<page>






                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)


                              FINANCIAL STATEMENTS


                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)











<page>


                                AUDITORS' REPORT


To the Shareholders of
Gemstar Resources Ltd.
(An Exploration Stage Company)

We have audited the balance  sheet of Gemstar  Resources  Ltd. as at January 31,
2006, and the statements of operations and deficit,  and cash flows for the year
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 Canadian  generally  accepted auditing
standards and the standards of the Public  Company  Accounting  Oversight  Board
(United  States).  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  financial  statements  present  fairly,  in all material
respects,  the financial  position of the Company as at January 31, 2006 and the
results  of its  operations  and its cash  flows  for the year  then  ended,  in
accordance with Canadian generally accepted accounting principles.

The financial statements as at January 31, 2005, and for the years ended January
31, 2005 and 2004,  were audited by other  auditors who have ceased  operations.
Those auditors  expressed an opinion  without  reservation in their report dated
April 4, 2005.


Vancouver, Canada

September 27, 2006                                     Chartered Accountants

    Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict

In the United States,  reporting  standards for auditors require the addition of
an explanatory  paragraph  (following the opinion  paragraph) when the financial
statements are affected by conditions and events that cast substantial  doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the  financial  statements.  Our  report  to the  shareholders,  dated
September 27, 2006 is expressed in accordance with Canadian reporting standards,
which do not permit a reference to such events and  conditions  in the auditors'
report when these are adequately disclosed in the financial statements.



Vancouver, Canada

September 27, 2006                                     Chartered Accountants


<page>


                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                                 BALANCE SHEETS
                          (Stated in Canadian Dollars)

<table>
<caption>
-------------------------------------------------------------------------------------------------------------------
                                                                                          JANUARY 31
                                                                                    2006               2005
-------------------------------------------------------------------------------------------------------------------
                                                                                                    (Restated)

                                                                             <c>                  <c>
ASSETS
Current
     Cash                                                                    $          16,945   $          3,343
     GST receivable                                                                      5,080              2,978
     Term deposit (Note 4)                                                               6,900              6,900
                                                                             --------------------------------------
                                                                                        28,925             13,221
Advance For Exploration Expenditures (Note 5)                                                -            152,000
Mineral Properties And Deferred Exploration Costs (Note 6)                              70,439              4,206
Computer Equipment (Note 7)                                                              1,725                809
                                                                             --------------------------------------

                                                                             $         101,089   $        170,236
===================================================================================================================

LIABILITIES
Current
     Accounts payable and accrued liabilities                                $          79,698   $        109,009
     Loans from related parties, including convertible note (Note 8)                   941,192            882,325
                                                                             --------------------------------------
                                                                                     1,020,890            991,334

 Long Term Debt (Note 9)                                                                39,676                  -
                                                                             --------------------------------------
                                                                                     1,060,566            991,334
                                                                             --------------------------------------


SHAREHOLDERS' DEFICIENCY

Share Capital (Note 10)
     Authorized:
         100,000,000 common shares without par value
     Issued:
         5,651,714 common shares                                                     1,113,471          1,113,471

Equity Component Of Convertible Note (Note 8)                                           11,576             11,576

Deficit Accumulated During The Exploration Stage                                    (2,084,524)        (1,946,145)
                                                                             --------------------------------------
                                                                                      (959,477)          (821,098)
                                                                             --------------------------------------

                                                                             $         101,089   $        170,236
===================================================================================================================
</table>

Approved on Behalf of the Board:

   "Linda Smith"                                      "Shannon Krell"
------------------                                  ------------------
     Director                                            Director


   The accompanying notes are an integral part of these financial statements.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                      STATEMENTS OF OPERATIONS AND DEFICIT
                          (Stated in Canadian Dollars)

<table>
<caption>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                   YEARS ENDED JANUARY 31
                                                                         2006               2005                  2004
-----------------------------------------------------------------------------------------------------------------------------
                                                                                         (Restated)          (Restated)

                                                                 <c>                  <c>                  <c>
General And Administration Expenses
     Amortization                                               $             740    $            348    $             496
     Accounting and audit fees                                             35,128              14,605                2,700
     Accretion of convertible note                                          1,356               3,650                3,859
     Management fees                                                       30,000              30,000               30,000
     Office                                                                38,855              26,430               24,005
     Professional fees                                                      5,000               5,337               15,728
     Transfer agent and filing fees                                         4,239               2,008                  711
     Travel and promotion                                                  23,061               9,971                2,185
                                                                -------------------------------------------------------------

