Sterilizers & Autoclaves News

Jocelyn Vézina, the Chief Executive Officer of TSO3 Inc., announced financial results for the second quarter of 2004. He stated that sales and marketing efforts continue unabated. During the last quarter we signed five more agreements with American hospitals and renewed the current agreements in Quebec, which confirms the considerable interest of the market for our technology and the confidence the end-users have in our Company. The company has collaboration with more than 20 of the major instrument manufacturers and of their suppliers.

TSO3 Inc. is located in Québec City, Canada, and was established in 1998. TSO3 currently has 45 employees, 17 of whom work exclusively in the Research and Development department. The company’s mission is to develop and market innovative and comprehensive sterilization solutions. TSO3 has perfected a novel sterilization process using ozone as a sterilizing agent.

The first product based on this technological platform is the 125L Ozone Sterilizer, which is intended for hospital sterilization units. The 125L - named after its 125-litre/4.3-cubic-foot capacity - was designed to sterilize the new generation of surgical and diagnostic instruments made of non-heat-resistant materials such as polymers and other plastics. The ozone sterilization process is a safe, efficient, fast and cost-effective response to evolving sterilization needs. Health Canada in May 2002 and the U.S. Food and Drug Administration (FDA) on September 3, 2003, have cleared 125L Ozone Sterilizer by TSO3 for commercialization by.

The Company’s R&D team has also undertaken the development of a smaller, point-of-use ozone sterilization device for operating rooms and private clinics, and is planning the development of an industrial-sized device for manufacturers of medical instruments, among others. For more information on TSO3, visit the Company’s Web Site at:www.tso3.com.

Summary of second quarter activities

Signing of five new agreements with American hospitals that will act as Referral Sites for the 125L Ozone Sterilizer.

Compatibility testing program for instruments is underway, in
collaboration with more than 20 instrument manufacturers as well as some 40 of their suppliers of raw materials and processes, in preparation for the rollout of our devices in Referral Sites and their commercial launch.

Start of the third phase of testing on prions, the infectious proteins that cause Creutzfeldt-Jakob Disease, the human version of mad cow disease. Presenting our sterilization process to the scientific community for the first time, by the scientific team at TSO3 during the 4th International Symposium on Ozone Applications.

Analysis of Financial Situation and Operating Results

Overview

The Company established in June 1998 has developed a unique new
sterilization process that uses ozone as the sterilizing agent. The first device 125L Ozone Sterilizer, has been designed to allow the sterilization of the new generation of surgical and diagnostic instruments made from heat-sensitive materials particularly polymers. After receiving its approval from Health Canada on May 3, 2002, and clearance from the United States Food and Drug Administration (FDA) on September 3, 2003, to sell the 125L Ozone Sterilizer and the Chemical Indicator.

In July 2003, the Company signed a distribution agreement with the U.S. firm SKYTRON, a medical equipment distribution company with a vast distribution network that covering the United States and Western Canada, with 120 sales representatives and 100 technical service technicians. The Company is currently working on the commercial launch of its technology, including compatibility of the process with the wide variety of commercially available surgical instruments as well as the installation of its sterilizer in Canadian pilot sites and U.S. referral sites.

Work on Compatibility

The Company expects to be able to provide a list of compatible
instruments that would meet a potential buyer’s minimum threshold before the end of the current fiscal year, relying on several partners. The Company has stepped up its collaboration with the leading industrial groups involved in the manufacture of surgical instruments and the production of construction materials, packaging and protective coatings. It is dedicating the bulk of its efforts to validating, as quickly as possible, guaranteeing a minimum of inconvenience to its initial users.

