**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **For
the three years ended December 31, 2004**
 *(Canadian
dollars)*
 
 **1.**
    **NATURE
      OF OPERATIONS AND GOING CONCERN**
 The
Company is in the process of exploring its two diamond properties, located in
Northern Québec and on Baffin Island, and its Québec gold property, acquired in
2003, and developing the Atlanta Gold Property (“Atlanta”), located in Idaho,
U.S.A., which has completed its feasibility study. To date, the Company has not
earned significant revenues and is considered to be in the development
stage.
 
 The
recoverability of exploration and development expenditures is dependent upon the
discovery of economically recoverable reserves, the preservation of the
Company’s interest in the underlying mineral claims, the ability to obtain
necessary financing, obtain government approval and attain profitable
production, or alternatively, upon the Company’s ability to dispose of its
interest on an advantageous basis. Changes in future conditions could require
material write-downs of the carrying amounts of deferred exploration
expenditure.
 
 The
financial statements of the Company have been prepared on the basis that the
Company will continue as a going concern, which presumes that it will be able to
realize its assets and discharge its liabilities in the normal course of
business. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
 
 **2.**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**
 **(a)**
    **Basis
      of presentation**
 The
consolidated financial statements are presented in Canadian dollars and are
prepared in accordance with accounting principles generally accepted in Canada.
 
 **(b)**
    **Use
      of estimates**
 The
preparation of the consolidated financial statements in conformity with Canadian
generally accepted accounting principles (Canadian GAAP) requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent liabilities at the date of the
consolidated financial statements and the reported amount of expenses during the
period. Actual results could differ from those reported. Significant estimates
include assessing the fair value of stock based compensation and the carrying
value of mineral properties.
 
 **(c)**
    **Cash
      and cash equivalents**
 Cash
and cash equivalents include investments to maturity of less than 90 days at
purchase.
 
 **(d)**
    **Supply
      inventory**
 Supply
inventory is recorded at the lower of cost and net realizable value, and where
expected to provide future economic benefit to the Company, is capitalized to
mineral property costs when utilized.
 
 **(e)**
    **Property,
      plant and equipment**
 Property,
plant, and equipment are recorded at cost and include office furniture,
fixtures, equipment and computer hardware and software. The office furniture,
fixtures, and equipment are amortized over ten years and vehicles, computer
hardware and software are depreciated over three years. All capital assets are
depreciated on a straight-line basis. An impairment loss is recognized when the carrying amount of long lived assets exceeds their fair values. When impairment conditions are identified, reviews of exploration properties and properties under development are conducted including an assessment of drilling and exploration results. The carrying values of property, plant and equipment, which are impaired, are written down to fair value, which is determined using a discounted cash flow model.
 
 **(f)**
    **Mineral
      property costs**
 Direct
exploration and development costs are deferred in the accounts, net of amounts
recovered from third parties, including receipts from options. At production,
these costs will be amortized using the units-of-production method based on
estimated reserves. Costs relating to properties abandoned are written off when
the decision to abandon is made, or earlier if a determination is made that the
property does not have economically recoverable reserves.
 
 The
Company is in the process of exploring and developing its various properties. On
a regular basis, the Company reviews the carrying values of deferred mineral
property acquisition and exploration expenditures with a view to assessing
whether there has been any impairment in value. In the event that reserves are
determined to be insufficient to recover the carrying value of any property or
facts and circumstances indicate impairment in value, the carrying value will be
written down or written off, as appropriate.
 
 
 **(g)**
    **Earnings
      per share**
 Basic
earnings per share is computed by dividing the earnings / loss for the year by
the weighted-average number of common shares outstanding during the year,
including contingently issuable shares which are included when the conditions
necessary for issuance have been met. Diluted earnings per share is calculated
in a manner similar to basic earnings per share, except the weighted-average
shares outstanding are increased to include potential common shares from the
assumed exercise of options and warrants, if dilutive. The number of additional
shares included in the calculation is based on the treasury stock method for
options and warrants.
 
 **(h)**
    **Translation
      of foreign currencies**
 Monetary
assets and liabilities are translated at the exchange rate in effect at the
balance sheet date and non-monetary assets and liabilities at the exchange rates
in effect at the time of acquisition or issue. Revenues and expenses are
translated at exchange rates in a manner that produces substantially the same
reporting amounts that would have resulted had the underlying transactions been
translated on the dates they occurred. Exchange gains or losses arising on
translation are included in income or loss for the year.
 