Net Loss For The Year                                                    (138,379)            (92,349)             (79,684)
                                                                -------------------------------------------------------------

Deficit, Beginning Of Year
     As previously reported                                             1,938,636           1,849,937            1,774,112
     Error correction (Note 3)                                              7,509               3,859                -
                                                                -------------------------------------------------------------

     As restated                                                       (1,946,145)         (1,853,796)          (1,774,112)
                                                                -------------------------------------------------------------

Deficit, End Of Year                                            $      (2,084,524)   $     (1,946,145)   $      (1,853,796)
=============================================================================================================================


 Weighted Average Number Of Shares Outstanding, Basic and
 diluted                                                                5,651,714           5,651,714            5,651,714
=============================================================================================================================

Net Loss Per Share, Basic and diluted                           $          (0.02)     $        (0.02)    $          (0.01)
=============================================================================================================================
</table>

   The accompanying notes are an integral part of these financial statements.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                            STATEMENTS OF CASH FLOWS
                          (Stated in Canadian Dollars)
<table>
<caption>
------------------------------------------------------------------------------------------------------------------------
                                                                                 YEARS ENDED JANUARY 31
                                                                           2006            2005                2004
------------------------------------------------------------------------------------------------------------------------
                                                                                        (Restated)        (Restated)

                                                                  <c>                <c>                <c>
Cash Flows Provided By (Used In)

Operating Activities
     Net loss for the year                                        $      (138,379)   $      (92,349)   $      (79,684)
     Items not requiring use of cash:
         Amortization                                                         740               348               496
         Accretion on convertible note                                      1,356             3,650             3,859
         Related party transactions                                        48,000            48,000            48,000
                                                                  ------------------------------------------------------
                                                                          (88,283)          (40,351)          (27,329)
     Changes in non-cash working capital items:
         GST receivable                                                    (2,102)             (520)             (668)
         Accounts payable and accrued liabilities                         (29,311)           (3,721)           11,847
                                                                  ------------------------------------------------------
                                                                         (119,696)          (44,592)          (16,150)
                                                                  ------------------------------------------------------

Investing Activities
     Refund of exploration advance                                        112,000                -                 -
     Investment in mineral properties and deferred exploration
         costs                                                            (26,233)               -             (4,206)
     Purchase of computer equipment                                        (1,656)               -             (1,653)
                                                                  ------------------------------------------------------
                                                                           84,111                -             (5,859)
                                                                  ------------------------------------------------------

Financing Activities
     Loans from related parties, net                                        9,511            46,994            21,096
     Long-term debt                                                        39,676                -                 -
                                                                  ------------------------------------------------------
                                                                           49,187            46,994            21,096
                                                                  ------------------------------------------------------

Increase (Decrease) In Cash                                                13,602             2,402              (913)

Cash, Beginning Of Year                                                     3,343               941             1,854
                                                                  ------------------------------------------------------

Cash, End Of Year                                                 $        16,945    $        3,343    $          941
========================================================================================================================


Supplemental Information
     Non-cash expenditures- investing activities                  $       (40,000)   $           -     $           -
     Interest paid                                                $            -     $           -     $           -
     Income taxes paid                                            $            -     $           -     $           -
========================================================================================================================
</table>

   The accompanying notes are an integral part of these financial statements.


<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


1.       NATURE AND CONTINUANCE OF OPERATIONS

     Gemstar   Resources  Ltd.  ("the  Company")  was  incorporated  in  British
     Columbia,  on March 31, 1998,  and that date is also the date of inception.
     The Company is in the exploration  stage relating to exploration of mineral
     properties and has not generated any revenues from operations.  The deficit
     has been accumulated during this exploration stage.

     Going Concern

     These  financial  statements have been prepared in accordance with Canadian
     generally  accepted  accounting  principles  applicable  to a going concern
     which  assume that the Company will  realize its assets and  discharge  its
     liabilities  in the normal  course of  business.  The Company has  incurred
     losses since  incorporation and inception of $2,084,524,  and has a working
     capital  deficit  at  January  31,  2006 of  $991,965  (2005  -  $978,113).
     Management is in the process of identifying sources of additional financing
     including  related  party  loans to fund third  party  liabilities  and the
     ongoing  development  of  the  Company's  business.  These  factors  create
     substantial  doubt as to the  ability of the Company to continue as a going
     concern  unless  sufficient  funds  are  raised  for  the  payment  of  its
     liabilities  and  for  ongoing   operations.   Realization  values  may  be
     substantially  different  from  the  carrying  values  as  shown  in  these
     financial  statements  should the  Company be unable to continue as a going
     concern.


