2008 Annual Report

TSX.V: AMA

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Table of Contents

Introduction ................................................................................................................ 3

Letter to the Shareholders ......................................................................................... 4

Industry Trends and News ......................................................................................... 6

Solutions & Services .................................................................................................. 9

Management Discussion & Analysis ........................................................................ 11

Management’s Report.............................................................................................. 28

Auditors’ Report ....................................................................................................... 29

Consolidated Balance Sheets.................................................................................. 30

Consolidated Statements of Loss and Deficit .......................................................... 31

Consolidated Statements of Cash Flows ................................................................. 32

Notes to Consolidated Financial Statements ........................................................... 33

Corporate Information .............................................................................................. 51

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Introduction

AeroMechanical Services Ltd. provides proprietary technological solutions and services designed to reduce costs and improve efficiencies in the aviation industry. The company has successfully commercialized three products and associated services currently marketed to airlines, manufacturers and maintenance organizations around the world. Its technologies, afirs UpTime, FIRST and Fuel MI allows airlines to monitor and manage aircraft operations anywhere, anytime, in real-time.

AeroMechanical was founded in 1998 and has been publicly traded on the Toronto Venture Exchange (TSX.V: AMA) since March 2003. The Company’s solutions and services are primarily sold under the FLYHT brand name.

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Letter to the Shareholders Dear Shareholders, On behalf of the management team and employees of AMA, I would like to thank you for your continued support and to share a few thoughts on the year past and the year ahead. 2008 was a roller coaster for AMA and the industry we serve. We experienced unprecedented fuel prices and the attendant paralysis of industry decision making related to spending. Then, as fuel prices receded, the ongoing global recession set in, causing a reduction of demand for passenger and cargo services; the degree of the drops in demand vary by segment and region - the results and projections are well documented in the press. Add to that the wait-and-see effect of changes in governments in the US and elsewhere, and it all added up to a challenging year for all of us. However, despite the foregoing issues and the impact of a major customer becoming insolvent, we are pleased to report that we achieved more than 100% growth in our cash revenues, finishing the year at $5.2 million. Additionally, after the end of the year, we signed a significant agreement with Sierra Nevada Corporation to help finish the design of our next generation products, assume responsibility for the manufacture and support of the products, as well as represent the products to the military markets around the world. Most significant in our revenue numbers is the substantial growth in recurring revenue as the installed base increases utilization of our UpTime web-based services. The effect of the fuel price instability and the global recession on your investments in AMA were dramatic, as our share price was taken down along with the entire TSX average and the perceptions of potential adverse effects of the aforementioned issues on our company. This drop was disappointing to shareholders and management as we have moved the business onto much more solid ground for long term growth and profitability. However, when widespread sell-offs occur, the discrimination between companies is often lacking and good companies get devalued. However, for AMA, we see a silver lining to the black economic clouds. First and foremost, our core business is all about providing airlines and unscheduled operators with timely information that allows managers to save money. The returns that are coming in from our existing customer base are convincing and compelling. Nothing could be more appropriate to an industry challenged with reducing costs and protecting revenue. Our new fuel management products, FIRST and Fuel MI, are making the difference in customer deliberations about investing in afirs UpTime, as the payback is immediate and very material. These products are enabling customers to reduce fuel consumption and greenhouse gas emissions by 3-6%, which translates into hundreds of thousands of dollars in savings per year for typical airliners, as well as significant reductions of greenhouse gases.

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Secondly, the downturn is causing operators to delay replacement of existing aircraft with new aircraft, cancel or delay deliveries, and develop plans to upgrade current aircraft. This opens the door for afirs UpTime to be considered for those aircraft that were previously scheduled for replacement. Furthermore, the reduced pressure on operations has freed up aircraft for installations that previously might have been delayed 2 years. Finally, our new partnership with Sierra Nevada Corporation creates the corporate bulk and capability that now distinguishes AMA from those competitors who are selling only part of a total system solution. Sierra Nevada will also provide AMA a fast track to the military market to access hundreds if not thousands of potential target aircraft for our solutions. We wish to thank our loyal customers, employees, and shareholders for bearing with us through a very trying but exciting year and look for good things for all in the coming years. Yours truly,

Richard E. Hayden President

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Industry Trends and News AeroMechanical Services Ltd is influenced by world trends more so than aviation trends and those trends drive our access to customers more than anything. The run up of world crude oil prices last year created paralysis in airlines and other sectors. When people thought they had a handle on the oil price, the opposite occurred and prices fell to lower levels than anyone could have predicted. The following chart shows the volatility of Jet fuel over the last 10 years.

A recent article in the Toronto Star stated:

“airlines everywhere are cutting routes, grounding aircraft and laying off staff in the midst a worldwide recession. "We are in the worst trading environment the industry has ever faced," said Willie Walsh, CEO of British Airways PLC, shortly before announcing a BA operating loss of $218.8 million (U.S.) in 2008. "Alarm bells are ringing everywhere," says Giovanni Bisignani, director general of the International Air Transport Association, whose members account for more than 90 per cent of commercial air traffic. "This industry is in intensive care. Airlines face two immediate fundamental challenges: conserving cash and carefully matching capacity to demand."

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AeroMechanical’s experience has not been this drastic, we have certainly seen programs we thought would proceed quickly take a lot of time to get through the management of our prospects. Everyone is evaluating programs and only implementing those that can save them money. Our recent program additions to help manage fuel and greenhouse gas emissions, have been a real hit with prospective clients. There is growth projected in the industry as a further quote from the Toronto Star article states:

“Yet there are glimmers of blue skies ahead even this early in the airline crisis. IATA estimates that global carriers will spend 31 per cent less on fuel in 2009. It also expects a lift from economic stimulus packages rolling out in North America, Europe and China, which encourages IATA's Bisignani, for one, to anticipate a quicker turnaround than in previous industry slumps. Longer term, the Official Airline Guide, a trade group that monitors worldwide maintenance and capacity trends, forecasts a 38 per cent increase in the global airline fleet by 2018. An "Open Skies" pact between Canada and the European Union, to be signed in May and providing reciprocal flying rights to carriers on both continents, is expected to create up to 1,000 new Canadian jobs in its first year, and boost traffic roughly 40 per cent.After quadrupling in size over the past three decades, the world airline business directly and indirectly accounts for a whopping 7.5 per cent of global GDP. And future growth rates will be higher still, claims aircraft maker Boeing Co. "Over the past 20 years, air travel grew by an average of 4.8 per cent each year," Boeing says in its latest market outlook. "This was despite two major world recessions, terrorist acts, the Asian financial crisis of 1997, the severe acute respiratory syndrome (SARS) outbreak in 2003 and two Gulf Wars." Boeing projects that over the next two decades, passenger travel will grow 5 per cent annually on average, and cargo traffic by 5.8 per cent. Not to be outdone, Boeing rival Airbus SAS points to tremendous developing-world demand growth for air travel. "While China and India will remain the largest (emerging-economy markets), Airbus forecasts that some 30 additional emerging economies, including Argentina, Brazil, South Africa and Vietnam, with a combined population of almost three billion people, will grow increasingly prominent by 2026"

AeroMechanical is seeing strong demand in areas of the world not as deeply hurt by the recession. When the rest of the world starts its comeback, AeroMechanical will be ready with exciting products, services and a strong loyal client base who can attest to the savings our

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solutions bring to them. The Star article also alluded to the growth of onboard sales with the comment below from one of the industries’ most notable characters.

“And if that doesn't work, there's the standby of squeezing the most loyal flyers for every nickel and dime. Or pound, in the case of Ryanair Holdings PLC, Europe's largest discount airline, which proposes to charge its passengers a quid to use the loo. We're not talking chump change here. Michael O'Leary, Ryanair's flamboyant CEO, calculates the move could raise about £15 million, which he vows to pass on to customers in reduced fares“

AeroMechanical is currently developing a real time approval of credit card data in conjunction with a major supplier to the industry. If someone would just invent a credit card door lock we could automatically put Mr. O’Leary’s vision on the map.

While we continue to work through the ups and downs of the industry, our strategy of a few years ago to diversify from our USA Low Cost Carriers (“LCC”) client base to a wider geography and diversify to specialty carriers, regional airlines, leisure travel carriers as well as the LCCs continues. AeroMechanical has continued to grow and we are pleased with our performance in a very tough year for aviation.

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Solutions & Services

AeroMechanical’s solutions and services are proudly marketed and sold under the FLYHT brand name. The Company provides innovative value added data and consulting solutions designed to improve profitability and efficiency within the aerospace industry.

afirs UpTime afirs UpTime is a satellite-based Automated Flight Information Reporting System (afirs) that allows aircraft operators to manage and monitor aircraft operations anywhere, anytime, in real-time. The afirs unit is an avionics component that resides on the aircraft. The afirs unit monitors the various systems on the aircraft, and when certain events are detected information is transmitted via Iridium satellite. The afirs unit also provides satellite phone capabilities and connectivity to a laptop computer in the cockpit allowing aircrew to make phones calls, request weather reports and send messages to the ground. UpTime is the ground based database that receives the information, stores it, and creates reports for customers.

