Rutter Technologies Inc. Consolidated Financial Statements August 31, 2003

Contents Page Auditors' Report 1 Consolidated Statement of Earnings 2 Consolidated Statement of Retained Earnings 3 Consolidated Balance Sheet 4 Consolidated Statement of Cash Flows 5 Notes to the Consolidated Financial Statements 6-25

P.O. Box 8037 ICON Building 187 Kenmount Road St. John’s Newfoundland and Labrador A1B 3M7 T (709) 722-5960 F (709) 722-7892 E StJohns@GrantThornton.ca W www.GrantThornton.ca Canadian Member of Grant Thornton International 1

Grant Thornton LLP Chartered Accountants Management Consultants

Auditors' Report To the Shareholders of Rutter Technologies Inc. We have audited the consolidated balance sheets of Rutter Technologies Inc. at August 31, 2003 and 2002 and the consolidated statements of earnings and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at August 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended, in accordance with Canadian generally accepted accounting principles.

St. John’s, Newfoundland and Labrador Grant Thornton LLP December 1, 2003 Chartered Accountants

See accompanying notes to the consolidated financial statements.

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Rutter Technologies Inc. Consolidated Statements of Earnings Year Ended August 31 2003 2002 Revenues $19,759,558 $ 2,881,688 Operating expenses 17,448,466 3,582,549 Earnings (loss) before undernoted items 2,311,092 (700,861) Depreciation and amortization 179,635 139,444 Earnings (loss) before income taxes 2,131,457 (840,305) Income taxes (Note 14) 289,423 - Net earnings (loss) $ 1,842,034 $ (840,305) Basic earnings (loss) per share (Note 13) $ 0.11 $ (0.08) Diluted earnings (loss) per share (Note 13) $ 0.11 $ (0.08)

See accompanying notes to the consolidated financial statements.

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Rutter Technologies Inc. Consolidated Statement of Retained Earnings Year Ended August 31 2003 2002 Deficit, beginning of year $ (861,078) $ (20,773) Net earnings (loss) 1,842,034 (840,305) Retained earnings (deficit), end of year $ 980,956 $ (861,078)

See accompanying notes to the consolidated financial statements.

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Rutter Technologies Inc. Consolidated Balance Sheet August 31 2003 2002 Assets Current

Cash $ 4,281,481 $ 3,153 Receivables (Note 4) 18,412,957 764,307 Inventories 6,014,475 67,643 Prepaids 366,055 5,928

29,074,968 841,031

Investment (Note 5) 3,091,496 -

Property and equipment (Note 6) 3,414,830 106,706

Deferred costs (Note 7) 2,167,342 677,708

Goodwill (Note 3) 2,661,902 -

$40,410,538 $ 1,625,445 Liabilities Current

Bank indebtedness (Note 8) $ 4,648,395 $ 312,460 Payables and accruals (Note 9) 15,366,628 1,125,140 Current portion of long term debt 1,824,962 40,000 Future income taxes 61,680 -

21,901,665 1,477,600

Long term debt (Note 10) 9,968,028 582,810

31,869,693 2,060,410

Deferred assistance (Note 11) 101,555 175,013

Future income taxes 268,433 -

Minority interest 51,135 - Shareholders’ Equity (Deficiency) Capital stock (Note 12) 6,860,766 251,100 Contributed surplus (Note 10) 278,000 - Retained earnings (deficit) 980,956 (861,078)

8,119,722 (609,978)

$40,410,538 $ 1,625,445 Contingencies (Note 16) Commitments (Note 17)

On behalf of the Board

Director Director

See accompanying notes to the consolidated financial statements.

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Rutter Technologies Inc. Consolidated Statement of Cash Flows Year Ended August 31 2003 2002 Increase (decrease) in cash and cash equivalents

Operating activities Net earnings (loss) $ 1,842,034 $ (840,305) Amortization of deferred costs 265,876 295,041 Amortization of deferred assistance (131,173) (175,400) Depreciation 44,932 19,803 Future income taxes 34,123 - 2,055,792 (700,861)

Change in non-cash operating working capital (Note 15) (1,121,440) 446,747 934,352 (254,114)

Financing activities (Repayment of) proceeds from bank borrowings (312,460) 312,460 Proceeds from issue of long term debt 6,837,038 488,770 Repayment of long term debt (840,000) - Proceeds from issue of common shares 6,200,000 - Share issue costs (954,071) - Proceeds from exercise of share warrants 636,415 - 11,566,922 801,230

Investing activities Purchase of investment (3,091,496) - Purchase of property and equipment (386,898) (110,600) Decrease (increase) in deferred costs 16,782 (605,834) Receipt of deferred assistance 57,715 86,850 Business acquisitions (net of cash acquired) (Note 3) (4,819,049) - (8,222,946) (629,584)

