Management Letter for Fiscal 1996

Management Review of Operations
and Financial Statements for Fiscal 1996
and first quarter of fiscal 1997.

Dear Fellow Shareholders:

Over the last four years, the focus of your company's efforts have changed. Four years ago we were a Canadian Junior Mining Company which held mineral properties that management believed were worth tens of billions of dollars. Technology was barely on our horizon.

Now, we are an intense and energetic Research and Development Company, complementing our mineral properties with technologies which hold enormous and unique potential for the world.

Mineral Properties

Sales efforts and discussions right now are at a 10 year high. Roche Bay is well placed in this buying cycle as the finest untapped iron ore deposit in the world. Freuchen Bay has many similarities to several major mining districts which have yielded tens of billions of dollars in revenues to date.

Borealis has changed our strategy with regards to our mining properties. We are planning on putting the properties in two stand-alone companies, Faraway Gold Mines Limited, and Roche Bay Mining Limited. These companies can then pursue their options more independently. Borealis will, at least initially, be the control shareholder in each. This change in strategy has been developed after extensive discussions with funding sources. Most funding sources for these properties desire the ability to take the properties public on a stand alone basis. In the past year we have been pursuing interim funding which would allow us to complete a crucial drill program on Freuchen Bay and help establish its future worth. Likewise, we have courted major players to fund Roche Bay. Both of these efforts have been undertaken with the understanding that we are willing to sell the properties outright for cash and shares or any number of other financing options.

This change in tack shows promise, and we are hopeful that we will see reward for the tens of millions of dollars we have invested over the past decades in the exploration and development work in the NWT. These are good transactions for the Borealis' shareholders and by next year all mining interests should be recorded as investments in other companies.

Finances

This transition from Mining Company to R&D Company has had far-reaching effects on Borealis' books, stemming in large part from the decision to write off virtually all of our expenses and investments, including all Research and Development expenditures.

The 1996 deficit was made up of $1,466,989 of administrative expenses and $2,825,967 in write down of mineral properties. This compared with the 1995 figures of $1,153,520 in administrative expenses along with $1,804,666 in write downs of mineral properties. With other recorded charges and gains, the total deficit for fiscal 1996 was $3,980,522. This compares with a deficit of $3,013,455 for fiscal 1995.

The administrative expenses for the past several years were mostly Research and Development expenses by our various research subsidiaries. We feel that we are getting tremendous value for our money.

The only expenditure the auditors are not taking to zero is direct payments to the various patent and trademark offices of the world. These total $21,994 to the March 31, 1996 year end.

With all these write-downs the company's deficit has grown from $25,246,768 to $29,227,290, resulting in a negative net worth of $1,440,033 for 1996 as compared with a positive net worth of $2,464,656 for 1995. However, this is not to say that these assets have no value. As an example, we are negotiating to sell for about $90,000 an asset which has been written-down to $1,706. We expect to sell for several millions of dollars in the foreseeable future another asset which we carry on our books at $1.

It should be noted that shares in companies that are carried at zero are being sold now for hundreds of thousands of dollars valuing the companies at millions of dollars. We expect to have many companies in which we have large share positions to sell shares for millions of dollars. On a consolidated basis this helps the capital position, though because of the conservative accounting approach, it is not income to your company.

Given the company's long term deficit, we are often asked: How does Borealis finance all of its activities? After all, the company is attempting to dominate, through basic technological advances coupled with key strategic partnerships, Refrigeration, Electric Motor, and Steel-making markets worldwide. The answer to this question is that the shareholders, researchers, staff, officers, directors and outside research houses are financing our operations. For example, senior management put in $477,851 in 1996 as compared to $366,538 in the previous year.

In the world of R&D companies, ours are minuscule expenditures. But they are serious sums of money for us. In return for the money, we have made tremendous advances. Your company is working very hard to return value for your investment.

If we did not believe we will be receiving billions of dollars in value for our expenditures and risks taken, we would not be taking these risks.

After year end, an additional $2,261,931 in capital was added by the issuance of shares to shareholders and close business associates of management, making our net worth positive.

Corporate Structure

Borealis Exploration Limited (the public company in which you own shares) owns 100% of Borealis Exploration Incorporated, which owns 99% of Borealis Technical Incorporated Limited, which owns varying amounts in the Borealis Subsidiary Companies. As of today, all of the subsidiary companies are indirectly wholly owned by Borealis Exploration Limited, with the exception of Borealis Cool Manufacturing Limited. Borealis Exploration currently owns about 82% of this subsidiary, with that interest expected to drop to about 52% as Borealis Cool Chips(tm) (for refrigeration) are developed and taken to market.