2.       SIGNIFICANT ACCOUNTING POLICIES

     These  financial  statements have been prepared in accordance with Canadian
     generally   accepted   accounting   principles  and  reflect   management's
     consideration of the following significant accounting policies:

     a)  Use of Estimates

         The  preparation  of financial  statements in conformity  with Canadian
         generally accepted  accounting  principles  requires management to make
         estimates and  assumptions  that affect  certain  reported  amounts and
         disclosures.  Estimates  are used  for,  but are not  limited  to,  the
         accounting for doubtful accounts,  depreciation,  income taxes, and the
         recoverability of non-producing  mining property  capitalized costs and
         deferred exploration expenditures. Actual results may differ from those
         estimates.

<page>


                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


2.       SIGNIFICANT ACCOUNTING POLICIES (Continued)

     b)  Financial Instruments

         The Company's  financial  instruments  consist of cash, GST receivable,
         term  deposit  on  credit  card,  current  liabilities,  and  long-term
         liabilities. It is management's opinion that the Company is not exposed
         to  significant  interest,  currency or credit risks arising from these
         financial  instruments.  The fair value of these financial  instruments
         approximates their carrying values.

     c)  Translation of Foreign Currencies

         Currency  transactions  and balances are  translated  into the Canadian
         dollar reporting currency using the temporal method as follows:

         i)    Monetary items are translated at the rates prevailing at the
               balance sheet date;
         ii)   Non-monetary items are translated at historical rates;
         iii)  Revenues  and expenses are translated at the average rates in
               effect during applicable accounting periods, except amortization,
               which is translated at historical rates;
         iv)   Gains and losses on foreign currency translation are reflected in
               the statements of operations as incurred.

         d)    Cash and Cash Equivalents

         Cash and cash equivalents consist of balances with banks,  unrestricted
         cash  balances in lawyer trust  accounts and  investments  in financial
         instruments  with  maturities  within 90 days held for the  purpose  of
         meeting  short-term cash commitments rather than for investing or other
         purposes.

         e)    Investments

         Investments  in  financial  instruments  held  for  investing  or other
purposes are carried at the lower of cost or fair value.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


2.       SIGNIFICANT ACCOUNTING POLICIES (Continued)

     f)  Mineral Properties and Deferred Exploration Costs

         Costs related to the acquisition of mineral  properties are capitalized
         by property.  Exploration costs are capitalized as deferred exploration
         costs  as  incurred.  If  economically  recoverable  ore  reserves  are
         developed,  capitalized  costs of the related property are reclassified
         as mining  assets and amortized  using the unit of  production  method.
         When a property  is  abandoned,  capitalized  costs are  written off to
         operations.  A mineral  property is reviewed  for  impairment  whenever
         events or changes in  circumstances  indicate that its carrying  amount
         may not be recoverable.

         The amounts shown for mineral  properties do not necessarily  represent
         present or future values.  Their  recoverability  is dependent upon the
         discovery  of  economically  recoverable  reserves,  the ability of the
         Company to obtain the necessary  financing to complete the development,
         and future  profitable  production  or  proceeds  from the  disposition
         thereof.

     g)  Computer Equipment

         The Company  records  amortization  on computer  equipment  at 30% on a
         declining   balance  basis  to  expense   capitalized  costs  over  the
         equipment's estimated useful life.

     h)  Impairment of Long-Lived Assets

         The Company records the impairment of long-lived assets,  which consist
         primarily  of  mineral  properties,   deferred  exploration  costs  and
         equipment,  whenever events or changes in  circumstances  indicate that
         the carrying value of an asset may not be  recoverable.  Recoverability
         of  assets  to be held and used are  measured  by a  comparison  of the
         carrying  value of the  asset to  future  undiscounted  net cash  flows
         expected to be generated by the asset. If such assets are considered to
         be impaired,  the amount of the impairment is measured by the amount by
         which the carrying amount of the asset exceeds its fair value.

