10-Q 1 t302184.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____________ TO ________________ COMMISSION FILE NUMBER __________ THINKPATH INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) ONTARIO 52-209027 -------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 201 WESTCREEK BOULEVARD BRAMPTON, ONTARIO L6T 5S6 --------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (905) 460-3040 ------------------- (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_| INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT) YES | | NO |X| AS OF NOVEMBER 14, 2005 THERE WERE 4,737,535 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES | | NO |X| THINKPATH INC. SEPTEMBER 30, 2005 QUARTERLY REPORT ON FORM 10-QSB TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Number Item 1. Financial Statements Interim Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004...............................................F-1,F-2 Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004............................F-3 Interim Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2005 and the year ended December 31, 2004...................................................F-5 Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004...................................F-6 Notes to Interim Consolidated Financial Statements........F-7 thru F-26 Item 2. Management's Discussion and Analysis or Plan of Operation............ 3 Item 3. Controls and Procedures..............................................16 PART II - OTHER INFORMATION Item 1. Legal Proceedings ...................................................17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........18 Item 3. Defaults Upon Senior Securities .....................................18 Item 4. Submission of Matters to a Vote of Security Holders .................18 Item 5. Other Information ...................................................18 Item 6. Exhibits and Reports on Form 8-K ....................................19 POTENTIAL MODIFICATIONS TO DISCLOSURE AND ACCOUNTING - we are currently responding to comments provided by the staff of the Securities and Exchange Commission in connection with its review of our financial statements and reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These comments affect our past filings and may affect this filing. The most recent comments relate to our accounting for certain convertible debt that has warrants, options and related registration rights and the application of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." We intend to respond to these comments and have engaged accounting professionals to assist in resolving these issues. Depending on the outcome of our discussions with the Securities and Exchange Commission, we may be required to amend our filings under the Exchange Act. -2- ITEM 1. FINANCIAL STATEMENTS THINKPATH INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2005 (UNAUDITED) (AMOUNTS EXPRESSED IN US DOLLARS) F-1 THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 30-SEP-05 31-DEC-04 --------- --------- $ $ ASSETS CURRENT ASSETS Cash 166,242 180,121 Accounts receivable 2,755,185 2,243,513 Prepaid expenses 175,342 88,403 --------- --------- 3,096,769 2,512,037 PROPERTY AND EQUIPMENT 504,733 494,003 GOODWILL 3,967,243 3,748,732 OTHER ASSETS 339,792 61,562 --------- --------- 7,908,537 6,816,334 ========= ========= The accompanying notes are an integral part of these interim consolidated financial statements. F-2 THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 30-SEP-05 31-DEC-04 --------- --------- $ $ LIABILITIES CURRENT LIABILITIES Receivable Discount Facility -- 723,995 Laurus Funds 1,386,008 -- Accounts payable 1,192,707 1,257,799 Current portion of long-term debt 117,165 85,099 12% Convertible Debentures -- 566,653 ----------- ----------- 2,695,880 2,633,546 LONG-TERM DEBT 113,449 182,837 ----------- ----------- 2,809,329 2,816,383 =========== =========== COMMITMENTS AND CONTINGENCIES (NOTE 21) STOCKHOLDERS' EQUITY CAPITAL STOCK 52,139,370 49,531,299 DEFICIT (45,704,887) (44,204,935) ACCUMULATED OTHER COMPREHENSIVE LOSS (1,335,275) (1,326,413) ----------- ----------- 5,099,208 3,999,951 ----------- ----------- 7,908,537 6,816,334 =========== =========== The accompanying notes are an integral part of these interim consolidated financial statements. F-3 THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS)

* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 The accompanying notes are an integral part of these interim consolidated financial statements. F-4 THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND THE YEAR ENDED DECEMBER 2004 (AMOUNTS EXPRESSED IN US DOLLARS)

* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 The accompanying notes are an integral part of these interim consolidated financial statements. F-5 THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 2005 2004 ---- ---- $ $ Net loss (1,499,952) (2,667,350) ---------- ---------- Adjustments to reconcile net loss to net cash used in operating activities: Amortization 261,512 432,363 Beneficial conversion on issuance of convertible debt 419,583 2,507,880 Interest on 12% senior secured convertible debentures 21,448 29,380 Write off unamortized debt discount 729,422 -- Write down of property and equipment 3,851 -- Increase in accounts receivable (501,299) (369,870) Increase in prepaid expenses (89,562) (109,203) Decrease in accounts payable (110,590) (1,014,369) Debt forgiveness (66,150) -- Accounts payable settled with common stock 240,000 -- Common stock and warrants issued for services 98,057 175,336 ---------- ---------- Net cash used in operating activities (493,680) (1,015,833) ---------- ---------- Purchase of property and equipment (211,000) (173,598) ---------- ---------- Net cash used in investing activities (211,000) (173,598) ---------- ---------- Repayment of receivable discount facility (722,331) (512,269) Proceeds from convertible financing facility 3,129,006 -- Deferred financing costs incurred (230,792) -- Repayment of notes payable -- (6,444) Repayment of long-term debt (97,624) (60,442) Repayment of convertible debt (1,162,700) -- Repurchase of shares for cancellation (123,110) -- Proceeds from issuance of common stock -- 229,121 Proceeds from issuance of debentures and warrants -- 1,175,000 ---------- ---------- Net cash provided by financing activities 792,449 824,966 ---------- ---------- Effect of foreign currency exchange rate changes (101,648) 24,707 ---------- ---------- Net decrease in cash (13,879) (339,758) Cash Beginning of period 180,121 483,443 ---------- ---------- End of period 166,242 143,685 ========== ========== Interest paid 278,037 304,887 ========== ========== Income taxes paid 95,348 15,906 ========== ========== The accompanying notes are an integral part of these interim consolidated financial statements. F-6 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 1. MANAGEMENT'S INTENTIONS AND GOING CONCERN Certain principal conditions and events are prevalent which indicate that there could be substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. These conditions and events include significant recurring operating losses and working capital deficiencies. At September 30, 2005, the Company had a deficit of $45,704,887 and has suffered recurring losses from operations. With insufficient working capital from operations, the Company's primary source of cash is a $3,500,000 convertible financing facility with Laurus Master Fund, Ltd. ("Laurus"). At September 30, 2005, the balance on the facility was $2,958,117. The convertible financing facility consists of a revolving line of credit based on 90% of eligible accounts receivable which matures on June 27, 2008 and bears interest at an annual rate equal to The Wall Street Journal prime rate plus 3%. The principal outstanding on the secured convertible note is convertible into common stock at a fixed conversion price ranging from 80% to 110% of the average closing price for the previous ten days, subject to certain conditions. As at November 14, 2005, management's plans to mitigate and alleviate its operating losses and working capital deficiencies include: a) Registration of the shares underlying the Laurus convertible financing facility, warrants and options to provide additional working capital; b) Continued focus on securing customers with high growth potential, such as those in the aerospace and defense industries; c) Compliment organic growth with the acquisition of profitable engineering companies over the next two years; and d) Continued expansion of the engineering service offerings in Ontario, Canada. Although there can be no assurances, it is anticipated that continued cash flow improvements will be sufficient to cover current operating costs and will permit payments to certain vendors and interest payments on debt. Despite its negative working capital and deficit, the Company believes that its management has developed a business plan that if successfully implemented could substantially improve the Company's operational results and financial condition. However, the Company can give no assurances that its current cash flows from operations, if any, borrowings available under its convertible financing facility with Laurus Master Fund, Ltd., and proceeds from the sale of securities, will be adequate to fund its expected operating and capital needs for the next twelve months. The adequacy of cash resources over the next twelve months is primarily dependent on its operating results, and the closing of new financing, all of which are subject to substantial uncertainties. Cash flows from operations for the next twelve months will be dependent, among other factors, upon the effect of the current economic slowdown on sales, the impact of the restructuring plan and management's ability to implement its business plan. The failure to return to profitability and optimize operating cash flows in the short term, and close alternate financing, could have a material adverse effect on the Company's liquidity position and capital resources. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Going Concern These consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities and commitments in the normal course of business. The application of the going concern concept is dependent on the Company's ability to generate sufficient working capital from operations and external investors. These consolidated financial statements do not give effect to any adjustments should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts differing from those reflected in the consolidated financial statements. Management plans to obtain sufficient working capital from operations and external financing to meet the Company's liabilities and commitments as they become payable over the next twelve months. There can be no assurance that management's plans will be successful. Failure to obtain sufficient working capital from operations and external financing will cause the Company to curtail operations. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. b) Change of Name On June 6, 2001, the Company changed its name from Thinkpath.com Inc. to Thinkpath Inc. F-7 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) c) Principal Business Activities Thinkpath Inc. is an engineering services company which, along with its wholly-owned subsidiaries, Thinkpath US Inc. (formerly Cad Cam Inc.), Thinkpath Michigan Inc. (formerly Cad Cam of Michigan Inc.), Thinkpath Technical Services Inc. (formerly Cad Cam Technical Services Inc.) and TBM Technologies Inc., provides engineering, design, technical publications and staffing, services to enhance the resource performance of clients. In addition, the Company owns the following companies which are currently inactive: Systemsearch Consulting Services Inc., International Career Specialists Ltd., Microtech Professionals Inc., E-Wink Inc. (80%), Thinkpath Training Inc. (formerly ObjectArts Inc.), Thinkpath Training US Inc. (formerly ObjectArts US Inc.) and TidalBeach Inc. In 2002, the Company sold Njoyn Software Incorporated, a wholly-owned subsidiary. d) Basis of consolidated financial statement presentation The consolidated financial statements include the accounts of the Company and its controlled subsidiaries. The earnings of the subsidiaries are included from the date of acquisition for acquisitions accounted for using the purchase method. For subsidiaries acquired prior to June 30, 2001 and accounted for by the pooling of interest method, earnings have been included for all periods reported. All significant inter-company accounts and transactions have been eliminated. e) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts from and to banks, and any other highly liquid investments purchased with a maturity of three months or less. The carrying amounts approximates fair values because of the short maturity of those instruments. f) Other Financial Instruments The carrying amounts of the Company's other financial instruments approximate fair values because of the short maturity of these instruments or the current nature of interest rates borne by these instruments. g) Long-Term Financial Instruments The fair value of each of the Company's long-term financial assets and debt instruments is based on the amount of future cash flows associated with each instrument discounted using an estimate of what the Company's current borrowing rate for similar instruments of comparable maturity would be. h) Property and Equipment Property and equipment are recorded at cost and are amortized over the estimated useful lives of the assets principally using the declining balance method. The Company's policy is to record leases, which transfer substantially all benefits and risks incidental to ownership of property, as acquisition of property and equipment and to record the occurrences of corresponding obligations as long-term liabilities. Obligations under capital leases are reduced by rental payments net of imputed interest. i) Net Income (Loss) and Diluted Net Income (Loss) Per Weighted Average Common Stock Net income (Loss) per common stock is computed by dividing net income (loss) for the year by the weighted average number of common stock outstanding during the year. Diluted net income (loss) per common stock is computed by dividing net income (loss) for the year by the weighted average number of common stock outstanding during the year, assuming that all convertible preferred stock, stock options and warrants as described in note 14 were converted or exercised. Stock conversions, stock options and warrants which are anti-dilutive are not included in the calculation of diluted net income (loss) per weighted average common stock. j) Revenue The Company recognizes revenue under engineering service contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collection of the contract price is considered probable and can be reasonably estimated. Revenue is earned under time-and-materials, fixed-price and cost-plus contracts. F-8 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) The Company recognizes revenue on time-and-materials contracts to the extent of billable rates times hours delivered, plus expenses incurred. For fixed price contracts within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue is recognized on the percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services, as appropriate. For fixed price-completion contracts that are not within the scope of SOP 81-1, revenue is generally recognized as earned according to contract terms as the service is provided. The Company provides its customers with a number of different services that are generally documented through separate negotiated task orders that detail the services to be provided and the compensation for these services. Services rendered under each task order represent an independent earnings process and are not dependent on any other service or product sold. The Company recognizes revenue on cost-plus contracts to the extent of allowable costs incurred plus a proportionate amount of the fee earned, which may be fixed or performance-based. The Company considers fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract, which generally corresponds to the timing of contractual billings. The Company records provisions for estimated losses on uncompleted contracts in the period in which those losses are identified. The Company considers performance-based fees under any contract type to be earned only when it can demonstrate satisfaction of a specific performance goal or it receive contractual notification from a customer that the fee has been earned. In all cases, the Company recognizes revenue only when pervasive evidence of an arrangement exists services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured. Contract revenue recognition inherently involves estimation. From time to time, facts develop that requires the Company to revise the total estimated costs or revenues expected. In most cases, these changes relate to changes in the contractual scope of the work, and do not significantly impact the expected profit rate on a contract. The Company records the cumulative effects of any revisions to the estimated total costs and revenues in the period in which the facts become known. k) Goodwill In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company began applying the new accounting rules effective January 1, 2002. As at December 31, 2004, Thinkpath completed SFAS No.142 impairment test and concluded that there was no impairment of recorded goodwill, as the fair value of its reporting units exceeded their carrying amount. On an ongoing basis, absent any impairment indicators, the Company will perform a goodwill impairment test as of the end of the fourth quarter of every year. l) Income Taxes The Company accounts for income tax under the provision of SFAS No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. Deferred tax assets may be reduced, if deemed necessary based on a judgmental assessment of available evidence, by a valuation allowance for the amount of any tax benefits which are more likely, based on current circumstances, not expected to be realized. m) Foreign Currency The Company is a foreign private issuer and maintains its books and records of its Canadian companies in Canadian dollars (their functional currency). The financial statements of the Canadian companies are converted to US dollars as the Company has elected to report in US dollars consistent with Regulation S-X, Rule 3-20. The translation method used is the current rate method which is the method mandated by SFAS No. 52 where the functional currency is the foreign currency. Under the current method all assets and liabilities are translated at the current rate, stockholders' equity accounts are translated at historical rates and revenues and expenses are translated at average rates for the year. Due to the fact that items in the financial statements are being translated at different rates according to their nature, a translation adjustment is created. This translation adjustment has been included in accumulated other comprehensive income. Gains and losses on foreign currency transactions are included in financial expenses. F-9 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) n) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could be material. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become known. o) Long-Lived Assets On January 1, 1996, the Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121 requires that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management used its best estimate of the undiscounted cash flows to evaluate the carrying amount and have reflected the impairment. In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144, effective January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's results of operations or financial condition. p) Comprehensive Income In 1999, the Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive Income". This standard requires companies to disclose comprehensive income in their financial statements. In addition to items included in net income, comprehensive income includes items currently charged or credited directly to stockholders' equity, such as the changes in unrealized appreciation (depreciation) of securities and foreign currency translation adjustments. q) Accounting for Stock-Based Compensation In December 1995, SFAS No. 123, "Accounting for Stock-Based Compensation", was issued. It introduced the use of a fair value-based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize stock-based compensation expenses to employees based on the new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules continued in Accounting Principles Board Option No. 25, Accounting for stock issued to employees. However, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 31, 1995. The Company has adopted the disclosure provisions of SFAS No. 123. SFAS No. 123 was amended by SFAS No. 148 which requires more prominent disclosure of stock-based compensation. r) Leases Leases are classified as either capital or operating. Those leases that transfer substantially all the benefits and risks of ownership of property to the Company are accounted for as capital leases. All other leases are accounted for as operating leases. Capital leases are accounted for as assets and are fully amortized on a straight-line basis over the lesser of the period of expected use of the assets or the lease term. Commitments to repay the principal amounts arising under capital lease obligations are included in current liabilities to the extent that the amount is repayable within one year, otherwise the principal is included in long term debt obligations. The capitalized lease obligation reflects the present value of future lease payments. The financing element of the lease payments is charged to interest expense in the consolidated statement of operations over the term of the lease. Operating lease costs are charged to administrative expense in the consolidated statement of operations on a straight-line basis. s) Investments in Non-Related Companies The Company records its investments in companies in which it holds a 20% or more interest and in which the Company can exercise significant influence over the investee's operating and financial policies on the equity basis. The Company records its investment in companies in which it holds less than 20% interest or in which the Company has a 20% or greater interest but the Company is unable to exercise significant influence at fair market value. Changes in fair market value are adjusted in comprehensive income, unless the impairments are of a permanent nature, in which case the adjustments are recorded in earnings. F-10 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) t) Recent Pronouncements In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 with certain exceptions. The Company does not believe that the adoption of SFAS No. 149 will have a material impact, if any, on its results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement specifies that certain instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 goes into effect at the beginning of the first interim period beginning after June 15, 2003. For contracts that were created or modified before May 31, 2003 and still exist at the beginning of the first interim period beginning after June 30, 2003, entities should record the transition to SFAS No. 150 by reporting the cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits entities from restating financial statements for earlier years presented. The Company does not believe that the adoption of SFAS No. 150 will have a material impact, if any, on its results of operations or financial position. In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106". This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS No. 132 (Revised) will retain and revise the disclosure requirements contained in the original SFAS No. 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS No. 132 (Revised) generally is effective for fiscal years ending after December 15, 2003. The Company does not believe that the adoption of SFAS No. 132 (Revised) will have a material impact, if any, on its results of operations or financial position. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43". This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 151 will have a material impact, if any, on its results of operations or financial position as it does not have inventory. In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67", which references the financial accounting and reporting guidance for real estate time-sharing transactions in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions". SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. The Company does not believe that the adoption of SFAS No. 152 will have a material impact, if any, on its results of operations or financial position. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29", effective for nonmonetary asset exchanges occurring in the fiscal year beginning January 1, 2006. This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. The Company does not believe that the adoption of SFAS No. 153 will have an impact, if any, on its results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based Payment". This statement requires employers to expense costs related to share-based payment transactions with employees. With limited exceptions, SFAS No. 123 (Revised) requires that the fair value of share-based payments to employees be expensed over the period service is received. SFAS No. 123 (Revised) becomes effective for annual reporting periods that begin after December 15, 2005.. The Company intends to adopt this standard using the modified retrospective method of transition. This method requires that issued financial statements be restated based on the amounts previously calculated and reported in the pro forma footnote disclosures required by SFAS No. 123. SFAS No. 123 (Revised) allows the use of both closed form models (e.g., Black-Scholes Model) and open form models (e.g., lattice models) to measure the fair value of the share-based payment as long as that model is capable of incorporating all of the substantive characteristics unique to share-based awards. In accordance with the transition provisions of SFAS No. 123 (Revised), the expense attributable to an award will be measured in accordance with the company's measurement model at that award's date of grant. The Company believes the pro forma disclosures in Note 3 (c) provide an appropriate short-term indicator of the level of expense that will be recognized in accordance with SFAS No. 123 (Revised). However, the total expense recorded in future periods will depend on several variables, including the number of shared-based awards that vest and the fair value of those vested awards. F-11 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations". FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application of interim financial information is permitted but is not required. The Company does not believe that the adoption of FIN 47 will have an impact, if any, on its results of operations or financial position. In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections", applying to all voluntary accounting principle changes as well as the accounting for and reporting of such changes. SFAS No. 154 requires voluntary changes in accounting principle be retrospectively applied to financial statements from previous periods unless such application is impracticable. SFAS No. 154 requires that changes in depreciation, amortization, or depletion methods for long-lived, non-financial assets must be accounted for as a change in accounting estimate due to a change in accounting principle. By enhancing the consistency of financial information between periods, the requirements of FASB 154 improves financial reporting. FASB 154 replaces APB Opinion No. 20 and FASB 3. FASB 154 carries forward many provisions of Opinion 20 and FASB 3 without change including those provisions related to reporting a change in accounting estimate, a change in reporting entity, correction of an error and reporting accounting changes in interim financial statements. FASB 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. u) Advertising Costs Advertising costs are expensed as incurred. 3. STOCK OPTION PLANS