Canadian Pilot Sites

TSO3 entered into agreements in 2002 and 2003 with the following hospital centres:

· McGill University Hospital Centre - Montréal Neurological Hospital
· Sacré-Coeur Hospital of Montréal
· Centre hospitalier universitaire de Québec - Saint-François d’Assise Hospital
· Centre hospitalier de l’Université de Montréal - Notre-Dame Hospital
· Vancouver General Hospital
· Sunnybrook and Women’s College Health Science Centre of Toronto

Currently, the sterilizers are installed in five Canadian hospitals with an installation at Sunnybrook and Women’s College Health Science Centre of Toronto scheduled for this fiscal year. These hospitals have agreed to make their sterilization department facilities and equipment available for the project. Various tests are scheduled to demonstrate the compatibility of the Company’s sterilization process with a broad range of medical instruments. These tests also aim to showcase for hospitals the potential savings resulting from a sizable reduction in direct and indirect operating costs.

American Referral Sites

To obtain market recognition of its innovative technology, it is promoting the use of its 125L Ozone Sterilizer in several prestigious U.S. hospitals, and installations are scheduled before the end of the current fiscal year.

The Company has already signed agreements, in October and December 2003, with two of the best-known U.S. hospital networks - Cleveland Clinic Foundation and Spectrum Health. On May 5, 2004, the Company announced the signing of five additional agreements with referral sites in the United States, including four with major hospitals and one with an industrial customer.

SUMMARY RESULTS
Periods ended June 30 (Unaudited)
SECOND QUARTER 2004 (Restated) 2003(Restated)
—————————————————————————–
EXPENSES
Operating $ 149,130 $ 159,654

Research and
Development $ 366,813 $ 386,883

Marketing $ 492,109 $ 250,298

Administrative $ 889,946 $ 34,562

Financial $2,925 $5,219
—————————————————————————–
$1,900,923 $1,536,616
——————————————————————————
OPERATING LOSS $ 1,900,923 $ 1,536,616
OTHER REVENUES $ 334,605 $ 281,691
INCOME TAX $ 12,223 –

NET LOSS $ 1,578,541 $ 1,254,925
——————————————————————————-

Results of Operations

Quarter ended June 30, 2004 compared with the same quarter ended June 30, 2003.

Operations:

The operating expenses were incurred primarily for the Company’s Production and Customer Service Departments. Operating activities continued at the same pace between the two periods.

R&D Activities:

The Company continued its R&D work according to budget and at the same pace as the corresponding period in 2003. These expenses were incurred for work on compatibility, improving existing products and diversification of products resulting from the Company’s technological platform.

Marketing:

This increase is due to increased costs related to representation, promotional activities and professional fees. The increase between the two periods can also be attributed to the greater number of employees assigned to the commercial launch (from four to ten between the two periods).

Administration:

This increase results from the addition of a new accounting item: Share-based compensation. Since January 1, 2004, the Company will record stock-based compensation and other stock-based payments according to the fair value method as required by the new regulations implemented by the CICA. The compensation expense associated with this method of stock-based payment will therefore be recognized as earnings. This new method will be applied retroactively to 2002 and 2003. It will have no effect on years prior to 2002. As a result of this change, administrative costs rose by $83,587 compared with the same period in 2003. Costs related to communications with investors also contributed to the increase between the two periods.

Other Revenues:

Other Revenues comprised mainly of investment income, R&D tax credits and government grants. On the other hand, the Company did not received incomes of its products.

Net Loss:

The Company recorded a net loss of $1,578,541 or $0.05 per share, for the second quarter of 2004, compared to a restated net loss of $1,254,925 or $0.04 per share for the same period in 2003.

SELECTED ELEMENTS SIX MONTHS

04/06/30 03/06/30
—————————————————————————–

Other Revenues $ 510,521 $ 454,835

Net Loss $ 3,120,545 $ 2,365,121

Basic and diluted
net loss per share $ 0.1 $ 0.08

Liquidities +
Accounts receivable $ 13,758,532 $ 10,180,840

Assets $ 24,441,138 $ 19,791,357

Long Term Liabilities $ 68,500 $ 3,568,500
————————————————————————-
YEARS ENDED DECEMBER 31
2003 2002 2001
————————————————————————-

Other Revenues $ 1,171,334 $ 933,137 $ 585,582

Net Loss $ 4,733,266 $ 3,354,160 $2,091,476

Basic and diluted
net loss per share $ 0.17 $ 0.16 $ 0.11

Liquidities +
Accounts receivable $ 17,092,708 $ 13,489,125 $4,227,857

Assets $27,406,162 $22,437,616 $11,552,431

Long Term Liabilities $ 68,500 $ 3,689,477 $3,768,500
——————————————————————————-

Capital payments required and the various contractual commitments in coming fiscal years are as follows:

2004 2005 2006
——————————————————————————
$3,633,721 $83,176 $2,446

Amount $3,500,000 is composed of loans contracted under the Immigrant Investor Program. These loans are matched by investments whose value at maturity, September 2004, will be the equivalent of the amounts due.