Net increase (decrease) in cash and cash equivalents 4,278,328 (82,468) Cash and cash equivalents Beginning of year 3,153 85,621 End of year $ 4,281,481 $ 3,153

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 1. Nature of operations The Company is a global marine technology enterprise focused on the business of accelerating cost effective access to innovative 21st century marine technology solutions that improve maritime operations, safety and travel. Key divisions include systems engineering and consulting services, products and manufacturing. 2. Summary of significant accounting policies Basis of presentation (a) Generally accepted accounting principles The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). (b) Principles of consolidation The consolidated financial statements combine the financial position and results of operations and cash flows of Rutter Technologies Inc. and its wholly-owned subsidiaries from the date of acquisition. All material intercompany transactions and balances have been eliminated upon consolidation. (c) Comparative figures Certain of the comparative figures have been reclassified to conform with the financial statement presentation adopted for the current year. Reverse takeover On November 29, 2002, Rutter Technologies Inc. (Rutter Newfoundland) was involved in a transaction which saw a reverse takeover of Rutter Technologies Inc. (Rutter Quebec) (formerly Courvan Mining Company Limited) by Rutter Newfoundland. The transaction is described in more detail in Note 12. Although Rutter Quebec is considered the legal parent and Rutter Newfoundland is considered the legal subsidiary, for accounting purposes, Rutter Newfoundland is viewed as the acquirer and Rutter Quebec is viewed as the subsidiary. As such, these financial statements are a continuation of Rutter Newfoundland (the legal subsidiary) and not of Rutter Quebec (the legal parent). The comparative figures presented are those of Rutter Newfoundland (the legal subsidiary). Use of estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the year. Actual results could differ from these estimates.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 2. Summary of significant accounting policies (cont'd.) Foreign currency translation Transactions denominated in foreign currencies are recorded in Canadian dollars at exchange rates in effect at the related transaction dates. Monetary assets and liabilities denominated in foreign currencies are adjusted to reflect exchange rates at the balance sheet date. Exchange gains and losses arising on the translation of monetary assets and liabilities are included in the determination of income. Revenue The Company derives its revenues from the sale of voyage data recorder (VDR) units, related components and interfaces, and the installation and servicing of these products. The Company has a dealer network to whom it sells and the dealers in turn sell to the end-user. Sales take the form of either a sale of product or a turnkey package consisting of a product sale and installation. Revenue from the sale of VDR’s and related components and interfaces is recognized at the time of shipping to the dealer. Revenue from turnkey operations is recognized according to certain critical events. Revenue from the sale of product is recognized at the date of shipment. Revenue from the installation is recognized when work has been completed and the VDR has been commissioned. Amounts received from customers in advance of completion of services is recognized as a liability in deferred revenue. Also included in deferred revenue is an amount received for completion of warranty work originally guaranteed by a third party. Revenue from contracts is recognized on the percentage of completion basis, measured by the percentage of costs incurred to date to the estimated total costs for each contract. Provision for estimated losses, if any, on uncompleted contracts is recorded in the period in which such losses are determined. Cash and cash equivalents Cash and cash equivalents include cash on hand and balances with banks. Bank borrowings are considered to be financing activities. Inventories Inventories consist of raw materials, work in progress and finished goods, valued at the lower of cost and net realizable value. Finished goods consist of materials, labour and manufacturing overhead.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 2. Summary of significant accounting policies (cont'd.) Depreciation

Rates and bases of depreciation applied to write-off the cost of property and equipment over their estimated lives on the declining balance method are as follows:

Building 10% Equipment 20% Computer hardware 30% Computer software 100%

Amortization of leasehold improvements is calculated on the straight line method over the terms of the leases.

Deferred costs Deferred costs include the costs of developing specific products, as well as the acquisition of intellectual properties. Research costs are expensed in the year in which they are incurred. Development costs are also expensed unless they are significant and meet generally accepted criteria for deferral. Product development costs represent the cost of developing specific products and are amortized over a period of three years commencing with commercial sale of the product. The intellectual properties acquired represent the rights to market and sell software and radar products developed by Sigma Engineering Limited. Intellectual properties are amortized over a period of fifteen years. Government assistance