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FIRST FIRST (Fuel Initiative Reporting System Tracker), provides a tool to eliminate uncertainty about the effectiveness of an airlines fuel saving initiatives. FIRST pinpoints exactly where fuel savings can be made and reveals the lost opportunity cost of non-compliance. The information is presented on an easy to read executive dashboard through our UpTime web interface. Fuel MI The Fuel Management Information (Fuel MI) tool provides detailed statistical reports in graphical format. Reports help airlines’ by comparing flight plan predictions with in-flight actual values. The Fuel MI tool allows an airline to isolate key queries by city pair, airport, fleet type or aircraft over a specified time period, maximizing their operational decision capabilities. Fuel Evaluation The Fuel Evaluation service is a consulting engagement is where our team of experts evaluate an airline’s operations and develops recommendations to reduce fuel consumption and CO2 emissions. The team is comprised of industry experts in the fields of flight operations, dispatch and operations control, and maintenance and engineering. They have experience with fleet sizes ranging from 2 to 300+ aircraft including all Boeing, Airbus and regional aircraft manufacturers’ models.

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Management Discussion & Analysis This management discussion and analysis (“MD&A”) should be read in conjunction with the audited annual consolidated financial statements of AeroMechanical Services Ltd. (“AMA” or the “Company”) as at and for the years ended December 31, 2008 and 2007. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Additional information with respect to AMA can be found on SEDAR at www.sedar.com. This MD&A is dated April 8, 2009. Non-GAAP Financial Measures The Company reports its financial results in accordance with generally accepted accounting principles (GAAP). It also occasionally uses certain non-GAAP financial measures, such as working capital and cash revenue. AMA defines working capital as current assets less current liabilities. AMA defines cash revenue as financial statement revenue plus arrangement consideration received during the period that has not yet been recognized as revenue in the period. These non-GAAP financial measures are always clearly indicated. The Company believes that these non-GAAP financial measures provide investors and analysts with useful information so they can better understand the financial results and perform a better analysis of the Company’s growth and profitability potential. Since non-GAAP financial measures do not have a standardized definition, they may differ from the non-GAAP financial measures used by other companies. The Company strongly encourages investors to review its financial statements and other publicly filed reports in their entirety and not rely on a single non-GAAP measure. Forward-Looking Statements This discussion includes certain statements that may be deemed “forward-looking statements”. All statements in this discussion other than statements of historical fact, that address future acquisitions and events or developments that the Company expects are forward-looking statements. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include market prices, foreign exchange rates, continued availability of capital and financing and general economic, market or business conditions in the aviation industry or any effect those may have on our customer base. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

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Overview AeroMechanical Services Ltd. is a designer, developer, and service provider of innovative solutions to the global aerospace industry. The Company’s solutions are designed to improve the productivity and profitability of our customers. The major products of the Company are the Automated Flight Information Reporting System (“afirs”), UpTime, Fuel Initiative Reporting System Tracker (“FIRST”), Fuel Management Information (“Fuel MI”), Underfloor Stowage Unit, and AeroQ. These products are marketed globally by a team of several employees and agents based in Canada (Calgary and Ottawa), United States (Boston and Portland), United Kingdom, France, Switzerland, and Argentina. A Calgary employee is currently spending more than 95% of his time in China working on opportunities there. In 2008 AMA continued on the progress made in 2007 through an increase in recurring revenues of afirs UpTime and services revenue. This progress with these two revenue streams further defines AMA as an aviation solutions company. The research and development of our leading edge technology and services and the development of add on products such as FIRST and Fuel MI, is being transformed into a continuous telecommunications revenue stream. To further this initiative, AMA continued to add Supplemental Type Certificates (“STCs”), therefore broadening the aircraft types, models and jurisdictions in which the afirs UpTime solution can be implemented. The process is a requirement that cannot be shortcut by any potential competitors and therefore, as the stable of STCs grow, the barriers to entry increase. Customer installation schedules continue to be a challenge. Customer installation schedules are determined by the “C Check” schedules. “C Checks” are the regular inspections made on all commercial aircraft after a set number of hours of operation of the aircraft or a time limit, allowing for the installation of AMA’s products. The Company obtains this schedule from a customer upon the signing of a contract, and manages the planned versus actual installations. During 2008 the Company developed relationships with third parties to provide installation services to new and existing customers. The service has been well received by airlines and has proven beneficial in accelerating the installation process. Trends and Economic Factors The Company continues to capitalize on the need for timely flight and sensor data from the aircraft to the ground operations and maintenance facilities. Airlines are increasingly looking for methods to reduce costs and more efficiently operate their aircraft. Margins are extremely thin in the airline industry. Fuel and labour compete as the largest operating expense for airlines, making up approximately 25 percent of an airline’s annual operating costs. The slightest decrease in fuel consumption can turn into big savings. Some of the fuel saving methods currently used by airlines include: using one engine instead of two while taxiing, tankering extra fuel to avoid refueling at expensive locations, and removing unnecessary equipment. The afirs, UpTime, FIRST and Fuel

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MI solutions provide airlines with the data to save fuel costs and to improve operational efficiency a valuable tool in managing aircraft operations. AMA customers are showing significant return on investment over the costs of afirs and UpTime. In 2008 the Company witnessed extreme decline across a variety of financial markets, resulting in substantial volatility and uncertainty on a global basis together with recessionary conditions in many economies. The Company was not immune from the impact of these economic conditions. In particular, the aviation industry has been impacted by a slow down in the demand for air travel, both business and vacation. The offset to the industry was a major reduction in fuel costs, which has reduced operating costs and removed some of the pressure from the industry. The Company remains optimistic about its business outlook for 2009 as the aviation industry continues to adopt technology that will help it monitor flight operations and reduce costs. The high fuel prices of early 2008 and the economic turmoil in the later part of the year a further incentive to the industry to adopt leading edge technology such as afirs, UpTime, FIRST and Fuel MI. The Company has seen an upsurge in interest from legacy airlines for its technology as they strive to improve operational efficiency and reduce costs. The weakening of the Canadian dollar relative to the US dollar since early 2008 has positively impacted the Company’s revenues and income. As a result of these movements, the Company’s Canadian dollar revenues, which are substantially all denominated in US dollars, were higher than would have been had the foreign exchange not changed. While a significant amount of the Company’s costs are denominated in Canadian dollars, a significant portion of marketing costs are non-Canadian denominated, and therefore create some natural hedge against the fluctuations of the Canadian dollar. System Approvals AMA has received STC approvals for afirs on the following aircraft:

Airbus A319, A320, A321 Boeing B737-200, 300, 400, 500 Boeing B737-500, 600, 700, 800 Boeing B757-200 Boeing B767-200, 300 Bombardier DHC-8-100, 200, 300 Bombardier CRJ100, 200, 400 Fokker F100 Hawker Beech 850XP, 900XP, 950XP DC-10 Viking Air DHC-7 (LSTC)

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AMA has a pending STC approval for afirs, expected in 2009, on the following aircraft:

Airbus A330 Hawker Beech 750

AMA has STC applications in process for afirs, expected to be submitted in 2009, on the following aircraft:

Boeing B747-100, 200 Boeing B747-300, 400 Boeing B747-8 MD-81/82/83/87/88

Results of Operations – Year Ended December 31, 2008 Revenues The following table shows, afirs and UpTime revenue as well as other revenue which consists of consulting services and interest revenue. The Company’s long-term investment in marketing, research and development and building relationships has resulted in a strong pipeline of prospective customers around the world. The ongoing revenue streams from our existing customer base will continue to expand throughout future years. In 2008 the Company commenced using a new service agreement, which passes title of equipment to the purchaser. This results in two types of revenue streams: (1) leases and (2) sales depending on the type of service agreement. In accordance with the Company’s revenue recognition policy for lease type agreements, the arrangement consideration are deferred as unearned revenue and revenue is recognized over the initial term of the contracts. In the early stages of the Company’s growth this will result in less recognized revenue than cash received. For sales type agreements, afirs fees are deferred as unearned revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and the customer has accepted, the system, the deferred amount is fully recognized in revenue along with the work in progress as cost of sales. Under both forms of agreement, the UpTime usage fees are recognized as the service is provided based on actual customer usage that month. The effect in the year is that AMA received $5,252,618 (2007 - $2,638,111) in cash revenue which is calculated as $3,176,995 (2007 - $1,989,404) reported as financial statement revenue plus $2,186,541 (2007 - $693,463) being cash received for arrangement consideration less the portion of cash received during the year that is recognized in financial statement revenue of $110,918 (2007 - $44,756). In 2008, revenue for the Company continued to reflect the benefits of the research and development efforts that have been invested over the past 8 years. AMA has products tested, certified, and installed on aircraft to generate revenue, as well as inventory to continue the roll out to our new and existing customers.

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Total revenues were $3,176,996 and $1,989,404 for fiscal 2008 and 2007, respectively.

Other revenue is derived from the sale of underfloor stowage units, the sale of consulting services, licensing fees, and interest. During 2008, underfloor stowage units revenue was $254,946 (2007 – $193,159) where the increase from the previous year was due to increased interest in the product. Consulting revenue increased to $484,408 (2007 - $nil) due to the increased emphasis on providing consulting services to airlines. Licensing fees were $Nil (2007 – $797,989l) and interest revenue was $81,616 (2007 - $95,861). Gross Margin and Cost of Sales Gross margins before general and administrative expenses was $1,017,149 for 2008 (2007 - $638,009). This increase was the result of the continued increase in afirs, UpTime revenue, increased consulting services revenue, and the move to sales type agreements from lease type agreements. Cost of sales for afirs, UpTime was $1,978,679 on revenues of $2,356,025 representing a gross margin of $377,346 in 2008. This compares to 2007’s $1,206,506 cost of sales on revenues of $902,395 or a gross loss of $304,111 on afirs, UpTime revenue. The increase in the 2008 gross margin over 2007 on afirs UpTime is primarily due to an increased number of installed afirs units under the sales type agreement versus the lease type agreements. The sales type agreements revenue recognition policy does not require the deferral of revenue, which improves the margin. Cost of sales on other revenue was $181,167 on revenues of $820,970 for a gross margin of $639,803. In 2007 other revenue cost of sales was $144,889 on revenues of $1,087,009 or a gross margin of $942,120. While this appears to be a reduction in the gross margin for other revenue in 2007 there was a one-time license fee of $727,989 with no corresponding cost of sales. The increase in other revenue in 2008 is the result of an increase in consulting services provided to customers.