SUMMARY OF QUARTERLY RESULTS

2004 2003 (Restated) 2002(Restated)
——————————————————————————-
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2

(000$
except
loss/share)
Revenues 335 176 559 158 282 173 270 408 133

Net Loss 1,579 1,542 1,275 1,386 1,255 1,110 1,029 521 994

Net Loss
perShare 0.05 0.05 0.04 0.05 0.04 0.04 0.05 0.02 0.05
(Basic and diluted)
—————————————————————————-

The Company’s revenues have come solely from investment income, income tax credits and government grants. Taken together, this item varies considerably from one quarter to the next, whereas on an annual basis, it has been relatively stable for the past two years.

CAPITAL RESOURCES:

Historically, the Company has funded its activities from several rounds of public and private financing and from various government subsidies. Since its inception in June 1998, the Company has raised $37 million from sale of its equity. For operations, the Company’s burn rate is on average of $700,000 approximately per month. The Company estimates its cash reserves are sufficient to fund operations for at least six quarters. Accordingly, the Company could require additional funding to achieve self-financing. The Company also regularly assesses acquisition possibilities that could require a potential source of additional funds.

The Company has a line of credit with which it can obtain advances up to a maximum of $500,000. Amounts had drawn on this line of credit, renewable on an annual basis, bear interest at the prime rate plus 1.5%. The Company’s accounts receivable and inventories are pledged as security on the line of credit, and the Company must satisfy certain financial ratios usually found in this type of loan. As at June 30, 2004, this line of credit was undrawn.

The Company entered into a non-refundable financial contribution
agreement with IQ Immigrants Investisseurs Inc., under which, upon attaining specific objectives, the Company can receive, based on its meeting specific objectives, a contribution totaling $1,000,000 payable in four (4) annual installments of $250,000 beginning in 2002. In 2002 and 2003, the Company received the first two installments, i.e. $500,000. The Company also qualified to the National Research Council of Canada’s with its “Process Optimization Bench” project that, once the Company has met certain objectives, will allow it to obtain a financial contribution of up to $150,000 until the end of 2004. As part of this project, the Company received, as of June 30, 2004, a cumulative amount of $71,000.

OFF-BALANCE SHEET TRANSACTIONS:
The Company made no off-balance Sheet transactions.

TRANSACTION WITH RELATED PARTIES:

The Company leases its premises from a company owned by the Company’s shareholders. Over the last two complete fiscal years, the Company has made the following related transactions, assesses at fair market value:

SIXMONTHS TWELVE MONTHS

04/06/30 03/06/30 2003 2002
—————————————————————————-
Rent $ 27,780 $ 27,780 $ 55,560 $ 53,352

Other
rent-related
expenses $39,703 $ 39,031 $ 83,034 $ 67,508
—————————————————————————-
$ 67,483 $ 66,811 $ 138,594 $ 120,860
——————————————————————————

CRITICAL ACCOUNTING ESTIMATES:

The Company financial statements are prepared in accordance with
generally accepted accounting principles in Canada (”G.A.A.P.”). The Company’s critical accounting policies include the use of estimates, revenue recognition, the recording of research and development expenses and the determination of the useful lives or fair value of goodwill and intangible assets. Some of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Discussed below are those policies that we believe are critical and require the use of complex judgment in their application.

Use of Estimates:

The preparation of financial statements, in accordance with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since the process for presenting financial information presupposes the use of estimates, actual results could differ from the information presented.