Government assistance relating to the acquisition of fixed assets is deducted from the cost of the assets. Government assistance relating to expenditures on deferred development costs is deferred and is being amortized over a period of three years. Government assistance related to expenditures on services is included in income. Goodwill Goodwill represents the unamortized excess of the cost of investments in subsidiary companies over the fair value of tangible and intangible assets acquired, less liabilities assumed. Under Canadian GAAP, goodwill is not amortized but is subject to a periodic impairment test at the reporting unit level. As the acquisitions of the three subsidiaries mentioned in Note 3 were completed on August 27, 2003, no impairment test was deemed necessary as at August 31, 2003.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 2. Summary of significant accounting policies (cont'd.) Income taxes Income taxes are accounted for using the liability method. Future income taxes result primarily from temporary differences between the carrying amount of balance sheet items and their corresponding tax values. Future income tax liabilities and future income tax assets are measured using the income tax rates and income tax laws that, at the balance sheet date are expected to apply when the liability is settled or the asset is realized. During the year, one of the subsidiaries received status under the provincial EDGE program (Economic Development and Growth Enterprises) resulting in a holiday in provincial income taxes for a ten year period. This is recorded as a reduction of income tax expense. Financial liabilities The Company has issued convertible debentures as described in detail in Note 10. For balance sheet presentation purposes, these debentures have been segregated into their liability and equity components. The liability component represents the present value of principal and interest obligations on the debentures discounted at 14%, being the estimated rate of interest that would be applicable to a debt-only instrument of comparable term and risk. The residual amount is allocated to shareholders’ equity as contributed surplus. Stock-based compensation During the year, the Company implemented an employee stock option plan. The Company applies the intrinsic value based method of accounting for stock-based compensation awards granted to employees. As permitted under GAAP, no compensation cost has been recognized for the stock option plan. 3. Business acquisitions On August 27, 2003, the Company completed three significant acquisitions as follows: a) NewTech Instruments Limited

The Company acquired 100% of the outstanding common shares of NewTech Instruments Limited from AMI Offshore Inc. (a subsidiary of Aliant Inc.). Transactions occurring between the closing date and year end were not considered material and thus the results of NewTech’s operations for this period have not been included in the consolidated financial statements. NewTech is an outsourcing solutions provider delivering integrated solutions, project management and manufacturing services. The cost of the purchase was $5,376,300 including a cash payment at closing of $3,000,000, a promissory note of $2,090,000 (for which details, including contingency provisions, are provided in Note 10), and closing costs incurred of $286,300.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 3. Business acquisitions (cont’d.)

b) Sea Systems Limited

The Company acquired 100% of the outstanding common shares of Sea Systems Limited from AMI Offshore Inc. (a subsidiary of Aliant Inc.). Transactions occurring between the closing date and year end were not considered material and thus the results of Sea’s operations for this period have not been included in the consolidated financial statements. Sea is an instrumentation, control, electrical and microprocessor systems integrator working in the industrial and marine/offshore sectors to improve productivity. Sea holds a 60% interest in Unicontrol International Ltda, a Brazilian subsidiary and a 100% interest in Sea Systems Inc., a US subsidiary. Both subsidiaries conduct similar businesses as Sea. The cost of the purchase was $565,710, including a cash payment at closing of $10 and closing costs incurred of $565,700. c) Sigma Engineering Limited

The Company acquired 100% of the outstanding common shares of Sigma Engineering Limited from 5262 West Limited (a company wholly-owned by a director of Rutter Technologies Inc.). Transactions occuring between the closing date and year end were not considered material and thus the results of Sigma’s operations for this period have not been included in the consolidated financial statements. Sigma specializes in the development of digital signal processing for the acquisition, processing, display and recording of surveillance radar data. The cost of the purchase was $3,240,365, including a cash payment at closing of $806,000, common shares of Rutter valued at $2,334,920, and closing costs incurred of $99,445. At the time of acquisition, Sigma held 2,035,600 common shares of Rutter. The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:

NewTech Sea Sigma

Current assets $ 8,750,137 $ 11,470,603 $ 239,391 Property and equipment 1,517,644 1,441,412 7,102 Investment in parent company - - 1,424,920 Intellectual properties - - 1,753,000 Goodwill 144,179 2,455,091 62,632 Other assets - 19,292 -

Total assets acquired 10,411,960 15,386,398 3,487,045

Current liabilities 4,398,335 12,490,706 246,680 Long term debt 460,265 2,159,917 - Future income taxes 177,060 118,930 - Minority interest - 51,135 -

Total liabilities assumed 5,035,660 14,820,688 246,680

Net assets acquired $ 5,376,300 $ 565,710 $ 3,240,365

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 3. Business acquisitions (cont’d.) Net assets acquired $ 9,182,375 Less common shares issued as consideration for acquisition (2,334,920) Less long term note payable issued as consideration for acquisition (2,090,000) Less cash acquired (121,084) Add allocation of purchase deficiency in reverse takeover 182,678 Cash consideration given in business acquisitions $ 4,819,049 The acquisitions and investments were financed as follows: (a) the issuance of subordinated debentures totalling $3,500,000, with 1,406,316 share

warrants attached allowing the holder to purchase common shares of the Company at $1.10 per share.