     i)  Asset Retirement Obligations

         Upon  initial  recognition  of a  liability  for  an  asset  retirement
         obligation,  the Company  will  recognize an asset  retirement  cost by
         increasing the carrying amount of the related  long-lived  asset by the
         same  amount as the  liability.  In periods  subsequent  to the initial
         measurement, the Company will recognize period-to-period changes in the
         liability for an asset retirement obligation resulting from the passage
         of time and revision to either the timing or the amount of the original
         estimate of undiscounted cash flows.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


2.       SIGNIFICANT ACCOUNTING POLICIES (Continued)

j)       Convertible Note

         The  convertible  note is  recorded  in  part  as  debt  and in part as
         shareholders' equity. The Company uses the residual valuation method to
         determine the debt and equity components of the convertible note. Under
         the residual  valuation  method,  the debt  component is  determined by
         estimating the present value of the future cash payments  discounted at
         a rate of  interest,  which the Company  would be charged by the market
         for similar debt without the conversion  option. The difference between
         the  proceeds  of the loan and the debt  component  is  recorded as the
         equity  component.  The debt component is accreted to its face value at
         maturity through a charge to accretion  expense using the straight-line
         method,  which approximates the effective interest rate method over the
         term of the convertible note.

k)       Stock Based Compensation Plan

         The  Company  applies  the  Accounting  Standard  3870  -  "Stock-Based
         Compensation  and  Other  Stock  Based  Payments"  requirement  of  the
         Canadian  Institute  of  Chartered  Accountants  ("CICA").  Under  this
         standard all stock options granted to non-employees for the receipts of
         reciprocal  services and goods are  accounted  for at the fair value of
         the services and goods received. Stock options granted to directors and
         employees in consideration  for compensation are measured at fair value
         of the  shares  at the  grant  date  net of the  amount,  if any,  that
         recipients  pay for the options when  granted and are  expensed  with a
         corresponding  increase to  contributed  surplus.  Upon exercise of the
         stock options, the amount previously  recognized in contributed surplus
         is  recorded  as  an  increase  to  share  capital  together  with  any
         additional  consideration  paid by the option holder.  No stock options
         have been issued and no stock options are outstanding.

l)       Earnings (Loss) Per Share

         The Company  calculates  earnings  per share using the  treasury  stock
         method. Under the treasury stock method, only instruments with exercise
         amounts less than market  prices  impact the diluted  calculations.  In
         computing  diluted  earnings  per  share,  no shares  were added to the
         weighted  average number of common shares  outstanding as there were no
         outstanding options or warrants.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


2.       SIGNIFICANT ACCOUNTING POLICIES (Continued)

m)       Income Taxes

         Income taxes are  calculated  using the asset and  liability  method of
         accounting.  Temporary  differences arising from the difference between
         the tax basis of an asset or liability  and its carrying  amount on the
         balance sheet are used to calculate  future income tax  liabilities  or
         assets at substantially enacted income tax rates. Future tax assets are
         recognized to the extent that they are considered  more likely than not
         to be realized. Valuation allowances are provided when unrecognized net
         future income tax assets are not more likely than not to be realized.

     n)  Reclassification of Comparative Figures

         Certain of the comparative figures have been reclassified to conform to
the disclosure in these financial statements.


3.       ERROR CORRECTION REGARDING ACCRETION OF CONVERTIBLE NOTE

     Accretion  charges  on the  convertible  debt  promissory  note  issued  on
     February 3, 2003 and amended on  December  31, 2005  amounted to $3,650 for
     the year ended  January 31, 2005 and $3,859 for the year ended  January 31,
     2004.  These amounts have been  recorded to correct the omitted  charges in
     the financial  statements for 2005 and 2004, which have been restated.  For
     the year ended January 31, 2006, the accretion charges amounted to $1,356.

     The  previously  reported  deficit as at January  31, 2005 in the amount of
     $(1,938,636) has been restated to $(1,946,145) and the previously  reported
     deficit  as at January  31,  2004 in the  amount of  $(1,849,937)  has been
     restated  to  $(1,853,796)  to reflect  the  cumulative  effect of the note
     discount accretion charges.


4.       TERM DEPOSIT

     The term  deposit is  invested  in a one-year  term  guaranteed  investment
     certificate  with interest at 1.75%  maturing on October 30, 2006. The bank
     as security for the Company's credit card usage requires this investment.