Intangible assets are the acquisition cost of a patent license and the acquisition cost of a technology (prototype) including all the related rights. Since 2004, the license, stated at acquisition cost, is amortized according to the straight-line method over the license’s useful life, 16 years. An amortization of $23,228 has been recorded during the second quarter of 2004. The value of the license will be periodically tested for impairment based on an estimate of undiscounted cash flows for the remaining amortization period. Any impairment loss revealed by this test would be carried to earnings for the period during which the loss occurred.

The acquired technology (prototype) is considered an intangible asset with an indefinite useful life. As a result, the technology will not be amortized, but beginning in 2004, it will be subject to an annual impairment test. The test will be conducted more frequently if events or circumstances indicate that the asset’s value could have been impaired. The impairment test consists of comparing the recovery fair value of the asset with its carrying value. Any excess of book value over fair value will be charged to earnings in the period in which the impairment is determined.

Revenues Recognition:

To comply with industry procedures, the Company builds a permanent inventory of some forty sterilizers to enable those clients who so wish to conduct a three month trial. It is possible that the initial sterilizers sold will require a longer trial period. The Company plans to follow the new Canadian accounting standards regarding recognition of its revenues. Accordingly, the revenues will not be recognized until the major inherent risks to ownership and future obligations regarding the delivered product are transferred, i.e. at the end of the trial period. Revenues from the sale of these products will also be recognized, after deduction for sales discounts. Amounts received from clients or our distribution partner before the revenues are recognized will be posted as Deferred Revenue.

CHANGES IN ACCOUNTING POLICIES:

Production Costs

Since the start of the 2004 fiscal year, in order to better reflects the
sterilizer production cost, the Company now allocates the costs of direct labor and direct production costs to the cost of units in stock. This accounting treatment has a negligible impact on the results for the second quarter of 2004.

Compensation and Other Stock-Based Payments:

Since January 1, 2004, the Company records stock-based compensation and other stock-based payments according to the fair value method as required by the new regulations implemented by the CICA. The compensation expense associated with this method of stock-based payment is therefore recognized as earnings. This new method is applied to 2002 and 2003 retroactively. The adoption of this new accounting standard will result in additional remuneration costs of $615,102 in 2004, $364,176 in 2005, $130,195 in 2006 and $16,974 in 2007. Conversely, these charges will have no impact on the use of the Company’s capital.

RISK FACTORS:

Risks Related to Operating Activities:

The Company’s activities entail certain risks and uncertainties inherent to the industry in which it operates. However, management has implemented a risk-reduction strategy that addresses:

· The Company’s ability to suitably protect its intellectual property.

· The Company’s ability to establish strategic alliances;

· The Company’s ability to compete with existing technologies marketed by industry’s major players;

· The Company’s ability to adequately market its products;

· The Company’s ability to develop alliances in order to constantly
increase the number of ozone-compatible instruments.

LIQUIDITY AND FINANCIAL RESOURCES:

Management believes that it will be able to raise the necessary long-term capital to achieve corporate objectives. However, the availability of these financial resources cannot be guaranteed.

VOLATILITY OF SHARE PRICE:

Company share prices are subject to volatility. Financial and scientific results that differ from analysts’ projections may lead to significant variations in the price of Company shares.

PROSPECTIVE STATEMENT:

This document contains certain prospective statements that reflect the Company’s current expectations concerning future activities, which include risks and uncertainties. The real results can differ considerably from those expected by the Company and which are described above. Investors are advised to consult the Company’s quarterly and annual reports. The Company is not obliged to update these prospective statements.

EXAMINATION OF THE FINANCIAL STATEMENTS:
External Controller has not audited the Financial Statements.

