Management Review of Operations

and Financial Statements

for Fiscal 1997 and First Quarter Fiscal 1998

August 22, 1997

Fellow Shareholders:

General Overview

Borealis owns and develops intellectual property in basic industrial fields. We select areas where change has been customarily slow with correspondingly increased rewards available for the right technological advance.

These technological advances are becoming commercial realities as we talk to and deal with forward-looking industrial companies, many of them leaders in their fields.

We have a Letter of Intent signed with Landis & Gyr (Europe) Corp. in regards to the Borealis Refrigeration Technology™. If the due diligence process now underway is successful, Borealis and Landis & Gyr expect to establish a long-term, exclusive cooperation to exploit this technology in Landis & Gyr (Europe) markets.

Landis & Gyr (Europe) Corp. is a wholly-owned subsidiary of Electrowatt Ltd., a Zurich, Switzerland-based company. Siemens AG, a $60 billion industrial company, has an acquisition of Electrowatt pending, through the purchase of CS Holdings' shares in Electrowatt.

Wide-ranging discussions over our technologies continue with other companies of similar size as well as with smaller enterprises.

As a companion to our research and development work, for the past 32 years Borealis has owned one of the largest viable untapped magnetite deposits in the world. We believe these properties are now close to commercialization. We will announce transactions as they become material.

Your management has been associated with Borealis as shareholders for over 27 years. The last few years have been exciting times for us all. We have worked with the singular aim of realizing a return of tens of billions of dollars for our shareholders, and we are closer to success than ever before.

Specific Borealis Properties and Operations

A. Borealis Roche Bay Magnetite Deposit contains over $1 trillion USD in future revenue if the property is developed to maximize revenue and profit. In the lowest estimate, these proved reserves, as defined under Ontario Securities Commission rules, at current market prices will have in excess of 60 billion US dollars in future revenue from the sales of iron ore and precious metals.

We have signed contracts and undertaken extensive work to see that these properties are now capitalized which will allow for their development in a timely and profitable manner. We firmly expect to develop these properties for the benefit of the Inuit people, Canada and the Borealis Shareholders.

These properties are now held by Roche Bay Mining Company Limited and will show up on the future books as share interests, not as mining properties.

B. Fruechen Bay Polymetallic Project, according to our technical staff, is a classic polymetallic structure. We hold this property in good standing, because of work carried out by Borealis with Kennecott Copper and RTZ, until 2002. Our geologists inform us that Freuchen Bay could be worth billions of dollars. We intend to use internal company money to drill and prove up this property when funds become available.

C. Borealis Refrigeration Technology™ is in development. Please note the Landis & Gyr Letter of Intent, and the fact that other transactions are in advanced discussion stages with major world class players. The Press Release is available at

D. Borealis Motor Works™ is in the final testing phase prior to commercialization. We have one major player wanting to use the technology for Locomotives and Off Road Haul Trucks. Once we achieve certification, we expect relatively rapid optimization and sales.

E. Borealis ZVT Sound™ has certified results from the Defense Research Agency, a sub-agency of the British Ministry of Defence. Intense worldwide discussions are underway, and contracts are pending. We expect significant revenue from this technology in fiscal 1998. Our web site, at has graphs showing some of the advantages of the technology and a copy of the certification letter from DRA.

F: The ThalesScope™ is a device which helps blind people to interpret visual information - in a sense, to "see" again - using sound. Borealis is managing the work on contract, for a fee, and we will do similar work for other parties on similar terms granted to ThalesScope Limited. This significant work is a showcase of the technical abilities Borealis can draw on.

G. Borealis Green Steel™ is very exciting technology. We plan to make one step Green Steel economically with the Roche Bay Ore, in a combination of our various holdings. This technology should be widely available, and will be useable almost everywhere steel is made. We expect to attract outside interest for this technology and hope to begin serious work on a melt shop in late fiscal 1998 or early fiscal 1999.

H. Other Borealis Technologies are under development and are not being discussed at this time.

Virtual Company

Borealis is a virtual company, and the Internet plays a dominant role in our day-to-day working practices as the means by which we manage our business, discuss new ideas, and promote ourselves to the outside world. Making full use of this modern communications technology allows us to work in many countries without problems of different time zones and locations.