F-12 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) c) Pro-forma net income At September 30, 2005, the Company has five stock-based employee compensation plans, which are described more fully in Note 14(d). The Company accounts for those plans under the recognition and measurement principles of APB Opinion No.25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123 Accounting for Stock-Based Compensation, to stock-based employee compensation. SFAS No.123 was amended by SFAS No. 148 which requires more prominent disclosure of stock based compensation.

d) Black Scholes Assumptions The fair value of each option grant used for purposes of estimating the pro forma amounts summarized above is estimated on the date of grant using the Black-Scholes option price model with the weighted average assumptions shown in the following table: 2005 Grants 2001 Grants ----------- ----------- Risk free interest rates 3.9% 4.76% Volatility 100% 100% factors Weighted average expected 10 years 4.90 years life Weighted average fair value per $0.50 $3,700.00 share Expected -- -- dividends During the nine months ended September 30, 2005, the Company granted Laurus Master Fund, Ltd. an option to purchase up to 379,572* shares of its common stock, no par value per share, at an exercise price of $.0001 per share. The options are exercisable at any time and in any amount for a period of ten years from the date of issuance. There have been no other option grants since 2001. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 F-13 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 4. ACQUISITIONS On January 17, 2005, the Company acquired TBM Technologies Inc., an Ontario Corporation which provides design engineering services. Pursuant to the Share Purchase Agreement, the Company purchased TBM for approximately $246,600 payable in shares of the Company's common stock, no par value. The Share Purchase Agreement also provided for price protection for the vendors for a period of two years from closing. In the event that the vendors seek to sell their shares in an open market transaction within the two years following closing and the bid price is less than the price of the shares on issuance, the Company will be obligated to issue additional shares of unregistered common stock with a value equal to the difference up to a maximum of $246,600. The acquisition was accounted for by the purchase method and the operations have been included in the consolidated operations from January 17, 2005. The net acquired assets have been valued as follows: Current assets $ 23,616 Property and equipment 11,240 Other assets 100,900 Liabilities assumed (107,667) Consideration 246,600 --------- Goodwill $ 218,511 ========= 5. ACCOUNTS RECEIVABLE

6. PROPERTY AND EQUIPMENT

Amortization of property and equipment for the nine months ended September 30, 2005 amounted to $203,845 including amortization of assets under capital lease of $36,161. Amortization of property and equipment for the year ended December 31, 2004 amounted to $568,069 including amortization of assets under capital lease of $51,278. F-14 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 7. GOODWILL Goodwill is the excess of cost over the value of assets acquired over liabilities assumed in the purchase of the subsidiaries. Goodwill has been allocated to reporting units as follows:

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". This statement requires the Company to evaluate the carrying value of goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions reflect management's best estimates and may differ from actual results. If different assumptions and estimates are used, carrying values could be adversely impacted, resulting in write downs that could adversely affect the Company's earnings. At December 31, 2004 and 2003, the Company performed its annual impairment test for goodwill and determined that no adjustment to the carrying value of goodwill was needed. On an ongoing basis, absent any impairment indicators, the Company expects to perform a goodwill impairment test as of the end of the fourth quarter of every year. 8. OTHER ASSETS

Included in Other Assets are deferred financing costs related to the Laurus Convertible Financing Facility to be amortized over three years beginning July 1, 2005. Amortization of other assets amounted to $57,667 for the nine months ended September 30, 2005 and nil for the year ended December 31, 2004. 9. RECEIVABLE DISCOUNT FACILITY i) September 30, 2005 On June 27, 2005, the Company paid down its receivable discount facility with Morrison Financial Services Limited in the amount of $1,073,468. The facility allowed the Company to borrow up to 75% of the value of qualified accounts receivables to a maximum of $1,500,000, and was subject to interest at 24% per annum. ii) December 31, 2004 At December 31, 2004, the Company had a receivable discount facility in the amount of $723,995 with Morrison Financial Services Limited which allowed the Company to borrow up to 75% of the value of qualified accounts receivables to a maximum of $1,500,000, bearing interest at 30% per annum. F-15 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 10. BANK INDEBTEDNESS On April 19, 2005, the Company paid down its revolving line of credit with the Royal Bank of Canada in the amount of $52,480. This liability was assumed by the Company on January 17, 2005 as a result of the acquisition of TBM Technologies Inc. The line was subject to interest at 7% per annum. 11. CONVERTIBLE DEBENTURE During the year ended December 31, 2004, the Company sold $2,050,000 in convertible debentures with 1,740,485* warrants to various investors. The debentures will become due twelve months from the date of issuance at various conversion prices and the warrants are exercisable at any time and in any amount for a period of seven years from closing at various purchase prices as outlined below:

* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 ** Conversion price is the lesser of $87.50 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. *** Conversion price is the lesser of $1.00 or 80% of the average of the three lowest prices on three separate trading days during the twenty-day trading period prior to conversion. The proceeds of $2,050,000 received by the Company were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $1,319,000. At December 31, 2004, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $3,654,507 which was credited to paid in capital and charged to earnings as interest expense. At March 31, 2005, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $235,833 which was credited to paid in capital and charged to earnings as interest expense. On June 27, 2005, the Company paid off the principal balance of the 12% Senior Secured Convertible Debentures in the amount of $1,162,700. The accrued interest of $66,150 was forgiven and a total of 626,384* common shares held by the debenture holders were repurchased for cancellation for $123,110. In addition a total of 1,671,189 warrants held by the debenture holders were cancelled. The unamortized debt discount remaining on the convertible debentures of $729,422 was expensed as interest. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 12. CONVERTIBLE FINANCING FACILITY On June 27, 2005, the Company closed a $3,500,000 convertible financing facility with Laurus Master Fund, Ltd. The facility consists of a revolving line of credit based on 90% of eligible accounts receivable which matures on June 27, 2008 and bears interest at an annual rate equal to The Wall Street Journal prime rate plus 3%. At closing, the Company received $3,100,000 in proceeds from the facility based on its eligible accounts receivable. The principal outstanding on the secured convertible note is convertible into common stock at a fixed conversion price ranging from 80% to 110% of the average closing price for the previous ten days, subject to certain conditions. F-16 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) In connection with the financing, the Company issued warrants to purchase up to 2,100,000* shares of its common stock with 1,050,000* at an exercise price of $0.55 per share and 1,050,000 at an exercise price of $0.60 per share. The warrants are exercisable at any time and in any amount for six years from the date of closing. The Company also issued an option to purchase up to 379,572* shares of its common stock, no par value per share, at an exercise price of $.0001 per share. The option is exercisable at any time and in any amount for a period of ten years from the date of issuance. The proceeds of $3,100,000 received by the Company were allocated between the options, warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the options and the warrants in the amount of $766,002. This unamortized debt discount will be amortized over the three year term of the facility. At September 30, 2005, the Company has amortized $65,758 in debt discount as interest expense. The beneficial conversion feature was determined to be $953,739 which was also credited to paid in capital and will be amortized over the three year term of the facility. At September 30, 2005, the Company has amortized $81,874 in beneficial conversion feature as interest expense. At September 30, 2005, the balance on the facility was as follows: Principal balance $2,958,117 Unamortized Beneficial Conversion Feature (871,865) Unamortized Debt Discount (700,244) ---------- Total $1,386,008 ========== * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 13. LONG-TERM DEBT i) September 30, 2005 At September 30, 2005, the Company had a loan balance of $189,874 with Terry Lyons with monthly payments of $10,000. The loan bears interest at US prime plus 14%. ii) December 31, 2004 Effective March 25, 2004, the Company amended its loan agreement with Terry Lyons. The balance of accrued interest was added to the original principal amount of $259,356 for a new principal balance of $299,768. Monthly payments of $10,000 began April 5, 2004 until the full amount of the note, including interest is paid in full. The interest rate was reduced from 30% per annum to US prime plus 14%. a) Included therein:

F-17 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) b) Future principal payments obligations as at September 30, 2005, were as follows: 2005 27,593 2006 129,344 2007 73,677 2008 -- 2009 -- -------- $230,614 ======== c) Interest expense related to long-term debt was $42,180 for the nine months ended September 30, 2005 and $69,037 for the year ended December 31, 2004. 14. CAPITAL STOCK a) Authorized Unlimited Common stock, no par value 1,000,000 Preferred stock, issuable in series, rights to be determined by the Board of Directors Effective June 29, 2005, the Company implemented a one-for-five thousand reverse split of its common stock. At the time of the reverse stock split, each five thousand shares of the Company's issued and outstanding common stock were combined into one share of its common stock. The reverse stock split did not change the number of authorized shares of the Company's common stock. The one-for-five thousand reverse split was approved by the Company's shareholders at its Annual General Meeting on April 22, 2005, and subsequently approved by its Board of Directors. All common share and per share amounts throughout these financial statements have been adjusted to give effect to this reverse stock split. b) Issued During the year ended December 31, 2004, the Company issued 50,039* shares of common stock, no par value per share, in consideration of consulting services in the amount of $175,336. This includes 50,000* shares of common stock, no par value per share, issued to Jeffrey Flannery pursuant to a consulting agreement with the Company dated May 26, 2004 for the provision of marketing and business development consulting services for a period of one year. During the year ended December 31, 2004, the Company issued 75,411* shares of its common stock to the 12% Senior Secured Convertible Debenture Holders on the exercise of warrants. During the year ended December 31, 2004, the Company issued 2,047,594* shares of its common stock to the 12% Senior Secured Convertible Debenture Holders upon the conversion of $1,025,400 principal balance and accrued interest. On January 17, 2005, the Company issued 246,450* shares of its common stock, no par value per share, to the Vendors of TBM Technologies Inc. for a total consideration of $246,600. During the six months ended June 30, 2005, the Company issued 1,366,495* shares of its common stock to the 12% Senior Secured Convertible Debenture holders upon the conversion of $321,900 principal balance and accrued interest. On June 27, 2005, the Company repurchased for cancellation 626,384* common shares held by the debenture holders for $123,110, representing approximately a sixty per cent discount to market value. On July 1, 2005 the Company issued 294,118* shares of its common stock, no par value per share, to Declan French in consideration of $100,000 extra compensation as approved by the shareholders at the Annual General Meeting on April 22, 2005. The shares were issued based on the closing price of $0.34 on July 1, 2005. The extra compensation was awarded in consideration of Mr. French's personal guarantees and indemnification of certain of the Company's debts as well as his acceptance of shares in lieu of cash for prior bonuses and debt payments. Also, on July 1, 2005, the Company issued 636,363* shares of its common stock, no par value per share, to Declan French in consideration of $140,000 in accrued bonuses from the years 2003 and 2004 as per his employment agreement. The shares were issued based on the lowest intraday price of $0.22 on July 1, 2005. On July 7, 2005, the Company entered into an agreement with Financial Media Relations, LLC, a California company, for the purpose of developing and implementing a marketing and investor relations program and the provision of business development and strategic advisory services. The term of the agreement is twelve months at a cost of $20,500 on execution and $12,500 per month thereafter. In addition, the Company issued 100,000* shares of common stock, no par value per share, and warrants to purchase 500,000* shares of common stock exercisable at $0.41 per share and 100,000* shares of common stock exercisable at $1.20 per share. The warrants shall be exercisable for a period of two years, shall vest immediately and be deemed earned upon issuance, and all warrants shall have "piggyback" registration rights. Using the Black Scholes pricing model, the fair value of the warrants was determined to be $57,057 and is included in selling expenses. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 F-18 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) c) Warrants For each of the periods presented, the following warrants for the purchase of one common share per warrant (as adjusted for 1:5,000 reverse stock split on June 29, 2005) at the following prices per common share and expiry dates were outstanding:

A summary of changes to number of issued warrants is as follows: Outstanding at December 31, 2004 1,811,389 Issued 2,700,000 Cancelled (1,671,189) Exercised -- Expired (339) ---------- Outstanding at September 30, 2005 2,839,861* ---------- On January 8, 2004, the Company issued 286* warrants to holders of the 12% Senior Secured Convertible Debentures which are exercisable at any time and in any amount for seven years from the date of closing at a purchase price of $87.50 per share. On April 7, 2004 all of these warrants were repriced from $87.50 to $2.00 per share. On March 25, 2004, the Company issued 184,800* warrants to Bristol Investment Fund, Ltd. which are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $2.09 per share. On June 18, 2004, all of these warrants were repriced from $2.09 to $1.25 per share. On November 12, 2004, 168,000 of these warrants were repriced from $1.25 to $1.00 per share. On March 29, 2004 the Company issued 50,000* warrants to Tazbaz Holdings Limited, which are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $2.00 per share. On May 20, 2004 and June 18, 2004, the Company issued 336,471* warrants to Bristol Investment Fund, Ltd. which are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $1.25 per share. On November 12, 2004, 305,882* of these warrants were repriced from $1.25 to $1.00 per share. On May 24, 2004 and June 18, 2004, the Company issued 231,429* warrants to Tazbaz Holdings Limited which are exercisable at any time and in any amount for a period of seven years from closing at purchase prices of $1.40 and $1.25 per share, respectively. F-19 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) On November 12, 2004, the Company issued 937,500* warrants to holders of the Original Discount Convertible Debentures which are exercisable at any time and in any amount for seven years from the date of closing at a purchase price of $1.00 per share. On June 27, 2005, a total of 1,671,189* warrants held by the debenture holders were cancelled in consideration of payment in full of the principal balance owing of $1,162,700. On June 27, 2005 the Company issued Laurus Master Fund, Ltd. warrants to purchase up to 2,100,000* shares of its common stock with 1,050,000* at an exercise price of $0.55 per share and 1,050,000* at an exercise price of $0.60 per share. The warrants are exercisable at any time and in any amount for six years from the date of closing. As disclosed in Note 14(b), on July 7, 2005, the Company issued warrants to purchase 500,000* shares of common stock exercisable at $0.41 per share and 100,000* shares of common stock exercisable at $1.20 per share to Financial Media Relations LLC. The warrants shall be exercisable for a period of two years, shall vest immediately and be deemed earned upon issuance, and all warrants shall have "piggyback" registration rights. Using the Black Scholes pricing model, the fair value of the warrants was determined to be $57,057 and is included in selling expenses. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 d) Stock Options The Company's Board of Directors and shareholders have approved the adoption of the 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan, 2002 Stock Option Plan and 2005 Stock Option Plan, pursuant to which an aggregate of 1,622,006* options may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to the Company The plans are administrated by the Compensation Committee of the Board of Directors, which determine among other things, those individuals who shall receive options, the time period during which the options may be partially or fully exercised, the number of common stock to be issued upon the exercise of the options and the option exercise price. The plans are effective for a period of ten years. Options granted to employees under the plans generally require a three-year vesting period, and shall be at an exercise price that may not be less than the fair market value of the common stock on the date of the grant. Options are non-transferable and if a participant ceases affiliation with the Company by reason of death, permanent disability or retirement at or after age 65, the option remains exercisable for one year from such occurrence but not beyond the option's expiration date. Other types of termination allow the participant 90 days to exercise the option, except for termination for cause, which results in immediate termination of the option. Any unexercised options that expire or that terminate upon an employee's ceasing to be employed by the Company become available again for issuance under the plans, subject to applicable securities regulation. The plans may be terminated or amended at any time by the Board of Directors, except that the number of common stock reserved for issuance upon the exercise of options granted under the plans may not be increased without the consent of the stockholders of the Company. On June 27, 2005, the Company issued Laurus Master Fund, Ltd. an option to purchase up to 379,572* shares of its common stock, no par value per share, at an exercise price of $.0001 per share. The options are exercisable at any time and in any amount for a period of ten years from the date of issuance. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 F-20 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 15. DEFERRED INCOME TAXES AND INCOME TAXES a) Deferred Income Taxes The components of the future tax liability classified by source of temporary differences that gave rise to the benefit are as follows:

b) Current Income Taxes Current income taxes consist of:

Issue expenses totaling approximately $1,090,000 may be claimed at the rate of 20% per year until 2005. To the extent that these expenses create a loss, which are available to be carried forward for seven years for losses up to and including 2003 and for ten years commencing in 2004 from the year the loss is incurred. The Company has not reflected the benefit of utilizing non-capital losses totaling approximately $12,400,000 nor a capital loss totaling $750,000 in the future as a deferred tax asset as at September 30, 2005. As at the completion of the September 30, 2005 financial statements, management believed it was more likely than not that the results of future operations would not generate sufficient taxable income to realize the deferred tax assets. 16. COMPREHENSIVE INCOME (LOSS)

The foreign currency translation adjustments are not currently adjusted for income taxes since the Company is located in Canada and the adjustments relate to the translation of the financial statements from Canadian dollars into United States dollars done only for the convenience of the reader. F-21 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 17. DISCONTINUED OPERATIONS Effective March 8, 2002, the Company sold its technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. As part of the transaction, Cognicase assumed all of the staff in the Company's technology division, including the employees of TidalBeach Inc. The Company will not have future revenues from either its Njoyn or Secondwave products and therefore the technology operations have been reported as discontinued. There was no technology revenue for the three and nine months ended September 30, 2005 and 2004. The net loss for the three and nine months ended September 30, 2005 was nil and $4,600 compared to $1,200 and $3,900 in 2004. Effective May 1, 2002, the Company signed an agreement with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of the Toronto training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, triOS assumed the Toronto training staff. On November 1, 2002, the Company entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of the New York training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC assumed the New York training staff, some assets and is subletting the classroom facilities. As a result of these two transactions, the Company will not have future revenues from its training division and therefore the operations have been reported as discontinued. There was no training revenue for the three and nine months ended September, 2005 and 2004. There were no losses from the training division for the three and nine months ended September 30, 2005 compared to a net loss of $14,000 and $39,000, respectively, in 2004. Effective June 27, 2003, the Company signed an agreement with Brainhunter.com Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT recruitment division for a nominal amount of cash and the assumption of all employee liabilities. The gain on disposal of $190,627 has been reflected in the Income (loss) from discontinued operations in 2003. Of the $190,627, $146,627 was received in cash on closing with the balance of $44,000 due in a promissory note payable by June 27, 2004. On June 8, 2005, the Company collected approximately $40,000 on the promissory note and forgave the balance. As a result of this transaction, the Company will not have future revenues from its IT recruitment division and therefore the operations have been reported as discontinued. There was no IT recruitment revenue for the three and nine months ended September 30, 2005 and 2004. Net income from the IT recruitment division for the three and nine months ended September 30, 2005 was nil and $24,000 reflecting a tax credit collected in the second quarter. There was no net income attributable to the IT recruitment division for the three and nine months ended September 30, 2004. The following table presents the revenues, loss from operations and other components attributable to the discontinued operations of Njoyn Software Incorporated, TidalBeach Inc., Thinkpath Training Inc. and Thinkpath Training US Inc. and the IT recruitment division:

F-22 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 18. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company issued common shares and warrants for the following: Nine Months Ended Year Ended September 30, 2005 December 31, 2004 ------------------ ----------------- $ $ Services rendered 98,057 175,336 Accounts payable 240,000 -- ------- ------- 338,057 175,336 ======= ======= 19. SEGMENTED INFORMATION a) Sales by Geographic Area

b) Net Income (Loss) by Geographic Area

c) Identifiable Assets by Geographic Area September 30, 2005 December 31, 2004 ------------------ ----------------- $ $ Canada 1,287,106 499,483 United States of America 6,621,431 6,316,851 --------- --------- 7,908,537 6,816,334 ========= ========= d) Revenue and Gross Profit by Operating Segment

No other segment represents 10% of the Company's revenues, operating losses or total assets. F-23 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) e) Revenues from Major Customers and Concentration of Credit Risk The consolidated entity had the following revenues from major customers: For the three and nine months ended September 30, 2005, one customer had sales of $806,950 and $3,097,238, respectively, representing approximately 25% and 30%, respectively, of total revenue. For the three and nine months ended September 30, 2004, one customer had sales of $1,008,468 and $2,965,921, respectively, representing approximately 32% and 31%, respectively, of total revenue. f) Purchases from Major Suppliers There were no significant purchases from major suppliers. 20. EARNINGS PER SHARE The Company has adopted Statement No. 128, Earnings Per Share, which requires presentation, in the consolidated statement of operations, of both basic and diluted earnings per share.