<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


5.       ADVANCES FOR EXPLORATION EXPENDITURES

     As at January 31, 2005 the advance of $152,000 for exploration  expenditure
     was held by an  unrelated  private  exploration  company.  The  exploration
     company was  contracted  to proceed with  exploration  upon approval of the
     work  program  from the Company.  In the year ended  January 31, 2006,  the
     unrelated  private company refunded  $112,000 and the remaining  balance of
     $40,000 was spent on geological survey costs.


6.       MINERAL PROPERTIES AND DEFERRED EXPLORATION COSTS

     The Company staked the Dotted Lake Property in the Thunder Mining  District
     of Ontario,  Canada, in March 2003 consisting of 78 claims units with a due
     date of March 14,  2007.  The claims are held in trust for the Company by a
     company  in  Ontario.  As at January  31,  the  Company  has  invested  the
     following amounts on these mineral properties:

<table>
<caption>
                                                                                          2006           2005
                                                                                     --------------- --------------
   
                                                                                  <c>             <c>
    Mineral properties
         Staking                                                                     $      4,206    $      4,206
                                                                                     ------------------------------

    Deferred exploration costs
         Geological survey                                                                 40,000            -
         Geological consulting fees                                                        26,233            -
                                                                                     ------------------------------
                                                                                           66,233            -
                                                                                     ------------------------------

                                                                                     $     70,439    $      4,206
                                                                                     ==============================
</table>

     The Company maintains this property for future  expenditures and management
     has  determined  that no  impairment  write down  applies as at January 31,
     2006.  The claims are  presently in good standing and are held in trust for
     the Company by an unrelated private company in Ontario.

7.       COMPUTER EQUIPMENT

                                                     2006          2005
                                                ------------- -------------

    Cost                                        $    3,309    $     1,653
    Accumulated amortization                         1,584            844
                                                ---------------------------
                                                $    1,725    $       809
                                                ===========================

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


8.       LOANS FROM RELATED PARTIES, INCLUDING CONVERTIBLE NOTE

     a)       i) Loans  from the  Company's  officers  and  immediate  family of
              $941,192 as at January 31, 2006 (2005 - $882,325)  are  unsecured,
              non-interest  bearing,  with no specific  terms of  repayment.  On
              January  25,  2006,  the  related  parties  signed  debt  deferral
              agreements  to defer  repayment  of all  balances  owing to a date
              after July 31, 2007.

              The following  table  provides  details of the balances due to the
related parties:

                                                   2006             2005
                                              ---------------- ----------------

             Darcy Krell, Secretary           $     348,614    $     291,152
             Linda Smith, President                 413,535          413,486
             Shannon Krell, Treasurer                75,000           75,000
             Ryan Krell (ii)                        104,043          102,687
                                              ---------------------------------

                                              $     941,192    $     882,325
                                              =================================

         ii)  The loan from Ryan  Krell is secured  by a  promissory  note dated
              February  3, 2003 and  amended  on  December  31,  2005,  which is
              non-interest  bearing  and due on  January  1,  2008.  The note is
              convertible  into 2,135,080  common shares of the Company prior to
              the  maturity  date  on the  basis  of  each  $0.05  of  principal
              outstanding being converted into one common share.

              In  accordance   with   Accounting   Standard  3861  -  "Financial
              Instruments - Disclosure  and  Presentation"  the Company used the
              residual  valuation  method to allocate  the  proceeds of issuance
              between the convertible note and the embedded  conversion  feature
              based on their  relative  fair  values.  Accordingly,  the Company
              recognized  the  $11,576  fair  value of the  embedded  conversion
              feature  as an equity  component  at  inception  using a 3.9% debt
              discount rate.  Accretion expense is accreted over the term of the
              convertible  note to the  face  value  of  $106,754  at  maturity.
              Accretion  expense of $1,356 for the year ended  January  31, 2006
              ($3,650 and $3,859 for the years ended  January 31, 2005 and 2004,
              respectively)  increasing  the carrying  value of the  convertible
              note from  $95,178 at the date funds were  received to $104,043 as
              at January 31, 2006.

       b)     Non-cash  management fees and office charges  incurred on behalf
              of the Company  totalled  $30,000 and $18,000,  respectively,  for
              each of the years ended January 31, 2006, 2005 and 2004.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


9.       LONG TERM DEBT

     On January  25,  2006,  the lawyer for the Company  signed a debt  deferral
     agreement  to defer the payment date of his unpaid legal fees in the amount
     of  $39,676  to a date after July 31,  2007.  Accordingly,  this  amount is
     classified as a long-term  liability with no amounts due in the next twelve
     months. This liability is unsecured and bears no interest.