 **(i)**
    **Financial
      Instruments**
 The
carrying amounts of cash, receivables, and accounts payable and accrued
liabilities approximate the fair values of those financial instruments due to
the short-term maturity of such instruments. The Company places its cash with
high quality financial institutions.
 ****
 **(j)**
    **Stock
      options**
 The
Company has a stock option plan as described in Note 5(c). During the year ended
December 31, 2002, the Company changed its method of accounting for stock
options to comply with CICA Handbook, section 3870, “Stock-Based Compensation
and Other Stock-Based Payments”. Since the Company had elected not to use the
fair value method of accounting for stock options, no compensation expense was
recognized when options were issued to employees with exercise prices at the
grant date equal to or greater than prevailing market prices. Stock options
issued in lieu of cash to non-employees for services performed were recorded at
the fair value of the options at the time they were issued and expensed as
service was provided.
 
 Effective
January 1, 2004, the Company has adopted the fair value method of recognizing
all stock-based compensation awards (including stock options), including those
made to employees, consultants, officers and directors of the Company. The
standard was implemented on a retroactive basis without restatement of previous periods, as
permitted by the transitional provisions. The impact on implementation was a
charge to accumulated deficit of $646,145 on January 1, 2004 and a charge to the
consolidated statement of loss for 2004 of $19,430.
 
 **(k)**
    **Income
      taxes**
 The
provision for future income tax assets and liabilities is based on the liability
method. Future income taxes arise from the recognition of the tax consequences
of temporary differences by applying enacted statutory tax rates more likely
than not to apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. The Company records a valuation
allowance against any portion of those future income tax assets that it believes
will, more likely than not, fail to be realized.
 
 **3.**
    **RECEIVABLES**
 In June
2004, the Company filed for refundable tax credits with the Quebec Ministry of
Revenue (“QMR”) totaling $531,354 and a mining duties rebate from the Quebec
Ministry of Natural Resources (“QMNR”) totaling $212,220, in connection with
exploration expenditures incurred in 2003 relating to the Company’s two
Quebec-based mining properties. These amounts were classified as a reduction in
the carrying values of TORNGAT by $3,197 and of Abitibi by $740,377. By the end
of the year, the Company had received the refund from QMR and is expected to
receive the amount from QMNR in the first quarter of 2005. The balance of the
receivables represents refunds of input sales tax credits earned in the fourth
quarter of 2004.
 
 
 **4.**
    **MINERAL
      PROPERTIES**
 **(a)**
    **TORNGAT
      Diamond Property**
 In
1999, the Company was granted four contiguous Diamond Mine Exploration permits
(“the permits”) by the Québec Ministry of Natural Resources (“QMNR”) for a
period of five years which cover 444 sq. km in the Torngat Mountain region along
the east coast of Ungava Bay in Northern Québec (“TORNGAT”). The permits are
renewable annually after five years.
 
 In
2002, the Company renewed three permits which cover 327 sq. km for $32,700. In
July 2002, the Company received a Mineral Exploration grant of $75,000 from the
QMNR for exploration expenditures incurred during the fiscal period ending on
March 31, 2002
 
 In both
2003 and the current year, the Company renewed the three permits for $34,335 for
each year.
 
 **(b)**
    **Jackson
      Inlet Diamond Property**
 On
April 27, 2000 **,** the
Company signed a letter agreement (“the Agreement”) with Helix Resources Inc.
(“Helix”), a private company based in Niagara Falls, Ontario, concerning three
mining claims totaling 28.85 sq. km (7,128.5 acres) staked on the Jackson Inlet
Property on the Brodeur Peninsula of Baffin Island (“Jackson Inlet”).
 
 In
order to maintain the Agreement in good standing, the Company paid Helix
$450,000 in the current year, including $200,000 due prior to December 31, 2003
but deferred by Helix until January 8, 2004, and issued 120,000 (105,000 - 2003)
common shares of the Company to Helix. The Company can continue to maintain the
Agreement in good standing by paying Helix the following amounts:
 
 Due
      Date
    
    Payment
      amount
    
    Common
      sharesDecember 31,
      2006
    
    $
    100,000
    
    
    -
 In
addition, $500,000 is due upon receipt of all development permits and $1,000,000
plus 500,000 common shares is due upon production of 500,000 carats.
Subsequently, a 5% net profits interest and a 1% gross royalty is due after
crediting all previous payments.
 
