2003 Annual Financial Statement

VENGA AEROSPACE SYSTEMS INC. CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002

AUDITORS' REPORT To the Shareholders of Venga Aerospace Systems Inc.

We have audited the consolidated balance sheets of Venga Aerospace Systems Inc. as at December 31, 2003 and 2002 and the consolidated statements of operations and deficit and cash flows for the years then ended. These consolidated 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 December 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.

"Silver Gold Glatt & Grosman LLP" Toronto, Ontario April 9, 2004, except for note 16 which is as of May 14, 2004

Chartered Accountants

Venga Aerospace Systems Inc. (Incorporated under the laws of the Province of Ontario)

Consolidated Balance Sheets as at December 31, 2003 and 2002 2003

2002

ASSETS Current Cash and term deposits Accounts receivable and sundry assets Inventory Deposit (Note 4)

$

Capital Assets (Note 5)

24,522 88,881 16,031 19,386

$

132,782 1,634 93,360

148,820

227,776

41,692

47,472

$

190,512

$

275,248

$

209,088 11,000 90,277

$

105,851 11,000 69,277

LIABILITIES Current Accounts payable and accrued liabilities (Note 6) Current portion of bank term loan (Note 11) Due to 2930170 Ontario Inc. (Note 7)

Bank Term Loan (Note 11)

310,365

186,128

11,164

22,164

321,529

208,292

15,047,646

15,047,646

890,684

890,684

CAPITAL DEFICIENCY Capital Stock (Note 8) Contributed Surplus

(16,069,347)

Deficit

(15,871,374)

(131,017) $

Approved on behalf of the Board

"Hirsh Kwinter"

Director

190,512

"Dr. Ezra Franken"

66,956 $

275,248

Director

Venga Aerospace Systems Inc. Consolidated Statement of Operations and Deficit For the years ended December 31, 2003 and 2002 2003 Sales

$

24,887

2002 $

306

Cost of Sales

19,218

-

Gross Profit

5,669

306

133,359 83,666 16,231 10,281

19,646 19,062 14,032 11,992

243,537

64,732

(237,868)

(64,426)

112,500 1,369 (73,974)

4,581 -

39,895

4,581

(197,973)

(59,845)

(15,871,374)

(15,811,529)

Expenses Professional fees General and administrative Interest Amortization

Loss From Operations Other Items Insurance Claim Recovery (Note 9) Interest Loss on CLIK 3D Joint Venture (Note 4)

Net Loss Deficit, Beginning of year Deficit, End of year

$ (16,069,347) $ (15,871,374)

Loss Per Common Share

$

(0.0010) $

(0.0003)

Venga Aerospace Systems Inc. Consolidated Statement of Cash Flows For the years ended December 31, 2003 and 2002 2003

2002

OPERATING ACTIVITIES Net loss Adjustments for non-cash items: Amortization Loss on CLIK 3D Joint Venture

$ (197,973) $

(59,845)

10,281 73,974

11,992 -

(113,718) (42)

(47,853) (25,981)

(113,760)

(73,834)

(4,500)

(93,360) (605)

(4,500)

(93,965)

21,000 (11,000)

119,514 (159,514) (11,000)

10,000

(51,000)

NET CHANGE IN CASH

(108,260)

(218,799)

CASH, Beginning of year

132,782

351,581

Changes in non-cash assets and liabilities Cash Expended In Operating Activities

INVESTING ACTIVITIES Deposit for CLIK 3D Joint Venture Purchase of capital assets Cash Expended In Investing Activities

FINANCING ACTIVITIES Advances from 2930170 Ontario Inc. Repayment to director Bank term loan repayments Cash Provided By (Expended In) Financing Activities

CASH, End of year

$

24,522

$

132,782

Venga Aerospace Systems Inc. Notes to Consolidated Financial Statements December 31, 2003 and 2002 1.