10.      SHARE CAPITAL

     a) Authorized:

             100,000,000 common shares without par value

     b) Issued and Outstanding:
<table>
<caption>
                                                                 NUMBER OF SHARES                    AMOUNT
                                                          -------------------------------- ---------------------------
       
                                                      <c>                          <c>
        Balance, January 31, 2005 and 2006                            5,651,714                 $  1,113,471
                                                          ================================ ===========================
</table>

c)       Convertible Note

         The previously  described promissory note is convertible into 2,135,080
         common shares of the Company prior to the January 1, 2008 maturity date
         on the basis of each $0.05 of  principal  outstanding  being  converted
         into one common share.


11.      INCOME TAXES

     The Company does not have any income tax liabilities  during 2006 and 2005,
     and,  accordingly,  no income taxes are recorded.  The potential income tax
     benefits  associated  with losses  incurred  by the  Company  have not been
     recorded  in the  accounts  as  future  taxation,  as they  are  offset  by
     valuation  allowances due to  uncertainty as to the  utilization of the tax
     losses.

     The  significant  components  of the  Company's  future  tax  assets are as
follows:

                                                2006               2005
                                        ------------------ -----------------

    Future tax assets                   $        705,000   $       659,000
    Valuation allowance                         (705,000)         (659,000)
                                        ------------------------------------
                                        $         -        $        -
                                        ====================================

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


11.      INCOME TAXES (Continued)

     The Company has non-capital  losses carried forward for income tax purposes
     in the amount of approximately $2,000,000 that expire in years 2006 through
     2015 if they are not utilized.

     A  reconciliation  between the  statutory  federal  income tax rate and the
     effective income rate of income tax expense for the years ended January 31,
     2006 and 2005 is as follows:
<table>
<caption>                                                                                     2006          2005
                                                                                          ------------ -------------
   
                                                                                     <c>           <c>
    Statutory federal income tax rate                                                          34.0%        35.0%
    Tax benefits not recognized on temporary differences                                      (34.0%)      (35.0%)
                                                                                          ------------ -------------
    Effective income tax rate                                                                  -            -
                                                                                          ============ =============
</table>

12.      SEGMENTED INFORMATION

     As at  January  31,  2006,  2005 and  2004,  the  Company  operated  in one
     reportable  segment  being the  exploration  of precious  metals and in one
     geographic segment being Canada.


13.      CONTINGENT LIABILITIES

     There is a long outstanding claim for unpaid  professional  accounting fees
     in the amount of $51,680  against a private  company owned by the Company's
     former  president and the Company is named as a  co-defendant.  The Company
     disputes the claim and considers the claim to be without merit. The results
     of this lawsuit are not determinable as at January 31, 2006.


14.      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
         ACCOUNTING PRINCIPLES

     These  consolidated  financial  statements have been prepared in accordance
     with Canadian generally accepted accounting  principles  ("Canadian GAAP").
     Material variations in the accounting measurement principles, practices and
     methods used in preparing  these  consolidated  financial  statements  from
     measurement principles, practices and methods accepted in the United States
     ("US GAAP") are described and quantified below.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


14.      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
         ACCOUNTING PRINCIPLES (Continued)

       Mineral Properties and Deferred Exploration Costs

       Under Canadian GAAP, mineral property interests and deferred  exploration
       costs,  are  carried  at cost  and  written  down if the  properties  are
       abandoned,  sold or if management determines there has been an impairment
       in value.  Under  United  States GAAP,  mineral  property  interests  are
       carried at cost and deferred exploration costs are expensed as incurred.

       The  significant  differences  in the  financial  statements  compared to
       United States GAAP related to deferred exploration costs were:

a)       Balance Sheets

<table>
<caption>
                                                                                          JANUARY 31
                                                                                    2006                2005
                                                                             ---------------------------------------
    
                                                                         <c>                    <c>
      Mineral properties and deferred exploration costs
        Per Canadian GAAP                                                    $        70,439      $        4,206
        Deferred exploration costs written off                                       (66,233)                -
                                                                             ---------------------------------------

        Per United States GAAP                                               $         4,206      $        4,206
                                                                             =======================================