 In
2002, the Company staked 32 mineral claims covering 334.43 sq. km (82,640 acres)
and paid an initial filing fee of $8,264. In 2003, the Company staked 426
additional mineral claims in the region covering 4,118 sq. km (1,017,593 acres)
and paid an initial filing fee of $101,759. Five of the claims staked in prior
years were allowed to lapse. Total direct exploration costs of $29,806 for the
five abandoned claims were written off in 2003. By the end of 2003, the Company
owned a 100% interest in 532 mineral claims totaling 5,075 sq. km (1,254,029
acres) within the region. During
the current year, the Company filed assessment reports with Indian and Northern
Affairs Canada in connection with claims covering 558,087.5 acres and paid
filing fees of $55,808 (2003 - $12,999).
 
 The
Company has supply inventory of $198,631 as at December 31, 2004 (2003 -
$192,584) in respect of fuel and supplies for use in the diamond exploration
program at Jackson Inlet.
 
 **(c)**
    **Atlanta
      Gold Property, Idaho, U.S.A.**
 On July
22, 1997, the Company and Canadian American Mining Company, LLC (“CAMC”)
(formerly Quest International Resources Corporation) (“Quest”), entered into a
joint venture agreement (the “Agreement”) whereby the Company is the operator of
Atlanta with an 80% interest, with Quest holding the remaining 20% participating
interest. Quest subsequently advised the Company that it had elected under the
Agreement not to participate in its contractual share of further property costs
incurred after 1997. In December 2002, CAMC agreed to transfer its 20%
participating interest in the joint venture to the Company. CAMC retains a 2%
NSR royalty on Atlanta, as per the Agreement.
 
 On
February 2, 1999, the Company signed a Lease/Option to Purchase Agreement (“the
Monarch Agreement”) with Monarch Greenback, LLC (“Monarch”) relating to
Monarch’s surface and mineral rights to Atlanta. During the term of the ten-year
lease, the Company has the option to purchase such surface and mineral rights
for US$2 million. If this option is exercised, the existing minimum annual
rental payments on such surface and mineral rights will be terminated and
replaced by a net smelter royalty of 0.5% of gold sales if the average realized
gold price is US$365 per ounce or less. For each US$1 increase in the average
realized gold price over US$365 per ounce, the net smelter royalty will be
increased by 0.01% to a maximum rate of 3.5%. In 1999, the Company amended the
minimum annual rental payment to Monarch. U.S.$25,000 owing in 1999, was paid in
January 2000 and the U.S.$75,000 unpaid balance was added to the option price.
In 2001, the Monarch Agreement was further amended such that, commencing in
2001, the Company will pay Monarch US$50,000 per year in minimum annual rental
payments until 2008. The cumulative balance owing to 2008 of US$800,000 will be
added to the option price. By then, the option price to purchase such surface
and mineral rights will be US$2,875,000.
 
 
 A net
smelter returns royalty is payable on production from Atlanta, subject to annual
payments to the lessors as set forth below. These payments are required to keep
the agreements in good standing. The advance royalty payments will be terminated
if the option to purchase is exercised. During the year, the Company paid
US$17,500 (2003 and 2002 - US$17,500) in advance royalty payments to the
lessors.
 Year ending
      December 31,
    
    Minimum
      annual rental payments US$
    
    Advance
      royalty payments US$2005
    
    50,000
    
    17,5002006
    
    
    50,000
    
    
    159,5002007 to
      2008
    
    
    50,000
    
    
    20,0002009 to
      2011
    
    
    -
    
    
    20,0002012 to
      2015
    
    
    -
    
    
    10,000
 **(d)**
    **Indonesia
      Properties**
 The
acquisition of title to mineral projects is a very time consuming process.
Although the Company has taken every precaution to ensure that legal title to
its properties is properly recorded in the name of the Company, there can be no
assurance that such title will ultimately be secured. The Company’s interest in
the majority of its properties in Indonesia is held under applications for
Contract of Work (“C.O.W.”) which, if approved, may not cover all of the areas
applied for. Furthermore, there is no assurance that its interests in such
properties may not be challenged.
 
 During
the year, the Company wrote off the carrying value of $1,450,626 of its
Indonesia gold property.
 