The outstanding options and warrants as detailed in note 14 were not included in the computation of the diluted earnings per common share as the effect would be anti-dilutive. The earnings per share calculation (basic and diluted) does not include any common stock for common stock payable, as the effect would be anti-dilutive. As at September 30, 2005, the Company has issued a total of 3,065,420* shares of its common stock to the convertible debenture holders upon the conversion of $3,862,300 of debentures and accrued interest. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005 F-24 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 21. COMMITMENTS AND CONTINGENCIES a) Lease Commitments Minimum payments under operating leases for premises occupied by the Company and its subsidiaries offices, located throughout Ontario, Canada and the United States, exclusive of most operating costs and realty taxes, as at September 30, 2005, for the next five years are as follows: 2005 $97,275 2006 300,321 2007 301,332 2008 174,968 2009 45,120 Thereafter 3,760 -------- $922,774 ======== The lease commitments do not include an operating lease for premises that the Company is currently sub leasing to the purchaser of the United States training division. If the purchaser was to default on payment or abandon the premises, the Company would be liable for annual payments of $282,096 expiring August 31, 2006. The lease commitments do not include an operating lease for premises located in the United States that was closed in the fourth quarter of 2002. The Company has not made any payments on this lease since the premises were abandoned. The Company does not intend to make any further payments and the lessor has not tried to enforce payment. The Company may be liable for a lease balance of $44,597 which expired November 30, 2004. b) On August 25, 2005, the Company reached a settlement with Johnston & Associates, LLC ("J&A"), a South Carolina corporation, of the action commenced at Ontario, Canada as Court File No. C-294-04 against the Company by J&A, in which J&A demanded payment of $60,000 pursuant to a consulting agreement entered into April 2002. In consideration of a monetary payment by the Company of $20,000 and execution of a Mutual Full and Final Release, J&A dismissed the aforementioned action. c) The Company is party to various lawsuits arising from the normal course of business and its restructuring activities. No material provision has been recorded in the accounts for possible losses or gains. Should any expenditure be incurred by the Company for the resolution of these lawsuits, they will be charged to the operations of the year in which such expenditures are incurred. 22. SUBSEQUENT EVENTS Subsequent to September 30, 2005, the Company issued a total of 1,460,000 options to its Management and Directors under the 2005 Stock Option Plan which was approved by the Company's shareholders at its Annual General Meeting on April 22, 2005, and subsequently approved by its Board of Directors. The options vest immediately and expire in 2015. On November 3, 2005, the Company terminated the service agreement of the vendors of TBM Technologies Inc., acquired on January 17, 2005, for what it believes is a material breach of the agreement by the vendors. F-25 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 23. FINANCIAL INSTRUMENTS a) Credit Risk Management The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce its credit risk, the Company has adopted credit policies, which include the analysis of the financial position of its customers and the regular review of their credit limits. In some cases, the Company requires bank letters of credit or subscribes to credit insurance. b) Concentration of Credit Risk Although the Company had one significant customer representing 30% of total revenue, the Company continues to actively expand its customer base. The Company's revenue is derived from customers of various industries and geographic locations reducing its credit risk. Where exposed to credit risk, the Company mitigates this risk by routinely assessing the financial strength of its customers, establishing billing arrangements and monitoring the collectibility of the account on an ongoing basis. c) Interest Risk The long-term debt bears interest rates that approximate the interest rates of similar loans. Consequently, the long-term debt risk exposure is minimal. d) Fair Value of Financial Instruments The carrying values of the accounts receivable and of the accounts payable on acquisition of subsidiary company approximates their fair values because of the short-term maturities of these items. The carrying amount of the long-term assets approximates the fair value of these assets. The fair value of the Company's long-term debt is based on the estimated quoted market prices for the same or similar debt instruments. The fair value of the long-term debt approximates the carrying value. 24. COMPARATIVE FIGURES Certain figures in the September 30, 2004 financial statements have been reclassified to conform with the basis of presentation used at September 30, 2005. F-26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The following discussion and analysis should be read in conjunction with the financial statements and notes thereto and the other historical financial information of Thinkpath Inc. contained elsewhere in this Form 10-QSB. The statements contained in this Form 10-QSB that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended including statements regarding Thinkpath Inc.'s expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include Thinkpath Inc.'s statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included in this Form 10-QSB are based on information available to Thinkpath Inc. on the date hereof, and Thinkpath Inc. assumes no obligation to update any such forward-looking statement. It is important to note that Thinkpath Inc.'s actual results could differ materially from those in such forward-looking statements. All dollar amounts stated throughout this Form 10-QSB are in United States dollars unless otherwise indicated. Unless otherwise indicated, all reference to "Thinkpath," "us," "our," and "we," refer to Thinkpath Inc. and its subsidiaries. OVERVIEW Thinkpath provides engineering services including design, build, drafting, technical publishing and documentation, and on-site engineering support to customers in the defense, aerospace, automotive, health care and manufacturing industries. We were incorporated under the laws of the Province of Ontario, Canada in 1994. In September 1999, we acquired an engineering services company CadCam Inc. and its two subsidiaries, CadCam Michigan Inc. and CadCam Technical Services Inc. CadCam Inc. was founded in 1977. Our principal executive offices are located at 201 Westcreek Boulevard, Brampton, Ontario, Canada and our website is www.thinkpath.com. PLAN OF OPERATION In 2002 we began to focus our efforts on building relationships with customers in high growth industries such as defense and aerospace. We have since been repositioning in growth industries and targeting customers with high growth potential, such as those in defense. We believe we are poised to benefit from the increased demand generated by aerospace and defense-related customers who we expect will increasingly rely on our project engineering design, expertise and technical staffing services. This year we will continue to solidify our relationships to actively increase new business opportunities with existing customers including General Dynamics, Lockheed Martin, Boeing, General Electric, United Defense and TACOM. We intend to continue to grow organically as well as through acquisitions over the next year. Acquisitions will be limited to profitable engineering companies, which must have an immediate accretive impact. -3- STATEMENTS OF OPERATIONS--PERCENTAGES (UNAUDITED) THREE MONTHS NINE MONTHS ENDED SEPT 30, ENDED SEPT 30, -------------- --------------- 2005 2004 2005 2004 ---- ---- ---- ---- REVENUE 100% 100% 100% 100% ---- ---- ---- ---- COST OF SERVICES 71% 63% 69% 64% ---- ---- ---- ---- GROSS PROFIT 29% 37% 31% 36% ---- ---- ---- ---- EXPENSES Administrative 19% 19% 18% 18% Selling 16% 12% 12% 11% Depreciation and amortization 3% 4% 2% 4% Write down of property and equipment 0% 0% 0% 0% Debt forgiveness 0% 0% (1)% 0% ---- ---- ---- ---- Income (loss) from continuing operations before interest charges (9)% 2% --% 3% Interest charges 7% 34% 14% 30% ---- ---- ---- ---- Loss from continuing operations before income taxes (16)% (32)% (14)% (27)% Income taxes 1% 1% 1% --% ---- ---- ---- ---- Loss from continuing operations (17)% (33)% (15)% (27)% Income (loss) from discontinued operations --% (1)% --% (1)% Net Loss (17)% (34)% (15)% (28)% ---- ---- ---- ---- -4- RESULTS OF OPERATIONS THE THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004 REVENUE For the three months ended September 30, 2005, we derived 84% of our revenue in the United States compared to 93% for the three months ended September 30, 2004. The decrease in total revenue derived from the United States is a result of the increase in engineering sales in Canada to $500,000 for the three months ended September 30, 2005 from $220,000 for the three months ended September 30, 2004. Our primary source of revenue was engineering services including engineering design and build, technical publications and documentation and on-site engineering support. Engineering services represented 99% of total revenue which is consistent with the same period last year. No other operating segment represented more than 10% of our consolidated revenues. Consolidated revenues for the three months ended September 30, 2005 increased by $45,000 or 1%, to $3,170,000 as compared to $3,125,000 for the three months ended September 30, 2004. The increase is primarily attributable to the increase in engineering sales in Canada. COST OF SERVICES The cost of services for the three months ended September 30, 2005 increased by $270,000, or 14%, to $2,250,000, as compared to $1,980,000 for the same period in 2004. This increase is partially attributable to the increase in revenue. As a percentage of revenue, the cost of services for the three months ended September 30, increased from 63% in 2004 to 71% in 2005. GROSS PROFIT Gross profit is calculated by subtracting all direct costs from net revenue. The direct costs of engineering services include wages, benefits, software training and project expenses. Gross profit for the three months ended September 30, 2005 decreased by $220,000, or 19%, to $920,000 compared to $1,140,000 for the same period in 2004. As a percentage of revenue, gross profit for the three months ended September 30, 2005 was 29% compared to 37% in 2004. The decrease in gross profit can be attributed to the addition of lower margin engineering projects during the second quarter as a means of establishing a new client base, delayed start dates of higher margin defense projects and the increase in lower margin contract placement sales compared to higher margin project sales. EXPENSES Total expenses for the three months ended September 30, 2005 increased by $100,000, or 9%, to $1,190,000 compared to $1,090,000 for the three months ended September 30, 2004. ADMINISTRATIVE EXPENSES Administrative expenses increased by $20,000 or 3% to $605,000 for the three months ended September 30, 2005 compared to $585,000 for the three months ended September 30, 2004. This increase is largely attributable to increased administrative salaries and benefits and additional maintenance fees on hardware and software. As a percentage of revenue, administrative expenses for the three months ended September 30, 2005 was 19% which is consistent with the same period in 2004. SELLING EXPENSES Selling expenses increased by $100,000, or 26%, to $490,000 for the three months ended September 30, 2005 compared to $390,000 for the same period in 2004. This increase is attributable to the costs associated with a comprehensive sales and marketing campaign initiated in September and launched in October 2005 as well as the cost of warrants issued to Financial Media Relations. As a percentage of revenue, selling expenses for the three months ended September 30, 2005 increased to 16% compared to 12% for the same period last year. -5- DEPRECIATION AND AMORTIZATION For the three months ended September 30, 2005, depreciation and amortization expenses decreased by $30,000, or 25%, to $90,000 from $120,000 for the three months ended September 30, 2004. As a percentage of revenue, depreciation and amortization expenses have decreased from 4% for the three months ended September 30, 2004 to 3% for the same period in 2005. This decrease is the result of the declining balance of our property and equipment. INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES For the three months ended September 30, 2005, income (loss) from continuing operations before interest charges decreased by $340,000 or 566% to a loss of $280,000,000 compared to income of $60,000 for the three months ended September 30, 2004. INTEREST CHARGES For the three months ended September 30, 2005, interest charges decreased by $820,000, or 70%, to $240,000 from $1,060,000 for the three months ended September 30, 2004. This decrease is largely attributable to the reduced interest expense on the beneficial feature recognized