(b) the issurance of convertible debentures totalling $3,000,000, convertible at $1.00 per

share into 3.0 million common shares of the Company. (c) the private placement of $2,100,000 in common shares of the Company. 4. Receivables 2003 2002 Trade and sundry $16,082,663 $ 611,817 Unbilled contract revenue 1,283,635 - Sales and other taxes 330,029 152,490 Related parties 716,630 - $18,412,957 $ 764,307 5. Investment During the year, the Company acquired a 10% interest in Doris Engineering, SA of Paris, France for Euro 1,800,000 ($2,805,243 CAD) plus closing costs of $286,253. This investment is accounted for by the cost method. Subsequent to year end, the Company announced its intent to acquire an additional 10% interest in Doris, as disclosed in Note 21 (c).

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 6. Property and equipment 2003 Accumulated Net Book Cost Depreciation Value Land $ 244,444 $ - $ 244,444 Building 77,500 3,757 73,743 Leasehold improvements 1,101,186 - 1,101,186 Plant equipment 1,169,230 - 1,169,230 Furniture and equipment 268,389 32,582 235,807 Computer equipment 623,561 33,141 590,420 $ 3,484,310 $ 69,480 $ 3,414,830 2002 Accumulated Net Book Cost Depreciation Value Building $ 25,910 $ 1,296 $ 24,614 Leasehold improvements 56,127 6,282 49,845 Furniture and equipment 6,641 3,578 3,063 Computer equipment 42,576 13,392 29,184 $ 131,254 $ 24,548 $ 106,706 7. Deferred costs 2003 Accumulated Net Book Cost Amortization Value Intellectual properties $ 1,753,000 $ - $ 1,753,000 Product development costs 1,239,130 850,080 389,050 Other deferred costs 25,292 - 25,292 $ 3,017,422 $ 850,080 $ 2,167,342 2002 Accumulated Net Book Cost Amortization Value Product development costs $ 969,465 $ 584,204 $ 385,261 Other deferred costs 292,447 - 292,447 $ 1,261,912 $ 584,204 $ 677,708

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 8. Bank indebtedness The Company has the following credit facilities:

Bank of Montreal, demand revolving line of credit for $8.0 million, with interest at prime plus 1.5%.

Bank of Montreal, demand revolving line of credit for USD $1.0 million, with interest

at prime plus 0.5% Bank of Montreal, demand loan, non-revolving for $160,000, with interest at prime

plus 1.5%.

As security, the Company has provided a general security agreement providing a first, fixed and floating charge on all assets; and a general assignment of receivables, inventories and insurance. The balance outstanding on the line of credit was $4,648,395 (August 31, 2002 - $312,460). 9. Payables and accruals 2003 2002 Trade and sundry $13,081,026 $ 950,140 Deferred revenue 1,477,110 - Related parties 596,453 175,000 Income taxes 212,039 - $15,366,628 $ 1,125,140 10. Long term debt 2003 2002 Bank of Montreal Capital Corporation (BMOCC), subordinated debenture, interest bearing at 10% per year plus quarterly premium interest of $18,750; principal repayments are due in instalments of $500,000 each on June 30, 2004 and 2005, with a final payment of $750,000 due on July 31, 2006. $ 1,750,000 $ - Business Development Bank of Canada (BDC), subordinated debenture, interest bearing at 10% per year plus quarterly premium interest of $18,750; principal repayments are due in instalments of $500,000 each on June 30, 2004 and 2005, with a final payment of $750,000 due on July 31, 2006. 1,750,000 -

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 10. Long term debt (cont’d.) 2003 2002 Bank of Montreal Capital Corporation, convertible debenture, interest bearing at 10% per year 1,361,000 - Business Development Bank of Canada, convertible debenture, interest bearing at 10% per year. 1,361,000 - Note payable to AMI Offshore Inc., non-interest bearing, principal repayments are due in equal annual instalments of $418,000 beginning November 30, 2004. 2,090,000 - Note payable to AMI Offshore Inc., non-interest bearing, principal payments are due on November 30 of each year until repaid in full or the expiration of a five year period. 1,033,000 - Note payable to Aliant Horizons Inc., bearing interest at 7%, repayable in monthly principal payments of $25,670 plus interest to July 2005, unsecured. 573,333 - Atlantic Canada Opportunities Agency, non-interest bearing loan, repayment of $5,000 per month until December 2003; $8,000 per month to January 2005; $10,000 per month to January 2007; $12,000 per month to September 2007, unsecured. 460,000 500,000 Atlantic Canada Opportunities Agency, non-interest bearing loan, with repayments commencing in March 2005, unsecured. 459,848 122,810 Atlantic Canada Opportunities Agency, non-interest bearing loan, payable in monthly instalments of $4,688, maturing in June 2007, unsecured. 210,938 - Atlantic Canada Opportunities Agency, non-interest bearing loan, payable in monthly instalments of $2,482, maturing 2006. 93,381 - Bank of Montreal, prime plus 1.5% demand loan, repayable in monthly principal payments of $5,000, maturing 2006. 160,000 - Department of Industry, Trade and Rural Development, 7.75% preference shares, repayable in full on December 31, 2003. 145,076 - Department of Industry, Trade and Rural Development, term loan, interest bearing at 6.75%, payable in blended monthly instalments of $5,230, maturing in June 2004. 61,198 -