We have consultants around the world, all of whom work over e-mail. Management discussions take place over the net, as do technical discussions. Borealis runs a continual Board of Directors Meeting 24 hours a day, all year, with an annual traffic of over 3000 messages to each Board Member. Borealis has intense direct participatory management, and many consultants to the company sit in on the Board Meetings and provide input even though they are not voting members.

Our Web Page,, makes information about our technology available and informs people about the company. Additionally we send out a weekly update (as well as daily closes) to shareholders and interested parties, detailing our ongoing work and progress (e-mail if you would like to receive these updates). Our wide distribution can keep people more informed than through traditional channels. Your management is, as a result, attempting to be very responsive to shareholder questions and comments.

The Borealis Annual Report, including financials, proxy solicitation, information circulars, and the notice of annual meeting will all be at by September 1st.

We are even accepting proxies, after September 1st, for the 1997 Annual Meeting electronically. Proxies can be voted either in hard copy, from a link on our web site, or by e-mail to

This virtual company structure puts Borealis at the cutting edge of modern business practice.

Discussion of Audited Financial Results for Fiscal 1997

Borealis remains short of cash, and the expenses involved maintaining our activities are substantial for a company our size.

For the past two years to March 31, 1997 your management and friends put well over $3 MM CDN into Borealis and the totals are over $5 MM CDN for the past 29 months. We are committed to Borealis, to its future, its past and present. Regardless of the difficulties we encounter, your management puts its money where its mouth is, and management share holdings are at an all-time high.

Our annualized operating expenses ran last year at $2,458,489, up from $1,466,989. We can expect our expenses to be higher this coming fiscal year.

With the step-up in our research activities, we expect significant third party assistance in fiscal 1998, either in direct purchase of development rights and royalty agreements or in the purchase of subsidiary company shares.

We can easily expect another $2 MM loss for fiscal 1998, though we do not expect our cumulative deficit to climb over $34 MM before royalty payments and other income brings these loss totals down.

Our current assets-to-liabilities ratio is extremely low, at $14,927 in current assets as compared to $7,003,233 in liabilities for a 0.00213 ratio, while last year it was $1,295 to $6,807,639, for a .00019 ratio. We probably have among the worst current asset to liability ratios of any viable operating company in the world. Some explanation is in order:

Management has chosen to keep the number of shares outstanding below 5 million. Management has lent millions of dollars to Borealis through the years at no interest in order to facilitate the operation of the corporation. Your Chairman is the largest single real creditor of Borealis, owed $755,076 at year-end compared to $1,145,251 at March 31, 1996.

Borealis continues to run large accounts payable. Our accounts payable cover everything that Borealis might owe. This figure of $2,655,162 is consistent with last year's accounts payable of $2,695,060. As of the date of this letter, the figure, in accordance with our standard accounting procedure, is now under $1 million.

The deposits on share issue of $939,959 is capital that has been raised by consolidated subsidiary companies and not an actual liability as that is normally understood. These are minority shareholder interests which are part of the capital of Borealis subsidiary companies. We expect to be raising millions of dollars in this manner through our subsidiary companies.

The Ontario Securities Commission has instructed Borealis and our auditor that the royalty payable of $2,595,300, which is essentially the same figure as last year, is a true book liability. This amount is due upon sale of product from the company's mineral properties, or sale of the properties themselves, which we believe makes this amount a true contingent liability. However, we have entered the sum in the manner the Securities Commission has dictated.

The mineral properties of $5,392,626 are valued essentially the same as they were last year, at $5,364,601.

These figures for the mineral properties will be going to zero as Borealis transfers Roche Bay and Fruechen Bay to free standing companies and the amounts are carried as Investment in Shares.

All our other share holdings are carried at $1,707. This number is conservative. For example, we are selling our Arktos Resource Limited shares, valued at $1,706 for gross considerations of well over $100,000. We are reactivating Faraway Gold Mines Limited, and plan to issue shares, share for share (except escrow shares), around January 1, 1998 in a new company Faraway Mines Limited. All registered shareholders of Faraway are expected to receive full instructions in the next few months. Borealis intends to make the Faraway holdings valuable for all shareholders.

In addition, two subsidiary companies are now offering by way of Private Placement Memorandums 610,870 shares each at $5.238 USD per share, and Borealis indirectly owns 5,200,000 shares in each of these companies.