on convertible debt. Included in the interest charges for the three months ended September 30, 2005 is $64,000 in amortized debt discount and $79,000 in beneficial conversion expense related to the Laurus Convertible Financing Facility. Included in the interest charges for the three months ended September 30, 2004 is $970,000 beneficial conversion expense related to the 12% Senior Secured Convertible Debentures. LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES For the three months ended September 30, 2005, loss from continuing operations before income taxes decreased by $500,000 or 50% to $510,000 compared to $1,010,000 for the same period in 2004. This decrease is largely attributable to the reduction in beneficial conversion expense included in interest charges. INCOME TAXES Income tax expense for the three months ended September 30, 2005 increased by $8,500 or 53% to $24,500 compared to $16,000 for the three months ended September 30, 2004. LOSS FROM CONTINUING OPERATIONS Loss from continuing operations for the three months ended September 30, 2005 decreased by $490,000 or 48% to a loss of $530,000 compared to a loss of $1,020,000 for the three months ended September 30, 2004. This decrease is largely attributable to the reduction in beneficial conversion expense included in interest charges. INCOME (LOSS)FROM DISCONTINUED OPERATIONS Operations of the technology, training and IT recruitment divisions have been reported as discontinued for the three months ended September 30, 2005 and 2004. Effective March 8, 2002, we sold our technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. As part of the transaction, Cognicase assumed all of the staff in our technology division, including the employees of TidalBeach Inc. We will not have future revenues from either our Njoyn or Secondwave products and therefore the technology operations have been reported as discontinued. There was no technology revenue for the three months ended September 30, 2005 and 2004. There was no income (loss) for the three months ended September 30, 2005 compared to a loss of $1,200 for the three months ended September 30, 2004. Effective May 1, 2002, we signed an agreement with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of our Toronto training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, triOS assumed the Toronto training staff. -6- On November 1, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of our New York training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC assumed the New York training staff, some assets and is subletting the classroom facilities. As a result of these two transactions, we will not have future revenues from our training division and therefore the operations have been reported as discontinued. There was no training revenue for the three months ended September 30, 2005 and 2004. There was no income (loss) from the training division for the three months ended September 30, 2005 compared to a net loss of $14,000 for the three months ended September 30, 2004. Effective June 27, 2003, we signed an agreement with Brainhunter.com Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT recruitment division for a nominal amount of cash and the assumption of all employee liabilities. As a result of this transaction, we will not have future revenues from our IT recruitment division and therefore the operations have been reported as discontinued. There was no IT recruitment revenue for the three months ended September 30, 2005 and 2004. There was no net income (loss) from the IT recruitment division for the three months ended September 30, 2005 or 2004. NET LOSS For the three months ended September 30, 2005, net loss decreased by $510,000 or 49% to a net loss of $530,000 compared to a net loss of $1,040,000 for the same period in 2004. This decrease is largely attributable to the reduction in beneficial conversion expense included in interest charges. THE NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004 REVENUE For the nine months ended September 30, 2005, we derived 86% of our revenue in the United States compared to 94% for the same period in 2004. The decrease in total revenue derived from the United States is a result of the increase in engineering sales in Canada to $1,475,000 for the nine months ended September 30, 2005 from $560,000 for the three months ended September 30, 2004. Our primary source of revenue was engineering services including engineering design and build, technical publications and documentation and on-site engineering support. Engineering services represented 99% of total revenue for the nine months ended September 30, 2005 compared to 98% for the same period last year. No other operating segment represented more than 10% of our consolidated revenues. Consolidated revenues for the nine months ended September 30, 2005 increased by $870,000 or 9%, to $10,380,000 as compared to $9,510,000 for the nine months ended September 30, 2004. The increase is primarily attributable to the increase in engineering sales in Canada as well as revenue related to the continuing contracts with existing customers in the defense industry, awarded in 2004. As a result of these contracts, one customer had sales of approximately 30% of our consolidated revenues for the nine months ended September 30, 2005. The same customer had sales of approximately 31% of our consolidated revenues for the same period last year. COST OF SERVICES The cost of services for the nine months ended September 30, 2005 increased by $1,030,000, or 17%, to $7,120,000, as compared to $6,090,000 for the same period in 2004. This increase is partially attributable to the increase in revenue. As a percentage of revenue, the cost of services for the nine months ended September 30, increased from 64% in 2004 to 69% in 2005. -7- GROSS PROFIT Gross profit for the nine months ended September 30, 2005 decreased by $160,000, or 5%, to $3,260,000 compared to $3,420,000 for the same period in 2004. This decrease can be attributed to the addition of lower margin engineering projects during the second quarter as a means of establishing a new client base, delayed start dates of higher margin defense projects and the increase in lower margin contract placement sales compared to higher margin project sales. As a percentage of revenue, gross profit for the nine months ended September 30, 2005 was 31% compared to 36% in 2004. EXPENSES Total expenses for the nine months ended September 30, 2005 increased by $50,000, to $3,230,000 compared to $3,180,000 for the nine months ended September 30, 2004. ADMINISTRATIVE EXPENSES Administrative expenses increased by $110,000 or 6% to $1,850,000 for the nine months ended September 30, 2005 compared to $1,740,000 for the nine months ended September 30, 2004. As a percentage of revenue, administrative expenses for the nine months ended September 30, 2004 are 18% which is consistent with the same period last year. SELLING EXPENSES Selling expenses increased by $130,000, or 12%, to $1,180,000 for the nine months ended September 30, 2005 compared to $1,045,000 for the same period in 2004. This increase is attributable to the increase in sales personnel salaries as well as marketing and promotional activities including the cost of warrants issued to Financial Media Relations LLC. As a percentage of revenue, selling expenses for the nine months ended September 30, 2005 are 11% which is consistent with the same period last year. DEPRECIATION AND AMORTIZATION For the nine months ended September 30, 2005, depreciation and amortization expenses decreased by $140,000, or 35%, to $260,000 from $400,000 for the nine months ended September 30, 2004. As a percentage of revenue, depreciation and amortization expenses have decreased from 4% for the nine months ended September 30, 2004 to 2% for the same period in 2005. This decrease is the result of the declining balance of our property and equipment. WRITE DOWN OF PROPERTY AND EQUIPMENT During the nine months ended September 30, 2005, we wrote down property and equipment in the amount of $4,000. The fair value of the impaired asset was generally estimated by discounting the expected future cash flows of the individual assets. Impairment was indicated by adverse change in market prices, current period cash flow losses combined with a history of losses, or a significant change in the manner in which the asset is to be used. DEBT FORGIVENESS Debt forgiveness for the nine months ended September 30, 2005 includes $66,150 of accrued interest on the 12% Senior Secured Convertible Debentures which was forgiven when the principal balance was repaid on June 27, 2005. INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES For the nine months ended September 30, 2005, income from continuing operations before interest charges decreased by $220,000 or 92% to $20,000 compared to $240,000 for the nine months ended September 30, 2004. INTEREST CHARGES For the nine months ended September 30, 2005, interest charges decreased by $1,390,000, or 49%, to $1,450,000 from $2,840,000 for the nine months ended September 30, 2004. This decrease is largely attributable to the reduced interest expense on the beneficial feature recognized on convertible debt. Included in the interest charges for the nine months ended September 30, 2005 is the write off of the unamortized debt discount remaining on the 12% Senior Secured Convertible Debentures which were repaid in June 2005 in the amount of $729,422. Also included is $65,758 in amortized debt discount and $81,874 in beneficial conversion expense related to the Laurus Convertible Financing Facility. Included in the interest charges for the nine months ended September 30, 2004 is $2,510,000 beneficial conversion expense related to the 12% Senior Secured Convertible Debentures. -8- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES For the nine months ended September 30, 2005, loss from continuing operations before income taxes decreased by $1,180,000 or 45% to $1,420,000 compared to $2,600,000 for the same period in 2004. This decrease is largely attributable to the reduction in beneficial conversion expense included in interest charges. INCOME TAXES Income tax expense for the nine months ended September 30, 2005 increased by $75,000 or 375% to $95,000 compared to $20,000 for the nine months ended September 30, 2004. LOSS FROM CONTINUING OPERATIONS Loss from continuing operations for the nine months ended September 30, 2005 decreased by $1,110,000 or 42% to a loss of $1,520,000 compared to a loss of $2,630,000 for the nine months ended September 30, 2004. This decrease is largely attributable to the reduction in beneficial conversion expense included in interest charges. INCOME (LOSS) FROM DISCONTINUED OPERATIONS Operations of the technology, training and IT recruitment divisions have been reported as discontinued for the nine months ended September 30, 2005 and 2004. There was no technology revenue for the nine months ended September 30, 2005 and 2004. The net loss for the nine months ended September 30, 2005 was $4,600 compared to $3,900 for the nine months ended September 30, 2004. There was no training revenue for the nine months ended September 30, 2005 and 2004. There was no loss from the training division for the nine months ended September 30, 2005 compared to a loss of $39,000 for the nine months ended September 30, 2004. There was no IT recruitment revenue or income for the nine months ended September 30, 2005 and 2004. Net income for the IT recruitment division for the nine months ended September 30, 2005 was $24,000 reflecting a tax credit collected in the second quarter. There was no income attributable to the IT recruitment division for the nine months ended September 30, 2004. NET LOSS For the nine months ended September 30, 2005, the net loss decreased by $1,170,000 or 44% to $1,500,000 compared to a net loss of $2,670,000 for the same period in 2004. This decrease is largely attributable to the reduction in beneficial conversion expense included in interest charges. LIQUIDITY AND CAPITAL RESOURCES With insufficient working capital from operations, our primary source of cash is a convertible financing facility with Laurus Master Fund, Ltd. The facility consists of a revolving line of credit based on 90% of eligible accounts receivable which matures on June 27, 2008 and bears interest at an annual rate equal to The Wall Street Journal prime rate plus 3%. The principal outstanding on the secured convertible note is convertible into common stock at a fixed conversion price ranging from 80% to 110% of the average closing price for the previous ten days, subject to certain conditions. At September 30, 2005, the balance on the facility was $2,958,117. At September 30, 2005, the unamortized beneficial conversion feature was $871,865 which is being amortized over the three year term of the facility. At September 30, 2005, the unamortized debt discount on the Laurus facility was $700,244 which is also being amortized over the three year term of the facility. At September 30, 2005, we have amortized $81,874 in beneficial conversion feature and $65,758 in debt discount as interest expense. -9- At September 30, 2005, we had cash of $170,000 and working capital of $400,000. At September 30, 2005, we had a cash flow deficiency from operations of $500,000 largely due to the increase in accounts receivable. At September 