Management Review of Operations

and Financial Statements

for Fiscal 1998 and First Quarter Fiscal 1999

August 18, 1998

Fellow Shareholders:

General Overview

Borealis owns and develops technologies that are designed to fundamentally change basic industries. Borealis Power Chips™ should revolutionize electrical power generation across virtually all applications, just as Borealis Cool Chips™ should replace virtually all active existing cooling and thermal management technologies. The Borealis Electric Motor™ is expected to have a similar impact in the world of traction motors.

For all three technologies, Borealis has patents and patents-pending, representing the intellectual property we have developed in recent years.

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.

As of this writing, we have successfully completed current technical evaluation reviews with three of the major players in the world. Others are deep into vetting our technology while others are just beginning the process.

As a companion to our research and development work, Roche Bay Mining Company Limited, currently a 100% wholly owned subsidiary of Borealis Exploration Limited, owns one of the largest viable untapped magnetite deposits in the world. Ownership was transferred this year to Roche Bay and expiring leases were renewed after 33 years under direct Borealis Exploration Limited ownership. We continue to believe these properties hold tremendous value and we are working to unlock the asset for our shareholders. In the past year we confirmed by INAA analysis very interesting Precious Metal Content in these deposits.

Your company, as noted in the enclosed documents, is voting on a Continuance out of Canada and a Continuance into Gibraltar. From a business point of view this is business as usual for Borealis. Roche Bay Mining Company Limited and most of the other operating companies in the Borealis Group of Companies have been incorporated in Gibraltar. Our Technology work is managed out of Europe and we are a virtual company based in the European Union. Borealis will retain all current share listings, and all reporting to the US and Canadian Securities Authorities will be the same as at present. All creditor and shareholder rights will be protected and everybody will be in at least as good a position concerning their stakeholding in Borealis as at present. We will review any significant tax implications with shareholders before the finalization of the Continuance out of Canada and the Continuance into Gibraltar at the Annual Meeting of Shareholders. Please read carefully the enclosed Information Circular, Memorandum of Association and Articles of Association documents which are enclosed. If you still have any questions please feel free to call or e-mail any of the Officers or Directors and we will do the best to answer any and all questions.

Specific Borealis Properties and Operations

A. The Roche Bay Magnetite Deposit, owned by wholly owned Roche Bay Mining Company Limited, contains 4.3 billion tonnes of estimated open pit magnetite reserves, as defined under Ontario Securities Commission rules, and well over an billion tonnes estimated open pit hematite reserves, under the same definition. If these reserves can be successfully processed on site into high value products such as Borealis Green Steel™, and if the precious metals can be successfully located and extracted the future, possible revenue from the sale of steel and the production and sale of the precious metals could be very large according to our consultants. It should be noted that in 1998 Oregon State University independently confirmed a MIT (Massachusetts Institute of Technology) INAA (Instrumental Neutron Activation Analysis) precious metal assay and as we learn more about our precious metal values the interest in and the value of the property can only grow. The leases that expired in 1998 were renewed for another 21-year renewable term by the Canadian Government and all the Roche Bay Leases are now in the name of Roche Bay Mining Company Limited and are shown on our consolidated books as mineral 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/RTZ, until 2002. Our geologists inform us that Freuchen Bay has significant potential. We intend to use internal company money to drill and prove up this property when funds become available. This property will be transferred to Faraway Gold Mines Limited in exchange for shares and the existing shareholders of Faraway will be given shares on a one for one basis in the new Gibraltar Company.

C. The Borealis Refrigeration Technology™ is in development with builds of the technology underway. We are comfortable with our technical grasp of the technology, and our excellent patent position. Major world class players are very interested in this technology.

D. Borealis Power Technology is becoming a reality. Builds are underway, and our pending patents are strong. We have a firm handle on this technology. Because of the importance of this technology we have seen intense industrial interest from the major power generation players in the world.

E. Borealis Motor Works™ is in the final testing phase prior to commercialization. The testing has been stalled by over a year at a research organization associated with the Ontario Government. 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. The principal patent covering this invention has been approved for issuance by the USPTO.

F. The ThalesScope™ is a device that 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 upon.

G. Borealis Green Steel™ is very exciting patented 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 prototype one-step steel plant in late fiscal 1999 or early fiscal 2000.

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. The Web page is being updated, a search engine is being added and some of our major technologies that have been under development, like Power Generation, will be discussed. Changes to the Web page will be announced as soon as this work is done. Additionally Borealis sends out a weekly update (as well as daily closes) to shareholders and to all the major news organizations and other 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 uses this technology 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 August 25th. We are, as we did last year, accepting proxies, after September 1st, for the 1998 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 is great to work with and allows us to have many people directly involved in the decision making processes at Borealis. This approach may not be conventional, but the results have validated the business structure many times over.

Discussion of Audited Financial Results for Fiscal 1998

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, 1998 your management and friends put well over $5.5 Million Canadian Dollars into Borealis on favourable terms to the company.