We expect many such sales of subsidiary company shares through the coming years. All of these shares are carried on the consolidated books at no value, which is correct conservative accounting on the part of our auditors.

One should note that all of our extensive Intellectual Property activities are also being taken on the books at a nominal value. The patents have a book value of $44,517 less accumulated amortization of $2,904 compared to the previous year's value of $21,994 with accumulated amortization of $1,123.

We remain optimistic that our extensive processing equipment in NWT will finally make it to Rankin Inlet where it will form the backbone of a crushed rock operation of which Borealis holds a 50% net profits interest. The equipment has, in our estimation, a value of over $1 million in Rankin Inlet, and is carried on our books at $13,990. 1996 carried the equipment at $18,996.

Our books are careful and conservative. Our liabilities are more than fully reported. Many of our assets are tough to value. Having many assets valued at zero on the books eliminates the need for management to justify asset values. Borealis is pleased with this careful accounting treatment. Given the large number of jurisdictions we operate in, the zero valuation of assets has been the only valuation acceptable to all.

The Ontario Securities Commission had discussions with Borealis over the fiscal 1996 accounting being too conservative. After discussions with our Auditors and ourselves, the OSC agreed to let our books stand as published. We do not have their comments yet on the 1997 figures, but we are confident that these books can stand the most rigorous of examination and though our evaluations of assets are very low, they can be defended from an accounting point of view.

Borealis Legal Matters

In fiscal 1997 the Alberta Court of Appeals overturned a decision against your management and our lead Canadian Counsel by reducing penalties to nominal periods. In a rare ruling, management was vindicated in a dispute with the Alberta Securities Commission. Further details and the entire decision are available at

As far as the Federal Government of Canada is concerned, Borealis was fined substantial sums for spilling a very small quantity of oil in a Northern lake. We are paying the fine and will continue to pursue vigorously the Government and the Government Officials who set this chain of events into motion and who ransacked and destroyed our camp at Fat Lake. Ultimately, these matters will be adjudicated by the Courts, but we expect much more in the way of restitution from the Government than we have paid in fines.

We are pursuing legal action against Borealis Technology Corporation Limited over their use of our name. There has been a great amount of confusion between the companies, and as they started using our name about 18 months ago, we feel our claim is solid. Again, our web page at has substantial documentation on this case.

We have other legal actions pending, all of which concern our past mineral exploration and development activities in Northern Canada. We expect to win most of them and collect serious damages. Settlement discussions are underway in several cases.


Borealis runs ongoing advertisement campaigns on an e-mail news service in which Borealis and your management are shareholders. The investment is carried at no value on our books though there is a chance that the service may become a valuable asset for Borealis. The web page is at The advertising has proven valuable and very cost effective in terms of generating contacts and developing the image of Borealis.

Change of Auditors

Our 1997 Auditors have informed Borealis that because of our wide-ranging and global interests, they are no longer in a position to continue overseeing our entire operations. Kenway Mack have arranged for Ernst & Young to take over all responsibility for Borealis audits, while Kenway Mack will continue to work with Borealis under Ernst & Young direction. We would like to thank Kenway Mack for their diligent efforts over the past 6 years. We have a solid working relationship with Kenway Mack, and we look forward to establishing a similar relationship with Ernst & Young.

Projections for Fiscal 1998

Fiscal 1998 should be one of dramatically improved results as our major projects begin to come to fruition.

We hope to achieve a positive cash-flow, and in doing so greatly improve our financial position. We hope the days when Borealis has to rely on its management to pay bills personally, lend money at no interest or guarantee obligations are over.

Your management is confident that the Roche Bay Mining Company Limited holdings will become cash flow positive for the first time in 32 years. This will be a true pleasure vindicating the millions of dollars invested throughout the decades in this property by your company.

Our scientific research is of immense significance to many industries. We have to turn that reality into a positive cash flow and profits. Our main goal is to develop our technologies into marketable products, where they can generate revenue. We are closer to achieving that goal from our technologies than at any time in the past five years.

Please mail in your proxy, or vote at, or on the web at

We look forward to an exciting future for your company.

Thanks for your continued support.

Best Regards,

Borealis Exploration Limited and the Borealis Group of Companies

Rodney T. Cox President/Chairman

Isaiah W. Cox Chief Operating Officer/Director