30, 2004, we had cash of $140,000 and a working capital deficiency of $940,000. At September 30, 2004, we had a cash flow deficiency from operations of $1,020,000 primarily attributable to a decrease in accounts payable. At September 30, 2005, we had a cash flow deficiency from investing activities of $210,000 related to the purchase of property and equipment. At September 30, 2004, we had a cash flow deficiency from investing activities of $170,000 also related to the purchase of property and equipment. At September 30, 2005 we had cash flow from financing activities of $790,000 largely attributable to proceeds from the convertible financing facility with Laurus Master Fund, Ltd. At September 30, 2004, we had cash flow from financing activities of $820,000 attributable primarily to proceeds from the sale of convertible debentures and the exercise of common stock purchase warrants. At September 30, 2005 we had a loan balance of $190,000 with an individual, Terry Lyons. We are required to make monthly payments of $10,000 until the full amount of the note, including interest is paid in full. The loan bears interest at US prime plus 14% per annum and is subordinated to Laurus Master Fund, Ltd. At September 30, 2005, we had approximately $40,000 outstanding on various capital leases with various payment terms and interest rates. The average balance on the terms of leases are 12 months and cover primarily the hardware and various software applications required to support our engineering division. Although we believe that our current working capital and cash flows from restructured operations will be adequate to meet our anticipated cash requirements going forward, we have accrued liabilities and potential settlements of outstanding claims that may require additional funds. We will have to raise these funds through equity or debt financing. There can be no assurance that additional financing will be available at all or that if available, such financing will be obtainable on terms favorable to us and would not be dilutive. Despite our recurring losses and negative working capital, we believe that we have developed a business plan that, if successfully implemented, could improve our operational results and financial condition. However, we can give no assurances that our current cash flows from operations, if any, borrowings available under our receivable discount facility, and proceeds from the sale of securities, will be adequate to fund our expected operating and capital needs for the next twelve months. The adequacy of our cash resources over the next twelve months is primarily dependent on our operating results and our ability to raise additional financing, which are subject to substantial uncertainties. Cash flow from operations for the next twelve months will depend, among other things, upon the effect of the current economic slowdown on our sales and management's ability to implement our business plan. The failure to return to profitability and optimize operating cash flow in the short term, and to successfully raise additional financing, could have a material adverse effect on our liquidity position and capital resources, which may force us to curtail our operations. RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after September 30, 2003 with certain exceptions. We do not believe that the adoption of SFAS No. 149 will have a material impact, if any, on our results of operations or financial position. -10- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement specifies that certain instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 goes into effect at the beginning of the first interim period beginning after June 15, 2003. For contracts that were created or modified before May 31, 2003 and still exist at the beginning of the first interim period beginning after September 30, 2003, entities should record the transition to SFAS No. 150 by reporting the cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits entities from restating financial statements for earlier years presented. We do not believe that the adoption of SFAS No. 150 will have a material impact, if any, on our results of operations or financial position. In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106. This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS No. 132 (Revised) will retain and revise the disclosure requirements contained in the original SFAS No. 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS No. 132 (Revised) generally is effective for fiscal years ending after December 15, 2003. We do not believe that the adoption of SFAS No. 132 (Revised) will have a material impact, if any, on our results of operations or financial position. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43". This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS No. 151 will have a material impact, if any, on our results of operations or financial position as it does not have inventory. In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67, which references the financial accounting and reporting guidance for real estate time-sharing transactions in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions. SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. We do not believe that the adoption of SFAS No. 152 will have a material impact, if any, on our results of operations or financial position. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29", effective for nonmonetary asset exchanges occurring in the fiscal year beginning January 1, 2006. This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. We do not believe that the adoption of SFAS No. 153 will have an impact, if any, on our results of operations or financial position. -11- In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based Payment". This statement requires employers to expense costs related to share-based payment transactions with employees. With limited exceptions, SFAS No. 123 (Revised) requires that the fair value of share-based payments to employees be expensed over the period service is received. SFAS No. 123 (Revised) becomes effective for annual reporting periods that begin after December 15, 2005. We intend to adopt this standard using the modified retrospective method of transition. This method requires that issued financial statements be restated based on the amounts previously calculated and reported in the pro forma footnote disclosures required by SFAS No. 123. SFAS No. 123 (Revised) allows the use of both closed form models (e.g., Black-Scholes Model) and open form models (e.g., lattice models) to measure the fair value of the share-based payment as long as that model is capable of incorporating all of the substantive characteristics unique to share-based awards. In accordance with the transition provisions of SFAS No. 123 (Revised), the expense attributable to an award will be measured in accordance with the company's measurement model at that award's date of grant. We believe the pro forma disclosures in Note 3 (c) provide an appropriate short-term indicator of the level of expense that will be recognized in accordance with SFAS No. 123 (Revised). However, the total expense recorded in future periods will depend on several variables, including the number of shared-based awards that vest and the fair value of those vested awards. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations". FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application of interim financial information is permitted but is not required. We do not believe that the adoption of FIN 47 will have an impact, if any, on its results of operations or financial position. In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections", applying to all voluntary accounting principle changes as well as the accounting for and reporting of such changes. SFAS No. 154 requires voluntary changes in accounting principle be retrospectively applied to financial statements from previous periods unless such application is impracticable. SFAS No. 154 requires that changes in depreciation, amortization, or depletion methods for long-lived, non-financial assets must be accounted for as a change in accounting estimate due to a change in accounting principle. By enhancing the consistency of financial information between periods, the requirements of FASB 154 improves financial reporting. FASB 154 replaces APB Opinion No. 20 and FASB 3. FASB 154 carries forward many provisions of Opinion 20 and FASB 3 without change including those provisions related to reporting a change in accounting estimate, a change in reporting entity, correction of an error and reporting accounting changes in interim financial statements. FASB 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. RECENT EVENTS On June 1, 2005, we received notice that the US Securities and Exchange Commission is reviewing our Form 10-KSB for the fiscal year ended December 31, 2004 and our Form 10-QSB for the quarterly period ended March 31, 2005. On September 28, 2005, we received notice that this review was extended to our Form 10-QSB for the quarterly period ended June 30, 2005. As a result of our ongoing discussions with the Securities and Exchange Commission, we may be required to amend this quarterly report to reflect any changes required. Subsequent to September 30, 2005, we issued a total of 1,460,000 options to our Management and Directors under the 2005 Stock Option Plan which was approved by our shareholders at our Annual General Meeting on April 22, 2005, and subsequently approved by our Board of Directors. The options vest immediately and expire in 2015. On November 3, 2005, we terminated the service agreement of the vendors of TBM Technologies Inc., for what we believe is a material breach of the agreement by the vendors. -12- CRITICAL ACCOUNTING ESTIMATES AND POLICIES On December 12, 2001, the Securities and Exchange Commission issued FR-60, Cautionary Advice Regarding Disclosure about Critical Accounting Policies, which encourages additional disclosure with respect to a company's critical accounting policies, the judgments and uncertainties that affect a company's application of those policies, and the likelihood that materially different amounts would be reported under different conditions and using different assumptions. Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Certain accounting policies and estimates have a more significant impact on our financial statements than others, due to the magnitude of the underlying financial statement elements. CONSOLIDATION Our determination of the appropriate accounting method with respect to our investments in subsidiaries is based on the amount of control we have, combined with our ownership level, in the underlying entity. Our consolidated financial statements include the accounts of our parent company and our wholly-owned subsidiaries. All of our investments are accounted for on the cost method. If we had the ability to exercise significant influence over operating and financial policies of a company, but did not control such company, we would account for these investments on the equity method. Accounting for an investment as either consolidated or by the equity method would have no impact on our net income (loss) or stockholders' equity in any accounting period, but would impact individual income statement and balance sheet items, as consolidation would effectively "gross up" our income statement and balance sheet. However, if control aspects of an investment accounted for by the cost method were different, it could result in us being required to account for an investment by consolidation or the equity method. Under the cost method, the investor only records its share of the investee's earnings to the extent that it receives dividends from the investee; when the dividends received exceed the investee's earnings subsequent to the date of the investor's investment, the investor records a reduction in the basis of its investment. Under the cost method, the investor does not record its share of losses of the investee. Conversely, under either consolidation or equity method accounting, the investor effectively records its share of the investee's net income or loss, to the extent of its investment or its guarantees of the investee's debt. At December 31, 2004, we wrote down our investments in non-related companies to nil. REVENUE RECOGNITION We recognize revenue under engineering service contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collection of the contract price is considered probable and can be reasonably estimated. Revenue is earned under time-and-materials, fixed-price and cost-plus contracts. We recognize revenue on time-and-materials contracts to the extent of billable rates times hours delivered, plus expenses incurred. For fixed price contracts within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue is recognized on the percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services, as appropriate. For fixed price-completion contracts that are not within the scope of SOP 81-1, revenue is generally recognized as earned according to contract terms as the service is provided. We provide our customers with a number of different services that are generally documented through separate negotiated task orders that detail the services to be provided and the compensation for these services. Services rendered under