 **(e)**
    **Abitibi
      Gold Property, Québec**
 In
August 2003, the Company signed a letter agreement with Breakwater Resources
Ltd. (“Breakwater”), whereby Breakwater granted the Company the exclusive right
and option to earn up to a 100% interest in six gold properties, totaling 91
mining claims and covering 28.49 sq. km, located along a 65km stretch of the
Abitibi gold belt in eastern Québec. The Company can earn a 60% interest by
paying Breakwater rental and option payments (“Payments”) and by incurring
expenditures as follows:
 On or
      before
    
    Payments
    
    Expenditures
      to be incurredSigning
    
    Nil
    
    Nil01-Sep-04
    
    $
    25,000
    
    $
    150,00001-Sep-05
    
    $
    25,000
    
    $
    350,00001-Sep-06
    
    $
    25,000
    
    $
    600,00001-Sep-07
    
    $
    25,000
    
    $
    1,000,00001-Sep-08
    
    $
    25,000
    
    $
    1,400,000
 Expenditures
exceeding minimum annual requirements incurred may be carried forward to
following years and credited against future expenditure minimums. The Company
can acquire an additional 10% interest by making a $100,000 cash payment to
Breakwater. Six months after the preparation of an independent positive
feasibility study, the Company may acquire a further 10% interest in the
property by making a $500,000 cash payment to Breakwater. Upon formation of a
joint venture, expenditures will be shared between the Company and Breakwater in
accordance with their respective ownership interest. If Breakwater’s interest in
the joint venture is reduced to, or below, a 10% interest, then Breakwater’s
interest in the joint venture will be deemed to be converted to a 1.5% net
smelter return (NSR) royalty. The Company may purchase the 1.5% NSR royalty at
any time for a cash payment of $1,500,000 to Breakwater.
 
 
 In
2003, the Company incurred $1,614,959 on the Breakwater claims and staked 68
additional claims covering 10.83 sq. km in the Bousquet township within the same
Abitibi gold belt. In 2004, the Company paid $25,000 to Breakwater for the 2004
rental and option fee, incurred $75,932 in additional field work on the
Breakwater claims, returned twenty-nine of the Breakwater claims covering 10.28
sq. km back to Breakwater and decided not to re-stake six of the Bousquest
claims covering 0.97 sq. km previously staked in error. After earning tax and
mining credits from QMR and QMNR (see note 3. above), the Company has incurred
sufficient work credits to keep the Breakwater claims in good standing until
September 1, 2005 and has spending commitments as follows:
 September
      1, 2006
    
    $
    200,000;September
      1, 2007
    
    $
    1,000,000;September
      1, 2008
    
    $
    1,400,000;
  **5.**
    **PROPERTY,
      PLANT AND EQUIPMENT**
 NetCost
      ($)
    
    Accumulated
      depreciation ($)
    
    2004
      ($)
    
    2003
      ($)Office
      equipment
    
    
    157,156
    
    
    116,964
    
    
    40,192
    
    
    47,137Exploration
      equipment
    
    
    15,120
    
    
    3,816
    
    
    11,304
    
    
    12,636172,276
    
    
    120,780
    
    
    51,496
    
    
    59,773
 **6.**
    **CAPITAL
      STOCK**
 **(a)**
    **Authorized
      share capital**
 Following
the continuance of the Company under the Business Corporation Act (Ontario), on
March 15, 2000, the Company's authorized capital consists of an unlimited number
of common shares, an unlimited number of first preference shares, issuable in
series and an unlimited number of second preference shares, issuable in series.
 
 **(b)**
    **Warrants**
 The
following summarizes warrants that have been granted, exercised or have expired
during the three years ended December 31, 2004:
 Number of
      Shares
    
    Fair market
      value of warrants $
    
    Weighted
      average exercise price $Outstanding,
      December 31, 2001
    
    
    -
    
    
    -
    
    
    -Warrants
      issued on issuance of shares for cash
    
    
    3,255,000
    
    
    -
    
    
    1Warrants
      issued as agent fees (note 6(d))
    
    
    586,000
    
    
    -
    
    
    0.5Outstanding,
      December 31, 2002
    
    
    3,841,000
    
    
    -
    
    
    0.92Warrants
      issued on issuance of sharesfor cash
      (note 6(d))
    
    
    2,116,667
    
    
    182,976
    
    
    0.5Outstanding,
      December 31, 2003
    
    
    5,957,667
    
    
    182,976
    
    
    0.77Warrants
      issued on issuance of sharesfor cash
      (note 6(d))
    
