Borealis Exploration Limited

(A Company in the Development Stage)

Consolidated Financial Statements

March 31, 1997

(Expressed in Canadian Dollars)

Auditors' Report

To the Shareholders of Borealis Exploration Limited:

We have audited the consolidated balance sheets of Borealis Exploration Limited as at March 31, 1997 and 1996 and the consolidated statements of loss and deficit, contributed surplus and changes in cash position 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 audit.

We conducted our audit in accordance with 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 March 31, 1997 and 1996 and the results of its operations and the changes in its cash position for the years then ended in accordance with generally accepted accounting principles.

August 7, 1997

Consolidated Balance Sheet

March 31, 1997

(Expressed in Canadian Dollars)

1996 1997
Current assets:
$ 13,632 $ -
Mineral properties (Note 4)

$ 5,406,258

$ 5,364,601


Current liabilities:
Bank indebtedness$ -- $ 410
Accounts payable (Note 6)2,652,160 2,692,058
Deposits on share issue (Note 7)939,959
Loans payable (Note 8)57,736 419,047
Due to shareholders 755,076 1,145,251
Royalty payable (Note 9)2,595,300 2,547,871
Contingencies (Note 10)
Subsequent event (Note 13)

Shareholders' Equity
Share capital (Note 11)24,886,715 23,000,531
Contributed surplus4,786,726 4,786,726
Deficit (31,267,414) (29,227,293)
$ 5,406,258$ 5,364,601

Approved by the Board:

_____________________________ Director.

_____________________________ Director.

Consolidated Statement of Contributed Surplus

For the Year Ended March 31, 1997

(Expressed in Canadian Dollars)
Contributed surplus, beginning of year $4,786,726$4,881,660
Decrease arising on the disposition of nil (1996 - 23,917) shares held by subsidiaries at proceeds less than the average paid-up capital - (94,934)
Contributed surplus, end of year $4,786,726$4,786,726

Consolidated Statement of Loss and Deficit

For the Year Ended March 31, 1997

(Expressed in Canadian Dollars)

Salaries and fees for services$2,034,129 $1,040,984
Office, travel and miscellaneous301,453 238,365
Legal and accounting 158,167 49,071
Foreign exchange loss (gain)(71,513) 50,499
Write-down of mineral properties -- 2,825,967
Other items:
Gain on settlement of debts443,785 227,978
Contract revenue22,012 9,375
Foreign exchange gain (loss) on royalty payable (47,429) 75,081
Loss(2,040,121) (3,980,522)
Deficit, beginning of year(29,227,293) (25,246,771)
Deficit, end of year$ (31,267,414) $ (29,227,293)
Basic loss per share$ (0.54) $ (1.24)

Consolidated Statement of Changes in Cash Position

For the Year Ended March 31, 1997

(Expressed in Canadian Dollars)
Operating activities:
Items not involving cash
Write-down of mineral properties -- 2,825,967
Foreign exchange (gain) loss on royalty payable 47,429(75,081)
Changes in non-cash working capital balances
Accounts payable(39,898) 708,597
Financing activities:
Proceeds on issuance of shares and options 1,886,184--
Deposits on share issue939,959 --
Advances (to) from shareholders(390,175) 477,851
Reductions of loans payable(361,311) (11,499)
Proceeds from sale of shares of Borealis Exploration Limited --75,833
Proceeds on disposal of marketable securities --3,640
Additions to royalty payable-- 3,125
Investing activities:
Deferred exploration and development costs (38,691)(41,608)
Increase (decrease) in cash14,042 (3,753)
Cash (bank indebtedness), beginning of year (410)3,343
Cash (bank indebtedness), end of year $13,632$(410)

1. Nature of Operations

The Company has changed its focus from developing its mining properties to conducting research in several technological areas for which it has patents issued or pending. The Company intends on retaining its remaining mining properties for future development.

Substantially all of the Company's expenses relate to its research activities.

2. Continued Operations

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. As of March 31, 1997, the Company had a deficit of $31,267,414 (1996 ­ $29,227,293) and a working capital deficiency of $4,391,299 (1996 ­ $4,256,766). The operations of the Company were primarily funded by increased accounts payable and loans from shareholders. The continued operation of the Company is dependent on its ability to receive continued financial support from shareholders, complete sufficient equity financing or generate profitable operations in the future.

3. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Borealis Exploration Limited and its subsidiaries, Borealis Exploration Incorporated, Borealis Gold Limited, Borealis Technical Incorporated Limited, Borealis Cool Manufacturing Limited and Borealis Power Manufacturing Limited.

Mineral Properties

The Company is in the exploration stage with respect to its mineral properties and accordingly follows the practice of capitalizing all costs related to exploration projects, until such time as the projects are put into commercial production, sold, abandoned or management determines that a write­down to net realizable value is required. If commercial production commences, these capitalized costs will be amortized on a unit­of­production basis.

Exploration costs renounced due to "flow­through" share subscription agreements remain capitalized, however, for income tax purposes, the Company has no right to these expenses nor the related depletion allowance. Under Canadian income tax legislation, the Company has previously entered into share subscription agreements for "flow­through" shares whereby the Company agreed to incur a certain dollar amount of qualifying Canadian exploration costs and renounced these costs to the shareholders.

Property examination costs that do not result in the successful acquisition of an interest in or an agreement on a mineral property are expensed in the year incurred.

3. Significant Accounting Policies (continued)

Valuation of Mineral Properties

Mineral properties are valued at the lower of cost and net recoverable amount.

The values for the mineral properties represent costs to date net of any write­downs and are not intended to reflect present or future values.


Capital assets are amortized using the declining balance method at the following rates:

Mining and geological equipment ­ 30%

Other equipment ­ 20%

Patents are amortized on the straight­line method at a rate of 4% per year.

Foreign Currency Translation

Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Other assets, liabilities, and items affecting earnings are translated into Canadian dollars at rates of exchange in effect at the date of the transaction. Gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the year.

Research and Development Costs

The Company is incurring costs related to research and development of new technologies. These costs are expensed as incurred.

4. Mineral Properties
Roche Bay Magnetite Project
Beginning of year$4,635,017 $4,582,622
Additions during year28,025 52,395
End of year4,663,042 4,635,017
Freuchen Bay Property
Beginning of year729,584 729,584
Net change during year-- --
End of year729,584 729,584
Fat Lake Property
Beginning of year-- 2,351,933
Write-down during year-- (2,351,933)
End of year-- --
Padlei Property
Beginning of year-- 384,513
Write-down during year-- (384,513)
End of year-- --
Mauna Property
Beginning of year-- 102,622
Write-down during year-- (102,622)
End of year-- --

Roche Bay Magnetite Project

In 1968, the Company acquired mineral rights, by permit, which have been converted to a 100% interest in various mineral leases and claims located near Roche Bay. These leases expire in 1998 and 2000. The Company is in the process of renewing the leases for another 21 year period.

The leases and claims are located in the Baffin Mining District of the Northwest Territories.

By agreement dated March 1, 1979, the Company granted a royalty interest to a corporation based on 5% of the crown royalty interest on 10,973 acres of mining leases currently held by the Company.

On March 6, 1979, the Company granted two royalties both based on 18.75% of the crown royalty. One of the royalty agreements was repurchased on September 26, 1984.

4. Mineral Properties (continued)

Freuchen Bay Property

In 1989, the Company acquired permits in the Freuchen Bay Area of the Keewatin Mining District of the Northwest Territories. Claims were staked on these permits in 1992. The Company retains a 100% interest in the FB 1 through FB 6 claims. The claims expire in 2002.

On July 24, 1995, the Attorney General of Canada filed a Notice of Seizure of Goods relating to these mineral properties due to the Company's failure to pay $150,000 in fines and penalties related to the Company's failure to clean up the Fat Lake mine site. Approximately $108,000 of the fine has been paid to date, and the remaining fine and an estimate of the clean up costs of $25,811 have been recorded as liabilities in these financial statements. The Company has made arrangements to complete payment of the fine and ensure the site is cleaned up. When this has been completed the Seizure Notice will be lifted.