      Shareholders' deficiency
        Per Canadian GAAP                                                    $      (959,477)     $     (821,098)
        Deferred exploration costs written off                                       (66,233)                  -
                                                                             ---------------------------------------

        Per United States GAAP                                               $    (1,025,710)     $     (821,098)
                                                                             =======================================

b)       Statements of Operations and Deficit

                                                                             YEARS ENDED JANUARY 31
                                                                   2006              2005               2004
                                                             -------------------------------------------------------
      Net loss for the year
        Per Canadian GAAP                                    $     (138,379)   $      (92,349)    $      (79,684)

        Deferred exploration costs written off                      (66,233)                -                 -
                                                             -------------------------------------------------------

        Per United States GAAP                               $     (204,612)   $      (92,349)    $     (79,684)
                                                             =======================================================

      Net loss per share, basic and diluted
        Per Canadian GAAP                                    $                 $                  $         (0.01)
                                                                   (0.02)             (0.02)
        Deferred exploration costs written off
                                                                   (0.02)                   -                 -
                                                             -------------------------------------------------------
        Per United States GAAP                               $                 $                  $         (0.01)
                                                                   (0.04)             (0.02)
                                                             =======================================================
</table>

<page>


                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


14.   DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
      ACCOUNTING PRINCIPLES (Continued)

c)       Statements of Cash Flows
<table>
<caption>
                                                                            YEARS ENDED JANUARY 31
                                                                  2006               2005               2004
                                                            --------------------------------------------------------
      
                                                     <c>                <c>                  <c>
      Cash flows provided by (used in)

      Operating activities
        Per Canadian GAAP                                   $  (119,696)       $    (44,592)      $     (16,150)
        Deferred exploration costs written off                  (26,233)                -                    -
                                                            --------------------------------------------------------
        Per United States GAAP                              $  (145,929)       $    (44,592)      $     (16,150)
                                                            ========================================================

      Investing activities
        Per Canadian GAAP                                   $    84,111       $         -        $        5,859
        Deferred exploration costs reallocated to
           operating activities                                  26,233                 -                    -
                                                            --------------------------------------------------------
        Per United States GAAP                              $   110,344        $         -        $       5,859
                                                            ========================================================
</table>

d)       Recent United States Accounting Pronouncements

i)         In November 2005,  the Financial  Accounting  Standards  Board (FASB)
           issued   Staff   Position   No.   FAS   115-1  -  "The   Meeting   of
           Other-Than-Temporary   Impairment  and  Its  Application  to  Certain
           Investments" ("FSP 115-1").  FSP 115-1 provides  accounting  guidance
           for identifying and recognizing  other-than-temporary  impairments of
           debt and equity  securities,  as well as cost method  investments  in
           addition  to  disclosure  requirements.  FSP 115-1 is  effective  for
           reporting  periods  beginning  after  December 15, 2005,  and earlier
           application  is  permitted.  The  Company  has  determined  that  the
           adoption  of FSP  115-1  does not have an impact  on its  results  of
           operations or financial position.

ii)        In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and
           Error  Corrections - A Replacement of APB Opinion No. 20 and SFAS No.
           3 ". SFAS No. 154 changes the  requirements  for the  accounting  for
           and reporting of a change in accounting principle and  applies to all
           voluntary changes in accounting principle. It also applies to changes
           required by an accounting  pronouncement in the unusual instance that
           the pronouncement  does not include specific  transition  provisions.
           SFAS No. 154 requires  retrospective  application to prior periods'
           financial statements of changes in accounting principle, unless it is
           impracticable  to determine  either the  period-specific  effects or
           the cumulative effect of the change. The provisions of SFAS No. 154
           are  effective for  accounting changes and  correction of errors made
           in fiscal years  beginning after June 1, 2006.  The adoption of this
           standard is not expected to have a material  effect on the  Company's
           results of operations or financial position.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