    
    42,322,888
    
    
    2,881,860
    
    
    0.24Warrants
      issued as agent fees (note 6(d))
    
    
    3,231,636
    
    
    144,423
    
    
    0.26Warrants
      expired during the year
    
    
    -4,457,667
    
    
    -26,393
    
    
    0.87Outstanding,
      December 31, 2004
    
    
    47,054,524
    
    
    3,182,866
    
    
    0.26
 
 The
fair market value of warrants issued are separately recorded and disclosed from
share capital in the year they are issued. Warrants that are issued and
exercised will be recorded as share capital and warrants that expire unexercised
will be recorded as contributed surplus .
During the year, 616,667of the warrants issued in 2003 and fair valued at
$26,393 expired unexercised. The
values of the warrants issued in 2004 and 2003 were estimated on the date of
grant using the Black Scholes option-pricing model with the following
assumptions adopted at the measurement date:
 
 
 2004
    
    2003Risk-free
      interest rate
    
    
    2.90
    %
    
    2.25
    %Expected
      life
    
    
    1.5
      years
    
    
    1.0
      yearsEstimated
      volatility in the market price of the common shares
    
    
    65
    %
    
    86
    %Dividend
      yield
    
    
    Nil
    
    
    Nil
 **(c)**
    **Stock
      options**
 The
Company has a stock option plan (the “Plan”) to attract, retain, and motivate
directors, officers, employees, and certain consultants with options to purchase
common shares of the Company. Under the Plan, the exercise price of each option
must equal or exceed the market price of the Company’s stock on the day of grant
and the maximum term of any option is five years. The number of shares reserved
for issuance (the “Optioned Shares”) pursuant to stock options granted to
insiders cannot exceed 10% of the outstanding shares of the Corporation. The
aggregate number of shares reserved for issuance to any one person cannot exceed
5% of the outstanding shares of the Corporation. If option rights granted to an
individual under the Plan expire or terminate for any reason without having been
exercised in respect of certain Optioned Shares, such Optioned Shares may be
made available for other options to be granted under the Plan. The Plan is
administered by the Board of Directors, which has full and final authority, but
subject to the express provisions of the Plan and the approval of The Toronto
Stock Exchange. The following summarizes the stock options that have been
granted, exercised, forfeited, cancelled, or expired during the three years
ended December 31, 2004:
 Number of
      Shares
    
    Weighted
      average exercise price $Outstanding,
      December 31, 2001
    
    
    3,800,000
    
    
    0.50Options
      granted
    
    
    1,400,000
    
    
    0.56Options
      forfeited
    
    
    (50,000
    )
    
    0.60Options
      expired
    
    
    (800,000
    )
    
    0.66Outstanding,
      December 31, 2002
    
    
    **4,350,000**
    
    
    0.49Options
      granted
    
    
    800,000
    
    
    0.38Options
      forfeited
    
    
    (250,000
    )
    
    0.45Options
      expired
    
    
    (250,000
    )
    
    0.65Outstanding,
      December 31, 2003
    
    
    4,650,000
    
    
    0.47Options
      granted
    
    
    650,000
    
    
    0.285Options
      forfeited
    
    
    (300,000
    )
    
    0.48Options
      expired
    
    
    (650,000
    )
    
    0.35Outstanding,
      December 31, 2004
    
    
    **4,350,000**
    
    
    0.46
 The
Company amended the Plan on March 20, 2003 to reserve an additional 1,500,000
common shares for issue and increase the number of common shares available for
issue from 7,500,000 to 9,000,000. As of December 31, 2004, there are 6,650,000
additional common shares in reserve available for stock compensation, including
in respect of stock options currently outstanding. All options outstanding at
December 31, 2004 expire at various dates to November 24, 2009 and are
immediately exercisable upon granting.
 
 During
the year: (a) all 650,000 options were granted when their exercise price equaled
the fair value of the stock at grant date and had a weighted-average grant date
fair value of $0.285 (2003: 350,000 options - $0.39; 2002: 900,000 - $0.61); and
(b) no options were granted when its exercise price exceeded the fair value of
the stock at grant date (2003: 450,000 options - $0.43; 2002: 500,000 options -
$0.43). The weighted-average remaining contractual life of all stock options
outstanding is 28 months.
 