THE COMPANY The Company was incorporated under the Business Corporations Act (Ontario) by certificate of amalgamation dated April 26, 1979, amalgamating Frodac Mines Ltd., Great Bear Silver Mines Limited and Silver Monard Mines Limited to become Frodac Consolidated Energy Resources Ltd. On July 25, 1985, it changed its name to Global Aerospace Systems Inc. On November 3, 1987, it changed its name to Venga Aerospace Systems Inc.

2.

OPERATIONS The Company's graphics division markets and sells advanced 3D products and services for both consumer and commercial applications. The Company's aeronautics division was in development of a full-scale composite drone aircraft. Further development of the Company's composite aircraft has stopped and is being held in abeyance until adequate funding for the project can be secured.

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company has prepared these financial statements on a consolidated basis which includes its whollyowned subsidiary, Venga Joint Venture Ltd.. Going Concern These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company's ability to remain as a going concern is dependent upon it successfully implementing its business plan including, a return to profitable operations and to raise additional capital. Management believes that steps taken to date and those in process will allow it to continue as a going concern. There can be no assurance that the Company will be successful in its efforts. If the going concern assumption was not appropriate for these consolidated financial statements, then adjustments would be necessary to the carrying values of assets and liabilities, the reported expenses and losses per share and the balance sheet classifications used. Inventory The Company records inventory at the lower of cost and net realizable value. Cost is determined on the firstin, first-out basis.

Venga Aerospace Systems Inc. Notes to Consolidated Financial Statements December 31, 2003 and 2002 3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd) Capital Assets and Amortization The Company records capital assets at historical cost and will be annually providing for amortization. Amortization rates are calculated to write off the assets over their estimated useful life as follows: Equipment Computer equipment Computer software

- 20% declining balance - 30% declining balance - 30% declining balance

Translation of Foreign Currencies Monetary assets and liabilities are translated at the year-end exchange rate. All other assets and liabilities are translated at the exchange rates in effect at the dates of the transactions. Revenue and expense items are translated at the monthly average exchange rate for the year. Exchange gains or losses are charged to income. Joint Ventures The Company's interest in joint ventures is accounted for by the proportionate consolidation method. Under this method, the Company books its share of all assets, liabilities, revenues and expenses on a line by line basis. Use of Estimates The preparation of these consolidated 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 at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Revenue Recognition The Company recognizes revenue when the sale is complete.

4.

DEPOSIT In 2002, the Company paid $93,360 to CLIK 3D Joint Venture to be used as a deposit on the purchase of some equipment. A further payment of $60,000 US was to be paid during the current year. Subsequent to the year end, the Company entered into an agreement with its co-venturist to end the joint venture. Pursuant to the terms of the agreement, the Company will receive $15,000 US ($19,386 CDN) from the joint venture's assets. Both parties have agreed to full and final releases relating to all other matters of the joint venture.

Venga Aerospace Systems Inc. Notes to Consolidated Financial Statements December 31, 2003 and 2002 5.

CAPITAL ASSETS Cost Equipment Computer equipment Computer software

6.

2003 Accumulated Amortization

2002 Net Book Value

Net Book Value

$

72,322 4,500 2,645

$

35,239 675 1,861

$

37,083 3,825 784

$

46,353 1,119

$

79,467

$

37,775

$

41,692

$

47,472

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Included in accounts payable and accrued liabilities are amounts due to two shareholders in the amount of $84,221 pursuant to two court orders during the year. The Company has appealed both decisions. Of this amount, $30,000 was previously recorded as share capital but has been reclassified in these financial statements.

7.

DUE TO 2930170 CANADA INC. This amount is due to another 40% co-venturist of Deep Focus Art Joint Venture - See Note 13. This amount is unsecured, bears interest at 5% per annum and is repayable as to principal and accrued interest on July 1, 2004. 2930170 Canada Inc. is controlled by 3 of the 4 current directors of the Company.

8.