FINANCIAL STATEMENTS
Balance Sheets as at

JUNE 30, DECEMBER 31, JUNE 30,
2004 2003 2003
Restated Restated
(Note3) (Note3)
(Unaudited) (Audited) (Unaudited)
——————————————————————————-
CURRENT ASSETS

Cash and
Temporary
Investments $13,227,336 $ 15,640,237 $ 9,590,139

Accounts
Receivable $ 531,196 $ 1,452,471 $590,701

Inventories $2,682,578 $2,349,047 $1,598,831

Investments
Immigrant
Investor
Program $ 3,440,048 $ 3,365,516 –

Prepaid
Expenses $ 62,892 $ 35,223 $ 92,633
—————————————————————————-
$ 19,944,050 $ 22,842,494 $ 11,872,304

INVESTMENTS - - $ 3,289,749

DEFERRED
FINANCING
COSTS $ 27,105 $ 84,822 $ 143,496

PROPERTY,
PLANT AND
EQUIPMENT $ 531,017 $ 508,909 $ 515,871

INTANGIBLE
ASSETS $ 3,938,966 $ 3,969,937 $ 3,969,937
—————————————————————————-
$ 24,441,138 $ 27,406,162 $ 19,791,357
—————————————————————————-
CURRENT LIABILITIES

Accounts
Payable
And Accrued
Liabilities $ 865,256 $ 917,271 $ 631,187

Deferred Revenue $ 40,014 - -

Current
Portion of
Long-term Debt $ 3,500,000 $ 3,620,978 $ 202,898
————————————————————————-
$4,405,270 $ 4,538,249 834,085
LONG-TERM
DEBT $ 68,500 $68,500 $ 3,568,500
————————————————————————-
SHAREHOLDERS’S EQUITY

Share Capital $ 37,651,920 $ 37,651,920 $ 27,721,522

Contributed
Surplus $ 1,924,799 $ 1,636,299 $ 1,423,405

Deficit (19,609,351) (16,488,806) (13,756,155)
—————————————————————————-
19,967,368 22,799,413 15,388,772
—————————————————————————–
$ 24,441,138 $ 27,406,162 $ 19,791,357
—————————————————————————–

Statements of Loss
Periods ended June 30 (Unaudited)

SECOND QUARTER SIX MONTHS
2004 2003 2004 2003
Restated Restated
(Note 3) (Note 3)
——————————————————————————-
EXPENSES
Operating $ 149,130 $ 159,654 $ 353,783 $ 319,600

Research and
Development $ 366,813 $ 386,883 $ 744,675 $ 784,245

Marketing $ 492,109 $ 250,298 $ 996,980 $539,082

Administrative $ 889,946 $734,562 $1,517,085 $1,165,928

Financial $ 2,925 $ 5,219 $ 6,320 $11,101
——————————————————————————
OPERATING
LOSS $ 1,900,923 $1,536,616 $3,618,843 $ 2,819,956

OTHER
REVENUES $ 334,605 $ 281,691 $ 510,521 $ 454,835

INCOME TAX $ 12,223 - $12,223 –
——————————————————————————-
NET LOSS $1,578,541 $1,254,925 $3,120,545 $2,365,121
——————————————————————————-

LOSS PER SHARE
Basic $ 0.05 $ 0.04 $ 0.10 $ 0.08
Diluted $ 0.05 $ 0.04 $ 0.10 $ 0.08

WEIGHTED AVERAGE NUMBER OF OUTSTANDING COMMON SHARES

Basic 31,400,295 28,028,443 31,400,295 27,992,236

Diluted 31,403,126 28,058,385 31,617,686 28,004,795
——————————————————————————-

Statements of Deficit
Periods ended June 30 (Unaudited)

SECOND QUARTER SIX MONTHS
2004 2003 2004 2003
Restated Restated
(Note 3) (Note 3)

——————————————————————————-
Balance,
Beginning
of Period $18,030,810 $12,483,989 $ 16,174,524 $11,320,954

Recovery due to
the Change in the
Accounting Policies
concerning the
Stock Options Plan - - 314,282 21,644
——————————————————————————
18,030,810 12,483,989 16,488,806 11,342,598

Issue Expenses of
Share Capital - 17,241 - 48,436

Net Loss $1,578,541 $1,254,925 $3,120,545 $2,365,121
——————————————————————————

Balance, End
of Period $ 19,609,351 $ 13,756,155 $ 19,609,351 $ 13,756,155
——————————————————————————-

Statements of Contributed Surplus
Periods ended June 30 (Unaudited)