 
 Number
      of
    
    ExerciseExpiry
      date
    
    Stock
      options
    
    price
      $February 4,
      2005
    
    
    150,000
    
    
    0.49December 22,
      2005
    
    
    1,000,000
    
    
    0.43June 1,
      2006
    
    
    700,000
    
    
    0.52January 21,
      2007
    
    
    600,000
    
    
    0.60February 12,
      2007
    
    
    250,000
    
    
    0.63May 17,
      2007
    
    
    200,000
    
    
    0.51January 17,
      2008
    
    
    100,000
    
    
    0.45January 29,
      2008
    
    
    50,000
    
    
    0.40February 5,
      2008
    
    
    50,000
    
    
    0.40August 19,
      2008
    
    
    200,000
    
    
    0.35August 21,
      2008
    
    
    100,000
    
    
    0.35November 13,
      2008
    
    
    300,000
    
    
    0.39November 24,
      2009
    
    
    650,000
    
    
    0.2854,350,000
    
    
    0.46
  The
fair market value of stock options granted are recorded into contributed surplus
in the year they are issued. Stock options that are exercised will be recorded
as share capital and stock options that expire unexercised will remain in
contributed surplus section of the shareholder equity. During the year,
stock-based compensation was calculated to be $19,430. Stock-based compensation,
calculated to be $179,622 for fiscal 2003 and $466,523 for fiscal 2002, is
recorded in the opening accumulated deficit for fiscal 2004.
 
 The
weighted average fair value at the date of grant for stock options granted
during the current year was $0.285 per share. The fair value of each option was
estimated on the date of grant using the Black Scholes option-pricing model with
the following assumptions at the measurement date:
 2004
    
    2003
    
    2002Risk-free
      interest rate
    
    
    4.00
    %
    
    3.60
    %
    
    4.50
    %Expected
      life
    
    
    4.9
      years
    
    
    4.0
      years
    
    
    4.0
      yearsEstimated
      volatility in the market price of the common shares
    
    
    65
    %
    
    86
    %
    
    79
    %Dividend
      yield
    
    
    Nil
    
    
    Nil
    
    
    Nil
  **(d)**
    **Capital
      Stock Offering**
 On
December 30, 2002, the Company completed a private offering whereby 6,510,000
flow through units were issued at a price of $0.50 per unit for total gross
proceeds of $3,255,000. Each flow through unit consisted of one flow through
common share and one half of one common share purchase warrant of the Company
exercisable at $1.00 per warrant. In addition, management of the Company
subscribed for 90,000 flow through common shares of the Company at a price of
$0.50 per share. The agents of the offering were paid agency fees of $226,100
and were granted 586,000 common share purchase warrants exercisable for 586,000
common shares of the Company at $0.50 per share. All of these warrants expired
unexercised in December 2004.
 
 In
2003, the Company completed four stock offerings for total gross proceeds of
$2,938,063 summarized as follows:
 Date
      Completed
    
    Units
      Issued
    
    Description
      of units issued
    
    Price
    
    Gross
      ProceedsMay
      9
    
    
    616,667
    
    
    Common share
      units
    
    $
    0.30
    
    $
    185,000July
      9
    
    
    5,357,143
    
    
    Flow through
      common shares
    
    $
    0.28
    
    $
    1,500,000October
      15
    
    
    762,500
    
    
    Common
      shares
    
    $
    0.35
    
    $
    263,063November
      9
    
    
    3,000,000
    
    
    Common share
      units
    
    $
    0.33
    
    $
    990,000
 Each
unit issued on May 9 consisted of one common share at $0.30 and one common share
purchase warrant of the Company exercisable at $0.50 per share. These warrants
expired unexercised in November 2004. Each unit issued on November 9 consisted
of one common share at $0.33 and one half of one common share purchase warrant
of the Company. These warrants are exercisable at $0.50 per warrant and expire
on May 9, 2005. Total share issue costs incurred in 2003 were
$128,601.
 
