2005 Annual Financial Statement

VENGA AEROSPACE SYSTEMS INC . CONSOLIDATED FINANCIAL STATEMENT S FOR THE YEAR ENDED DECEMBER 31, 2005 (with comparative figures for 2004)

VENGA AEROSPACE SYSTEMS INC . Index to the Financial Statements DECEMBER 31, 200 5

INDEX Pag e Auditors' report FINANCIAL STATEMENTS Consolidated balance sheet

2

Consolidated statement of operations and deficit

3

Consolidated statement of cash flows

4

Notes to the consolidated financial statements

5-8

175 Bloor St. East South Tower, Suite 303 Toronto, Ontario M4W 3R8 Telephone : 416-863-1400 Facsimile : 416-863-4881 ww,A rnchrotstein .com

AUDITORS' REPORT

To the Shareholders o f Venga Aerospace Systems Inc .

We have audited the consolidated balance sheet of VENGA AEROSPACE SYSTEMS INC . as at December 31, 2005 and the consolidated statements of operations and deficit and cash flows for the year 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 financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and the results of its operations and the changes in cash flows for the year then ended in accordance with Canadian generally accepted accounting principle s The 2004 comparative figures were audited by another firm of Chartered Accountants .

R" Ra&&4t RICH ROTSTEIN Chartered Accountants Toronto, Canada April 27, 2006

VENGA AEROSPACE SYSTEMS INC . CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 200 5 (with comparative figures for 2004 )

ASSET S

2005

Current Assets Cash Accounts receivable & sundry assets Inventory

2004

7,467 3,197 12,217

10,17 4 19,91 9 12,42 5

22,881

42,51 8

0

31,14 7

22 .881

73,66 5

191,529 6,062 222,777

271,924 8,66 2 167,277

420 .368

447,86 3

Prope rty, Plant and Equipment (note 4) Total Assets

LIABILITIE S Current Liabilities Accounts payable and accrued charges (note 5) Deferred revenue Due to 2930170 Canada Inc . (note 6)

SHAREHOLDERS' DEFICIENC Y Capital stock (note 7) Contributed surplus Deficit

15,377,375 890,684 (16,665,546)

15,155,88 5 890,684 (16,420 767 )

397,487)

(374,198 )

22,881

73,665

Total Liabilities and Shareholders' Deficiency

Approved by the Board of Directors :

Hirsh Kwinte r

Ezra Franke n The accompanying notes are an integral part of these financial statements -2-

VENGA AEROSPACE SYSTEMS INC . CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT FOR THE YEAR ENDED DECEMBER 31, 200 5 (with comparative figures for 2004 )

2005

REVENU E Sales

8,681

16,81 8

208

4,24 8

8,473

12,57 0

213,734 32,404 0 0

163,252 94,55 1 6,142 1,399

246,138

265,34 4

(237,665)

(252,774 )

(7,114)

(37 866)

COST OF GOODS SOL D Cost of sales GROSS PROFIT EXPENSES General & administration

Professional fees Amortization Interest

LOSS FROM OPERATIONS LOSS ON DISPOSAL OF CAPITAL ASSETS LOSS BEFORE EXTRAORDINARY ITEMS

2004

(244,779)

(290,640)

EXTRAORDINARY ITEM S Contingency Loss (note 10 ) NET LOSS FOR THE YEAR

0

60,77 9

(244,779)

(351,419 )

DEFICIT - BEGINNING OF YEAR

(16,420,767)

(16,069,348 )

DEFICIT - END OF YEAR

(16,665,546)

(16,420,767)

The accompanying notes are an integral part of these financial statements -3-

VENGA AEROSPACE SYSTEMS INC . CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 200 5 (with comparative figures for 2004)

2005

OPERATING ACTIVITIE S Net (Loss) Depreciation Loss on disposal of capital assets

CASH USED IN OPERATING ACTIVITIES

200 4

(244,779) 0 7,114

(351,419 ) 6,14 2 37,866

(237,665) 6( 6,065)

(307,411 ) 163,45 1

(303,73

(143 960 )

INVESTING ACTIVITIE S Purchase (sale) capital assets

24,033

(33,463 )

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

24,033

(33,463 )

FINANCING ACTIVITIES Decrease in bank loan Receipts from related parties Proceeds from issuance of common stock

0 55,500 221,490

(22,164 ) 77,000 108,239

CASH PROVIDED BY FINANCING ACTIVITIES

276,990

163,07 5

NET DECREASE IN CASH

(2,707)

(14,348 )

Cash and cash equivalents - beginning of year

10,174

24,522

7,467

10 .174

CASH - END OF YEAR

The accompanying notes are an integral part of these financial statements -4-

VENGA AEROSPACE SYSTEMS INC . NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005

1.

THE COMPAN Y The Company was incorporated under the Business Corporations Act (Ontario) by certificates 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.