SECOND QUARTER SIX MONTHS
2004 2003 2004 2003
Restated Restated
(Note 3) (Note3)
————————————————————————-
Balance,
Beginning
of Period $1,761,468 $ 1,343,661 $1,322,017 $ 1,305,724

Recovery
due to the
Change in the
Accounting Policies
concerning the
Stock Options Plan - - $314,282 $21,644
————————————————————————-
$1,761,468 $1,343,661 $1,636,299 $1,327,368

Warrants issued
In the Public
Offering - - - 16,293

Stock-based
Compensation 163,331 79,744 288,500 79,744
—————————————————————————–
Balance, End
of Period $1,924,799 $ 1,423,405 $ 1,924,799 $ 1,423,405
——————————————————————————

Statements of Cash Flows
Periods ended June 30 (Unaudited)

SECOND QUARTER SIX MONTHS
2004 2003 2004 2003
Restated Restated
(Note 3) (Note3)
————————————————————————-
OPERATING ACTIVITIES
Net Loss $1,578,541 $1,254,925 $3,120,545 $ 2,365,121

Adjustment for:
Depreciation and
Amortization of
Property, Plant
And Equipment $46,585 $49,142 $89,790 $96,311

Depreciation and
Amortization of
the License $23,228 - $30,971 –

Depreciation and
Amortization of
Deferred Financing
Costs $29,018 $29,017 $57,717 $57,718

Stock-based
Compensation $163,331 $79,744 $288,500 $79,744

Gain on Sale of
Property, Plant
and Equipment - - - 193
——————————————————————————
1,316,379 1,097,022 2,653,567 2,131,541

Change in Non-Cash
Operating Working
Capital Items 157,611 748,844 400,167 1,423,992
—————————————————————————–

CASH FLOW APPLIED
TO OPERATING
ACTIVITIES 1,473,990 1,845,866 3,053,734 3, 555,533
——————————————————————————-
INVESTING ACTIVITIES

Temporary
Investments 2,439,254 631,661 7,137,068 8,772,512

Acquisition of
Property, Plant
and Equipment 43,721 31,970 111,898 108,876

Increase in the Value
of Investments –
Immigrant Investor
Program 37,472 37,472 74,532 74,533

Sale of Property,
Plant and Equipment - - - 14,500
——————————————————————————-

CASH FLOW APPLIED
TO INVESTING
ACTIVITIES 2,520,447 562,219 6,950,638 8,603,603
——————————————————————————-
FINANCING ACTIVITIES

Warrants - - - 16,293

Repayment of
Long-Term Debt 105,244 141,667 120,978 183,333

Share Issue - - 948,241 418,195

Share Issue Expenses - 17,241 - 48,436
——————————————————————————
CASH FLOW FROM
FINANCING
ACTIVITIES 105,244 158,908 827,263 202,719
——————————————————————————-
INCREASE IN CASH AND
CASH EQUIVALENTS 4,099,681 1,442,555 4,724,167 5,250,789
——————————————————————————-
CASH AND CASH
EQUIVALENTS,
BEGINNING
OF PERIOD 14,887,763 11,032,694 6,063,915 4,339,350
——————————————————————————-
CASH AND CASH
EQUIVALENTS, END
OF PERIOD $10,788,082 $9,590,139 $10,788,082 $9,590,139
——————————————————————————-

Notes to the Financial Statements:

1. The Unaudited financial statements are prepared in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. The Unaudited financial statements are consistent with the policies outlined in the Company’s audited financial statements for the year ended December 31, 2003. The interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003. Certain of the prior periods comparative amounts have been reclassified to conform to the current year’s presentation.

2. Accounting Policies

Intangible Assets

Intangible assets are the acquisition cost of a patent license and the acquisition cost of a technology (prototype) including all the related rights. The license, stated at acquisition cost, is amortized according to the straight-line method over the license’s useful life, 16 years. The value of the license will be periodically tested for impairment based on an estimate of undiscounted cash flows for the remaining amortization period. Any impairment loss revealed by this test would be carried to earnings for the period during which the loss occurred. The acquired technology (prototype) is considered an intangible asset with an indefinite useful life. As a result, the technology will not be amortized, but will be subject to an annual impairment test. The test will be conducted more frequently if events or circumstances indicate that the asset’s value could have been impaired. The impairment test consists of comparing the recovery fair value of the asset with its carrying value. Any excess of book value over fair value will be charged to earnings in the period in which the impairment is determined.