 
 In
2004, the Company completed stock offerings for total gross proceeds of
$9,261,275 summarized as follows:
 
 Date
      Completed
    
    Units
      Issued
    
    Description
      of units issued
    
    Price
    
    Gross
      ProceedsJuly
      5
    
    
    142,857
    
    
    Common share
      units
    
    $
    0.35
    
    $
    50,000February
      26
    
    
    1,905,000
    
    
    Common share
      units
    
    $
    0.315
    
    $
    600,075February 26
    
    
    2,383,667
    
    
    Common share
      units
    
    $
    0.30
    
    $
    715,100November
      3
    
    
    22,000,000
    
    
    Common share
      units
    
    $
    0.20
    
    $
    4,400,000December
      23
    
    
    15,891,364
    
    
    Common share
      units
    
    $
    0.22
    
    $
    3,496,100
 All
units issued consisted of one common share and one common share purchase warrant
of the Company. All warrants issued during the year are exercisable at prices
ranging from $0.24 to $0.50 per warrant and expire within twenty-four months
from the grant date. All of the units offered at $0.35 and $0.315, 1,136,634 of
the units offered at $0.22, and 1,750,000 of the units offered at $0.20 were
placed with three directors of the Company. An 8% cash finders’ fee of $294,032
was paid in 2004 and an additional $248,456 remains unpaid to brokers and agents
in respect of the 2004 stock offerings. In addition, warrants were granted to
the brokers and agents that entitles them to purchase 3,231,636 shares of the
Company at prices ranging from $0.205 to $0.23 per share. The warrants expire
within 24 months from date of grant.
 
 Total
share issue costs incurred in 2004 was $730,103.
 
 **(e)**
    **Shareholder
      Rights Plan**
 In
November 2000, the Board of Directors adopted a Shareholder Rights Plan (the
“Plan”), the terms of which are set forth in a Shareholder Rights Plan Agreement
dated as of November 17, 2000 between the Company and Equity Transfer Services
Inc. The Plan was approved by the shareholders at the annual meeting held on
March 15, 2001. The Plan will be in effect until the 2011 annual meeting, unless
terminated earlier by the Board of Directors.
 
 Under
the Plan, a right to purchase one of the Company’s common shares (a “Right”) was
issued for each outstanding common share as of November 17, 2000. In addition, a
Right will be issued for each share issued subsequent to November 17, 2000 and
prior to the separation date of the Rights. The rights are initially not
separate from the Company’s common shares nor are they represented by separate
certificates. However, upon a person acquiring ownership of 20% or more of the
Company’s common shares (other than by means of complying with the Plan’s
Permitted Bid provisions or with approval of the Board of Directors of the
Company), a holder of a Right (other than the acquiror of 20% or more of the
Company’s common shares) becomes entitled to exercise the Right and to purchase
the number of common shares as determined under the Plan at a 50% discount to
the then prevailing market price per share.
 
 Under
the Plan, a Permitted Bid is, among other things, a bid made to all shareholders
for all common shares that is open for at least 60 days and which must be
accepted by holders of at least 50% of the Company’s outstanding common shares,
excluding shares held by the offeror and certain related parties. If at the end
of 60 days, at least 50% of the outstanding shares, other than those owned by
the offeror and certain related parties, have been tendered to the bid, the
offeror may take up and pay for the shares, but must extend the bid for a
further 10 days to allow other shareholders to tender. The Rights may, in
certain circumstances, be redeemed by the Company at a price of $0.00001 per
Right.
 
 
  **7.**
    **INCOME
      TAXES**
 The
Company has non-capital tax losses of approximately $6,039,000 expiring between
2005 and 2011 which are available to reduce future Canadian taxable income.
These losses expire as follows:
 2005
    1,042,0002006
    715,0002007
    255,0002008
    685,0002009
    1,057,0002010
    1,130,0002011
    1,155,0006,039,000
 
 The
Company has operating losses of approximately US$7,977,000 expiring between 2005
and 2024, which are available to reduce future United States taxable income. The
Company did not pay any income taxes in 2004, 2003 or 2002.
 
 The
Company has recorded future income tax liabilities and a future income tax
recovery (provision) arising from temporary differences between the accounting
values and tax base values of various net capital assets of the Company as
follows:
 Description
    
    
    
    
    
    Amount
      (CD$)Future tax
      expense regarding share issue costs
    
    
    
    
    
    
    
    
    263,712Income tax
      recovery (provision) at Canadian federal and provincial statutory
      rates
    
    
    
    
    
    (928,243
    )Expiry of
      losses not utilized - Canadian
    
    
    
    
    
    
    
    
    991,545Previously
      unrecognized liability
    
    
    
    
    
    
    
    
    1,179,485Permanent
      differences
    
    
    
    
    
    
    