As discussed above, Borealis is having its interests reduced in these companies by the companies themselves selling off shares in private transactions. There are over 20 identified market driven companies today and we expect that number to grow to around 200 in the next several years. These share sales by the various subsidiary companies should continue to be a source of capital for your company as they pay back overheads which are their responsibility. We expect to retain majority ownership positions in all of these subsidiary companies.

Technology

Borealis has significantly strengthened its core technologies, and has continued to advance into new fields.

Over the past year we have obtained public vindication of our refrigeration science from an industry leader who stated that Borealis technology has the potential to dominate their industry. We have built a laboratory version (a proof of concept device) of Borealis Cool Chips(tm) and demonstrated that it works at room temperatures - a first recorded instance. Most recently, we have opened serious negotiations with a range of key companies in the global markets with a view to forming a consortium with the financial power and commitment to see the product through all development phases into the marketplace.

At the same time, we continue to work at developing the Borealis Green Steel Technology(tm), demonstrating and certifying the performance advantages of the Borealis Motor(tm), and building more advanced prototypes of the Borealis Refrigeration Technology(tm). In all cases, we are aiming to lock in strategic partnerships with key industrial giants en route to the commercialization of our technologies and entry into the marketplace. This process will take time and money.

If you are not familiar with the progress of our technology research and the claims we make for our technologies, we strongly urge you to visit our Web site, at http://www.borealis.com where we provide a great deal of information on our activities.

Last year we said that "we have every expectation of property and technology sales in fiscal 1996." While we fell short on property sales, we had a technology sale which financed the Proof of Concept work. Due to a contractual default, caused by non-related events, the third party defaulted, returning to Borealis any possible interest they had earned in the research work.

As stated above, your company has been also selling shares in subsidiary companies for the development of its projects. Monies received for research projects are now being booked either as revenue and expensed or as capital in subsidiary companies and then expensed. From your management's perspective, this is very careful and conservative treatment of our financial health.

Other Corporate News

If you read the Financial Notes carefully, you will see that we have a fine that has to be paid to the Canadian Government. Weconsider this fine an outrage. Individuals with the Canadian Government and GNWT participated in the looting of one of our camps and then fined us for their actions to cover for it. We are planning on paying the fine, and we are suing the government for monetary damages which far exceed the cost of the fine. This is a matter of on-going litigation, but even if we lose the case, this should not have a material effect on our financial statements or financial position. We have already accounted for the fine in our books as a liability, though we feel our legal position is strong.

Everybody should look at the Web page to see the Appeals Court decision on Borealis, our Solicitor and your President/Chairman. In this case, actions by the Alberta Securities Commission were effectively reversed by the Appeals Court. Cases against regulatory institutions are rarely won, and management is pleased. We now trade in Toronto and are regulated by the Ontario Securities Commission as our senior jurisdiction.

As soon as we can arrange it, we are working for your company to be a full SEC-reporting company, listed on a major US exchange. This move will be expensive and time consuming, but it is a very good move for increasing our visibility, and our regulatory environment. We are at present a SEC reporting company and are listed in Standard & Poors.

There are basic differences between Canadian and US disclosure rules. Canadian regulators are free to second-guess the actions of a company, all of their announcements, and even basic corporate decisions. To date, we have been criticized by our regulator for doing the Research and Development work in the framework of Borealis Exploration when the regulator would have preferred us to start a new company, and abandon Borealis' shareholders. We chose not to do so, and as a result we are under additional scrutiny from the Canadian Securities Authorities. The corollary, of course, is that you, our shareholders, own our technology in addition to the mineral properties.

The United States SEC, by contrast, requires a full and honest disclosure, but does not generally second-guess management. We welcome this regulatory framework, and think that we will be better able to maximize shareholder return in this environment.

Borealis is run for the benefit of its shareholders. Borealis runs a very open company, with weekly reports to its shareholders, and daily updates are sent when warranted. We contend that, through our mailing list on the Internet, Borealis provide as much or more information about your company as any public company in the world. This mailing list, the BoreyNet(tm), is open to all. You will be added by writing to Isaiah@borealis.com. We also maintain a frequently updated Web page at http://www.borealis.com which contains detailed corporate summaries as well as our press releases and weekly updates. Nevertheless, if you have any questions about what your company is doing, or about this statement, we welcome your comments and queries, which may be sent via e-mail to: pr@borealis.com.

We deeply appreciate the support of you, our shareholders, and we are proud of our record of protecting your interests.

We have every expectation of great excitement, progress, and success in the coming year.

May you all be inscribed for a happy, healthy, and prosperous New Year.

Thank you,

BOREALIS EXPLORATION LIMITED

Rodney T. Cox, President/Chairman
Isaiah W. Cox, Secretary/Chief Operating Officer