3. Change in Accounting Policies

Stock-Based Compensation and Other Stock-Based Payments

Since January 1, 2004, the Company has recorded stock-based compensation and other stock-based payments according to the fair value method as required by the new regulation issued by the CICA. The compensation expense associated with this method of stock-based payment is therefore recognized as earnings. This new guidance is applied retroactively and contains the recovery of 2002 and 2003 data. It has no effect on the previous years before 2002. The fiscal effect on the results is represented by an increase of the administration expenses of $288,500 for the six-month period ended on June 30, 2004. ($79,744 for the six-month period ended on June 30, 2003). On the balance sheets, the effect of this modification is represented by an increase of the deficit and the contributed surplus of $314,282 on June 30, 2004 ($101,388 as of June 30, 2003).

4. Share Issues

JUNE 30, DECEMBER 31,
ISSUED 2004 2003

——————————————————————————
31,400,295 common shares (31,400,295 as of December 31, 2003)
$ 37,651,920 $ 37,651,920
——————————————————————————

On February 17, 2004, the Company has granted 40,000 stock options to an employee and to a director. Each option, which vests over 3 years, entitles the holder to subscribe to one common share of the Company at a price of $2.75 until February 16, 2014. None of these options has been exercised as at June 30, 2004. On March 24, 2004, the Company has granted 20,000 stock options to an employee. Each option, which vests over 3 years, entitles the holder to subscribe to one common share of the Company at a price of $1.85 until March 23, 2014. None of these options has been exercised as at June 30, 2004. On May 11, 2004, the Company has granted 259,000 stock options to employee and managers. Each option, which vests over 3 years, entitles the holder to subscribe to one common share of the Company at a price of $1.73 until May 10, 2014. None of these options has been exercised as at June 30, 2004. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. A practice, which significantly differs from the Company’s stock option awards. In addition, option valuation models require the input of highly subjected assumptions including the expected stock price volatility. Any changes in the subjective input assumptions can materially affect the fair value estimate. The weighted average fair value of the options at the grant date is estimated using the Black-Scholes option-pricing model under the following weighted average assumptions: 2004

Risk Free Interest Rate 4.91 %
Expected Volatility 54.12 %
Life 10 years
Expected Dividend Yield 0 %
Weighted Average of Fair Value at Grant Date $1.32

5. Dilutive Items:

SECOND QUARTER SIX MONTHS
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
——————————————————————————-
Warrants
Outstanding
at the
Beginning of the
Period / Exercise 624,202 $ 2.09 624,202 $ 2.09

Granted - - - -

Exercised - - - -

Expired (163,726) 2.00 (163,726) 2.00
——————————————————————————
460,476 $ 2.12 460,476 $ 2.12
——————————————————————————

Stock Options

Outstanding at the
Beginning of the
Period / Exercise 1,499,668 $ 2.04 1,469,668 $ 1.98

Granted 259,000 1.73 319,000 1.87

Exercised - - - -

Expired /
Cancelled (15,000) 1.70 (45,000) 1.70
—————————————————————————–
1,743,668 $ 2.00 1,743,668 $ 1.96
—————————————————————————–
Outstanding at
the End of the
Period / Exercise 2,204,144 $ 2.03 2,204,144 $ 2.00
—————————————————————————–
Exercisable at
the End of the
Period / Exercise 1,172,031 1,172,031
————————————————————————-

6. Financial Instruments:

Interest Rate Risk

Long-term debt bears interest at fixed rates. The Company expects to reimburse this debt fully at maturity. As a result, the risk related to cash flow is minimal. In addition, the long-term debt is made up mainly of loans related to the Immigrant Investors Program, of an amount of $3,500,000, matching the investments that, upon maturity, will be equal to the amounts due.