5. Mining and Other Equipment
Mining and geological equipment$ 613,330 $ 599,341$ 613,330 $ 594,334
Camp equipment328,847 283,631328,847273,333
Office equipment66,936 34,28757,64825,402
Drilling equipment48,356 44,56248,35643,698
Patents44,5172,904 21,9941,123
$ 1,101,986$ 964,725 $ 1,070,175$ 937,890

The net book value of mining and other equipment is included with the respective mineral properties in the financial statements.

6. Accounts Payable

In 1992, the Company issued 112,199 shares to some creditors in an attempt to settle debts. Certain creditors refused to accept the shares as full settlement of their outstanding accounts and returned the shares to the Company. The Company then held the shares until the market price reached a point where the creditors would accept them in full payment of the outstanding amount.

At March 31, 1997, 10,200 shares related to outstanding accounts payable of $22,950 have not been accepted by creditors.

7. Deposits on Share Issue

During the year, the company received deposits for the issue of shares of its wholly owned subsidiaries Borealis Cool Manufacturing Limited and Borealis Power Manufacturing Limited. The deposits represent purchase of approximately 14% of each company. These shares have not been issued.

8. Loans Payable

The loans are unsecured and bear interest at 3%.

9. Royalty Payable

In 1993, the Company renegotiated its loan with Mr. G. Gillet, which had been assigned to Boston Safe Deposit & Trust Company. Under the terms of the agreement with Boston Safe Deposit & Trust Company the loan was converted into 10,000 common shares of Borealis Exploration Limited and a $1,875,000 U.S. royalty. The royalty is to be paid from 25% of the net proceeds from the lease, sale or other disposition, or production on or from its real property. As security for payment of the Royalty the Company gave an assignment of all receivables derived from its real property. To date, $2,625 U.S. has been paid to Boston Safe Deposit & Trust Company. In 1995, Boston Safe Deposit & Trust Company assigned its interest to its nominee Mitlock Limited Partnership.

10. Contingencies

Certain creditors have initiated legal proceedings to receive payment for amounts which have been recorded in these financial statements. In conjunction with this action, the creditors have had liens registered against certain of the Company's mineral properties.

In 1996, statements of claim were filed by the Attorney General of Canada, the Kilvalliq Inuit Association and the Baffin Region Inuit Associational for failure to clean up sites in Fat Lake, Roche Bay and near

Naguak Lake. At the present time, the result of these claims and any potential cost to the Company is not determined and no liability for this has been recorded in these financial statements.

11. Share Capital

5,000,000 common shares without par value

Number of SharesAmount Number of SharesAmount
Balance, beginning of year3,232,498 $23,084,0593,232,498 $23,084,059
Issued during the year
- Shares issued during the year915,847 2,261,932-- --
- Shares cancelled during the year(133,692) (375,748)-- --
Less - Shares held by the Company4,014,653 24,970,2433,232,498 23,084,059
Balance, end of year(17,395) (83,528)(17,395) (83,528)
3,997,258$24,886,715 3,215,103$23,000,531

As at March 31, 1997, Borealis Gold Limited owned 16,895 shares (1996 ­ 16,895 shares) of Borealis Exploration Limited and Borealis Exploration Limited owned 500 shares (1996 ­ 500 shares) of itself.

By authorization of the Company, the president, at his sole discretion, can authorize the issue of up to 12,000 shares in aggregate per annum to any individual as compensation for work done for or on behalf of the Company.

The Company has granted options expiring March 29, 2002 to a director and an officer to acquire a total of 200,000 shares of the Company for a price of $5.00 per share.

12. Related Party Transactions

During the year ended March 31, 1997:

Management fees totalling $234,144 (1996 ­ $218,110) have been paid to a Partnership controlled by the President of the Company.

Travel, promotion, rent, and other expenses totalling $109,653 (1996 ­ $108,850) have been reimbursed to the President and a Partnership controlled by the President of the Company.

13. Subsequent Event

On June 25, 1997, the Company issued 429,726 common shares totalling $1,289,178 as payment to various creditors. Included in this issue, were 225,000 shares issued to officers in payment for services for $675,000. These shares plus another 30,000, to total 255,000 shares, are to be held in trust for one year before being delivered to the officers and creditors.

14. Fair Value Disclosure

The fair value of all the Company's financial assets and liabilities approximates their carrying value.