CAPITAL STOCK Authorized Unlimited

Common and special shares without par value

Issued 194,590,053

Common shares (2002-194,590,053)

2003

2002

$ 15,047,646

$ 15,047,646

The capital stock was reduced by $30,000 and the prior year balance was also restated, as described in detail in Note 9 and Note 17.

9.

INSURANCE CLAIM RECOVERY The amount represents the consideration against the full and final settlement accepted by the Company to give final release and discharge to the parties involved in its claim for damages caused to the Company as a result of the fire which occurred on or about May 23, 1998. It was received subsequent to the year-end on January 8, 2004, net of legal fee and other charges of $27,324.

Venga Aerospace Systems Inc. Notes to Consolidated Financial Statements December 31, 2003 and 2002 10. INCOME TAXES The Company has accumulated losses for income tax purposes totaling approximately $1,147,000 for which the tax benefits have not been recognized in the financial statements. These losses can be deducted from future years' taxable income and expire as follows: 2004 2005 2006 2007 2008 2009 2010

$

421,000 115,000 173,000 60,000 120,000 60,000 198,000

$ 1,147,000

11. DEEP FOCUS ART JOINT VENTURE The Company has a 50% interest in a joint venture formed to develop two dimensional to three dimensional technologies and produce high resolution 3D images in various hardcopy formats. The following information summarizes the activity of the joint venture from January 1, 2003 to December 31, 2003: 2003

2002

Assets Current Cash and term deposit Accounts receivable and sundry assets

$

Capital Assets

29,815 3,873

$

30,548 3,874

33,688

34,422

75,733

94,944

$

109,421

$

129,366

$

7,544 22,000

$

7,544 22,000

Liabilities Current Accounts payable and accrued charges Current portion of bank term loan

29,544

29,544

Bank Term Loan

22,328

44,328

Participants' Equity

57,549

55,494

$

109,421

$

129,366

Venga Aerospace Systems Inc. Notes to Consolidated Financial Statements December 31, 2003 and 2002 11. DEEP FOCUS ART JOINT VENTURE (cont'd) Sales

$

821

$

612

Cost of Sales

878

-

Gross Profit

(57)

612

Expenses General and administrative Rent Interest and bank charges Amortization

Loss Before Interest Income Interest Income Net Loss

9,303 9,630 3,760 19,212

34,736 9,630 5,164 23,984

41,905

73,514

(41,962)

(72,902)

328 $

828

(41,634) $

(72,074)

The joint venture has a small business loan with the Bank of Montreal to be utilized for the acquisition of equipment directly related to the joint venture's advanced graphics business operation. The loan is secured by a general security agreement, a guarantee in the amount of $105,000 from the Company and its coventurers and a chattel mortgage over specific assets financed, bears interest at prime plus 3% per annum and the principal amount is repayable as follows: 2004 2005

$

22,000 22,328

$

44,328

$

11,000 11,164

$

22,164

The Company's 50% interest in the joint venture's small business loan is as follows: Current portion Long-term portion

12. FINANCIAL INSTRUMENTS It is the opinion of management that the Company is not exposed to significant interest, foreign exchange and credit risks arising from its financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted.

Venga Aerospace Systems Inc. Notes to Consolidated Financial Statements December 31, 2003 and 2002 13. COMPARATIVE FIGURES The Company has reclassified the comparative figures, where necessary, to conform to the current year's presentation.

14. LITIGATION On May 12, 2004 the Company was sued by a former insider and senior member of the Company's management team in the Ontario Superior Court of Justice. In this action, the plaintiff is claiming damages for a debt allegedly owed by the Company to the Plaintiff, recovery of possession of certain property; an injunction restraining the Company from disposing of certain property; and damages for breach of contract. The Company's management considers this plaintiff's action to be without merit and substance and intends to both vigorously defend the action and institute a counter-claim against the plaintiff.

15. PRIOR PERIOD RESTATEMENT The prior year's figures have been restated to properly reclassify the loan that was incorrectly recorded as share capital, as described in detail in Note 6.