2008 2007 2006 afirs

UpTime Other Total afirs UpTime Other Total afirs

UpTime Other Total

Q1 $ 349,893 $ 48,175 $ 398,068 $ 171,778 $ 666,140 $ 837,918 $ 93,901 $ 124,427 $ 218,328

Q2 475,675 120,588 596,263 191,278 281,844 473,122 140,304 158,548 298,852

Q3 502,966 287,027 789,993 256,710 55,974 312,684 134,397 124,416 258,813

Q4 1,027,491 365,180 1,392,671 282,629 83,051 365,680 239,262 79,211 318,473

Total $ 2,356,025 $ 820,970 3,176,995 $ 902,395 $ 1,087,009 $ 1,989,404 $ 607,864 $ 486,602 $1,094,466

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Net Loss, General and Administrative and Marketing Expenses In 2008 the key driver of our performance continued to be the timely closing of contracts with potential customers, the airline installation schedules of afirs on contracted aircraft due to their maintenance schedules, and the timely receipt of STC approvals from multiple regulators. The key challenge continues to be the speed with which potential customers execute contracts and the difficulty in predicting the accuracy of aircraft maintenance schedules that are supplied by customers. As a result, the net loss for the year ended December 31, 2008 was $8,523,228 compared with $6,868,314 loss for 2007. Our expense categories are not broken into departments for this year as the entire company was and is focused on getting our main products, afirs, UpTime, FIRST and Fuel MI, out to our customers. For the year ended December 31, 2008, expenses were $9,504,377 compared with $7,506,323 for 2007.

2008 Revenue Cost of Sales Gross Margin

afirs UpTime $ 2,356,025 $ 1,978,679 $ 377,346

Other 820,970 181,167 639,803

Total $ 3,176,995 $ 2,159,846 $ 1,017,149

2007 Revenue Cost of Sales Gross Margin

afirs UpTime $ 902,395 $ 1,206,506 $ (304,111)

Other 1,087,009 144,889 942,120

Total $ 1,989,404 $ 1,351,395 $ 638,009

2006

Revenue Cost of Sales Gross Margin

afirs UpTime $ 607,864 $ 535,046 $ 72,818

Other 486,602 326,101 160,501

Total $ 1,094,466 $ 861,147 $ 233,319

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Major Expense Categories

2008 2007 Variance Explanation

Salaries and benefits, third

party consulting, and share

compensation

5,865,426 4,624,138 1,241,688

Staff levels increased marginally in 2008 because of the addition of key individuals to meet specific needs and a settlement of an action brought by the former President, resulting in increased salaries of $610,331 over 2007, and related statutory payments and benefits increased $36,835. Third party consultants were engaged in 2008 to deal with sales and customer support of international customers resulting in an increase in consulting costs of $476,634. Share based compensation increased by $179,607 over 2007. With the goal of retaining leading edge staff, the need for training was addressed in 2007 with less of a requirement in the current year, thus reducing that cost by $61,719 during 2008.

Research and development costs

745,308 253,236 492,072

The increase in research and development is the result of increased direct research and development activities to meet the ongoing needs of the aviation industry. This included $255,925 for a new operating system for afirs which was required to conform to emerging aviation rules. As well, the introduction of additional service offerings such as FIRST and Fuel MI had created an increase in the requirement for research and development.

Office, computer services,

insurance, depreciation stock exchange fees and

bad debts

787,360 572,455 214,905

Office costs increased $214,905 primarily due to an increase in equipment amortization of $85,655, which was the result of equipment added in late 2007 and software added early in 2008. Bad debt expenses during 2008 were $175,333 versus none in 2007 due to the bankruptcy of three customers during the year. Foreign exchange loss decreased $20,793 from 2007 as the result of the weakening of the Canadian dollar. Other office related expenses tracked either at the same level or lower than 2007.

Interest and bank charges

41,963 24,094 17,869 Bank charges increased in 2008 due to an increase of $8,386 in service charges related to increased banking activity and increased interest expense of $9,483 related to capital leases.

Rent 240,589 194,448 46,141 Rent expense increased in 2008 as the result of the operating expense adjustment in the year being 17,194 lower than in 2007.

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Marketing 1,009,963 1,079,353 (69,390)

The decrease in marketing was related to the decreased requirement for general marketing material as significant investment was made in 2007. General marketing expenses such as trade show costs, advertising, and promotional material decreased $108,827. The travel and entertainment portion of marketing increased $39,437 over 2007. The Company expects that expenses in marketing will continue at these levels over the next year, as AMA continues to target global markets for its solutions. Marketing costs do not include salaries.

Investor relations 158,330

193,981

(35,651)

Investor relations costs decreased $35,651 due to the decreased emphasis on the use of investor show attendance and video presentations and the termination of the relationship with Agoracom. The Company maintained a presence in the capital markets and by presenting the Company to institutional investors, retail brokers, and retail investors via one on one meetings. The Company believes that one on one meetings to be the most effective use of funds.

Professional fees 691,438 564,618 126,820

Accounting and audit fees were $78,270 in 2008 compared to $119,665 in 2007, a decrease of $41,395. Legal fees were higher in 2008 by $119,130 because of legal work related to the actions by a Toronto based company. These actions are related to an allegation of patent infringement, request for a review of the Company’s patent, and an allegation of interference with an employment contract. Consulting fees were $170,904 in 2008 compared to $121,848 in 2007, an increase of $49,056. This increase is primarily due to the use of a consulting group to assist with the introduction of FIRST and Fuel MI to the aviation industry.

Total 9,540,377 7,506,323 2,034,054

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2008 Q4 Q3 Q2 Q1

Revenue $1,392,671 $789,994 $596,263 $398,067 Loss 1,912,469 1,814,010 2,709,237 2,087,512

Loss/Share 0.02 0.02 0.03 0.03

2007 Q4 Q3 Q2 Q1

Revenue 365,680 312,684 473,122 837,918 Loss 2,387,162 1,693,258 1,978,629 809,265

Loss/Share 0.04 0.03 0.03 0.01

2006 Q4 Q3 Q2 Q1

Revenue 318,473 258,813 298,852 218,328 Loss 1,231,842 1,176,113 965,349 1,166,402

Loss/Share 0.02 0.03 0.03 0.04 Comments on Quarterly Results Quarterly revenue streams continue to shift to monthly repeating afirs, UpTime revenues from specific sales of goods and consulting revenue streams over 2008. The monthly and annual UpTime fees will increase over time as more aircraft are installed with afirs and customers contract for the FIRST and Fuel MI products that were introduced in 2008. Research and Development Research and development costs are being expensed as incurred. The majority of R&D costs are salaries and consulting expenses related to the design, testing, and manufacture of afirs, the design and testing of UpTime, and the design and testing of FIRST and Fuel MI. There are also expenses being incurred in the preliminary phases of AeroQ development. Foreign Exchange All international sales of the Company’s products and services are denominated in U.S. dollars. Accordingly, the Company is susceptible to foreign exchange fluctuations. In 2008, over 97% of the Company’s gross sales were made in U.S. dollars compared to nearly 96% in 2007. The Company expects this to increase with the aviation industry conducting a majority of its transactions in U.S. dollars, the opportunity for sales in Canadian dollars is limited. Transactions with Related Parties During the year the Company’s transactions with a company owned by a director to supply consulting services totaled $73,694. All of the transactions were at amounts that were agreed by the parties and approximated fair market value. The remaining transactions with related parties

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were normal business transactions related to their positions with the Company. These transactions were expense reimbursements for business travel and other company expenses paid by the related party and were measured at exchange amounts that the related party paid to a third party and were substantiated with a third party receipt. Liquidity and Capital Resources During 2008, the Company issued Common Shares through a private placement, the exercise of warrants, and the exercise of stock options. This has improved the financial position of the Company, especially when coupled with the increased cash based revenue. Pursuant to a private placement on March 13th, 2008 the Company issued 4,500,000 units at $1.00 for gross proceeds of $4,500,000. Each unit consisted of one common share and one-half of one purchase warrant where one full warrant is exercisable until March 13, 2010 at $1.30. The net cash proceeds after issuance costs of these private placements totaled $4,010,491. This private placement also included the issuing of an additional 472,500 relating to agent options. Of these warrants 315,000 are agent option units which consist of one common share and one-half warrant which are exercisable at $1.00 until September 13, 2009. The remaining 157,500 warrants that are associated with the agent options entitle the holder to acquire one common share at $1.30 until March 13, 2010. During 2008, AMA issued a total of 4,751,597 common shares on the exercise of various series of warrants at a weighted average price of $0.39 per share. These exercised warrants provided net cash proceeds of $1,853,411. A further 528,000 common shares were issued to directors, officers, employees, and consultants on the exercise of stock options. The weighted average issue price of these common shares was $0.32, resulting in cash proceeds of $169,230. The successful equity offerings combined with increased cash based revenue throughout the year created sufficient capital to continue to operate and to provide capital for inventory to be deployed in order to expand our customer base. Working capital at December 31, 2008 was $1,335,314 compared to $3,469,360 in 2007. The decrease in working capital is primarily attributed to the operating loss for the year of $8,523,228 less the net funds generated from the raising of capital equity of $6,522,641; the remaining decrease of $133,459 is the result of various changes in working capital components as the result of business operations during the year. The Company currently has an available operating line of $250,000 which had not been drawn at December 31, 2008. The operating line bears an interest rate of Canadian chartered bank prime plus 1.0% and is secured by assignment of cash collateral and a general security agreement. The achievement of positive earnings before interest and amortization is necessary before the Company can improve liquidity. The Company has continued to expand its cash flow potential through its continued marketing drive to clients around the world. Management believes that the company’s installation momentum, conversion of installations to recurring revenue, new revenue streams, and ongoing sales will be sufficient to meet standard liquidity requirements. If general

