Inscape Corporation Announces Third Quarter Results

Business Wire, March 10, 2005

Notes to the Interim Consolidated Financial Statements

As at January 31, 2005

Unaudited (in thousands of dollars except share and per share amounts)

1. BASIS OF PRESENTATION

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles; however, they do not include all of the disclosure requirements for annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies as were used for the consolidated financial statements for the year ended April 30, 2004, except for the changes disclosed in Note 2. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended April 30, 2004 including notes thereto. These interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the periods reported.

2. CHANGE IN ACCOUNTING POLICIES

Effective January 1, 2004, the Company prospectively adopted the new CICA Handbook section 1100, Generally Accepted Accounting Principles (GAAP). This standard establishes what constitutes Canadian generally accepted accounting standards and provides guidance on the GAAP hierarchy. The adoption of this standard did not have a material effect on the Company's results of operations, financial position or cash flows.

Effective May 1, 2004, the Company adopted the requirements of the CICA handbook section 3110 retroactively with restatement, which requires the Company to estimate the fair value of asset retirement obligations arising from the retirement of long lived assets. The Company's obligations are in connection with leased properties. An adjustment was recorded to decrease opening retained earnings for the year ended April 30, 2003 by $137 (net of tax of $81), representing the expense incurred prior to May 1, 2003. There was also an adjustment to increase retained earnings by $65 (net of tax of $33) to reflect the income statement impact for the year ended April 30, 2004. The total estimated undiscounted asset retirement obligations which is expected to settle in 2008 and 2009 is $360. As at May 1, 2004, the present value of these obligations was estimated using a credit-adjusted risk-free rate of 4.21%. During the quarter, the Company's asset retirement obligation increased by $3 and for the nine month period has increased from $325 to $337 as a result of accretion (2004-$317) .

Effective May 1, 2004, the Company adopted the requirements of the Canadian Institute of Chartered Accountants ("CICA") handbook Section 3870 retroactively without restatement. This section requires the Company to estimate the fair value of stock-based compensation granted to employees and to record the expense over the estimated vesting period of the stock options granted. The Company uses a Black Scholes option-pricing model to estimate the fair value of stock options. Using this model, the Company estimated that the total stock-based compensation incurred for the years ended April 30, 2002 and 2003 was $103 and consequently opening retained earnings were adjusted by this amount. The offset to retained earnings was recorded as an increase in contributed surplus. During the quarter, options expired without vesting resulting in a reversal of $56 to selling, general and administrative expense. As a result of this change in accounting policy, a compensation expense of $29 has been recorded to selling, general and administrative expense in 2005 (2004-$53).