14.   DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
      ACCOUNTING PRINCIPLES (Continued)

d)       Recent United States Accounting Pronouncements (Continued)

iii)       The FASB issued FASB  Interpretation No. ("FIN") 47 - "Accounting for
           Conditional  Asset  Retirement  Obligations"  in March  2005.  FIN 47
           clarifies  that an entity must record a liability  for a  conditional
           asset  retirement  obligation if the fair value of the obligation can
           be  reasonably  estimated.  This  interpretation  also  clarifies the
           circumstances under which an entity would have sufficient information
           to  reasonably  estimate  the  fair  value  of  an  asset  retirement
           obligation. This Interpretation is effective no later than the end of
           fiscal  years ending  after  December 15, 2005.  The Company does not
           expect  this  guidance  to have a  material  impact on its  financial
           statements.
iv)        In March 2005, the Emerging Issue Task Force issued EITF Issue 04-6 -
           "Accounting  for Stripping  Costs in the Mining Industry ("EITF Issue
           04-6"), stating that post-production stripping costs are a component
           of mineral  inventory costs subject to the provisions of the American
           Institute of Certified Public Accountants Accounting Research
           Bulletin  No.  43 - "Restatement and Revision of Accounting Research
           Bulletins, Chapter 4, "Inventory Pricing", ("ARB No. 43"). Based upon
           this statement,  post-production  stripping  costs are  considered as
           costs of the extracted minerals under a full absorption costing
           system  and  are  recognized  as  a  component  of  inventory  to  be
           recognized in costs of coal sales in  the same period as  the revenue
           from the sale of the inventory.  In addition,  capitalization of such
           costs would be appropriate only to the extent inventory exists at the
           end  of  a  reporting  period.  The  provisions will be effective for
           financial statements issued for the first  reporting period in fiscal
           years  beginning  after  December  15, 2005,  with  early  adoption
           permitted.  The Company  has  determined  that the  adoption  of EITF
           Issue 04-6 does not have an impact on its  results  of  operations or
           financial  position  since  the  Company is still in the  exploration
           stage and has not yet realized  any  revenues  from its operations.

<page>

                             GEMSTAR RESOURCES LTD.
                         (An Exploration Stage Company)

                          NOTES TO FINANCIAL STATEMENTS

                            JANUARY 31, 2006 AND 2005
                          (Stated in Canadian Dollars)


14.   DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
      ACCOUNTING PRINCIPLES (Continued)

d)         Recent United States Accounting Pronouncements (Continued)

v)         In December  2004,  FASB issued  Statement  of  Financial  Accounting
           Standards No.123(revised 2004) ("SFAS 123 (revised 2004)"), "Share-
           Based  Payment".  This  Statement  requires that the cost resulting
           from all share-based transactions be recorded in the financial
           statements.  The Statement  establishes fair value as the measurement
           objective in accounting for share-based  payment  arrangements  and
           requires all entities to apply a  fair-value-based  measurement  in
           accounting for share-based  payment  transactions with employees. The
           Statement also establishes  fair  value as the measurement  objective
           for transactions in which an entity acquires goods or services from
           non-employees in share-based payment  transactions.  The Statement
           replaces FASB  Statement No. 123  "Accounting  for  Stock-Based
           Compensation"  and supersedes APB Opinion No. 25 "Accounting  for
           Stock Issued to Employees".  The  provisions of this Statement will
           be effective for the Company  beginning with its fiscal year ending
           2007. The Company has  determined  that the adoption of SFAS 123
           (revised 2004) does not have an impact on its results of operations
           or financial position.

vi)        In December  2004, the FASB issued SFAS No. 153,  "Exchanges of Non-
           monetary  Assets - An Amendment of APB Opinion No. 29 ". The guidance
           in APB Opinion No. 29,  "Accounting for  Non-monetary  Transactions",
           is based on the principle that exchanges of non-monetary assets
           should be measured based on the fair value  of the assets  exchanged.
           The  guidance in that Opinion, however,  included certain  exceptions
           to that principle.  SFAS No. 153 amends Opinion No. 29  to  eliminate
           the exception for non-monetary exchanges of similar productive assets
           and  replaces  it  with  a  general  exception  for exchanges of non-
           monetary  assets  that  do  not  have  commercial  substance.  A non-
           monetary  exchange  has commercial substance if the future cash flows
           of  the entity  are expected to change  significantly  as a result of
           the exchange.  The provisions of SFAS No. 153 are effective  for non-
           monetary asset exchanges occurring in fiscal periods  beginning after
           June 1, 2006.  Early  application  is permitted  and  companies  must
           apply  the  standard  prospectively.  The  adoption of this  standard
           is not expected to have a material effect on the Company's results of
           operations or financial position.

vii)       In November  2004,  FASB issued  Statement of Financial  Accounting
           Standards No. 151 ("SFAS 151"),  "Inventory  Costs".  The adoption of
           SFAS 151 does not have an impact on the Company's results of
           operations or financial position.