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economic conditions or the financial condition of a major customer deteriorates then the Company may have to raise the necessary financing in the capital markets. As at April 8, 2009, AMA’s issued and outstanding shares was 82,500,219. Contractual Obligations The Company has entered into various leases for its operating premises and equipment. Future minimum annual payments under these operating leases are as follows:

Year Premises Equipment Total

2009 $ 392,335 $ 34,263 $ 426,5982010 419,619 22,107 441,7262011 432,652 16,630 449,2822012 445,685 445,6852013 458,718 458,7182014 76,815 76,815

$ 2,225,824 $ 73,000 $ 2,298,824 In addition, the Company has repayment obligations related to two Government of Canada loan programs. Under the Industrial Research Assistance Program (IRAP), the outstanding balance is $307,101 (2007 – $330,966), which is to be repaid, as a percentage of gross revenues, over a five to ten year period commencing in October 2005. Under the Technology Partnerships Canada (TPC) program, the Company has an outstanding balance of $85,410 (2007 - $104,523) to be repaid over a ten-year period commencing in April 2006. During 2008, AMA leased computer equipment totaling $15,612 (2006 - $15,612), which was accounted for as capital leases that expire in various years to 2011. The minimum lease payments are as follows:

The imputed interest is $17,575 (2007 - $7,847), leaving a total obligation of $55,425 (2007 - $41,832).

Year Total

2009 $ 34,263

2010 22,107

2011 16,630

$ 73,000

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Results of Operations – Three Months Ended December 31, 2008 Revenues The introduction of a new service agreement that passes title of the equipment to the purchasers has resulted in two types of revenue streams, leases and sales. The Company has adopted, for lease type agreements, a revenue recognition policy whereby the arrangement consideration is deferred as unearned revenue and revenue is recognized over the initial term of the contract. This will result in less revenue recognized than cash received. For sales type agreements, afirs fees are deferred as unearned revenue and corresponding expenses are recorded as work in progress. Upon acceptance by the customer the deferred revenue is fully recognized in revenue along with work in progress as cost of sales. The effect in the quarter of these two revenue streams is that $1,934,462 (2007 - $640,941) was received in cash revenue which is calculated as $1,392,672 (2007 - $365,680) reported as financial statement revenue plus $624,805 (2007 - $300,176) being cash received for arrangement consideration less the portion of cash recognized during the quarter that is included in financial statement revenue of $83,015 (2007 - $24,915). Revenue increased $1,026,992 in the fourth quarter compared to the fourth quarter of last year. afirs UpTime revenues increased by $775,443 over the fourth quarter of 2007. Product sales revenue increased $145,995 and services revenue and interest increased $105,554 over the same quarter of the previous year. The increase in afirs UpTime revenue is the result of the increased number of installed and revenue generating afirs boxes as well as the installation of afirs from sales contracts where the entire revenue is recognized upon acceptance by the customer. These revenues are expected to grow at a significantly higher rate because of the sales type agreements and the additional revenue generating services that are being offered to customers. As well, the Company has the infrastructure, sales people, and support organization in place to support revenue growth. Gross Margin and Cost of Sales Cost of sales in the fourth quarter of 2008 is $847,179 compared to $610,190 in 2007, an increase of $236,989. The gross margin for the fourth quarter of 2008 was 38.1% versus 15.7% for the same period of 2007. This is a result of an increase in the volume of installations and product mix variations. Included in cost of sales are costs of non-routable parts and travel expenses for our engineers on initial installations of aircraft. Also, the introduction of the sales type agreement will increase the gross margin as all cost of sales are recognized when the revenue is recognized instead of the revenue being recognized over the first term of the agreement. As part of our service agreement, we assist new customers with engineering support on their initial installations. Non-routable parts are parts involved in the installation process that are non-reusable (such as cables) and do not form part of the afirs unit. They would remain on the aircraft if the afirs unit was extracted. The travel and support costs form part of the non-routable parts and are expenses in the period. As we move forward with more clients the result will be less initial installations and increased recurring revenue streams. Accordingly, we will see cost of sales decline and margins increase.

P. 23

Net Loss, General and Administrative and Marketing Expenses The net loss for the quarter ended December 31, 2008 was $1,912,469 (2007-$2,387,162). Included in general and administrative expenses are decreased marketing costs. Marketing expenses decreased by $53,398 to $224,776 over the fourth quarter of 2008. The Company’s focus is on generating new customers and will continue to engage resources in marketing; however, a marketing plan is in place that holds costs in line with the previous year but aims to improve effectiveness for the cost. Office expenses decreased by $149,474 in the fourth quarter over the same period of 2007, primarily due to a $114,146 decrease in professional fees mainly related to legal fees, a $19,403 decrease in equipment costs, and an overall $15,655 decrease in general office expenses. Salaries, the main cost of doing business, increased to $1,504,493 for the quarter versus $1,209,974 for the fourth quarter of 2007, a $294,519 increase. This increase is the result of the settlement of an action brought by the former President and minor staffing changes during 2008. The Company continues to hire qualified personnel as our customer base grows to ensure the Company is prepared for the growth as the result of our strategic business alliances that continue to open opportunities. Stock based compensation was $34,757 in the fourth quarter of 2008 compared to $Nil in the same period of 2007. The increase was due to an option grant to non executive employees in the quarter to recognize their service to the Company. Research and Development Research and development costs are being expensed as incurred. The fourth quarter development costs for 2008 were $258,158 as compared to $102,408 in the same quarter of 2007. The majority of R&D costs are salaries, consulting expenses, testing and certification, and other expenses related to ongoing design, testing and certification of afirs UpTime, FIRST, and Fuel MI. The introduction of additional service offerings such as FIRST and Fuel MI created an increase in the requirement for research and development. There is also a minor amount of expense associated with the preliminary phases of AeroQ. Development continues on a next generation afirs product in collaboration with Sierra Nevada Corporation as noted in Subsequent Events. Critical Accounting Policies and Estimates The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada. The preparation of these financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based on management’s historical experiences and various other assumptions that are believed by management to be reasonable under the circumstances. Such assumptions are evaluated on an ongoing basis and form the basis

P. 24

for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. The following are the Company’s critical accounting policies, significant estimates, and assumptions used in preparing our financial statements:

1. The Company maintains an allowance for doubtful accounts for estimated losses that may occur if customers are unable to pay trade balances owing to the Company. This allowance is determined based on a review of specific customers, historical experience and economic circumstances.

2. Inventories are carried at the lower of cost and net realizable value. Provisions for excess or obsolete inventory are recorded based on Management’s assessment of the estimated market value of components and rental assets.

3. The Company evaluates its future tax assets and records a valuation allowance where the recovery of future taxes does not meet the required level of certainty. At December 31, 2008, valuation allowances are provided for the full amount of future tax assets.

4. The Company accrues reserves for estimated afirs warranty expenses for the repair or replacement of defective products leased or sold. The warranty reserve is based on an assessment of the historical experience of the Company. If the Company suffers a decrease in the quality of its products, an increase in warranty reserve may be required.

5. The Company recognizes revenue from lease type agreements as agreement consideration which is recorded as unearned revenue and recognized into revenue over the term of the lease agreement. Sales type agreement consideration is deferred as unearned revenue and corresponding expenses are recorded as work in progress until the system is fully functional and customer acceptance has been obtained when the full deferred amount is recognized in revenue along with the work in progress as cost of sales. For both types of agreement the revenue from UpTime usage fees is recognized at the end of each month and is based on actual usage during that month.

Under floor storage box revenue is recognized when the unit is shipped and consulting services revenue is recognized when the services are completed.

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Financial Instruments The Company is exposed to fluctuations in the exchange rates between the Canadian dollar and other currencies with respect to assets, sales and purchases. The Company monitors fluctuations and may take action, if deemed necessary to mitigate its risk. The Company is exposed to changes in interest rates as a result of the operating loan, bearing interest based on the Company’s lenders’ prime rate. There is a credit risk associated with accounts receivable where the customer fails to pay invoices. The Company extends credit generally to credit worthy or well established customers. In the case of network access fees or product sales the invoiced amount is generally payable before the afirs or other product is shipped to the customer. The Company assesses the financial risk of a customer and based on that analysis will require that a deposit payment be made before a service is provided. As well, for monthly recurring revenue the Company has the ability to disable afirs UpTime and/or supply data in cases where the customer has not fulfilled its financial obligations. Subsequent Events On March 3rd, 2009, the Company signed a License and Manufacturing Agreement with Sierra Nevada Corporation (“SNC”) of Reno, Nevada. Under the agreement SNC will manufacture the Company’s afirs product and market the afirs UpTime technology and products to the global military market. Under the terms of the agreement SNC will pay the Company a license fee and a royalty for all future sales to the military, contribute funds, personnel, and expertise to the design of next generation afirs technologies, and share other revenue opportunities from the sale of afirs UpTime technology by SNC to military organizations. Contingencies The Company is defending itself in two actions instigated by the same plaintiff and the Company believes that, as the amount of any liability is undetermined at this time, no liability has been accrued for claims on these actions: In September 2007, the Company, among others, was served with a counterclaim alleging that the Company induced a breach of contract and interfered with economic relationships. The Company maintains that the claims are without merit and no liability in respect to this action has been included in these consolidated financial statements, as management intends to vigorously defend the matter and believes the outcome will be in its favour. On November 7, 2007, the Company filed a statement of defense and a counterclaim against three parties for interference with legally binding contracts, disrupted business, attacks on the Company’s reputation, and costs. Any amounts awarded as a result of these actions will be reflected in the year the amounts become reasonably estimable.