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 10. Long term debt (cont’d.) 2003 2002 Capital lease obligations, with various interest rates, payable in monthly principal and interest instalments of $13,760, with maturities to January 2007. 284,216 -

11,792,990 622,810

Less: current portion 1,824,962 40,000

$ 9,968,028 $ 582,810 Security: (a) As security for the subordinated and convertible debentures, the Company has pledged a

fixed and floating charge over all assets, including rights to any intellectual property, subject only to the priority of Bank of Montreal acting in the capacity of the Company’s senior lender (with the exception of intellectual properties where BMOCC and BDC require a senior charge); the assignment of the Company’s insurance policies; inter-creditor agreement; a letter of understanding/undertaking regarding specific covenants for Sea Systems Limited and Unicontrol International Ltda. The convertible debentures are convertible at any time at the option of the holders at $1.00 per share into 3,000,000 common shares of the Company. Any portion of the debentures not converted three years from the anniversary date of August 27, 2003, will become fully repayable, plus interest at 6% per annum, on August 27, 2006. Of the $3,000,000 in convertible debentures issued, an amount of $278,000 has been allocated to shareholders’ equity as contributed surplus, in accordance with the Company’s accounting policy for financial liabilities, as disclosed in Note 2.

(b) The first AMI promissory note is unsecured. The amounts of instalment payments to AMI

are contingent upon the Company or any other related companies, retaining a minimum of $4,600,000 in gross revenues annually from Aliant Inc. The amount of the initial payment is reduced by $0.20 for each $1.00 that Aliant revenue falls below the limit, provided that if revenue exceeds the target in any year, up to 20% of the excess can be carried forward and backwards to offset any shortfall in any other promissory note year. Should the Company become unable to repay this debt, the note becomes repayable in full, plus accrued interest at 20% from August 27, 2003.

(c) The second AMI promissory note is unsecured. The amount of instalment payments to

AMI is calculated at an amount equal to 50% of the annual after-tax earnings of Sea Systems Limited, on a consolidated basis.

(d) The Bank of Montreal demand loan is secured by the security as outlined in Note 8. (e) The Department of Industry, Trade and Rural Development term loan is secured by a

fixed and floating charge debenture over the capital assets of Sea Systems Limited, and an assignment of receivables and inventories of Sea, subject to prior charges of the Bank of Montreal.

(f) The capital lease obligations are secured by chattel mortgages on specific equipment.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 10. Long term debt (cont’d.) Principal repayments for the next five years are as follows:

2004 $ 1,824,962 2005 2,124,495 2006 5,308,463 2007 713,365 2008 519,440

11. Government assistance During the year, the Company claimed for assistance under various programs totalling $195,100 (2002 - $89,195). This assistance has been recorded as an increase in deferred assistance in the amount of $54,570 (2002 - $89,195) and a reduction of expense of $140,530 (2002 - $Nil). 12. Capital stock 2003 2002 Authorized: Unlimited number of common shares with no par value

Issued: Common shares 24,918,303 4,000,300 Warrants convertible into common shares 5,627,216 - (a) Reverse takeover As of November 29, 2002, a reverse takeover of Rutter Technologies Inc. (Rutter Quebec) (formerly Courvan Mining Company Limited), a publicly listed company, by Rutter Technologies Inc. (Rutter Newfoundland) was completed. The following summarizes the transactions:

the shareholders of Rutter Quebec exchanged 4,000,300 common shares for 1,333,438 common shares of Rutter Quebec.

the shareholders of Rutter Newfoundland exchanged all the preferred and common shares outstanding for 11,000,000 common shares of Rutter Quebec.