each task order represent an independent earnings process and are not dependent on any other service or product sold. We recognize revenue on cost-plus contracts to the extent of allowable costs incurred plus a proportionate amount of the fee earned, which may be fixed or performance-based. We consider fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract, which generally corresponds to the timing of contractual billings. We record provisions for estimated losses on uncompleted contracts in the period in which those losses are identified. We consider performance-based fees under any contract type to be earned only when it can demonstrate satisfaction of a specific performance goal or it receive contractual notification from a customer that the fee has been earned. In all cases, we recognize revenue only when pervasive evidence of an arrangement exists services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured. -13- Contract revenue recognition inherently involves estimation. From time to time, facts develop that requires us to revise the total estimated costs or revenues expected. In most cases, these changes relate to changes in the contractual scope of the work, and do not significantly impact the expected profit rate on a contract. We record the cumulative effects of any revisions to the estimated total costs and revenues in the period in which the facts become known. CARRYING VALUE OF GOODWILL AND INTANGIBLE ASSETS Prior to January 1, 2002, our goodwill and intangible assets were accounted for in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement required us to evaluate the carrying value of our goodwill and intangible assets upon the presence of indicators of impairment. Impairment losses were recorded when estimates of undiscounted future cash flows were less than the value of the underlying asset. The determination of future cash flows or fair value was based upon assumptions and estimates of forecasted financial information that may differ from actual results. If different assumptions and estimates were used, carrying values could be adversely impacted, resulting in write-downs that would adversely affect our earnings. In addition, we amortized our goodwill balances on a straight-line basis over 30 years. The evaluation of the useful life of goodwill required our judgment, and had we chosen a shorter time period over which to amortize goodwill, amortization expense would have increased, adversely impacting our operations. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. This statement requires us to evaluate the carrying value of goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions and estimates may differ from actual results. If different assumptions and estimates are used, carrying values could be adversely impacted, resulting in write-downs that could adversely affect our earnings. At December 31, 2004, we performed our annual impairment test for goodwill and determined that no adjustment to the carrying value of goodwill was needed. On an ongoing basis, absent any impairment indicators, we expect to perform a goodwill impairment test as of the end of the fourth quarter of each year. FOREIGN CURRENCY TRANSLATION The books and records of our Canadian operations are recorded in Canadian dollars. The financial statements are converted to US dollars as we have elected to report in US dollars consistent with Regulation S-X, Rule 3-20. The translation method used is the current rate method which is the method mandated by SFAS No. 52 where the functional currency is the foreign currency. Under the current method all assets and liabilities are translated at the current rate, stockholders' equity accounts are translated at historical rates and revenues and expenses are translated at average rates for the year. -14- Due to the fact that items in the financial statements are being translated at different rates according to their nature, a translation adjustment is created. This translation adjustment has been included in accumulated other comprehensive income. There can be no assurance that we would have been able to exchange currency on the rates used in these calculations. We do not engage in exchange rate-hedging transactions. A material change in exchange rates between United States and Canadian dollars could have a material effect on our reported results. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005. -15- ITEM 3. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and recorded within time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily required was required to apply its judgment in evaluating its cost benefit relationship of possible controls and procedures. The Company's certifying officers have concluded that the Company's disclosure controls and procedures were not effective in reaching that level of reasonable assurance. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective. In light of the material weakness described below, which were first discovered by the Chief Executive Officer and the Chief Financial Officer subsequent to the end of the quarter ended June 30, 2005, the Company implemented additional procedures to ensure its consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes the financial statements presented in this Form 10QSB fairly present, in all material respects, the Company's financial position, results of operations and cash flow for the periods presented; provided, however, it should be noted we are currently responding to comments provided by the staff of the Securities and Exchange Commission in connection with its review of our financial statements and reports filed under the Exchange Act. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2005. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of September 30, 2005, management has identified the following material weaknesses: 1. As of September 30, 2005, the Company did not have an effective control environment based on criteria established in "Internal Control - Integrated Framework" issued by COSO. The Company failed to design appropriate company wide policies and procedures over the accounting, revenue, treasury and risk management functions and did not uniformly and consistently communicate the importance of internal controls throughout the organization. In addition, the Company's policies and procedures with respect to review and supervision of its accounting operations were not operating effectively in so far as the Company failed to implement the appropriate accounting treatment in connection with two convertible debenture financings engaged in by the Company. This control deficiency, together with the control deficiencies described in point 2 below, indicate that the Company did not maintain an effective control environment. This control deficiency could result in a material misstatement of annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness. 2. As of September 30, 2005, the Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with the Company's financial reporting requirements including personnel with that had the expertise to evaluate the accounting treatment of convertible debentures issued by the Company. In addition, the Company also failed to implement processes to ensure periodic monitoring of its existing internal control activities over financial reporting. Specifically, the Company had a shortage of finance and accounting staff with sufficient depth and skill in the application of U.S. generally accepted accounting principles and individuals in the finance function who did not have the appropriate skills, training and experience to meet the objective that should be expected of these roles. -16- Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of September 30, 2005, based on the criteria in Internal Control - Integrated Framework. Plan for Remediation of Material Weaknesses At the direction of our board of directors, management has spent and continues to spend a significant amount of time, effort and resources to improve our control environment. Such efforts have included the engagement of the Complex Accounting and Transaction Expertise and the SEC Services Group of Deloitte & Touche, the appointment of David Barnes as a director of the Company who has extensive accounting experience and will serve as the head of our audit committee, the subscription to accounting journals and the attendance of accounting seminars by our personnel. This effort has been undertaken to improve our operational and financial reporting efficiency. Although we have undertaken steps to prevent further material weaknesses or significant deficiencies in our internal controls, we cannot assure that we will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that have not previously been identified, or that all the material weaknesses identified in this report will be remediated by December 31, 2005. Changes in Internal Control over Financial Reporting Except the procedures implemented to improve our internal controls as described above including the engagement of consultants, the appointment of a director that will serve as the chair of our audit committee, the subscription to accounting journals and the attendance of seminars by accounting personnel, there were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2005, other than as described above, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company's business. Except for the following, the Company is currently not aware of nor has any knowledge of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results: -17- On August 25, 2005, we reached a settlement with Johnston & Associates, LLC, a South Carolina corporation, of the action commenced at Ontario, Canada, Court File No. C-294-04, against us demanding payment of $60,000 pursuant to a consulting agreement entered into April 2002. In consideration of a monetary payment of $20,000 and execution of a Mutual Full and Final Release, Johnston & Associates dismissed the action against us. ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS During the third quarter 2005, we sold unregistered securities as described below. There were no underwriters involved in the transactions and there were no underwriting discounts or commissions paid in connection therewith, except as disclosed below. The purchasers of the securities in such transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for sales in connection with any distribution thereof and appropriate legends were affixed to the certificates for the securities issued in such transactions. The purchasers of the securities in the transactions below were each experienced investors who were provided information about us and were able to bear the risk of loss of their entire investment. On July 1, 2005 we issued 294,118* shares of our common stock to Declan French in consideration of $100,000 extra compensation as approved by the shareholders at the Annual General Meeting on April 22, 2005. The shares were issued based on the closing price of $0.34 on July 1, 2005. The extra compensation was awarded in consideration of Mr. French's personal guarantees and indemnification of certain of the Company's debts as well as his acceptance of shares in lieu of cash for prior bonuses and debt payments. Also, on July 1, 2005, we issued 636,363* shares of our common stock to Declan French in consideration of $140,000 in accrued bonuses from the years 2003 and 2004 as per his employment agreement. The shares were issued based on the lowest intraday price of $0.22 on July 1, 2005. On July 7, 2005, we entered into an agreement with Financial Media Relations, LLC, a California company, for the purpose of developing and implementing a marketing and investor relations program and the provision of business development and strategic advisory services. The term of the agreement is twelve months at a cost of $20,500 on execution and $12,500 per month thereafter. In addition, we issued 100,000* shares of common stock, no par value, and warrants to purchase 500,000* shares of common stock exercisable at $0.41 per share and 100,000* shares of common stock exercisable at $1.20 per share. The warrants shall be exercisable for a period of two years, shall vest immediately and will be deemed earned upon issuance. All options shall have "piggyback" registration rights. We believe the above issuances were exempt from registration pursuant to the exemption provided by Section 4(2) of the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. -18- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 31. Rule 13a-14(a)/15d-14(a) Certifications. Exhibit 32.1 Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements.** Exhibit 32.2 Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.** (b) Reports on Form 8-K. On October 7, 2005, the Company filed a report on Form 8-K to disclose non-reliance and restatement of previously issued financial statements and the appointment of a new director. * Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005. ** The Exhibit attached to this Form 10-QSB shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. -19- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THINKPATH INC. Dated: November 21, 2005 By: /s/ Declan French By: /s/ Kelly Hankinson --------------------- ----------------------- Declan French Kelly L. Hankinson Chief Executive Officer Chief Financial Officer -20-

THINKPATH INC 10-Q