P. 26

In September 2007, the Company was served with a claim of patent infringement seeking unspecified damages. The Company maintains that the claims are without merit and no liability in respect to this action has been included in these consolidated financial statements, as management intends to vigorously defend the matter and believes the outcome will be in its favour. On December 24, 2007 the Company filed a Motion to Dismiss, which was heard on April 8, 2008 and dismissed with the caveat that the plaintiff could file an amended complaint by April 30, 2008 in which both inventors are named as parties. On April 28, 2008 the plaintiff filed an amended complaint and the Company filed a motion to dismiss on May 12, 2008. On June 20, 2008 the court issued an order requiring the plaintiffs to submit supplemental information and rescheduled the hearing on the motion. On August 20, 2008 the court issued an order granting the motion to dismiss with the caveat that the plaintiff could file an amended complaint, which they did, and the Company filed a third motion to dismiss on September 17, 2008. On October 30, 2008 the court issued an order affording the plaintiffs leave to conduct jurisdictional discovery by February 7, 2009 and until February 27, 2009 to file supplemental opposition to the Company’s motion to dismiss. The discovery was completed and the plaintiff submitted a supplemental response on February 27, 2009. On March 17, 2009 the plaintiff filed a voluntary dismissal without prejudice. Therefore, no amount will be awarded. The Company filed a motion for sanctions against the plaintiff and their attorneys. The motion requests that the court award sanctions in the form commensurate with the Company’s legal fees. The motion is to be heard on May 15, 2009. On October, 28, 2008, the Company was served with a Statement of claim by the former President alleging that on or about August 5, 2008, his employment was wrongfully terminated without cause and without notice. The action was settled on March 27, 2009 and the court action was discontinued. The amount of the settlement was included in the consolidated statements for 2008. Adoption of New Accounting Standards The Canadian Accounting Standards Board (AcSB) has confirmed a strategic plan to converge Canadian GAAP with International Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences on recognition, measurement and disclosures. IFRS is likely to result in a change in certain of the Company’s accounting policies and may require restatements for comparative purposes on amounts reported by the Company for the year ended December 31, 2010. In order to mitigate the impact of the adoption of IFRS, the AcSB will continue to issue accounting standards that are converged with IFRS. The Company is in the education and assessment phases of the conversion. This includes, among other things, educating staff on and identifying the differences between existing Canadian GAAP and IFRS as it relates to the Company and the analysis of the potential for exemptions under IFRS 1. As of January 1, 2008, the Company adopted CICA Handbook Section 1535, “Capital Disclosures”, Section 3862, “Financial Instruments – Disclosures”, and Section 3863, “Financial Instruments –

P. 27

Presentation”. The new standards have been adopted on a prospective basis with no restatement of prior periods. Section 1535 requires additional disclosures regarding the Company’s capital management (note 14), while section 3862 addresses financial instruments and the nature, extent and management of risks arising from financial instruments to which the Company may be exposed (note 13). The adoption of Section 3863 had no effect on the presentation of the Company’s financial instruments. The CICA issued new accounting standard Section 3064 “Goodwill and Intangible Assets” which is applicable for fiscal years beginning on or after October 1, 2008. The Company does not expect any significant effect on its financial statements due to the application of this standard. As of January 1, 2008, the company has adopted newly issued accounting standards for inventories, relating to the method of accounting for inventory and related disclosures. The adoption had no effect on the amounts recorded or presentation contained within the financial statements.

P. 28

Management’s Report To the Shareholders of AeroMechanical Services Ltd.

The accompanying consolidated financial statements of AeroMechanical Services Ltd. and all of the information in its annual report are the responsibility of Management and have been approved by the Board of Directors.

Management has prepared the consolidated financial statements in accordance with Canadian generally accepted accounting principles and where alternative accounting methods exist, Management has chosen those that it deems most appropriate.

Financial statements are not precise since they include amounts based on estimates and judgments. Such amounts have been determined on a reasonable basis to ensure the financial statements are presented fairly in all material aspects. Management has prepared the financial information in this annual report and has ensured it is consistent with the consolidated statements.

The Company maintains internal accounting and administrative controls designed to provide reasonable assurance that the financial information is relevant, reliable, and accurate and that the Company’s assets are appropriately accounted for and adequately safeguarded.

The AeroMechanical Board of Directors is responsible for ensuring Management fulfills its responsibilities for financial reporting and for reviewing and approving the financial statements. This is carried out principally through the Audit Committee. AeroMechanical’s auditors have access to the audit committee.

The Audit Committee of the Board of Directors, consisting of a majority of independent members, meets regularly with management, as well as external auditors, to discuss auditing, internal controls, accounting policy and financial reporting matters. The Committee reviews the financial statements with both management and the independent auditors and reports its finding to the Board of Directors before such statements are approved by the Board.

William Tempany Thomas R. French, CGA Chief Executive Officer Chief Financial Officer April 8, 2009 April 8, 2009

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Auditors’ Report To the Shareholders of AeroMechanical Services Ltd.

We have audited the consolidated balance sheets of AeroMechanical Services Ltd. as at December 31, 2008 and 2007 and the consolidated statements of loss and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants Calgary, Canada April 8, 2009

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Consolidated Balance Sheets December 31, 2008 & 2007 2008 2007 Assets Current assets:

Cash and cash equivalents $ 801,404 $ 1,945,687 Restricted cash (note 8) 250,000 284,500 Accounts receivable 1,163,420 621,726 Prepaid expenses 312,379 349,924 Inventory (note 3) 1,787,811 1,810,483 4,315,014 5,012,320

Property and equipment (note 4) 262,331 252,826 Rental assets (note 5) 1,347,508 981,414 Intangible asset 34,992 34,992 $ 5,959,845 $ 6,281,552 Liabilities and Shareholders’ Equity Current liabilities:

Accounts payable and accrued liabilities $ 1,558,594 $ 1,219,977 Current portion unearned revenue 1,289,466 232,805 Current portion of deferred leasehold inducements (note 6) 2,281 13,687 Current portion of loans payable (note 7) 105,068 52,810 Current portion of obligation under capital lease (note 9) 24,291 23,681 2,979,700 1,542,960

Unearned revenue 812,608 689,861 Deferred leasehold inducements (note 6) - 2,281 Loans payable (note 7) 287,443 382,679 Obligation under capital lease (note 9) 31,134 18,150 Warranty - 13,842 4,110,885 2,649,773 Shareholders’ equity:

Share capital (note 10) 28,982,059 23,992,644 Warrants (note 10) 1,717,678 493,589 Contributed surplus (note 10) 1,467,350 940,445 Deficit (30,318,127) (21,794,899)

1,848,960 3,631,779 Going concern (note 1) Commitments (note 11) Subsequent event (note 17) Contingencies (note 18) $ 5,959,845 $ 6,281,552 See accompanying notes to the consolidated financial statements. On behalf of the board Director – William Tempany Director – Paul Takalo

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Consolidated Statements of Loss and Deficit Years ended December 31, 2008 and 2007 2008 2007 Revenue:

afirs UpTime revenue $ 2,015,810 $ 709,191 Product sales revenue 595,161 386,363 Services revenue and interest 566,024 893,850 3,176,995 1,989,404

Cost of sales 2,159,846 1,351,395 Gross margin 1,017,149 638,009 Expenses:

Salaries and benefits 5,160,967 4,098,886 General and administrative 1,502,596 1,400,126 Marketing 1,009,963 1,079,353 Research and development 745,308 253,236 Stock based compensation 704,859 525,252 Bad debts 175,334 - Amortization 174,693 89,038 Interest and bank charges 41,563 24,094 Foreign exchange loss 15,546 36,338 Loss (gain) on asset disposal 9,548 - 9,540,377 7,506,323

Net loss and comprehensive loss (8,523,228) (6,868,314) Deficit, beginning of year (21,794,899) (14,926,585) Deficit, end of year $ (30,318,127) $ (21,794,899) Net loss per share:

Basic and diluted (note 2 (m)) $ (0.11) $ (0.11) See accompanying notes to the consolidated financial statement

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Consolidated Statements of Cash Flows Years ended December 31, 2008 and 2007 2008 2007 Cash provided by (used in): Operating activities:

Net loss $ (8,523,228) $(6,868,314) Add items not affecting cash

Amortization 174,693 89,038 Amortization of rental assets 124,219 82,749 Stock based compensation 704,859 525,252 Loss on asset disposal 9,548 - Write down of rental assets 75,117 122,400 Warranty expense (13,842) 1,825 Unrealized foreign exchange loss 30,215 26,232

(7,418,419) (6,020,818)

Net change in non-cash working capital balances (note 16) 992,646 (591,873) (6,425,773) (6,612,691)

Financing:

Issuance of common shares 6,522,641 6,583,616 Repayment on capital leases (33,756) (18,444) Share issue costs (487,089) (122,884) Loan repayment (42,978) (37,213) 5,958,818 6,405,075

Investments:

Restricted cash 34,500 - Purchase of property and equipment (147,898) (117,220) Proceeds on disposal of property and equipment 1,500 - Purchase of rental assets (565,430) (417,866) (677,328) (535,086)

Change in cash and cash equivalents (1,144,283) (742,702) Cash and cash equivalents, beginning of year 1,945,687 2,688,389 Cash and cash equivalents, end of year $ 801,404 $ 1,945,687 See accompanying notes to the consolidated financial statements.