The assets acquired, liabilities assumed and purchase deficiency attributed to the reverse takeover are as follows:

Payables and accruals $ 182,678

Purchase deficiency $ (182,678)

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 12. Capital stock (cont’d.) The purchase deficiency represents Rutter Newfoundland’s cost of the reverse takeover and is allocated to capital stock as a cost of the acquisition. (b) Initial public offering, private placements and common share warrants The Company raised additional capital of $2,600,000 by the sale of 5,200,000 units through a public offering, less closing costs of $475,870. Each unit is comprised of one common share at a price of $0.50 per share, and one common share purchse warrant, entitling its holder to subscribe for one common share at a price of $0.65 per share for a period of twelve months from the issue date. Private placements were completed in July and August 2003. The placements consisted of the sale of 3,230,765 common shares at $0.65 per share and 1,875,000 common shares at $0.80 per share, less closing costs of $478,200. As part of the August placement, the Company’s agent (Jones Gable) received 187,500 compensation options entitling the agent to purchase 187,500 common shares of the Company at $0.95 per share, within one year of closing. A total of 1,406,316 share warrants were issued to the Bank of Montreal Capital Corporation and Business Development Bank of Canada for aggregate consideration of $2.00 in conjunction with debentures issued. In addition, 979,100 warrants were exercised during the year at an exercise price of $0.65 per common share. The following summarizes the share transactions that took place during the year:

Number of shares Common shares outstanding, at August 31, 2002 4,000,300 Less exchange of common shares at 1:3 ratio 2,666,862

1,333,438

Common shares issued to effect reverse takeover 11,000,000

12,333,438 Common shares issued through initial public offering 5,200,000 Common shares issued through private placements 5,105,765 Common shares issued due to exercise of warrants 979,100 Common shares issued as partial consideration for acquisition of Sigma Engineering Limited 3,335,600 Less common shares of Rutter held by Sigma (2,035,600) Common shares outstanding, at August 31, 2003 24,918,303

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 12. Capital stock (cont’d.) $ Capital stock, at August 31, 2002 $ 251,100 Allocation of purchase deficiency in reverse takeover (182,678) 68,422 Proceeds of initial public offering 2,600,000 Less closing costs of initial public offering (475,870) Proceeds of private placements 3,600,000 Less closing costs of private placements and other share issue costs (478,200) Proceeds of exercise of share warrants 636,414 Common shares issued as partial consideration for acquisition of Sigma Engineering Limited 2,334,920 Less common shares of Rutter held by Sigma (1,424,920) Capital stock, at August 31, 2003 $ 6,860,766 (c) Stock options The Company approved a stock option plan for employees and directors during the year. Under the plan 2,427,500 options were granted, as detailed below. The options are granted at exercise price equivalent to the fair market value of the Company’s common shares as of the grant date. The options vest as follows: 20% on first anniversary of grant date; 20% on second anniversary of grant date; 20% on third anniversary of grant date, and; 40% on fourth anniversary of grant date. All options expire five years after the grant date. Details of stock options outstanding are as follows: 2003 2002 Weighted Weighted Average Average Number Exercise Price Number Exercise Price Outstanding, at beginning of year $ - $ - Granted 2,427,500 0.80 - - Exercised - - - - Forfeited, cancelled or expired (52,000) 0.75 - - Outstanding, at end of year 2,375,500 $ 0.80 - $ - Vested, at end of year 337,500 $ 1.14 - $ -

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 12. Capital stock (cont’d.) The following summarized information relates to stock options outstanding and exercisable as at August 31, 2003. Options Outstanding Options Exercised Weighted Weighted Weighted Range of Average Average Average Exercise Number Remaining Life Exercise Number Exercise Prices Outstanding (years) Price Exercisable Price

$0.75 - $0.76 2,038,000 2.76 $ 0.75 - $ - $0.95 - $1.37 337,500 1.00 $ 1.14 337,500 $ 1.14 (d) Share warrants The Company has 5,627,216 common share warrants outstanding which are convertible into an equivalent number of common shares at prices ranging from $0.65 to $1.10. 13. Per share information 2003 2002 Weighted average common shares used in the calculation of basic earnings per share 16,483,180 11,000,000

Dilutive effect of share warrants 648,730 - Dilutive effect of stock options 116,111 - Dilutive effect of convertible debentures 32,877 -

Weighted average common shares used in the calculation of diluted earnings per share 17,280,898 11,000,000

Basic earnings (loss) per share $ 0.11 $ (0.08) Diluted earnings (loss) per share $ 0.11 $ (0.08) GAAP requires the calculation of diluted earnings per share under the treasury stock method for warrants and stock options. Under the treasury stock method, the proceeds from the exercise of warrants and options are assumed to be used to repurchase the Company’s shares on the open market. Assumed proceeds include the actual proceeds plus the unrecognized compensation cost. The difference between the number of shares assumed purchased and the number of warrants/ options exercised is added to the number of basic shares outstanding to determine diluted shares outstanding for purposes of calculating diluted earnings per share. The dilutive effect of convertible securities is calculated under GAAP using the “if-converted” method. Under this method, income charges applicable to convertible financial liabilities are added back to income (net of tax) and the weighted average number of common shares is adjusted for the assumption that the convertible securities were converted at the later of the beginning of the period and the date they were issued.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 14. Income taxes Income tax expense varies from the amount that would have been computed by applying the combined federal and provincial statutory tax rates as a result of the following:

2003 2002

Income tax expense according to combined statutory rate of 38.79% (2002 – 38.79%) $ 826,793 $ -

Reduction of income tax expense due to application of loss carry-forwards (391,242) -

Reduction of expense due to provincial income tax assistance (140,528) -

Future income tax expense due to recognition of temporary differences 34,123 -

Other deductible amounts (46,703) -

Other provincial taxes 6,980 -

Income tax expense for the year $ 289,423 $ - Income tax expense attributable to earnings consists of:

Current taxes $ 255,300 $ -

Future taxes 34,123 -

$ 289,423 $ - Significant components of the Company’s future income tax assets and liabilities:

Accounting value of capital assets in excess of tax values $ 330,504 $ - Research and development costs deducted for tax purposes 100,764 - Work in progress 61,680 - Loss carryforwards (73,419) - Deferred assistance (43,613) - Non-deductible provisions (29,065) - Other deductible differences (16,738) -

$ 330,113 $ -

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 15. Supplemental cash flow information 2003 2002 Change in non-cash operating working capital Receivables $ (6,149,071) $ (172,717) Inventories (129,726) (67,643) Prepaids (214,141) (5,928) Payables and accruals 5,371,498 693,035 $ (1,121,440) $ 446,747 Supplementary information Non cash items Note payable issued as consideration for acquisition (Note 3a) $ 2,090,000 $ - Common shares issued as consideration for acquisition (Note 3c) $ 2,334,920 $ - 16. Contingencies The Company has $3,000,000 in convertible debentures with its lenders which are convertible into 3.0 million common shares. Any portion of the debentures not converted three years from the anniversay date of closing, August 27, 2003, will become fully repayable plus interest at 6% per annum on August 27, 2006. 17. Commitments a) The Company has an agreement with the Canadian Centre for Marine Communications

to pay royalties at a rate of 2.5% of Voyage Data Recorder sales subsequent to January 1, 2001 to a limit of $806,000.

b) The Company has an agreement with one of its shareholders to pay royalties upon the

sale of Voyage Data Recorders when the Company has achieved and maintains retained earnings of at least $400,000. The agreement provides a royalty of 1.07% of Voyage Data Recorder sales on the first 150 units per year, and an additional royalty of 4.29% of earnings before income taxes, subject to an annual limit of $64,000. The total maximum royalty payout over the life of the agreement under the sales provision is $268,000, and under the earnings provision is $214,000, for a total maximum payout of $482,000. The agreement is also subject to having met certain retained earnings targets. Based on retained earnings having exceeded $400,000 as of the balance sheet date, the Company will begin accruing a liability related to this agreement effective September 1, 2003.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 17. Commitments (cont’d.) c) The Company has agreements to lease office and warehouse space, with minimum

lease payments over the next five years as follows:

2004 $ 713,500 2005 658,700 2006 585,400 2007 478,200 2008 346,700

18. Stock-based compensation The Company applies the intrinsic value based method of accounting for stock-based compensation awards granted to employees. As permitted under GAAP, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company’s stock option plan been determined based on the fair market value at the grant date, consistent with the fair value based method of accounting for stock-based compensation, the pro forma effect on the Company’ s net earnings and earnings per share would have been: 2003 2002

Net earnings (loss) As reported $ 1,842,034 $ (840,305) Pro forma 1,441,034 (840,305)

Basic earnings (loss) per share As reported 0.11 (0.08) Pro forma 0.09 (0.08)

Diluted earnings (loss) per share As reported 0.11 (0.08) Pro forma 0.08 (0.08)

The Black Scholes option pricing model was used to fair value the options as of the grant dates for options issued during the quarters ended February 28, 2003 and August 31, 2003, using the following weighted average assumptions: February 28, 2003 August 31, 2003

Expected life 3 years 1.24 years Expected dividend yield 0% 0% Risk-free interest rate 4.0% 4.0% Stock volatility 75% 100%

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 19. Related party transactions 2003 2002 During the year, the Company incurred development costs and various expenses charged by related parties as follows:

Conpro Group Ltd. Management fees $ 175,437 $ 329,546 Rent 46,099 21,900 Capital assets 242,000 3,840 Dollard Investments Ltd. Management fees 17,667 - Exploits Investments Ltd. Management fees 182,667 - Gunite Investments Inc. Management fees 181,667 - Rent 6,000 - Consolidated Technologies Ltd. Component purchases 1,210,106 105,244 Technical support 68,087 74,725 Sigma Engineering Ltd. Technical support 73,564 77,070 EJE Translite Inc. Promotional materials 15,012 - Sales and technical support - 47,970