OPERATION S The Company's graphics division markets and sells a range of 3D products . 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 as is being held in abeyance until funding for the project can be secured . The Company has now entered into development agreements with ARINC Incorporated to explore the creation of an international maintenance training centre capable of providing maintenance training to civil and military aircrews and with Air Combat Warfare International to secure contracts to supply flight and combat support services for the U .S . military and the military forces of Canada and various other NATO countries . The Company has made an unsolicited proposal to supply equipment and services to the Canadian Armed Forces . This proposal has yet to be accepted .

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)

Basis of Presentatio n The company has prepared these comparative financial statements on a consolidated basis which includes its wholly-owned subsidiary, Venga Joint Venture Ltd .

(b)

Going Concern These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assumes 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 the to carrying values of assets and liabilities, the reported expenses and losses per share and the balance sheet classifications used .

(c)

Inventory The company records inventory at the lower of cost and net realizable value . Cost is determined on the first-in, first-out basis .

VENGA AEROSPACE SYSTEMS INC . NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 200 5

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued ) (d)

Capital Assets and Amortizatio n 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 : Office equipment Computer equipment

(e)

- 20% declining balance - 30% declining balance

Translation of Foreign Currencie s 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 transactions . Revenue and expense items are translated at the monthly average exchange rate for the year. Exchange gains and losses are charged to income .

(f)

Joint Venture s 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 .

(g)

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 the financial statements and the reported amounts of revenue and expense during the reporting period . Actual results could differ from these estimates .

(h)

Financial Instruments The Company's financial instruments consist of cash, accounts receivable, sundry assets, accounts payable, accrued liabilities and loans payable . 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 .

(i)

Revenue Recognitio n The company recognizes revenue when the sale is complete .

VENGA AEROSPACE SYSTEMS INC . NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 200 6

4.

PROPERTY, PLANT AND EQUIPMENT

Accumulate d Amortization

ost Office equipment Computer equipment

200 5 Ne t Carryin g Amount

200 4 Net Carrying Amoun t

0 0

0 0

0 0

46 3 30,684

0

0

0

31 147

During the year, the Company sold all of it's Property, Plant and Equipment . The Company realized a loss on the disposal of these assets in the amount of $7,114 (2004 - $37,866) . 5.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The 2004 accounts payable and accrued liabilities figure includes two amounts that were due to two shareholders in the amount of $132, 656 pursuant to two court orders during that year . One of the cases was settled in April 2005 (see note 10) .

6.

DUE TO 2930170 CANADA INC . 2930170 Canada Inc. is controlled by 3 of the 4 current directors of the Company . The amount owed to 2930170 Canada Inc . bears interest at the rate of 5% per annum, is payable on demand and is secured pursuant to the provisions of the Ontario Personal Property Securities Act . Subsequent to year end, the Company and 2930170 Canada Inc . entered into an agreement wherein 2930170 Canada Inc . agreed to accept common shares of the Company in accordance with the TSX Venture Exchange's Policy 4 .3 - shares for debt in payment of a portion of the debt that the Company owed 2930170 Canada Inc .

7.

CAPITAL STOC K Authorized Unlimited

Common shares and special shares without par value 2005

2004

Issue d

201,184,633

Common shares (2004- 196,754,833)

15,377,375 15 .155 .88 5

On April 18, 2005, the TSX Venture Exchange approved the Company's application to issue 4,429,800 common shares, including 2,100,000 common shares to settle a lawsuit and 2,329,800 common shares to settle claims of creditors of the Company .

VENGA AEROSPACE SYSTEMS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 200 5

8.

TAX BENEFITS AVAILABL E The Company has operating losses available to offset future income for tax purposes of approximately $1,177,000, which expire as follows : 2005 2006 2007 2008 2009 2013 2014

115,000 173,000 60,000 120,000 60,000 198,000 451 .00 0 1 .177 .000

The benefit of these losses has not been recognized in the financial statements . 9.

COMPARATIVE FIGURE S The Company has reclassified the comparative figures, where necessary, to conform to the current year's presentation .

10

CONTINGENCY LOS S In October of 2003, the Company was sued by a former director and officer of the Company in the Ontario Superior Court of Justice . The case was settled in April 2005 . The Company was required to pay $30,000 in cash and issue 2,100,000 common shares . A cash payment of $16,000 was paid in 2004, the remaining balance of $14,000 was paid during the fiscal year. The Company issued 2,100,000 common shares at $0 .05 each on April 18, 2005 .

11 .

SUBSEQUENT EVENT (a)

The Company entered into an agreement with 2930170 Canada Inc . wherein the Company agreed to settle a portion of a claim of a creditor (see note 6) through the issuance and delivery of the Company's common shares to the creditor . This agreement to issue the Company's shares is subject to the approval of the TSX Venture Exchange.

(b)

The Company is subjected to an arbitration proceeding that was instituted by a former insider . The individual seeks various relief and maintains a claim for damages and has sued previously in Small Claims Court . The current arbitration is for an amount larger than the $10,000 Small Claims Court limit and the claim (not including costs) will probably not exceed $50,000, if it succeeds .