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Notes to Consolidated Financial Statements Years ended December 31, 2008 and 2007

AeroMechanical Services Ltd. (the “Company”) is a public company incorporated under the Canada Business Corporations Act. The Company is listed on the Toronto Venture Stock Exchange, trading under the symbol “AMA”.

The Company is a designer, developer and service provider to the global aerospace industry. The major products are the Automated Flight Information Reporting System (“afirs™”), UpTime™, AeroQ™ FIRST, Fuel MI and Underfloor Stowage Units.

1. Going concern:

These consolidated financial statements have been prepared on the basis that the Company will continue to realize its assets and meet its obligations in the ordinary course of business. At December 31, 2008, the Company had working capital of $1,335,314 (2007 – $3,469,360), a deficit of $30,318,127 (2007 - $21,794,899), a net loss of $8,523,228 (2007 - $6,868,314) and negative cash flow from operations of $6,425,773 (2007 - $6,612,692).

The Company’s ability to continue as a going concern is dependent upon attaining and sustaining profitable operations and/or obtaining additional financing in order to fund its on-going operations (note 15). The Company’s ability to attain profitable operations and positive cash flow in the future is dependent upon various factors including its ability to acquire new customer contracts, the success of management’s continued cost containments and general economic conditions.

There is no assurance that the Company will be successful in attaining and sustaining profitable operations and cash flows or raising additional capital to meet its working capital requirements. If the Company is unable to satisfy its working capital requirements from these sources, the Company’s ability to continue as a going concern and to achieve its intended business objectives will be adversely affected. These financial statements do not reflect adjustments that would otherwise be necessary if the going concern assumption was not valid such as revaluation to liquidation values and reclassification of balance sheet items.

2. Significant accounting policies:

The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles within the framework of the accounting policies as summarized below.

(a) Basis of presentation:

These financial statements consolidate the accounts of the Company and its wholly-owned subsidiaries, Flyht Inc, AeroMechanical Services USA Inc, Flyht Corp. and Flyht India Corp. The latter three subsidiaries were inactive for the reporting period and currently remain inactive. All inter-company transactions have been eliminated upon consolidation.

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2. Significant accounting policies (continued):

(b) Measurement uncertainty:

The preparation of the financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from and affect the results reported in these consolidated financial statements as future confirming events occur.

Amounts recorded for stock-based compensation are based on management’s estimates of share price volatility and the expected life of the options. By their nature, these estimates are subject to uncertainty and the impact on the consolidated financial statements of future periods could be material.

Amounts recorded for warranty are based on management’s estimates of the costs associated with afirs™ UpTime™. Costs of replacing components that are not functioning plus associated costs of travel and staff time have been included in the estimates. By their nature, these estimates are subject to uncertainty and the impact on the consolidated financial statements of future periods could be material.

Amounts recorded for provisions for obsolete inventory are based on management’s estimates which consider a variety of factors that may affect the carrying values of inventories. These factors include, but are not limited to, market demand, technology changes and design changes.

(c) Revenue recognition:

The Company’s main revenue sources are derived from the rental and sale of afirs™ units and related UpTime™ usage fees and the sale of under floor storage boxes. The Company has developed a new service agreement for agreements executed after January 1, 2008 which pass title of the equipment to the purchaser. This has resulted in two types of revenue steams, leases and sales, in 2008 depending on the type of service agreement. Under the terms of lease type agreements, revenue from afirs™ is derived from an upfront fee which is recorded as unearned revenue and recognized into revenue over the term of the lease agreement. For sales type service agreements, afirs™ fees are deferred as unearned revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and customer acceptance has been obtained, the full deferred amount is recognized in revenue along with the work in progress as cost of sales. Under both forms of agreement, revenue from UpTime™ usage fees is recognized at the end of each month and is based on actual usage during that month.

Revenue from the sale of under floor storage boxes is recognized when the unit is shipped, title is transferred and collection is reasonably assured. Certain customers have prepaid for product services not yet delivered. These amounts are recorded as accounts payable and accrued liabilities on the balance sheet and are recorded as revenue in the period in which such product or services are delivered.

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2. Significant accounting policies (continued):

(d) Property and equipment:

Property and equipment is recorded at cost. Amortization is provided annually at rates calculated to write-off assets over their estimated useful lives as follows:

Computers 30% declining balance Computer Software 12 months straight-line Equipment 20% declining balance Leasehold improvements Term of lease

(e) Rental assets:

Rental assets are recorded at cost and consist of afirs™ units that are in use in customer aircraft, spare units held by airlines and units available for sale or lease. The Company classifies afirs™ units as rental assets until it is determined that the unit is leased or sold. Amortization is provided for units that are leased on a straight line basis over 6 years and for sold units the carrying value is recorded as cost of good sold. For units leased, no amortization is recorded until the unit is leased to a customer.

(f) Future income taxes:

The Company uses the asset and liability method to account for income taxes. Future income taxes are calculated based on temporary differences arising between the financial statement carrying values and tax bases of assets and liabilities. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Changes in income tax rates that are substantively enacted are reflected in the accumulated future tax balances in the period the change occurs. To the extent that future income taxes are not considered more likely than not to be realized, a valuation allowance is provided.

(g) Foreign currency translation:

Transactions denominated in US dollars have been translated into Canadian dollars at the approximate rate of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in foreign currencies have been translated into Canadian dollars at the year end exchange rates. The operations of the Company’s foreign subsidiary are considered self sustaining and therefore its accounts are translated into Canadian dollars under the current method of accounting whereby the assets and liabilities are translated into Canadian dollars using the exchange rate in effect and the consolidated balance sheet date. Revenues and expenses are translated at rates in effect at the time of the transactions. Exchange gains or losses on translation of the Company’s net investment in the foreign operation are deferred in the cumulative adjustment component of shareholders’ equity. Due to the timing and limited nature of the activities in the subsidiary in the current year, there was no exchange gains or losses on translation of the Company’s net investment in the foreign operation. Other exchange gains and losses are included in the consolidated statement of loss and deficit.

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2. Significant accounting policies (continued):

(h) Research and development costs:

Research costs are expensed as incurred. Development costs incurred in the design and development of new products are capitalized if certain defined criteria are met. The criteria for capitalization of development costs is met when the product is clearly identified, the technical feasibility has been established, management has indicated its intention to market the product, the future market is identified and adequate resources exist or are expected to be available to complete the project. Upon commercial production or use of the product, deferred costs will be amortized over the estimated useful life of the product. If the criteria are no longer met, costs for a specific product are charged against earnings. To date, all development costs have been expensed as incurred.

(i) Financial instruments:

Financial instruments are initially classified into one of five categories: (i) held-for-trading, (ii) held-to-maturity, (iii) loans and receivables, (iv) available-for-sale, and (v) other financial liabilities. All financial instruments including all derivative instruments are recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities – except those in the held-for-trading and available-for-sale categories – must be determined at amortized cost using the effective interest rate method. Held-for-trading financial instruments are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial instruments are measured at fair value with changes in fair value recognized in comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net earnings.

The Company classifies its cash, cash equivalents and restricted cash as held-for-trading, accounts receivable are classified as loans and receivables. Accounts payable and certain accrued liabilities are classified as other liabilities all of which are measured at amortized cost. Carrying values approximate the fair values due to the short term nature of the instruments.

(j) Inventory:

Inventory is stated at the lower of cost and net realizable value. Management evaluates inventory for obsolescence and charges obsolescence to cost of goods sold. Cost is determined using the first in first out method. Inventories include under floor storage units and general parts which are held pending installation and sale to the customer.

(k) Cash and cash equivalents:

Cash and cash equivalents consists of deposits in banks, redeemable deposits, Guaranteed Investment Certificates, and short-term investments with initial maturities of three months or less.

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2. Significant accounting policies (continued):

(l) Warranty:

Provisions for estimated expenses related to product warranties are made at the time products are leased or sold. These estimates are established using historical information relating to the nature, frequency, and average cost of warranty claims.

(m) Per share amounts:

The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments. The treasury stock method assumes that proceeds received from the exercise of in-the-money instruments are used to repurchase common shares at the average market price for the period.

The weighted average number of shares outstanding during the year was 81,201,148 (2007 – 64,304,464).

(n) Stock-based compensation:

The Company has a stock option plan for directors, officers, employees and consultants of the Company. The executive stock compensation plan provides for direct grants of stock to the Company’s officers. Under the terms of the stock option plan, the options shall be granted at an exercise price not less than market price of the stock on the date of issuance, less a discount up to a percentage permitted by the rules and policies of the stock exchange.

The Company records compensation expense in the consolidated statement of loss and deficit for stock options using the fair value method. Compensation costs are recognized over the vesting period, and are determined using the Black-Scholes option pricing model.