$ 2,218,306 $ 660,295 During the year, the Company charged related parties for accounting and administrative support as follows: Conpro Group Ltd. Accounting and admin $ 24,572 $ 2,004 EJE Translite Inc. Accounting and admin 12,338 326 $ 36,910 $ 2,330 Each of the above are companies in which certain directors of Rutter have a controlling interest. All of the above related party transactions are in the normal course of operations and are measured at the exchanged amount. During the year, the Company acquired 100% of the outstanding common shares of Sigma Engineering Limited from a company wholly-owned by a director of Rutter Technologies Inc., as outlined in Note 3(c). During the year, the Company purchased land from Conpro Group Ltd. (a company controlled by three directors of Rutter Technologies Inc.) at a cost of $242,000. This is measured in the financial statements at the exchange amount and is included in property and equipment on the balance sheet. During the year, the Company issued a short-term advance to a related party (Conpro Group Ltd.) for $250,000. The loan earned interest at a rate of 25% per annum and was repaid with interest in September 2003. Related parties to whom balances are owed to or from at the balance sheet date are companies which directors of Rutter have an ownership interest.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 20. Financial instruments Fair values Fair values of financial instruments are disclosed in the notes to the financial statements when they differ from the carrying amounts. Where amounts receivable and payable are subject to normal credit terms, their carrying amount is used as an approximation of their fair values. The fair market value of the non-interest bearing loans from ACOA and AMI Offshore Inc., assuming an interest rate of 10%, would be $3,370,000 (August 2002 - $508,000). These loans have a book value of $4,340,000 (August 2002 - $622,810). Foreign currency risk The Company has transactions that are denominated in foreign currencies, and thus is exposed to the financial risk of earnings fluctuations arising from changes in foreign exchange rates and the degree of volatility of these rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risk. The Company has a natural hedge in that certain expenses are denominated in foreign currencies in which some revenues are derived as well. For the year ended August 31, 2003, approximately 99% (August 2002 – 99%) of the Company’s sales and 40% (August 2002 – 5%) of expenses (net of depreciation and amortization) were subject to foreign currency risk. Included in the determination of net earnings is a foreign exchange loss of $587,000. Credit risk Concentration of credit risk may arise from exposure to a single debtor or to a group of debtors, having similar characteristics, such as their ability to meet their obligations, is expected to be affected similarly by changes in economic or other conditions. This risk is mitigated by proactive credit management policies that include the regular monitoring of the debtor’s payment history and performance. 21. Subsequent events a) On December 1, 2003 the Company acquired certain of the assets of the Systems

Engineering Division of Digital Products Ltd. (DPL) of Saint John, New Brunswick, Canada for total consideration of $633,975. The consideration is payable in the form of $333,975 cash on closing and $100,000 per year over a three year period. The purchase price is subject to a final inventory valuation. The division specializes in electrical, instrumentation, controls and systems integration with locations in New Brunswick and Nova Scotia.

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Rutter Technologies Inc. Notes to the Consolidated Financial Statements August 31, 2003 21. Subsequent events (cont’d.) b) The Company signed a letter of intent to acquire 100% of the shares of Davis

Engineering & Associates Ltd. (Davis) for total consideration of $2,636,000, payable at closing in the form of $185,000 cash; 1,225,500 shares of Rutter issued at $2.00;and the granting of 50,000 stock options to key personnel at an exercise price of $2.00; expiring five years from closing. Davis provides a variety of engineering services to the offshore industry and is located in Clarenville, Newfoundland, Canada. As 70% of Davis is owned by a company controlled by directors of Rutter, the transaction is subject to all required regulatory approvals.

c) The Company announced its intent to exercise its option to acquire an additional 10%

interest in Doris Engineering, SA, of Paris France for Euro 1,800,000 (approximately $2,800,000 CAD). The transaction is subject to all required regulatory approvals.

d) A total of 4,220,900 share warrants were exercised at one common share for each share

warrant at $0.65 each, for total proceeds of $2,743,585. All 5,200,000 share warrants issued at time of the initial public offering have now been exercised.

e) Funding of $1,400,000 from ACOA relating to the Company’s research and development

program has been approved. The funding is to be received over a two year period in the form of an interest-free long term loan.

f) Funding of $1,500,000 has been approved for completion of building renovations. Of the

total, $1,000,000 is a loan from the Business Development Bank of Canada and the remaining $500,000 is an interest free long term loan from ACOA. Repayment terms and interest rates have not been finalized.

g) The Company’s 60% controlled subsidiary in Brazil, Unicontrol International LTDA

(International) reached agreement to:

(i) purchase 100% of the outstanding shares of Unicontrol Automacao LTDA (Automacao) for total consideration of $2.00. Automacao is currently owned by two of the minority shareholders of International and provides services to International.

(ii) purchase the assets and contracts held in Unicontrol Sistemas de Medicao e Controls LTDA for total consideration of $70,365.