    
    (173,567
    )Increase in
      valuation allowance
    
    
    
    
    
    
    
    
    3,416,202Earnings in
      foreign jurisdictions
    
    
    
    
    
    
    
    
    88,7784,574,200Comprised of:Future tax
      expense -
    
    
    Canada
    
    
    2,873,491Foreign
    
    
    1,700,709
    
    
    4,574,200The Future
      income tax liabilities at December 31, 2004 are summarized as
      follows;Property,
      plant and equipment
    
    
    
    
    
    
    
    
    35,235Exploration
      and development
    
    
    
    
    
    
    
    
    (7,315,795
    )Non capital
      losses carried forward
    
    
    
    
    
    
    
    
    3,675,242Other
    
    
    
    
    
    
    
    
    649,209(2,956,109
    )Valuation
      allowance
    
    
    
    
    
    
    
    
    (3,471,382
    )Future income
      tax liability
    
    
    
    
    
    
    
    
    (6,427,491
    )
 Tax
provisions arising from CEE renounced are recorded as share issue costs and
charged directly to shareholders’ equity. During the current year, the Company
recorded a valuation allowance in the amount of $3,416,202 (2003 - $55,180) in
respect of Canadian non-capital losses carried forward.
 
 **8.**
    **SEGMENTED
      INFORMATION**
 The
Company has operated in the following geographical segments: Canada, United
States, and Indonesia. Corporate administrative activities are conducted from
Canada. The income and expenses for the three years ended December 31, 2004, and
the assets of those years identifiable to those segments are as
follows:
 
 
 Canada
    
    USA
    
    Indonesia
    
    Consolidated31-Dec-04Interest and
      other income
    
    $
    1,956
    
    $
    14
    
    $
    -
    
    $
    1,970Loss (gain)
      for the year
    
    
    3,984,888
    
    
    1,708,573
    
    
    1,450,626
    
    
    7,144,087Identifiable
      assets
    
    
    16,417,181
    
    
    20,716,974
    
    
    -
    
    
    37,134,15531-Dec-03Interest and
      other income
    
    $
    22,675
    
    $
    117
    
    $
    -
    
    $
    22,792Loss (gain)
      for the year
    
    
    1,025,383
    
    
    (920,727
    )
    
    -
    
    
    104,656Identifiable
      assets
    
    
    14,350,811
    
    
    15,980,830
    
    
    1,450,626
    
    
    31,782,26731-Dec-02Interest and
      other income
    
    $
    23,660
    
    $
    107
    
    $
    -
    
    $
    23,767Loss (gain)
      for the year
    
    
    855,734
    
    
    (76
    )
    
    -
    
    
    855,658Identifiable
      assets
    
    
    11,859,778
    
    
    14,304,149
    
    
    1,444,739
    
    
    27,608,666
 **9.**
    **CONTINGENCY
      AND COMMITMENTS**
 In
November 1999, the Company and Atlanta Gold Corporation of America, Inc., the
wholly owned U.S. subsidiary of the Company (“Atlanta Gold”), were named as
third party defendants in a lawsuit commenced by Monarch against Doe Run
Resource Corporation (“Doe Run”) with respect to environmental liability on the
Butler Ranch, which is adjacent to the Atlanta Property. In 2002, the Company
obtained an order from the U.S. District Judge in Boise, Idaho, summarily
dismissing the claims against the Company and Atlanta Gold. Doe Run has appealed
that order to the United States Court of Appeals for the Ninth Circuit. The
Appeal has not yet been heard.
 
 In
2004, the Company renewed its operating lease commitments for head office space
and office equipment until January 2010 as follows:
 2005
    
    $
    50,3002006
    
    $
    73,7502007
    
    $
    73,7502008
    
    $
    75,7602009
    
    $
    77,7002010
    
    $
    6,198
 After
undertaking the issuance of flow through shares in 2003, the Company fulfilled
its spending commitments by incurring in excess of $1,200,000 on Canadian
properties for the current year. In 2005, the Company has spending commitments
of $741,000 arising from refundable tax credits received from QMR in 2004 and
mining credits due from QMNR in 2005. If the Company is not able to fulfill this
commitment prior to July 2005, Canadian Exploration Expenses (CEE) renounced in
2003 will be rescinded.
 
 **10.**
    **COMPARATIVE
      FIGURES**
 Certain
comparative amounts have been reclassified to conform to the presentation
adopted in 2004.