(o) Intangible asset:

Intangible asset is stated at cost and is comprised of a license. The license has an indefinite life. Intangible asset is subject to an annual impairment test or more frequent if events or changes in circumstances indicate that the carrying value may not be recoverable.

(p) Deferred leasehold inducements:

Leasehold inducements are deferred and amortized against rent expense on a straight-line basis over the term of the lease. When a lease interest is abandoned, the balance of the leasehold inducement is offset against the lease buyout cost or rent expense during the applicable period.

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2. Significant accounting policies (continued):

(q) Adoption of new accounting standards:

As of January 1, 2008, the Company adopted CICA Handbook Section 1535, “Capital Disclosures”, Section 3862, “Financial Instruments – Disclosures”, and Section 3863, “Financial Instruments – Presentation”. The new standards have been adopted on a prospective basis with no restatement of prior periods. Section 1535 requires additional disclosures regarding the Company’s capital management (note 15), while section 3862 addresses financial instruments and the nature, extent and management of risks arising from financial instruments to which the Company may be exposed (note 14). The adoption of Section 3863 had no effect on the presentation of the Company’s financial instruments.

The CICA issued new accounting standard Section 3064 “Goodwill and Intangible Assets” which is applicable for fiscal years beginning on or after October 1, 2008. The Company does not expect any significant effect on its financial statements due to the application of this standard.

The Canadian Accounting Standards Board’s recently announced that as of January 1, 2011 International Financial Reporting Standards (IFRS) will replace current Canadian GAAP for publicly accountable enterprises. The Company has been carefully evaluating its own implementation plan and assessing the impact the changes will have on the organization. As the final implementation date approaches, the Company will continue to monitor developments.

As of January 1, 2008, the company has adopted newly issued accounting standards for inventories, relating to the method of accounting for inventory and related disclosures. The adoption had no effect on the amounts recorded or presentation contained within the financial statements.

3. Inventory:

2008 2007 Raw material $ 1,374,771 $ 1,810,483 Work in progress 413,040 -

$ 1,787,811 $ 1,810,483

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4. Property and equipment:

Accumulated Net book 2008 Cost amortization value Computer $ 420,211 $ 261,702 $ 158,509 Software 101,088 74,563 26,525 Equipment 144,658 72,065 72,593 Leasehold improvements 79,369 74,665 4,704 $ 745,326 $ 482,995 $ 262,331 2007 Computer $ 331,950 $ 197,578 $ 134,372 Equipment 153,376 57,469 95,907 Leasehold improvements 79,369 56,822 22,547 $ 564,695 $ 311,869 $ 252,826

Included in computer and equipment are capital leases with a cost of $98,418 (2007 - $60,568), accumulated amortization of $41,065 (2007 – 20,941) and a net book value of $57,352 (2007 - $39,627).

5. Rental assets:

Accumulated Net book 2008 Cost amortization value Leased assets $ 724,871 $ 248,772 $ 476,099 Assets available for sale or lease 1,089,926 218,517 871,409 $ 1,814,797 $ 467,289 $ 1,347,508 2007 Leased assets $ 705,942 $ 172,246 $ 533,696 Assets available for sale or lease 591,118 143,400 447,718 $ 1,297,060 $ 315,646 $ 981,414

In 2008, it was determined that certain rental assets in the amount of $75,117 (2007 – $122,400) were obsolete. This obsolescence was recorded in cost of sales.

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6. Deferred leasehold inducements:

2008 2007 Balance, beginning of year $ 15,968 $ 29,655

Amortization (13,687) (13,687) Balance, end of year 2,281 15,968 Less: current portion (2,281) (13,687)

$ - $ 2,281

7. Loans payable:

2008 2007 The Industrial Research Assistance Program "IRAP"

loan is non-interest bearing and is repaid annually, based on 1.11% of gross revenues, commencing October 2005 and is unsecured. The current portion

is calculated based on the actual gross revenues in the previous quarter plus the Company’s revenue projections for the next nine months. $ 307,101 $ 330,966 The Technology Partnerships Canada "TPC" loan is

non-interest bearing and unsecured. The loan is repayable annually, based on 15% of the initial contribution when the Company has achieved more than 10% growth in gross revenues above the previous year's gross revenue and the gross revenue for the year is greater than the base amount. The base amount is defined as the Company’s gross revenue in fiscal 2004, which was at $556,127. 85,410 104,523

392,511 435,489 Less: current portion (105,068) (52,810) $ 287,443 $ 382,679

8. Bank loan:

Operating demand loan is available to the Company up to a maximum of $250,000 (2007 – $284,500). The operating demand loan bears interest at Canadian chartered bank prime plus 1.0%. The operating demand loan and other revolving credit facilities are secured by an assignment of cash collateral in the amount of $250,000 and a general security agreement including a first ranking security interest in all personal property. The amount of the cash collateral has been disclosed as restricted cash. As at December 31, 2008 and 2007, the facility has not been drawn.

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9. Obligations under capital lease:

The Company is party to various capital leases for computer hardware and software that expire in 2011. Future minimum lease payments under the capital leases are as follows:

2008 2007 2008 $ - $ 29,400 2009 34,263 16,275 2010 22,107 4,003 2011 16,630 - 73,000 49,678 Less: imputed interest (17,575) (7,847) Less: current portion (24,291) (23,681) $ 31,134 $ 18,150

10. Share capital:

(a) Authorized:

Unlimited numbers of: Common shares Classes A, B and C preferred shares, issuable in series

The preferred shares may be issued in one or more series and the directors are authorized to fix the number of shares in each series and to determine the designation, rights, privileges, restrictions, and conditions attached to the shares in each series.

(b) Issued and outstanding: Number of

shares Value Common shares: Balance December 31, 2006 58,488,823 $ 17,052,282

Issued for cash 6,519,467 2,929,180 Exercise of employee options 1,259,993 430,966 Contributed surplus from exercise of employee options 290,632 Exercise of warrants 6,452,339 3,223,470 Contributed surplus from exercise of warrants 179,908 Share subscription receivable 9,090 Share issue costs (122,884)

Balance December 31, 2007 72,720,622 23,992,644 Issued for cash 4,500,000 4,500,000 Bifurcation of warrants issued to contributed surplus (1,353,218) Exercise of employee options 528,000 169,230 Contributed surplus from exercise of employee options 177,955 Exercise of warrants 4,751,597 1,853,411 Contributed surplus from exercise of warrants 398,515 Share issue costs (756,478)

Balance December 31, 2008 82,500,219 $ 28,982,059

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10. Share capital (continued):

(c) Stock option plan:

The Company grants stock options to its directors, officers and consultants. The Company has a policy of reserving up to 10% of the outstanding common shares for issuance to eligible participants. As at December 31, 2008, there were 8,250,022 (2007 – 7,272,062) common shares reserved for this purpose. All options vest immediately at the grant date with the exception of 33,333 (2007 – 116,666) options granted to employees during 2006 which have not yet vested. The options are granted at an exercise price not less than fair market value of the stock on the date of issuance. A summary of the Company’s outstanding and exercisable stock option grants, as at December 31, 2008 and 2007 and changes during these years is presented below:

2008 2007 Weighted Weighted Number average Number average of exercise of exercise shares price shares price Outstanding, beginning of year 2,235,668 $ 0.50 2,426,995 $ 0.33 Granted 1,752,000 0.54 1,139,000 0.65 Exercised (528,000) 0.32 (1,259,993) 0.34 Cancelled/expired (1,150,670) 0.57 (70,334) 0.57 Outstanding, end of year 2,308,998 $ 0.52 2,235,668 $ 0.50 Exercisable, end of year 2,275,665 $ 0.52 2,119,002 $ 0.48 Weighted average life remaining for the options outstanding and exercisable is 2.8 years for both.

The weighted average fair market value of the options granted during the year was $0.54 (2007 - $0.65) per option. The fair value of the options granted was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

2008 2007 Risk-free interest rate 2.73% 4.69% Expected life (years) 2.4 2.6 Volatility in the price of the Company’s common shares 163% 190% Dividend yield rate 0.00% 0.00%

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10. Share capital (continued):

(d) Contributed surplus:

2008 2007 Balance, beginning of year $ 940,445 $ 705,825 Employee stock options exercised (177,955) (290,632) Stock based compensation 704,859 525,252 Balance, end of year $ 1,467,350 $ 940,445

(e) Warrants:

A summary of the Company’s outstanding warrants and changes during the years are presented below:

2008 2007 Balance, beginning of year $ 493,589 $ 673,497 Finder fee warrants exercised (398,515) (179,908) Warrants issued on private placement 1,353,218 - Agent options issued 269,387 - Balance, end of year $ 1,717,678 $ 493,589

2008 2007 Weighted Weighted Number average Number average of exercise of exercise warrants price warrants price Outstanding, beginning of year 9,535,960 $ 0.52 17,136,376 $ 0.51 Granted 2,722,500 1.27 - Exercised (4,751,597) 0.44 (6,452,339) 0.49 Expired (4,934,363) 0.75 (1,148,077) 0.45 Outstanding, end of year 2,572,500 $ 1.31 9,535,960 $ 0.52

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10. Share capital (continued):

During 2008 the Company issued 4,500,000 units at $1.00 per unit with each unit consisted of one common share and one-half of one purchase warrant. In connection with this private placement 2,250,000 warrants were issued entitling the holder to acquire one common share of the Company at $1.30 until March 13, 2010.