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 $2,053,137 down from $2,458,489 in 1997. We would 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 1999, either in direct purchase of development rights and royalty agreements or in the purchase of subsidiary company shares.

Our deficit at year end was $33,389,076 compared to $31,267,414 at year end 1997. Unless we obtain serious outside funding we can easily expect another $2 million loss for fiscal 1999.

Our current assets-to-liabilities ratio is extremely low, at 7,944 in current assets to 6,601,482 in current liabilities for a ratio of 0.001203 compared to the fiscal 1997 where we had $13,632 in current assets as compared to $7,003,233 in liabilities for a 0.00213 ratio. We continue to 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 management is the largest single real creditor of Borealis, owed $1,025,670 at year end compared to $755,076 at year end fiscal 1997.

Borealis continues to run large accounts payable, $1,267,449 at year end fiscal 1998. This figure was reduced significantly from last year, when the figure was $2,652,160.

The deposits on share issue of $1,618,677 compares with last year's figure of $939,959. This is capital that has been raised by subsidiary companies and is included as a liability in the financial statements. Once the shares of these subsidiaries are issued these amounts will be reflected as minority interests on the consolidated balance sheet. We expect to raise substantial sums in this manner through our subsidiary companies in the years to come.

As noted in the prior year's annual report the royalty payable of $1,800,000 USD is shown as a liability. As per Note 9 of our financial statements this amount is due upon sale of product from the company's mineral properties, or sale of the properties themselves. The repayment of the balance is solely from proceeds on the sale of the Company's mineral properties or products thereof. This liability is now held by a subsidiary company, Roche Bay Mining Company. The balance outstanding is the same amount as last year figure adjusted for exchange rate fluctuations between the US Dollar and the Canadian Dollar.

The mineral properties and other assets of $5,371,933 are carried at essentially the same as they were last year, $5,351,013.

All of our corporate share investments have been written down to zero compared to last year's value of $1,707. As reported last year we continue to expect to sell our Arktos Resource Limited shares, valued at Zero for gross considerations of well over $100,000. We continue with our desire as reported last year to reactivate Faraway Gold Mines Limited, and plan to issue shares, share for share (except escrow shares), around January 1, 1999 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, Borealis Power Manufacturing Limited and Borealis Cool Manufacturing Limited are now offering and selling shares privately at $20 USD. Last year 610,870 of these shares in each Company were offered by way of Private Placement Memorandums at $5.238 USD per share. Borealis indirectly owns 5,200,000 shares in each of these two companies. The shares of these two companies that have been sold to date have not yet been issued to the shareholders.

One should note that all of our extensive Intellectual Property activities are also being taken on the books at a relatively nominal value. We are only capitalizing patent office filing fees and these fees will continue to grow as the patent base grows. With this accounting system the patents have a book value this year of $77,658 less accumulated amortization of $6,010 compared to $44,517 less accumulated amortization of $2,904 last year.

Again, 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% interest in the venture. It is our opinion that this will be just a great business for your company.

Our financial statements do not reflect the intrinsic value that certain assets may have. Borealis has always followed conservative accounting policies. Our liabilities are fully reported while many assets are valued at a nominal amount on the books. In addition, we follow a conservative accounting treatment with respect to the research expenditures. None of these costs have been deferred, or capitalized as even though they may have resulted in proving technologies we have not yet established a market or obtained the resources to commercialize the technology.

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 against management to nominal periods. In a rare ruling, management was vindicated in this dispute with the Alberta Securities Commission. Further details and the entire decision are available at

The Federal Government of Canada fined Borealis substantial sums for spilling a very small quantity of oil in a northern lake. We paid off the fine in 1998 and are now paying off the interest. Borealis 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.

There remains a great deal of confusion about Borealis Technology Corporation, and their use of the Borealis name. We have settled a first case with them, but this is an ongoing problem. Many people apparently have bought shares in the wrong company. Remember that we trade under the symbols BOREF and BSXC. If your share certificates do not say Borealis Exploration Limited, and you were buying shares in our company, you have bought the wrong company and your broker should make the error good.

We have other legal actions pending, where we are the plaintiff, 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 but management expects these cases to go to Court and is eager to get these matters finally resolved.


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.

We advertise on other e-mail services. We feel these advertisements are very cost effective way to get our name and our technologies known to the world.

Change of Auditors

Our 1997 Auditors, Kenway Mack informed Borealis that because of our wide-ranging global interests, they were no longer in a position to continue overseeing our entire operations. Our new auditors, BDO Dunwoody have a presence in many of the jurisdictions where we operate and are a major worldwide presence in international auditing. We really have enjoyed working with them and they have the depth to handle our wide ranging operations.

Projections for Fiscal 1999

Fiscal 1999 should be one of dramatically improved results as our major projects begin to come to fruition. This is exactly what we said last year, but it does seem that this can become the case.

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

Your management hopes that Roche Bay Mining Company Limited will vindicate our holding this property through the decades.

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.

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, CEO/Chairman

Isaiah W. Cox, President/Chief Operating Officer