 2005 between the Company and
            USDR Aerospace, Ltd.(13)

10.41       Agreement to Convert Debt dated May 11, 2005 between the Company and
            USDR, Inc.(13)

14          Code of Ethics (7)

23.1        Consent of Grobstein, Horwath & Company LLP

31.1        Certification by Chief Executive Officer


                                       22
<PAGE>

31.2        Certification by Chief Financial Officer

32          Certification pursuant to 18 U.S.C. Section 1350

----------
+     Confidential treatment requested as to certain portions, which portions
      were omitted and filed separately with the Securities and Exchange
      Commission.

(1)   Incorporated by reference from a Form 8-K filed with the Securities and
      Exchange Commission on May 30, 2002.

(2)   Incorporated by reference from Amendment No. 1 to the Registration
      Statement on Form SB-2 filed with the Securities and Exchange Commission
      on March 20, 1996.

(3)   Incorporated by reference from the Registration Statement on Form SB-2
      filed with the Securities and Exchange Commission on September 12, 1995.

(4)   Incorporated by reference from a Form 10-KSB filed with the Securities and
      Exchange Commission on July 11, 2003, as amended.

(5)   Incorporated by reference from a Form 10-QSB filed with the Securities and
      Exchange Commission on September 10, 2003.

(6)   Incorporated by reference from a Form 10-QSB filed with the Securities and
      Exchange Commission on November 14, 2003.

(7)   Incorporated by reference from a Form 10-KSB filed with the Securities and
      Exchange Commission on July 14, 2004.

(8)   Incorporated by reference from a Form 8-K/A filed with the Securities and
      Exchange Commission on June 1, 2005.

(9)   Incorporated by reference from a Form 10-QSB filed with the Securities and
      Exchange Commission on November 15, 2004.

(10)  Incorporated by reference from a Form 10-QSB/A filed with the Securities
      and Exchange Commission on November 16, 2004.

(11)  Incorporated by reference from a Form 10-QSB/A filed with the Securities
      and Exchange Commission on February 9, 2005.

(12)  Incorporated by reference from a Form 10-QSB filed with the Securities and
      Exchange Commission on February 25, 2005.

(13)  Incorporated by reference from a Form 8-K filed with the Securities and
      Exchange Commission on May 16, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      (1) AUDIT FEES

      The aggregate fees billed by the Company's principal accountant,
      Grobstein, Horwath, & Company LLP for the audit and review of the
      Company's annual financial statements at March 31, 2004 and 2005, and for
      review of the Company's quarterly 10-QSBs and services provided for
      regulatory filings during the period April 1, 2004 through March 31, 2005
      were $156,758 as of this filing date.

      The aggregate fees billed by the Company's previous accountant, Grant
      Thornton LLP for the audit and review of the Company's annual financial
      statements at March 31, 2004 were $5,830.


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<PAGE>

      (2) AUDIT-RELATED FEES

      NONE

      (3) TAX FEES

      The aggregate fees billed by the Company's principal accountant,
      Grobstein, Horwath, & Company LLP for tax preparation and advice for year
      ended March 31, 2004 was $6,500.

In accordance with Section 13 of 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.

                                US GLOBAL NANOSPACE, INC.

Date: July 22, 2005
                                By: /s/ John Robinson
                                    -----------------------------------------
                                    John Robinson, Chairman and Chief Executive
                                    Officer


                                By: /s/ Julie Seaman
                                    -----------------------------------------
                                    Julie Seaman, Secretary and Chief Financial
                                    Officer

      In accordance with the requirements of the Exchange Act, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:

Name                            Title                                   Date


                                Chairman, Chief Executive          July 22, 2005
/s/ John Robinson               Officer and director
--------------------------
John Robinson


                                Treasurer, Chief Financial         July 22, 2005
/s/ Julie Seaman                Officer and director
--------------------------
Julie Seaman


                                       24