The estimated fair value of these warrants is $1,353,218 or $0.56 per warrant. The fair value of these warrants was estimated using the Black-Scholes option pricing model with average risk-free interest rate of 2.6%, expected life of 2.0 years, volatility in the price of the Company's common shares of 140% and dividend yield of 0.00%.

The remaining 472,500 warrants were issued in connection with the private placement completed in 2008 and consisted of 315,000 agent option units which consisted of one common share and one-half warrant at a price of $1.00 expiring September 13, 2009. These agent options are accounted for as a charge to share issuance costs of $170,233 or $0.54 per warrant. The fair value of the agent options were estimated using the Black-Scholes option pricing model with a weighted average risk-free interest rate of 2.6%, expected life of 1.5 years, volatility in the price of the Company’s common shares of 129%, and a dividend yield rate of 0.00%.

The 157,500 warrants associated with the agent options entitle the holder to acquire one common share of the Company at $1.30 until March 13, 2010. These warrants are accounted for as a charge to share issuance costs of $99,154 or $0.63 per warrant. The fair value of these agent options were estimated using the Black-Scholes option pricing model with a weighted average risk-free interest rate of 2.6%, expected life of 2.0 years, volatility in the price of the Company’s common shares of 147%, and a dividend yield rate of 0.00%.

11. Commitments:

The Company is party to various leases for its operating premises and equipment. Future minimum annual payments under these operating leases are as follows:

2009 $ 426,598 2010 441,726 2011 449,282 2012 445,685 2013 458,718 2014 76,815 $ 2,298,824

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12. Related party transactions:

During the year, the Company contracted with a company owned by a director to supply consulting services totaling $73,694. All of the transactions were measured at the exchange amounts, that being the amount of consideration established and agreed upon by the related parties and approximates fair market value.

13. Income taxes:

(a) The income tax expense differs from the amounts which would be obtained by applying the expected Federal and provincial income tax rate of 29.50% (2007 – 32.12%) as follows:

2008 2007 Computed “expected” tax (recovery) $ (2,514,352) $ (2,206,102) Non-deductible expenses 22,512 20,676 Stock-based compensation 207,933 168,711 Rate change and other 363,322 823,123 Valuation allowance and other 1,920,585 1,193,592 $ – $ –

(b) The components of the Company’s future income tax assets are as follows:

2008 2007 Capital assets $ 19,652 $ 148,108 Intangibles (857) 51 Warranty liability - 3,607 Non-capital loss carry-forwards 6,239,744 4,709,586 Share issue costs 215,546 192,018 Scientific research and experimental development expenditures 1,138,337 648,953 Other 14,643 4,161 Valuation allowance (7,627,065) (5,706,484)

$ – $ –

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13. Income taxes (continued):

(c) The Company has non-capital losses for income tax purposes of approximately $24,589,703 which are available to be applied against future year’s taxable income. The benefit of these non-capital losses has not been recognized in the consolidated financial statements. These losses will expire as follows:

2009 561,577 2010 1,715,370 2014 2,570,288 2015 2,461,959 2026 3,390,309 2027 5,596,948 2028 8,293,252

$ 24,589,703

14. Financial instruments and financial risk management:

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to the relatively short periods to maturity of these instruments. The fair value of the loans payable could not be determined as the timing of repayment is difficult to estimate since they are dependant on future revenues.

The nature of these instruments and the Company’s operations expose the Company to the following risks:

(a) Credit risk:

Credit risk reflects that the Company may be unable to collect amounts due to the Company from customers for its services, products, or other transactions that may be entered into by the Company. The extent of risk depends on the credit quality of the party from which the amount is due.

The Company employs established credit approval and monitoring practices to mitigate this risk, including evaluating the creditworthiness of new customers and monitoring customer payment performance. The Company also includes the ability to receive payments in advance for both services and products in its agreements with customers as well as the ability to suspend services and ongoing support. The Company establishes an allowance for doubtful accounts that corresponds to the credit risk of its customers, historical trends, and economic circumstances.

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14. Financial instruments and financial risk management (continued):

The aging of the accounts receivable as at year end is as follows: 2008 Current, 1 – 30 days $ 711,294 31 – 60 days 136,908 61 – 90 days 171,540 Greater than 90 days 160,623 $ 1,180,365

The movement in the allowance for doubtful accounts as at year end is as follows: Provision Balance, December 31, 2007 $ - Provision 175,333 Accounts receivable written off (175,333) Balance, December 31, 2008 $ -

(b) Interest risk:

The Company is exposed to interest rate risk on cash balances earning interest income and to the extent that it may draw on its operating line of credit which calculates interest as a function of variable interest rates. As at December 31, 2008, the Company does not carry material liabilities that are exposed to variable interest rates.

(c) Liquidity risk:

The Company is exposed to liquidity risk to the extent it is unable to collect its trade receivable balances on a timely basis and generate additional services revenue, which in turn could impact the Company’s ability to meet commitments to creditors. The Company manages its liquidity risks by carrying cash on its balance sheet, by maintaining a conservative capital structure, by prudently managing its credit risks, and by maintaining its relationship with the capital markets to meet any near-term liquidity requirements.

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14. Financial instruments and financial risk management (continued):

(d) Foreign exchange risk:

The Company is exposed to foreign exchange risk primarily in the following ways:

(i) Cash flow – a significant portion of the Company’s revenues and a portion of its expenses are denominated in US dollars. Management estimates that a 1% weakening of the Canadian dollar will increase net earnings by approximately $30,342 and a strengthening of the Canadian dollar will decrease net earnings by approximately $30,342.

(ii) Working capital – the Company has exposure to foreign exchange risk for working capital items denominated in US dollars. At December 31, 2008, working capital denominated in US dollars was approximately $760,506. As a result a 1% weakening of the Canadian dollar will increase net earnings by approximately $7,606 and a strengthening of the Canadian dollar will decrease net earnings by approximately $7,606.

The Company mitigates its exposure to foreign exchange risk in the following ways:

(iii) Cash flow – the Company mitigates its cash flow exposures by the international nature of the business where a significant portion of its marketing costs are in currencies that naturally hedge a portion of US dollar revenue. The Company has not engaged in activities to manage its cash flow foreign currency exposure through the use of financial instruments.

(iv) Working capital – the Company mitigates its working capital exposure by managing its US dollar denominated working capital items to limit the requirement to convert either to or from US dollars to fulfill working capital payment requirements.

15. Capital management:

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern (note 1) so that it can continue to seek to provide returns for shareholders and benefits for other stakeholders, to maintain optimal structure to reduce the cost of capital, and to facilitate the growth strategy of the Company.

The Company monitors its capital management through analysis of cash flow expectations to ensure an adequate amount of liquidity and through the monthly review of financial results and business expectations. The Company considers the shareholders equity to be the capital of the Company.

Based upon the dynamic nature of the aviation and technology markets that the Company engages in, and the low level of tangible assets required, the capital strategy is to carry a low level of debt, including capital leases. Although a formal debt to equity ratio has not been established by the Company, the ratio of debt to equity at December 31, 2008 was 24.2% (2007 - 13.1%)

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16. Supplemental cash flow information:

Change in non-cash working capital:

2008 2007

Changes in non-cash working capital: Accounts receivable $ (571,909) $ (330,123) Prepaid expenses 37,545 (116,884) Inventory 22,672 (1,381,597) Accounts payable and accrued liabilities 338,617 722,446 Unearned revenue 1,179,408 527,972 Deferred lease inducement (13,687) (13,687)

$ 992,646 $ (591,873) Interest earned $ 67,378 $ 85,132 Cash and cash equivalents: 2008 2007 Cash in bank $ 386,404 $ 430,187 Guaranteed investment certificates 415,000 1,515,500

$ 801,404 $ 1,945,687

17. Subsequent event:

On March 3, 2009, the Company signed a License and Manufacturing Agreement with Sierra Nevada Corporation (“SNC”). Under the agreement, SNC will pay an upfront license fee, a royalty on future sales by SNC of afirs™ to the military market and contribute funding, personnel, and expertise to the future design of afirs™. As well, SNC will manufacture the Company’s afirs products under license.

18. Contingencies:

In September 2007, the Company, among others, were served with a counterclaim alleging that the Company induced a breach of contract and interfered with economic relationships. The Company maintains that the claims are without merit. Management intends to vigorously defend the matter and believes the outcome will be in its favour. On November 7, 2007, the Company file a statement of defense and a counterclaim against three parties for interference with legally binding contracts, disrupted business, attacks on the Company’s reputation, and costs. Any amounts awarded as a result of these actions will be reflected in the year the amounts become reasonably estimable.

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NOTES:

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Corporate Information Directors Bill Tempany CEO of the Company

Richard Hayden President of the Company

Doug Marlin President of Marlin Ventures Ltd.

Mike Brown Partner, Geselbracht Brown

Paul Takalo, CA Vice-President, Standen’s Limited

Jack Olcott President, General Aviation Company

Officers Bill Tempany CEO

Richard Hayden President

Thomas French, CGA CFO

Matt Bradley VP Operations

Auditor KPMG LLP Calgary, Alberta

Legal Counsel Chris Croteau Tingle Merrett LLP

Offices Head Office 200W, 1144 - 29 Avenue NE Calgary, Alberta T2E 7P1

US Office Suite 130-310, 2951 Marina Bay Drive League City, TX 77573

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AeroMechanical Services Ltd.

200W, 1144 – 29 Avenue NE Calgary, AB, Canada T2E 7P1

Phone: 403-250-9956 Fax: 403-291-9717

www.flyht.com